Monday, March 12, 2007

Chapman Capital Wants Immediate Sale of Embarcadero Tech (EMBT), May Seek To Replace Board

In a press release today on Embarcadero Technologies (Nasdaq: EMBT), 9.3% holder Chapman Capital reiterated its demand that the company's Board of Directors maximize shareholder value via a change-of-control transaction. Chapman's original 13D filing was released after the close on 03/07.

Chapman Capital has determined to seek nominees to replace Class I directors Timothy C.K. Chou and Frank M. Polestra, and Class II directors Michael J. Roberts and Samuel T. Spadafora, should a sale of Embarcadero not be announced by March 30, 2007.

Robert L. Chapman, said, "The Board, with no meaningful 'skin in the game, ' shall not be allowed to 'play venture capitalist' with the hard-earned money of a shareholder base held hostage by weak corporate governance."

From the "Purpose of Transaction" section of the 13D filing:

In August 2006, Chapman Capital initiated research into the suitability of the Funds making an investment in the Common Stock of the Issuer. Following several weeks of due diligence using publicly available information, Chapman Capital determined that the Issuer was a prime candidate for a going private transaction given that operating expenses (i.e., R&D and SG&A) historically had consumed over 85% of the Issuer’s gross profit, due in part to the Issuer’s mere $15 million/quarter revenue run-rate. Furthermore, Chapman Capital came to believe that the relative stability of the Issuer’s estimated $60 million in annual software license and maintenance revenue facilitated a leveraged capital structure such as that typically utilized by leading private equity investment partnerships. In advance of making its initial purchases of Common Stock, in mid-August 2006, Mr. Chapman made several telephone calls to senior management of the Issuer to convey and check such conclusions; however, Chapman Capital has no record of any return phone calls being received.

On September 7, 2006, the Issuer announced that it had entered into a definitive agreement to be acquired by an affiliate of Thoma Cressey Equity Partners (“Thoma Cressey”) in a cash transaction valued at $8.38 per share of Common Stock. On such date, the Issuer stated , “After a review of our strategic alternatives by our board, we concluded that entering into an agreement with Thoma Cressey Partners to take the company private represents the best alternative available to our stockholders at this time.” As the market value of the Common Stock resultantly appreciated to a price in excess of $8.00/share, Chapman Capital determined to terminate its interest in directing the Funds to acquire a significant ownership stake in the Issuer.

In response to the Company’s November 10, 2006, submission to the Securities and Exchange Commission (SEC) of a Notification of Late Filing pursuant to Rule 12b-25 of the Securities Exchange Act of 1934, the Issuer’s Common Stock plummeted as much as 13% to a daily low of $7.21 per share. The Issuer had determined to delay its filing of its Quarterly Report on Form 10-Q for the third quarter ended September 30, 2006, to “enable the Audit Committee of the Company’s Board of Directors to evaluate the Company’s accounting for certain stock option grants made in 2000 and 2001.” Following this development, Chapman Capital reinstituted its research and analysis of the Issuer’s Common Stock. However, on November 30, 2006, Chapman Capital decided to delay any investment by the Funds in the Common Stock of the Issuer following a Form 8-K filing by Chordiant Software, Inc. (“Chordiant”; NASDAQ: CHRDD) in which Chordiant disclosed that its Chairman and Chief Strategy Officer, Mr. Samuel Spadafora, who coincidentally serves as a zero Common Stock-owning director of the Issuer, had his positions severed from Chordiant amid an options backdating scandal at Chordiant itself. As part of a separation agreement signed by both Chordiant and Mr. Spadafora, a) Mr. Spadafora agreed to resign as a director and employee of the Chordiant effective immediately, b) Chordiant agreed to pay Mr. Spadafora a severance payment in the amount of $125,000, c) Mr. Spadafora agreed to sign a release excluding certain indemnification rights, and d) Mr. Spadafora would be allowed to keep his computer, monitor and cell phone. Chapman Capital’s decision to defer having the Funds make an investment in the Common Stock was buttressed by the fact that Mr. Spadafora was now associated with not one but two options backdating scandals, potentially increasing the legal liability associated with this second Spadafora-associated options scandal and consequently causing a prudent investment partnership to terminate an acquisition agreement signed before such risk was known.

On December 18, 2006, the Issuer announced that it and Thoma Cressey had agreed mutually to terminate their pending merger agreement following the developing options backdating scandal. As a result of the approximate 15% resultant decline in the Common Stock to a valuation that appeared to favor upside reward over downside risk, Chapman Capital began to accumulate a significant ownership stake in the Issuer. Over the following several months, various members of Chapman Capital’s research staff, along with Mr. Chapman, have contacted various individual and institutional past and present owners of the Issuer in order to survey their views of, and background with, the Issuer. By February 28, 2007, Chapman Capital’s research led to the conclusion that there was virtually unanimous sentiment amongst the Issuer's ownership that the most suitable strategic course of action for the Issuer was to resume the auction process conducted by Morgan Stanley & Co., as compared to the arguably higher risk spend-for-growth strategy that has crippled numerous sub-$100 million technology companies in the past. As a result, on February 28, 2007, the Funds purchased sufficient shares of Common Stock such that their combined ownership stake in the Issuer surpassed the 5% threshold.

Throughout March 2007, Chapman Capital continued to contact various individual and institutional past and present owners of the Issuer in order to survey their views of, and background with, the Issuer. Particularly in light of the Issuer’s February 16, 2007, disclosure regarding the Issuer’s ongoing NASDAQ delisting risk, declining license revenue, and option-scandal related inability to announce full earnings results for the fourth quarter ended December 31, 2006, the Issuer’s ownership base conveyed a uniform desire for the Issuer’s Common Stock value to be maximized through a change-of-control transaction. Certain owners of the Issuer conveyed heightened concern over a potentially unacceptable corporate governance that could result from having Mr. Spadafora serve as Interim co-CEO (via the Issuer’s Management Oversight Committee) given the developments that led to his severance as Chairman and Chief Strategy Officer of Chordiant.

On March 6, 2007, Mr. Chapman initiated contact with the Board of Directors (“the Board”) of the Issuer, including Mr. Gary E. Haroian (now a “career director” with board memberships at Aspen Technology, Inc., Lightbridge Inc., Network Engines, Inc., and Phase Forward Inc.), Mr. Samuel T. Spadafora (aforementioned severed Chairman of Chordiant), Mr. Frank M. Polestra (retired partner of Ascent Venture Partners and current director of Network Engines, Inc.), Mr. Michael J. Roberts (Executive Director, Harvard Business School) and Dr. Timothy C. K. Chou (formerly employed by Oracle Corporation; current employment unknown). In addition, Mr. Chapman made contact with Mr. Michael B. Shahbazian, the Issuer’s Chief Financial Officer. In all communications with the Board and Mr. Shahbazian, Mr. Chapman strongly conveyed the views of Chapman Capital and also various individual and institutional past and present owners of the Issuer. Mr. Chapman communicated Chapman Capital’s expectation that the Board’s failure to consummate a merger transaction in the near future would result in the Board being replaced by the Issuer’s owners, particularly in light of the Board’s ownership of zero shares of the Issuer.

On March 7, 2007, Mr. Chapman communicated to Thomas Cressey Chapman Capital's intention to file a Schedule 13D related to the Issuer with the SEC.

On March 7, 2007, Mr. Chapman communicated to Mr. Shahbazian that the Board’s failure to announce a definitive merger agreement no later than March 30, 2007, would result in the filing by the Reporting Persons of an amended Schedule 13D, which should be expected to include as an exhibit a letter to the Board making public the results of Chapman Capital’s recently-accelerated investigation into the Board and management of the Issuer.

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