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INTERCEPT, INC.
(Name Of Registrant As Specified In Its Charter)
JANA PARTNERS LLC
JANA MASTER FUND, LTD.
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Registrant)
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LETTERHEAD OF JANA PARTNERS LLC
June 1, 2004
Dear Fellow InterCept, Inc. Shareholder:
As holders of over 9% of the common shares of InterCept, we expect
management to be focused solely on maximizing shareholder value. The recent
history of InterCept, however, is a story of destruction of shareholder value
and an arrogance of power that is unparalleled in our experience as investors.
We are asking for your support to elect two new directors who will work to
maximize shareholder value and to change InterCept's bylaws to empower
shareholders.
PLEASE SEND IN THE GOLD PROXY CARD IN
THE ENCLOSED PREPAID ENVELOPE TODAY!
Considering the following examples of the performance of the current
InterCept leadership, we think it is indisputable that the time has come for
fundamental change:
o ENTRENCHED MANAGEMENT HAS FOUGHT SHAREHOLDER DEMOCRACY AT EVERY STEP.
o CHAIRMAN AND CEO JOHN W. COLLINS TRIED TO BUY THE COMPANY WHEN THE
PRICE WAS LOW, BUT ONCE PREMIUM BIDDERS APPEARED, THE BOARD SHUT DOWN
THE PROCESS.
o THE CURRENT LEADERSHIP HAS PRESIDED OVER A STAGGERING DECLINE IN THE
STOCK PRICE, DESTROYING AT ONE INTERVAL APPROXIMATELY $700 MILLION IN
SHAREHOLDER VALUE.
o WHILE SHAREHOLDERS HAVE SUFFERED AS THE STOCK PRICE DECLINES,
MANAGEMENT COMPENSATION AND PERKS CONTINUE TO SOAR.
o MANAGEMENT SQUANDERED SHAREHOLDER VALUE AND DRAGGED INTERCEPT'S NAME
THROUGH THE MUD WITH A RECKLESS INTERNET PORN BILLING ACQUISITION.
o INTERCEPT SIGNIFICANTLY AND CONSISTENTLY UNDERPERFORMS ITS PEERS.
ENTRENCHED MANAGEMENT FIGHTS AGAINST SHAREHOLDER
DEMOCRACY
o ENTRENCHMENT TECHNIQUES: The Board has taken every opportunity to
entrench itself, including denying shareholders the right to fill
vacancies on the Board or remove directors for poor performance, and
having staggered terms for directors.
o DISENFRANCHISING SHAREHOLDERS: Management gave extraordinary rights,
including the ability to block changes to the bylaws and a sale of the
company, to an investor group called the Sprout Group. Although Sprout
purchased preferred stock convertible into only 3.5% of InterCept's
shares, they were given more power than all of InterCept's
shareholders combined! We find it impossible to believe that InterCept
shopped for the best deal in getting this investment, particularly
given the fact that the right to a Board seat as part of the deal was
given not to Sprout as the investor but to one Sprout employee,
suggesting to us that personal relationships dictated these terms more
than real negotiations. The only possible explanation we see for
granting these extraordinary, non-market rights in exchange for so
little was so that management could further entrench themselves at the
expense of shareholders.
o BUYING THEIR WAY OUT OF TROUBLE WITH YOUR MONEY: Now that the
spotlight is on them, management is trying to make their entrenchment
deal with this investor group look better, and they're making
shareholders pay for it. In exchange for a very limited reduction in
Sprout's rights, InterCept has agreed to lower the conversion price on
the preferred stock, which will result in Sprout receiving over
230,000 additional shares upon conversion, which will lead to a
write-off to earnings as a result of the dilution compared to the
prior deal. At last Friday's closing price, the cost to shareholders
would be approximately $4 million, and it will be worse if the stock
goes up! Even worse, Sprout will still be able to block changes to the
bylaws even if a majority of the shareholders approve them.
o EXTRAORDINARY BYLAW AMENDMENT: When we announced our director
nominations, the Board responded by changing their six-year old bylaw
which stated that any director selected by the Board to fill a vacancy
would only serve until the next election of directors by shareholders,
saying their own bylaw conflicted with Georgia law. We believe this
was done to ensure that only two seats would be contested and that
their hand-picked replacements for the independent directors who quit
earlier this year would not be up for election.
o FIGHTING SHAREHOLDER RIGHTS: When we asked for shareholder
information, they hid behind procedural excuses, producing only some
of it and only on the eve of a court hearing.
o SHAM OFFER: InterCept made an "offer" to settle this contest which
not only would have done nothing to improve shareholder democracy, but
would have also pushed back by a full year the possibility of our
taking majority control away from the current Board, from June 2005 to
June 2006, and we therefore rejected it outright.
COLLINS TRIED TO BUY INTERCEPT WHEN THE PRICE WAS LOW, BUT
WHEN PREMIUM BIDDERS APPEARED, THE BOARD SHUT DOWN THE
PROCESS
o COLLINS' FAILED ATTEMPT TO BUY INTERCEPT: Last October, Chairman and
CEO John W. Collins announced that he intended to make an offer to buy
InterCept. In response, the Board formed a special committee of three
independent directors to evaluate the possible sale and to review
indications of interest made by Mr. Collins and others. In December,
however, Mr. Collins announced that he had been unable to attract
financing on terms allowing him to make a bid that would be in the
shareholders' best interest, and dropped his plans.
o PREMIUM BIDDERS APPEAR: InterCept has admitted that the special
committee received 10 indications of interest in January. According to
Analysts Craig Peckham and Courtney Cleman in a March 15, 2004,
Jeffries & Company, Inc. report, there has been "widespread
speculation that there were multiple entities interested in acquiring
InterCept at a premium to current market value."
o BOARD SHUTS DOWN THE PROCESS: Yet, just 2 months after Mr. Collins'
change of plans, the Board shut down the sale process, over the
objections of a majority of the special committee.
WE BELIEVE THIS WAS AN ATTEMPT BY JOHN W. COLLINS TO SNATCH INTERCEPT WHEN
THE PRICE WAS LOW. HOW ELSE CAN HE EXPLAIN ANNOUNCING HIS PLANNED OFFER ON THE
SAME DAY THAT INTERCEPT ANNOUNCED ANOTHER EARNINGS MISS, AFTER WHICH THE STOCK
FELL ALMOST 16%? AND WHEN REAL BIDDERS STEPPED IN WITH PREMIUM OFFERS, HE AND
THE BOARD SHUT DOWN THE PROCESS.
o INDEPENDENT DIRECTORS QUIT: As a result of the Board's decision, in a
highly unusual and extraordinary move, two independent directors on
the special committee, each of whom had been Board members since
InterCept went public, resigned and publicly made their reasons known
in nearly identical letters. Boone A. Knox, who was then also Vice
Chairman of InterCept, stated in his resignation letter:
"THE SPECIAL COMMITTEE, AFTER CAREFULLY CONSIDERING THE
ADVICE OF FINANCIAL ADVISORS DETERMINED THAT THE COMPANY
SHOULD PERMIT SELECTED INTERESTED AND CAPABLE STRATEGIC
BUYERS TO CONDUCT DUE DILIGENCE AND NEGOTIATIONS TO EVALUATE
A POSSIBLE SALE OF THE COMPANY. THE BOARD OF DIRECTORS HAS
DETERMINED TO DISCONTINUE THIS PROCESS. AS A RESULT OF THIS
DECISION, I HEREBY RESIGN AS A DIRECTOR, VICE CHAIRMAN AND
MEMBER OF VARIOUS COMMITTEES OF THE COMPANY AND ITS
SUBSIDIARIES EFFECTIVE FEBRUARY 13, 2004 AND REQUEST THAT
THIS LETTER AND THE FORGOING REASONS FOR MY RESIGNATION BE
DISCLOSED PUBLICLY."
o BOARD HANDPICKS REPLACEMENTS: According to a March 15, 2004, Jeffries
& Company, Inc. report by Analysts Craig Peckham and Courtney Cleman,
the Board's handpicked replacements for the "respected" independent
directors who resigned "appear to have less depth of experience in the
financial services sector--InterCept's principal end-market." So if
these directors were not picked for their industry knowledge, why were
they picked? And why did the Board take the extraordinary step of
changing InterCept's bylaws just to make sure they would not have to
stand for election this year?
THE CURRENT MANAGEMENT HAS DESTROYED SHAREHOLDER VALUE . . .
o STOCK HAS PLUMMETED: From its 2002 peak, InterCept's equity value fell
almost 90% to its low in 2003, an equity loss of more than $700
million. While the stock has "rebounded" to roughly a third of its
peak, we believe much of this is due only to sale speculation. For
example, according to Analyst Nikolai Fisken in a February 18, 2004,
Stephens Inc. report, "We believe that the primary driver of
InterCept's valuation over the past months was speculation that the
Company would be sold at a premium to its current levels."
o ROSY PREDICTIONS, LOUSY RESULTS: Management as usual claims they will
make things better, but are they ever right? InterCept cut its
earnings guidance for both 2002 and 2003. They have yet to even issue
guidance for 2004, and without so much as a press release management
issued first quarter numbers showing unadjusted earnings per share
fell from 7 cents for the first quarter of 2003 to negative ten cents
for the first quarter of 2004.
o COST OVERRUNS, MANAGEMENT FAILURE: InterCept has experienced severe
cost overruns in servicing Sovereign Bancorp, now its largest
customer, and has suffered serious problems in consolidating item
processing centers, which Analysts Christopher Rowen and Kevin Bannon
in a November 13, 2003, SunTrust Robinson Humphrey report wrote
resulted in part from "project management error". Even worse,
InterCept is operating with a "part-time" CFO.
BUT MANAGEMENT COMPENSATION HAS CONTINUED TO SOAR
WE RECEIVE NO SALARY, BONUSES, STOCK OPTIONS, SARS OR PERKS FROM INTERCEPT.
WE ONLY PROFIT WHEN THE STOCK PRICE GOES UP, AND WHEN IT FALLS, WE SUFFER JUST
LIKE YOU. MOST OF THE BOARD HOWEVER, OWNS LITTLE OR NO STOCK, AND MANAGEMENT HAS
CONTINUED TO EARN OUTRAGEOUS COMPENSATION EVEN AS THE STOCK HAS PLUMMETED.
o SKYROCKETING SALARIES AND STOCKPILING OPTIONS: John W. Collins' cash
compensation has doubled since 1997, including a 30% increase from
2001 to 2003. President and COO G. Lynn Boggs' cash compensation rose
28% in 2003. Since 1999, Mr. Collins has received at least 1.2 million
stock options while Mr. Boggs has received at least 300,000 since
2002.
o GOLDEN PARACHUTES: Plus, Mr. Collins' "golden parachute" guarantees
him three years salary plus bonus if he's fired without "cause" or
just walks away after a change of control. President and COO G. Lynn
Boggs gets this protection for two years.
o HIGHLY QUESTIONABLE PERKS: Management's rewards don't stop there. Mr.
Collins for example, together with Board member Glenn W. Sturm, owns
an aircraft company which was paid $49,000 last year by InterCept. Mr.
Collins' daughter and son-in-law took home over $410,000 last year in
cash compensation from InterCept. And InterCept's "part-time" CFO is
still getting a "full-time" $325,000 salary for the rest of the year!
MANAGEMENT SQUANDERED SHAREHOLDER VALUE AND THE
COMPANY'S REPUTATION ON AN ILL-FATED INTERNET
PORN BILLING ACQUISITION
o PORN LOSERS: Despite agreeing to pay approximately $170 million for
Internet Porn transaction processor iBill and another merchant
services company called Electronic Payment Exchange in March, 2002,
InterCept sold the combined entity at a fire sale price of
approximately $51 million earlier this year, including only
approximately $12.7 million of cash at closing, and took an
approximately $130 million write-off.
o INDECENT EXPOSURE: We think it is an outrage that management exposed
InterCept, whose core business is servicing financial institutions, to
the risks of the Internet Porn billing industry, including high
customer attrition and high fines from the credit card companies,
which had a devastating financial impact on InterCept. Seth Lubove of
FORBES.COM described this acquisition best when he wrote in a March
22, 2004 article that it "may go down in history as one of the most
boneheaded acquisitions ever by a public company."
o THE MORNING AFTER: Shareholder litigation over the iBill acquisition
was recently settled by InterCept for over $5 million of your money,
an amount which indicates to us that management truly had reason to
fear going to court. Plus, InterCept indemnified the buyers for many
pre-closing liabilities and now one of the buyers, a subsidiary of
Penthouse International, Inc., is withholding payment of approximately
$3.8 million to InterCept because it believes it will incur
liabilities for which InterCept must indemnify it in excess of that
amount. There is also an ongoing Dept. of Justice antitrust
investigation involving iBill.
INTERCEPT CONSISTENTLY AND SIGNIFICANTLY UNDERPERFORMS
PEERS
o POOR OPERATIONAL PERFORMANCE: Analyst Nikolai D. Fisken wrote in a
March 26, 2004, Stephens, Inc. report that "[W]e believe that ICPT
continues to warrant a discounted valuation to its peers because of
its many operational issues."
o LAGS ITS PEERS: InterCept significantly lags behind its competitors in
terms of profitability. For calendar year 2003, InterCept's EBITDA
margin was approximately half of the EBITDA margins of both Fiserv
Inc. and Jack Henry & Associates, Inc. Furthermore, Analysts David A.
Trossman and Christopher M. Gay in a March 30, 2004, Wachovia
Securities report predict that InterCept's EBITDA margins will
continue to be significantly lower than those of these competitors in
both 2004 and 2005. Even taking differences in size between these
companies into account, this performance gap is unacceptable.
o NO END IN SIGHT: In their March 15, 2004, Jeffries & Company, Inc.
report downgrading InterCept's stock, Analysts Craig Peckham and
Courtney Cleman wrote "[D]espite the continued valuation disparity
between InterCept and its peers, we think it is premature to argue for
higher valuation . . . The primary factors include poor visibility, a
spotty track record in prior quarters, and dependence on a single
client (Sovereign) for much of the growth in 2004."
THIS ENTRENCHMENT, TERRIBLE PERFORMANCE AND OUTRAGEOUS
COMPENSATION LEADS TO ONE CONCLUSION: ENOUGH IS ENOUGH!
WE ARE ASKING FOR YOUR SUPPORT TO ELECT DIRECTORS WHO WILL BE FULLY
COMMITTED TO MAXIMIZING VALUE FOR SHAREHOLDERS AND TO APPROVE BYLAW AMENDMENTS
WHICH WILL BREAK THE CONTROL THAT THE CURRENT MANAGEMENT AND HAND-PICKED
DIRECTORS HAVE OVER INTERCEPT.
o OUR NOMINEES: Our nominees are both experienced finance professionals
who understand what it takes to deliver for investors and will
relentlessly pursue all avenues of maximizing shareholder value. Given
that a majority of the special committee voted to continue the sale
process, and that the financial services outsourcing industry is
consolidating which may make it harder for InterCept to compete
profitably with its larger competitors, we believe a sale of the
company could likely be the highest value-maximizing option and that
this option should be fully explored. However, our nominees will
consider all relevant factors and will seek to cause the Board to
pursue the highest value-maximizing option, whatever it may be. As the
company's largest shareholder, we have a substantial interest in
seeing InterCept's stock go up, and we believe these individuals are
far more likely to pursue maximum value than any of the current
directors, most of whom own very little or no stock.
o OUR BYLAW AMENDMENT PROPOSALS: The changes we are proposing will let
shareholders remove directors for poor performance, prevent the Board
from handpicking directors and will lower the requirement for
shareholders to call meetings to address issues of importance.
CAST YOUR VOTE FOR MAXIMIZING SHAREHOLDER VALUE &
INCREASING SHAREHOLDER DEMOCRACY BY SENDING IN
THE GOLD PROXY CARD
WE ENCOURAGE YOU TO CAREFULLY READ THE ENCLOSED PROXY STATEMENT AND HOPE
THAT YOU WILL SUPPORT THIS EFFORT TO BRING ACCOUNTABILITY TO THE BOARD OF
DIRECTORS AND TO SET INTERCEPT ON A COURSE TO FULLY REALIZE THE MAXIMUM VALUE OF
EVERY SHAREHOLDER'S INVESTMENT.
Very truly yours,
/s/ Barry S. Rosenstein
Barry S. Rosenstein
MANAGING DIRECTOR
JANA PARTNERS LLC
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