6. EDSR 06-12-2006ITEM # 6.
MEMORANDUM
TO: Economic Development Authority
FROM: Heidi Steinmetz, Assistant Director of Economic Development
DATE: June 12, 2006
SUBJECT: Consider Enforcement of Incubator Location Commitment
Clause for K-Netica
Attachment
Letter received on May 19, 2006 from K-Netica
Background
K-Netica became an Incubator tenant in May of 2002, subleasing 2,267 SF of space. The
company has developed a universal human language translator utilized through computer
software. The software has a number of key applications fox commercial, government,
military, and personal use.
The EDA granted K-Netica six sublease extensions: one for 9 months, four for 6 months
and one fox two months.
Upon formal notification in February that the Incubator building was sold, staff became
highly invoh~ed with the company's relocation efforts, based on the company's space and
lease rate requirements. Staff provided information on seven available lease space options,
coordinated site tours, and referred the company to a recruiter experienced in recruiting the
type of employees I{-Netica needed.
In March, the company's CEO verbally indicated that the company would be relocating to
the Twin Cities.
Issue
Staff received the attached letter on May 19`h from K-Netica indicating that the company has
relocated to Minneapolis.
There is a location commitment clause in the Memo of Understanding document held
between the EDA and K-Netica. The.clause reads as follows:
"Location Commitment; Mandatory Repurchase: Put Options. So long as EDA is owner of
any Shares of Company stock, the Company's headquarters and administrative facilities shall
be located within the City of Elk River. In the event that the Company no longer maintains
ALL such facilities within the City of Elk River, the EDA shall have the option to require
the Company to repurchase the Shares owned by EDA within 30 days of written demand.
The repurchase price shall be the last price per share offered in any private ox public offering
authorized by the Board of Directors of the Company, but not less than twice the price used
to calculate Shares provided to the EDA under 2.1.(A) of this Agreement."
Based on K-Netica's 3 years and 11 months as an Incubator tenant, the EDA cuxrendy owns
26,451 shares of I{-Netica stock. These shares represent the portion of rent that was "paid"
in the form of stock. The stock value will be determined by the price per share paid by the
first equity investors.
Recommendation
Staff recommends that the EDA consider enforcing the location commitment clause due to
the primary purpose of the Business Incubator Program. As stated in the Business
Incubator Guidelines & Application document, the purpose of the program "is to provide
inexpensive space and support fox higher technology, (start-up and existing) small companies
whose success would add significantly to the growth and diversification of the City of Elk
River's economic base."
In the past this clause has not been enforced due to not having the ability to meet the
company's space requirements at the time (e.g. Bixby Energy Systems). However, in this
case the company was provided several space options.
As the EDA discusses the future of the Incubator Program, the EDA may wish to
reevaluate the stated purpose of the program ox discontinue the stock options and location
commitment clause.
IC-NEtica
Dear Friends of K-Netica:
~IAY ~ 9 2ggE;
K-Netica Corporation
6120 Earle Brown Drive, Suite 502
Minneapolis, MN 55430-4112
763.274.1000
The past six years has been dedicated to the development of K-Netica's ISYLT'" ("I Speak Your
Language ") software. We operated on ashoe-string up to now, with little cash, space, or
personnel resources. However, like all early-stage companies have found, success does not occur
in a vacuum.
We have many supporters to thank. Without the guidance of our advisors and investment from
angel investors, the Elk River Investment Club, the Anoka County Economic Development
Program, and the Little Falls Initiative Foundation, we never could have financed our "survival"
through the past formative years. Without the help of the Genesis Incubator program, the City of
Elk River EDA and our land-lord Larry Hickman, we would not have been able to afford the
space necessary to get us to where we are today.
A few months ago our incubator space in Elk River was purchased by a new landlord. With the
loss of our space, we hurriedly looked at dozens of spaces in Elk River and the northern corridor.
We Found a GREAT sub-lease in the Earle Brown Farm system at 694 and Hwy 100 - (2.SK
square feet at 50% discount off of market rates, $ l OK of furniture and a phone system "thrown
in"...all with a 2 % year lease).
Today we are pleased to announce that we are currently implementing our first major
commercial project with Blue Cross Blue Shield of Minnesota, and have moved from survival
mode to growth mode! We are cash-flow positive (but may do a new financing to help
accelerate our growth), have hired additional staff, and are scoping even more new projects in
the Health Maintenance Organization market. We have been nominated as a candidate for the
Minnesota Tekne Award (www.tekneawards.ora) in the IT-Software, Communications and
Infrastructure category, and we're looking forward to thanking all of you publicly from the stage
"when we ruin" next fall!
We have a long way to go and remain forever mindful of "who got us here". Please note our
new location and stop in and visit us soon.
With deep gratitude and thanks,
Joe Roushar -Founder/CTO
ioer(a~knetica.com
Steve Pederson -CEO
stevep(a knetica.com
5/16/2006