Phonetime Inc.
TSX : PHD

Phonetime Inc.

August 25, 2010 17:02 ET

Phonetime Proposes Private Placement of Units

Placement to Convert Up to $2.3 Million of Outstanding Debt to Equity and Raise Up to $200,000 in Cash

PICKERING, ONTARIO--(Marketwire - Aug. 25, 2010) - Phonetime Inc. (TSX:PHD) announced today that it will be seeking shareholder approval, at its upcoming annual and special meeting of shareholders to be held on August 31, 2010, for a proposed private placement of Units comprised of common shares and common share purchase warrants, to convert up to $2.3 million of outstanding debt to equity and raise up to $200,000 in additional cash.

Background

On May 4, 2010, the Company issued $1,000,000 in Junior Subordinated Secured Short Term Notes to certain insiders and shareholders of the Company. The Notes, which bear interest at a rate of 15% per annum and are secured by a general security agreement over the assets of the Company, matured on July 31, 2010. Due to its severe financial condition, the Company could not repay the debt on maturity was forced to seek forbearance from the Noteholders. As well, in connection with the Company's acquisition of the Symphony Telecommunications business in December 2007, the Company remains indebted to the vendors of that business pursuant to a vendor take-back debenture. 

On August 4, 2010, the Company announced that it had agreed to issue an additional $1,000,000 in Junior Subordinated Secured Short Term Notes to certain insiders and shareholders of the Company, on the same terms as the earlier issuance. These Notes will mature on December 31, 2010. 

Management has determined that in view of the Company's current cash flow and debt service requirements, and the general severity of its financial condition, it is in the Company's best interests to pursue the conversion of outstanding debt into equity. Accordingly, Management has proposed a restructuring of the Notes and the Symphony debt whereby the $2 million principal amount of the Notes together with accrued and unpaid interest thereon, and a $200,000 portion of the outstanding Symphony debt, will be converted into equity by way of Units comprised of common shares and common share purchase warrants. At the same time, Management proposes to raise up to an additional $200,000 of cash in private placement equity offering of such Units. The Company intends to use the proceeds of the financing for working capital purposes. The proposed transaction, which consists of the conversion of the Notes and the Symphony debt (the "Debt Conversion") and the additional $200,000 private placement for cash (the "Additional Financing"), is expected to close by September 15, 2010, subject to the completion of definitive documentation and regulatory and shareholder approval.

Proposed Debt Conversion and Private Placement

The Company proposes to convert the $2 million outstanding principal amount of the Notes together with accrued and unpaid interest thereon, and a $200,000 portion of the outstanding Symphony debt, into approximately 32,857,143 Units, each of which is comprised of One Common Share of the Company, One Class D Common Share Purchase Warrant (a "Class D Warrant") and One Class E Common Share Purchase Warrant (a "Class E Warrant"). The Company will also concurrently offer to accredited investors up to an additional 2,857,142 Units at an offering price of $0.07 per Unit. Each Class D Warrant will be exercisable, for a period of six months following the Closing, into One Common Share of the Company at an exercise price of $0.07 per share. Each Class E Warrant will be exercisable, for a period of twelve months following the Closing, into One Common Share of the Company at an exercise price of $0.09 per share. The maximum number of Common Shares that could be issued under the Debt Conversion and Additional Financing (collectively, the "Private Placement") would be up to 107,142,855 million common shares, representing a dilution of approximately 94% of the Company's market capitalization. In the event that the Company were to issue all of the 107,142,855 common shares available for issuance under the Private Placement, including those common shares issuable upon the exercise of all of the Class D Warrants and Class E Warrants, the total value of the consideration received by the Company in respect thereof would amount to $8,214,285.

Insider Participation

Several of the participants in the Debt Conversion are insiders of the Company, and those and other insiders of the Company may also participate in the Additional Financing. As such, the transaction is a "related party transaction" under applicable Canadian securities laws; these laws provide for a financial hardship exemption from certain requirements applicable to such transactions on the basis that the issuer is in serious financial difficulty. The directors of the Company have unanimously determined that the Company meets the requirements of the financial hardship exemption, including that the financing is designed to improve the Company's financial situation and that its terms are reasonable in the circumstances of the Company.

Shareholder Approval

The number of common shares issuable by the Company pursuant to the Private Placement represents approximately 94% of the Company's market capitalization. At least 50% of the Units issuable pursuant to the Private Placement will be issued to insiders of the Company. In these circumstances, the Company is required to first obtain the approval of those shareholders of the Company who are not participants in the transaction or "associates" in respect of such participants (the "disinterested shareholders"). Accordingly, Shareholders will be asked to pass a resolution approving the issuance of up to 107,142,855 Common Shares in connection with the Private Placement. If this resolution is not passed, the Company will not give effect to the Private Placement.

Given the requirement for approval of the disinterested shareholders, of the 113,971,424 Common Shares outstanding as at July 15, 2010, to the knowledge of the Company approximately 9,527,336 Common Shares are not eligible to vote on the Private Placement. Additionally, an insider of the Company in respect of which one of the participants in the Debt Conversion may be considered to be an "associate" for purposes of the applicable legal requirements has advised the Company that it will voluntarily refrain from voting on the Private Placement the 28,650,000 Common Shares which it beneficially owns. Accordingly, an aggregate of 38,117,336 Common Shares will be withheld from voting on the Private Placement. To the extent that prior to the shareholder meeting any additional insiders of the Company subscribe for Units pursuant to the Additional Financing, the votes attaching to securities beneficially owned by such insiders and their associates will be excluded from the vote on the Private Placement.

Additional Disclosure

The Company has disclosed this proposal in the Management Information Circular dated August 5, 2010 delivered to its shareholders in connection with its upcoming shareholder meeting, and further disclosure has been provided in a Material Change Report filed today with securities regulatory authorities. Copies of these documents are available on SEDAR at www.sedar.com.

About Phonetime Inc.

Phonetime is an international telecommunications Network carrier. Phonetime provides long-distance services to major telephone carriers around the world. Phonetime's common shares trade on the Toronto Stock Exchange under the symbol PHD. More information can be found at the Company's website, www.phonetime.com.

Caution Regarding Forward Looking Information:

This press release contains forward-looking statements, which may be identified by words like "expects", "anticipates", "plans", "intends", "indicates" or similar expressions. These statements are not a guarantee of future performance and are inherently subject to risks and uncertainties. Phonetime's actual results could differ materially from those currently anticipated due to a number of factors set forth in reports and other documents filed by the Company with Canadian securities regulatory authorities from time to time.

Contact Information