<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED May 3, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
---------- ----------
Commission file number 0-11457
-------
CROWN BOOKS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1227415
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3300 75th Avenue, Landover, Maryland, 20785
-------------------------------------------
(Address of principal executive offices)
(Zip Code)
(301) 226-1200
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
----- -----
At June 13, 1997, the registrant had 5,288,973 shares of Common Stock, $.01 par
value per share, outstanding.
1
<PAGE> 2
PART I
Item 1. Financial Statements
Certain consolidated financial statements included herein have been prepared by
Crown Books Corporation ("Crown Books"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although Crown Books believes
that the disclosures are adequate to make the information presented not
misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Crown Books' annual report on Form 10-K for the fiscal year ended
February 1, 1997.
2
<PAGE> 3
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, UNAUDITED
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------
May 3, May 4,
1997 1996
---------- ----------
<S> <C> <C>
Sales $ 66,543 $ 62,492
Interest and other income 113 430
-------- --------
66,656 62,922
-------- --------
Expenses:
Cost of sales, store occupancy and
warehousing 54,870 51,105
Selling and administrative 14,173 12,910
Depreciation and amortization 1,698 1,358
Interest expense 173 357
-------- --------
70,914 65,730
-------- --------
Loss before income taxes (4,258) (2,808)
Income taxes (benefits) (1,596) (1,017)
-------- --------
Net loss $ (2,662) $ (1,791)
======== ========
Weighted average common shares outstanding 5,289 5,389
======== ========
Net loss per share $ (.50) $ (.33)
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
May 3, February 1,
ASSETS 1997 1997
---------- ----------
<S> <C> <C>
Current Assets:
Cash $ 3,738 $ 3,377
Short-term instruments 762 12,674
Accounts receivable 5,881 7,962
Income taxes refundable 4,100 3,802
Merchandise inventories 122,019 110,036
Deferred income tax benefit 868 830
Other current assets 2,769 2,902
-------- --------
Total Current Assets 140,137 141,583
-------- --------
Property and Equipment, at cost:
Furniture, fixtures and equipment 37,490 36,033
Leasehold improvements 15,898 16,122
Property under capital leases 1,187 1,187
-------- --------
54,575 53,342
Accumulated Depreciation and
Amortization 29,489 27,963
-------- --------
25,086 25,379
-------- --------
Deferred Income Taxes 9,680 8,404
-------- --------
Other Assets 1,966 1,531
-------- --------
Total Assets $176,869 $176,897
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
May 3, February 1,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
---------- ----------
<S> <C> <C>
Current Liabilities:
Accounts payable, trade $ 49,239 $ 54,787
Accrued expenses -
Salaries and benefits 3,898 3,290
Taxes other than income 2,935 4,011
Other 16,785 18,916
Current portion of reserve for
closed stores and restructuring 3,298 3,298
Due to affiliate 523 213
-------- --------
Total Current Liabilities 76,678 84,515
-------- --------
Revolving Credit Facility 10,840 -
-------- --------
Obligations Under Capital Leases 1,695 1,684
-------- --------
Reserve for Closed Stores and
Restructuring 5,863 6,243
-------- --------
Total Liabilities 95,076 92,442
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.01 per share;
20,000,000 shares authorized,
5,612,611 issued 56 56
Paid-in capital 43,809 43,809
Retained earnings 43,379 46,041
Treasury stock, 323,638 shares of
common stock, at cost (5,451) (5,451)
-------- --------
Total Stockholders' Equity 81,793 84,455
-------- --------
Total Liabilities and Stockholders' Equity $176,869 $176,897
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
<PAGE> 6
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, UNAUDITED
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------
May 3, May 4,
1997 1996
---------- ----------
<S> <C>
Cash Flows from Operating Activities:
Net loss $ (2,662) $ (1,791)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 1,698 1,358
Changes in assets and liabilities:
Accounts receivable 2,081 16
Merchandise inventories (11,983) (10,404)
Prepaid and refundable income taxes (298) (288)
Other current assets 133 (2,118)
Accounts payable, trade (5,548) 4,268
Accrued expenses (2,588) 3,690
Due to affiliate 310 (312)
Deferred income taxes (1,314) (754)
Other assets (607) -
Reserve for closed stores (380) (702)
-------- --------
Net cash used in operating activities $(21,158) $ (7,037)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures $ (1,233) $ (1,218)
-------- --------
Net cash used in investing activities $ (1,233) $ (1,218)
-------- --------
Cash Flows from Financing Activities:
Net borrowing under revolving credit facility $ 10,840 $ -
-------- --------
Net cash provided by financing activities $ 10,840 $ -
-------- --------
Net Decrease in Cash and Equivalents $(11,551) $ (8,255)
Cash and Equivalents at Beginning of Year 16,051 30,765
-------- --------
Cash and Equivalents at End of Period $ 4,500 $ 22,510
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the quarter for:
Interest $ 173 $ 106
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
May 3, 1997 and May 4, 1996
NOTE 1 - GENERAL
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 discount
specialty retail book stores in the United States. The stores offer books,
newspapers, magazines and related accessories. The unaudited statements as of
May 3, 1997 and May 4, 1996 reflect, in the opinion of management, all
adjustments (normal and recurring in nature) necessary to present fairly the
consolidated financial position as of May 3, 1997 and May 4, 1996 and the
results of operations and cash flows for the periods indicated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those estimates.
The results of operations for the 13 weeks ended May 3, 1997 are not
necessarily indicative of the results of operations to be achieved for the full
fiscal year.
NOTE 2 - EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares of
common stock and common stock equivalents (certain stock options) outstanding
during the period. The effect of common stock equivalents were not considered
for the periods presented as they were antidilutive. The difference between
primary earnings per common share and fully diluted earnings per common share
was not significant for the periods presented.
NOTE 3 - INTERIM INVENTORY ESTIMATES
The Company's inventories are priced at the lower of cost or market using the
first-in, first-out method or market.
The Company takes a physical count of its store and warehouse inventories
annually. The Company uses a gross profit method to determine inventories for
quarters when complete physical counts are not taken. The Company did not take
a physical inventory for the quarter ended May 3, 1997.
7
<PAGE> 8
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED (Continued)
May 3, 1997 and May 4, 1996
NOTE 4 - SHORT-TERM INSTRUMENTS
The Company's short-term instruments included United States Treasury Bills with
a maturity of three months or less and money market funds.
NOTE 5 - CREDIT AGREEMENT
On September 12, 1996, the Company entered into a revolving credit facility
with a finance company to borrow up to $50 million. The Company intends to use
proceeds from draw-downs under the credit facility for working capital and
other corporate purposes. The agreement has an original term of three years.
Borrowings under the credit facility include revolving loans and letters of
credit which bear interest at a rate equal to the prime rate (as defined in the
credit agreement) and LIBOR loans which bear interest at LIBOR plus 2.25%.
Interest on prime rate borrowings is payable monthly. Interest and principal
on LIBOR loans is payable between one and six months from the borrowing date.
LIBOR loans are subject to a prepayment penalty and may be continued for
subsequent one to six month periods. LIBOR loans may be converted to prime
rate loans and vice versa. The agreement includes a facility fee of .25% on
the unused principal balance, as defined. No single advance may be outstanding
for more than 36 months.
Borrowings under the credit facility are secured by the Company's inventory,
accounts receivable and proceeds from the sale of such assets of the Company.
The credit facility also contains certain restrictive covenants, including a
limitation on the incurrence of additional indebtedness and places a $13.1
million limitation on payments to settle disputes with Haft family members.
There are additional covenants related to tangible net worth. Loans under the
credit facility are subject to limitations based upon eligible inventory
levels, as defined in the agreement. The Company may terminate the credit
facility upon 60-days prior written notice to the lender and the lender may
terminate it as of September 12, 1999 or on any anniversary date thereafter
upon 60-days prior written notice to the Company. During fiscal 1997 the
Company began borrowing under the credit facility. The maximum borrowings
outstanding at any one time during the 13 weeks ended May 3, 1997 were
$10,840,000 and the outstanding balance as of May 3, 1997 was $10,840,000. The
Company had $14.2 million available for borrowing at May 3, 1997. In
connection with its expansion plans, the Company may need to increase its
borrowing under its revolving credit facility, subject to limitations contained
in the loan agreement. To increase the limit from $25.0 million to $35.0
million, the Company is required to maintain a minimum tangible net worth of
$73.0 million as of the fiscal year end preceding the election and for each
fiscal year end thereafter, and to maintain a minimum tangible net worth of
$70.0 million as of the election date and
8
<PAGE> 9
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED (Continued)
May 3, 1997 and May 4, 1996
thereafter, in addition to other covenants. To increase the limit from $35.0
million to $50.0 million, the Company is required to maintain a minimum
tangible net worth of $75.0 million as of the fiscal year end preceding the
election and for each fiscal year end thereafter, in addition to other
covenants. The average borrowings and weighted average interest rate for the
13 weeks ended May 3, 1997 were $2,570,000 and 8.5%.
NOTE 6 - PROPERTY, EQUIPMENT AND DEPRECIATION
Effective February 2, 1997, the Company changed its accounting policy from
expensing purchased computer software costs in the year of acquisition to
capitalizing and depreciating these costs over the estimated useful life not to
exceed five years. Management has determined that these costs benefit future
periods.
During the 13 weeks ended May 3, 1997, the Company recorded amortization of
computer costs of approximately $116,000. The effect of capitalizing purchased
computer software was to reduce the Company's loss by $1,004,000, ($.19 per
share) net of income tax benefits.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Outlook
Except for historical information, the statements in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking. Actual results may differ materially due to a variety of
factors, including the results of ongoing litigation (or settlement of
litigation), the Company's ability to effectively compete in the retail book
store industry, the effect of national and regional economic conditions, and
the availability of capital to fund operations. The Company undertakes no
obligation and does not intend to update, revise or otherwise publicly release
the result of any revisions to these forward-looking statements that may be
made to reflect future events or circumstances.
The Company believes that its superstore concept presents growth opportunities
and intends to open new Super Crown Books stores in existing and new markets.
Realizing these opportunities are dependent upon the successful performance of
the superstores. In the past, Super Crown Books stores have generated higher
sales at converted locations as well as higher gross margins as a result of a
change in product mix. The Company believes that as Super Crown Books stores
mature and as the number of stores and total sales increase, operating expenses
as a percentage of sales will decrease.
The Company intends to continue its practice of reviewing the profitability
trends and prospects of existing stores and close or relocate under-performing
stores. The Company closed one Classic Crown Books store and one Super Crown
Books store during the quarter ending May 3, 1997. The Company anticipates
closing an additional 27 Classic Crown Books stores and 10 non-prototype Super
Crown Books stores and relocating one prototype Super Crown Books store during
the remainder of fiscal 1998.
The retail book market is highly competitive. The two largest book
chains continue to open additional new stores each year in the Company's
markets, thereby continuing to increase the overall level of competition.
Management believes that the markets in which it operates will remain highly
competitive in the foreseeable future and, as a result, the Company will be
challenged to improve operating results for fiscal 1998.
Liquidity and Capital Resources
Cash, including short-term instruments, has historically been the Company's
primary source of liquidity. However, during the 13 weeks ended May 3, 1997,
the Company borrowed under its revolving credit facility. Cash, including
short-term instruments, decreased by $11,551,000 to $4,500,000 at May 3, 1997
from $16,051,000 at February 1, 1997. The decrease was primarily due to
payments for increased merchandise inventory, capital expenditures and funding
operating losses. The decrease was partially offset by borrowing under the
10
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Company's revolving credit facility.
Operating activities used $21,158,000 of the Company's cash during the 13 weeks
ended May 3, 1997, compared to $7,037,000 for the same period one year ago.
The increase is due primarily to payments for increased merchandise inventory
and funding operating losses.
The Company used $1,233,000 for capital expenditures during the 13 weeks ended
May 3, 1997 compared to $1,218,000 during the 13 weeks ended May 4, 1996.
Financing activities provided $10,840,000 to the Company during the 13 weeks
ended May 3, 1997 from net borrowings under the credit facility.
The Company's primary capital requirements relate to new store openings and
investments in management information systems. The Company believes that the
costs incurred in opening a new store generally approximate $800,000, including
inventory purchases, net of accounts payable, and the costs of store fixtures
and leasehold improvements net of landlord contribution. During fiscal 1998,
the Company expects to open approximately 27 to 35 Super Crown Books stores
requiring cash expenditures of approximately $21.6 million to $28.0 million.
During the 13 weeks ended May 3, 1997, the Company opened four Super Crown
Books stores. As of June 13, 1997, the Company had entered into lease
agreements to open 13 new Super Crown Books stores in fiscal 1998 and one in
fiscal 1999. In addition, the Company expects to have cash expenditures
related to stores that have been closed or will be closed of approximately $2.5
million in fiscal 1998.
The Company anticipates funding its requirements for working capital and
capital expenditures in fiscal 1998 with cash generated from improving its
inventory turnover, inventory from stores closed during fiscal 1998, improving
its operations and borrowings under its existing revolving credit facility.
The Company had $14.2 million available for borrowing under its revolving
credit facility at May 3, 1997 (see Note 5 to the Consolidated Financial
Statements). There can be no assurance that the Company will have adequate
resources to meet its cash flow requirements for projected store openings if it
does not improve its inventory turnover.
In connection with its expansion plans, the Company may need to increase its
borrowing under its revolving credit facility, subject to limitations contained
in the loan agreement. To increase the limit from $25.0 million to $35.0
million, the Company is required to maintain a minimum tangible net worth of
$73.0 million as of the fiscal year end preceding the election and for each
fiscal year end thereafter, and to maintain a minimum tangible net worth of
$70.0 million as of the election date and thereafter, in addition to other
covenants. To increase the limit from $35.0 million to $50.0 million, the
Company is required to maintain a minimum tangible net worth of $75.0 million
as of the fiscal year end preceding the election and for each fiscal year end
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
thereafter, in addition to other covenants. As of February 1, 1997 and May 3,
1997 the Company's tangible net worth was $84.5 million and $81.8 million,
respectively. There can be no assurance that the Company's tangible net worth
will meet the requirements to increase its revolving credit facility
availability above the current $25.0 million limit. There also can be no
assurance that if the limit is increased above $25.0 million, that the Company
will maintain the required minimum tangible net worth and that it would be able
to pay down the revolving credit facility as required.
Funding of Possible Settlements
Dart has reached a conditional settlement agreement in principle with Herbert
H. Haft and is currently negotiating a possible settlement collectively with
Robert M. Haft, Gloria G. Haft and Linda G. Haft as well as a possible
supplemental settlement agreement with Ronald S. Haft. The aggregate payments
estimated to be paid by Dart and its subsidiaries in connection with these
possible settlements is approximately $90 million (including a loan of $10
million), part of which would be deferred. It is anticipated that Dart would
pay substantially all of this amount, though a portion (yet to be determined)
could be allocated to Trak Auto Corporation ("Trak Auto"), an affiliate of
Dart, and Crown Books. Allocation of any actual settlement obligations among
the companies would be in proportion to reflect relative benefits each company
receives, as determined by their boards of directors after consultation with
outside advisors.
Dart and its subsidiaries do not presently have cash available to pay the
approximately $90 million contemplated by the possible settlements, but are
considering various options to finance them, if they occur. Dart may use the
existing cash ($41.3 million at May 3, 1997) of Shoppers Food Warehouse Corp.
("Shoppers"), a wholly owned subsidiary, and proceeds from new debt financing
by Shoppers. However, there can be no assurance that Shoppers would obtain any
such financing or as to the terms of any financing, if it is obtained. Trak
Auto and Crown Books anticipate that they would pay their portion of the
settlement obligations from borrowings under their respective credit
facilities.
Results of Operations
During the 13 weeks ended May 3, 1997, the Company opened four Super Crown
Books stores and closed one classic Crown Books store and one Super Crown Books
store. At May 3, 1997, the Company had 170 stores, including 58 new prototype
Super Crown Books stores and 54 original format Super Crown Books.
Sales of $66,543,000 for the 13 weeks ended May 3, 1997 increased by $4,051,000
or 6.5% compared to the 13 weeks ended May 4, 1996. Comparable sales (sales
for stores open for 13 months) decreased 3.0% during the 13 weeks ended May 3,
1997. Sales for Super Crown Books stores represented 82.1% and 73.4% of total
sales
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
for the 13 weeks ended May 3, 1997 and May 4, 1996, respectively. Super Crown
Books stores sales of $54,628,000 increased 19.1% over the prior year but sales
for all comparable Super Crown Books stores decreased 3.3%. Comparable sales
for the new superstore prototype decreased 3.0%. The Company's superstores
consist of the original superstores which are primarily 6,000 to 10,000 square
feet and the new superstore prototype targeted to occupy 15,000 square feet.
Interest and other income decreased by $317,000 during the 13 weeks ended May
3, 1997 when compared to the same period one year ago. The decrease was
primarily due to reduced interest income as a result of the decrease in cash
available for short-term investment.
Cost of sales, store occupancy and warehousing as a percentage of sales were
82.5% for the 13 weeks ended May 3, 1997 compared to 81.8% for the same period
one year ago. The increase was primarily due to increased store occupancy
costs and was partially offset by an increase in gross margins.
Selling and administrative expenses as a percentage of sales were 21.3% for the
13 weeks ended May 3, 1997 compared to 20.7% for the same period one year ago.
The increase was due primarily to increased payroll costs and consulting fees
for management information systems.
Depreciation and amortization expenses increased $340,000 for the 13 weeks
ended May 3, 1997 compared to the same period one year ago as a result of
increased fixed assets for the new Super Crown Book stores.
Interest expense decreased $184,000 during the 13 weeks ended May 3, 1997
primarily due to accrued interest on the Robert M. Haft judgement last year
which was paid in August 1996. This decrease was partially offset by interest
expenses for borrowings under the revolving credit facility in the current
year.
The Company has recorded a tax benefit on the net operating loss for the 13
weeks ended May 3, 1997 of $1,596,000, as compared to a tax benefit of
$1,017,000 for the same period one year ago. The Company recorded a $2,500,000
valuation allowance in fiscal year 1995 due to the uncertainty relating to the
timing of the reversal of certain taxable temporary differences during the
periods when the Company has taxable income. In management's opinion no
additional valuation allowance is necessary at this time as the realization of
the net deferred tax asset is more likely than not. The effective income tax
rate was 37.5% for the 13 weeks ended May 3, 1997 compared to 36.3% for the 13
weeks ended May 4, 1996. The increase in the effective rate was primarily due
to the increased net operating loss and increased state income tax benefits.
As a result of the net operating losses, the Company has a $13.9 million tax
net operating loss carryforward that will expire in 2013.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Earnings Per Share. SFAS 128 replaces the presentation of primary earnings per
share, previously presented by the Company, with basic earnings per share and
requires a reconciliation of the numerator and denominator of basic earnings
per share to fully diluted earnings per share. Fully diluted earnings per
share is computed similarly to the previous requirements. The Company will be
required to adopt SFAS No. 128 in the fourth quarter of fiscal 1998 and restate
all previously presented earnings per share data. The presentation of the
Company's basic earnings per share under SFAS No. 128 is not materially
different than the amounts presented herein as primary earnings per share.
14
<PAGE> 15
PART II
Item 1. Legal Proceedings
Material legal proceedings pending against Crown Books are described in its
Annual Report on Form 10-K for the year ended February 1, 1997 (the "Annual
Report"). There have been no material developments in any legal proceedings
reported in the Annual Report.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
18(a) Letter from Crown Books' independent accountants
regarding a change in accounting principle or practice.
27 Financial Data Schedule
(B) Reports on Form 8-K
None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements 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.
CROWN BOOKS CORPORATION
Date: June 16, 1997 By: E. STEVE STEVENS
---------------------- ----------------------------
E. STEVE STEVENS
President and Chief
Executive Officer
Date: June 16, 1997 By: DONALD J. PILCH
---------------------- ----------------------------
DONALD J. PILCH
Vice President and Chief
Financial Officer
16
<PAGE> 1
Exhibit 18(a)
June 16, 1997
Crown Books
3300 75th Avenue
Landover, Maryland 20785
RE: Form 10-Q Report for the quarter ended May 3, 1997
Ladies and Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
We have been informed that, as of February 2, 1997, the Company changed from
the expense method of accounting for purchased software costs to the
capitalization method. According to the management of the Company, this change
was made to reflect the fact that these assets provide probable future benefits
and contribute to future net cash flows.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we
have reviewed the pertinent factors, including those related to financial
reporting, in this particular case on a subjective basis, and our opinion
stated below is based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to
an acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under
the circumstances in this particular case. In arriving at this opinion, we
have relied on the business judgment and business planning of your management.
We have not audited the application of this change to the financial statements
of any period subsequent to February 1, 1997. Further, we have not examined
and do not express any opinion with respect to your financial statements for
the three months ended May 3, 1997.
Very truly yours,
ARTHUR ANDERSEN LLP
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> MAY-03-1997
<CASH> 4,500
<SECURITIES> 0
<RECEIVABLES> 5,881
<ALLOWANCES> 0
<INVENTORY> 122,019
<CURRENT-ASSETS> 140,137
<PP&E> 54,575
<DEPRECIATION> 29,489
<TOTAL-ASSETS> 176,869
<CURRENT-LIABILITIES> 87,518
<BONDS> 1,695
0
0
<COMMON> 56
<OTHER-SE> 81,737
<TOTAL-LIABILITY-AND-EQUITY> 176,869
<SALES> 66,543
<TOTAL-REVENUES> 66,656
<CGS> 54,870
<TOTAL-COSTS> 54,870
<OTHER-EXPENSES> 15,871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 173
<INCOME-PRETAX> (4,258)
<INCOME-TAX> (1,596)
<INCOME-CONTINUING> (2,662)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,662)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
