Essential Sees Path To IPO

By Marianne Dunn, Staff Writer



An influx of government contracts is putting Essential Technologies Inc. of Rockville, Md., on track for its planned initial public offering targeted for early 2001.

"Since we brought in our first round of venture capital in 1993, we have done everything to become a public company," said Jim Morentz, founder and chief executive officer.

The $1.5 million Essential raised in 1993 from Edison Venture Fund, Lawrenceville, N.J., allowed it to expand its software development business from crisis management to the environment, health and safety fields. The company closed a second round of funding May 15 with $6 million of investments from Allegra Capital Partners III of New York and Lazard Technology Partners, Washington, the technology venture arm of New York-based investment banking firm Lazard Frères.

That money will be used to expand internal growth and possibly for acquisitions, said Morentz, who declined to elaborate on potential candidates. "We view the last infusion of money as the last round before we go public," he said.

While the company is "leaning toward an IPO" in early 2001, he said, management also is open to the possibility of being acquired by another company. The company's revenue was $14.5 million in 1998, up from $8.8 million in 1997. Morentz projected 1999 revenue will hit $20 million.

About 400 copies of Essential software have been purchased using the General Services Administration schedule, and close to 20 government entities have signed contracts for software and support to identify and correct Year 2000 glitches, Morentz said.

A Sept. 10 contract award from the GSA calls for Essential to develop two command centers in Washington that will monitor Y2K disruptions at the agency's 13 regional offices. Financial and delivery details are still under negotiation.

In late August, Essential won a contract worth about $250,000 from the Agriculture Department to install an information system that monitors disruptions at all of its offices. And the company received a contract in June worth the same amount from the Coast Guard. Under that contract, Essential provided the Y2K command center that will compile information about every vessel and marine facility in the United States and evaluate that information to assess their risk levels during the rollover.

But, Morentz said, Essential should not be viewed as just another Y2K company. That is because the software purchased to monitor the Y2K rollover can be used as a crisis management command center after Jan. 1, 2000.

"This is about to get very exciting," said Morentz.

Essential's business mix is about two-thirds commercial, one-third government. "We bid on everything we can, and we have a pretty high success rate, probably about 98 percent," said Morentz. "There are a couple of other companies that we compete with. But we have sold more than 11,000 copies of our software and together they have sold about 100."

Jerry Grossman, a director with the investment banking firm Houlihan Lokey Howard & Zukin of McLean, Va., agreed that the competition is lagging.

"There are some software businesses out there," he said. "But I am not aware of any that do all that Essential does."

Morentz said business on the commercial side has grown significantly during the past few years because corporate clients, including Lucent Technologies Inc. of Murray Hill, N.J., Mead Corp. of Dayton, Ohio, and Union Carbide of Danbury, Conn., see the need for crisis management.

Essential software, he said, allows these customers to monitor how workers use chemicals in manufacturing, locate facilities in hurricane or earthquake zones, transport oil on ships or trains, assure compliance with environmental regulations and prevent terrorism and sabotage.

Public-sector business has increased steadily, but it has not experienced a similar growth spurt because government agencies always have been concerned about crisis management.

Essential's first public-sector win came in 1982 when it received a three-year contract worth $1,800 to provide crisis management software to Waseca County, Minn.

"The government business goes in waves," Morentz said. "We are potentially at an upturn of a new government wave of business."

Essential software already is being used by the Federal Emergency Management Agency, the departments of Agriculture and Defense and several other agencies that Morentz said he could not mention.

Morentz said Essential has created software that commercial clients use to ensure that they are in compliance with Occupational Safety and Health Administration requirements, but he has not yet targeted that agency as a customer.

"Our software can be used to analyze large volumes of reports," he said. "So that is something we should be talking to OHSA about."

Grossman said Essential has great potential to generate a substantial amount of business in the public sector.

"This looks like a business that could penetrate the federal markets a good bit more than they have done today," said Grossman. "The federal markets are going to look more and more to existing software to deal with their needs rather than custom solutions."

Almost half of Essential's government business comes from the Department of Defense. The company's largest contract, signed in February 1998, is a three-year award potentially worth $4.2 million to provide mobilization and contingency management for the Army National Guard.

State and local governments contribute about 15 percent of the company's government business. The remaining 35 percent comes from civilian agencies.

Proceeds from Essential's 1993 round of funding were used to develop and market crisis management products for the environment, health and safety fields. In these new areas, Essential faced competition from EnviroMetrics Software Inc. of New Castle, Del.

Morentz said his company, then known as EIS International Corp., had generated enough revenue by 1997 to acquire EnviroMetrics for a stock transaction valued at nearly $4.5 million. The merged company was renamed Essential Technologies.

"Overnight we increased the size by 50 percent," said Morentz. Today, Essential has about 140 employees at offices in Atlanta, Chicago, Houston, Indianapolis, Los Angeles, Pittsburgh, San Diego and Tempe, Ariz. And the company still uses the Delaware facility for product development.

"We found that it is easier to draw people out of the Philadelphia and Baltimore areas where there are fewer high-tech firms [than in the greater Washington area]," he said.

The company will expand internationally but probably not for at least three years.