Network 1 Seeks CyberCash Assets in Chapter 11 Filing

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Failure to raise funds has forced CyberCash Inc. to file for Chapter 11 bankruptcy and to nix plans for a merger with Network 1 Financial Corp.


CyberCash's software supports online transactions at thousands of Internet retailers. Network 1, a supplier of multichannel payment-processing systems, now has agreed to acquire CyberCash's operating assets and to assume its operating liabilities. An $8 million bid has been submitted to U.S. Bankruptcy Court in Delaware.


"They needed to raise the capital in order to consummate the merger and get the merger closed, [and] they unfortunately were unable to do that," said Christian Fadel, chief financial officer at Network 1, McLean, VA.


"Network 1, of course, was not willing to proceed with the merger if the combined companies were not going to have sufficient capital," Fadel said.


CyberCash, Reston, VA, which continues to operate despite the bankruptcy proceedings, blamed its troubles only partly on outside forces.


"The market is particularly tight now for Internet companies, but certainly an underlying reason for not getting the financing was CyberCash's legacy on Wall Street for not performing and not delivering," said John H. Karnes, executive vice president and chief financial officer at CyberCash.


"The message that we heard from investors time and time again was that they were supportive of the merger but wanted to watch a couple of quarters of execution before they invested," Karnes said.


CyberCash posted a fourth-quarter net loss of $64.3 million, compared with a loss of $10.1 million for the year-ago period. Its shares were halted at 25/32 on March 1, trading near its 52-week low of 50 cents. Its 52-week high was $16.


The Network 1-CyberCash merger was intended to garner the combined company a larger share of the estimated $3 billion in transaction volume that passes through their systems from 50,000 merchants.


Serving both the business-to-consumer and business-to-business markets, CyberCash has a roster of more than 27,500 Internet merchants. These include Toysrus.com, Kozmo.com, PalmPilot.com, hrblock.com, PlanetRx.com and SmarterKids.com.


CyberCash software allows online retailers to charge the consumer's credit card, passing that electronic data through its gateway and forwarding it to a company similar to Network 1. For its part, Network 1 takes that transaction data and deposits the amount in the retailer's bank account.


"We have a gateway as well, and we also deal with physical-world merchants," Fadel said. "CyberCash would not take any risk as far as that credit card transaction. We would finish the cycle and settle the transaction."


Fadel said flawed economics hobbled CyberCash, a 7-year-old company that, in addition to supporting e-commerce merchants through its CashRegister service, also has sold more than 145,000 copies of payment software for PCs.


"Their revenue model gave away a lot of the revenue," he said. "They weren't keeping the revenue for themselves."


CyberCash keeps a processing fee of about 10 cents per transaction. By comparison, a company like Network 1 gets a larger chunk, typically 2.7 percent, for settling the transaction and depositing the amount in the merchant's bank.


So it was not necessarily that CyberCash lacked the right customers or a big enough customer base, Fadel said.


"[The] problem was that these customers wanted to use CyberCash as a one-stop shop for the Internet and also for their physical-world transactions, and CyberCash was having to refer those merchants [seeking offline services] out to third-party vendors, kind of like what we do," he said.


"In a lot of these instances, not only were these third-party companies taking the physical-world business, but they were also taking the gateway business from CyberCash," he said. "It really was a flaw in the revenue stream, and the merger between CyberCash and Network 1 was hoping to fix that."


In business since 1989, Network 1 supplies electronic-payment processing systems and merchant accounting to online and offline retailers. Revenue last year was an estimated $24 million.


Acquiring CyberCash's assets would help bring its services under one roof with Network 1's services.


"What we're hoping to do from our standpoint is to buy these assets and, of course, continue with [CyberCash's] gateway," Fadel said.


If the bankruptcy court accepts Network 1's bid -- it is open to suitors in the auction process -- then Network 1 would drop the CyberCash name, or limit it to a product since much money was spent on marketing the brand, Fadel said.


"We would [also] assume employees," he said. "CyberCash has made several layoffs and probably needed layoffs just because of their cash-burn rate. We're looking at a little bit leaner operation."


But such a move hinges on CyberCash not attracting competition. Network 1 knows that FDC, CyberSource, Nova Information Systems and Concord EFS might submit rival bids.


"We're far enough in the process to know that it would be a very competitive bidding process," Karnes said.


A larger issue, however, is the fear of stranded CyberCash customers jumping to competitors.


"That's why the bankruptcy court looks to do something relatively quick," Fadel said. "We're looking at maybe six weeks before we have a decision so that we can try and prevent any turnover in the customer and merchant base. And then we can get in."


Karnes said that fear was unwarranted for now.


"CyberCash is assuring all of its merchants that the company has adequate human and financial resources to continue its Internet payment service without interruption," Karnes said.


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