AMS Stock Plummets as Investors Flee $350 Million Lawsuit

American Management Systems Inc. took a pounding on Wall Street the day after it was sued by one of its federal customers for $350 million for failure to perform.


The company's stock dropped nearly 24 percent from $21.30 to $16.24 July 18 after the Federal Retirement Thrift Investment Board terminated a contract with AMS and filed suit against it.


The retirement thrift board, which administers a saving program for federal workers, alleged that AMS of Fairfax, Va., failed to meet numerous delivery schedules for a customized record-keeping system based on a commercial product. The complaint also claimed AMS misled the board about its ability to deliver the finalized system.


The suit, filed July 17 in U.S. District Court, asks for $50 million in actual damages and $300 million in punitive damages.


"AMS has this bad habit of blowing one contract a year," said Tom Meagher, vice president of equity research with BB&T Capital Markets, Richmond, Va. "It basically comes down to a management issue. ... I'm not sure what credibility the management has after this."


Meagher said the company has been without a management team for almost a year. William Purdy is president and chief executive officer on an interim basis.


Meagher said rumors have floated that AMS might be up for sale, but he questioned who would be interested in the company now.


Not all analysts are as gloomy about AMS' prospects. Bill Loomis, managing director of the technology research group at Legg Mason Wood Walker Inc., Baltimore, issued a report maintaining a "buy" rating on the company's stock despite the lawsuit, though with an above-average risk factor attached. His firm still considers AMS a potential acquisition target.


The stock plunge mirrored the 31 percent hit the stock took Aug. 23, 2000, the day a Mississippi jury ordered AMS to pay the state $474.5 million in damages because of the company's alleged failure to deliver an automated tax system. AMS later reached a settlement in which it agreed to pay Mississippi $185 million over 13 years.


AMS said it intends to contest the retirement board's allegations and defend the suit vigorously. Meagher, however, said he believes the company will have to settle this lawsuit out of court.

AMS said in a press release that the retirement board's lawsuit is an attempt "to shift the focus from the board's own deficiencies in performance and contract breaches." AMS said that since the contract was awarded in May 1997, the board had continued to revise and modify its system requirements without ever settling on a final configuration.

"AMS has developed more than 1.2 million lines of software code ? five times the original estimate ? to meet the board's evolving requirements," the company said.


The project originally was supposed to be finished by May 2000, with a price tag of about $30 million. The cost of the new record-keeping system had risen to at least $90 million, though, and the board claims AMS would not commit to a completion date of January 2002.


At the same time the retirement board severed its relationship with AMS, it awarded a new contract to Materials, Communication & Computers Inc. of Alexandria, Va., essentially to complete the project. Matcom will adapt the software within one year for no more than $20 million, the board announced.