The latest attempt to revitalize CyberCash Inc., the electronic transactions software company that has persistently struggled to find a market, will take place without its founder, the entrepreneur William N. Melton.
Mr. Meltons resignation last month came on the heels of a Dec. 14 announcement that CyberCash plans to merge by April with Network 1 Financial Corp. of McLean, Va., a privately held provider of Internet gateway, credit card authorization and payment, and electronic funds transfer services.
CyberCash was founded seven years ago to develop Internet payment products for consumers, such as a digital wallet that held credit card numbers and other online payment tools. But that business model hit a dead end, and the Reston, Va., company began reinventing itself by shifting its product mix toward payment acceptance products for Internet merchants.
The Network 1 merger was touted as a way for CyberCash, which reported a fourth-quarter per-share loss of 29 cents, excluding one-time costs associated with the Network 1 deal and Mr. Meltons departure, to jump-start its revenue stream.
But Mr. Melton, who used the fortune he amassed by founding Verifone Inc. to start CyberCash, resigned abruptly as chairman in a dispute with two major investors over a highly dilutive conversion of warrants, the company revealed last week. Mr. Melton, whose own investments in CyberCash totaled more than $9 million, wrote in a farewell letter to the companys employees that the imminent devaluation of the stock was to blame for his departure.
A CyberCash spokeswoman said Rose Glen Capital Management LP of Bala Cynwyd, Pa., and Palladin Group LP of Maplewood, N.J., invested a total of $34 million in CyberCash in 1999, which would eventually have become exchangeable for promises of stock in the form of warrants. The deal was structured so that if CyberCashs share price dropped, the investors would be entitled to a proportionally larger number of shares.
In announcing its fourth-quarter results, the company said last week that it took two one-time, merger-related charges: $900,000, or 4 cents per share, related to the departure of its chief executive, and a writedown of goodwill of $55.9 million, or $2.16 per share. Taking the charges into account, the company lost $64.3 million, or $2.48 per share.
CyberCashs stock has slipped since January 2000 from about $10 a share to $1.13 at Fridays close.
As a result, during the last year CyberCash issued warrants for more than one million shares, reduced the exercise price on another million warrants by more than half, and issued a note convertible into an additional 4.5 million shares.
When the company was forced to issue additional warrants at the beginning of this year to buy back more than 15.5 million shares, or more than half of its total outstanding stock, at nominal prices, Mr. Melton balked and tried to compromise with the two investors.
In a letter dated Jan. 9, Mr. Melton wrote to his staff: As I communicated to these holders last week, I think that the full effect of these warrants under current market conditions 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 wrote that he informed these holders that I did not believe I could continue to serve on the board unless significant changes to these arrangements were made. When a compromise that I believed would be in all our stockholders interests was not accepted by these holders, I resigned from the board, the letter said.
Mr. Melton did not return telephone calls seeking comment on his resignation, and CyberCash executives referred inquiries to his letter, in which he also said he bore no ill will toward CyberCashs executives.
Although I will not be involved as a director I remain a major stockholder and the biggest believer in the CyberCash vision in the future, he wrote.
His departure seems to represent yet another blow to a company that has consistently struggled to hit its stride. Its first product was a digital wallet that consumers could download directly from the companys Web site and use to store payment information, including credit card numbers. From there, CyberCash aimed to expand into electronic checks and digital coins.
But the wallet came before its time, when people were still not familiar enough with the Internet and not accustomed to conducting e-commerce, and the product was cumbersome to download and use at first.
Today, CyberCash sells software that helps merchants accept Internet payments and thwart fraud. The company says it has sold products to more than 25,000 Internet merchants, and has shipped more than 145,000 copies of its software.
Daniel C. Lynch, who founded CyberCash in 1994 with Mr. Melton, became interim chief executive officer and chairman. On Jan. 12 he wrote in a press release: On behalf of CyberCash stockholders, I want to acknowledge our gratitude to Rose Glen Capital and Palladin Group LP for the substantial concession made in surrendering their rights to receive almost 10 million shares of CyberCash, thereby minimizing the tremendous dilution which we would have experienced.
The December press release announcing the Network 1 deal stated that Mr. Melton would serve as chairman of the new post-merger CyberCash, and that Mr. Lynch would serve as interim CEO until the completion of the deal. But a later release stated that Mr. Lynch had been appointed chairman.
For more than two decades Mr. Melton has been building companies around the application of technology in financial services. He pioneered the use of mini-computers, voice response systems, and distributed processing nodes in the financial community.
In 1971 he founded Real-Share Inc., a database and telecommunications company that provided services to the majority of TeleCheck franchisees.
Mr. Melton also played an important role in converting paper-based card transactions to electronics during the early 1980s.
In 1981 he made perhaps his biggest contribution when he founded Verifone, the transaction automation company that has made credit authorization terminals ubiquitous on retail merchant counters.
CyberCash may turn out to be one of the few ventures Mr. Melton has left before it became truly successful.
He has delved into his personal net worth several times to support the company. In August 1998 he bought 350,000 shares of CyberCash for $3.5 million, 23% above the market price at the time. He put another $5.5 million into the company by purchasing one million shares of stock, according to a June 2000 filing with the Securities and Exchange Commission.
Mr. Melton, who agreed not to draw a salary until the company became profitable reported no compensation in fiscal 1998. CyberCash, which has traded publicly since 1996, has never turned a profit.
Despite its focus on Internet retailers, the company reported in an earnings statement last week that its merchant accounts in the fourth quarter grew only 3.3% from the third quarter, to 27,600, a smaller growth than in previous quarters.
CyberCash chief financial officer John H. Karnes, who would retain that post after the merger, said the slow growth was not caused by a decline of new merchant signups, but by a pattern of customers being migrated off to competitors.
As a result, especially in the fourth quarter, we saw record numbers of merchants being recruited away, he said. That is what this merger is all about. Once we can offer a one-stop, integrated solution, no one is going to be able to compete with us. And we can substantially slow down the number of merchants being recruited off our service.
During a conference call last week to discuss the fourth-quarter results, CyberCashs officers discussed a new revenue model that would result from the merger.
This merger will fundamentally change the economics of CyberCashs business model, said Bill Wade, chief executive officer of Network 1, who would become the CEO of the combined company.
Where the company formerly earned only a flat rate of mere pennies per transaction, CyberCash would now earn about $1.40 for an average $70 transaction as a result of new gateway fees, he said.
CyberCash officials predict this new business model would drive up revenue substantially. Mr. Karnes projected that in its first 12 months as a combined company, the new CyberCash would report revenue of more than $100 million.
For the full year, CyberCashs revenue rose 18% from the previous year, to $23.9 million. Fourth-quarter revenues fell 3.2% from a year earlier but rose 5% from the third quarter, to $6.1 million.
Network 1 Financial, founded in 1989, expects to report more than $24 million of revenue for 2000.
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