Unapix Entertainment, Inc. (the "Company") is primarily a world-wide distributor, licensor and producer of feature films and programming; it exploits multiple distribution channels, including all forms of television (including free and pay television, syndication, broadcast, cable and satellite), the home video market, including videocassette, laser discs and digital video disks ("DVD"), and the consumer market, including direct response and electronic commerce ("E-Commerce"). The Company's current "library" of films and programs includes feature films, non-fiction series, children's programming, educational and special interest programming, musical concerts, comedy shows, adventure series and classic films and serials (together with music videos and audio recordings, "Properties").

Since 1993 the Company has sought to exploit the increasing worldwide demand for television programming and feature films resulting from the fractionalization of the television viewing audience. A shift has occurred from mass audiences dominated by a few, free broadcast networks to niche audiences served by diverse cable, satellite and free television services, home videocassette and other products. This fragmentation has been augmented by technological developments including, most recently, the growth of the internet. The Company primarily focuses on the licensing and distribution of Properties that are designed to appeal to a specific segmented audience. However, during 1998 the Company expanded its development, production and distribution of Properties that it believes have broader appeal, such as reality-based television programming and fictional feature films designed for a relatively wide audience, such as family films. In addition, during 1998 the Company continued its exploitation of new technologies by marketing most of its Properties over its own E-Commerce web sites as well as approximately 30 E-Commerce web sites operated by others.

The Company's operations currently consist principally of the following: the distribution of feature films via videocassettes to domestic home video rental stores; the distribution of Properties from the Company's library to foreign broadcasters and home video publishers; the licensing of Properties to the North American television market; and the marketing of products that are intended to be purchased by consumers, including via sales to mass merchants and through catalogues and the internet.

The Company was incorporated in Delaware on January 7, 1993 and is the successor to Majestic Entertainment, Inc., which was incorporated in California on January 6, 1986 and which was merged into the Company on March 23, 1993.

ACQUISITION OF FEATURE FILMS AND TELEVISION PROGRAMMING

The Company continuously monitors the industry for available films and television programming and attempts to acquire rights to such Properties which it believes are saleable to various markets. Before acquiring the rights to a specific film or program, the Company analyzes its viability for licensing or distribution in light of its projected costs and revenues and attempts to target the Property's audience appeal. The Company includes in its calculation the degree to which it will be able to exploit the Property through its various distribution channels. In determining the desirability of acquiring rights to films or television programs, the Company examines their content, genre, quality, theme, participating talent (e.g., actors and directors), plot, format and other criteria to determine the Properties' suitability for the commercial broadcast, cable, satellite, pay television and home video markets. In acquiring finished films or programming, management typically views a program or film in its entirety to evaluate its commercial viability.

In order to obtain licensing or distribution rights with respect to films or television programs, the Company generally enters into a licensing or distribution arrangement with the copyright holder or an assignee of rights from the copyright holder. The Company's rights generally cover all media, but in certain instances may be limited to specific media (e.g., broadcast television, cable or home video). The rights also may be limited to particular geographic areas. Most of the Company's domestic distribution rights to feature films that it has acquired during the last year, have terms ranging from 15 years to perpetuity. The Company's distribution rights with respect to television programming are often of shorter duration. In acquiring rights, the Company usually pays a non-refundable advance and/or commits to expend a certain amount of funds on marketing. In some cases, the producer or distributor licensing the Property to the Company is entitled to receive the revenues from the Company's distribution activities, after the Company has been paid a specified distribution fee (which is a percentage of revenues) as well as recouped its advance and specific recoupable marketing and other distribution expenses. In other cases, the Company will agree to pay the licensor a royalty equal to a specific percentage of revenues; after the Company has recouped its advance, it will then pay the licensor its royalty and the Company will be entitled to retain all remaining revenues. The Company usually charges interest on its advances, which, similar to the principal of the advances, is payable only out of royalties or participations otherwise payable to the licensor.

While the majority of the films and television programs that the Company acquired for distribution during 1998 were produced by others and had been completed at the time the Company acquired rights therein, the Company has increasingly been acquiring distribution rights in films and television programs by funding a portion of their production, or in certain instances, by funding all of their production. In exchange for such funding, the Company

may acquire, in addition to its distribution rights, an ownership interest in the Property entitling it to a percentage of profits from any distribution thereof (whether or not effectuated by the Company). Funding productions often enables the Company to acquire distribution rights of longer duration than it might otherwise have been able to obtain. In consideration for its involvement in a production, the Company may also receive an Executive Producer's fee. Because production arrangements necessarily entail unfinished programs, the Company is not able to view the program prior to acquiring its rights, and therefore, there is the risk that the finished product may be different from that which was initially envisioned. The Company assigns executives to monitor the production, in an effort to reduce such risk.

Production costs include the costs of acquiring or developing a screenplay, film studio rental, cinematography, post-production and the compensation of creative and other production personnel. Major studios (such as Universal Pictures, Warner Brothers, Twentieth Century Fox, Sony Pictures Entertainment, Paramount Pictures, and The Walt Disney Company) generally fund production costs from cash flow from their motion picture and related activities or, in some cases, from unrelated businesses. Independent production companies generally avoid incurring substantial overhead costs by hiring creative and other production personnel and retaining the other elements required for pre-production, principal photography and post-production activities on a project-by-project basis. Independent production companies often arrange for financing on a project by project basis.

After acquiring rights in a feature film or television program prior to production, the Company typically, at a minimum, has approval rights over key product elements and maintains a production supervisory staff to carefully monitor production and maintain quality control. In connection with acquiring rights in television programming prior to production, the Company has often acted as an independent production company, retaining the personnel and other elements required for production, and frequently developing concepts for programs as well.

Since 1996 the Company has developed and produced documentary and educational non-fiction programming. A recent program developed by the Company, which is being co-produced by the Company together with Story Street Productions and Films 2 People, is a two part, two-hour documentary, "Nelson Mandela", that is scheduled to be broadcast on the Public Broadcasting System's "Frontline" series in May 1999.

During the second quarter of 1998, the Company expanded its television programming production operation to include the development (for domestic and international markets) of reality based and creative television programming that is principally designed to have a mass audience appeal. During February 1999 the first such production by the Company, "Shocking Behavior: Caught on Tape," was broadcast domestically on the Fox network. The program was the second most watched television show in its time slot,

earning a 10 rating and a 15 share of television viewers nationwide.

To date, the Company has sought to limit its risk with respect to the production of both television series and film. In connection with the production of television series or programs, the Company generally limits its initial funding to the creation of print materials or the production of a short demo film. Additional financing of production by the Company is then conditioned upon attaining a significant level of pre-sales of the series or program based upon the demo film or print materials. Pre-sales consist of license fees paid or committed to be paid to the producer by third parties in return for the right to exhibit the program or to distribute it in home video, television or ancillary markets in certain negotiated territories. While pre-selling a series reduces the Company's risk, it does not entirely eliminate the risks to the Company, which include the following: failure to complete the production and deliver the programs in which case the Company will either not be entitled to be paid by the licensee to whom it pre-sold the programs or may have to reimburse amounts already paid; a delay in completing production as to some or all of the episodes comprising a series, which would result in the Company's not being paid according to schedule by the licensee to whom it pre-sold the series and could result in cancellation of the sale; and actual production costs significantly exceeding the original production budget, thereby materially increasing the Company's cash flow requirements and decreasing the ultimate profitability of the series. When a television program has a well-defined television or home video audience and entails relatively limited production costs, the Company has funded its entire production without pre-selling the series. During 1998 the Company completed production of approximately 50 hours of television programming.

In connection with the financing of the production of a feature film, the Company generally commits to provide an amount of funding that, when added to other financial commitments the producer already has received, equals the production budget. In most cases, the Company makes only limited commitments to advance funds prior to completion of principal photography, when the bulk of production costs has already been incurred. In addition, in most instances when the Company provides production financing of a feature film the producer obtains a completion bond that guarantees delivery of a finished film. In the future, the Company anticipates that it will, in some instances, act as the lead producer on feature films by developing projects and hiring creative and other production personnel. One such project that the Company is developing with a planed release for the year 2000 is "The Texas Chainsaw Massacre - 25th Anniversary." In such cases, the Company anticipates that it will not proceed to principal photography unless it has obtained a significant level of pre-sales. In 1998 the Company co-financed the production of 10 films, and it plans to co-finance the production of 12 films during 1999.

There is no assurance that in the future the Company will not change its conditions for providing production financing for feature films or television programs.

The Company believes that through production financing it can acquire distribution rights to higher quality films and programs with better production values and more recognizable stars, as well as on more favorable terms, than can be obtained after a Property is completed.

To enhance the Company's position in a dynamic marketplace, given the financial terms and available rights, the Company seeks to acquire distribution rights in as many media and territories with respect to films and television programs as is practicable. This permits a single Property to be marketed by more than one of the Company's divisions and subsidiaries and has permitted the Company to exploit new technological developments such as DVD.

VIDEOCASSETTE DISTRIBUTION OF FEATURE FILMS TO HOME VIDEO RENTAL STORES IN THE UNITED STATES

The Company, through A-Pix Entertainment("A-Pix"), is engaged in the promotion and distribution of feature films for the home video rental market in the United States, primarily consisting of video rental chains, individual video rental stores, and supermarkets.

The Company commenced distributing videocassettes to the home video rental market in 1994, releasing a total of 22 films during that year. During 1995, 1996 and 1997 the Company released a total of 23, 24 and 25 films, respectively. The Company released 27 films in 1998 and expects to release 29 films in 1999. Most of the films distributed by the Company in this market to date have been films that were released directly to the video rental market without any prior exhibition in theaters or without a premiere on cable or broadcast television.

The market for home videos has become increasingly competitive and video rental outlets are becoming more selective in their choice of product. In addition, overall growth in the domestic home video market has slowed as growth in the number of new outlets and new VCR homes has moderated. The growth in outlets designed to serve the rental market has remained essentially flat or has actually declined for the past several years. Furthermore technological developments could make competing delivery systems economically viable and could affect the home video marketplace. This has resulted in a significant decrease in the number of A-Pix's competitors.

The Company has been reacting to this evolving market by seeking to acquire (i) increasingly higher quality films with more recognizable stars and better production values and (ii) all domestic distribution rights, which enables the Company's other divisions to exploit new evolving technologies as well as presently

existing distribution channels such as the following: pay-per-view, which allows cable television and satellite service subscribers to purchase individual programs; pay television, which allows cable television subscribers to view premium channels such as HBO/Cinemax and Showtime/The Movie Channel; and broadcast and basic cable television delivery systems, which allow viewers to receive, without charge, programming broadcast over the air by affiliates of the major networks (ABC, CBS, NBC and Fox), newly formed networks (UPN and WB Network), independent television stations and cable and satellite networks and stations.

Approximately 50% of the Company's films distributed to the domestic home video rental market during 1998 were also licensed by the Company for exhibition on pay-per-view and pay and basic cable television. In most instances, such licenses were for exhibition after the release of the film to the home video rental market. However, during 1998 two of the Company's films that were released to the rental market also premiered on pay television. The Films "Devil in the Flesh" (starring Rose McGowan) and "Bram Stoker's The Mummy" (starring Louis Gossett, Jr.), both of which were co- produced by the Company, premiered on HBO. During 1998 the Company also released one film to the theatrical market; the film was promoted and exhibited in a select group of cities. As the Company acquires or produces higher quality films, it anticipates that the proportion of the films that it releases to the home video rental market which have previously been released to the theatrical market or premiered on cable or broadcast television will increase; albeit, there can be no assurance that this will, in fact, be the case.

Almost all feature films released by A-Pix are subsequently distributed by the Company to the consumer market. Certain films that were previously released by A-Pix have been, and all of its current films are, reformatted on DVD for distribution for purchase by consumers.

Notable films that have recently been released by A-Pix or are scheduled to be released by it within the next 12 months include the following:

The family films: "Invisible Dad"; and "Boys will be Boys" (starring Randy Travis, Julie Hagerty and Jon Voight);

The horror films: "Uncle Sam" (starring Robert Forster and Isaac Hayes); "Bleeders" (starring Rutger Hauer); and "Jack Frost";

"Jane Doe" (starring Calista Flockhart), which won grand prize for best feature film at the New York Independent Film and Video Festival in February 1999. This film is slated for release in 1999.

"A Merry War" (starring Helena Bonham Carter and Richard E. Grant); and

"Lies and Whispers" (starring Gina Gershon).

INTERNATIONAL OPERATIONS

The Company, through its division Unapix International, exploits rights to Properties in the international marketplace; marketing Properties to broadcasters and others in more than 100 countries.

The Company's international library contains documentaries and television series. Its library also contains films in the drama, adventure, comedy, horror, musical, war and western genres as well as music videos from Miramar. Many of the Company's acquisitions for international distribution have been exhibited domestically on PBS, the Disney, Discovery and A&E Channels as well as on The Learning Channel.

During 1994, the Company formed a unit to concentrate on international television distribution of educational programming. Currently, the unit has over 350 hours of telecourse programming in diverse areas, such as science, humanities, business, sociology, child development and art.

Notable Properties that the Company distributes in the international marketplace include the following: "Nova's Century of Discovery" (a series consisting of five two-hour programs that explores 100 years of monumental achievements in a variety of scientific fields); "Banana Zoo" (a series consisting of 26 half- hour programs that is designed to foster a child's love for nature and animals); "Medical Detectives" (a series consisting of 52 half- hour programs which is a non-fiction crime solving series that airs domestically on The Learning Channel); "Too Extreme" (a series consisting of four one-hour programs featuring human behavior taken to the limit); and "Out of Control" (a series consisting of three one-hour programs focusing on people, vehicles and mother nature running amok).

NORTH AMERICAN TELEVISION LICENSING

The Company licenses the Company's feature films and television programs to domestic and Canadian television networks, independent television stations, satellite networks and cable system operators. The Company also acts as a sales agent for other distributors or producers with respect to the licensing of their programs in these markets, for which the Company receives a sales commission. The Company's licensing activities to the domestic television market are conducted by the Company's division, Unapix Program Enterprises ("UPE"), and its majority-owned subsidiary Unapix Syndication, Inc. ("Unapix Syndication").

UPE licenses Properties primarily for exhibition on pay-per view, pay television and basic cable channels. Customers have included the following: HBO; Showtime; The Sundance Channel; Encore; Disney Channel; Lifetime; USA Network; TNT; Comedy Central; The Discovery Channel; The History Channel; American Movie Classics; F/X; The Family Channel; The Learning Channel ("TLC"); Animal Planet; and CNBC. In addition to the feature films

distributed to the domestic home video rental market, notable Properties that UPE has licensed in the North American television market include the following: "Ushuaia: Adventures of Nicolas Hulot" (a series consisting of 26 one-hour episodes of a television series that had been broadcast in France for many years. The series began broadcast on CNBC in January 1998); and "Superstructures" (a series consisting of ten one-hour programs featuring episodes on such subjects as the following: Nuclear Submarines, Tunnels, Skyscrapers, the Panama Canal and an oil rig off the coast of Nova Scotia. The series has been broadcast on TLC).

The Company commenced its syndication operations in the fourth quarter of 1998 in order to distribute, to individual domestic television broadcasters, the Company's Properties as well as first-run series and specials produced directly for syndication and off-network syndication strips (in which shows originally produced for weekly broadcast on a network are aired five days a week). Unapix Syndication licenses Properties for domestic national or regional broadcast on a television station by station basis (including television station groups).

In addition to the operations of UPE and Unapix Syndication, in the second quarter of 1998, the Company began to focus on developing and producing specials for broadcast on domestic television networks. The Company develops the ideas for the specials then attempts to obtain production financing from the networks. During February 1999 the Company's first such production, "Shocking Behavior: Caught on Tape," a one-hour special, was broadcast domestically on the Fox network.

CONSUMER PRODUCTS

The Company, through its wholly-owned subsidiaries, Miramar Images, Inc. ("Miramar"), currently doing business under the name Unapix Home Entertainment, and Unapix Direct Media, Inc. ("Unapix Direct Media"), conducts "sell-through" operations, marketing products that are intended to be purchased by consumers. Products marketed by the Company for consumer purchase primarily consist of feature films, television series and special interest programs on videocassettes and DVDs. Typical suggested retail prices for videocassettes to be marketed as sell-through range from $9.95 to $19.95 per program; suggested retail prices on DVDs range from $14.98 to $29.98 per program. At such prices it is believed that the product becomes attractive for consumer purchase.

A portion of the Company's sell-through operations is conducted under the name "Inner Dimension." Inner Dimension currently distributes home videos and audio books, which explore the dynamics of the human mind or body or metaphysics, to retailers, mail-order companies, mass merchants and distributors. Many of the products marketed under the Inner-Dimension label are sold at General Nutrition Centers and other health stores. Programs distributed by Inner Dimension include PBS specials such as the following: Andrew Weil's "Eight Weeks to Optimum Health" and "Spontaneous Healing;" Caroline Myss' "Three Levels of Power and

How to Use them" and "Why People Don't Heal and How They Can;" Deepak Chopra's "The Seven Spiritual Laws of Success" and "The Way of the Wizard;" and Joseph Campbell's "Mythos," hosted by Susan Sarandon, which explores the world's most enduring archetypes.

In addition to the Inner Dimension operations, the Company also distributes for consumer purchase films and programs licensed and distributed by the Company in other markets as well as Properties acquired by the Company solely for sell-through distribution. An example of a Property acquired solely for the sell-through market is Lifetime's "Intimate Portrait" series (each episode of which presents biographies of women from the diverse worlds of art, entertainment, politics, business and sports) which the Company began distributing in 1998. The Company currently markets to consumers approximately two titles per month that were previously released to the home video rental market by A-Pix; marketing for sell-through typically commences approximately nine months after the initial rental market release. The Company currently operates three direct mail catalogues, consisting of:

"Inner Dimension," which offers programs distributed by the Company as well as programs and products purchased wholesale from other vendors, all of which are focused on healthy living;

"The Jazz Store," which features collections of jazz recordings, videos, T-Shirts, books and collectibles and which is operated through the Company's 90% owned subsidiary The Jazz Store, Inc. ("The Jazz Store"). Most of the products distributed through The Jazz Store catalogue are acquired whole-sale from third party vendors, but certain of the products are The Jazz Store's own proprietary items; and

"The Entertainer," which offers video cassettes and DVD's, of the Company's Properties and programs and products purchased wholesale from third party vendors.

During 1998 the Company launched a number of E-Commerce web- sites. These sites are in addition to The Jazz Store web-site (WWW.THEJAZZSTORE.COM),(which offers substantially the same merchandise as the Jazz Store catalogue), that has been operated by The Jazz Store since 1995. The new E-Commerce sites consist of the following:

The Horror Shop (WWW.THEHORRORSHOP.COM), which offers genre videos and related merchandise to horror fans;

Direct Response Television (WWW.REPLYTV.COM), which allows television viewers to quickly and easily purchase Company programs;

Inner Dimension (WWW.INNERDIMENSIONS.COM), which features the same products as the catalogue by the same name; and

The Digital Entertainment Catalog (WWW.DVDENT.COM), which offers Company titles on DVD.

The Company operates a number of other web-sites that serve, via links on such sites, as conduits for its E-Commerce web-sites. An example of such a web-site is Horrormovies.com, which the Company acquired in 1998; this web-site has chat rooms and articles related to the horror genre and serves as an important link to the Company's E-Commerce site the horror shop.com. In addition, the Company markets its products through approximately 30 E-Commerce sites operated by others, such as Amazon.com.

MARKETING OF FEATURE FILMS AND TELEVISION PROGRAMS

In acquiring the rights to various film and television Properties, the Company analyzes the viability of the Properties for distribution to the various marketplaces in an effort to target the Properties' audience appeal. After such analysis, the Company markets the Properties to the various media in a selective manner. The Company and its key personnel have established contact with many broadcasters, cable system operators and home video companies worldwide. The Company also presents certain of its films and television programs to foreign and domestic broadcasters, cable system operators and home video companies who are in attendance at the various international and domestic television programming conventions such as NATPE, MIP, MIP Asia, MIPCOM, DISCOP East Europe, the London Screenings, and the Los Angeles Screenings. In addition, with respect to certain of its non-fiction programming, i.e. to date its "Great Minds" series, the Company has entered into arrangements with print publishers to both promote the series and give the series greater prominence, such as Forbes for "Great Minds of Business," and American Heritage magazine for "Great Minds of American History."

In connection with its distribution of films and television programming to the international marketplace and its licensing of such Properties to the North American television market, the Company licenses Properties for exhibition primarily via pay, basic cable, pay-per-view and broadcast television, and, in the case of international distribution, also via home video publishers. The Company enters into license agreements with ultimate exhibitors, i.e., television networks, television stations and cable and satellite systems operators, as well as sub-distributors. The Company does not, with some minor exceptions, directly distribute videocassettes internationally, rather, its licenses videocassette distribution rights to sub-distributors. The Company also licenses feature films and television programs or series for distribution on DVD.

The Company's license agreement with a customer typically grants the customer an exclusive license to either exhibit or distribute a specific film or television program for a specified term, territory and medium, and in the case of a license to a pay television channel or a broadcast or cable television operator, the right to exhibit the Property for a specified number of times.

Upon the execution of the license agreement, the Company typically delivers a copy of the master of the film or television program in a format appropriate to the customer's needs. In consideration for the granting of the license to a specific film or television program, the Company receives a licensing fee, which, in the case of a license granted to a distributor or a pay-per-view television exhibitor, is a percentage of revenues from the licensee's distribution or exhibition of the Property and may include an advance of the fee which is then recoupable from what otherwise would have been payable to the Company. In the case of a license granted directly by the Company to a broadcast network or station or pay or basic cable television operator, the Company usually receives a set license fee that is not dependent upon the amount of revenue achieved by the channel, network or operator from the exhibition of the licensed Property. In certain cases Unapix Syndication will enter into barter arrangements where the license fee it receives from a television station consists of advertising time; the Company then sells that time to advertisers.

The Company distributes videocassettes of feature films to the domestic home video rental market primarily by selling them to nine wholesale distributors, who then sell the videocassettes to rental outlets, such as video rental chains, individual video rental stores, and supermarkets. The Company also sells videocassettes directly to Blockbuster Entertainment and Hollywood Entertainment. During 1998, an aggregate of approximately 27% of the Company's total revenues on a consolidated basis arose from sales to Discovery Channel Inc. and its affiliates, Blockbuster Entertainment and Ingram Entertainment. The Company currently sub- licenses laser disc and DVD rights to other domestic and Canadian distributors, who directly or indirectly, sell the laser discs and DVDs to retail outlets.

The Company selects an average of approximately two feature films for release each month to the United States home video rental market. Approximately sixteen weeks prior to a video's retail release, the Company embarks on a marketing campaign that includes advertising in distributor mailers and trade publications and direct mailing of marketing literature and screening copies of the video. The Company sells videocassettes to the United States home video rental market primarily on a "pre-order" basis. Distributors who meet certain sales and performance objectives may earn rebates, return credits and cooperative advertising allowances.

The Company believes that the packaging and art work for the video boxes, posters, advertisements and other selling materials relating to the films it distributes to the United States home video rental market are key factors in determining the amount of sales. The Company believes that it was one of the first distributors to utilize several new techniques of video box designs including the use of 3-D graphics and "moving" images, along with multiple box designs for the same films. The Company designs the promotional campaign for each such Property it releases. While some of the art works for packaging, advertisements, trade show displays and posters are created entirely in-house, the Company

usually commissions outside parties to assist in the art work for these materials. The Company then arranges for the printing, production and distribution of all promotional materials.

Most of the feature films the Company distributes to the domestic home video rental marketplace are released directly to that market. From 1995 to 1998, the Company had not engaged in theatrical distribution, albeit, during such period, it had distributed films that were released by others theatrically. As the Company has been acquiring rights in feature films earlier in their production stages, the Company has been seeking to acquire all rights in the United States, including theatrical distribution rights. Because the production quality of these films as well as the caliber of their stars has been improving, the Company intends to increasingly exploit the theatrical rights it acquires by either sub-licensing such rights to domestic theatrical distributors or engaging in theatrical distribution itself. Theatrical distribution of a film involves the manufacture of release prints, the promotion of the picture through advertising and publicity campaigns and the licensing of the motion picture to theatrical exhibitors. The size of the promotional advertising campaign can materially affect the revenues realized from the theatrical release of a motion picture. During 1998 the Company theatrically released one film on a platform basis. In a platform release, a film is exhibited in theatres in one or two cities where the film is promoted; if the release is successful in those cities, then it is released in other cities.

Films that are first released theatrically are generally released to the home video rental market four to six months after the theatrical release. Films that are first exhibited on cable television are generally released to the home video rental market two to three months after the television premiere.

It is expected that in the future a greater percentage of the films the Company releases for the home video rental market will first be released theatrically or premiere on cable television. During 1998 two of the films that A-Pix released to the home video rental market first premiered on pay television. The Company believes that a theatrical release or pay cable premiere of a film should complement its home video release by generating greater interest and awareness of the film before it is marketed for home videos.

The Company markets films and television programs that are intended to be purchased by consumers by the following means: (i) selling to distributors and "rack-jobbers" who then sell the products to large retail outlets (such as "Best Buy," "Music Land" and "Tower Records"), convenience stores (such as "Seven Eleven") or mass merchants (such as "Sam's Club"), or otherwise market the products via shelf space they occupy at these locations, for resale to the ultimate consumer, (ii) direct response advertisements appearing on the Company's videocassettes and at the end of

broadcasts of some of the Company's programs, and (iii) sales to specialty retail outlets (such as governmental agencies, gift stores, libraries, museums, Radio Shack, The Nature Company, The Sharper Image and General Nutrition Centers). In addition, the Company markets Properties directly to consumers through their inclusion in catalogues operated by the Company and others, and through web-sites operated by the Company and others. All of the Company's E-Commerce web-sites are cross-promoted via direct advertising, web addresses on telecasts of Company programs, in Company mail-order catalogues, customer response cards included with Company product, the use of trailers on the Company's videos and via links to other Web sites operated by the Company. The Company's E-Commerce sites themselves cross-promote the Company's other products; as an example, thehorrorshop.com may contain promotion for an upcoming horror video release by A-Pix.

MUSIC VIDEOS AND AUDIO TAPES AND COMPACT DISCS - MIRAMAR IMAGES, INC.

The Company, through Miramar Images, Inc. ("Miramar"), which was acquired by the Company in 1997, produces and distributes music videos and audio recordings primarily for the New Adult Contemporary market, i.e., products that are designed to appeal to individuals over the age of 25. Miramar's videos are primarily long form music videos that match visual images with music rather than attempting to tell a story. Miramar commenced operations in 1985 and was known primarily as a "New Age" label. Early Miramar productions included "Natural States," "Desert Vision," and "Canyon Dreams." During the 1990's Miramar progressed from merely being a "New Age" label and began producing videos that utilize a computer animated medium rather than traditional cinematography, such as "The Mind's Eye," "Beyond the Mind's Eye" and "The Gate to the Mind's Eye." In 1999, Miramar's music video "Televoid" was nominated for a Grammy Award for Best Long Form Video. Miramar markets the soundtracks to a number of its videos separately as audio products. In addition, Miramar's record division produces and markets audio albums independent of videos. Artists who have recorded on the Miramar label include the following: Tangerine Dream; Pete Bardens; Jan Hammer; Thomas Dolby; Abraxas Pool; and Roger Smith. Audio only albums that have been released by Miramar include: "Drive;" "220 Volt Live;" "Both Sides;" and "Tyranny of Beauty." While most of Miramar's products are marketed to adults, Miramar has a children's line of videos, examples of which are "Gift of the Whales," "Imaginaria," and "Elroy's Toy."

Recordings are primarily obtained from artists and their agents who approach Miramar seeking a distribution label. In almost all cases, the music has been recorded on a relatively high quality master when it is presented to Miramar. Miramar may re-sequence and remix the master, however, rarely will it arrange for a record to be produced by an artist in a recording studio.

Most recordings are acquired by Miramar's purchasing the master. Such master purchase arrangements usually enable Miramar to have distribution rights in all media and territories in perpetuity to the recordings thereon. The artist is usually prohibited from rerecording the music on the master for a period of three to seven years. To a lesser extent, Miramar may acquire recordings by obtaining the exclusive right to distribute the recordings on audio tapes and compact discs, and where applicable, use the recordings in conjunction with videos. The license will usually be limited to a certain time period and territory. In acquiring distribution rights to recordings under either master purchase arrangements or license agreements, Miramar usually pays a small royalty advance as well as royalties based upon net sales. In some instances Miramar may sign an exclusive recording agreement with a particular musician or musical group, whereby Miramar agrees to acquire the recording that has already been presented to Miramar by the musician or musical group and has the option to acquire the next subsequent recordings at an agreed upon fee structure.

Miramar distributes its products to both the "traditional retail marketplace," such as retail record and video stores and chain bookstores, as well as specialty retail outlets (alternative markets), such as governmental agencies, gift stores, libraries, museums, Radio Shack and The Sharper Image. In January, 1998 Miramar entered into a distribution agreement with Distribution North America ("DNA"), a division of Valley Media, Inc., for distributing its music videocassettes and audio compact discs and tapes in the "traditional retail marketplace" in United States, which is the principal territory in which Miramar's products are sold. The distribution agreement with DNA expires in January 2001. Miramar maintains an in-house sales department that promotes and markets its products particularly targeting the alternative market; it also utilizes radio air play, television exposure, retail promotion, and publicity and advertising to create demand within both the traditional and alternative markets. Miramar from time to time has licensed its videos for exhibition on PBS and the Disney Channel. It also markets its products through direct response television advertisements and direct mail, including through catalogues operated by the Company and others, and the Company's Web sites.

FOREIGN SALES

Revenues derived by the Company from foreign markets were $6,313,000 and $6,358,000, in the years ended December 31, 1998 and 1997, respectively. The Company is subject to various risks inherent in foreign trade which could have a significant impact on the Company's ability to market its Properties competitively. These risks include economic or political instability and artificial ceilings placed on the demand for the Company's Properties in foreign markets by foreign government's implementation of local content and quota requirements prohibiting or limiting the quantity of foreign-made feature films and

television programs which may be exhibited or broadcast in one or more foreign countries.

GOVERNMENT AND OTHER REGULATION

United States television stations and networks as well as foreign governments impose restrictions on the content of motion pictures which may restrict in whole or in part exhibition on television or in a particular territory. There can be no assurance, therefore, that current or future restrictions on the content of the Company's films, may not limit or affect the Company's ability to exhibit certain of such motion pictures in such media or markets.

EMPLOYEES

Currently the Company and its subsidiaries, have 91 employees, three of which are part-time.

COMPETITION

Success in the distribution of films, television programming and audio compact discs and tapes is largely dependent upon a company's ability to acquire distribution rights to products at attractive prices and upon the subsequent performance of these products in the marketplace. The Company faces significant competition both in obtaining distribution rights and in selling products.

Competition for distribution rights to films, television programs and recordings is based primarily on the amount of royalty advances that companies are willing to offer to producers and recording artists and the producers' and artists' perception of the Company's marketing capabilities and its commitment to marketing the property. The Company's principal competitors for acquisitions of films and television programs are companies such as New Line Cinema, Artisan Home Entertainment, Trimark Entertainment, Columbia Tristar Home Video, BMG Entertainment, Pearson Television, Winstar Home Entertainment and Tapestry International. The Company's principal competitors for recordings are Windham Hill, Private Music, and Narada Media; however, to the Company's knowledge, Private Music and Narada Media do not produce or distribute long form music videos to any significant extent. Many of the Company's competitors have significantly greater financial resources and longer operating histories than the Company. In general, the Company acquires films, television programming, videos and recordings that are designed to appeal to a specific niche audience, and which can be promoted with a limited advertising budget. Many of the films and television programs the Company acquires may appeal to such a targeted audience that competitors who are financially stronger than the Company may not actively pursue them, and the competitors that do seek to acquire distribution rights in them may be financially

weaker than the Company, do not have as good a marketing reputation, or are unable to exploit the films or programs in as many markets as the Company (i.e. domestic television, domestic home video rental, consumer or international markets). The Company also believes that it is able to compete against larger companies because it can react to trends in the entertainment industry and public tastes more quickly than such competitors since it lacks the more elaborate bureaucracies that often characterize larger organizations. Most of the recordings that Miramar seeks to acquire are not pursued by major record labels because of their limited appeal. The Company believes that Miramar can compete against other smaller record labels for acquisitions of recordings because of Miramar's reputation in the industry.

In marketing films, television programs, recordings and music videos, the Company competes against the same competitors with whom it competes for the acquisition of such products, as well as major studios and record companies, such as Time/Warner, The Walt Disney Company, MCA, Paramount, Fox, Sony/Columbia, and Geffen Records. Since the Company expends significantly less on product acquisitions than many of these competitors it believes it can produce profits from even modest sales volume.

SERVICEMARKS AND TRADEMARKS

The Company has registered the following trademarks or service marks with the United States Patent and Trademark Office: "UNAPIX;" "MIRAMAR PRODUCTIONS;" A-PIX;" "INNER DIMENSION;" "UNAPIX FILMS;" and "The HORROR SHOP." The Company has applied for federal registration of the following trademarks or service marks: "UNAPIX CONSUMER PRODUCTS;" "THE JAZZ STORE;" "GREAT MINDS OF ,;" "DOCERE;" and related logo treatments and designs.

FACTORS WHICH MAY AFFECT RESULTS

THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS MAY CONSIST OF ANY STATEMENT OTHER THAN A RECITATION OF HISTORICAL FACT AND CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "EXPECT," "ESTIMATE," "ANTICIPATE," "MAY," "BELIEVE," OR "CONTINUE" OR THE NEGATIVE THEREOF AND SIMILAR EXPRESSIONS AND VARIATIONS THEREOF. THE READER IS CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS ARE NECESSARILY SPECULATIVE AND THAT THERE ARE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE REFERRED TO IN SUCH FORWARD-LOOKING STATEMENTS. CERTAIN OF THOSE RISKS AND UNCERTAINTIES ARE SET FORTH BELOW. HOWEVER, THE RISKS HIGHLIGHTED BELOW AND ELSEWHERE IN THIS ANNUAL REPORT SHOULD NOT BE ASSUMED TO BE THE ONLY THINGS THAT COULD AFFECT THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY DOES NOT HAVE A POLICY OF UPDATING OR REVISING FORWARD-LOOKING STATEMENTS AND THUS IT SHOULD NOT BE ASSUMED THAT SILENCE BY THE

COMPANY'S MANAGEMENT OVER TIME MEANS THAT ACTUAL EVENTS ARE BEARING OUT AS ESTIMATED IN SUCH FORWARD-LOOKING STATEMENTS.

NATURE OF THE ENTERTAINMENT INDUSTRY - The film, television programming and audio compact disc and tape distribution business involves a substantial degree of risk. The success of a product depends upon unpredictable and changing factors such as competition and audience acceptance, which may bear little or no correlation to the Company's production and other costs. Audience acceptance of the Company's products represents a response not only to the artistic components of the products, but also to the level of advertising and promotion by the distributor and availability of alternative forms of entertainment and leisure time activities, general economic conditions and public taste, and other intangible factors, all of which change rapidly and cannot be predicted with certainty. In addition, as a result of the Company increasing its resources to film and television product earlier in its production and acquisition stages, the possibility always exists that the finished product may be different from that which was initially envisioned. Therefore, there is a substantial risk that some or all of the Company's products may not be commercially successful, resulting in costs not being recouped or anticipated profits not being realized.

CAPITAL INTENSIVE INDUSTRY; ADDITIONAL FINANCING REQUIREMENTS - The film, television programming and audio compact disc and tape distribution and licensing industry is capital intensive and requires significant expenditures of funds to establish a library of Properties from which revenues may be generated. The Company could be dependent upon future financing in order to compete more effectively in the marketplace. The Company's cash requirements have been and will continue to be significant. If additional funding is unavailable to the Company when needed, the Company could be required to curtail significantly one or more aspects of its operations and the Company's business and financial condition could be materially adversely affected.

DEPENDENCE UPON KEY PERSONNEL - The Company is highly dependent on the services of Herbert M. Pearlman, its Chairman of the Board and Chief Executive Officer, Scott Hanock, Co-President of the Company and Managing Director of International Sales and Marketing, and Robert Baruc, Co-President of the Company and President of A-Pix. The loss of the services of one or more of Messrs. Pearlman, Hanock or Baruc could have a material adverse effect upon the Company's business. Presently, the Company has key man life insurance on the life of Mr. Baruc in the amount of $750,000.

INCOME FORECAST; BASIS OF PRINCIPAL ASSETS; POSSIBLE FLUCTUATION IN OPERATING RESULTS - Included in the Company's assets at December 31, 1999 are unamortized film costs of $36,525,000 which include costs incurred for the production, acquisition and distribution of its Properties and other rights acquired from third parties. Amortization of these costs is based on the "individual film

forecast method" of accounting. This method, which is prescribed by generally accepted accounting principles and is standard practice in the entertainment industry, requires management to project future revenues to be generated by the Company's Properties and to amortize the costs of the Properties based on the percentage that revenue recognized bears to total projected revenues. There can be no assurance that management's projection of future revenues will be realized. Moreover, if the Company subsequently determines that future revenues will be less than originally projected, an adjustment would have to be made in the carrying value of deferred costs which could materially affect operating results reported in the period such adjustment is made. Accordingly, there may be significant fluctuation in quarterly financial results reported by the Company as a result of such adjustments.

COMPETITION - The Company currently competes with other distribution companies including many of which have longer-standing relationships in the industry, significantly greater financial resources and more extensive libraries than the Company. There can be no assurance that the Company will be able to compete successfully against these other companies.

SHIFT IN STRATEGY - Although members of management of the Company have prior experience in film and television program productions, the Company itself has a limited track record in such activities. The Company's shift in strategy toward an increased emphasis on motion picture production may increase the rewards available to the Company, but may increase the risks as well.