NAT -- summary under Convertible Debentures

General

Offering by NAT of $10 million of 10.00% convertible subordinated debentures at their principal amount ($1,000 per debenture), and with a maturity date of September 30, 2017. The interest is payable semi-annually in arrears. The debentures are partially secured with a limited recourse guarantee of a US subsidiary, namely, a guarantee which is secured by assets with an initial acquisition cost of $5.5 million, and with recourse under the guarantee limited to those assets.

Terms

Generally similar to the ENTREC offering above, except that they are redeemable by NAT afer September 30, 2015 and until maturity if the sustained trading price is at a 25% premium to the $2.90 conversion price (i.e., no subsequent window during which they are redeemable at par), and the amortizing change-of-control conversion premium is 31.26% rather than 35%.

Business/pro forma capitalization

NAT is a BC corporation which processes "bast" feed-stocks such as flax into spinnable, knittable and weavable fibers, and dissolving pulp. It has pro forma debt of $10 million (i.e., only these convertible debentures) and shareholders' equity of U.S.$39.1 million. (Negative) earnings coverage ratio of worse than -7.

Canadian tax consequences

"Generally, a Resident Holder who converts a Debenture into Common Shares (or Common Shares and cash delivered in lieu of a fraction of a Common Share) pursuant to the conversion privilege will be deemed not to have disposed of the Debenture... ." The tax disclosure also states (subject to the increasingly common thin cap exclusion) that an arm's length non-resident generally will not be subject to withholding tax on interest, but states that "this conclusion depends in part on an interpretation of CRA policy that is not fully clear or definitive...and counsel has not provided a legal opiniion, in this regard." The Risk Factors contain a detailed discussion of the point.