U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                                   (Mark One)

[X] Annual  Report under Section 13 or 15(d) of the  Securities  Exchange Act of
    1934 (Fee required)

         For the fiscal year ended: January 31, 1999

[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
    of 1934 (No fee required)

For the transition period from ___________ to ___________.

Commission file number:             0-22638

                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)
              (Exact name of Small Business Issuer in Its charter)


New Jersey                                  22-3219281

(State or other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)

22 Meridian Road, Eatontown New Jersey      07724
 (Address of Principal Executive Offices)   (Zip Code)

Issuer's Telephone Number, Including
Area Code:                                  (732)-380-0991

Securities registered under
section 12(b) of the Act:                   None

Securities registered under
section 12(g) of the Act:                   Common Stock, $.01 Par Value

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act 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 past 90 days.

YES        NO   X
   ------    ------

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B 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: $1,699,625

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the closing sale price of such stock,
as of November 1, 1999 is $6,292,175.

Check whether issuer has filed all documents and reports required to be filed by
Section 12, 13, 15(d) of the Exchange Act after the  distribution  of securities
under a plan confirmed by the Court. Yes    No  X .
                                        ----  ----

As of November 1, 1999, the Issuer had 2,516,870  shares of Common Stock, $.01
par value, outstanding.


<PAGE>


ITEM 1.  BUSINESS

Overview

The Company  changed  its focus in the prior  fiscal year ended June 27, 1998 to
concentrate on the specialty retail sale of bulk candy. Previously,  the Company
operated Starlog stores that included various science fiction and other products
under  licensed  names.  The Company will continue to offer such  merchandise as
part of its candy operation and not as a stand-alone business.

Effective July 9, 1998, the Company  instituted a 1-for-10  reverse stock split,
which  reduced  its  outstanding  shares  of common  stock  from  20,937,640  to
approximately   2,093,764   (including   rounding  up  of  fractional   shares).
Subsequently,  the  Company  issued  approximately  423,000  shares  pursuant to
private  placements.  Share  numbers have been  adjusted to reflect such reverse
stock split, unless stated to the contrary.

Candico

Candico,  Inc. is a retail candy company  currently  operating 13 stores trading
under the name Candy Candy! or Candico (the "Candico Stores").  Several of these
stores have been successfully operating for more than 10 years.

The typical Candico store is between 600 and 800 square feet and is located in a
high traffic enclosed shopping mall. The Candico stores create visual excitement
with an array of colorful  candy-filled towers. Candy is an impulse purchase and
this  bright  contemporary  look  creates a consumer  magnetism.  The stores are
professionally  designed and utilize  creative  lighting effects and proprietary
acrylic fixtures to create an upbeat buying  atmosphere.  In-store sound systems
with  continuous  programmed  music are also an  integral  part of the  formula.
Because  sales are  directly  proportional  to mall foot  traffic,  prime retail
locations are critical.

The Candico stores sell  approximately 300 bulk candy items displayed in acrylic
bins  designed to ensure  freshness and  cleanliness.  Bulk candy is sold with a
singular  pricing  strategy  at $7.76 per  pound in most  stores.  This  pricing
formula  enables the stores to enjoy a high gross margin targeted at almost 70%.
The  one-price  concept also allows the customer to randomly  shop the store and
fill his bag with a wide  variety  of his  favorite  candies,  promoting  higher
average sales per customer.

There is no typical  customer as the appeal of the Candico stores and product is
universal.  Children  and teens  comprise  the  largest  segment of the  stores'
customer  profile;  however,  adults of all ages  frequent  the  stores.  A wide
selection  of  sugar-free  candies  promotes  destination  shopping  for  health
conscious and diabetic customers.

In additon to the bulk candy items, the Candico stores stock  approximately  125
"count  goods"  (individual  wrapped  novelties  such  as  Pop  Rocks,  Pez  and
Warheads). The typical layout includes two fixtures selling hand-made, specialty
lollipops  (such as Mickey Mouse pops  selling for several  dollars  each),  two
fixtures  selling gift and seasonal  items,  and a checkout  counter  offering a
large display of non-sports gaming and trading cards.

The Candico  stores  average about 100,000  transactions a year with the average
transaction averaging approximately $3.50. The stores are open 7 days a week (72
hours). A typical store is staffed by a manager, a lead, full time sales person,
working  30 hours a week and  three  part time  workers  who,  among the  three,
average an additional 32 hours a week.  Additional  staffing is required  during
busy times such as Christmas and Easter. Generally,  there are two sales persons
at the store.  The cost of a Candico store can range from $50,000 - $175,000 for
lease improvements and equipment.  Initial  inventories  average between $12,000
and $15,000.

There  are  approximately  15 major  distributors  of bulk  candy  from whom the
Company can obtain product.  The Company  typically  concentrates  its purchases
between two suppliers to ensure good pricing.

Competition

The candy  industry is a multi  billion  dollar  industry with most retail sales
taking place in the mass markets.

                                      -1-

<PAGE>


Specialty candy retailing is very fragmented.  It is basically  divided into two
segments: specialty chocolates and bulk candies.

The  chocolate  retail  segment is very  regional with such names as See's (West
Coast) and Fannie Mae (Chicago, Philadelphia and Baltimore). Godiva Chocolatier,
a division of Campbell Soup, with its upscale  specialty  chocolates and elegant
packaging,  operates  a chain  of  company-owned  stores  located  primarily  in
regional  malls.  Escalating  occupancy  cost and wages have  rendered  the full
service chocolate business marginally profitable except in high traffic and high
volume locations.

The bulk  self-service  candy segment is even more fragmented than the chocolate
segment.   The  dominant   mall   retailer  of  bulk  candy  is  Sweet   Factory
(approximately 240 stores) headquartered in San Diego. Other active companies in
this field are Candy Express and Candy  Headquarters.  Candy  Barrel,  a similar
concept  headquartered in Reno, NV,  merchandises its product in wooden barrels,
rather than acrylic  bins and  consequently  sells only wrapped and  prepackaged
candies.

Plans for Expansion of Candico

The Company intends to expand its successful bulk candy operation and add to its
profitability   by  adding   selected,   fast-moving   items  from  its  science
fiction/fantasy/ memborabilia product line to the candy stores. The Company also
intends  to  develop  Candy  Carousels  which  will  involve  small,  relatively
inexpensive, easy to assemble and transport, candy kiosks. These 400 square foot
octagonal  "carousels"  will be  located  in  enclosed  shopping  malls  and are
designed to allow the Company to expand its  operations  at a far lower per site
cost than traditional stores.

On November 24, 1998, Candy Candy Acquisition  Corporation  ("CCAC") purchased 8
additional  candy stores which it  contracted  the Company to manage.  CCAC is a
whole owned subsidiary of Hope  Associates,  LLC which owns more than 50% of the
Company's common stock. Hope has granted the Company an option to purchase these
stores at its cost as well as an agreement to manage these stores.  In July 1999
one of these  stores  was  transferred  back to the  seller in  settlement  of a
dispute. (See ITEM 12. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below)

Goal Post

Goal  Post  Distributors,  Inc.  ("Goal  Post")  is an  international  wholesale
distributor  of sports,  comics,  science  fiction,  movie & television  trading
cards,  gaming  cards,  hobby  supplies,  collectibles  and other toys.  It also
produces a catalog that is mailed to over 8,500 accounts worldwide.

Goal Post was founded in 1991 to service the growing market of card, comics, and
collectibles  shops  and  small  to  medium  specialty  store  chains.   Rapidly
expanding,  first reaching $1,000,000 in annual sales in 1993, Goal Post grew to
service more than 4,000 existing customers and $5,000,000 in sales by 1996. Goal
Post was acquired by the Company at the end of June 1997.

Because the Goal Post Division was operating at a loss,  effective June 27, 1998
the  Company  sold the Goal  Post  business  and  related  assets  back to Kevin
VanderKelen,  who had originally  sold this business to the Company.  Under this
resale agreement, Mr. VanderKelen transferred back to the Company 330,000 of the
430,000 Company's shares originally  received by Mr. VanderKelen and the Company
gave Mr.  VanderKelen  a  promissory  note for  $50,000  (See ITEM 12.  "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" below).

Stores

In October 1997, The Company acquired 14 KCK stores ("Candico") of which 1 store
(Princeton  Market) was closed in December 1997. The remaining 13 KCK stores are
located  throughout  the Eastern  U.S.  in  Connecticut,  New Jersey,  Maryland,
Virginia,  Georgia  and  Florida.  The Company  acquired  KCK on the date of its
reorganization,  and  emerged  from  Chapter 11  bankruptcy  in late March 1998.
Thereafter,  the  Company  merged KCK into  Candico  Entertainment,  Inc.,  thus
changing  its name.  (See  ITEM 2  "PROPERTIES"  below  for a  listing  of

                                      -2-
<PAGE>


these locations and certain lease terms). In November 1998, a subsidiary of Hope
Associates  (which owns more than 50% of the outstanding  shares of the Company)
purchased 8 more candy  stores  which it granted the Company the right to manage
and the option to purchase at Hope  Associates'  cost. In July 1999 one of these
stores was transferred back to the seller in settlement of a dispute.  (See ITEM
12. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below)

The Company at various times has opened 15 Starlog  Stores and 6  Sumon/Hologram
Stores, all of which have been closed.

The ongoing  operations of the Company is contingent on the Company's ability to
continue as a going concern,  which should be appraised in conjunction  with the
Company's  history of operating losses and lack of working  capital.  See Item 6
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS".  The Company filed a voluntary petition for relief under Chapter 11
of the United  States  Bankruptcy  Code on November  13,  1995 and emerged  from
bankruptcy on August 28, 1996. See Item 3 "LEGAL PROCEEDINGS".

Background / History

The  Company was  started  with one Starlog  store in 1992 by the founder of the
Starlog Group,  the publisher of several science  fiction and horror  magazines.
Its original  goal was to  capitalize  on the steadily  growing niche market for
science  fiction and fantasy  literature,  apparel  and  collectibles  through a
network of stores.  In November 1993 the Company raised $5.5 million through its
initial public offering.  Following the offering,  the Company's then management
rapidly expanded its operations, opening nine stores in 15 months.

Lacking  experience in retail chain  operations,  the original  management made,
what can now be seen, as several  critical  errors.  First, the Company expanded
rapidly based on experience with only one store and without adequate research to
determine proper store size,  inventory  levels,  occupancy factors and start-up
costs. As a result,  stores opened during the first year proved to be too large,
with high  start-up  costs and annual  rent  commitments  which were too high to
permit profitable operation.  Additionally,  these original stores were found to
be too geographically  dispersed for efficient  management control. As a result,
during  their  first  fiscal  year as a public  company,  losses  were  suffered
totaling $3.2 million and were continuing at a rate of approximately  $800,000 a
quarter.

Shortly  after  the  Company's  current  Chief  Executive   Officer,   Mr.  John
Fitzgerald,  joined the Company he recognized  these problems and started taking
steps to  reorganize  the Company.  In June 1995 Mr.  Fitzgerald  was  appointed
President and Chief  Operating  Officer.  In November  1995, the Company filed a
voluntary  petition for Chapter 11  Bankruptcy.  While in Bankruptcy the Company
was able to rid  itself  of its most  expensive  store  leases.  In an effort to
salvage some of the start-up expenses invested in the stores and to determine if
they  could  be  profitable  with  more  favorable  lease  terms,   the  Company
renegotiated much more favorable terms for the leases of eight of the stores and
attempted to operate  them.  The Company  emerged from Chapter 11 in August 1996
and secured working  capital from Hope  Associates,  LLC.  ("Hope  Associates"),
which  in  exchange,  owned  at that  time  approximately  90% of the  Company's
outstanding Common Stock.

Subsequently,  in November 1996 the Company's original executive  management and
Board of  Directors  resigned  and were  replaced by a new Board  formed by Hope
Associates'  principals  and Mr.  Fitzgerald.  Additionally,  the founder of the
Company relinquished substantially all of his stock in the Company.

Following  the  Chapter  11   reorganization,   the  Company  acquired  two  new
businesses,  KCK Corporation (now Candico,  Inc.), in March 1998 (See "BUSINESS-
Candico"  above)  and,  and Goal  Post  Distributors,  Inc.  in June  1997  (See
"BUSINESS- Goal Post" above).

                                      -3-
<PAGE>


Elimination of Unprofitable Starlog and Hologram Stores.

After  reviewing  the  results of the last six Starlog  and  remaining  Hologram
Stores, the Company determined in April 1998 that these stores could not operate
profitably,  even with the more favorably  renegotiated lease terms.  During the
period from October 1997 through  January 1998,  the six Starlog stores had been
suffering operating losses of more than $25,000 a month,  greatly offsetting the
operating profits of the Company's other divisions.

As a result, the Company closed five of the last six unprofitable Starlog stores
and all of the remaining  Hologram stores.  The last Starlog store was closed in
October  1998.  The leases for four of the six  Starlog  stores,  and all of the
Hologram stores were expired and the Company had no on-going liability resulting
from such closings.  In the case of two Starlog stores,  the Company was able to
terminate the leases by making payments of $12,000 and $15,000 in October 1998.

Termination of License to Use Starlog Name.

On July 1, 1998,  the Company was able to terminate its License  Agreement  with
Starlog Group, Inc. to use the "Starlog"  trademark in return for making royalty
payments. The Company transferred to Starlog Group, Inc. certain assets worth an
immaterial amount in connection with such termination.

Financial Information about Industry Segments

From  inception  through the period ended January 31, 1999,  the Company and its
subsidiaries have operated in the same industry segment.

Employees

As of  November  1, 1999,  the  Company  had 58  employees.  This  includes  the
Company's  President,  General  Merchandising  Manager,  CFO, 1 MIS  Manager,  2
District   Operations   Managers,   1   Warehouse   Manager,   1   Merchandising
Manager/Buyer,  Financial  Manager,  an  Administrative  Assistant and 48 retail
store employees, of which 16 are full time and 32 are part time.

ITEM 2.  PROPERTIES

On September 30, 1996 the Company's  executive  offices and distribution  center
were relocated from  Clearwater,  Florida to a facility at 945 Brighton  Street,
Union, New Jersey.  This facility  consisted of approximately  6,500 square feet
leased at a monthly rental of $3,000.  This lease terminated on January 31, 1999
and was extended month to month until July 1999. In July 1999, the Company moved
its  headquarters  to it current  address of 22  Meridian  Road,  Eatontown  New
Jersey.  This facility  consists of  approximately  9,300 square feet lease at a
monthly rental of $4,600. This lease terminates on October 31, 2004.

Candico Stores

The  following  table sets forth the  locations  of the 13 KCK stores  where the
Company currently holds a leasehold interest.

<TABLE>
<CAPTION>

Location                                            Retail Square      Lease Termination     Minimum Monthly
                                                       Footage                                    Rent
<S>                                                 <C>                <C>                   <C>
Harbor Place, Baltimore, MD                              742                  04/30/04         $5,874(1)
Crystal Mall, Waterford, CT                              646                  01/31/04         $4,166-4,583(2)
Bayside Marketplace, Miami, FL                           636                  09/10/00         $3,975(3)
Bridgewater Commons, Bridgewater, NJ                     836                  12/31/03         $6,667(4)
</TABLE>


                                      -4-

<PAGE>

<TABLE>


<S>                                                 <C>                <C>                   <C>
Tampa Bay Center, Tampa, FL                              913                  04/30/01         $1,140 (5)
Rockaway Town Sq. Rockaway, NJ                           535                  10/31/06         $4,458-$4904(6)
Jacksonville Landing, Jacksonville, FL                   563                  02/28/00         $1,173(7)
Woodbridge Center, Woodbridge, NJ                        889               Month-to-Month      $3,334(8)
Macon Mall, Macon, GA                                    662                  02/14/03         $2,917(9)
Pembroke Lakes Mall, Pembroke, FL                        700                  01/31/06         $4,000(10)
Coolsprings Galleria, Franklin, TN                       893                  03/15/02         $3,333(11)
Coliseum Mall, Hampton, VA                               630                  06/30/00         $1,837(12
The Avenues Mall, Jacksonville, FL                       821                  03/09/02         $3,417(13)
</TABLE>

(1)   Plus 10% of annual Gross Sales over  $704,900,  plus an annual  Merchant's
      Association Contribution of $4,080.

(2)   Plus 10% of annual Gross Sales over $500,000 for the period ending 1/31/99
      and $550,000 for the balance of the lease term.

(3)   Plus 8% of annual  Gross Sales over a  "breakpoint"  which is $596,250 for
      the last  three  years of the lease  ending  9/10/99  plus CAM,  taxes and
      extras.

(4)   Plus 8% of annual Gross Revenues over $1,000,000.

(5)   Plus 8% of annual Gross Sale over $25,000.

(6)   Plus 10% of annual Gross  Revenue,  a $4,253  environment  charge,  a $802
      promotional charge, both subject to adjustment.

(7)   Plus 8% of annual  Gross Sales in excess of  $175,937,  plus a  Merchants'
      Association Contribution Rate equal to the greater of 1% of Gross Sales or
      $1,689 per annum.

(8)   Plus 10% of annual Gross Sales over $333,375.

(9)   Plus 8% of annual  Gross Sales in excess of  $437,500,  plus  tenant's pro
      rata share of real estate taxes, Common Area Maintenance,  Insurance,  and
      Merchant association advertising.

(10)  Plus 8% of annual Gross Sales over $600,000.

(11)  Plus 8% of annual Gross Sales in excess of $500,000 per annum.

(12)  Plus 10% of annual Gross Receipts,  plus tenants  pro-rata share of Common
      Area Charges and Insurance charges.

(13)  Plus 8% of  annual  Gross  Sales in  excess of  $468,750.  Plus  Merchants
      Association  Marketing Fund, Media Fund and General Promotional charges of
      approximately $900 per month, subject to escalation.

At various times, the Company had 15 Starlog Stores and 6 Hologram  stores,  all
of which have been  closed.  Leases for all but 8 of the 15 Starlog  Stores were
rejected  when the Company  was in Chapter 11 (See Item 3 "LEGAL  PROCEEDINGS").
All but two of the remaining eight leases expired  pursuant to their terms.  The
Company was able to  terminate  the other two by making  payments of $12,000 and
$15,000 in October 1998.

In the case of the various  Sumon-Hologram  Stores, all the leases were rejected
pursuant a Chapter 11 bankruptcy petition (See Item 3 "LEGAL PROCEEDING")

In addition to the foregoing,  beginning in November 1998 the Company  manages 7
stores owned by CCAC,  a subsidiary  of Hope  Associates,  LLC.  Pursuant to its
agreement  with Hope,  the Company has the right to acquire these stores or CCAC
at Hope's cost.  CCAC is in the process of obtaining  approval of the assignment
of the leases to these stores from the respective  landlords.  No assurances can
be given that such consent will be given.  (See ITEM 12. "CERTAIN  RELATIONSHIPS
AND RELATED TRANSACTIONS" below)

ITEM 3.  LEGAL PROCEEDINGS

On November 13,  1995,  the Company and its  subsidiaries  filed  petitions  for
voluntary  reorganization  under Chapter 11 of the United States Bankruptcy code
in the  Bankruptcy  Division of the District  Court of the United States for the
Middle District of Florida. The Plan of Reorganization was filed on February 29,
1996,  and  subsequently  amended  on May 28,  1996.  In July  1996 the Plan was
submitted to creditors and stockholders for their vote of approval and on August
28,  1996 the Plan was  confirmed  by the Court  and the  Company  emerged  from
bankruptcy. The major provisions of the Plan were as follows:

                                      -5-
<PAGE>


Hope  Associates,  the secured  lender,  reduced its secured  claims against the
Company by $200,000  (leaving it a secured  claim of $500,000,  all of which was
post-petition  financing)  in exchange for  1,800,000  shares (post  one-for-ten
reverse split) of the Common Stock of the Company. The 167,600 (post one-for-ten
reverse  split)  shares of Common Stock of the Company  whose voting  rights had
been assigned to the Company in care of Jack Fitzgerald by the Company's founder
and Chairman of the Board,  his son and former  President of the Company and the
former  Chairman  as Trustee  for his  daughter  as  inducement  for the secured
lender, were canceled.

Holders of general  unsecured  claims  received  newly  issued new  warrants  to
purchase  shares  of the  Company's  Common  Stock at the  rate of  $2.50  (post
one-for-ten  reverse split) per share, which were distributed at the rate of one
warrant  for each  $0.70 of claim.  The  remaining  30  percent of the claims of
unsecured  creditors  (totaling  $390,000)  is  to  be  paid  in  equal  monthly
installments over 60 months. [Such payments were expected to commence during the
third fiscal quarter of 1998.]

Common  stock  equity  owners  retained  their  stock  but it was  significantly
diluted.  Hope Associates,  the secured lender,  owned  approximately 90% of the
Company's  outstanding stock before exercise of the creditor warrants and 86% if
such warrants were exercised.  The equity ownership of the "old stockholders" of
the Company was diluted,  after the Chapter 11, to slightly more than 9.3%. Such
amount  was  further  diluted  by the  shares  issued  to the owner of Goal Post
Distributors in consideration  of the Company's  acquisition of that business in
June 1997.

During  1996,  the  Company and Hope  Associates  engaged in  negotiations  with
Charles  Huttoe  ("Huttoe") to provide  financing to the Company and acquire the
ownership  of the  shares  of the  Company's  Common  Stock  owned by  Hope.  In
September,  1996,  pursuant to an agreement between Huttoe,  Hope Associates and
its members, Huttoe provided working capital to the Company aggregating $650,000
prior to  completion  of any  written  agreement,  and on  October  l7,  1996 an
associate  of Huttoe  caused a bank  loan to Hope  Associates  in the  amount of
$500,000 to be paid in full in alleged  compliance with the Sales Agreement.  On
November 7, 1996,  the SEC filed a complaint in federal court against Huttoe and
others alleging unregistered distribution of the stock of Systems of Excellence,
Inc. and  manipulation  of its stock price. In November 1996, the Court issued a
temporary  restraining order temporarily  freezing assets and accounts of Huttoe
and various third party  accounts into which  payments were made from  allegedly
Huttoe-controlled  accounts. The SEC amended its complaint to include as "relief
defendants"  the  Company,  Hope  Associates  and Hope's  members  and sought to
recover  from the  relief  defendants  the sums  advanced  by Huttoe as  working
capital  to the  Company  ($650,000)  and  the  bank  loan to  Hope  Assoc.  LLC
($500,000).  The SEC made no allegations  of wrongdoing as to the Company,  Hope
Associates or Hope's owners.  After  negotiations  with the SEC an agreement was
reached and approved by the Company whereby the Company agreed to repay $500,000
of the  $650,000  received  from Huttoe (plus  interest  computed at the rate of
5.55% per annum) in four annual installments,  the first three of which to be in
the amount of  $114,916,  and the fourth to comprise  the  remaining  balance of
principal  and  interest.  The first such annual  installment  was paid in April
1998. Hope Associate's members have also agreed to personally guarantee $250,000
of the $500,000 owed by the Company to the SEC.

The Company  acquired  SUMON,  LLC, doing  business as the Hologram  Company and
Lazer Wizardry, on December 31, 1996 for a combination of cash and assumption of
liabilities  valued at $50,000  and  options  to  purchase  common  stock of the
Company.  The operations acquired consisted of a six store specialty retailer of
holographic artwork and gifts and a wholesale distributor of holographic artwork
and gifts.  On February 3, 1997,  the purchase  price was adjusted  down to zero
because of certain matters that were not disclosed by the seller.  Subsequently,
SUMON, LLC filed for Chapter 11  Reorganization  in the Bankruptcy Court for the
Middle  District of Florida.  The  bankruptcy  was dismissed and the company was
basically liquidated by fiscal year end June 27, 1998.

The Company  acquired KCK Corporation and  subsequently  merged KCK into Candico
Entertainment, Inc. (Candico) thus changing its name. The purchase price was $10
cash,  plus  $200,000 in cash  loaned to KCK,  and  warrants to purchase  50,000
shares (after giving effect to the reverse stock split) at $2.50. As part of the
purchase agreement and Plan of Reorganization, the Company converted $100,000 of
it's loan into equity of the debtor

                                      -6-

<PAGE>

thereby owning 1,000 shares of newly owned stock in KCK (see Item 7.  "Financial
Statements"  and notes  thereto  below).  The warrants  expired  unexercised  on
September 30, 1999.

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

No matters were  submitted to a vote of the  Company's  stockholders  during the
fourth quarter of the fiscal year ended January 31, 1999.

                                     PART II

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

The Common Stock of the Company had  previously  been quoted on the NASDAQ Small
Cap Market under the symbol  "SIFI".  The stock was removed  from their  listing
upon the  Company's  filing for  bankruptcy  but  continued  to trade under that
symbol.   Effective  July  9,  1998,   the  Company   amended  its  Articles  of
Incorporation so as to change its name to its current name "Retail Entertainment
Group, Inc." and effected a one-for-ten  reverse stock split. In September 1998,
the Company changed its trading symbol to "RETN".

The  following  table  sets  forth the high and low  closing  bid  prices of the
Company's  Common  Stock from for the last two fiscal  periods,  as  reported by
NASDAQ. Bid quotations  represent high and low prices quoted between dealers, do
not reflect  retail  markup,  markdown  or  commission,  and do not  necessarily
represent actual transactions.

                                                        Sales Prices
                                               ------------------------------
                                                   High              Low
Fiscal Year 1997
----------------
Quarter ended September 30, 1996 .............   $  .9375         $   .050
Quarter ended December 31, 1996 ..............   $  .5625         $   .125
Quarter ended March 31, 1997 .................   $  .3758         $   .125
Quarter ended June 28, 1997 ..................   $  .5800         $   .130

Fiscal Year 1998
----------------
Quarter ended September 30, 1997 .............   $    .79         $    .33
Quarter ended December 31, 1997 ..............   $    .65         $    .25
Quarter ended March 31, 1998 .................   $    .54         $    .20
Quarter ended June 27, 1998 ..................   $    .49         $    .10

Fiscal Year 1999
----------------
Quarter ended September 30, 1998                 $   4.00         $  1.100
Quarter ended December 31, 1998                  $   3.50         $  1.125
Month ended January 31, 1999                     $  1.125         $  1.125


On November 1, 1999, the closing price of the Company's  Common Stock was $ 2.50
per share. However, such price does not necessarily reflect the price that would
result upon the sale or purchase of a significant number of shares.

On November 1, 1999,  the Company had 107 holders of record of its Common Stock.
The Company  reasonably  believes that it has a  significantly  larger number of
beneficial holders of its Common Stock.

                                      -7-
<PAGE>


The Company has not paid any cash dividends on its Common Stock to date and does
not  anticipate  paying any in the  foreseeable  future.  The Board of Directors
intends  to retain  earnings,  if any,  to support  the growth of the  Company's
business.

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
Consolidated  Financial Statements and Notes thereto appearing elsewhere in this
Report.

Results of Operations

The  Company  dramatically  changed  its focus in the fiscal year ended June 27,
1998 to  concentrate  on the  specialty  retail  sale of bulk  candy and  gifts.
Previously,  the Company  operated  Starlog stores that included various science
fiction and other products under licensed names.  These stores were unprofitable
and all but one was closed during Fiscal Year ended June 27, 1998.

The Fiscal Year (31 Weeks)  ended  January 31,  1999  ("1999"),  compared to the
Fiscal Year (52 Weeks)  ended June 27, 1998  ("1998") and Fiscal Year (52 Weeks)
ended June 28, 1997 ("1997") follow:

The  Company's  revenues for 1999,  1998 and 1997 were earned from the following
sources:  Retail  sales for its Candy  stores,  Gains from  Vendor  Settlements,
Starlog  and  Hologram  Stores,  franchise  fees  and  royalties  and  sales  of
merchandise to its  franchisees.  During the second quarter of 1998, the Company
managed  and  operated  thirteen  Candy  Stores  (after  closing  one  store and
reopening  another).  The Company owned and operated six Starlog  Stores for the
first three  fiscal  quarters of 1998 and closed all but one of these  stores by
the fourth  fiscal  quarter of 1998.  (The last Starlog  store was closed during
October 1998). The Company owned and operated six Hologram Stores during part of
1998, and closed all of them by fiscal year end 1998.  The Company  acquired the
Goal Post Distributing,  Inc. in late June 1997 and sold the company back at the
end of June 1998.  During fiscal year ended June 28, 1997, the Company owned and
operated six Starlog Stores (after opening three and closing three) and acquired
six Hologram  stores.  The Company  operated  eight Starlog stores during fiscal
year ended June 29, 1996.

Total revenues from  continuing  operations for 1999 of $1,699,625  were for the
31-week period ending January 31, 1999. This compares to $2,230,922 that was for
the  52-week  period  ending  June  27,  1998.  On an  annualized  basis  [note:
annualized = period / 31 x 52] revenues for the same period were  $2,850,984  an
increase of 28% over 1998 revenues from  continuing  operations.  The annualized
revenues for the period ending January  31,1999  reflect a decreased of 41% from
the $4,831,947 for 1998,  which includes  revenues of  approximately  $2,598,540
from  discontinued  operations.  Total  revenues  for 1998  increased by 104% to
$4,831,947  from  $2,367,722  for 1997.  There were sales of merchandise to four
franchisees  in 1997. Net sales for the Hologram  stores totaled  $458,757 since
they were  acquired on December  31, 1996.  All of the Hologram  stores had been
closed by fiscal year end June 27, 1998.  All Starlog  stores were closed during
fiscal year 1998, except for one store, which closed in October 1998.

Franchise fees and royalties  earned from  franchisees  for 1999,  1998 and 1997
were $ 0, $ 0 and $58,945,  respectively.  Sales of  merchandise  to franchisees
were $0 in 1999, $ 0 in 1998 and $413,671 in 1997.

Consolidated  cost of sales as a  percentage  of sales  decreased to 31% in 1999
compared with 55% in 1998 and 41% for 1997. The increased gross margin % in 1999
is due to the  acquisition  of Candico  Candy Stores and the  discontinuance  of
unprofitable  operations  in fiscal  year  1998.  This has  resulted  in the new
direction  of  the  company  exiting  unprofitable   operations  for  profitable
operations. The decreased gross profit margin in 1998 was due to the acquisition
on a  new  trading  card  business  (Goal  Post)  with  lower  margins  and  the
liquidation  of the Hologram and Starlog store  operations at distressed  prices
for  merchandise  sold.  The gross profit  margin  increase for 1997 is a direct
result of  increased  margins  on sales of  merchandise  to  franchisees,  ample
product for sale

                                      -8-
<PAGE>


during the holiday  season and positive  physical  inventory  counts as a direct
result of selling  inventory  that  previously  had been fully  reserved  due to
anticipated obsolescence, but never materialized.

Consolidated   selling,   general   and   administrative   expenses   (excluding
depreciation and amortization)  when annualized  decreased in 1999 to $2,285,265
from  $4,020,646  in 1998 and  $2,470,409  for 1997.  The 1998  period  included
approximately $1,972,943 in S.G. & A. applicable to the newly acquired Goal Post
and Candy  store  operations.  In 1997,  $471,917  of  additional  S.G. & A. was
attributable  to the  SUMON/Hologram  stores  acquired on December  31,  1996. A
decrease  S, G & A was  due to a  conscientious  effort  to  reduce  costs.  The
Company's selling,  general and administrative  expenses for 1999, 1998 and 1997
consisted  primarily of salaries,  rent,  franchise  related  selling  expenses,
travel, telephone and utilities,  professional fees, insurance, depreciation and
amortization, and the selling, general and administrative expenses of the retail
Candico and Goal Post  operations,  Starlog  and  Hologram  stores.  In 1998 the
provision  for  bad  debts   increased  to   approximately   $100,000  of  which
approximately $84,000 in 1998 and $5,000 in 1997 was applicable to the Goal Post
operation.  Depreciation  and  amortization  decreased  to  $94,996 in 1999 from
$350,238  in 1998  mainly  due to  write-offs  of  liquidated  and  discontinued
operations.

The Company showed a consolidated net profit of $230,095, primarily due to gains
from extinguishment of debt of $707,388. The Candico Candy Stores reported a net
loss  of  $1,440  for  the  period.  In  1998  the  Company  reported  a loss of
$3,605,833.  The total 1998 loss included write-offs of $673,039 applicable to a
loss on sale or  abandonment  of assets and $513,261  related to  reorganization
value both of which related to  discontinued  operations.  The Company  showed a
consolidated  net loss of $1,286,771 for Fiscal year 1997 including  income from
forgiveness  of debt of $250,000,  applicable to the period up to emergence from
bankruptcy.

1999  fiscal  year  reflects a  provision  for bad debt of $0.  1998 fiscal year
reflects a provision for bad debts of approximately $100,000 of which $84,000 is
applicable to the Goal Post operation. The 1997 period reflects drawdowns in its
previously established valuation reserves of $50,000 applicable to inventory and
$428,886 applicable to usage of lease  renegotiation and bankruptcy  contingency
reserves. This was partially offset by additions of $62,112 to the allowance for
bad debts required by the bankruptcy of two franchisees in the United Kingdom.

Liquidity and Capital Resources

The Company  had a working  capital  deficit at January  31, 1999 of  $1,695,932
compared to a working  capital  deficit at June 27, 1998,  of  $2,190,098  and a
working  capital deficit of $972,488 at June 28, 1997. The current ratio was .14
to 1 in 1999,  .07 to 1 in 1998 and .51 to 1 in 1997.  The Company is seeking to
raise additional  capital through private  placements.  Without such capital the
Company does not believe that it has  sufficient  capital to continue to operate
its  business.  There is no  assurance  that the Company will be  successful  in
raising such capital.

During  Fiscal 1999,  the Company had net cash used in  operations  of $564,574.
This resulted  primarily  from a net gain from  forgiveness of debt of $707,388.
The  Company's  expenditures  for  property and  equipment  for Fiscal 1999 were
approximately  $44,000  (mainly  new  property  and  equipment  related  to  the
renovation of one Candico store).

During Fiscal 1998,  the Company had net cash used in operations of  $1,125,579.
This  resulted  primarily  from a net  loss  of  $3,605,833  less  approximately
$1,454,203 in non-cash expenses,  gains and losses,  including  depreciation and
amortization,  recording of  Reorganization  Value in Excess of Assets Allocated
applicable to KCK offset by the write-off of Reorganization  Value applicable to
Starlog,  less  write-downs  of Trade and other Claims from the  emergence  from
bankruptcy.  Decreases in  inventories  and  increases  in accounts  payable and
accruals and reserves for closed stores applicable to Starlog  operations offset
the decrease in cash. The Company's  expenditures for property and equipment for
Fiscal  1998 were  approximately  $98,000  (mainly  new  leasehold  improvements
related to the renovation of one Candico store).

                                      -9-
<PAGE>


In  March  1998  the  Company  acquired  KCK  Corporation  (which  prior  to the
acquisition, KCK had filed a Chapter 11 Bankruptcy Petition in the United States
Bankruptcy  Court  for the  Middle  District  of  North  Carolina  Winston-Salem
Division).  The plan of reorganization was approved by the Court and KCK emerged
from bankruptcy effective March 28, 1998, the effective date of acquisition.

As of the  Confirmation  Date,  KCK adopted Fresh Start  Reporting in accordance
with the  American  Institute  of  Certified  Public  Accountants  Statement  of
Position 90-7 (SOP 90-7) -- "Financial  Reporting by Entities in  Reorganization
under the Bankruptcy Code."

The Reorganization Value (the approximate fair value) of the Company is based on
the  consideration  of many  factors and various  valuation  methods,  including
discounted  cash  flows and  price/earnings  and  other  applicable  ratios  and
valuation  techniques  believed by management  and its financial  advisors to be
representative  of the  Company's  business  and  industry.  The  excess  of the
Reorganization  Value  over the fair  value of net  assets  and  liabilities  is
reported as excess  Reorganization  Value and is amortized  over a  fifteen-year
period.

KCK  Corporation is a retailer that owned and operated 14 candy stores under the
trade name Candy Candy, and Candico.  The Company  acquired KCK Corporation,  in
March,  1998,  in exchange for $10.00 cash for 1,000  shares of stock,  $200,000
super-priority  financing and warrants to purchase 50,000 shares of common stock
(40,000  shares at a strike  price of $2.50 per share if  exercised by September
28, 1998 or for $4.00 per share if exercised  thereafter  and 10,000 shares at a
strike  price of $5.00 a  share).  All  warrants  expire  on  October  1,  1999.
Effective  the date of  acquisition  $100,000 of  super-priority  financing  was
converted to equity.

The Independent  Auditors Report, which accompanies and is part of the Company's
audited  financial  statements  as of January 31, 1999 and June 27, 1998 and are
included as part of this Annual Report, is qualified by the following statement:
"The accompanying  consolidated financial statements have been prepared assuming
that Retail Entertainment  Group, Inc. (formerly Starlog Franchise  Corporation)
and  Subsidiaries  will continue as a going concern.  As discussed in Note 12 to
the consolidated financial statements, the Company has incurred recurring losses
from operations. The Company has not yet shown the ability to generate cash from
operations and as such, this raises substantial doubt about the entity's ability
to continue as a going concern.  The  consolidated  financial  statements do not
include any adjustments  relating to the  recoverability  and  classification of
reported asset amounts or the amounts and  classification  of  liabilities  that
might result from the outcome of these uncertainties."

ITEM 7. FINANCIAL STATEMENTS

This  information  appears in a separate  section of this Report  following Part
III.

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

None.

                                    PART III

ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT

As of January  31,  1999 the  Directors  and  officers  of the  Company  were as
follows:


                                      -10-
<PAGE>


Name                               Age                   Position
--------------------------------------------------------------------------------

Herman Rush                         70         Co-Chairman of Board of Directors
Michael Michaelson                  76         Co-Chairman of Board of Directors
John (Jack) Fitzgerald              57         President, CEO and Director
Ray Markman                         71         Director
Kevin M. VanderKelen(1)             32         Director
Allan R. Lyons                      58         Director
Mark Savel(1)                       45         Director

Mr.  VanderKelen  resigned  as a member  of the  Board in May  1999.  Mr.  Savel
resigned as a member of the Board in September 1998.

Herman Rush was appointed  Chairman of the Board in November of 1995.  Mr. Rush,
former  Chairman and Chief  Executive  Officer of Coca-Cola  Telecommunications,
Inc.,  Senior  Vice  President  of  the  Entertainment  Business  Sector  of the
Coca-Cola  Company and a member of the Board of Directors  of Columbia  Pictures
Industries,   Inc.  and  past  Chief  Operating  Officer  of  Columbus  Pictures
Television Group, has more than thirty years experience in executive, production
and marketing positions.  In 1992, Mr. Rush formed Katz-Rush Entertainment whose
credits include "The Montel Williams Show" and "The Susan Powter Show." Mr. Rush
began his television career in 1951. Mr. Rush was instrumental in the television
packaging and network placement of such programs as "Voyage to the Bottom of the
Sea", "Lost in Space", "Time Tunnel" and "Land of the Giants".

Michael  Michaelson was appointed to the Board of Directors in November of 1995.
Earning a BS degree at New York University in 1948, Mr.  Michaelson's career has
been spent in magazine publishing and direct marketing. Mr. Michaelson currently
serves as a member of the Board of Directors of Allied  Devices Inc., a publicly
held precision tool company. Mr. Michaelson began his career with Look Magazine.
He then joined Ziff-Davis where he was Vice President,  Circulation Director and
a  member  of the  board.  In  1961  he  became  President  of  Franklin  Square
Subscription Agency,  where he created the first college student  multi-magazine
subscription card,  becoming the official agency of the National  Association of
College Stores under the name of Campus  Subscriptions.  In 1979 Mr.  Michaelson
sold Campus  Subscriptions  to Publishers  Clearing House where he became Senior
Vice  President,  Marketing.  He left there in 1980 to found GAMES MAGAZINE with
his partner  Chip  Block.  GAMES were sold to PLAYBOY in 1982.  He then  founded
RAINWATER ENTERPRISES,  a consulting firm that has served such clients as Rodale
Press,  Hearst Magazines,  Fairchild  Publications,  Meredith Publishing and the
Smithsonian.  From 1986 to 1989 Mr.  Michaelson  was  Chairman of the Council on
Economic Priorities. He served in the U.S. Army, 35th Infantry, 25th Division in
the South Pacific as a Company  Commander from 1942 to 1946,  receiving a Bronze
Star and Purple Heart.  From 1986 to 1998, Mr. Michaelson is President and owner
of Rainwater  Associates,  Inc., providing  publishing  management and marketing
consultation services.

John (Jack)  Fitzgerald was appointed  President and Chief Operating  Officer of
the Company  effective June 1, 1995.  Previously,  Mr. Fitzgerald served as Vice
President  and General  Manager of the Company since July 1994.  Prior  thereto,
from 1990, he owned a consulting  firm which  developed and  implemented  retail
concepts  such as Candy  Candy  Inc.,  The Candy  Store in Baton  Rouge,  LA and
Shop-N-Stop (Sweet 99), the bulk candy concept for K-Mart Stores. Prior thereto,
from 1989, he was Chief  Operating  Officer and President of Candico  Stores,  a
bulk candy specialty concept.  From 1984 to 1989 he was Executive Vice President
and Chief Operating Officer for J & D Brauner Butcher Block Stores. From 1974 to
1984 he was Vice President of Store Operations for Lechters.

Ray Markman was  appointed  to the Board of Directors of the Company in November
1995. Mr. Markman is a multi-faceted  entrepreneur  with a degree in journalism,
advertising  and economics at the University of Missouri with post graduate work
at the University of Chicago.  Mr. Markman has lectured at the N.Y.U.  School of
Management and the Kellogg  Executive MBA Program at Northwestern  University on
Strategic Planning. He was Executive Vice President at Encyclopaedia  Britannica
and a senior  executive  at the Leo Burnett  and  McCann-Erickson  (Division  of
Interpublic Group of Companies)  advertising agencies. Mr. Markman was a founder
of two

                                      -11-

<PAGE>


companies that pioneered the  distribution  of  pre-recorded  video cassettes to
mass market outlets for such companies as Disney, Hanna/Barbera and the original
Jane Fonda aerobic  tapes.  He is a member and lecturer at the Direct  Marketing
Association  and  Chairman  of the Echo  Awards  Committee  (creative  marketing
awards) and a contributing  author for a book on direct  marketing.  Mr. Markman
founded FIND (Foundation for Inventions and New Developments),  founded FACT, an
organization devoted to public economic education.  He was a Director of Chicago
City Bank,  founder and Director of Mayflower  Life Insurance Co. and Seago Real
Estate Co., which companies he helped to take public. He is currently  President
and founder of Life Planning Company which provides  financial planning services
for high net worth individuals, corporations and pension plans.

Mark Savel was  appointed  to the Board of  Directors  in November of 1995.  Mr.
Savel has been Director of Franchise  Development since July 1994. Mr. Savel was
responsible  for sales  training  and the  marketing  and  sales of  franchises,
nationally and internationally,  for Starlog Franchise Corporation.  Since 1978,
Mr. Savel,  through his development  company,  Majic Development  Corp.,  (later
Majic  Franchise  Development,  LLC) was and is an area  developer and franchise
sales consultant for a major automotive after market  franchiser.  Mr. Savel has
held  the  positions  of  operations  manager,  sales  trainer,  franchise  area
development  agent and  franchise  sales  consultant.  Mr.  Savel is currently a
consultant to Lee Myles  Associates  Corporation and markets  franchises for Lee
Myles  Transmissions  in the  Arizona  market.  Mr.  Savel  owns  two Lee  Myles
Franchises in Arizona. Mr. Savel resigned as a director in September 1998.

Kevin M. VanderKelen  earned a BA degree in marketing and finance in 2 1/2 years
from the  University  of  Wisconsin.  He started  his  career  founding a screen
printing  business Body Wraps,  Inc. and selling it to employees.  He worked for
Metropolitan Life, MetLife Securities,  Inc. and VanderKelen Investment Company.
He started a position as a corresponding pricing analyst for several collectible
price  guide  magazines  and  includes  several  nationally  published  magazine
articles to his credit.  He founded Goal Post Distributing in 1991 and developed
a wholesale  distribution  concept to service  retail trading card,  comic,  and
collectible stores. Goal Post publishes a monthly wholesale catalog and services
an  international  base in  excess of 8,000  customers  that  achieved  sales of
approximately  $5,000,000.  Mr. VanderKelen resigned from the Company's Board of
Directors in March 1999.

Allan R. Lyons had been a director  of the  Company  from  August 1993 until his
resignation on November 15, 1995. Mr. Lyons was reelected to serve as a director
by the Board of  Directors  effective  May 15, 1998.  Allan R. Lyons,  CPA, is a
senior member of the firm Piaker & Lyons in Vestal, New York, which he joined in
1964. Mr. Lyons is an active  investor and has served on a number of Boards.  He
is currently a member of the Board of Directors of Ambanc, Inc., Franklin Credit
Management Corporation,  Officeland, Inc., and Scoreboard, Inc. Scoreboard, Inc.
filed for  Chapter 11  bankruptcy  in March 1998.  Mr.  Lyons is a member of the
American  Institute  of  CPAs,  the New York  State  Society  of  CPA's  and the
International  Association for Financial Planning. Mr. Lyons was the Comptroller
and Finance Director of the Town of Vestal from 1970 to 1997 and is on the Board
of Advisor-School of Management -Binghamton University, Treasurer and Trustee of
United  Health  Services and a member of the  Endowment  Committee of the United
Jewish Appeal of Broome County, New York.

All directors hold office until the next annual meeting of shareholders  and the
election  and  qualification  of their  successors.  No fees  have  been paid or
accrued to directors as  compensation  for their  acting in such  capacity.  The
Company has established an Audit Committee consisting of Allan Lyons and Michael
Michaelson and a Compensation Committee,  consisting of Messrs. Michaelson, Rush
and Lyons.  Officers are elected annually by the Board of Directors and serve at
the discretion of the Board.

ITEM 10.  EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth all  compensation  awarded to, earned by, or paid
for all services  rendered to the Company  during  Fiscal 1999,  Fiscal 1998 and
Fiscal 1997 by the Company's Executive Officers but does not



                                      -12-

<PAGE>


include information  regarding Executive Officers with annual compensation under
$100,000, except current Chief Executive Officer.

Annual Compensation



<TABLE>
<CAPTION>
   Name and Principal                                                                          Other Annual
     Compensation                    Year              Salary $              Bonus $          Compensation $
--------------------------------------------------------------------------------------------------------------
<S>                                  <C>              <C>                    <C>              <C>
John (Jack) Fitzgerald
 President CEO, Director             1997             $110,000                  -0-                 (1)
                                     1998             $110,000                  -0-
                                     1999             $ 64,166                  -0-
</TABLE>

(1) Does not include the cost to the Company of the use of automobiles leased by
the Company, or the cost to the Company of benefits, including premiums for life
and health insurance and any other personal  benefits provided by the Company to
such persons in connection with the Company's  business since such amounts total
less  than  (i)  $50,000  or  (ii)  10% of  the  Executive  Officer's  disclosed
compensation.

Contingent Stock Options Granted in Last Fiscal Year:

<TABLE>
<CAPTION>

Option/SAR Grants in Last Fiscal Year-Individual Grant

            (a)                        (b)                         (c)                  (d)                 (e)
                                                         % of Total Options
                               Number of Securities        /SARs Granted to
                                Underlying Options        Employees in Fiscal      Exercise or Base      Expiration
            Name                /SARs Granted (#)                 Year               Price ($/Sh)           Date
----------------------------------------------------------------------------------------------------------------------
<S>                             <C>                       <C>                      <C>                   <C>
   John (Jack) Fitzgerald
       President-CEO                   0(1)                      --%                       --                ---

</TABLE>

(1)   On April 1, 1997, the Company granted Mr. Fitzgerald, President and CEO of
      the Company an option to acquire 300,000 shares (post one-for-ten  reverse
      split) of the Company's  common stock until March 31, 2003.  The option to
      acquire  100,000  (post  one-for-ten  reverse  split)  of such  shares  is
      currently  exercisable.  The option to acquire the second  100,000  shares
      (post  one-for-ten  reverse split) is exercisable  only if the Company has
      $500,000 of annual net profits, before interest,  taxes,  depreciation and
      amortization  ("EBITDA"),  and the option to acquire the remaining 100,000
      shares (post  one-for-ten  reverse split) will be exercisable  only if and
      Company has  $1,000,000 of annual net profits  EBITDA.  This option was in
      replacement of other options previously granted to Mr. Fitzgerald.

Mr.  Kevin  VanderKelen,  who as a Vice  President of the Company and founder of
Goal Post  Distributing,  Inc., in connection  with the original  acquisition of
Goal  Post was  granted  an  option  to  purchase  up to  100,000  shares  (post
one-for-ten  reverse  split) for prices ranging from $5.00 to $9.00 on a sliding
scale  over  the next  five  years  provided  that  certain  annual  gross  sale
projections  from  $5,000,000 to $9,000,000 were met. This option was terminated
when the Company sold Goal Post back to Mr. VanderKelen effective June 27, 1998.

None of the Company's  outstanding options or warrants were exercised during the
Fiscal Year ended June 27, 1998 or since then,  through November 1, 1999, by any
of the  name  Executive  Officers  or any  other  parties.  The  Company  has no
long-term incentive plans.

No fees have been paid or accrued to any  directors  in  consideration  for them
acting as such.

                                      -13-
<PAGE>


Employment Agreements

The Company originally entered into an employment agreement with Jack Fitzgerald
commencing July 11, 1994. This agreement was  subsequently  amended as of August
15, 1996. As amended the agreement  provides for a five year term,  and a salary
of $100,000 per year,  increasing  by $10,000 a year up to $140,000,  plus other
benefits and a monthly car  allowance of $500.  In addition  Mr.  Fitzgerald  is
eligible for a  discretionary  bonus of up to 50% of his base salary.  Under the
1996 Agreement,  Mr.  Fitzgerald was to receive an option to purchase,  for $.06
per share,  such  number of shares as equals 5% of the  issued  and  outstanding
shares, each year for three years, subject to certain limitations.  At the April
1, 1997  Board  meeting,  it was  agreed to amend  Mr.  Fitzgerald's  employment
agreement  as follows:  Mr.  Fitzgerald's  base salary  will be  increased  from
$100,000 to $150,000  when the  Company  raises  $500,000 or more in a currently
proposed private placement.  Mr. Fitzgerald's previously granted stock option is
replaced  with an option to purchase a total of 300,000  shares of the Company's
common stock  (taking into account the reverse  split) at $0.60 per shares for a
period of five years, ending March 31, 2003. Under this option,  100,000 of such
shares are  immediately  exercisable.  The right to  exercise  the  option  with
respect to the second 100,000  shares will be exercisable  only if and after the
Company   achieves  annual  pre-tax   profits  of  $500,000   before   interest,
depreciation,  taxes, and amortization  ("EBITDA") and the right to exercise the
option with respect to the last 100,000 shares will be  exercisable  only if and
after the Company achieves annual pre-tax profits of $1,000,000 EBITDA.

In connection  with the  acquisition of Goal Post,  the Company  entered into an
employment agreement with its President,  Mr. Kevin VanderKelen,  dated June 29,
1997.  This  agreement  had a term of five years and  provides  for annual  base
salary of $100,000 for the first two years,  $115,000  for year 3,  $120,000 for
year 4 and $125,000 for year 5. This agreement also granted Mr. VanderKelen with
an option to purchase a total of up to 100,000  shares of the  Company's  Common
stock  (after  taking  into  effect the reverse  stock  split) as  follows.  Mr.
VanderKelen's  options  vest  20,000  shares per year,  subject to the Goal Post
division  reaching gross sales of $5,000,000 for the 1st measurement year ending
June 29, 1998,  $6,000,000  for the 2nd  measurement  year ending June 29, 1999,
$7,000,000 for the 3rd measurement year ending June 29 2000,  $8,000,000 for the
4th measurement year ending June 29, 2001 and $9,000,000 for the 5th measurement
year ending June 29, 2002. The option price ranged from $5.00 to $9.00 per share
for the 20,000 share increments, which would have vested over that period.

Mr.  VanderKelen's  employment  agreement  and the  related  stock  option  were
terminated  when the Company  sold Goal Post back to Mr.  VanderKelen  effective
June 27, 1998. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below)

ITEM  11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  tables sets forth certain  information  regarding the  beneficial
ownership of the Company's common stock as of October 1, 1998 by (i) each person
known  by the  Company  to own  beneficially  5% or  more  of any  class  of the
Company's voting stock, (ii) each director and executive officer of the Company,
and (iii) all directors and  executive  officers of the Company as a group.  All
percentages  in  this  section  were  calculated  on the  basis  of  outstanding
securities plus securities  deemed  outstanding under Rule 13d-3 of the Exchange
Act. All shares are expressed post reverse stock split.

  Name and Address of           Shares of Common        Percentage of
   Beneficial Owner                   Stock Held          Shares Held
--------------------------------------------------------------------------------

Hope Associates, LLC(1)(2)        2,700,000  (2)               70.74%
c/o Michael Michaelson
135 E. 71st St., Apt. 3A
New York, NY 10021


                                      -14-
<PAGE>



Kevin VanderKelen(1)(3)             572,668 (3)                22.12%
Goal Post Distributing, Inc.
13949-9 W. Hillsborough
Tampa, FL 33634

(1)   Shares  outstanding  are  calculated  giving  effect to a 1-for-10 reverse
      stock split which occurred effective July 9, 1998.

(2)   Hope Associates,  LLC is a limited  liability  company.  The percentage of
      Hope Associates  owned by Directors of the Company is as follows:  Michael
      Michaelson and Herman Rush each own approximately 25.83%; Ray Markman owns
      approximately  17.22%; Kevin VanderKelen owns approximately  14.35%; Allan
      Lyons owns 13.89% and Mark Savel owns  approximately  2.87%. The 2,700,000
      shares attributed to Hope Associates includes warrants to purchase 500,000
      and 300,000 shares and an option to purchase  500,000 shares for $1.25 per
      share. (See Item 12 CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS" for a
      description  of the  transactions  in  which  the  Company  granted  these
      warrants and option to Hope Associates.)

(3)   Includes 344,448 shares based on Mr. VanderKelen's  ownership of 14.35% of
      Hope Associates and a portion of the warrants and the option to purchase a
      total  of   1,300,000   shares  which  were  granted  by  the  Company  in
      consideration  for certain  transactions.  Hope Associates holds 1,400,000
      shares and Hope and/or its members hold warrants and an option to purchase
      an additional  1,300,000  shares.  (See Item 12 CERTAIN  RELATIONSHIPS AND
      RELATED TRANSACTIONS")

DIRECTORS AND EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
                                                    Shares of Common          Percentage of
Name of Director or Executive Officer                     Stock Held            Shares Held
-------------------------------------------------------------------------------------------

<S>                                                          <C>                      <C>
Jack Fitzgerald(1)(2)
President, CEO, Director                                     100,000                  3.87%

Kevin M. VanderKelen(1)(3)
Director                                                     572,668                 22.12%

Herman Rush(1)(4)
Co-Chairman of the Board                                     740,669                 25.58%

Michael Michaelson(1)(5)
Co-Chairman of the Board                                     740,448                 25.58%

Mark  Savel(1)(6)
Director of Franchise Development
and Director                                                  54,530                  2.15%

Ray Markman(1)(7)
Director                                                     493,658                 17.83%

Allan R Lyons(1)(8)
Director                                                     448,149                 16.47%

ALL DIRECTORS AND OFFICERS AS A GROUP
(EIGHT PERSONS) (9)                                        3,160,181                 80.47%
-------------------------------------------------------------------------------------------

</TABLE>

                                      -15-


<PAGE>

(1)   All shares expressed after giving effect to a 1 for 10 Reverse Stock Split
      which  occurred  effective  July  9,  1998.  Based  on a total  number  of
      outstanding  shares  of  2,516,870.  Based  on a total  number  of  shares
      outstanding and options and warrants which were exercisable on November 1,
      1999. (See Item 12 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").

(2)   Includes 100,000 shares pursuant to currently exercisable options.

(3)   Includes 100,000 out of 430,000 shares received by Mr. VanderKelen in June
      1997 in connection with the sale to the Company of the assets of Goal Post
      Distributors, Inc. (330,000 of which were returned to the Company upon the
      resale of Goal Post), 200,000 shares purchased by Mr. VanderKelen from the
      Company for $250,000, and 344,448 shares based on Mr. VanderKelen's 14.35%
      ownership  interest in Hope  Associates  and a portion of the warrants and
      the option to purchase a total of  1,300,000  shares which were granted by
      the Company in  consideration  for certain  transactions.  Hope Associates
      holds  1,400,000  shares and Hope and/or its members hold  warrants and an
      option  to  purchase  an  additional   1,300,000  shares.   (See  "CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS" below.)

(4)   Based on Mr. Rush's approximately 25.83% interest in Hope Associates and a
      portion of the  warrants  and the option to purchase a total of  1,300,000
      shares  which were  granted by the  Company in  consideration  for certain
      transactions.  Hope Associates  holds 1,400,000 shares and Hope and/or its
      members hold  warrants and an option to purchase an  additional  1,300,000
      shares..  (See "CERTAIN  RELATIONSHIPS AND RELATED  TRANSACTIONS"  below.)
      Includes  warrants to purchase 181 shares held by Royal  Animated Art, Inc
      of which Mr. Rush owns 66 2/3% of the shares.  Royal Animated Art received
      the warrants in October 1997 along with the other  creditors of Company as
      part of the Chapter 11 proceedings.

(5)   Based on Mr. Michaelson's approximately 25.83% interest in Hope Associates
      and a  portion  of the  warrants  and the  option to  purchase  a total of
      1,300,000  shares which were granted by the Company in  consideration  for
      certain  transactions.  Hope Associates  holds  1,400,000  shares and Hope
      and/or its members hold  warrants and an option to purchase an  additional
      1,300,000 shares.  (See "CERTAIN  RELATIONSHIPS AND RELATED  TRANSACTIONS"
      below.)

(6)   Based on Mr. Savel's approximately 2.87% interest in Hope Associates and a
      portion of the  warrants  and the option to purchase a total of  1,300,000
      shares  which were  granted by the  Company in  consideration  for certain
      transactions.  Hope Associates  holds 1,400,000 shares and Hope and/or its
      members hold  warrants and an option to purchase an  additional  1,300,000
      shares. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below.)

(7)   Based on Mr.  Markman's  approximately  17.22% interest in Hope Associates
      and a  portion  of the  warrants  and the  option to  purchase  a total of
      1,300,000  shares which were granted by the Company in  consideration  for
      certain  transactions.  Hope Associates  holds  1,400,000  shares and Hope
      and/or its members hold  warrants and an option to purchase an  additional
      1,300,000 shares.  (See "CERTAIN  RELATIONSHIPS AND RELATED  TRANSACTIONS"
      below.)

(8)   Based on Mr. Lyons' approximately 13.89% interest in Hope Associates and a
      portion of the  warrants  and the option to purchase a total of  1,300,000
      shares  which were  granted by the  Company in  consideration  for certain
      transactions.  Hope Associates  holds 1,400,000 shares and Hope and/or its
      members hold  warrants and an option to purchase an  additional  1,300,000
      shares.  (See "CERTAIN  RELATIONSHIPS  AND RELATED  TRANSACTIONS"  below.)
      Additionally  includes  20,000 shares held by Vestal  Venture  Capital and
      30,000  shares  held  by  Lyonshare   Venture   Capital,   two  investment
      partnerships.  Mr. Lyons is the Managing Partner of these entities and can
      vote the shares of the Company held by them.  However, he has no ownership
      interest in such entities or the shares held by them.

                                      -16-

<PAGE>

(9)   Based on shares held by Mr.  VanderKelen,  currently  exercisable  options
      held by Mr.  Fitzgerald  and  another  director,  the shares  held by Hope
      Associates,  and warrants and an option Held by Hope  Associate and or its
      members to purchase 1,300,000 shares.

ITEM  12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the bankruptcy reorganization of the Company, 1,800,000 (post
one-for-ten reverse split) shares of Common Stock were issued to Hope, resulting
in the  beneficial  ownership  of a majority of the  Company's  Common  Stock by
certain present officers and directors.  Hope subsequently  surrendered  200,000
(post  one-for-ten  reverse  split) of its shares to the  Company  reducing  its
holdings to 1,600,000 (post one-for-ten  reverse split) shares effective July 9,
1998 (of which 200,000 have since been transferred).

In connection with the acquisition of Goal Post  Distributing Inc. in June 1997,
430,000  shares of Common Stock  (after  giving  effect to the 1-for-10  reverse
stock  split)  were  issued  to Kevin  VanderKelen,  and in  connection  with an
employment agreement with Mr. VanderKelen the Company granted Mr. VanderKelen an
option to acquire up to 100,000  additional  shares (also after giving effect to
the reverse stock split),  subject to the Goal Post  Division  reaching  certain
revenue goals (See Item 11 "SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT"). Additionally, Mr. VanderKelen acquired an additional 200,000 (post
reverse  split)  shares of the Company from the Company at about the time of the
Goal Post acquisition for $250,000.

Effective June 27, 1998, the Company sold the Goal Post business and assets back
to Mr. VanderKelen.  In connection with this resale, Mr. VanderKelen transferred
to the Company 330,000 of the 430,000 (post  one-for-ten  reverse split) Company
shares  which he had  received  when he sold Goal Post to the  Company,  and the
Company gave Mr.  VanderKelen a promissory note for $50,000.  Also in connection
with  this  transaction,  Mr.  VanderKelen  agreed  to the  cancellation  of his
employment agreement and the stock options granted under such agreement.

During fiscal year 1998, the Company  borrowed  $1,250,000  from BSB Bank in the
form of a note payable. The Company also renewed a previous note due to BSB Bank
in the amount of $500,000.  Subsequently, the members of Hope Associates, LLC, a
majority  stockholder,  personally guaranteed the line of credit from BSB Bank &
Trust Co. to the Company in the amount of  $1,750,000  and forgave an additional
$250,000  due to them by the  Company.  Hope  Associates,  LLC assumed the total
obligation  for the BSB  loan,  so that the  Company  will not be a party to the
loan,  nor will it have any guarantee or liability.  The $2,000,000 was recorded
as additional paid-in-capital. In consideration for such assumption, the Company
will pay an investment  fee to Hope  Associates  in the amount of  approximately
$20,000 a month.  The Company  also  granted the  members of Hope  Associates  a
warrant to purchase,  until May 3, 2003,  500,000 shares of the Company's common
stock  (after  giving  effect to a proposed  reverse  stock split) for $1.25 per
share.

In April  1998,  various of the  Directors  have made the Company  bridge  loans
totaling  $128,090 as follows:  Mr. Rush $39,974,  Mr. Michaelson  $39,974,  Mr.
Lyons $21,492, and Mr. Markman $26,650. Such loans are evidenced by demand notes
and bear 10%  interest.  It is  intended  that  such  loans be  repaid  from the
proceeds  of a  proposed  private  placement  of  the  Company's  Common  Stock.
Additionally,  Mr. Rush loaned the Company $100,000 in March 1997 which is still
outstanding.  Rainwater  Enterprises  Ltd., a company  owned by Mr.  Michaelson,
loaned the  Company  $100,000  in  February  1997,  which has been  repaid.  Mr.
VanderKelen  also loaned the Company  $60,174  pursuant to a demand note bearing
interest at 10%, which amount was forgiven following the fiscal year 1998.

Pursuant to an  agreement  dated  November  24,  1998,  Candy Candy  Acquisition
Corporation  ("CCAC")  acquired  eight candy stores (the  "Jonford  Stores") (of
which one was  subsequently  sold back to the seller) from  Jonford  Corporation
("Jonford") for $549,000, of which $225,000 was payable at the time of sale, and
the balance of $324,000 which was in the form of a promissory  note,  payable in
12 quarterly  installments of $27,000. CCAC is a wholly owned subsidiary of Hope
Associates,  which owns over 50% of the Company's  shares and was formed for the
purpose of making  this  acquisition.  Hope made this  acquisition  because  the
Company  did not have the  funds or  access  to  sufficient  credit  to make the
acquisition itself.

                                      -17-

<PAGE>


However,  in connection with this  acquisition,  CCAC entered into a "Management
and Option  Agreement" (M&O  Agreement")  with the Company.  Pursuant to the M&O
Agreement  the Company was retained to manage the eight  Jonford  Stores and the
Company was granted an option to acquire these stores exercisable until November
30,  2001 for the price  invested  by Hope  Associates  in CCAC in  making  this
acquisition and supplying  necessary  working capital to run the Jonford Stores.
The M&O Agreement  provides that in consideration  for managing the stores,  the
Company will receive Six percent (6%) of Gross Sales from the Jonford Stores and
fifty percent (50%) of the "Excess  Margin"  (amount by which cost of goods sold
are less than 38% of sales  price).  In  consideration  for the  foregoing,  the
Company granted to those members of Hope Associates who funded such  acquisition
a  Warrant  to  purchase  500,000  shares  at $1.25 a share,  exercisable  until
November  30, 2002.  At the time of this  acquisition,  certain  members of Hope
loaned or caused to be loaned to the  Company  $300,000  of working  capital due
upon demand,  and received an additional  warrant to purchase  300,000 shares at
$1.25 a share, exercisable until November 30, 2002.

In July 1999, in order to settle certain disputes between CCAC and Jonford,  the
parties  entered an  amendment of the Jonford  Agreement  whereby CCAC resold to
Jonford one of the eight Jonford Stores and paid Jonford  approximately  $14,000
and balance due on the Promissory Note was reduced from $298,000 to $108,000.

From time to time the Members of Hope Associates,  LLC have made direct loans to
the  Company or have  personally  guaranteed  working  capital  loans by outside
banking facilities to the Company on terms no less favorable to the Company than
could have been obtained from unrelated third parties,  if such funds would have
been available at all considering the Company's financial circumstances.

Compliance with 16(a) of the Exchange Act

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
Officers,  Directors  and persons who own more than ten percent of a  registered
class of the  Company's  equity  securities,  to file reports of  ownership  and
changes in ownership  with the  Securities  and Exchange  Commission.  Officers,
Directors and ten percent shareholders are required by regulation to furnish the
Company with copies of all Section  16(a) forms that they file.  Based solely on
the  Company's  copies of such forms  received or written  representations  from
certain reporting persons that no Form 5's were required for those persons,  the
Company  believes  that,  during the time period  November  10, 1993 to June 27,
1998, all filing requirements applicable to its Officers,  Directors and greater
than ten percent beneficial owners were complied with.

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

(a) Exhibits

The following is a complete list of exhibits  which are  incorporated  herein or
filed herewith as part of this Report.

<TABLE>
<CAPTION>
                                                                                                 Filed Herewith (X)
                                                                                                 or Incorporated By
No.                                               Exhibit                                             Reference
----------------------------------------------------------------------------------------------------------------------

<S>          <C>                                                                                 <C>
3.1          Certificate of Incorporation of the Registrant.                                             (1)
3.2          By-Laws of the Registrant, as amended.                                                      (1)
3.3          Amendment to Certificate of Incorporation of Registrant filed July 9, 1998.                 (5)
3.4          By-Laws of SF Stores, Inc.                                                                  (1)
10.10        Employment  Agreement  dated as of July 1, 1994 between the  Registrant  and Jack           (3)
             Fitzgerald.
10.33        Notice of Confirmation of Plan of Reorganization dated August 28, 1996.                     (3)

</TABLE>

                                      -18-
<PAGE>


<TABLE>

<S>          <C>                                                                                         <C>
10.34        Notices of  Commencement  of Case Under Chapter 11 of the Bankruptcy  Code dated            (3)
             November 13, 1995.

10.35        Agreement of Asset Acquisition and Corporate  Reorganization dated June 28, 1997            (4)
             between the Registrant and Goal Post Distributing, Inc.
10.36        Employment  Agreement  made as of June 29, 1997 between the Registrant and Kevin            (4)
             M. VanderKelen

10.37        Employment  Agreement made as of August 15, 1998 between the Registrant and John            (4)
             (Jack) J. Fitzgerald.
10.38        Purchase  of  Corporation  through  Stock  Purchase,  dated  September  28, 1997            (4)
             between the registrant and KCK Corporation
10.39        Orders dated November 26, 1997 of United States  District Court for the District            (4)
             of Columbia,  incorporating  agreements  relating to repayment of sums  received

             from Charles O. Huttoe

10.40        Form of Warrant to Purchase  Shares                                                         (5)
10.41        Agreement  of Asset  Acquisition  dated  November  24, 1998  relating to certain            (5)
             stores owned by Jonford Corporation

10.42        Management and Option Agreement dated November 24, 1998                                     (5)
10.43        Sale Agreements relating to resale of Goal Post effective June 27, 1998                     (5)
10.44        Assumption Agreement, as of April 1, 1998                                                   (5)
22.1         Subsidiaries of Registrant                                                                  (5)
</TABLE>

      (1)   Incorporated by reference from the Company's  Registration Statement
            on Form SB-2 for November 10, 1993 (No. 33-68692-NY).

      (2)   Incorporated  by reference from the Company's  Annual Report on Form
            10K- SB for the Fiscal year ended June 30, 1994.

      (3)   Incorporated  by reference from the company's  Annual Report on Form
            10K-SB for the Fiscal year ended June 29, 1996.

      (4)   Incorporated  by reference from the company's  Annual Report on Form
            10K-SB for the Fiscal year ended June 28, 1997

      (5)   Incorporated  by reference from the company's  Annual Report on Form
            10K-SB for the Fiscal year ended June 27, 1998

Reports on Form 8-K.

No reports on Form 8-K were filed by the  Company  during the period  ended June
27, 1998.



                                      -19-
<PAGE>






                                   SIGNATURES

 Pursuant to the requirements of 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.

Dated: December 7, 1999

RETAIL ENTERTAINMENT GROUP, INC.

BY:      /s/ John Fitzgerald                  December  7, 1999
   ----------------------------------
         John (Jack) Fitzgerald               Date
         President, CEO & CFO

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

<TABLE>
<CAPTION>

<S>                                      <C>                                    <C>
 /s/John Fitzgerald                      President, Chief Executive Officer     Date: December 7, 1999
---------------------------              and Director
John (Jack) Fitzgerald

 /s/ Michael Michaelson                  Director                               Date: December 7, 1999
---------------------------
Michael Michaelson

 /s/ Herman Rush                         Director                               Date: December 7, 1999
---------------------------
Herman Rush

 /s/ Ray Markman                         Director                               Date: December 7, 1999
---------------------------
Ray Markman

 /s/ Allan R. Lyons                      Director                               Date: December 7, 1999
---------------------------
Allan R. Lyons

</TABLE>
                                      -20-
<PAGE>


                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                        Consolidated Financial Statements

                       January 31, 1999 and June 27, 1998
                   (With Independent Auditors' Report Thereon)


<PAGE>







                          Independent Auditors' Report

The Board of Directors
Retail Entertainment Group, Inc.
(Formerly Starlog Franchise Corporation):

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Retail
Entertainment   Group,  Inc.   (formerly  Starlog  Franchise   Corporation)  and
Subsidiaries  as of  January  31,  1999  and  June  27,  1998,  and the  related
consolidated statements of operations, stockholders' deficit, and cash flows for
the seven-months  ended January 31, 1999 and the year ended June 27, 1998. These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Retail
Entertainment   Group,  Inc.   (formerly  Starlog  Franchise   Corporation)  and
Subsidiaries  at January  31,  1999 and June 27,  1998,  and the  results of its
operations  and cash flows for the  seven-months  ended January 31, 1999 and the
year  ended June 27,  1998 in  conformity  with  generally  accepted  accounting
principles.

The accompanying  consolidated  financial statements have been prepared assuming
that Retail Entertainment  Group, Inc. (formerly Starlog Franchise  Corporation)
and  Subsidiaries  will continue as a going concern.  As discussed in Note 15 to
the consolidated financial statements, the Company has incurred recurring losses
from operations. The Company has not yet shown the ability to generate cash from
operations, as such, this raises substantial doubt about the entity's ability to
continue  as a going  concern.  The  consolidated  financial  statements  do not
include any adjustments  relating to the  recoverability  and  classification of
reported asset amounts or the amounts and  classification  of  liabilities  that
might result from the outcome of these uncertainties.


December 3, 1999

<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                           Consolidated Balance Sheets

                       January 31, 1999 and June 27, 1998

                                                           ASSETS

<TABLE>
<CAPTION>
                                                                                 January 31, 1999             June 27, 1998
                                                                                 ----------------             -------------
<S>                                                                                    <C>                           <C>
Current assets:
    Cash                                                                                $  42,469                  $ 60,132
    Accounts receivable, net of allowance for
     doubtful accounts of $-0- and $100,000
     for 1999 and 1998, respectively                                                        5,400                        --
    Inventories, net of reserves of $-0- and
     $12,500 for 1999 and 1998, respectively                                              199,862                   104,013
    Prepaid expenses and other current assets                                              18,255                     8,896
                                                                                        ---------                  --------

                     Total current assets                                                 265,986                   173,041

Property and equipment, net                                                               195,408                   238,000
Reorganizational value in excess of amounts
  allocated to identifiable assets, net                                                   476,696                   510,379
Other assets                                                                                2,891                        --
                                                                                        ---------                  --------









                                                                                        $ 940,981                  $921,420
                                                                                        =========                  ========

</TABLE>

<PAGE>



                      LIABILITIES AND STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
                                                                                 January 31, 1999             June 27, 1998
                                                                                 ----------------             -------------
<S>                                                                              <C>                          <C>
Liabilities:
Current liabilities:
    Accounts payable and accrued expenses                                             $   722,557              $ 1,313,558
    Notes payable - affiliates                                                            638,088                  398,264
    Current portion of long-term debt                                                     456,444                  346,677
    Due to Candy Candy Acquisition Corporation                                            144,829                       --
    Other liabilities, including restructuring reserves                                        --                  304,640
                                                                                      -----------              -----------

                     Total current liabilities                                          1,961,918                2,363,139

Long-term liabilities:
    Long-term debt                                                                        661,587                  890,900
                                                                                      -----------              -----------

                     Total liabilities                                                  2,623,505                3,254,039
                                                                                      -----------              -----------

Stockholders' deficit:
    Common stock, $.01 par value; authorized 6,000,000
      shares, issued and outstanding 2,429,764 and 2,093,764
      shares for 1999 and 1998, respectively                                               24,298                   20,938
    Additional paid-in capital                                                          2,962,552                2,545,912
    Accumulated deficit                                                                (4,669,374)              (4,899,469)
                                                                                      -----------              -----------

                     Net stockholders' deficit                                         (1,682,524)              (2,332,619)
                                                                                      -----------              -----------




                                                                                      $   940,981              $   921,420
                                                                                      ===========              ============
</TABLE>









See accompanying notes to consolidated financial statements.


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                      Consolidated Statements of Operations

                     Seven-Months Ended January 31, 1999 and
                          The Year Ended June 27, 1998

<TABLE>
<CAPTION>
                                                                                              January 31, 1999         June 27, 1998
                                                                                              ----------------         -------------

<S>                                                                                           <C>                      <C>
Net sales                                                                                        $ 1,699,625            $ 2,230,922
                                                                                                 -----------            -----------

    Total revenues                                                                                 1,699,625              2,230,922

Cost of sales                                                                                        530,550                839,143
                                                                                                 -----------            -----------

                     Gross profit                                                                  1,169,075              1,391,779

Selling, general and administrative                                                                1,536,313              1,570,740
                                                                                                 -----------            -----------

Loss from operations                                                                                (367,238)              (178,961)

Other income (expense):
    Interest and other income                                                                          5,213                  8,839
    Interest expense                                                                                (127,405)              (215,221)
    Management fee revenue                                                                            56,852                     --
                                                                                                 -----------            -----------

                     Loss before discontinued operations                                            (432,578)              (385,343)

Discontinued operations:
    Loss from operations of discontinued operations                                                  (19,695)            (2,034,190)
    Loss on disposal of discontinued operations                                                      (25,020)            (1,186,300)
                                                                                                 -----------            -----------

                     Loss before extraordinary items                                                (477,293)            (3,605,833)

Extraordinary items -
    Gain on extinguishment of debt                                                                   707,388                     --
                                                                                                 -----------            -----------

                     Net income (loss)                                                           $   230,095            $(3,605,833)
                                                                                                 ===========            ===========

Basic and diluted net income (loss) per share of common stock:

  Before discontinued operations                                                                 $      (.20)           $      (.16)
                                                                                                 -----------            -----------

  Discontinued operations                                                                               (.02)                 (1.33)

  Extraordinary items                                                                                    .32                     --
                                                                                                 -----------            -----------

    Net income (loss)                                                                            $       .10            $     (1.49)
                                                                                                 ===========            ===========

</TABLE>

                                                                     (continued)


<PAGE>






                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                Consolidated Statements of Operations - Continued

                     Seven-Months Ended January 31, 1999 and
                          The Year Ended June 27, 1998

<TABLE>
<CAPTION>
                                                                                  January 31, 1999            June 27, 1998
                                                                                  ----------------            -------------

<S>                                                                               <C>                         <C>
  Earnings per common share - assuming dilution
    Loss before discontinued operations                                                $     (.13)               $    (.16)
      Discontinued operations                                                                (.01)                   (1.33)
      Extraordinary items                                                                     .21                       --
                                                                                       ----------                ---------

    Net income (loss)                                                                         .07                    (1.49)
                                                                                       ==========                =========

Weighted number of common shares outstanding                                            2,223,232                2,422,859
                                                                                       ==========                =========

Weighted average number of common shares outstanding -
 dilutive options and warrants                                                         $3,283,232                $      --
                                                                                       ==========                =========

</TABLE>









See accompanying notes to consolidated financial statements.


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                Consolidated Statements of Stockholders' Deficit

        Seven-Months Ended January 31, 1999 and Year Ended June 27, 1998

<TABLE>
<CAPTION>

                                                    Common Stock
                                              -------------------------
                                                                  Par           Additional                            Net
                                              Number of          Value            Paid-In       Accumulated      Stockholders'
                                               Shares           Amount            Capital         Deficit           Deficit
                                             ----------       ----------        ----------     ------------      -------------

<S>                                           <C>             <C>               <C>             <C>               <C>
Balances at June 28, 1997                     2,423,764       $   24,238       $  575,612      $(1,293,636)     $  (693,786)

Conversion of debt into additional
 paid-in capital                                     --               --        2,000,000               --        2,000,000

Consideration received and retirement
 of treasury shares                            (330,000)          (3,300)         (29,700)              --          (33,000)

Net loss                                             --               --               --       (3,605,833)      (3,605,833)
                                             ----------       ----------       ----------      -----------      -----------

Balances at June 27, 1998                     2,093,764           20,938        2,545,912       (4,899,469)      (2,332,619)

Issuance of common stock                        336,000            3,360          416,640               --          420,000

Net income                                           --               --               --          230,095          230,095
                                             ----------       ----------       ----------      -----------      -----------

Balances at January 31, 1999                  2,429,764       $   24,298       $2,962,552      $(4,669,374)     $(1,682,524)
                                             ==========       ==========       ==========      ===========      ===========


</TABLE>






















See accompanying notes to consolidated financial statements.


<PAGE>




                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                      Consolidated Statements of Cash Flows

        Seven-Months Ended January 31, 1999 and Year Ended June 27, 1998

<TABLE>
<CAPTION>

                                                                                January 31, 1999             June 27, 1998
                                                                                ----------------             -------------
Cash flows from operating activities:

<S>                                                                               <C>                          <C>
    Net income (loss)                                                             $  230,095                  $(3,605,833)
    Adjustments to reconcile net loss to net cash from
      operating activities:
    Net effects from purchase of Candico Entertainment, Inc.
      and sale of Goal Post Distributors, Inc.:
        Depreciation and amortization                                                 94,996                      237,103
        Accretion of interest                                                          9,800                       30,800
        Gain on forgiveness of debt                                                 (707,388)                          --
        Loss on disposal of property and equipment and
          other assets                                                                25,020                      921,345
        Loss on sale of Goal Post Distributors, Inc.                                      --                      264,955
        Changes in operating assets and liabilities:
             Increase in accounts receivable                                          (5,039)                     (18,295)
             Decrease (increase) decrease in inventories                             (95,849)                     652,538
             Decrease (increase) in prepaid expenses and other
               current assets                                                        (12,611)                      13,224
             Increase in accounts payable and accrued expenses                        56,213                      596,883
             Increase (decrease) other liabilities                                  (304,640)                      98,208
             Decrease in trade and other miscellaneous claims                             --                     (316,507)
             Increase in related party payables                                      144,829                           --
                                                                                  ----------                  -----------

                           Net cash used in operating activities                    (564,574)                  (1,125,579)
                                                                                  ----------                  -----------

Cash flows from investing activities:
    Business acquisitions, net of acquired cash                                           --                      (46,817)
    Purchases of property and equipment                                              (43,743)                     (98,101)
    Decrease in other assets                                                              --                       13,875
                                                                                  ----------                  -----------

                           Net cash used in investing activities                     (43,743)                    (131,043)
                                                                                  ----------                  -----------

Cash flows from financing activities:
    Proceeds from long-term borrowings - bank                                             --                    1,250,000
    Proceeds from notes payable - affiliates                                         300,000                      188,264
    Payments to unsecured creditors                                                   (5,743)                     (70,000)
    Net payments on long-term debt                                                  (123,603)                    (110,802)
    Payments to affiliates                                                                --                     (100,000)
    Proceeds from long-term debt                                                          --                       27,572
    Proceeds from common stock private placement                                     420,000                           --
                                                                                  ----------                  -----------

                           Net cash provided by financing activities              $  590,654                  $ 1,185,034
                                                                                  ----------                  -----------
</TABLE>





                                                                     (continued)

<PAGE>






                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                Consolidated Statements of Cash Flows - Continued

        Seven-Months Ended January 31, 1999 and Year Ended June 27, 1998

<TABLE>
<CAPTION>
                                                                                 January 31, 1999             June 27, 1998
                                                                                 ----------------             -------------
<S>                                                                              <C>                          <C>
Decrease in cash                                                                    $    (17,663)             $    (71,588)

Cash at beginning of year                                                                 60,132                   131,720
                                                                                    ------------              ------------

Cash at end of year                                                                 $     42,469              $     60,132
                                                                                    ============              ============

</TABLE>


Supplemental schedule of non-cash financing activities:

On June 27, 1998, the Company received 330,000 shares of its own common stock at
$.10 per  share  and  issued a $50,000  note  payable  for the sale of Goal Post
Distributing, Inc.

Interest paid was approximately $107,400 and $188,100 for the seven-months ended
January 31, 1999 and the year ended June 27, 1998, respectively.











See accompanying notes to consolidated financial statements.


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

                       January 31, 1999 and June 27, 1998

(1)  Summary of Significant Accounting Policies

     (a)  Principal Business Activity

          The principal  business activity of Retail  Entertainment  Group, Inc.
          (Company)  (formerly  Starlog  Franchise  Corporation)  is the  retail
          distribution of bulk candy under the name of "Candy Candy!" or Candico
          (the  "Candico  Stores").  Previously,  the Company  operated  Starlog
          stores that  included  various  science  fiction  and other  products.
          During  fiscal year 1998,  the Company  changed its name from  Starlog
          Franchise Corporation to Retail Entertainment Group, Inc.

     (b)  Consolidation

          The  accompanying   consolidated   financial  statements  include  the
          accounts  of the Company and its  wholly-owned  subsidiaries,  Candico
          Entertainment,  Inc. (Candico),  Goal Post Distributing,  Inc., Sumon,
          LLC  and  Shuttlecart   Enterprises.   All  significant   intercompany
          transactions and balances have been eliminated in consolidation.

     (c)  Sale of Operations of Goal Post Distributors, Inc.

          In April 1998, the Company's  Board of Directors  approved the sale of
          substantially  all of the net assets of Goal Post  Distributing,  Inc.
          (Goal Post), a wholly-owned  subsidiary,  back to its original  owner,
          effective  June 27,  1998.  Under this resale  agreement,  the Company
          received 330,000 shares of its own common stock (post 1-for-10 reverse
          split)  in  exchange  for the net  assets  of Goal  Post and a $50,000
          promissory  note  payable to the  previous  owner.  The  common  stock
          received was  accounted  for as treasury  stock using the cost method.
          Subsequently,  the Company  retired  all of the common  shares held in
          treasury.  The cost of the  re-acquired  shares in excess of par value
          has been charged to  additional  paid-in  capital.  As a result of the
          sale of Goal Post, certain warrants granted to management of Goal Post
          have been canceled.

          The  Company  incurred  a loss as a result of the sale of Goal Post of
          approximately  $265,000,  which has been reported in the  accompanying
          consolidated  statements  of operations as part of loss on disposal of
          discontinued operations (see Note 3).

                                                                     (continued)


<PAGE>






                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

     (d)  Discontinued Operations Reporting

          1. Starlog Franchise Corporation,  Sumon, LLC, Goal Post Distributors,
             Inc. and Shuttlecart Enterprises

             On April 25, 1998,  the Company's  Board of Directors  approved the
             closing of the remaining  Starlog and Hologram stores (Sumon,  LLC)
             and Goal Post  Distributors,  Inc. As a result,  the Company closed
             five of the remaining six Starlog  stores by June 27, 1998 with the
             last store closing  October 1998. In January 1999, the Company also
             approved  the closing of  Shuttlecart  Enterprises.  The results of
             operations  of each  subsidiary  are  reported in the  accompanying
             reclassified  consolidated statements of operations and accumulated
             deficit under discontinued operations. During fiscal year 1998, the
             Company wrote down certain assets of the retail operations to their
             net realizable  values and the cost of disposing  these  operations
             are also  reported in the  accompanying  reclassified  consolidated
             statements of operations and accumulated deficit under discontinued
             operations.  In  addition,  the  leases of four of the six  Starlog
             stores  expired  leaving  the  Company  with no  ongoing  liability
             resulting  from such  closings  and the  remaining  two leases were
             renegotiated resulting in a liability of approximately $27,000 (see
             Note 3).

     (e)  Inventories

          Inventories,  consisting  of finished  goods,  are stated at their net
          realizable value using the lower of cost or market,  and determined by
          the first-in, first-out method (FIFO).

     (f)  Depreciation and Amortization

          Depreciation  and amortization of property and equipment is calculated
          using the straight-line  method over the estimated useful lives of the
          related assets or life of the lease, whichever is shorter.

     (g)  Revenue Recognition

          The Company recognizes revenue when goods or services are provided.

     (h)  Estimates

          The preparation of the consolidated financial statements in conformity
          with generally accepted  accounting  principles requires management to
          make estimates and assumptions  that affect certain  reported  amounts
          and  disclosures.  Accordingly,  actual  results may differ from those
          estimates.

     (i)  Seasonality

          The  Company's  sales are seasonal in nature  based,  in part, on gift
          buying during holiday periods such as Halloween, Christmas and Easter.

                                                                     (continued)


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

     (j)  Reclassifications

          Certain  amounts in the 1998  consolidated  financial  statements have
          been  reclassified  to  conform  with  the  1999  presentation.   Such
          reclassifications had no effect on reported total net loss.

     (k)  Cash and Cash Equivalents

          The Company considers all highly liquid investments  purchased with an
          original maturity of three months or less to be cash equivalents.

     (l)  Earnings Per Share

          In the  fourth  quarter  of fiscal  year  1997,  the  Company  adopted
          Statement  of Financial  Accounting  Standards  No. 128,  Earnings Per
          Share,  (SFAS 128).  In February  1998,  the  Securities  and Exchange
          Commission  issued  Staff  Accounting  Bulletin No. 98 related to SFAS
          128. SFAS 128 replaced the  calculation  for primary and fully diluted
          earnings per share with basic and diluted  earnings per share.  Unlike
          primary  earnings  per share,  basic  earnings  per share  exclude any
          dilutive  effects of options,  warrants  and  convertible  securities.
          Diluted earnings per share is similar to the previously reported fully
          diluted  earnings  per share.  The Company had options and warrants at
          January 31, 1999,  resulting in diluted earnings per share. Certain of
          the  Company's  options and  warrants  were not  included in computing
          dilutive net income (loss) per common share because their effects were
          anti-dilutive.  At June 27,  1998,  the  Company  had no common  stock
          equivalents resulting in diluted earnings per share, and the Company's
          options and  warrants  were not  included in  computing  dilutive  net
          income   (loss)  per  common   share   because   their   effects  were
          anti-dilutive.

     (m)  Income Taxes

          The Company has adopted  Statement of Financial  Accounting  Standards
          (SFAS 109), Accounting for Income Taxes. Under the asset and liability
          method of SFAS 109 deferred tax assets and  liabilities are recognized
          for the future tax  consequences  attributable to differences  between
          the  financial  statement  carrying  amounts  of  existing  assets and
          liabilities  and their  respective tax bases.  Deferred tax assets and
          liabilities  are measured using enacted tax rates expected to apply to
          taxable income in the years in which those  temporary  differences are
          expected  to  be  recovered  or  settled.   Valuation  allowances  are
          established  when  necessary to reduce  deferred tax assets to amounts
          expected to be realized.

                                                                     (continued)


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

     (n)  Risks and Uncertainties

          (1)  Concentration of Credit Risk

               Financial  instruments,  which potentially subject the Company to
               significant concentrations of credit risk, consist principally of
               cash and cash  equivalents.  The carrying amounts reported in the
               consolidated   balance  sheets  for  cash  and  cash  equivalents
               approximate their fair values. The balances, at times, may exceed
               federally insured limits.

          (2)  Concentrations of Financial Risk

               The Company is  dependent  upon funding of Hope  Associates,  LLC
               (Hope  Associates)  which owns greater than 50% of the  Company's
               outstanding common stock.

     (o)  Recent Accounting Pronouncements

          (1)  Comprehensive Income

               The Company adopted SFAS No. 130, Reporting  Comprehensive Income
               (SFAS  130).  Under  SFAS 130  changes in net assets of an entity
               resulting from  transactions  and other events and  circumstances
               from non-owner  sources are reported in the financial  statements
               for the period in which they are  recognized.  Because there were
               no such  changes,  adoption  of  SFAS  130  did  not  impact  the
               consolidated financial statements of the Company.

          (2)  Segment Reporting

               The Company adopted SFAS No. 131,  Disclosures  About Segments of
               an  Enterprise  and Related  Information.  The Company  currently
               operates as a single segment and will evaluate additional segment
               disclosure requirements as it expands its operations.

          (3)  Derivative Instruments and Hedging Activities

               In June 1998, SFAS No. 133, Accounting for Derivative Instruments
               and Hedging Activities,  was released. The statement requires the
               recognition of all derivatives as either assets or liabilities in
               the balance sheet and the  measurement  of those  instruments  at
               fair  value.  The  accounting  for changes in the fair value of a
               derivative  depends on the planned use of the  derivative and the
               resulting  designation.  The Company is required to implement the
               statement in the first  quarter of fiscal  2000.  The Company has
               not used  derivative  instruments  and  believes  the  impact  of
               adoption of this statement will not have a significant  effect on
               the consolidated financial statements.

                                                                     (continued)


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

     (o)  Recent Accounting Pronouncements - Continued

          (4)  Long-Lived Assets

               The  Company  has  adopted  SFAS  No.  121,  Accounting  for  the
               Impairment of Long-Lived  Assets and for Long-Lived  Assets to be
               Disposed of, (SFAS 121). SFAS 121 requires that long-lived assets
               and certain  identifiable  intangibles held and used by an entity
               be  reviewed  for  impairment   whenever  events  or  changes  in
               circumstances  indicate that the carrying  amount of an asset may
               not be recoverable.  If the sum of the expected future cash flows
               (undiscounted  and without  interest)  is less than the  carrying
               amount  of  the  asset,   an  impairment   loss  is   recognized.
               Measurement  of that loss would be based on the fair value of the
               asset.  SFAS 121 also generally  requires  long-lived  assets and
               certain identifiable intangibles to be disposed of to be reported
               at the lower of the  carrying  amount or the fair value less cost
               to sell.

          (5)  Accounting for Stock-Based Compensation

               The  Company  has  adopted  the  disclosure-only   provisions  of
               Statement of Financial  Accounting Standards No. 123, "Accounting
               for  Stock  Based  Compensation"   (SFAS  123).  Accordingly,  no
               compensation costs have been recognized for the Company's granted
               stock options and warrants.  Had  compensation and other cost for
               the Company's  granted stock options and warrants been determined
               based on the fair value at the grant date or issuance  for awards
               in 1998 and 1999  consistent with the provisions of SFAS 123, the
               impact on operations would have been immaterial.

(2)  Management Agreement and Acquisition of Entity in Chapter 11

     (a)   Management Agreement and Funding

           In October  1997,  the Company  entered  into an  agreement  with KCK
           Corporation  (Debtor)  and the U.S.  Bankruptcy  Court to manage  and
           provide  certain  funding  while  the  debtor  reorganized  under the
           federal  bankruptcy  laws.  The  Company  was the  debtor's  approved
           post-petition   lender   of   an   allowed   secured   super-priority
           administrative  claim of $200,000.  KCK  Corporation  filed voluntary
           petitions for relief under Chapter 11 of the Federal  Bankruptcy Laws
           in July 1997.

                                                                     (continued)


<PAGE>






                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

     (b)  Emergence and Acquisition

          The United States  Bankruptcy  Court for the Middle  District of North
          Carolina,  confirmed the Debtor's Plan of Reorganization (the Plan) on
          March 26, 1998 (the Confirmation Date),  allowing the debtor to emerge
          from Chapter 11  Bankruptcy  effective  March 28, 1998 (the  Effective
          Date).  On March 28, 1998, the Company  acquired all of the assets and
          liabilities of KCK Corporation  and effectively  owned KCK. The debtor
          operated  under the  protection  of Chapter 11  following  a voluntary
          petition for  reorganization  filed July 22, 1997 and amended on March
          19, 1998. The Company was the Debtor's approved  post-petition  lender
          of an  allowed  secured,  super-priority  administrative  claim in the
          amount of $200,000 plus accrued, but unpaid, interest. Pursuant to the
          Plan,  the Company  converted  $100,000 of its loan into equity of the
          Debtor and  received  1,000 shares of newly issued stock in the Debtor
          which  constituted 100% of the Debtor's issued and outstanding  stock.
          The remaining  $100,000  obligation would be paid over a period not to
          exceed five  years.  Arrangements  satisfactory  to the Debtor and the
          Company have been made for the Debtor's substantial  compliance of its
          obligations to the Company under the Plan. The following are the major
          provisions under the Plan:

          1.  Thomas W. Gray and Sidney A. Crawley  reorganized  note of $65,000
              is a secured  claim  allowed by the court with interest of 10% per
              year, payable in 60 equal monthly installments  totaling $2,655.89
              per  month.  Payments  will  begin on the  first  day of the month
              following the Effective Date, none of which has been paid.

          2.  All  allowed  administrative  expenses  shall be paid in full,  in
              cash, on the Effective Date. All administrative expenses were paid
              except for approximately $36,000.

          3.  Allowed tax claims shall be paid over a period not  exceeding  six
              years after the date of  assessment  of such claim,  in  quarterly
              payments with interest at 7% per year  amortized  over that period
              beginning  on the  effective  date and ending on the date which is
              six years after the date of assessment. The amount of these claims
              was $10,000 and was paid prior to June 27, 1998.

          4.  NationsBank  allowed  secured  claim of  $147,542.46.  NationsBank
              shall  receive a note in the amount of its allowed  secured  claim
              payable in equal  monthly  installments  amortized  based over six
              years  with  interest  at 9%,  due in  three  years.  The  monthly
              payments are due on the first day of each month beginning with the
              first  month  following  the  Effective  date.  Subsequent  to the
              approval  of the  plan,  KCK's  former  owners  paid the  claim to
              NationsBank,  and, the Company  agreed to pay the entire amount to
              the original  owners under the same terms.  The amount is shown as
              note payable to NB Services, Inc. in the accompanying consolidated
              balance sheets.

          5.  Johnson  County  Bank  allowed  secured  claim  in the  amount  of
              $211,464.67.  Johnson  County  Bank  shall  receive  a note in the
              amount of its  allowed  secured  claim  which  shall be payable in
              equal monthly  installments over six years at 9% interest,  due in
              three years. The monthly payments shall be due on the first day of
              each month  beginning with the first month following the Effective
              Date.  This claim has been fully  guaranteed by KCK  Corporation's
              former owners.

                                                                     (continued)


<PAGE>







                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

     (b)  Emergence and Acquisition - Continued

          6.  Holders of general  unsecured  claims will receive $70,000 for pro
              rata payment.  The payment was made to an escrow  agent.  The same
              unsecured  creditors  also received a  reorganization  note in the
              total   amount  of   $60,000,   none  of  which  has  been   paid.
              Subsequently, the Court also approved a motion filed by the debtor
              for a dividend  distribution to unsecured  creditors.  No dividend
              distributions have been made as of June 27, 1998.

          7.  The Company issued to Nick Tricarico, Thomas W. Gray and Sidney A.
              Crawley, a total of 50,000 common stock warrants.  Each individual
              was offered 5,000 warrants (15,000) at a strike price of $5.00 per
              share  to be  exercised  prior  to  September  30,  1999  and  the
              remaining  warrants (35,000) issued at a strike price of $2.50 per
              share if  exercised  prior to  September  30, 1998 or at $4.00 per
              share if exercised prior to September 30, 1999.

     (c)  Fresh Start Reporting

          As of the Confirmation  Date, the Debtor adopted Fresh Start Reporting
          in  accordance  with  the  American   Institute  of  Certified  Public
          Accountants  Statement  of  Position  90-7  (SOP  90-7) --  "Financial
          Reporting by Entities in Reorganization under the Bankruptcy Code."

          The  Reorganization  Value (the  approximate fair value) of the Debtor
          was based on the  consideration of many factors and various  valuation
          methods,  including discounted cash flows and price/earnings and other
          applicable ratios and valuation  techniques believed by management and
          its financial  advisors to be  representative of the Debtor's business
          and  industry.  The excess of the  Reorganization  Value over the fair
          value of net assets and  liabilities  are  reported as  Reorganization
          Value in excess of  allocated  amounts  and will be  amortized  over a
          fifteen-year  period.  The  balance  of  such  assets  at the  date of
          emergence from bankruptcy was approximately $519,000.

                                                                     (continued)


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

     (c)  Fresh Start Reporting - Continued

          The  restructured  and  acquired  balance  sheet as of March 28,  1998
          (effective date of emergence) is as follows:

<TABLE>
<CAPTION>
                                                                       Restructured and acquired
                ASSETS                                                        Balance Sheet
                ------                                                 -------------------------
<S>                                                                    <C>
                Current assets:
                  Cash                                                         $  166,167
                  Due from affiliates                                               7,797
                  Inventories, net of reserves                                    205,715
                  Prepaid expenses and other assets                                 4,623
                                                                               ----------

                           Total current assets                                   384,302

                Property and equipment, net                                        90,661
                Reorganization value in excess of amounts allocable               519,030

                                                                               $  993,993
                                                                               ==========

                LIABILITIES AND STOCKHOLDERS' DEFICIT:
                --------------------------------------
                Post Petition Liabilities:
                  Current liabilities:
                  Accounts payable and accrued expenses                           201,120
                  Other liabilities, including reserves                            14,761
                  Notes payable - unsecured creditors                             130,000
                                                                               ----------

                           Total current liabilities                              345,881

                Long-term liabilities:
                  Secured notes payable - Johnson County Bank                     211,465
                  Secured notes payable - Gray & Crawley                           65,000
                  Super priority note payable to SFC                              100,000
                  Secured notes payable - NB Services, Inc.                       147,542
                                                                               ----------

                           Total liabilities                                      869,888

                Stockholders' deficit:
                   Common stock                                                        10
                   Additional paid-in capital                                     124,095
                                                                               ----------

                           Net stockholders' equity                               124,105
                                                                               ----------

                                                                               $  993,993
                                                                               ==========

</TABLE>

                                                                     (continued)



<PAGE>






                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

     (c)  Fresh Start Reporting - Continued

          During the current  year,  while under the  Company's  management  and
          prior to emergence from bankruptcy, KCK operations were as follows:

<TABLE>
<CAPTION>
                                                                           KCK Operations for the
                                                                           period October 1, 1997
                                                                           through March 28, 1998
                                                                           ----------------------

<S>                                                                        <C>
                Revenue                                                         $ 1,551,879

                Cost of sales                                                       493,029
                                                                                -----------

                           Gross profit                                           1,058,850

                General and administrative expenses:

                  Rent                                                              360,598
                  Depreciation and amortization                                     150,841
                  Office and salary expense                                         519,142
                                                                                -----------

                           Total general and administrative expenses              1,030,581
                                                                                -----------

                           Operating income                                          28,269

                  Other income (expense):

                     Other income                                                     5,316
                     Interest expense                                                (9,480)
                                                                                -----------

                           Net other income (expense)                                (4,164)
                                                                                -----------

                           Net income                                           $    24,105
                                                                                ===========

</TABLE>

          These  amounts are included in the  Company's  consolidated  financial
          statements for the year ended June 27, 1998.

     (d)  Merger

          Effective  June 17, 1998,  KCK  Corporation  (KCK) merged with Candico
          Entertainment,  Inc.  and  subsequently  changed  its name to  Candico
          Entertainment, Inc. (Candico). Each of the 1,000 shares outstanding of
          KCK was converted into one share of Candico.

                                                                     (continued)


<PAGE>






                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

(3)  Discontinued Operations

     For the  seven-months  ended January 31, 1999 and year ended June 27, 1998,
     the Company recorded a net loss of $19,695 and $2,034,190, respectively, as
     part of discontinued operations in the accompanying  consolidated statement
     of operations.  For financial reporting purposes, the assets,  liabilities,
     results of  operations  and cash flows of  Starlog  Franchise  Corporation,
     Sumon, LLC, Goal Post  Distributors,  Inc. and Shuttlecart  Enterprises are
     included in the Company's consolidated  financial statements.  A summary of
     these assets and  liabilities  as of January 31, 1999 and June 27, 1998 are
     as follows:

<TABLE>
<CAPTION>

                                                                January 31, 1999            June 27, 1998
                                                                ----------------            -------------
Assets:

<S>                                                             <C>                         <C>
  Cash and cash equivalents                                              $     --               $      85
  Accounts receivable, net                                                     --                      --
  Inventory                                                                    --                      --
  Other current assets                                                         --                      29
  Property, plant and equipment                                                --                      --
                                                                         --------               ---------

       Total assets - discontinued operations                            $     --                     114
                                                                         ========               =========

Liabilities:
  Accounts payable and accrued liabilities                               $ 11,433                 393,206
  Other current liabilities                                                    --                 421,462
  Long-term liabilities                                                        --                      --
                                                                         --------               ---------

       Total liabilities - discontinued operations                         11,433                 814,668
                                                                         --------               ---------

       Net assets (liabilities) of discontinued
         operations                                                      $(11,433)              $(814,554)
                                                                         ========               =========
</TABLE>

     Certain amounts in 1998 have been reclassified for comparative purposes.

     The  1998   liabilities  of   discontinued   operations  were  paid  and/or
     renegotiated  and  recorded as an  extraordinary  gain in the  accompanying
     consolidated statement of operations under extraordinary items.

     The remaining  liabilities  of  discontinued  operations are expected to be
     paid in fiscal period ended January 31, 2000.  The repayment will come from
     cash from continuing operations or other financing sources.

                                                                     (continued)


<PAGE>






                                          RETAIL ENTERTAINMENT GROUP, INC.
                                      (Formerly Starlog Franchise Corporation)

                                     Notes to Consolidated Financial Statements

(4)  Property and Equipment

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                                      Estimated
                                                         January 31, 1999         June 27, 1998      Useful Life
                                                         ----------------         -------------      -----------

<S>                                                      <C>                      <C>                <C>
           Trade show exhibition displays                       $      --               44,048           3 years
           Computer equipment and software                        119,207              119,207         3-5 years
           Furniture, fixtures and equipment                      275,939              281,994         3-7 years
        Leasehold improvements                                     79,206               91,463     Life of lease
                                                                ---------            ---------     or 10 years

                                                                  474,352              536,712
           Less accumulated depreciation
             and amortization                                    (278,944)            (298,712)
                                                                ---------            ---------

                                                                $ 195,408            $ 238,000
                                                                =========            =========

</TABLE>

     Depreciation  and  amortization  related to property and equipment  totaled
     approximately  $95,000 and $237,000 for the seven-months  ended January 31,
     1999 and year ended June 27, 1998, respectively.

     Approximately  $30,000 of net property and equipment reported in prior year
     was disposed of in the current period as part of discontinued operations.

(5)  Accounts Payable and Accrued Expenses

     Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                           January 31, 1999                June 27, 1998
                                                           ----------------                -------------
<S>                                                        <C>                             <C>
           Accounts payable                                       $ 482,551                   $1,001,631
           Accrued professional fees                                130,000                       95,000
           Accrued payroll                                           29,239                       39,788
           Accrued taxes                                             60,233                       59,367
           Accrued interest                                          20,000                       16,000
           Accrued rents                                                 --                       83,727
           Other                                                        534                       18,045
                                                                  ---------                   ----------

                                                                  $ 722,557                   $1,313,558
                                                                  =========                   ==========

</TABLE>

     Approximately $815,000 of accounts payable and accrued expenses reported in
     the prior year related to discontinued operations (see Note 3).

                                                                     (continued)


<PAGE>






                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

(6)  Notes Payable - Affiliates

     During  1997,  two  members  of  Hope  provided  $200,000  working  capital
     financing to the  Company.  One of the members was repaid  $100,000  during
     fiscal year 1998.

     On March 5, 1998, Hope Associates,  LLC provided $60,000 of working capital
     to the Company for operating needs. Interest accrues at the rate of 10% per
     year payable with principal 90 days after issuance.  Interest after default
     shall be at the rate of 18% per year.  At June 27,  1998,  none of the note
     has been repaid.

     In April 1998,  certain  members of Hope provided funds  totaling  $188,264
     which remained  outstanding at June 27, 1998. All of the notes are due upon
     demand  and bear  interest  at 10% per year.  During  the  current  period,
     $60,174  was  forgiven  and  is  reported  as  an  extraordinary   gain  on
     extinguishment  of  debt in the  accompanying  consolidated  statements  of
     operations.

     On June 27, 1998,  the Company sold the  remaining  net assets of Goal Post
     Distributing,  Inc. (Goal Post) to its original owner (see Note 1). As part
     of the terms of the sale,  the Company  agreed to pay $50,000 to the former
     owner of Goal Post.  The  $50,000 is  recorded  as part of notes  payable -
     affiliates and is due upon demand.

     In November 1998, Hope Associates, LLC (Hope Associates) and certain of its
     members,  loaned the  Company  $300,000  in  working  capital to be used to
     purchase  inventories  and pay  current  overhead  expenses.  The note will
     accrue interest at 10% with interest payable monthly,  due upon demand.  In
     conjunction  with the money  received  from Hope  Associates,  the  Company
     granted to the members of Hope Associates  300,000 common stock warrants at
     an exercise price of $1.25 expiring November 30, 2002.

(7)  Related Party Transactions

     The  Company  paid Hope  Associates,  LLC  ("Hope  Associates")  $60,000 in
     management fee expenses per an agreement  requiring payments of $20,000 per
     month  depending  on excess cash flows (see Note 12),  which is included in
     selling,   general,   and  administrative   expenses  in  the  accompanying
     consolidated  statements  of  operations.  It also  incurred an  additional
     $144,829   of  expenses  in   connection   with  Candy  Candy   Acquisition
     Corporation, which is also included in selling, general, and administrative
     expenses in the  accompanying  consolidated  statements of operations.  The
     Company earned  management fee revenues of $56,852  related to a management
     agreement with Hope  Associates  allowing the Company to manage eight candy
     stores  previously  acquired by Hope  Associates (see note 8). The revenues
     are reported as management fee revenues in other income in the accompanying
     consolidated statements of operations.

                                                                     (continued)


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

(8)  Management and Option Agreement

     On November 24,  1998,  the Company  entered  into a management  and option
     agreement with Hope  Associates,  LLC,  (Hope  Associates) a related party,
     whereby the Company will manage  certain  retail candy stores  (Candy Candy
     Acquisition  Corporation)  belonging  to Hope  Associates,  and in exchange
     grant to Hope  Associates  500,000 common stock warrants at $1.25 per share
     expiring in November 2002. The Company will receive quarterly compensation,
     based upon a specified formula as noted in the agreement,  for its services
     with respect to the agreement.  In addition,  the Company has the right and
     option to purchase, effective the date of the agreement, until November 30,
     2001,  all of the  outstanding  common  stock  of Candy  Candy  Acquisition
     Corporation.  The exercise price for the option is equal to the cost of the
     Candy Candy  Acquisition  Corporation  plus the outstanding  balance of any
     Hope loans and any additional  capital  contributions or loans made by Hope
     to the Company and Candy Candy Acquisition Corporation.

(9)  Long-Term Debt

     Amounts  due to  unrelated  entities  at January 31, 1999 and June 27, 1998
     consists of the following:

<TABLE>
<CAPTION>

                                                                                  January 31, 1999        June 27, 1998
                                                                                  ----------------        -------------
<S>                                                                               <C>                     <C>
           Note  payable  to  Securities   Exchange  Commission  due  in  annual
           installments through January 2002, with interest
           payable annually at 5.5%.                                                 $    303,820              396,180

           Notes  payable to  unsecured  creditors  due in monthly  installments
           through June 2002 with interest payable monthly at 12% (net
           of unamortized portion imputed interest of $43,400).                           346,600               336,800

           Note  payable to  Johnson  County  Bank due in  monthly  installments
           through May 2001 with  interest at 9%. This note is fully  guaranteed
           by Gray and Crawley.                                                           206,777               218,765

           Note payable to NB Services, Inc. due in monthly
           installments through May 2001 with interest
           at 9%.                                                                         148,491               160,832

           Note payable to Gray and Crawley due in monthly
           installments through April 2003 with interest at 10%.                           58,086                65,000

           Notes payable to unsecured creditors due in monthly
           installments through May 2003 with interest at 10%.                             54,257                60,000
                                                                                      -----------           -----------

</TABLE>


                                                                     (continued)




<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements


(9)  Long-Term Debt - Continued

<TABLE>
<CAPTION>

                                                                                January 31, 1999         June 27, 1998
                                                                                ----------------         --------------
<S>                                                                             <C>                      <C>
                Total                                                                 $1,118,031            $1,237,577

           Less current installments of long-term debt                                   456,444               346,677
                                                                                      ----------            ----------

           Long-term debt, excluding current installments                             $  661,587            $  890,900
                                                                                      ==========            ==========

</TABLE>

     The  aggregate  of future  maturities  of long-term  indebtedness  are as
follows:

           Fiscal Year Ending June:
           ------------------------

                  2000                             $   456,444
                  2001                                 268,185
                  2002                                 356,098
                  2003                                  29,467
                  2004                                   7,837
                                                   -----------
                                                   $ 1,118,031
                                                   ===========

     During fiscal year 1998, the Company  borrowed  $1,250,000 from BSB Bank in
     the form of a note payable. The Company also renewed a previous note due to
     BSB Bank in the amount of $500,000.  Subsequently,  in September 1998, Hope
     Associates,  LLC, a majority  stockholder,  assumed  the  $1,750,000  notes
     payable to BSB Bank and forgave an  additional  $250,000 due to them by the
     Company,  all of which was recorded as a contribution  to capital (see Note
     12). In  consideration  for such assumption and  contribution,  the Company
     will pay a monthly  fee to Hope  Associates  of  approximately  $20,000 per
     month.  Subsequently,  Hope  Associates  agreed  to waive  certain  monthly
     management fees until the Company is able to operate  profitably and obtain
     excess cash flows.  In connection with the above  transactions  the Company
     also granted the members of Hope  Associates a warrant to purchase  500,000
     shares of the  Company's  common  stock at an  exercise  price of $1.25 per
     share.  The warrant  expires May 3, 2003.  The  warrants  estimated at fair
     market  value  at  date  of  issuance  was not  material  to the  Company's
     financial statements.

(10) Income Taxes

     The Plan of Reorganization of the Company was approved by the United States
     Bankruptcy  Court on August 28,  1996,  provided  for the  issuance  of new
     common  stock to satisfy  the  Company's  indebtedness  and  resulted in an
     "ownership  change"  under  Section 382 of the United States Tax Code. As a
     result,  total usage of the Company's net operating loss  carryforwards  of
     $7,900,000 that occurred prior to emergence from  bankruptcy,  noted below,
     will be limited to approximately $20,000 annually or $300,000 over the next
     15 years. In addition,  deferred  deductions,  described below, that become
     deductible  for tax  purposes  during the five year  period  following  the
     effective date of the bankruptcy are also subject to the annual limitation.
     Net  operating  carryforwards  (NOL) and future  deductions  exceeding  the
     annual limitation will expire unutilized.  NOL's which resulted  subsequent
     to  emergence  from  bankruptcy  will not be  fully  available  for  future
     utilization. (continued)


<PAGE>






                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

(10) Income Taxes - Continued

     The  Company  accounts  for  income  taxes  pursuant  to the  Statement  of
     Financial Accounting Standards No. 109. The approximate amounts of deferred
     assets at January 31, 1999 and June 27, 1998, respectively,  resulting from
     temporary differences and carryforwards were as follows:

<TABLE>
<CAPTION>
                                                                      January 31, 1999             June 27, 1998
                                                                      ----------------             -------------
<S>                                                                   <C>                          <C>
Net operating loss carryforwards                                          $ 9,220,900                  9,300,000
Expenses recognized for financial
  reporting purposes not yet deductible:
     Other                                                                         --                    100,000
                                                                          -----------                -----------
                                                                            9,220,900                  9,400,000
     Effective federal and state tax rate                                         40%                        40%
                                                                          -----------                -----------

Total deferred tax asset                                                    3,688,360                  3,760,000

Valuation allowance for deferred tax asset                                 (3,688,360)                (3,760,000)
                                                                          -----------                -----------

Net deferred tax asset                                                    $        --                         --
                                                                          ===========                ===========

</TABLE>

(11) Commitments and Contingencies

     The Company has entered into various  non-cancelable  operating  leases for
     office,  warehouse and retail store space expiring at various dates through
     2006.  Certain  of the leases  provide  for  minimum  annual  rentals  plus
     additional rental payments based upon sales volume.

     At January 31, 1999,  aggregate  approximate future minimum rental payments
     required under operating leases are as follows:

           Fiscal Year Ending June:
           ------------------------

                  2000                   $  607,721
                  2001                      449,720
                  2002                      429,089
                  2003                      358,165
                  2004                      304,113
                  Thereafter                265,652
                                         ----------
                                         $2,414,460

     Rent expense charged to operations for the years ended January 31, 1999 and
     June 27, 1998 was approximately $501,923 and $1,116,000, respectively.





                                                                     (continued)


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

(11) Commitments and Contingencies - Continued

     The  Company  entered  into a  trademark  license  agreement  with  Starlog
     Communications  International,  Inc.  (SCI),  an entity  related  by common
     ownership for the exclusive right to use the name, registered trademark and
     logos "Starlog" and "Starlog: The Cosmic and Science Fiction Universe." For
     the years ended June 27, 1998 and June 28, 1997,  no amounts were due under
     the terms of this  agreement.  On July 1, 1998, the Company  terminated its
     license  agreement with SCI and transferred  certain of its assets worth an
     immaterial amount in connection with the dissolution.

     The Company entered into an employment agreement with the President and CEO
     commencing  July 11, 1994 and  subsequently  amended  August 15,  1996.  As
     amended,  the  agreement  provided  for a  five-year  term and a salary  of
     $100,000 per year, increasing by $10,000 a year up to $140,000,  plus other
     benefits  including a discretionary  bonus of up to 50% of his base salary.
     In April 1998, the Board of Directors  amended the employment  agreement to
     provide a base salary of $150,000 when the Company raises  $150,000 or more
     in a currently  proposed private  placement of common stock. The employment
     agreement also granted certain other stock options (see Note 14).

     The  Company is party to various  claims and legal  actions  arising in the
     ordinary  course of business.  Management does not believe that the outcome
     of such claims and legal  actions will have a material  effect on financial
     position or results of operations of the Company.

(12) Stockholders' Equity

     On May 10, 1998, the Company's Board of Directors and shareholders approved
     a  one-for-ten  reverse  stock  split of the  outstanding  shares of Retail
     Entertainment  Group,  Inc.  (formerly  Starlog  Franchise  Corporation) to
     shareholders  of record on July 9, 1998. In addition to the reverse  split,
     the Company  reduced the number of shares of common stock  authorized  from
     40,000,000,  with a .001 par  value,  to  6,000,000  shares  with a .01 par
     value.   Shareholders'   equity  has  been  restated  to  give  retroactive
     recognition to the reverse stock split in prior  periods.  The total number
     of shares  outstanding  following the reverse split was 2,093,764.

     In September 1998, Hope Associates,  LLC (Hope  Associates),  the Company's
     majority shareholder, assumed $1,750,000 of debt owed by the Company to BSB
     Bank  and  forgave  $250,000  of debt  owed to  them  by the  Company.  The
     transaction   resulted  in  a  contribution  of  $2,000,000  to  additional
     paid-in-capital (see Note 9). The members of Hope Associates had personally
     guaranteed the amounts due to BSB Bank.

                                                                     (continued)


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

(12) Stockholders' Equity - Continued

     Effective June 27, 1998, the Company entered into an agreement for the sale
     of Goal Post  Distributors,  Inc., a wholly owned  subsidiary,  back to its
     original owner.  The sale of Goal Post resulted in a loss of  approximately
     $265,000.  In addition,  in exchange for Goal Post, the Company received as
     consideration  330,000  shares of the  Company's own common stock valued at
     $.10 per share.  The  shares  were  accounted  for as  treasury  shares and
     resulted  in a charge to common  stock and  additional  paid-in-capital  of
     approximately  $33,000.  The shares were subsequently retired and accounted
     for using the cost method (see Note 1).

     In November 1998, the Company issued approximately 336,000 shares of common
     stock at $1.25 per share pursuant to private  placements under Regulation D
     of U.S.  Securities  laws. The proceeds of  approximately  $420,000 will be
     used to provide for working capital and repay certain debts to affiliates.

     None of the Company's  outstanding  options or warrants have been exercised
     during the  seven-months  ended  January  31, 1999 or the fiscal year ended
     June 27, 1998.

(13) Earnings Per Share Disclosure


<TABLE>
<CAPTION>
                                                                                        Seven-Months
                                                                                           Ended
                                                                                      January 31, 1999
                                                                                     -----------------
                                                              Income              Shares              Per-Share
                                                           (Numerator)         (Denominator)            Amount
                                                           -----------         -------------          ---------
<S>                                                        <C>                 <C>                    <C>
        Income available to common
          stockholders                                      $ 230,095                    --            $  --
                                                            ---------

        Basic EPS
        Income available to common stockholders               230,095             2,223,232              .10

        Effect of Dilutive Securities
        Warrants and options                                       --             1,060,000               --
                                                            ---------             ---------            -----

        Diluted EPS
        Income available to common stockholders
          plus assumed conversions                          $ 230,095             3,283,232            $ .07
                                                            =========             =========            =====

</TABLE>

     Options  and  warrants  to  purchase  144,000  shares of common  stock were
     outstanding  during the period but were not included in the  computation of
     diluted  EPS because  their  exercise  price was  greater  than the average
     market price of the common shares.

                                                                     (continued)


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

(14) Stock Options and Warrants

     On April 1,  1997 and  subsequently  revised  in April  1998,  the  Company
     granted  the  President  and  CEO  an  option  to  acquire   300,000  (post
     one-for-ten reverse split) shares of the Company's common stock until March
     31, 2003. The option to acquire 100,000 (post one-for-ten reverse split) of
     such  shares is  currently  exercisable.  The option to acquire  the second
     100,000 (post one-for-ten  reverse split) shares is exercisable only if and
     after the Company  has  $500,000 of annual net  profits,  before  interest,
     taxes, depreciation and amortization (EBITDA) and the option to acquire the
     remaining  100,000 shares will be exercisable only if and after the Company
     has $1,000,000 of annual net profits EBITDA.  This option is in replacement
     of  other  options  previously  granted.  None  of the  options  have  been
     exercised. The Company has no other long-term incentive plans.

     Aggregate Stock Option Activity

     The following tables summarize information about the aggregate stock option
     and warrant activity (post one-for-ten  reverse split) for the seven-months
     ended January 31, 1999:

<TABLE>
<CAPTION>
                                                                                        Weighted-
                                                                                         average
                                                                    Number              exercise
                                                                  of shares               price
                                                                  ---------             ---------
<S>                                                               <C>                   <C>
           Outstanding, beginning of year                           744,000               $ 1.52
             Granted                                                800,000                 1.25
           Exercised                                                     --                   --
             Forfeited                                                   --                   --
                                                                  ---------               ------

           Outstanding, end of year                               1,544,000                 1.39
                                                                  ---------               ------

           Options and warrants vested, end of year               1,544,000               $ 1.39
                                                                  =========               ======

</TABLE>


<TABLE>
<CAPTION>

                           Options and Warrants Outstanding                       Options and Warrants Exercisable
                       ---------------------------------------                  -------------------------------------

                                                                   Weighted-
                                                  Weighted-         average                                  Weighted-
                                                  average          remaining                                  average
            Average               Number          exercise         contractual          Number               exercise
        Exercise Price          outstanding        price           life (years)      exercisable              price
        --------------          -----------       ---------       -------------      -----------            ---------
        <S>                     <C>               <C>             <C>                <C>                    <C>
          $.60 - 2.50               194,000          $ 1.52                 5           194,000                $ 1.52
          1.25 - 5.00               550,000            1.53                 3           550,000                  1.53
            1.25                    800,000            1.25                 -           800,000                  1.25
                                 ----------          ------                --        ----------                ------

                                  1,544,000          $ 1.43                 8         1,544,000                $ 1.43
                                 ==========          ======                ==        ==========                ======

</TABLE>

     These tables do not include options and warrants in which certain events or
     contingencies must be met prior to grant.

                                                                     (continued)


<PAGE>



                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

(14) Stock Options and Warrants - Continued

     Accounting for Stock-Based Compensation

     The Company accounts for its stock option plans under Accounting Principles
     Board Opinion No. 25 (APB 25), under which no compensation expense has been
     recognized. In October 1995, the FASB issued SFAS No. 123, "Accounting for
     Stock-Based Compensation"  (SFAS 123), which was effective for fiscal years
     beginning  after December 15, 1995.  SFAS 123 allows  companies to continue
     following  the  accounting  guidance  of APB 25,  but  requires  pro  forma
     disclosure  of net  income  and  earnings  per  share  for the  effects  on
     compensation  expense had the accounting guidance of SFAS 123 been adopted.
     The pro forma  disclosures  are required only for options granted in fiscal
     years beginning after December 15, 1994.

     The Company  adopted  the  disclosure-only  provisions  of SFAS 123 for the
     seven-months  ended  January  31,  1999 and the year ended  June 27,  1998.
     Accordingly,  no  compensation  cost has been  recognized for the Company's
     granted stock options and warrants.  Had  compensation  and other costs for
     the Company's  granted stock options and warrants been determined  based on
     the fair value at the grant date or  issuance  for awards in 1999 and 1998,
     consistent  with the  provisions of SFAS 123, the impact on net  operations
     would have been immaterial.

(15) Going Concern

     As shown in the accompanying consolidated financial statements, the Company
     has  incurred   recurring  losses  from   operations.   These  losses  have
     contributed to the Company's working capital  deficiency and resulting cash
     flow  problems.  Although  the  Company's  cash flows  increase  during the
     holiday  season,  it has not been  profitable  on a year round  basis.  The
     Company has raised cash through  various debt  financing  from  affiliates,
     however,  its  ability to  continue  as a going  concern  will  require the
     attainment of profitable  operations  for extended  periods,  conversion of
     debt into permanent equity or obtaining  additional  permanent equity.  The
     Company is currently pursuing various debt and equity opportunities.

(16) Huttoe Financing

     During  the  confirmation   process,   the  Company  and  Hope  engaged  in
     discussions  with  Charles  Huttoe  (Huttoe) to provide  post  confirmation
     financing  to the Company and to acquire the  ownership  of the  18,000,000
     shares of the Company's  common stock owned by Hope.  In  September,  1996,
     Huttoe,  Hope  and  its  members,  but  not the  Company,  entered  into an
     agreement (Sales Agreement)  pursuant to which,  Huttoe was to make certain
     payments  to Hope's  bank and to Hope's  members  and was to  purchase  the
     membership  interests in Hope from its members,  thus indirectly  obtaining
     Hope's  18,000,000  shares into the  Company.  The position of the Company,
     Hope and the members of Hope is that the  purchase  of the Hope  membership
     interests has not been consummated.

                                                                     (continued)


<PAGE>






                        RETAIL ENTERTAINMENT GROUP, INC.
                    (Formerly Starlog Franchise Corporation)

                   Notes to Consolidated Financial Statements

(16) Huttoe Financing - Continued

     In  September,  1996,  Huttoe  provided  working  capital  to  the  Company
     aggregating  $650,000.  There was no written  agreement between the Company
     and Huttoe regarding these funds.  Subsequent to the above, David Goldstein
     (Goldstein), who had been acting as the attorney for Huttoe with respect to
     these matters,  announced that the Sale Agreement had been assigned to him.
     However,  it is the  position  of Starlog,  Hope and its members  that this
     purported assignment is legally ineffective.

     October  1996,  a bank  loan to Hope was paid in full  from an  account  of
     Goldstein's in alleged compliance with the Sale Agreement. In addition, the
     sum of $200,000 has been  deposited  from  Goldstein's  account into escrow
     with an  attorney  for Hope for  payment to the  members of Hope to acquire
     their membership interests in alleged compliance with the Sale Agreement.

     In November  1996, the  Securities  and Exchange  Commission  (SEC) filed a
     complaint in the U.S.  District Court for the District of Columbia  (Court)
     against Huttoe and others, but not including  Goldstein,  alleging "massive
     unregistered  distribution"  of the "stock of Systems of  Excellence,  Inc.
     (SOE) and manipulation of the SOE stock price." In November 1996, the Court
     issued a  temporary  restraining  order  temporarily  freezing  assets  and
     accounts of Huttoe and various  third party  accounts  into which  payments
     were  made  from  allegedly  "Huttoe   controlled"   accounts.   The  order
     specifically  covered the Company's  account which received the $650,000 as
     well as the attorney  escrow account holding the  aforementioned  $200,000.
     The  $200,000  has not been paid to the members of Hope and the transfer of
     membership interest from Hope has not occurred.

     During fiscal year 1998, the Company and the SEC reached  agreement for the
     repayment  of $500,000 of the  $650,000  of funds  provided by Huttoe.  The
     Company will repay this amount over five years with  interest (see Note 8).
     The $150,000  difference between the amount funded by Huttoe and the amount
     to be repaid to the SEC is  reflected  in the  Consolidated  Statements  of
     Operations  as gain on  extinguishment  of debt for the year ended June 28,
     1997.

(17) Year 2000 Issue (Unaudited)

     The  Company  does not  expect  the Year 2000  issue to have a  significant
     effect on  operations.  Management  of the  Company  does not expect  major
     vendors  or  customers  to be unable to sell to,  provide  services  to, or
     purchase from the Company because of the Year 2000 issue.

(18) Subsequent Events

     In February  1999,  the Company  granted an  additional  option to purchase
     50,000 shares of the Company's common stock at $1.25 per share, expiring on
     February 9, 2004.  Of these  options  granted,  $10,000  would be currently
     vested and the  remaining  15,000 will vest at 5,000 per year in subsequent
     years.

     In July 1999,  the Company  issued  approximately  87,000  shares of common
     stock at $1.25 per share pursuant to private  placements under Regulation D
     of U.S.  Securities  laws. The proceeds of  approximately  $108,000 will be
     used to provide for working capital and repay certain debts to affiliates.