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A Thing Anatomy of a Bankruptcy

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.


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. Netbilling Services processes for over 100,000 Web sites and offers extreme ease of implementation, flexibility, and a very generous partner/reseller program. There is no other processing company/gateway that gives merchants so many features, including a FREE shopping cart system, recurring billing/password management, variable fraud scrubbing, advanced real-time reporting, customizable payment forms and e-mails, and 24/7 toll-free customer service for the merchants and their customers as well. Netbilling will get your merchant started with no setup fee if they are switching from another processor such as CyberCash, Authorize.Net, or any other!"

What’s the latest news?

CyberCash set up a Web page ( on March 2 to keep merchants, customers, etc., aware of the most recent developments. As this Green Sheet went to press, no information had been added since that date. For some history about CyberCash, check out the following archive issues on The Green Sheet Online: 99:10:02, 99:08:01, 99:07:01, 98:12:02, 98:06:01, 96:11:02 and 95:10:02.

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