CROWN BOOKS CORP, 10-K, 1995-04-28

CROWN BOOKS CORP
10-K, 1995-04-28
MISCELLANEOUS SHOPPING GOODS STORES

Previous: CIRCON CORP, 10-K/A, 1995-04-28

Next: WILLIAMS SONOMA INC, 10-K, 1995-04-28

<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
(X) Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required) for the fiscal year ended
January 28, 1995

( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from
___________ to __________

Commission file number 0-11457

CROWN BOOKS CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
Delaware 52-1227415
- ------------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

3300 75th Avenue, Landover, Maryland 20785
- ------------------------------------ -----------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code (301) 731-1200
-------------------------

Securities registered pursuant to Section 12(b) of the Act: NONE
-------------
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $.01 per share
- ------------------------------------------------------------------------------
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /

At April 27, 1995, the registrant had 5,388,973 shares of Common Stock
outstanding and the aggregate market value of such shares held by
non-affiliates of the registrant was approximately $33,848,000.

DOCUMENTS INCORPORATED BY REFERENCE

1995 Proxy Statement for annual stockholders' meeting to be held
June 30, 1995..................... Part III Items 10-13

The exhibit index begins at page 64 of this Form 10-K.

1
<PAGE> 2
PART I

Item 1. Business

Crown Books Corporation ("Crown Books") was incorporated in Delaware in 1981
and operates retail discount book stores. The term "Company" refers
collectively to Crown Books and its wholly-owned subsidiaries, including Crown
Books East Corporation ("Crown East"), Crown Books West Corporation ("Crown
West"), Super Crown Books Corporation ("Super Crown") and Crown DHC Corporation
("Crown DHC"). Dart Group Corporation ("Dart") owns 51.4% of Crown Books'
outstanding common stock, par value $.01 per share (the "Common Stock").

Operations

The Company is a retailer operating discount specialty stores. These stores
offer popular hardback and paperback books, newspapers, magazines, books on
tape, videos, computer software, reference materials and other items and
accessories.

The Company responds to the demand for books at prices below the publishers'
and manufacturers' suggested retail prices and at the same time provides
quality service to its customers. The Company sells hardbacks on The New York
Times best seller list at 40% below the publishers' suggested retail prices,
paperbacks on The New York Times best seller list at 25% below the publishers'
suggested retail prices, other new books at 10% to 25% below the publishers'
suggested retail prices, and magazines at 10% below the publishers' suggested
retail prices. All other merchandise is sold at a discount from the
manufacturers' suggested retail price. The Company sells publishers'
over-stock, reprints and former best sellers at significant discounts from the
publishers' original suggested retail prices. In addition, the Company allows
customers at all stores to special order books not stocked in inventory at
discount pricing. Merchandise is generally purchased directly from a large
number of publishers and suppliers and the Company is not dependent on any
single publisher or supplier.

The Company advertises intensively, primarily through newspapers and direct
mail, stressing its pricing policy. The Company satisfies regional and local
consumer preferences by tailoring the selections and quantities of books that
it makes available in individual stores. The Company clusters its stores in
selected market areas to maximize the efficiency of advertising, publicity,
management and distribution. Within those areas, the Company generally locates
its stores in retail power centers, strip shopping centers and urban street
locations. These locations typically may be rented at more favorable rates
than locations in large enclosed malls and provide for increased consumer
awareness and convenience of the store locations.

All major merchandising decisions concerning pricing, advertising and
promotional campaigns, as well as the initial ordering of inventory for each
store, are managed centrally at the Company's headquarters in Landover,
Maryland. Over 80% of the merchandise is shipped directly from publishers to
the stores. Best sellers and other books that are purchased in large
quantities are often shipped directly from the publishers to the Company's
regional warehouses for distribution to the stores. Inventories are monitored
both at stores and in the central office in Landover, Maryland, to determine
purchase requirements. In general, unsold books and magazines can be returned
to the publishers for credit.

2
<PAGE> 3
Operations (continued)

Super Crown Books operates discount retail book superstores. The first Super
Crown Books store opened in May of 1990 and the Company has been expanding the
Super Crown Books concept since. The stores carry as many as 80,000 titles,
nearly eight times the number of titles as a "classic" Crown Books ("Classic
Crown Books") store. Super Crown Books stores also carry a wider selection of
non-book products and accessories.

The following table sets forth by metropolitan area the locations of the
Company's stores for each of the last five fiscal years:
<TABLE>
<CAPTION>
Number of Stores
at end of fiscal year
------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Metropolitan Area:
- ------------------
Washington, D.C. ........... 63 61 59 60 47
Los Angeles, California .... 80 79 76 68 59
Chicago, Illinois .......... 44 43 43 43 37
San Francisco, California .. 31 30 30 31 24
San Diego, California ...... 19 20 20 17 12
Houston, Texas ............. 6 5 3 6 6
Seattle, Washington ........ 16 16 16 15 11
---- ---- ---- ---- ----
Total..................... 259 254 247 240 196
==== ==== ==== ==== ====
</TABLE>

The following tables set forth the number of stores of each of Classic Crown
Books and Super Crown Books that were opened, closed or remodeled during each
of the last five fiscal years, as well as the total number of such stores as of
the end of each such fiscal year.

<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Super Crown Books stores:
- -------------------------
Opened during the year.... 6 9 13 37 12
Closed during the year.... - - - 4 3

Classic Crown Books stores:
- ---------------------------
Opened during the year.... 10 4 - 5 2
Closed during the year.... 10 18 20 45 55
Remodeled during the year. 16 7 2 - -

Total Opened at January 31
- --------------------------

Super Crown Books stores.... 6 15 28 61 70
Classic Crown Books stores.. 253 239 219 179 126
</TABLE>

Classic Crown Books stores range in size from approximately 2,000 to 3,000
square feet and Super Crown Books stores range in size from approximately 6,500
to 35,000 square feet. All stores use specially-designed display fixtures.
The Company's new prototype stores, generally range in size from approximately
12,000 to 35,000 square feet. These new prototype stores permit more effective
and economic utilization of space. The interior of the stores is standardized,
so that the stores can be assembled quickly. Most of the stores are open seven
days a week.

All Super Crown Books stores and all Classic Crown Books stores have
computerized point of sale and inventory management systems ("systems"). The
systems enable store personnel to scan bar coded merchandise resulting in less
time to process the sales transaction with more accurate pricing. The systems
are designed to provide detailed inventory information on an item basis to
store management and the central office providing for better informed
reordering and

3
<PAGE> 4
Operations (continued)

merchandising decisions. As of January 28, 1995 the inventory systems were not
fully operational. The Company believes these systems will, when fully
operational, enhance customer service as well as store operating efficiency.

During the past three fiscal years, the Company has recorded charges in
connection with store closings and restructurings. During the year ended
January 30, 1993, the Company recorded a restructuring charge of $6,600,000 for
anticipated costs associated with a restructuring plan to close, relocate,
expand and convert approximately 50 Classic Crown Books stores to a Super Crown
Books format. At January 28, 1995, the Company had charged approximately
$1,445,000 against this reserve in connection with the closing, relocation,
expansion on conversion of approximately 40 stores. These charges consisted
primarily of unrecoverable lease costs (including buyouts of remaining lease
terms) and the remaining book value of leasehold improvements and store
fixtures for stores that have closed.

In the year ended January 29, 1994, the Company determined that seven of the
smaller Super Crown Books stores (typically 6,000 - 10,000 square feet) opened
in prior years were no longer competitive in the current market environment and
in light of the industry's movement to larger stores. Accordingly, the Company
recorded an additional restructuring charge of $6,200,000 in the year ended
January 29, 1994, representing the anticipated costs (unrecoverable lease costs
and the remaining book value of leasehold improvements and store fixtures
subsequent to management's estimate of the stores' closing dates) associated
with closing, relocating and converting these stores to the new, larger
prototype. At January 28, 1995, the Company had not charged any costs in
connection with this reserve. The Company presently intends to use this
restructuring charge and complete the restructuring related to these seven
stores during the next 24 months. The total restructuring reserve at January
28, 1995 is $10.5 million.

A comprehensive review of the Company was begun by its new Chief Operating
Officer and interim Chief Financial Officer shortly after their appointments in
October of 1994. That review, which continued into February, identified
opportunities to improve the Company's profitability, organization, staffing,
computer systems, and operating controls. The initial review found that the
Company still had a majority of its stores in the original Classic Crown Books
stores format and concluded that many of these Classic Crown Books stores were
not generating, and were not expected to generate, a return on investment
sufficient to justify their continued operation and that the Company's
competitors had long since moved to a much larger format. As a result, the
Company determined to act aggressively to implement the larger Super Crown
format begun as part of its earlier restructuring and close approximately 100
of these small and under-performing stores over the succeeding 6-18 months.
As a result, the Company recorded a closed store reserve of $18.9 million for
the costs to be incurred in these closings.

During the fiscal years 1995, 1994 and 1993, the Company recorded net charges
(income) of $18,865,000, $(631,000), and $513,000, respectively for such closed
store costs. The income during the year ended January 28, 1994 was the result
of early lease terminations, net of cash buyouts. At January 28, 1995, 28 of
the 100 stores targeted for closing during the third fiscal quarter had been
closed and over 40 stores targeted for closing under the previous
restructurings had been closed. At January 28, 1995, the Company had an
aggregate store closing and restructuring reserve of $29,853,000 of which
approximately $6,936,000 will be utilized over the next 12 months.

4
<PAGE> 5
Operations (continued)

During the fourth fiscal quarter an additional 54 stores were targeted for
closure as a result of the continuing analysis of store profitability and
market presence. Additional reserves for store closings were not deemed
necessary as the remaining reserves adequately provide for the Company's
obligations for the currently identified stores to be closed due to revisions
to the planned closing dates for certain stores. The Company will continue to
evaluate the performance and future viability of its remaining stores and may
close additional stores in the future. No reserves for these stores have been
recorded. The closings of these smaller or underperforming stores may, where
appropriate, be coordinated with the opening of Super Crown Books stores in
those markets where the Company plans to maintain or expand its presence. A
commitment has recently been made to accelerate the opening of stores in the
Super Crown Books format.

Management plans to open 28 Super Crown Books stores varying in size from
12,000 to 18,000 square feet over the next 12-18 months. These stores will
represent approximately 420,000 square feet of new space opened in the next
12-18 months.

The review discussed above also identified the need for changes in officers
and key employees to address the other opportunities identified for improving
the Company's performance. In this regard, the Company has recruited and
hired senior management to address particular issues identified, including
a senior management information systems specialist; a senior loss prevention
specialist; a senior personnel administrator and trainer; and a senior regional
operations manager. Recruiting of other key personnel is underway including: a
permanent chief financial officer; a senior merchandiser; a senior operations
manager; additional management information specialists; and experienced
district and sales managers at several levels. Coupled with this recruiting
effort, the Company has also begun replacing certain district and regional
managers.

Finally, as a result of the review discussed above, an increased focus on
enhancing store profitability through efforts to re-engineer operating
processes, procedures and further improve information system capabilities was
initiated. The Company believes that there exists opportunities to enhance
store operating performance through the use of updated methodologies and
technology.

The Company anticipates that the efforts relating to improved personnel in
strategic areas and local store management, together with the Company's planned
re-engineering efforts, will continue and will have a positive impact on the
Company's results of operations in the future.

Relationship with Dart

Dart provides the Company with certain general and administrative functions,
including executive management, legal services, advertising administration,
accounting and data processing, loss prevention and personnel administration.
Dart charged the Company approximately $758,000 for such services in the year
ended January 28, 1995. See Notes 4 and 5 to the Consolidated Financial
Statements and Item 2.- Properties.

5
<PAGE> 6
Competition

The business in which the Company is engaged is highly competitive. The
Company competes with Border's Group, Inc. a subsidiary of K Mart Corporation;
B. Dalton Booksellers, Bookstop, and Barnes and Noble, subsidiaries of Barnes &
Noble Inc., other chains and independent bookstores and major national book
clubs in all the Company's markets. In addition, the Company competes with
drug stores, supermarkets, department stores, computer stores, airport vendors
and others that make incidental sales of books and magazines. Some of the
Company's competitors offer larger selections than the Company, and some of its
competitors have greater resources than the Company. Price competition occurs
in all of the Company's markets.

Employees

On January 28, 1995, the Company employed approximately 1,300 full-time and
1,600 part-time persons engaged in retail and administrative operations. The
Company considers its relations with employees to be good.

Executive Officers

The following table sets forth the names, ages and positions of the executive
officers of the Company. Executive officers are appointed to serve until their
successors are appointed.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Herbert H. Haft 74 Chairman of the Board of Directors
Ronald S. Haft 36 Interim President and Chief Executive
Officer and Director
E. Steve Stevens 39 Senior Executive Vice President and
Chief Operating Officer
Robert A. Marmon 51 Chief Financial Officer
</TABLE>

Herbert H. Haft has been Co-Chairman of the Board and Chief Executive Officer
of the Company since its incorporation in 1983 until December 1991, when he
became Chairman of the Company's previous Executive Committee. Mr. Haft became
Chairman of the Board of Directors of the Company, again, in June 1993. Mr.
Haft is the founder of Dart and has been its Chairman and Chief Executive
Officer since 1960. He is also Chairman and Chief Executive Officer of each of
Dart's other subsidiaries, including Trak Auto Corporation ("Trak Auto") and
Total Beverage Corporation ("Total Beverage"), and a director of Shoppers Food
Warehouse Corp. ("Shoppers Food"), in which Dart owns a 50% interest.

Ronald S. Haft was appointed Interim President and Chief Executive Officer in
June 1994, when Glenn E. Hemmerle resigned. Mr. Haft was appointed President
and Chief Operating officer of Dart since August 1, 1993. Prior to joining
Dart he was President of Combined Properties, Inc. a real estate management
company, from 1984, and continues to hold that position. Mr. Haft was elected
a director of the Company, Dart, Trak Auto in July 1993 and was subsequently
elected a director of Shoppers Food.

E. Steve Stevens has been Senior Executive Vice President and Chief Operating
Officer of the Company since October 1994. Mr. Stevens joined the Company in
June 1994 as Senior Vice President and General Merchandise Manager. Prior to
that, Mr. Stevens served in several executive positions at Circuit City Stores,
Inc. the West Bertona Group, Inc. of Chevy Chase, MD and Portico Bed and Bath,
Ltd. of New York.

6
<PAGE> 7
Executive Officers (Continued)

Robert A. Marmon has been Chief Financial Officer of the Company since October
1994. At the same time, Mr. Marmon has served as Chief Financial Officer of
Dart and each of its subsidiaries. Mr. Marmon has been a management consultant
since 1970 and worked for McKinsey & Company, Inc. from 1970 to 1973. He
served in various capacities at The Palmieri Company from 1973 to 1988. Mr.
Marmon has been president of RPF, Inc. since 1988. Mr. Marmon was retained for
his current positions on an interim basis pursuant to an agreement between RPF,
Inc. and Dart effective until April 30, 1995. On March 20, 1995, the contract
under which Mr. Marmon provides services was modified and extended on a
month-to-month basis. Under the modified terms, Dart may terminate the
agreement on thirty days notice. However, Mr. Marmon must provide sixty days
notice to Dart if he intends to terminate the agreement.

Herbert H. Haft, Chairman of the Board of Directors, is the father of Ronald S.
Haft, Interim President and Chief Executive Officer and Director. There is no
other family relationship between any director and executive officer of the
Company.

7
<PAGE> 8
Changes in Management

Robert M. Haft's employment as Chief Executive Officer and President of the
Company concluded in November 1992 upon the appointment and election of Glenn
E. Hemmerle to those positions. Robert M. Haft continued to serve as Chairman
of the Board of Directors of the Company until June 1993. Thereafter, Herbert
H. Haft resumed the position of Chairman of the Board.

In June 1994, Glenn E. Hemmerle resigned all positions with the Company. The
Company then sought to replace Mr. Hemmerle and in the interim Ronald S. Haft
was appointed the Company's President and Chief Executive Officer and Ron
Marshall was appointed its interim Chief Operating Officer.

Effective October 1, 1994, Ron Marshall resigned his positions with the
Company. In addition to serving as the Company's interim Chief Operating
Officer, Mr. Marshall had served as Chief Financial Officer of the Company and
Dart and Principal Financial Officer of Trak Auto.

Subsequent to Mr. Marshall's departure, the Board of Directors of the Company
appointed E. Steve Stevens as Senior Executive Vice President and Chief
Operating Officer, and, on an interim basis, Robert A. Marmon as Chief
Financial Officer in October 1994. Also in October 1994, Mr. Marmon was
appointed, on an interim basis, as Chief Financial Officer of Dart and its
wholly-owned subsidiaries and Principal Financial Officer of Trak Auto.

The Board of Directors of each of the Company, Dart and Trak Auto was
reconstituted in 1993 to include five new directors, four of whom were neither
officers or employees of the Company. Bonita A. Wilson and Douglas M. Bregman
were elected directors of the Company, Dart and Trak Auto in June 1993. Ronald
S. Haft was appointed President and Chief Operating Officer of Dart on August
1, 1993, and was elected a director of the Company, Dart and Trak Auto on July
28, 1993. H. Ridgely Bullock and Larry G. Schafran were elected as directors
by the respective boards of the Company, Dart and Trak Auto pursuant to each
company's bylaws on December 20, 1993. Robert M. Haft and Gloria G. Haft
ceased to be directors of the Company, Dart and Trak Auto in June 1993.

On September 7, 1994, the Board of Directors of Dart established an Executive
Committee comprised of Dart's outside directors to conduct the affairs of Dart
with respect to matters that are the subject of dispute between the Chairman of
the Board and Chief Executive Officer of Dart, Herbert H. Haft, and the
President and Chief Operating Officer of Dart, Ronald S. Haft. Because Herbert
H. Haft and Ronald S. Haft are each an executive officer and director of Crown
Books, on October 11, 1994, the Board of Directors of Crown Books established
an Executive Committee comprised of the same outside directors, with authority
parallel to that of Dart's Executive Committee. The disputes between Herbert
Haft and Ronald Haft concerning issues involving Dart and Crown Books have been
extensive. Accordingly, the respective Executive Committees have assumed
day-to-day involvement in these disputed issues and other matters affecting
Dart and Crown Books, in particular matters relating to litigation to which
Dart or Crown Books is a party. The continuing roles of the Executive
Committees of Dart and Crown Books are dependent upon future developments.

The Directors appointed to each Executive Committee were Douglas Bregman, H.
Ridgely Bullock, Larry G. Schafran and Bonita Wilson, with Mr. Bullock as the
Chairman of each Executive Committee. After Mr. Bullock died in December 1994,
Mr. Schafran was elected Chairman of each Executive Committee in January 1995.

8
<PAGE> 9
Changes in Management (Continued)

A Standstill Agreement entered into in September 1994 in connection with a
lawsuit filed by Ronald S. Haft against Dart (the "Standstill Agreement")
provides, among other things, that Dart may not, until further order is entered
by the Delaware Court of Chancery, (i) change the current composition of the
board of directors of Dart or any of its subsidiaries, or (ii) change the
current Haft family officers of Dart or any of its subsidiaries. See Item 3 -
Legal Proceedings.

9
<PAGE> 10
Item 2. Properties

The Company subleases from Dart 28,000 square feet of a warehouse and office
facility located in Landover, Maryland that it shares with Dart and Trak Auto.
The sublease is for 30 years and six months, provides for rental payments
increasing approximately 15% every five years over the term of the sublease and
commenced October 1985. The current annual rental is $269,500. The sublease
also requires the payment of maintenance, utilities, insurance and taxes
allocable to the space subleased. Dart leases the entire 271,000 square foot
warehouse and office facility from a private partnership in which Haft family
members own all of the partnership interests. The Company's sublease is on the
same terms as Dart's lease.

The Company leases 23,300 square feet of office and warehouse space in Addison,
Illinois. The lease is for ten years with one five year renewal option and
commenced January 1993. The annual rental is $143,000 for the first five years
and increases to $156,000 for the second five years. The lease requires the
Company to pay for maintenance, utilities, insurance and real estate taxes.

The Company leases 28,000 square feet of office and warehouse space in La
Mirada, California. The lease is for five years with two five year renewal
options and commenced May 1990. The annual rental for the first five years was
$138,000. The annual rental during the first option period, if such option is
exercised, is $154,500. The lease requires the Company to pay for maintenance,
utilities, insurance and real estate taxes. The lease will terminate July 31,
1995 and the warehouse operations will be consolidated with those of Trak Auto
in Ontario, California on a fee for service basis.

The Company leases all of its 196 retail stores. The total minimum annual
payments for the Company's retail store space (excluding closed stores) and
equipment aggregate approximately $100,409,000 to the lease expiration dates.
The lease expiration dates (without regard to renewal options) range from 1995
to 2009. Nine of these leases are with entities in which the Haft family has
substantially all the beneficial interest. Three of the leases are in shopping
centers owned by partnerships in which Dart owns the majority partnership
interests and Haft family members own the remaining partnership interests.

The 12 lease agreements involving Haft-owned entities provide for various
termination dates that range from 1996 to 2029 (including option periods) and
require payment of future minimum rentals aggregating $47,782,000 at January
28, 1995. These agreements also require payment of a percentage of sales in
excess of a stated minimum. In addition, four closed stores have lease
agreements with Haft-owned entities with various termination dates that range
from 1996 to 2001 and require future minimum rentals aggregating $891,000 at
January 28, 1995. Annual fees and rentals paid to Haft-owned entities, open or
closed, were $2,296,000 in the year ended January 28, 1995.

The Executive Committee of Dart undertook a legal review of leases (the "Pennsy
Leases") for in excess of one half million square feet of warehouse space
located at 3301 Pennsy Drive in Landover, Maryland, beginning late in the third
quarter of the fiscal year ended January 31, 1995. On February 10, 1995, Dart
filed a complaint alleging, inter alia, breaches of fiduciary duty, waste and
other irregularities by members of the Haft family in connection with the
Pennsy Leases. The complaint seeks rescission of the Pennsy Leases and
restitution of rent paid on them since 1991. The Executive Committees of
Dart, Crown Books and Trak Auto have also undertaken a legal

10
<PAGE> 11
Item 2. Properties (Continued)

review of other leasing arrangements and real estate related transactions
between Dart, the Company or Trak Auto, on the one hand, and Haft-owned
entities, on the other hand. This review is ongoing and the Executive
Committees have not yet determined whether other actions will be taken as a
result of this legal review.

See Notes 4 and 5 to the Consolidated Financial Statements for information
concerning charges and methods of allocation to the Company and the lease and
license arrangements in which Dart or the Haft family has an interest.

11
<PAGE> 12
Item 3. Legal Proceedings

Robert M. Haft Employment Litigation

In August 1993, Robert M. Haft, the former president of the Company and Dart,
filed a lawsuit in the United States District Court for the District of
Delaware, Robert M. Haft v. Dart Group Corporation, et al. (D. Del. Civil
Action No. 93-384-SLR), naming as defendants Dart, the Company and Trak Auto.
The complaint, as amended, alleged breach of contract regarding various
employment, stock option, stock incentive and loan agreements and sought
declaratory judgment regarding a stock incentive agreement and a possible right
by Robert M. Haft to acquire an interest in Total Beverage, all in connection
with the termination of Robert M. Haft's employment in June 1993. The
complaint, as amended, sought unspecified damages, costs and attorneys fees.

On September 20, 1994, a jury found that Dart had breached its employment
contract with Robert M. Haft and awarded him damages against Dart (equivalent
to the compensation projected to be due over a ten-year period) in the amount
of $18,856,964. The jury also found that the Company had breached an
employment agreement with Robert Haft and awarded him damages (equivalent to
the compensation projected to be due over a ten-year period) against the
Company in the amount of $12,800,910.

The jury also found that Robert M. Haft did not voluntarily terminate his
employment within the meaning of his Incentive Stock Agreement ("ISA") with the
Company. Under the terms of the ISA, a voluntary termination by Robert M. Haft
of his employment would have allowed the Company to repurchase all or a portion
of 100,000 shares of Common Stock issued to Robert Haft by the Company pursuant
to the ISA, subject to certain transfer restrictions, in return for a
non-interest bearing promissory note, discounted at an effective rate of 11%,
for $203,750, due January 2, 2004. The jury's finding would preclude the
Company from making such a repurchase.

Robert M. Haft asked the judge presiding over the case to award him additional
damages in the amount of approximately $2.4 million based on the failure of the
Company to deliver 100,000 shares of unrestricted Common Stock, which he would
have a right to receive under the ISA in the event of his termination without
cause by the Company, when he demanded them in August of 1993. Robert M. Haft
also requested a declaratory judgment on his claim against Dart, the Company
and Trak Auto arising from certain stock options granted to him by those
corporations and his claim that he has a purchase option for an interest in
Total Beverage.

On February 22, 1995, the federal district court in Robert M. Haft's employment
litigation made the following rulings against Dart, the Company and Trak Auto:

(1) The court found that Robert M. Haft was entitled to damages in
the amount of $2,146,250, plus interest, based on the failure
of the Company to deliver 100,000 shares of unrestricted
Common Stock when he demanded them in August of 1993;

12
<PAGE> 13
Item 3. Legal Proceedings (Continued)

not yet expired, the court extended the exercise date for a
period equal to the period from June 30, 1993 until final
judgment was entered. (Under the relevant plans, Robert M.
Haft would be entitled to exercise options for 50,000 of Class
A Common Stock, $1.00 par value per share (the "Class A Common
Stock"), of Dart having exercise prices of $71.50 - $104.50
per share, 80,000 shares of Common Stock of the Company having
exercise prices of $21.45 - $23.93 per share and 40,000 shares
of Trak Auto Common Stock having exercise prices of $6.60 -
$13.75 per share.); and

(3) The Court found that Robert M. Haft has the right to purchase
for $149,400 ten percent of Dart's interest in the entity that
acquired the assets of Total Beverage's Chantilly, Virginia
store.

The Court entered final judgment on all claims in this lawsuit on March 23,
1995. On April 6, 1995, Dart and the Company filed a motion for a new trial
and/or reduction of damages with the court, challenging the Court's breach of
contract findings, damages awards and certain evidentiary rulings. Depending
upon the outcome of this motion, Dart, the Company and Trak Auto may also file
an appeal challenging some or all of the rulings in this lawsuit.

The Company has reserved $13,342,000 for these judgments and has expensed the
remaining unamortized deferred compensation associated with the ISA totaling
$1,424,000 (before income taxes).

Derivative Litigation

In September 1993, Alan R. Kahn and the Tudor Trust (the "Kahn Derivative
Plaintiffs"), shareholders of Dart, filed a lawsuit in the Delaware Court of
Chancery for New Castle County naming as defendants Herbert H. Haft, Ronald S.
Haft, Douglas M. Bregman, Bonita A. Wilson, Combined Properties, Inc.,
Combined Properties Limited Partnership, and Capital Resources Limited
Partnership. The suit is brought derivatively and names as nominal defendants
Dart, Trak Auto, the Company, Shoppers Food, Total Beverage, and Cabot-Morgan
Real Estate Company, a wholly-owned subsidiary of Dart.

The complaint, as amended on January 12, 1995, alleges waste, breach of
fiduciary duty, violation of securities laws and entrenchment in connection
with various lease agreements between the Combined Properties defendants and
Dart and its subsidiaries, the termination of Robert M. Haft, the compensation
paid to Ronald S. Haft and Herbert H. Haft, Dart's employment agreement with
Ronald S. Haft dated August 1, 1993 (the "Agreement"), the sale of 172,730
shares of Class B Common Stock, $1.00 par value per share (the "Class B Common
Stock"), of Dart by Herbert H. Haft to Ronald S. Haft and the compensation paid
to the Executive Committee. Plaintiffs seek an accounting of unspecified
damages incurred by Dart, voiding of the options sold to Ronald S. Haft,
appointment of a temporary custodian to manage the affairs of Dart or to
oversee its recapitalization or sale and costs and attorneys' fees.

On April 27, 1995, the Kahn Derivative Plaintiffs and the Special Litigation
Committee of Dart's Board of Directors filed a Stipulation and Order which,
if entered by the Court, will (1) dismiss claims against Douglas M. Bregman
and Bonita Wilson; and (2) realign Dart as a party plaintiff to the amended
complaint.

13
<PAGE> 14
Item 3. Legal Proceedings (Continued)

director transactions, breach of fiduciary duty and waste in connection with
the Agreement. Robert M. Haft also brings individual claims for breach of
contract and dilution of voting rights in connection with the sale of shares
of the Class B Common Stock by Herbert H. Haft to Ronald S. Haft and the
Agreement. The complaint seeks rescission of such shares and the Agreement,
unspecified damages from the individual directors, and costs and attorneys'
fees.

A Special Litigation Committee consisting of two outside, independent directors
of Dart, the Company and Trak Auto was appointed by the Board of Directors to
assess, on behalf of Dart, whether to pursue, settle or abandon the claims
asserted in these two derivative lawsuits. In September 1994, the Special
Litigation Committee moved for dismissal of certain claims in those derivative
lawsuits and for realignment of the parties to permit Dart to prosecute other
claims in those derivative lawsuits.

In September 1994, Jolien Lou, a purported shareholder of the Company, filed a
lawsuit in the Delaware Court of Chancery for New Castle County naming as
defendants Herbert H. Haft, Glenn E. Hemmerle, Ronald S. Haft, Douglas M.
Bregman, H. Ridgely Bullock, Larry B. Schafran and Bonita A. Wilson. The suit
is brought derivatively and names the Company as nominal defendant. The
complaint, as amended on February 24, 1995, alleges waste and breach of
fiduciary duty in connection with the termination of Robert M. Haft from his
position at the Company in 1993 and in connection with Herbert H. Haft's
management of the Company. The amended complaint also alleges legal
malpractice against a lawyer advising the Company at that time. Plaintiff
seeks unspecified damages incurred by the Company, and costs and attorneys'
fees. Ronald S. Haft and Glenn E. Hemmerle have been dismissed without
prejudice from this lawsuit. The Company and other defendants have filed a
motion to dismiss this lawsuit.

Given that these derivative lawsuits are brought in the name of Dart and its
subsidiaries, recovery in them would inure to the benefit of Dart and its
subsidiaries, including the Company if the claims are successfully litigated or
settled. Therefore, in the opinion of management, resolution of these actions
will not have a material adverse effect on the consolidated financial condition
or results of operations of the Company.

Ronald S. Haft Stock Options

On September 6, 1994, Ronald S. Haft tendered Dart a letter requesting:

(1) to exercise, effective immediately, stock options for shares of Dart's
Class B Common Stock pursuant to the Agreement (the "Options"), to
purchase, at an exercise price of $89.65 per share, 197,048 shares
(the "Option Shares") and

(2) to exercise his right under the Agreement, effective immediately, to
obtain a loan from Dart in the amount of $17,665,353.20, for part of
the exercise price of the Options.

Together with that letter, Ronald S. Haft tendered to Dart a check payable to
Dart in the amount of $197,048 as payment of the par value of the Option
Shares; and an executed unsecured promissory note of Ronald S. Haft payable to
the order of Dart in the amount of $17,665,353.20, the balance of the exercise
price for the Option Shares under the Options.

14
<PAGE> 15
Item 3. Legal Proceedings (Continued)

Dart has rejected the validity of Ronald S. Haft's exercise of the Options and
the promissory note tendered in connection therewith. Issuance of the Option
Shares has not been recorded in the stock records of Dart, Dart has returned
his $197,048 check, and Dart has not issued any stock certificate to Ronald S.
Haft for the Option Shares. Dart delivered to Ronald S. Haft a check in the
amount of the $985,000 price (plus interest) previously paid by him for the
Options, but he returned the check to Dart. These funds are now in an interest
bearing escrow account.

On September 12, 1994, Ronald S. Haft filed a lawsuit against Dart (Ronald S.
Haft v. Dart Group Corporation, Del. Ch., C.A. No. 13736) (the "Options
Lawsuit") in the Delaware Court of Chancery for New Castle County seeking a
court order that Dart issue the Option Shares and grant him a loan of
$17,665,353.20 to be used as part of the payment for such shares.

Dart has denied the validity of the Options and the Agreement and is contesting
the Options Lawsuit. On November 14, 1994, the Court of Chancery entered a
Memorandum Opinion denying Ronald S. Haft's motion for summary judgment.

In connection with this proceeding, on September 14, 1994, the Standstill
Agreement agreed to on behalf of Dart and Ronald S. Haft was ordered by the
Delaware Court of Chancery. The Standstill Agreement restricts certain actions
by Dart until further order of the court. In particular, Dart may not, without
further order of the court: (i) change its Certificate of Incorporation or
Bylaws; (ii) change the current composition of the Board of Directors of Dart
or its subsidiaries; (iii) change the current Haft family officers of Dart or
its subsidiaries; (iv) issue any additional securities of Dart or any of its
subsidiaries; or (v) take any extraordinary actions that would result in (a)
the liquidation of Dart or any of its subsidiaries, (b) the sale of any major
subsidiary of Dart, or (c) the disadvantage of any Class B Common Stockholder
of Dart through any debt transaction.

In December 1994, Ronald S. Haft filed a motion for contempt against Dart,
Herbert H. Haft, Larry G. Schafran and Bonita A. Wilson, alleging a breach of
the Standstill Agreement. In his motion, Ronald S. Haft asserted that the
defendants violated the prohibition on the issuance of additional securities of
Dart, the Company and Trak Auto by approving certain employee stock option
grants pursuant to existing stock option plans, and by approving a form of
employment contract for executives of Dart, the Company and Trak Auto that
contains a provision for stock option grants. Dart opposed this motion and
moved for a clarification or waiver of the Standstill Agreement with respect to
the issuance and exercise of employee stock options that would (i) allow Dart,
the Company and Trak Auto to grant stock options to its employees, other than
members of the Haft family, in a way that complies with the past practice of
those companies and (ii) allow Dart, the Company and Trak Auto to issue stock
pursuant to the exercise of options granted prior to September 14, 1994. A
hearing on these matters was held on April 18, 1995 at which the court denied
the motion for contempt and issued an order stating that the Standstill
Agreement did not enjoin the exercise of stock options granted prior to
September 14, 1994, or the issuance of stock options to employees approved by
the Board of Directors in December 1994.

15
<PAGE> 16
Item 3. Legal Proceedings (Continued)

Compromise, Settlement, and Release (the "Settlement Agreement"), in which they
purported to settle the Options Lawsuit. As part of the putative Settlement
Agreement, Ronald S. Haft's exercise of the Options would have been allowed.

Dart filed a brief opposing the Settlement Agreement on March 8, 1995, which
brief contained as an exhibit a memorandum (the "Memorandum") responding to the
terms of the Settlement Agreement. See Item 7. - Management's Discussion and
Analysis of Financial Condition and Results of Operations. On March 10, 1995,
the Kahn Derivative Plaintiffs withdrew from the putative Settlement Agreement.
Trial in the Options Lawsuit is currently scheduled for July 17, 1995.

Other

In the normal course of business, the Company is involved in various claims and
litigation. In the opinion of management, liabilities, if any, will not have a
material affect upon the consolidated financial condition and results of
operations of the Company.

The Company has recorded expenses of approximately $3,414,000 and $1,900,000
during the years ended January 28, 1995 and January 29, 1994, respectively, for
legal expenses incurred during these years. These amounts include estimated
future expenses likely to be considered necessary to resolve all litigation
discussed above.

16
<PAGE> 17
Item 4. Submission of Matters to a Vote of Security Holders

Inapplicable.

PART II

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

The Common Stock is quoted on the Nasdaq National Market ("Nasdaq") under the
symbol CRWN. The following table sets forth the range of the high and low sale
prices for the Common Stock, as reported by the Nasdaq, for the quarters
indicated.

<TABLE>
<CAPTION>
Quarter Ended High Low
------------- --------- --------
<S> <C> <C>
May 1, 1993 24 19 1/2
July 31, 1993 24 21
October 30, 1993 26 1/2 22
January 29, 1994 25 18 3/4
April 30, 1994 20 1/2 17
July 30 1994 18 1/2 16 3/4
October 29, 1994 17 3/4 14 1/2
January 28, 1995 17 1/2 11 1/2
</TABLE>

The Company has not paid dividends during the last two fiscal years and does
not expect to pay dividends in the foreseeable future.

There were approximately 300 record holders of the Common Stock as of April 10,
1995.

17
<PAGE> 18
Item 6. Selected Financial Data

INCOME STATEMENT DATA: (in thousands, except per share and sales % data)

<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales $305,606 $275,125 $240,682 $232,484 $220,304
Interest and other income 2,289 3,073 3,015 4,047 4,360
Cost of sales, store
occupancy and
warehousing 266,877 221,264 189,000 181,543 172,495
Selling and administrative 62,208 46,911 38,395 35,646 34,469
Depreciation and
amortization 5,176 3,986 2,418 2,180 1,502
Interest expense 965 323 391 470 537
Restructuring charge - 6,200 6,600 - -

Income (loss) before
income taxes (27,331) (486) 6,893 16,692 17,490
Net Income (Loss) (19,380) (210) 4,281 10,349 10,649

Net Income (Loss) per share $ (3.60) $ (.04) $ .82 $ 1.97 $ 2.03

Weighted average common
share and common share
equivalents outstanding 5,389 5,402 5,214 5,245 5,233

Percentage change in sales
Total stores 11.1% 14.3% 3.5% 5.5% 7.8%
Comparative stores (2.5)% (0.6)% 2.6% 5.3% 3.2%
</TABLE>

<TABLE>
<CAPTION>
BALANCE SHEET DATA: (in thousands)

at end of Fiscal Year
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current assets $182,331 $180,210 $147,809 $149,432 $127,097
Current liabilities 105,553 94,981 56,492 62,622 49,495
Working capital 76,778 85,229 91,317 86,810 77,602
Total assets 213,379 210,636 165,433 160,264 136,872
Long-term obligations 24,449 13,913 8,156 3,623 4,131
Stockholders' equity 83,327 101,742 100,785 94,019 83,246
</TABLE>

18
<PAGE> 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations

A Standstill Agreement entered into on September 14, 1994 in connection with a
lawsuit filed by Ronald S. Haft against Dart provides that Dart may not, until
further order is entered by the Delaware Court of Chancery, (i) change its
certificate of incorporation or bylaws, (ii) change the current composition of
the board of directors of Dart or its subsidiaries, (iii) change the current
Haft family officers of Dart or its subsidiaries, (iv) issue any additional
securities of Dart or any of its subsidiaries, or (v) take any extraordinary
actions that would result in (a) the liquidation of Dart or any of its
subsidiaries, (b) the sale of any major subsidiary of Dart, or (c) disadvantage
of any Class B stockholder of Dart through any debt transaction. See Item 3. -
Legal Proceedings.

In October 1994, Robert A. Marmon was appointed, on an interim basis, as Chief
Financial Officer for Dart, each of its wholly-owned subsidiaries and the
Company, and as Principal Financial Officer for Trak Auto. Mr. Marmon reports
directly to the Executive Committee and the Board of Directors for each of
Dart, the Company and Trak Auto.

The Executive Committees of Dart, Crown Books and Trak Auto have undertaken a
legal review of leasing arrangements and other real estate related transactions
between Dart, the Company or Trak Auto, on the one hand, and Haft-owned
entities, on the other hand. On February 10, 1995, Dart filed a complaint
alleging, inter alia, breaches of fiduciary duty, waste and other
irregularities committed by members of the Haft family in connection with
leases for in excess of one half million square feet of warehouse known as the
Pennsy Leases. This review is ongoing and the Executive Committees have not
yet determined whether other actions will be taken in connection with these
matters.

19
<PAGE> 20

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)

Dart has retained an investment banking firm to provide advice concerning the
value of Dart and its subsidiaries and the option to purchase Class B Common
Stock of Dart claimed by Ronald Haft. This retention initially related to
Dart's defense of the Options Lawsuit and certain other issues of shareholder
value. The investment banking firm has advised that the current market price
of Dart's stock is significantly undervalued and has reviewed with members of
the Executive Committee potential types of transactions that might enhance
value for Dart's stockholders. No final decision has been made whether or not
Dart will engage in any such transactions, and there can be no assurance as to
the timing or terms of such transactions, if they occur. Any such transaction
may require further order of the Delaware Court of Chancery under the
Standstill Agreement and may be opposed by certain controlling stockholders of
Dart.

Liquidity and Capital Resources

Cash, including short-term instruments, is the Company's primary source of
liquidity. Cash, including short-term instruments, decreased by $36,110,000 to
$29,634,000 at January 28, 1995 from $65,744,000 at January 29, 1994. The
decrease in cash was primarily due to increased purchases of merchandise
inventory, to the timing of payments on accounts payable, trade and expense
liabilities outstanding at January 29, 1994 and to an increase in investment in
marketable debt securities. The Company's marketable debt securities are
available for sale should current cash balances be fully utilized.

Operating activities used $27,111,000 of the Company's cash during the year
ended January 28, 1995 compared to providing $27,018,000 for the year ended
January 29, 1994. The use of cash was primarily for current year merchandise
inventory purchases and payments on January 29, 1994 accounts payable, trade.

The Company used $8,969,000 for investing activities during the year ended
January 28, 1995, primarily for the net purchase/disposition of United States
Treasury Notes. Capital expenditures decreased $11,298,000 compared to the
same period last year due to reduced amounts the Company spends on leasehold
improvements for new stores and to fewer store openings.

Financing activities used $30,000 of the Company's funds during the year ended
January 28, 1995, compared to providing $943,000 last year. The use of cash
when compared to the prior year providing cash was due to proceeds from the
exercise of stock options and proceeds from a note receivable in fiscal 1994.

The Company has a $6,000,000 revolving line of credit available that it shares
with Dart and Trak Auto (see Note 9 to the Consolidated Financial Statements).
The Company, Dart and Trak Auto have not borrowed any funds against this
revolving line of credit.

The Company anticipates that funds necessary to fund net capital expenditures
for new store openings and remodelings, meet capital lease obligations,
purchase inventory for new and existing stores and meet current and long-term
liabilities will come from operations and existing current assets. During
fiscal 1996, the Company anticipates closing approximately 70 Classic Crown
Books stores and four Super Crown Books store and over the next 12-18 months
opening approximately 28 Super Crown Books stores. The Company anticipates
that costs incurred in opening a new Crown Books store to be approximately
$1,100,000, including

20
<PAGE> 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)

inventory, Superstore fixtures, leasehold improvements and certain other costs.
At January 28, 1995, the Company had signed leases for two new store locations
and four signed amendments to existing leases for expansion to Super Crown
stores.

During the past three fiscal years, the Company has recorded charges in
connection with store closings and restructurings. During the year ended
January 30, 1993, the Company recorded a restructuring charge of $6,600,000 for
anticipated costs associated with a restructuring plan to close, relocate,
expand and convert approximately 50 Classic Crown Books stores to a Super Crown
Books format. At January 28, 1995, the Company had charged approximately
$1,445,000 against this reserve in connection with the closing, relocation,
expansion or conversion of approximately 40 stores. These charges consisted
primarily of unrecoverable lease costs (including buyouts of remaining lease
terms) and the remaining book value of leasehold improvements and store
fixtures for stores that have closed.

In the year ended January 29, 1994, the Company determined that seven of the
smaller Super Crown Books stores (typically 6,000 - 10,000 square feet) opened
in prior years were no longer competitive in the current market environment and
in light of the industry's movement to larger stores. Accordingly, the Company
recorded an additional restructuring charge of $6,200,000 in the year ended
January 29, 1994, representing the anticipated costs (unrecoverable lease costs
and the remaining book value of leasehold improvements and store fixtures
subsequent to management's estimate of the stores' closing dates) associated
with closing, relocating and converting these stores to the new, larger
prototype. At January 28, 1995, the Company had not charged any costs in
connection with this reserve. The Company presently expects to complete the
restructuring related to these seven stores during the next 24 months. The
total restructuring reserve at January 28, 1995 is $10.5 million.

A comprehensive review of the Company was begun by its new Chief Operating
Officer and interim Chief Financial Officer shortly after their appointments in
October of 1994. That review, which continued into February of 1995,
identified opportunities to improve the Company's profitability, organization,
staffing, computer systems, and operating controls. The initial review found
that the Company still had a majority of its stores in the original Classic
Crown Books stores format and concluded that many of these Classic Crown Books
stores were not generating, and were not expected to generate, a return on
investment sufficient to justify their continued operation and that the
Company's competitors had long since moved to a much larger format. As a
result, the Company determined to act aggressively to implement the larger
Super Crown format begun as part of its earlier restructuring and close
approximately 100 of these small and under-performing stores over the
succeeding 6-18 months. As a result, the Company recorded a closed store
reserve of $18.9 million for the costs to be incurred in these closings.

21
<PAGE> 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)

During the fiscal years 1995, 1994 and 1993, the Company recorded net charges
(income) of $18,865,000, $(631,000), and $513,000, respectively for such closed
store costs. The income during the year ended January 28, 1994 was the result
of early lease terminations, net of cash buyouts. At January 28, 1995, 28 of
the 100 stores targeted for closing during the third fiscal quarter had been
closed and over 40 stores targeted for closing under the previous
restructurings had been closed. At January 28, 1995, the Company had an
aggregate store closing and restructuring reserve of $29,853,000, of which
approximately $6,936,000 will be utilized over the next 12 months.

During the fourth fiscal quarter an additional 54 stores were targeted for
closure as a result of the continuing analysis of store profitability and
market presence. Additional reserves for store closings were not deemed
necessary as the remaining reserves adequately provide for the Company's
obligations for the currently identified stores to be closed due to revisions
to the planned closing dates for certain stores. The Company will continue to
evaluate the performance and future viability of its remaining stores and may
close additional stores in the future. No reserves for these stores have been
recorded. The closings of these small and underperforming stores may, where
appropriate, be coordinated with the opening of Super Crown Books stores in
those markets where the Company plans to maintain or expand its presence. A
commitment has recently been made to accelerate the opening of stores in the
Super Crown Books format.

Management plans the opening of 28 Super Crown Books stores varying in size
from 12,000 to 18,000 square feet over the next 12-18 months. These stores
will represent approximately 420,000 square feet of new space opened in the
next 12 months.

The review discussed above also identified the need for changes in officers and
key employees to address the other opportunities identified for improving the
Company's performance. In this regard, the Company has recruited and hired
senior management to address particular issues identified, including a senior
management information systems specialist; a senior loss prevention specialist;
a senior personnel administrator and trainer; and a senior regional operations
manager. Recruiting of other key personnel is underway including: a permanent
chief financial officer; a senior merchandiser; a senior operations manager;
additional management information specialists; and experienced district and
sales managers at several levels. Coupled with this recruiting effort, the
Company has also begun replacing certain district and regional managers.

The Company anticipates that the efforts relating to improved personnel in
strategic areas and local store management will continue and will have a
positive impact on the Company's results of operations in the future.

The Company believes that its current liquid assets are sufficient to fund its
program of store closings, restructuring and expansion. Super Crown Books
stores have generated increased sales at converted locations as well as

22
<PAGE> 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)

increased gross margins as a result of the change in product mix. The Company
believes that by leasing large stores it can obtain more favorable rates and
that as the stores mature, operating expense as a percentage of sales, will
decrease.

The liquid assets maintained by the Company are intended to fund the expansion
of the Company's retail business through the opening of stores in new markets,
converting Classic Crown Books stores to Super Crown Books stores and the
opening of additional stores in existing markets, and to fund other corporate
activities.

The Company's Board of Directors has authorized the repurchase of up to 500,000
shares of its outstanding common stock. The Company has repurchased in open
market transactions 223,638 shares of its common stock as of January 28, 1995.
The last repurchase of such shares was in April 1990. The Company may purchase
additional shares in the future if market conditions are favorable.

At January 28, 1995

Working capital decreased by $8,451,000 to $76,778,000 at January 28, 1995
compared to the same period one year ago. The decrease in working capital was
primarily the result of accruals for the current portion of the closed store
reserve and the Robert M. Haft employment litigation.

At January 29, 1994

Working capital decreased by $6,088,000 to $85,229,000 at January 29, 1994 from
$91,317,000 at January 30, 1993, primarily due to purchase of store fixtures
and leasehold improvements as a result of the conversion to the superstore
concept.

23
<PAGE> 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)

Results of Operations

Year Ended January 28, 1995 as Compared to the Year Ended
January 29, 1994

Sales of $305,606,000 for the year ended January 28, 1995 increased by
$30,481,000 or 11.1% over the same period one year ago. Comparable sales
(sales for stores open for fifteen months) decreased 2.5% for the year ended
January 28, 1995. Sales for Super Crown Book stores represented 54.7% of total
sales for the year ended January 28, 1995 compared to 39.8% of total sales for
the year ended January 29, 1994. Super Crown sales of $167,200,000 for the
year ended January 28, 1995 increased 52.5% over the prior year sales and
sales for comparable Super Crown Books stores increased 0.2%. Sales for
comparable classic Crown Books stores decreased 4.0% during the year ended
January 28, 1995.

During the year ended January 28, 1995, the Company opened 12 Super Crown Books
stores and two Classic Crown Books stores while closing 55 Classic Crown Books
stores and three Super Crown Books stores. These Super Crown Books stores were
closed as a result of opening larger stores in the same area. At January 28,
1995, the Company had 196 stores including 70 Super Crown Books stores.

Interest and other income decreased by $784,000 during the year ended January
28, 1995 when compared to one year ago. The decrease was due to decreased
funds available for short-term investment resulting from the lower cash
balances discussed above.

Cost of sales, store occupancy and warehousing (excluding the closed store
reserve) as a percentage of sales was 81.1% for the year ended January 28,
1995 compared to 80.4% for the same period the prior year. The increase was
primarily due to increased occupancy costs for Super Crown Books stores and was
partially offset by an increase in store margins as a result of a positive turn
in the sales mix during the quarter ended January 28, 1995 and to an increase
in overall store margins as a result of controlling purchasing. During the year
ended January 28, 1995, the Company recorded a closed store reserve of
$18,963,000 for underperforming stores while last year the Company's cost of
sales, store occupancy and warehousing expenses were reduced by a $631,000
reduction in the closed store reserve as a result of the termination of three
leases.

Selling and administrative expenses as a percentage of sales were 20.4% for the
year ended January 28, 1995 compared to 17.1% for the same period the prior
year. The increase was primarily due to the accruals for a $12.8 million
judgement against the Company in connection with Robert M. Haft's claim for
breach of his employment contract and related legal costs. (See Item 3. - Legal
Proceedings and Note 7 to the Consolidated Financial Statements). Excluding
these accruals, selling and administrative expenses as a percentage of sales
decreased to 16.2% for the year ended January 28, 1995, primarily the result of
reduced payroll costs.

Depreciation expense increased $1,190,000 for the year ended January 28, 1995
compared to the same period one year ago. The increase was primarily due to
the increase in fixed assets as a result of the expansion of Super Crown Books
stores.

Interest expense increased by $642,000 primarily due to interest accrued on the

24
<PAGE> 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)

judgment against the Company in favor of Robert M. Haft.

The Company has recorded a tax benefit of $7,951,000 for the year ended January
28, 1995 net of a deferred tax valuation allowance of $2,500,000 as compared to
tax benefit of $276,000 for the same period one year ago. The tax benefit was
the result of taxable temporary differences included in the $27,331,000
financial reporting net operating loss. In management's opinion, a valuation
allowance of $2,500,000 is necessary for the uncertainty related to the timing
of the reversal of certain of the taxable temporary differences during periods
when the Company has taxable income.

Year Ended January 29, 1994 as Compared to the Year Ended
January 30, 1993

Sales of $275,125,000 for the year ended January 29, 1994 increased by
$34,443,000 or 14.3% compared to the year ended January 30, 1993. Sales for
stores open more than one year decreased 0.6% for the year ended January 29,
1994. Sales for Super Crown Books stores represented 39.8% and 21.0% of total
sales for the twelve months ended January 29, 1994 and January 30, 1993,
respectively. As a result of the adoption of a 52/53 week fiscal year in
December of 1992, fiscal 1994 had one less day than fiscal 1993. If prior year
sales are adjusted to reflect the 52/53 week fiscal year, total sales increased
14.5% for the year ended January 29, 1994 and comparable sales decreased 0.3%.
Super Crown Books stores sales of $109,637,000 increased 116.7% over the prior
year and sales for comparable Super Crown Books stores increased 1.2%. Classic
Crown Books stores sales of $164,886,000 decreased 13.26% over the prior year
and sales for comparable classic Crown Books stores decreased 1.0%.

During the twelve months ended January 29, 1994, the Company opened 37 Super
Crown Books stores, five expanded Classic Crown Books stores and one store that
primarily sells remainders, while closing 45 Classic Crown Books stores and
four Super Crown Books stores. At January 29, 1994, the Company had a total of
240 stores.

Interest and other income increased by $58,000 when compared to the prior
fiscal year. The increase was primarily due to increased income from magazine
distributors for displays in new stores. Interest income decreased $193,000 as
a result of decreased funds available for short term investment.

Cost of sales, store occupancy, and warehousing as a percentage of sales was
80.4% for the year ended January 29, 1994 compared to 78.5% the prior fiscal
year. The increase was primarily due to a decrease in store margins, as a
result of a less favorable sales mix, increased purchasing from wholesalers at
a higher cost and the impact of closed store liquidation sales, and to an
increase in store occupancy costs for Super Crown Books stores.

Selling and administrative expenses as a percentage of sales were 17.1% for the
year ended January 29, 1994 compared to 16.0% for the same period in the prior
year. The increase was due primarily to increased payroll costs at both the
store and administrative levels, largely the result of expansion of Super Crown
Books stores, and to increased legal fees (see Note 7 to the Consolidated
Financial Statements) including the accrual of estimated future legal costs to
be incurred in relation to certain litigation. The increases were partially
offset by decreased insurance costs as a result of the Company's efforts to
reduce workers compensation cost.

25
<PAGE> 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)

Year Ended January 29, 1994 as Compared to the Year Ended
January 30, 1993

Depreciation and amortization expense increased by $1,568,000 for the year
ended January 29, 1994 when compared to the prior fiscal year. This increase
was primarily due to the acquisition and installation of a point-of-sale system
in all stores and to the purchase of fixed assets for new Super Crown Books
stores.

Interest expense decreased by $68,000 in fiscal 1994 compared to fiscal 1993
due to the reduction of amounts owed under capital lease obligations.

During the year ended January 29, 1994, the Company recorded a restructuring
charge of $6,200,000 before income taxes. The charge included the anticipated
costs associated with closing, relocating, expanding and converting existing
smaller Super Crown Books to a new larger prototype store. This charge
reflects the costs of implementing a decision of management to close smaller
Super Crown Books stores opened over the three years prior to the year ended
January 29, 1994 that proved to be too small to compete effectively. These
costs were primarily unrecoverable lease obligations and the remaining book
value of leasehold improvements.

The Company recorded a $276,000 tax benefit during the year ended January 29,
1994.

Seasonality

Sales, net income and increase in working capital for the fourth quarter have
historically been substantially higher than for any of the previous three
quarters (see Note 12 to the Consolidated Financial Statements). Inventory and
payables have historically been substantially higher at the end of the third
quarter than for any other quarter for the year. The fourth quarter results of
operations have historically been sufficient to satisfy the third quarter
accounts payable requirements.

Effects of Inflation

Inflation in the past several years has had no significant impact on the
Company's business. The Company's purchase cost and selling price for
merchandise are a percentage of the publishers' suggested retail prices. The
Company believes the impact of inflation is generally reflected in the
publishers' suggested retail prices. Therefore, the Company believes that it
will be able to recover most cost increases.

26
<PAGE> 27
Item 8. Financial Statements and Supplementary Data

<TABLE>
<CAPTION>
Financial Statements Page No.
-------------------- --------
<S> <C>
Report of Independent Public Accountants 28

Consolidated Balance Sheets
As of January 28, 1995 and January 29, 1994 29 - 30

Consolidated Statements of Income
Years ended January 28, 1995, January 29,
1994 and January 30, 1993 31

Consolidated Statements of Stockholders' Equity
Years ended January 28, 1995, January 29,
1994 and January 30, 1993 32

Consolidated Statements of Cash Flows
Years ended January 28, 1995, January 29,
1994 and January 30, 1993 33 - 34

Notes to Consolidated Financial Statements 35 - 55
</TABLE>

27
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO CROWN BOOKS CORPORATION:

We have audited the accompanying consolidated balance sheets of Crown Books
Corporation (a Delaware corporation and a majority-owned subsidiary of Dart
Group Corporation) and subsidiaries as of January 28, 1995 and January 29,
1994, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three fiscal years in the period ended January
28, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Crown Books Corporation and
subsidiaries as of January 28, 1995 and January 29, 1994, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 28, 1995, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Washington, D.C.
April 27, 1995.

28
<PAGE> 29
CROWN BOOKS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
January 28, January 29,
------------ ------------
1995 1994
------------ ------------
<S> <C> <C>
Current Assets:
Cash $ 4,226,000 $ 3,701,000
Short-term instruments 25,408,000 62,043,000
Marketable debt securities 35,106,000 30,394,000
Accounts receivable 3,832,000 4,743,000
Merchandise inventories 102,433,000 77,363,000
Deferred income tax benefit 10,957,000 1,189,000
Other current assets 369,000 777,000
------------ ------------
Total Current Assets 182,331,000 180,210,000
------------ ------------

Property and Equipment, at cost:
Furniture, fixtures and equipment 24,936,000 23,127,000
Leasehold improvements 18,063,000 18,976,000
Property under capital leases 1,406,000 1,406,000
------------ ------------
44,405,000 43,509,000
Accumulated Depreciation and
Amortization 21,401,000 18,281,000
------------ ------------
23,004,000 25,228,000
------------ ------------

Deferred Income Taxes 7,911,000 4,889,000
------------ ------------

Other Assets 133,000 309,000
------------ ------------

Total Assets $ 213,379,000 $210,636,000
============= ============
</TABLE>

See notes to consolidated financial statements.

29
<PAGE> 30
CROWN BOOKS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
January 28, January 29,
------------ ------------
1995 1994
------------ ------------
<S> <C> <C>
Current Liabilities:
Accounts payable, trade $ 55,695,000 $ 70,691,000
Income taxes payable 5,046,000 2,346,000
Accrued expenses -
Salary and benefits 5,798,000 5,140,000
Taxes other than income 3,981,000 4,138,000
Robert M. Haft judgement 13,342,000 -
Other 14,639,000 11,990,000
Current portion of reserve for
closed stores and restructuring 6,936,000 600,000
Current portion of obligations
under capital leases 24,000 30,000
Due to affiliate 92,000 46,000
------------ ------------
Total Current Liabilities 105,553,000 94,981,000
------------ ------------

Obligations Under Capital Leases 1,582,000 1,553,000
------------ ------------
Reserve for Store Closings and
Restructuring 22,917,000 12,360,000
------------ ------------
Total Liabilities 130,052,000 108,894,000
------------ ------------

Stockholders' Equity:
Common stock, par value $.01 per
share; 20,000,000 shares
authorized, 5,612,611 shares
issued 56,000 56,000
Notes receivable, net of discount (103,000) (92,000)
Deferred compensation - (1,424,000)
Paid-in capital 43,809,000 43,809,000
Unrealized investment losses (448,000) -
Retained earnings 43,197,000 62,577,000
Treasury stock, 223,638 shares of
common stock, at cost (3,184,000) (3,184,000)
------------ ------------

Total Stockholders' Equity 83,327,000 101,742,000
------------ ------------

Total Liabilities and Stockholders'
Equity $213,379,000 $210,636,000
============ ============
</TABLE>

See notes to consolidated financial statements.

30
<PAGE> 31
CROWN BOOKS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Interest and other income 2,289,000 3,073,000 3,015,000
------------ ------------ ------------
307,895,000 278,198,000 243,697,000
------------ ------------ ------------

Expenses:
Cost of sales, store
occupancy and warehousing 266,877,000 221,264,000 189,000,000
Selling and administrative 62,208,000 46,911,000 38,395,000
Depreciation and amortization 5,176,000 3,986,000 2,418,000
Interest expense 965,000 323,000 391,000
Restructuring charges - 6,200,000 6,600,000
------------ ------------ ------------
335,226,000 278,684,000 236,804,000
------------ ------------ ------------

Income (loss) before income
taxes (27,331,000) (486,000) 6,893,000

Income taxes (benefit) (7,951,000) (276,000) 2,612,000
------------ ------------ ------------

Net income (loss) $(19,380,000) $ (210,000) $ 4,281,000
============ ============ ============

Weighted average common
share and common share
equivalents outstanding 5,389,000 5,402,000 5,214,000
============ ============ ============

Per share data:

Net income (loss) $ (3.60) $ (.04) $ .82
============ ============ ============
</TABLE>

See notes to consolidated financial statements.

31
<PAGE> 32
CROWN BOOKS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Years Ended
----------------------------------------
January 28, January 29, January 30,
------------ ------------ ------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Common Stock:
Balance, beginning of period $ 56,000 $ 56,000 $ 54,000
Stock options exercised - - 2,000
------------ ------------ ------------
Balance, end of period $ 56,000 $ 56,000 $ 56,000
============ ============ ============

Note Receivable, Net of
Discount:
Balance, beginning of period $ (92,000) $ (790,000) $ (69,000)
Stock options exercised - - (710,000)
Proceeds from payment of
note receivable - 710,000 -
Amortization of discount (11,000) (12,000) (11,000)
------------ ------------ ------------
Balance, end of period $ (103,000) $ (92,000) $ (790,000)
============ ============ ============

Deferred Compensation:
Balance, beginning of period $ (1,424,000) $ (1,629,000) $ (1,835,000)
Recognition/write-off of
compensation 1,424,000 205,000 206,000
------------ ------------ ------------
Balance, end of period $ - $ (1,424,000) $ (1,629,000)
============ ============ ============

Paid-in Capital:
Balance, beginning of period $ 43,809,000 $ 43,545,000 $ 40,547,000
Stock options exercised - 264,000 2,998,000
------------ ------------ ------------
Balance, end of period $ 43,809,000 $ 43,809,000 $ 43,545,000
============ ============ ============

Unrealized Investment losses $ (448,000) $ - $ -
============ ============ ============

Retained Earnings:
Balance, beginning of period $ 62,577,000 $ 62,787,000 $ 58,506,000
Net income (loss) (19,380,000) (210,000) 4,281,000
------------ ------------ ------------
Balance, end of period $ 43,197,000 $ 62,577,000 $ 62,787,000
============ ============ ============

Treasury Stock:
Balance, beginning and
end of period $ (3,184,000) $ (3,184,000) $ (3,184,000)
============ ============ ============

Common Stock Outstanding
Balance, beginning of period 5,388,973 5,373,970 5,159,745
Stock options exercised - 15,003 214,225
------------ ------------ ------------
Balance, end of period 5,388,973 5,388,973 5,373,970
============ ============ ============
</TABLE>

See notes to consolidated financial statements.

32
<PAGE> 33
CROWN BOOKS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended
----------------------------------------
January 28, January 29, January 30,
------------ ------------ ------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income (loss) $(19,380,000) $ (210,000) $ 4,281,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 5,176,000 3,986,000 2,418,000
Write-off of deferred
compensation 1,424,000 - -
Amortization of deferred
compensation - 193,000 195,000
Provision for closed stores,
and restructuring charge 18,865,000 5,569,000 7,113,000
Change in assets and
liabilities:
Accounts receivable 911,000 (1,505,000) 892,000
Merchandise inventories (25,070,000) (17,405,000) (4,197,000)
Other current assets 408,000 (480,000) (83,000)
Other assets 176,000 65,000 (256,000)
Accounts payable, trade (14,996,000) 31,018,000 (4,259,000)
Accrued expenses 16,627,000 8,551,000 (2,542,000)
Due to affiliate 46,000 32,000 (2,000)
Income taxes payable 2,700,000 605,000 (213,000)
Deferred income taxes (12,790,000) (2,721,000) (2,596,000)
Reserve for closed stores (1,208,000) (680,000) (491,000)
------------ ------------ ------------
Net cash provided by
(used in) operating
activities $(27,111,000) $ 27,018,000 $ 260,000
------------ ------------ ------------

Cash Flows from Investing
Activities:
Capital expenditures $ (3,716,000) $(15,014,000) $ (6,722,000)
Purchase of United States
Treasury Notes (106,373,000) (68,707,000) -
Disposition of United
States Treasury Notes 96,203,000 61,823,000 -
Purchase of corporate notes (1,541,000) (5,141,000) -
Sale of corporate notes 4,412,000 - -
Purchase of United States
Agency Notes (1,492,000) (999,000) -
Sale of Unites States Agency
Notes 195,000 - -
Maturities of United States
Agency Notes - 1,000,000 -
Disposition of reverse
repurchase agreements (93,000) - -
Purchase of municipal
securities (6,124,000) (24,404,000) -
Sales of municipal
securities 9,560,000 6,034,000 -
------------ ------------ ------------
Net cash used in
investing activities $ (8,969,000) $(45,408,000) $ (6,722,000)
------------ ------------ ------------
</TABLE>

33
<PAGE> 34
CROWN BOOKS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended
----------------------------------------
January 28, January 29, January 30,
------------ ------------ ------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Financing
Activities:
Principal payments under
capital lease obligations $ (30,000) $ (30,000) $ (1,124,000)
Proceeds from payment of
Note Receivable - 710,000 -
Proceeds from exercise of
stock options - 263,000 2,291,000
------------ ------------ ------------
Net cash provided by
(used in) financing
activities $ (30,000) $ 943,000 $ 1,167,000
------------ ------------ ------------

Net Decrease in Cash
and Equivalents $(36,110,000) $(17,447,000) $ (5,295,000)

Cash and Equivalents Beginning
of Year 65,744,000 83,191,000 88,486,000
------------ ------------ ------------

Cash and Equivalents at End
Of Year $ 29,634,000 $ 65,744,000 $ 83,191,000
============ ============ ============
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the
year for:
Interest $ 316,000 $ 323,000 $ 391,000
Income taxes 2,111,000 1,904,000 4,767,000
</TABLE>

See notes to consolidated financial statements.

34
<PAGE> 35
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 28, 1995, January 29,
1994 And January 30, 1993

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements reflect the accounts of
Crown Books Corporation ("Crown Books") and its wholly-owned subsidiaries.
Crown Books and its wholly-owned subsidiaries are referred to collectively as
the "Company". All significant intercompany accounts and transactions have
been eliminated. The Company is engaged in the business of operating specialty
retail book stores.

Fiscal Year

The Company's fiscal year ends on the Saturday closest to January 31. All
fiscal years presented include 52 weeks.

Cash and Equivalents

For purposes of the statement of cash flows, the Company considers short-term
instruments, consisting of United States Treasury Bills, purchased with a
maturity of less than one year to be cash equivalents. The Company's United
States Treasury Bills primarily consist of instruments with a maturity of less
than four months. These highly liquid instruments are considered to be an
integral part of the Company's operating cash management program.

Short-term Instruments and Marketable Debt Securities

The Company's short-term instruments included United States Treasury Bills,
money market funds and marketable debt securities included United States
Treasury Notes, corporate notes and municipal securities.

The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities,
effective January 30, 1994. In accordance with SFAS No. 115, prior years'
financial statements have not been restated to reflect the change in accounting
method.

Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determination at each
balance sheet date. Debt securities for which the Company does not have the
intent or ability to hold to maturity are classified as available for sale.
Securities available for sale are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. At January 28, 1995, market value was $448,000 less than cost
(adjusted for income taxes). At January 28, 1995, the Company had no
investments that qualified as trading or held to maturity.

35
<PAGE> 36
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended January 28, 1995, January 29,
1994 And January 30, 1993

The amortized cost of debt securities classified as available for sale is
adjusted for amoritization of premiums and accretion of discounts to maturity.
Such amortization and interest are included in interest income. Realized gains
and losses are included in interest and other income. The cost of securities
sold is based on the specific identification method. The following table
(which excludes money market funds) presents the estimated fair value of debt
securities available for sale by contractual maturity at January 28, 1995:

<TABLE>
<S> <C>
Due in one year or less $ 25,360,000
Due after one year through three years 20,875,000
Due after three years 11,832,000
-------------
$ 58,067,000
=============
</TABLE>

Expected maturities will differ from contractual maturities because the issuers
of securities may have the right to prepay obligations without prepayment
penalties.

Fair Value of Financial Instruments

The fair values of current assets and current liabilities are approximately
equal to the reported carrying amounts. No value has been placed on the
Company's line of credit facility as any borrowings would bear interest at
market rates.

Merchandise Inventories

The Company's inventories are priced at the lower of first-in, first-out cost
or market.

Property and Equipment and Depreciation

Property and equipment are recorded at cost. The Company depreciates
furniture, fixtures and equipment generally over a ten year period using the
straight-line method. Computer equipment is depreciated over a five year
period using the straight-line method. Computer software is charged to expense
in the year of acquisition. All stores and some equipment are leased.
Improvements to leased premises are amortized over a ten year period or over
the term of the lease, whichever is shorter. Assets (primarily buildings)
financed through asset based financing arrangements are depreciated over the
lives of the leases. Accumulated amortization for assets under capital lease
was $566,000 and $505,000 as of January 28, 1995 and January 29, 1994,
respectively.

36
<PAGE> 37
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,

1994 And January 30, 1993

Preopening Expenses

All costs of a noncapital nature incurred in opening a new store are charged to
expense as incurred.

Self Insurance Programs

The Company is self insured for certain levels of general liability, workers
compensation and employee medical coverage. Estimated costs of these self
insurance programs are accrued at the expected value of projected settlements
for known and anticipated claims.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk
consist primarily of short-term instruments, marketable debt securities and
accounts receivable from vendors. The Company restricts investment of
temporary cash investments to United States Treasury Notes and corporate notes
and municipal securities with a high credit standing. Credit risk on accounts
receivable is minimized as a result of deducting such receivables from amounts
payable to the vendors.

Net Income Per Common Share and Common Share Equivalents

Net income per common share has been computed using the weighted average number
of shares of common stock and common stock equivalents (certain stock options)
outstanding during the period. The difference between primary net income per
common share and fully diluted net income per common share is not significant
for the periods presented.

New Accounting Standards

The Company adopted SFAS No. 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments, during the year ended
January 28, 1995. The Company adopted SFAS No. 112, Employers Accounting for
Postemployment Benefits and SFAS No. 115, Accounting for Certain Instruments
in Debt and Equity Securities effective January 30, 1994. Adoption of these
standards had no material effect on the Company's consolidated financial
statements. The Company adopted SFAS No. 109, Accounting for Income Taxes,
effective February 1, 1992. Adoption of the Standard for income taxes did not
have a material effect on the consolidated financial statements. The Company
is required to adopt SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, as amended, no later than its fiscal year ending February 3, 1996.
Application of this statement is not expected to have a material effect on the
Company's consolidated financial statements. The Company is also required to
adopt SFAS No. 121, Accounting for Long Lived Assets, no later than its fiscal
year ending January 25, 1997. The Company has not determined the impact of
this recently issued accounting standard on the Company's consolidated
financial statements.

37
<PAGE> 38
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,

1994 And January 30, 1993

NOTE 2 - INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
Fiscal Year
---------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 3,034,000 $ 1,507,000 $ 4,031,000
State 823,000 505,000 755,000
----------- ----------- -----------
3,857,000 2,012,000 4,786,000
Deferred:
Federal (9,775,000) (1,951,000) (1,864,000)
State (2,033,000) (337,000) (310,000)
----------- ----------- ------------
$(7,951,000) $ (276,000) $ 2,612,000
=========== =========== ===========
</TABLE>

The effective income tax rate is reconciled to the Federal statutory rate as
follows:

<TABLE>
<CAPTION>
Fiscal Year
---------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
Income taxes at Federal
statutory rate $(9,293,000) $ (165,000) $ 2,344,000
Increase (decrease) in
taxes resulting from:
State income taxes,
net of Federal
income tax benefit (800,000) 110,000 285,000
Tax exempt municipal
bond income (386,000) (237,000) -
Deferred tax valuation
allowance 2,500,000 - -
Other 28,000 16,000 (17,000)
----------- ----------- -----------
Income tax provision
(benefit) $(7,951,000) $ (276,000) $ 2,612,000
=========== =========== ===========

Effective tax rate $ (29.1%) (56.8%) 37.9%
=========== =========== ===========
</TABLE>

38
<PAGE> 39
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,
1994 And January 30, 1993

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This standard requires, among other things,
recognition of future tax benefits, measured by enacted tax rates, attributable
to deductible temporary differences between financial statement and income tax
bases of assets and liabilities and for tax net operating losses carryforwards,
to the extent that realization of such benefits is more likely than not. The
components of the net deferred tax assets are as follows:

<TABLE>
<CAPTION>
January 28, January 29,
----------- -----------
Gross deferred Tax Assets: 1995 1994
----------- -----------
<S> <C> <C>
Capitalized leases treated as
operating leases for tax purposes $ 173,000 $ 159,000
Uniform capitalization of inventory 494,000 340,000
Reserves for closed stores and restructuring 11,139,000 4,642,000
Bonus accruals - 381,000
Straight line rent adjustments 277,000 142,000
Accrued legal expenses 1,021,000 385,000
Accelerated depreciation 540,000 2,000
Self insurance accrual 540,000 -
Litigation accruals 5,732,000 -
Vacation accrual 799,000 -
Unrealized investment losses 284,000 -
Expense accruals 361,000 -
Other 8,000 27,000
----------- -----------
21,368,000 6,078,000
Valuation allowance (2,500,000) -
----------- -----------
Net deferred tax assets $18,868,000 $ 6,078,000
=========== ===========
</TABLE>

During the year ending January 28, 1995 the Company's net deferred tax asset
increased by $12,790,000 from the balance as of January 29, 1994. The increase
is primarily attributable to significant events that occurred during the third
quarter that have resulted in additional taxable temporary differences. These
events include, among others, the charge for closed stores of $18,963,000 (see
Note 3), the jury verdict for Robert M. Haft of $12,800,910 and the additional
legal reserve of $2,600,000 (see Note 7). Realization of the deferred tax
assets is dependent upon the reversal of taxable temporary differences during
periods when the Company has taxable income, carryback of current losses and
future operating results. In management's opinion, a valuation allowance of
$2,500,000 is necessary for the uncertainty related to the timing of the
reversal of certain of the taxable temporary differences. The valuation
allowance was recorded during the year ending January 28, 1995 and is included
in Income Taxes in the accompanying Statement of Income.

With respect to the remaining deferred tax asset of $18,868,000, the Company
has generated taxable income in the existing carryback period available to
carryback certain future deductions resulting from taxable temporary
differences. In addition, management believes that sufficient taxable income
will be generated in the future, based upon the Company's historical ability to
generate taxable earnings and the benefits to be derived from the closing of
unprofitable stores (see Note 3), to realize the remaining net deferred tax
asset.

<PAGE> 40

CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,

1994 And January 30, 1993

NOTE 3 - RESTRUCTURING AND CLOSED STORE RESERVES

Restructuring Reserves

During the year ended January 30, 1993, the Company recorded a restructuring
charge of $6,600,000 before income taxes. The charge included the anticipated
costs associated with closing, relocating, expanding and converting existing
stores to the Super Crown Books concept. These costs are primarily
unrecoverable lease obligations and the remaining book value of leasehold
improvements from the estimated closing date. During the years ended January
28, 1995 and January 29, 1994, the Company had charged approximately $1,445,000
and $840,000 against this reserve.

The Company has determined that a number of the smaller Super Crown Books
stores opened in previous years (typically 6,000 - 10,000 square feet) were not
a competitive format in the current environment. These stores have been
negatively impacted by the industry's introduction of larger stores.
Accordingly, the Company recorded a restructuring charge of $6,200,000 in the
year ended January 29, 1994, representing the anticipated costs (unrecoverable
lease costs and the remaining book value of leasehold improvements and store
fixtures subsequent to management's estimate of the stores' closing dates)
associated with closing, relocating and converting these smaller Super Crown
Books stores to new, larger Super Crown Books. At January 28, 1995, the
Company had not charged any costs to this reserve.

The total restructuring reserve as of January 28, 1995 of approximately
$10,515,000 is comprised of the following components:
<TABLE>
<CAPTION>
Lease Leaseholds
Year Ended Stores Obligations & Fixtures
- ----------------- ------ ----------- ----------
<S> <C> <C> <C>
January 29, 1994 7 $ 5,100,000 $1,100,000
January 30, 1993 30 4,035,000 280,000
------ ----------- ----------
37 $ 9,135,000 $1,380,000
</TABLE>

The above lease obligations are for primary terms from 5 to 107 months.

The amount of unrecoverable lease costs relating to properties under related
party leases is approximately $657,000.

The following table indicates the fiscal years in which the restructuring
reserve is expected to be utilized.

<TABLE>
<CAPTION>
Fiscal Year Amount
----------- -------------
<S> <C>
1996 $ 2,059,000
1997 2,611,000
1998 2,057,000
1999 1,304,000
2000 667,000
2001 to 2005 1,817,000
-------------
$ 10,515,000
=============
</TABLE>

40
<PAGE> 41
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,

1994 And January 30, 1993

Store Closing Costs

The costs associated with store closings are charged to store occupancy when
management makes a decision to close a store. Such costs consist primarily of
future lease obligations after the closing date, net of estimated sublease
income, and the remaining book value of leasehold improvements.

During the fiscal years 1995, 1994 and 1993, the Company recorded net charges
(income) of $18,865,000, $(631,000) and $513,000, respectively for such closed
store costs. The income during the year ended January 29, 1994 was the result
of early lease terminations, net of cash buyouts.

During the three months ended October 29, 1994, the Company concluded that due
to lower than anticipated operating performance as many as 100 of its stores
would not generate sufficient return on investment to justify their continued
operation and therefore should be closed. These stores are in addition to the
stores previously scheduled for closing under the Company's restructuring and
closed store reserves and accordingly, the Company recorded charges of
approximately $18,963,000 during the three months ended October 29, 1994.
During the three months ended January 28, 1995 an additional 54 stores were
targeted for closure as a result of the continuing analysis of store
profitability and market presence. Additional reserves for store closings were
not deemed necessary as the remaining reserves adequately provide for the
Company's obligations for the currently identified stores to be closed due to
revisions to the planned closing dates for certain stores. The Company will
continue to evaluate the performance and future viability of its remaining
stores and may close additional stores in the future.

In addition to the charge recorded during the period ending October 29, 1994,
the Company has remaining closed store reserves as of January 28, 1995 from
charges recorded in prior years of approximately $778,000. The total closed
store reserve as of January 28, 1995 of approximately $19,338,000 is comprised
of the following components:

<TABLE>
<S> <C>
Lease obligations $16,630,000
Leasehold improvements and fixtures 2,708,000
-----------
$19,338,000
</TABLE>

To estimate the future lease obligations, the Company considered lease costs
after the planned closing date. The charge is included in cost of sales, store
occupancy and warehousing in the Company's consolidated statements of income.
At January 28, 1995, the Company had closed 28 stores and charged approximately
$403,000 against this reserve. The Company continues to review store
operations and may decide to close additional stores in the future.

The amount of unrecoverable lease costs relating to properties under related
party leases is approximately $1,308,000.

41
<PAGE> 42
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,

1994 And January 30, 1993

The following table, which does not include previously recorded restructuring
reserves, indicates the fiscal years in which the total closed store reserves
are expected to be utilized:

<TABLE>
<CAPTION>
Fiscal Year Amount
----------- -------------
<S> <C>
1996 $ 4,877,000
1997 5,338,000
1998 4,164,000
1999 2,545,000
2000 1,019,000
2001-2005 1,395,000
-------------
$ 19,338,000
=============
</TABLE>

NOTE 4 - TRANSACTIONS WITH AFFILIATES

Dart Group Corporation ("Dart") owns 51.4% of the Crown Books outstanding
common stock. Dart provides certain services relating to management, general
and administrative functions and charges the Company using methods and bases
described herein.

A portion of the Company's general and administrative functions are obtained
directly from Dart. The Company has been charged an amount which, in
management's opinion, is equal to costs incurred by Dart to provide these
functions. These functions included, but were not limited to, executive
management, advertising administration, accounting, data processing, loss
prevention, personnel administration, legal services, store set up and
construction services and office facility usage. It is not practicable for the
Company to estimate the cost it would have incurred for these services if it
had operated as an unaffiliated entity.

In addition to the intercompany charges for general and administrative
services, Dart charges the Company, on a quarterly basis, for actual expenses
which relate directly to the Company's operations. Substantially all such
charges were supported by invoices from unrelated parties designating the
Company as recipient of the related goods or services.

In the Company's opinion, the methods used for allocating costs described above
constitute a reasonable basis on which to allocate such costs.

Amounts receivable from or payable to affiliate relate to transactions made on
behalf of the Company by Dart or on behalf of Dart by the Company.

42
<PAGE> 43
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,

1994 And January 30, 1993

The following table summarizes the intercompany transactions:

<TABLE>
<CAPTION>
Fiscal Years
---------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Due To Affiliate,
Beginning of Year $ 46,000 $ 14,000 $ 16,000
----------- ----------- -----------
Direct Expense Charges -
Rentals (Note 5) 261,000 314,000 314,000
Other expenses 9,000 9,000 13,000
----------- ----------- -----------
270,000 323,000 327,000
----------- ----------- -----------
Allocated charges -
Salaries 758,000 761,000 749,000
Rentals and other 2,855,000 894,000 956,000
----------- ----------- -----------
3,613,000 1,655,000 1,705,000
----------- ----------- -----------
Payments (3,837,000) (1,946,000) (2,034,000)
----------- ----------- -----------

Due To Affiliate,
End of Year $ 92,000 $ 46,000 $ 14,000
=========== =========== ===========
</TABLE>

All transactions with Dart included above are made under current payment terms
that, in management's opinion, are comparable to those with unrelated parties
and are free of interest. The average balances of amounts due to affiliate
were $380,000, $162,000, and $143,000 for fiscal 1995, 1994 and 1993,
respectively.

NOTE 5 - COMMITMENTS

Lease Commitments

The Company leases stores, warehouses, leasehold improvements, fixtures and
equipment. Renewal options are available on the majority of leases. In some
instances, store leases require the payment of contingent rentals and license
fees based on sales in excess of specified minimums. Certain properties are
subleased with various expiration dates. Certain capital leases have purchase
options at fair market value at the end of the lease.

43
<PAGE> 44
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,

1994 And January 30, 1993

Following is a schedule by fiscal year of future minimum payments under capital
leases and noncancelable operating leases (excluding sublease income) and
license agreements which have initial or remaining terms in excess of one year
at January 28, 1995. The imputed interest rate on capital leases is 20.0% in
the aggregate.

<TABLE>
<CAPTION>
-- in thousands --
--------------------------------------
Capital Leases Operating
(see Related Party Leases) Leases
-------------------------- ----------
Fiscal Fixtures &
Year Building Equipment
- ------ ---------- ----------
<S> <C> <C> <C>
1996 $ 270 $ 25 $ 22,793
1997 288 - 20,548
1998 304 - 17,216
1999 334 - 12,436
2000 334 - 7,867
2001-2017 6,896 - 26,591
---------- ---------- ----------
Total 8,426 25 $ 107,451
==========
Less: Imputed interest 6,844 1
---------- ----------
Present value of net
minimum lease payments 1,582 24
Less: Current maturities - 24
---------- ----------
Long-term capital lease
obligations $ 1,582 $ -
========== ==========
</TABLE>

The above table includes $6,948,000 for store operating leases where the store
has been closed and the lease obligation has been accrued in the restructuring
or store closing reserves. Minimum operating lease obligations have not been
reduced by total future minimum sublease rental of $1,047,000 receivable in the
future under six leases. There are no sublease arrangements for the capital
leases.

Rent expense for operating leases are as follows:

<TABLE>
<CAPTION>
Fiscal Year
---------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Minimum rentals $21,401,000 $17,015,000 $13,606,000
Contingent rentals 174,000 168,000 199,000
----------- ----------- -----------
$21,575,000 $17,183,000 $13,805,000
=========== =========== ===========
</TABLE>

Related Party Leases

Members of the Haft family own all the issued and outstanding voting stock of
Dart. Of the Company's 196 stores as of January 28, 1995, nine are leased from
entities in which the Haft family has substantially all the beneficial
interests. The Company leases three of the stores in shopping centers in which
Dart owns the majority of the partnership interests and members of the Haft
family hold the remaining beneficial interests. These 12 lease and sublease
agreements with Dart and the Haft family provide for various termination dates

44
<PAGE> 45
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,
1994 And January 30, 1993

which, assuming renewal options are exercised, range from 1996 to 2029, and
require the payment of future minimum rentals aggregating $47,782,000 at
January 28, 1995. These agreements also require payment of a percentage of
sales in excess of a stated minimum, and are included in the lease commitments
table above. In addition, four closed stores have lease agreements with Haft-
owned entities with various termination dates from 1996 to 2001 and require
future minimum rentals aggregating $891,000 at January 28, 1995. Annual fees
and rentals included in the consolidated statements of income for leases and
subleases involving the Haft family were $2,296,000, $1,780,000, and $1,410,000
for 1995, 1994 and 1993, respectively.

The Company subleases from Dart 28,000 square feet of a warehouse and office
facility located in Landover, Maryland which it shares with Trak Auto
Corporation ("Trak Auto"), an affiliate of Dart. The sublease is for 30
years and six months, and provides for rental payments increasing approximately
15% every five years over the term of the sublease and commenced October 1985.
The annual rental is $269,500. The sublease agreement also requires payment
for maintenance, utilities, insurance and taxes allocable to the space
subleased. This sublease is classified as a capital lease and is the only
capital lease under the caption, Capital Lease - Building, on the lease
commitment table above. Dart leased the entire 271,000 square foot warehouse
and office facility from a private partnership in which Haft family members own
all of the partnership interests. The Company's sublease is on the same terms
as Dart's lease from the Haft family partnership.

The Executive Committees of Dart, Crown Books and Trak Auto have undertaken a
legal review of leasing arrangements and real estate related transactions
between Dart, the Company or Trak Auto, on the one hand, and Haft-owned
entities, on the other hand. The Executive Committees have not yet determined
what actions may be taken as a result of this legal review.

Employment Arrangements

On January 24, 1995, the Company entered into employment agreements with E.
Steve Stevens, Senior Executive Vice President and Chief Operating Officer and
another key executive. Mr. Stevens' agreement is for a term of two years (the
Company's fiscal years 1996 and 1997) and the other agreement is for a term of
one year (the Company's 1996 fiscal year). The agreements are automatically
extended two years and one year, respectively, unless the individual is
terminated with cause. The agreements provide for compensation increases
following review and performance appraisal by the Board of Directors.

NOTE 6 - BOARD OF DIRECTORS

On January 4, 1994, the Board of Directors of Dart established a Special
Litigation Committee to assess, on behalf of the Company, whether to pursue,
settle or abandon, claims raised in the derivative lawsuits filed against the
Company. See Note 7 for a discussion of the derivative lawsuits. The
Directors appointed to the Special Litigation Committee were H. Ridgely Bullock
and Larry G. Schafran. On September 30, 1994, the Special Litigation Committee
issued its report.

45
<PAGE> 46

CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,

1994 And January 30, 1993

Members of the Executive Committee are compensated at a salary rate of $275 per
hour plus reimbursement of expenses. Members of the Special Litigation
Committee of the Board of Directors, which was established on January 4, 1994,
have been compensated at a salary rate of $250 per hour plus reimbursement of
expenses. Through January 28, 1995, the compensation paid by Dart and its
subsidiaries, including the Company, to members of the respective Executive

Committees for their services on those committees totaled $666,000 ($166,000
paid by the Company), and the compensation paid by Dart and its subsidiaries,
including the Company, to members of the Special Litigation Committee for their
service on that committee totaled $269,000 ($121,000 paid by the Company), in
each case exclusive of expense reimbursement.

NOTE 7 - LITIGATION

Robert M. Haft Employment Litigation

46
<PAGE> 47
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 29, 1994, January 30,

1994 And January 30, 1993

agreement with Robert Haft and awarded him damages (equivalent to the
compensation projected to be due over a ten-year period) against the Company in
the amount of $12,800,910.

On February 22, 1995, the federal district court in Robert M. Haft's employment
litigation made the following rulings against Dart, the Company and Trak Auto:

(2) The court found that Robert M. Haft was entitled to exercise
certain employee stock options under the 1981 and 1992 Stock
Option Plans of Dart, the Company's Stock Option Plan adopted
March 12, 1987, and the Trak Auto Corporation Stock Option
Plan adopted March 24, 1987. As to options that had expired
during the pendency of the case, the court extended the time
for exercise for a period equal to the period from June 30,
1993 to the expiration date. As to options that had not yet
expired, the court extended the exercise date for a period
equal to the period from June 30, 1993 until final judgment
was entered. (Under the relevant plans, Robert M. Haft would
be entitled to exercise options for 50,000 of Dart Class A
Common Stock, $1.00 par value per share (the "Class A Common
Stock"), of Dart having exercise prices of $71.50 - $104.50
per share, 80,000 shares of Common Stock of the Company having
exercise prices of $21.45 - $23.93 per share and 40,000 shares
of Trak Auto Common Stock having exercise prices of $6.60 -
$13.75 per share.); and

47
<PAGE> 48
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 29, 1994, January 30,

1994 And January 30, 1993

(3) The Court found that Robert M. Haft has the right to purchase
for $149,400 ten percent of Dart's interest in the entity that
acquired the assets of Total Beverage's Chantilly, Virginia
store.

The Company has reserved $13,342,000 for these judgments and has expensed the
remaining unamortized deferred compensation associated with the ISA totaling
$1,424,000 (before income taxes).

Derivative Litigation

The complaint, as amended on January 12, 1995, alleges waste, breach of
fiduciary duty, violation of securities laws and entrenchment in connection
with various lease agreements between the Combined Properties defendants and
Dart and its subsidiaries, the termination of Robert M. Haft, the compensation
paid to Ronald S. Haft and Herbert H. Haft, Dart's employment agreement with
Ronald S. Haft dated August 1, 1993 (the "Agreement"), the sale of 172,730
shares of Class B Common Stock, $1.00 par value per share (the "Class B Common
Stock") of Dart by Herbert H. Haft to Ronald S. Haft and the compensation paid
to the Executive Committee. Plaintiffs seek an accounting of unspecified
damages incurred by Dart, voiding of the options sold to Ronald S. Haft,
appointment of a temporary custodian to manage the affairs of Dart or to
oversee its recapitalization or sale and costs and attorneys' fees.

In November 1993, Robert M. Haft filed another lawsuit in the Delaware Court of
Chancery for New Castle County. The lawsuit names as defendants Herbert H.
Haft, Ronald S. Haft, Douglas M. Bregman, and Bonita A. Wilson, and also names
Dart as a nominal defendant. The complaint derivatively alleges interested
director transactions, breach of fiduciary duty and waste in connection with
the Agreement. Robert M. Haft also brings individual claims for breach of
contract and dilution of voting rights in connection with the sale of shares
of the Class B Common Stock by Herbert H.

48
<PAGE> 49
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 29, 1994, January 30,

1994 And January 30, 1993

Haft to Ronald S. Haft and the Agreement with Ronald S. Haft. The complaint
seeks rescission of the sale of such shares and the Agreement, unspecified
damages from the individual directors, and costs and attorneys' fees.

Ronald S. Haft Stock Options

On September 6, 1994, Ronald S. Haft tendered Dart a letter requesting:

(2) to exercise his right under the Agreement, effective immediately, to
obtain a loan from Dart in the amount of $17,665,353.20, for part of
the exercise price of the Options.

49
<PAGE> 50
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 29, 1994, January 30,

1994 And January 30, 1993

of Dart in the amount of $17,665,353.20, the balance of the exercise price for
the Option Shares under the Options.

In connection with this proceeding, on September 14, 1994, a Standstill
Agreement (the "Standstill Agreement") agreed to on behalf of Dart and Ronald
S. Haft was ordered by the Delaware Court of Chancery. The Standstill
Agreement restricts certain actions by Dart until further order of the court.
In particular, Dart may not, without further order of the court: (i) change its
Certificate of Incorporation or Bylaws; (ii) change the current composition of
the Board of Directors of Dart or its subsidiaries; (iii) change the current
Haft family officers of Dart or its subsidiaries; (iv) issue any additional
securities of Dart or any of its subsidiaries; or (v) take any extraordinary
actions that would result in (a) the liquidation of Dart or any of its
subsidiaries, (b) the sale of any major subsidiary of Dart, or (c) the
disadvantage of any Class B Common Stockholder of Dart through any debt
transaction.

50
<PAGE> 51
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 29, 1994, January 30,

1994 And January 30, 1993

pursuant to the exercise of options granted prior to September 14, 1994. A
hearing on these matters was held on April 18, 1995 at which the court denied
the motion for contempt and issued an order stating that the Standstill
Agreement did not enjoin the exercise of stock options granted prior to
September 14, 1994, or the issuance of stock options to employees approved by
the Board of Directors in December 1994.

In December 1994, the Delaware Court of Chancery granted a motion by the Kahn
Derivative Plaintiffs to intervene permissively as defendants in the Options
Lawsuit on their own behalf. Subsequently, on January 20, 1995, Ronald S. Haft
and the Kahn Derivative Plaintiffs filed a Stipulation and Agreement of
Compromise, Settlement, and Release (the "Settlement Agreement"), in which they
purported to settle the Options Lawsuit. As part of the putative Settlement
Agreement, Ronald S. Haft's exercise of the Options would have been allowed.

Dart filed a brief opposing the Settlement Agreement on March 8, 1995, which
brief contained as an exhibit a memorandum (the "Memorandum") responding to the
terms of the Settlement Agreement. On March 10, 1995, the Kahn Derivative
Plaintiffs withdrew from the putative Settlement Agreement. Trial in the
Options Lawsuit is currently scheduled for July 17, 1995.

Other

51
<PAGE> 52
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 29, 1994, January 30,

1994 And January 30, 1993

NOTE 8 - INCENTIVE STOCK AGREEMENT

In fiscal 1990, the Company entered into an incentive stock agreement (the
"ISA") with Robert M. Haft, the former president of the Company. Under the
terms of the ISA, the Company issued 100,000 shares of Common Stock to Robert
M. Haft, subject to certain transfer restrictions, in return for a non-interest
bearing promissory note, discounted at an effective rate of 11%, for $203,750,
due January 2, 2004. Pursuant to the ISA, a voluntary termination by Robert M.
Haft of his employment would allow the Company to repurchase all or a portion
of the 100,000 shares of Common Stock; also, if the Company terminates Robert
M. Haft without cause, the ISA would require the Company to issue 100,000
shares of unrestricted common stock to him.

The Company recognized deferred compensation to Robert M. Haft under the ISA
with a combination of amortization of the discount on the note ($11,000
annually) and straight-line recognition of the difference between the market
price of Crown Books common stock on the date of grant and the purchase price
for the shares subject to the ISA ($194,000 annually).

When Robert M. Haft's employment with the Company terminated in June 1993, the
Company maintained that he had voluntarily terminated his employment, and
therefore the Company had a right to repurchase these shares. In August 1993,
Robert M. Haft filed a lawsuit against Dart, the Company and Trak Auto that,
among other claims, contested the right of the Company to repurchase the
shares, and alleged that the Company had terminated Robert M. Haft without
cause. The jury and the court in this litigation found in favor of Robert M.
Haft on these claims. On February 22, 1995, the court held that Robert M. Haft
was entitled to damages in the amount of $2,146,250, plus interest, for Robert
M. Haft's claims with respect to the ISA. The Company is contesting this
judgment. See Note 7 for further discussion of this litigation.

As a result of this litigation, however, the Company took a charge against
earnings for the remaining unamortized deferred compensation totaling
$1,424,000 (before income taxes) associated with the ISA in the year ending
January 31, 1995.

NOTE 9 - CREDIT AGREEMENT

Together with Dart and Trak Auto the Company is party to a $6 million revolving
credit agreement with a bank. The $6 million is an aggregate amount and not
specifically allocated to any of the parties. The line is intended to be used
for the issuance of standby and trade letters of credit. At January 28, 1995,
there had been no borrowings under the credit agreement. This line of credit
expires on May 1, 1995.

52
<PAGE> 53
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,

1994 And January 30, 1993

NOTE 10 - EMPLOYEES PROFIT-SHARING PLAN

The Company maintains a non-contributory profit-sharing plan for all full-time
employees with one year's continuous employment. Annual contributions to the
plan are based on a discretionary percentage of the Company's consolidated net
income as defined in the plan, as determined by the Board of Directors.
Contributions are allocated to individual employees based on each employee's
salary in relation to the total salaries of all eligible employees. The
Company's contribution was $240,000, $95,000 and $650,000 for the fiscal years
1995, 1994 and 1993, respectively.

NOTE 11 - STOCK OPTION PLANS

Crown Books Corporation 1993 Stock Option Plan

The Crown Books Corporation 1993 Stock Option Plan (the "1993 Option Plan") was
approved by the stockholders at the June 1993 annual meeting. The 1993 Option
Plan is for officers, directors and key employees. The total number of shares
that may be issued under the 1993 Option Plan is 1,250,000. The 1993 Option
Plan will terminate June 30, 2003. Based on options outstanding at January 28,
1995 the maximum shares issuable under options exercisable over the next five
years are: 57,754 in 1996, 79,130 in each of 1997, 1998 and 1999 and 10,000 in
2000.

Information concerning the 1993 Option Plan:

<TABLE>
<CAPTION>
Number of Option Price
Options per Share
--------- ------------
<S> <C> <C>
Outstanding at January 30, 1993 - $ -
Granted 92,495 23.00
Exercised - -
Expired (4,675) 23.00
--------- ------------
Outstanding at January 29, 1994 87,820 23.00
Granted 10,000 17.00
Exercised - -
Expired (18,690) 23.00
--------- ------------
Outstanding at January 28, 1995 79,130 $17.00-23.00
========= ============
</TABLE>

Options to purchase 36,377 shares were exercisable at January 28, 1995 and
1,170,870 options remained available for grant.

53
<PAGE> 54
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 29,

1994 And January 30, 1993

Crown Books Corporation Stock Option Plan

The Crown Books Corporation Stock Option Plan (the "Option Plan") provided for
option grants to officers, directors and key employees of the Company and its
parent and subsidiaries. Based on the options outstanding, as of January 28,
1995, the maximum shares issuable under options exercisable over the next three
years are: 144,747 in 1996, 124,923 in 1997, and 103,238 in 1998. No new
options could be granted after January 1, 1993.

Information concerning the Option Plan:

<TABLE>
<CAPTION>
Number of Option Price
Options per Share
--------- --------------
<S> <C> <C>
Outstanding at January 30, 1993 309,552 $14.06 - 23.93
Exercised (8,728) 14.06 - 19.50
Expired (38,595) 14.06 - 21.75
--------- --------------
Outstanding at January 29, 1994 262,229 19.25 - 23.93
Exercised - -
Expired (117,482) 19.25 - 23.93
--------- --------------
Outstanding at January 28, 1995 144,747 $19.50 - 23.93
========= ==============
</TABLE>

Options to purchase 131,999 shares were exercisable at January 28, 1995.
Options outstanding and expired at January 29, 1994 have been restated to
reflect a ruling delivered on February 22, 1995, by the federal district court
in employment litigation brought by Robert M. Haft against Dart, the Company
and Trak Auto. The court found, in part, that Robert M. Haft was entitled to
exercise certain stock options under the Option Plan. As to options that had
expired during the pendency of the case, the court extended the time for
exercise for a period equal to the period from June 30, 1993 to the expiration
date. As to options that had not yet expired, the court extended the exercise
date for a period equal to the period from June 30, 1993 until final judgment
was entered. Under the Option Plan Robert M. Haft would be entitled to
exercise options for 80,000 shares of the Company having exercise prices of
$21.45 - $23.93 per share. See Note 7.

The Board of Directors of the Company has authorized certain officers and
directors of the Company to apply for loans from the Company to exercise their
vested stock options. Under the plan approved by the board, the loans must
bear interest at the prime rate, adjusted annually, must be secured by all of
the stock acquired by exercise of the options, must be repaid out of the first
proceeds of sale of the stock or at the end of three years, whichever is
earlier, and the borrower must demonstrate to the Company's chief financial
officer both that it would be difficult to dispose of the number of shares on
the open market and that he or she presents a reasonable credit risk to the
Company.

54
<PAGE> 55
CROWN BOOKS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Years Ended January 28, 1995, January 30,

1993 and January 30, 1993

NOTE 12 - INTERIM FINANCIAL DATA - (UNAUDITED)

Selected interim financial data for the years ended January 28, 1995 and
January 29, 1994 are as follows:

<TABLE>
<CAPTION>
-- In Thousands, Except Per Share Data --

THREE MONTHS ENDED: JANUARY OCTOBER JULY APRIL
28, 1995 29, 1994 30, 1994 30, 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 99,411 $ 68,374 $ 72,179 $ 65,642
GROSS PROFIT (1)(3) 22,324 (7,624) 12,318 11,711
NET INCOME (4) 4,604 (25,008) 609 415
NET INCOME (LOSS) PER
SHARE (2) $ .85 $ (4.64) $ .11 $ .08
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED: JANUARY OCTOBER JULY MAY
29, 1994 30, 1993 31, 1993 1, 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 99,483 $ 60,972 $ 60,147 $ 54,523
GROSS PROFIT (1) 19,095 11,483 12,061 11,222
NET INCOME (5) (1,921) 118 552 1,041
NET INCOME (LOSS) PER
SHARE (2) $ (.36) $ .02 $ .10 $ .19
</TABLE>

(1) After deduction of cost of sales, store occupancy and warehousing
expenses.
(2) The sum of these amounts may not equal the annual amount because of
the changes in the average number of shares outstanding during the year.
(3) After deduction for 3rd quarter closed store reserve.
(4) After deductions for 3rd quarter Robert M. Haft accrual and legal accrual.
(5) After deduction for 4th quarter restructuring charge.

55
<PAGE> 56
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure

Inapplicable.

PART III

The following Items 10 through 13 are incorporated herein by reference to the
Company's definitive Proxy Statement to be filed with the Commission pursuant
to Regulation 14A.

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and
Management

Item 13. Certain Relationships and Related Transactions

56
<PAGE> 57
PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K

(A)

<TABLE>
<S> <C>
1. Financial Statements

See Item 8.

2. Schedules (Consolidated)

Report of Independent Public Accountants on
Schedules

II - Valuation and Qualifying Accounts

All other schedules are omitted because the required
information is inapplicable or it is presented in the
consolidated financial statements or related notes.

3. Exhibits

3.1 Restated Certificate of Incorporation (incorporated by reference
to Crown Books' registration statement on Form S-1, Reg. No. 2-83999).

3.2 By-laws, amended and restated as of September 14, 1993
(incorporated by reference to Exhibit 3(b) to Crown Books'
1994 Form 10-K).

3.3 Certificate of Amendment of the Certificate of Incorporation
(incorporated by reference to Exhibit 3(c) to Crown
Books' 1987 Form 10-K.

10.1 Crown Books Corporation Stock Option Plan, as amended
(incorporated by reference to Crown Books' registration
statement Form S-8, Reg. No. 33-43267).

10.2 Letter of Agreement dated May 24, 1983 between Crown
Corporation and Robert M. Haft (incorporated by reference to
Crown Books' registration statement on Form S-1, Reg. No. 2-83999).

10.3 Lease Agreement dated May 26, 1981 between Combined Properties
Corporation and Crown Books Corporation (826)(incorporated by
reference to Crown Books' registration statement on Form S-1,
Reg. No. 2-83999).

10.4 Lease Agreement dated May 26, 1981 between Bradlick, Inc. and
Crown Books Corporation (828)(incorporated by reference to Crown
Books' registration statement on Form S-1, Reg. No. 2-83999).

10.5 Lease Agreement dated November 16, 1981 between Rolling Valley Plaza,
Inc. and Crown Books Corporation (830)(incorporated by reference to
Crown Books' registration statement on Form S-1, Reg. No. 2-83999).
</TABLE>

57
<PAGE> 58
<TABLE>
<S> <C>
10.6 Lease Agreement dated May 23, 1983 between Penn-Daw Associates Limited
Partnership and Crown Books Corporation incorporated by reference to
Crown Books' registration statement on Form S-1, Reg. No. 2-83999). (834)

10.7 Sublease dated December 26, 1984 between Dart Group Corporation and
Crown Books Corporation (75th Avenue)(incorporated by reference to Exhibit
10(tttt) to Crown Books' 1986 Form 10-K).

10.8 Employment agreement with Mr. Robert M. Haft dated February 28, 1987
(incorporated by reference to Exhibit 10(xxxx) to Crown Books' 1987
Form 10-K).

10.9 Agreement of Amendment dated June 9, 1986 of Crown Stockholder Agreement
dated May 24, 1983 (incorporated by reference to Exhibit 10(yyyy) to
Crown Books' 1987 Form 10-K).

10.10 Indemnity Agreement by and between Dart Group Corporation and Crown Books
Corporation dated June 9, 1986 (incorporated by reference to Exhibit
10(zzzz) to Crown Books' 1987 Form 10-K).

10.11 1988 Crown Books Corporation Deferred Compensation Plan for Directors,
effective January 1, 1988 (incorporated by reference to Exhibit 10(ccccc)
to Crown Books' 1988 Form 10-K).

10.12 10(ddddd) Incentive stock agreement with Mr. Robert M. Haft and
promissory note from Mr. Haft dated September 5, 1989 (incorporated
by reference to Exhibit 10(ddddd) to Crown Books' 1990 Form 10-K).

10.13 Assignment and Assumption Agreement dated December 30, 1989, between
Briggs Chaney Associates Limited Partnership and CM/CP Briggs Chaney
Plaza Joint Venture, and lease agreement dated June 26, 1981 between
Crown Books Corporation and Western Development Corporation (incorporated
by reference to Exhibit 10(ggggg) to Crown Books' 1990 Form 10-K). (837)

10.14 Lease agreement dated January 5, 1990 between Combined Properties
Limited Partnership and Crown Books Corporation re: Turnpike Shopping
Center (incorporated by reference to Exhibit 10(iiiii) to Crown Books'
1990 Form 10-K). (815)

10.15 Lease agreement dated January 5, 1990 between Combined Properties Limited
Partnership and Crown Books Corporation re: the Plaza at Landmark
(incorporated by reference to Exhibit 10(jjjjj) to Crown Books' 1990
Form 10-K). (165)

10.16 Lease agreement dated January 5, 1990 between Combined Properties
Limited Partnership and Crown Books Corporation re: Manaport Plaza
Shopping Center (incorporated by reference to Exhibit 10(jjjjj) to
Crown Books' 1990 Form 10-K). (804)

10.17 Lease agreement dated October 31, 1990 between CP CP Acquisitions
Limited Partnership (a Haft controlled entity) and Crown Books
Corporation re: McLean Shopping Center (incorporated by reference
to Exhibit 10(kkkkk) to Crown Books' 1991 Form 10-K).
</TABLE>

58
<PAGE> 59
<TABLE>
<S> <C>
10.18 Lease agreement dated May 11, 1990 between CM/CP Greenway Center Joint
Venture (a Haft controlled entity) and Crown Books Corporation
re: Greenway Center (incorporated by reference to Exhibit 10(llll)
to Crown Books' 1991 Form 10-K). (822)

10.19 Lease agreement dated March 20, 1991 between Charles County Associates
Limited Partnership (a Haft controlled entity) and Crown Books
Corporation re: Charles County Plaza (incorporated by reference to
Exhibit 10(mmmm) to Crown Books' 1991 Form 10-K). (833)

10.20 Lease agreement dated May 11, 1990 between Combined Properties/Greenbriar
Limited Partnership (a Haft controlled entity) and Crown Books Corporation,
the First Amendment dated September 13, 1990 and the Second Amendment dated
March 14, 1991 re: Greenbriar Town Center (incorporated by reference to
Exhibit 10(nnnn) to Crown Books' 1991 Form 10-K). (104)

10.21 Sublease agreement dated February 12, 1991 between Crown Books Corporation
and Trak Corporation re: McLean Shopping Center (incorporated by
reference to Exhibit 10(ppppp) to Crown Books' 1992 Form 10-K). (Old 803)

10.22 Lease agreement dated May 8, 1991 between Combined Properties Limited
Partnership and Crown Books Corporation re: Montgomery Village
(incorporated by reference to Exhibit 10(qqqqq) to Crown Books'
1992 Form 10-K). (827)

10.23 Sublease agreement dated February 19, 1992 between Crown Books
Corporation and Trak Corporation re: Vienna (incorporated by
reference to Exhibit 10(rrrrr) tp Crown Books' 1992 Form 10-K). (855)

10.24 Third Amendment dated June 4, 1992 and Fourth Amendment dated
June 15, 1992 to the Lease Agreement between Combined Properties
Limited Partnership and Crown Books Corporation re: Greenbriar Town
Center (incorporated by reference to Exhibit 10(sssss) to Crown
Books' 1993 Form 10-K). (104)

10.25 Second Amendment of Lease dated August 19, 1993 and Third
Amendment of Lease dated August 30, 1993 between Combined Properties
Limited Partnership and Super Crown Books Corporation (incorporated
by reference to Exhibit 10 (wwwww) to Crown Books' 1994 Form 10-K). (165)

10.26 Lease agreement dated August 19, 1993 between Retail Lease Acquisition
Limited Partnership and Super Crown Books Corporation (incorporated by
reference to Exhibit 10(xxxxx) to Crown Books' 1994 Form 10-K). (132)

10.27 Crown Books Corporation 1993 Stock Option Plan (incorporated by reference
to Crown Books' registration statement on Form S-8 Reg. No. 33-78378).

10.28 Employment Agreement dated January 25, 1995 between Crown Books
Corporation and E. Steve Stevens.

10.29 Standstill Agreement executed on behalf of Dart Group Corporation and Ronald S.
Haft and ordered on September 14, 1994 by the Court in Ronald S. Haft v.
Dart Group Corporation, Del. Ch. 13736 (filed September 12, 1994)
(incorporated by reference to Exhibit 99(b) to the Current Report of Crown Books
on Form 8-K of September 6, 1994 and filed on September 14, 1994).
</TABLE>

59
<PAGE> 60
<TABLE>
<S> <C>
11 Statement on Computation of Per Share Net Income.

21 Subsidiaries of Crown Books Corporation.

23 Consent of Independent Public Accountants.

27 Schedules to the Financial Statements
</TABLE>

(B) Reports on Form 8-K

During the fourth quarter of fiscal year ended January
28, 1995, the Company filed four Current Reports on Form 8-K.

<TABLE>
<S> <C>
1. The Company filed a Current Report on Form 8-K on November 16,

1994, reporting that the Court of Chancery of the State of
Delaware entered a Memorandum Opinion denying plaintiff Ronald
S. Haft's motion for a summary judgement in Ronald S. Haft v.
Dart Group Corporation, Del. Ch. C.A. No. 13736 (filed
September 12, 1994).

2. The Company filed a Current Report on Form 8-K on December
21, 1994 reporting the death of H. Ridgely Bullock, Chairman
of the Company's Executive Committee.

3. The Company filed a Current Report on Form 8-K on January 4,
1995 reporting Ronald S. Haft's proposed settlement of his
pending lawsuit against Dart Group Corporation and Dart's
rejection of that settlement.

4. The Company filed a Current Report on Form 8-K on January 10,
1995 reporting; first that plaintiffs in the shareholder
derivative action, Alan R. Kahn and The Tudor Trust v. Herbert
H. Haft, et al., C.A. No. 13154 (Del. Ch.), filed a motion for
the appointment of a temporary custodian to manage the affairs
of Dart Group Corporation or a receiver to sell it or oversee
a recapitalization thereof and Dart's opposition thereto;
second, that Larry G. Schafran had been elected to serve as
Chairman of the Company's Executive Committee.
</TABLE>

Since the fiscal year ended January 28, 1995, the Company has also filed the
following two Current Reports on Form 8-K:

<TABLE>
<S> <C>
1. The Company filed a Current Report on Form 8-K on March 1, 1995,
reporting the February 22, 1995, opinion of the Federal
District Court in Robert M. Haft v. Dart Group Corporation, et
al., D. Del. Civil Action No. 93-384-SLR.

2. The Company filed a Current Report on Form 8-K on March 14, 1995,

reporting (1) the response of Dart's Executive Committee to
the settlement agreement proposed by Ronald S. Haft and
defendants-intervenors Alan R. Kahn and the Tudor Trust in
Ronald S. Haft v. Dart Group Corporation, C.A. No. 13736 (Del.
Ch.); and (2) the defendants-intervenors' withdrawal from
such proposed settlement on March 10, 1995.
</TABLE>

60
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES

TO CROWN BOOKS CORPORATION:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Crown Books Corporation and subsidiaries
included in this Form 10-K and have issued our report thereon dated April 27,
1995. Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
accompanying index (Item 14A2) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in
our opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.

ARTHUR ANDERSEN LLP

Washington, D.C.
April 27, 1995.

61
<PAGE> 62
SCHEDULE II

CROWN BOOKS CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE BALANCE
BEGINNING AMOUNTS AT END OF
DESCRIPTION OF PERIOD ADDITIONS PAID PERIOD
----------- ----------- ----------- ---------- -----------
AS OF JANUARY 28, 1995
----------------------
<S> <C> <C> <C> <C>
Reserve for closed
stores including
restructuring
charge $12,960,000 $18,963,000 $ 2,070,000 $29,853,000
</TABLE>

<TABLE>
<CAPTION>
AS OF JANUARY 29, 1994
----------------------
<S> <C> <C> <C> <C>
Reserve for closed
stores including
restructuring
charge $ 8,890,000 $ 5,569,000 $ 1,499,000 $12,960,000
</TABLE>

<TABLE>
<CAPTION>
AS OF JANUARY 30, 1993
----------------------
<S> <C> <C> <C> <C>
Reserve for closed
stores including
restructuring
charge $ 2,268,000 $ 7,113,000 $ 491,000 $ 8,890,000
</TABLE>

62
<PAGE> 63
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.

<TABLE>
<S> <C> <C>
CROWN BOOKS CORPORATION

Date: April 28, 1995 By: E. Steve Stevens
-------------- ------------------------------------
E. Steve Stevens
Senior Executive Vice President and
Chief Operating Officer
</TABLE>

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

<TABLE>
<S> <C>
Date: April 28, 1995 Herbert H. Haft
-------------- -----------------------------------
Herbert H. Haft
Chairman of the Board of Directors

Date: April 28, 1995 E. Steve Stevens
-------------- ------------------------------------
E. Steve Stevens
Senior Executive Vice President and
Chief Operating Officer

Date: April 28, 1995 Ronald S. Haft
-------------- ------------------------------------
Ronald S. Haft
Interim President, Chief Executive
Officer and Director

Date: April 28, 1995 Bonita Wilson
-------------- ------------------------------------
Bonita Wilson
Director

Date: April 28, 1995 Douglas Bregman
-------------- ------------------------------------
Douglas Bregman
Director

Date: April 28, 1995 Larry G. Schafran
-------------- ------------------------------------
Larry G. Schafran
Director

Date: April 28, 1995 Robert A. Marmon
-------------- ------------------------------------
Robert A. Marmon
Chief Financial Officer
</TABLE>

63
<PAGE> 64
CROWN BOOKS CORPORATION AND SUBSIDIARIES

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Number
------- ------- ------
<S> <C>
10.28 Employment Agreement dated January
25, 1995 between E. Steve Stevens
and Crown Books Corporation.

11 Statement on Computation of Per
Share Net Income.

21 Subsidiaries of Crown Books

23 Consent of Independent Public
Accountants

27 Financial Statement Schedules
</TABLE>

<PAGE> 1
January 24, 1995

EMPLOYMENT AGREEMENT

This Agreement dated as of January 24, 1995, by and between E.
Steve Stevens ("Employee"), and CROWN BOOKS CORPORATION, a Delaware
corporation ("Employer").

WITNESSETH:

WHEREAS, the parties hereto desire by this Agreement to provide for
the employment of Employee by Employer;

NOW THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and other good and valuable consideration, the
receipt, sufficiency and adequacy of which the parties conclusively
acknowledge, the parties hereto, intending to be legally bound, agree as
follows:

1. EMPLOYMENT

(a) Duties. Employer hereby employs Employee, and
Employee accepts employment by Employer, as Senior Executive Vice President,
Chief Operating Officer during the Employment period (as defined in Section
2), with such duties, responsibilities and authority as are commensurate with
and appropriate to such position and as are from time to time set forth in the
bylaws of the Employer and otherwise delegated to him or her by the Board of
Directors of the Employer ("the Board of Directors"), and shall report to the
Chairman of the Board, the President, and the Board of Directors. Employee
agrees to observe and comply with the rules and regulations of Employer as
adopted by the Board of Directors respecting the performance of his or her
duties and to carry out and follow the orders, policies and directions stated
by Employer to him or her from time to time, provided, however, that such
regulations and directions are consistent with the authority and responsibility
of the position specified above.

(b) Full Time Employment. During the Employment period
Employee shall devote all his or her time and attention to his services for
Employer and shall diligently perform his or her duties and responsibilities
under this Agreement. Employee acknowledges that the proper performance of his
or her duties and responsibilities may require the rendering of services not
only during normal business hours, but over and beyond those hours as well.

(c) Place of Employment and Travel. Employee's principal
place of employment shall be at the executive offices of Employer in Landover,
Maryland. If Employer's executive offices are moved from Landover, Maryland,
Employee's principal place of employment shall be changed to the location where
such executive offices are moved. Employee agrees to travel for the
performance of his or her duties under this Agreement as Employer may request
from time to time. If Employers executive offices are relocated a distance
greater than 100 miles from Landover, Maryland, Employee's relocation expenses
will be paid by Employer if Employee elects to relocate. At the Employee's
option, if Employee decides not to relocate, the relocation of the executive
offices will be deemed a termination without cause and the Employee will be
eligible to receive severance benefits as outlined in Section 7 (e) of this
Agreement.

<PAGE> 2
2. TERM

The term of Employee's employment under this Agreement (the
"Employment Period") shall commence on February 1, 1995 and end on January 31,
1997. However, Employer and Employee agree that the term of this agreement
automatically extends for an additional two (2) years at the end of each
Employment Period, unless Employee has been, or is being, terminated pursuant
to Section 7..

3. COMPENSATION

(a) Base Salary. Employee's annual base salary shall be
Two Hundred and Seventeen Thousand and Five Hundred Dollars ($217,500.00),
subject to an annual increase as recommended by the Compensation Committee of
the Board of Directors following review and performance appraisal of Employee,
and approval by the Board of Directors. Employee's base salary shall be paid in
accordance with Employer's normal payroll procedure.

(b) Withholding Tax. All compensation shall be subject
to the customary withholding tax and other employment taxes as required with
respect to compensation paid by a corporation to an employee.

4. STOCK OPTIONS

(a) Stock Options. Employee shall be eligible for the
annual award of stock options pursuant to the stock option plans under which
the Employee is currently a participant, as determined by the Board(s) of
Directors of the company(s), pursuant to the individual company(s) stock option
plan(s).

(b) Exercise upon Certain Terminations of Employment. In
the event of the termination of Employee's employment hereunder for any reason
other than pursuant to Section 7 (d), Employee shall have the right to
exercise, on or before the effective date of the termination of this Agreement,
any option which has vested in Employee hereunder coincident with or prior to
the effective date of the termination of Employee's employment hereunder,
subject to the other terms and conditions of such option plan(s). In addition,
in the event of the termination of Employee's employment due to his or her
death, the personal representative of the Employee shall have the right to
exercise any such option within sixty (60) days of the date of Employee's
death.

5. EMPLOYEE BENEFITS

During the Employment Period, Employer shall provide Employee
with the following benefits:

(a) Health Plan Coverage. Employer shall provide
Employee with health benefits, including major medical health insurance and
Long Term Disability (LTD), Accidental Death and Dismemberment (AD&D) and such
other benefits that are in effect at the time of this Agreement for the
Employee and his or her immediate family all in accordance with Employer's
"Executive Health Plan" as now in effect.

(b) Further Benefits. Employee shall, during the term of
this Agreement (and thereafter to the extent provided herein), be eligible to
participate in all applicable profit sharing and 401 (k) plans and insurance
benefits in effect for all salaried employees of the Employer, together with
any

<PAGE> 3
future improvements in such plans or benefits, subject to the eligibility
requirements of such plans. In addition, Employee shall be entitled during the
term of this Agreement, and thereafter to the extent provided for herein or in
any such plan, to receive such other and further benefits as shall be generally
made applicable to key executive employees of the Employer, and such additional
benefits, as may be granted from time-to-time by the Board of Directors, in
it's sole discretion.

(c) Vacation. Employee shall be entitled to paid
vacation leave of Three (3) weeks in every year of employment, increased
pursuant to Employer's vacation plan. Any accrued vacation previously earned
prior to the date of this Agreement shall be permanantly accrued to the
Employee (grandfathered). Effective with this Agreement, all vacation earned
subsequent to the date of this Agreement shall be taken no later than by the
end of the following year or be forfeited, unless prior approval is granted by
the Compensation Committee of the Board of Directors.

(d) Business Expenses. Employer shall reimburse Employee
pursuant to Employer's policy of employee expense reimbursement of all items of
travel, entertainment and miscellaneous expenses reasonably incurred by
Employee on behalf of Employer and presented to Employer on the appropriate
voucher.

(e) Automobile Allowance: Employer shall pay to Employee
as an automobile allowance the sum of Eight Hundred and Fifty Dollars ($850.00)
per month.

6. PROPRIETARY DATA

(a) Trade Secrets and Other Confidential Information.
During the Employment Period and for three (3) years thereafter, Employee shall
keep confidential any data, documents, or financial or other information of a
trade secret or confidential nature relating to Employer's past, present or
future operations (the "Proprietary Data"), shall not disclose the Proprietary
Data to any third parties other than officers, employees or agents of Employer
on a "need to know" basis, shall take all necessary steps to ensure that such
officers, employees or agents keep such Proprietary Data confidential, and
shall use the Proprietary Data only in connection with rendering services to
Employer. Upon the end of the Employment Period, Employee shall promptly
return to Employer the originals and all copies of the Proprietary Data in the
possession of Employee, and shall not use any of the Proprietary Data for his
or her own benefit or for the benefit of any third parties. The covenants
contained in this Section 6 (a) shall not apply to Proprietary Data which is or
becomes a matter of general knowledge in the industry otherwise than by a
breach of the provisions of this Section 6 (a).

(b) Injunctive Relief. Employee acknowledges that the
convenants contained in Sections 6 (a) are necessary for the protection of the
legitimate business interests of Employer and are reasonable limitations of
activities, that the rights of Employer are of a specialized and unique
character, and that immediate and irreparable damage will result to Employer if
Employee fails to or refuses to perform or comply with such covenants.
Therefore, notwithstanding any election by Employer to claim damages from
Employee as a result of any such failure or refusal, Employer may, in addition
to any other remedies and damages available, seek an injunction in a court of
competent jurisdiction to restrain any such failure or refusal (and no bond or
other security shall be required in connection therewith). In that connection,
Employee represents and warrants that his or her expertise and capabilities are
such that performance or compliance with the covenants (and the enforcement
thereof by injunction or

<PAGE> 4
otherwise) will not prevent him or her from earning a livelihood. If a court
refuses to enforce the covenants set forth in Section 6 (a) because they are
found to be unreasonable, Employee and Employer agree to abide by any lesser
restrictions (for instance, as to duration and geographic area) that are found
to be reasonable.

7. TERMINATION

(a) Definition of Compensation: For purposes of
termination, compensation at the time of termination shall be deemed to include
accrued sick and vacation and salary through the effective date of termination,
plus any and all benefits normally granted by Employer to Employees upon
termination.

(b) Death. The Employment Period shall forthwith
terminate upon the death of Employee, whereupon Employer shall not have any
further obligations or liability hereunder except to pay the Employee's estate
the unpaid portion, if any, of Employee's compensation accrued for the period
up to the date of Employee's death.

(c) Total Disability. In the event of the Total
Disability (as that term is hereafter defined) of Employee for a period of four
(4) consecutive calendar months, or for eighty percent (80%) or more of the
normal working days during a period of six (6) consecutive full calendar
months, Employer shall have the right to end the Employment Period by giving
Employee ten (10) days' written notice. Upon the expiration of such ten (10)
day period, the Employment Period shall end and Employer shall not have any
further obligations hereunder except to pay Employee the unpaid portion, if
any, of Employee's compensation accrued for the period up to the date of
termination of Employee's employment. As used in this Agreement, the term
"Total Disability" shall mean a mental or physical condition which, in the
opinion of Employer and in the opinion of two consulting physicians, renders
Employee unable or incompetent to carry out his obligations hereunder,
provided, however that said disability must also be in accordance with
disability as defined in the Company's Long Term Disability coverage.

(d) With Cause. Employer shall have the right to
terminate the employment of Employee at any time for cause (as hereinafter
defined) upon at least five (5) days' written notice setting forth the specific
details of the action or inaction of Employee which constitutes cause. For
purposes of the foregoing, "cause" shall mean (i) Employee's commission of any
act which shall be an offense involving moral turpitude under federal, state or
local law; (ii) Employee's conviction of a felony; (iii)Employee's material
breach of any of the terms of this Agreement; or (iv.) Employee's refusal to
follow lawful and reasonable directive(s) of the Board of Directors. Upon such
termination, Employer shall have no further obligations or liability hereunder
except to pay Employee the unpaid portion, if any, of Employee's compensation
accrued for the period up to the date of termination of Employee's employment.

(e) Dissatisfaction by Employer Without Cause. If
Employer is at any time and for any reason dissatisfied with Employee's
performance hereunder, Employer shall have the right to terminate the
employment of Employee upon at least thirty (30) days written notice to
Employee. If Employer shall terminate the employment of Employee pursuant to
this Section 7 (e), the Employment Period shall end at the expiration of the
notice period and Employer shall not have any further obligations or liability
hereunder except (i) to pay Employee the unpaid portion, if any, of Employee's
compensation accrued for the period up to the date of termination of Employee's
employment, together with an additional amount of two (2) years of base salary
as severance in accordance with Employer's normal payroll schedule, to commence
immediately following the

<PAGE> 5
effective date of the termination of Employee's employment hereunder; and (ii)
to pay to Employee in a lump sum an amount equal to the number of days of
accrued and unused vacation and sick leave times the Employee's base salary in
effect on the date of termination. If at anytime following Employee's
termination, Employee obtains employment with a base salary equal to at least
75% of the base salary received from Employer at the time of
termination,Employer shall not be required to make any further severance
payments for any period of time after the later of the first anniversary date
of termination AND the commencement of Employee's new employment. In addition,
for purposes of the Employer's medical, disability, and life insurance
programs, Employee shall be considered and deemed eligible for two (2) years
following such termination or until Employee attains the age of 65 or until
similar benefits are paid or extended by a new employer, whichever first
occurs, to be eligible to participate in such programs of the Employer on the
same basis as other officers or employees. Lastly, Employee shall be entitled
to seek the services of a professional out placement service, the reasonable
cost of which shall be borne by Employer.

(f). Dissatisfaction by Employee. If Employee at any time
is for any reason dissatisfied with the terms and conditions of his or her
employment hereunder, Employee shall have the right to terminate his employment
upon at least thirty (30) days written notice to Employer. If Employee shall
terminate his employment pursuant to this Section 7 (f), the Employment Period
shall end at the expiration of the notice period and Employer shall have no
further obligations or liability hereunder except to pay to Employee the unpaid
portion, if any, of Employee's compensation accrued for the period up to the
date of termination.

8. MISCELLANEOUS

(a) Governing Law. This Agreement shall be governed by
the laws of the State of Delaware applicable to agreements made by and to be
performed by Delaware corporations.

(b) Amendment of Agreement. No amendment or variation of
the terms of this Agreement, with or without consideration, shall be valid
unless made in writing and signed by the Employee and a duly authorized
representative of the Employer (other than Employee).

(c) Waiver of Conditions. Any waiver agreed to between
Employer and Employee of any provision should not be construed as a general
waiver of the provision, or any other provision of this agreement.

(d) Entire Agreement. This Agreement contains the entire
agreement between the parties and supersedes all prior oral and written
agreements, understandings, commitments, and practices between the parties,
whether or not fully performed by Employee before the date of this Agreement.

(e) Headings. The section headings of this Agreement are
for reference purposes only and are to be given no effect in the construction
or interpretation of this Agreement.

(f) Notice. All notices, requests and other
communications under this Agreement shall be in writing and shall be deemed
given when delivered personally or upon receipt when sent by an express mail
service, provided that in each case a copy is mailed by first-class, registered
mail, return receipt requested, addressed as follows (or as may otherwise have
been specified by the intended recipient by notice as herein provided);

<PAGE> 6

<TABLE>
<S> <C>
If to Employee: E. Steve Stevens
182 Southdown Rd.
Edgewater, Maryland 21032

If to Employer: Chief Executive Officer
Crown Books Corporation
3300 75th Avenue
Landover, Maryland 20785
</TABLE>

(g) Severability. If any provision of this Agreement is
held invalid or unenforceable, the remainder of this Agreement shall
nevertheless remain in full force and effect. If any provision is held invalid
or unenforceable with respect to particular circumstances, it shall
nevertheless remain in full force and effect in all other circumstances.

(h) Merger or Consolidation. This Agreement shall not be
terminated by any merger, consolidation, transfer of any or all of the assets
of the Employer or voluntary or involuntary dissolution of the Employer. In
the event of a merger or consolidation or upon the transfer of assets, the
surviving or resulting corporation or the transferee of the Employer's assets
shall be bound by and shall have the benefit of the provisions of this
Agreement, and the Employer shall take all actions necessary to ensure that
such corporation or transferee is bound by the provisions of this Agreement.
This Agreement shall be binding upon the Employer notwithstanding any change in
the composition of the Board of Directors or change in ownership of the
Employer.

(i) No Covenants. Employee hereby represents and
warrants that he or she is not subject to or bound by any employment contract,
restrictive covenant or other agreement or any order or decree that prevents
him or her from entering into this Agreement or from performing his or her
responsibilities as contemplated by this Agreement.

(j) Attorney's Fees. If a dispute arises with respect to
the Employer's obligations or the Employee's rights under this Agreement, or if
any legal proceedings shall be brought to enforce or interpret any provisions
contained herein, or to recover damages for breach hereof, or in the event of
any other litigation involving this Agreement, Employee shall recover from the
Employer all reasonable attorney's fees and costs and disbursements incurred as
a result of such dispute. In addition, Employee shall recover from Employer all
reasonable attorney's fees and costs and disbursements incurred as a result of
legal proceeding, unless the Employee's pursuit of legal proceedings is deemed
frivolous or in bad faith as determined by the court in any such action.

(k) Assignment; Binding Effect. This Agreement shall be
binding upon, and shall inure to the benefit of, and be enforceable by , the
parties hereto and their respective successors and assigns, provided, that (i)
this

<PAGE> 7
Agreement is a personal service agreement and no right hereunder may be
assigned by Employee, except that it shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives, executors or
administrators; and (ii) unless Employer shall have complied with Section 8 (h)
hereof, no right hereunder may be assigned or transferred by Employer by
operation of law or otherwise. Any purported assignment or transfer in
violation of this Section 8 (k) shall be null and void..

IN WITNESS WHEREOF, this Agreement has been signed by a duly
authorized officer of Employer and by Employee as of the date first
above-written

CROWN BOOKS CORPORATION
-----------------------

BY: /s/ Herbert H. Haft
--------------------------------
HERBERT H. HAFT, Chairman

BY: /s/ L.G. Schafran
--------------------------------
L.G. SCHAFRAN, Chairman of the
Executive Committee of the Board
of Diretors

/s/ E. Steve Stevens
----------------------------------
Name of Employee: E. Steve Stevens

<PAGE> 1
Exhibit 11

STATEMENT ON COMPUTATION OF PER SHARE NET INCOME

<TABLE>
<CAPTION>
Fiscal Years
---------------------------------------
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Weighted average common
shares outstanding
during the year 5,389,000 5,385,000 5,205,000

Effect of dilutive stock
options, net of shares
assumed repurchased
at average market price - 17,000 9,000
------------ ----------- -----------

Weighted average common
shares and common share
equivalents 5,389,000 5,402,000 5,214,000
============ =========== ===========

Net Income (Loss) $(19,380,000) $ (210,000) $ 4,281,000
============ =========== ===========

Earnings (Loss) per share $ (3.60) $ (.04) $ .82
============= =========== ===========
</TABLE>

The difference between primary net income (loss) per share and fully diluted
net income (loss) per share is not significant for the periods presented.

<PAGE> 1
Exhibit 21

SUBSIDIARIES OF CROWN BOOKS

<TABLE>
<CAPTION>
State of Incorporation
----------------------
<S> <C>
Crown Books West Corporation (100%) Delaware
Crown Books East Corporation (100%) Delaware
Crown Books National Corporation (100%) Delaware
Crown DHC Corporation (100%) Delaware
Super Crown Books Corporation (100%) Delaware
</TABLE>

<PAGE> 1
Exhibit 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our reports, included in this Form 10-K, into Crown Books Corporation's
previously filed Forms S-8 File Number 33-43267 and 33-78378.

ARTHUR ANDERSEN LLP

Washington, D.C.
April 27, 1995.

<ARTICLE> 5
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-28-1995
<PERIOD-START> JAN-30-1994
<PERIOD-END> JAN-28-1995
<CASH> 29,634
<SECURITIES> 35,106
<RECEIVABLES> 3,832
<ALLOWANCES> 0
<INVENTORY> 102,433
<CURRENT-ASSETS> 182,331
<PP&E> 44,405
<DEPRECIATION> 21,401
<TOTAL-ASSETS> 213,379
<CURRENT-LIABILITIES> 105,553
<BONDS> 1,582
<COMMON> 56
0
0
<OTHER-SE> 83,271
<TOTAL-LIABILITY-AND-EQUITY> 213,379
<SALES> 305,606
<TOTAL-REVENUES> 307,895
<CGS> 266,877
<TOTAL-COSTS> 266,877
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 965
<INCOME-PRETAX> (27,331)
<INCOME-TAX> (7,951)
<INCOME-CONTINUING> (19,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,380)
<EPS-PRIMARY> (3.60)
<EPS-DILUTED> (3.60)

</TABLE>