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Taking Advantage Of The Tangles In Telecom

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For most shareholders and creditors, the bankruptcy of Telesphere Communications Inc. was a disaster. Last year, local phone companies slowed collections from callers who objected to high charges from often-steamy 900-number lines. That pushed the $300 million company into bankruptcy, leaving more than $100 million in unpaid claims and shareholders with worthless stock.

But former Telesphere CEO and major shareholder Ronald J. Haan isn't complaining. He picked up Telesphere's choicest assets from bankruptcy court for $17 million last October and promptly parlayed them into a controlling interest in another telecommunications company. It's International Telecharge Inc., an alternate operator services (AOS) company that sells long-distance service to hotels and pay phones, often at a huge markup. Now, just six months later, ITI says it may also seek bankruptcy protection. But Haan won't go down with this ship, either: Through a complex series of transactions, he has already recouped $22 million from Dallas-based ITI.

Haan is just one of many entrepreneurs who have wheeled and dealed on the lightly regulated fringe of the U.S. telecommunications industry since the breakup of the Bell System in 1984. But, says Jack Lake, a former telecom sales contractor in Orange County, Calif., "This is the biggest thing that's happened in the communications industry." Lake is suing a Haan-controlled company in a contract dispute.

Haan, who declined to speak with BUSINESS WEEK, got his start in Reading, Pa., where, with $5,000 of borrowed money, he launched a job data bank for college seniors in 1970. But his big opportunity came with the end of American Telephone & Telegraph Co.'s lock on operator services for pay phones and telephone "aggregators" such as hotels and hospitals. In 1987, Haan plunked down $10 million for a controlling interest in National Telephone Services Inc. in Atlanta, an early player in AOS. Left virtually unregulated after the Bell breakup, such companies sometimes charged several times the benchmark AT&T rate for long-distance calls.

QUICK REBOUND. In October, 1990, Haan, who owned 85% of National, wangled a lucrative buyout for it from Chicago's Telesphere--even though Securities & Exchange Commission filings indicate that the privately held company had never turned a profit prior to the sale. Telesphere paid $21 million in cash, $14 million in notes, and 3.3 million shares of Telesphere stock for National, which claimed to have $153 million in annual sales.

Less than three months later, in January, 1991, Telesphere was so cash-strapped that it turned to Haan for help. He agreed to invest $7 million, cancel $12 million of the notes Telesphere owed him, and help Telesphere expand its bank lines. In exchange, he got almost 10 million Telesphere shares, which raised his stake to 37%. He also assumed the titles of president and chief executive. The following August, creditors pushed for an involuntary bankruptcy, and in September, Telesphere began a voluntary reorganization.

Haan wasn't sidelined for long. In October, 1991, he crafted a complex deal to buy most of Telesphere's assets from the bankruptcy court for $17 million. Then, he turned to International Telecharge, which had overexpanded in the AOS business. It was in technical default on its credit agreements and particularly receptive to Haan, who had also acquired from the Telesphere bankruptcy estate $22 million in delinquent notes and receivables owed by ITI. Haan immediately sold Telesphere's switching network to a division of Williams Cos. and sold Telesphere's AOS business and the overdue notes to International Telecharge for $12 million. Haan then lent publicly held ITI the money to buy him out and $14 million more to pay commissions Telesphere owed its agents. He also personally paid Security Pacific Bank $5 million that ITI owed for receivables financing.

FAT ROYALTY. In return, Haan gained control of ITI's board and became chief executive. At the same time, he was promised a royalty of 10% of revenues from the former Telesphere business until the debt was repaid. And ITI agreed to pay a large advance royalty should it gain new receivables financing. That financing came through in December, and Haan soon got $22 million in advance royalties and loan repayments, allowing him to recoup much of the cash he had used to gain control of ITI. At the same time, ITI agreed to boost monthly royalties to a minimum of $500,000.

It was good timing, considering ITI's dimming prospects. The company still hasn't issued audited results for the year ended last Dec. 31 but estimates it lost $40 million before extraordinary items on revenue of $180 million. On Apr. 15, ITI announced that final results would be delayed until auditors figured out how to account properly for the purchases of Telesphere assets from Haan. The company is in default on several credit agreements, including one expiring in late April. It says if it can't refinance the loans, it may seek bankruptcy protection. The auditors have insisted that ITI's board appoint a special committee to determine whether there were irregularities in its dealings with Haan.

Meanwhile, the AOS business itself is under fire. The Federal Communications Commission has begun regulating AOS operators, requiring them to identify themselves twice at the start of a call to give consumers a chance to hang up, rather than incur steep charges. Another FCC rule forbids electronic "blocking" of access to other carriers by 1997. And there's growing support in Congress to cap AOS rates.

Is this the end of the line for Haan? Hardly. With mounting pressure to cut rates, ITI is slashing costs as fast as it can. But if the company is liquidated, Haan could still profit. As a major creditor, he could emerge from a bankruptcy with a piece of the same AOS business he first sold Telesphere and later peddled to ITI. If he can pull that off, Haan is one slick operator.HAAN'S CIRCUMNAVIGATION

OCTOBER, 1990 Haan sells National Telephone Services, an alternate operator

service company, to Telesphere for $21 million in cash, $14 million in notes,

and 3.3 million shares of Telesphere

JANUARY, 1991 Haan invests $7 million in Telesphere and cancels $12 million in

notes, boosting his stake to 37%. Haan is named CEO

SEPTEMBER, 1991 Telesphere declares bankruptcy

OCTOBER, 1991 For $17 million, Haan buys most Telesphere assets, including his

old NTS business, which he sells to International Telecharge Inc. for $12


DECEMBER, 1991 ITI pays Haan $22 million in advance royalties and loan

repayments and boosts his future royalties to $500,000 per month

APRIL, 1992 ITI warns that it may have to seek bankruptcy protection. As a

major creditor, Haan could still end up with part of his original AOS business

that he sold to both Telesphere and ITI


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