-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KWcLmt64m/3wM0dnNqTRZVhmh5st884eJajHCl5p2nw3TqpHRqO2618rPuyVGfVu vsbfHOHRWkYOrGsZemKDiA== 0000902664-05-001451.txt : 20050706 0000902664-05-001451.hdr.sgml : 20050706 20050706172936 ACCESSION NUMBER: 0000902664-05-001451 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20050706 DATE AS OF CHANGE: 20050706 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SOURCECORP INC CENTRAL INDEX KEY: 0000936931 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 752560895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-48475 FILM NUMBER: 05941683 BUSINESS ADDRESS: STREET 1: 3232 MCKINNEY AVE STREET 2: STE 900 CITY: DALLAS STATE: TX ZIP: 75204 BUSINESS PHONE: 2149537555 MAIL ADDRESS: STREET 1: 3232 MCKINNEY AVE STREET 2: STE 900 CITY: DALLAS STATE: TX ZIP: 75204 FORMER COMPANY: FORMER CONFORMED NAME: FYI INC DATE OF NAME CHANGE: 19951026 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: JANA PARTNERS LLC CENTRAL INDEX KEY: 0001159159 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: JANA PARTNERS LLC STREET 2: 536 PACIFIC AVENUE CITY: SAN FRANCISCO STATE: CA ZIP: 94133 BUSINESS PHONE: 2125935955 SC 13D/A 1 sc13da.txt SOURCECORP, INCORPORATED SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- SCHEDULE 13D/A (Rule 13d-101) INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO RULE 13d-2(a) (AMENDMENT NO. 1)* SOURCECORP, Incorporated - -------------------------------------------------------------------------------- (Name of Issuer) Common Stock, par value $0.01 per share - -------------------------------------------------------------------------------- (Title of Class of Securities) 836167106 - -------------------------------------------------------------------------------- (CUSIP Number) Marc Weingarten, Esq. Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022 (212) 756-2000 - -------------------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) July 6, 2005 - -------------------------------------------------------------------------------- (Date of Event which Requires Filing of This Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box. [_] NOTE: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7 for other parties to whom copies are to be sent. (Continued on following pages) (Page 1 of 6 Pages) - -------- * The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). - ------------------------------ ---------------------- CUSIP NO. 836167106 SCHEDULE 13D/A PAGE 2 OF 6 PAGES - ------------------------------ ---------------------- - ----------- -------------------------------------------------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY) JANA PARTNERS LLC - ----------- -------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ] (b) [ ] - ----------- -------------------------------------------------------------------- 3 SEC USE ONLY - ----------- -------------------------------------------------------------------- 4 SOURCE OF FUNDS* AF - ----------- -------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDING IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) [ ] - ----------- -------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION Delaware - --------------------- --------- ------------------------------------------------ 7 SOLE VOTING POWER 2,065,192 NUMBER OF --------- ------------------------------------------------ SHARES 8 SHARED VOTING POWER BENEFICIALLY OWNED BY -0- EACH --------- ------------------------------------------------ REPORTING 9 SOLE DISPOSITIVE POWER PERSON WITH 2,065,192 --------- ------------------------------------------------ 10 SHARED DISPOSITIVE POWER -0- - ----------- -------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH PERSON 2,065,192 - ----------- -------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ] - ----------- -------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13.2% - ----------- -------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON* IA - ----------- -------------------------------------------------------------------- * SEE INSTRUCTIONS BEFORE FILLING OUT! - ------------------------------ ---------------------- CUSIP NO. 836167106 SCHEDULE 13D/A PAGE 3 OF 6 PAGES - ------------------------------ ---------------------- The Schedule 13D (the "Schedule 13D") filed on May 9, 2005 by JANA Partners LLC, a Delaware limited liability company (the "Reporting Person"), relating to the shares ("Shares") of common stock, $0.01 par value, of SOURCECORP, Incorporated (the "Issuer"), is hereby amended as set forth below by this Amendment No. 1 to the Schedule 13D. The principal executive office of the Issuer is located at 3232 McKinney Avenue, Suite 1000, Dallas, Texas 75204. ITEM 4. PURPOSE OF TRANSACTION. Item 4 of the Schedule 13D is hereby amended and restated as follows: The Reporting Person originally acquired the Shares for investment in the ordinary course of business, as the Reporting Person believed that the Shares at market prices when acquired were undervalued and represented an attractive investment opportunity. Representatives of the Reporting Person have engaged in discussions with representatives of the Issuer regarding the Reporting Person's concerns about the performance and direction of the Issuer and various actions that the Reporting Person believes the Issuer should take to enhance stockholder value. Among other things, the parties also discussed the appointment of a representative of the Reporting Person to the board of directors (the "Board") of the Issuer, and the Reporting Person believed that the Issuer had agreed to such appointment. During the time that the Reporting Person and the Issuer were discussing this appointment, the Board took various actions that the Reporting Person believes disenfranchise stockholders and entrench management and the Board, including enacting a "Poison Pill" and amending the Issuer's By-Laws to, among other things, strip stockholders of their right under the previous By-Laws to call a special meeting and to place burdens upon the ability of stockholders to act by written consent. On July 6, 2005, the Reporting Person and two investment funds under its management, JANA Piranha Master Fund, Ltd. ("JPMF") and JANA Master Fund, Ltd., filed a complaint in the Court of Chancery for the State of Delaware seeking to invalidate the Poison Pill and the By-Law amendments. A copy of the complaint is attached hereto as Exhibit A. On July 6, 2005, the Reporting Person also delivered a letter to the Issuer notifying the Issuer of the complaint, commenting on the Board's recent actions and disclosing that the Reporting Person inntends to shortly send the Issuer formal notice of its intention to solicit consents from the Issuer's stockholders to, among other things, remove and replace directors in order to take control of the Board. A copy of this letter is attached hereto as Exhibit B and incorporated herein by reference. In addition, on July 6, 2005, JPMF demanded access to various books and records of the Issuer pursuant to Delaware law. A copy of this demand is attached hereto as Exhibit C and incorporated herein by reference. A copy of the press release issued on July 6, 2005 by the Reporting Person in connection with these matters is attached hereto as Exhibit D. - ------------------------------ ---------------------- CUSIP NO. 836167106 SCHEDULE 13D/A PAGE 4 OF 6 PAGES - ------------------------------ ---------------------- The Reporting Person intends to review its investment in the Issuer on a continuing basis and may engage in discussions with management, the Board, other stockholders of the Issuer and other relevant parties concerning the business, operations, board composition, management, strategy and future plans of the Issuer. Depending on various factors including, without limitation, the Issuer's financial position and strategic direction, the outcome of the discussions and actions referenced above, price levels of the Shares, conditions in the securities market and general economic and industry conditions, the Reporting Person may in the future take such actions with respect to its investment in the Issuer as it deems appropriate including, without limitation, purchasing additional shares or selling some or all of its Shares, engaging in short selling of or any hedging or similar transactions with respect to the Shares and/or otherwise changing its intention with respect to any and all matters referred to in Item 4 of Schedule 13D. Except as set forth above and in Exhibits A and B, the Reporting Person has no present plan or proposal that would relate to or result in any of the matters set forth in subparagraphs (a) - (j) of Item 4 of Schedule 13D. ITEM 5. INTEREST IN THE SECURITIES OF THE ISSUER. Paragraphs (a) and (c) of Item 5 of the Schedule 13D are hereby amended and restated as follows: (a) The aggregate percentage of Shares reported to be beneficially owned by the Reporting Person is based upon 15,670,116 Shares outstanding, which is the total number of Shares outstanding as of April 29, 2005, as reported in the Issuer's quarterly report on Form 10-Q for the three months ended March 31, 2005. As of the close of business on July 5, 2005, the Reporting Person beneficially owned 2,065,192 Shares, constituting approximately 13.2% of the Shares outstanding. (c) There have been no transactions in the Shares effected by the Reporting Person during the past 60 days. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER. Item 6 of the Schedule 13D is hereby amended and restated as follows: Except as otherwise set forth herein, the Reporting Person does not have any contract, arrangement, understanding or relationship with any person with respect to securities of the Issuer. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. Item 7 of the Schedule 13D is hereby amended and restated as follows: 1. Exhibit A - Complaint filed on July 6, 2005 2. Exhibit B - Letter to the Issuer, dated July 6, 2005 3. Exhibit C - Demand letter to the Issuer, dated July 6, 2005, pursuant to Section 220 of the Delaware General Corporation Law 4. Exhibit D - Press release issued on July 6, 2005 - ------------------------------ ---------------------- CUSIP NO. 836167106 SCHEDULE 13D/A PAGE 5 OF 6 PAGES - ------------------------------ ---------------------- SIGNATURES After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: July 6, 2005 JANA PARTNERS LLC By: /s/ Barry Rosenstein ------------------------------ Name: Barry Rosenstein Title: Managing Partner By: /s/ Gary Claar ------------------------------ Name: Gary Claar Title: Managing Director - ------------------------------ ---------------------- CUSIP NO. 836167106 SCHEDULE 13D/A PAGE 6 OF 6 PAGES - ------------------------------ ---------------------- EXHIBIT INDEX 1. Exhibit A - Complaint filed on July 6, 2005 2. Exhibit B - Letter to the Issuer, dated July 6, 2005 3. Exhibit C - Demand letter to the Issuer, dated July 6, 2005, pursuant to Section 220 of the Delaware General Corporation Law 4. Exhibit D - Press release issued on July 6, 2005 EX-99 2 exhibita.txt SOURCECORP COMPLAINT IN THE COURT OF CHANCERY FOR THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY JANA PARTNERS LLC, ) JANA PIRANHA MASTER FUND, LTD. ) AND JANA MASTER FUND, LTD., ) ) ) PLAINTIFFS, ) C.A. NO. _______________ ) v. ) ) SOURCECORP, INCORPORATED, ) THOMAS C. WALKER, ) ED H. BOWMAN, JR., ) G. MICHAEL BELLENGHI, ) MICHAEL J. BRADLEY, ) DAVID LOWENSTEIN, ) DONALD F. MOOREHEAD, JR. AND ) EDWARD M. ROWELL ) ) DEFENDANTS. ) COMPLAINT --------- Plaintiffs JANA Partners LLC, JANA Piranha Master Fund, Ltd. and JANA Master Fund, Ltd. (collectively, "JANA" or "Plaintiffs") for their complaint against defendants SOURCECORP, Incorporated ("SOURCECORP," or the "Company") and its Board of Directors (collectively with SOURCECORP, "Defendants") allege as follows: SUMMARY OF THE ACTION --------------------- 1. This is an action to remedy the wrongful subversion of corporate democracy. Plaintiffs seek declaratory relief to invalidate an extraordinary series of measures hastily adopted recently by the Board of Directors, the primary purpose of which was to entrench themselves and to disenfranchise the Company's stockholders. 2. The Company was formed in 1994 and is in the business of providing "business process outsourcing solutions." Since its initial public offering on January 26, 1996, the Company has undertaken a massive expansion effort, acquiring 66 companies and divesting 22 operating units by sales or closures. During that period the share price has gone from over $44 per share in 2001 to a current price of approximately $20 per share, resulting in a loss of over $400 million in market capitalization. 3. Under the current Board of Directors and management team, within just the past ten months the Company has admitted that its financial statements for previous fiscal periods from 2001 to 2004 were not presented in accordance with Generally Accepted Accounting Principles ("GAAP") and were materially false and misleading, and has been forced to restate prior years' financial statements. The Securities and Exchange Commission ("SEC") instituted an inquiry with respect to the Company in 2004, and in 2005 informed the Company that it had launched a formal investigation with respect to the Company which is still ongoing. The Company and its management also have been sued in numerous securities class action lawsuits and a stockholder derivative action has been filed against current and former officers and directors of the Company. During this period the Company has been in breach of its credit agreement and has been subjected to a delisting proceeding by the NASDAQ. 4. In April, 2005, following questions raised by JANA - the beneficial owner of 13.2% of the Company's outstanding shares of common stock - regarding the performance and direction of the Company, the Board of Directors indicated to JANA that it would appoint a representative of JANA to the Board. However, the Board deliberately prolonged the process of considering JANA's designated nominee through unnecessary delay and through changing and unreasonable requests, including at various points insisting that JANA be restricted in speaking with its Board representative, that JANA sacrifice its right to express its views as a stockholder and that JANA and its nominee agree to restrictions placed upon no other member of the Board. The Board then used this period of delay to take inequitable action by surreptitiously (i) amending the Company's By-Laws to, among other things, effectively frustrate stockholder suffrage, strip stockholders of their right to call a Special Meeting, and place significant burdens on the ability of stockholders to act by written consent; (ii) adopting a "Poison Pill"; and (iii) executing agreements with certain Board members and officers providing extended terms of employment and increased "Golden Parachutes." 5. The Board amended the By-Laws and adopted the "Poison Pill" both without prior notice to stockholders or stockholder approval despite having had an opportunity to garner stockholder support (if possible) for these actions at the Company's Annual Meeting on May 23, 2005 - just five weeks earlier. The timing of these actions leaves little doubt that they were taken to prevent the possibility that JANA, a large stockholder that had expressed concerns about the direction of the Company, would call a Special Meeting or seek to take action by written consent, or acquire more shares of the Company. 6. The By-Law amendments adopted by the Board of Directors stripped stockholders of the right to call a Special Meeting, whereas previously the holders of 25% of the shares could do so. The amendments also inserted a highly onerous and unusual series of requirements for stockholders to satisfy to even seek to act by written consent in order to discourage stockholders from doing so and to reduce the likelihood of successfully or timely doing so. To further disenfranchise the stockholders, the Board made these new By-Law amendments subject to repeal or amendment only by a supermajority vote (requiring two-thirds of the shares outstanding). 7. The Poison Pill adopted by the Board would massively dilute the holdings of any stockholder acquiring 15% or more of the outstanding shares of common stock, and thereby make it more difficult for stockholders to increase their holdings and for the Company and its stockholders to attract takeover bids from third parties, despite the fact that no threat justifies such a step. 8. The Poison Pill will not expire until 2015 and at no point prior to its expiration is stockholder renewal required. It was not adopted based on a reasonable belief that a danger to corporate policy and effectiveness existed such that defensive, anti-takeover measures were appropriate, and was not a reasonable response in relation to any threat to corporate policy or effectiveness. 9. The revised employment contracts for two management Board members executed by the Board in May, 2005, contain excessive Golden Parachutes equal to more than three times their compensation. And the Board approved new employment contracts for eight other officers of the Company, also containing new or increased Golden Parachutes equal to as much as three times their compensation (not including "gross-ups" paid to the employees to compensate for excise taxes incurred by each employee in connection with the Golden Parachute payment). 10. The actions by the Board and management of SOURCECORP were taken for the primary purpose of disenfranchising SOURCECORP's stockholders, for which there was no compelling justification. These actions serve to further entrench the Board and management at the expense of the Company and its stockholders, are inequitable and an improper use of the corporate machinery and should not be countenanced. JANA seeks a declaration invalidating the recent By-Law amendments and thereby restoring the By-Laws as they existed prior to the recent amendments so that JANA and the other stockholders may effectively exercise their rights as stockholders, and invalidating the Board's adoption of the Poison Pill and the rights authorized thereunder. PARTIES 11. JANA Partners LLC ("JANA Partners") is a Delaware limited liability company with its primary place of business in San Francisco, CA. JANA Partners is a private money management firm which serves as the investment manager of several investment funds and accounts. 12. JANA Partners is the beneficial owner of the SOURCECORP shares held by the various investment funds and accounts it manages, within the meaning of Rule 13d-3, because JANA Partners has the power to vote and dispose of those shares. 13. JANA Piranha Master Fund, Ltd. ("JPMF") is a Cayman Islands exempted company and an investment fund managed by JANA Partners. JPMF holds 1,435,087 shares of SOURCECORP, which are under the control of its investment manager, JANA Partners, representing approximately 9.2% of the outstanding shares. 14. JANA Master Fund, Ltd. ("JMF") is a Cayman Islands exempted company and an investment fund managed by JANA Partners. JMF holds 570,105 shares of SOURCECORP, which are under the control of its investment manager, JANA Partners, representing approximately 3.6% of the outstanding shares. 15. JANA Partners also serves as the investment manager of an unaffiliated managed account that holds 60,000 shares in SOURCECORP, representing approximately .4% of the outstanding shares. 16. Defendant SOURCECORP is a Delaware corporation with its principal place of business in Dallas, Texas. SOURCECORP is in the business of providing business process outsourcing solutions specializing in document and information management. SOURCECORP common stock trades on the NASDAQ market under the ticker symbol SRCP. The Company has approximately 15.67 million shares of common stock outstanding, of which the Plaintiffs beneficially own 2,065,192 shares, or 13.2%. 17. SOURCECORP's Board consists of seven Directors (collectively, the "Director Defendants"), each of whom has been with the Company as a Director and/or part of the management team since at least 1996. 18. Ed H. Bowman has been a Director and the President and Chief Executive Officer of SOURCECORP since November, 1995. Bowman received cash compensation from SOURCECORP of $635,000 and a grant of restricted stock valued at $1.895 million for the year ended December 31, 2004. Bowman's current annual base compensation is $625,000. In the event of a "change of control" of SOURCECORP, Bowman's employment contract guarantees him a lump-sum payment of five times the sum of his base salary plus maximum bonus, which would total at least $6.75 million, a "gross-up" payment to Bowman to cover certain liabilities to him triggered by that payment, as well as additional payments to Bowman to cover certain additional tax liabilities to Bowman triggered by each successive "gross-up." Bowman's employment contract was renewed in May, 2005, for a five-year term, with an automatic annual five-year renewal. According to SOURCECORP's most recent proxy statement, Bowman owns only 11,000 shares, or less than one-tenth of one percent, of the Company's outstanding stock (excluding restricted stock grants and unexercised options). 19. Thomas C. Walker has been Chairman of the Board of SOURCECORP since the Company's inception in 1994. Walker is also Chief Development Officer of SOURCECORP, a position he has held since November, 1995. Prior to that time Walker held the positions of President and Chief Executive Officer of SOURCECORP. Walker received cash compensation from SOURCECORP of $340,000 for the year ended December 31, 2004. Walker's current annual base compensation is $350,000. In the event of a "change of control" of SOURCECORP, Walker's employment contract guarantees him a lump-sum payment of 3.64 times the sum of his base salary plus maximum bonus, which would total $2.1 million, a "gross-up" payment to Walker to cover certain tax liabilities to him triggered by that payment, as well as additional payments to Walker to cover certain additional tax liabilities to Walker triggered by each successive "gross-up." Walker's employment contract was renewed in May, 2005, for a two-year term, with an automatic annual two-year renewal. According to SOURCECORP's most recent proxy statement, Walker owns only 39,000 shares, or approximately a quarter of a percent, of the Company's outstanding stock (excluding restricted stock grants and unexercised options). 20. G. Michael Bellenghi has been a Director of SOURCECORP since May, 2003. Before that time he served as a Director of SOURCECORP from the Company's inception in 1994 until May, 1999. According to SOURCECORP's most recent proxy statement, Bellenghi owns no shares of the Company's stock (excluding restricted stock grants and unexercised options). 21. Michael J. Bradley has been a Director of SOURCECORP since 1996. From 1991-1996, Bradley served as a Director of Recordex, a predecessor of a SOURCECORP subsidiary. According to SOURCECORP's most recent proxy statement, Bradley owns only 6,000 shares, or less than one-tenth of a percent, of the Company's outstanding stock (excluding restricted stock grants and unexercised options). 22. David Lowenstein has been a SOURCECORP Director since February, 1995. In the past, Lowenstein has also held the positions of Executive Vice-President, Treasurer and Chief Financial Officer at SOURCECORP. Lowenstein currently has a consulting agreement with the Company and received cash compensation from SOURCECORP of $178,023 for the year ended December 31, 2004, pursuant to the consulting agreement. In the event of a "change of control" of SOURCECORP, Lowenstein's consulting agreement also provides for a "Golden Parachute" lump sum payment to him of $1.5 million, notwithstanding the fact that he is not even an employee of the Company. According to SOURCECORP's most recent proxy statement, Lowenstein owns no shares of the Company's stock (excluding restricted stock grants and unexercised options). 23. Donald F. Moorehead, Jr. has been a SOURCECORP Director since January, 1995. According to SOURCECORP's most recent proxy statement, Moorehead owns no shares of the Company's stock (excluding restricted stock grants and unexercised options). 24. Edward M. Rowell has been a SOURCECORP Director since 1996. According to SOURCECORP's most recent proxy statement, Rowell owns only 300 shares, or less than one- tenth of a percent, of the Company's outstanding stock (excluding restricted stock grants and unexercised options). 25. Given the Director Defendants' longstanding professional and economic relationships with SOURCECORP, and their miniscule actual stock holdings, it is not surprising that they seek to further entrench themselves, notwithstanding the fact that recent events indicate that they and their management team lack the judgment and ability to run the Company and create the maximum value for its stockholders. SOURCECORP'S RECENT LEGAL TROUBLES AND POOR PERFORMANCE 26. In just the last ten (10) months, SOURCECORP has faced numerous financial and regulatory difficulties that have called into question the leadership and effectiveness of the Board and current management team. 27. For example, SOURCECORP failed to file its September 30, 2004 Form 10-Q within the timeframe prescribed by the SEC, resulting in a default under its credit agreement with various lenders. 28. On October 27, 2004, SOURCECORP announced that it was required to restate its earnings for the year ending December 31, 2003, as well as for the first two fiscal quarters of 2004, because it (1) materially overstated its revenue and earnings per share; (2) prematurely recognized revenue; and (3) did not prepare financial statements in accordance with GAAP. 29. The price of SOURCECORP stock immediately fell $5.96 per share, or 27%, following the October 27, 2004, announcement that it had misstated its earnings for 2003 and the first two fiscal quarters of 2004. The restated financial statements for 2003 reflect earnings that are approximately 30% lower than previously reported. 30. On November 16, 2004, SOURCECORP announced the receipt of a NASDAQ Staff Determination letter, which indicated that SOURCECORP stock was subject to delisting by NASDAQ for failing to timely file its Form 10-Q for the quarter ended September 30, 2004. 31. On November 17, 2004, class action lawsuits were filed against SOURCECORP, defendant Bowman and SOURCECORP's CFO, Barry L. Edwards, to recover damages resulting from federal securities laws violations from May 7, 2003, through October 27, 2004, based upon publication of false and misleading financial information. SOURCECORP acknowledges that this lawsuit could subject the Company to "substantial damages" or other penalties. 32. On December 28, 2004, a stockholder derivative action was filed against SOURCECORP's current and former officers and directors. The derivative action alleges breach of fiduciary duty, abuse of control, gross mismanagement, waste of assets, and unjust enrichment related to SOURCECORP's October 27, 2004, announcement that it had restated earnings. 33. Things went from bad to worse for the Company on January 14, 2005, when it received confirmation from the SEC that it had converted its informal inquiry with respect to SOURCECORP's restated financials into a formal investigation that is still ongoing. 34. Seven days later, on January 21, 2005, SOURCECORP again restated earnings - this time for the fiscal years ended December 31, 2001 and 2002. The restated financial statements for 2001 indicate that SOURCECORP suffered a net loss of approximately $21,000,000. The restated financial statements for 2002 reflect earnings that are approximately 26% lower than previously reported. 35. In connection with the restatements, the Company also disclosed that it had made overpayments in connection with the acquisition of an operating subsidiary totaling over $25 million, causing a significant loss to stockholders and demonstrating a lack of proper controls at the Company 36. On March 7, 2005, SOURCECORP issued a press release stating that it had concluded its internal investigation relating to the restatement of financial statements, but only said that it is still "working towards resolution based on the results of such investigation." SOURCECORP did not provide any details about any findings or a potential resolution. The press release also acknowledged the ongoing SEC formal investigation. 37. Over the last four years, SOURCECORP's net income has fallen approximately 75%, from more than $32 million in 2000 to less than $8.1 million in 2004. 38. SOURCECORP's stock price has fallen from over $44 per share on May 24, 2001, to under $20 per share as of July 1, 2005. 39. Notwithstanding the Company's recent troubles and poor performance, the Director Defendants in May, 2005, rewarded themselves and management by extending the terms of employment and increasing the compensation of many management personnel, including defendants Bowman and Walker, and awarding "Special Bonuses" to defendants Bowman and Walker and an officer of the Company. The Board took this action shortly after JANA had first contacted the Board to express concerns about the direction of the Company. 40. Bowman's new employment contract increases his base compensation, sets his potential bonus at 100% of his salary and extends his employment through December 31, 2009, with an automatic annual five-year renewal (unless prior notice of non-renewal is given to him according to the terms of the agreement). However, just last year, on or about January 1, 2004, Bowman had executed his prior employment contract, which was not due to expire until December, 2008. 41. Walker's new employment contract increases his base compensation, sets his potential bonus at 65% of his salary and extends his employment through December 31, 2006, with an automatic annual two-year renewal (unless prior notice of non-renewal is given to him according to the terms of the agreement). However, just last year, on or about January 1, 2004, Walker had executed his prior employment contract, which was not due to expire until December, 2005. 42. The Director Defendants in May, 2005, also extended the employment and increased the compensation of eight other corporate officers. 43. In addition, in a May 6, 2005 Form 8-K filing, SOURCECORP first disclosed "Special Bonuses" that were paid to defendants Bowman and Walker, and the Company's CFO, Edwards. 44. SOURCECORP did not award defendant Bowman, defendant Walker or CFO Edwards cash bonuses in 2004 because the Company did not meet its performance target. Nevertheless, on May 6, 2005, SOURCECORP paid "Special Bonuses" to defendant Walker, defendant Bowman and CFO Edwards purportedly for their work on the Company's restatement of its financial statements, which included financial statements from the first and second fiscal quarters of 2004. 45. Defendant Bowman was paid a "Special Bonus" of $325,000, which is more than 50% of his 2004 annual base compensation. 46. Defendant Walker was paid a "Special Bonus" of $125,000, which is approximately 37% of his 2004 annual base compensation. 47. Edwards was paid a "Special Bonus" of $175,000, which is more than 50% of his 2004 annual base compensation. 48. Thus, the Company paid bonuses to these three executives for helping to restate earnings for fiscal periods for which the Company had refused to pay them bonuses in the first place due to poor financial performance, and at a time when the Company is being investigated for accounting irregularities by the SEC and facing substantial litigation arising from the performance of these very same executives. JANA'S COMMUNICATIONS WITH THE SOURCECORP BOARD 49. By April, 2005, SOURCECORP was a company in trouble: it had restated its financial statements for 3 1/2 years, been named in class actions and a derivative lawsuit, was the subject of an SEC investigation, and had been in default under its loan obligations. JANA contacted the Company in April, 2005, to discuss the performance and direction of the Company. On April 29, 2005, representatives of the Company indicated to JANA in a phone call that the Board would appoint a person designated by JANA to the Board. 50. In a May 11, 2005, Form 8-K filing with the SEC, the Company stated that it would consider a Board nominee proposed by JANA (although the Company claimed it had not agreed to appoint JANA's nominee "at this time"). 51. The Board and management, however, proceeded to delay the process of considering the appointment of JANA's nominee through a series of changing and unreasonable requests prior even to any consideration of the actual qualifications of JANA's nominee. The Board and its representatives first required that, before its representatives would even meet with JANA's nominee, such nominee enter into a non-disclosure agreement containing unreasonable terms - including that JANA's nominee be restricted in speaking with JANA, that the nominee be restricted from purchasing stock of the Company for one year (whether or not such nominee was ever appointed to the Board) and that the agreement have an infinite duration. 52. After several weeks of negotiations regarding the unreasonable non-disclosure agreement, the terms of an acceptable non-disclosure agreement had essentially been agreed upon. However, as a further stalling tactic, towards the end of these negotiations the Company next revealed that before appointing JANA's nominee to the Board, an entirely new agreement with even more onerous restrictions - including a non-disparagement clause preventing JANA from exercising its right as a stockholder to comment upon the Company - and which the Company admitted no other director of the Company had even been asked to sign would have to be signed by JANA and its nominee. 53. The roadblocks systematically put in place by the Company during May and June, 2005, excessively delayed what should have been a simple meeting with a potential Board nominee. But there was a purpose behind the delay. At the very same time, unbeknownst to JANA, the Company was surreptitiously establishing a plethora of mechanisms to radically limit participation of the stockholders in the governance process. While JANA was misled to believe it was reaching an agreement to participate in the management of the Company by nomination of a director, the Board was concocting and enacting procedures to inequitably misuse the corporate machinery for the purposes of entrenching itself and management at the expense of the stockholders. It is clear from the timing of the Board's actions and the delaying techniques utilized to enable them that once JANA expressed concern regarding the direction of the Company, the Board feared that JANA might call a Special Meeting, seek to act by written consent and/or increase its holdings, and thus took these actions for the primary purpose of disenfranchising JANA and the other stockholders. THE BOARD OF DIRECTORS AMENDS THE BY-LAWS 54. Unbeknownst to JANA Partners, while it was negotiating in good faith with SOURCECORP in May and June, 2005, to resolve what it thought were the remaining obstacles to obtaining a position on the Board, the Board was scheming to put in place an extraordinary series of defensive measures that were hastily adopted by the Director Defendants to effectively frustrate the stockholder franchise, prevent stockholder participation and further entrench the Board and senior management. 55. On June 24, 2005, the Director Defendants amended the SOURCECORP By-Laws (the "Amended By-Laws") to prevent stockholders from effectively exercising their rights as stockholders. 56. The Board amended the Company's By-Laws both without prior notice to stockholders or stockholder approval despite having had an opportunity to garner stockholder support (if possible) for these actions at the Company's Annual Meeting on May 23, 2005 - just five weeks earlier. 57. Previously, under Section 2 of the By-Laws, a collection of stockholders representing 25% of outstanding shares could request in writing that a Special Meeting of the stockholders be held. This 25% threshold had been a longstanding provision of the By-Laws. However, the June 24, 2005 amendments took away in its entirety the stockholders' right to call a Special Meeting. According to Section 2 of the amended By-Laws, only the Board of Directors, the Chairman of the Board or the President may call a Special Meeting, even if 100% of the stockholders wished to do so. 58. This change in the By-Laws was intended to make it impossible for stockholders to meet and vote in a forum other than at the Company's Annual Meeting, the next of which will not likely take place until May, 2006 at the earliest. 59. The Director Defendants also instituted a change in Section 5 of the By-Laws to ensure that at any meeting the Board can prevent the stockholders from taking any action by simply adjourning the meeting. Previously, under Section 5 of the By-Laws, a meeting of the stockholders could only be adjourned by a majority of the stockholders at the meeting. 60. However, in breach of their fiduciary duties, on June 24, 2005, the Director Defendants amended the By-Laws to take away the stockholders' right to adjourn a meeting. According to Section 5 of the Amended By-Laws only the "Chairman" of the meeting (which is defined in Section 6 of the By-Laws as the Chairman of the Board, the President or any Vice-President) may adjourn the meeting. 61. The elimination of JANA's and the other stockholders' rights to convene a Special Meeting is particularly significant because it makes it much more difficult for stockholders to take action. At a Special Meeting, actions (such as the election and removal of Directors) generally could be approved by a majority of the quorum. As a quorum could be constituted with the presence of stockholders holding a mere majority of the outstanding shares, approval of action at a Special Meeting could be effected by the vote of far less than a majority of the outstanding shares. By contrast, action by written consent requires the approval of at least a majority of the outstanding shares. Thus, by stripping stockholders of the right to call a Special Meeting, the Board has changed the rules on the percentage of stockholders required to take action by increasing that percentage to protect themselves, and thus has tilted the playing field to its advantage. 62. The Board also made it even more difficult for stockholders to act by written consent. Previously, under Section 9 of the By-Laws, gaining consent of stockholders to take action in lieu of a meeting required only the delivery of signed consents by the appropriate number of stockholders as would have been needed at a meeting of stockholders to take that action. 63. However, Section 9 of the Amended By-Laws imposes a significant obstacle to stockholder action. Under the amended Section 9, before a stockholder may even SEEK consent from other stockholders, he must first request that the Board of Directors set a record date, ostensibly so the Company can determine the stockholders eligible to consent to corporate action in writing without a meeting. The record date set by the Board can be up to twenty days after the Company receives the stockholder request, significantly slowing the process for stockholder action in lieu of a meeting. 64. The amendments to the By-Laws not only change the previous By-Laws, but introduce new sections that, similarly, interfere with the rights of stockholders. Section 10 of the Amended By-Laws requires a lengthy and involved submission to the Secretary of the Company prior to soliciting any written consent from other stockholders without a meeting. Specifically, in addition to the unprecedented requirement that the proponent of the consent deliver a proxy statement to the Company Secretary in order to even be able to request that a record date be set, and in addition to the information typically required for action by written consent, the submission must also contain: (e) a description of any negotiations, transactions or contacts during the past two years between or among the stockholders of the Corporation or their affiliates seeking to take action by written consent without a meeting and any other person (including the identity of such other person) concerning any take-over bid, tender offer, exchange offer, merger, consolidation, business combination, recapitalization, restructuring, liquidation, dissolution, distribution, stock purchase or other extraordinary transaction involving the Corporation or any of its subsidiaries or the assets or securities of the Corporation or any of its subsidiaries; (f) a description of any negotiations, transactions or contacts during the past two years between or among the stockholders of the Corporation or their affiliates seeking to take action by written consent without a meeting and any other person (including the identity of such other person) concerning any solicitation of proxies or consents from stockholders, any stockholder proposal, the election, removal or appointment of directors or executive officers of the Corporation or any of its subsidiaries or the policies, affairs or strategy of the Corporation or any of its subsidiaries; and (g) such other information regarding each nominee or matter of business to be proposed as would be required to be included in solicitations of proxies, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. 65. The requirements for disclosure of this information pursuant to Section 10, and in particular the information required to be disclosed pursuant to subparagraphs (e) and (f) thereunder, which even federal proxy rules do not require, may be used by the Board to arbitrarily claim that a stockholder's submission fails to comply with these subjective requirements and thereby delay or even deny the stockholder's attempt to exercise its right to act by written consent. Both Sections 9 and 10 were obviously adopted for the true purpose of delaying or denying stockholder action by written consent. 66. Section 11 of the Amended By-Laws is similarly complex and onerous. In order to propose business or nominate a person for election as a director at any meeting of the stockholders, the nominating stockholder must deliver notice to the Company at least 90 days but no more than 120 days before the meeting. In addition, the notice must set forth an incredible amount of detail regarding the proposed business or proposed nominee. In addition to the information typically required, the following information is required: (e) a description of any negotiations, transactions or contacts during the past two years between the stockholder or its affiliates and any other person (including the identity of such other person) concerning any take-over bid, tender offer, exchange offer, merger, consolidation, business combination, recapitalization, restructuring, liquidation, dissolution, distribution, stock purchase or other extraordinary transaction involving the Corporation or any of its subsidiaries or the assets or securities of the Corporation or any of its subsidiaries; (f) a description of any negotiations, transactions or contacts during the past two years between the stockholder or its affiliates and any other person (including the identity of such other person) concerning any solicitation of proxies or consents from stockholders, any stockholder proposal, the election, removal or appointment of directors or executive officers of the Corporation or any of its subsidiaries or the policies, affairs or strategy of the Corporation or any of its subsidiaries; and (g) such other information regarding each nominee or matter of business to be proposed as would be required to be included in solicitations of proxies, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. 67. The requirements for disclosure of this information pursuant to Section 11, and in particular the information required to be disclosed pursuant to subparagraphs (e) and (f) thereunder, which even federal proxy rules do not require, may be used by the Board to arbitrarily claim that a stockholder's submission fails to comply with these subjective requirements and thereby delay or even deny the stockholder's attempt to exercise its voting rights. 68. Not only did the Board make the above described changes to the By-Laws by amending Section 9 and adopting Sections 10 and 11, which erode the stockholders' rights to effect change, but it also made sure the stockholders could not easily eliminate these limitations on their voting rights by providing that these changes cannot be repealed or amended in any respect or in any manner except by a vote of the holders of not less than 66(2)/3 of the outstanding shares, whereas the prior By-Laws required only a vote by a majority of the shares outstanding. Additionally, whereas the stockholders could otherwise respond to these changes by calling a Special Meeting, they can no longer do so, and even at the Annual Meeting may now only make such changes by the vote of 66(2)/3 of the shares outstanding, whereas the prior By-Laws required only a vote by a majority of the shares outstanding. 69. It is telling that the Board made these changes to the By-Laws, which significantly erode the effectiveness of the stockholders' ability to vote, a mere five weeks after the Annual Meeting, rather than raising the issue with the stockholders at the meeting. THE BOARD OF DIRECTORS ADOPTS A "POISON PILL" 70. In conjunction with adopting the Amended By-Laws, on June 24, 2005, the Board also adopted a stockholders' Rights Agreement (the "Rights Agreement" or the "Poison Pill") - also without prior notice to the stockholders or stockholder approval - to make it more difficult for stockholders to acquire more shares or for the Company to attract viable takeover bids and thereby further entrench themselves and management. The Poison Pill will not expire until 2015 and at no point prior to its expiration is stockholder renewal required. 71. The Rights Agreement provides, among other things, a "flip-in" provision whereby non-acquiring stockholders are issued Rights to purchase a certain amount of additional SOURCECORP common stock at a reduced price in the event that a person acquires 15% or more of the Company's outstanding common stock (such a person is defined in the Rights Agreement as an "Acquiring Person"). The result of triggering the Poison Pill would be to dilute significantly the holdings of the Acquiring Person, making it very difficult for an Acquiring Person to take over the Company without the existing Board's consent or otherwise influence or control management. 72. Specifically, under the Rights Agreement each holder of SOURCECORP common stock as of the close of business on July 4, 2005 (the "Record Date") received the right to purchase, for $90, 1/1000th of a share of preferred stock for every share of common stock held by such stockholder (the "Rights"). In the event of a "Triggering Event" - that is, an event rendering a person an Acquiring Person - the Rights entitle stockholders, other than the Acquiring Person, to obtain $180 worth of common stock for every Right held. At the same time, the Acquiring Person's Rights would become null and void, thereby significantly diluting the percentage of common stock owned by the Acquiring Person. EXCESSIVE "GOLDEN PARACHUTES" FOR MEMBERS OF THE BOARD AND MANAGEMENT 73. On May 6 and 9, 2005, the Company executed new employment agreements with defendants Bowman and Walker, as well as eight other SOURCECORP officers. Each of those employment agreements contains a Golden Parachute provision, whereby the officer is guaranteed a large lump-sum payment in the event their employment is terminated within two years of a "change of control", regardless of whether the employee terminates the employment and regardless of the reason for termination, if any. 74. Nationwide, in the wake of scandals such as Enron and Tyco, increased attention by the press, stockholders and politicians has been paid to the inequities of extravagant payouts to corporate directors and executives. Stockholders at many of the country's largest corporations are expressing their increasing intolerance of these payments. Alcoa, Bank of America, Home Depot and Hewlett-Packard have all recently acceded to stockholder demands to submit golden parachutes and other severance arrangements to stockholder votes. 75. The SOURCECORP Board on the other hand deliberately waited until shortly after its 2005 Annual Meeting to increase the size of the Company's Golden Parachute payments and then took away its stockholders' right to call a Special Meeting to respond. 76. Under the Golden Parachute provision in defendant Bowman's new employment agreement, upon a "change of control" and the termination of his employment by either party, Bowman will receive 5 times the sum of his annual salary and maximum potential bonus, which equals $6,750,000. Under the Golden Parachute provision in defendant Walker's new employment agreement, upon a "change of control" and the termination of his employment by either party, Walker will receive 3.64 times the sum of his annual salary and maximum potential bonus, which equals $2,102,100. 77. Under the Golden Parachute provision in their respective new employment agreements, upon a "change of control" and the termination of his employment by either party, CFO Barry L. Edwards will receive 3 times the sum of his annual salary and maximum potential bonus, which equals $1,782,000; Division President Kerry Walbridge will receive 3 times the sum of his annual salary and maximum potential bonus, which equals $1,680,000; Division President David Delgado will receive 2 times the sum of his annual salary and maximum potential bonus, which equals $962,500; Division President Ronald Zazworsky will receive 2 times the sum of his annual salary and maximum potential bonus, which equals $997,500; Senior Vice-President, Secretary and General Counsel Charles S. Gilbert will receive 2 times the sum of his annual salary and maximum potential bonus, which equals $858,000; Chief Accounting Officer W. Bryan Hill will receive 2 times the sum of his annual salary and maximum potential bonus, which equals $660,000; Chief Information Officer Stephen W. Davis will receive 2 times the sum of his annual salary and maximum potential bonus, which equals $810,000; and Vice President of Corporate Development Ralph D. Burns will receive 1 times the sum of his annual salary and maximum potential bonus, which equals $432,000. 78. In addition, each of these new employment agreements provides that SOURCECORP will make a "gross-up" payment to the respective Board member or officer to cover the 20% excise tax triggered by the Golden Parachute payment. Only the "base amount" of each Golden Parachute - equal to the average annual compensation over the prior five years - is not subject to the 20% excise tax where the total payments to the executive in connection with the "change of control" exceed 2.99 times the base amount. Thus, for example, of the Company's approximate $6,750,000 payment that the Board agreed to make to Bowman (based on his annual salary and maximum potential bonus), approximately $5,400,000 would be subject to a 20% excise tax, for which the Company has agreed to reimburse him. This does not even take into account the impact of other sources of income, such as options, that would further inflate the value of Bowman's Golden Parachute payment and, accordingly, inflate the cost to the Company to reimburse him for the excise tax thereon. In addition, each of these new employment agreements also provides that SOURCECORP will make further "gross-up" payments to the respective Board member or officer to cover any tax liabilities to the respective Board member or officer triggered by each preceding "gross-up" payment. These "gross-up" payments for excise taxes dramatically increase the cost of each Golden Parachute to the Company and, ultimately, the stockholders. 79. In addition to approving these extravagant severance payments, which were completely out of line with the Company's performance, and agreeing to reimburse the executive for the excise taxes incurred in connection with those payments, the Board also deprived the Company of valuable tax deductions that would otherwise be available in the absence of the excessive nature of the Golden Parachutes. Only the "base amount" of each Golden Parachute - equal to the average annual compensation over the prior five years - is deductible by the Company where the total payments to the executive in connection with the "change of control" exceed 2.99 times the base amount. Thus, for example, of the Company's approximate $6,750,000 payment that the Board agreed to make to Bowman (based on his annual salary and maximum potential bonus), only approximately $1,350,000 would be deductible by the Company - approximately $5,400,000 would not. This does not even take into account the impact of other sources of income, such as options, that would further inflate the value of Bowman's Golden Parachute payment. In addition, each successive "grossed-up" amount to be paid by the Company to Bowman (and others) constitutes even more Golden Parachute payments that would not be deductible by the Company. 80. In the aggregate, the effect of the Golden Parachutes is that, if the Company is acquired in a transaction otherwise favored by its stockholders, over $15 million in consideration that otherwise could have gone to stockholders has been shifted into the pockets of certain Board members and management (without taking into account the payment to the Board members and officers of other sources of income, such as options, that would be triggered in connection with a "change of control"). 81. Thus, at a time when the Company is performing abominably, restating earnings and being investigated by the SEC, the Board has increased the cost to be borne by the Company in the event of a "change of control", and lowered the threshold to trigger the Golden Parachutes, thereby making it less likely that the Company will attract suitors and more likely that the Board will remain firmly entrenched and in control of SOURCECORP, and at the same time rewarding management for a job poorly done as stockholders continue to see a steady decline in the value of their shares. FIRST CAUSE OF ACTION FOR BREACH OF FIDUCIARY DUTY (Seeking Declaration that the SOURCECORP Board's Adoption of the Amended By-Laws Violated its Fiduciary Duties and is Invalid and the By-Laws as they Existed Prior to the Recent Amendments are In-Effect) 82. Plaintiffs repeat and reallege the allegations of paragraphs 1 through 81 as if fully set forth herein. 83. The effect of the Amended By-Laws is to impede and interfere with the efforts of stockholders to effectively exercise their rights as stockholders. 84. The Amended By-Laws were designed to entrench the Board and current management to protect their generous compensation schemes and to insulate themselves from stockholder participation. The timing of the Board's amendments to the By-Laws shows it was done for the primary purpose of impeding and interfering with the fundamental rights of the Company's stockholders. 85. There is no compelling justification for the amendments to the By-Laws adopted by the Board. They constitute a wrongful subversion of corporate democracy by manipulation of the Delaware corporate machinery. 86. The Amended By-Laws were not adopted based on a reasonable belief that a danger to corporate policy and effectiveness existed such that defensive, anti-takeover measures were appropriate. 87. The Amended By-Laws were not a reasonable response in relation to any threat to corporate policy or effectiveness. 88. The Director Defendants, through the adoption of the Amended By-Laws, breached their fiduciary duties to Plaintiffs. 89. The Director Defendants in adopting the Amended By-Laws did not act in good faith. 90. As evidenced by the actions that the Defendants have taken thus far, Plaintiffs are aggrieved by their substantially impaired ability to exercise their rights and effect change as stockholders of SOURCECORP due to the amendments to the By-Laws. Thus, there is a substantial controversy between parties having adverse interests which is of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. 91. Accordingly, Plaintiffs are entitled to a declaration that, the SOURCECORP Board's adoption of the Amended By-Laws violated the Board's fiduciary duties, the Amended By-Laws are invalid, void and of no force and effect, and that the By-Laws as they existed prior to the recent amendments are valid and in-effect. SECOND CAUSE OF ACTION FOR BREACH OF FIDUCIARY DUTY (Seeking Declaration that the SOURCECORP Board's Adoption of the Rights Agreement Violated its Fiduciary Duties and the Rights Agreement and any Rights Thereunder are Invalid) 92. Plaintiffs repeat and reallege the allegations of paragraphs 1 through 91 as if fully set forth herein. 93. The Rights Agreement was designed solely to entrench the Board and current management. 94. The effect of the Rights Agreement is to harm the Company's stockholders by making it more difficult for stockholders to acquire more shares or for the Company to receive takeover bids from third parties. 95. The Rights Agreement was not adopted based on a reasonable belief that a danger to corporate policy and effectiveness existed such that defensive, anti-takeover measures were appropriate. 96. The Rights Agreement was not a reasonable response in relation to any threat to corporate policy or effectiveness. 97. The Director Defendants, through the adoption of the Rights Agreement, breached their fiduciary duties to Plaintiffs because they acted out of self-interest, and not out of a desire to act in the best interests of ordinary stockholders. 98. The Director Defendants in adopting the Rights Agreement did not act in good faith. 99. As evidenced by the actions that the Defendants have taken thus far, Plaintiffs are currently aggrieved as stockholders of SOURCECORP due to the Rights Agreement. Thus, there is a substantial controversy between parties having adverse interests which is of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. 100. Accordingly, Plaintiffs are entitled to a declaration that, the SOURCECORP Board's adoption of the Rights Agreement violated the Board's fiduciary duties, and the Rights Agreement and any Rights thereunder are invalid, void and of no force and effect. PRAYER FOR RELIEF Wherefore, Plaintiffs pray for judgment in their favor on all counts as well as the following relief: (a) A declaration that the adoption of the Amended By-Laws violated the SOURCECORP Board's fiduciary duties, and are invalid, void, and of no force and effect, and the By-Laws as they existed prior to the recent amendments are in-effect; (b) A declaration that the adoption of the Rights Agreement violated the SOURCECORP Board's fiduciary duties and the Rights Agreement and any Rights authorized thereunder are invalid, void, and of no force and effect; (c) Awarding Plaintiffs their costs and disbursements in this action, including reasonable attorneys' fees; and (d) Such other and further relief as this Court deems just and proper. POTTER ANDERSON & CORROON LLP. OF COUNSEL: By: /s/ Brian C. Ralston ---------------------------- Howard O. Godnick, Esquire Michael D. Goldman (#268) Marc E. Elovitz, Esquire Stephen C. Norman (#2686) SCHULTE ROTH & ZABEL LLP Brian C. Ralston (#3770) 919 Third Avenue Hercules Plaza, 6th Floor New York, NY 10022 1313 North Market Street (212) 756-2000 Wilmington, Delaware 19899 (302) 983-6000 Dated: July 6, 2005 Attorneys for Plaintiffs EX-99 3 exhibitb.txt LETTER TO THE ISSUER July 6, 2005 Board of Directors SOURCECORP, Inc. 3232 McKinney Avenue Suite 1000 Dallas, Texas 75204 Attention: Mr. Thomas C. Walker, Chairman of the Board TRANSMITTED BY FAX AND OVERNIGHT DELIVERY Members of the Board: JANA Partners LLC ("we" or "us") is a $4 billion hedge fund which currently owns approximately 13% of the outstanding shares of SOURCECORP, Inc. ("SOURCECORP" or the "Company"). Having invested in hundreds of companies over the years, we can say without fear of exaggeration that the recent actions taken by the Company's Board of Directors to disenfranchise shareholders and entrench themselves at shareholder expense are a shocking affront to even the most rudimentary notion of fiduciary duty to shareholders. To date, the Board has taken the following entrenchment measures: o Without the approval of or even prior notice to shareholders, the Board has amended the Company's by-laws (the "By-laws") to strip all shareholders of the right to call a special meeting, whereas prior to such amendment shareholders holding 25% of the company's stock could call a special meeting to address issues of shareholder concern. o The By-law amendments further place onerous restrictions and elaborate requirements on the shareholders' ability to act by written consent, designed in our opinion to discourage, delay and ultimately prevent a majority of shareholders from utilizing this right. o The Board has adopted a "Poison Pill" which will not expire until 2015, again without the approval of or prior notice to shareholders. o The Board took all of these actions without shareholder approval a mere FIVE WEEKS after its annual meeting of shareholders, at which the Board clearly could have presented these proposals to shareholders for consideration on the merits (where we believe they likely would have been defeated). And in response to what threat did the Board take these actions? We believe it was in response to the prospect that a large shareholder might gain representation on the Board and attempt to persuade the Board to reverse course and pursue maximum value for shareholders, clearly a "threat" for a Board under whose guidance we believe the Company has consistently destroyed shareholder value. To briefly recap, following our discussions with you regarding our concerns about the business and operations of the Company, we believed we had an agreement that our nominee would be appointed to the Board following a reasonable review. Instead, we were forced to engage in a protracted set of negotiations for more than a month over what should have been a routine review process, including at various points requests that our designee be restricted in speaking with us, that we give up the right to express our views as shareholders about the direction of the Company (even based on entirely public information) and that we and our nominee enter into onerous agreements that by the Company's own admission have never been proposed to any other outside director of the Company. Our frustration during this process turned to outrage upon learning that it appeared that the delay was merely a stalling tactic to enable the Board to put into place the entrenchment devices described above. In our opinion these were brazen and clumsy maneuvers to strip shareholders of their right to hold directors accountable and truly make us wonder if the Board has avoided the television and newspapers during the 21st century and is thus unaware that we are living in the era of Sarbanes-Oxley and heightened focus on corporate fiduciary duties. In addition, we note that the Board has increased the size of the already generous "Golden Parachute" packages of certain executives by up to twice the amount of the original payments. The size of the packages granted to management, including a Golden Parachute payment of FIVE TIMES salary and bonus for President and CEO Ed H. Bowman, Jr., were frankly an outrage in our opinion even prior to their amendment given the Company's performance. Our opinion is that reasonable severance arrangements to secure the continued employment of top management are defensible. Severance payments of up to 5 times salary and bonus (so large that excise taxes must be paid by the Company) we believe are clearly unreasonable, and the term "top management" certainly cannot be used in our mind to describe the current leadership of the Company. As the Company's share price has plummeted in the last four years, close to $400 million of shareholder value has been destroyed. Despite years of acquisitions (at a cost by our estimates of $170 million in the last five years net of divestitures) and increasing levels of capital expenditures as a percentage of revenues, the Company's operating cash flow (EBITDA less capital expenditures) has fallen significantly from 2000 to 2004 and operating cash flow margins have also fallen, from 15% in 2000 to 7% in 2004. Additionally, the recent accounting problems (including overpayments related to an acquisition which have resulted in a total loss of over $25 million in cash, or over $1.50 per share, to the Company through 2004) and SEC investigation of the Company casts very serious doubt we believe on the oversight capabilities of the current leadership. These severance payments are even more outrageous given the already stunning disparity between the exorbitant salaries paid to senior management and the destruction of shareholder value. Just to take one example, Mr. Bowman's annual total compensation increased by 2.5 times from 2001 to 2004, a period during which the Company's share price fell from its peak by over 50%. The gulf between management and shareholder interests has been made even wider in our opinion by the fact that most of the Board and management hold what we view as a miniscule amount of stock. For example, Mr. Bowman and Mr. Walker each actually owns less than a quarter of one percent of the Company's outstanding stock (excluding restricted stock awards and unexercised options) and the rest of the Board members own even less or no stock at all. Additionally, despite the significant losses to the Company, the restatement and the SEC investigation caused by the recent accounting problems at the Company, to our knowledge not a single senior SOURCECORP executive has been dismissed or even penalized. In short, we believe this is a leadership team that should be asking its shareholders for forgiveness, not secretly erecting self-entrenching barriers to shareholder action. For all of the foregoing reasons, we have today filed suit in the Court of Chancery for the State of Delaware seeking to invalidate the entrenchment devices adopted by the Board. In addition, we believe the Company should invalidate the overly generous guaranteed change of control payments contained in the most recent employment agreements of all applicable senior executives, directors and consultants, including but not limited to Mr. Bowman, Mr. Walker, CFO Barry L. Edwards, Division President Kerry Walbridge, Division President David Delgado, Division President Ronald Zazworsky, Senior Vice-President, Secretary and General Counsel Charles S. Gilbert, Chief Accounting Officer W. Bryan Hill, Chief Information Officer Stephen W. Davis, Vice President of Corporate Development Ralph D. Burns and consultant David Lowenstein. Finally, given what we view as SOURCECORP's history of destroying shareholder value, we also intend shortly to send you formal notice of our intention to solicit written consents and then to begin a solicitation of written consents, despite the Board's attempt to make such an effort procedurally impossible, to remove current Board members in order to take control of the Board. We intend to elect directors whose primary goal will be the maximization of value for all SOURCECORP shareholders, including potentially through a sale of the Company. You should not compound what we believe is your already actionable misconduct by attempting to thwart this effort with new procedural roadblocks. /s/ Barry Rosenstein - ------------------------ Barry Rosenstein JANA Partners LLC Managing Partner BR/CP/KM EX-99 4 exhibitc.txt DEMAND LETTER TO THE ISSUER JANA PIRANHA MASTER FUND, LTD. July 6, 2005 VIA FACSIMILE AND FEDERAL EXPRESS - --------------------------------- SOURCECORP, Incorporated 3232 McKinney Avenue, Suite 1000 Dallas, TX 75204 Attention: Secretary Re: Demand for Right to Inspect Books and Records Pursuant to Section 220 of the Delaware General Corporation Law Dear Sir/Madam: JANA Piranha Master Fund, Ltd., a Cayman Islands exempted company ("JPMF"), is the record owner of 1,000 shares and the direct beneficial owner of 1,435,087 shares (inclusive of the 1,000 shares owned of record) of common stock, par value $0.01 per share (the "Common Stock"), of SOURCECORP, Incorporated, a Delaware corporation (the "Company"), which represents approximately 9.2% of the Common Stock outstanding. JANA Partners LLC, a Delaware limited liability company ("JANA Partners"), is the investment manager for JPMF, JANA Master Fund, Ltd., a Cayman Islands exempted company ("JANA Master"), and a separate managed account (together with JANA Partners, JPMF and JANA Master, the "JANA Parties"), and in that capacity may be deemed to be the indirect beneficial owner of the 2,065,192 shares (the "Shares") of Common Stock held in the aggregate by the JANA Parties, which represents approximately 13.2% of the outstanding Common Stock (1,435,087 shares held by JPMF, 570,105 shares held by JANA Master and 60,000 shares held by the separate managed account). Barry Rosenstein and Gary Claar, through their control of JANA Partners, may be deemed to be indirect beneficial owners of the Shares. Share ownership is reported as of the date hereof, and the percentages used herein are based upon 15,670,116 shares of Common Stock outstanding as of April 29, 2005 as reported in the Company's quarterly report on Form 10-Q for the period ended March 31, 2005. Pursuant to Section 220 of the Delaware General Corporate Law (the "DGCL"), as the record and beneficial owner of the shares of Common Stock stated above, JPMF hereby demands that it and its attorneys, representatives and agents be given, during regular business hours, the opportunity to inspect the following books, records and documents of the Company and to make copies or extracts therefrom: (a) A complete record or list of the stockholders of the Company, certified by the Company's transfer agent(s) and/or registrar(s), setting forth the name and address of, and the number, series and class of shares of stock of the Company held by, each stockholder as of the date hereof, and as of any record date established or to be established for any special meeting SOURCECORP, Incorporated Page 2 or consent solicitation that may be called by any of the JANA Parties or any other stockholder or group of stockholders of the Company, and any other record date that may be established as a new or substituted record date for any other consent solicitation or meeting of stockholders held in lieu thereof and any adjournments, postponements, reschedulings or continuations of the foregoing; (b) Relating to the list of stockholders and all other information referred to in paragraph (a), a magnetic computer tape or other electronic medium containing such information, the computer processing data necessary for JPMF to make use of such information on magnetic computer tape or other electronic medium and a hard copy printout of such information in order of descending balance for verification purposes; (c) All daily transfer sheets showing changes in the names and addresses of the Company's stockholders and the number, series or class of shares of stock of the Company held by the Company's stockholders that are in or come into the possession of the Company or its transfer agent, or that can reasonably be obtained from brokers, dealers, banks, clearing agencies or voting trusts or their nominees from the date of the stockholder list referred to in paragraph (a); (d) Any stop transfer lists or stop lists relating to any shares of stock of the Company and any additions, deletions, changes or corrections made thereto; (e) All information in or that comes into the Company's or its transfer agent(s)' or registrar(s)' possession or control or that can reasonably be obtained from brokers, dealers, banks, clearing agencies, voting trusts or their nominees relating to the names and addresses of and number of shares of stock of the Company held by the participating brokers and banks named in the individual nominee names of Cede & Co. or other similar depositories or nominees, including respondent bank lists, and all omnibus proxies and related respondent bank proxies and listings issued pursuant to Rule 14b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (f) All information in or that comes into the Company's possession or that can reasonably be obtained from brokers, dealers, banks, clearing agencies, voting trusts or their nominees relating to the names of the non-objecting beneficial owners of the stock of the Company pursuant to Rule 14b-1(c) or Rule 14b-2(c) under the Exchange Act, on magnetic computer tape or other electronic medium, such computer processing data as is necessary for JPMF to make use of such information on magnetic computer tape or other electronic medium, and a hard copy printout of such information in order of descending balance for verification purposes. If such information is not in the Company's possession, custody or control, such information should be requested from Automatic Data Processing - Investor Communications Services; and (g) All lists on computer tapes or other electronic media and the relevant processing data and printouts (as described in paragraph (b) above) containing the name and address of and number, series and class of shares of stock of the Company attributable to any participant in any employee stock ownership plan, employee stock purchase plan or other employee compensation or benefit plan of the Company in which the decision to vote shares of stock of the Company SOURCECORP, Incorporated Page 3 held by such plan is made, directly or indirectly, individually or collectively, by the participants in the plan and the method(s) by which JPMF or its agents may communicate with each such participant, as well as the name, affiliation and telephone number of the trustee or administrator of each such plan, and a detailed explanation of the treatment not only of shares for which the trustee or administrator receives instructions from participants, but also shares for which either the trustee or administrator does not receive instructions or shares that are outstanding in the plan but are unallocated to any participant. JPMF demands that all modifications, additions or deletions to any and all information referred to above be immediately furnished as such modifications, additions or deletions become available to the Company or its agents or representatives. JPMF will bear the reasonable costs incurred by the Company including those of its transfer agent(s) or registrar(s) in connection with the production of the information demanded. The purpose of this demand is to enable JPMF and the other JANA Parties to communicate with the Company's stockholders on matters relating to their interests as stockholders and to facilitate and support a consent solicitation of the Company's stockholders to, among other things, remove members of the board of directors and elect their replacements. JPMF hereby designates and authorizes Marc Weingarten and Steven J. Spencer of Schulte Roth & Zabel LLP and any other persons designated by them or by JPMF, acting singly or in any combination, to conduct the inspection and copying herein requested. It is requested that the information identified above be made available to the designated parties no later than July 13, 2005. Pursuant to Section 220 of the DGCL, you are required to respond to this demand within five (5) business days. Please advise JPMF's counsel, Marc Weingarten, Esq. of Schulte Roth & Zabel LLP, at (212) 756-2280, as promptly as practicable, when and where the items requested above will be made available to JPMF. If the Company contends that this request is incomplete or is otherwise deficient in any respect, please notify JPMF immediately in writing, with a copy to Marc Weingarten, Esq., Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022, facsimile 212-593-5955, setting forth the facts that the Company contends support its position and specifying any additional information believed to be required. In the absence of such prompt notice, JPMF will assume that the Company agrees that this request complies in all respects with the requirements of the DGCL. JPMF reserves the right to withdraw or modify this request at any time. [The remainder of this page has been left intentionally blank.] SOURCECORP, Incorporated Page 4 Very truly yours, JANA PIRANHA MASTER FUND, LTD. By: JANA Partners LLC, its Investment Manager By: /s/ Barry Rosenstein -------------------------- Name: Barry Rosenstein Title: Managing Partner State of New York ) ) ss: County of New York ) BARRY ROSENSTEIN, being sworn, states: I executed the foregoing letter, and the information and facts stated therein regarding JANA Piranha Master Fund, Ltd.'s ownership and the purpose of this demand for inspection are true and correct. Such inspection is reasonably related to JANA Piranha Master Fund, Ltd.'s interest as a stockholder and is not desired for a purpose which is in the interest of a business or object other than the business of SOURCECORP, Incorporated. By: /s/ Barry Rosenstein -------------------------- Barry Rosenstein Subscribed and sworn to before me this 6 day of July, 2005. /s/ Kate A. Mangano - ---------------------------- [Notary Stamp] Notary Public My commission expires: November 22, 2008 -------- -- -- EX-99 5 exhibitd.txt PRESS RELEASE FOR IMMEDIATE RELEASE For more information, please contact JANA Partners LLC at (212) 692-7645 JANA PARTNERS LLC ANNOUNCES FILING OF SUIT AGAINST SOURCECORP AND INTENTION TO REPLACE BOARD MEMBERS New York, New York - July 6, 2005 - JANA Partners LLC ("JANA"), a $4 billion hedge fund, announced today that it and funds under its management and control have filed suit in the Delaware Court of Chancery seeking to invalidate recent entrenchment devices adopted by the Board of Directors (the "Board") of SOURCECORP, Incorporated (NASDAQ - SRCP) ("SOURCECORP" or the "Company"). JANA currently beneficially owns approximately 13.2% of the outstanding common shares of SOURCECORP. Additionally, JANA notified the Board of its plan to deliver shortly formal notice of its intention to solicit written consents to replace current Board members with directors who will pursue the maximization of value for all shareholders, including potentially through a sale of the Company. JANA's suit was filed in direct response to the following recent actions of the Board, all of which were taken without prior notice to or approval of shareholders a mere FIVE WEEKS after the Company's Annual Meeting: o The Board has amended the Company's by-laws to strip all shareholders of the right to call a special meeting, whereas prior to such amendment shareholders holding 25% of the company's stock could call a special meeting to address issues of shareholder concern. o The by-law amendments further place onerous restrictions and elaborate requirements on the shareholders' ability to act by written consent, which in JANA's opinion were designed to discourage, delay and ultimately prevent a majority of shareholders from utilizing this right. o The Board has adopted a "Poison Pill" which will not expire until 2015 and which contains no annual shareholder renewal requirement. "Having invested in hundreds of companies over the years, we can say without fear of exaggeration that the recent actions taken by the Company's Board of Directors to disenfranchise shareholders and entrench themselves at shareholder expense are a shocking affront to even the most rudimentary notion of fiduciary duty to shareholders," wrote JANA Managing Partner Barry Rosenstein in today's letter. Mr. Rosenstein noted that all of the entrenchment devices listed above were secretly put into place by the Board during a period in which the Company claimed it would consider a designee of JANA for appointment to the Board but repeatedly stalled this process through a series of unreasonable requests. Mr. Rosenstein also informed the Board that, given the failure of the current SOURCECORP leadership to deliver for the Company's shareholders, JANA plans to send the Company shortly formal notice of its intention to solicit written consents for the purpose of replacing current members of the Board. In particular, Mr. Rosenstein noted the following factors: o As the Company's share price has plummeted in the last four years, close to $400 million of shareholder value has been destroyed. o Despite years of acquisitions (at a cost by JANA's estimates of $170 million in the last five years net of divestitures) and increasing levels of capital expenditures as a percentage of revenues, the Company's operating cash flow (EBITDA less capital expenditures) has fallen significantly from 2000 to 2004 and operating cash flow margins have also fallen, from 15% in 2000 to 7% in 2004. o The Company's recent accounting problems (including overpayments related to an acquisition which have resulted in a total loss of over $25 million in cash, or over $1.50 per share, to the Company through 2004) and the SEC investigation of the Company has cast very serious doubt on the oversight capabilities of the current leadership. Mr. Rosenstein went on to note that at the same time as the Board took the entrenchment actions listed above, it also increased the size of the already generous "Golden Parachute" packages of certain executives by up to twice the amount of the original payments. The "Golden Parachutes" originally granted to members of senior management include a severance payment of 5 TIMES salary and maximum bonus following a change of control for President and CEO Ed H. Bowman, Jr., which JANA believes is unacceptable given the Company's performance for shareholders. JANA therefore stated its belief that the overly generous guaranteed change of control payments contained in the employment agreements of all senior executives, directors and consultants should be invalidated. "These severance payments are even more outrageous given the already stunning disparity between the exorbitant salaries paid to senior management and the destruction of shareholder value," Mr. Rosenstein added in his letter. "Just to take one example, Mr. Bowman's annual total compensation increased by 2.5 times from 2001 to 2004, a period during which the Company's share price fell from its peak by over 50%." BACKGROUND JANA Partners LLC, a Delaware limited liability company, is a private money management firm that holds the common stock of the Company in various accounts under its management and control. *** -----END PRIVACY-ENHANCED MESSAGE-----