AMS Ready To Leave Tumultuous 2000 Behind

By Steve LeSueur, EditorThe year 2000 has been one of dramatic swings for American Management Systems Inc. of Fairfax, Va.The company's stock in March climbed past $44 a share when the entire stock market reached dizzying heights. Then in August it fell disturbingly low to $14, a price not seen since mid-1995.AMS and two of its insurance companies in August agreed to pay $185 million in damages to Mississippi to settle a contract dispute. But AMS now is fighting back with a lawsuit against one of the insurance providers to recover its share of the fine, legal fees and other damages.And in September, the company's Chairman and Chief Executive Officer Paul Brands announced he will retire by Feb. 1, 2001. "It will cause some uncertainty," he told Wall Street investors Oct. 10 in New York. But don't read too much into his departure, he said. After 23 years with AMS, the last seven as CEO, he was ready to pursue other interests.As for the company's stock, Brands insists that at its current price of $16 to $17 a share, it's extremely undervalued. He came to New York, in fact, to give this message to Wall Street analysts attending an e-gov conference sponsored by BB&T Capital Markets of Richmond, Va. "We would like to think that investors think our story is compelling, and [that they] are ultimately willing to put some money in the equity for a successful ride," he said after the meeting.With 1999 earnings of $68.7 million on $1.2 billion in revenue, AMS anks among the top players in the government IT market, especially in providing systems for finance and administration, tax and revenue, human services and e-procurement. The company brings in about $700 million in annual revenue from the public sector, split almost equally between its federal business and its state and local business.The remainder of its revenue comes from work in commercial industries, such as telecommunications, finance, insurance and health care.Despite speculation that his departure makes AMS a more likely acquisition target, Brands said the company is large enough to remain independent. If its stock is not properly valued, the company could sell one of its slower growing business lines as a way to provide return to investors, but the board is not currently pursuing this strategy, he said.Many analysts agree that AMS' stock is undervalued.William Loomis, an analyst with Legg Mason Wood Walker Inc. of Baltimore, last month upgraded AMS to a strong buy and put a target price of $30 on its shares.Tom Meagher, an analyst who follows the company for BB&T Capital Markets, places AMS' share price in the same range, saying that the company's price-to-earnings ratio suggests that the stock is probably worth twice its current value. "Some institutional investors have lost patience with the company due to problems like it had in Mississippi, but it's certainly a quality company," he said.AMS' dispute with Mississippi clearly irritates Brands, who said the attorneys representing the state portrayed AMS officials as northern city slickers who came south to defraud the poor Mississippi people. "The jury came back in 90 minutes with a decision. ... It was like going back to the 1890s," he said.The dispute began in April 1999 when Mississippi terminated AMS' contract to develop an automated tax revenue system for the state tax revenue commission. The $11.2 million project, which already had experienced troubles and delays, was canceled less than two weeks before it was scheduled to go live. Mississippi filed a lawsuit against AMS seeking $984 million in actual and punitive damages, and Aug. 23 a jury awarded the state $474.5 million. With AMS planning an appeal, the two sides reached a negotiated settlement five days later in which AMS agreed to pay $185 million over 13 years.AMS' two insurance companies will pay about $151 million, Brands said. He would not name the companies, but Armin Moeller, a partner at Phelps Dunbar LLP of Jackson, Miss., who represented Mississippi in the case, said the companies are American International Group Inc. of New York and the Chubb Corp. of Warren, N.J. Both companies declined to comment.AMS combined its portion of the fine with its legal fees to take a one-time, before-tax charge of $38 million in the third quarter, which amounts to an after-tax charge of $23.5 million.AMS is trying to recoup this loss by filing a lawsuit against one of its insurance companies. AMS asserts that the insurance company did not carry out negotiations for a pre-trial settlement "in a responsible manner, "thus costing AMS and the insurers a lot more money than they should have paid, Brands said.Brands, however, declined to say when the lawsuit was filed, which company it was filed against or precisely how much the company was suing for. He would only say that one of the insurance companies would join AMS against the other insurer in the lawsuit, and that AMS was suing to recover $38 million in fines and legal fees, plus an additional amount for other damages, such as the damage to the company's reputation. AMS intends to provide details of the lawsuit in about a month, he said.Since the lawsuit was initiated, AMS has won tax and revenue projects in five states worth $15 million to $40 million without incident, Brands said. A tax module installed by AMS in Kansas recently won an award for outstanding achievement from the National Association of State Information Resource Executives of Lexington, Ky."Any technology firm that works in Mississippi ought to be very careful," he said, adding that AMS is reviewing the laws and precedents in other southern states to avoid similar problems.AMS has grown steadily during Brands' seven-year tenure at the helm. Annual revenue grew from $360 million to an expected $1.3 billion in 2000. The international portion of annual revenue grew from less than $10 million to more than $250 million this year, with a strong showing in Europe, Canada and Australia, he said.Within the past two years, the company has expanded rapidly its e-government and e-business offerings. An important part of AMS' e-strategy has been its strategic alliances with companies such as Siebel Systems Inc., Ariba Inc. and govWorks Inc. Annual revenue from AMS' e-government and e-business projects has grown by more than 100 percent in each of the last two years and now stands at about $500 million, Brands said.It is these types of partnerships and initiatives that could provide a significant payoff for AMS, said Ben Andrews, an analyst with Liberty Wanger Asset Management LP in Chicago. "They have a core federal and state business where they're an entrenched player, and [which] provides a core base of revenue," he said. The maturing initiatives "could help drive revenue higher."One of the first tasks of the next CEO will be to devise a plan for achieving the company's goal of doubling annual revenue to about $2.6 billion within three to four years.The search committee formed by AMS' board is looking both inside and outside the company for a successor, but is leaning toward selecting someone from the outside, Brands said. The next CEO must have experience with large organizations, the international market and e-business, so that he or she can "help drive the company to the next level," he said.