Article

Choice Hotels and PayStar roll out project

Though the pay-per-use Internet kiosk project has gotten off to a sluggish start, the hotel chain said it is too early to give up on the deployment.

August 21, 2002

An agreement between Choice Hotels International (NYSE:CHH) and PayStar Corp. (OTCBB:PYST) that was to make pay-per-use Internet kiosks available to more than 3,000 hotels in the Choice chain has gotten off to a sluggish start.

According to information from the chain, just six hotels out of 3,200 eligible for the program have signed up to take part since the agreement was initially announced March 11 (See story: PayStar checks into Choice Hotels). At the time, Choice officials did not offer any predictions of how many kiosks would be deployed, saying only that the kiosk would bring value to the chain and provide a new amenity to guests.

Of the six, representatives at three hotels said they had yet to hook up their machines, while a fourth requested a delay in deploying the kiosk because of expense issues. Attempts to reach the other two locations, the Clarion Carriage Martha's Vineyard in Edgartown, Mass., and a MainStay Suites in Chattanooga, Tenn., were unsuccessful.

But the slow rollout has not raised alarm bells at Choice Hotels. Officials from the hotel chain, which franchises more than 5,000 hotels in 43 countries, said it is too early in the program's development to write it off, noting that the first set of kiosks has just been delivered.

"We've just started marketing the program through our channels," said Anne Curtis, Choice Hotels communications director. "It's still really ramping up."

Choice is marketing the machines to its franchisees, which operate the chain's hotels. PayStar officials in March said the franchisees would receive a percentage of revenue generated by the kiosks, but did not offer any details.

The rollout is taking place as PayStar faces fraud and breach of contract lawsuits from investors in its payphone and ATM businesses. PayStar president and chief executive officer William Yotty did not return several calls seeking comment.

Putting the pieces together

The pay-per-use work stations, part of PayStar's InfoStation Network, are designed to offer Choice guests selected Internet access, e-mail, information on local dining and restaurants, and access to the chain's Choice Privileges frequent guest program.

The machines are powered by NetNearU software and housed in kiosks manufactured by NCR Corp. and supplied by Sparta, N.J.-based kiosk service and maintenance firm Instrument & Equipment Co.

The Internet stations are a new method of information delivery for Choice. The company reported a profit of $14.3 million on revenue of $341.4 million in fiscal year 2001; Choice averaged profits of around $51 million in each of the three years prior to 2001.

Curtis said franchisees go through the parent company to negotiate deployment deals with PayStar. She suggested the slow pace of the rollout is tied to the lack of familiarity the company has with PayStar.

"PayStar is still a relatively new partner for us," she said. "We're doing the best we can to let franchisees know it's available."

A dissenting voice

Mansukh Pagdal, who manages a Quality Inn in Rome, N.Y., said he has been disappointed with his PayStar InfoStation unit. His hotel was one of the first to receive a PayStar unit, in late July, and after just three weeks he said his frustration has reached the breaking point.

"I'm totally unhappy; 100 percent unhappy," Pagdal said. "The kiosk machines came in not working and has not been working since. It hasn't had a proper hookup."

Pagdal said a technician unsuccessfully attempted to get the kiosk operating in mid-August. He is currently waiting for another service call, which he said was PayStar's responsibility.

"A technician didn't call on us until we called (the first time)," he said. "We didn't call this time because that's their duty; PayStar is supposed to call.

"It might be the final word we're going to say is `Take it back; we don't need it,' " Pagdal continued.

Pagdal said his hotel is leasing its machine from PayStar and the two companies plan to split the revenue generated by the kiosk once it is in operation.

Hotel roundup

At two other locations, a Sleep Inn at State College, Pa., and a Comfort Inn in Bonita Springs, Fla., hotel managers said the machines had recently arrived, but had yet to be installed. Both hotels were expecting PayStar technicians to connect the machines on Aug. 21.

Karen Mansfield, who manages the State College Sleep Inn, said there were some technical issues that delayed the kiosk's launch at her location.

"The people who were setting it up had problems with the Internet service provider we have, which is NetZero," Mansfield said. "They think it will work when they come and set it up. We don't know how it will work."

Krista Olson, another manager at the Sleep Inn, said the hotel did not purchase the kiosk and plans to split revenues with PayStar, though she wouldn't elaborate on the revenue agreement..

Mansfield, who also operates a Comfort Suites hotel adjacent to the Sleep Inn, said her hotel was steered to PayStar by Choice Hotels.

"Here at Comfort Suites, we had a little Internet work station that we did on our own and was very popular," she said. "We wanted to try something like this at Sleep Inn and Choice Hotels recommended something like this as a way to offer our patrons access to their e-mail and news and weather. We need to be up to speed on technology like this."

Isabelle Kim, manager of the Comfort Inn in Dawsonville, Ga., said her hotel delayed its plans to deploy a PayStar kiosk because of economic conditions and the necessity of installing a DSL or T2 line for the unit.

"We need to put our plans on hold," Kim said. "It may be a month's delay; it may be longer. The business has not been in good shape for a while. When we told (PayStar) they said it should be fine. We're not canceling."

ATM and payphone problems

In recent weeks, the Modesto Bee and Stockton Recordhave both reported on lawsuits filed against PayStar for fraud and breach of contract (See story: PayStar accused of fraud in lawsuit).

On March 24, 159 plaintiffs, primarily elderly people, sued the company in San Joaquin County, California, Superior Court, alleging that PayStar had ceased paying monthly rental fees on payphones they had invested in. The company has filed papers denying the allegations.

Another investor, Michael McDonald of Sonora, Calif., said he has filed a pair of suits against PayStar, alleging that the company ceased paying rent on 85 ATMs he purchased from U.S. Cash Exchange of Calif., for $340,000 in 1999.

PayStar purchased U.S. Cash in 2001, according to McDonald, and quit making rent payments amounting to $3,600 per month four months later. McDonald, 69, said PayStar refused to tell him where the ATMs were for seven months, nearly forcing him into bankruptcy. He said he got his machines back only after signing an agreement with PayStar not to sue the company.

Once the agreement was signed, McDonald alleges that PayStar returned machines that were substandard and barely operational. He said only 35 of them are now in use, prompting him to file suit anyway. One of his suits asks for $25,000 in back rent, while the other seeks $500,000 for the return of his initial investment plus damages.

"I don't have anything good to say about Yotty," McDonald said of PayStar's CEO, William Yotty.

PayStar did not mention McDonald's suits in papers filed with the Securities & Exchange Commission (SEC) on July 15. The company, however, disclosed that lawsuits alleging similar charges were filed in the state of Washington during February and March, seeking nearly $5 million in damages. PayStar filed a motion for dismissal. The company also claimed in the SEC report that it owed payphone and ATM operators $950,650 in unpaid rent.

The company recorded a net loss of $1.5 million for the first quarter of fiscal year 2002, ending March 31, and stated that its current liabilities exceed current assets by $8.8 million.

"Management is currently in the process of seeking additional funding, changing its business model, reducing expenses, and decreasing human resources," the company stated in its first-quarter report, filed on Aug. 9. "However, there can be no assurances that management's efforts to restore the company to profitable operations will be successful."