Race is on to make Emagisoft a success

The founder of the local software company is confident he can get Emagisoft funded before it burns through all its money and before rivals develop comparable products.

By MICHAEL BRAGA

© St. Petersburg Times, published August 6, 2000

ST. PETERSBURG -- Kyle E. Jones, chief executive of Emagisoft, is one of those entrepreneurs who won't let unpleasant realities stand in the way of his e-commerce brainstorm.

Faced with a dire shortage of computer programmers in the Tampa Bay area, he hired crews of Russian code-writers to create a suite of software applications that will help businesses set up shop online. Now, Jones' programmers ship their handiwork to him via satellite from Moscow and Minsk.

Confronted with the high price of superstrength Internet computers that route information from PCs to Web sites and back again, Jones had his team build its own no-name hardware.

Frustrated in his first attempt to take his company public, he bought a publicly-traded shell company created specifically to allow a company like his to sell stock without having to go through the rigorous process of an initial public offering.

Concerned that such a maneuver would make his company seem to be just another penny stock, Jones spent money he could barely spare to hire big-name law and accounting firms with connections and credentials.

"I'll do whatever it takes to get this idea off the ground," Jones said.

As with many a Web start-up, however, Jones' bravado and determination may not be enough to make up for his lack of cash. He is in a race against time to get his company funded before it burns through the money it has left -- and before rivals develop products just like the ones he thinks can make Emagisoft a fortune.

Setting a strategy

Jones, 37, was born in the small Appalachian town of Barbourville, Ky. He moved to the Tampa Bay area in 1993 after one of the companies he founded with two college friends was purchased by North American Data Inc., a now-defunct St. Petersburg corporation that specialized in scanning documents into computer data banks. Jones stayed with that company for several years after the sale.

In 1995, he set off on his own again. This time, his intention was to make handheld medical devices that monitor patients' vital signs. He raised $100,000 through a state grant. But Jones soon realized the market for such devices was not developed enough for him to proceed. So he switched gears.

Now, more than three years later, Jones and his team of 110 programmers, Web designers and sales personnel are almost ready to mass-market a suite of six software applications. The software is designed to allow companies to build their own commercial Web sites and to begin buying and selling products online. The applications also allow businesses to collect information about their customers, about where they go when they visit the sites and what they buy. This information then can be used to redesign the sites to improve sales.

One of the best features about the software, Emagisoft marketing director Jamie Jalazo said, is that it's easy to use. People don't need to know sophisticated programming languages to build their own sites, he said. "All they have to know how to do is point and click."

Rather than selling the software in the traditional way, by shipping CD-ROMs in packages to customers for a lump-sum payment, Emagisoft intends to rent its software over the Internet. Customers can call up Emagisoft's Web site and download the software for a monthly fee. The cost: $45 to $4,500 a month, depending on how many people use the system and how many applications they deploy.

By leasing the software over the Internet, Jones says Emagisoft's customers won't need to hire information technology personnel to install, maintain and upgrade the programs. Emagisoft takes care of that via the Internet.

"It's a fairly slick tool," says Chris Tellbuescher, vice president and co-founder of NetWise Technology, a competing St. Petersburg Web development and systems integration firm.

Emagisoft's software is better than similar applications produced by iCat and comparable to software made by IBM and Intershop, said Tom O'Flaherty, an analyst with the Gartner Group, the Stamford, Conn., technology consulting firm that Emagisoft hired to evaluate its business plan. But O'Flaherty said competing firms have an advantage over Emagisoft in that their software already is widely distributed.

To complete its software development and get its products to market in the most economical way, Emagisoft is using some unconventional strategies. About 70 of Emagisoft's programmers, for instance, reside in the former Soviet Union. Half of them live in Moscow and the other half in Minsk. They earn from $400 to $1,500 a month -- about one-tenth what U.S. programmers make.

The risk involved with employing a relatively low-paid work force is that Emagisoft's programmers could be recruited by competing companies. Jones bristles at discussing pay: "I don't need other companies competing for my people."

Emagisoft also is approaching sales and marketing in a novel way. Instead of developing a large in-house sales staff, Emagisoft wants computer equipment resellers, such as Vanstar, Novaquest and First International Computer, to sell its goods. These companies, which focus on selling and installing hardware, have seen their margins erode over the past few years as consumers buy hardware over the Internet. Because of their declining financial situations, marketing director Jalazo thinks these companies will jump at the chance to earn commissions from selling Emagisoft's software.

According to critics, Emagisoft's plan of marketing through computer hardware resellers is a good one. "But much will depend on implementation," said O'Flaherty of the Gartner Group. The plan also might turn out to be more costly than Emagisoft thinks.

"It will take a lot of money to support resellers," said NetWise president and co-founder Randy Wadle. "You have to advertise heavily to drive customers to resellers. And there's nothing to say that competitors with deeper pockets won't make better use of the same strategy."

Another of Emagisoft's money-saving approaches is its use of homemade computer equipment. By buying components from manufacturers, instead of already assembled routers from established companies such as Cisco, Emagisoft can save about $13,000 on each machine it uses. A Cisco router costs about $15,000; a custom-built router costs $2,000.

A lot of Internet service providers also custom-build their own routers. The risk is some customers may be wary about doing business with a company that doesn't use brand-name equipment. Critics also warn that the systems are dependent on the guy who installs them. For instance, what if Emagisoft chief information officer David T. Hollis leaves the company? "I'm not going anywhere," he said. "That's why they gave me all these stock options."

Waiting for a windfall

Emagisoft's greatest obstacle at the moment, though, is its shortage of cash.

The company generated revenues of $421,004 in 1999 from about 30 clients that have employed Emagisoft to build and maintain their Web sites. Clients include EUnited Mortgage, St. Petersburg Catholic High School and Floridaforsalebyowner.com. Because of software development costs, however, Emagisoft reported a loss of $981,288 last year and a loss of $751,110 for the first quarter of this year.

So far, these losses have been covered by the $2.2-million that Jones raised from angel investors, private investors that have a net worth of at least $1-million. But Emagisoft only had $30,911 of that money left as of March 31, according to Securities and Exchange Commission documents. In April, Jones borrowed another $610,000 from investors, but that money is gone, too.

To keep operating, Emagisoft is trying to raise $3-million through a private placement arranged by Hotovez Pomeranz & Co., a little-known San Francisco-based broker dealer. Jones said the deal is about to close.

But to really make Emagisoft's product launch a success, Jones says he needs to raise at least $15-million. He first tried to get Morgan Stanley Dean Witter to back his efforts in February. But Jones said the big New York-based investment firm wanted to see revenues from the sale of Emagisoft's software before committing its money. Jones then approached CIBC Oppenheimer and Pequot Capital and received the same response. When the market for high-tech stocks collapsed in April, Jones realized he would have to move quickly in another direction.

With the help of Hotovez Pomeranz, Emagisoft participated in a reverse merger. It purchased an empty shell company that was created specifically to allow companies such as Emagisoft to trade shares on public stock markets. As a result, Emagisoft's stock is listed on the Over-the-Counter Bulletin Board exchange, and Jones is planning to raise money by issuing stock this summer.

The drawback of taking a company public through a "back door" reverse merger, however, is that it raises red flags among investors, says Barry Alpert, Raymond James Financial's managing director for new business development. Companies that have gone public that way in the past, such as BusinessMall.com, Reliant Interactive Media and Affinity International Travel, often are penny stocks, and few big-name securities firms want to trade their stock or employ analysts to cover them. Knowing that, Jones says he hired the most prominent securities law and accounting firms in the state: Greenberg Traurig and Arthur Andersen.

"That," Jones said, "gives us credibility."

But even Arthur Andersen cast doubt about Emagisoft's future in its March 31 audit report. The report said that "the cash position of the company raises substantial doubt about its ability to continue as a going concern."

Still, Jones thinks he will raise the money he needs. If he is unable to do it by selling shares on the Over-the-Counter Bulletin Board exchange, he can do it by selling shares in Europe. Jones has been stopping in Germany on recent trips to Russia and has discussed the possibility of a public offering on the Neuer Market exchange.

But all these efforts take time, and that's something Jones doesn't have much of.

"Time to market is crucial," says Tellbuescher of NetWise.

"There's already lots of competition. So Emagisoft needs to get its product to market as fast as it can."

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