A Calgary-based navigation company is trying to rise from the grave after the U.S. Federal Aviation Administration agreed to purchase its satellite-landing system for six major airports and four test facilities south of the border.
But before it can resume operations and grab its share of contract options that are worth an estimated $350 million US, Pelorus Navigation Systems must kiss and make up with its estranged business partner, the huge U.S. Fortune 100 company Honeywell International Inc. – and retain control of the part of the Landing Area Augment- ation System (LAAS) that it created.
“I’m confident that the differences with Honeywell can be sorted out,” said Pelorus president Fred Welter.
He said Pelorus’s proprietary services deal with Honeywell required the U.S. aerospace giant to pay the Calgary company $600,000 when the FAA contract was awarded in April. But Honeywell voided its contract with Pelorus after the Calgary company was forced into receivership in March.
“There is a cure period for receivership (in the Honeywell-Pelorus contract) and receivership was cured within the cure period, so the contract has to be reinstated,” said Welter.
The contract calls for Pelorus to supply and install the ground-station portion of Honeywell’s Landing Area Augmentation systems at the U.S. sites. Pelorus’s audited annual report for 2002-03 says that the company plans to invoke a binding arbitration mechanism in the contract with Honeywell, but Welter said Pelorus has opted to have conversations with the company instead. “We see (a resolution) happening in the middle of September,” said Welter.
Honeywell media-relations manager Ron Crotty declined to comment on the status of the Pelorus-Honeywell contract. “It’s Honeywell’s policy not to discuss the terms of a private commercial contract,” said Crotty in a telephone interview from his Phoenix office.
Last month, Pelorus shareholders elected a new board of directors and approved a plan to keep the company operating after North West Geomatics, a private Calgary-based aerial photography company that is part of the North West Group, rescued it from receivership on May 27.
North West Geomatics bought $1.6 million in debentures in a friendly takeover in April after the former debenture holders – several Saskatchewan government agencies – exercised an option to place Pelorus in receivership following the sale of two subsidiaries, Pelorus AustralAsia and Interscan, to a British firm.
Welter said the receivership resulted soon after Pelorus defaulted on interest payments to the former debenture holders while FAA approval of the Honeywell deal was delayed.
North West Geomatics, which does most of its business in the U.S., has an option to convert 33 per cent of the debentures into common shares valued at 49 cents each. Welter, who joined Pelorus from North West, said it agreed to invest in Pelorus before Honeywell was awarded the FAA contract because the two Calgary companies have other technologies that complement each other.
But, he said, Pelorus’s contract with Honeywell is “most important” to the company’s revival because the deal will allow it to hire people and continue operations. “It’s an open-ended contract, essentially, depending on the success of (LAAS) in the U.S.,” said Welter.
The FAA contract calls for the LAAS to be installed at Chicago’s O’Hare International Airport, as well as major airports in Seattle-Tacoma, Houston, Juneau, Phoenix and Memphis, as well as test facilities in Oklahoma City, Atlantic City and Honeywell’s engineering centre in Coon Rapids, Minn.
“It’s going to be implemented worldwide, eventually,” said Honeywell’s Crotty. “I think that’s pretty clear, and it’s our hope to continue to provide services for it.”
In a move that industry insiders consider to be unusual, the FAA required a conditional three-phase implementation process. As part of the pivotal first phase, Honeywell must prove over 18-24 months that the design can warn pilots within two seconds when it can’t provide safe guidance. The second and third phases cover system development and production.
Crotty said there’s no guarantee that Honeywell will be awarded contracts to complete the second and third phases. But according to a May Honeywell news release, its contract with the FAA contains options that are worth $350 million US.
“One of the pluses that Pelorus has right now is that (the LAAS) has been certified by the FAA,” said Welter, adding that if the Honeywell-Pelorus deal is not reinstated, Honeywell would have to do new research and get the technology recertified.
Pelorus, a public company which stopped trading after going into receivership and is applying for reinstatement on the TSX, and Honeywell started developing the LAAS in 1995. “Pelorus was a subcontractor, so Honeywell had ownership of a certain part of the technology and Pelorus had proprietary rights,” said Welter.
The LAAS technology uses a ground station, remote satellite measurement units and VHF data link transmitter to correct GPS inaccuracies. It allows planes equipped with compatible technology to make curved landing approaches from anywhere, enabling them to avoid residential areas and manoeuvre between mountains or buildings.
Instrument-landing system technology, which is now used at most airports worldwide, requires a plane to make a long, straight approach at a fixed angle.
Honeywell’s May news release announcing the FAA contract made no mention of Pelorus, although previous news releases referred to the technology as the Honeywell Pelorus LAAS.
The Pelorus-Honeywell dispute can best be described as a David vs. Goliath battle. Pelorus reported a $16.8-million deficit in 2003, an increase of almost $3 million from 2002, while Honeywell reported $22.3 billion in total sales – $8.9 billion in its aerospace sector alone.
If Pelorus remains operational, it will enjoy millions of dollars worth of tax benefits between now and 2012. According to its annual report, Pelorus has $7.187 million in research and development costs that can be used to reduce taxable income and $1,080,500 worth of tax credits. It also has $1.2 million in capital losses and $5.9 million in non-capital losses that can be claimed against taxes between now and 2012.
Pelorus was initially funded by the National Bank and Canadian Commercial Corp. (CCC), a Crown corporation that helps Canadian companies obtain contracts from branches of the U.S. government.
The CCC came under fire last week after the Ontario Supreme Court ruled, in a $70-million judgment, that it lied repeatedly to a company it was trying to persuade to assume a contract, defrauded the U.S. government, and then tried to drive a Canadian company into bankruptcy to extinguish a lawsuit against the CCC.