Knowledgeware Inc. Business Information, Profile, and History

History of Knowledge Ware Inc.

Acquired and absorbed by Sterling Software, Inc. in 1994, KnowledgeWare Inc. built its reputation as a leading developer of computer-aided software engineering, or CASE, tools. Much more complex than word processing programs, CASE systems are used by computer professionals for the development of applications ranging from payroll to financial management. CASE tools can also be used to customize, modify, or speed up existing programs. As a result, they can greatly increase the efficiency of computer systems and the profitability of the companies that use them. KnowledgeWare's Application Development Workbench (ADW) was used by over 4,000 companies, and became the industry standard. After making a series of rapid acquisitions in an effort to regain its position, KnowledgeWare was left cash-strapped with sagging revenues, and it was then swallowed up by Sterling Software.

Young Company Finds a Business Niche

KnowledgeWare was founded by James Martin in Ann Arbor, Michigan, in 1979. The company, originally called Database Design, Inc., began operations relatively early in the history of software engineering. Computers at that time were generally large, expensive, and slow, and the market for software programs was limited to corporate and institutional customers.

The company's original line of business was consulting, offering client companies logical data modeling services, as well as two software packages, called Information Planner and Data Designer, which were introduced in 1982. These systems used graphics tools organized around an instruction repository, referred to as an encyclopedia.

Database Design also developed a DOS-based system modeling package in conjunction with the accounting consultancy Ernst & Young. This product, called Information Engineering Workbench, or IEW, enabled programmers to quickly and easily build customized programs to handle a variety of specialized financial management tasks. Gradually the company built up a clientele. To better reflect its graduation from consulting into software engineering, Database Design changed its name to KnowledgeWare.

Expansion in the 1980s

During this period, Minnesota Vikings quarterback Fran Tarkenton was wrapping up his distinguished career in professional football and beginning a new career as a public speaker. The articulate athlete began giving motivational speeches before employees of corporations, and his colorful and surprisingly effective message for building teamwork inspired greater enthusiasm and raised productivity. During his tours of the corporate circuit, Tarkenton discovered that many companies were crippled to a great extent by the inadequate state of their computer systems. This prompted him to hire a team of programming experts in order to market the additional services of management consulting and troubleshooting for companies with unstable or poorly managed computer systems. Tarkenton named his enterprise Tarkenton Software, Inc., and the new company soon began marketing a COBOL code generator product developed by his engineers. Tarkenton made it clear that his role at the company was that of productivity consultant, not programmer. Nevertheless, some executives dismissed his company as the whim of a retired athlete who didn't even understand the business he was in.

In 1985 Tarkenton decided to merge his small enterprise with a firm that was better established in the market. He soon discovered James Martin's KnowledgeWare, whose software 'workbenches' were in great demand. In turn, Tarkenton Software's Gamma code generator provided the back-end coding and testing component that KnowledgeWare needed to enhance its own product line.

When the two firms combined operations later that year, KnowledgeWare adopted Tarkenton's Atlanta headquarters as its new home. Tarkenton eventually retired from productivity consulting and became a senior executive at KnowledgeWare, representing the company to clients that included DuPont and Grumman. This enabled Martin to devote his full attention to the engineering group.

The company's IEW software product walked programmers through a series of customized functions, allowing them to choose individual command sequences and quickly customize a complete, error-free, and often highly complex computer program. These CASE programs contained options developed directly from customer requests, often specifically articulated by system operators.

KnowledgeWare quickly established a powerful reputation in the industry. Large companies with thousands of employees and increasingly complex accounting needs found CASE programs essential to maintaining financial order. Furthermore, they appreciated the flexibility of the programs, which could be tailored to the companies' own needs.

In 1988 KnowledgeWare introduced its first desktop-based code generator, called IEW/Construction Workstation. The system enabled customers to analyze business requirements, design new applications, and write new code for mainframes, using only a personal computer.

Hundreds of new clients were drawn to KnowledgeWare, including Caterpillar and Martin Marietta. These clients each paid more than $200,000 for multiple copies of KnowledgeWare's CASE workbench. KnowledgeWare also sparked the interest of IBM, which saw KnowledgeWare as a potentially lucrative business partner as well as a catalyst for sales of its own products. Since KnowledgeWare's popular CASE programs were run on IBM computers, the company, it was hoped, would inspire customers to purchase or retain IBM computers.

KnowledgeWare was the largest and fastest growing CASE company in the market, and IBM--which produced its own CASE programs--was determined to latch on to the company and ally its product line with KnowledgeWare's. In August 1989 IBM purchased an 8.7 percent stake in KnowledgeWare for $10.5 million, which helped preserve IBM's position in the market.

With such a powerful vote of confidence, KnowledgeWare became popular on Wall Street. The company seized the opportunity by launching a public offering of 1.7 million shares, representing 15 percent of the company. The sale generated $20 million. Tarkenton personally sold 150,000 shares, netting $1.9 million.

A month after IBM's investment in KnowledgeWare, the latter company's programs were incorporated into IBM's AD/Cycle mainframe CASE product. A few months later, KnowledgeWare introduced its Application Development Workbench, or ADW, program, which garnered the 'analysts choice' award from PC Week magazine. At the time, ADW was the only CASE system that was compatible with IBM's popular new OS/2 system. IBM customers who wanted to use ADW first had to upgrade their systems to OS/2, providing IBM with the increased sales it had hoped for.

Challenges in the 1990s

In 1990, KnowledgeWare doubled its sales over the previous year to $92.3 million, representing a four-year growth rate of 1,700 percent. Profits rose by 54 percent, to $9.8 million. On paper, IBM's investment in KnowledgeWare was a smashing success.

However, the partnership was derailed later that year when KnowledgeWare introduced a new software product called ADW/MVS. This system used a repository that closely resembled one under development by IBM. Rather than risk incurring a lawsuit from IBM, KnowledgeWare pulled ADW/MVS out of distribution. However, IBM's similar software system, AD/Cycle, met with flat sales and, while the losses did not have a profound effect on IBM, KnowledgeWare had bet its entire future on a projected steady stream of revenue from ADW/MVS. The failure of this product put other joint marketing arrangements with IBM into disarray, denying the company an important sales channel. Furthermore, these failures amplified doubts about KnowledgeWare's other products.

Nevertheless, by March 1991, total sales of ADW reached 25,000, while sales of IEW reached 34,000. Despite its trouble with IBM, KnowledgeWare posted a profit of $5.3 million on sales of $40.3 million during the fourth quarter of 1991. These results were augmented by the company's introduction of the RAD Workstation, Documentation Workstation, and a Japanese-language version of ADW.

KnowledgeWare's fiscal health appeared sound, especially when its dominance in the mainframe programming market was analyzed. However, scores of investors and industry analysts failed to recognize the flaw in KnowledgeWare's seemingly rosy future. Aided by the sharper vision of hindsight, The Wall Street Journal succinctly explained the situation in an article in its June 3, 1994 edition: 'mainframes had already begun to disappear, replaced by more nimble networks of personal computers.' Caught off guard, KnowledgeWare had virtually no product in which to compete in this emerging 'client-server' sector.

In an effort to remedy this situation, KnowledgeWare embarked on a series of acquisitions in 1991. In January the company took over UDM Technology, a processing tool designer. In May the company added Quinsoft, and in August it acquired Language Technology. Soon thereafter, Tarkenton announced that KnowledgeWare would attempt to buy out IntelliCorp.

Tarkenton's acquisition campaign was aimed at maintaining the company's earlier sales growth and beefing up its product line. However, KnowledgeWare's president Terri McGowan and financial director Don Ellis reportedly advised against further expansion. Tarkenton, fearing that McGowan and Ellis had become overly cautious, asked for their resignations in September and proceeded with the business of acquiring IntelliCorp.

The bid for IntelliCorp failed, however, as KnowledgeWare announced bleak financial results for 1991. With a deficit of $4.9 million and sales down by ten percent, the company was unable to counteract some of the negative effects of both its acquisitions and the nationwide economic downturn. Furthermore, the company faced increased competition from Texas Instruments, whose Information Engineering Facility CASE program reportedly worked more smoothly than KnowledgeWare's IEW and ADW.

During this time, KnowledgeWare stock plummeted from $43 to $19 a share. When it was revealed that some of the company's senior executives, including Tarkenton, had cashed in lucrative stock options only months before their decline in value, a lawsuit was filed charging that the management team had profited at the expense of shareholders. The court found that Tarkenton and the others were protected by a new Securities and Exchange Commission (SEC) rule allowing investors to sell their options at the time that they were awarded. However, while the executives were cleared of charges of impropriety, the incident proved to be a public relations disaster.

Nevertheless, Tarkenton's acquisitions succeeded in giving KnowledgeWare a toe-hold in the client/server market. The technologies assembled through the purchases enabled KnowledgeWare to develop a new product, the Legacy Workstation, and the subsequent roll-out of Construction Workstation-GUI bolstered KnowledgeWare's position. With the takeover of Viewpoint Systems, Computer and Engineering Consultants, Ltd., and Matesys Mathematics, Knowledgeware moved even further into client/server operations. Matesys' ObjectView program was especially important to KnowledgeWare.

By January 1992 KnowledgeWare had reversed its losses, in part due to a massive layoff of employees. Still, sales in the second quarter again fell, this time to $1.3 million, down 57 percent from the previous year. During this time, ComputerWorld magazine reported that Flashpoint, the company's first product in the client/server market, was inferior to that of rival Powersoft Corp.'s PowerBuilder.

In an effort to remain competitive, KnowledgeWare instituted additional efficiency measures. To improve service and support, KnowledgeWare formed an Application Development Solution Services division and expanded its distribution channels to include systems integrators. Furthermore, the company established an international presence by taking over Ernst & Young's CASE distribution operation in Europe and setting up an international sales division. KnowledgeWare also acquired Ernst & Young's CASE business in Australia in December 1993.

For a time, it appeared as though KnowledgeWare had weathered the storm of plummeting sales and would emerge unscathed. In October 1993 the company reported better-than-anticipated profits for the second straight quarter, and an article in the February 14, 1994 ComputerWorld lauded KnowledgeWare for being 'on the cutting edge of client/server software development,' as the company released more positive results for the third consecutive quarter.

Despite these indications of success, however, KnowledgeWare was in deep trouble. Though Tarkenton optimistically declared to the June 3, 1994 Wall Street Journal that 'we like our position and think we're in great shape to go forward,' the opposite was true. KnowledgeWare's spate of acquisitions had left the company with a negative cash flow. Moreover, ObjectView and its other client/server products never regained the sizable client base that had flocked to its earlier ADW software.

The bottom fell out in July 1994 when the company reported a third quarter loss of $25.8 million. In response, KnowledgeWare laid off 240 people--one quarter of its workforce--in a bid to lower expenses. In August, Sterling Software--a Dallas-based software company that managed data processing center operations and was successful in network management--offered $143 million to acquire KnowledgeWare, which would thereafter conduct business as Sterling. Tarkenton was invited to serve on Sterling's board of directors. 'We see tremendous opportunity for Sterling and predict excellent growth,' a Sterling spokesperson told Advertising Age.

KnowledgeWare did not enter the Sterling fold quietly, however. In January 1995 several former KnowledgeWare shareholders sued Tarkenton and other executives for securities fraud and breach of contract. The investors alleged that Tarkenton had deliberately misrepresented KnowledgeWare's earnings between November 3, 1993 and August 29, 1994. Sterling was forced to allocate $15 million for legal fees, and court costs negatively impacted Sterling's 1995 revenue. Nevertheless, Sterling did successfully integrate KnowledgeWare into its growing roster of acquisitions. Tarkenton remained on Sterling's board until 1997.

Chronology

• Key Dates:

• 1979: James Martin founds Database Design, Inc. (later renamed KnowledgeWare).
• 1985: Fran Tarkenton's Tarkenton Software, Inc. merges with KnowledgeWare.
• 1988: KnowledgeWare introduces its IEW/Construction Workstation.
• 1989: IBM purchases an 8.7 percent stake in KnowledgeWare; KnowledgeWare launches its Application Development Workbench (ADW) program.
• 1994: KnowledgeWare is acquired by Sterling Software, Inc.