By KOUROSH KARIMKHANY
c.1995 Bloomberg Business News
CHICAGO - System Software Associates Inc. shares fell 12 percent
Friday amid concern that a fraud lawsuit will hurt the software
company's sales in coming quarters.
A lawsuit by Owens-Illinois Inc., which charges that a System Software
computer program does not work as promised, may drive potential
customers to other software companies with better reputations and
damage the fastest-growing part of System Software's business,
analysts said.
The lawsuit also may be a symptom that the company's new product line
has serious flaws.
``What you've got now is the equivalent of a time bomb strapped to
your waist, with a 1 percent chance of blowing up,'' said Eric Upin,
analyst at Robertson, Stephens & Co, who downgraded the stock today.
``Although we firmly believe this is a one customer issue, the
downside is very severe.''
Shares of Chicago-based System Software fell 4 5/8 to 32 7/8 on Nasdaq
trading of 2.99 million shares, making the stock the fourth most
active in U.S. markets in a holiday-shortened session. Earlier, the
shares traded as low as 30.
On Monday, Owens-Illinois sued the System Software for fraud, seeking
its money back and unspecified damages, according to documents filed
in the Circuit Court of Cook County, Illinois.
New Product
The product in dispute is a new computer program that helps
manufacturers keep track of factory floor operations, inventory and
finances.
The program, Business Planning and Central Systems, is designed to
work on a network of computers running the Unix operating system.
System Software is depending on this new family of network-based
products to wean itself from sales of software for mainframe
computers, a business that has slowed in the past few years.
The lawsuit could make it much more difficult for System Software to
compete with established Unix software vendors such as Oracle Corp.,
SAP AG and PeopleSoft Inc., which each have thousands of customers.
``This is a business that's based on references,'' analyst Upin said.
``The software is very complicated and it takes years to install. Most
buyers depend on word of mouth when they buy this kind of software,
and this could have huge implications'' for System Software's
business.
System Software began selling its network-based line of programs in
the second quarter ended in March. It accounted for $6 million of
total revenue of $84.3 million. In the third quarter, network software
accounted for $21 million of $105 million in revenue.
The stock fell sharply today because the lawsuit may damage the
fastest-growing portion of the company's business, analysts said.
Lawsuit
Owens-Illinois, based in Toledo, Ohio, did not specify how much it
paid for the software. A former System Software executive and analysts
said Owens-Illinois paid $6 million up front for a mainframe version
of the program and was to pay another $6 million when the Unix product
was up and running.
In court documents, Owens-Illinois said the product performed almost
none of the functions System Software executives promised.
System Software said Wednesday it filed a suit of its own, charging
Owens-Illinois with not paying for the software. The software maker
said it ``emphatically denies misrepresentation.''
Officials at both companies couldn't be reached for comment. Latham &
Watkins, the law firm representing Owens-Illinois, declined to
comment.
System Software executives told analysts Wednesday that they do not
expect the lawsuit to hurt their financial condition or affect their
auditor's opinion. The company did not say if it would restate its
revenue from the Owens-Illinois contract.
The company, which began operations in 1981, grew rapidly by offering
products for IBM AS/400 mainframe computers. It went public in 1987.
Insider Selling
The stock hit an all-time high on Sept. 22 of 45 3/4, triple its price
at the beginning of the year, based on investors' confidence about
growth from the Unix-based products.
Just as the stock was nearing the record, several System Software
executives began selling shares. Vice president Terry Notari filed
documents with the Securities and Exchange Commission to exercise
options to sell about 19,500 shares worth about $692,000. President
Terence Osborne also filed to exercise options to sell 5,000 shares
worth about $187,500.
Neither executive could be reached for comment.
In late October, SEC officials began questioning System Software about
some its accounting practices for recognizing revenue, former
executives, analysts and investors said.
Company officials have not confirmed the inquiry. SEC officials
declined to comment.
NYT-11-27-95 1049EST
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