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Anatomy
of a Bankruptcy By
now you’ve probably heard that CyberCash, the electronic payment technologies
and services company, has declared bankruptcy. The Chapter 11 filing on March 2,
followed a failure by the company to raise capital to finance a merger with
Network 1 Financial (see the February 2001 issue of GSQ). Last autumn, CyberCash
expected to report more than $100 million in revenue for the first 12 months
after the acquisition, and expected to be cash flow positive in the third
quarter of this year. When CyberCash failed to raise the money, they announced a
restructuring under Chapter 11. “The
Network 1 merger was the culmination of months of hard work and was key to our
getting profitable,” said CyberCash Chairman and CEO Daniel Lynch.
“Unfortunately, the financial markets have dried up and we have been held up
just short of the finish line, without the funds to close and execute the
plan,” he said. While Network 1 has indicated plans to buy CyberCash at
auction, such a purchase is not an absolute certainty —this gives any other
interested parties the chance to outbid Network 1. Although
CyberCash has laid off approximately 80 of their 309 employees, they report that
they will continue to support their 27,500 Internet merchants and more than
100,000 individual software users. The company has not laid off personnel in the
customer support or operations areas and they do not expect their customers to
experience any interruptions of service. In
a letter to CyberCash customers dated March 2, Lynch stated, “Please rest
assured that we will continue to provide the same high quality customer service
that has made us the world leader in payment processing. As these plans develop,
we will send you additional communications.” Following
the filing, Nasdaq halted trading of CyberCash stock and requested more
information from the company, to determine whether it should be “delisted”
from the Nasdaq. When trading was halted, shares of CyberCash were trading at 78
cents, down from a 52-week high of $15.50. (For the fourth quarter ended Dec.
31, revenue was $6 million and net loss was $64.3 million.) In
CyberCash’s response to the Nasdaq, John H. Karnes, CyberCash’s CFO stated: “Beginning
in 2000, CyberCash began making definite strides toward operating profitability
by rationalizing its cost structure. With these increased cost controls, and
based on management’s revenue projections, CyberCash’s business model
reflected CyberCash becoming profitable on an operating basis mid-2001. Based on
CyberCash’s relatively flat revenue growth experienced during the second
quarter of 2000, management began formulating a strategy to engage in settling
credit card transactions as a supplement to, and natural ancillary of
CyberCash’s Internet payment service. “Despite
significant efforts by both CyberCash and Network 1 to obtain additional funds
in the form of debt, equity financing or other cash infusion to fund operations
through the closing of the merger, those efforts, to date, have been
unsuccessful. As a result, the board of directors and the management of
CyberCash concluded that the best alternative for maximizing value to the
Company’s creditors and equity interest holders is through a Chapter 11
proceeding whereby CyberCash can sell its assets as a going-concern in an open,
orderly and expedited format so as to minimize the risk of operational
disruptions that could substantially impair one of CyberCash’s most valuable
assets, its brand name. “Operationally,
we are conducting business as usual and are continuing to sign up new merchants
daily on our Internet Payment Service,” said Karnes. His letter concluded,
“Our merchants and channel partners have been very understanding and
supportive of our decision. Filing promptly, while we still have substantial
working capital, was the most responsible course of action inasmuch as it
ensured our continued ability to provide our customers with the same high
caliber service and support that have become synonymous with CyberCash.” On
March 16, CyberCash pre-emptively removed itself from the Nasdaq and reported
that they intend to begin trading on the Over-the-Counter Bulletin Board (OTCBB)
as soon as possible. “The Nasdaq’s decision does not mean that CyberCash is
going out of business, as some of our competitors would have people believe,”
Karnes said in a statement. It’s not as bad as it sounds —at least CyberCash
has an interested buyer —Network 1. What’s
the OTCBB? The
OTCBB is a regulated quotation service that displays real-time quotes, last-sale
prices, and volume information in Over-the-Counter (OTC) equity securities. An
OTC equity security generally is any equity that is not listed or traded on the
Nasdaq or a national securities exchange. In
June 1990, the OTCBB began operation, on a pilot basis, as part of market
structure reforms to provide transparency in the OTC equities market. The system
was designed to facilitate the widespread publication of quotation and last-sale
information. In April 1997, the SEC approved the operation of the OTCBB on a
permanent basis. Some
Casualties CyberCash
says it is operating as usual and that customers will not experience any
interruption in service. In fact, they expect March Internet payment
transactions to exceed 11 million, enough to break a company record. However,
there are some casualties scattered among CyberCash products. Development of
MacAuthorize, a standalone credit card authorization/processing software system
is ending. Other casualties include DOS, SCO, AIX, and Solaris versions of
ICVERIFY. However, users of these versions can get assistance through
CyberCash’s Web and fax-on-demand support services. Why? While
substantial news coverage has speculated on the reasons behind the demise of
CyberCash, the following paragraphs examine key factors that may have
contributed to its downfall. Was
CyberCash ahead of its time? CyberCash first entered the market with a digital
wallet (similar to that of DigiCash, which filed for bankruptcy in 1998).
However, the idea never quite caught on, probably because most online products
and services at that time were free. Consumers were not yet ready to pay for
online products. CyberCash then shifted to providing payment-acceptance products
for e-tailers, as well as providing Internet fraud-detection tools. They were
also successful with their InstaBuy one-click shopping format that defaults to
the consumer’s credit card information. Could
the final straw have been due to the combined forces of the resignation of
chairman William N. Melton and the investments of Rose Glen Capital and the
Palladin Group? When Melton resigned in January, he told employees that two
investors with interests counter to those of other shareholders, were poised to
significantly dilute the value of the company. However, the company may have
been desperate for cash and forced to take the funding on unfavorable terms. Rose
Glen Capital Management LP and the Palladin Group LP invested a combined $15
million in CyberCash in early 1999, in exchange for promises of stock in the
form of warrants. Warrants allow holders to buy shares at a specified price for
a certain period. The deals were structured so that if CyberCash’s share price
plunged, the investors would be entitled to a greater numbers of shares. When
the stock did plummet-—to $.88, the number of shares to which Rose Glen and
Palladin were entitled went from 1.4 million to more than 15 million. Melton,
who founded the firm in 1994, made the following observation in his resignation
memo: “I think that the full effect of these additional warrants under current
market conditions and in light of the tremendous upside attendant the Network 1
merger, while technically in compliance with the letter of our agreements, is
inconsistent with the spirit of our relationship and inequitable to our
stockholders as a whole.” He
arrived at that conclusion, the memo said, after weeks of negotiations with the
two firms over how to partly execute their warrants without excessively diluting
CyberCash stock or disrupting its merger with Network 1. He did not mention Rose
Glen or Palladin by name. “I
hope that following my resignation the holders of these securities will rethink
their position and whether it comports with the best interests of all
stockholders, including themselves,” the memo read. Was
Melton’s hope fulfilled? Three days after his resignation, CyberCash and the
two investment firms struck a deal. The investors received less than half the
issued shares to which they were entitled. However, CyberCash still reported a
loss of $64.3 million for the three months ending December 31, compared with a
loss of $10.1 million for the same period in 1999. For
the year 2000, CyberCash reported a loss of $92.9 million (including two
one-time expenses: $900,000, related to Melton’s exit, and $55.9 million to
write down goodwill related to the WebAuthorize and ICVERIFY products) compared
with a $43 million loss in 1999. Who
wins? CyberCash
maintains that merchants will not see any interruption in service. Meanwhile,
other providers are taking this opportunity
to point to their own robust place in the industry from which they are able to
provide a wide range of services. For example, below is a recent posting to The Green Sheet Online: "Attention:
CyberCash resellers, users, and partners Dear
CyberCash users, resellers, and partners: Since
CyberCash has announced its bankruptcy, merchants and resellers are scrambling
to find better alternatives that are inexpensive, flexible, and easy to
integrate with. What’s
the latest news? |
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copyright 2001 · The Green Sheet, Inc. |
