Opportunity Knocked, But Door Shut on CA$HWAVE

W e've all heard the expression "when a door closes, a window opens." In the case of one ISO, the sound of those doors has been deafening. Walk through the empty halls of CA$HWAVE and you'll see a lot of closed doors - to offices that once were alive with aggressive and eager agents selling ATMs throughout the country.

Those offices are like tombs, testimonials to the unpredictable and unavoidable economic climate in which more and more resellers find themselves.

How did CA$HWAVE get to this space? Perhaps the answer lies with the man whose vision created this multimillion-dollar entity - President/CEO Andy Karsh.

A native San Diegan, Karsh didn't start his business career in financial services. Ironically, it was in furniture building. Karsh's first venture was a furniture shop in his parents' garage - "The Wood Menagerie." It expanded to California Furniture Connection, where Karsh created the entertainment center, sold 2 million units and changed the way living rooms looked across California during the 1980s.

He sold the company for $2.5 million, paid off creditors and, with excess pocket change, ventured into payment processing. Karsh became a reseller for NDC, Universal Savings and U.S. ATM, where he ultimately carved his career path.

At U.S. ATM, Karsh started selling the first ATMs in San Diego. A bankruptcy as well as a change in name, management and direction at U.S. ATM didn't stop Karsh from seeing the potential of the budding ATM market in the early '90s.

"I recognized the need in the marketplace for consumers to have easy convenience of getting their cash," says Karsh.

Karsh saw the ATM market as a viable business niche, especially because the machines were only at banks. When Karsh started, NCR and Diebolt were the providers of machines that were owned and operated by banks on site. Then Tidel, located in Texas, took a drop safe and hooked it up to a VeriFone terminal and made a quasi-machine - an anycard machine.

"The first machine we sold wasn't an ATM," says Karsh. "Designed to drop tubes of money in, it converted to an ATM by hooking up with a VeriFone machine."

Selling scrip machines and pen pads to access debit cards wasn't an easy sell for Karsh. He knew the market was debit but realized scrip machines were not widely recognized by networks.

"They were hesitant to endorse us, what with fraud and surcharge issues," says Karsh.

Despite the challenges, Karsh persevered. Using the letterhead and logo from his defunct furniture company (California Furniture Connection), Karsh formed California Fast Cash. The recycled CFC took off.

"I realized I could earn 100% of the income and not have to share it with anyone else, so I became my own ISO," says Karsh.

In 1997, Karsh went totally independent, changed CFC to CA$HWAVE and launched a nationwide company with a catchy brand name - the wave of cash.

"We did a lot of trade shows," says Karsh. "I recruited sales agents around the country. I advertised. I was a salesman."

And sell he did. In less than two years, Karsh had sold more than 200 ATMs in California and Nevada alone. CA$HWAVE became the premier ATM company in Southern California, providing equipment, technicians and installers and attracting outside reps to sell as well.

"We tried to become the best of brand," says Karsh. "We developed our own design for branded, off-premise wall-through ATMs with aluminum surrounds. Our philosophy remained constant, though - always try to do what's right, make the deal work for both sides."

Karsh stayed true to that philosophy. CA$HWAVE gave agents a solid commission structure based on upfront hardware commission and residual income for life of contract. Residuals were based on volume and selling prices of machines.

CA$HWAVE did extensive cataloging and marketing brochures for its agents. Turnaround time was one to two weeks for installation and up-and-running systems.

CA$HWAVE worked with Triton, Tidel and Cross International to ensure quality equipment. CA$HWAVE stored inventory at its own facility so that it could guarantee fast and competitive delivery. Customer support was around-the-clock.

"Two hundred customers had my pager number," says Karsh. "I was hands-on for sales, service and tech support for all my customers at any time of the day or night."

His commitment to service was evident to his agents as well. In-house training, a designated line for agents and guidance to manufacturers' tech-support desks were all part of the business plan.

That business plan expanded in 1999, when Karsh consolidated CA$HWAVE. Moving the company's headquarters, he bought a building (which he still is in today), the CA$HWAVE Building in Mission Valley.

Karsh started aggressively launching additional national campaigns and recruiting more sales agents. CA$HWAVE grew from three employees in 1997 to 25 by 2001, by which time it had sold 600 machines in the last two years and almost 1,000 since '97.

With a target market of unlimited potential in the retail industry, with more than 200 machines churning out cash, with a strong in-house staff and outside national reps all happily selling branded ATMs, what could possibly go wrong? Plenty. The first significant change came about in August 2000, when Karsh sold 70% of CA$HWAVE's portfolio to E*TRADE. The intention was to create a strategic alliance that was strong and powerful with a nationally recognized brand.

CA$HWAVE may have been a household word in California, but Karsh envisioned more. He negotiated a deal with E*TRADE, and CA$HWAVE became the only independent co-marketer with E*TRADE for ATMs.

"The deal gave me the ability to call on large corporative nationwide chains with the combined name of E*TRADE and CA$HWAVE," Karsh says.

CA$HWAVE became a reseller for E*TRADE - an indirect marketing force for indirect marketing of E*TRADE-branded ATMs while still selling CA$HWAVE-branded machines to deals outside of the E*TRADE scope.

"We were basically selling the branded ATMs under their contracts, and they bought the contracts," says Karsh. "We sold E*TRADE-branded ATMs, and they in turn paid us for those contracts."

No residuals, these outright sales gave CA$HWAVE a strong competitive factor in the marketplace on a national basis.

The competitive factor of the deal - a strong brand name - allowed CA$HWAVE to outmaneuver most other competitors and recruit an extensive national sales force. Karsh admits it was a philosophical issue: "I traded off long-term equity for short-term cash, but I felt the tradeoff was more practical because you gained the strength of a national brand."

It was a decision that he now says had flaws. At the same time, ATM sales started becoming difficult when the financing to sell new machines started dissipating.

"Leasing dried up, and we were getting a 20% sales ration on equipment that had previously been 80%," says Karsh. "There were a lot of companies out there abusing the leasing scenario to finance deals with false pretenses. This caused the leasing companies to get tight with their paper. That's why we switched to conversions."

Conversions was the next decision that proved fatal for CA$HWAVE. It changed its sales focus to conversions of contracts from companies that fell into demise. One notable ISO had 15,000 contracts up for grabs, and that was too tempting to pass up.

From October 2000 through April 2001, CA$HWAVE changed strategy and concentrated on conversion of bankrupt company contracts rather than focus on selling E*TRADE-branded machines, thus changing its focus from new sales to conversions of expired and/or terminated contracts.

"We were still selling E*TRADE but on a more limited basis," says Karsh. "The change in direction, going to conversions and setting up an in-house telemarketing department, undermined our outside sales efforts," says Karsh. "We lost the loyalty of our independents."

It was during this time that another fly buzzed into the ointment.

"A top executive of mine started working on the side for another company, diverting energy, sales and advertising to a competitor without my knowledge," says Karsh.

"In August of 2001, I discovered that this individual was contacting my sales agents and employees to go to work for this other company. I immediately terminated him, but the damage was done. My sales force was decimated, as was my sales activity."

The downward spiral continued for CA$HWAVE. In May 2001, a theft of an ATM cost the company more than $100,000 - a loss that wasn't recoupable because of insurance-policy exclusions. This affected the cash flow infrastructure dramatically.

Then Sept .11 came along and, at the same time, E*TRADE closed its West Coast office and decided not to buy CA$HWAVE contracts for equipment that already had been processed. "We had to absorb the contracts," says Karsh.

CA$HWAVE got overextended because it had set up a different business model for the E*TRADE-oriented deals.

"The conversions would reap money up front if E*TRADE was still in the picture," Karsh says. "But with the income now spread over 60 months, we didn't have any cash flow."

Stuck with contracts for equipment that was not the right type - i.e., E*TRADE-branded machines as opposed to CA$HWAVE-branded machines - Karsh had to immediately restructure.

He laid off half of his work force and scaled back the company. By December 2001, CA$HWAVE had hit bottom, struck with a number of fatal blows - ATM financing difficulties, theft of a machine, change in strategy; termination of a top VP, termination of the E*TRADE alliance. What's happening at CA$HWAVE now? Karsh is contemplating shutting down the business, selling the building, liquidating assets and paying off as many creditors as possible.

"I'm getting stabilized again," says Karsh. "I'm putting tourniquets on the bleeding, healing the patient. We will be profitable once again."

Bankruptcy is not an option for Karsh. He's not considering it and is trying to avoid it.

"I don't think it is necessary because there are sufficient assets that can be liquidated," says Karsh. "I've worked too hard for this, and I'm too proud to give up and walk away."

With the demise of CA$HWAVE because of financing, lack of sales and bad business decisions, Karsh has started developing a new business, as any visionary would. His vision is taking flight toward development of business Web sites.

He's done the research and knows that 70 million Web sites will be in the marketplace within the next few years. He wants a part of that space, and a phoenix is rising from CA$HWAVE's ashes.

Its name: Amazing E-Business.