<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 for the fiscal year ended January 31, 1998

( )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          (I.R.S. Employer
       incorporation or organization)         Identification No.)

    3300 75th Avenue, Landover, Maryland           20785           
 (Address of principal executive offices)        (Zip Code)

        Registrant's telephone number, including area code (301) 226-1200

        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 30, 1998, the registrant had 5,288,473 shares of Common Stock
outstanding and the aggregate market value of such shares held by non-affiliates
of the registrant was approximately $20,643,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's 1998 proxy statement to be used in connection with
the registrant's annual stockholders' meeting to be held June 26, 1998 are
incorporated by reference in Part III of this Form 10-K

                                        1
<PAGE>   2
                                Table of Contents

                                     PART I

<TABLE>
<CAPTION>
                                                                                                                   Page
                                                                                                                   ----
<S>               <C>                                                                                            <C>
Item 1.           Business . . . . . . . . . ...................................................................     3

Item 2.           Properties....................................................................................    13

Item 3.           Legal Proceedings.............................................................................    14

Item 4.           Submission of Matters to a Vote of
                    Security Holders............................................................................    20

                                     PART II

Item 5.           Market for the Registrant's Common Equity and
                    Related Stockholder Matters.................................................................    21

Item 6.           Selected Financial Data.......................................................................    22

Item 7.           Management's Discussion and Analysis of
                    Financial Condition and Results of
                    Operations..................................................................................    23

Item 8.           Financial Statements and Supplementary Data...................................................    31

Item 9.           Changes in and Disagreements with Accountants
                    on Accounting and Financial Disclosure......................................................    62

                                    PART III

Item 10.          Directors and Executive Officers of the
                    Registrant..................................................................................    62

Item 11.          Executive Compensation........................................................................    62

Item 12.          Security Ownership of Certain Beneficial Owners
                    and Management..............................................................................    62

Item 13.          Certain Relationships and Related Transactions................................................    62

                                     PART IV

Item 14.          Exhibits, Financial Statement Schedules and
                    Reports on Form 8-K.........................................................................    63
</TABLE>

                                        2
<PAGE>   3
                                     PART I

Forward-looking Statements

Statements in this report that are not historical in nature, including
references to beliefs, anticipations or expectations, are forward-looking. Such
statements are subject to a wide variety of risks and uncertainties that could
cause actual results to differ materially from those projected, including
without limitation the consummation of the Merger (as defined below), the
ability of the Company (as defined below) to open new stores and close other
stores, the sufficiency of recorded reserves for closed stores, uncertainties
regarding the availability of sufficient liquidity to continue operations, the
ability of the Company to renegotiate its existing credit arrangements or enter
into new arrangements, the effect of national and regional economic conditions,
the effect of increased competition in markets in which the Company operates
and other risks described from time to time in the Company's filings with the
Securities and Exchange Commission. 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, which revisions may be made
to reflect any future events or circumstances, other than through its regular
quarterly and annual financial statements, and through the accompanying
discussion and analysis contained in the Company's Quarterly Reports on Form
10-Q and Annual Report on Form 10-K.

Item 1.  Business

Crown Books Corporation ("Crown Books") was incorporated in Delaware in 1981 and
operates retail discount book stores in the United States. The term "Company"
refers collectively to Crown Books and its wholly-owned subsidiaries, including
Crown Books East Corporation, Crown Books West Corporation, Super Crown Books
Corporation ("Super Crown"), Crown Books National Corporation and Crown DHC
Corporation. Dart Group Corporation ("Dart") owns 52.3% of Crown Books'
outstanding common stock, par value $.01 per share (the "Common Stock").

Planned Merger of Dart

On April 9, 1998, Dart entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Richfood Holdings, Inc. ("Richfood Holdings") and a subsidiary
of Richfood Holdings ("Acquisition Subsidiary") pursuant to which Dart has
agreed to become a wholly owned subsidiary of Richfood Holdings. Pursuant to the
terms of the Merger Agreement, Richfood Holdings will (1) make a cash tender
offer (the "Offer") for all of the issued and outstanding shares of common stock
at a price of $160.00 per share and (2) take all steps necessary to cause
Acquisition Subsidiary to merge with and into Dart (the "Merger") in a
transaction in which Dart will become a wholly owned subsidiary of Richfood
Holdings. As a result of the Merger, Richfood Holdings will indirectly own 52.3%
of the outstanding Common Stock of Crown Books.

The Offer is subject to a number of customary conditions. The Merger is
subject to the tender in the offer of a majority of shares of common stock on a
fully diluted basis and to other customary conditions, including the receipt of
regulatory approvals and the absence of material adverse effects on the
business or financial conditions of Dart and its subsidiaries, taken as a whole
with certain limited exceptions. There can be no assurance that the Offer or
the Merger will be consummated.

                                        3
<PAGE>   4
Item 1.  Business

New Management

With the exception of the Vice President of Merchandising, all of Crown Books'
corporate officers have been retained by Crown Books near or subsequent to
January 31, 1998. The president joined the Company in mid-January. The Vice
President of Operations and the new Chief Financial Officer joined the Company
in February. The Chief Information Officer joined the Company in March.

Liquidity Issues

Crown Books has suffered substantial declines in financial performance and
substantial deterioration of its business in recent years and is currently
exploring alternatives for maintaining adequate liquidity. Negotiations are
underway with Crown Books' principal vendor to extend the payment schedule
of accounts payable due to the vendor, but no agreement has been reached. There
can be no assurance that this vendor or other vendors will continue to ship
inventory to Crown Books or that there will not be further significant declines
in Crown Books' business and financial condition.

Under the terms and conditions of its revolving credit facility, Crown Book is
currently permitted to borrow up to a maximum of $25 million. As of April 28,
1998, Crown Books had borrowed $22.2 million under its credit facility and had
$2.8 million in availability. Crown Books is negotiating with its lenders
either to increase its borrowing capacity under its existing credit facility or
to enter into a new credit facility with increased borrowing capacity. 
Management of Crown Books believes that it will either amend its existing
facilities or enter a new credit facility in May 1998. There can be no
assurance, however, that Crown Books will succeed in its attempt to increase
its existing credit facility or obtain a new credit facility. If Crown Books is
not successful in increasing its borrowing availability or otherwise improving
its liquidity situation, there can be no assurance that Crown Books will have
sufficient liquidity to operate its business and remain a going concern. If the
negotiations with the lenders and the vendors are not successful and
alternative financing sources are not available, the Company will consider
reorganization protection alternatives under bankruptcy laws. The Company
currently has no plans to liquidate. The accompanying financial statements do
not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.

Internal Controls

During the year ended January 31, 1998, under its prior management team, Crown
Books implemented a new accounts payable/inventory system without the system
being completely tested and interfaced with the store systems. As a result of
implementation problems with the system, Crown Books has been unable to
determine in an accurate and timely manner the purchases and amounts payable
for each vendor throughout the year. Additionally, reconciliations of certain
key general ledger accounts, including cash, accounts payable and inventory,
were not performed on a timely basis during the year and the adjustment to
reconcile the general ledger to the physical inventory at year-end was
unusually high. Significant effort was

                                        4
<PAGE>   5
Item 1. Business (Continued)

required in connection with the year-end financial statement closing process to
reconcile these accounts, determine the nature of any reconciling items and
record adjustments to correct errors or omissions to these accounts.

Since February 1998, Crown Books, under its new management, has invested a
substantial effort and made improvements in the controls and procedures relating
to the above mentioned items. To date these improvements have not resolved the
problems and efforts need to continue to enable Crown Books to produce accurate
financial data in a timely and efficient manner. As a result of the foregoing
issues, Crown Books' independent public accountants advised Crown Books that in
their view, there is a material weakness in Crown Books' internal control
structure. Management of Crown Books intends to continue its efforts to improve
internal control and procedures.

Operations

The Company operates retail discount book stores. These stores offer popular
hardback and paperback books, newspapers, magazines, books on tape, videos,
reference materials and other items and accessories.

The Company responds to the demand for books at value prices and 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 15% below the publishers'
suggested retail prices. 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. Crown Books characterizes its
stores as "Classic Crown Books" stores and "Super Crown Books" stores. Classic
Crown Books stores range in size from approximately 2,000 to 6,000 square feet
and carry approximately 25,000 to 40,000 titles Super Crown Books stores range
in size from approximately 6,000 to 35,000 square feet, carry as many as 80,000
titles and also carry a wider selection of non-book products and accessories.
The interior of the Company's stores is standardized, so that the stores can be
assembled quickly. Most of the stores are open seven days a week.

The new prototype Super Crown Books is targeted to occupy 15,000 square feet,
although the Company recognizes that opportunities exist in smaller-size
locations. The new prototype is based on an ongoing assessment of what
contributes to the Company's customers' shopping experience. This includes a new
floor layout with convenient adjacencies; upgraded fixtures, signage and
lighting; and expanded non-book merchandise such as book accessories, CDs and
computer software.

The Company believes that its superstore concept presents growth opportunities
and intends to open new Super Crown Books stores. The Company's immediate focus
is on existing markets, but it may consider expansion in to new markets. As of
January 31, 1998, the Company had entered into lease agreements to open four new
stores.

                                        5
<PAGE>   6
Item 1.  Business (Continued)

In the past, the Company purchased its merchandise from a large number of
publishers and suppliers for direct shipment to the stores and to its three
internal warehouses for distribution to the stores. In January 1998, the Company
decided to outsource the majority of its warehouse operations through Ingram's
warehouse system. The Company's buyers continue to work with the publishers and
suppliers to select merchandise for the stores. Although this merchandise passes
through the Ingram warehouses, the Company still collects promotional fees due
from the publishers and suppliers. The Company also places orders through other
warehouse sources and directly from publishers and suppliers so that the Company
is not dependent on any single publisher or supplier.

The Company advertises extensively, primarily through newspapers, stressing its
value 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 also arranges for special
appearances and book autographing sessions with recognized authors to attract
customers and to build and reinforce customer awareness of its stores.

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. Inventories are monitored both at stores and in Crown Books'
headquarters in Landover, Maryland, to determine purchase requirements. In
general, unsold books and magazines can be returned to the publishers for
credit.

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-by-item basis
to store management.

In selecting specific store sites, the Company considers numerous factors,
including local demographics, desirability of available leasing arrangements,
proximity to existing Company operations and competitors, and overall retail
activity. The Company generally clusters its stores in selected market areas to
maximize advertising, distribution and management resources. Within a selected
market area, the Company generally locates its stores in strip shopping centers
and urban street locations. Compared to large enclosed malls, the Company
believes that the strip shopping centers and urban street locations typically
charge less rent and provide greater consumer awareness and convenience.

The following table sets forth by metropolitan area the locations of the
Company's stores for each of the last five fiscal years:

                                        6
<PAGE>   7
Item 1.  Business (Continued)


<TABLE>
<CAPTION>
                                          Number of Stores
                                        at end of fiscal year
Metropolitan Area:              1994    1995    1996    1997    1998
------------------              ----    ----    ----    ----    ----
<S>                             <C>     <C>     <C>     <C>     <C>
 Chicago, Illinois                43      37      32      36      37
 Dallas, Texas                    -       -       -       -        3
 Houston, Texas                    6       6       6       8      11
 Los Angeles, California          68      59      51      47      43
 Philadelphia, Pennsylvania      --      --      --      --        4
 San Diego, California            17      12       9       5       8
 San Francisco, California        31      24      20      20      21
 Seattle, Washington              15      11      11      12      13
 Washington, D.C.                 60      47      43      40      39
                                ----    ----    ----    ----    ----
   Total                         240     196     172     168     179
                                ====    ====    ====    ====    ====
</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 fiscal year.

<TABLE>
<CAPTION>
                                        1994    1995    1996    1997    1998
                                        ----    ----    ----    ----    ----
<S>                                     <C>     <C>     <C>     <C>     <C>
Super Crown Books stores:
  (including new prototype)
   Opened during the year                 37      12      16      27      26
   Closed during the year                  4       3       2       2       4

Classic Crown Books stores:
   Opened during the year                  5       2      --      --       -
   Closed during the year                 45      55      38      29      11

Total Stores Open at end of year:
   New prototype superstore               --       9      25      54      79
   Prior Format Super Crown
     Books stores                         61      61      59      55      52
   Classic Crown Books stores            179     126      88      59      48
</TABLE>

The Company intends to continue its practice of reviewing the profitability
trends and prospects of existing stores and may close or relocate under-
performing stores.

Restructuring Reserve

In fiscal years 1993 and 1994, the Company determined that a number of the
smaller Classic Crown Books stores were not competitive in an industry moving to
larger stores. Consequently, the Company recorded restructuring charges totaling
$12,800,000 during these two years for the anticipated costs for closing certain
of the smaller Classic Crown Books stores and, relocating, expanding and
converting certain of such stores to the Super Crown Books concept. These costs
primarily represent unrecoverable lease obligations (net of estimated sublease
income) and the book value of leasehold improvements at the estimated closing
date. The activity in the restructuring reserves during the last three fiscal
years was as follows:

                                        7
<PAGE>   8
Item 1.  Business (Continued)

<TABLE>
<CAPTION>
                                                  (dollars in thousands)
                                               1998        1997        1996
                                               ----        ----        ----
<S>                                         <C>         <C>         <C>
Restructuring Reserve, beginning of year    $  1,507    $  7,025    $ 10,515
Less: Payments and charges                      (426)     (1,653)     (1,439)
      Reversal of reserves                       (88)     (3,865)     (2,051)
                                            --------    --------    --------
Restructuring Reserve, end of year          $    993    $  1,507    $  7,025
                                            ========    ========    ========
</TABLE>

During the last three fiscal years, the Company reversed portions of the
restructuring reserve as a result of (i) management decisions not to close
certain stores that had been scheduled for closing, (ii) stores were closed
under negotiated lease settlements that were more favorable than expected, and
(iii) the postponement of certain store closings.

The remaining restructuring reserve relates to nine stores, of which four have
been closed as of January 31, 1998, with lease obligations ranging from one to
84 months. The lease obligation allocable to related party leases is
approximately $485,000. The restructuring reserve is expected to be utilized as
follows:

<TABLE>
<CAPTION>
                             (dollars in thousands)
                              Lease           Leasehold
           Fiscal          Obligations      Improvements
            Year         (Cash Outflows)     & Fixtures         Total
          --------       ---------------    ------------     --------
<S>                      <C>                <C>              <C>
            1999            $     223         $       -       $     223
            2000                  347                 4             351
            2001                  100                 -             100
            2002                   61                 -              61
            2003                   61                 -              61
            2004-2005             197                 -             197
                            ---------         ---------       ---------
            Total           $     989         $       4       $     993
                            =========         =========       =========
</TABLE>

Since the recorded restructuring reserve represents an estimate based upon
anticipated store closing dates and the book value of the leasehold improvements
at the time a store is closed, the actual amounts of costs associated with store
closings may be different from the reserve.

Store Closing Reserve

The Company continually evaluates its store operations and the need to close
stores that do not perform satisfactorily. The Company recognizes store closing
costs when management decides to close a store. The costs primarily represent
unrecoverable lease obligations (net of estimated sublease income) and the book
value of leasehold improvements at the estimated closing date. The activity in
the closed store reserve during the last three fiscal years is as follows:

<TABLE>
<CAPTION>
                                                  (dollars in thousands)
                                               1998       1997        1996
                                               ----       ----        ----
<S>                                         <C>         <C>         <C>
Closed Store Reserve, beginning of year     $  8,034    $ 10,850    $ 20,241
Less: Payments and charges                    (1,667)     (1,764)     (2,648)
      Reversal of reserves                    (1,546)     (1,052)     (6,743)
                                            --------    --------    --------
Closed Store Reserve, end of year           $  4,821    $  8,034    $ 10,850
                                            ========    ========    ========
</TABLE>

During the last three fiscal years, the Company reversed portions of the closed
store reserve as a result of (i) management decisions not to close certain

                                        8
<PAGE>   9
Item 1.  Business (Continued)

stores that had been scheduled for closing, (ii) stores were closed under
negotiated lease settlements that were more favorable than expected, and (iii)
the postponement of certain store closings.

The remaining closed store reserve relates to 41 stores, of which 12 have been
closed as of January 31, 1998, with lease obligations ranging from one to 71
months. The lease obligation allocable to related party leases is approximately
$582,000. The closed store reserve is expected to be utilized as follows:

<TABLE>
<CAPTION>
                               (dollars in thousands)
                              Lease            Leasehold
          Fiscal           Obligations      Improvements
           Year          (Cash Outflows)     & Fixtures         Total
         --------        ---------------    ------------     --------
<S>                      <C>                <C>              <C>
           1999            $   1,193          $    405         $  1,598
           2000                1,386               136            1,522
           2001                  890               101              991
           2002                  470                45              515
           2003                  109               -                109
           2004-2005              86               -                 86
                           ---------          --------         --------
           Total           $   4,134          $    687         $  4,821
                           =========          ========         ========
</TABLE>

Since the recorded closed store reserve represents an estimate based upon
anticipated store closing dates and the book value of the leasehold improvements
at the time the store is closed, the actual costs are subject to change and may
be different from the reserve. The Company will continue to evaluate the
performance and future viability of its remaining stores and may close
additional stores. The Company has not recorded reserves for any such future
possible store closings.

Relationship with Dart

Dart provides the Company with certain general and administrative functions.
Dart also pays certain "common expenses" for it and its affiliates and allocates
such expenses on a judgmental basis. Dart charged the Company approximately
$2,124,000 for such services in the year ended January 31, 1998. See Notes 4 and
9 to the Consolidated Financial Statements and Item 2.- Properties.

Competition

The business in which the Company is engaged is highly competitive. The Company
competes with one or more of Borders Group, Inc.,("Borders"), Barnes & Noble,
Inc., Books-a-Million, Waldenbooks and other chains and independent bookstores
and major national book clubs in all the Company's markets. During fiscal 1998,
Internet competition grew significantly from Amazon.com, Inc. and Barnes &
Noble. Borders and Bertelsmann have also announced plans for major sites on the
Internet. 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 and more amenities (e.g., coffee bars) than the Company, and
some of its competitors have greater resources than the Company. Price
competition occurs in all of the Company's markets.

                                        9
<PAGE>   10
Item 1.  Business (Continued)

Seasonality

Sales, net income and working capital for the fourth quarter have historically
been substantially higher than for any of the previous three quarters (see Note
14 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. However, this was not true in fiscal 1998. Due to disappointing
operating performance throughout fiscal 1998, the Company made major reductions
in inventory through an inventory returns initiative in the fourth quarter in an
effort to increase working capital.

Employees

On January 31, 1998, the Company employed approximately 1,600 full-time and
2,400 part-time persons engaged in retail and administrative operations. The
Company considers its relationship with its employees to be good.

Executive Officers of the Registrant

The following table sets forth the names, ages and positions of the executive
officers of Crown Books. Executive officers are appointed to serve until their
successors are appointed. Except for Mr. Sutton, all of the executive officers
joined Crown Books within the last few months (December 1997 to March 1998).

<TABLE>
<CAPTION>
        Name                 Age    Position
        ----                 ---    --------
<S>                          <C>    <C>
        Richard B. Stone     69     Chief Executive Officer
        Anna L. Currence     47     President and Chief Operating Officer
        John R. Sutton       43     Vice President, Merchandising
        Stephen M. Petty     44     Chief Financial Officer
        Steven A. Pate       45     Vice President, Operations
        Mark C. Paxton       46     Chief Information Officer
</TABLE>

Richard B. Stone was elected Chief Executive Officer of Crown Books in October
1997. Senator Stone serves as Chairman and Chief Executive Officer of Dart and
Chairman of the Board of Directors and Chief Executive Officer of Shoppers Food
Warehouse Corp. ("Shoppers"), a wholly-owned subsidiary of Dart, and Chairman of
the Board of Directors and Chief Executive Officer of Trak Auto Corporation
("Trak Auto"), a majority-owned subsidiary of Dart. Since December 1995, Senator
Stone had been Voting Trustee of a trust that held all of the voting stock of
Dart until February 1998 when Dart's Class A shareholders were given voting
power. From 1992 to 1994, Senator Stone was a Director of International Service
System. He served as United States Ambassador to Denmark from 1992 to 1993, and
he is currently a member of the Council of America Ambassadors. He was Chief
Operating Officer of Capital Bank, N.A. from 1989 to 1991, and was Vice Chairman
of the Board of Directors of Capital Bank, N.A. from 1985 to 1991. Senator Stone
served as President Reagan's Special Envoy for Central American Affairs and
Ambassador-at-Large from 1983 to 1984. He was a United States Senator from 1975
to 1981, representing the State of Florida.

Anna L. Currence was appointed President and Chief Operating Officer of Crown
Books on January 12, 1998.  Immediately prior to joining Crown Books, Ms.

                                       10
<PAGE>   11
Item 1.  Business (Continued)

Currence was an executive recruiter.  From 1992 to 1995, Ms. Currence was Chief
Executive Officer of Kitchen Bazaar Inc.  In 1992, Kitchen Bazaar Inc. filed
for bankruptcy protection under the United States Bankruptcy Code. Six months
after Ms. Currence became President and Chief Executive Office. She
successfully led Kitchen Bazaar Inc.'s turnaround and emergence from Chapter
11. Kitchen Bazarr Inc. filed again for bankruptcy protection under the United
States Bankruptcy Code after Ms. Currence had left Kitchen Bazaar Inc.  From
1990 to 1992, Ms. Currence was  Vice President of Operations, Merchandising,
and Marketing for a chain of 175 video stores that also sold music.  This chain
was sold to Blockbuster Video.  Ms. Currence was with Barnes & Noble Inc. or B.
Dalton Bookseller Inc. from 1973 to 1990.  At Barnes & Noble, Ms. Currence was
responsible for the creation and launch of the Barnes & Noble Superstores.

John R. Sutton was appointed Vice President of Merchandising in September 1996.
Prior to that, Mr. Sutton served in various positions at Crown Books since
joining Crown Books in February 1978.

Stephen M. Petty joined Crown Books in February 1998 as Chief Financial Officer.
Prior to joining Crown Books Mr. Petty was President of Creative Business
Solutions, a business consulting group. From 1993 to 1996, Mr. Petty was Senior
Vice President and Chief Financial Officer of Waccamaw Corporation. During the
previous 13 years he served in various executive positions with The May Company.

Steven A. Pate joined Crown Books in February 1998 as Vice President of
Operations.  Prior to joining Crown Books Mr. Pate was Director of Operations
Development at Barnes & Noble Inc. from 1996 to 1998.  He was Director of
Operations for B. Dalton Bookseller Inc.  from 1990 to 1996.

Mark C. Paxton joined Crown Books in March 1998 as Chief Information Officer.
Prior to joining Crown Books Mr. Paxton was Director of Merchandise Systems for
Kmart from 1997 and 1998.  From 1994 to 1997, Mr. Paxton was Director of Product
Planning and Manager of Product Development for Compuware.  From 1989 to 1994,
Mr. Paxton was Director of Applications for Frank's Nursery & Crafts.

There is no family relationship between any director and executive officer of
the Company.

Changes in Management

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 were the subject of disputes between the then
Chairman of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and
the then President and Chief Operating Officer of Dart, Ronald S. Haft. For a
description of such disputes and their resolutions, see Item 3 - Legal
Proceedings. On October 11, 1994, the Board of Directors of Trak Auto, Crown
Books and Total Beverage each established an Executive Committee of their
respective Boards of Directors comprised of the same outside directors, with
authority parallel to that of Dart's Executive Committee. The disputes between
Herbert H. Haft and Ronald S. Haft concerning issues involving Dart were
extensive. Accordingly, the Executive Committee assumed day-to-day involvement
in these disputed issues and other matters affecting Dart, in particular matters
relating to litigation to which Dart was then a party. The Executive Committee
remains active in the day-to-day affairs of Dart. Its continuing role is
dependent on future developments.

                                       11
<PAGE>   12
Item 1.  Business (Continued)

In October 1995, Dart and Ronald S. Haft entered into a settlement of certain
litigation and other related transactions (collectively, the "RSH Settlement").
Among other things, the RSH Settlement transferred majority control of Dart's
voting stock to one or more voting trustees under a Voting Trust Agreement (the
"Voting Trust Agreement"), by and among Ronald S. Haft, Dart and Larry G.
Schafran and Sidney B. Silverman, as initial Voting Trustees. On December 28,
1995, the initial Voting Trustees resigned and appointed Richard B. Stone as
successor Voting Trustee.

On September 24, 1997, Richard B. Stone, in his capacity as Voting Trustee, and
Herbert H. Haft, in his capacity as the holder of the purported Proxy from
Ronald S. Haft to vote 172,730 shares of Dart's Class B common stock, removed
Larry G. Schafran from Dart's Board of Directors and appointed Richard B. Stone
to Dart's Board of Directors. For a description of the Proxy, see Item 3 - Legal
Proceedings - Herbert H. Haft Proxy Litigation. In addition, Richard B. Stone
was named Chairman of the Executive Committee of Dart's Board of Directors, and
Acting Chief Executive Officer of Dart and he replaced Larry G. Schafran as a
director of Trak Auto, Crown Books, Shoppers and Total Beverage. Richard B.
Stone also assumed the positions of Acting Chief Executive Officer of Trak Auto
and Chairman of the Executive Committee of both Trak Auto and Crown Books.

On October 21, 1997, Howard M. Metzenbaum and Harry M. Linowes were elected to
fill new positions on the Board of Directors of Dart which was increased from
five to seven members. On December 19, 1997, Richard B. Stone, in his capacity
as Voting Trustee, and Herbert H. Haft, in his capacity as holder of the
purported Proxy, executed a unanimous written consent in lieu of an annual
meeting of stockholders pursuant to which (i) Dart's bylaws were amended to
provide for a board of directors composed of four directors and (ii) Richard B.
Stone, Howard M. Metzenbaum, Harry M. Linowes and Herbert H. Haft were elected
directors of Dart. Accordingly, Ronald S. Haft, is no longer a director of Dart.
At the same time, Douglas M. Bregman and Bonita A. Wilson jointly stepped down
as directors and members of the Executive Committee of Dart and its
subsidiaries.

In February 1998, pursuant to the Settlements (as defined in Item 3 - Legal
Proceedings), Herbert H. Haft, among other things, (i) resigned from all of his
positions with Dart and its subsidiary corporations, (ii) relinquished his claim
to voting control of Dart and (iii) terminated his employment contract with
Dart. In addition, all outstanding litigation and disputes between Dart and
Herbert H. Haft were dismissed or resolved. For a description of the
Settlements, see Item 3 - Legal Proceedings - Resolution of Haft Family and
Related Litigation.

In February 1998, Richard B. Stone was appointed Chief Executive Officer of Dart
and its subsidiaries instead of Acting Chief Executive Officer.

                                       12
<PAGE>   13
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 in 1985. The current annual rental is $334,000. The sublease also
requires the payment of maintenance, utilities, insurance and taxes allocable to
the space subleased. Dart originally leased the entire 271,000 square foot
warehouse and office facility from a private partnership in which Haft family
members owned all of the partnership interests. As a result of the various
settlements with members of the Haft family, a Dart subsidiary now owns the
warehouse and office facility. The Company's sublease is on the same terms as
Dart's lease was from the Haft family partnership.

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 was $143,000 for the first five years
and increased 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 all of its retail stores. The total future minimum payments
for the Company's retail store space (excluding closed stores) and equipment
aggregate approximately $178,489,000 to the lease expiration dates and
approximately $180,111,000 to the lease expiration dates (including closed
stores). The lease expiration dates (without regard to renewal options) range
from 1998 to 2010.

Ten of the store leases are with entities in which the Haft family has
substantially all the beneficial interest. The ten lease agreements involving
Haft-owned entities provide for various termination dates that range from 1998
to 2029 (including option periods) and require payment of future minimum rentals
aggregating $34,159,000 at January 31, 1998. These agreements also require
payment of a percentage of sales in excess of a stated minimum. In addition,
three closed stores have lease agreements with Haft-owned entities with various
termination dates that range from 1998 to 2005 and require future minimum
rentals aggregating $715,000 at January 31, 1998. Annual fees and rentals paid
to Haft-owned entities, open or closed, were $2,032,000 in the year ended
January 31, 1998.

                                       13
<PAGE>   14
Item 3.  Legal Proceedings

Resolution of Haft and Related Litigation

The litigation discussed below involving Dart Group Corporation ("Dart"), its
affiliates, including, Crown Books and members of the Haft family settled prior
to January 31, 1998. On February 5, 1998, Dart closed the settlement agreement
with Herbert H. Haft (the "HHH Settlement") and a Second Supplemental Settlement
Agreement with Ronald S. Haft ("Second Supplemental Agreement"). The RSH
Settlement, the First Supplemental Agreement, the Second Supplemental Agreement,
the RGL Settlement and the HHH Settlement are collectively referred to herein as
the "Settlements". The RSH Settlement, the First Supplemental Agreement, the
Second Supplemental Agreement and the RGL Settlement are described below. As
part of the closing of the HHH Settlement, Herbert H. Haft (i) sold to Dart all
of his shares of, and options to purchase, Dart Class A Common Stock, and sold
his capital stock of Dart's subsidiaries Crown Books and Trak Auto Corporation
("Trak Auto"),(ii) resigned from all of his positions with Dart and its
subsidiary corporations, (iii) relinquished his claim to voting control of Dart,
and (iv) terminated his employment agreement with Dart. In addition, all
outstanding litigation and disputes between Dart and Herbert H. Haft were
resolved. As consideration for the HHH Settlement, Dart paid Herbert H. Haft
approximately $28 million at the closing. In connection with the closing of the
Settlements, Dart also made a $10 million loan to a partnership owned by Ronald
S. Haft, the proceeds of which were used to repay a $10 million note to Herbert
H. Haft. As a result of the consummation of the Settlements all litigation
between Dart and members of the Haft family has been settled and dismissed, and
the Company is no longer subject to a Standstill Order previously imposed by the
Delaware Court of Chancery.

In October, 1995, Dart entered into a settlement agreement with Ronald S. Haft,
to settle certain litigation to which Dart was a party ("RSH Settlement").
Pursuant to the RSH Settlement, Ronald S. Haft transferred 172,730 shares of
Dart's Class B Common Stock, par value $1.00 (Dart's sole voting stock prior to
February, 1998 when Dart discontinued its dual class common stock structure,
"Class B Common Stock"), in exchange for 288,312 shares of Dart's Class A Common
Stock, par value $1.00 (Dart's non-voting, publicly traded class of stock prior
to February, 1998, "Class A Common Stock"). Ronald S. Haft also exercised an
option to purchase 197,048 shares of Class B Common Stock, and paid the exercise
price by paying cash and issuing a promissory notes to Dart for approximately
$27.4 million. Dart also loaned Ronald S. Haft approximately, $37.9 million and
he issued Dart a $37.7 million promissory note to Dart. Then, Ronald S. Haft
placed the 288,312 shares of Class A Common Stock and the Class B Common Stock
which he owned or in which he had an interest, into a voting trust. Dart also
(i) transferred approximately $11.6 million to Ronald S. Haft in exchange for an
additional promissory note (which was repaid in May 1996), and (ii) entered into
a variety of agreements with Ronald S. Haft regarding the sale of certain
properties owned by Dart or affiliates of Dart at that time. As a part of the
RSH Settlement, Ronald S. Haft resigned all positions he had with Dart and its
subsidiaries and consented to the termination of all of his outstanding options
with Dart and its affiliates.

On November 19, 1997, the real estate related transactions contemplated in the
First Supplemental Agreement to the RSH Settlement were closed and include:
completion of bankruptcy plans of reorganization for partnerships owning Dart's
headquarters in Landover, Maryland and a distribution center leased to Trak Auto

                                       14
<PAGE>   15
Item 3.  Legal Proceedings

in Bridgeview, Illinois; payment by Dart of $7 million to reduce outstanding
mortgage loans on these properties, which thereafter are wholly-owned by Dart
and/or its affiliates; and Ronald S. Haft paid $2.2 million to Dart from
escrowed funds previously earmarked for Ronald S. Haft.

Trak Auto advanced approximately $3.3 million to a wholly-owned subsidiary of
Dart for the Bridgeview distribution center portion of the First Supplemental
Agreement and the RGL Settlement. The $3.3 million advance is in the form of a
promissory note and is expected to be repaid in May 1998.

The Second Supplemental Agreement to the RSH Settlement closed in February 1998
and Dart required that the shares held in Voting Trust for the benefit of Ronald
S. Haft be transferred to Dart. Dart purchased the shares in the Voting Trust
from Ronald S. Haft by offsetting the $27.4 million and $37.7 million Notes
Receivable from him and a cash payment of approximately $0.7 million. The Class
A and Class B Common Stock from Voting Trust was placed in treasury and on
February 17, 1998, the Class A Common Stock and Class B Common Stock were
reclassified as Common Stock.

On September 26, 1997, Dart closed an agreement, dated August 16, 1997, to
settle certain litigation and enter other related transactions (the "RGL
Settlement") with Robert M. Haft, Gloria G. Haft, Linda G. Haft and certain
related parties (collectively, "RGL").

In addition to mutual dismissal of claims against or by RGL (including control
of Dart), Crown Books' portion of the RGL Settlement was $45,000 for repurchase
of certain Crown Books stock options. Dart also acquired all of Robert M. Haft
and Linda G. Haft's interest in partnerships owning Dart and Trak Auto's
headquarters building in Landover, Maryland and a distribution center leased by
Trak Auto in Bridgeview, Illinois for $4.4 million.

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. ("CPI"),
Combined Properties Limited Partnership and Capital Resources Limited
Partnership. The suit is brought derivatively and names as nominal defendants
Dart, Trak Auto, Crown Books, Shoppers Food Warehouse Corp. ("Shoppers"), a
wholly-owned subsidiary of Dart, and other affiliated companies. The complaint,
as amended on January 12, 1995, alleged waste, breach of fiduciary duty,
violation of securities laws and entrenchment in connection with various lease
agreements between the CPI defendants and Dart and its subsidiaries, the
termination of Robert M. Haft, the compensation paid to Ronald S. Haft and
Herbert H. Haft, the employment agreement entered into by Ronald S. Haft and
Dart on August 1, 1993 (the "RSH Employment Agreement"), the sale of 172,730
shares of Class B Common Stock by Herbert H. Haft to Ronald S. Haft, and the
compensation paid to the Executive Committee. Plaintiffs sought 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.

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

In January 1994, a Special Litigation Committee consisting of two outside,
independent directors of Dart, Crown Books 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 the derivative lawsuit. (After the death of one
member in December 1994, the Special Litigation Committee has consisted of one
director.) In September 1994, the Special Litigation Committee moved for
dismissal of certain claims in the derivative lawsuit and for realignment of the
parties to permit Dart to prosecute other claims in the derivative lawsuit.
Thereafter, the Special Litigation Committee amended its motion and advised the
court that it had instituted certain lawsuits concerning Dart related party real
estate transactions, and was considering asserting additional claims, certain of
which were subsequently asserted. See the Lawsuit Against Herbert H. Haft
Concerning Haft-Owned Real Estate, described below. The Court did not act upon
the amended motion.

In September 1994, Jolien Lou, a purported shareholder of Crown Books, 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 G. Schafran and Bonita A. Wilson. The suit
was brought derivatively and named Crown Books 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 Crown Books in 1993 and in connection with the management of Crown
Books. The amended complaint also alleges legal malpractice against a lawyer
advising Dart at that time. Plaintiff seeks unspecified damages incurred by
Crown Books, and costs and attorneys' fees. Ronald S. Haft and Glenn E. Hemmerle
were dismissed without prejudice from this lawsuit. The amended complaint does
not name as a defendant H. Ridgely Bullock, who died subsequent to the filing of
the original complaint. Crown Books and other defendants filed a motion to
dismiss this lawsuit.

As a result of the Settlements, these derivative lawsuits have been dismissed
with prejudice (except for the legal malpractice claim which was dismissed
without prejudice) and Dart paid approximately $3.5 million in attorney's fees
to derivative plaintiffs' counsel.

Herbert H. Haft Proxy Litigation

In connection with Herbert H. Haft's sale of 172,730 shares of Class B Common
Stock to Ronald S. Haft on July 28, 1993 (the "Stock Sale Agreement"), Ronald S.
Haft purportedly granted Herbert H. Haft an irrevocable proxy (the "Proxy") to
vote these shares of stock "to the same extent and with the same effect as
Ronald S. Haft might or could do under any applicable laws or regulations
governing the rights and powers of shareholders of Dart," until Herbert H.
Haft's death or incapacitation. On June 30, 1995, Ronald S. Haft sent a letter
to Herbert H. Haft purportedly revoking this proxy.

On July 18, 1995, Ronald S. Haft filed a lawsuit against Herbert H. Haft and,
nominally, Dart in the Delaware Court of Chancery for New Castle County for
Herbert H. Haft's alleged breach of contract and breach of fiduciary duties to
Ronald S. Haft and to Dart in connection with the Proxy (Ronald S. Haft v.
Herbert H. Haft, et al., Civ. A. No. 14425).  In this action, Ronald S. Haft
sought a declaration that the Proxy was revocable or would be revocable under

                                       16
<PAGE>   17
Item 3.  Legal Proceedings (Continued)

certain conditions, as well as costs and attorneys' fees. Ronald S. Haft also
requested that the court require Dart to refuse to recognize the validity of the
Proxy. On August 9, 1995, Herbert H. Haft filed an Answer and Counterclaim
denying liability and requesting rescission of the Stock Sale Agreement because
of Ronald S. Haft's alleged breach of contract and other grounds. On September
25, 1995, Dart filed its answer in this action. Both Ronald S. Haft and Herbert
H. Haft moved for summary judgment in this lawsuit. On November 14, 1995, the
court denied Ronald S. Haft's motion for summary judgment; Herbert H. Haft's
motion for summary judgment was not acted upon.

In October 1995, Dart and its subsidiaries and Ronald S. Haft entered into a
settlement of certain litigation and other related transactions (collectively
the "RSH Settlement"). As part of the RSH Settlement Dart purchased from Ronald
S. Haft the 172,730 shares of Class B Common Stock that were subject to the
Proxy and placed the shares in treasury.

As a result of the Settlements, this litigation has been dismissed with
prejudice.

Challenge to RSH Settlement by Herbert H. Haft

On November 6, 1995, Herbert H. Haft filed a lawsuit captioned Herbert H. Haft
v. Dart Group Corporation, et al., Del. Ch., Civ. A. No. 14685, in the Delaware
Court of Chancery for New Castle County naming as defendants Dart, all of its
directors (except Herbert H. Haft), Robert M. Haft, Gloria G. Haft and Linda G.
Haft (collectively, "RGL"), John L. Mason, Ellen V. Sigal and Michael Ryan.
Herbert H. Haft sought a judgment (i) declaring the RSH Settlement unlawful,
hence null and void; (ii) declaring either that 172,730 shares of Class B Common
Stock belong to him were wrongfully sold by Ronald S. Haft to Dart, and that
Herbert H. Haft is entitled to restitution of such shares or, alternatively,
that his purportedly irrevocable proxy on the 172,730 shares continues to be
valid; (iii) declaring that Herbert H. Haft retains voting control of Dart or,
at a minimum, 34.55% of Dart's voting power; (iv) declaring that the Trust
Shares may not be lawfully voted; and (v) declaring that defendants John L.
Mason, Ellen V. Sigal and Michael Ryan are not duly elected directors of Dart.

On December 5, 1996, Herbert H. Haft filed a motion for partial summary judgment
in which he asserted two arguments based upon Section 160(c) of the Delaware
General Corporation Law. Section 160(c) provides that the shares of capital
stock "belonging to" a corporation are not entitled to vote. Herbert H. Haft
maintained that (i) notwithstanding Section 160(c), the 172,730 Class B shares
that Dart purchased in the RSH Settlement on October 6, 1995 do not "belong to"
Dart and are still subject to the Proxy, and (ii) Section 160(c) does not permit
the Trust Shares to be voted because those shares "belong to" Dart, not Ronald
S. Haft. Dart opposed this motion for partial summary judgment and, on March 14,
1997, the Delaware Court of Chancery denied Herbert H. Haft's motion in its
entirety.

As a result of the Settlements, all claims in this litigation against or on
behalf of Dart have been dismissed with prejudice.

                                       17
<PAGE>   18
Item 3.  Legal Proceedings (Continued)

Standstill Order

In connection with the legal challenges to the RSH Settlement raised by RGL, and
by Herbert H. Haft, on December 6, 1995, the Delaware Court of Chancery entered
the Standstill Order, which restricted certain actions by Dart. Without further
order of the court, Dart could not (i) change its Certificate of Incorporation
or Bylaws; (ii) change the current composition of Dart's Board of Directors or
any of its subsidiaries; (iii) change the Haft family officers of Dart or any of
its subsidiaries; or (iv) issue any additional securities of Dart or any of its
subsidiaries (except employee stock options issued in the ordinary course of
business). In addition, without first giving Herbert H. Haft and the other
parties to the Section 225 Action not less than seven days written notice, Dart
could not take any extraordinary actions, including but not limited to 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
stockholder of Dart through any debt transaction. For purposes of the Standstill
Order, the phrase "extraordinary actions" means any transaction, contract or
agreement, the value of which exceeds $3 million.

As a result of the Delaware Court of Chancery approval of the Settlements, Dart
is no longer subject to the Standstill Order.

Lawsuit Against Herbert H. Haft Concerning Haft-Owned Real Estate

On December 17, 1996, Dart, Crown Books and Trak Auto filed a lawsuit captioned
Dart Group Corporation, et al. v. Herbert H. Haft, Civ. A. No. 96-26474, in the
Circuit Court for Prince George's County, Maryland, seeking damages from Herbert
H. Haft for breach of fiduciary duty, fraud and waste arising from a series of
lease transactions between Dart and certain partnerships owned beneficially by
members of the Haft family. The complaint alleged that Herbert H. Haft exploited
the dominance and control he enjoyed as an officer, director and controlling
stockholder of Dart to enrich himself and other members of the Haft family
unlawfully and unfairly at the expense of the public stockholders of Dart, Crown
Books and Trak Auto. In particular, the complaint charged that Herbert H. Haft
(i) caused Trak Auto to surrender favorable retail store leases and subleases in
Haft-owned shopping centers in exchange for new leases less favorable to Trak
Auto; (ii) required Crown Books to relinquish its favorable lease in the McLean
Chain Bridge Road Shopping Center and to enter into a new lease with a Haft
family partnership for a new location in the same shopping center at a rent rate
equal to 450 percent of the prior lease; (iii) caused Dart, Crown Brooks and
Trak Auto to enter into exorbitant long-term leases for warehouse and
distribution facilities that were purchased and developed by Haft family
partnerships for the purpose of leasing those facilities to these companies as
captive tenants; (iv) induced Dart and Trak Auto to lease retroactively from a
Haft family partnership a 2.66 acre wooded lot for which the companies had no
use; and (v) caused Trak Auto to purchase certain used warehouse equipment from
a Haft family partnership for more than 700 percent of the price contemplated by
the original equipment lease.

As a result of the Settlements, this litigation has been dismissed with
prejudice.

                                       18
<PAGE>   19
Item 3.  Legal Proceedings (Continued)

Lawsuit Against Herbert H. Haft in Washington, D.C.

On December 17, 1996, Dart, Crown Books and Trak Auto also filed a lawsuit
captioned Dart Group Corporation, et al. v. Herbert H. Haft, Civ. A. No. 96-CV-
2788 (D.D.C.) in the U.S. District Court for the District of Columbia naming
Herbert H. Haft as defendant. In this action, Dart, Crown Books and Trak Auto
have advanced claims for breach of fiduciary duty, civil conspiracy and tortious
interference with contracts. The companies alleged that Herbert H. Haft
wrongfully imposed Robert M. Haft's excessively generous employment contracts
upon Dart and Crown Books, later breached those contracts for personal reasons
and then, due in large part to a personal conflict of interest, mishandled the
defense to Robert M. Haft's wrongful termination lawsuit. Dart, Crown Books and
Trak Auto seek to recover the approximately $38 million paid to Robert M. Haft
in satisfaction of the judgment in his wrongful termination suit, approximately
$5 million in attorneys' fees incurred by the companies in defense of that
litigation, and punitive damages.

As a result of the Settlements, this litigation has been dismissed with
prejudice.

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 adverse effect, if established, upon the consolidated financial
condition and results of operations of the Company.

The Company recorded legal expenses of approximately $0.4 million, $0.8 million
and $1.1 million during the years ended January 31, 1998, February 1, 1997 and
February 3, 1996, respectively.

                                       19
<PAGE>   20
Item 4.  Submission of Matters to a Vote of Security Holders

         Inapplicable.

                                       20
<PAGE>   21
                                     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 4, 1996           11           7  7/8
                 August 3, 1996        16           8  1/2
                 November 2, 1996      13  1/2      9  1/2
                 February 1, 1997      12  1/2      8  3/4

                 May 3,1997            14  1/4     10
                 August 2, 1997        13  3/4      9  3/8
                 November 1, 1997      10  1/2      8
                 January 31, 1998       8  3/4      6  1/4
</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 230 record holders of the Common Stock as of April 30,
1998.

                                       21
<PAGE>   22
Item 6.  Selected Financial Data

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

<TABLE>
<CAPTION>
                                                            Fiscal Year
                                 1998           1997           1996           1995           1994
                                 ----           ----           ----           ----           ----
<S>                           <C>            <C>            <C>            <C>            <C>
Sales                         $ 297,505      $ 287,737      $ 283,475      $ 305,606      $ 275,125
Interest and Other
  Income                            290          1,007          2,936          2,289          3,073

Cost of sales, store
  occupancy and
  warehousing                   260,497        233,847        231,837        248,012        221,895
Selling and
  Administrative                 68,046         54,430         50,993         62,208         46,911
Depreciation and
  amortization                    5,809          5,707          5,415          5,176          3,986
Interest expense                  1,497          1,115          1,279            965            323
Write-off of impaired
  assets                          4,275           --             --             --             --
Closed store
  reserve (reversal)             (1,546)        (1,052)        (6,743)        18,865           (631)
Restructuring
  Charge (reversal)                 (88)        (3,865)        (2,051)          --            6,200
Income (loss) before
  income taxes                  (40,695)        (1,438)         5,681        (27,331)          (486)

Net Income (loss)               (48,650)          (860)         3,704        (19,380)          (210)

Per share data
  Basic earnings (loss)
    per share                 $   (9.20)     $    (.16)     $     .69      $   (3.60)     $   (.04)
  Diluted earnings (loss)
    per share                     (9.20)          (.16)           .69          (3.60)         (.04)

Weighted average common
  share and common share
  equivalents outstanding:
  Basic                           5,289          5,344          5,389          5,389          5,385
  Dilutive                        5,289          5,344          5,399          5,389          5,385
Percentage increase
  (decrease) in sales:
  Total stores                      3.4%           1.5%          (7.2)%         11.1%          14.3%
  Comparative stores               (5.9)%         (2.1)%         (3.3)%         (2.5)%         (0.6)%
</TABLE>


BALANCE SHEET DATA:
<TABLE>
<CAPTION>
                                       (dollars in thousands)
                                        at end of Fiscal Year
                          1998       1997       1996       1995       1994
                          ----       ----       ----       ----       ----
<S>                     <C>        <C>        <C>        <C>        <C>
Current assets          $103,291   $141,583   $150,574   $182,331   $180,210
Current liabilities       85,542     84,515     77,606    105,553     94,981
Working capital           17,749     57,068     72,968     76,778     85,229
Total assets             126,926    176,897    180,852    213,379    210,636
Long-term obligations      5,584      7,927     15,785     24,499     13,913
Stockholders' equity      35,800     84,455     87,461     83,327    101,742
</TABLE>

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

Control of Dart

Dart owns 52.3% of the outstanding common stock of Crown Books. Prior to the
Settlements Dart's voting stock, the Class B Common Stock, was beneficially
owned by Haft family members.

On April 9, 1998, Dart entered into the Merger Agreement with Richfood Holdings
and Acquisition Subsidiary pursuant to which Dart has agreed to become a wholly
owned subsidiary of Richfood Holdings. Pursuant to the terms of the Merger
Agreement, Richfood Holdings will (1) make the Offer for all of the issued and
outstanding shares of common stock at a price of $160.00 per share and (2) take
all steps necessary to cause Acquisition Subsidiary to merge with and into Dart
in a transaction in which Dart will become a wholly owned subsidiary of
Richfood Holdings. As a result of the Merger, Richfood Holdings will indirectly
own 52.3% of the outstanding Common Stock of Crown Books.

The Offer is subject to a number of customary conditions. The Merger is
subject to the tender in the offer of a majority of shares of common stock on a
fully diluted basis and to other customary conditions, including the receipt of
regulatory approvals and the absence of material adverse effects on the
business or financial conditions of Dart and its subsidiaries, taken as a whole
with certain limited exceptions. There can be no assurance that either the
Offer or the Merger will be consummated.

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 without limitation the consummation of the Merger, the
ability of the Company to open new stores and close other stores, the
sufficiency of recorded reserves for closed stores, uncertainties regarding the
availability of sufficient liquidity to continue operations, the ability of
the Company to renegotiate its existing credit arrangements or enter into new
arrangements, the effect of national and regional economic conditions and other
risks described from time to time in the Company's filings with the Securities
and Exchange Commission. 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.

During the last three years, the Company's business strategy has been to pursue
growth opportunities by opening new Super Crown Books stores. Realizing these
opportunities is dependent upon the successful performance of the superstores
and adequate liquidity. Adequate liquidity is dependent upon successfully
improving store performance, improving inventory turnover and reducing expenses.
There are serious concerns regarding the Company's ability to maintain 
adequate liquidity (see -- Liquidity and Capital Resources). 

In prior years Super Crown Books stores have generated higher sales at converted
locations. During the last five fiscal quarters, the new prototype superstores
have performed below the Company's expectations. New management of the Company
is making significant revisions to the design and layout of the new superstore
prototype which management believes will enhance its performance. After
considering the actual results achieved by the superstores, together with

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

liquidity constraints, the Company has significantly reduced its expansion
plans.

The Company intends to continue its practice of reviewing the profitability
trends and prospects of existing stores and may close or relocate under-
performing stores. The Company closed eleven Classic Crown Books stores and four
Super Crown Books stores during fiscal 1998. The Company anticipates closing
approximately three Classic Crown Books stores and one non-prototype Super Crown
Books stores during fiscal 1999.

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
significantly improve operating results.

Liquidity and Capital Resources

Cash and short-term instruments have historically been the Company's primary
source of liquidity. During the 52 weeks ended January 31, 1998 ("fiscal 1998"),
the Company borrowed under its revolving credit facility. All such borrowings
were repaid as of January 31, 1998 however, as of April 28, 1998, the Company
had borrowed $22.2 million under the credit facility. Cash, including short-term
instruments, decreased by $2,173,000 to $13,878,000 at January 31, 1998 from
$16,051,000 at February 1, 1997 primarily due to operating losses and capital
expenditures. The inventory return (discussed below) provided the cash to repay
the borrowings under the credit facility.

Operating activities provided $7,155,000 to the Company during fiscal 1998,
compared to using $8,936,000 during the 52 weeks ended February 1, 1997 ("fiscal
1997"). The cash was provided primarily by the merchandise inventory return.

The Company used $9,323,000 for investing activities during fiscal 1998 for
capital expenditures in new stores.

Financing activities used $5,000 of the Company's funds during fiscal 1998, for
the repurchase of treasury stock.

The Company's primary working capital and capital requirements relate to new
store openings, upgrading existing locations and investments in management
information systems. The Company believes that the net cash expenditures
incurred in opening a new store generally approximate $1.0 million, including
purchases of inventory, net of accounts payable, and the costs of store
fixtures and leasehold improvements, net of landlord contributions. During
fiscal 1999, the Company expects to open no more than five Super Crown Books
stores requiring cash expenditures of approximately $5.0 million. As of January
31, 1998 the Company entered into lease agreements for four of the stores to be
opened 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 $1.4 million in fiscal 1999.

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

Crown Books has suffered substantial declines in financial performance and
substantial deterioration of its business in recent years and is currently
exploring alternatives for maintaining adequate liquidity.  Negotiations are
under way with the Company's principal vendor to extend the payment schedule of
accounts payable due to the vendor, but no agreement has been reached. There
can be no assurance that the vendor will continue to ship inventory to Crown
Books or that there will not be further significant decline in Crown Books'
business and financial condition.

Under the terms and conditions of its revolving credit facility, Crown Book is
currently permitted to borrow up to a maximum of $25 million. As of April 28,
1998, Crown Books had borrowed $22.2 million under its credit facility and had
$2.8 million in availability. Crown Books is negotiating with its lenders
either to increase its borrowing capacity under its existing credit facility or
to enter into a new credit facility with increased borrowing capacity. 
Management of Crown Books believes that it will either amend its existing
facilities or enter a new credit facility in May 1998. There can be no
assurance, however, that Crown Books will succeed in its attempt to obtain a
new credit facility. If Crown Books is not successful in increasing its
borrowing availability or otherwise improving its liquidity, there can be no
assurance that Crown Books will have sufficient liquidity to operate its
business and remain a going concern. If the negotiations with the lenders and
the vendors are not successful and alternative financing sources are not
available, the Company will consider reorganization protection alternatives
under bankruptcy laws. The Company currently has no plans to liquidate. The
accompanying financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern.

As part of its effort to improve its inventory turns and improve liquidity, the
Company undertook an inventory returns initiative among other steps. Under the
inventory returns initiative, the Company returned approximately $25.0 million
of inventory after December 1997, in addition to its normal seasonal returns.
The Company's sales were severely impacted during this return, however the
return allowed the Company to replace older slower-selling merchandise with
newer faster-selling merchandise.

Funding of Settlements

Prior to January 31, 1998, Dart and certain of its subsidiaries finalized
settlements of certain litigation and certain related transactions with Herbert
H. Haft and Ronald S. Haft. As consideration for the settlements with Herbert
H. Haft and Ronald S. Haft, Dart paid Herbert H. Haft approximately $28 million
subsequent to January 31, 1998. Dart also made a $10 million loan to a
partnership owned by Herbert H. Haft and Ronald S. Haft, which loan is
personally guaranteed by Ronald S. Haft and is secured by the partnership's
interest in three shopping centers located in suburban Washington, D.C. and by
a one-half indirect interest

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

in an office building in Lanham, Maryland leased by a wholly-owned Dart
subsidiary Shoppers Food Warehouse Corp. ("Shoppers"). Dart paid substantially
all of this amount with loans from Trak Auto and Shoppers. In addition, certain
derivative litigation was dismissed with prejudice and Dart paid approximately
$3.5 million in attorney's fees to derivative plaintiffs' counsel with
approximately $0.5 million due in December 1998. The Company's portion of the
Settlements was approximately $0.8 million and was funded prior to January 31,
1998.

At January 31, 1998

Working capital decreased by $39,319,000 to $17,749,000 during the 52 weeks
ended January 31, 1998. The decrease was primarily due to funding operating
losses.

At February 1, 1997

Working capital decreased by $15,900,000 to $57,068,000 at February 1, 1997
compared to the same period one year ago. The decrease in working capital was
primarily due to capital expenditures, operating losses and the acquisition of
treasury stock as a result of the satisfaction of the RMH Judgment.

Results of Operations

Year Ended January 31, 1998 Compared to the Year Ended February 1, 1997

During fiscal 1998, the Company opened 26 Super Crown Books stores while closing
eleven Classic Crown Books stores and four Super Crown Books stores. At January
31, 1998, the Company had 179 stores, including 131 Super Crown Books stores.

Sales of $297,505,000 for fiscal 1998 (52 weeks) increased by $9,768,000 or 3.4%
compared to fiscal 1997 (52 weeks). The increase was primarily due to the 26 new
Super Crown Books stores opened during the year. Comparable sales (sales for
stores open for 13 months) decreased 5.9% for fiscal 1998. Sales for Super Crown
Books stores represented 83.9% of total sales for fiscal 1998 compared to 78.4%
of total sales for fiscal 1997. Super Crown Books sales of $249,655,000 for
fiscal 1998 increased 11.7% over sales for fiscal 1997. Sales for comparable
Super Crown Books stores, however, decreased 6.2% in fiscal 1998. Sales for
comparable classic Crown Books stores decreased 4.4% during fiscal 1998.

Interest and other income decreased by $717,000 during fiscal 1998 when compared
to fiscal 1997. The decrease was due to reduced interest income as a result of
decreased funds available for short-term investments.

Cost of sales, store occupancy and warehousing expenses as a percentage of sales
were 87.6% for fiscal 1998 compared to 81.3% for fiscal 1997. The increase was
primarily due to decreased gross margins as a result of increased promotional
discounts, increased purchases from wholesalers, increased reserves for books
returned to publishers and increased shrink. The increase was also due to higher
occupancy costs for new larger stores and the effect of the decline in

                                       26
<PAGE>   27
Item 7.  Management's Discussion and Analysis of Financial Condition And
         Results of Operations (Continued)

comparable store sales on occupancy costs, as a percentage of sales, in existing
stores.

Selling and administrative expenses as a percentage of sales were 22.9% for
fiscal 1998 compared to 18.9% for fiscal 1997. The increase was primarily due to
increased payroll and advertising costs and the continuing consulting services
for new management information systems, primarily the accounts payable and
merchandising system.

Depreciation and amortization expense increased $102,000 for fiscal 1998
compared to fiscal 1997. The increase was primarily due to an increase in fixed
assets for new Super Crown Books stores and to the amortization of computer
software.

Interest expense increased by $382,000 due to increased borrowings under the
revolving credit facility.

During fiscal 1998 the Company recorded a tax benefit of approximately $15.0
million and increased its valuation allowance for deferred income tax assets
$23.0 million. See Note 2 to the Consolidated Financial Statements.

The Company had a net loss of $48,650,000 in fiscal 1998 compared to a net loss
of $860,000 in fiscal 1997 primarily as a result of the decline in comparable
store sales and gross margins together with increasing store expenses, the
continuing cost associated with the implementation of new management information
systems, the increased advertising costs and the increase in the tax valuation
allowance.

Year Ended February 1, 1997 Compared to the Year Ended February 3, 1996

During fiscal 1997, the Company opened 27 Super Crown Books stores while closing
29 Classic Crown Books stores and two Super Crown Books stores. At February 1,
1997, the Company had 168 stores, including 109 Super Crown Books stores.

Sales of $287,737,000 for fiscal 1997 (52 weeks) increased by $4,262,000 or 1.5%
compared to fiscal 1996(53 weeks). The increase was primarily due to the 27 new
Super Crown Books stores opened during the year and the maturity of Super Crown
Books stores opened in fiscal 1996. Comparable sales (sales for stores open for
13 months) decreased 2.1% for fiscal 1997. However, comparable sales for the new
prototype superstore increased 5.1% during fiscal 1997. Sales for Super Crown
Books stores represented 78.4% of total sales for fiscal 1997 compared to 66.7%
of total sales for fiscal 1996. Super Crown Books sales of $225,543,000 for
fiscal 1997 increased 19.2% over sales for fiscal 1996. Sales for comparable
Super Crown Books stores, however, decreased 1.9% in fiscal 1997. Sales for
comparable classic Crown Books stores decreased 2.7% during fiscal 1997.

Interest and other income decreased by $1,929,000 during fiscal 1997 when
compared to fiscal 1996. The decrease was due to reduced interest income as a
result of decreased funds available for short-term investments.

                                       27
<PAGE>   28
Item 7.  Management's Discussion and Analysis of Financial Condition And
         Results of Operations (Continued)

Cost of sales, store occupancy and warehousing expenses as a percentage of sales
were 81.3% for fiscal 1997 compared to 81.8% for fiscal 1996. The decrease was
primarily due to increased gross margins as a result of taking advantage of
vendor discounts, an improvement in the sales mix and a change in the sales
discount policy and were partially offset by increased store occupancy costs.
Selling and administrative expenses as a percentage of sales were 18.9% for
fiscal 1997 compared to 18.0% for fiscal 1996. The increase was primarily due to
increased store and administrative payroll costs.

Depreciation expense increased $292,000 for fiscal 1997 compared to fiscal 1996.
The increase was primarily due to an increase in fixed assets as a result of new
Super Crown Books stores.

Interest expense decreased by $164,000 due to reduced interest expense for the
RMH Judgement as a result of its payment in August 1996. The decrease was
partially offset by interest on borrowings under the revolving credit facility.

During fiscal 1997, the Company reversed approximately $3,865,000 of its
restructuring reserve and approximately $1,052,000 of its closed store reserve.
The reversals resulted from (i) management's decision not to close certain
stores, (ii) stores that were closed under negotiated lease settlements that
were more favorable than expected and(iii) the postponement of certain store
closing dates. The remaining closed store and restructuring reserves relate to
83 stores with lease obligations primarily through the next three fiscal years.

The Company had a net loss of $860,000 in fiscal 1997 compared to net income of
$3,704,000 in fiscal 1996 as a result of the foregoing factors.

The Company has recorded a tax benefit of $578,000 in fiscal 1997 as compared to
income tax expense of $1,977,000 in fiscal 1996. In fiscal 1997, the effective
tax rate was 40.2% compared to 34.8% in fiscal 1996 due primarily to state
income tax benefits associated with the Company's net operating losses.

Year Ended February 3, 1996 Compared to the Year Ended January 28, 1995

During fiscal 1996, the Company opened 16 Super Crown Books stores while closing
38 Classic Crown Books stores and two Super Crown Books stores. These Super
Crown Books stores were closed as a result of opening larger stores in the same
area. At February 3, 1996, the Company had 172 stores, including 84 Super Crown
Books stores.

Sales of $283,475,000 for fiscal 1996 decreased by $22,131,000 or 7.2% compared
to fiscal 1995. The decrease is primarily due to the net decrease in the number
of stores as a result of the Company's continuing transition to the new
superstore concept. Comparable sales (sales for stores open for 15 months)
decreased 3.3% for fiscal 1996, however, comparable sales for the new prototype
superstore increased 11% during the 14 weeks ended February 3, 1996. Sales for
Super Crown Books stores represented 66.7% of total sales for fiscal 1996
compared to 54.7% of total sales for fiscal 1995. Super Crown Books sales of
$189,142,000 for fiscal 1996 increased 12.9% over the sales for fiscal 1995 and
sales for comparable Super Crown Books stores decreased 1.8%. Sales for
comparable classic Crown Books stores decreased 5.7% during fiscal 1996.

                                       28
<PAGE>   29
Item 7.  Management's Discussion and Analysis of Financial Condition And
         Results of Operations (Continued)

Interest and other income increased by $647,000 during fiscal 1996 when compared
to fiscal 1995. The increase is primarily due to higher interest rates on the
Company's short-term investments.

Cost of sales, store occupancy and warehousing expenses as a percentage of sales
were 81.8% for fiscal 1996 compared to 81.2% for fiscal 1995. The increases were
primarily due to higher occupancy costs associated with the Super Crown Book
store format and were partially offset by increased gross margins.

Selling and administrative expenses as a percentage of sales were 18.0% for
fiscal 1996 compared to 20.4% for fiscal 1995. The decrease was primarily due to
the prior year accruals for Robert M. Haft's judgment and legal costs. Excluding
these accruals, selling and administrative expenses as a percentage of sales
were 16.2% for fiscal 1995. The increase in selling and administrative expenses,
excluding the accruals, was primarily due to increased payroll and advertising
costs and costs associated with Crown Books' Executive Committee.

Depreciation expense increased $239,000 for fiscal 1996 compared to fiscal 1995.
The increase was primarily due to increased fixed assets for new Super Crown
Books stores, an upgrade in the point-of-sale register system and additional
computer hardware.

Interest expense increased by $314,000 primarily due to interest accrued on the
judgment against the Company in favor of Robert M. Haft.

The closed store reserve was reversed by $6,743,000 in fiscal 1996 compared to
an increase (expense) in such reserve of $18,865,000 in fiscal 1995. In
addition, the restructuring reserve was reversed by $2,051,000 in fiscal 1996.
The reversals in the store closing and restructuring reserves in fiscal 1996
resulted from (i) stores that were closed under negotiated lease settlements
that were more favorable than expected, (ii) the postponement of certain store
closings and (iii) management's decision not to close two stores that had been
scheduled for closing.

The Company had net income of $3,704,000 in fiscal 1996 compared to a net loss
of $19,380,000 in fiscal 1995 as a result of the foregoing factors.

The Company has recorded income tax expense of $1,977,000 in fiscal 1996 as
compared to tax benefit of $7,951,000 in fiscal 1995. In fiscal 1996, the
effective tax rate was 34.8% compared to (29.1)% in fiscal 1995 due primarily to
the $2,500,000 valuation recorded in the third quarter of fiscal 1995.

Internal Controls

During the year ended January 31, 1998, under its prior management team, Crown
Books implemented a new accounts payable/inventory system without the system
being completely tested and interfaced with the store systems. As a result of
implementation problems with the system, Crown Books has been unable to
determine an accurate and timely manner the purchases and amounts payable for
each vendor throughout the year. Additionally, reconciliations of certain key
general ledger accounts, including cash, accounts payable and inventory, were
not performed on a timely basis during the year and the adjustment to reconcile
the general ledger to the

                                       29
<PAGE>   30
Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations (Continued)

physical inventory at year-end was unusually high. Significant effort was
required in connection with the year-end financial statement closing process to
reconcile these accounts, determine the nature of any reconciling items and
record adjustments to correct errors or omissions to these accounts.

Since February 1998, Crown Books, under its new management, has invested a
substantial effort and made improvements in the controls and procedures relating
to the above mentioned items. To date these improvements have not resolved the
problems and efforts need to continue to enable Crown Books to produce accurate
financial data in a timely and efficient manner. As a result of the foregoing
issues, Crown Books' independent public accountants advised Crown Books that in
their view, there is a material weakness in Crown Books' internal control
structure. Management of Crown Books intends to continue its efforts to improve
internal control and procedures.

Year 2000

The Company is currently conducting a review of the impact of Year 2000 on its
information systems, as well as reviewing its impact on relationships with key
customers and vendors. Based on a preliminary review, the store systems will
need to upgrade to the latest version of the point-of-sale program, and some
stores will need new computer equipment to handle this upgrade. The general
ledger system seems to be ready to handle Year 2000, but ancillary and related
programs could need modification. Based on this review, a plan to ensure minimal
disruption to the Company operations will be developed. There can be no
certainty that there will be sufficient time to implement the plan by the Year
2000. Currently the aggregate costs associated with this program are estimated
at $600,000 for fiscal 1999.

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.

                                       30
<PAGE>   31
Item 8.  Financial Statements and Supplementary Data

<TABLE>
<CAPTION>
Financial Statements                                              Page
--------------------                                              ----
<S>                                                              <C>
       Report of Independent Public Accountants                   32

       Consolidated Balance Sheets                                33-34

       Consolidated Statements of Operations                      35

       Consolidated Statements of Stockholders' Equity            36

       Consolidated Statements of Cash Flows                      37-38

       Notes to Consolidated Financial Statements                 39-61
</TABLE>

                                       31
<PAGE>   32
                    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 31, 1998 and February 1, 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three fiscal years in the period ended January 31,
1998. 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 31, 1998 and February 1, 1997, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 31, 1998, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and is experiencing liquidity problems. These facts raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, in fiscal 1997
the Company changed its method of accounting for cash equivalents and in fiscal
1998 changed its method of accounting for purchased computer software costs.





                                                       ARTHUR ANDERSEN LLP

Washington, D.C.
April 28, 1998

                                       32
<PAGE>   33
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                           January 31,     February 1,
 ASSETS                                       1998            1997
                                              ----            ----
<S>                                        <C>             <C>
Current Assets:
  Cash and equivalents                     $  4,320        $  3,377
    Short-term instruments                    9,558          12,674
  Accounts receivable                         5,955           7,962
  Income taxes refundable                      --             3,802
  Merchandise inventories                    79,457         110,036
  Deferred income taxes                        --               830
  Prepaid income taxes                          584            --
  Other current assets                        3,417           2,902
                                           --------        --------
    Total Current Assets                    103,291         141,583
                                           --------        --------

Property and Equipment, at cost:
  Furniture, fixtures and equipment          37,420          36,033
  Leasehold improvements                     11,547          16,122
  Property under capital leases               1,187           1,187
                                           --------        --------
                                             50,154          53,342
Accumulated Depreciation and
  Amortization                               26,819          27,963
                                           --------        --------
                                             23,335          25,379

Deferred Income Taxes                          --             8,404

Other Assets                                    300           1,531
                                           --------        --------

Total Assets                               $126,926        $176,897
                                           ========        ========
</TABLE>

                 See notes to consolidated financial statements.

                                       33
<PAGE>   34
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                   January 31,       February 1,
 LIABILITIES AND STOCKHOLDERS' EQUITY                 1998              1997
                                                      ----              ----
<S>                                                <C>               <C>
Current Liabilities:
  Accounts payable, trade                          $  54,096         $  54,787
  Accrued expenses -
    Salaries and benefits                              3,960             3,290
    Taxes other than income                            3,814             4,011
    Other                                             21,299            18,916
  Current portion of reserve for
    closed stores and restructuring                    1,955             3,298
  Due to affiliate                                       418               213
                                                   ---------         ---------
    Total Current Liabilities                         85,542            84,515
                                                   ---------         ---------

Obligations Under Capital Leases                       1,725             1,684
                                                   ---------         ---------
Reserve for Store Closings and
  Restructuring                                        3,859             6,243
                                                   ---------         ---------
    Total Liabilities                                 91,126            92,442
                                                   ---------         ---------

Commitments and Contingencies

Stockholders' Equity:
  Common stock, par value $.01 per share;
    20,000,000 shares authorized, 5,612,611
    shares issued                                         56                56
  Paid-in capital                                     43,809            43,809
  Retained earnings (deficit)                         (2,609)           46,041
  Treasury stock, 324,138 and 323,638
    shares of common stock,
    at cost, respectively                             (5,456)           (5,451)
                                                   ---------         ---------
    Total Stockholders' Equity                        35,800            84,455
                                                   ---------         ---------


Total Liabilities and Stockholders'
  Equity                                           $ 126,926         $ 176,897
                                                   =========         =========
</TABLE>

                 See notes to consolidated financial statements.

                                       34
<PAGE>   35
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                Years Ended
                                              January 31,       February 1,       February 3,
                                                 1998              1997              1996
                                                 ----              ----              ----
                                              (52 weeks)        (52 weeks)        (53 weeks)
<S>                                           <C>               <C>               <C>
 Sales                                        $ 297,505         $ 287,737         $ 283,475
 Interest and other income                          290             1,007             2,936
                                              ---------         ---------         ---------
                                                297,795           288,744           286,411
                                              ---------         ---------         ---------

 Expenses:
   Cost of sales, store
     occupancy and warehousing                  260,497           233,847           231,837
   Selling and administrative                    68,046            54,430            50,993
   Depreciation and amortization                  5,809             5,707             5,415
   Interest expense                               1,497             1,115             1,279
   Write-off of impaired assets                   4,275              --                --
   Closed store charge (reversal)                (1,546)           (1,052)           (6,743)
   Restructuring charge (reversal)                  (88)           (3,865)           (2,051)
                                              ---------         ---------         ---------
                                                338,490           290,182           280,730
                                              ---------         ---------         ---------

Income(loss)before income taxes                 (40,695)           (1,438)            5,681

Income taxes (benefit)                          (15,016)             (578)            1,977
Valuation allowance for deferred
  tax assets                                     22,971              --                --
                                              ---------         ---------         ---------

Net income (loss)                             $ (48,650)        $    (860)        $   3,704
                                              =========         =========         =========

Per share data:
  Basic earnings (loss) per share             $   (9.20)        $    (.16)        $     .69
  Diluted earnings (loss) per share               (9.20)             (.16)              .69

Weighted average common share and
  common share equivalents outstanding
  Basic                                           5,289             5,344             5,389
  Dilutive                                        5,289             5,344             5,399
</TABLE>

                 See notes to consolidated financial statements.

                                       35
<PAGE>   36
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                                                              Years Ended
                                             January 31,      February 1,      February 3,
                                                1997             1997             1996
                                             (52 weeks)       (52 weeks)       (53 weeks)
<S>                                          <C>              <C>              <C>
Common Stock:
  Balance, beginning and end of period        $     56         $     56         $     56
                                              ========         ========         ========


Note Receivable, Net of Discount:
  Balance, beginning of period                $   --           $   (115)        $   (103)
    Acquisition of treasury shares                --                115             --
    Amortization of discount                      --               --                (12)
                                              --------         --------         --------
  Balance, end of period                      $   --           $   --           $   (115)
                                              ========         ========         ========

Paid-in Capital:
  Balance, beginning and end of period        $ 43,809         $ 43,809         $ 43,809
                                              ========         ========         ========

Unrealized Investment Losses:                 $   --           $   --           $     (6)
                                              ========         ========         ========

Retained Earnings:
  Balance, beginning of period                $ 46,041         $ 46,901         $ 43,197
    Net income (loss)                          (48,650)            (860)           3,704
                                              --------         --------         --------
  Balance, end of period                      $ (2,609)        $ 46,041         $ 46,901
                                              ========         ========         ========

Treasury Stock:
  Balance, beginning of period                $ (5,451)        $ (3,184)        $ (3,184)
    Acquisition of treasury shares                  (5)          (2,267)            --
                                              --------         --------         --------
  Balance, end of period                      $ (5,456)        $ (5,451)        $ (3,184)
                                              ========         ========         ========

Shares of Common Stock Outstanding:
  Balance, beginning of period                   5,289            5,389            5,389
    Acquisition of treasury shares                --               (100)            --
                                              --------         --------         --------
  Balance, end of period                         5,289            5,289            5,389
                                              ========         ========         ========
</TABLE>

                 See notes to consolidated financial statements.

                                       36
<PAGE>   37
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                Years Ended
                                               January 31,      February 1,     February 3,
                                                  1998             1997            1996
                                                  ----             ----            ----
                                               (52 weeks)       (52 weeks)      (53 weeks)
<S>                                           <C>              <C>              <C>
Cash Flows from Operating Activities:
  Net income (loss)                            $(48,650)        $   (860)        $  3,704
  Adjustments to reconcile net income
    (loss) to net cash used in
    operating activities:
    Depreciation and amortization                 5,809            5,707            5,415
    Reversal of closed stores
      and restructuring charge                   (1,634)          (4,917)          (8,794)
    Valuation allowance for deferred
      tax assets                                 22,971             --               --
    Provision for impaired assets                 4,275             --               --
    Interest in excess of capital
      loan payments                                  41             --               --
    Loss on disposal of fixed assets              1,205             --               --
  Changes in assets and liabilities:
    Accounts receivable                           2,825           (4,021)             601
    Merchandise inventories                      30,579           (7,844)             241
    Prepaid and refundable income taxes           3,218           (2,331)          (1,471)
    Other current assets                           (515)          (2,261)            (272)
    Other assets                                    (25)          (1,444)             (30)
    Accounts payable, trade                        (691)          12,479          (13,387)
    Accrued expenses                              2,856            9,861           (5,668)
    Payment to Robert M. Haft                      --            (14,749)            --
    Due to affiliate                                205             (212)             315
    Income taxes payable                           --               --             (5,046)
    Deferred income taxes                       (13,737)           4,521            4,873
    Reserve for closed stores
      and restructuring                          (1,577)          (2,865)          (3,426)
                                               --------         --------         --------
      Net cash provided by (used in)
        operating activities                   $  7,155         $ (8,936)        $(22,945)
                                               --------         --------         --------

Cash Flows from Investing Activities:
  Capital expenditures                         $ (9,323)        $ (7,800)        $ (6,816)
  Purchases of United States Treasury
    Bills                                          --               --            (51,497)
  Dispositions of United States
    Treasury Bills                                 --              2,009           49,494
  Purchases of United States
    Treasury Notes                                 --               --             (2,200)
  Dispositions of United
    States Treasury Notes                          --               --             19,200
  Sales of corporate notes                         --               --              2,750
</TABLE>

                                       37
<PAGE>   38
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS, (Continued)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                         Years Ended
                                                          January 31,     February 1,       February 3,
                                                             1998            1997              1996
                                                             ----            ----              ----
                                                          (52 weeks)      (52 weeks)        (53 weeks)
<S>                                                      <C>              <C>              <C>
Cash Flows from Investing Activities
  (continued):
  Maturities of United States
    Agency Notes                                          $   --           $   --           $    950
  Maturities of municipal securities                          --                550             --
  Sales of municipal securities                               --              3,612           10,216
                                                          --------         --------         --------
      Net cash provided by(used in)
        investing activities                              $ (9,323)        $ (1,629)        $ 22,097
                                                          --------         --------         --------

Cash Flows from Financing Activities:
  Principal payments under
    capital lease obligations                             $   --           $   --           $    (24)
  Purchase of treasury stock                                    (5)            --               --
  Payment to Robert M. Haft for
    treasury shares                                           --             (2,146)            --
                                                          --------         --------         --------
      Net cash used in financing
        activities                                        $     (5)        $ (2,146)        $    (24)
                                                          --------         --------         --------

Net Increase (Decrease) in
  Cash and Equivalents                                    $ (2,173)        $(12,711)        $   (872)
Cash and Equivalents at Beginning
  of Year (Note 1)                                          16,051           28,762           29,634
                                                          --------         --------         --------
Cash and Equivalents at End
  of Year (Note 1)                                        $ 13,878         $ 16,051         $ 28,762
                                                          ========         ========         ========

Supplemental Disclosures of Cash Flow Information:
  Cash paid (refunded) during the year for:
    Interest                                              $  1,497         $  2,016         $    377
    Income taxes (refund)                                   (4,445)          (2,755)           3,129

Supplemental Disclosure of Non Cash Activities:
  Write-off book value of fixed assets
  to restructuring and closed store
  reserves                                                $  4,956         $    522         $    661
</TABLE>

                 See notes to consolidated financial statements.

                                       38
<PAGE>   39
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

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 discount specialty retail book
stores in the United States. The stores offer books, newspapers, magazines and
related accessories.

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.

Risk and Liquidity Factors

Crown Books has experienced recurring losses and decreased in comparable store
sales over the last past several years. Additionally, as of January 31, 1998,
the Company has current liabilities of approximately $85 million and current
assets excluding merchandise inventories of $24 million. Under the terms of its
credit facility, the Company is currently permitted to borrow up to a maximum of
$25 million. As of April 28, 1998, $22.2 million dollars was borrowed under this
facility. As a result of the recurring losses and the limited borrowing capacity
currently available, the Company is experiencing liquidity problems that raise
substantial doubt about its ability to continue as a going concern.

The Company's new management team is negotiating with the lenders to either
increase its borrowing capacity under its existing credit facility or to enter
into a new credit facility with increased borrowing capacity and expect to
obtain commitments for these facilities in May 1998. Additionally, management
has developed a plan to stabilize store sales and reduce operating costs and
intends to negotiate extended payment terms with its vendors. While management
believes all these actions will enable the Company to meet its obligations as
they become due, there can be no assurance that the Company will be successful
in obtaining the additional financing, extending vendor terms and implementing
its operating plan in a manner that ensures the Company will have sufficient
liquidity to operate its business and remain a going concern. If the
negotiations with the lenders and the vendors are not successful and
alternative financing sources are not available, the Company will consider
reorganization protection alternatives under bankruptcy laws. The Company
currently has no plans to liquidate. The financial statements do not include
any adjustments related to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.

                                       39
<PAGE>   40
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996


Fiscal Year

The Company's fiscal year ends on the Saturday closest to January 31. The fiscal
year ended February 3, 1996 included 53 weeks and all other fiscal years
presented include 52 weeks.

Cash and Equivalents

Effective in fiscal 1997, and applied retroactively to all years presented
herein, the Company changed its accounting policy to include only investments
with a maturity of three months or less as cash equivalents. The impact of this
change was to reclassify amounts previously presented in the accompanying
consolidated balance sheets and statements of cash flows. Cash equivalents
include short-term instruments which are comprised of United States Treasury
Bills and money market funds.

Fair Value of Financial Instruments

The fair values of current financial assets and liabilities are approximately
the reported carrying amounts.

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. 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 52 weeks ended January 31, 1998, the Company
recorded amortization of purchased computer software of approximately $530,000.
The effect of capitalizing purchased computer software was to reduce the
Company's reported net loss in fiscal 1998 by approximately $1,200,000 ($.23 per
share). 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 financed (primarily buildings) through asset based
financing arrangements are depreciated over the lives of the leases. Accumulated
amortization for assets under capital lease was $480,000, $441,000 and $402,000,
as of January 31, 1998, February 1, 1997 and February 3, 1996, respectively.

                                       40
<PAGE>   41
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996


Preopening Expenses

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

Long Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value should be assessed. Impairment is
measured by comparing the carrying value to the estimated undiscounted future
cash flows expected to result from the use of the assets and their eventual
disposition. Crown Books has determined that as of January 31, 1998, there was
an impairment in the carrying value of certain long-lived assets and recorded
approximately a $4.3 million reserve for those assets.

Advertising Expenses

The Company records the costs of advertising as expense as the costs are
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 Bills and 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 related vendors.

Earnings Per Share

The computation of diluted earnings per share is based on the weighted average
number of common shares and common share equivalents outstanding during the
year. The Company adopted statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings Per Share, in the fourth quarter of fiscal 1998 and has
restated all previously presented earnings per share data. Stock options
represent the only difference between basic and diluted earnings per share,
however they are anti-dilutive for all periods presented.

                                       41
<PAGE>   42
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996


New Accounting Standards

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
Reporting Comprehensive Income. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt SFAS No.
130 in the first quarter of fiscal 1999 and will provide the necessary
disclosures.

Reclassifications

Certain reclassifications have been made to prior year statements to conform to
the current year presentation.

NOTE 2 - INCOME TAXES

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 loss carry forwards,
to the extent that realization of such benefits is more likely than not.

The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                (dollars in thousands)
                                                      Fiscal Year
   Current:                                 1998         1997         1996
                                            ----         ----         ----
<S>                                      <C>          <C>          <C>
     Federal                              $    -       $ (4,026)    $ (2,715)
     State                                     -         (1,020)        (474)
                                          --------     --------     ---------
                                               -         (5,046)      (3,189)
   Deferred:
     Federal                               (11,737)       3,433        4,191
     State                                  (3,279)       1,035          975
     Valuation allowance                    22,971          -            -
                                          --------     --------     ---------
                                          $  7,955     $   (578)    $  1,977
                                          ========     ========     =========
</TABLE>

                                       42
<PAGE>   43
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996


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

<TABLE>
<CAPTION>
                                                                 (dollars in thousands)
                                                                       Fiscal Year
                                                         1998              1997              1996
                                                         ----              ----              ----
<S>                                                   <C>              <C>                <C>
    Federal statutory rate                                34.0%             34.0%             34.0%
    Income taxes at Federal
      statutory rate                                  $(13,836)         $   (489)         $  1,932
    Increase(decrease)in taxes resulting from:
        State income taxes, net of
          Federal income tax benefit                    (1,272)              (76)              194
        Tax exempt municipal bond income                  --                 (38)             (191)
        Valuation allowance                             22,971              --                --
        Other                                               92                25                42
                                                      --------          --------          --------
    Income tax provision (benefit)                    $  7,955          $   (578)         $  1,977
                                                      ========          ========          ========

    Effective tax rate                                     N/A              40.2%             34.8%
                                                      ========          ========          ========
</TABLE>

The tax effect of each type of temporary difference and carry forward that
generates a significant portion of deferred tax assets is as follows:

<TABLE>
<CAPTION>
                                                             (dollars in thousands)
                                                           January 31,       February 1,
     Gross deferred Tax Assets:                               1998              1997
                                                              ----              ----
<S>                                                       <C>              <C>
        Capitalized leases treated as
          operating leases for tax purposes                 $    228         $    212
        Uniform capitalization of inventory                      579              866
        Reserves for closed stores and restructuring           1,811            3,098
        Straight line rent adjustments                         1,276              719
        Accrued legal expenses                                  --                222
        Depreciation                                           1,877            1,759
        Self-insurance accrual                                   575              252
        Unrealized investment losses                            --                  4
        Capital loss carryforward                                195              204
        Construction reimbursements                              575             --
        Reserve for inventory                                  1,775             --
        Bad debt reserve                                         457             --
        Sick and vacation accrual                                351              123
        Other                                                    360              234
        Net operating loss carryforward                       15,112            3,641
        Alternative minimum tax credit carryforward              300              400
        Valuation allowance                                  (25,471)          (2,500)
                                                            --------         --------
          Net deferred tax assets                           $   --           $  9,234
                                                            ========         ========
</TABLE>

During fiscal 1998 the Company generated a $31.9. million net operating loss
carryforward. During fiscal 1997, the Company generated a $24.0 million net
operating loss of which approximately $14.0 million was carried back to fiscal

                                       43
<PAGE>   44
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996


1994 and fiscal 1995. As a result, the Company has a cumulative net operating
loss carryforward of approximately $41.9 million which will expire in 2013. In
addition, the Company has generated an alternative minimum tax credit of
approximately $0.3 million, which can be used to offset future regular tax
liabilities. The Company has approximately $0.5 million capital loss
carryforwards that will expire in 2011.

Realization of the net deferred tax assets is dependent upon the reversal of
taxable temporary differences during periods when the Company has taxable income
or carryback of current losses against taxable income generated in the carryback
period.

During fiscal 1998, due to continuing net operating losses the Company concluded
that it was more likely than not that the Company would not realize deferred
income tax benefits of approximately $23.0 million as a result of ongoing net
operating losses. Accordingly, the Company increased its valuation allowance for
deferred tax assets from $2.5 million to $25.5 million. The Company will
continue to evaluate the need for the valuation allowance for deferred tax
assets.

Under the provisions of the Tax Reform Act of 1996 the utilization of the
Company's net operating loss carryforwards may be limited, if substantial
changes in stock ownership takes place.

NOTE 3 - RESTRUCTURING AND CLOSED STORE RESERVES

Restructuring Reserves

In fiscal years 1993 and 1994, the Company determined that a number of the
smaller Classic Crown Books stores were not competitive in an industry moving to
larger stores. Consequently, the Company recorded restructuring charges totaling
$12,800,000 during these two years for the anticipated costs for closing certain
of the smaller Classic Crown Book stores and, relocating, expanding and
converting certain of such stores to the Super Crown Books concept. These costs
primarily represent unrecoverable lease obligations (net of estimated sublease
income) and the book value of leasehold improvements at the estimated closing
date. The activity in the restructuring reserves during the last three fiscal
years was as follows:

<TABLE>
<CAPTION>
                                                     (dollars in thousands)
                                             1998             1997            1996
                                             ----             ----            ----
<S>                                       <C>              <C>              <C>
Restructuring Reserve,
  beginning of year                       $  1,507         $  7,025         $ 10,515
Less: Payments and charges                    (426)          (1,653)          (1,439)
      Reversal of reserves, net                (88)          (3,865)          (2,051)
                                          --------         --------         --------
Restructuring Reserve, end of year        $    993         $  1,507         $  7,025
                                          ========         ========         ========
</TABLE>

During the last three fiscal years, the Company reversed portions of the
restructuring reserve as a result of (i) management decisions not to close
certain stores that had been scheduled for closing, (ii) stores were closed
under negotiated lease settlements that were more favorable than expected, and
(iii) the postponement of certain store closings.

                                       44
<PAGE>   45
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996


The remaining restructuring reserve relates to nine stores, of which four have
been closed as of January 31, 1998, with lease obligations ranging from one to
84 months. The lease obligation allocable to related party leases is
approximately $485,000. The restructuring reserve is expected to be utilized as
follows:

<TABLE>
<CAPTION>
                                  (dollars in thousands)
                               Lease               Leasehold
           Fiscal           Obligations          Improvements
            Year          (Cash Outflows)         & Fixtures             Total
            ----          ---------------         ----------             -----
<S>                       <C>                    <C>                   <C>
            1999             $     223             $       -           $     223
            2000                   347                     4                 351
            2001                   100                     -                 100
            2002                    61                     -                  61
            2003                    61                     -                  61
            2004-2005              197                     -                 197
                             ---------             ---------           ---------
            Total            $     989             $       4           $     993
                             =========             =========           =========
</TABLE>

Since the recorded restructuring reserve represents an estimate based upon
anticipated store closing dates and the book value of the leasehold improvements
at the time a store is closed, the actual amounts of costs associated with store
closings may be different from the reserve.

Store Closing Reserve

The Company continually evaluates its store operations and the need to close
stores that do not perform satisfactorily. The Company recognizes store closing
costs when management decides to close a store. The costs primarily represent
unrecoverable lease obligations (net of estimated sublease income) and the book
value of leasehold improvements at the estimated closing date. The activity in
the closed store reserves during the last three fiscal years is as follows:

<TABLE>
<CAPTION>
                                                         (dollars in thousands)
                                                 1998              1997            1996
                                                 ----              ----            ----
<S>                                            <C>              <C>              <C>
Closed Store Reserve, beginning of year        $  8,034         $ 10,850         $ 20,241
Less: Payments and charges                       (1,667)          (1,764)          (2,648)
      Reversal of reserves, net                  (1,546)          (1,052)          (6,743)
                                               --------         --------         --------
Closed Store Reserve, end of year              $  4,821         $  8,034         $ 10,850
                                               ========         ========         ========
</TABLE>

During the last three fiscal years, the Company reversed portions of the closed
store reserve as a result of (i) management decisions not to close certain
stores that had been scheduled for closing, (ii) stores were closed under
negotiated lease settlements that were more favorable than expected, and (iii)
the postponement of certain store closings.

The remaining closed store reserve relates to 41 stores, of which 12 have been
closed as of January 31, 1998, with lease obligations ranging from one to 71
months. The lease obligation allocable to related party leases is approximately
$582,000. The closed store reserve is expected to be utilized as follows:

                                       45
<PAGE>   46
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996



<TABLE>
<CAPTION>
                                  (dollars in thousands)
                                Lease             Leasehold
          Fiscal             Obligations         Improvements
           Year            (Cash Outflows)        & Fixtures            Total
           ----            ---------------        ----------            -----
<S>                        <C>                   <C>                  <C>
           1999               $   1,193            $    405            $  1,598
           2000                   1,386                 136               1,522
           2001                     890                 101                 991
           2002                     470                  45                 515
           2003                     109                 -                   109
           2004-2005                 86                 -                    86
                              ---------            --------            --------
           Total              $   4,134            $    687            $  4,821
                              =========            ========            ========
</TABLE>

Since the recorded closed store reserve represents an estimate based upon
anticipated store closing dates and the book value of the leasehold improvements
at the time the store is closed, the actual costs are subject to change and may
be different from the reserve. The Company will continue to evaluate the
performance and future viability of its remaining stores and may close
additional stores. The Company has not recorded reserves for any such future
possible store closings.

NOTE 4 - TRANSACTIONS WITH AFFILIATES

Dart Group Corporation ("Dart") owns 52.3% of the Crown Books outstanding common
stock. Dart provides certain services relating to management, general and
administrative functions and charges the Company using the methods and bases
described herein.

Some 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. 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 monthly 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 or were for matters related to all of
Dart's affiliated companies and were allocated on a judgmental basis by
management. 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.

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

The following table summarizes the intercompany transactions:

                                       46
<PAGE>   47
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996


<TABLE>
<CAPTION>
                                           (dollars in thousands)
                                                 Fiscal Years
                                          1998       1997         1996
                                          ----       ----         ----
<S>                                    <C>         <C>         <C>
   Due To Affiliate,
     Beginning of Year                 $    213    $    425    $     92
                                       --------    --------    --------
   Direct Expense Charges -
     Rentals (Note 7)                       381         294         275
     Salaries                             2,126       1,846       1,669
     Legal, rentals and other             5,453       5,683       5,110
                                       --------    --------    --------
                                          7,960       7,823       7,054
                                       --------    --------    --------

  Payments                               (7,755)     (8,035)     (6,721)
                                       --------    --------    --------

  Due To Affiliate, End of Year        $    418    $    213    $    425
                                       ========    ========    ========
</TABLE>

All transactions with Dart included above are made free of interest and under
current payment terms that, in management's opinion, are comparable to those
with unrelated parties. The average balances of amounts due to affiliate were
$236,000, $188,000 and $553,000 for fiscal 1998, 1997, and 1996, respectively.

NOTE 5 - CREDIT AGREEMENT

On September 12, 1996, the Company entered into a revolving credit facility with
a finance company to borrow up to $50.0 million. While the Company's tangible
net worth is less than $70.0 million, the Company is limited to borrowing a
maximum of $25.0 million under the current terms of the revolving credit
facility. As of January 31, 1998 the Company's tangible net worth was $35.8
million. Outstanding borrowings during fiscal 1998 and fiscal 1997 were paid-
off as of January 1, 1998 and 1997, respectively. The maximum borrowings
outstanding at any one time during the 52 weeks ended January 31, 1998 were
$22,148,000. The average borrowings and weighted average interest rate for the
52 weeks ended January 31, 1998 were $10,061,000 and 8.5%. The Company intends
to use proceeds from draw-downs under the credit facility for working capital
and other corporate purposes. The credit facility 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% per annum 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

                                       47
<PAGE>   48
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996


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. The Company had $25.0 million available for
borrowing at January 31, 1998.

The Company may need to increase its borrowing under its revolving credit
facility, though its ability to do so is subject to conditions contained in the
loan agreement that the Company does not meet. 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
thereafter, in addition to other covenants. Crown Books is negotiating with its
lenders either to increase its borrowing capacity under its existing credit
facility or to enter into a new credit facility with increased borrowing
capacity. Management of Crown Books believes that it will either amend its
existing facilities or enter a new credit facility in May 1998. There can be no
assurance, however, that Crown Books will succeed in its attempt to obtain a new
credit facility.

NOTE 6 - BOARD OF DIRECTORS

In January 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.

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 were the subject of disputes between the Chairman
of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and the then
President and Chief Operating Officer of Dart, Ronald S. Haft. In October 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 H. Haft and Ronald S.
Haft concerning issues involving Dart and Crown Books were extensive.
Accordingly, the respective Executive Committees 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 was then

                                       48
<PAGE>   49
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996


a party. The Executive Committee remains involved in the day-to-day affairs of
Dart. Its continuing role is dependent upon future developments.

Members of the Executive Committee are compensated at a 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, were
compensated at a salary rate of $250 per hour plus reimbursement of expenses.
Compensation paid by Dart and its subsidiaries, including the Company, to
members of the respective Executive Committees for their services on those
committees totaled $1,137,000, $1,299,000 and $1,263,000 in fiscal 1998, 1997
and 1996, respectively ($379,000, $423,000 and $421,000 paid by the Company in
fiscal 1998, 1997 and 1996, respectively). There were no fees paid to the
Special Litigation Committee in fiscal 1998, 1997 and 1996.

NOTE 7 - LITIGATION

Robert M. Haft Litigation

On August 21, 1996, the Company paid approximately $16,895,000 (including
interest of $1,407,000) for satisfaction of a final judgement against the
Company in litigation brought by Robert M. Haft (the "RMH Judgment"). The
Company accrued approximately $13,342,000 of the RMH Judgment in fiscal 1995 and
accrued interest monthly at rates set forth in the RMH Judgment. Approximately
$2,146,000 (plus interest) of the RMH Judgment was paid to Robert M. Haft for
100,000 shares of common stock of Crown Books. The Company recorded the purchase
of the shares as treasury stock. The Company has filed a lawsuit against Herbert
H. Haft to recover these amounts.

Resolution of Haft and Related Litigation

The litigation discussed below involving Dart, its affiliates, including Crown
Books, and members of the Haft family settled prior to January 31, 1998. On
February 5, 1998, Dart closed the settlement agreement with Herbert H. Haft (the
"HHH Settlement") and a Second Supplemental Settlement Agreement with Ronald S.
Haft ("Second Supplemental Agreement"). The settlements with the various Haft
family members are referred to as the "Settlements". As part of the HHH
Settlement, Herbert H. Haft (i) sold to Dart all of his shares of, and options
to purchase, Dart Class A Common Stock, and his capital stock of Dart's
subsidiaries Crown Books and Trak Auto Corporation ("Trak Auto"),(ii) resigned
from all of his positions with Dart and its subsidiary corporations, (iii)
relinquished his claim to voting control of Dart, and (iv) terminated his
employment agreement with Dart. In addition, all outstanding litigation and
disputes between Dart and Herbert H. Haft were resolved. As consideration for
the HHH Settlement, Dart paid Herbert H. Haft approximately $28.0 million at the
closing. An accrual for the HHH Settlement of approximately $28.0 million has
been reflected in Dart's Consolidated Financial Statements. Subsequent to
January 31, 1998, in connection with the closing of the Settlements, Dart also
made a $10 million loan to a partnership owned by Ronald S. Haft, the proceeds

                                       49
<PAGE>   50
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

of which were used to repay a $10 million note to Herbert H. Haft. Consummation
of the Settlements also means that all litigation (discussed below) between Dart
and members of the Haft family has been settled and dismissed, and the Company
is no longer subject to a Standstill Order (discussed below) previously imposed
by the Delaware Court of Chancery.

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. ("CPI"),
Combined Properties Limited Partnership and Capital Resources Limited
Partnership. The suit was brought derivatively and names as nominal defendants
Dart, Trak Auto, Crown Books, Shoppers Food Warehouse Corp. ("Shoppers"), a
wholly-owned subsidiary of Dart, and other affiliated companies. The complaint,
as amended on January 12, 1995, alleged waste, breach of fiduciary duty,
violation of securities laws and entrenchment in connection with various lease
agreements between the CPI defendants and Dart and its subsidiaries, the
termination of Robert M. Haft, the compensation paid to Ronald S. Haft and
Herbert H. Haft, the employment agreement entered into by Ronald S. Haft and
Dart on August 1, 1993 (the "RSH Employment Agreement"), the sale of 172,730
shares of Class B Common Stock by Herbert H. Haft to Ronald S. Haft, and the
compensation paid to the Executive Committee. Plaintiffs sought 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 January 1994, a Special Litigation Committee consisting of two outside,
independent directors of Dart, Crown Books 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 the derivative lawsuit. (After the death of one
member in December 1994, the Special Litigation Committee has consisted of one
director.) In September 1994, the Special Litigation Committee moved for
dismissal of certain claims in the derivative lawsuit and for realignment of the
parties to permit Dart to prosecute other claims in the derivative lawsuit.
Thereafter, the Special Litigation Committee amended its motion and advised the
court that it had instituted certain lawsuits concerning Dart related party real
estate transactions, and was considering asserting additional claims, certain of
which were subsequently asserted. See the Lawsuit Against Herbert H. Haft
Concerning Haft-Owned Real Estate, described below. The Court did not act upon
the amended motion.

In September 1994, Jolien Lou, a purported shareholder of Crown Books, 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 G. Schafran and Bonita A. Wilson.  The suit
was brought derivatively and named Crown Books as nominal defendant.  The
complaint, as amended on February 24, 1995, alleges waste and breach of

                                       50
<PAGE>   51
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

fiduciary duty in connection with the termination of Robert M. Haft from his
position at Crown Books in 1993 and in connection with the management of Crown
Books. The amended complaint also alleges legal malpractice against a lawyer
advising Dart at that time. Plaintiff seeks unspecified damages incurred by
Crown Books, and costs and attorneys' fees. Ronald S. Haft and Glenn E. Hemmerle
were dismissed without prejudice from this lawsuit. The amended complaint does
not name as a defendant H. Ridgely Bullock, who died subsequent to the filing of
the original complaint. Crown Books and other defendants filed a motion to
dismiss this lawsuit.

As a result of the Settlements, these derivative lawsuits have been dismissed
with prejudice (except for the legal malpractice claim which was dismissed
without prejudice) and Dart paid approximately $3.5 million in attorney's fees
to derivative plaintiffs' attorneys.

Herbert H. Haft Proxy Litigation

In connection with Herbert H. Haft's sale of 172,730 shares of Class B Common
Stock to Ronald S. Haft on July 28, 1993 (the "Stock Sale Agreement"), Ronald S.
Haft purportedly granted Herbert H. Haft an irrevocable proxy (the "Proxy") to
vote these shares of stock "to the same extent and with the same effect as
Ronald S. Haft might or could do under any applicable laws or regulations
governing the rights and powers of shareholders of Dart," until Herbert H.
Haft's death or incapacitation. On June 30, 1995, Ronald S. Haft sent a letter
to Herbert H. Haft purportedly revoking this proxy.

On July 18, 1995, Ronald S. Haft filed a lawsuit against Herbert H. Haft and,
nominally, Dart in the Delaware Court of Chancery for New Castle County for
Herbert H. Haft's alleged breach of contract and breach of fiduciary duties to
Ronald S. Haft and to Dart in connection with the Proxy (Ronald S. Haft v.
Herbert H. Haft, et al., Civ. A. No. 14425). In this action, Ronald S. Haft
sought a declaration that the Proxy was revocable or would be revocable under
certain conditions, as well as costs and attorneys' fees. Ronald S. Haft also
requested that the court require Dart to refuse to recognize the validity of the
Proxy. On August 9, 1995, Herbert H. Haft filed an Answer and Counterclaim
denying liability and requesting rescission of the Stock Sale Agreement because
of Ronald S. Haft's alleged breach of contract and other grounds. On September
25, 1995, Dart filed its answer in this action. Both Ronald S. Haft and Herbert
H. Haft moved for summary judgment in this lawsuit. On November 14, 1995, the
court denied Ronald S. Haft's motion for summary judgment; Herbert H. Haft's
motion for summary judgment was not acted upon.

In October 1995, Dart and its subsidiaries and Ronald S. Haft entered into a
settlement of certain litigation and other related transactions (collectively
the "RSH Settlement"). As part of the RSH Settlement Dart purchased from Ronald
S. Haft the 172,730 shares of Class B Common Stock that were subject to the
Proxy and placed the shares in treasury.

                                       51
<PAGE>   52
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

As a result of the Settlements, this litigation has been dismissed with
prejudice.

Challenge to RSH Settlement by Herbert H. Haft

On November 6, 1995, Herbert H. Haft filed a lawsuit captioned Herbert H. Haft
v. Dart Group Corporation, et al., Del. Ch., Civ. A. No. 14685, in the Delaware
Court of Chancery for New Castle County naming as defendants Dart, all of its
directors (except Herbert H. Haft), Robert M. Haft, Gloria G. Haft and Linda G.
Haft (collectively, "RGL"), John L. Mason, Ellen V. Sigal and Michael Ryan.
Herbert H. Haft sought a judgment (i) declaring the RSH Settlement unlawful,
hence null and void; (ii) declaring either that 172,730 shares of Class B Common
Stock belong to him were wrongfully sold by Ronald S. Haft to Dart, and that
Herbert H. Haft is entitled to restitution of such shares or, alternatively,
that his purportedly irrevocable proxy on the 172,730 shares continues to be
valid; (iii) declaring that Herbert H. Haft retains voting control of Dart or,
at a minimum, 34.55% of Dart's voting power; (iv) declaring that the Trust
Shares may not be lawfully voted; and (v) declaring that defendants John L.
Mason, Ellen V. Sigal and Michael Ryan are not duly elected directors of Dart.

On December 5, 1996, Herbert H. Haft filed a motion for partial summary judgment
in which he asserted two arguments based upon Section 160(c) of the Delaware
General Corporation Law. Section 160(c) provides that the shares of capital
stock "belonging to" a corporation are not entitled to vote. Herbert H. Haft
maintained that (i) notwithstanding Section 160(c), the 172,730 Class B shares
that Dart purchased in the RSH Settlement on October 6, 1995 do not "belong to"
Dart and are still subject to the Proxy, and (ii) Section 160(c) does not permit
the Trust Shares to be voted because those shares "belong to" Dart, not Ronald
S. Haft. Dart opposed this motion for partial summary judgment and, on March 14,
1997, the Delaware Court of Chancery denied Herbert H. Haft's motion in its
entirety.

As a result of the Settlements, all claims in this litigation against or on
behalf of Dart have been dismissed with prejudice.

Standstill Order

In connection with the legal challenges to the RSH Settlement raised by RGL and
by Herbert H. Haft, on December 6, 1995, the Delaware Court of Chancery entered
a Standstill Order. Without further order of the court, Dart could not (i)
change its Certificate of Incorporation or Bylaws; (ii) change the current
composition of Dart's Board of Directors or any of its subsidiaries; (iii)
change the Haft family officers of Dart or any of its subsidiaries; or (iv)
issue any additional securities of Dart or any of its subsidiaries (except
employee stock options issued in the ordinary course of business). In addition,
the Standstill Order restricted certain significant corporate actions by Dart
without first giving Herbert H. Haft and the other parties to the Section 225
Action not less than seven days written notice.

                                       52
<PAGE>   53
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

As a result of the Delaware Court of Chancery approval of the Settlements, Dart
is no longer subject to the Standstill Order.

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 adverse effect, if established, upon the consolidated financial
condition and results of operations of the Company.

The Company recorded legal expenses of approximately $0.4 million, $0.8 million
and $1.1 million during the years ended January 31, 1998, February 1, 1997 and
February 3, 1996, respectively.

NOTE 8 - SETTLEMENTS OF LITIGATION

Settlement with Ronald S. Haft

On October 6, 1995, Dart and Ronald S. Haft entered into the RSH Settlement. The
RSH Settlement transactions were subject to legal challenges. See Note 7. The
RSH Settlement transactions were intended to have the effect, by their terms, of
transferring majority control of Dart's voting stock to one or more voting
trustees (the "Voting Trustees") under a Voting Trust Agreement, by and among
Ronald S. Haft, Dart and Larry G. Schafran and Sidney B. Silverman, as initial
Voting Trustees. On December 29, 1995, the initial Voting Trustees resigned and
appointed Richard B. Stone as successor Voting Trustee.

As part of the RSH Settlement, Ronald S. Haft consented to the termination of
all of his outstanding stock options to purchase up to 10,000 shares of Crown
Books common stock.

Settlement with Robert, Gloria and Linda Haft

On September 26, 1997, the Company and Dart closed the transactions contemplated
in an agreement, dated August 16, 1997, to settle certain litigation and enter
other related transactions (the "RGL Settlement") with RGL.

The transactions completed by the closing of the RGL Settlement include: the
purchase by Dart from RGL (or related parties) of 104,976 shares of Dart Class B
Common Stock and 77,244 shares of Dart Class A Common Stock; the termination of
options held or claimed by RGL to purchase shares of Dart Class A Common Stock;
the termination of putative options to purchase 15 shares of Dart/SFW Corp., and
the termination of a small number of options to purchase shares of common stock
of Crown Books and Trak Auto. Dart paid RGL a total of approximately $41.0
million in connection with these transactions. In addition, Dart acquired all of
Robert M. Haft and Linda G. Haft's respective interest in partnerships owning
Dart's headquarters building in Landover, Maryland and a warehouse leased by
Trak Auto, in Bridgeview, Illinois for $4.4 million.

                                       53
<PAGE>   54
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

The closing of the RGL Settlement resulted in the termination of the pending
claim by RGL to control of Dart and the settlement of all litigation between
them and Dart and its subsidiaries. In addition, the Company dismissed all of
its claims against each of RGL. Approximately $45,000 of the cost of the RGL
Settlement was paid by the Company.

Settlements with Herbert H. Haft and Ronald S. Haft

On October 16, 1997, Dart announced the Settlements with Herbert H. Haft and
Ronald S. Haft.  The Settlements were subsequently approved by the Delaware
Court of Chancery on November 24, 1997.

The HHH Settlement closed February 5, 1998 and includes the following
transactions: the purchase by Dart from Herbert H. Haft of all his shares of,
and options to purchase, Dart Class A Common Stock; that Herbert H. Haft
resigned from all of his positions with Dart and its subsidiary corporations;
that Herbert H. Haft relinquished his claim to voting control of Dart; and that
Herbert H. Haft terminated his employment contract with Dart. In addition, all
outstanding litigation and disputes between Dart and Herbert H. Haft were
dismissed or resolved. As consideration for the Settlements, Dart paid Herbert
H. Haft approximately $28 million upon closing. Dart also made a $10 million
loan to a partnership owned by Herbert H. Haft and Ronald S. Haft, which loan is
personally guaranteed by Ronald S. Haft and is secured by the partnership's
interest in three shopping centers located in suburban Washington, D.C. and by a
one-half indirect interest in an office building in Lanham, Maryland leased by
Shoppers. Dart paid substantially all of this amount with loans from Trak Auto
and Shoppers. In addition, the derivative litigation (see Note 7) was dismissed
with prejudice and Dart paid approximately $3.5 million in attorney's fees to
derivative plaintiffs' counsel. In January 1998 Crown Books paid approximately
$0.8 million for its portion the Settlements.

The transactions contemplated in the First Supplemental Agreement include:
completion of bankruptcy plans of reorganization for partnerships owning Dart's
headquarters in Landover, Maryland and a warehouse leased to Trak Auto in
Bridgeview, Illinois; payment by Dart of $7 million to reduce outstanding
mortgage loans on these properties, which will thereafter be wholly-owned by
Dart and/or its affiliates; and Ronald S. Haft paid $2.2 million to Dart from
escrowed funds previously earmarked for Ronald S. Haft. On November 19, 1997,
the real estate related transactions contemplated in the First Supplemental
Agreement were closed.

The Second Supplemental Agreement was closed in February 1998 and Dart required
that the shares held in Voting Trust for the benefit of Ronald S. Haft to be
transferred to Dart. On February 17, 1998, the Dart Class A and Class B Common
Stock from the Voting Trust was placed in treasury and the outstanding Class A
Common Stock and Class B Common Stock was designated Common Stock with all
distinctions between the two eliminated.

                                       54
<PAGE>   55
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

NOTE 9 - COMMITMENTS

Supplier Arrangements

In the fourth quarter of fiscal 1998, the Company entered into an agreement to
purchase substantially all of its books in the future from one supplier and
returned approximately $40.0 million of books to its previous suppliers. 
Because of the new book supply arrangement, the Company will need to settle
their accounts with its previous suppliers including resolution of the credit
for book returns, disputed items and chargebacks. Management believes that
adequate reserves have been provided for these matters.

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.

Following is a schedule by fiscal year of future minimum payments under capital
leases and noncancelable operating leases for warehouses and stores (excluding
sublease income) which have initial or remaining terms in excess of one year at
January 31, 1998. The imputed interest rate on capital leases is 20.5% in the
aggregate.

<TABLE>
<CAPTION>
                                                        (dollars in thousands)
        Fiscal                                 Capital Leases             Operating
         Year                             (see Related Party Leases)         Leases
         ----                             --------------------------         ------
<S>                                       <C>                             <C>
         1999                                    $    334                    29,845
         2000                                         334                    26,187
         2001                                         334                    25,051
         2002                                         334                    21,645
         2003                                         352                    18,816
         2004-2010                                  5,876                    58,567
                                                 --------                  --------
         Total                                      7,564                  $180,111
                                                                           ========
         Less: Imputed interest                     5,839
                                                 --------
         Present value of net minimum
           lease payments                           1,725
         Less: Current maturities                     -
                                                 --------
         Long-term capital lease
           obligations                           $  1,725
                                                 ========
</TABLE>

The above table includes $1,622,000 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

                                       55
<PAGE>   56
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

reduced by total future minimum sublease rentals of $630,000 receivable in the
future under five leases.

Rent expense for operating leases is as follows:

<TABLE>
<CAPTION>
                                             (dollars in thousands)
                                                   Fiscal Year
                                          1998         1997         1996
                                          ----         ----         ----
<S>                                    <C>          <C>          <C>
Minimum rentals                        $  27,599    $  23,640    $  20,695
Contingent rentals                           104           32          143
                                       ---------    ---------    ---------
                                       $  27,703    $  23,672    $  20,838
                                       =========    =========    =========
</TABLE>

Related Party Leases

Members of the Haft family beneficially owned all the issued and outstanding
voting stock of Dart prior to the various Haft family settlements. As of
February 17, 1998, Haft family members no longer own shares of Dart common
stock.

Of the Company's 179 stores as of January 31, 1998, ten are leased from entities
in which the Haft family members own substantially all the beneficial interests.
These ten lease agreements with the Haft family provide for various termination
dates which, assuming renewal options are exercised, range from 1998 to 2029,
and require the payment of future minimum rentals aggregating $34,159,000 at
January 31, 1998. 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, three closed stores have lease agreements with Haft-owned
entities with various termination dates from 1998 to 2005 and require future
minimum rentals aggregating $715,000 at January 31, 1998. Annual fees and
rentals included in the consolidated statements of operations for leases
involving the Haft family were $2,032,000, $1,985,000 and $2,406,000 for 1998
and 1997, 1996, 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. The
sublease, which commenced in 1985, is for 30 years and six months, and provides
for rental payments increasing approximately 15% every five years over the term
of the sublease. The annual rental is $334,000. 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, on the lease commitment
table above. Dart originally leased the entire 271,000 square foot warehouse and
office facility from a private partnership in which Haft family members owned
all of the partnership interests. However, as part of the various Haft
settlements, Dart now owns the warehouse and office facility. The Company's
sublease is on the same terms as Dart's original lease.

                                       56
<PAGE>   57
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

Employment Arrangements

The Company has entered into employment agreements with several key employees.
The employment agreements are for one-year terms. The agreements are
automatically extended for one year unless the individual is terminated with
cause. The agreements provide for compensation increases following review and
performance appraisal by the Compensation Committee of the Board of Directors.
Total commitments under these agreements are approximately $945,000.

NOTE 10 - 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 terminated 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 March 23, 1995, the court entered final judgement that Robert M. Haft
was entitled to damages in the amount of $2,146,000, plus interest, for Robert
M. Haft's claims with respect to the ISA.

As a result of this litigation 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 28, 1995. In
addition, the Company paid Robert M. Haft approximately $2,146,000 (plus
interest) for the 100,000 shares during the year ended February 1, 1997. The
Company recorded the purchase of the shares as treasury stock.

                                       57
<PAGE>   58
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

NOTE 11 - EMPLOYEES' BENEFIT PLANS

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. The
Company did not make a contribution for fiscal 1998, 1997 and 1996.

In June 1995, the Company established a 401(k) retirement plan for all employees
projected to work 1,000 hours and 90 days continuous employment. The Company is
obligated to contribute an amount equal to 25% of the employees' deferrals up to
6%. The Company's contribution was approximately $140,000, $120,000 and $90,000
for fiscal 1998, 1997 and 1996, respectively.

In March 1996, the Company established a nonqualified deferred compensation plan
for certain officers and key employees of the Company. The Company contributes
an amount equal to 25% of the employees deferral in the nonqualified deferred
compensation plan and the 401(k) plan together up to 6%. The contribution was
$2,000 in each of fiscal 1998 and 1997.

NOTE 12 - STOCK OPTION PLANS

The Company has two stock option plans and accounts for the plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for the plans been determined consistent with SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts:

<TABLE>
<CAPTION>
                                               (dollars in thousands, except per share date)
                                                                  Fiscal Year
                                                   1998              1997             1996
                                                   ----              ----             ----
<S>                                           <C>                <C>               <C>
Net Income (Loss):
  As Reported                                 $  (48,650)        $    (860)        $   3,704
  Pro Forma                                      (49,344)           (1,073)            3,639
Net Income (Loss) per share (diluted):
  As Reported                                 $    (9.20)        $    (.16)        $     .69
  Pro Forma                                        (9.33)             (.20)              .67
</TABLE>

The effect of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts.  SFAS No. 123 does not apply to awards prior to
1995.

The weighted average fair value of options granted was $4.09, $8.14 and $7.24
for options granted during fiscal 1998, 1997 and 1996 respectively. The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1998, 1997 and 1996, respectively: risk
free rates of approximately 5.42% in fiscal 1998 and 6.0% for fiscal 1997 and

                                       58
<PAGE>   59
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

1996; no expected dividends; expected lives of 5.0 years; and expected
volatility of 40.0% in fiscal 1998 and 75% in fiscal 1997 and 1996.

Crown Books Corporation 1993 Stock Option Plan

The Company may grant options for up to 1,250,000 shares under the Crown Books
Corporation 1993 Stock Option Plan (the "1993 Option Plan"). The 1993 Option
Plan is for officers, directors and key employees and will terminate June 30,
2003. The option exercise price equals the market price on the date of grant.
Options vest fully after three years and expire after five years.

Information concerning the 1993 Option Plan:

<TABLE>
<CAPTION>
                                                                Weighted Average
                             Number         Exercise Price          per Share
                          of Options          per Share          Exercise Price
                          ----------          ---------          --------------
<S>                      <C>               <C>                 <C>
Outstanding at
  January 28, 1995          79,130           17.00-23.00              22.24
    Granted                148,540           11.00-17.00              12.80
    Exercised                  -                  -                     -
    Forfeited              (44,100)          11.00-23.00              18.70
                          --------          -------------            ------
Outstanding at
  February 3, 1996         183,570           11.00-23.00              15.45
    Granted                184,225           10.50-12.375             11.43
    Exercised                  -                  -                     -
    Forfeited              (18,225)          11.00-23.00              14.65
                          --------          -------------            ------
Outstanding at
  February 1, 1997         349,570          $10.50-23.00             $13.56
    Granted                165,550                  9.375              9.375
    Exercised                  -                     -                  -
    Forfeited             (109,295)          9.375-23.00              12.32
                          --------          ------------             ------
Outstanding at
  January 31, 1998         405,825          $9.375-23.00             $12.19
                          ========          ============             ======
</TABLE>

Options to purchase 159,801 shares were exercisable at January 31, 1998 and
844,175 options remained available for grant. At January 31, 1998, 66,230 of the
options outstanding have exercise prices between $17.00 and $23.00 per share,
with a weighted average exercise prices of $20.67 per share, a weighted average
contractual life of 0.9 years and all such options are exercisable. The
remaining 339,595 options outstanding have exercise prices between $12.375 and
$9.375 per share, with a weighted average exercise price of $10.54 per share, a
weighted average contractual life of 3.8 years and 93,571 such options are
exercisable.

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. No new options could be granted after January 1, 1993.

                                       59
<PAGE>   60
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Continued

              Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996

Information concerning the Option Plan:


<TABLE>
<CAPTION>
                               Number          Option Price       Weighted Average
                             of Options         per Share          Exercise Price
                             ----------         ---------          --------------
<S>                        <C>                <C>                <C>
Outstanding at
  January 28, 1995             144,747         19.50-23.93               21.79
    Exercised                      -                -                      -
    Forfeited                   (7,458)        19.50-20.50               20.22
    Expired                    (19,758)        19.50-21.45               20.49
                               -------        ------------            --------
Outstanding at
  February 3, 1996             117,531         20.00-23.93               22.11
    Exercised                      -                -                      -
    Forfeited                   (2,904)        20.00-20.50               20.24
    Expired                    (16,933)        20.50-22.55               21.71
                               -------        ------------            --------
Outstanding at
  February 1, 1997              97,694         20.00-23.93               22.24
    Exercised                      -                -                      -
    Forfeited                  (80,000)        20.00-23.93               22.48
    Expired                    (17,694)        20.00-22.00               21.13
                               -------        ------------            --------
Outstanding at
  January 31, 1998                 -          $     -                 $    -
                               =======        ============            ========
</TABLE>

All outstanding options under the Option Plan expired or were forfeited during
fiscal 1998.

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, be secured by all of the stock
acquired by exercise of the options, 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.

NOTE 13 - SUBSEQUENT EVENT

On April 9, 1998, Dart entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Richfood Holdings, Inc. ("Richfood Holdings") and a subsidiary
of Richfood Holdings ("Acquisition Subsidiary") pursuant to which Dart has
agreed to become a wholly owned subsidiary of Richfood Holdings. Pursuant to the
terms of the Merger Agreement, Richfood Holdings will (1) make a cash tender
offer (the "Offer") for all of the issued and outstanding shares of common stock
at a price of $160.00 per share and (2) take all steps necessary to cause
Acquisition Subsidiary to merge with and into Dart (the "Merger") in a
transaction in which Dart will become a wholly owned subsidiary of Richfood
Holdings. As a result of the Merger, Richfood Holdings will indirectly own 52.3%
of the outstanding Common Stock.

                                       60
<PAGE>   61
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
                                        
             Fiscal Years Ended January 31, 1998, February 1, 1997
                              And February 3, 1996


The Offer is subject to a number of customary conditions. The Merger is
subject to the tender in the offer of a majority of shares of common stock on a
fully diluted basis and to other customary conditions, including the receipt of
regulatory approvals and the absence of material adverse effects on the
business or financial conditions of Dart and its subsidiaries, taken as a whole
with certain limited exceptions. There can be no assurance that either the
Offer or the Merger will be consummated.

If the Merger occurs, Richfoods intends to divest Dart's interest in the
Company. The impact, if any, resulting from the Merger or subsequent divestment
of the Company by Dart has not been considered in these financial statements.

NOTE 14 - INTERIM FINANCIAL DATA - (UNAUDITED)

Selected interim financial data for the years ended January 31, 1998 and
February 1, 1997 are as follows:

<TABLE>
<CAPTION>
                                        (in thousands, except per share data)
THREE MONTHS ENDED:         JANUARY 31,      NOVEMBER 1,       AUGUST 2,         MAY 3,
                               1998             1997             1997             1997
                               ----             ----             ----             ----
<S>                         <C>              <C>              <C>              <C>
NET SALES                    $ 98,268         $ 65,676         $ 67,018         $ 66,543
GROSS PROFIT (1)                8,358            6,630           10,347           11,673
NET INCOME (LOSS)(2)          (16,176)         (25,637)          (4,175)          (2,662)
NET INCOME (LOSS) PER
  SHARE (DILUTED) (3)        $  (3.06)        $  (4.85)        $   (.79)        $   (.50)
</TABLE>


<TABLE>
<CAPTION>
THREE MONTHS ENDED:         FEBRUARY 1,      NOVEMBER 2,      AUGUST 3,        MAY 4,
                                1997            1996            1996            1996
                                ----            ----            ----            ----
<S>                         <C>             <C>             <C>              <C>
NET SALES                    $ 95,431        $ 63,281        $ 66,533         $ 62,492
GROSS PROFIT (1)               19,939          10,672          11,892           11,387
NET INCOME (LOSS) (4)           2,357             110          (1,536)          (1,791)
NET INCOME (LOSS) PER
  SHARE (DILUTED) (3)        $    .45        $    .02            (.28)        $   (.33)
</TABLE>

(1)      After deduction of cost of sales, store occupancy and warehousing
         expenses.
(2)      Includes valuation allowance for deferred tax assets during the third
         quarter.
(3)      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.
(4)      Including reversals of previously provided closed store reserves.
(5)      Includes fourth quarter reserves of $3.8 million for a returns to
         publishers and $6.9 million for shrink.

                                       61
<PAGE>   62
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

                                       62
<PAGE>   63
                                     PART IV

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

<TABLE>
<CAPTION>
<S>               <C>
(a)(1)            Financial Statements

                  See Item 8.

(a)(2)            Schedules (Consolidated)

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

(a)(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           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).

   10.3           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).

   10.4           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).

   10.5           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)

   10.6           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).

   10.7           Indemnity Agreement by and between Dart Group Corporation and
                  Crown Books Corporation dated June 9, 1986 (incorporated by
                  reference to
</TABLE>

                                       63
<PAGE>   64
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
          (Continued)

<TABLE>
<CAPTION>
<S>               <C>
                  Exhibit 10(zzzz) to Crown Books' 1987 Form 10-K).

   10.8           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).

   10.9           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)

   10.10          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)

   10.11          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)

   10.12          Lease agreement dated October 31, 1990 between 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).

   10.13          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)

   10.14          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)

   10.15          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)

   10.16          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)

   10.17          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)
</TABLE>

                                       64
<PAGE>   65
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
          (Continued)

<TABLE>
<CAPTION>
<S>               <C>
   10.18          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)

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

   10.20          Financing Agreement, dated as of September 12, 1996 between
                  Crown Books Corporation and The CIT Group/Business Credit,
                  Inc.(incorporated by reference to Exhibit 10.1 to Crown Books'
                  Form 10-Q filed September 16, 1996).

   10.21          Employment Agreement dated as of January 12, 1998 between Crown Books
                  Corporation and Anna L. Currence.

   10.22          Employment Agreement dated as of February 6, 1998 between Crown Books
                  Corporation and Steven A. Pate.

   10.23          Employment Agreement dated February 9, 1998 between Crown Books
                  Corporation and Stephen M. Petty.

   10.24          Employment Agreement dated March 13, 1998 between Crown Books
                  Corporation and Mark C. Paxton.

   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

(b)               Reports on Form 8-K

                  During the fourth quarter of fiscal year ended January 31,
                  1998, the Company filed one report on Form 8-K.
</TABLE>

                           1.       Crown Books filed a Current Report on Form
                                    8-K on November 5, 1997 reporting under Item
                                    5 (Other Events) a change in the composition
                                    of Crown Book's Board of Directors.

                                       65
<PAGE>   66
                                   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.

                                       CROWN BOOKS CORPORATION


    Date: May 1, 1998          By:     Richard B. Stone
          -----------                  ----------------
                                       Richard B. Stone
                                         Chief Executive Officer

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>
<CAPTION>
<S>                                    <C>
    Date: May 1, 1998                  Richard B. Stone
          -----------                  ----------------
                                       Richard B. Stone
                                       Chairman of the Board of Directors


    Date: May 1, 1998                  Anna L. Currence
          -----------                  ----------------
                                       Anna L. Currence
                                       President and Chief
                                         Operating Officer


    Date: May 1, 1998                  Howard M. Metzenbaum
          -----------                  --------------------
                                       Howard M. Metzenbaum
                                       Director


    Date: May 1, 1998                  Harry M. Linowes
          -----------                  ----------------
                                       Harry M. Linowes
                                       Director

    Date: May 1, 1998                  Stephen M. Petty
          -----------                  ----------------
                                       Stephen M. Petty
                                       Chief Financial Officer
</TABLE>

                                       66
<PAGE>   67
                    CROWN BOOKS CORPORATION AND SUBSIDIARIES
                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
        Exhibit
        -------
<S>     <C>                <C>
         10.21             Employment Agreement dated as of January 12, 1998
                           between Crown Books Corporation and Anna L.
                           Currence.

         10.22             Employment Agreement dated as of February 6, 1998
                           between Crown Books Corporation and Steven A.
                           Pate.

         10.23             Employment Agreement dated as of February 12, 1998
                           between Crown Books Corporation and Stephen M.
                           Petty.

         10.24             Employment Agreement dated March 13, 1998 between
                           Crown Books Corporation and Mark C. Paxton.

         11                Statement on Computation of Per Share Net Income

         21                Subsidiaries of Crown Books Corporation

         23                Consent of Independent Public Accountants

         27                Financial Data Schedules
</TABLE>

                                       67