To get an idea of what kind of business people Yotty and Martin are, check out the extremely long list of legal problems they got into with Paystar (PYST). just look how many times Yotty and Martin are named. this info taken from Paystar form 10KSB from 2002.....
Except as set forth below, neither our parent company nor any of its subsidiaries, or any of their properties, is a party to any pending legal proceeding. Except as set forth below, we are not aware of any contemplated proceeding by a governmental authority. Also, we do not believe that any director, officer, or affiliate, any owner of record or beneficially of more than five percent of the outstanding common stock, or security holder, is a party to any proceeding in which he or she is a party adverse to us or has a material interest adverse to us, except as set forth below.
WORLD CASH PROVIDERS, INC.
This case (Fresno County Superior Court, Case No. 643683-6) was dismissed with prejudice on September 25, 2001.
PAYPHONES, INCORPORATED
In connection with the promissory note in the principal amount of $197,500 due from us to Payphones, Incorporated, we received notice from counsel for Payphone, Incorporated dated September 25, 2001, that it intended to file suit to protect its interest in the note if the issue were not resolved by November 1, 2001. We have asked a third party mediator to assist in resolving this matter. As of May 30, 2002, no resolution had been reached.
T&C MANAGEMENT
On May 12, 2002, a complaint was filed by T&C Management, a California Limited Liability Company, against PayStar Corporation, PayStar Communications, Inc., Intermountain Marketing Associates, LLC, William D. Yotty, Communication Management Services, Inc., Kenneth Deisz, and Chuck Jones. The case was filed in the State of California, in the Orange County Superior Court (Case No. 02CC04136). This action arose out of the sale in 2001 of approximately 1,750 pay telephones owned by a series of Washington limited partnerships for
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which T&C Management was general partner. On or about November 8, 2001, the limited partnerships, PayStar Corporation, and Intermountain Marketing Associates entered into an Asset Purchase and Debt Settlement Agreement in which the limited partnerships agreed to sell 1,000 pay telephones and transfer the telephones to Intermountain Marketing for 2,501,853 shares of PayStar Corporation. As consideration for the transfer of the pay telephones to Intermountain Marketing Associates, it cancelled a debt owed to it by PayStar Corporation and its subsidiaries. In a contemporaneous transaction, PayStar Corporation and PayStar Communications, Inc. entered into a separate agreement with the Washington limited partnerships on or about November 8, 2001, in which the limited partnerships agreed to sell 750 pay telephones to PayStar Communications, Inc. in return for 1,997,883 shares of PayStar Corporation. In the complaint, T&C Management, as assignee of the claims of the limited partnerships, alleges that PayStar Corporation breached the agreement by refusing to transfer the 4,499,736 shares from both contracts to the limited partnerships. T&C Management further alleges that the defendants defrauded the plaintiff by representing that PayStar Corporation was adequately capitalized, that it was engaged in a series of financial transactions which would infuse it with additional capital, that it had entered into an agreement with a brokerage firm which would recommend PayStar's stock to its clients, and that the value of PayStar's stock was expected to increase significantly, when in fact none of these representations was allegedly true. The plaintiff also alleges that the defendants entered into the agreements with no intention to perform the promises set forth therein. In addition to compensatory and punitive damages in an amount to be determined at trial, the plaintiff is seeking a rescission of the agreements and a return of the telephones, the appointment of a receiver to take possession of the pay telephones, and the declaration that the plaintiffs hold the pay telephones and all income there from as a constructive trustee for plaintiff's benefit. Plaintiff is also seeking an accounting of all income earned from the telephones. Finally, the plaintiff is seeking a preliminary and permanent injunction enjoining defendants from failing to maintain the telephones.
On or about April 17, 2002, PayStar Corporation and PayStar Communications, Inc. filed a cross-complaint against T&C Management, Ken Cheatham, Don Truman, and Charles Truman (hereinafter the "cross- defendants"). The individuals named are shareholders of Payphone Management, Inc., which we acquired under a separate Stock-For-Stock Agreement between the parties and which managed the payphones acquired in the above transaction. The individuals are also principals of T&C Management. The cross-complaint alleges that the cross-defendants breached the asset purchase agreements by delivering only 1,600 pay telephones instead of the 1,750 promised, and that of the 1,600 pay telephones only 1,000 were operable; that the actual revenues generated by the pay telephones is substantially less than that represented by the cross- defendants; and that the liabilities assumed in the acquisition of Payphone Management, Inc. significantly exceeded the amount represented by the cross-defendants. The cross-complainant is seeking damages in the amount of $6,000,000, in addition to general, incidental, and consequential damages, and punitive damages to be determined at trial.
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TASQ TECHNOLOGY
On January 11, 2002, a complaint was filed by Tasq Technology, Inc. against PayStar Communications, Inc. and U.S. Cash Exchange, Inc. in the State of California, Placer County Superior Court (Case No. SCV12768), for nonpayment of invoices for the manufacture and service of script ATM machines in the principal amount of $46,902. Judgment was entered against both defendants on April 25, 2002, in the amount of $54,587.60. We have agreed with the plaintiff to pay $3,000 per month until the full amount is paid, and the plaintiff has agreed not to enforce the judgment so long as the payments are made timely.
MARK WAGNER
On or about February 26, 2002, Mark Wagner, our former president, filed a claim with the California Department of Labor against PayStar Communications Corporation and SHS Communications for unpaid wages of $140,000 and expense reimbursement for $5,000. This matter was settled on or about March 28, 2002.
On March 19, 2002, we filed a complaint against Mr. Wagner in the State of California, San Joaquin Superior Court (Case No. CV016835), for breach of fiduciary duty and interference with economic relationships. The complaint alleged that Mr. Wagner, while an executive officer of one or our subsidiaries, diverted business from the subsidiary to himself and made false representations about our company to our customers. We were asking for damages in the amount of $1,800,000, punitive damages, an order to show cause why defendant should not be enjoined, and for a temporary restraining order, preliminary injunction, and a permanent injunction enjoining defendant from making false misrepresentations or otherwise harassing our customers concerning their business relationships with us. This complaint was dismissed by us on April 12, 2002, in connection with the settlement of the Department of Labor claim with Mr. Wagner.
ROBERT COPPER
On November 15, 2001, a complaint was filed by J. Robert Copper, a Fun e-Business shareholder, against Edward Bevilacqua, Dan Normand, Brian VanZandt, and PayStar Corporation. The complaint was filed in the State of Missouri, Jackson County Circuit Court (Case No. 01CV226464), and alleged that defendants Bevilacqua, Normand, and VanZandt conspired in the conversion of Fun e-Business assets and various breaches of duty, all arising out of the Asset Purchase Agreement entered into with PayStar Corporation. The attorneys for J. Robert Copper voluntarily dismissed the case without prejudice as to PayStar Corporation on March 13, 2002.
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NETWORK OPERATOR SERVICES
On or about January 18, 2002, a petition was filed by Network Operator Services, Inc. against PayStar Communications, Inc. (County Court for Gregg County, Texas; Cause No. 2002-156-CC), for failure to pay for operator services in connection with our pay telephone operations. Plaintiffs sought damages in the amount owed for the operator services. Judgment was granted to the plaintiff on or about April 23, 2002, in the amount of $8,333.
CIVIL ACTIONS RELATING TO NON-PAYMENTS TO PAY TELEPHONE OWNERS
* On March 24, 2002, a complaint was filed in the State of California, in the San Joaquin County Superior Court (Case No. CV016886), by approximately 159 pay telephone owners against PayStar Communications, Inc., William D. Yotty, and Harry T. Martin. The complaint seeks payment of past due amounts under pay telephone agreements. The plaintiffs have also filed an application for injunctive relief to prevent us from receiving the fourth quarter 2001 dial around compensation which was anticipated to be received on April 25, 2002. PayStar Communications, Inc., William D. Yotty, and Harry T. Martin have filed an answer denying the allegations. PayStar Communications, Inc. has also filed a cross-complaint against Tri-Tech Payphone Communications, LLC, which assumed the management of the owners' pay telephones. The cross-complaint seeks indemnification from Tri-Tech and alleges that TriTech received substantial monies in connection with the management of the payphones that must be applied against the relief sought by the owners against PayStar Communications, Inc.
* On December 12, 2001, a petition for damages was filed against PayStar Communications, Inc. by Chauffe Family Leasing, LLC in the 18th Judicial District Court, Parish of Iberville, State of Louisiana (No. 56,395 "D"). The petition alleges that plaintiff has not been paid its monthly compensation due under the PayPhone Telephone Services Agreement. On March 22, 2002, Plaintiff filed an amended petition joining United Fidelity Corporation as a defendant to the suit and alleging, via bonds, it has failed to pay the obligation of PayStar to repurchase pay telephones from plaintiff. On May 30, 2002, PayStar Communications, Inc. filed a responsive pleading to dismiss the amended action based upon improper venue and a lack of subject matter jurisdiction.
* In addition to the foregoing actions relating to our pay telephone operations, we have also received demands for payment from other pay telephone owners. At December 31, 2001, the unpaid amount owed to all of the pay telephone owners was approximately $225,650. Some of these demands have included threats of litigation. In addition, three complaints have been filed with the California Department of Justice and one consumer complaint has been filed with the Consumer Protection Division of the Attorney General of Missouri in regard to non-payment of fees in maintenance contracts involving
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approximately twenty-six pay telephones. We have responded to each of these complaints.
CIVIL ACTIONS RELATING TO NON-PAYMENTS TO CTM OWNERS
* Virtually identical complaints were filed in the State of Washington, in Spokane County District Court (Case No. 22042431) on February 19, 2002, and in Spokane County Superior Court (Case No. 022201408-3) on March 7, 2002. These complaints were filed by Twilight Resources, Steve Turney and John Schlabach, Trustees, BC&L Holdings, Tammie Goulet, Trustee, against PayStar Communications, Inc., U.S. Cash Exchange, Inc., PayStar.com, PayStar Communication, Inc., U.S. Cash Exchange, PayStar Corporation, PayStar Financial Services, PayStar Prepaid Services, Inc., PayStar InfoStations, Inc., William Yotty, Jeff McKay, Harry Martin, Julie Watts, David A. Goldenberg, Bruce Grogg, Steven Forbes, and Edward Bevilacqua. The Defendants filed a motion for a dismissal on June 13, 2002 which is scheduled to be heard on August 5, 2002. Plaintiffs allege that in connection with the sale and management of approximately 282 cashless ATM machines, defendants failed to provide payments as required for operation of the machines and failed to provide bond insurance, as required. Plaintiffs are seeking damages in the amount of $1,196,000 for the machines; $60,000 for the bond fees; $3,456,000 as triple damages for allegedly defrauding the plaintiffs, embezzlement, and unlawful conversion; $180,000 as triple damages for defrauding plaintiffs of the bond funds and embezzlement of these funds; and costs.
* In addition to the foregoing actions relating to our CTM operations, we have also received demands for payment from other CTM owners. At June 1, 2002, we estimate the unpaid amount owed to all of the CTM owners at approximately $725,000. Some of these demands have included threats of litigation. Also, on February 22, 2002, a complaint was filed by a CTM owner with the Texas Consumer Protection Division of the Office of the Attorney General, alleging non-payment under service contracts for sixteen CTMs and failure to install and/or maintain CTMs at certain locations. On March 29, 2002, U.S. Cash Exchange, Inc. responded to the complaint acknowledging the failure to pay, but providing a list of the locations of twelve of the CTMs and notification that three of the CTM locations had been cancelled. We have responded to the complaint.
STATE REGULATORY MATTERS
* On December 7, 1999, the Pennsylvania Securities Commission issued a summary cease and desist order against PayStar Communications, Inc., one of our wholly owned subsidiaries, and William D. Yotty, our chief executive officer, chairman, and principal shareholder, and against Interactive Technologies, Inc., a pay telephone marketing company, Tony O. LaVine, its president, and Joseph A. Watters, a selling agent for that company (Docket No. 9907-05). The order was issued without a hearing. The order
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alleged that the parties were in the business of offering and selling pay telephone and management services which constituted the offer and sale of a security without proper registration under the state securities act, or an applicable exemption from registration. In June 2000, without admitting or denying the allegations, PayStar Communications, Inc. and Mr. Yotty entered into a stipulated settlement with the commission in which the original cease and desist order was rescinded and which provided that each party would permanently cease and desist from violating the state securities laws. The order also bars Mr. Yotty and PayStar Communications, Inc. for a period of five years from selling securities in the State of Pennsylvania unless they retain counsel knowledgeable and experienced in securities matters to make all applicable filings. The parties were also ordered to pay $1,500 for costs of the commission. In addition, the parties are required to make an offer of rescission to each of the participants in the State of Pennsylvania and offer them the return of their purchase price. There were approximately thirty-one purchasers who paid a total of approximately $604,500 for the pay telephone equipment in the State of Pennsylvania who would potentially participate in the rescission offer. We submitted a form of rescission offer to the Pennsylvania Securities Commission for review on or about August 11, 2000. We received our first comment letter from the Commission on or about December 14, 2000. We submitted a second draft of the rescission offer on or about March 29, 2001. On or about June 13, 2001, we received a second comment letter stating that the second draft did not address satisfactorily the comments in the December 14, 2000, letter from the Commission. Until these comments are addressed to the satisfaction of the Commission, we will not be permitted to commence the rescission offer in Pennsylvania.
* In April 2000, following an investigation, the Enforcement Division of the Oklahoma Department of Securities recommended to the Administrator of the Department that the Department issue an order against U.S. Cash Exchange, Inc., one of our wholly owned subsidiaries, Jeff McKay, president of this entity at that time, and PayStar Communications, Inc. to cease and desist the offer and sale of cashless ATM machines in the state of Oklahoma and to impose a civil penalty in the amount of $5,000. The recommendation was based upon the allegation that the offer, sale and lease-back of the cashless ATM machines in the State of Oklahoma constituted the offer and sale of a security. On July 27, 2000, U.S. Cash Exchange, Jeff McKay, and PayStar Communications, Inc. agreed to an order of the Department of Securities without admitting or denying any of the findings of fact or conclusions of law reached by the department. The order provides that the parties will cease and desist from offering any securities in the State of Oklahoma, unless they are registered or exempt from registration. The order also provides that the parties will cease and desist from engaging or associating with any agent or contractor to offer any security in and/or from the State of Oklahoma, unless those agents are registered or exempt from registration. If the parties comply with the terms of the order, no civil penalty would be imposed. In addition, the parties are required to make an offer of rescission to each of the participants
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in the State of Oklahoma and offer them the return of their purchase price plus 10% interest or they may elect to continue their rental agreement in full force, if they desire. There were eleven purchasers who paid a total of approximately $268,000 for the cashless ATM machines in the State of Oklahoma who would potentially participate in the rescission offer. In August 2000 we submitted a form of rescission offer to the Oklahoma Department of Securities together with a request for an exemption from the registration requirements for purposes of submitting the offer of rescission to the purchasers in the State of Oklahoma. The Oklahoma Department of Securities recently issued an Order Granting Exemption on March 22, 2002.
* On or about February 23, 2001, the California Department of Corporations sent a letter to U.S. Cash Exchange, Inc. requesting a statement and certain information concerning the sale of scrip automated teller machines. On or about April 9, 2001, we received a subpoena duces tecum dated March 15, 2001, from the California Department of Corporations in regard to an investigation and examination of U.S. Cash Exchange, Inc. The subpoena requested records for the period from January 1, 1999, to the date of production of the documents. The records were requested in connection with an investigation and examination of possible violation of securities laws and/or rules in the State of California. The records were forwarded to the Department of Corporations on or about June 4, 2001. On or about October 9, 2001, the Department of Corporations issued a Subpoena for testimony to be given by William D. Yotty in connection with the investigation and examination of U.S. Cash Exchange, Inc., Quantum Telequip Services, Inc., Clifford Goehring, Jeff McKay, and William Yotty. The depositions of Mr. Yotty and Mr. Goehring in this matter were taken by the Department of Corporations in December 2001.
* On or about April 9, 2001, we also received a letter dated January 31, 2001, from the Office of the Securities Commissioner of Kansas stating that it had received information that PayStar Financial Services, Inc., our wholly owned subsidiary, may have been engaged in activities connected with the offer and sale of securities in the State of Kansas in connection with the sale or lease back of automatic teller machines. The Commissioner requested information to determine whether the company or any of its officers, directors, agents, employees, assigns, or affiliates in connection with the offer and/or sale of any securities may have violated the provisions of the Kansas Securities Act. In June 2001 Mr. Yotty, as president of U.S. Cash Exchange, Inc., submitted an affidavit denying that it had offered or sold securities in the State of Kansas.
* On or about May 14, 2001, we received a letter dated April 24, 2001, from the Rhode Island Department of Business Regulation stating that it had opened an investigation of the placement of cashless ATM machines by PayStar Financial Services, Inc., our wholly owned subsidiary, in the State of Rhode Island. The Department requested certain information involving these transactions. On or about September 12, 2001, Harry T.
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Martin, the secretary/treasurer of U.S. Cash Exchange, Inc., submitted a declaration stating that no owners of the company's cashless ATMs were Rhode Island residents.
* In July 2000 we received a copy of a letter dated January 7, 2000, from the Securities Division of the North Carolina Department of the Secretary of State addressed to a third party requesting information relating to the alleged sale of interests in PayStar Communications, Inc. and Interactive Technologies, Inc. in the State of North Carolina. To our knowledge no response was submitted by the recipient of the request and we have not received any communication directly from this state securities regulator.
FEDERAL REGULATORY MATTERS
* We are aware of three complaints which have been filed with the U.S. Securities and Exchange Commission by CTM owners for failure to pay the monthly fees under the service and maintenance agreements.
* We received a letter dated May 10, 2002, from the U.S. Securities and Exchange Commission relating to the matter of an informal, non-public inquiry of Interactive Technologies, Inc. to determine if there have been violations of the federal securities laws involving our parent company, PayStar Communications, Inc., PayStar Financial Services, Inc., and U.S. Cash Exchange, Inc. We have been requested to furnish certain documents in connection with this inquiry. Interactive Technologies was a third party marketer of payphones, some of which were managed by us.
RISK FACTOR RELATING TO REGULATORY MATTERS
We have been engaged in certain transactions involving site location, management and servicing of pay telephones and CTMs owned by individuals that purchased their equipment from third-party, non-related marketers. All operations, servicing and maintenance of pay telephones ceased as of December 1, 2001 and CTMs in January 2002. Although we are not, nor have we ever been a third-party marketer, there are some states securities law administrators, as well as the United States Securities and Exchange Commission, which take the position that this type of transaction by third- parties may be deemed to involve the unregistered offer and sale of a type of security. As a consequence of these activities by third parties, there may be other state securities administrators who will commence fact-finding proceedings against the third parties and/or us.
In addition, in connection with offerings of shares of our stock, debentures, or other securities, we failed to meet the notice filing requirements of Rule 503 of Regulation D promulgated by the Securities and Exchange Commission which requires the filing of a notice on Form D within fifteen days following the first sale of securities, and we may not qualify for the exception provided in Rule 508 which permits certain deviations from the requirements of
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Regulation D. Also, in many instances we did not comply with the notice filing requirements of the several states in which these securities were offered and sold. As a result of the failure to meet these filing requirements, or if the exemption provided by Regulation D and similar state exemptions is unavailable, and if no other exemption from the registration requirements of state and federal securities acts is available, we may be deemed to have violated the registration requirements of Section 5 of the Securities Act and similar state statutes.
CONTRACT BREACHES
We are in breach of provisions in several agreements, of which some could lead to litigation, and would be in addition to the matters discussed above. Management is attempting to resolve each of these items.
INDEMNIFICATION PROVISIONS
We have agreed to indemnify and provide representation for any employee who has been joined in any legal proceeding or government action involving the employee and relating to our business. The Board of Directors has not determined the full extent to which this indemnification will apply and the amount which we are willing to commit for the defense of these actions. Because we have agreed to provide indemnification of these employees, including officers and directors, such action may be considered a proceeding in which the person has a material interest adverse to the company.
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