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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Ownership has its privileges


Lisa Keon dusts the Fenton Handcrafted Glass collection in the gallery at Halpin's in Spokane Valley. Halpin's is employee-owned.
 (Liz Kishimoto / The Spokesman-Review)

At Halpin’s Pharmacy, the employees are much more than workers who stock shelves, ring up sales and fill drug prescriptions. They are owners. Through its employee stock ownership plan, or ESOP, the Spokane Valley business fixture offers its dozen employees a retirement perk by investing profits into a special fund designed to provide money when an employee retires or the company sells. In return, the business, now in its 66th year, is better able to retain employees like Lisa Keon, who prides herself on customer service and views each sale as an investment in her future.

“I think it helps us because everyone cares just that much more and gives a little extra,” Keon said. “This is our store.”

Halpin’s is among about 25 employee-owned businesses around Spokane.

They range in size and industry, from grocers such as Yoke’s and Tidyman’s, to industrial engine and transmission seller Torque-A-Matic Inc., to temporary staffing and training firm Humanix.

Halpin’s is one of those home-grown success stories now on its third round of ownership.

It was founded in 1940 by J.E. Halpin at the southwest corner of Pines and Sprague. In 1949 the owners moved the popular pharmacy to its current spot at Sprague and Bowdish.

In 1969 pharmacists Frank Terhaar and Gary Christensen bought the store. The two sold it to their employees through an ESOP in 1992 when attempts to sell the business didn’t net acceptable bids, said Rick Ericksen, who along with pharmacist Ron Gill manages the business.

That’s a typical scenario for business owners, said Dick Phenneger, whose Spokane company, Phenneger & Morgan, sets up ESOPs around the region.

Created in 1974 as part of the Employee Retirement Income Security Act (ERISA), ESOPs are designed to give workers at least partial ownership of their company.

There are about 11,000 companies in the United States with ESOPs. Of them, about 2,000 are 100 percent owned by employees.

Companies with ESOPs employ 10 million workers, or about 10 percent of the nation’s work force, according to the Washington D.C.-based ESOP Association.

These companies take advantage of tax benefits, as contributions to ESOP trusts are tax deductible. If companies borrow against their ESOP, tax deductions are available.

Among the largest firms with employee ownership plans: Procter and Gamble Co., beer-maker Anheuser-Busch Co., and W.L. Gore Associates, the inventors of Gore-Tex fabric.

Corey Rosen, executive director of the National Center for Employee Ownership, said the number of employee-owned companies has reached a plateau as some companies mature and others are repurchased from employees, as was the case with Spokane-based Rosauers Supermarkets.

Employees of Rosauers paid $25.5 million to buy their grocery chain from URM in 1990. A decade later, URM repurchased Rosauers at a time when the grocery chain was performing well and was considered an attractive takeover target by larger competitors. Though the purchase price has not been disclosed, the Rosauers ESOP trust had assets of about $48.7 million at the time of the buyout.

While the benefits of ESOPs include spreading a company’s wealth to its employees by awarding them stock, the arrangement also means more financial risk is shouldered by workers than is the norm. That’s what has happened at Tidyman’s, which operates in the hypercompetitive grocery industry where profit margins are thin and earned by volume sales.

The Spokane grocery chain announced last week that it was selling its remaining eight stores, a move the company hopes will salvage jobs and money for its employee owners.

While many factors contributed to Tidyman’s troubles, perhaps most devastating was a $6.2 million legal judgment stemming from a gender discrimination lawsuit filed eight years ago. Two managers — the company’s controller and senior grocery buyer — were passed over for promotions and paid less than their male peers at the firm. The big jury verdict was upheld by the U.S. Ninth Circuit Court of Appeals.

The resulting problem for Tidyman’s stemmed from the failure of its past management to properly insure against such claims. That meant the company – namely the employees – were stuck with the responsibility of paying the verdict.

Reviews of Tidyman’s public filings with the Internal Revenue Service show a cash drain on its ESOP account, which fell from $14.6 million in early 2003 to $7.1 million at the end of 2004 — a dramatic hit to the retirement savings of the firm’s employees.

“Few companies could handle such a punishing blow,” said Phenneger, who said that the grocer’s struggles should not reflect poorly on ESOPs.

Mike Davis, who took over as Tidyman’s chief executive in the aftermath of the lawsuit and insurance debacle, was unavailable for comment. In a press release issued earlier, however, Davis said store and other real estate sales will provide some return on investment to Tidyman’s employee owners.

That would be a better outcome than that experienced by employees at Darby Lumber deep in the Bitterroot Valley of southwest Montana. Workers there had $6 million in their ESOP in 1992, but by the time the mill failed in 1998, that money had evaporated.

Most ESOPs, however, are managed in ways that benefit employees and also can also offer protection in the form of diversified retirement savings by offering separate 401(k) retirement plans, Rosen said.

Just 3 percent of companies with ESOPs are operating under financial distress, according to ESOP Association figures.

Eric Carlson, a partner with Retirement Plan Specialists in Spokane, said Washington state has a successful history of employee-owned companies and that Spokane likely has more per capita than other U.S. cities.

A 1998 study by the Washington State Department of Community, Trade and Economic Development found that ESOP companies in the state paid better, offered superior benefits and had set aside twice as much money for employee retirement savings than companies without ESOPs. The study compared 100 ESOP companies against 500 non-ESOP companies.

Companies run by employees often pay closer attention to costs, thus allowing them to fund better benefits, Carlson said.

That’s a tactic that has worked well at Halpin’s as it continues to maneuver for market share while competing with large drugstore chains and the sudden retail shift away from Sprague Avenue to the Spokane Valley Mall area and Sullivan Road.

To keep customers, Halpin’s has expanded its product line. Shoppers there can find Thomas Kinkade prints, collectible figurines, birthday cards, party favors, flowers, makeup, toys, candy and knickknacks.

It has served the store and its employees well. Last year the company had sales of about $4 million. Profits made on sales are sunk right into the ESOP trust, which at the end of 2004 had a balance of $337,000. Past and current employees can sell their ESOP shares when they reach retirement age.

There are question marks about Halpin’s future, as there are in any business. Ericksen and Gill are majority owners and 10 to 15 years away from retiring. When that date arrives, several scenarios may play out, including employees securing the financing to buy them out; the company securing an infusion of cash from a new owner; or the store selling or going out of business.

Employees like manager Christine Edmonds are confident in Halpin’s ability to make the next transition.

“Business has been good and we expect it will continue to be good,” she said.