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Some Are Betting Against Red-Hot Software Firm : High tech: Despite Software Toolworks’ rapid growth, the amount of short-selling activity may mean many expect its stock to skid.

TIMES STAFF WRITER

Leslie Crane says he is looking forward to June. That’s when his Software Toolworks Inc. of Chatsworth will unveil a product at the Consumer Electronics Show that Crane says “has the potential for being the most exciting consumer electronics product of this year or the recent past.”

And what is it? For now, Crane, Software Toolworks’ chairman and chief executive, will say only that it is a “combination hardware-software” product that will work with virtually any personal computer and with the blockbuster Nintendo video game system.

Whether the product’s sales ever match Crane’s big expectations is an open question, but considering his success to date, it’s easy to understand Crane’s optimism.

Since Crane, 56, started the company on his dining room table five years ago, Software Toolworks, which sells video games and other entertainment, business and educational programs, has been a house afire. The company’s sales--helped in part by several small acquisitions--have soared from $516,000 in its fiscal year ended March 31, 1986, to about $22 million in fiscal 1990. (The actual results haven’t been released yet.)

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Crane said he’s comfortable with analysts’ predictions that sales will reach $90 million to $100 million this year. Profit keeps leapfrogging too. In the nine months ended Dec. 31, Software Toolworks’ earnings nearly doubled to $3.9 million from $1.4 million, and analysts estimate that its current-year profit will hit about $20 million.

As a result, the company’s stock has been on a nearly steady climb in recent months. The stock closed Monday at $15.75 a share in over-the-counter trading, up from $4 last August (adjusted for a 100% stock dividend paid last month). Software Toolworks now has a total stock valuation of $300 million, giving Crane’s 20% stake a paper value of $60 million.

The stock’s climb has attracted the attention of short-sellers, who are hoping Software Toolworks trips. Short-sellers are investors who sell borrowed stock with the expectation of profiting by replacing it later with stock bought at a lower price. Short interest in Software Toolworks--the shares that have been sold short but not yet replaced--jumped 52% in mid-April to 575,000 shares, or 3% of Software Toolworks’ 20 million shares outstanding.

Crane, who gained moderate fame in the 1960s as a late-night talk-show host on ABC, said the short-sellers “are no cause for concern here,” because whenever a company has rapid growth “there are going to be some people who are not true believers.”

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Software Toolworks owes its success to several factors. The company is diversified and thus not dependent on one source of revenue. For instance, early this year in a stock swap valued at $40 million, it bought Mindscape Inc., one of 50 or so software publishers worldwide licensed to publish game cartridges for the Nintendo system. (Japan-based Nintendo sells the main control box for about $100 each.)

Software Toolworks also develops software for personal computers. Its Chessmaster series of chess games and its Mavis Beacon Teaches Typing tutorial program have been best-sellers.

The company is one of the few that uses its excess production capacity to duplicate and package floppy disks for other software developers, “one of the few people in the software business to do that,” said Robert F. Kleiber, who follows Software Toolworks for the brokerage firm Piper Jaffray & Hopwood in Minneapolis.

Crane also has his software engineers designing so-called operating environments for several overseas computer makers, such as the Dutch giant N.V. Philips, that are about to enter the U.S. market. The programs are graphic guides that help the computer’s user select specific programs, such as word processing, from the computer’s data base.

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Diversification was necessary because “I did not want this company to be subject to the vagaries of the entertainment retail software marketplace, which can be very cyclical and very fickle,” Crane said.

Nonetheless, analysts estimate that 50% or more of Software Toolworks’ sales and operating profit are related to Nintendo cartridge sales, which has analysts watching the Nintendo story closely. And lately there has been talk of a slowdown in the phenomenal growth that has let Nintendo put its systems in one-fifth of U.S. homes over the last few years.

Kleiber said it appears Nintendo will sell up to 9 million hardware units this year. That’s down from 10 million in 1989, “but it’s not like the market’s collapsing,” he said, adding that Software Toolworks and the other software developers should sell about 70 million Nintendo cartridges in 1990.

“The growth is decelerating and perhaps the sale of cartridges may be about to plateau for a while, but I don’t think it’s a replay of the early 1980s when Atari crashed and burned,” said Vincent L. Turzo, a analyst with Gulfstream Financial Associates Inc. in Boca Raton, Fla.

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Crane has to sidestep other potential problems, such letting Software Toolworks’ growth get out of control. To bolster management, he recently turned the president’s post over to a new hire, Elizabeth Barker, 34, who had been with Software Toolworks’ investment banker Montgomery Securities in San Francisco.

SOFTWARE TOOLWORKS AT A GLANCE

Software Toolworks Inc. in Chatsworth makes entertainment, educational and business software programs for personal computers, and it is licensed to design games for the popular Nintendo home video system. Software Toolworks, which went public in 1986, also provides duplication and packaging services for other software producers.

For fiscal years ended March 31; in millions.

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