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

                                       OR

               [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF

                       THE SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to

                        Commission File Number 001-12885

                        AVENUE ENTERTAINMENT GROUP, INC.

                 (Name of Small Business Issuer in its charter)

            Delaware                                    95-4622429
----------------------------                            ----------
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)

11111 Santa Monica Blvd., Suite 525, Los Angeles, CA               90025
----------------------------------------------------               -----
(Address of principal executive offices)                         (Zip Code)

Registrant's telephone number, including area code:            (310) 996-6800

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

Title of Each Class                  Name of each exchange on which registered:
-------------------                  ------------------------------------------
Common Stock, $.01 Par Value                  American Stock Exchange, Inc.

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

Check 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 past 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

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure  will be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. / /

State issuer's revenues for its most recent fiscal year.   $4,748,660

As of March 15, 2000,  the aggregate  market value of the voting and  non-voting
common equity,  held by non-affiliates  (assuming for this calculation only that
all officers and directors are affiliates) was approximately $2,708,977 based on
the closing  price of the Common Stock on the American  Stock  Exchange on March
15, 2000.

State the number of shares  outstanding of each of the  Registrant's  classes of
common stock, as of the most recent practicable date.

Class                                            Outstanding at March 15, 2000
-----                                            -----------------------------
Common Stock, par value $.01 per share                   4,589,030 shares

DOCUMENTS INCORPORATED BY REFERENCE:                         NONE


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                                TABLE OF CONTENTS

                                                                      Page

PART I

         Item 1.    Description of Business.............................2

         Item 2.    Description of Property............................17

         Item 3.    Legal Proceedings..................................17

         Item 4.    Submission of Matters to a Vote of
                    Security Holders...................................17

PART II

         Item 5.    Market for the Registrant's Common Equity
                    and Related Stockholder Matters....................18

         Item 6.    Management's Discussion and Analysis of

                    Financial Condition and Results of Operations......18

         Item 7.    Financial Statements...............................23

         Item 8.    Changes In and Disagreements with Accountants
                    on Accounting and Financial Disclosure.............42

PART III

         Item 9.    Directors, Executive Officers, Promoters
                    and Control Persons; Compliance with

                    Section 16(a) of the Exchange Act..................43

         Item 10.   Executive Compensation.............................45

         Item 11.   Security Ownership of Certain

                    Beneficial Owners and Management...................48

         Item 12.   Certain Relationships and Related

                    Transactions.......................................51

         Item 13.   Exhibits and Reports on Form 8-K...................53


<PAGE>




                                     PART I.

ITEM 1.       DESCRIPTION OF BUSINESS

Organization

         Avenue Entertainment Group, Inc. (the "Company") was founded in 1969 by
Gene Feldman and his wife,  Suzette St. John  Feldman.  Pursuant to the Business
Combination  described  below,  the Company  acquired  Avenue Pictures from Cary
Brokaw. Prior to the Business Combination,  the Company's primary focus had been
the  production  of one-hour  profiles  of  Hollywood  Stars.  The Company is an
independent entertainment company that produces feature films, television films,
series for televisions,  made-for-television/cable  movies and one-hour-profiles
of Hollywood stars both domestically and internationally.

Share Exchange and Reincorporation

         Pursuant  to  a  Share   Exchange   Agreement   (the  "Share   Exchange
Agreement"), dated as of September 30, 1996, among Cary Brokaw, Avenue Pictures,
and The CineMasters Group, Inc. ("CineMasters"), CineMasters acquired all of the
outstanding  capital  stock of Avenue  Pictures from Mr.  Brokaw,  then the sole
shareholder of Avenue Pictures,  in exchange for 1,425,000 shares of CineMasters
common stock ("CineMasters Common Stock") (the "Business Combination").

         Following  the  Business  Combination,   the  Board  of  Directors  and
shareholders of CineMasters  approved a transaction pursuant to which (i) all of
the  assets of the  Wombat  Productions  division  (the  "Wombat  Division")  of
CineMasters   were   transferred,   subject  to  all  related   liabilities  and
obligations,  to its  newly-formed,  wholly-owned  Delaware  subsidiary,  Wombat
Productions  ("Wombat  Productions"),  (ii) CineMasters was merged with and into
the  Company  (its  newly-formed,  wholly-owned  Delaware  subsidiary)  with the
Company being the surviving  corporation in the merger (the  "Reincorporation"),
and (iii) each stockholder of CineMasters  received an equal number of shares of
the Company in exchange for each share of capital stock of  CineMasters  held by
such stockholder  immediately prior to the effective time of the Reincorporation
(the  "Effective  Time").  As a result of the  Reincorporation,  Avenue Pictures
became a wholly-owned subsidiary of the Company.

General

         Mr. Brokaw has extensive experience in the motion picture industry.  He
began his career in the marketing  department at Twentieth  Century Fox. He also
served as executive vice president at Cineplex Odeon and was president and chief
executive  officer of Island Pictures.  Mr. Brokaw has particular  experience in
producing and releasing modestly budgeted  independent films which appeal to the
more sophisticated theatergoer. He has enjoyed success with such films as Choose
Me, El Norte,  Kiss of the Spider Woman,  The Trip to  Bountiful,  Mona Lisa and
Spike Lee's first film,  She's Gotta Have It. Mr. Brokaw is responsible  for the

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production and release of Gus Van Sant's Drug Store Cowboy,  James Foley's After
Dark My Sweet,  Michael  Lindsay-Hogg's  The  Object of Beauty,  Jane  Campion's
Sweetie,  and Jim  Sheridan's  The Field.  Mr. Brokaw was the producer of Robert
Altman's The Player,  the celebrated  and successful  comedy which was nominated
for five Academy awards, including Best Picture. Mr. Brokaw also produced Robert
Altman's Short Cuts, which was nominated for several Academy Awards.  Mr. Brokaw
also produced  Restoration,  the Academy-Award  winning and critically acclaimed
epic adventure  directed by Michael  Hoffman and released by Miramax  Films.  In
1996, Mr. Brokaw produced Sony Pictures' Voices from a Locked Room,  directed by
Malcolm  Clarke and  starring  Jeremy  Northam.  In February  1998,  the Company
completed  Finding  Graceland  starring Harvey Keitel,  Johnathan  Schaech,  and
Bridget Fonda which was fully  financed by Largo  Entertainment  Corp., a wholly
owned subsidiary of JVC  Entertainment,  Inc. All domestic rights to the picture
were licensed to the  Columbia/TriStar  Motion  Picture Group and Largo licensed
the picture internationally.

      The  Company  has  completed  production  of Wayward  Son  starring  Harry
Connick,  Jr., Pete Postlethwaite,  Patricia Clarkson and Vinessa Shaw. The film
is an epic drama set in the depression era in the south, written and directed by
Randall Harris, produced by Cary Brokaw and executive produced by Michael Hammer
and Steve Tisch.  Financed by way of an insurance  backed bank loan, the Company
has no financial  exposure  with respect to the film's  success.  Subject to the
bank's  first  position  lien,  the Company  holds the  copyright to the film in
perpetuity.  The Company is in the process of licensing the distribution  rights
to the film.

         The Company is in the business of producing  feature films,  television
films,  series for television and  one-hour-profiles  of Hollywood Stars. As set
forth in greater detail below, Avenue Pictures is currently active in developing
and producing projects in each of its three areas of activity.

Feature Films

         Currently,  Mr. Brokaw serves as the producer or executive  producer of
all  the  Company's  feature  films  with  overall   responsibility   for  their
development,  financing,  and  production  arrangements.  The  Company is paid a
producing fee for both the services of Mr. Brokaw and for the Company's services
in  connection  with the  development  and  production  of each feature film, in
addition  to a  negotiated  profit  participation.  The  nature  of  the  profit
participation  is a function  of Mr.  Brokaw's  standing  as a producer  and the
Company's  relative  bargaining  position with respect to each  project.  As set
forth above,  the Company's  bargaining  position is enhanced by the development
and  "packaging" of a project to the fullest  possible extent before seeking the
financial assistance of a studio or distributor.


<PAGE>

         The Company has recently concluded a three year non-exclusive  multiple
co-financing  agreement with  Intermedia.  Intermedia is one of the  pre-eminent
foreign sales companies in the film industry. They have co-financed and licensed
such films as Sliding Doors, Hilary and Jackie,  Playing by Heart, Woody Allen's
Sweet and Lowdown,  and upcoming The Wedding Planner starring Jennifer Lopez and
Matthew McConaughey.  The agreement provides Avenue with favorable  distribution
terms for its films in the  international  market,  co-financing for its feature
films  providing  for  co-ownership  of the  copyright of most films,  favorable
producing  fees  and  funding  for the film  development  expenses  of  projects
undertaken with Intermedia.

         Current  feature film  projects for the Company  include the  following
titles: The Courier,  Original Sin, Blessed Virgins,  Easy Money Blues,  Phobic,
and Mindhunters.

         The  Company  is  scheduled  to  produce  The  Courier  which  would be
co-financed  and  licensed  internationally  by  Intermedia.  Developed  by  the
Company,  the original  screenplay by Michael Brandt and Derek Haas,  concerns a
courier  hired to make  the  ultimate  drop to a  mysterious  and  exceptionally
powerful man who is considered `unfindable'. Brad Pitt has expressed interest to
star  subject to his  approval  of the film's  director.  Several  studios  have
expressed  an interest  in  co-financing  and  distributing  the motion  picture
domestically. The Company hopes to start filming in September 2000.

         Original Sin is a highly suspenseful  thriller written by William Brown
and Antonella  Osborne about a celebrated  defense attorney whose life is turned
upside down when he is perfectly framed for his ex-wife's  murder.  Stuart Baird
(Executive  Decision,  U.S. Marshalls) is attached to direct and Intermedia will
co-finance  and license the film  internationally.  Intermedia  is  currently in
negotiation with a major studio for the film's domestic distribution rights. The
Company hopes to commence production in October 2000.

         Blessed  Virgins is a highly  original teen comedy with strong dramatic
underpinnings  written by Sarah Kelly (Full Tilt  Boogie) who will also  direct.
The Company has  concluded an agreement  with Capitol  Films,  a well  respected
London based film sales  company who will  co-finance  or fully finance the film
and  license  the film  internationally  subject to cast.  Casting  efforts  are
underway and the Company hopes to commence production late summer 2000.

         The Company has optioned the  original  screenplay  Easy Money Blues by
John Cork, a provocative and sweeping serio-comic drama set against the excesses
of the late 80's. Keith Gordon  (Midnight  Clear,  Mother Night and the upcoming
Waking the Dead) is attached to direct.  Casting  efforts are  underway  and the
Company hopes to commence production in 2000.

         Phobic is a highly  charged and  terrifying  thriller  written by Chris
Bertolet about a former New York homicide  detective  drawn back into the search
for a serial killer who kills his victims based on their worst feat.  Intermedia
will co-finance the film (and license it internationally)  and the Company is in
negotiation with a potential director.  The Company hopes to commence production
in early 2001.

<PAGE>

         The Company is also  developing  The Judge,  an original  screenplay by
Gustave Reiniger,  about a New Orleans attorney recruited to a Federal judgeship
only to find  himself a target in the massive  corruption  surrounding  a gaming
empire.  Intermedia  is funding  development  and will  co-finance  (and license
internationally)  subject to cast.  The Company hopes to commence  production in
early 2001.

         Mindhunters  is a  screenplay  developed  by the  Company  and  sold to
Twentieth  Century  Fox.  Written by Wayne Kramer and Kevin  Brodbin,  the story
concerns a serial  killer  amidst the most elite unit of the FBI. Fox has placed
the  project  in  turnaround  and the  Company  has  reached an  agreement  with
Intermedia to further  develop and  co-finance the motion  picture.  The Company
hopes to commence production August 2000.

         TriStar  Pictures has financed the development of a film based upon the
acclaimed  Walker Percy  novel,  The  Moviegoer.  Terrence  Malick,  director of
Badlands,  Days of Heaven and The Thin Red Line,  has  written  the  screenplay.
TriStar has placed this project in turnaround  and the Company is in discussions
with several potential directors and two other studios to finance the film.

         Although the Company  continues to pursue  vigorously  the  development
and/or production of these projects, there can be no assurance that each project
will  be  produced  within  the  indicated  time  frame  and  budget  due to the
contingencies of securing talent, financing, and distribution.

         In addition to these  projects,  the  Company is  currently  developing
approximately fifteen additional projects. However, no assurance can be given as
to when or if any of these projects will be completed.

Made-for-Television/Cable Movies

         The Company has also successfully produced  made-for-television  movies
and movies for cable television.  Movies produced for television include: In The
Eyes of a  Stranger,  which  aired on CBS in the  spring of 1992,  See Jane Run,
based on the  best-selling  novel by Joy Fielding,  starring  Joanna Kerns (ABC)
which  aired in January  1995 and was  rebroadcast  on ABC in June  1997,  and A
Stranger in Town, an  adaptation  of R.T.  Marcus's play starring Jean Smart and
Gregory  Hines,  which  aired on CBS in March of  1996.  More  recently,  Avenue
Pictures  produced The Almost Perfect Bank Robbery  starring  Brooke Shields and
Dylan Walsh for CBS, Two Mothers for Zachary for ABC starring Valerie Bertinelli
and Vanessa  Redgrave,  and Tell Me No Secrets  starring Lori Loughlin and Bruce
Greenwood which aired on ABC in January 1997.

         For cable  television,  the Company produced Amelia Earhart:  The Final
Flight for Turner Network Television,  starring Diane Keaton,  Rutger Hauer, and
Bruce Dern,  and directed by Yves Simoneau which aired in June 1994, and Path To
Paradise:  The Untold Story of the World Trade Center Bombing for HBO,  starring
Peter Gallagher, Marcia Gray Hardin, and Art Malik and directed by Leslie Libman
and Larry Williams. Path to Paradise aired in June 1997.

<PAGE>

         The Company has completed  production of the time travel  adventure The
Timeshifters  as  an  original  two-hour  movie  for  TBS  Superstation,  Turner
Broadcasting's  flagship  network seen in more than 76 million  households.  The
movie premiered in October 1999. Avenue owns the film copyright and has licensed
the film internationally through Carlton International.

         The Company is in  negotiation  with HBO to produce a cable  television
movie based on this year's  Pulitzer  Prize winning play Wit written by Margaret
Edson.  With HBO, the Company is in  negotiation  with a major actress and major
director in connection with their  involvement in the film. The Company hopes to
commence production by September 2000.

         The Company intends to produce a six hour cable  mini-series  Angels in
America,  based on the  Pulitzer  Prize  and  Tony  Award  winning  play by Tony
Kushner.  The Company is in  discussions  with a potential  director and several
major actors, including Al Pacino have expressed ongoing interest to star in the
motion  picture.  Developed at New Line Cinema,  the Company is now  negotiating
with several  companies with respect to financing the  mini-series.  The Company
hopes to start filming in fall 2000.

         Typically, the domestic broadcaster of a made-for-television movie pays
a license fee which entitles it to a limited number of airings of the movie over
a designated  period of time  (generally 2-5 years).  The initial  network/cable
license  fees  generally  range  from  $2.5  -$3.5  million  dependent  upon the
broadcaster and the nature and content of the programming. Producers such as the
Company have  historically been required to expend production costs in excess of
the initial  domestic  network/cable  broadcast  license  fee.  The  practice of
incurring  production  costs in excess  of the  initial  domestic  network/cable
broadcast  license fee is  generally  referred to as "deficit  financing."  This
deficit    financing   is   generally    recovered    through   sales   of   the
made-for-television   movie  in  media  and  territories   other  than  domestic
network/cable  broadcasting,  such as international  free  television,  domestic
syndication  (post initial  broadcast  license),  domestic and international pay
television,  and domestic and international  home video.  Unlike many television
producers who must seek licensing arrangements on a project-by-project  basis to
cover its deficit  financing,  the Company has historically  entered into output
arrangements  which provide it the ability to assemble financing more easily and
enable it to move forward more  efficiently  with its television  projects.  The
Company  had an  output  agreement  which  expired  in  October  1997  with  RHI
Entertainment,  Inc., a distribution  company which is a wholly owned subsidiary
of  Hallmark  Entertainment,   Inc.  ("Hallmark").  The  Company  retained  100%
ownership in its  made-for-television  movies subject to the rights  licensed to
the initial domestic network/cable broadcaster and Hallmark.

         Avenue  Pictures had an output  agreement which expired in January 2000
with  Pearson  Television,  a division of Pearson  Plc.  With vast  interests in
publishing, media and television, Pearson is one of the world's largest and most
prestigious distributors of television programming.  The Company granted Pearson
the right to license Avenue Pictures Television programs (i) internationally and
(ii) in the domestic market subsequent to the initial network license period and
Avenue  Pictures  retains  100%  ownership of the  copyright  to its  television
programs.  Pearson pays the Company a substantial  predetermined advance against
its distribution rights to all such movies.  Pearson also provided the Company a
recoupable  contribution  to its  operating  overhead  on a monthly  basis and a
development fund on an annual basis.

<PAGE>

         The Pearson agreement does not cover television movies which Mr. Brokaw
or other the Company executives produce pursuant to "for hire" arrangements with
programmers. In such producer-for-hire  arrangements, Mr. Brokaw and the Company
do not have  financing  responsibility  or ownership  for the films.  Mr. Brokaw
receives a substantial producer's fee for such services. Mr. Brokaw will provide
such services to HBO as a producer-for-hire on Wit.

         The Company has approximately  eleven television movies in development,
including a four hour CBS mini-series entitled American Country.  Based upon the
upcoming  book  American  Country  by Bud  Schaetzle,  the  mini-series  will be
accompanied by a three compact disc release featuring the program's  exceptional
country music  soundtrack.  Written by Ronni Kerns,  the  mini-series  tells the
story of four  generations  of one  extended  musical  family  whose  lives  are
interwoven with the development of country music and the events of the twentieth
century.  It is the story of the  quintessential  American  family with the rich
backdrop  of the  evolution  of country  music from its  pre-radio  roots to its
phenomenal current popularity.

         Other  television  movies in active  development  include The Chimes of
Christmas  (CBS) based on Charles  Dicken's other Christmas story and written by
Mark Medoff  (Children  of a Lesser God),  Special  Occasions  (CBS)  written by
Bernard Slade (Tribute,  Same Time, Next Year),  The Replacement  Husband (NBC),
The Second  Coming  (USA),  Checking  Out (VH1) and a  mini-series  based on the
stories of the Brothers Grimm titled Enchanted Kingdom.  Although the Company is
actively  pursuing  these  projects,  there can be no assurance that each or any
project  will be produced  due to the  Company's  reliance  upon the network and
cable  programmers  who must  approve  and order  the films in order to  provide
adequate financing.

Series Television

         The Company is currently in development with several television series.
These series  include  Emily  Undercover a detective  show  conceived by Stanley
Wilson,  Dylan written by Michael  Brandt and Derek Haas (The  Courier)  about a
female bounty hunter and Gotham  created by Gerald and Bridget  Dobson  (General
Hospital, Santa Barbara) which is a contemporary Dickenesque one hour drama.

One Hour-Profiles
The Hollywood Collection

         Through its subsidiary,  Wombat Productions,  the Company also produces
one-hour  profiles of Hollywood's  most important stars which have been aired by
PBS and major cable  networks.  Gene  Feldman and Suzette  Winter have  produced
films together for over  twenty-five  years. The programs have been aired by PBS
and major cable networks in the United States and by television  stations around
the world.  The Company has produced the following  hour-length  programs  since
1982. With the exception of Vivien Leigh:  Scarlett And Beyond, all programs are
copyrighted  and owned by the  Company  and  available  for license to all media
world-wide and in perpetuity. These titles form The Hollywood Collection:

<PAGE>

"Hollywood's Children"                "Audrey Hepburn Remembered"
"The Horror Of It All"                "Mae West. And The Men Who Knew Her"
"Ingrid"                              "The Story Of Lassie"
"Marilyn Monroe: Beyond The Legend"   "Charlton Heston: For All Seasons"
"Steve McQueen: Man On The Edge"      "Roger Moore: A Matter Of Class"
"Grace Kelly: The American Princess"  "Yul Brynner: The Man Who Was King"
"Cary Grant: The Leading Man"         "Ingrid Bergman Remembered"
"Gregory Peck: His Own Man"           "Jack Lemmon: America's Everyman"
"Vivien Leigh: Scarlett And Beyond"*  "Joan Crawford: Always The Star"
"Anthony Quinn: An Original"          "Fred MacMurray: The Guy Next Door"
"Robert Mitchum: The Reluctant Star"  "Shirley MacLaine: Kicking Up Her Heels"
"Michael Caine: Breaking The Mold"    "Barbara Stanwyck: Straight Down The Line"
"Shirley Temple: America's Little     "Gary Cooper: The Face Of A Hero"
 Darling"                             "Walter Matthau: Diamond In The Rough"
"Alan Ladd: The True Quiet Man"       "Clint Eastwood: the Man From Malpaso"**

* Copyright Owned by Turner Broadcasting System.
** Licensed to Warner Home Video

Other Entertainment Profiles

         In 1998, a new series of programs was begun by Wombat  Productions  for
the Art and Film Channel,  Bravo,  profiling  entertainment  figures outside the
motion-picture    industry.    The   first   of   these    productions   was   a
performance/profile  of the Broadway diva,  Betty  Buckley:  In Performance & In
Person,  and  presented on the series Bravo  Profiles in the fall of 1999.  Also
produced and presented  the same year on Bravo  Profiles was The Worlds of Harry
Connick,  Jr., an hour-length  profile on the gifted musician,  composer,  actor
Harry Connick, Jr.

         Currently,  Wombat is in production on a program for Bravo  Profiles on
the master magician David Copperfield, with Mr. Copperfield's full cooperation.

Distribution  Arrangement

         Pursuant to a Distribution  Agreement (the  "Distribution  Agreement"),
dated July 1, 1995 and amended on April 28, 1996, between the Company and Janson
Associates,  Inc.  ("Janson),  Janson was granted the sole and exclusive  right,
subject  to the  production  arrangement,  to license  substantially  all of the
Company's  Hollywood  Collection  film library for all forms of  television  and
video  worldwide  for a period of ten years,  subject to  automatic  renewals in
three-year   increments.   In  consideration  of  Janson's  services  under  the
Distribution Agreement, Janson is entitled to retain a distribution fee, ranging
from 10% to 35%,  depending  upon  whether  such  distribution  is via  domestic
television network, syndication, international television, or home video, of the
gross  receipts  from the  licensing of each  program.  In  addition,  Janson is
reimbursed  for certain  distribution  expenses out of gross  receipts  with the
remaining balance remitted to the Company as program licensor.

<PAGE>

Business Approach

         As an independent producer of feature films and television programming,
the Company does not have sufficient  capital to  independently  finance its own
productions.  Accordingly,  most  of its  financial  resources  are  devoted  to
financing  development  activities  which include the  acquisition of underlying
literary works such as books,  plays, or newspaper articles and commissioning of
screenplays  based upon such  underlying  literary  works.  A key element in the
success  of  the  development   process  is  Mr.  Brokaw's   reputation  in  the
entertainment business and his access to and relationships with creative talent.

         It is the ability to identify and develop  attractive  properties which
is instrumental to the success of independent  producers such as the Company. In
particular, the feature film industry relies heavily on independent producers to
identify  projects which are then developed  further or produced and distributed
by the major  studios.  Independent  producers  serve a similar  function in the
television  industry.  The Company employs a flexible strategy in developing its
motion  picture  and film  properties.  Wherever  possible,  it employs  its own
capital and financial resources in developing a project to the point where it is
ready to go into production.  Typically, this means putting together a "package"
which  consists  of  the  underlying  property,  a  script  that  is  ready  for
production, and key talent, including a director and principal cast. The benefit
of  developing  a project to this  advanced  stage is that the Company will have
maximum  leverage in negotiating  production and financing  arrangements  with a
distributor.  Nevertheless,  there are occasions when the Company  benefits from
the financial assistance of a studio at an earlier stage. These occasions may be
necessary as a result of lengthy  development of a script,  the  desirability of
commissioning a script by a highly paid writer,  the acquisition of an expensive
underlying  work, or a significant  financial  commitment to a director or star.
Moreover,  when  developing  a  property  for  series  television,  it is almost
essential to involve a network at an earlier stage inasmuch as  development  and
production of a television  series requires a much larger  financial  commitment
than production of a television movie.

         In addition to the  development  and  production  strategies  described
above,  the Company also considers  various  production  financing  alternatives
which  are  available  whereby  commitments  from  various  end  users  such  as
independent domestic  distributors,  foreign distributors,  cable networks,  and
video  distributors  can be combined to finance a project without a major studio
financial commitment.

         The  Company's  primary goal with respect to its  documentary  films is
significant  and  sustained  growth  through  production  activity  and  greater
exploitation of its wholly owned programs.  Further  revenues and  profitability
will  depend on the  Company's  ability  to secure  financing  for new  programs
through its present relationship with Bravo or other cable or television entity.
In order to provide maximum exposure of the twenty-eight titles of The Hollywood
Collection  available in the home-video  market in the United States and Canada,
Wombat  entered  into an  agreement  with MPI,  one of the  premiere  home-video
companies for documentary and performance  programs. In June of 2000, the entire
available  collection  will be offered to the vast  special-interest  market via
home-video stores, MPI's 800 number provided on its web sites,  www.mpimedia.com
and www.hollywoodcollection.com, which are also connected through the Yahoo! and
Amazon  web  sites.  Having  successfully  exploited  programming  opportunities
deriving from the world of  entertainment,  Wombat is currently  exploring other
subject areas for  programs.  Following up its license  agreement  with MPI Home
Video,  Wombat is currently in discussions  that could lead to joint ventures in
programming  with WPA Film Library,  one of the worlds largest archives of stock
footage and a wholly owned subsidiary of MPI Media Group.

<PAGE>

Competition

         The motion picture industry is extremely  competitive.  The competition
comes  from both  companies  within the same  business  and  companies  in other
entertainment media which create alternative forms of leisure entertainment. The
Company  competes  with several  "major" film studios  which are dominant in the
motion picture industry, as well as with numerous independent motion picture and
television production companies, television networks, and pay television systems
for the acquisition of literary properties,  the services of performing artists,
directors, producers, and other creative and technical personnel, and production
financing.  Many of the  organizations  with  which the  Company  competes  have
significantly greater financial and other resources.  In addition, the Company's
films  compete  for  audience  acceptance  with  motion  pictures  produced  and
distributed  by other  companies.  As a result,  the  success  of the  Company's
production  is  also  heavily   dependent  on  public   taste,   which  is  both
unpredictable and susceptible to change without warning.

         A limited  number of independent  production  companies are as actively
involved  in the  production  of  both  feature  films  and  television  movies.
Management   believes  that  its  established  track  record  of  high  quality,
critically  acclaimed  films attracts some of the best writing,  directing,  and
acting talent in the industry. In addition,  Mr. Brokaw's years of experience in
the business and strong  reputation  further  enhance the Company's  competitive
edge.

         The Company was one of the first production  companies  specializing in
the production of profiles of movie stars and for years had been an acknowledged
quality  producer in this  field.  However,  with the  success of the  biography
format on the cable outlet A&E, other cable  companies have  introduced  similar
programs.  Cable companies,  often in association with major films studios,  are
increasingly  producing  their  own  programs  and  securing  ownership  of each
program's  copyright.  Programs  are being  produced  by staff  producers  or by
producers for hire for a specific  project.  Consequently,  cable  companies are
acquiring  ownership  of the  back end  (income  deriving  from  the  subsequent
licensing of programs) and are now licensing  their  programs to a world market.
Faced with these new  circumstances,  the Company had seen a significant drop in
sales to  overseas  buyers.  This trend now seems to be  reversing.  Part of the
reason for this reversal may be that The Hollywood Collection profiles deal with
stars of special interest to older moviegoers and frequently  involve  on-camera
participation  of the profiled star.  Also, the development of digital video and
the  increasing  number of new  delivery  systems  in new areas of the world are
creating a renewed hunger for this programming.

<PAGE>

Major Customers

         The Company's revenue has historically been derived from the production
of a  relatively  small number of programs and  licensing  revenues.  Given this
fact,  the limited  number of outlets  for the  Company's  productions,  and the
individually  significant  license  fees  generated  from  certain of its sales,
certain customers have historically  accounted for a significant  portion of the
Company's  revenue.  The Company derived  approximately 58% of its total revenue
for the year ended  December 31, 1999 from TBS  Superstation  ("TBS") and 27% of
its  total   revenue  for  the  year  ended   December  31,  1999  from  Carlton
International ("Carlton") both related to the television movie The Timeshifters.

Employees

         The Company has 9 full time employees.

The Motion Picture Industry

General

         The motion  picture  industry  consists  of two  principal  activities:
production, which involves the development,  financing, and production of motion
pictures;  and  distribution,  which involves the promotion and  exploitation of
feature-length  motion  pictures  in a variety  of media,  including  theatrical
exhibition,   home  video,   television,   and  other  ancillary  markets,  both
domestically and  internationally.  The United States motion picture industry is
dominated by the "major" studios,  including The Walt Disney Company,  Paramount
Pictures,   Warner  Brothers,   Universal   Pictures,   Twentieth  Century  Fox,
Columbia/Tri-Star Pictures, and MGM/UA. The major studios are typically parts of
large  diversified  corporations  that have strong  relationships  with creative
talent,  exhibitors, and others involved in the entertainment industry and whose
non-motion  picture operations provide a stable source of earnings and cash flow
which offset the  variations  in the financial  performance  of their new motion
picture releases and other aspects of their motion picture operations. The major
studios have  historically  produced and  distributed  the vast majority of high
grossing theatrical motion pictures released annually in the United States.

Independent Film

         At the same time that films  released by the major  studios have become
more  expensive,  currently  with  average  budgets  exceeding  $40  million (as
reported by the Motion  Picture  Association  of America  ("MPAA")),  low budget
"independent films" have successfully entered the market.  Typically, such films
are more  character  driven than plot driven and  originally  they lacked  major
stars.  Miramax,  originally an independent  distributor  (now owned by Disney),
broke ground in this area with films like My Left Foot and The Piano.

         Over  the  last   several   years   there  have  been   other   notable
"independent-type"  films such as Four  Weddings  and A Funeral,  Pulp  Fiction,
Scream, The Full Monty and The Blair Witch Project. Indeed, given the relatively
small  financial  risk of producing and releasing  such films,  all of the major
studios  have  started  or  are  studying  the  feasibility  of  production  and
distribution units focusing on smaller, independent-type films.

         The  growth  of  this  product  and  market   segment   should  provide
opportunities for the Company which is one of the pioneers in this area.

<PAGE>

Motion Picture Production and Financing

         The   production  of  a  motion  picture  begins  with  the  screenplay
adaptation of a popular novel or other literary work acquired by the producer or
the development of an original  screenplay having its genesis in a story line or
scenario  conceived or acquired by the producer.  In the development  phase, the
producer typically seeks production  financing and tentative  commitments from a
director,  the principal cast members and other creative  personnel.  A proposed
production schedule and budget are also prepared during this phase.

         Upon  completing the screenplay  and arranging  financing  commitments,
pre-production of the motion picture begins. In this phase, the producer engages
creative personnel to the extent not previously committed; finalizes the filming
schedule  and  production  budget;  obtains  insurance  and  secures  completion
guaranties,  if  necessary;   establishes  filming  locations  and  secures  any
necessary  studio  facilities  and stages;  and prepares for the start of actual
filming.  Principal photography (the actual filming of the screenplay) generally
extends  from  seven to twelve  weeks,  depending  upon such  factors as budget,
location, weather, and complications inherent to the screenplay.

         Following  completion  of  principal  photography  in what is typically
referred  to  as  post-production,  the  motion  picture  is  edited;  opticals,
dialogue,  music,  and any special effects are added;  and voice,  effects,  and
music sound tracks and pictures are synchronized. This results in the production
of a fully edited  negative from which release  prints of the motion picture are
made.

         Production  costs  consist of acquiring or developing  the  screenplay,
film studio rental, principal photography, post-production, and the compensation
of creative and other production personnel. Distribution expenses, which consist
primarily of the costs of  advertising  and preparing  release  prints,  are not
included in direct  production  costs and vary widely depending on the extent of
the release and promotional markets. Average studio budgets currently exceed $40
million. Average independents are far lower and are often less than $10 million.
The major studios  generally fund  production  costs from cash flow generated by
motion  picture  and  related  activities  or,  in some  cases,  from  unrelated
businesses or through  off-balance  sheet methods.  Substantial  overhead costs,
consisting  largely of salaries and related  costs of the  production  staff and
physical  facilities  maintained  by the major  studios,  also  must be  funded.
Independent  production  companies  generally avoid incurring  overhead costs as
substantial as those incurred by the major studios by hiring  creative and other
production   personnel   and   retaining   the  other   elements   required  for
pre-production,  principal  photography,  and  post-production  activities  on a
picture-by-picture  basis. Sources of funds for independent production companies
include bank loans,  "pre-licensing" of distribution  rights,  equity offerings,
and joint ventures. Independent production companies generally attempt to obtain
all or a  substantial  portion of their  financing of a motion  picture prior to
commencement of principal  photography,  at which point  substantial  production
costs begin to be incurred and require payment.

<PAGE>

         "Pre-licensing"  of film  rights  is  often  used by  independent  film
companies to finance all or a portion of the direct production costs of a motion
picture.  By "pre-licensing"  film rights, a producer obtains amounts from third
parties in return for granting  such parties a license to exploit the  completed
motion  picture  in  various  markets  and  media.   Production  companies  with
distribution  divisions may retain the right to distribute the completed  motion
picture  either  domestically  or in one or more  international  markets.  Other
production companies may separately license theatrical,  home video,  television
and all other distribution rights among several licensees.

         In connection with the production and distribution of a motion picture,
major studios and independent  production  companies generally grant contractual
rights to actors, directors, screenwriters, owners of rights, and other creative
and  financial  contributors  to share in revenues or net profits (as defined in
their respective  agreements) from a particular  motion picture.  Except for the
most sought-after talent,  these third-party  participants are generally payable
after all distribution fees,  marketing  expenses,  direct production costs, and
financing costs are recouped in full.

         Major  studios  and   independent   film  companies   typically   incur
obligations to pay residuals to various  guilds and unions  including the Screen
Actors Guild, the Directors Guild of America,  and the Writers Guild of America.
Residuals are obligations  arising from the  exploitation of a motion picture in
markets other than the primary  intended market for such picture.  Residuals are
primarily  calculated  as a percentage  of the gross  revenues  derived from the
exploitation  of the picture in these secondary  markets.  The guilds and unions
typically obtain a security interest in all rights of the producer in the motion
picture which is usually subordinate to the financier of the motion picture, and
the  completion  bond  company if any.  The  producer  may transfer the residual
obligation to a distributor if the distributor  executes the  appropriate  guild
assumption agreement.

Motion Picture Distribution

         General.  Distribution  of  a  motion  picture  involves  domestic  and
international  licensing  of the  picture  for (a)  theatrical  exhibition,  (b)
non-theatrical  exhibition,  which  includes  airlines,  hotels and armed forces
facilities,  (c)  videocassettes  and video  discs,  (d)  television,  including
pay-per-view, pay, network, syndication or basic cable, and (e) marketing of the
other rights in the picture and underlying literary property,  which may include
books, merchandising,  and soundtrack albums. In recent years, revenues from the
licensing of rights to distribute motion pictures in secondary (i.e., other than
domestic  theatrical)   markets,   particularly  home  video  and  international
theatrical pay and free television, have increased significantly.

         The  distributor   typically  acquires  rights  from  the  producer  to
distribute  a  motion  picture  in one or more  markets  and/or  media.  For its
distribution  rights, the distributor  generally agrees to pay to the producer a
certain minimum  advance or guarantee upon the delivery of the completed  motion
picture,  which  amount is to be  recouped  by the  distributor  out of revenues
generated from the  distribution  of the motion  picture in particular  media or
territories. After the distributor's distribution fee is deducted from the gross
receipt of the picture,  the  distributor  recoups the amount  advanced (if any)
plus its distribution costs.


<PAGE>

         Motion  pictures  may continue to play in theaters for up to six months
following their initial release.  Concurrently  with their release in the United
States,  motion  pictures  generally  are  released  in  Canada  and may also be
released  in one or more  other  international  markets.  A  motion  picture  is
typically  available for distribution  during its initial  distribution cycle as
follows:

<TABLE>

                                               Months After Initial                  Approximate
<CAPTION>
        Marketplace                         Domestic Theatrical Release            Release Period
-------------------                         ---------------------------            --------------
<S>                                                                                   <C>
Domestic theatrical                                 ----                              4-6 months
International theatrical                            ----                             6-12 months
Domestic home video (initial release)             4-6 months                            6 months
Domestic pay-per-view                             6-9 months                            2 months
International Video (initial release)            6-12 months                         6-12 months
Domestic pay television                         12-15 months                           18 months
International television (pay or free)          18-24 months                        12-36 months
Domestic free television*                       30-33 months                           1-5 years
-----------------------
* Includes network, barter syndication, syndication, and basic cable.

</TABLE>

         A substantial  portion of a film's ultimate revenues are generated in a
film's  initial  distribution  cycle  (generally  the first five years after the
film's initial domestic  theatrical  release).  Commercially  successful  motion
pictures,  however,  may continue to generate  revenues after the film's initial
distribution cycle from the relicensing of distribution rights in certain media,
including  television  and home video,  and from the  licensing of  distribution
rights with respect to new media and technologies.

         Theatrical.  The theatrical  distribution of a motion picture  involves
the licensing and booking of the motion  picture to theatrical  exhibitors,  the
promotion of the picture through  advertising and publicity  campaigns,  and the
manufacture of release  prints from the film  negative.  The size and success of
the  promotional  advertising  campaign  can  materially  affect  the  financial
performance  of the  film.  Moreover,  as  the  vast  majority  of  these  costs
(primarily  advertising  costs) are incurred  prior to the first  weekend of the
film's  domestic  theatrical  release,  there is not  necessarily  a correlation
between these costs and the film's ultimate box office performance. In addition,
the ability to distribute a picture during peak  exhibition  seasons,  including
the summer months and the Christmas holidays,  may affect the theatrical success
of the picture.

<PAGE>

         The distributor and theatrical  exhibitor  generally enter into license
agreements  providing  for  the  exhibitor's  payment  to the  distributor  of a
percentage of box office receipts after deducting the exhibitor's  overhead or a
flat working amount. The percentage  generally ranges from 45-60% and may change
for each week the film plays in a specific theatre,  depending on the success of
the  picture at the box office  and other  factors.  The  balance  ("gross  film
rentals")  is  remitted  to the  distributor.  The  distributor  then  retains a
distribution  fee  from  the  gross  film  rentals  and  recoups  the  costs  of
distributing the film, which consist  primarily of advertising,  marketing,  and
production  cost, and the cost of manufacturing  release prints.  The balance of
film  rentals,  if  any,  after  recouping  any  advance  or  minimum  guarantee
previously  paid to producer and  interest  thereon is then paid to the producer
based on a predetermined split between the producer and distributor.

         Home  Video.  A  motion  picture   typically   becomes   available  for
videocassette  distribution within four to six months after its initial domestic
theatrical release.  Home video distribution  consists of the promotion and sale
of videocassettes to local,  regional and national video retailers which rent or
sell  videocassettes  to consumers  primarily for home  viewing.  The market for
videocassettes  for  home use has  expanded  rapidly  over  the past ten  years,
although  the rate of growth in this  market  has slowed in recent  years.  Most
films are initially made available in videocassette form at a wholesale price of
$55 to $60 and are sold at that price  primarily to video rental  stores,  which
rent the  cassettes  to  consumers.  Owners of films  generally  do not share in
rental  income.  Following  the initial  marketing  period,  selected  films are
remarketed  at a  wholesale  price of $10 to $15 or less for sale to  consumers.
These  "sell-through"  arrangements  are used most  often  with  films that will
appeal to a broad  marketplace or to children.  Some films are initially offered
at a price designed for sell-through rather than rental when it is believed that
the ownership  demand by consumers will result in a sufficient level of sales to
justify the reduced margin on each cassette  sold.  Home video  arrangements  in
international  territories are similar to those in domestic  territories  except
that the wholesale prices may differ.

         Television.   Television   rights  are  generally   licensed  first  to
pay-per-view  for an  exhibition  period  within  six to nine  months  following
initial domestic theatrical release, then to pay television approximately twelve
to fifteen  months after  initial  domestic  theatrical  release,  thereafter in
certain  cases to free  television  for an  exhibition  period,  and then to pay
television again. These films are then syndicated to either independent stations
or basic cable outlets.  Pay-per-view  television allows  subscribers to pay for
individual programs, including recently released movies and live sporting, music
and other events on a per use basis.  Pay  television  allows  cable  television
subscribers to view such services as  HBO/Cinemax,  Showtime/The  Movie Channel,
Starz,  or Encore Media Services  offered by their cable system  operators for a
monthly subscription fee. Since groups of motion pictures are typically packaged
and licensed for exhibition on television  over a period of time,  revenues from
these television licensing "packages" may be received over a period that extends
beyond five years from the initial domestic  theatrical  release of a particular
film. Motion pictures are also "packaged" and licensed for television  broadcast
in international markets.

         Non-Theatrical  and  Other  Rights.  Films may be  licensed  for use by
airlines,   schools,   public  libraries,   community   groups,   the  military,
correctional  facilities,   ships  at  sea,  and  others.  Musical  compositions
contained in a film which have been  commissioned  for that film may be licensed
for sound  recording,  public  performances,  and  sheet  music  publication.  A
soundtrack album may be released  including music contained in a film. Rights in
motion  pictures  may be  licensed  to  merchandisers  for the  manufacturer  of
products such as video games, toys,  T-shirts,  posters,  and other merchandise.
Rights may also be licensed to create  novelizations of the screenplay and other
related book publications.

<PAGE>

         International Markets. Motion picture distributors and producers derive
revenue from  international  markets in the same media as domestic markets.  The
growth of foreign  revenues has been dramatic,  now accounting for more than 50%
of the total revenues of many films. The increase in revenues is currently being
driven primarily from the growth of television  abroad.  The increase in foreign
television  values and foreign  revenues  is likely to  continue.  Although  the
increased level of foreign values affects the revenues of most films, the effect
is not  uniform.  Action  films and films with  major  stars  benefit  most from
foreign  revenues;  films with  uniquely  American  themes with  unknown  actors
benefit the least.

Regulation

         Distribution  rights to motion  pictures are granted  legal  protection
under the copyright laws of the United States and most foreign countries,  which
laws  provide   substantial  civil  and  criminal   sanctions  for  unauthorized
duplication and exhibition of motion pictures.  Motion pictures,  musical works,
sound recordings, art work, still photography, and motion picture properties are
separate  works subject to copyright  under most copyright  laws,  including the
United  States  Copyright  Act of 1976,  as amended.  The Company  plans to take
appropriate and reasonable measures to secure,  protect,  and maintain or obtain
agreements to secure, protect, and maintain copyright protection for all Company
pictures under the laws of applicable jurisdictions. Motion picture piracy is an
industry-wide  problem.  The MPAA operates a piracy hotline and investigates all
reports of such  piracy.  Depending  upon the  results  of such  investigations,
appropriate  legal  action may be brought by the owner of the rights.  Depending
upon the extent of the piracy, the Federal Bureau of Investigation may assist in
these investigations and related criminal prosecutions.

         Motion  picture  piracy  is an  international  as  well  as a  domestic
problem.  Motion  picture  piracy  is  extensive  in many  parts  of the  world,
including  South  America,  Asia  (including  Korea,  China,  and  Taiwan),  the
countries of the former Soviet Union,  and other former Eastern bloc  countries.
In addition to the MPAA,  the Motion Picture  Export  Association,  the American
Film Marketing Association, and the American Film Export Association monitor the
progress and efforts made by various  countries to limit or prevent  piracy.  In
the past, these various trade  associations have enacted voluntary  embargoes of
motion picture exports to certain countries in order to pressure the governments
of those  countries  to become more  aggressive  in  preventing  motion  picture
piracy. In addition,  the United States government has publicly considered trade
sanctions against specific countries which do not prevent copyright infringement
of United  States  produced  motion  pictures.  There can be no  assurance  that
voluntary industry embargoes or United States government trade sanctions will be
enacted.  If enacted,  such actions  could impact the amount of revenue that the
Company  realizes from the  international  exploitation  of its motion  pictures
depending  upon the  countries  subject to such action and the  duration of such
action.  If not enacted or if other  measures are not taken,  the motion picture
industry (including the Company) may continue to lose an indeterminate amount of
revenues as a result of motion picture piracy.

<PAGE>

         The  Code  and  Ratings  Administration  of the  MPAA  assigns  ratings
indicating age-group suitability for theatrical distribution of motion pictures.
The Company has followed and will  continue to follow the practice of submitting
its pictures for such ratings.

         United  States  television  stations and  networks,  as well as foreign
governments,  impose  additional  restrictions on the content of motion pictures
which may restrict in whole or in part  theatrical or  television  exhibition in
particular  territories.  Management's  current  policy  is  to  produce  motion
pictures for which there will be no material  restrictions  on exhibition in any
major  territories or media.  This policy often  requires  production of "cover"
shots or different  photography and recording of certain scenes for insertion in
versions of a motion picture  exhibited on television or theatrically in certain
territories.

         There can be no assurance that current and future  restrictions  on the
content of the Company's  pictures may not limit or affect the Company's ability
to exhibit certain of its pictures in certain territories and media.

ITEM 2.       DESCRIPTION OF PROPERTY

         The  Company's  philosophy  on  real  estate  investments  is to  lease
required  properties  and  invest  in the  development  of film  and  television
properties.  The  Company  presently  leases  for  itself  and  Avenue  Pictures
approximately 4,000 square feet of office space at its corporate headquarters at
11111 Santa Monica Boulevard, Suite 525, Los Angeles,  California 90025 pursuant
to a  lease  that  expires  October  18,  2004.  The  rent  for  such  space  is
approximately $11,000 per month.

         Management  believes the  properties  herein  described are adequate to
handle current and short term projected business.

ITEM 3.  LEGAL PROCEEDINGS

      The Company is not involved in any material legal proceedings.

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year covered by this report.


<PAGE>


                                     PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
           MATTERS

                          MARKET PRICE OF COMMON STOCK

         The Company's  Common Stock is traded on the American  Stock  Exchange,
Inc.  ("AMEX") under the symbol "PIX".  The following  table sets forth the high
and low  sales  prices  for the  Common  Stock on the AMEX for the  years  ended
December 31, 1999 and 1998.

             1999                       High Sale                  Low Sale
             ----                       ---------                  --------
          1st Quarter                     $3.75                      $1.94
          2nd Quarter                     $2.38                      $1.00
          3rd Quarter                     $2.12                      $1.00
          4th Quarter                     $1.75                      $.375

             1998                       High Sale                  Low Sale
             ----                       ---------                  --------
          1st Quarter                     $6.44                      $5.25
          2nd Quarter                     $7.50                      $4 32
          3rd Quarter                     $5.00                      $1.75
          4th Quarter                     $2.75                      $1.63

         As of March 15, 2000, there were 158 holders of record of Common Stock.

         On  March  15,  2000,  the  closing  price of the  Common  Stock on the
American Stock Exchange was $1.875.

                                 DIVIDEND POLICY

         The Company anticipates that, for the foreseeable future,  earnings, if
any,  will be retained for the  development  of its business.  Accordingly,  the
Company  does  not  anticipate  paying  dividends  on the  Common  Stock  in the
foreseeable  future.  The  payment  of  future  dividends  will  be at the  sole
discretion of the  Company's  Board of Directors and will depend on, among other
things, future earnings,  capital requirements,  the general financial condition
of the Company, and general business  conditions.  Payment of dividends may also
be limited by the terms of any Preferred  Stock or debt the Company may issue or
incur.  See  "Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations -- Liquidity and Capital Resources".

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

         The following  discussion  and analysis  should be read in  conjunction
with the Company's consolidated financial statements and related notes thereto.

<PAGE>

Liquidity and Capital Resources

         At December 31, 1999, the Company had  approximately  $476,000 of cash.
The  accompanying  financial  statements  have been  prepared on a going concern
basis,  which  contemplates  the  realization of assets and the  satisfaction of
liabilities  in the  normal  course of  business.  However,  revenues  have been
insufficient  to cover costs of operations in the past three years.  The Company
has a working  capital  deficiency and has an accumulated  deficit of $4,755,000
through  December 31, 1999.  The  Company's  continuation  as a going concern is
dependent on its ability to ultimately attain profitable operations and positive
cash  flows from  operations.  The  Company's  management  believes  that it can
satisfy  its  working  capital  needs based on its  estimates  of  revenues  and
expenses,  together with improved  operating  cash flows,  as well as additional
funding  whether from financial  markets,  other sources or other  collaborative
arrangements.  The Company  believes it will have sufficient  funds available to
continue to exist  through the next year,  although no assurance can be given in
this  regard.  Insufficient  funds will  require  the  Company to scale back its
operations.  The  Independent  Auditor's  Report  dated  April  12,  2000 on the
Company's consolidated financial statements states that the Company has suffered
losses from operations,  has a working capital deficiency and has an accumulated
deficit that raises  substantial  doubt about its ability to continue as a going
concern.  The accompanying  financial  statements do not include any adjustments
that may result from the Company's inability to continue as a going concern.

Results of Operations

         For the year ended  December  31,  1999 the  Company  had a loss before
income  taxes of  $1,369,000  as compared to a loss of  $2,114,000  for the year
ended  December 31, 1998. The decreased loss in 1999 was primarily the result of
increased revenue earned in 1999 and reduced selling, general and administrative
expenses.

Revenues

         Revenues  for the year  ended  December  31,  1999  were  approximately
$4,749,000  as compared to $829,000 for the year ended  December  31, 1998.  The
increased  revenues  for the year were  primarily  the  result of  license  fees
related to the  production  of The  Timeshifters.  In 1999,  the Company  earned
$95,000 in additional  producer fees related to the feature film Wayward Son, as
well as $332,000 of revenue from the licensing of rights to its  programming  in
secondary markets through Janson Associates and Bravo. In addition,  the Company
received  development  fees during 1999 for various  projects.  Revenues for the
year ended  December  31, 1998 were derived  primarily  from the  production  of
Wayward Son. In addition,  the Company earned $320,000 of revenue from licensing
of rights to its programming in secondary markets through Janson Associates. For
the year ended December 31, 1999,  approximately  58% of the Company's  revenues
were earned from TBS and 27% from Hamdon, both related to The Timeshifters.

<PAGE>

Film Production Costs

         Film  production  costs  for the year  ended  December  31,  1999  were
$4,033,000  as compared to $718,000 for the year ended  December  31, 1998.  The
increased film production costs were the result of increased revenue  recognized
during the year.  Included  in film  production  costs for 1999,  is  $3,700,000
related to amortization of The Timeshifters.  Film production costs for the year
ended  December  31,  1998  can  be  attributed  to  the  film  amortization  of
approximately  $628,000 related to the Company's documentary films and licensing
activities,  including  a $225,000  write  down  taken on  several  films in the
Hollywood Collection, due to the reduced revenue stream forecast in the future.

Selling, General, and Administrative

         Selling,  general and  administrative  expenses ("SG&A") for the twelve
months  ended  December  31,  1999  and 1998  were  $2,057,000  and  $2,425,000,
respectively.  Included  in SG&A for the  period is  approximately  $280,000  of
amortization of goodwill related to the Avenue Pictures acquisition on September
30, 1996. In addition, the Company incurred $37,500 of stock option compensation
expense  relating  to  previously  issued  stock  options in 1999 and 1998.  The
remaining SG&A costs for 1999 and 1998 relate to salaries,  occupancy  costs and
professional fees. The reduced costs in 1999 were primarily  attributable to the
efforts to reduce expenses and personnel costs.

Income Taxes

         For the years  ended  December  31,  1999 and 1998,  the Company had an
income tax expense (benefit) of $1,700 and ($57,000),  respectively. The benefit
was derived from the carry back of the current  years loss, as well as an offset
of the balance of the income tax payable at December 31, 1997.

Recent Developments

         The Company received a letter from the American Stock Exchange ("AMEX")
notifying  the  Company  that it has fallen  below  certain of AMEX's  continued
listing  guidelines  because of the  Company's  recurring  losses.  The  Company
attended  a meeting  with AMEX on  November  16,  1999 to  discuss  its  listing
eligibility.  As a result of this  meeting  AMEX  informed the Company that they
would be granted an extension  until after the filing of the Company's year- end
financial statements to enable the Company to satisfy the listing criteria.  The
Company is currently  preparing a package for presentation to the AMEX. However,
there can be no  assurance  that the Common  Stock will not be  delisted  in the
future.

Recent Accounting Developments

         The Financial  Accounting  Standards Board issued Accounting  Standards
(SFAS 130),  "Reporting  Comprehensive  Income",  in June 1997 which  requires a
statement of comprehensive income to be included in the financial statements for
fiscal years  beginning  after  December 15, 1997.  The Company has included the
required information in Note 11 to the Consolidated Financial Statements.

<PAGE>

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standard  (SFAS) No. 133,  "Accounting  for Derivative
Instruments and Hedging Activities." This Statement  establishes  accounting and
reporting standards for derivative  instruments and for hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities in the statement of financial position and measure those instruments
at fair value.  This  Statement is effective  for all fiscal  quarters of fiscal
years  beginning  after June 15,  1999.  The Company  will adopt SFAS No. 133 by
January 1, 2000. The Company is currently  evaluating the impact the adoption of
SFAS No. 133 will have on the consolidated financial statements.

Year 2000

         During 1999, the Company  completed any required  modifications  to its
critical systems and applications relating to year 2000 issues. The Company also
completed a survey of its significant suppliers to assess their vulnerability if
these companies were to fail to remediate their year 2000 issues.  The responses
received  indicated  that the  Company's  suppliers  were aware of the year 2000
issue and were  implementing all necessary  changes prior to the end of calendar
year  1999.  The  Company  also  formulated  contingency  plans to  ensure  that
business-critical  processes were protected from disruption and will continue to
function during and after the year 2000.  During 1999, the Company did not incur
any material  costs in connection  with  identifying,  evaluating or remediating
year 2000 issues.

         The Company's  business and operations  experienced no material adverse
effects  from the  calendar  change  to the year 2000 or from the leap year that
occurred  in 2000,  and we have  not  been  notified  of any  disruptions  to or
failures in the systems of any of our suppliers.

         The Company will  continue to monitor our  information  technology  and
non-information  technology  systems  and  those of third  parties  with whom we
conduct  business  throughout  the year 2000 to ensure that any latent year 2000
issues that may arise are addressed promptly.  Although we do not anticipate any
additional expenditures relating to year 2000 compliance,  we cannot provide any
assurance as to the  magnitude of any future  costs until  significant  time has
passed.

Forward-Looking Statements

         This report  contains  certain  forward-looking  statements  reflecting
management's   current  views  with  respect  to  future  events  and  financial
performance.  These forward-looking  statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking  statements,  including,  but not limited to, the ability of
the Company to reverse its history of  operating  losses;  the ability to obtain
additional financing and improved cash flow in order to meet its obligations and
continue to exist as a going concern;  production risks; dependence on contracts
with certain customers; future foreign distribution arrangements; and dependence
on certain key management personnel. All of these above factors are difficult to
predict, and many are beyond the control of the Company.


<PAGE>

Market Risk Exposure

The financial  position of the Company is subject to market risk associated with
interest rate  movements on outstanding  debt. The Company has debt  obligations
with variable  terms.  The carrying  value of the  Company's  variable rate debt
obligation  approximates  fair value as the  market  rate is based on prime (see
Note 8 to the Consolidated Financial Statements).


<PAGE>




ITEM 7.                                         FINANCIAL STATEMENTS

                                                                 Page

Avenue Entertainment Group, Inc.

   Independent Auditors' Report                                   24

   Consolidated Balance Sheet as of December 31, 1999             25

   Consolidated Statements of Operations for the years ended
     December 31, 1999 and 1998                                   26

   Consolidated Statement of Stockholders' Equity for the
     years ended December 31, 1999 and 1998                       27

   Consolidated Statement of Cash Flows for the years ended
     December 31, 1999 and 1998                                   28

   Notes to Consolidated Financial Statements                     30



<PAGE>


                          INDEPENDENT AUDITORS' REPORT

         The Board of Directors and Stockholders
         Avenue Entertainment Group, Inc.:

         We have audited the accompanying  consolidated  balance sheet of Avenue
         Entertainment  Group,  Inc.  as of  December  31,  1999 and the related
         consolidated  statements of operations,  stockholders'  equity and cash
         flows for each of the years in two-year period ended December 31, 1999.
         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 audit.

         We conducted our audit in accordance with generally  accepted  auditing
         standards.  Those standards  require that we plan and perform the audit
         to obtain reasonable  assurance about whether the financial  statements
         are free of material  misstatement.  An audit includes examining,  on a
         test basis,  evidence  supporting  the amounts and  disclosures  in the
         financial  statements.  An audit also includes assessing the accounting
         principles used and significant  estimates made by management,  as well
         as evaluating the overall financial statement presentation.  We believe
         that our audit provides 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
         Avenue  Entertainment  Group,  Inc.  as of  December  31,  1999 and the
         results of its  operations  and its cash flows for each of the years in
         the  two-year  period  ended  December  31,  1999  in  conformity  with
         generally accepted accounting principles.

         The accompanying  consolidated  financial statements have been prepared
         assuming that Avenue Entertainment Group, Inc. will continue as a going
         concern.  As  discussed  in  Note  1  to  the  consolidated   financial
         statements,  the Company has suffered net losses from operations, has a
         working capital deficiency and has incurred  accumulated losses through
         December 31, 1999.  These  factors  raise  substantial  doubt about the
         Company's ability to continue as a going concern. Management's plans in
         regard to these matters are also described in Note 1. The  accompanying
         consolidated  financial  statements do not include any adjustments that
         might result from the outcome of this uncertainty.

                                                        /s/  KPMG LLP

         New York, New York
         April 12, 2000


<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 1999

                                     Assets

Cash                                                            $  476,198
Accounts receivable                                                652,429
Income tax receivable                                               29,703
Film costs, net                                                    959,850
Property and equipment, net                                         72,664
Goodwill                                                         1,893,509
Other assets                                                        18,169
                                                               -----------

Total assets                                                   $ 4,102,522
                                                               ===========

                      Liabilities and Stockholders' Equity

Accounts payable and accrued expenses                          $ 1,151,045
Deferred Income                                                    149,128
Loan payable                                                       277,500
Deferred compensation                                              340,783
Due to related party                                                99,172
                                                               -----------

Total liabilities                                                2,017,628
                                                               -----------

Commitments and contingencies

Stockholders' Equity:
 Common stock, par value $.01 per share                             45,890
 Additional paid-in capital                                      6,947,894
 Deficit                                                        (4,755,203)
 Treasury Stock                                                     (3,687)
 Note receivable for common stock                                 (150,000)
                                                               ------------

Total stockholders' equity                                       2,084,894
                                                               -----------

Total liabilities and stockholders' equity                     $ 4,102,522
                                                               ===========

          See accompanying notes to consolidated financial statements.


<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                  Years ended December 31,

                                               1999                    1998
                                               ----                    ----

Operating revenues                            4,748,660            $   828,732
                                           ------------            -----------

Costs and expenses:
  Film production costs                       4,033,211                717,915
  Selling, general and

   administrative expenses                    2,056,838              2,425,597
                                           ------------            ------------

Total costs and expenses                      6,090,049              3,143,512
                                           ------------            ------------

Operating loss                               (1,341,389)            (2,314,780)

Unrealized gain on trading securities                 0                135,888

Gain (loss) on sale of investments              (27,198)                65,070
                                           -------------           ------------

Loss before income taxes                     (1,368,587)            (2,113,822)


Income tax expense (benefit)                      1,667                (56,691)
                                           ------------           --------------

Net loss                                   $ (1,370,254)          $ (2,057,131)
                                           ============           =============

Basic and diluted loss
 per common share                          $      (.32)           $       (.50)
                                           ------------       ----------------



          See accompanying notes to consolidated financial statements.


<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1999 AND 1998


<TABLE>

<CAPTION>

                                                                                             Accumulated
                                      Common Stock                Additional     Retained      other          Stock
                                        Number of      Treasury    Paid-in       earnings   comprehensive  subscription
                                     Shares   Amount    Stock      capital      (deficit)      income       receivable    Total

<S>              <C>              <C>        <C>                 <C>          <C>            <C>            <C>           <C>
Balance, January 1, 1998          4,072,838  $40,728             $6,232,256   $(1,327,818)   $ 197,711      $(150,000)    $4,992,877

Net loss                                                                        (2,057,131)                              (2,057,131)
Other comprehensive income                                                                    (197,711)                    (197,711)
Total comprehensive income                                                                                               (2,254,842)
Issuance of common stock             36,000      360                145,440                                                 145,800
Stock option compensation
  expense                                                            37,500                                                  37,500
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998        4,108,838   41,088              6,415,196    (3,384,949)                   (150,000)    2,921,335
------------------------------------------------------------------------------------------------------------------------

Net loss and total comprehensive
  loss                                                                         (1,370,254)                               (1,370,254)
Stock option compensation expense                                    37,500                                                  37,500
Issuance of Common Stock            480,192    4,802                495,198                                                 500,000
Purchase of Treasury Stock                              (3,687)                                                              (3,687)
Balance, December 31, 1999         4,589,030 $45,890   $(3,687)  $6,947,894   $(4,755,203)   $    0          $(150,000)  $2,084,894
------------------------------------------------------------------------------------------------------------------------



                                     See  accompanying   notes  to  consolidated financial statements.

</TABLE>

<PAGE>




                        AVENUE ENTERTAINMENT GROUP, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                               Years ended December 31,

                                                            1999                  1998
                                                            ----                  ----

Cash flows from operating activities
<S>                                                     <C>                      <C>
     Net loss                                           $  (1,370,254)           (2,057,131)
Adjustments to reconcile net income
     (loss) to net cash provided by (used in)
      operating activities:
     Depreciation                                              23,864                23,859
     Amortization - film production costs                   3,886,231               702,172
     Amortization - goodwill                                  280,520               280,520
     Loss on disposal of fixed assets                             465
     (Gain) loss on sale of investments                        27,198               (65,070)
     Unrealized (gain) loss on trading securities                   0              (135,888)
     Proceeds from sale of marketable securities              312,518               228,048
     Stock compensation                                        37,500                37,500

Changes in assets and liabilities affecting net income:

     Accounts receivable                                     (518,617)               17,977
     Film costs                                            (3,754,435)             (312,247)
     Other assets                                              11,597               (11,057)
     Accounts payable and accrued expenses                    126,183               271,638
     Deferred compensation                                    195,777               145,006
     Deferred Income                                          149,128
     Income taxes receivable                                                         15,000
     Due to related party                                       4,691            __________
                                                       --------------

              Net cash used in operating
               expenses                                      (587,634)             (859,673)

Cash flows from investing activities:

     Proceeds from disposal of fixed assets                     1,360
     Purchase of equipment                                    (11,081)               (8,775)
-----                                                         --------       ---------------

     Net cash used in investing activities                     (9,721)               (8,775)
                                                        ------------------------------------

                                   (Continued)
</TABLE>


<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>

                                                               Years ended December 31,

                                                            1999                  1998
                                                            ----                  ----

Cash flows from financing activities:
   Proceeds from the issuance of
<S>                                                     <C>                   <C>
    common stock                                        $     500,000         $     145,800
   Treasury stock                                              (3,687)
   Proceeds from issuance of short term
    debt, net                                                 150,000
   Principal payments of capital
    lease obligations                                        ________                (8,459)
                                                                              -------------

       Net cash provided by financing activities              646,313               137,341
                                                           ----------           -----------

       Net increase (decrease) in cash                         48,958              (731,107)

Cash at beginning of year                                     427,240             1,158,347
                                                           ----------          ------------

Cash at end of year                                     $     476,198         $     427,240
                                                        =============          ============

Supplemental cash flow information: Cash paid during the year for:

     Interest  expense                                  $      10,335         $      12,701
     Income taxes                                       $       1,667         $      10,222





         See accompanying notes to consolidated financial statements.

</TABLE>

<PAGE>


                        AVENUE ENTERTAINMENT GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (1)   Summary of Significant Accounting Policies

       Description of Business

       Avenue  Entertainment  Group,  Inc.  (the  "Company")  is an  independent
       entertainment  company,  that produces feature films,  television  films,
       series    for    television,    made-for-televison/cable    movies    and
       one-hour-profiles  of Hollywood  Stars. The Company develops and produces
       motion  pictures  for  theatrical  exhibition,   television,   and  other
       ancillary markets, both domestically and internationally.

       The  accompanying  financial  statements  have been  prepared  on a going
       concern  basis,  which  contemplates  the  realization  of assets and the
       satisfaction  of liabilities  in the normal course of business.  Revenues
       have been  insufficient  to cover costs of operations  for the year ended
       December 31, 1999. The Company has a working  capital  deficiency and has
       an  accumulated  deficit of  $4,755,000  through  December 31, 1999.  The
       Company's  continuation as a going concern is dependent on its ability to
       ultimately  attain  profitable  operations  and positive  cash flows from
       operations.  The  Company's  management  believes that it can satisfy its
       working  capital  needs based on its  estimates of revenues and expenses,
       together  with  improved  operating  cash  flows,  as well as  additional
       funding  whether  from  financial  markets,  other  sources.  The Company
       believes it will have  sufficient  funds  available  to continue to exist
       through the next year, although no assurance can be given in this regard.
       The accompanying financial statements do not include any adjustments that
       may result from the Company's inability to continue as a going concern.

       Principles of Consolidation

       The  Company's  financial  statements  include the accounts of all wholly
       owned   subsidiaries.   All   significant   intercompany   accounts   and
       transactions have been eliminated.

       Cash and Cash Equivalents

       Cash and cash  equivalents  include all highly  liquid  investments  with
       original maturities, to the Company, of three months or less.

       Film Costs

       The  Company  capitalizes  costs  incurred  to  produce  a film  project,
       including the interest  expense funded under the production  loans.  Such
       costs  also  include  the  actual  direct  costs of  production,  certain
       exploitation costs and production overhead.  Capitalized  exploitation or
       distribution  costs  include  those  costs that  clearly  benefit  future
       periods such as film prints and prerelease and early release  advertising
       that is expected to benefit the film in future  markets.  These costs, as
       well as expected revenue or profit  participations  and talent residuals,
       are  amortized  each period on an  individual  film program  basis in the
       ratio that the current  period's  gross revenues from all sources for the
       program bear to management's estimate of anticipated total gross revenues
       for such film or program from all sources. Revenue estimates are reviewed
       periodically  and  adjusted  where  appropriate  and the  impact  of such
       adjustments could be material.

<PAGE>

       Film  property  costs  are  stated at the  lower of  unamortized  cost or
       estimated  net   realizable   value.   Losses  which  may  arise  because
       unamortized  costs of individual  films exceed  anticipated  revenues are
       charged to operations through additional amortization.

       Property, Equipment and Depreciation

       Property  and  equipment  are  stated  at cost.  Major  expenditures  for
       property  and  those  which  substantially   increase  useful  lives  are
       capitalized.  Maintenance,  repairs and minor  renewals  are  expensed as
       incurred.  When assets are retired or otherwise  disposed of, their costs
       and related  accumulated  depreciation  are removed from the accounts and
       resulting  gains or  losses  are  included  in  income.  Depreciation  is
       provided by the  straight-line  method over the estimated useful lives of
       the assets.

       Goodwill

       Goodwill,  representing  the  excess  of the  purchase  price  of  Avenue
       Pictures,  Inc. over its net assets,  is being  amortized over a ten-year
       period on a straight line basis. Accumulated amortization at December 31,
       1999 and 1998 was $911,690 and $631,170.

       The carrying value of intangible  assets is periodically  reviewed by the
       Company based on the expected future undiscounted operating cash flows of
       the  related  business  unit.  Based upon its most recent  analysis,  the
       Company believes that no material impairment of intangible assets exists.

       Fair Value of Financial Instruments

       The Company's  carrying value of cash,  accounts  receivable and accounts
       payable and accrued  expenses and due to related party  approximate  fair
       value because of the short-term maturity of these instruments.

       Revenue and Cost Recognition

       Revenues from feature film and television program distribution  licensing
       agreements  are  recognized on the date the completed  film or program is
       delivered  or  becomes   available   for   delivery,   is  available  for
       exploitation  in the relevant media window  purchased by that customer or
       licensee and certain  other  conditions of sale have been met pursuant to
       criteria specified by Statement of Financial  Accounting Standards (SFAS)
       No. 53,  "Financial  Reporting by Producers  and  Distributors  of Motion
       Picture Films."

       Production  costs of released  films are amortized  based on the ratio of
       revenues  earned during the current  period to  management's  estimate of
       total  revenues  to  be  derived  from  the  related  productions.  It is
       anticipated  that production costs will be amortized over various periods
       of generally up to 15 years although for certain films,  the amortization
       period may be longer or shorter based upon most recent revenue forecasts.

       The market  trend of each film is  regularly  examined to  determine  the
       estimated future revenues and  corresponding  lives. Due to the nature of
       the industry, management's estimates of future revenues may change within
       the next year and the change could be material.
<PAGE>

       Revenues   from   producer-for-hire   contracts   are   recognized  on  a
       percentage-of-completion  method,  measured  by the  percentage  of costs
       completed to date to estimated  total cost for each contract.  Provisions
       for estimated  losses on uncompleted  contracts are made in the period in
       which such losses are determined.

       Use of Estimates

       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions  that affect the reported  amounts of assets and  liabilities
       and  disclosures 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.

       Significant  estimates  include  those  related to  valuation of accounts
       receivable  and  inventories  of  released  productions.  It is at  least
       reasonably  possible  that the  significant  estimates  used will  change
       within the next year.

       Loss per Common Share

       The Company has  adopted  Statement  of  Financial  Accounting  Standards
       (SFAS) No. 128,  "Earnings per Share",  which  established  standards for
       computing  and  presenting   earnings  per  share  (EPS).  The  statement
       simplifies the standards for computing EPS,  replaces the presentation of
       primary  EPS  with a  presentation  of  basic  EPS  and  requires  a dual
       presentation  of  basic  and  diluted  EPS on  the  face  of  the  income
       statement. Basic EPS are based upon the weighted average number of common
       shares  outstanding  during the  period.  Diluted  EPS are based upon the
       weighted  average  number of common  shares  for all  dilutive  potential
       common shares outstanding. At December 31, 1999 and 1998, the Company did
       not include any potential common stock in its calculation of diluted EPS,
       because all options and warrants are anti-dilutive.

       Concentration of Credit Risk

       The  Company's  accounts   receivable  are  due  from  companies  in  the
       entertainment industry (see Note 10).

       Stock Option Plan

       Prior to January 1, 1996, the Company accounted for its stock option plan
       in accordance  with the provisions of Accounting  Principles  Board (APB)
       Opinion No. 25,  "Accounting  for Stock Issued to Employees," and related
       interpretations.  As such,  compensation expense would be recorded on the
       date of grant only if the current  market price of the  underlying  stock
       exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
       No.  123,  "Accounting  for  Stock-Based   Compensation,"  which  permits
       entities to recognize  as expense over the vesting  period the fair value
       of all stock-based awards on the date of grant.  Alternatively,  SFAS No.
       123 also  allows  entities to  continue  to apply the  provisions  of APB
       Opinion No. 25 and  provide  pro forma net income and pro forma  earnings
       per share  disclosures  for employee stock option grants made in 1995 and
       future years as if the  fair-value-based  method  defined in SFAS No. 123
       had been  applied.  The  Company  has  elected to  continue  to apply the
       provisions  of APB Opinion  No. 25 and  provide the pro forma  disclosure
       provisions of SFAS No. 123.

<PAGE>

(2)    Film Costs

       Film costs consist of the following:

                                                                   December 31,

                                                                          1999

       In process or development                                   $   267,404
       Released, net of accumulated amortization of $16,341,477        692,446
                                                                   $   959,850

       Based upon the Company's present estimates of anticipated future revenues
       at December 31, 1999,  approximately 75% of the net film costs related to
       released  product will be amortized  during the  five-year  period ending
       December 31, 2004.

 (3)   Property and Equipment

       The major classes of property and equipment consist of the following:

                                              Useful                December 31,
                                              life                      1999

       Machinery and equipment             4 to 5 years              $ 229,368
       Furniture and fixtures              10 years                     29,495
                                                                       258,863
       Less accumulated depreciation                                  (186,199)
                                                                     ----------
                                                                     $  72,664

       Depreciation  expense was $23,864 and $23,859 for the year ended December
       31, 1999 and 1998.

 (4)   Commitments and Contingencies

       Leases

       The Company is obligated  under a lease for office space,  which requires
       minimum annual  rentals,  plus  increases  based on real estate taxes and
       operating  costs.  In  addition  to a security  deposit of  $12,061,  the
       Company  delivered a letter of credit in the amount of $82,000  issued by
       City National Bank.
<PAGE>

       Rent expense was  $116,793 and $156,166 for the years ended  December 31,
       1999 and 1998, respectively.

       Minimum  annual  rental  commitments  at  December  31,  1999  under  the
       noncancelable operating leases are as follows:

        2000                                                 $  131,568
        2001                                                    131,568
        2002                                                    131,568
        2003                                                    131,568
        2004                                                     98,676
                                                                 ------
        Total minimum obligations                            $  624,948
                                                             ==========


       Employment Agreements

       Effective  September  30,  1996,  the  Company  entered  into  employment
       agreements  with its President  and its Chairman  providing for an annual
       salary  of  $450,000,   plus  benefits  and  $150,000,   plus   benefits,
       respectively.  Increases to base  salaries and bonuses  (limited to twice
       the base salary) will be determined at the discretion of the Compensation
       Committee of the Board of Directors.  In 1999, the President and Chairman
       deferred $100,000 and $105,000 of their compensation, respectively.

 (5)   Common Stock and Stock Option Plan

(a)    In March 1997, the Company adopted The Avenue  Entertainment  Group, Inc.
       Stock Option and Long Term Incentive Compensation Plan which provides for
       the grant of an  aggregate  of  1,750,000  shares of common  stock of the
       Company. The options may be exercised subject to continued employment and
       certain other  conditions.  The options vest over a five-year  period and
       expire five to ten years from the date of grant.  At December  31,  1999,
       1,028,500 options are exercisable.


<PAGE>


       Option activity was as follows:
<TABLE>

<CAPTION>
                                                                                      Weighted
                                                                                       average
                                                 Number of           Price range       exercisable

                                                   shares             per share           price

<S>                           <C>                <C>                 <C>   <C>             <C>
       Outstanding at January 1, 1998            1,364,500           .32 - 6.31            1.97
                                                 ---------        --------------        -------


       Options cancelled                          (623,000)         3.00 - 6.31            3.23

       Options granted                             670,000          1.81 - 5.63            2.08
                                                 ---------        -------------         -------

       Outstanding at December 31, 1998          1,411,500           .31 - 1.81            1.50
                                                 ---------       --------------         --------

       Options Cancelled                           (55,000)          .32 - 1.81            1.67
                                                   --------      --------------         --------

       Outstanding at December 31, 1999          1,356,500           .32 - 1.81            1.45
                                                 ------------    --------------         --------
</TABLE>

       The Company recorded compensation expense related to stock option granted
at prices  less than  market  value  totaling  $37,500 and $37,500 for the years
ended December 31, 1999 and 1998.

       At December 31, 1999, the weighted average remaining  contractual life of
all outstanding options was 5.4 years.


<PAGE>


       The  following  table  summarizes  information  about the Plan's  options
outstanding at December 31, 1999:

                                                      Weighted
                                      Weighted        average
   Number            Range of         average          years          Number
 Outstanding      exercise prices  exercise price    remaining      exercisable
 ------------------------------------------------------------------------------

  1,070,000       $1.70 - 1.81        $1.76          4.12              742,000
    286,500                .32          .32            .7              286,500
 -----------------------------------------------------------------------------
  1,356,500         .32 - 1.81         1.45           5.4            1,028,500
  ----------------------------------------------------------------------------

       Prior to January 1, 1996, the Company accounted for its stock option plan
       in accordance  with the provisions of Accounting  Principles  Board (ABP)
       Option No. 25,  "Accounting  for Stock Issued to Employees,"  and related
       interpretations.  As such,  compensation expense would be recorded on the
       date of grant only if the current  market price of the  underlying  stock
       exceeded the exercise price.

       In 1996, the Company  adopted SFAS No. 123,  "Accounting  for Stock-Based
       Compensation,"  which  permits  entities to recognize as expense over the
       vesting  period the fair value of all  stock-based  awards on the date of
       grant.  Alternatively,  SFAS No. 123 also allows  entities to continue to
       apply the  provisions  of APB  Opinion  No. 25 and  provide pro forma net
       income and pro forma  earnings per share  disclosures  for employee stock
       option  grants made in 1995 and future  years as if the  fair-value-based
       method defined in SFAS No. 123 had been applied.  The Company has elected
       to continue to apply the  provisions  of APB Opinion No. 25 in accounting
       for its Plan, and accordingly,  no compensation  cost has been recognized
       for its stock  options  granted at fair market value in the  consolidated
       financial statements.  Compensation cost will continue to be recorded for
       options granted below fair market value.

       Had the Company  determined  compensation cost based on the fair value at
       the grant date for its stock  options  under SFAS No. 123, the  Company's
       net loss would have been or increased to the pro forma amounts  indicated
       below:

                                               December 31,        December 31,

                                                   1999                1998
                                                   ----                ----

        Net loss            As reported         $(1,370,254)        $(2,057,131)
                            Pro forma            (1,515,283)         (2,315,464)

        Basic and diluted
          loss per share    As reported            (.32)                   (.50)
                            Pro forma              (.35)                   (.57)


       Pro forma net loss  reflects  only  options  granted  in the years  ended
       December  31, 1999 and 1998.  Therefore,  the full impact of  calculating
       compensation  cost for stock  options under SFAS No. 123 is not reflected
       in the pro forma net loss amounts  presented  above because  compensation
       cost is  reflected  over the  options'  vesting  period of five years and
       compensation  cost for  options  granted  prior to  August 1, 1994 is not
       considered.
<PAGE>

       At December 31, 1998, the per share  weighted-average fair value of stock
       options  granted  was  $1.53,  on the date of grant  using  the  modified
       Black-Scholes  option-pricing  model with the following  weighted-average
       assumptions:  December 31, 1998- expected  dividend  yield 0%,  risk-free
       interest rate of 4.5%,  expected  volatility  of 84.95%,  and an expected
       life of 7 years.

 (b)   In the fourth  quarter of 1997,  the Company  adopted the  provisions  of
       Statement of Financial Accounting Standards No. 128, "Earning per Share".
       (SFAS 128), as required,  and restated the previously  reported  earnings
       per share in  conforming  with SFAS 128. The new standard  specifies  the
       computation,  presentation  and disclosure  requirements for earnings per
       share.

       Loss per share  for the years  ended  December  31,  1999 and 1998 are as
       follows (in thousands, except per share amounts):

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

        Basic and diluted loss per share

           Net loss                                 $(1,370,254)   $ (2,057,131)
           Weighted average shares outstanding        4,298,284       4,094,992
           Basic and diluted loss per share         $      (.32)   $       (.50)


       Basic  earnings per share are based upon the weighted  average  number of
       common shares outstanding  during the period.  Diluted earnings per share
       are based upon the weighted  average number of common shares  outstanding
       during  the  period,  assuming  the  issuance  of common  shares  for all
       dilutive potential common shares outstanding. The options outstanding are
       not dilutive.

<PAGE>

(c)    In May 1998, the Company sold 36,000 restricted shares of common stock to
       certain  investors  pursuant  to  a  private  placement  transaction  and
       realized net  proceeds of  approximately  $146,000.  The shares of common
       stock cannot be sold,  transferred or assigned for a one-year period. The
       Company  claimed an exemption from the  registration  requirements of the
       Securities Act of 1933 (the "Act") pursuant to Rule 506 of Registration D
       of the Act.

 (d)   In August 1999,  the Company  sold  480,192  shares of Common Stock and a
       Warrant to purchase  500,000  shares of Common Stock which expires August
       2002 (the "Warrant") to certain investors pursuant to a private placement
       transaction. The Warrant is exercisable at an exercise price of $2.00 per
       share. The shares of Common Stock and the shares of Common Stock issuable
       upon  exercise of the  Warrant  cannot be sold,  transferred,  pledged or
       assigned for a one-year  period.  The Company claimed  exemption from the
       registration  requirements  of the  Securities  Act of 1933  (the  "Act")
       pursuant to Rule 506 of Regulation D. of the Act.

 (6)   Income Taxes

       Components of income tax expense (benefit) are as follows:

                                          December 31,       December 31,

                                              1999               1998
                                              ----               ----
            Federal                                            $ (56,691)
            State and local                $  1,667
                                           ---------
                                           $  1,667            $(56,691)
                                           ==========          =========


       Reconciliation  of the statutory Federal income tax rate to the Company's
       effective tax rate is as follows:

<TABLE>
<CAPTION>

                                                        December 31,       December 31,
                                                            1999               1998
                                                            ----               ----
       Tax (benefit)
<S>                                   <C>              <C>  <C>             <C>
         at Federal statutory rate of 34%              $ (  465,320)        $ (718,699)
       Increase (decrease) in taxes resulting from:
       State and local income taxes, net of
         federal income tax benefit                      (   50,023)           (56,822)
       Nondeductible goodwill amortization                   95,377             95,377
       Other                                                  1,266              2,282
       Change in valuation allowance                        420,367            621,171
                                                      -------------          ---------
       Total                                         $        1,667          $ (56,691)
                                                     ==============          =========
</TABLE>



<PAGE>


       The tax effects of temporary  differences between the financial reporting
and tax bases of assets and liabilities are as follows:

                                                     1999
                                                     ----
       Deferred tax assets

       Accrued expenses                             $ 308,025
       Stock options                                   95,407
       Film cost write-down                            37,840
       NOLs                                         1,072,429
                                                    ---------
                                                    1,513,701
       Valuation allowance                         (1,427,848)
                                                   ----------
       Net assets                                      85,853
                                                 ------------

       Deferred tax liabilities

       Unrealized gains
       State liabilities                              (85,853)
                                                   ----------
       Net liabilities                                (85,853)
                                                   ----------
       Net tax assets                          $
                                              ===============




       For Federal  and State  income tax  purposes,  the Company has unused net
       operating loss  carryforwards of approximately  $2,600,000 and 1,800,000,
       respectively expiring through 2018.

(7)    Related Party Transactions

       Transactions with GP Strategies

       At December  31,  1999,  the Company owed GP  Strategies,  an  affiliated
       company and major stockholder,  $99,172 related to the payment of certain
       expenses of the Company by GP Strategies.

       Transaction with Michael Hammer

       In August 1999,  the Company  sold  480,192  shares of Common Stock and a
       Warrant to purchase  500,000  shares of Common Stock which expires August
       2002 (the "Warrant") to Hammer  International  Foundation.  Pursuant to a
       private placement  transaction Michael Hammer is the President and CEO of
       the Hammer International Foundation and is a Director of the Company. The
       Warrant is  exercisable  at an  exercise  price of $2.00 per  share.  The
       shares of Common  Stock and the  shares  of Common  Stock  issuable  upon
       exercise of the Warrant cannot be sold, transferred,  pledged or assigned
       for  a  one-year   period.   The  Company  claimed   exemption  from  the
       registration  requirements  of the  Securities  Act of 1933  (the  "Act")
       pursuant to Rule 506 of Regulation D. of the Act.


<PAGE>

       Distribution Agreement

       On March 1, 1994,  the  Company  entered  into an  agreement  with Janson
       Associates  whereby Janson  Associates (the distributor) was granted sole
       and  exclusive  rights to license  essentially  all the  programs  of the
       Company's  "Hollywood  Collection"  for all forms of television and video
       worldwide.  The  Hollywood  Collection  is a series  of  one-hour  motion
       picture profiles of Hollywood's  biggest star, which are aired by a major
       cable network. The distributor also gained the exclusive right to execute
       all contracts for the  exploitation of these rights.  Revenues earned for
       the years ended  December 31, 1999 and 1998 were  $162,000 and  $320,000,
       respectively. Included in operating expenses was $60,400 and $112,000, of
       commissions to Janson Associates incurred in the years ended December 31,
       1999 and  1998,  respectively.  The  President  of Janson  Associates  is
       related to the Company's Chairman through marriage.

(8)    Loan Payable

       On May 27, 1997, the Company  entered into an unsecured  demand note (the
       "Note")  which  provided the Company  with  borrowings  in the  principal
       amount  of  $150,000,  at  prime  plus  1%,  with  Fleet  Bank,  National
       Association.  The Note is payable  on demand,  but in any event not later
       than May 27, 2000.  As of December 31,  1999,  $47,500 had been  borrowed
       under the Note.  The Company  believes that it will be able to extend the
       note for an additional  period on similar terms and  conditions,  however
       there can be no assurance that such loan will be extended.

       On  June  3,  1999,  the  Company  entered  into an  unsecured  loan  for
       $1,000,000  at prime plus 1% with City  National  Bank  which  matured on
       October 1, 1999.  As of December  31, 1999,  $230,000  had been  borrowed
       under the loan and the loan has been extended through June 1, 2000.

 (9)   Postretirement Benefit

       Pursuant  to an  agreement  dated  September  30,  1996,  the  Company is
       obligated to pay its Chairman, his spouse, or estate, as the case may be,
       commencing upon the termination of his  employment,  monthly  payments of
       $8,333, for the greater of five years or the remainder of his life. Under
       certain circumstances, a reduced benefit may be payable to the Chairman's
       wife for a period not to exceed five years from the date of his death.

       The  Company is accruing  $640,000,  the  present  value of the  expected
       benefit payments at December 31, 2001, on a straight-line  basis over the
       term of the  Chairman's  employment  contract,  which  covers  the period
       September 30, 1996 to December 31, 2001.

       This  agreement  also gives the Chairman  the option to purchase  certain
       assets of the Wombat  Production  Division  of the  Company at book value
       following the termination of his employment, and a right of first refusal
       if the  Company  wishes to sell the  Wombat  film  library.  The  Company
       retained the rights to acquire any future productions of the Chairman for
       normal  consideration,  subject to reasonable  producer  fees,  rights of
       licensees and existing distribution rights.

<PAGE>

 (10)  Significant Customers

       Significant  customers,  exceeding  10% of  revenue,  were as follows (in
       percents):

                                               Year ended Year ended
                                             December 31, December 31,

                                             1999                 1998
                                             ----                 ----

       Janson Associates                                           39
       Wayward Son Productions                                     26
       TBS                                    58
       Carlton                                27

As of December 31, 1999, 2 customers  represented  55% and 19% of gross accounts
receivable.

(11)     Recent Development

         The Company received a letter from the American Stock Exchange ("AMEX")
notifying  the  Company  that it has fallen  below  certain of AMEX's  continued
listing  guidelines  because of the  Company's  recurring  losses.  The  Company
attended  a meeting  with AMEX on  November  16,  1999 to  discuss  its  listing
eligibility.  As a result of this  meeting  AMEX  informed the Company that they
would be granted an extension  until after the filing of the Company's year- end
financial statements to enable the Company to satisfy the listing criteria.  The
Company is currently  preparing a package for presentation to the AMEX. However,
there can be no  assurance  that the Common  Stock will not be  delisted  in the
future.


<PAGE>



ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
             FINANCIAL DISCLOSURE

              None


<PAGE>



                                    PART III

ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
             COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors and Executive Officers

         The  following  table sets forth  certain  information  concerning  the
directors and officers of the Company:

Name                   Age     Position

Gene Feldman           73      Chairman of the Board, President of Wombat
Cary Brokaw            48      President, Chief Executive Officer and Director
Michael Feldman        32      Executive Vice President and Director
Sheri L. Halfon        43      Senior Vice President, Chief Financial
                               Officer, and Director
Doug Rowan             61      Director
Michael Hammer         44      Director

         Gene  Feldman  has served as  Chairman  of the Board of the Company and
President of Wombat since their respective formations on March 7, 1997. Prior to
the Reincorporation, Gene Feldman served as Chairman of the Board of CineMasters
and  President of the Wombat  Division  for more than the past five years.  Gene
Feldman is a Class III Director.

         Cary  Brokaw has  served as  President,  Chief  Executive  Officer  and
Director  of the  Company  since its  formation  on March 7, 1997.  Prior to the
Reincorporation,  Mr. Brokaw served as President,  Chief  Executive  Officer and
Director of CineMasters from September 30, 1996 and Chairman and Chief Executive
Officer of Avenue  Pictures  since its formation in 1991.  Mr. Brokaw is a Class
III Director.

         Michael  Feldman has served as Executive Vice President and Director of
the Company since its formation on March 7, 1997. Prior to the  Reincorporation,
Michael  Feldman  had  served  as  Executive  Vice  President  and  Director  of
CineMasters  from  September 30, 1996.  Michael  Feldman served as an officer of
General  Physics  Corporation  from  1991 to 1996  and has  been a  Director  of
International  Business Development at GP Strategies since 1995. Michael Feldman
is a Class II Director.

         Sheri L. Halfon has served as Senior Vice  President,  Chief  Financial
Officer and Director of the Company since its formation on March 7, 1997.  Prior
to the  Reincorporation,  Ms.  Halfon  served as Senior  Vice  President,  Chief
Financial Officer and Director of CineMasters from September 30, 1996 and Senior
Vice  President  and  Chief  Financial  Officer  of  Avenue  Pictures  since its
formation in 1991. Ms. Halfon is a Class II Director.

<PAGE>

         Doug Rowan served as President  and Chief  Executive  Officer of Corbis
Corporation, a company which is building a library of digital images, from April
1994 to July 1997.  Prior to his position at Corbis,  Mr. Rowan served as Senior
Vice  President of Worldwide  Customer  Operations  of  Ungermann-Bass,  Inc., a
networking  product company,  from November 1993 to April 1994, and President of
AXS, a software corporation for the new digital content industry,  from April 1,
1991 through December 31, 1992. Mr. Rowan is a Class I Director.

         Michael  Armand  Hammer  is  Chairman  and  CEO  of The  Armand  Hammer
Foundation  and President and CEO of the Hammer  International  Foundation.  Mr.
Hammer is Chairman of the Board and  President of Hammer  Galleries and Knoedler
Galleries  in New York City.  In Los  Angeles,  he is a  director  of the Armand
Hammer  Museum of Art and  Cultural  Center and a Director of The Armand  Hammer
United World College of the American West in Montezuma,  New Mexico.  Mr. Hammer
joined Occidental Petroleum  Corporation in 1982 and served in various positions
in the company's foreign and domestic oil and gas subsidiaries. Prior to joining
Occidental,  Mr.  Hammer worked in the  Corporate  Finance  Department of Kidder
Peabody,  an  investment  banking  firm in New  York.  Mr.  Hammer  is a Class I
Director.

         Directors of the Company are divided into three classes. At each annual
meeting of stockholders,  directors are elected to succeed those directors whose
terms  expire  and are  elected  for a term of  office  to  expire  at the third
succeeding  annual  meeting of  stockholders  after  their  election.  Under the
Company's  bylaws,  the number of  directors  constituting  the entire  Board of
Directors  shall be fixed,  from time to time, by the directors  then in office,
who may decrease or increase the number of directors by majority  action without
soliciting stockholder approval. The Company does not currently pay compensation
to directors for service in that capacity.

Section 16(a) Beneficial Ownership Reporting Compliance

         The  Company  believes  that during the most recent  fiscal  year,  all
filing requirements  applicable to its officers,  directors and greater than 10%
beneficial  owners were  complied  with,  except that  Michael  Hammer  filed an
untimely report on Form 3.


<PAGE>


ITEM 10.      EXECUTIVE COMPENSATION

Executive Compensation

         The  following  table sets  forth the  aggregate  compensation  paid or
accrued to the Company's  executive  officers for the services rendered in 1999,
1998, and 1997.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                         Long-Term
                                                                       Compensation

                                                                          Awards

                                              Annual Compensation          Stock               All Other

                                             Salary          Bonus        Options            Compensation

Name and Principal Position          Year      ($)            ($)           (#)                   ($)
---------------------------          ----   -------         ------       ---------          ---------

<S>                                  <C>     <C>
Cary Brokaw                          1999    450,000(1)
President, Chief Executive           1998    450,000            -0-      100,000(2)(3)            --
Officer and Director                 1997    450,000            -0-                               --

Gene Feldman                         1999    150,000
Chairman of the Board,               1998    150,000(4)         -0-       75,000(3)(5)            --
President of Wombat                  1997    150,000            -0-                               --

</TABLE>

-------------------
(1)  Mr. Brokaw's salary for the year pursuant to his employment agreement
     was $450,000, of which  $100,000  has been  deferred by Mr. Brokaw.
(2)  Of the 100,000 stock options granted to Mr. Brokaw in 1998, only 80,000
     are currently vested.
(3)  On December 10, 1998, the Board of Directors of the Company  determined
     to cancel  certain  options  which had an  exercise  price of $3.00 per
     share,  previously  granted to the named executive officers in 1997 and
     to grant new options at the exercise price of $1.8125 per share,  which
     was the market  price on December 10,  1998.  The vesting  schedule and
     expiration date remained the same.

(4)  Mr. Feldman's salary for the year was $150,000, of which $105,000 has been
     deferred by Mr. Feldman.

(5)  Of the 75,000 stock options granted to Mr. Feldman in 1998, only 60,000 are
     currently  vested.

Option Grants in 1999

No options were granted in 1999 to the named executive officers.

<PAGE>

         The  following  table sets forth  information  concerning  the value of
unexercised  options as of December 31, 1999 held by the executives named in the
Summary Compensation Table above. No options were exercised during 1999.


<TABLE>

                AGGREGATED OPTION EXERCISES AT DECEMBER 31, 1999

                           AND YEAR-END OPTION VALUES

<CAPTION>
                             Number of Securities                   Value of Unexercised
                            Underlying Unexercised                 In-the-Money Options at

                          Options at Fiscal Year End                   Fiscal Year End

Name                  Exercisable (E)/ Unexercisable (U)    Exercisable (E)/ Unexercisable (U)(1)
----                  ----------------------------------    -------------------------------------
<S>                       <C>                   <C>             <C>                      <C>
Gene Feldman              245,000(E)            30,000(U)       $61,000(E)               $0(U)
Cary Brokaw               300,000(E)           100,000(U)             0(E)                0(U)
Sheri Halfon               60,000(E)            15,000(U)             0(E)                0(U)
----------
</TABLE>

(1) Calculated  based on the closing price of the Common Stock $.625 as reported
by the American Stock Exchange on December 31, 1999.

Employment Contracts and Termination of Employment and Change in Control
Arrangements

         Brokaw   Employment   Agreement.   In  connection   with  the  Business
Combination,  Mr.  Brokaw  entered into a five-year  employment  agreement  (the
"Brokaw  Employment  Agreement") with the Company pursuant to which, among other
things,  Mr.  Brokaw became the  President  and Chief  Executive  Officer of the
Company. The Brokaw Employment Agreement provides Mr. Brokaw with an annual base
salary of $450,000  (which base salary may be paid from any Company source other
than net cash flow  generated  by Wombat),  subject to such  increases as may be
made by the Compensation Committee of the Board of Directors. Mr. Brokaw is also
eligible for annual  bonuses  based upon the  performance  of Mr. Brokaw and the
Company during the previous  fiscal year. Such annual bonuses will be determined
in the discretion of the Compensation Committee. The dollar amount of the annual
bonus will not exceed two times the annual base  salary.  The Brokaw  Employment
Agreement  provides that the Company may only terminate Mr. Brokaw's  employment
with the Company for "cause." If Mr.  Brokaw's  employment is terminated  due to
death or  disability,  he will  receive  his  base  salary  through  the date of
termination  of  employment.  Any  vested  options  not  exercised  prior to the
termination  of employment for this reason will remain  exercisable  for the six
month  period  beginning  on the  date  of  termination.  If his  employment  is
terminated for "Cause" as defined in the Brokaw Employment Agreement, he will be
entitled  to the  base  salary  and any  accrued  annual  bonus  that  has  been
determined  and awarded,  but not paid,  through the date of  termination of his
employment.  Any  vested  options  not  exercised  prior to the  termination  of
employment for Cause will remain  exercisable until the end of the ninetieth day
following the date of  termination.  If Mr.  Brokaw  terminates  his  employment
following a "Change of Control" as defined in the Brokaw  Employment  Agreement,
he will  receive  (i) his earned but unpaid  compensation  as of the date of the
Change  of  Control;   (ii)  continued  benefits  for  the  remaining  unexpired
employment  term;  (iii) a lump sum payment on the date of the Change of Control
equal to the future base  salary  that he would have earned if he had  continued

<PAGE>

working for the remaining  unexpired  employment  term;  and (iv) bonus payments
that  would have been made to Mr.  Brokaw if he had  continued  working  for the
Company during the remaining unexpired  employment term. The Company is entitled
to seek to obtain,  and has obtained,  $2,000,000 in "key-man" life insurance on
his life.  Pursuant to the Brokaw Employment  Agreement,  Mr. Brokaw was granted
options to purchase up to 300,000  shares of Common Stock for an exercise  price
of $1.70 per share. Such stock options will vest in equal  installments over the
first  five  years  of Mr.  Brokaw's  employment  with the  Company  and will be
exercisable  for a  period  of ten  years  from the date of  grant.  The  Brokaw
Employment  Agreement  provides for  accelerated  vesting of all of Mr. Brokaw's
stock  options  upon a "change  of  control"  of the  Company or upon a material
breach of the Brokaw Employment Agreement by the Company. As President and Chief
Executive  Officer of the Company,  Mr. Brokaw is entitled to certain  customary
perquisites,   including,   without  limitation,  a  car  allowance,  term  life
insurance,   and  reimbursement  of  all  reasonable  travel  and  entertainment
expenses.  In addition,  Mr. Brokaw is entitled to  participate  in all employee
benefit plans offered to executive officers of the Company.

         Gene Feldman  Employment  Agreement.  In  connection  with the Business
Combination,  Gene Feldman  entered into a five-year  employment  agreement (the
"Feldman Employment  Agreement") with CineMasters pursuant to which, among other
things,  Gene Feldman  became the Chairman of  CineMasters  and President of its
Wombat Division.  The Feldman Employment Agreement provides Gene Feldman with an
annual base salary of $150,000  (provided that such base salary is funded solely
out of net cash flow generated by the Wombat Division of  CineMasters),  subject
to such increases as may be made by the  Compensation  Committee of the Board of
Directors.  Gene  Feldman is also  eligible  for annual  bonuses  based upon the
performance  of Gene Feldman and  CineMasters  during the previous  fiscal year.
Such annual  bonuses will be  determined in the  discretion of the  Compensation
Committee.  The dollar  amount of the annual bonus will not exceed two times the
annual base salary. The Feldman  Employment  Agreement provides that CineMasters
may only terminate Gene Feldman's  employment  with  CineMasters for "cause." If
Mr.  Feldman's  employment is  terminated  due to death or  disability,  he will
receive his base salary through the date of termination of employment.

Any vested options not exercised prior to the termination of employment for this
reason will remain exercisable for the six month period beginning on the date of
termination.  If his  employment  is  terminated  for  "Cause" as defined in the
Feldman  Employment  Agreement,  he will be  entitled to the base salary and any
accrued annual bonus that has been determined and awarded, but not paid, through
the date of  termination  of his  employment.  Any vested  options not exercised
prior to the termination of employment will remain  exercisable until the end of
the ninetieth day following the date of termination.  If Mr. Feldman  terminates
his  employment  following  a "Change of  Control"  as  defined  in the  Feldman
Employment Agreement,  he will receive (i) his earned but unpaid compensation as
of the date of the Change of Control;  (ii) continued benefits for the remaining
unexpired employment term; (iii) a lump sum payment on the date of the Change of
Control  equal to the future  base  salary  that he would have  earned if he had
continued  working for the remaining  unexpired  employment term; and (iv) bonus
payments that would have been made to Mr.  Feldman if he had  continued  working
for the Company during the remaining  unexpired  employment term. As chairman of
CineMasters  and President of the Wombat  Division,  Gene Feldman is entitled to
certain customary perquisites,  including,  without limitation, a car allowance,
term  life  insurance,   and   reimbursement   of  all  reasonable   travel  and

<PAGE>

entertainment  expenses. In addition, Gene Feldman is entitled to participate in
all employee  benefit plans  offered to executive  officers of  CineMasters.  In
connection with the  Reincorporation,  the Gene Feldman Employment Agreement was
amended  to  indicate  that Gene  Feldman  is the  Chairman  of the Board of the
Company and the President of Wombat.

ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                             PRINCIPAL STOCKHOLDERS

         The only persons  known by the Board of Directors to be the  beneficial
owner of more than five percent of the outstanding shares of Common Stock of the
Corporation, as of March 15, 2000, are indicated below:

Name and Address                           Amount and Nature        Percent
of Beneficial Owner                    of Beneficial Ownership*     of Class
-------------------                    -----------------------      --------

Cary Brokaw                                 1,731,350(1)               35%
c/o Avenue Pictures, Inc.
11111 Santa Monica Boulevard
Suite 525
Los Angeles, CA 90025

GP Strategies Corporation                   1,067,900                  23%
9 West 57th Street
New York, New York 10019

Gene Feldman                                  426,700(2)                9%
c/o Avenue Entertainment Group, Inc.
9 West 57th Street
Suite 4170
New York, New York 10019

Hammer International Foundation               980,192(3)               19%
2425 Olympic Blvd., Suite140E
Santa Monica,  CA  90404
---------------------
* As used in this  Proxy  Statement,  "beneficial  ownership"  means the sole
shared power to vote, or to direct the voting of the Corporation's  Common Stock
of the sole or shared investment power with respect to such Common Stock.

(1) Includes  vested options to purchase up to 240,000 shares of Common Stock of
the Corporation at a price of $1.70 per share,  exercisable  until September 30,
2006 and vested  options to purchase up to 80,000  shares of Common Stock of the
Corporation  at a price of $1.8125 per share,  exercisable  until  February  19,
2007.  Does not include  unvested  options to  purchase  up to 60,000  shares of
Common Stock of the Corporation at a price of $1.70 per share, exercisable until
September  30, 2006 and  unvested  options to  purchase  up to 20,000  shares of
Common  Stock of the  Corporation  at a price of $1.8125 per share,  exercisable
until February 19, 2007.

<PAGE>

(2) Does not include 17,500 shares of Common Stock of the Corporation and 40,000
vested stock options  which are owned by Mr.  Feldman's  wife,  Suzette St. John
Feldman, as to which Mr. Feldman disclaims beneficial ownership. Includes vested
options to purchase up to 200,000 shares of Common Stock of the Corporation at a
price of $0.32 per share,  exercisable  until August 11, 2000 and vested options
to purchase up to 60,000 shares of Common Stock of the Corporation at a price of
$1.8125  per share,  exercisable  until  February  19,  2007.  Does not  include
unvested  options to  purchase  up to 15,000  shares of the Common  Stock of the
Corporation  at a price of $1.8125 per share,  exercisable  until  February  19,
2007.

(3)  Includes  Warrants  to  purchase  500,000  shares  of  Common  Stock of the
Corporation  at an exercise  price of $2.00 per share until August 9, 2002.  Mr.
Hammer,  a director of the  Company,  disclaims  beneficial  ownership  of these
shares, except to the extent of his pecuniary interest in these shares.


<PAGE>



          SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS

         The  following  table  sets  forth,  as of March 15,  2000,  beneficial
ownership of shares of Common Stock of the Company by each director, each of the
named executive officers and all directors and executive officers as a group:

                                Total Number of Shares              Percent of
                                   of Common Stock                    Common

Name                              Beneficially Owned                 Stock(1)
----                              ------------------                 --------

Gene Feldman                            426,700(2)                      9

Cary Brokaw                           1,731,350(3)                     35

Michael Feldman                         197,000(4)(5)                   4

Sheri L. Halfon                          60,100(6)                      1

Doug Rowan                                7,000(7)                      *

Michael Hammer                          980,192 (8)                     9

Directors and Executive               3,402,342(9)                     58
  Officers as a Group
  (7 persons)
----------
* The number of shares owned is less than one percent of the outstanding shares.

(1) The percentage of class  calculation  assumes for each beneficial owner that
all of the  options  are  deemed  to be  exercised  in full  only  by the  named
beneficial  owner and that no other  options are deemed to be  exercised  by any
other stockholder.

(2)      See footnote 2 to Principal Stockholders table.

(3)      See footnote 1 to Principal Stockholders table.

(4) Includes  vested options to purchase up to 120,000 shares of Common Stock of
the Corporation at a price of $1.70 per share, which option is exercisable until
September 30, 2006 and vested  options to purchase up to 60,000 shares of Common
Stock of the  Corporation  at a price of $1.8125  per share,  exercisable  until
February 19, 2007.  Does not include  unvested  options to purchase up to 30,000
shares  of  Common  Stock of the  Corporation  at a price of  $1.70  per  share,
exercisable  until  September  30, 2006 and  unvested  options to purchase up to
15,000  shares of Common  Stock of the  Corporation  at a price of  $1.8125  per
share, exercisable until February 19, 2007.

(5)      Michael Feldman is Gene Feldman's nephew.

(6) Includes  vested  options to purchase up to 60,000 shares of Common Stock of
the Corporation at a price of $1.8125 per share,  exercisable until February 19,
2007.  Does not include  unvested  options to  purchase  up to 15,000  shares of
Common  Stock of the  Corporation  at a price of $1.8125 per share,  exercisable
until February 19, 2007.

(7)  Includes  vested  options to purchase up to 6,000 shares of Common Stock of
the Corporation at a price of $1.8125 per share, exercisable until July 1, 2007.
Does not include unvested options to purchase up to 4,000 shares of Common Stock
of the  Corporation at a price of $1.8125 per share,  exercisable  until July 1,
2007.

(8)      See footnote 3 to Principal Stockholders table.

(9) Includes  826,000 shares of Common Stock issuable upon exercise of currently
exercisable  stock options,  and a warrant to purchase  500,000 shares of Common
Stock.

Except for the shares of Avenue Common Stock subject to the options described in
footnotes  1 through 4, and 6 and 7 above,  none of such  shares is known by the
Corporation  to be shares with  respect to which such  beneficial  owner has the
right to acquire beneficial  ownership.  The Corporation believes the beneficial
holders listed above have sole voting and investment  power regarding the shares
shown as being beneficially owned by them.

ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Transaction  With  Michael  Hammer.  In August  1999,  the Company sold
480,192  shares of Common  Stock and a Warrant  to  purchase  500,000  shares of
Common Stock which expires August 2002 (the  "Warrant") to Hammer  International
Foundation  pursuant  to a  private  placement  transaction.  Michael  Hammer is
President  and  CEO of the  Hammer  International  Foundation.  The  Warrant  is
exercisable at an exercise price of $2.00 per share.  The shares of Common Stock
and the shares of Common Stock  issuable upon exercise of the Warrant  cannot be
sold, transferred, pledged or assigned for a one-year period.

         Gene Feldman Exit Option  Agreement.  In  connection  with the Business
Combination, Gene Feldman entered into an exit option agreement with CineMasters
pursuant  to which,  among  other  things,  he was given an option,  exercisable
during  the  six-month  period  commencing  on the  date of  termination  of his
employment, to purchase the production assets of CineMasters for a cash purchase
price equal to the book value of such  assets.  This option does not include the
CineMasters film library. In addition, CineMasters retained the right to acquire
any future production of Mr. Feldman for nominal  consideration,  subject to (i)
the rights of Mr. Feldman to receive commercially reasonable producer fees, (ii)
the rights,  if any, of A&E, as licensee,  consistent  with past  practice,  and
(iii) the distribution rights pursuant to the Distribution Agreement, dated July
1, 1995, as amended,  between Janson and the Wombat Division.  Upon the exercise
of such option,  Gene Feldman will no longer be employed by CineMasters but will

<PAGE>

be entitled to receive  annual  payments for the  remainder of his life equal to
the  lesser of (i) 25% of the  annual  net  income  (which  shall be  determined
without   deduction  for  general  and   administrative   expenses)  derived  by
CineMasters from the original CineMasters library and (ii) $100,000 annually. If
Gene  Feldman  shall die prior to the exercise of such  option,  Gene  Feldman's
wife,  Suzette St. John Feldman,  shall  following Gene Feldman's death have the
right to exercise  such option and to receive such annual  payments for a period
of five years  following  the date of such  exercise.  If Gene Feldman shall die
after the exercise of such option but prior to the fifth anniversary of the date
of such exercise,  Suzette St. John Feldman shall following Gene Feldman's death
be entitled to receive such annual payments for a period of five years following
the date of Gene Feldman's death;  provided,  however, that such annual payments
shall be reduced from $100,000 to $75,000 following the fifth anniversary of the
date of Gene  Feldman's  exercise of such option.  In addition,  if  CineMasters
shall  determine to sell its library  during the first five years  following the
exercise of such option by Gene Feldman,  CineMasters  shall first offer to sell
its library to Gene Feldman based upon a specific price and upon specific terms.
If Gene Feldman  does not accept such offer within a reasonable  period of time,
CineMasters will then have a limited period of time in which to sell its library
to a third  party for a price and upon terms no less  favorable  to  CineMasters
than those offered to Gene Feldman. In connection with the Reincorporation,  the
Gene Feldman Exit Option  Agreement was amended to replace  CineMasters with the
Company.

         Stockholders  Agreement.  In connection with the Business  Combination,
Mr. Brokaw entered into a stockholders agreement (the "Stockholders Agreement"),
amended in connection with the Reincorporation,  with CineMasters and each of GP
Strategies Corporation,  Gene Feldman, Jerome Feldman, Suzette St. John Feldman,
and Michael  Feldman  (collectively,  the "Feldman  Group"),  pursuant to which,
among other things, the Board of Directors of CineMasters was reconstituted such
that Mr. Brokaw and the Feldman Group each have three  designees on a six-person
Board  of  Directors  and,  except  as  may  be  mutually  agreed  upon,   equal
representation  on any  committee of the Board of  Directors.  The  Stockholders
Agreement  provides that all  extraordinary  transactions  (i.e.,  any merger or
consolidation involving CineMasters or any subsidiary,  any public offering, any
sale or other  disposition  of a material  portion of the assets of  CineMasters
and/or its  subsidiaries,  any  acquisition or investment in excess of $250,000,
etc.) shall require the prior approval of the Board of Directors of CineMasters.
In addition,  the  Stockholders  Agreement  provides  that,  except for ordinary
course (i) expenditures for office rent, (ii) expenditures for selling, general,
and administrative  expenses, and (iii) out-of-pocket  development  expenditures
not in excess of $500,000  during each of the first two fiscal  years  following
consummation of the Business  Combination,  aggregate  expenditures in excess of
$250,000  in any fiscal  year will  require  the prior  approval of the Board of
Directors of CineMasters.  The Stockholders  Agreement also provides each of Mr.
Brokaw and the  members of the  Feldman  Group with  reciprocal  rights of first
negotiation  and refusal  and  tag-along  rights in the event that either  party
wishes to dispose of some or all of his, her, or its shares of Common Stock in a
privately-negotiated  transaction.  In connection with the Reincorporation,  the
Stockholders Agreement was amended to replace CineMasters with the Company.


<PAGE>

         Distribution  Agreement.  On March 1, July 1, 1995 and April 28,  1996,
the  Company   entered  into  an  agreement  with  Janson  whereby  Janson  (the
distributor)  was granted sole and exclusive  rights to license  essentially all
the  programs  of the  Company's  documentary  film  library  for all  forms  of
television and video worldwide.  The distributor also gained the exclusive right
to execute all contracts for the exploitation of these rights.  The President of
Janson,  Stephen  Janson,  is related to the Company's  Chairman,  Gene Feldman,
through marriage.

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.

(a) The Exhibits listed on the accompanying  Index to Exhibits are filed as part
of this Annual Report.


<PAGE>



                                   SIGNATURES

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

                        AVENUE ENTERTAINMENT GROUP, INC.

                                       Cary Brokaw

                                       President and Chief Executive Officer

Dated:   April 14, 2000

         In accordance with 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.

Signature                      Title

Gene Feldman                   Chairman of the Board

Cary Brokaw                    President and Chief Executive Officer and
                               Director

Sheri L. Halfon                Senior Vice President, Chief Financial Officer
                               and Director

Michael D. Feldman             Executive Vice President and Director


Michael Hammer                 Director

Dated: April 14, 2000


<PAGE>




(a)  INDEX TO EXHIBITS

       3            Restated Certificate of Incorporation. Incorporated herein
                    by reference to Exhibit 3 (I) of the Company's  Registration
                    Statement on Form 10-SB, as amended, filed on April 9, 1997.

       3.1          By-Laws.  Incorporated  herein by reference to Exhibit 3(ii)
                    of the Company's  Registration  Statement on Form 10-SB,  as
                    amended, filed on April 9, 1997.

       10           Share  Exchange  Agreement,  dated as of September 30, 1996,
                    among Cary Brokaw, Avenue Pictures, Inc. and The CineMasters
                    Group,  Inc.  Incorporated  herein by  reference  to Exhibit
                    10(a)(i) of the  Company's  Registration  Statement  on Form
                    10-SB, as amended, filed on April 9, 1997.

       10.1         Stockholders  Agreement,  dated as of  September  30,  1996,
                    among Cary Brokaw,  The CineMasters  Group,  Inc.,  National
                    Patent  Development   Corporation,   Gene  Feldman,   Jerome
                    Feldman,  Suzette  St. John  Feldman  and  Michael  Feldman.
                    Incorporated  herein by reference  to Exhibit  10(a) (ii) of
                    the  Company's  Registration  Statement  on Form  10-SB,  as
                    amended, filed on April 9, 1997.

       10.2         Exit  Option  Agreement,  dated as of  September  30,  1996,
                    between  The  CineMasters  Group,  Inc.  and  Gene  Feldman.
                    Incorporated  herein by reference to Exhibit  10(a)(iii)  of
                    the  Company's  Registration  Statement  on Form  10-SB,  as
                    amended, filed on April 9, 1997.

       10.3         Distribution Agreement, dated April 28, 1996, between Janson
                    Associates,   Inc.   and  The   CineMasters,   Group,   Inc.
                    Incorporated herein by reference to Exhibit  10(b)(ii)(1) of
                    the  Company's  Registration  Statement  on Form  10-SB,  as
                    amended, filed on April 9, 1997.
<PAGE>

       10.4         Output  Agreement,  dated  October  1, 1994  between  Avenue
                    Pictures,  Inc.  and RHI  Entertainment,  Inc.  Incorporated
                    herein by reference to Exhibit 10(b)(ii)(6) of the Company's
                    Registration  Statement on Form 10-SB, as amended,  filed on
                    April 9, 1997.

       10.5         Promissory Note between Avenue Entertainment Group, Inc. and
                    Fleet Bank,  National  Association.  Incorporated  herein by
                    reference   to  Exhibit   10(b)(ii)(7)   of  the   Company's
                    Registration  Statement on Form 10-SB, as amended,  filed on
                    April 9, 1997.

       10.6         Avenue  Entertainment Group, Inc. Stock Option and Long Term
                    Incentive   Compensation   Plan.   Incorporated   herein  by
                    reference to Exhibit 10(c)(i) of the Company's  Registration
                    Statement on Form 10-SB, as amended, filed on April 9, 1997.

       10.7         Employment Agreement,  dated as of September 30, 1996, among
                    The CineMasters Group, Inc., Avenue Pictures,  Inc. and Cary
                    Brokaw.   Incorporated   herein  by   reference  to  Exhibit
                    10(c)(ii) of the  Company's  Registration  Statement on Form
                    10-SB, as amended, filed on April 9, 1997.

       10.8         Employment Agreement,  dated as of September 30, 1996, among
                    The CineMasters Group, Inc., Avenue Pictures,  Inc. and Gene
                    Feldman.   Incorporated   herein  by  reference  to  Exhibit
                    10.(c)(iii) of the Company's  Registration Statement on Form
                    10-SB, as amended, filed on April 9, 1997.

       10.9         Option  Agreement,  dated as of September 30, 1996,  between
                    The CineMasters  Group,  Inc. and Cary Brokaw.  Incorporated
                    herein by  reference to Exhibit  10(c)(iv) of the  Company's
                    Registration  Statement on Form 10-SB, as amended,  filed on
                    April 9, 1997.
<PAGE>

       10.10        Form of Option Grant  Agreement,  dated as of September  30,
                    1996,  between  Avenue  Entertainment  Group,  Inc.  and the
                    Optionee.   Incorporated  herein  by  reference  to  Exhibit
                    10(c)(v) of the  Company's  Registration  Statement  on Form
                    10-SB, as amended, filed on April 9, 1997.

       10.11        Form of Option Grant  Agreement,  dated as of March 10, 1997
                    between Avenue  Entertainment  Group, Inc. and the Optionee.
                    Incorporated herein by reference to Exhibit 10(c)(vi) of the
                    Company's  Registration Statement on Form 10-SB, as amended,
                    filed on April 9, 1997.

       21           Subsidiaries of the Company *

       27           Financial Data Schedule *

--------------
* Filed herewith.


(b) There were no Reports  on Form 8-K filed by the  Registrant  during the last
quarter of the period covered by this report.