For Telesphere's Clients, Dial `1 900 Tuf Luck'

Back in 1987, Telesphere Communications Inc. was a third-tier long-distance phone company with a small but intriguing niche in 900 numbers. It was the first national carrier to offer interactive 900 numbers, which let consumers call in and use their phone keypads to select what they wanted to hear. As people flocked to the lines for entertainment, information, and titillation, Telesphere's sales skyrocketed. By last year, 900 services accounted for 59% of its $293 million in revenue. But just as the sometimes pricey pay-per-call programs have moved from novelty to nuisance for many consumers, Telesphere, too, has fallen out of favor. Now, with its 900 business shrinking, it's scrambling to keep an open line to the future.

The Oakbrook Terrace (Ill.) company disclosed in late August that it lost $9.6 million in the second quarter--25% more than its first-quarter losses. That put it $17 million in the red on sales of $195 million by June 30. Now, the company isn't paying the hundreds of information providers (IPs) that develop 900 programming, get phone lines from Telesphere, and depend on it for billing and collection. That has set off a stampede of complaints to the Federal Communications Commission and state regulators and a rash of suits by unpaid IPs (table). "If we wait," explains Gene F. Stevens, an attorney whose clients have sued to recover more than $30 million in unpaid fees and damages, "the company won't be here."

The suits serve as painful testimony to the maturation of the controversial 900-number industry. The 11-year-old business exploded as the public discovered phone sex, soaps, `scopes, and jokes--in a few cases racking up monthly charges of thousands of dollars. But under pressure from regulators, consumers, and parents aghast at unregulated charges, fraud, and X-rated programs, local phone companies--which serve as collection agents for Telesphere and the other long-distance carriers--are backing off. At customers' requests, they are erasing contested 900 charges from bills.

Ameritech Corp. will forgive any 900 charge the first time a customer tries to get out of paying, and new California regulations for in-state 900 calls will be even more favorable to complainants.

The mounting uncollectables hit Telesphere harder than its three rivals because 900 services account for a higher portion of its revenues and more of its lines are adult-oriented. Now, IP suits are pushing it close to the edge. On Aug. 19, 10 IPs filed a bankruptcy petition against Telesphere in Chicago. Telesphere's new senior management--its third team in as many years--vows a court fight. With a negative net worth of $106 million as of June 30, there's not much for unsecured creditors to seize anyway. Says Executive Vice-President Eugene Ruiz: "The value in this business is your revenue stream."

After slowing payments early this year, Telesphere in May told local phone companies to deposit revenues from 900 calls directly into the accounts of its lender banks--and soon stopped paying back what it owed the IPs. That sent providers rushing to court (table).

STOCK PLAN. Telesphere's response: It wants either to pay IPs 50~ on the dollar, in the form of company stock, or to repay 15% of the outstanding IOUs in cash and the rest in the form of discounted transmission rates. Telesphere also proposes a special account that only the IPs could draw from, into which local phone companies would deposit revenues from 900 calls.

Although the company claims 60% of its creditors are going along, some major ones are scoffing. Given the 90% drop in Telesphere's share price since 1987, from more than $8 to 50~, many IPs aren't eager for its stock. "I don't want stock, I don't want discounted time, all I want is my money," fumes one information provider in California. Besides, the plan might not work anyway because bank lenders are objecting to the special account.

Still, IPs may have little choice. For those offering dating or other adult services, Telesphere is fast becoming the only available carrier as its competitors shun the services and focus on business-oriented 900 products such as technical and legal advice. Even so, Telesphere's corner on the market is no guarantee of survival. Its 900 service revenue plunged 40% in the first six months of 1991, and now it's trying to get back its ordinary long-distance lines, which it agreed to sell to MCI Communications Corp. in March. It also made recent merger overtures to another company that provides operator services, but was quickly rebuffed. If bankers start to pull the plug, the magic number at Telesphere may soon change from 900 to 911.


AT&T In a March, 1990, suit, AT&T charges that a Telesphere unit stole its public-telephone customers by switching them to Telesphere's network without their knowledge or by forging their signatures. AT&T wants Telesphere's contracts voided and damages paid. Telesphere is disputing the case

IP TELECOMMUNICATIONS The Canadian provider of 900-number programming charges in a May, 1991, suit that Telesphere diverted funds that it collected from local phone companies for IP Telecom's 900 programs. It says Telesphere inflated its bad-debt reserve and pledged the funds as collateral to secure loans. Telesphere is fighting the case

INFORMATION PROVIDERS GROUP In June, 1991, 12 of Telesphere's customers who transmit 900-number programming filed a Federal Communications Commission complaint, accusing Telesphere of withholding payments. They want an FCC order suspending Telesphere's authority to offer interstate 900 service unless it pays the money. A similar complaint is pending in California. Telesphere disputes the claims

OTHER CUSTOMERS Ten of Telesphere's 900-number information providers say the telecom company owes them $2.1 million in unpaid fees. On Aug. 19, they filed an involuntary bankruptcy petition in Chicago to have the company liquidated. Telesphere wants the petition thrown out


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