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PayStar accused of fraud in lawsuit

August 26, 2002

LODI, Calif. -- Alleging fraud and breach of contract, more than 100 investors have filed suit against kiosk, cashless ATM, and payphone deployer PayStar Corp. (OTCBB:PYST) for its business practices in its payphone and ATM divisions.

According to the Stockton Record, Rancho Mirage, Calif. attorney Lois Stewart filed suit on behalf of PayStar investors earlier this year. The investors are primarily elderly people who invested $6,500 apiece to buy payphones managed by the company. PayStar agreed to pay each investor a $65 monthly rental fee and a percentage of revenue from each phone during the course of the agreement.

The company informed the investors on Dec. 29, 2001, that PayStar was terminating the agreement and would cease paying the monthly rental fees, according to the suit. The termination came shortly before a five-year deadline for returning the initial $6,500 outlay to the investors.

PayStar offered to exchange the rights to the payphones for company stock, according to the Record, but investors turned that offer down. The company's stock was trading at 9 cents per share as of Aug. 13.

According to PayStar's first-quarter financial report, filed on Aug. 9, the company was maintaining 1,212 payphones at the end of the quarter on March 31. PayStar had 3,572 payphones under its management as of June 30, 2001, according to SEC filings.

PayStar noted the suit in its Aug. 9 filing, saying the plaintiffs were seeking the return of the payphones.

"The company intends to vigorously defend its position and has filed a cross-complaint against the plaintiffs," the report states. "The outcome of this matter cannot be determined at this time."

The company has also come under regulatory scrutiny in numerous states. Cease-and-desist orders were filed by securities agencies in Pennsylvania and Oklahoma in 1999 and 2000, respectively, citing PayStar for failing to trade under the proper registration.

Earlier this year, PayStar appeared to have landed a significant kiosk deal when it reached an agreement to deploy Internet/loyalty-club kiosks at selected Choice Hotels International (NYSE:CHH) locations. But the company reported that it suffered a net loss of $1.5 million for the quarter ending March 31, and that current liabilities exceed current assets by $8.8 million.

"There is substantial doubt concerning the company's ability to continue as a going concern," the company admitted in its SEC filing for the quarter.