Beleaguered telecom giant WorldCom is seeking to back out of a
commitment to spend millions of dollars for advertising on AOL Time
properties, the company disclosed last week in
According to documents filed with the U.S. Bankruptcy Court for the
Southern District of New York, which is handling Clinton, Miss.-based
WorldCom’s record-breaking $41 billion bankruptcy, the nation’s No. 2
long-distance carrier and Internet backbone giant is looking to cancel
an agreement signed in June 2001 that had it paying a total of $185
million to AOL through 2004.
In exchange for the payments, which come to about $20.25 million per
quarter, AOL agreed to promote WorldCom’s MCI WorldCom unit on its
online and offline properties.
For example, AOL said at the time that it planned to advertise
WorldCom products and services in print through Time Inc. magazines,
Time Warner Cable networks, and America Online brands including
MapQuest, Digital City, ICQ, and Spinner, as well as FORTUNE.com and
InStyle.com. The deal built on several separate earlier agreements
with America Online and Time Warner, which were struck prior to their
But now, however, WorldCom said it ought to be able to void the
contract to get out of the payments.
WorldCom “has determined that it does not need the advertising
services provided for in the agreement in its ongoing business,” it
said in the filing. “The agreement requires the debtors to purchase
more advertising than they need and requires the advertising purchased
to be allocated between the AOL TW properties in a manner that is not
favorable. Thus, the services provided under the agreement are
unnecessary and costly to the debtors’ estates.”
U.S. Bankruptcy Code allows for debtors in possession to “reject any
executory contract or unexpired lease,” pending court approval.
WorldCom said that by rejecting the agreement, it would save an
estimated $81 million per year in expenses, and $182.3 million for the
remainder of the contract.
The filing comes as the latest move by WorldCom to get its expenses
back into line, while for AOL, it represents another potential injury
for its already-troubled advertising business.
In addition, both companies are under federal investigation over
accounting practices. WorldCom, of course, filed for the largest
bankruptcy in history after revealing that $3.85 billion in expenses
had been improperly booked. A month later, the company said it
uncovered another $3.8 billion in accounting errors.
Last month, AOL disclosed in Securities and Exchange Commission filings that it might have
improperly accounted for as much as $49 million in advertising and
commerce revenue booked by America Online.
The problems, which AOL said it uncovered as it was preparing to
have its executives certify its past results, involved three separate
marketing deals over six quarters, starting in March, 2000.
At least one of those deals is believed to involve WorldCom’s UUNET
subsidiary, to which America Online sold advertising, and from which it
purchased dialup capabilities and bandwidth.