The precipitous drop in the price of Dart Drug Corp.'s stock in the past three weeks may be, in the long run, a blessing in disguise for the company.
Ironically, the people who run Crown Books Corp. and Dart, which spun off Crown this week, may have unwittingly enhanced the attractiveness of Dart's stock through an accounting procedure that the Securities and Exchange Commission rejected.
If things work out as some securities analysts believe they will, neither Dart nor Crown will be hurt in the long run by the SEC challenge, which forced a delay in the initial public sale of Crown's stock.
Investors who paid $148 a share for Dart's stock a few weeks ago and then watched it plunge to $106 may have a different view.
After drifting along in the $30 to $40 range, Dart's stock hit an all-time high of $148 a share in June and continued in that range until mid-July when Crown was forced by the SEC to delay its stock sale. Questions raised about Crown's failure to include interest payments in its financial statement forced Crown to reduce its reported profits for the past two years.
On that news, Dart's stock price plummeted to $106, but has held steady recently. Crown's price has also held steady at $24 1/2 since the initial sale of 2.5 million shares Tuesday at $25 each.
At least one analyst, Kenneth Gassman, vice president at Wheat First Securities, sees "substantial appreciation" potential in Crown's stock because "the fundamentals are there." Referring to decisions that forced the delay in Crown's stock sale, Gassman said, "In time all that will be forgotten."
In the second of two amended registration statements on file at the SEC, Crown explains that it used proceeds of bank loans arranged in 1981 and 1982 for working capital. Crown was listed as the borrower originally but in amended loan documents the primary debtor became Dart and Thrifty Corp., each of which owns 34 percent of Crown. Crown was listed as a secondary debtor.
Contrary to what it reported to the SEC originally, however, Crown's amended filing states that "pursuant to the bank loan amendments, since May 20, 1983, no interest expense related to the borrowings is recorded on the books of Crown and the amounts involved have been accounted for as working capital advances."
The maximum borrowed was $5 million in fiscal year 1982 and $9.5 million in 1983. The interest rate varied from 17.5 percent in 1982 to 9.8 percent on the latest loan.
Elsewhere in the SEC filing, Crown says it was charged $42,000, $103,000 and $169,000 in 1981, 1982 and 1983, respectively, for administrative services provided by Dart, with which Crown shares headquarters and warehouse facilities.
"In management's opinion," Crown states, "if such costs were charged on the basis of sales of the company as a proportion of the sales of Dart and its affiliates, the company would have been charged approximately $100,000, $200,000 and $300,000." On that basis the administrative charges would have totaled $600,000 rather than the $314,000 originally reported.
As a result of questions raised by the SEC, Crown now says net income was reduced 18 percent for the fiscal year ended Jan. 31, 1982, and 20 percent for the year ended Jan. 31, 1983. Net income restated for the three-month periods ended April 30, 1982, and April 30, 1983, was reduced by 59 and 16 percent, respectively.
But even with the accounting adjustments, as a discount retail book chain, Crown remains "an interesting concept," and "continues to make money," Gassman points out.
In Dart's case, Gassman agrees with other analysts that as soon as the smoke clears, and if Crown and Trak Auto Corp. continue to contribute substantially to Dart's earnings, Dart's stock will do well. Dart retains a 71 percent ownership in Trak.
Dart is expected to report earnings of $7 a share this year, giving it a multiple that is fairly close to average for the chain drug industry.
But at $148, Dart's stock flirted with being overpriced, making it less attractive to investors, some analysts believe. The fact that there has never been a stock split didn't help either. At $106, the price seems more reasonable and "an analyst can go on record and recommend the stock," says Gassman.
For that, Dart can thank the SEC, whose posture with Crown had a dual effect.