HARP'S OPTING FOR EMPLOYEE OWNERSHIP

ELLIOT ZWIEBACH

SPRINGDALE, Ark. -- Harp's Food Stores here said last week it will become a 100% employee-owned company later this year, after which it will form a new legal entity with its wholesale supplier, Associated Wholesale Grocers, Kansas City, Kan.

Harp's will control "the vast majority" of the new entity, with AWG as a minority stakeholder, Gary Phillips, AWG president and chief executive officer, told SN. He also said AWG will "help employees facilitate the acquisition of Harp's by providing financial assistance, partly in the form of an equity investment."

Harp's is a privately held company with 42 stores in Arkansas and Oklahoma, plus a single unit in Missouri. The company's sales are estimated to be approximately $375 million. It operates 28 conventional Harp's stores, 13 Price Cutter warehouse stores and one convenience store called Pennzmart.

The company has had an Employee Stock Ownership Program since 1989, with the ESOP owning 8% of the chain's stock.

Once the deal has been completed, a trustee will be appointed to administer the ESOP, whose stock will be allocated to participants over time, Roger Collins, president and CEO of Harp's, told SN. He said he is not sure how long it will be before most of the stock is distributed to Harp's employees.

AWG is a $3.3 billion retailer-owned cooperative serving 342 members operating 850 stores in 10 states. It has been Harp's primary supplier for the past 20 years, although Harp's distributes its own general merchandise, health and beauty care items, and cigarettes.

The plan for the two companies to form a new legal entity has been approved by both companies and is scheduled to close by midsummer, Collins said.

He told SN the transaction will enable Harp's "to enjoy a partnership with AWG that will help us grow and expand." In addition, the deal will enable some stockholders to cash out, and it will give employees the opportunity to own 100% of the company "and to enjoy the benefits going forward," he said.

"Employee ownership is a great tool for motivating, hiring and retaining your people," Collins added.

Phillips said the pending deal with Harp's "enables AWG to enter into a long-term supply arrangement and allows them to continue to be a viable retailer -- one that has been able to compete effectively with Wal-Mart and that has withstood that battle over the years." Phillips said the plan originated with Gerald Harp, Harp's chairman, who approached AWG about his intention to sell the company to the Harp's ESOP to take advantage of certain tax benefits. Once Harp and other major shareholders have sold their stock to the ESOP, Harp's, under its new ownership, will form the new legal entity with AWG.

While Collins said that entity would likely be a joint venture, Phillips said it could be a joint venture, a partnership or a limited liability company.

Collins said he will continue as president and CEO of Harp's, with existing management remaining intact and continuing to manage the retail chain.

It's possible that other retailers could become part of the new entity, Collins added. "That's a real possibility," he said.

Asked if any additional companies would have to operate in the same area as Harp's, Collins told SN, "There could be additional members who are not geographically close, though it would make more sense if they were in the same vicinity."

Once the plan takes effect, the board of Harp's will be disbanded, with Gerald Harp stepping down as chairman, Collins said. A new Harp's board will be formed to oversee the ESOP, he explained, and a new advisory board will also be selected to administer the new entity.