AOL, Talk America Scrap Telecom Marketing Deal

For the second time in a week, America Online is renegotiating a sales and marketing contract with a partner, this time paring down its relationship with Reston, Va.-based Talk America.

Talk America, which provides local and long distance telephone services, will now stagger its payments to America Online, a unit of multi-media conglomerate AOL Time Warner, and the two companies will end their four-year-old marketing relationship, which had recently been extended until 2003.

Through the renegotiated contract, Talk America (formerly known as Tel-Save.com) will cease marketing its services on AOL next month. Starting with a deal in 1997, Tel-Save.com/Talk America agreed to pay a total of $150 million for the right to provide phone services to AOL’s members under the “AOL Long Distance” brand. The deal also called for Tel-save.com to pay a portion of the profits to the online service. That contact was last renewed in May, although Talk America lost its exclusive rights to sell AOL Long Distance.

In addition to concluding their marketing relationship, AOL is also letting Talk America off the hook, somewhat. By the end of the month, Talk America was to have paid AOL about $90 million in debt and through a warrant obligation. However, the firm only had about $25 million in the bank, as of the end of June.

Now, AOL has absolved Talk America of $20 million of its $54 million debt, with the remainder converted into 8 percent, 10-year senior secured convertible debt. That debt is convertible at AOL’s option into 10.8 million shares of Talk America common stock, worth about $7.3 million at press time. Half of the debt’s interest is also payable by way of Talk America services, the firm said.

Talk America also is obligated to pay $6 million in two cash installments.

Additionally, AOL said it would accept 3.1 million additional shares of TALK, worth about $2.1 million, rather than force Talk America to honor its $36 million warrant obligation. Including its earlier 4.1 million share stake in Talk America, AOL’s ownership in the firm rises to about 8.8 percent.

Not surprisingly, the reconfigured deal is aimed at keeping Talk America afloat, as AOL — which is feeling the pinch from a worsening advertising climate, and shortfalls in ad revenue from last week’s non-stop news coverage — extracts whatever payments it can. Last quarter, Talk America posted an operating loss of $24.9 million, on $133 million in revenue, burning through about $16 million of its $40.6 million cash horde.

“We are pleased that America Online has worked with us to facilitate this transaction,” said Talk America chairman and chief executive Gabe Battista. “The financial restructuring provides us with a strengthened capital structure as we implement our strategy of marketing bundled local and long distance services using the Talk America brand.”

Earlier in the week, AOL announced a similar arrangement with PurchasePro, resulting in the Las Vegas e-commerce firm ending its payments to America Online. Through the arrangement, AOL retained the rights to continue using PurchasePro’s e-commerce exchange software in its Netscape Netbusiness Marketplace.

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