Catalyst challenges IMAX consent solicitation for 9 5/8% notes; IMAX executes supplemental indenture

By Jennifer Chiou

New York, April 16 - Significant noteholder Catalyst Fund Limited Partnership II is challenging the validity of process and IMAX Corp.'s alleged receipt of required consents from holders of its senior notes, according to a letter from Catalyst to IMAX.

Catalyst specifically refuted IMAX's statement that it has received the majority vote needed for the consent solicitation to succeed and also challenged the validity of IMAX's effort to extend the solicitation period.

The solicitation to provide IMAX with additional time to file its 10-K annual report for 2006 began on April 3.

On April 13, IMAX said it received consents from the holders of a majority of its $160 million of 9 5/8% senior notes due Dec. 1, 2010.

The consents allowed the company to extend the deadline to file its 10-K annual report for the year ended Dec. 31 until May 31 or, at the company's option, until June 30. The consents also waived any defaults arising due to the company's failure to file the report, according to an IMAX news release.

The consent solicitation deadline was 12:01 p.m. ET on April 16, extended from April 12. As of the deadline, the company had received consents from holders of $95.4 million, or 59.61%, of the notes.

In addition, the company executed a supplemental indenture on April 16 to effect the amendments and waiver, and it has become effective.

In the letter, Catalyst said that IMAX's press release "appears to be either materially misleading or, at a minimum, seriously confusing."

The letter added that the release also "appears to suggest that prior press releases that IMAX has issued - in particular, a press release that it issued on April 3, 2007, when it formally commenced the consent solicitation - were false and misleading.

"IMAX disclosed that, although it had announced in its April 3 press release that it had obtained two-thirds of the consents that it required (which would amount to consents from holders of approximately $53.3 million of the senior notes), consents for at least $25.1 million of that amount (or 47%) could not, in fact, be obtained by the then-effective expiration date for the consent solicitation.

"To the extent that IMAX obtained consents after the April 3 press release but before [Monday's] new disclosure (which appears intended to correct the prior misstatement), IMAX obtained those consents based on false and/or misleading statements. Thus, those consents are not valid, and no waiver of any default can be effected by those consents," the Catalyst letter said.

Catalyst alleged that the representation that IMAX had already obtained two-thirds of the required consents appears to have been specifically calculated to entice other noteholders to submit their consents.

In addition, Catalyst said that noteholders were rushed to consent in order to avoid losing the consent fee.

According to the letter, IMAX appears to concede that the process was flawed, given that it has included what appears intended to be curative information in Monday's press release and has extending the solicitation period until April 16.

Catalyst noted that, under the terms of the consent solicitation statement, the solicitation period may be extended only if the requisite consents have not been received by the expiration date. Because IMAX said it has received the necessary consents, Catalyst pointed out in its letter that the company may not extend the solicitation period.

In its letter, Catalyst said that "IMAX is required to clarify the issues raised above before any amendment of the relevant trust indenture can be made.

"Unless and until IMAX provides such clarification, Catalyst will oppose any amendment to that trust indenture and contends that there has not been an effective waiver of IMAX's defaults under that indenture," Catalyst added in the letter.

On April 5, Catalyst said it was working with a group of noteholders to ensure that the serious issues linked to the consent solicitation and IMAX's financial reporting failures were addressed.

In addition, Catalyst previously noted that the waiver request came at a time when Standard & Poor's and Moody's Investors Service put the credit rating of the bonds under negative review.

As previously reported, the opposing noteholders alleged that there are at least two serious flaws in the consent solicitation itself, in addition to at least three serious concerns regarding the process and circumstances under which IMAX has undertaken to obtain the waiver and amend the note indenture.

They said that the waiver and amendment in the consent solicitation are broader than portrayed by IMAX in its public statements relating to the waiver. Noteholders highlighted one proposed waiver, which purports to waive "any past default or event of default" arising out of IMAX's failure to comply with the Section 1019 reporting provisions of the indenture.

Given that the company has publicly acknowledged potentially serious accounting and reporting issues spanning six years or more, noteholders previously said that it was unclear whether the requested waiver is intended to cover not only the current 10-K annual report, but any other potential defaults arising out of any infirmities in prior financial reporting.

The opposing noteholders also contended that the proposed 1% consent fee is woefully insufficient even if the waiver were limited to the reporting requirements for the year ended Dec. 31.

Further, the noteholders intended to explore any potential wrongdoing by IMAX in connection with the company's delay in advising noteholders of IMAX's inability to meet its financial reporting deadlines.

The opposing noteholders were also concerned that despite the company having filed a 12b-25 notification of late filing with the Securities and Exchange Commission on March 16 and having indicated that its 10-K filing was expected to be made within a 15-day grace period, IMAX apparently sought, only days later, a waiver under its bank credit agreement - prior to advising the noteholders or the public generally that it would be unable to file its 10-K report within the 15-day grace period.

Finally, the holders took note of IMAX's apparent solicitation of only certain noteholders prior to initiation of the formal consent solicitation and said this raises serious concerns about the process undertaken by IMAX and potential violation of the indenture terms.

The Toronto-based motion picture technology company and theater operator previously said that it already had 67% of the necessary approvals from noteholders.

As previously disclosed, IMAX said it would have further delays with the annual report as well as the corresponding filings under Canadian provincial securities laws, pushing them beyond the March 31 deadline.

Noteholders who consent will receive a fee of $10.00 per $1,000 principal amount for the extension to May 31 (plus applicable cure period). IMAX will have the option to extend the deadline to June 30 (plus applicable cure period) on payment of an additional $5.00 fee.

IMAX said previously that it had already obtained a waiver under its bank credit agreement of the covenant to deliver its audited financial statements until June 30.

Management and the audit committee of the board of directors are evaluating certain accounting errors over a six-year period. As a result, IMAX said it expects to file restated financial statements for certain periods during those years.

After receiving comments from the SEC and the Ontario Securities Commission, the company said it will broaden its review, primarily in connection with its revenue recognition for certain theater system installations in previous periods, including the fourth quarter of 2005.

IMAX said that it and its auditors, PricewaterhouseCoopers LLP, may determine that it is necessary to restate additional items beyond the previously identified errors.

The company previously added that it does not believe that a potential restatement resulting from changes to its revenue recognition accounting would have any impact on its previously reported or existing cash accounts.

As already reported, IMAX said it cannot predict when it will complete this review and file its 10-K, adding that it does not believe its operations will be impacted by any delays in filing.

In addition, the company received a notice of delisting from Nasdaq on April 3 as a result of the delayed filing.

Catalyst said it encourages other noteholders to contact Gabriel de Alba (416 945-3020).

Global Bondholder Services Corp. is information agent and tabulation agent for the solicitation (866 857-2200 or 212 430-3774). Credit Suisse is solicitation agent (contact Liability Management Group at 212 325-7596).

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