October 3, 2005
Heating up | Bangor-area companies scuffle over a product they say is revolutionary
By Taylor Smith
In recent weeks, concerns about energy prices have come to a head. Hurricane Katrina's effect on oil refineries in the Gulf Coast pushed gas prices across the country to record levels while the cost of other energy sources ˆ including home heating oil, natural gas and even firewood ˆ rose to reflect increased demand and shrinking supply. And while the cooler fall evenings mean good sleeping weather, many Mainers are tossing and turning over concerns that the cost of keeping homes and businesses warm during the winter months will be financially backbreaking.
But if a new Bangor company has its way, residents in Maine and other cold-weather areas will soon have an alternative to high-priced traditional heating methods like oil and natural gas. Hallowell International LLC, which was founded this summer by former refrigeration technician Duane Hallowell, announced in early August that its new facility in Bangor would begin producing a specialized heat pump that is highly efficient even in cold weather. Operating like an air conditioner in reverse, a heat pump draws heat out of the air. But while the efficiency of traditional heat pumps flag when the mercury drops, Duane Hallowell says his product can draw heat out of air as cold as -40 degrees Fahrenheit. "It's an amazing market opportunity," he says.
And in addition to manufacturing what could very well be a revolutionary product ˆ Hallowell International Chairman Ed Paslawski says that other players in the heating, ventilation and air conditioning market don't even know this kind of heat pump exists ˆ Duane Hallowell plans for his company to become one of the largest employers in the Bangor region. He expects the company in five years to employ 900, which would significantly eclipse the 500-plus employees of General Electric in Bangor, the city's largest manufacturing employer according to Rodney McKay, Bangor's director of community and economic development.
But if all this sounds familiar, that's because Hallowell International isn't the first company in the Bangor area to talk up plans for manufacturing a new heat pump product. Last July, the Bangor Daily News reported that Brewer-based Nyle Special Products ˆ Hallowell's former employer ˆ proposed building a 60,000-square-foot manufacturing facility and hiring an additional 80 employees to assemble the company's Cold Climate Heat Pump. (See "Hot to trot," Sept. 27, 2004.) While those plans never got off the ground, Nyle already had been manufacturing the heat pumps and distributing them nationally during a preliminary rollout to test their effectiveness. But because of production difficulties and a lack of funding ˆ as well as the pesky matter of a revoked patent license ˆ Nyle last year halted production of its Cold Climate Heat Pump and effectively put the project on the back burner.
So when Hallowell presented his proposal in August to the Bangor City Council, which was scheduled to vote on whether to award a $200,000 development agreement and incentive package to the company, the plan was met with some criticism ˆ most pointedly from Don Lewis, co-founder of Nyle International, the parent company of Nyle Special Products.
When the city council voted to award the company funding for operations and rent on a 40,000-square-foot city-owned warehouse, Lewis voiced concerns that officials were making a premature bet on Hallowell International. In a recent interview with Mainebiz, Lewis bemoaned the lack of financial support from state and local agencies during the time his company was working to develop its heat pump product, and discounted Hallowell's employment projections, which he says would make the company "one of the largest HVAC companies in the world" worth "billions of dollars."
Hallowell's plans have caused a rift between the companies, including a dispute over which company owns the rights to manufacture the heat pump design and a host of conflicting opinions surrounding Nyle's production of the product. But while the bad blood seems to be simmering, city officials in Bangor and Brewer ˆ as well as state economic development officials ˆ have been trying to play down the corporate acrimony and focus instead on the potential boon to the Bangor area's economy should Hallowell's proposal pan out. "We don't care who develops this," says Jack Cashman, commissioner of the Maine Department of Economic and Community Development. "It's whoever creates the jobs. We do not play favorites."
Patent problems
So if this product is so revolutionary ˆ and is so under the radar of the rest of the national HVAC market ˆ how do two companies just a few miles away from one another release such similar plans a bit more than a year apart? For the answer, look no further than Duane Hallowell, who until a few months ago headed Nyle Special Products' Cold Climate Heat Pump project under the direction of Lewis. Hallowell left Nyle after the company's right to license patents for the heat pump was revoked by the patent holder, David Shaw, an HVAC industry veteran who worked for many years with Carrier Corp., a leading HVAC company owned by Hartford, Conn.-based United Technologies. According to Shaw, who lives in East Falmouth, Mass., and has worked for more than a decade on his heat pump design, Nyle's license was revoked after the company defaulted on the terms of its contract, including what Shaw calls "serious" performance issues. "They missed a number of terms in the contract ˆ and not just missing, but grossly missing," says Shaw. "I just couldn't deal with them anymore."
But Lewis says Shaw's heat pump patent was seriously flawed when the company first made a deal with Shaw in 2002 to produce the product. Nyle Special Products spent more than $2 million and "two or three years to get it to where it was an operable product," says Lewis. Though Shaw's patents were the genesis of the project, according to Lewis, Nyle also spent time and money into making the heat pump a viable product that would work effectively in the field. ("As far as I'm concerned, anything he's told you in that regard is categorically false," said Shaw when asked whether there was any merit to Lewis' contention that his designs were flawed.)
But the company eventually ran into financial problems as a result of costs involved in developing the heat pump. Steve Konstantino, who marketed the Cold Climate Heat Pump for Nyle through his Freeport-based EnerKon Corp., recalls that dwindling cash reserves for the project did indeed lead to the downfall of Nyle's heat pump project. Konstantino says the potential market for these products is huge, and that he had to cancel "a lot of orders" because Nyle was unable to produce enough workable heat pumps to fill the demand. "They just stunk at raising capital," he says. "From day one, they were always supposed to be getting more money and they never did. They had accumulated too much debt and there were problems with units going out. They weren't handed a blueprint ˆ they thought the design was all ready to go, then they found out that it didn't work right. They had to do a lot of engineering and design to get it to work right."
Despite what Lewis describes as the problems with the initial designs, he says he wanted to maintain a working relationship with Shaw, but that Shaw's royalty demands for the product were "financially unreasonable." Lewis says earlier this year he tried to renegotiate the contract in light of the difficulties in manufacturing a workable product from Shaw's blueprints. "If Joe Investor comes along and wants to put money on the company and the patents aren't sure, let's make some deal so at least we have sales and marketing and a patina that we're working together," he says.
Not-so-friendly neighbors
But instead of renegotiating his contract with Lewis, Shaw opted to partner with Hallowell. Shaw says he decided earlier this year to sell his patents outright to Hallowell International because he feels the company has a much better chance than Nyle to manufacture the heat pumps successfully. He says that Hallowell International has been "financed properly" and that he's confident the company's management team will be able to smooth out any bumps in the production process. "This isn't rocket science, as far as I'm concerned," he says. "It's relatively simple technology, but you've got to have a committed company who can do it right or else it will turn into a disaster. That's where it was heading [at Nyle]."
However, financing still remains an issue for Hallowell International. For starters, Bangor's financing agreement with the company calls for Hallowell International to meet incremental employment targets during the first few years of operations, and also requires the company to raise a minimum of $2 million in private equity capital before the end of the year, according to McKay. The city of Bangor is renting Hallowell a warehouse formerly used as storage space by Old Town Canoe, and has agreed to forgive up to $100,000 in rent if the company meets those employment and fundraising requirements. "If they don't raise the money by the end of the year," says McKay, "then there's no lease beyond that point and no $200,000 from the city. We're trading our assistance for jobs."
Though Hallowell notes that Paslawski is the best source of information regarding company finances, he says that the $2 million the company needs to raise to comply with the city's financing requirements is nearly complete. "We're doing extremely well," he says. "It's already in place, actually. Right now, it's just a matter of locking [up the] contracts."
(Paslawski, when reached for comment on the company's financial status, declined to comment beyond saying that the funding process "is going fine." He also declined to discuss the source or sources of the company's funding, citing Hallowell International's status as a privately held company.)
If Hallowell International can indeed raise that capital, it will be one step closer to manufacturing a product parties on both sides of the issue agree is a blockbuster. "Right now, nobody manufactures cold-climate heat pumps or pumps operating on that technology," says Lewis. "But there's a huge demand for it. We get calls for it every day. I have utilities and distributors that would take every one we could give them, but I don't have any to give them."
And because of the potential market for heat pumps that work well in cold weather, Lewis says he hasn't given up on Nyle's plans to manufacture the pumps. He expects that a potential settlement in a lawsuit Nyle filed against Berlin, Conn.-based Northeast Utilities will give the company enough capital to resume production. ("Out of respect for the parties involved, we don't comment on pending litigation," said Al Lara, a spokesman for Northeast Utilities.) Lewis expects to ramp up production slowly and says he wants to make sure his employees ˆ from assemblers to installers in the field ˆ are well trained. Lewis expects the company to hire 20-25 employees by next spring to handle production, and expects sales to reach $5 million or so in the first year of production.
David Shaw says that if Lewis indeed restarts production of Nyle's Cold Climate Heat Pumps, it will constitute patent infringement. "He'll get shut down so fast it'll make your head spin," says Shaw.
Lewis, however, isn't overly concerned that Nyle's heat pumps will be infringing on Shaw's patents or the products that Hallowell International will be producing. That's because he says Nyle won't be relying on Shaw's patents for the pumps. Also, Lewis says that Hallowell International's deal for the patents doesn't mean Nyle will get shut out of the market. "The patents aren't really an issue for us anymore, and they're not particularly valuable to Hallowell," says Lewis. (Asked to comment on Lewis' contention that Shaw's heat pump designs don't represent a finished product, Ed Paslawski says Hallowell International is "not the least bit interested in commenting on any allegations that Don Lewis is making.")
Meanwhile, Lewis figures that there's plenty of room for two companies manufacturing these specialized heat pumps. "There's probably room for seven or eight companies doing it," he says. "In a lot of ways, it's probably better having more than one company making these products. I think if Hallowell is to succeed and we were to succeed, it would actually help both our businesses."
But whether these two companies can figure out a way to coexist in the marketplace may be a moot point, says Konstantino, who adds that it's unlikely Nyle and Hallowell International are the only two companies working to develop cold-weather heat pumps.
And though others ˆ including Lewis and Paslawski ˆ contend that major companies like Carrier and Tyler, Texas-based Trane haven't started work on such products, Konstantino is convinced that the industry's bigger players already are working to grab a piece of such a potentially large market. And, he says, the squabbling between Nyle and Hallowell International means that the companies are expending precious resources instead of focusing on their particular products. "Right now, I have less confidence that anyone will have a headstart on anyone else," he says. "I think that the two of them will end up battling up there and neither of them have the strength to do that. Some other company will come out and blow their doors off."
But if a new Bangor company has its way, residents in Maine and other cold-weather areas will soon have an alternative to high-priced traditional heating methods like oil and natural gas. Hallowell International LLC, which was founded this summer by former refrigeration technician Duane Hallowell, announced in early August that its new facility in Bangor would begin producing a specialized heat pump that is highly efficient even in cold weather. Operating like an air conditioner in reverse, a heat pump draws heat out of the air. But while the efficiency of traditional heat pumps flag when the mercury drops, Duane Hallowell says his product can draw heat out of air as cold as -40 degrees Fahrenheit. "It's an amazing market opportunity," he says.
And in addition to manufacturing what could very well be a revolutionary product ˆ Hallowell International Chairman Ed Paslawski says that other players in the heating, ventilation and air conditioning market don't even know this kind of heat pump exists ˆ Duane Hallowell plans for his company to become one of the largest employers in the Bangor region. He expects the company in five years to employ 900, which would significantly eclipse the 500-plus employees of General Electric in Bangor, the city's largest manufacturing employer according to Rodney McKay, Bangor's director of community and economic development.
But if all this sounds familiar, that's because Hallowell International isn't the first company in the Bangor area to talk up plans for manufacturing a new heat pump product. Last July, the Bangor Daily News reported that Brewer-based Nyle Special Products ˆ Hallowell's former employer ˆ proposed building a 60,000-square-foot manufacturing facility and hiring an additional 80 employees to assemble the company's Cold Climate Heat Pump. (See "Hot to trot," Sept. 27, 2004.) While those plans never got off the ground, Nyle already had been manufacturing the heat pumps and distributing them nationally during a preliminary rollout to test their effectiveness. But because of production difficulties and a lack of funding ˆ as well as the pesky matter of a revoked patent license ˆ Nyle last year halted production of its Cold Climate Heat Pump and effectively put the project on the back burner.
So when Hallowell presented his proposal in August to the Bangor City Council, which was scheduled to vote on whether to award a $200,000 development agreement and incentive package to the company, the plan was met with some criticism ˆ most pointedly from Don Lewis, co-founder of Nyle International, the parent company of Nyle Special Products.
When the city council voted to award the company funding for operations and rent on a 40,000-square-foot city-owned warehouse, Lewis voiced concerns that officials were making a premature bet on Hallowell International. In a recent interview with Mainebiz, Lewis bemoaned the lack of financial support from state and local agencies during the time his company was working to develop its heat pump product, and discounted Hallowell's employment projections, which he says would make the company "one of the largest HVAC companies in the world" worth "billions of dollars."
Hallowell's plans have caused a rift between the companies, including a dispute over which company owns the rights to manufacture the heat pump design and a host of conflicting opinions surrounding Nyle's production of the product. But while the bad blood seems to be simmering, city officials in Bangor and Brewer ˆ as well as state economic development officials ˆ have been trying to play down the corporate acrimony and focus instead on the potential boon to the Bangor area's economy should Hallowell's proposal pan out. "We don't care who develops this," says Jack Cashman, commissioner of the Maine Department of Economic and Community Development. "It's whoever creates the jobs. We do not play favorites."
Patent problems
So if this product is so revolutionary ˆ and is so under the radar of the rest of the national HVAC market ˆ how do two companies just a few miles away from one another release such similar plans a bit more than a year apart? For the answer, look no further than Duane Hallowell, who until a few months ago headed Nyle Special Products' Cold Climate Heat Pump project under the direction of Lewis. Hallowell left Nyle after the company's right to license patents for the heat pump was revoked by the patent holder, David Shaw, an HVAC industry veteran who worked for many years with Carrier Corp., a leading HVAC company owned by Hartford, Conn.-based United Technologies. According to Shaw, who lives in East Falmouth, Mass., and has worked for more than a decade on his heat pump design, Nyle's license was revoked after the company defaulted on the terms of its contract, including what Shaw calls "serious" performance issues. "They missed a number of terms in the contract ˆ and not just missing, but grossly missing," says Shaw. "I just couldn't deal with them anymore."
But Lewis says Shaw's heat pump patent was seriously flawed when the company first made a deal with Shaw in 2002 to produce the product. Nyle Special Products spent more than $2 million and "two or three years to get it to where it was an operable product," says Lewis. Though Shaw's patents were the genesis of the project, according to Lewis, Nyle also spent time and money into making the heat pump a viable product that would work effectively in the field. ("As far as I'm concerned, anything he's told you in that regard is categorically false," said Shaw when asked whether there was any merit to Lewis' contention that his designs were flawed.)
But the company eventually ran into financial problems as a result of costs involved in developing the heat pump. Steve Konstantino, who marketed the Cold Climate Heat Pump for Nyle through his Freeport-based EnerKon Corp., recalls that dwindling cash reserves for the project did indeed lead to the downfall of Nyle's heat pump project. Konstantino says the potential market for these products is huge, and that he had to cancel "a lot of orders" because Nyle was unable to produce enough workable heat pumps to fill the demand. "They just stunk at raising capital," he says. "From day one, they were always supposed to be getting more money and they never did. They had accumulated too much debt and there were problems with units going out. They weren't handed a blueprint ˆ they thought the design was all ready to go, then they found out that it didn't work right. They had to do a lot of engineering and design to get it to work right."
Despite what Lewis describes as the problems with the initial designs, he says he wanted to maintain a working relationship with Shaw, but that Shaw's royalty demands for the product were "financially unreasonable." Lewis says earlier this year he tried to renegotiate the contract in light of the difficulties in manufacturing a workable product from Shaw's blueprints. "If Joe Investor comes along and wants to put money on the company and the patents aren't sure, let's make some deal so at least we have sales and marketing and a patina that we're working together," he says.
Not-so-friendly neighbors
But instead of renegotiating his contract with Lewis, Shaw opted to partner with Hallowell. Shaw says he decided earlier this year to sell his patents outright to Hallowell International because he feels the company has a much better chance than Nyle to manufacture the heat pumps successfully. He says that Hallowell International has been "financed properly" and that he's confident the company's management team will be able to smooth out any bumps in the production process. "This isn't rocket science, as far as I'm concerned," he says. "It's relatively simple technology, but you've got to have a committed company who can do it right or else it will turn into a disaster. That's where it was heading [at Nyle]."
However, financing still remains an issue for Hallowell International. For starters, Bangor's financing agreement with the company calls for Hallowell International to meet incremental employment targets during the first few years of operations, and also requires the company to raise a minimum of $2 million in private equity capital before the end of the year, according to McKay. The city of Bangor is renting Hallowell a warehouse formerly used as storage space by Old Town Canoe, and has agreed to forgive up to $100,000 in rent if the company meets those employment and fundraising requirements. "If they don't raise the money by the end of the year," says McKay, "then there's no lease beyond that point and no $200,000 from the city. We're trading our assistance for jobs."
Though Hallowell notes that Paslawski is the best source of information regarding company finances, he says that the $2 million the company needs to raise to comply with the city's financing requirements is nearly complete. "We're doing extremely well," he says. "It's already in place, actually. Right now, it's just a matter of locking [up the] contracts."
(Paslawski, when reached for comment on the company's financial status, declined to comment beyond saying that the funding process "is going fine." He also declined to discuss the source or sources of the company's funding, citing Hallowell International's status as a privately held company.)
If Hallowell International can indeed raise that capital, it will be one step closer to manufacturing a product parties on both sides of the issue agree is a blockbuster. "Right now, nobody manufactures cold-climate heat pumps or pumps operating on that technology," says Lewis. "But there's a huge demand for it. We get calls for it every day. I have utilities and distributors that would take every one we could give them, but I don't have any to give them."
And because of the potential market for heat pumps that work well in cold weather, Lewis says he hasn't given up on Nyle's plans to manufacture the pumps. He expects that a potential settlement in a lawsuit Nyle filed against Berlin, Conn.-based Northeast Utilities will give the company enough capital to resume production. ("Out of respect for the parties involved, we don't comment on pending litigation," said Al Lara, a spokesman for Northeast Utilities.) Lewis expects to ramp up production slowly and says he wants to make sure his employees ˆ from assemblers to installers in the field ˆ are well trained. Lewis expects the company to hire 20-25 employees by next spring to handle production, and expects sales to reach $5 million or so in the first year of production.
David Shaw says that if Lewis indeed restarts production of Nyle's Cold Climate Heat Pumps, it will constitute patent infringement. "He'll get shut down so fast it'll make your head spin," says Shaw.
Lewis, however, isn't overly concerned that Nyle's heat pumps will be infringing on Shaw's patents or the products that Hallowell International will be producing. That's because he says Nyle won't be relying on Shaw's patents for the pumps. Also, Lewis says that Hallowell International's deal for the patents doesn't mean Nyle will get shut out of the market. "The patents aren't really an issue for us anymore, and they're not particularly valuable to Hallowell," says Lewis. (Asked to comment on Lewis' contention that Shaw's heat pump designs don't represent a finished product, Ed Paslawski says Hallowell International is "not the least bit interested in commenting on any allegations that Don Lewis is making.")
Meanwhile, Lewis figures that there's plenty of room for two companies manufacturing these specialized heat pumps. "There's probably room for seven or eight companies doing it," he says. "In a lot of ways, it's probably better having more than one company making these products. I think if Hallowell is to succeed and we were to succeed, it would actually help both our businesses."
But whether these two companies can figure out a way to coexist in the marketplace may be a moot point, says Konstantino, who adds that it's unlikely Nyle and Hallowell International are the only two companies working to develop cold-weather heat pumps.
And though others ˆ including Lewis and Paslawski ˆ contend that major companies like Carrier and Tyler, Texas-based Trane haven't started work on such products, Konstantino is convinced that the industry's bigger players already are working to grab a piece of such a potentially large market. And, he says, the squabbling between Nyle and Hallowell International means that the companies are expending precious resources instead of focusing on their particular products. "Right now, I have less confidence that anyone will have a headstart on anyone else," he says. "I think that the two of them will end up battling up there and neither of them have the strength to do that. Some other company will come out and blow their doors off."
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