According to the Company’s Form 10-K For the Fiscal Year Ended December 31, 2004, in November 2004, two putative class action lawsuits were filed against the Company and certain of its officers. Each of these lawsuits has been voluntarily dismissed without prejudice. The dismissal of the first lawsuit was filed and approved by the court on February 2, 2005, and the dismissal of the second lawsuit was filed and approved by the court on February 7, 2005.
The complaint charges Embarcadero Technologies and certain of its officers with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. More specifically, the Complaint alleges that the Company failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them: (1) that the Company had materially overstated its net income and earnings per share; (2) that defendants prematurely recognized revenue in its UK subsidiary, Embarcadero Europe Ltd.; (3) that the Company's financial statements were not prepared in accordance with Generally Accepted Accounting Principles ("GAAP"); (4) that the Company lacked adequate internal controls and was therefore unable to ascertain the true financial condition of the Company; and (5) that as a result, the value of the Company's net income and financial results were materially overstated at all relevant times.
The complaint further alleges that on October 27, 2004 Embarcadero Technologies, after the market closed, announced that it was delaying the release of its financial results for the third quarter ended September 30, 2004. The Company also announced that its Audit Committee this week commenced an investigation of the revenue recognition practices of its UK subsidiary, Embarcadero Europe Ltd. (Embarcadero Europe), as a result of recent discoveries relating to Embarcadero Europe's resellers. News of this shocked the market. Shares of Embarcadero Technologies fell $2.29 per share, or 23.20 percent, by noon on October 28, 2004.