<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999          Commission file No. 0-18866

                                       OR

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

                       FIRST NATIONAL ENTERTAINMENT CORP.
                       ----------------------------------
        (Exact name of small business issuer as specified in its charter)

               Colorado                                   93-1004651
    -------------------------------                     ------------
    (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                    Identification No.)


              6516 West North Avenue, Suite 200, Chicago, IL 60707
              ----------------------------------------------------
                    (Address of principal executive offices)

              477 E. Butterfield Rd., Suite 410, Lombard, IL 60148
              ----------------------------------------------------
                     (Address of previous executive offices)

                                 (630) 971-9924
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

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

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

                          Common Stock $0.005 Par Value
                          -----------------------------
                                (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-B 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 of Part III of this Form 10-KSB, or any amendment to
this Form 10-KSB. [ ]

Registrant's revenues for the Twelve Month Period Ending 12/31/99: $475,097.

As of March 31, 2000 the registrant had 19,437,458 shares of its $.005 par value
Common Stock outstanding. The aggregate market value of shares of Common Stock
held by non-affiliates was $167,530 as of this date.




<PAGE>   2


                                      INDEX


<TABLE>
<CAPTION>
                                     Part I.

                                                                                                  Page
<S>       <C>                                                                                     <C>
Item 1.   Business..................................................................................1
Item 2.   Properties................................................................................8
Item 3.   Legal Proceedings.........................................................................8
Item 4.   Submission of Matters to a Vote of Security Holders.......................................8


                                     Part II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters.....................8
Item 6.   Management's Discussion and Analysis of Financial Conditions and results
          of operations.............................................................................9
Item 7.   Financial Statements and Supplementary Data..............................................11
Item 8.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosures....................................................................11


                                    Part III

Item 9    Directors and Executive Officers of the Registrant.......................................11

Item 10   Executive Compensation...................................................................13
Item 11   Security Ownership of Certain Beneficial Owners and Management...........................13

Item 12   Certain Relationships and Related Transactions...........................................14


                                     Part IV

Item 13   Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................14
</TABLE>



<PAGE>   3
                                     PART I

ITEM 1 - BUSINESS

GENERAL

         First National Entertainment Corp. (the "Corporation") was founded to
pursue the acquisition, distribution and marketing of high quality entertainment
properties targeted at the family market in all forms of media. The Corporation
was incorporated on January 10, 1985, under the name of Power Capital Inc., a
Colorado corporation. In November of 1989, Power Capital became a public
company. On October 26, 1990 Power Capital acquired 100% of the stock of 1st
National Film Corp., a California corporation (1st National Film - California)
in a tax-free, stock-for-stock exchange. For financial reporting purposes this
acquisition was considered a reverse acquisition, in which 1st National
Film-California was deemed the acquiring or successor parent corporation. In
December of 1990 the name of the Corporation was changed to 1st National Film
Corp. (the "Corporation"), and 1st National Film - California's inception date
of July 7, 1989 is considered the Corporation's inception date. In October of
1994, the Corporation changed its name to First National Entertainment Corp.

         In December, 1991 the Corporation completed the acquisition of all U.S.
and Canadian distribution, merchandising and ancillary licensing rights to the
completed animated film property Happily Ever After for approximately $1.35
million.

         In 1993, the Corporation left the developmental stage and entered the
operational stage concurrent with the national theatrical release of Happily
Ever After. The revenue resulting from the release of the motion picture,
including other forms of media, was well below projections. Resulting losses
were significant and the Company accumulated a substantial tax-loss
carry-forward.

         With the entry of a new management team in 1997 a business plan was
developed with the approval of the Board of Directors to immediately develop an
income stream, establish positive cash flow, pursue continuation and expansion
in the entertainment industry while exploring new business opportunities that
could immediately utilize its other unique resources.

         In 1997 the Corporation established First National Finance Corp. This
division provides short term, high yield bridge loans primarily to developers
and redevelopers of real estate in the Chicago area. The cash flow from this
division currently supports the daily cash requirements of the entire
Corporation.

         During second quarter of 1998 the Corporation purchased the assets of
Windy City Video and created a wholly owned subsidiary First National Video
Corp.

         In 1998, First National Entertainment Corp. created a wholly owned
subsidiary Equator Entertainment. This Company is primarily in distribution and
creative support of family entertainment to North America.

         In 1999 First National Finance Corp. purchased the assets of Prairie
Business Credit, a accounts receivable factoring company.

         The Corporation had been listed and traded on the NASDAQ since July,
1991 until it was delisted July 3, 1997. The Corporation was denied its
delisting appeal on January 28, 1998 by the NASD Board of Governors. Currently
the Corporation trades on the OTC Bulletin Board.



                                       1
<PAGE>   4
FIRST NATIONAL ENTERTAINMENT CORP. (THE CORPORATION)

         Holding Corporation for subsidiaries in the general entertainment
industry and the finance industry. The company has the following wholly owned
subsidiaries. A brief overview and then in depth presentations follow.


ENTERTAINMENT SUBSIDIARIES

FIRST NATIONAL ENTERTAINMENT CORP. (FNAT)

         This Company maintains unrestricted distribution rights to a variety of
media and products for Canada and the United States relating to its full length
animated movie - Happily Ever After. This movie is primarily aimed at the 3 to 7
year old market, films of this nature have continuing value since the target age
group turns over quickly and there is a new market available every 3 to 5 years.
It is believed an added value is the fact that the movie has never been viewed
on public or cable television. The company continues to pursue a sale or lease
of Happily Ever After. Several obstacles toward achieving this goal were
eliminated in 1999.

EQUATOR ENTERTAINMENT

         The Plan to diversify was enhanced in 1998 with the addition of Mr.
Peter Keefe located in Los Angeles area. The new company operates under the name
Equator Entertainment. This subsidiary will focus upon programs that have
"all-family" appeal and that are calculated to achieve success in the domestic
and international market place. Mr. Peter Keefe has many years of experience in
children's animated entertainment and is a well known and respected executive in
the television industry. Excellent strides were made by Mr. Keefe in 1999
towards establishing important alliances and relationships in Europe, Asia and
North America.

STYLUS RECORDS

         A Company acquired in 1994 (80%) which ceased operations several years
ago. During 1998, all claims by prior ownership/management were resolved and the
subsidiary totally dissolved.


VIDEO CHAIN SUBSIDIARY

FIRST NATIONAL VIDEO CORP.

         In April, 1998 the Company acquired the assets of Windy City Video a
chain of six retail video stores in the Chicagoland area. Since its purchase
this division has failed to meet expectations and has a potential buyer for the
remaining two stores, all other stores have been closed. This subsidiary was
accounted for as a discontinued operation in the 1999 audited financial
statements.


FINANCING SUBSIDIARY

FIRST NATIONAL FINANCE CORP.

         In 1997 the Corporation established a wholly owned subsidiary to
contain the assets of Shiloh Corporation, a company engaged in relatively small,
high yield bridge loans.




                                       2
<PAGE>   5
PRAIRIE BUSINESS CREDIT, INC.

         Company was formed in January, 1999 to acquire the name and assets of a
corporation engaged in accounts receivable factoring. The purchase was recorded
on January 1, 1999. The subsidiary experienced a significant loss in 1999 and,
along with differences in management philosophy the corporation agreed to sell
the subsidiary back to the prior ownership as of January 31, 2000. The
subsidiary is being treated as a discontinued operation for the purposes of the
audited financial statements.

FIRST NATIONAL ENTERTAINMENT CORP. (FNAT) - (THE CORPORATION)


MISSION STATEMENT

         The Corporation has developed or continues to develop mission
statements for each subsidiary to establish clear operating parameters. These
statements assist in monitoring each company to maintain a well defined
direction in daily operations and long term planning.

INSURANCE

         The Company maintains adequate insurance policies, including general
liability, workers compensation and employers' liability and officers and
directors. There can be no assurance that any of the above coverage's will be
adequate for the Company's needs.

EMPLOYEES

         As of December 31, 1999 the Company had four permanent employees,
including two officers and two staff. No employee of the Company is represented
by a labor union or is subject to a collective bargaining agreement. The Company
believes that its relationship with its employees is good.

RESEARCH AND DEVELOPMENT

         The Company did not incur any research and development (R&D) costs for
the period ended December 31, 1999 or the fiscal year ended December 31, 1998.
The Company does not expect to generate any significant R&D costs in fiscal
2000.

REGULATION

         The Code and Ratings Administration of the Motion Picture Association
of America, an independent industry trade association, assigns ratings for age
suitability for viewing of motion pictures. The Company has and will continue to
submit its films for ratings.

         United States television stations and networks, as well as foreign
governments, impose restrictions on the content of motion pictures and other
entertainment properties. There can be no assurance that future restrictions on
entertainment properties released by the Company may not affect the Company's
ability to exhibit or sell such entertainment properties.

INDUSTRY OVERVIEW

         The Company competes with many other entertainment companies that have
greater industry experience, acceptance and financial resources than the
Company. The Company faces significant competition from companies in the field
of acquiring, financing, developing, producing, marketing and distributing
quality entertainment products into related markets.



                                       3
<PAGE>   6
EQUATOR ENTERTAINMENT (EE)

GENERAL

         Mr. Peter Keefe was named to head up the company's entertainment
operations in 1998. Mr. Keefe will be responsible for expanding the Company's
presence in the industry through program creation, production and sales &
marketing, with an emphasis upon building alliances and joint ventures in which
the Company will have a substantial ownership.

         Equator Entertainment generally will focus upon programs that have
family appeal and that will be successful in the domestic and international
marketplace. One of the initial primary thrusts is in representing international
programs for sale to American television networks. Significant progress has been
achieved toward these objections through the Egmont alliance and the David
Dortort /CAA agreement.

SALES & MARKETING

         Equator Entertainment will prudently "grow" its business with the
addition of further key executives to compliment its new business plan. In
addition, Mr. Keefe has an extensive network of contacts in the television
broadcast and production community as well as in the merchandise licensing
business throughout the world entertainment market. The focus will be
extraordinary, character driven entertainment properties which appeal to
children two to eleven years old as well as very selective adult "G" rated
entertainment.

OPERATIONS

         During 1999, the Company has two employees and has an office located in
Southern California. All accounting, payroll and operating requirements are
handled through an agreement with the Corporation.

COMPETITION

         Competing in a world entertainment environment, competition comes from
a variety of international producers, distributors and studios. Equator expects
to market high end, world class children's entertainment properties in the
global television, video, music, publishing and merchandising marketplace. A
sample of the competition ranges from Disney to Canal Plus in Europe.

FINANCIAL CONDITION

         Equator does not expect any revenue until the latter part of 2000. The
Board continues to unanimously maintain its belief in Mr. Keefe and the mission
of Equator Entertainment. Agreements with television networks require
substantial advance timing before revenue is recognized due to the nature of
industry scheduling. Currently, Equator is holding discussions regarding several
high level projects for cable television.

         The Corporation Board has approved extending funds for Equators
operations until a positive Cash Flow can be expected, during the second full
year of operations, in 2001.

FIRST NATIONAL VIDEO CORP. (FNVC)

GENERAL

         In April, 1998 the corporation acquired the assets of a chain of six
retail video stores. These stores were located in the Chicago area. Despite
considerable due diligence in the purchase the stores have performed well below
forecasts and management expectations since their purchase in rapidly changing
market conditions. The Corporation is in the process of selling or closing all
locations.



                                       4
<PAGE>   7
OPERATIONS

         A General Manager oversees a manager at each location. Controls over
cash and credit card receipts are maintained on a daily basis. Videos are
purchased in a range of $25.00 to $102.00 and in turn rented or sold. In 1999
the subsidiary signed and agreement with Rentrak Corp. with a pay per video
revenue sharing program. Videos are purchased at a low cost and revenue shared
with each rental.

         A number of attempts to improve sales; remodeling some stores, adding
Illinois Lotto sales and ATM machines to improve pedestrian traffic and minor
sub lease income all failed to improve their profitability. In 1999 the
corporation closed two of its stores. Currently, the Corporation has a sales
contract for one store, a sales agreement for another store and is in the
process of closing the balance of the locations.

EMPLOYEES

         Collectively the stores employ approximately 20 full and part time
employees. Managers and some assistant managers are salaried with the remainder
of the employees hourly. Currently, the company has no union and does not
anticipate one.

INDUSTRY OUTLOOK/COMPETITION

         Currently the independent video store segment of the industry is under
siege from the large national chains, particularly Blockbuster and Hollywood
Video. In addition to opening hundreds of new stores nationally (some of which
may affect the company's existing locations) Blockbuster has negotiated a
tremendously favorable deal with the major studios. This deal is detrimental to
the sales health of many independent stores. This type of deal is Pay Per View -
which is a plan offering the videos at a very nominal cost, usually $8.00 or
less, and sharing in the revenue. This allows for many more copies per store
with a nominal initial cash investment.

FINANCIAL CONDITION

         A loan of $400,000 was obtained from a national bank and all payments
have been made on a timely basis. With the rapidly changing adverse market the
company experienced substantial losses during 1999.

PRAIRIE BUSINESS CREDIT, INC. (PBCI)

THE COMPANY

         Prairie Business Credit, Inc. is in the business of factoring, i.e.
purchasing accounts receivable from companies in transition that do not qualify
for bank standard credit. Prairie succeeds in this form of lending to companies
by relying on the credit of the client's customers, not the credit of the
client. Extensive credit research reduces a significant (although not all)
possible losses through the failure of the ultimate customer to pay the factored
invoices.

         PBCI was started in July of 1993 by Trevor Morgan who has more than
twenty five years experience lending to business. PBCI has a staff of seasoned
lenders and accounts receivable professionals.

         On December 17, 1999 management decided to sell or otherwise dispose of
this segment of the business (see note 15 to the financial statements).




                                       5
<PAGE>   8
THE MARKET

         Prairie's target market is new companies with a brief history of
selling a proven product without sufficient history or credit worthiness to
obtain standard banking financing. PBCI fills this short term void. Client
longevity with Prairie has been six months to three years. PBCI's clients either
achieve enough success to be bankable or have sufficient internal cash.
Factoring is particularly attractive to fast growing young companies who do not
want to, or cannot raise equity to fund a growth surge. New business is usually
obtained through referrals from banks, attorneys, accountants and other business
professionals. Some new business has come from replies to our web page.

THE BUSINESS

         Factoring is the purchase of accounts receivable at a discount by a
third party. Prairie typically advances 60-80% of the face value of the account
receivable invoice upon verification of its validity. The amount not advanced,
the "reserve", less the factor's discount, the "commission", is remitted to the
client after collection. Prairie purchases accounts on a full recourse basis,
i.e. the client must buy them back if the invoice goes 60 days past terms.
Prairie requires personal guarantees from all clients. PBC may not necessarily
purchase all a clients receivables but has the right and the capability to
notify all the client's customers to pay Prairie directly to satisfy any past
due accounts regardless if the client has submitted the account to Prairie for
factoring. Prairie also has full offset rights.

MARKETING

         Mr. Morgan leads the sales effort through numerous professional
referral contacts in the banking industry, public accounting and business
professionals. The marketing goal for 1999 is to significantly increase the
purchases of receivables from existing and new prospects. Personnel, systems and
procedures are in place to increase capacity to well over $5,000,000 a month in
purchased invoices. The company expects some moderate growth from our existing
clients and significant growth from new clients due to significantly increased
advertising and calling efforts. The ultimate size and success will be
determined by the ability to attract and retain highly qualified employees and
to raise funds.

FINANCIAL CONDITION

         Prairie Business Credit, Inc. was sold to prior management as of
January 31, 2000.


FIRST NATIONAL FINANCE CORP. (FNFC)

         The Corporation established FNFC as a wholly owned subsidiary to
acquire certain assets from Shiloh Corporation. Mr. Charles E. Nootens was
elected Chairman of the company's Board of Directors effective June 30, 1997.

         FNFC issued $3,500,000 principal amount of preferred stock and 50 call
pack options, at $10,000 each, to purchase 20 million shares of the
Corporation's Common Stock at 10 cents a share in exchange for the assets of Mr.
Nootens business. As of June 30, 1997, FNFC had issued additional call pack
options to purchase an aggregate of 8 million of the Corporation's common
shares. These calls were issued for a consideration of 2.5 cents per share and
entitled the holder to purchase shares at 10 cents per share or an aggregate of
$800,000.

         The Corporation obtained approximately $3.5 million dollars of assets
($2.9 million liquid short-term) with the issuance of preferred stock in FNFC
and Call Options. Included in the short term assets are loans receivable,
interest and cash. (See Financial Statements, Note 14 "Continuing Operations,
Acquisitions and Subsequent Events").




                                       6
<PAGE>   9
INDUSTRY OVERVIEW

         Urban areas are experiencing significant demands for redevelopment of
single and multiple family dwellings. Many qualified developers responding to
this demand require short term financing. The Company provides this financing
generally in large metropolitan areas.

FNFC'S FINANCING SERVICE OVERVIEW

         FNFC is an active business engaged in making relatively small, high
yield bridge loans. These loans are typically in the range of $25,000 to
$100,000 to developers and redevelopers of real estate and to a lesser extent
tangible personal property and to producers, inventors, authors and syndicators
of media, software and other similar entertainment and intellectual properties.
The Corporation expanded through the acquisition of Prairie Business Credit an
accounts receivable factoring company.

         During 1998 FNFC financed certain old time successful television shows
which were being released on VHS and DVD. These loans were for six months or
less and secured by a library of established television shows previously
converted to video tape or DVD.

SALES AND MARKETING

         Through networking the Company has established contacts in local
markets allowing the Company to capitalize on their expertise. Guidelines have
been established to attract clients capable of fulfilling their business loan
obligations on a timely basis. The Company's marketing strategy incorporates a
continued review of client's needs, areas which require its services and
development of long-term relationships with borrowers to more fully understand
and anticipate their needs.

COMPETITION

         The short term loan industry is very competitive and fragmented. There
are limited barriers to entry and new competitors frequently enter the market.
Some may possess substantially greater resources. The Company believes that the
availability of quality loan candidates, level of service, effective monitoring
of loan and renovation performance and the price of service are the principal
elements of competition in bridge loans.

EMPLOYEES

         As of December 31, 1999 FNFC has no employees and has a management
agreement for all services with First National Entertainment Corp.

PROPERTIES

         The Company shares space with its parent in a leased office which has
an annual lease ending December 31, 2003.


FIRST NATIONAL ENTERTAINMENT CORP. (THE CORPORATION)

TURNAROUND PLAN & SUBSEQUENT EVENTS

         The corporation continues to follow a Business Turnaround Plan
developed in 1997, when the new management team led by Chairman Mr. Charles
Nootens was established. At that time it was determined that the company had
primary assets of a large shareholder base on the OTC Market and a tax-loss
carry-forward of approximately $31,000,000.





                                       7
<PAGE>   10
         The Plan consisted of two major parts - establish and expand a
financial services business primarily in bridge loans and accounts receivable
factoring while re-establishing a viable general entertainment division. In 1998
and early 1999 the Corporation has completed two acquisitions toward these goals
with the addition of Mr. Peter Keefe (now Equator Entertainment) and Prairie
Business Credit, Inc. (See Financial Statements, Note 14 "Continuing Operations,
Discontinued Operations, Acquisitions, and Subsequent Events").

ITEM 2 - PROPERTIES

         The Corporation's principal executive offices are currently being
relocated to 6516 W. North Avenue, Suite 200, Chicago, Illinois 60707, (630)
971-9924. The Company leases approximately 1000 square feet of office space in
an executive office building. The lease expires on December 31, 2003.

         In addition, the FNVC leases two stores for its video operation with
varying length of lease ending dates. (See Financial Statement, Note 12
"Leases").

         The corporation anticipates establishing a sales and marketing office
for Equator Entertainment in the Los Angeles area during the year 2000.

ITEM 3 - LEGAL PROCEEDINGS

         In the ordinary course of its business, the Corporation is from time to
time threatened with or named as a defendant in various lawsuits. The
Corporation is not currently involved in any material litigation. (See Financial
Statement, Note 13 "Commitments and Contingencies").

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

         None.

                                     PART II

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
         MATTERS

         The Corporation's $.005 par value Common Stock shares were traded on
the NASDAQ 'Small Cap' Market System under the symbol "FNAT" through July 3,
1997. The following table shows the range of reported high and low bid
quotations for the Corporation's Common shares, as indicated on the OTC Market
Reports.


                                            High               Low
                                            ----              -----
For the year ended 12/31/99                 $0.05             $0.01


         As of March 1, 2000, the Corporation had an estimated 3,500
shareholders of record. The Company has never paid a cash dividend on its Common
Stock and does not expect to pay a cash dividend on its Common Stock in the
foreseeable future.

         On October 6, 1996 the Corporation's Board of Directors approved and
issued an Extension and Optional New Pricing Offer to the holders of Warrants
from its Private Placement of 1,260,000 of the Corporation's common stock in
December 1995. These 1,260,000 Warrants originally entitled the holders to
purchase an additional share each of the Corporation's common stock at a price
of $1.00 through an expiration date of December 15, 1997. The Extension and
Optional New Pricing Offer allows an extension




                                       8
<PAGE>   11
at the same price until December 31, 1998 for no additional consideration or an
extension until December 31, 1999 at a share price of $.15 for additional
consideration of $.05 per Warrant or an extension until December 31, 2000 at a
share price of $.05 for additional consideration of $.10 per Warrant. The Board
approved an extension of an additional year until December 31, 2000 and 2001
respectively.

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

         Not every asset or subsidiary is worth holding on to since it may have
poor operating results and or inadequate growth potential. With these parameters
in mind, the Board ordered the sale or closing of the video store chain,
improved control of bridge loans and the sale of Prairie Business Credit, Inc.,
back to the former owner.

         Many times we are excited about expanding revenue, however when profits
and positive cash flow from such growth are not available for long term growth
or investment in new innovative products it is time to return to the basic
business plan established when the current management group assumed daily
operations of the corporation. To that end the Board has pledged to stay
fiscally responsible, improve our operating margins and generate net income for
the year 2000.

         The video stores have failed to meet profit goals for each quarter
since their purchase. Despite an outstanding effort by its employees to add
customer friendly services and a pay per view agreement for videos the
competition from the largest chain appears insurmountable. The subsidiary is
being treated as a discontinued operation. Currently, a sales agreement is in
place to sell two of the remaining stores.

         First National Finance Corporation's loan portfolio suffered some
severe problems as the company had to seize a number of properties for failure
to meet obligations on the part of the borrowers. Many of the properties needed
rehab completion in order to be sold. The Company has completed and sold several
properties and has a plan to complete and sell the remaining inventory by May
31, 2000. The need remains strong for this bridge loan business into the
foreseeable future and with new contracts the subsidiary should be profitable in
2000.

         Prairie Business Credit, Inc. acquired in 1999 failed to meet revenue
and income projections. In addition, management style differences created a
business climate which was not conducive to future growth. The subsidiary is
being treated as a discontinued operation for accounting purposes. The
Corporation concluded the sale of this subsidiary in the first quarter of 2000.
The majority of these sales will be used to reduce the shareholder's loans.

         Equator Entertainment experienced a year of progress in establishing
relationships which point to a bright future. Two such agreements have been
established with Egmont Imagination for a joint alliance focusing on technical
and marketing activity in North America and with Mr. David Dortort of Bonanza to
develop a possible return of the classic television show in some format yet to
be determined.

         In the year ahead, management intends to focus on three core areas of
the turnaround business plan. Significant improvements in control strategy of
bridge loans, continued support of the entertainment business through Equator
Entertainment and pursuit of profitable companies in order to generate net
income from our tax loss asset.

FORWARD LOOKING STATEMENTS

         The form 10-K includes certain "forward looking" statements, which
reflect the Corporation's current expectations regarding the future results of
operations, performance, and achievements. First National Entertainment Corp.
has tried, wherever possible, to identify these statements by having words such
as "believe", "anticipate", "expect" and similar expressions. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results,



                                       9
<PAGE>   12
performances or achievements of the Corporation or its industry to be materially
different from any future results, performance or achievements expressed or
impaired by such forward-looking statements. The risks and uncertainties include
the following: economic activity in the United States, continued strong building
rehabilitation market with available mortgage funds; the Corporation's ability
to attract new businesses to its plan of diversification; the retention of key
personnel; exposure to liability risk and changes in tax or regulatory
requirements.

REVENUE

         The Corporation's revenues were generated from interest and loan fees
in the Finance subsidiary and video store rentals and sales.

NET OPERATING REVENUE

         Net operating revenue from continuing operations amounted to $475,097
for the year ended December 31, 1999 compared to an amount of $813, 374 for the
prior year.

OPERATING EXPENSES

         Operating expenses from continuing operations amounted to $1,351,440
versus $680,931 for the prior year.

OPERATING LOSS

         The loss from continuing operations of $1,330,483 as compared to income
of $43,455 for 1999. In addition, an extremely poor performance in the loan
portfolio requiring foreclosure on several properties resulting in significantly
reduced revenue resulted in a higher than anticipated loss.

DISCONTINUED OPERATIONS

         The loss from discontinued operations amounted to $437,558 during 1999.
This amount pertains to the First National Video Corp. and Prairie Business
Credit and amounted to a loss of $(.02) per share. (See Note 14 - "Continuing
Operations, discontinued operations, acquisitions, and subsequent events).

INCOME TAXES

         No income tax effect for the year ended December 31, 1999. The
corporation is limited in its annual utilization of loss carrryforwards under
IRC Section 382. "Limitation of Net Operating Loss Carryforwards", based on
certain changes in ownership. (See Financial Statement, Note 10 "Income Taxes").

NET LOSS

         Net loss of $1,768,041 for the year compared to $320,963 for the year
ended December 31, 1999.

LIQUIDITY AND CAPITAL RESOURCES

         Historically, the Corporation has financed its operations through cash
generated by operating activities and through external financing, including sale
of warrants, bank credit, and private placement of lines of credit and
shareholder loans.



                                       10
<PAGE>   13
         The corporation believes that its cash balance, funds from operations
and planned line of revolver credit along with shareholder financial support to
be sufficient to fund the operation of corporate management and growth for the
next twelve months.

MANAGEMENT REPORT

         The accompanying financial statements of First National Entertainment
Corp. and Subsidiaries (the "Company") are the responsibility of and have been
prepared by the Corporation in conformity with generally accepted accounting
principles. It is necessary to include some amounts that are based on best
judgment and estimates. The Corporation seeks to assure the objectivity and
integrity of its financial records by careful selection of its employees and by
insuring that its policies and methods are understood. The Board of Directors
pursue oversight of financial reporting and internal control on a regular basis.
It is believed by management as stated earlier it has sufficient funding to
continue as a going concern.


ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See the attached Financial Statements



ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

         None.


                                    PART III

ITEM 9 - DIRECTORS AND  EXECUTIVE OFFICERS

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the Executive Officers and Directors of the Board
for the Corporation, their ages, positions held with the Corporation and term of
service as Director of the Corporation, as of December 31, 1999.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                                   PERIODS OF SERVICE AS
       NAME                      AGE      POSITIONS HELD WITH CORPORATION          CORPORATION DIRECTOR
---------------------------------------------------------------------------------------------------------
<S>                              <C>      <C>                                      <C>
Charles E. Nootens               58       Chairman of the Board of Directors       April 1997 to Present
                                          President                                June 1997 to Present
---------------------------------------------------------------------------------------------------------
Geoffrey W. McGrath              27       Director                                 March 1997 to Present
---------------------------------------------------------------------------------------------------------
Kenneth E. Scipta                59       CEO, Secretary and Director              June 1997 to Present
---------------------------------------------------------------------------------------------------------
Peter Keefe                      47       Director                                 July, 1998 to Present
---------------------------------------------------------------------------------------------------------
</TABLE>



                                       11
<PAGE>   14

         Kenneth E. Scipta was appointed CEO by the Board effective August 1,
1997. On September 10, 1997 Mr. Scipta replaced Mr. McGrath as Secretary.

         All Directors serve until the next annual meeting of stockholders and
the concurrent election of directors. All officers serve at the pleasure of the
Board of Directors. No Director holds directorships in other reporting
companies.

         On September 10, 1997, a stock program was approved to option 300,000
shares to each board member earned monthly over 36 months. At December 31, 1999,
966,000 shares have been issued.

BUSINESS EXPERIENCE OF NOMINEES AND EXECUTIVE OFFICERS


CHARLES E. NOOTENS - Mr. Nootens (age 58) is the Chairman of the Board,
President and a Director of FNAT. He is also President and sole director of FNFC
and a director of FNET. Prior to joining the Company, he was President and
primary stockholder of Shiloh Inc., which was engaged in a business similar to
FNFC. Prior thereto, he was President of American Energy Management, Inc., which
he founded in 1987 and sold in 1995. Mr. Nootens is a graduate of the University
of Chicago (A.B. 1963 and MBA 1964). He majored in accounting and worked as an
auditor for Arthur Andersen & Co. prior to founding American Energy Management,
Inc.

KENNETH E. SCIPTA - Mr. Scipta (age 59) is the CEO, Director, and Secretary of
FNAT. Prior to joining the Company, he was President and Board Member of
Mid-West Spring Manufacturing Company, one of the five largest spring companies
in the USA. During his twenty years with the company he served as Vice President
of Finance and Vice President of Sales & Marketing. Mr. Scipta is a CPA and
initially worked as an auditor with Ernst & Young. He is a graduate of St.
Joseph's College, Indiana (BA - 1966).

GEOFFREY W. MCGRATH - Mr. McGrath (age 27) is a Director and Secretary of FNAT.
He is also a Vice President and Director of NHI, where he is responsible for
NHI's investment in FNAT as well as certain other investments in the NHI
portfolio. He is a graduate of the University of Illinois, Champaign-Urbana (BA
- 1997).

PETER KEEFE - Mr. Keefe (age 47) is a Director of FNAT. He is the Managing
Director of Equator Entertainment. Prior to joining the company, he was
President of Peter Keefe Productions, a global television production &
merchandise licensing consulting company. Prior there to he was the Managing
Director of Zen Entertainment (1994-1996), a Managing Partner of Zodiac
Entertainment (1989-1994) and the Senior Vice President at World Events
Productions (1980-1989). He has created, produced and successfully marketed
several US & International hit children's and family entertainment series
including Voltron, which generated over 100 million dollars in earnings.

ITEM 10 - EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table summarizes the compensation paid during the last three
fiscal years to the Company's executive officers and directors.


                                       12
<PAGE>   15



<TABLE>
<CAPTION>
                         Annual Compensation                Long-Term Compensation
                         -------------------                ----------------------
                    Fiscal                 Other        Restricted    Securities
Name and            Year &                 Annual         Stock       Underlying          All Other
Principal Position   1999    Salary    Compensation       Awards    Options/SARs(#)     Compensation
------------------- ------  --------   ------------     ---------   ----------------    ------------
<S>                  <C>    <C>        <C>                <C>       <C>                 <C>
Charles E. Nootens   1998   $ 32,813   $  1,000(a)        $  0           0                     0
President            1999   $ 12.500   $  1,100(a)

Kenneth E. Scipta    1998   $ 85,000   $  1,000(a)        $  0           0                     0
CEO, Company         1999   $100,000   $  1,000(a)
Secretary

Peter Keefe          1998   $ 37,500   $    500(a)        $  0           0                     0
Director             1999   $162,500   $  1,100(a)
</TABLE>



NOTES:

(a)  Mr. Nootens and Mr. Scipta received 100,000 shares each for 1999 and 1998
     respectively. Mr. Peter Keefe received 50,000 shares for 1998 and 100,000
     for 1999 service.


ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL STOCKHOLDERS AND STOCK HOLDINGS OF MANAGEMENT

The following table sets forth as of March 31, 2000 all persons known by the
Corporation to be a beneficial owner of more than five percent of any class of
the Corporation's voting securities and the security ownership in the
Corporation or its affiliates, directly or indirectly by all directors and
nominees, executive officers and all directors and officers of the Corporation
as a group. Unless otherwise stated, the nature of beneficial ownership is that
of sole voting power and sole investment power.

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

CHARLES E. NOOTENS
477 E.BUTTERFIELD RD.,                   840,994(6)                4.3%
STE.307, LOMBARD, IL 60148            24,200,000(2)

KENNETH E. SCIPTA
477 E. BUTTERFIELD RD.,                  500,450(6)                2.6%
STE. 307, LOMBARD, IL 60148              800,000(3)
GEOFFRY MCGRATH
NIMBUS HOLDINGS, INC                     893,000(4),(5),(6)        4.6%
943 EDGEMERE CT                        4,300,000
EVANSTON, IL 60202

PETER KEEFE
29050 WAGON RD                           250,000(6),(7)            1.3%
AGOURA HILLS, CA                         100,000

TREVOR MORGAN
221 W. JEFFERSON AVE                     100,000                    .5%
NAPERVILLE, IL 60540


                                       13
<PAGE>   16

(1) Calculated based upon 19,437,458 shares of Common Stock issued and
outstanding as of the Record Date of March 31, 2000. In addition to its Common
Stock, the Corporation had outstanding as of March 31, 2000, 29,325,000 Options
and Warrants to purchase one share of common stock, $0.005 par value each. None
of the holders of the Warrants are entitled to vote, receive dividends, receive
notices of meetings or to any other shareholder rights on account of the
Warrants prior to exercise thereof.

(2) Of the options and warrants owned, 200,000 of these shares represent shares
that may be purchased on existing warrants at $.05 per share (See Financial
Statements, Note 11 "Shareholders' Equity"), and an additional 22,400,000
options at $0.10 each. Purchased 800,000 warrants from participant in the 1997
offering. Received 500,000 options @ .25 for 1998 and 1999 respectively for
employer compensation. (See Financial Statements, Note 14 "Continuing
Operations, Acquisitions, and Subsequent Events").

(3) Call pack options of Scipta (800,000) and Nimbus (4,300,000) at a cost of
$.025 each to acquire shares at $0.10 each. (See Financial Statements, Note 14
"Continuing Operations, Acquisitions, and Subsequent Events")

(4) Geoffry McGrath owns 2.6% of the shares and serves as Vice President and
Director of Nimbus Holdings. Accordingly, Mr. McGrath may be deemed to
beneficially own the shares of Common Stock held by Nimbus Holdings.

(5) Of the shares beneficially owned, 600,000 of these shares represent shares
that may be purchased upon exercise of warrants at $.15 per share. (See
Financial Statements, Note 11 "Shareholders' Equity").

(6) Common Stock for Board Service, Nootens (275,000), McGrath-Nimbus (283,000),
and Scipta (258,000), Peter Keefe (150,000). (See Financial Statements, Note 11
"Shareholders' Equity").

(7) Peter Keefe obtained 150,000 shares and Trevor Morgan obtained 100,000
shares in the acquisition of the assets of their companies. In addition Mr.
Keefe received 100,000 warrants to obtain one common share at $.25 per share.

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         None

COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT

         The Securities Exchange Act of 1934 requires all executive officers,
directors and 5% or greater shareholders to report any changes in their
ownership of Company common stock to the Securities and Exchange Commission,
NASDAQ and the Company.

PART IV

ITEM 13 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

Financial Statements and Schedules:

         See Table of Contents at the beginning of attached financial
statements. Exhibits required by Item 601 of Regulation S-B.



                                       14
<PAGE>   17

EXHIBIT NO.    DESCRIPTION
-----------    -----------

3.1*           Articles of Incorporation as Amended on 7/1/93 approved by
               shareholders on May 21, 1993 (Restated as Amended). (Incorporated
               by reference to Exhibit 3.1 of the Company's Annual Report of
               Form 10-K for the year ended June 30, 1993, Commission File No.
               0-18866)

3.1.1*         Amendment of Articles of Incorporation approved on October 28,
               1994.

3.2*           By-laws approved and adopted March 30, 1989. (Incorporated by
               reference to Exhibit 3.2 of the Company's Annual Report of Form
               10-K for the year ended June 30, 1993, Commission File No.
               0-18866)

4.1*           Instruments Defining Rights of Security Holders, Class A and
               Class B Common Stock Purchase Warrants. (Incorporated by
               reference to the Registration Statement on Form S-18, declared
               effective on 9/19/89, SEC Reg. No. 33-30153-B)

10.1*          1993 Non-Statutory Stock Option Plan, April 1, 1993.
               (Incorporated by reference to Exhibit 10.1 of the Company's
               Annual Report of Form 10-K for the year ended June 30, 1993,
               Commission File No. 0-18866)

10.2*          1993 Incentive Stock Option Plan, April 1, 1993. (Incorporated by
               reference to Exhibit 10.2 of the Company's Annual Report of Form
               10-K for the year ended June 30, 1993, Commission File No.
               0-18866)

10.3*          Employment Agreement with Jeffrey S. Schwaber dated March 26,
               1993. (Incorporated by reference to Exhibit 10.3 of the Company's
               Annual Report of Form 10-K for the year ended June 30, 1993,
               Commission File No. 0-18866)

10.4*          Employment Agreement and option with Rick D. Busby dated January
               15, 1993. (Incorporated by reference to Exhibit 10.4 of the
               Company's Annual Report of Form 10-K for the year ended June 30,
               1993, Commission File No. 0-18866)

10.5*          Milton Verret Stock Purchase Arrangement of December 1, 1991
               (Written Summary). (Incorporated by reference to Exhibit 10.5 of
               the Company's Annual Report of Form 10-K for the year ended June
               30, 1993, Commission File No. 0-18866)

10.6*          Continental Capital & Equity Corp. Advertising Consulting
               Agreement dated March 5, 1993 and Agenda of May 11, 1993
               (Incorporated by reference to Exhibit 10.6 of the Company's
               Annual Report of Form 10-K for the year ended June 30, 1993,
               Commission File No. 0-18866)

10.7*          Television Distribution Agreement with Technovision Industries,
               Inc. dated March 16, 1993 (Incorporated by reference to Exhibit
               10.7 of the Company's Annual Report of Form 10-K for the year
               ended June 30, 1993, Commission File No. 0-18866)

10.8*          Letter Agreement and Amendment Agreement with Entertainment
               Marketing & Communications International dated February 3, 1992
               and June 15, 1993, respectively (Incorporated by reference to
               Exhibit 10.8 of the Company's Annual Report of Form 10-K for the
               year ended June 30, 1993, Commission File No. 0-18866)

10.9*          Agreement with American Softworks Corporation dated June 17,
               1993. (Incorporated by reference to Exhibit 10.9 of the Company's
               Annual Report of Form 10-K for the year ended June 30, 1993,
               Commission File No. 0-18866)



                                       15
<PAGE>   18
10.10*         Agreement with Worldvision Enterprises Inc. dated July 16, 1993.
               (Incorporated by reference to Exhibit 10.10 of the Company's
               Annual Report of Form 10-K for the year ended June 30, 1993,
               Commission File No. 0-18866)

10.11*+        1994 Employee Stock Purchase Plan, dated January 22, 1994
               (Incorporated by reference to Exhibit 10.11 of the Company's
               Annual Report of Form 10-K for the year ended June 30, 1994,
               Commission File No. 0-18866)

10.12*         Amendments to Worldvision Enterprises Inc. Agreement, dated April
               13, 1994 and May 23, 1994 (Incorporated by reference to Exhibit
               10.12 of the Company's Annual Report of Form 10-K for the year
               ended June 30, 1994, Commission File No. 0-18866)

10.13*         Stylus Records Inc. subsidiary Founder's Agreement dated April
               15, 1994 (Incorporated by reference to Exhibit 10.13 of the
               Company's Annual Report of Form 10-K for the year ended June 30,
               1994, Commission File No. 0-18866)

10.14*         Replacement Television Program Distribution Agreement with
               Technovision Industries, Inc. dated June 10, 1994 (Incorporated
               by reference to Exhibit 10.14 of the Company's Annual Report of
               Form 10-K for the year ended June 30, 1994, Commission File No.
               0-18866)

10.15*+        Employment Agreement with Stephen J. Denari dated May 10, 1995.
               (Incorporated by reference to Exhibit 10.15 of the Company's
               Annual Report of Form 10-K for the year ended June 30, 1995,
               Commission File No. 0-18866)

10.16*+        Non-Qualified Stock Option Grant Agreement with Eugene E. Denari,
               Jr. dated June 26, 1995. (Incorporated by reference to Exhibit
               10.16 of the Company's Annual Report of Form 10-K for the year
               ended June 30, 1995, Commission File No. 0-18866)

10.17*+        Non-Qualified Stock Option Grant Agreement with Stephen J. Denari
               dated June 26, 1995. (Incorporated by reference to Exhibit 10.17
               of the Company's Annual Report of Form 10-K for the year ended
               June 30, 1995, Commission File No. 0-18866)

10.18*         Promissory Note from Milton J. Verret dated July 14, 1995.
               (Incorporated by reference to Exhibit 10.18 of the Company's
               Annual Report of Form 10-K for the year ended June 30, 1995,
               Commission File No. 0-18866)

10.19*         Distribution Agreement with SeaGull Entertainment , Inc. dated
               October 4, 1995. (Incorporated by reference to Exhibit 10.19 of
               the Company's Annual Report of Form 10-K for the year ended June
               30, 1995, Commission File No. 0-18866)

10.20*         Amendment to Promissory Note and Collateral Agreement with Milton
               Verret, dated July 14, 1995. (Incorporated by reference to
               Exhibit 10.20 of the Company's Annual Report of Form 10-K for the
               year ended June 30, 1995, Commission File No. 0-18866)

10.21*         Option Agreement with Vivienne Crowe dated September 14, 1996.


16.1*          Letter from former accountant regarding concurrence with
               registrant's statements in report regarding dismissal as
               registrant's principal accountant, dated June 30, 1994
               (Incorporated by reference to Exhibit 16.1 of the Company's
               Annual Report of Form 10-K for the year ended June 30, 1994,
               Commission File No. 0-18866)

21.1*          Subsidiaries of the Registrant, as amended on April 15, 1994
               (Incorporated by reference to Exhibit 21.1 of the Company's
               Annual Report of Form 10-K for the year ended June 30, 1994,
               Commission File No. 0-18866)

* Previously filed with the Commission.
+ Constitutes agreement or plan relating to employment or employee benefits.


                                       16
<PAGE>   19
REPORTS ON FORM 8-K DURING THE LAST QUARTER

         On December 8, 1999 the Company filed on Form 8-K that FNAT's wholly
owned subsidiary Equator Entertainment has entered into a strategic alliance
with Egmont Imagination, a member of the Egmont Group of Companies.

         This cross Atlantic alliance provides cross regional access to the
American and European entertainment markets. This alliance focus is on the
creation, financing, production and distribution of commercially competitive,
content driven, family entertainment for all media applications.



                                   SIGNATURES

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

Dated:  April 17, 2000

                                              FIRST NATIONAL ENTERTAINMENT CORP.



                                              By: /s/ Charles E. Nootens
                                                 -------------------------------
                                                 Charles E. Nootens
                                                 President


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



<TABLE>
<CAPTION>
       SIGNATURE                     TITLE                             DATE
       ---------                     -----                             ----
<S>                        <C>                                     <C>
/s/ CHARLES E. NOOTENS     CHAIRMAN, PRESIDENT,                    April 17, 2000
------------------------                                           ---------
CHARLES E. NOOTENS

/s/ KENNETH E. SCIPTA      CHIEF EXECUTIVE OFFICER, DIRECTOR       April 17, 2000
------------------------                                           ---------
KENNETH E. SCIPTA
</TABLE>



                                       17
<PAGE>   20
                                 EXHIBIT INDEX
                                 -------------

<TABLE>
<CAPTION>
Exhibit No.      Description                                                    Comment
-----------      -----------                                                    -------
<S>              <C>                                                            <C>
3.1 *            Articles of Incorporation, as amended                          Restated as Amended
3.1.1*           Articles of Amendment to the Articles of Incorporation         Adopted October 28, 1994 (Filed concurrently)
3.2 *            By-laws                                                        By-laws see Note 1
4.1 *            Instruments Defining Rights of Security Holders                Class A & B Warrants
10.1 *           Non-Statutory Stock Option Plan                                April 1, 1993
10.2 *           Incentive Stock Option Plan                                    April 1, 1993
10.3 *           Employment Agreement with Jeffrey Schwaber                     March 26, 1993
10.4 *           Employment Agreement with Rick Busby                           January 15, 1993
10.5 *           Stock Purchase Agreement with Milton Verret                    December 1, 1991
10.6 *           Continental Capital & Equity Agreement                         March 5, 1993 and Addenda May 11, 1993
10.7 *           Technovision Agreement                                         March 16, 1993
10.8 *           Entertainment Marketing & Communications Agreement             February 3, 1992 and June 15, 1993
10.9 *           American Softworks Agreement                                   June 17, 1993
10.10 *          Worldvision Agreement                                          July 16, 1993
10.11*           Employee Stock Purchase Plan                                   January 22, 1994
10.12*           Worldvision Agreement, as amended                              April 13, 1994 and May 23, 1994
10.13*           Stylus Records Founder's Agreement                             April 15, 1994
10.14*           Technovision Agreement, as amended                             June 10, 1994
10.15 *+         Employment Agreement with Stephen J. Denari                    May 10, 1995 (Filed concurrently)
10.16*+          Non-Qualified Stock Option Grant Agreement with                June 26, 1995 (Filed concurrently)
                   Eugene E. Denari, Jr.
10.17*+          Non-Qualified Stock Option Grant Agreement with                June 26, 1995 (Filed concurrently)
                   Stephen J. Denari
10.18*           Promissory Note from Milton J. Verret                          July 14, 1995 (Filed concurrently)
10.19*           Distribution Agreement with SeaGull Entertainment, Inc.        October 4, 1995 (Filed concurrently)
10.20*           Amendment to Promissory  Note and  Collateral  Agreement with  July 14, 1995
                   Milton Verret
10.21*           Option agreement with Viviene Crowe                            September 14, 1996
16.1*            Letter from previous auditor                                   June 30, 1994
21.1*            Subsidiaries of the Registrant, as amended                     Restated as Amended

</TABLE>

* Previously filed with the Commission.

+ Constitutes agreement or plan relating to employment or employee benefits.


                                       18
<PAGE>   21







               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES

                                Lombard, Illinois

                        CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998








<PAGE>   22

               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                                Lombard, Illinois

                        CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998



                                    CONTENTS






REPORT OF INDEPENDENT AUDITORS............................................   1


FINANCIAL STATEMENTS

     CONSOLIDATED BALANCE SHEETS..........................................   2

     CONSOLIDATED STATEMENTS OF OPERATIONS................................   3

     CONSOLIDATED STATEMENTS OF CASH FLOWS................................   4

     CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT.....................   6

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...........................   7



<PAGE>   23

                              [CROWE CHIZEK LOGO]


                         REPORT OF INDEPENDENT AUDITORS


Board of Directors
First National Entertainment Corp.
  and Subsidiaries
Lombard, Illinois


We have audited the accompanying consolidated balance sheets of First National
Entertainment Corp. and Subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, cash flows, and shareholders'
deficit for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First National
Entertainment Corp. and Subsidiaries at December 31, 1999 and 1998 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered losses from
operations and has a net capital deficiency that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

As more fully described in Note 2 to the consolidated financial statements, the
Company receives significant financial support from one of the shareholders and
the Company is dependent upon the continuance of such financial support.


                                            /s/ Crowe, Chizek and Company LLP

                                            Crowe, Chizek and Company LLP

Oak Brook, Illinois
February 17, 2000

                                                                              1.
<PAGE>   24


               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

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

<TABLE>
<CAPTION>
                                                               December 31,
                                                       ------------------------------
                                                           1999              1998
                                                           ----              ----
<S>                                                    <C>               <C>
ASSETS
Cash                                                   $     60,123      $    117,465
Loans receivable, less allowance for loan losses
  of $50,000 and $23,000 at December 31, 1999
  and 1998, respectively                                  1,020,586         2,157,565
Other real estate owned, less allowance for losses
  of $125,000 and $127,000 at December 31, 1999
  and 1998, respectively                                  1,311,122           911,280
Notes receivable, less allowance for uncollectible
  notes of $125,000 at December 31, 1999                    126,000           909,380
Interest receivable                                         118,380            87,582
Real estate held for development                              9,000             9,000
Furniture and fixtures and equipment, net                    12,035            19,873
Other assets                                                 11,800            31,793
Net assets of discontinued operations                       345,161              --
                                                       ------------      ------------

                                                       $  3,014,207      $  4,243,938
                                                       ============      ============

LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities
     Short-term debt                                   $  3,113,050      $  2,073,984
     Accounts payable                                        30,173            24,238
     Accrued expenses                                       302,643           215,181
     Net liabilities of discontinued operations                --             292,903
                                                       ------------      ------------
         Total liabilities                                3,445,866         2,606,306

Minority interest in consolidated subsidiary
  (entitled in liquidation to $3.5 million)               2,788,968         2,788,968

Shareholders' deficit
     Preferred stock, $.0001 par value
       authorized 10,000,000 shares, no shares
       issued and outstanding                                  --                --
     Common stock, $.005 par value; authorized,
       100,000,000 shares                                    95,190            92,690
     Paid-in capital                                     27,260,741        27,258,241
     Accumulated deficit                                (30,576,558)      (28,502,267)
                                                       ------------      ------------
         Total shareholders' deficit                     (3,220,627)       (1,151,336)
                                                       ------------      ------------

                                                       $  3,014,207      $  4,243,938
                                                       ============      ============
</TABLE>

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

          See accompanying notes to consolidated financial statements.

                                                                              2.
<PAGE>   25
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

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

<TABLE>
<CAPTION>
                                                                Year Ended
                                                                December 31,
                                                        -----------------------------
                                                             1999            1998
                                                             ----            ----
<S>                                                     <C>              <C>
Operating revenues
     Interest and fees on loans                         $    475,097     $    813,374

Operating expenses
     Marketing, selling, and royalties                        31,487            2,356
     General and administrative                            1,319,953          373,448
     Loss on real estate held for development                   --            216,000
     Other                                                      --             89,127
                                                        ------------     ------------
                                                           1,351,440          680,931
                                                        ------------     ------------


INCOME (LOSS) FROM OPERATIONS                               (876,343)         132,443

Other income (expense)
     Other                                                  (134,230)          44,294
     Interest expense                                       (319,910)        (133,282)
                                                        ------------     ------------
                                                            (454,140)         (88,988)
                                                        ------------     ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                  (1,330,483)          43,455

Discontinued operations
     Loss from operations of Prairie Business
       Credit, Inc. (Note 14)                               (123,165)            --
     Loss from operations of First National
       Video Corp. (Note 14)                                (204,035)        (370,118)
     Loss on disposal of First National Video Corp.,
       including provision of $76,000 for operating
       losses during phaseout period (Note 14)              (110,358)            --
     Gain on disposal                                           --              5,700
                                                        ------------     ------------
                                                            (437,558)        (364,418)
                                                        ------------     ------------

Net loss                                                  (1,768,041)        (320,963)

Dividends on preferred stock of subsidiary                  (306,250)        (402,245)
                                                        ------------     ------------

Net loss allocated to common shareholders               $ (2,074,291)    $   (723,208)
                                                        ============     ============

Net loss allocated to common shareholders per share
     Loss from continuing operations                    $       (.09)    $       (.02)
     Discontinued operations                                    (.02)            (.02)
                                                        ------------     ------------

         Net loss allocated to common shareholder
           per share                                    $       (.11)    $       (.04)
                                                        ============     ============

Weighted average shares outstanding                       18,588,965       18,413,020
                                                        ============     ============
</TABLE>

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

          See accompanying notes to consolidated financial statements.


                                                                              3.
<PAGE>   26
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

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

<TABLE>
<CAPTION>
                                                                                    Year Ended
                                                                                    December 31,
                                                                            ----------------------------
                                                                                1999             1998
                                                                                ----             ----
<S>                                                                         <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net loss                                                                $(1,768,041)     $  (320,963)
    Adjustments to reconcile net loss to net cash
      used in operating activities
       Gain on disposal of subsidiaries                                            --             (5,700)
       Loss on disposal of furniture and equipment                                  228           18,000
       Loss on real estate held for development                                    --            216,000
       Stock issued for services and compensation, net                            5,000            6,000
       Provision for loans and notes receivable losses                          150,000          113,000
       Amortization and depreciation                                              6,339            4,095
       Increase (decrease) in cash caused by change in assets and
         liabilities, net of effects from acquisitions and divestitures
          Loans receivable                                                    1,109,979         (285,167)
          Other real estate owned                                              (397,842)        (911,280)
          Interest receivable                                                   (30,798)          59,423
          Accounts payable                                                        5,935         (448,977)
          Other assets                                                           19,993          (10,790)
          Other liabilities                                                      36,420          (90,407)
          Discontinued operations
              First National Video Corp.                                        201,641           83,010
              Prairie Business Credit, Inc.                                     (89,655)            --
                                                                            -----------      -----------
                 Net cash used in operating activities                         (750,801)      (1,573,756)

CASH FLOWS FROM INVESTING ACTIVITIES
    Acquisition of furniture, fixtures, and equipment                            (1,729)        (134,638)
    Cash received from escrow                                                      --            500,000
    Notes receivable                                                               --           (783,380)
    Proceeds from sale of asset                                                   3,000             --
    Cash received from sale of real estate held for development                    --            208,000
    Cash paid for real estate development property                                 --             (9,000)
    Discontinued operations                                                        --            (28,269)
                                                                            -----------      -----------
       Net cash provided by (used in) investing activities                        1,271         (247,287)

CASH FLOWS FROM FINANCING ACTIVITIES
    Cancellation of warrants                                                       --            (20,000)
    Loans from shareholder                                                    1,039,066          700,288
    Proceeds from borrowings on notes                                              --          1,158,333
    Principal payments on notes                                                    --            (58,333)
    Dividends paid on preferred stock of subsidiary                            (255,208)        (402,245)
    Discontinued operations                                                     (91,670)         341,667
                                                                            -----------      -----------
       Net cash provided by financing activities                                692,188        1,719,710
                                                                            -----------      -----------

Decrease in cash                                                                (57,342)        (101,333)

Cash and cash equivalents at beginning of period                                117,465          218,798
                                                                            -----------      -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $    60,123      $   117,465
                                                                            ===========      ===========
</TABLE>

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

                                  (Continued)


                                                                              4.
<PAGE>   27

               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

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

<TABLE>
<CAPTION>
                                                                      Year Ended
                                                                      December 31,
                                                                -----------------------
                                                                    1999        1998
                                                                -----------------------
<S>                                                             <C>          <C>
Supplemental schedule of noncash investing activities

    Note received in exchange for sale of real estate held
      for development                                                        $  126,000
                                                                             ==========

Supplemental schedules of cash flow information
    Interest paid                                               $  249,251   $  102,348
</TABLE>












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

          See accompanying notes to consolidated financial statements.


                                                                              5.

<PAGE>   28

               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

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

<TABLE>
<CAPTION>
                                          Common Stock
                                   -------------------------
                                     Number                       Additional
                                       of                           Paid-in        Accumulated
                                     Shares        Amount           Capital          Deficit           Total
                                     ------        ------           -------          -------           -----
<S>                                <C>           <C>           <C>               <C>              <C>
Balance at January 1, 1998         18,672,458    $    93,365   $   27,271,566    $  (27,779,059)  $    (414,128)

Issuance of common stock
  for professional fees and
  employee compensation               600,000          3,000            3,000                 -           6,000

Cancellation of warrants
  and return of cash                        -              -          (20,000)                -         (20,000)

Cash dividends on
  preferred stock of
  subsidiary                                -              -                -          (402,245)       (402,245)


Net loss                                    -              -                -          (320,963)       (320,963)

Cancellation of stock related
  to disposal of subsidiaries        (735,000)        (3,675)           3,675                 -               -
                               --------------    -----------   --------------    --------------   -------------


Balance at December 31, 1998       18,537,458         92,690       27,258,241       (28,502,267)     (1,151,336)

Issuance of common stock
  for professional fees and
  employee compensation               500,000          2,500            2,500                 -           5,000

Cash dividends on preferred
  stock of subsidiary                       -              -                -          (306,250)       (306,250)

Net loss                                    -              -                -        (1,768,041)     (1,768,041)
                               --------------    -----------   --------------    --------------   -------------


Balance at December 31, 1999       19,037,458    $    95,190   $   27,260,741    $  (30,576,558)  $  (3,220,627)
                               ==============    ===========   ==============    ==============   =============
</TABLE>

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

          See accompanying notes to consolidated financial statements.


                                                                              6.
<PAGE>   29
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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


NOTE 1 - BUSINESS DESCRIPTION

The Company's business has historically been the acquisition, distribution, and
marketing of high-quality entertainment properties targeted at the family market
in film and other media. Beginning in May 1997, the Company embarked on a
diversification program.

First National Finance Corp. was formed for the purpose of extending credit
primarily to developers and redevelopers of real estate and to producers,
inventors, authors, and syndicators of media software and similar entertainment
and intellectual properties in the form of short-term, high-yield bridge loans
(typically in the range of $25,000 to $100,000).

On April 28, 1998, First National Video Corp. was established when the Company
acquired all of the assets and operating rights to six retail video stores in
the Chicago area. The transaction was accounted for as a purchase. On October
18, 1999, the Company entered into a plan to dispose of all the video stores
(see Note 15).

As of January 1, 1999, Prairie Business Credit, Inc. was established when the
Company acquired all of the assets and operating rights of a business whose
primary function was the factoring of various companies' accounts receivable.
The transaction was accounted for as a purchase. On December 17, 1999,
management decided to sell or otherwise dispose of this segment of the business
(see Note 15).


NOTE 2 - MANAGEMENT'S FUTURE PLANS

The Company incurred a net loss of $1,768,041 during the year ended December 31,
1999 and, as of that date, the Company's total liabilities exceeded its total
assets by $3,220,627. The Company has historically incurred operating losses
and, at December 31, 1999, has an accumulated deficit of approximately
$31,000,000.

The Company's ability to continue as a going concern is dependent on its ability
to generate sufficient cash flow to satisfy current obligations, its ability to
convert short-term obligations into long-term obligations, and the continuing
financial assistance of its majority shareholder. The financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.

Management has developed a plan to increase profitability in 2000 which includes
the following:

-    Disposition of Prairie Business Credit, Inc. and First National Video Corp.
     Combined, these businesses incurred a net loss of $437,558 and $346,118 for
     the years ended December 31, 1999 and 1998, respectively. Management is
     expecting to reduce debt by approximately $850,000 as a result of these
     dispositions.

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

                                  (Continued)

                                                                            7.

<PAGE>   30
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 2 - MANAGEMENT'S FUTURE PLANS (Continued)

-    At December, 31, 1999, the Company had other real estate owned, net of
     allowances for losses of $1,311,122. Management is actively seeking to sell
     these properties and use the proceeds to revitalize its loan business.
     Substantially all of the real estate owned at December 31, 1999 represents
     loans made during the year ended December 31, 1998 and prior.

-    During 1999, management improved its loan process by becoming more active
     in monitoring the progress of the rehabilitation of the properties.
     Additionally, management has more history on working with specific
     developers and redevelopers and, as a result, has discontinued doing
     business with specific unprofitable developers and redevelopers. During the
     year ended December 31, 1999, management made sixteen new loans of which
     eight were closed on during the year. Management believes as a result of
     these actions, this business segment will become more profitable in 2000.

-    In efforts to reduce operating expenses, management is in the process of
     moving its office space to a more economical location and will be reducing
     its administrative staff.

-    Additionally, Equator Entertainment, a wholly-owned subsidiary, which is in
     the business of marketing and distributing high-quality entertainment
     properties targeted at the family market, has various alliances in place
     and is expected to begin generating revenue late in 2000.

-    The Company is in the process of negotiating an extension of the terms of
     its $1,100,000 term note.

-    One of the Company's shareholders has provided significant financial
     support to the Company. The Company has a note payable to the shareholder
     for $1,802,350 at December 31, 1999. The shareholder has committed not to
     demand repayment in full on the note and to provide additional support as
     needed.


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the
accounts of First National Entertainment Corp. (a Colorado corporation) and its
subsidiaries, Equator Entertainment, First National Finance Corp., and First
National Video Corp. (collectively referred to as the "Company"). Effective
January 1, 1999, First National Finance Corp. has a wholly owned subsidiary,
Prairie Business Credit, Inc., which is also included within the consolidated
financial statements. All significant intercompany accounts and transactions
have been eliminated in consolidation.

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

                                  (Continued)

                                                                            8.
<PAGE>   31
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Cash and Cash Equivalents: For purposes of the statement of cash flows, the
Company considers all investments with maturities of three months or less, when
purchased, to be cash equivalents.

Loans Receivable: Loans are stated net of the allowance for loan losses and
unearned discount. Interest on loans is included in operating revenues over the
term of the loan based upon the principal balance outstanding. Where serious
doubt exists as to the collectibility of a loan, the accrual of interest is
discontinued. Loan fees and direct loan origination costs are deferred and
amortized over the term of the loan as a yield adjustment.

Allowance for Loan Losses: An allowance for loan losses has been established to
provide for those loans which may not be repaid in their entirety. The allowance
is increased by provisions for loan losses charged to expense and decreased by
charge-offs, net of recoveries. Although a loan is charged off by management
when deemed uncollectible, collection efforts may continue and future recoveries
may occur.

The allowance is maintained by management at a level considered adequate to
cover losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
(including their financial position and collateral values) and other factors and
estimates which are subject to change over time. Estimating the risk of loss and
the amount of loss on any loan is necessarily subjective and ultimate losses may
vary from current estimates. These estimates are reviewed periodically, and as
adjustments become necessary, they are reported in earnings in the periods in
which they become known.

Loans are considered impaired if full principal or interest payments are not
anticipated. Each impaired loan is carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to an impaired loan if the present value of cash
flows or collateral value indicate the need for an allowance.

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

                                  (Continued)

                                                                              9.

<PAGE>   32
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

For impaired loans and other loans, accrual of interest is discontinued on a
loan when management believes, after considering collection efforts and other
factors, that the borrower's financial condition is such that collection of
interest is doubtful. Cash collections on impaired loans are credited to the
loan receivable balance, and no interest income is recognized on those loans
until the principal balance has been collected.

Other Real Estate Owned: Real estate acquired in settlement of a loan is carried
at the lower of the recorded investment in the property or its fair value. Prior
to foreclosure, the value of the underlying loan is written down to the fair
value of the real estate to be acquired by a charge to the allowance for loan
losses, if necessary. At the time of foreclosure, an allowance is established
for estimated selling costs. Any subsequent write-downs required by changes in
estimated fair value or disposal expenses are provided through this allowance
and the provision is charged to operating expense. Carrying costs of such
properties, net of related income, and gains and losses on their disposition are
charged or credited to operating expense as incurred.

Furniture, Fixtures, and Equipment: Furniture, fixtures, and equipment are
recorded at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, generally 3 to 7 years.

Financial Instruments: The Company's financial instruments consist principally
of loans receivable and notes payable and are carried at amounts which
approximate fair value.

Stock-Based Compensation: Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income (loss) and
earnings (loss) per share impacts are provided as if the fair value method had
been applied.

Income Taxes: The Company accounts for income taxes using the deferred asset and
liability method as required by SFAS No. 109, "Accounting for Income Taxes."
Deferred income taxes are provided as temporary differences arise between the
basis of asset and liabilities for financial reporting and income tax reporting.

Loss Per Share: Earnings per common share ("EPS") is computed under the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Basic loss per common share is computed by dividing net loss available
to common shareholders by the weighted average number of common shares
outstanding during the period. Net loss available to common shareholders is
calculated by deducting dividends on preferred stock of subsidiary from net
loss. Since the Company has experienced net operating losses, the outstanding
options and warrants to purchase common stock have an anti-dilutive effect.
Therefore, options and warrants were not included in computing dilutive loss per
share.

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

                                   (Continued)

                                                                             10.
<PAGE>   33

               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassification: Certain amounts in the financial statements for the year ended
December 31, 1998 have been reclassified to conform to the December 31, 1999
presentation.


NOTE 4 - ALLOWANCE FOR LOSSES

Activity in the allowance for loan losses for the years ended December 31, 1999
and 1998 is as follows:

                                                        1999           1998
                                                        ----           ----


     Balance, beginning of year                     $     23,000    $         -
     Provision for losses                                 27,000         23,000
                                                    ------------    -----------

         Balance, end of year                       $     50,000    $    23,000
                                                    ============    ===========

During 1999 and 1998, the Company foreclosed on various loans resulting in other
real estate owned of $1,311,122 and $911,280 at December 31, 1999 and 1998.
Activity in the allowance for loan losses to record these properties at the
lower of cost or net realizable value at December 31, 1999 and 1998 is as
follows:
                                                        1999            1998
                                                        ----            ----

     Balance, beginning of year                     $    127,000    $    37,000
     Provision (recoveries) for losses                    (2,000)        90,000
                                                    ------------    -----------

         Balance, end of year                       $    125,000    $   127,000
                                                    ============    ===========


NOTE 5 - NOTES RECEIVABLE

Notes receivable at December 31, 1999 and 1998 are as follows:

                                                            December 31,
                                                            ------------
                                                        1999           1998
                                                        ----           ----
     Advances to Prairie Business Credit, Inc.
     (Note 1) that were converted to equity
     in 1999. The note is collaterized by the
     assignment of certain accounts receivable
     under a factoring agreement.                   $          -    $   658,380



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

                                  (Continued)

                                                                             11.
<PAGE>   34
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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


NOTE 5 - NOTES RECEIVABLE (Continued)

<TABLE>
<CAPTION>
                                                                        December 31,
                                                               ----------------------------
                                                                    1999            1998
                                                                    ----            ----
     <S>                                                       <C>              <C>
     10% note due January 1, 2000, convertible to a
     21% ownership in a travel company at the
     option of the Company's management.                       $     125,000    $   125,000

     10% note due May 1, 2000, secured by real estate.               126,000        126,000
                                                                ------------    -----------
                                                                     251,000        909,380

     Less allowance for uncollectible notes                          125,000              -
                                                                ------------    -----------
                                                                $    126,000    $   909,380
                                                                ============    ===========
</TABLE>

NOTE 6 - AMORTIZATION OF FILM INVENTORY

Amortization of capitalized film property costs was computed using the
individual-film-forecast computation method as promulgated under SFAS No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films." At
June 30, 1996, the Company intended to amortize the remaining unamortized film
costs for its Happily Ever After property over the next five years, subject to
future market conditions altering this accounting estimate. At December 31,
1997, a review and analysis of the film's net realizable value resulted in a
charge to income of $490,000.


NOTE 7 - FURNITURE, FIXTURES, AND EQUIPMENT

Furniture, fixtures, and equipment consisted of the following at December 31,
1999 and 1998:

<TABLE>
<CAPTION>
                                                                    1999            1998
                                                                    ----            ----
     <S>                                                        <C>             <C>
     Office equipment                                           $     17,395    $    27,483
     Furniture and fixtures                                           11,070          3,377
                                                                ------------    -----------
                                                                      28,465         30,860
     Accumulated depreciation                                        (16,430)       (10,987)
                                                                ------------    -----------

                                                                $     12,035    $    19,873
                                                                ============    ===========
</TABLE>

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

                                  (Continued)

                                                                             12.
<PAGE>   35
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 8 - SHORT-TERM DEBT

Short-term debt consisted of the following at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                1999             1998
                                                                ----             ----
     <S>                                                    <C>              <C>
     8.5% term note, due March 1, 2000.
     Collateralized by substantially all the
     Company's assets, other than First National
     Video Corp.                                            $  1,100,000     $  1,100,000

     Subordinated 18% demand note payable to
     shareholders. Collateralized by substantially
     all of the Company's assets.                              2,013,050          973,984
                                                            ------------     ------------

                                                            $  3,113,050     $  2,073,984
                                                            ============     ============
</TABLE>

The Company is in the process of negotiating new terms on the $1,100,000 term
note.


NOTE 9 - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY

The minority interest in consolidated subsidiary consists of shares of $1 par
value, variable rate, cumulative, preferred stock issued by First National
Finance Corp. At December 31, 1999 and 1998, 3,500,000 shares had been issued at
approximately $.80 a share. The liquidation preference of these shares is
$3,500,000.


NOTE 10 - INCOME TAXES

The Company had cumulative tax operating loss carryforwards of approximately
$24,400,000 million at December 31, 1999. Approximately $200,000 of the
operating loss carryforwards expire between 2000 and 2006. The remainder of the
net operating loss carryforwards expire as follows:

                 2007                                     $    1,700,000
                 2008                                          6,600,000
                 2009                                          4,800,000
                 2010                                          4,700,000
                 2011                                          2,600,000
                 2012                                          2,600,000
                 2019                                          1,200,000



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

                                  (Continued)

                                                                             13.
<PAGE>   36
              FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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


NOTE 10 - INCOME TAXES (Continued)

Due to changes in the Company's ownership, the annual utilization of the net
operating loss carryforwards arising prior to the ownership changes may be
limited. Generally, the amount of those carryforwards available for annual
utilization is based on the value of the Company at the time of the ownership
change multiplied by a rate specified by the Internal Revenue Service.

The provision for income taxes is summarized as follows:

                                                           December 31,
                                                           ------------
                                                       1999             1998
                                                       ----             ----

     Expense (benefit) of net operating loss       $   (398,000)   $     52,000
     Deferred taxes                                     (54,000)        (37,225)
     Change in valuation allowance                      452,000         (14,775)
                                                   ------------    ------------

                                                   $          -    $          -
                                                   ============    ============

A reconciliation of the provision for income taxes at the statutory federal
income tax rate for continuing operations is as follows:
                                                           Year Ended
                                                           December 31,
                                                           ------------
                                                       1999             1998
                                                       ----             ----

     Tax expense (benefit) at statutory rate       $   (452,000)   $     14,775
     Valuation allowance                                452,000         (14,775)
                                                   ------------    ------------

                                                   $          -    $          -
                                                   ============    ============

Significant components of deferred tax assets and liabilities are as follows:

                                                            December 31,
                                                            ------------
                                                       1999             1998
                                                       ----             ----
     Deferred tax assets
     Net operating loss carryforwards              $  8,552,000    $ 7,880,000
     Reserves and allowances                            365,000        311,000
                                                   ------------    -----------
                                                      8,917,000      8,191,000
     Valuation allowance                              8,917,000      8,191,000
                                                   ------------    -----------

     Net deferred taxes                            $          -    $         -
                                                   ============    ===========

--------------------------------------------------------------------------------
                                  (Continued)

                                                                             14
<PAGE>   37
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 10 - INCOME TAXES (Continued)

A valuation allowance has been established by the Company due to the
uncertainties of the realization of deferred tax assets based on the Company's
prior history of tax losses. The valuation allowance increased approximately
$726,000 for the year ended December 31, 1999 due to the decrease in net
deferred tax assets. Management will continue to re-evaluate the appropriateness
of the valuation allowance in future years.

There were no income tax payments in the years ended December 31, 1999 and 1998.


NOTE 11 - SHAREHOLDERS' EQUITY

Preferred  Stock:  The Company has  authorized the issuance of 10,000,000
shares of $.001 par value  preferred  stock.  At December 31, 1999, the Company
had not issued any preferred shares.

Common Stock: During the years ended December 31, 1999 and 1998, respectively,
the Company issued 500,000 and 600,000 shares for employee compensation and
professional fees valued at $5,000 and $6,000.

In the second quarter of 1996, the Company initiated an equity restructuring
program in which the Company issued 1,260,000 shares of its common stock (par
value $.005) along with warrants to purchase an additional 1,260,000 shares of
its common stock (par value $.005) at $1/share. Total proceeds from the offering
amounted to $830,000. On October 6, 1996, the Company's Board of Directors
approved and issued an Extension and Optional New Pricing Offer to the holders
of these warrants. These 1,260,000 warrants originally entitled the holders to
purchase an additional share each of the Company's common stock at a price of $1
through an expiration date of December 15, 1997. The Extension and Optional New
Pricing Offer allows an extension until December 31, 1999, at a share price of
$.15 for additional consideration of $.05 per warrant or an extension until
December 31, 2000, at a share price of $.05 for additional consideration of $.10
per warrant. During the year ended June 30, 1997, warrants for 800,000 shares
were extended to December 31, 1999 and warrants for 200,000 shares were extended
to December 31, 2000. Additional paid-in capital of $60,000 was received from
these transactions for the period ended June 30, 1997. During 1998, certain
warrants previously issued in the six-month period ended December 31, 1998 were
cancelled and cash of $20,000 was returned. During the years ended December 31,
1999 and 1998, 500,000 and 600,000 warrants, respectively, were issued as part
of an executive compensation agreement. The warrants are convertible to common
stock at $.25 per share. There were 29,200,000 warrants outstanding at December
31, 1999.

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

                                  (Continued)
                                                                             15.
<PAGE>   38
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 11 - SHAREHOLDERS' EQUITY (Continued)

Stock Options: On May 21, 1993, shareholders approved an incentive stock plan
which reserved 3,500,000 shares of the Company's common stock for issuance under
the 1993 Incentive Stock Option Plan ("ISO") and the 1993 Non-Qualified Stock
Option Plan ("NQSO") (collectively referred to as the "1993 Plan"). The 1993
Plan provides incentives to officers, directors, employees, consultants, and
advisors in the form of stock options, subject to certain restrictions. The
Company's Board of Directors determines the granting of options under the 1993
Plan, including the exercise period, contingencies, vesting periods, and
employee qualifications. Options to be issued under the ISO are intended to
qualify as "incentive stock options" under Section 422 of the 1986 Internal
Revenue Code (the "Code"), as amended. Options granted under the NQSO are
subject to fewer restrictions than the ISO and are considered "Non-Statutory
Stock Options" as defined in the Code. As of December 31, 1997, 25,000 options
had been issued under the 1993 Plan. These options were issued in August 1993 at
the exercise price of $1.53 per share. All of the outstanding options were
exercisable at December 31, 1999. No options were exercised during the years
ended December 31, 1999 and 1998.

Employee Stock Purchase Plan: The Company implemented an Employee Stock Purchase
Plan in 1994 which permits substantially all employees to acquire Company common
stock. Participating employees may acquire stock at the end of each six-month
period (June 30 and December 31 of each year) at a purchase price of 85% of the
lower of fair market value at the beginning or end of the period. Employees may
designate up to 10% of their base compensation for the purchase of stock under
this plan. There were no charges to income in connection with this plan for the
years ended December 31, 1999 and 1998.


NOTE 12 - LEASES

The Company occupies certain office facilities and video stores under operating
lease arrangements. Under terms of the leases, the Company is responsible for
real estate taxes, insurance, and maintenance costs on the facilities. Total
rent expense under such arrangements was approximately $401,000, and $278,000
for the years ended December 31, 1999 and 1998, respectively. The leases expire
from 1999 through 2003.

Future minimum payments under noncancelable leases as of December 31, 1999 are
as follows:

                                            Continuing        Discontinued
                                            Operations         Operations
                                            ----------         ----------

              2000                        $     37,353       $    227,551
              2001                              38,479            212,742
              2002                              19,524            214,440
              2003                                   -            180,870
                                          ------------       ------------

                                          $     95,356       $    835,603
                                          ============       ============


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

                                  (Continued)

                                                                             16.
<PAGE>   39
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 13 - COMMITMENTS AND CONTINGENCIES

The Company received notice from the Screen Actors Guild that supplemental
residuals of 4.5% of the first $1,000,000 and 5.4% of all remaining gross
producer receipts are due them. The Company's entertainment counsel is
researching the matter to determine whether the Company has a liability related
to this matter. As of December 31, 1999, management has determined there is no
liability to the Company and believes that if any residuals are due, they are
the responsibility of Lou Scheimer and Filmation (the original producer of the
film) or its successor in interest.

Contingent Liabilities Against Future Revenues: The Company has agreed to pay
compensation to various parties based on gross revenues from the film Happily
Ever After as follows:

     Mr. Lou Schiemer, creator and original owner of Happily Ever After:

         Home Video            -    Forty cents ($.40) for each videocassette
                                    unit sold, up to two million units;
                                    thereafter, twenty-five cents ($.25) for
                                    each additional home video unit sold in
                                    excess of two million units;
         Video Disc            -    15% of producer's gross;
         Merchandising         -    45% of gross revenue received by the Company
                                    after deductions of licensing commissions
                                    and fees.

     Technovision Industries, Inc., marketing consultant for Happily Ever After:

         Home Video            -    5% of net Company  collection  proceeds from
                                    Republic  after  partial  deductions  for
                                    Scheimer royalties.

     American Softworks Corp. for Happily Ever After:

         Video Games           -    50% of net proceeds to the Company after
                                    deductions for manufacturing,  marketing,
                                    and distribution by the distributor.

No payments have been made to any of the above parties for the years ended
December 31, 1999 and 1998.

The Company is involved in various other legal proceedings arising in the normal
course of business. It is the opinion of management that any judgment or
settlement resulting from pending or threatened litigation would not have a
material adverse effect on the financial position or on the operations of the
Company.



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

                                  (Continued)

                                                                             17.
<PAGE>   40
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 14 - CONTINUING OPERATIONS, DISCONTINUED OPERATIONS,
  ACQUISITIONS, AND SUBSEQUENT EVENTS

Effective June 30, 1997, the Company acquired certain assets from corporations
owned by Mr. Charles E. Nootens, Chairman of the Company's Board of Directors,
through First National Finance Corp. (FNFC), a wholly owned subsidiary of the
Company. FNFC, previously operated by Mr. Nootens, is in the business of
extending credit to real estate developers and others at rates substantially
higher than conventional real estate and commercial loans. See Note 1.

FNFC issued $3,500,000, principal amount, of preferred stock and 50 call pack
options, at $10,000 each, to purchase 20,000,000 shares of First National
Entertainment Corp. common stock at $.10 per share in exchange for the assets of
Mr. Nootens' business. The acquisition was treated as a purchase and recorded at
the fair market value of the assets received.

In September 1997, the Company acquired a Swiss management company having the
rights to certain ultraviolet light technology and additional capital
contributed by the selling shareholders in exchange for 1,500,000 shares of
common stock. Consolidated net loss includes approximately $680,000 attributable
to operations of the Swiss company. On July 31, 1998, the Company entered into
an agreement to shut down the Swiss operations and transferred ownership to a
new company formed by two of the three Swiss shareholders. The two Swiss
shareholders returned all their shares and any outstanding warrants to the
Company. The net effect of this transaction was to recognize a gain on disposal
of approximately $5,700. In addition, the Company received a $270,000 note
conditional upon the new company meeting certain performance measurements. The
Company charged this note off at December 31, 1998.

As of June 30, 1997, FNFC had issued additional call pack options to purchase an
aggregate of 8,000,000 of the Company's common shares. These calls were issued
for a consideration of $.02 1/2 per share and entitle the holder to purchase
shares at $.10 per share or an aggregate of $800,000. During the six-month
period ended December 31, 1997, 20 call pack options were purchased for
$200,000.

On April 28, 1998, the Company acquired certain assets of Alpine Investment,
Inc. through First National Video Corp. (FNVC), a newly formed wholly-owned
subsidiary of the Company. The new venture operates six video stores in the
Chicagoland area. Income is derived from the sale and rental of videocassettes
and games and other various merchandise. FNVC acquired the assets for $337,000.
The acquisition was treated as a purchase and recorded at the fair market value
of the assets received.


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

                                  (Continued)

                                                                             18.
<PAGE>   41
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 14 - CONTINUING OPERATIONS, DISCONTINUED OPERATIONS,
  ACQUISITIONS, AND SUBSEQUENT EVENTS (Continued)

On October 18, 1999, the Board of Directors voted to sell or otherwise dispose
of First National Video Corp. Two stores were closed prior to December 31, 1999.
Management anticipates the closing of two additional stores during February and
March, 2000 and the sale of two stores to be completed in April, 2000. The
consolidated statements of operations and cash flows have been restated to
reflect this segment as a discontinued operation. Net liabilities of
discontinued video operations at December 31, 1999 have been segregated in the
Consolidated Balance Sheet. Summary financial information for First National
Video Corp. for the years ended December 31, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                                               1999             1998
                                                                               ----             ----
         <S>                                                             <C>                <C>
         Net sales                                                       $    1,333,477     $    1,060,138
         Operating expenses                                                   1,613,512          1,430,256
                                                                         --------------     --------------
         Loss from operations                                                  (280,035)          (370,118)
         Loss on disposal of business                                           (34,358)                 -
                                                                         --------------     --------------

         Loss from discontinued operations                               $     (314,393)    $     (370,118)
                                                                         ==============     ==============
</TABLE>

Net liabilities of First National Video Corp. at December 31, 1999 and 1998 are
as follows:

<TABLE>
         <S>                                                             <C>                <C>
         Cash                                                            $       (3,635)    $       66,518
         Video inventory                                                        102,000            117,333
         Prepaids                                                                38,820             31,581
         Property and equipment                                                  89,538            108,508
         Accounts payable                                                      (184,378)          (147,646)
         Notes payable                                                         (250,000)          (341,667)
         Accrued expenses                                                      (195,219)          (127,530)
                                                                         --------------     --------------

         Net liabilities of discontinued operations                      $     (402,874)    $     (292,903)
                                                                         ==============     ==============
</TABLE>

During June of 1998, the Company formed a new subsidiary, Equator Entertainment,
Inc. (EEI), and hired Mr. Peter Keefe as president. EEI's main business is the
creation, production, and distribution of a children's television program
series.

On February 4, 1999, the Company purchased all the assets and the rights to the
name of the Prairie Business Credit, Inc. by converting the advance described in
Note 5, issuance of 100,000 shares of common stock, and other consideration for
a total purchase price of $1,037,000. The transaction was treated as a purchase
and recorded at the fair market value of the assets received. The new business
was established as a wholly-owned subsidiary of FNFC and operated under the name
of Prairie Business Credit, Inc. This new entity is engaged in factoring
accounts receivable.


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

                                   (Continued)

                                                                             19.
<PAGE>   42
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 14 - CONTINUING OPERATIONS, DISCONTINUED OPERATIONS,
  ACQUISITIONS, AND SUBSEQUENT EVENTS (Continued)

On December 17, 1999, the Board of Directors decided to sell Prairie Business
Credit, Inc (PBCI). The consolidated statements of operations and cash flows
have been presented to reflect this segment of the business as a discontinued
operation. The assets at December 31, 1999 have been segregated in the
Consolidated Balance Sheet. PBCI was sold effective January 1, 2000 and no costs
were incurred related to its disposal. Summary financial information for PBCI
for the year ended December 31, 1999 is as follows:

                  Commissions                                      $    276,472
                  Operating expenses                                    409,173
                                                                   ------------
                  Loss from operations                                 (132,701)
                  Other income                                            9,536
                                                                   ------------

                  Loss from discontinued operations                $   (123,165)
                                                                   ============

Net assets of Prairie Business Credit at December 31, 1999 are as follows:

                  Cash                                             $      9,552
                  Factored receivables, net                             806,716
                  Prepaids                                                  169
                  Property and equipment                                 37,478
                  Intangibles                                            44,044
                  Accounts payable                                       (2,040)
                  Accrued expenses                                     (147,884)
                                                                   ------------

                  Net assets of discontinued operations            $    748,035
                                                                   ============


NOTE 15 - SEGMENT INFORMATION

The Company has reportable segments: finance and entertainment. The finance
segment derives its revenues from short-term, high-yield bridge loans and
commissions related to the factoring of accounts receivable. The entertainment
segment is in the process of creating, acquiring, distributing, and marketing of
high-quality family entertainment.

The accounting policies for the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from continuing operations.



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

                                  (Continued)

                                                                             20.
<PAGE>   43
               FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1999 and 1998

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

NOTE 15 - SEGMENT INFORMATION (Continued)

The Company's reportable segments are strategic business units that offer
different products and services. Segment disclosures are on a performance basis
consistent with internal management reporting. The cost of some corporate
functions and the cost of certain employee benefits are sold to segments at
predetermined rates which approximate cost. Remaining costs, if any, are not
allocated to revenue segments. The following segment information has been
prepared in accordance with the internal accounting policies of the Company, as
described above, and may not be presented in accordance with generally accepted
accounting principles. Summarized financial information concerning the industry
segments in which the Company operated for the periods ended December 31, 1999,
December 31, 1998, and December 31, 1997 are as follows:

<TABLE>
<CAPTION>
                                                                     Finance      Entertainment        Totals
                                                                     -------      -------------        ------
<S>                                                              <C>              <C>              <C>
   December 31, 1999
       Revenues from external customers                          $    755,712     $         -      $    755,712
       Intersegment revenues                                          205,485               -           205,485
       Segment loss                                                  (272,843)       (407,324)         (680,167)
       Segment assets                                               4,794,578         915,523         5,710,101

    December 31, 1998
       Revenues from external customers                               813,374               -           813,374
       Intersegment revenues                                           58,561               -            58,561
       Segment profit                                                 123,806         326,139           449,945
       Nonrecurring gains (expenses)
          Loss on sales of real estate held for development          (216,000)              -          (216,000)
       Segment assets                                               5,179,155         692,000         5,871,155
</TABLE>

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                          -----------
                                                                    1999             1998
                                                                    ----             ----
   <S>                                                         <C>                <C>
   Segment profit (loss)
       Total profit or loss for  reportable segments           $     (680,167)    $   449,945
       Elimination of intersegment revenues                            92,063          36,931
       Unallocated expenses                                          (742,379)       (443,421)
                                                               --------------     -----------

                                                               $   (1,330,483)    $    43,455
                                                               ==============     ===========

    Identifiable assets
       Total identifiable assets for  reportable segments       $   5,710,101    $  5,871,155
       Elimination of intersegment assets                          (3,054,674)     (1,675,878)
       Unallocated assets                                              13,619          48,661
                                                                -------------    ------------

                                                                $   2,669,046    $  4,243,938
                                                                =============    ============
</TABLE>



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

                                  (Continued)
                                                                             21.