Ten days ago, Michael Dahood had just about given up hope on Dart Drug Corp. As a managing director at Smith Barney, Harris Upham & Co. -- which holds stock and bonds in the company -- Dahood had been closely monitoring the financially troubled retailer.

What he had seen over the past three months was disturbing: Despite a financial reorganization, Dart was in big trouble.

Although Dart's chairman, Stephen J. Hansbrough, had predicted that the financial restructuring would give the 80-store chain a new lease on life, Dart's major suppliers had not regained their confidence in the company. Among other things, they were disturbed by Dart's statement that it would have had to seek protection from its creditors under the bankruptcy laws if the refinancing plan had failed.

So even after the refinancing plan was completed July 31, many suppliers did not resume shipping products to Dart stores. Still others cut back the amount of merchandise they had been sending or tightened payment requirements. With its inventory thus sharply reduced, Dart had to cancel several costly advertising promotions it had planned to spur sales.

It was no surprise, then, that the chain's sales dropped substantially. Sources close to Dart said sales were down about 7 percent in late summer and early fall from the year before, when sales were admittedly bad.

"They were in desperate straits," said one source close to the company.

"My only hope on Friday {Oct. 30} was that some turnaround expert ... would come in," Dahood said.

Last Monday, Dahood's hope was fulfilled. Sheldon W. (Bud) Fantle, the former chairman of Dart's rival, Peoples Drug Store Inc., announced that he was taking over Dart by making an $8 million investment for 20 percent of the company. The takeover was completed Friday.

Fantle, 64, has earned a prominent reputation in the drugstore industry for turning around two other sleepy chains: Lane Drug in Ohio and Peoples here. But Fantle may face his toughest challenge with Dart. Not only is the chain in financial trouble, it also faces some of the stiffest competition the drugstore industry has seen in years -- particularly from Giant Food Inc., which has been aggressively trying to increase its share of the drugstore market.

Nonetheless, drugstore industry experts last week were confident that if anyone can save Dart, Fantle can.

"I feel much better now," Dahood said a day after the deal was announced. "My expectations have been altered dramatically by the infusion of cash" and the presence of Fantle.

Interviews over the past week with Dart insiders, drug-retailing industry executives and analysts -- many of whom asked not to be named -- paint a picture of Dart as a chain on the brink of failure when Fantle agreed to take it over. They say the company was suffering from dwindling sales, a lack of support from suppliers, sparse inventories, a thin management team and precarious finances. Hansbrough, who stepped down as chairman when the takeover was completed, declined comment.

The relatively cheap $8 million price Fantle paid for a 20 percent stake in Dart illustrates the company's financial woes. Based on that amount, the value of Dart as a whole now is $40 million -- one-fourth the $160 million price tag Washington's Haft family put on the chain three years ago when it sold Dart to the management team that was running the stores.

Unanimously, industry experts say the high cost of the management buyout of the company has been a big part of Dart's problems.

"I don't think anyone in the country except the three who bought Dart ever thought the chain was worth close to $160 million," said one local retailing official, who declined to be named. "It's a legacy they have been living and dying with ever since."

To help finance the cost of that acquisition, Dart sold $160 million of high-risk junk bonds in the summer of 1986. The transaction proved to be a costly one, however, because it required Dart to make $28 million in annual interest payments at a time when the chain's operating profit, before interest payments and taxes, was only $12 million a year.

Meeting the interest payments would have been difficult even in the best of times. But increased competition, particularly from Giant -- which launched a price war -- and a drought that hurt the sales of lawn and garden supplies caused Dart's sales to drop in the summer of 1986.

Making matters worse, there were sharp disagreements among the management team that bought Dart from the Hafts.

Initially, the buyout was led by Alvin F. Towle, a merchandise expert who became the chain's chairman. Hansbrough, a distribution expert, was second in command, serving as president and chief operating officer.

But 16 months after the buyout, Towle left after a disagreement on how the chain should be run. He was outvoted by Hansbrough and Joseph Santarlasci, who as Dart's vice chairman developed and oversaw the company's bond sale.

In mid-1986, not long after Towle's departure, Santarlasci left because of ill health. His departure came at the same time that it was becoming clear that Dart wouldn't be able to continue meeting its semiannual interest payments.

Hansbrough took complete charge, launching an aggressive newspaper and television advertising campaign that brought Dart and Hansbrough a lot of positive attention as he repeatedly promised that "things are going to get better."

Even so, skepticism remained in the industry about Hansbrough's ability. "An operations man was running the company without the merchandising tools he needed," said one industry expert. "That's like having the head of classified advertising run the whole newspaper."

As Dart's finances became more precarious, the company ultimately was forced last spring to ask its bond holders and major creditors to swap their high-yield bonds and notes for a combination of lower-rate bonds and stock.

Dart had to sweeten the terms of its offer twice before the deal could be closed. In the end, bondholders were asked to exchange each $1,000, 12.7 percent bond for a new package of securities with a face value less than $766. The final package consisted of a $500 bond that bears an initial 6 percent rate and increases 1.1 percent every six months after 1990. Additionally, bondholders who agreed to the swap got 24 shares of common stock, plus 40 shares of preferred stock, each convertible into 1.3 shares of common stock. The common stock was valued by Dart at $3.50 a share, but when it went on sale, the market priced it at just $2.50 a share.

There were problems with the deal right down to the wire: Dart had to extend its 5 p.m. July 31 deadline by several hours to convince enough bondholders to swap their debt to make the transaction viable. And though the company said it needed 85 percent of the bonds swapped for the deal to be successful, in the end it received only 82.5 percent.

The refinancing cut Dart's yearly interest payments to $13 million from $28 million and immediately transformed its net worth -- assets minus liabilities -- from a negative $40 million to $4.8 million.

Even so, Dart's troubles were far from over. "Their refinancing effort took so long and it was down to the wire," said one source close to Dart. "During that time, many drugstore vendors started to get nervous, and many started to cut them off. Dart had no merchandise, no advertising allowances {manufacturers' rebates to stores that promote their products}. Dart was doing business from an empty shop."

"We were in a Catch-22," said one Dart official. "Manufacturers would say 'Show me some sales and I'll ship you the product,' but we couldn't show the sales because we didn't have any product."

Meanwhile, all the money Dart had spent to launch an aggressive new advertising campaign was in vain, because without the inventory, the store was unable to back up the campaign.

Complicating the situation was Dart's inability to raise more cash. Dart's line of credit was an asset-based loan, tied to its inventory. As Dart's inventory decreased, so did its assets -- and the line of credit.

Dart "found itself in a total cash-nil position. It had enough cash to pay payroll and leases, but other than that it was in desperate shape," according to a source close to Dart.

Smith Barney's Dahood was growing increasingly pessimistic. "I was getting ready to lower my earnings estimate from 14 cents a share, which would have justified a $2 stock price, to 4 cents a share, which would have justified a 50-cent to 60-cent stock," he said.

Aware of the problem, Hansbrough and Dart officials began scrambling for more money. Among other things, they closed one of their stores and sold the lease back to the landlord for $2.4 million. Other leaseback sales also were considered, because Dart was in the fortunate position of having long-term leases at $2.50 to $3 per square foot in a market where real estate now leases for between $15 and $30 a foot.

But leasebacks were not the answer over the long term, industry officials said, because they would cut the company's size and opportunity for growth.

So Hansbrough went looking for other investors. Among them was turnaround expert Victor Palmieri, who runs the Oppenheimer-Palmieri Fund, a private limited partnership that invests in financially troubled enterprises where Palmieri can exercise active management. But after looking at the company, the fund decided not to pursue a deal.

In the end, "Fantle's was the best proposition," said Dart's financial adviser, Wilbur Ross of Rothschild Inc. in New York. "It is a much better route than asset disposition."

For Fantle, the Dart takeover represented the end of a 11-month search that began the day he was abruptly dismissed from Peoples last January. Peoples' parent company, Imasco Ltd., asked Fantle to leave after the chain reported a steep operating loss.

Longing to get back into the retail drug business, Fantle aggressively pursued buying other chains. He approached Dart early last winter, but Hansbrough declined to consider the offer. Then Fantle tried to buy the Gray Drug Fair chain, only to be outbid by Rite-Aid Corp.

Having given up hope of buying another chain, Fantle and his 39-year-old son, who had been an executive with him at Peoples, began signing leases to open a new drugstore chain called Fantle's. (The leases now will be used to open Dart stores.)

About a month ago, Fantle called Dart officials again to urge them to reconsider. With Dart's troubles growing bigger, Hansbrough relented -- even though the 41-year-old chairman realized that a deal with Fantle probably would cost him his job.

With his investment, Fantle assumes the chairmanship of Dart, while his son, Jeffrey, becomes president, a post the younger Fantle held at Peoples' Ohio subsidiary, Lane Drugs, for more than six years.

Despite his previous successes in turning around troubled drugstore chains, Fantle's challenges at Dart will be immense, drugstore industry officials say.

For one thing, the industry is far different than it was when Fantle joined Peoples 12 years ago. It is more competitive than ever, particularly as supermarket chains vie for drugstore shoppers' dollars.

But Fantle gets good reviews from industry observers. "Fantle's a dynamic guy who has a lot of charisma," said David Pinto, editor of Chain Drug Review. "He knows the drugstore industry and will certainly be a tremendous improvement. He has taken two failing companies and made them successful. But can he do it again with a radically different company in a different competitive climate?"

"The two things Dart desperately needed -- and increasingly so -- were cash and credibility of senior management," Dahood said. "Hopefully, Fantle will bring both elements here."