AVENUE ENTERTAINMENT GROUP INC /DE/, 10KSB, 1998-04-15

AVENUE ENTERTAINMENT GROUP INC /DE/
10KSB, 1998-04-15
ALLIED TO MOTION PICTURE PRODUCTION

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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, 1997

[ ] 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
of incorporation or organization) Identification No.)

11111 Santa Monica Blvd., Suite 2110, 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. $2,367,000

As of March 2, 1998, 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 $14,421,292 based
on the closing price of the Common Stock on the American Stock Exchange on March
2, 1998.

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 2, 1998
- ----- ----------------------------
Common Stock, par value $.01 per share 4,072,838 shares

DOCUMENTS INCORPORATED BY REFERENCE: None

<PAGE>

TABLE OF CONTENTS
Page
PART I

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

Item 2. Description of Property..............................16

Item 3. Legal Proceedings....................................16

Item 4. Submission of Matters to a Vote of
Security Holders.....................................16

PART II

Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters......................17

Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations........18

Item 7. Financial Statements................................F-1

Item 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure............III-1

PART III

Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act.................III-1

Item 10. Executive Compensation............................III-3

Item 11. Security Ownership of Certain
Beneficial Owners and Management..................III-6

Item 12. Certain Relationships and Related
Transactions......................................III-8

Item 13. Exhibits and Reports on Form 8-K..................III-10

<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS

General

Avenue Entertainment Group, Inc. (the "Company") is an independent
entertainment company which, through its two operating subsidiaries, Avenue
Pictures, Inc. ("Avenue Pictures") and Wombat Productions, Inc. ("Wombat")
develops and produces motion pictures for theatrical exhibition, television, and
other ancillary markets, both domestically and internationally.

Share Exchange and Reincorporation

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, (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.

Avenue Pictures

Avenue Pictures was founded by Cary Brokaw in 1991. 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 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. More recently, Mr. Brokaw
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 and Tushka Bergen. In February 1998,
Avenue Pictures completed Finding Graceland starring Harvey Keitel, Johnathan
Schaech, and Bridget Fonda based on an original screenplay developed by Avenue
Pictures, which was fully financed by Largo Entertainment Corp., a wholly owned
subsidiary of JVC Entertainment, Inc. ("Largo"). Finding Graceland is expected
to be released in the Fall of 1998. Largo is currently negotiating a domestic
distribution agreement.

Avenue Pictures is in the business of producing feature films,
television films, and series for television. 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.

Business Approach

As an independent producer of feature films and television programming,
Avenue Pictures 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 Avenue Pictures.
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. Avenue Pictures 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 Avenue Pictures
will have maximum leverage in negotiating production and financing arrangements
with a distributor. Nevertheless, there are occasions when Avenue Pictures
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, Avenue Pictures 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. Set forth below are Avenue Pictures's current projects in
the feature film, made-for-television, and series television categories,
including a brief description of the financial arrangements which pertain to
each type of production.

Feature Films

Currently, Mr. Brokaw serves as the producer or executive producer of
all Avenue Pictures films with overall responsibility for their development,
financing, and production arrangements. Avenue Pictures is paid a producing fee
for both the services of Mr. Brokaw and for Avenue Pictures'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 Avenue Pictures's relative
bargaining position with respect to each project. As set forth above, Avenue
Pictures'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.

Current feature film projects for Avenue Pictures include the following
titles: The Diviners, Angels in America, The Moviegoer, Mindhunters, AKA
Goldfish and Stand by Your Man.

Finding Graceland, an original screenplay developed by Avenue Pictures,
directed by David Winkler and starring Harvey Keitel, Johnathan Schaech, and
Bridget Fonda, was completed in May 1997 and was delivered to Largo in February
1998. The $11 million film was fully financed by Largo. Largo currently plans to
distribute the film in foreign markets by licensing the rights to most major
territories and through a network of sales representatives in other territories.
In the domestic market, principally the United States and Canada, Largo is
currently negotiating to license the film. After Largo receives a distribution
fee for its services and recoups its expenses and investment in the film plus
interest, Avenue Pictures will receive a profit participation of approximately
50% out of which all third party participants must be paid.

Avenue Pictures will produce the film Angels in America, based on the
Pulitzer Prize and Tony Award winning play by Tony Kushner. Director P.J. Hogan
of Muriel's Wedding and My Best Friend's Wedding, starring Julia Roberts, has
agreed to direct the picture. Several major actors, including Al Pacino and
Meryl Streep, have agreed to star in the motion picture. Developed at New Line
Cinema, Avenue is now negotiating with several studios with respect to financing
of the film. Avenue Pictures hopes to start filming in late 1998.

Tri-Star Pictures has financed the development of a film based upon the
Walker Percy novel, The Moviegoer. Actor Julia Roberts is contractually
committed to the film subject to approval of the final script and choice of
director. Terence Malik, director of Badlands, Days of Heaven, and the upcoming
The Thin Red Line, has written the screenplay and may direct. Tri-Star has
placed this project in turnaround and Avenue is in discussions with several
other studios to finance the film.

Woody Harrelson and Liv Tyler are committed to star in The Diviners.
The Diviners is based on a play by Jim Leonard, Jr. who also wrote the
screenplay. Avenue Pictures has an option to acquire the screenplay and is
finalizing financing for the film. Avenue Pictures anticipates commencing
filming in August 1998.

Mindhunters is a screenplay developed by Avenue Pictures and sold to
Twentieth Century Fox in a bidding war. Now on the fast track to production, the
story concerns a serial killer amidst the most elite unit of the FBI. The script
is out to several directors and, subject to casting, production is anticipated
for July 1998.

The Company has recently acquired an option to the original screenplay
Stand by Your Man by Andy Borowitz, creator of "The Fresh Prince of Bel Air".
The Company is simultaneously in the process of casting the film and securing a
director and financing for the film and production is anticipated for late 1998.

The Company is completing the financing of Yanqui Dollar, which is
expected to star Bob Hoskins. Based upon a screenplay by Martin Stellman and
Brian Ward, and to be directed by Brian Ward, production is scheduled to
commence in July 1998.

Dimension Pictures/Miramax Films have recently agreed to finance the
development of JINX and AKA Goldfish, based on the acclaimed underground comic
book by Brian Michael Bendis. Mr. Bendis has completed a screenplay of AKA
Goldfish which has been submitted to potential directors. Subject to the process
of selecting a director and cast, filming is anticipated for fall 1998.

Although Avenue Pictures 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, Avenue Pictures 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

Avenue Pictures 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 on June 15, 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, Avenue Pictures 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 on June 14, 1997.

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
Avenue Pictures 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, Avenue Pictures 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. Avenue Pictures 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"). Avenue Pictures retains
100% ownership in its made-for-television movies subject to the rights licensed
to the initial domestic network/cable broadcaster and Hallmark.

In March 1998, Avenue Pictures Television concluded a new two year
distribution agreement 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.
Like the Hallmark agreement, Avenue has 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. Like the previous
arrangement with Hallmark, Avenue holds the copyright to its television programs
and Pearson pays Avenue a substantial predetermined advance against its
distribution rights to all such movies. In addition, Pearson provides Avenue a
recoupable contribution to its operating overhead on a monthly basis and a
development fund on an annual basis.

Neither the Hallmark nor Pearson agreements cover television movies
which Mr. Brokaw or other Avenue Pictures executives produce pursuant to "for
hire" arrangements with programmers. In such producer-for-hire arrangements, Mr.
Brokaw and Avenue Pictures do not have financing responsibility or ownership for
the films. Mr. Brokaw receives a substantial producer's fee for such services.
Mr. Brokaw has provided services to HBO as a producer-for-hire on Path to
Paradise. Mr. Brokaw has also been asked to executive produce Drugs, Inc.:
Sympathy for the Devil, a two hour movie about the infamous drug lord Pablo
Escobar for HBO. Sympathy for the Devil, which is still in the development
stage, is expected to begin principal photography in late 1998 or early 1999.

Avenue Pictures has approximately fifteen television movies in
development, including Don't Cry Now (ABC), based on Joy Fielding's best selling
novel, and Spree, The Andrew Cunanan Story (ABC) and The Replacement Husband
(NBC). In addition, in March 1998, Avenue Pictures Television secured an order
from CBS to develop a script for a three night, six hour 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. 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. Although Avenue Pictures is actively pursuing
these projects, there can be no assurance that each or any project will be
produced due to Avenue Pictures's reliance upon the network and cable
programmers who must approve and order the films in order to provide adequate
financing.

Series Television

Currently, Avenue Pictures is in development with several television
series. In conjunction with New Line Television, Avenue Pictures has developed
and produced a one-hour pilot for a television series based upon the movie, The
Player, for which Mr. Brokaw serves as Executive Producer. ABC has financed the
pilot with New Line Television. The pilot was delivered to ABC in late May 1997.
ABC has declined to produce a series based on the pilot. However, New Line
Television is currently negotiating with another network interested in producing
the series.

Avenue Pictures is also working on three other television series which
are in the developmental stage, including Street Life written by Joseph Cacaci,
which is a one hour series being developed with Warner Brothers Television, and
Sports Freaks.

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.
Avenue Pictures 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 Avenue Pictures
competes have significantly greater financial and other resources than does
Avenue Pictures. In addition, Avenue Pictures's films compete for audience
acceptance with motion pictures produced and distributed by other companies. As
a result, the success of Avenue Pictures'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. The
management of Avenue Pictures 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 competitive
edge of Avenue Pictures.

Major Customers

Avenue Pictures's revenue has historically been derived from the
production of a relatively small number of programs. Given this fact, the
limited number of outlets for the Avenue Pictures productions, and the
individually significant license fees generated from certain of its sales,
certain customers have historically accounted for a significant portion of
Avenue Pictures's revenue. Avenue Pictures derived approximately 40% and 15% of
the Company's total revenue from Hallmark and Largo, respectively, for the year
ended December 31, 1997.

Employees

Avenue Pictures has nine full time employees and one part time
employee.

Wombat

Wombat was formed in March 1997 to acquire all of the assets of the
Wombat Division of CineMasters, founded in 1969 by Gene Feldman and his wife,
Suzette St. John Feldman. Historically, Wombat's primary focus has been the
production of one hour motion picture profiles of Hollywood's biggest stars
which are aired by the major cable networks. Gene Feldman and Suzette St. John
Feldman have produced films together for over twenty years.

<PAGE>

The following titles, produced since 1982, are included in the Wombat
program library:

Program Library- The Hollywood Collection

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

* Turner Broadcasting System owns the copyright on "Vivien Leigh: Scarlett and
Beyond." All other copyrights are owned by Wombat.

** Wombat recently completed "Alan Ladd: The True Quiet Man".

Wombat recently completed the last two one-hour documentaries under its
agreement with the A&E Cable Network ("A&E"). Walter Matthau: Diamond in the
Rough which was delivered on May 23, 1997, and Gary Cooper: The Face of a Hero
which was delivered on October 10, 1997. Wombat recently completed production on
a self-financed program, Alan Ladd: The True Quiet Man. Wombat is also
self-financing a 90-minute pilot for a new series on performance artists
entitled Betty Buckley: In Performance & In Person. This program will be an
intimate look at the talent and life of this Tony award-winning stage, film and
television actress. Wombat is currently seeking distribution arrangements with
cable or public television companies which would license these programs from
Wombat. To date, Gene Feldman and Suzette St. John Feldman have produced 30 film
star biographies. Among their awards was a Cable Ace award for a film on Robert
Mitchum and an Emmy nomination for a program on Audrey Hepburn.

The process of preparing a biography generally takes four months from
start to finish. In preparing the biography, Wombat uses interview materials,
film clips, public domain films, trailers, still photos, archival materials, and
newsreels. Wombat conducts interviews with the subject of the biography, if he
or she is still alive, and various family members, friends, and associates of
the individual. Additional research on the figures involves the gathering and
reading of any publicly available information, including biographical and
autobiographical materials and interviews with biographers. Generally, all
interviewees sign releases and participate willingly in the compilation of
materials for the biography at no cost to Wombat.

Gene Feldman and his wife, Suzette St. John Feldman, do all research on
the figures as well as produce, write, and direct the biographies. In addition,
Wombat employs a staff cameraperson/ editor and an associate producer. Budgets
for the films range from $200,000 to $250,000 per film. Once the film is
completed, Wombat submits the film to the principal licensee for its content and
technical approval.

Production Arrangements

Wombat has in the past substantially relied upon the financial
commitments of A&E and other United States television and cable companies to
fund the production of its programs and upon Janson Associates for their
world-wide distribution once completed. At present, Wombat does not have a
distribution arrangement with a domestic television or cable company and is
producing its current projects with deficit financing. Although Wombat has had
preliminary discussions with respect to the sale of its self-financed projects
and with other parties for similar types of arrangements, no such sales or
agreements have been entered into, and there can be no assurance that Wombat
will be able to enter into arrangements with other parties on similar or
otherwise acceptable terms. Wombat's future production activities will depend on
its ability to sell the projects it is currently self-financing or to enter into
future production arrangements.

A&E: In 1997, Wombat completed the last two one-hour documentaries
under its agreement with A&E. Pursuant to an Agreement, dated as of December 5,
1994 and amended as of June 27, 1995 and as of October 1, 1996, A&E commissioned
the production of seven one-hour motion picture profiles by Wombat, all of which
have now been completed. A&E paid an advance on each program for which it
received an exclusive five-year exhibition period per program in the United
States and its territories and possessions and, in the English language only,
Canada, Mexico, Central America, and the Caribbean. In addition, A&E had two
successive options, each to order up to five additional programs. A&E exercised
its first option for three additional programs, for which Wombat received
increased advances. A&E has determined not to exercise additional options. A&E
also has two successive options to extend the exhibition periods of their
ordered programs for an additional payment. To date, A&E has not exercised any
of its extension options.

Distribution Arrangements

Pursuant to a Distribution Agreement (the "Distribution Agreement"),
dated July 1, 1995 and amended on April 28, 1996, between Wombat and Janson
Associates, Inc. ("Janson"), Janson was granted the sole and exclusive right,
subject to the production arrangements described above, to license substantially
all of the Wombat 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 25% to
40%, depending upon whether such distribution is via domestic television
network, syndication, international television, or home video, of the gross
receipts derived from the licensing of each program.

In addition, Janson is reimbursed for certain distribution expenses out
of gross receipts. The remaining balance is remitted to Wombat as its licensor
royalty. See Item 12 "Certain Relationships and Related Transactions." There has
been a downturn in revenues derived from Janson as a result of recent
consolidations among major media conglomerates seeking to control content as
they expand their international distribution channels with new and proprietary
cable and satellite networks and program services.

<PAGE>

Competition

Wombat was one of the first production companies specializing in the
distribution of profiles of movie stars and has since established itself as a
market leader. Competitors include independent production companies and
subsidiaries of major studios. Although some of the Wombat competitors have the
advantage of being affiliated with established studios, and, as such, have
greater financial resources, Wombat has developed a reputation in the industry
for producing quality biographies with a personal touch.

Major Customers

Wombat has in the past substantially relied upon the financial
commitments of A&E and other United States television and cable companies to
fund the production of its programs and upon Janson for their worldwide
distribution once completed. Wombat derived approximately 17% of the Company's
total revenues from A&E for the twelve months ended December 31, 1997 and
approximately 24% of the Company's total revenues from Janson for the twelve
months ended December 31, 1997

Employees

Wombat has four full time employees and one part time employee.

Business Strategy

The Company's primary goal is significant and sustained growth through
an increased level of development and production activity in both motion
pictures and television. Future revenues and profitability will depend on the
Company's ability to successfully develop and finance viable film and television
properties.

In order to increase its production activity in cable and long form
television, the Company will attempt to form exclusive arrangements with other
established independent producers to work within Avenue Television's aegis. Such
relationships would allow the Company to significantly increase its production
activity and to more fully capitalize on its favorable distribution
relationships. The Company recently hired an individual to spearhead its
television division with responsibility for TV production and an additional
focus on miniseries and "event television."

In series television, the Company will continue to explore development
and production opportunities based on its film properties, television
properties, and writer relationships without committing significant financial
resources to this area of its business.

Wombat will continue to produce its film biographies on a more limited
basis utilizing its own capital while continuing to explore new production and
distribution arrangements. A&E has expressed preliminary interest in dramatized
biographical films, including some of Wombat's previously profiled subjects. The
expanding international marketplace, as well as the enhanced brand awareness of
the Avenue Pictures/Wombat label, may have the potential to expand the market
and potential licensing revenue for the Wombat library. However, no assurance
can be given that additional production talent will be available when needed by
the Company. Further, no assurance can be given that additional funding, whether
from financial markets or collaborative or other arrangements with corporate
partners or from other sources, will be available when needed or on terms
acceptable to the Company.

International Sales & Distribution

As the global market for entertainment programming continues to expand,
the Company foresees real opportunity in developing an international sales
division. With its own sales organization the Company believes it can optimize
revenues from programming both produced and acquired by the Company. The
practice of pre-selling films internationally significantly reduces financial
risk and increases both the cash flow and ability to finance this area of the
Company's business activity. Direct involvement in international sales also
provides favorable opportunities in the areas of co-production and co-financing
which can further benefit the Company. No assurance can be given that such
co-production and co-financing opportunities will be available to the Company.

Through an international sales division, the Company will either act as
its own sales agent in international markets, sell foreign rights to third
parties in the international marketplace, or sell certain rights while retaining
others which the Company may exploit on its own. To the extent the Company
retains any of these foreign rights, the Company's financial commitment with
respect to a particular motion picture may be substantially increased. Although
the Company believes that its expansion into this area can provide opportunities
for future growth, foreign distribution creates certain additional risks,
including the necessity for additional capital, an increase in operating
overhead, fluctuation in currency exchange rates, and changes in foreign
exchange control laws. No assurance can be given that Company funds will be
available to create and develop an international sales division.

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",
and "Scream." 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 Avenue Pictures which is one of the pioneers in this area.

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.

"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.

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>

<CAPTION>
Months After Initial Approximate
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.

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.

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.

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.

<PAGE>

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 subleases for itself and Avenue Pictures on a
month-to-month basis approximately 3,700 square feet of office space at its
corporate headquarters at 11111 Santa Monica Boulevard, Suite 2110, Los Angeles,
California 90025. The rent for such space is approximately $8,000 per month.

Wombat presently leases approximately 2,000 square feet of office space
at 250 West 57th Street, Suite 2421, New York, New York, 10019 pursuant to a
lease that expires on April 30, 1999. Wombat's rent for such space is
approximately $5,000 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>

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

MARKET PRICE OF COMMON STOCK

The Common Stock commenced trading on the American Stock Exchange
("AMEX") on July 16, 1997 under the symbol "PIX." Prior to July 16, 1997, the
Common Stock was traded on the Over-the-Counter Bulletin Board under the symbol
"FLIK." The following table sets forth the high and low sales prices for the
Common Stock on the AMEX since July 16, 1997, and, for periods prior thereto,
the high and low bid prices for the Common Stock. Quotations for periods prior
to July 16, 1997 represent bid prices between dealers and do not include retail
mark-up, mark-down, or commissions, and do not represent actual transactions.

1997 Low Bid High Bid
1st Quarter $2 3/4 $ 4 1/2
2nd Quarter $3 3/4 $ 6
3rd Quarter (to July 15, 1997) $6 5/8 $ 6 5/8

Low Sale High Sale
3rd Quarter (from July 16, 1997
to September 30, 1997) $5 1/2 $10 1/4

4th Quarter $51/16 $ 8 1/2

1996 Low Bid High Bid
---- ------- --------
1st Quarter $1 3/4 $ 2 1/2
2nd Quarter $2 1/4 $ 3 3/4
3rd Quarter $2 1/4 $ 3 1/2
4th Quarter $1 3/4 $ 3 1/2

As of March 2, 1998, there were 165 holders of record of Common Stock.

On March 2, 1998, the closing price of the Common Stock on the American
Stock Exchange was $5.875.

DIVIDEND POLICY

The Company anticipates that, for the foreseeable future, earnings 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".

<PAGE>

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.

General

The Company is an independent entertainment company which, through its
two operating subsidiaries (Avenue Pictures and Wombat), produces motion
pictures for theatrical exhibition, television, and other ancillary markets,
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"). In
connection with the Business Combination, GP Strategies Corporation, a Delaware
corporation, (formerly National Patent Development Corporation) ("GP
Strategies"), a significant shareholder of CineMasters, made a capital
contribution to CineMasters of 90,566 shares of registered GP Strategies common
stock valued at $815,000 in the aggregate, based upon the closing price per
share of GP Strategies common stock on the AMEX on September 30, 1996, in
exchange for 407,500 shares of CineMasters Common Stock. Such capital
contribution was made by GP Strategies for investment purposes and was a
condition to closing pursuant to the Share Exchange Agreement. Prior to
completion of the Business Combination, in August 1996, certain affiliates and
employees of GP Strategies and CineMasters contributed $185,000 in cash to the
capital of CineMasters in exchange for 123,338 shares of restricted CineMasters
Common Stock in a private placement transaction. In furtherance of the Business
Combination, CineMasters entered into a stockholders agreement and certain
employment agreements.

The consolidated financial statements of the Company for the period
ended December 31, 1996 include the results of operations of Avenue Pictures
from the date of acquisition.

<PAGE>

Year Ended December 31, 1997, Five Months Ended December 31, 1996 and Year
Ended July 31, 1996

Revenues

Revenues for the twelve months ended December 31, 1997 were $2,367,000,
of which $967,000 were attributable to Wombat and $1,400,000 were attributable
to Avenue. Avenue's revenues were derived primarily from the completion and
delivery to Hallmark Entertainment of "Tell Me No Secrets" as well as $275,000
of producer fees generated from the production and delivery of the feature film
"Finding Graceland." Wombat's revenues were generated from the completion and
delivery to A&E of three one hour features which led to approximately $411,000
of revenue from A&E and $506,000 of revenue earned from licensing of rights to
Wombat programming in secondary markets through Janson Associates.

Revenues for the five months ended December 31, 1996 were $3,509,000.
The revenues were derived from revenues generated by Avenue Pictures which was
acquired on September 30, 1996 and the operations of Wombat. Revenues from the
operations of Avenue Pictures from the acquisition date through December 31,
1996 amounted to approximately $2,727,000 and were primarily derived from the
completion and availability to ABC of the made-for-television movie "Tell Me No
Secrets." Revenues from Wombat operations for the five months ended December 31,
1996 were approximately $782,000. Of this amount approximately $454,000 was
derived from the completion and availability of four one hour motion picture
profiles to A&E and Lifetime Productions, Inc. ("Lifetime"). The remaining
revenue was derived from licensing of rights to Wombat programming in secondary
markets. No revenues were derived from the operations of Kaufman Films, Inc.
("Kaufman Films") during the five month period ended December 31, 1996 due to
the Kaufman Termination Agreement (as defined below; see Note 8 to the
Consolidated Financial Statements).

One customer, ABC, accounted for approximately 77% of total revenues
during the five months ended December 31, 1996. During fiscal 1996, A&E
accounted for approximately 12% of total revenues and Janson accounted for
approximately 40% of total revenues, respectively.

Film Production Costs

Film production costs for the year ended December 31, 1997 were
$1,482,000 which can be attributed to the film amortization related to Avenue
Pictures' television product in the amount of $904,000 and approximately
$424,000 related to Wombat's operations. Wombat's expense included a $70,000
reserve taken on the one hour film, "The Story of Lassie", due to the reduced
revenue stream forecast in the future.

Film production costs for the five months ended December 31, 1996 were
$2,752,000 which can be attributed to the film amortization relating to Avenue
Pictures' television product in the amount of $2,496,000 and approximately
$256,000 from Wombat's operations.

Selling, General, and Administrative

Selling, general and administrative expenses ("SG&A") for the twelve
months ended December 31, 1997 were $2,718,000. Included in SG&A for the period
is approximately $280,000 of amortization of goodwill related to the Avenue
acquisition on September 30, 1996. In addition, the Company incurred $37,500 of
stock option compensation expense relating to previously issued stock options
and $100,000 of deferred compensation recognized on stock (see Note 5 to the
consolidated financial statements). The remaining SG&A costs for 1997 relate to
salaries, occupancy costs and professional fees.

SG&A expenses for the five months ended December 31, 1996 was $662,000.
Included in the five months ended December 31, 1996 expenses are $262,000 of
SG&A expenses related to Avenue Pictures operations and were principally
salaries and related benefits and occupancy expenses. SG&A expenses, exclusive
of Avenue Pictures, for the five months ended December 31, 1996 were
approximately $400,000 and were primarily salary and related benefits, occupancy
costs, and professional fees.

Income Taxes

For the year ended December 31, 1997, the Company had an income tax
benefit of $208,000. 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, 1996. The Company currently has a July 31 year end for tax
purposes, which led to the recording of a payable at December 31, 1996.

Liquidity and Capital Resources

At December 31, 1997, the Company had approximately $1,158,000 of cash
and approximately $562,000 of short term investments.

On May 27, 1997, the Company entered into an unsecured demand note (the
"Note") which provides the Company with borrowings in the principal amount of
$250,000, at prime plus 1%, with Fleet Bank, National Association. The Note is
payable on demand, but in any event not later than May 27, 1998. As of December
31, 1997, $127,500 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.

The Company believes it has adequate capital resources to meet its
short-term needs covering at least twelve months. The Company expects to expand
its production activities. Management believes that the existing cash and short
term investments are adequate to fund the Company's operations. However,
management may seek to raise additional funds, through the issuance of Common
Stock or debt, to expand the Company's business at a greater rate. There is no
guarantee that such funding will be available, or available under terms which
are acceptable to the Company. The Company's rate of growth and investment in
projects will be adjusted as necessary based on available financing and existing
capital resources.

Recent Accounting Developments

In February 1997, the Financial Accounting Standards Board issued
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 dual
presentation of basic and diluted EPS on the face of the income statement. This
Statement was effective for financial statements issued for periods after
December 15, 1997 and required restatement of all prior-period EPS data
presented. The adoption of SFAS No. 128 did not have a material impact on
previously reported EPS data.

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 is presently
designing such statement, and accordingly, will include such statement beginning
with the first quarter of 1998.

In addition, in June of 1997, the FASB issued SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information". SFAS 131 requires
disclosure of certain information about operating segments and about products
and services, geographic areas in which a company operates, and their major
customers. The Company is presently in the process of evaluating the effect that
this new standard will have on disclosures in the Company's financial statements
and the required information will be reflected in the year ended December 31,
1998 financial statements.

The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.

The Company is utilizing both internal and external resources to
identify, correct or reprogram and test the systems for the year 2000
compliance. It is anticipated that the project will be completed by the middle
of 1999. Management has not yet assessed the year 2000 compliance expense and
related potential effect on the Company's earnings. However, there can be no
assurance that the systems of other companies on which the Company's systems
rely also will be timely converted or that any such failure to convert by
another company would not have an adverse effect on the Company's systems.

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; 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.

Inflation

Inflation is not expected to have a significant impact on the Company's
business.

<PAGE>

F-4

ITEM 7. FINANCIAL STATEMENTS

Page
Avenue Entertainment Group, Inc.

Independent Auditors' Reports F-2

Consolidated Balance Sheet as of December 31, 1997 F-4

Consolidated Statements of Operations for the year
ended December 31, 1997, the five months ended
December 31, 1996 and the year ended July 31, 1996 F-5

Consolidated Statement of Stockholders' Equity
for the year ended December 31, 1997, the five
months ended December 31, 1996 and the year ended
July 31, 1996 F-6

Consolidated Statement of Cash Flows for the year
ended December 31, 1997, the five months ended
December 31, 1996 and the year ended July 31, 1996 F-7

Notes to Consolidated Financial Statements F-9

<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, 1997 and the related
consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1997 and the five-month period
ended December 31, 1996. 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, 1997 and the
results of its operations and its cash flows for the year ended
December 31, 1997 and the five-month period ended December 31, 1996 in
conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP
New York, New York
April 9, 1998

<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statements of operations,
stockholders' equity and cash flows of Avenue Entertainment Group, Inc.
for the year ended July 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash
flows of Avenue Entertainment Group, Inc. for the year ended July 31,
1996 in conformity with generally accepted accounting principles.

Israeloff, Trattner & Co., CPAs, P.C.

Valley Stream, New York
October 10, 1996, except for note 9,
which is as of October 28, 1996.

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Consolidated Balance Sheet

December 31, 1997

Assets

Cash $ 1,158,347
Short-term investment 562,711
Accounts and other receivables 126,492
Income tax receivable 235,000
Film costs, net 1,481,571
Property and equipment, net 102,356
Goodwill 2,454,549
Other assets 18,709
-------------

Total assets $ 6,139,735
============

Liabilities and Stockholders' Equity

Accounts payable and accrued expenses $ 916,419
Loan payable 127,500
Capitalized lease obligations 8,459
Due to related party 94,480
------------

Total liabilities 1,146,858

Commitments and contingencies

Stockholders' equity:
Preferred stock, par value $.01 per share. Authorized
2,000,000 shares, none issued
Common stock, par value $.01 per share. Authorized
15,000,000 shares; issued and outstanding, 4,072,838 shares 40,728
Class B common stock, no par value. Authorized
1,000,000 shares; none issued
Additional paid-in capital 6,232,256
Deficit (1,327,818)
Unrealized gain on marketable securities 197,711
Note receivable for common stock (150,000)
-------------

Total stockholders' equity 4,992,877

Total liabilities and stockholders' equity $ 6,139,735
===========

See accompanying notes to consolidated financial statements.

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Consolidated Statements of Operations

<TABLE>

Year ended Five months ended Year ended
December 31, December 31, July 31,
1997 1996 1996
---- ---- ----

<S> <C> <C> <C>
Operating revenues $ 2,367,215 $ 3,508,967 $ 1,961,333
------------ -------------- ------------

Costs and expenses:
Film production costs 1,463,822 2,752,307 1,103,291
Selling, general and administrative expenses 2,718,028 661,766 733,243
------------- -------------- ------------

Total costs and expenses 4,181,850 3,414,073 1,836,534
------------- ------------- ------------

Income (loss) from operations (1,814,635) 94,894 124,799

Gain on sale of investments 55,000

Income (loss) before income taxes (1,759,635) 94,894 124,799

Income tax benefit (expense) 207,816 (74,945) (51,230)
-------------- ----------------- ---------------

Net income (loss) $ (1,551,819) $ 19,949 $ 73,569
============= ============== ===========

Basic and diluted earnings (loss)
per common share $ (.41) $ .01 $ .04
----------------- ----------------- ---------------

See accompanying notes to consolidated financial statements.
</TABLE>

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.
<TABLE>

Consolidated Statement of Stockholders' Equity
Year ended December 31, 1997, five
months ended December 31, 1996 and year ended July 31, 1996

Common Stock
Unrealised
<CAPTION> gain (loss)
Additional Retained on Stock
Number of paid-in earnings marketable subscription
Shares Amount capital (deficit) securities receivable Total
------ ------ ------- -------- ---------- ---------- -----

<S> <C> <C> <C> <C> <C>
Balance, July 31, 1995 1,795,000 $ 17,950 $ 703,423 $ 130,483 $ $ $ 851,856
Shares redeemed - net (80,000) (800) (72,911) (73,711)
Issuance of stock 123,338 1,233 183,767 185,000
Net income - year ended July 31, 1996 73,569 73,569
---------- --------- --------- ---------- ---------- ---------- ----------
Balance, July 31, 1996 1,838,338 18,383 814,279 204,052 1,036,714
Exercise of stock options 2,000 20 620 640
Stock option compensation expense 9,375 9,375
Issuance of common stock 407,500 4,075 810,925 815,000
Purchase of Avenue Pictures, Inc. 1,450,000 14,500 2,885,500 2,900,000
Contribution of payable, net of tax 110,553 110,553
Net unrealized loss on marketable
securities (118,850) (118,850)
Net income - five months ended
December 31, 1996 19,949 19,949
---------- --------- --------- ---------- --------- ----------- ----------
Balance, December 31, 1996 3,697,838 36,978 4,631,252 224,001 (118,850) 4,773,381
Net loss (1,551,819) (1,551,819)
Issuance of common stock 225,000 2,250 1,122,750 1,125,000
Net unrealized gain on marketable
securities 316,561 316,561
Stock option compensation expense 37,500 37,500
Proceeds from previously issued stock 92,254 92,254
Deferred compensation 100,000 100,000
Exercise of warrants 100,000 1,000 99,000 100,000
Stock subscription receivable 50,000 500 149,500 (150,000)
---------- --------- --------- ------------ -------- ----------
Balance, December 31, 1997 4,072,838 $ 40,728 $6,232,256 $(1,327,818) $197,711 $(150,000) $4,992,877
========== ========= =========== ============ ======== ========= ==========

See accompanying notes to consolidated financial statements.
</TABLE>

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.
<TABLE>

Consolidated Statements of Cash Flows

Year ended Five months ended Year ended
December 31, December 31, July 31,
1997 1996 1996
---- ---- ----

Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ (1,551,819) $ 19,949 $ 73,569

Adjustments to reconcile net income to net cash
provided by (used for) operating
activities:
Depreciation 32,499 10,046 51,232
Amortization - film production costs 1,276,629 2,624,627 351,801
Amortization - goodwill 280,520 70,130
Gain on sale of investments (55,000)
Stock compensation 137,500 9,375
Changes in assets and liabilities which
affect net income:
Accounts receivable 22,991 302,398 (133,090)
Film costs (759,874) (1,569,655) (592,995)
Other assets 56,132 19,674
Accounts payable and accrued expenses 174,209 101,083 (65,070)
Due to GP Strategies 94,480
Income taxes receivable (235,000)
Income taxes payable (330,891) 13,550
Advances from customers (577,730) (1,716,001) 311,000
Other 62,354 (11,000)
-------------- ----------------- ---------

Net cash provided by (used for)
operating activities (1,429,132) (91,916) 18,671
----------- -------- ------

Cash flows from investing activities:
Purchase of equipment (17,363) (5,731) (25,340)
Proceeds from sale of marketable securities 505,000
Cash acquired in purchase transaction 620,714
--------------- ------------

Net cash provided by (used for)
investing activities 487,637 614,983 (25,340)
--------------- -------- ------

(Continued)
</TABLE>

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.
<TABLE>

Consolidated Statements of Cash Flows, Continued
<CAPTION>

Year ended Five months ended Year ended
December 31, December 31, July 31,
1997 1996 1996
---- ---- ----

Cash flows from financing activities:
<S> <C> <C>
Proceeds from short-term borrowings $ 127,500 $ $
Stock subscription 150,000
Proceeds from the issuance of common stock 1,217,254 640 35,000
Exercise of warrants 100,000
Principal payments of capital lease obligation (31,992) (7,906) (35,613)
Due to officers (10,000)
Repayment of loan payable (20,000)
------------------- ----------------
Net cash provided by (used for)
financing activities 1,412,762 122,734 (10,613)
------------- --------------- ------------

Net increase (decrease) in cash 471,267 645,801 (17,282)

Cash at beginning of year 687,080 41,279 58,561
---------------- ---------------- ------------

Cash at end of year $ 1,158,347 $ 687,080 $ 41,279
============== ============== ===========

Supplemental cash flow information: Cash paid during the year for:
Interest $ 46,061 $ 3,082 $ 11,428
Income taxes 201,694 38,910 33,775

Noncash transactions:
During the five months ended December 31, 1996, $815,000 of common
stock was issued for short-term investments, $184,255 of payables was
contributed to capital, net of a $73,702 tax liability, and Avenue Pictures,
Inc. was acquired resulting in the following:

Fair value of assets acquired $ 5,528,733
Liabilities assumed (2,662,066)
Common stock issued (2,866,667)
---------------

Net cash paid

Cash acquired 620,714
---------------
Net cash acquired $ 620,714
==============

See accompanying notes to consolidated financial statements.

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

Description of Business

Avenue Entertainment Group, Inc. (formerly The CineMasters Group, Inc.)
(the "Company"), through its Wombat Production Division, writes, produces
and distributes film star biographies for television and other markets.
On September 30, 1996, the Company acquired all of the outstanding
capital stock of Avenue Pictures, Inc. ("Avenue") (see note 9). Avenue is
an independent producer of feature films and television programming.
Subsequent to July 31, 1996, the Company changed its year-end to December
31.

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.

Reclassifications

Certain reclassifications have been made to the July 31, 1996
consolidated financial statements to conform to the current presentation.

Cash and Cash Equivalents

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

Short-Term Investment

Short-term investment consists of marketable equity securities which are
recorded at fair market value. All marketable securities are classified
as available-for-sale. In accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," unrealized holding gains or losses are reflected
as an adjustment to stockholders' equity. At December 31, 1997,
short-term investment is comprised of registered shares of GP Strategies
Corporation (GP Strategies), formerly National Patent Development
Corporation, a stockholder of the Company.

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

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

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.

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,
1997 was $350,650.

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."

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

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. 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.

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.

Income (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, 1997, 1996 and July 31, 1996,
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

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

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.

(2) Film Costs

Film costs consist of the following:

December 31,
1997

In process or development $ 47,955
Released, net of accumulated amortization of $11,753,074 1,433,616
----------

$ 1,481,571

Based upon the Company's present estimates of anticipated future revenues
at December 31, 1997, approximately 75% of the film costs related to
released product will be amortized during the three-year period ending
December 31, 2000.

(3) Property and Equipment

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

Useful December 31,
life 1997

Machinery and equipment 4 to 5 years $ 228,985
Furniture and fixtures 10 years 15,641
Leasehold improvements Lease term 20,489
-----------
265,115
Less accumulated depreciation and amortization (162,759)
$ 102,356

Depreciation expense was $32,499 for the year ended December 31, 1997,
$10,046 for the five months ended December 31, 1996 and $51,232 for the
year ended July 31, 1996.

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

(4) Commitments and Contingencies

Leases

The Company is obligated under a lease for office space, expiring April
30, 1999, which requires minimum annual rentals, plus increases based on
real estate taxes and operating costs.

Rent expense was $143,782, $10,002 and $56,340 for the year ended
December 31, 1997, the five months ended December 31, 1996 and the year
ended July 31, 1996, respectively. These amounts are net of $0 for the
year ended December 31, 1997, $9,127 for the five months ended December
31, 1996 and $45,142 for the year ended July 31, 1996, capitalized as
film costs.

Minimum annual rental commitments at December 31, 1997 under the
noncancelable operating and capital leases are as follows:

Operating Capital
Year ending December 31:
1998 42,938 8,459
1999 14,313 --
--------- --------

Total minimum obligations $ 57,251 8,459
=========

Less amount representing interest 373
Present value of minimum lease obligation $ 8,086
=======

Interest expense relating to the capital lease obligations was $373,
$2,806 and $11,428 for the year ended December 31, 1997, the five months
ended December 31, 1996 and the year ended July 31, 1996, respectively.

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 (which base salary may be funded from
any Company source other than net cash generated by the Wombat Division)
and $150,000, plus benefits (provided that such base salary is funded
solely out of net cash flow generated by the Wombat Division),
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.

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

(5) Common Stock and Stock Option Plan

(a) In 1995, the Company adopted a Non-Qualified Stock Option Plan whereby
certain employees and related parties were granted non-qualified options
to purchase up to 600,000 shares of common stock of the Company. 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, 1997, 577,100
options are exercisable.

Option activity was as follows:

</TABLE>
<TABLE>
<CAPTION>

Weighted
average
Number of Exercise exercisable
shares price price

Options granted during the year ended
<S> <C> <C> <C> <C>
July 31, 1996 393,500 $ .32 - 1.00 $ .49
--------- ------------- ---------

Outstanding at July 31, 1996 393,500 .32 - 1.00 .49
Options granted 500,000 1.70 1.70
Options exercised (2,000) .32 .32
----------- ------------- ---------

Outstanding at December 31, 1996 891,500 .32 - 1.70 1.29
--------- -------------- ---------
Options granted 573,000 3.00 - 6.31 3.05
Options exercised (100,000) 1.00 1.00
---------- -------------- --------

Outstanding at December 31, 1997 1,364,500 .32 - 6.31 1.97
--------- -------------- --------

</TABLE>

The Company recorded compensation expense related to stock options
granted at prices less than market value totaling $37,500 and $9,375 for
the year ended December 31, 1997 and the five months ended December 31,
1996.

At December 31, 1997, the weighted average remaining contractual life of
all outstanding options was 8.9 years.

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.

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

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 income (loss) would have been reduced or increased to the pro forma
amounts indicated below:
<TABLE>

<CAPTION>
December 31, December 31, July 31,
1997 1996 1996
---- ------------ --------

<S> <C> <C> <C>
Net income (loss) As reported (1,551,819) $ 19,949 $73,569
Pro forma (2,090,005) (138,461) (2,901)

Basic and diluted
earnings (loss) per share As reported (.41) .01 .04
Pro forma (.55) (.05) (.01)
</TABLE>

Pro forma net income reflects only options granted in the year ended
December 31, 1997, the five months ended December 31, 1996 and the year
ended July 31, 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected
in the pro forma net income 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.

At December 31, 1997, 1996 and July 31, 1996, the per share
weighted-average fair value of stock options granted was $2.75, $1.58 and
$.46, respectively, on the date of grant using the modified Black-Scholes
option-pricing model with the following weighted-average assumptions:
December 31, 1997- expected dividend yield 0%, risk-free interest rate of
6.3%, expected volatility of 87.4% and an expected life of 8 years,
December 31, 1996 - expected dividend yield 0%, risk-free interest rate
of 6.5%, expected volatility of 73.2%, and an expected life of 9 years;
July 31, 1996 - expected dividend yield 0%, risk-free interest rate of
6.2%, expected volatility of 94.7%, and an expected life of 2.9 years.

(b) In October 1995, as part of a consulting agreement, the Company issued
options to acquire 100,000 shares of common stock at $1.00 per share
(note 7). The options were immediately exercisable and were exercised in
October 1997.

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

(c) In July 1994, the Company issued options to acquire 200,000 shares of
common stock at $.25 per share to Kaufman Films, Inc. (Kaufman) in
conjunction with an acquisition (note 8). These options were subsequently
returned to the Company. This activity has been excluded from the table
of stock option activity above. These options were issued outside of the
Non-Qualified Stock Option Plan. Such options were subsequently canceled
(note 8).

(d) In April 1997, the Company issued 50,000 shares of restricted common
stock to a consultant pursuant to a private placement transaction in
exchange for a promissory note in the principal amount of $150,000 due on
demand but in no event later than December 31, 1998. The Company recorded
$100,000 as deferred compensation expense, based upon the calculated
value of the restricted common stock issued in 1997.

(e) 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.

Earnings per share (EPS) for the year ended December 31, 1997, five
months ended December 31, 1996 and year ended July 31, 1996 are as
follows (in thousands, except per share amounts):

December 31, December 31, July 31,
1997 1996 1996
---- ---- ----

Basic and diluted EPS
<S> <C> <C> <C>
Net income $ (1,551,819) $ 19,949 $ 73,569
Weighted average shares outstanding 3,790,146 3,321,251 1,788,525
Basic and diluted EPS $ .41 $ .01 $ .04
</TABLE>

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.

(6) Income Taxes

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

December 31, December 31, July 31,
1997 1996 1996
---- ---- ----
Federal $(146,698) $ 58,737 $ 18,725
State and local (61,118) 16,208 32,505
---------- --------- --------

$(207,816) $ 74,945 $ 51,230
========== ========= ========

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

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

December 31, December 31, July 31,
1997 1996 1996
---- ---- ----

Tax expense (benefit)
<S> <C> <C> <C>
at Federal statutory rate of 34% $ (598,276) $ 32,264 $ 48,639
Increase (decrease) in taxes resulting from:
State and local income taxes, net of
Federal income tax benefit (35,377) 10,697 21,453
Surtax exemption (11,580)
Nondeductible goodwill amortization 95,377 28,052
Other 3,400 3,932 (7,282)
Change in valuation allowance 327,060

Total $ (207,816) $ 74,945 $ 51,230
=========== ========== =========

</TABLE>

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

December 31,
1997
Deferred tax assets

Stock options $ (63,156)
Film cost write-down (30,100)
NOLs (366,970)
------------
(460,226)
Valuation allowance 430,919
Net assets (29,307)

Deferred tax liabilities

State liabilities (29,307)

Net tax assets $

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

(7) Related Party Transactions

Transactions with GP Strategies

In July 1996, the Company had a private placement in which it sold
123,338 shares of common stock at $1.50 per share to people affiliated
with the Company and GP Strategies. At July 31, 1996, 23,334 shares were
paid. The remaining subscribed shares were paid for in September 1997.

In September 1996, GP Strategies made a capital contribution of $815,000
to the Company (see note 9). At December 31, 1997, the Company owed GP
Strategies $94,480 related to the payment of certain expenses of the
Company by GP Strategies.

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 Wombat Production Division 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. Included in
operating expenses was $216,845, $89,978 and $277,764 of commissions to
Janson Associates incurred in the year ended December 31, 1997, five
months ended December 31, 1996 and the year ended July 31, 1996,
respectively. The President of Janson Associates was a director of the
Company and is related to the Company's Chairman through marriage.

Consulting Agreement

In October 1995, the Company entered into a two-year agreement with a
financial consultant. The consultant will provide financial advisory and
investment banking related services. The agreement provides for monthly
payments of $4,000 per month, plus a two-year option to purchase 100,000
shares of the Company's common stock at an exercise price of $1.00 per
share. The 100,000 options were exercised in October 1997. Either party
could elect to terminate the agreement upon 30 days written notice.
Pursuant to its termination agreement with Kaufman (see note 8), Kaufman
agreed to reimburse the Company $1,000 per month for services of such
consultant.

(8) Acquisition and Disposition of Kaufman Films, Inc.

On July 26, 1994, the Company acquired the net assets of Kaufman Films,
Inc. (Kaufman). Kaufman is a media company specializing in the production
of corporate and commercial films. The net assets were acquired in
exchange for 160,000 shares of the Company's class A common stock, valued
at $.25 per share and an option for Kaufman to acquire an additional
200,000 shares at $.25 per share which may be exercised no earlier than
two years from the closing nor more than five years from the closing.
These options were not ascribed a value.

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

On July 3, 1996, the Company entered into a termination agreement with
Kaufman. The agreement terminated an employment agreement dated July 26,
1994 with Kevin Kaufman and canceled the stock options granted to him and
Kaufman Films, none of which have been exercised. It also assigned the
lease at Leonard Street and returned certain acquired net assets to
Kaufman. In addition, Kaufman returned 80,000 shares of the previously
issued 160,000 shares of the Company's common stock. Kevin Kaufman agreed
to provide the Company with one-half of the proceeds from the sale of
18,000 of the remaining 80,000 shares. In 1997, the Company received net
proceeds of $92,254 from the sale of the 18,000 shares of the Company's
common stock. The cash received has been reflected as an increase in
Additional Paid in Capital. Stockholders' equity was charged
approximately $74,000, the fair value of assets returned to Mr. Kaufman
and of the 80,000 shares of common stock returned by him, and
subsequently canceled by the Company.

(9) Acquisition of Avenue Pictures, Inc.

On October 28, 1996, the Company acquired Avenue Pictures, Inc. (Avenue),
effective September 30, 1996, in consideration for 1,425,000 shares of
its common stock which were ascribed a value of $2.00 per share.

In connection with the purchase, the Company has changed its name to
Avenue Entertainment Group, Inc. In conjunction with the acquisition of
Avenue, GP Strategies, together with its affiliates, contributed $815,000
in the form of its common stock in exchange for 407,500 shares of common
stock ($2.00 per share) of the Company prior to the consummation of this
business combination. In addition, accrued expenses due to the Chairman
and President of the Wombat Production Division amounting to $185,000
were forgiven. The forgiveness, net of the related tax liability, was
recorded as a capital contribution. An additional 25,000 shares were
issued to the Company's legal counsel for services rendered to the
Company and Avenue relating to the acquisition. The portion of the legal
fees relating to the Company was capitalized as part of the transaction
cost. The portion of the legal fees relating to services provided to
Avenue was expensed.

Goodwill, relating to the acquisition of Avenue Pictures, Inc. is as
follows:

Purchase Price $2,866,667
Fair Market value of net assets
acquired:
Assets $ 2,723,534
Liabilities 2,662,066
-----------
Net assets acquired 61,468

Goodwill $2,805,199
===========

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

The pro forma results listed below are unaudited, reflect the acquisition
of Avenue using purchase accounting and assume the acquisition occurred
at the beginning of each of the periods:

Five months ended Year ended
December 31, 1996 July 31, 1996
----------------- -------------

Revenues $ 3,651,925 6,357,802
Net loss (58,055) (247,560)
Net loss per share (.02) (.07)

The pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results
that would have occurred had the Avenue acquisition been consummated as
of the above date, nor are they indicative of future operating results.

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.

(10) Significant Customers

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

Year Five months Year
ended ended ended
December 31, December 31, July 31,
1997 1996 1996
---- ---- ----

ABC 77
A&E Television Networks 17 12
Janson Associates 24 40
Hallmark Entertainment 40
Largo Entertainment Corp. 15

<PAGE>

AVENUE ENTERTAINMENT GROUP, INC.

Notes to Consolidated Financial Statements, Continued

(11) Preferred Stock

The Company has authorized 2,000,000 shares of preferred stock with a
$.01 par value. No preferred stock has been issued.

<PAGE>

III-13

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

The Board of Directors recommended and approved, effective January 1,
1997, the selection of KPMG Peat Marwick LLP to audit the accounts of the
Company for the five months ending December 31, 1996 and the year ended December
31, 1997. KPMG Peat Marwick LLP has no financial interest in the Company or any
of its subsidiaries, and neither it nor any member or employee of the firm has
had any connection with the Company or any of its subsidiaries in the capacity
of promoter, underwriter, voting trustee, director, officer or employee. The
decision to engage KPMG Peat Marwick LLP did not result from disagreements with
the Company's prior accountants, Israeloff, Trattner & Co., who were dismissed
effective January 1, 1997. The accountant's reports of Israeloff, Trattner & Co.
on the financial statements of the Company for the years ended July 31, 1996 and
1995 were unqualified and no disagreements or reportable events occurred during
such period and the subsequent interim period.

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 71 Chairman of the Board, President of Wombat
Cary Brokaw 46 President, Chief Executive Officer and Director
Michael Feldman 30 Executive Vice President and Director
Sheri L. Halfon 41 Senior Vice President, Chief Financial
Officer and Director
Doug Rowan 59 Director
James A. Janowitz 51 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 whose term expires at the 2000 annual meeting of
the Company.

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 whose term expires at the 2000 annual meeting of the Company.

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 National Patent since 1995. Michael
Feldman is a Class II Director whose term expires at the 1999 annual meeting of
the Company.

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 whose term expires at the
1999 annual meeting of the Company.

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 whose term expires at the 1998 annual meeting of the
Company.

James A. Janowitz has been a senior partner in the litigation
department at Pryor, Cashman, Sherman & Flynn and head of its motion picture
group for more than the past five years. Mr. Janowitz is a Class I Director
whose term expires at the 1998 annual meeting of the Company.

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 Feldman filed an
untimely report on Form 4.

<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 1997,
1996 and 1995.

<TABLE>

SUMMARY COMPENSATION TABLE
<CAPTION>

Long-Term
Compensation
Awards
Annual Compensation Stock All Other
Salary Bonus Options Compensation
Name and Principal Position Year ($) ($) (#) ($)
- --------------------------- ---- ------- ------ --------- ------------

<S> <C> <C> <C> <C>
Cary Brokaw 1997 450,000 -0- 100,000(1) --
President, Chief Executive 1996 450,000(2) -0- 300,000(1) --
Officer and Director 1995 391,000 -0- -0- --

Gene Feldman 1997 150,000 -0- 75,000(3) --
Chairman of the Board, 1996 150,000 -0- -0- --
President of Wombat 1995 101,115 4,225 200,000(3) --
Division of the Corporation

Sheri Halfon 1997 120,000(4) -0- 75,000(5) --
Senior Vice President, 1996 95,000(2)(4) -0- -0- --
Chief Financial Officer 1995 95,000(2)(4) -0- -0- --
- -------------------

(1) Of the 100,000 stock options granted to Mr. Brokaw in 1997, only 40,000 are
currently vested and of the 300,000 stock options granted to Mr. Brokaw in
1996, only 120,000 are currently vested.

(2) Prior to completion of the Business Combination on September 30, 1996, Mr.
Brokaw's and Ms. Halfon's compensation was paid directly by Avenue Pictures.

(3) Of the 75,000 stock options granted to Mr. Feldman in 1997, only 30,000 are
currently vested and of the 200,000 stock options granted to Mr. Feldman in
1995, all are currently vested.

(4) Includes $65,539, $8,400 and $56,763 for 1997, 1996 and 1995, respectively,
paid to Ms. Halfon by certain companies whose shows were in production or
post-production by the Company.

(5) Of the 75,000 stock options granted to Ms. Halfon in 1997, only 30,000 are
currently vested.

</TABLE>

<PAGE>

Option Grants in 1997

The following table and notes contain information concerning the grant of
non-qualified stock options in 1997 to the named executive officers pursuant to
the 1997 Plan.

<TABLE>

STOCK OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>

% of Total Market Price
Number of Options of Underlying
Securities Granted to Exercise Security on
Underlying Employees Price Date of
Options in Fiscal ($ per Grant ($ per Expiration
Name Granted (1) Year share) share) Date
- ---- ----------- ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Gene Feldman 75,000 13 3.00 3.125 2/19/07
Cary Brokaw 100,000 17 3.00 3.125 2/19/07
Sheri Halfon 75,000 13 3.00 3.125 2/19/07
- -------------

(1) The options were granted pursuant to the terms of the Company's Stock Option
and Long Term Incentive Compensation Plan. The options are exercisable at the
rate of 20% per annum commencing on the February 19, 1997, date of grant and
expire on February 19, 2007.

</TABLE>
The following table sets forth information concerning the value of unexercised
options as of December 31, 1997 held by the executives named in the Summary
Compensation Table above. No options were exercised during 1997.

<TABLE>
AGGREGATED OPTION EXERCISES AT DECEMBER 31, 1997
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 215,000(E) 60,000(U) 1,207,875(E) $187,500(U)
Cary Brokaw 140,000(E) 260,000(U) 593,500(E) 1,046,500(U)
Sheri Halfon 15,000(E) 60,000(U) 46,875(E) 187,500(U)
- ----------

(1) Calculated based on the closing price of the Common Stock $6.125 as
reported by the American Stock Exchange on December 31, 1997, which price was
higher than the exercise price.
</TABLE>

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
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
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 2, 1998, are indicated below:

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

Cary Brokaw 1,571,350(1) 37.1%
c/o Avenue Pictures, Inc.
11111 Santa Monica Boulevard
Suite 2110
Los Angeles, CA 90025

GP Strategies Corporation 1,067,100 26.2%
9 West 57th Street
New York, New York 10019

Gene Feldman 396,700(2) 9.2%
c/o Avenue Entertainment Group, Inc.
250 West 57th Street
Suite 2421
New York, New York 10019
- ---------------------
* As used in this Proxy Statement, "beneficial ownership" means the sole or
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 120,000 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 40,000 shares of Common Stock of the
Corporation at a price of $3.00 per share, exercisable until February 19, 2007.
Does not include unvested options to purchase up to 180,000 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 60,000 shares of
Common Stock of the Corporation at a price of $3.00 per share, exercisable until
February 19, 2007.

(2) Does not include 17,500 shares of Common Stock of the Corporation and 30,000
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 30,000 shares of Common Stock of the Corporation at a price of
$3.00 per share, exercisable until February 19, 2007. Does not include unvested
options to purchase up to 45,000 shares of the Common Stock of the Corporation
at a price of $3.00 per share, exercisable until February 19, 2007.

SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS

The following table sets forth, as of March 2, 1998, 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 396,700(2) 9.2

Cary Brokaw 1,571,350(3) 37.1

Michael Feldman 111,500(4)(5) 2.7

Sheri L. Halfon 30,100(6) *

Doug Rowan 3,000(7) *

James A. Janowitz -0-(8) *

Directors and Executive 2,112,650(9) 46.08
Officers as a Group
(6 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 by any other stockholders.

(2) See footnote 2 to Principal Stockholders table.

(3) See footnote 1 to Principal Stockholders table.

(4) Includes vested options to purchase up to 60,000 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 30,000 shares of Common
Stock of the Corporation at a price of $3.00 per share, exercisable until
February 19, 2007. Does not include unvested options to purchase up to 90,000
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
45,000 shares of Common Stock of the Corporation at a price of $3.00 per share,
exercisable until February 19, 2007.

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

(6) Includes vested options to purchase up to 30,000 shares of Common Stock of
the Corporation at a price of $3.00 per share, exercisable until February 19,
2007. Does not include unvested options to purchase up to 45,000 shares of
Common Stock of the Corporation at a price of $3.00 per share, exercisable until
March 10, 2007.

(7) Includes vested options to purchase up to 2,000 shares of Common Stock of
the Corporation at a price of $5.00 per share, exercisable until July 1, 2007.
Does not include unvested options to purchase up to 8,000 shares of Common Stock
of the Corporation at a price of $5.00 per share, exercisable until July 1,
2007.

(8) Does not include 25,000 shares of Common Stock of the Corporation which are
owned by Pryor, Cashman, Sherman & Flynn, a law firm in which Mr. Janowitz is a
senior partner, as to which Mr. Janowitz disclaims beneficial ownership.

(9) Includes 512,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options.

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

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
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
Wombat.

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
National Patent, 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. Mr. Brokaw has agreed until December 31, 1997
to maintain a balance of cash or cash equivalents (including the registered
shares of National Patent common stock held by the Company as described below)
for CineMasters of at least $500,000 and shall at all times thereafter maintain
a balance of cash or cash equivalents for CineMasters of at least $300,000.
Pursuant to the Stockholders Agreement, $500,000 in cash or cash equivalents was
placed in a separate account with any withdrawal from such account requiring the
signatures of each of Mr. Brokaw and a representative from the Feldman Group.
The balance of such account will be reduced to $300,000 on December 31, 1997. In
connection with the Reincorporation, the Stockholders Agreement was amended to
replace CineMasters with the Company.

Transactions with GP Strategies Corporation. In connection with the
Business Combination, GP Strategies made a capital contribution valued at
$815,000 to the Company in the form of registered shares of GP Strategies common
stock in exchange for 407,500 shares of the Company's Common Stock. In August
1996, certain directors, affiliates and employees of GP Strategies contributed
an aggregate of $185,000 in cash to the capital of the Company in exchange for
an aggregate of 123,338 shares of restricted Common Stock of the Company in a
private placement transaction. The Chairman of the Company and Jerome I.
Feldman, the President and Chief Executive Officer of GP Strategies are
brothers. Michael Feldman is the son of Jerome Feldman.

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 Wombat Division 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.

Transactions with Pryor, Cashman, Sherman & Flynn. As consideration for
legal services rendered in connection with the Business Combination, Pryor,
Cashman, Sherman & Flynn was paid approximately $75,000 in legal fees in 1996
and approximately $55,000 in legal fees in 1997. As additional consideration for
such legal services, the Company issued 25,000 shares of the Company's Common
Stock to the firm. Mr. Janowitz, a director of the Company, is a senior partner
at Pryor, Cashman, Sherman & Flynn.

Other Transactions

Cary Brokaw, the President and Chief Executive Officer and a director
of the Company, had loans outstanding to the Company aggregating approximately
$110,000 (including accrued interest thereon) for the period April 15, 1997
through March 31, 1998. As of March 31, 1998, $81,204 of the loan was repaid and
$28,840 is currently outstanding.

<PAGE>

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.

(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.

10.4 Agreement, dated as of December 5, 1994, amended as of June 27, 1995
and as of October 1, 1996, between The CineMasters Group, Inc. and A&E
Television Networks. Incorporated herein by reference to Exhibit
10(b)(ii)(2) of the Company's Registration Statement on Form 10-SB, as
amended, filed on April 9, 1997.

10.5 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.

10.6 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.

10.7 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.

<PAGE>

10.8 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.

10.9 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.

10.10 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.

10.11 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.

10.12 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.

10.13 Termination Agreement, With Accounts Receivable, dated July 3, 1996
among The CineMasters Group, Inc., Kaufman Films, Inc. and Kevin
Kaufman. Incorporated herein by reference to Exhibit 10(c)(vii) of the
Company's Registration Statement on Form 10-SB, as amended, filed on
April 9, 1997.

10.14 Letter Agreement, dated November 27, 1995, between CineMasters Group,
Inc. and Ehrenkrantz, King, Nussbaum, Inc. Incorporated herein by
reference to Exhibit 10(c)(viii) to Amendment No. 1 of the Company's
Registration Statement on Form SB-2/A1 filed on October 30, 1997.

10.15 Warrant, dated October 1, 1995, issued by CineMasters Group, Inc. to
Ehrenkrantz, King, Nussbaum, Inc. Incorporated herein by reference to
Exhibit 10(c)(ix) to Amendment No. 1 of the Company's Registration
Statement on Form SB-2/A1 filed on October 30, 1997.

21 Subsidiaries of the Company *

23 Consent of KPMG Peat Marwick LLP *

23.1 Consent of Israeloff, Trattner & Co., CPAs, P.C. *

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.

<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, 1998

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

Cary Brokaw President and Chief Executive Officer, Director

Sheri L. Halfon Director

Gene Feldman Chairman of the Board

Doug Rowan Director

James A. Janowitz Director

Ira J. Sobotko Principal Financial and Accounting Officer

Exhibit 21

Subsidiaries

Avenue Pictures, Inc.*

Wombat Productions, Inc.*

- -------
*100% owned

Exhibit 23

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Avenue Entertainment Group, Inc.

We consent to incorporation by reference in Registration Statement No. 333-37397
on Form SB-2 of Avenue Entertainment Group, Inc. of our report dated April 3,
1998 relating to the consolidated balance sheet of Avenue Entertainment Group,
Inc. as of December 31, 1997 and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1997 and the
five-month period ended December 31, 1996, which report appears in Form 10-KSB
for the year ended December 31, 1997 of Avenue Entertainment Group, Inc.

KPMG Peat Marwick LLP

New York, New York
April 14, 1998

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Avenue Entertainment Group, Inc.

We consent to incorporation by reference in Registration Statement No. 333-37397
on Form SB-2 of Avenue Entertainment Group, Inc. of our report dated October 10,
1996, except for note 9, which is as of October 28, 1996 relating to the
statements of operations, stockholders' equity and cash flows for the year ended
July 31, 1996, which report appears in Form 10-KSB for the year ended December
31, 1997 of Avenue Entertainment Group, Inc.

Israeloff, Trattner & Co., CPAs, P.C.

Valley Stream, New York
April 9, 1998

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