Cash-strapped city loans $5 million for software financing

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July 11, 2005 // UPDATED 1:56 pm - April 26, 2007
By: Scott Russell
Scott Russell

Credit line will help Convention Center produce 'entrepreneurial' product - despite lawsuit

The City Council has approved a second $2.5 million line of credit to the Greater Minneapolis Convention and Visitors Bureau (GMCVA) to support its fledgling software-development business - upping the city's backing to $5 million for the for-profit venture.

Meanwhile, the product has earned GMCVA a lawsuit by Pittsburgh-based Software Management, Inc., alleging software copyright infringement, breach of contract and other charges, court records say.

The Council approved the loan 12-1 July 1, with Councilmember Paul Zerby (2nd Ward) voting no.

City Coordinator John Moir supports the GMCVA loan and calls the lawsuit spurious, an effort to stifle competition.

The GMCVA's product, Internet Destination Sales System (iDSS), is a Web-based sales and marketing program for conventions and trade shows. The city approved an initial $2.5 million loan on Jan. 30, 2004.

Councilmember Dan Niziolek (10th Ward) and Paul Ostrow praised the GMCVA for its entrepreneurship. Councilmember Scott Benson said the GMCVA is backing the loan with money it gets from Convention Center-related sales tax revenues.

"There is no risk," to the city, Benson said. "This is a very safe investment."

Zerby said the loan was not risk-free as Benson suggested - precisely because sales tax money would back the loan if the business flopped. "It all comes out of the city taxpayers' pockets, in one guise or another," he said.

The first $2.5 million loan is gone, Zerby said. Extending a second $2.5 million - under the lawsuit's cloud - is loaning good money after bad. "We should cut our losses, swallow a bitter pill and be done with it," he said.

According to Software Management's complaint, GMCVA used its products from 1993 to 1999. It alleges that GMCVA and its partner, Eutech, developed iDSS, "by improperly using and/or reverse engineering" Software Management's product.

Benson called the lawsuit a "sham." Moir said he is not worried that GMCVA violated any patents. However, in the short term, the lawsuit blocks GMCVA's access to private venture capital markets, he said.

"This is a total business ploy to try to snuff this extremely strong competitive product from their market," he said. "It is standard business practice."

Greg Ortale, GMCVA's executive director, said the two sides are in nonbinding dispute resolution, with a third party evaluating the patent claim. He expected a favorable outcome, but the suit could still end up in court.

A jury trial date is set for Feb. 6, 2006, court records say.

Ortale said the GMCVA needed the city loan to improve the product and penetrate the market.

Without the city loan, the iDSS project would have run out of money July 1, a city staff memo said. Staff also recommended allowing GMCVA to defer repayment of its initial $2.5 million loan by one year, to 2008.

Moir said GMCVA ended the Eutech partnership earlier this year and now wholly owns iDSS. Eutech was more focused on the technical aspects than the business aspects, he said.

IDSS has taken a broader view of its market, targeting convention and visitors' bureaus as well as trade associations, Moir said. Together, they are a $2 billion annual target market.

Ortale said iDSS now has 22 customers, either committed or in the queue. They include convention and visitors' bureaus and direct marketing organizations from Sydney, Australia; Glasgow; Pittsburgh; Galveston, Tex.; and Baltimore.

Moir said the city would earn the same interest rate from the GMCVA loan as it does on its U.S. Treasury investments, now approximately 5 percent.

"We didn't want to have any opportunity costs at all in this transaction," he said.

If iDSS meets projections, it will start making money in 2006 and have $1.5 million net revenue by the end of 2007, the staff memo said.

If iDSS does not make a profit, GMCVA would pay back the city using dedicated Convention Center-related sales taxes - portions of the half-cent citywide sales tax, the 3 percent Downtown liquor and food tax and the 3 percent lodging tax, Moir said. That would means the GMCVA would have less money to market the city.

The group gets $5.1 million of its $9 million annual budget from sales tax; its other funding includes member contributions, he said.

If iDSS underperformed, the city and GMCVA would work out a repayment plan - "but we would still get our money back with interest," Moir said.

City staff supported the loan, saying it would help the GMCVA become more "financially self-sufficient," a memo said. Still, software profits wouldn't have any upside for the city's ailing General Fund, which pays for basic services such as police, firefighters and roads.

If the GMCVA software venture succeeds, the additional money would support Convention Center-related functions and marketing efforts, Moir said.

The city is also taking an iDSS oversight role.

According to the staff memo, iDSS executive management will review progress monthly with GMCVA and city staff. The city would have to approve any capitalization changes, including additional lines of credit and employee equity stakes.

Benson said the GMCVA will use $300,000 of the new $2.5 million line of credit to repay a Wells Fargo loan.

A brief history of iDSS

- Feb. 19, 2003: GMCVA news release announces iDSS's launch, in partnership with Singapore-based Eutech Cybernetics.

- Jan. 26, 2004: Software Management, Inc. files suit against GMCVA in federal court.

- Jan. 30, 2004: Council votes 13-0 to loan $2.5 million loan to GMCVA. (Moir said GMCVA disclosed lawsuit to city leaders, who sit on the GMCVA board.)

- Early 2005: GMCVA dissolves Eutech partnership; iDSS becomes a wholly owned GMCVA subsidiary.

- July 1, 2005: Council votes to approve a second $2.5 million loan, the same day iDSS was expected to run out of money.

For more information on the company, see www.idss.com.