Why Fran Tarkenton May Draw Penalty Flags

When Francis A. Tarkenton, the CEO of KnowledgeWare Inc., faced shareholders at a Nov. 30 meeting, the former quarterback probably wished he were back on the gridiron staring down a 300-pound lineman instead. Shares in his Atlanta-based software company had traded as high as 43 in 1991. Now, Tarkenton proposed selling the company to Sterling Software Inc. for a paltry $5 a share. In a 20-minute meeting, shareholders approved the deal.

It's likely that the tumult surrounding Tarkenton's tenure as CEO will take much longer to settle. The company faces a class action from shareholders, who allege that it concocted financial results to lift its stock price to ensure a merger. And the Securities & Exchange Commission has informally requested information related to the merger and KnowledgeWare's results, according to company documents. The SEC won't comment.

Tarkenton, 54, has also managed to infuriate his longtime friend, financier Irwin L. Jacobs. The Minneapolis executive has known Tarkenton since the Hall-of-Famer's playing days as a Minnesota Viking. Jacobs and his associates sank $14.8 million into KnowledgeWare through a private placement last January after allegedly receiving assurances from Tarkenton that KnowledgeWare's prospects were sound. "This company was hyped to anybody and everybody who'd listen," says Jacobs, who wants KnowledgeWare to cover his group's $9.5 million in losses. Tarkenton and other KnowledgeWare executives declined to be interviewed by BUSINESS WEEK. The company has yet to respond to the class action.

HOT GROWTH. For Tarkenton, KnowledgeWare is a dark episode in an

otherwise sparkling career. After 17 years in the National Football League, Tarkenton retired in 1978. The charismatic quarterback made a name for himself as a motivational speaker and dabbled in varied businesses. In 1986, he merged one, Tarkenton Software Inc., a consulting firm, with KnowledgeWare, then known as Database Design Inc.

By all accounts, it was a successful marriage. KnowledgeWare was a technological leader. Its top-selling programs, the Information Engineering Workbench and later the Application Development Workbench, helped corporate programmers customize their own mainframe software. And Tarkenton's extensive contacts with the corporate elite helped further the business.

In June, 1989, IBM signed a licensing deal to use KnowledgeWare's technology. Big Blue also agreed to work with KnowledgeWare to develop the next generation of programming tools. IBM even acquired a 10% stake in the company for $10.5 million. KnowledgeWare went public in October, 1989, at $12.50 a share, raising $37.5 million. Its roaring 1990 results propelled it to No.2 on BUSINESS WEEK's annual ranking of hot-growth companies the following year.

But by 1991, KnowledgeWare's business--and IBM's--slumped as corporate clients turned away from mainframes to personal-computer networks. In October, the company reported an unexpected $4.9 million loss for the fiscal first quarter ended in September. Later, shareholders filed a class action, alleging that management had previously misled investors about the company's health. In one instance, company documents show that it booked $11.9 million in sales from its European distributor, Ernst & Young International, even though E&Y was given over a year to pay off much of it. Without admitting any wrongdoing, KnowledgeWare settled the suits last April, agreeing to give shareholders $1.75 million in cash and warrants on 500,000 shares.

MERGER BID. KnowledgeWare appeared to be recovering from these setbacks. In 1992, Tarkenton started cutting costs. And IBM signed a new $12 million licensing agreement, according to KnowledgeWare's documents. In addition, Big Blue promised to pay KnowledgeWare $13 million over three years for maintenance and service. The pact, insiders allege, was nothing more than a cash infusion to help keep KnowledgeWare alive. Without IBM, the quarter's licensing revenues would have fallen 77% from the year before, rather than the reported 32% drop, to $25.5 million, according to company documents. IBM declined to comment.

Tarkenton apparently felt confident enough that he turned down a merger offer from German carmaker BMW's Softlab Inc. unit. It bid $22.38 a share for KnowledgeWare in March, 1992, claims a source familiar with the talks. At the time, the company was trading at about $17.

Tarkenton began 1994 with a new outlook. In a letter to shareholders, he wrote "of unprecedented opportunity." Tarkenton allegedly expressed similar optimism when he suggested a private placement to Jacobs, who had made about $2 million from a prior KnowledgeWare investment.

Tarkenton needed the cash. KnowledgeWare's audit for fiscal 1994, ended in June, by Coopers & Lybrand revealed that some 13.4% of its receivables were more than 90 days past due, and it was late paying half its suppliers. In documents filed with the SEC, the company acknowledged that part of the problem was that it was booking revenues before collecting cash from its distributors. The upshot: As mf June 30, "there existed substantial doubt about KnowledgeWare's ability to continue as a going concern," according to SEC filings.

Tarkenton soon found a way out of the mess. Dallas-based Sterling Software expressed an interest in buying the company. Sterling, which makes the same kind of mainframe software as KnowledgeWare, saw the deal as a way of enhancing its position in the market. Mn July 31, the companies announced a tentative stock swap that valued KnowledgeWare stock at roughly $8.75. Under the pact, Tarkenton will be a consultant to Sterling for $300,000 a year.

BIG LOSS. There was little time to celebrate. After its yearend audit, KnowledgeWare said it would restate its first three quarters and report a $19 million loss for fiscal 1994. As KnowledgeWare's stock slipped beneath $4, Sterling slashed the purchase price to about $5 a share.

Still, the legal wrangling is just starting. On Oct. 27, lawyers for Jacobs' investment group wrote Tarkenton and KnowledgeWare, demanding reimbursement for its loss. "They're going to have to pay it," vows Jacobs. And KnowledgeWare was hit with a second shareholder class action, alleging that management overstated and misrepresented KnowledgeWare's financial position.

What's more, the shareholders from the 1991 class action have filed a motion to renegotiate their settlement, claiming they were defrauded. The warrants they received, exercisable at $17.50 a share, may be worthless. The company denies any wrongdoing and defends the settlement. KnowledgeWare has also been sued by Ecta Corp., a small software maker based in Fairfield, Iowa. Tarkenton agreed to buy the company last May. Ecta claims it was induced into a merger when KnowledgeWare's stock was artificially high and wants to renegotiate terms. KnowledgeWare denies any wrongdoing and stands by the deal. Without commenting on KnowledgeWare's legal problems, Sterling says it has set aside funds to cover possible liabilities. Shareholders may have approved the merger, but Tarkenton is still a long way from the end zone.

INVESTOR IRE
      Shareholders have filed a class action against KnowledgeWare, alleging the 
      company released inaccurate financial results to lift the stock price. 
      KnowledgeWare won't comment and has yet to respond formally to the suits.
          Investors led by Irwin Jacobs are demanding that KnowledgeWare pay them 
      $9.5 million to cover their losses from a January private placement. 
      KnowledgeWare declines to comment.
          Investors who settled a 1991 class action in April have filed a motion to 
      renegotiate the deal, claiming they were defrauded by KnowledgeWare. Company 
      denies any wrongdoing and stands by the original agreement.
      DATA: BUSINESS WEEK