Survival of Fittest:Y2K Firm Jumps Track

By Richard McCaffery, Staff WriterZmax Corp., Germantown, Md., which has focused almost exclusively on year 2000 work for commercial clients and state and local governments, is hunting for acquisitions to make the move from Y2K specialist to nationwide information technology services player.In December, Zmax, which offers year 2000 remediation and verification services, paid more than $1.5 million in cash and stock for Eclipse Information Systems Inc., a privately held Chicago company that provides electronic business solutions, enterprise resource planning applications, and client-server migration services. Zmax will add these skills to its own to pursue contracts with government and commercial customers, according to Michael Higgins, Zmax Corp.'s president and chief executive officer. "Our goal is to be a nationwide IT consulting company in the first half of 2000," Higgins said. In April, the company received a $3 million Y2K contract from the state of New York. Under the deal, Zmax will perform Y2K auditing and independent verification and validation services. Zmax Corp. was a shell company on the over-the-counter market until 1996, when Higgins acquired Zmax through a stock swap with Century Services Inc., a company he founded in 1995. The reverse IPO gave Higgins what he needed to execute his plan ? access to capital, and it made Century Services part of a publicly traded company.Zmax is now a holding company with two subsidiaries: Century Services and Eclipse. The company's stock trades on the Nasdaq Small Cap Market under the ticker symbol zmax. It has a clean balance sheet, Higgins said, and commercial Y2K customers that include Lockheed Martin Corp., Lehman Brothers and First National Bankcorp. The company had sales of $10 million last year, up from $1.4 million the year earlier. It had net income minus one-time charges of $300,000, or 2 cents a share, compared with a net loss of $14.2 million the year before. Higgins said he expects revenue of up to $30 million in 1999. Such growth can be fueled by acquisitions, a marketing campaign aimed at commercial and government customers and by leveraging existing customers, he said.With the Eclipse acquisition, Zmax's Y2K-related business dipped to 42 percent in the first quarter of this year from nearly 100 percent last year. State and federal government work accounted for 27 percent of Zmax's $5.1 million revenue in the first quarter of 1999, Higgins said. Higgins plans to make at least two acquisitions this year. He is looking for companies in the $10 million to $15 million range that provide services similar to the kind Eclipse offers. Higgins plans to phase out year 2000 work and replace it with high-end IT services through the acquisitions. With the Eclipse acquisition, the company has 165 employees (up from 65) and offices in Boston, Chicago, Cleveland, Detroit, Germantown and Minneapolis. Higgins also wants to expand into the south and southwest. Many investors, however, are waiting to be convinced. After hitting $11.25 early last summer, Zmax's flower faded fast on Wall Street. It closed June 8 at $2.53, just pennies above its 52-week low of $2.50.Across the board, stocks of companies that focused on Y2K services started stumbling last fall as compliance deadlines neared and the financial community came to view the software glitch as yesterday's problem. Now investors are taking a wait-and-see approach to determine who will survive, said Christopher Desautelle, communications, enterprise and software analyst at Legg Mason Inc. in Baltimore. "As far as investors are concerned, [Y2K] is over," Desautelle said.Companies whose primary business is Y2K work will have to focus on hot markets such as electronic commerce, call center automation and Web enabling legacy systems, Desautelle said. In that regard, Zmax is on the right track, he said.