Overhill Corporation

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Overhill Corporation

4800 Broadway, Suite A
Addison, Texas 75001
U.S.A.
Telephone: (972) 386-0101
Fax: (972) 386-8008

Public Company
Incorporated: 1963 as Kappa Networks, Inc.
Employees: 1,200
Sales: $162.2 million (2001)
Stock Exchanges: American
Ticker Symbol: OVH
NAIC: 514200 Packaged Frozen Foods

Overhill Corporation is a Dallas-area holding company in the process of focusing on its core food business, which accounts for nearly 80 percent of sales. Formerly known as Polyphase Corporation, the company in 2001 changed its name to Overhill, an allusion to its Overhill Farms subsidiary, which is a manufacturer of value-added quality frozen foods products. Its customers include major airlines, such as American, United, and Delta. Overhill Farms also produces frozen entrees for weight loss company Jenny Craig, as well as supplying major restaurant chains, including Carl’s Jr., Denny’s, Jack-in-the-Box, and Panda Express. The subsidiary’s six manufacturing operations are located in southern California, with three each in the Los Angeles area and San Diego area. Overhill’s other business segment is devoted to the forestry industry and conducted through Texas Timberjack, Inc. and its majority-owned subsidiaries. Struggling in recent years, the forestry segment is a distributor of industrial and logging equipment. It also invests in logging and sawmill ventures. Overhill expected to complete its transition by spinning off Overhill Farms, leaving the forestry business as the sole surviving operation. Overhill then expected to again change its name and sell off the company, thus freeing management to concentrate on the growing food business of Overhill Farms.

Corporate Lineage Dating Back to 1963

The corporate entity that would become Overhill was founded in 1963 as Kappa Networks, an electronics firm located in Rahway, New Jersey. Its founder was Stanley L. Pearl, who had served as chief engineer of Columbia Technical Corporation, manufacturer of delay lines. He also had gained experience with delay lines during his five years at ESC Electronics Corp. Striking out on his own, Pearl established Kappa to produce his own delay lines, which were important in synchronizing signals in electronics products. In the beginning Kappa sold delay lines to makers of television broadcast equipment, mostly the RCA Corporation. It also produced custom delay lines for use in aircraft control and communications systems, sonar systems, shipboard systems, military countermeasure devices, radar ranging, and guided missiles. In 1966 Kappa became involved in the design and manufacture of communications filters, for use in commercial as well as military applications. These frequency-selective filters permitted communications devices to accept frequencies that carried desired information while eliminating or attenuating other frequencies. Kappa sold its filter business to a former employee in 1973 and under terms of the deal was not allowed to engage in the business for four years. Kappa returned to the communications filter business from 1978 through 1980.

The rise of the personal computer industry in the early 1980s promised to enhance greatly the demand for Kappa’s delay lines. Starting in 1981 the company began a concerted effort to tap into this market. After generating $1.7 million in revenues and a $34,000 profit in 1982, Kappa increased sales to $6.68 million in 1984 while earning nearly $325,000. Close to 80 percent of its delay lines were sold to the computer industry. Shortly after completing its fiscal year on September 30, 1984, Kappa drew on its resources to make a major acquisition, paying $4.5 million in cash and notes for Polyphase Instruments Company, located in Fort Washington, Pennsylvania. In business since 1956, Polyphase designed, manufactured, and marketed transformers and filters, primarily for the military. Kappa then went public in 1985 and began trading on the American Stock Exchange in March 1986. Later in the year, Kappa expanded further, acquiring the test equipment division of VIZ Manufacturing.

Losses and Reorganization in the 1980s and Early 1990s

The fortunes of Kappa peaked in the mid-1980s. In 1985 the company earned more than $600,000, followed in 1986 by record revenues of $13.8 million. Business then soured for the rest of the 1980s, as revenues fell and losses increased—nearly $900,000 in 1987, more than $1 million in 1988, and close to $2.4 million in 1989. In July 1989 Pearl, nearing 70 years of age, stepped down as CEO in favor of Paul Stevens, who had joined the company earlier in the year to serve as the general manager of the Polyphase division. Stevens initiated a reorganizing effort to concentrate on Kappa’s core business, which by now had become the Polyphase products. In January 1990 he closed down the struggling Kappa/Viz Test Equipment Division. Then in April 1990 he unloaded the Delay Line Division, which had been unprofitable in recent years, selling it to a former controlling shareholder group, including Pearl’s son, Michael.

Because the primary business of the Kappa Networks corporation was now its Polyphase Instruments business, Stevens changed the name of the company to Polyphase Corporation in June 1991, and changed its state of incorporation from New Jersey to Pennsylvania. Although Polyphase returned to profitability in 1991, earning $1.64 million, the company was not well positioned for continued growth. Nearly 95 percent of its business was connected to equipment and systems used by the military. With the end of the Cold War, as well as a downturn in the economy, defense budgets were cut, resulting in a significant decrease in sales. After generating sales of $7.6 million in 1991, Polyphase saw its revenues fall to $5.56 million in 1992 while losing more than $800,000.

With its stock worth about 25 cents per share, Polyphase was in dire condition when it was approached by Dallas businessman Paul Tanner and his partner James Rudis, who were looking for a corporate shell to serve as an investment vehicle. They were attracted to Polyphase because of its Amex listing and depressed stock price. Tanner, a licensed Texas real estate broker, had been involved in a variety of businesses since the mid-1950s. A self-described “big picture” man, Tanner was a dealmaker uninterested in actually operating a company. Rudis, on the other hand, had a much broader business background, having spent 14 years working for CIT Financial Corporation. Although his primary responsibility with Tanner was to help target and complete acquisitions, he was fully capable of fulfilling operational responsibilities. The deal he structured for Polyphase was based on stock options. In essence, Tanner and Rudis offered a no-lose proposition to a desperate Polyphase: if their acquisition investments did not pan out, they would assume the financial risk and Polyphase would be no worse off. The two parties reached an agreement and in December 1992 both men were elected to the board of directors, with Tanner subsequently named chairman and chief executive officer. The headquarters of the company soon moved to Dallas.

Diversification in the Mid-1990s

Using Polyphase stock, Tanner and Rudis wasted little time in making acquisitions and branching out in a number of directions. On January 1, 1993 they bought Computer Systems Concepts, a Long Island City, New York company involved in the computer marketing, service, and networking business. Polyphase’s nascent computer segment was then bolstered by the April 1993 acquisition of Network America, a Tulsa, Oklahoma assembler and retailer of computer hardware. In October 1993 Polyphase acquired Taylor-Built Industries, a Dallas automotive aftermarket products business, which was sold off in February 1995. Furthermore, in 1993, Polyphase acquired Dallas Parkway Properties, which owned the office building that housed the company’s headquarters.

Polyphase continued to pick up a diversified mix of businesses in 1994. In March it added to its computer segment by acquiring the rights to Register-Mate, a point-of-sale software system. Later in the year the company added PC Repair of Florida, Inc., retailer of computer hardware and networks, followed by the acquisition of Micro Configurations, a Brooklyn, New York company involved in the assembly, sale, and service of computers as well as other electronics products. Furthermore, in 1994 Polyphase acquired Texas Timberjack, creating its forestry segment. Although Polyphase posted a $1 million loss in 1994, after earning more than $1 million in 1993, the company was growing rapidly, with revenues increasing from $7.3 million in 1993 to almost $25 million in 1994.

In 1995 Polyphase entered the food business, making its most significant acquisition. It formed a subsidiary named Overhill Farms to purchase IBM Foods, Inc., a Culver City, California food processor that generated four times as much sales volume as Polyphase had achieved in 1994. In addition, IBM Foods earned $7 million for the year. The purchase price was $31.3 million in cash, plus the assumption of debt. IBM Foods boasted strong enough cash flow, however, that it was expected to have an immediate positive effect on Polyphase’s balance sheet. Boasting three state-of-the-art manufacturing plants and 750 employees, it already had steady customers in the airline and hotel industries, as well as the Jenny Craig operation. Because neither Tanner nor Rudis had experience in the food business, they turned to an old hand, Rod Stephens, to serve as president of Overhill Farms, as well as to look for further food acquisitions. The 70-year-old Stephens was the retired chairman and president of Armour Foods and had more than 40 years of experience in all aspects of the food industry. With sales for the new food group added to its transformer group, computer group, and forestry group, Polyphase experienced a dramatic increase in sales and earnings, posting more than $102 million revenues and almost $3.3 million in net profits.

Key Dates:

1963:: Kappa Networks is incorporated.
1985:: Polyphase Instrument Co. is acquired.
1991:: The name is changed to Polyphase Corp.
1992:: Paul Tanner and James Rudis are named directors.
1995:: Overhill Farms subsidiary is formed to acquire IBM Foods.
1998:: Rudis replaces Tanner as chairman and CEO.
2001:: The company changes its name to Overhill Corporation.

Tanner, ever the ambitious dealmaker, initiated an ill-fated project in 1996 that ultimately led to his departure from Polyphase. He headed a private investment group, PLY Stadium Partners, to build an 85,000-seat indoor stadium to serve as a major sports, entertainment, and convention facility in Las Vegas, Nevada. Polyphase was enlisted to serve as the managing investor for the project, responsible for the design and construction of the stadium, as well as the sale of luxury suites and premium seating, event planning, and operations. With the exception of baseball, the $530 million facility was designed to accommodate any kind of event, with the hope of attracting NCAA, NFL, and NBA games, as well as music performers and trade shows. Unlike in most stadiums, luxury suites would be available for use 24 hours a day with catering. Moreover, the plan called for restaurants and stores, as well as a nongaming hotel with at least 500 rooms on the site. Because the stadium would require only 30 of the 62 acres of the land that PLY Stadium would purchase from Union Pacific Railroad, there was more than enough space for the hotel. It was certainly a daring plan, but financing of the project was dependent on the up-front sale of 300 luxury suites, with an average price of $1.5 million each. Although Tanner would maintain that some suites had been sold and that he was finalizing a wide range of future events for the stadium and talking to major hotel chains about a joint venture for the hotel, the start of construction was continually postponed. Polyphase also became embroiled with a lender over money Overhill Farms transferred to Polyphase accounts, a situation that led the American Stock Exchange to suspend trading of Polyphase stock after litigation prevented the company from making SEC filings. By the time Polyphase was allowed to resume trading, the stadium had lost what little momentum it had, and it began to slowly fade as a viable project.

In addition to becoming involved in stadium development in 1996, Polyphase began to ease out of the computer industry, selling off 51 percent of its interests in the segment. Although revenues for 1996 increased significantly, approaching $150 million, the company lost nearly $400,000. Polyphase suffered an even more disappointing year in 1997. Revenues grew by just one percent, while the company posted a $19.2 million loss, due in large part to the stadium project. In February 1998 Tanner resigned, replaced as chairman and CEO by Rudis, who began to refocus the company. Revenues fell to $141.4 million for fiscal 1998, but the company lost only $329,000. Much of the drop-off in sales was the result of the food group eliminating lower margin business. The following year, the segment rebounded, posting a 21 percent increase in revenues. Moreover, it landed two important new national accounts in Panda Express and Denny’s, as well as extending its supply agreement with Jenny Craig. Polyphase’s other business groups, however, did not offer as promising a future.

Food and Forestry at the Turn of the Century

In fiscal 1999 Polyphase sold off its Polyphase Instrument subsidiary, severing the company’s ties to its past in electronics and leaving the holding company involved in two highly different businesses: food and forestry. The forestry group had proven to be inconsistent, susceptible to weather conditions and other factors that lowered the demand for its products and services. Clearly, Overhill Farms, which was now generating nearly 80 of the company’s revenues, had become Polyphase’s primary business. In September 2000 the subsidiary grew further by acquiring the operating assets and trademarks of the Chicago Brothers food business, in the process gaining the rights to two trademarked brands: “Chicago Brothers” and “Florence Pasta and Cheese.”

In 2001 Polyphase decided to adopt the name of its subsidiary, becoming Overhill Corporation. Management believed that the move would strengthen the Overhill name with potential customers as well as the investment community. Later in the year the company announced a plan to spin off Overhill Farms, leaving Texas Timberjack as the sole business of Overhill Corporation. Once the spin-off was completed, Overhill Corporation would change its name again, and Rudis would resign to take over Overhill Farms. With the expected completion of these maneuvers in 2002, Overhill Farms would begin a new chapter as an independent food services company. Given Rudis’s background and strength in acquisitions, it was likely that the business would begin to pursue an active program of external growth.