- The Washington Times - Monday, August 13, 2001

Talk America Inc. is lucky to have friends in high places.
The company's stock is currently trading at less than a dollar, and it has just about six weeks to boost it to $19 before a prior agreement the company struck with America Online forces them to repay their losses.
The Reston telephone services provider owes AOL, of Sterling, Va., about $54 million, and only has about $22.5 million in cash at its disposal. As the company's stock is trading at less than a dollar, many analysts are saying that a quick recovery is almost out of the question. But they are counting on the online services provider to strike some sort of deal with Talk America within the next few weeks, as the agreement expires on Sept. 30.
"It's in both companies' interest to resolve this," says Stephen Shook, an analyst with Wachovia Securities in Charlotte, N.C. "They don't want their top partner to go out of business, and they don't want to push them out."
James Waggoner, an analyst with Sand Brothers & Co. in New York, says the money Talk America owes to America Online is like peanuts to the multibillion-dollar company. Mr. Waggoner is also a customer of Talk America.
"It'd be silly for AOL to step in and say 'I make $30 billion and you make $50 million, I'll squash you,'" he says. "One way or another, AOL will step in. It's too small an amount for them to worry about."
Net losses for Talk America's second quarter ended June 30 ballooned to $62.7 million (80 cents per diluted share) from net losses of $891,000 (1 cent) for the like quarter the year before. The company said paying a one-time accounting charge of $36.8 million caused the increase. Diluted shares reflect the value of options, warrants and other securities convertible into common stock.
The stock reached its 52-week high back in September, trading at $8.06. Its 52-week low came a little over two weeks ago, trading at 50 cents on July 26. The stock closed at 68 cents on Friday. Mr. Waggoner is counting on the company to do a reverse stock split to bring the cost of the stock to about $2, preventing a delisting.
"They are at a risk for going to the pink sheets," Mr. Waggoner says. "That won't help their equity raising efforts."
Mr. Shook says that the company's past experience with debuting new products was not successful, and they are still working out the kinks of their latest products.
"It's causing a lot of friction and lowered expectations among stockholders," he says. "The actual number of subscribers has plateaued and come down."
The competition between companies such as Sprint, AT&T; and Talk America is pretty tight, Mr. Waggoner says.
"Gabe Battista came up with a good business model not a great one the local residential model, which is declining. The local market has proved to be frustrating. It's a brutally difficult market to enter."
Mr. Shook says just resolving the AOL issue could help the Talk America stock.
"They need better than expected success in their new markets or resolve the AOL issue, which is more in their control," Mr. Shook says, who rates the company neutral.
"It's a combination of reduced expectations and a lack of resolution on the AOL issue," he says. "If their revenue improves dramatically, we'll take a look at it, and may find it attractive."

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