Unassociated Document
Filed
Pursuant to Rule 424(b)(3)
SB-2
Registration Statement
SEC
File
No. 333-147098
PROSPECTUS
SUPPLEMENT NO. 1
Prospectus
Supplement dated January 31, 2008
(To
Prospectus dated December 5, 2007)
CHINA
NATURAL GAS, INC.
This
prospectus supplement dated January 31, 2008 supplements and amends the
Prospectus dated December 5, 2007 (the “Prospectus”) relating to the offer and
sale by the selling stockholders identified in the Prospectus of up to 5,382,693
shares of our common stock.
You
should read this prospectus supplement in conjunction with the Prospectus.
This
prospectus supplement is qualified by reference to the Prospectus, except to
the
extent that the information contained in this prospectus supplement supersedes
the information contained in the Prospectus. This prospectus supplement is
not
complete without, and may not be delivered or utilized except in connection
with, the Prospectus, including any amendments or additional supplements
thereto. Capitalized terms used in this prospectus supplement but not otherwise
defined herein shall have the meanings given to such terms in the Prospectus.
Our
common stock is quoted on the OTC Bulletin Board under the symbol “CHNG.”
The
last
reported sales price per share of our common stock, as reported by the OTC
Bulletin Board on January 30, 2008, was $7.02.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 5 of the Prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
supplement or the Prospectus is truthful or complete. Any representation to
the
contrary is a criminal offense.
The
date
of this prospectus supplement is January 31, 2008.
Summary
of Material Transaction
On
December 30, 2007, China Natural Gas, Inc. (the “Company”) entered into a
Securities Purchase Agreement (as amended, the “Purchase Agreement”) with Abax
Lotus Ltd. (the “Investor”). The Purchase Agreement was subsequently amended on
January 29, 2008, pursuant to which the Company (i) agreed to issue to the
Investor 5.00% Guaranteed Senior Notes due 2014 (the “Senior Notes”) in
aggregate principal amount of RMB 145,000,000 (approximately $20,000,000),
(ii)
agreed to issue to the Investor Senior Notes in aggregate principal amount
of
RMB145,000,000 (approximately $20,000,000) on or before March 3, 2008 subject
to
the Company meeting certain closing conditions, (iii) granted the Investor
an
option to purchase up to RMB 73,000,000 (approximately $10,000,000) in principal
amount of its Senior Notes and (iv) agreed to issue to the Investor seven-year
warrants exercisable for up to 2,900,000 shares of the Company’s common stock
(the “Warrants”) at an initial exercise price equal to $7.3652 per share,
subject to certain adjustments.
On
January 29, 2008, the Company completed the sale of RMB145,000,000 in principal
amount of the Senior Notes and the issuance of the warrants pursuant to the
Purchase Agreement. At the closing, the Company entered into:
| · |
An
indenture for the 5.00% Guaranteed Senior Notes due
2014;
|
| · |
An
investor rights agreement;
|
| · |
A
registration rights agreement covering the shares of common stock
issuable
upon exercise of the warrants;
|
| · |
An
information rights agreement that grants to the Investor, subject
to
applicable law, the right to receive certain information regarding
the
Company, and
|
| · |
A
share pledge agreement whereby the Company granted to the Collateral
Agent
(on behalf of the holders of the Senior Notes) a pledge on 65% of
the
Company’s equity interest in Shaanxi Xilan Natural Gas Equipment Co.,
Ltd., a PRC corporation and wholly-owned subsidiary of the Company.
|
| · |
An
account pledge and security agreement whereby the Company granted
to the
Collateral Agent a security interest in the account where the proceeds
from the Senior Notes are
deposited.
|
In
addition, Qinan Ji, Chief Executive Officer and Chairman of the Board of the
Company, executed non-competition agreements for the benefit of the
Investor.
The
Senior Note in the amount of RMB 145,000,000 was issued pursuant to an indenture
between the Company and DB Trustees (Hong Kong) Limited, as trustee, at the
closing. The Senior Notes will be due in January 2014 and will initially bear
interest at the stated interest rate of 5.00% per annum, subject to increase
in
the event of certain circumstances described herein.
The
Warrants were issued pursuant to a warrant agreement between the Company,
Deutsche Bank AG, Hong Kong Branch, as the warrant agent and Deutsche Bank
Luxembourg S.A. as warrant registrar.
The
Company also paid the Investor an arrangement fee of $1.6 million.
Material
Terms of Senior Notes
Maturity
and Redemption
The
Senior Notes will mature on January 30, 2014. The Company is required to make
mandatory prepayments on the Senior Notes on the following dates and in the
following amounts, expressed as a percentage of the aggregate principal amount
of Notes that will be outstanding on the first such payment date:
|
Date
|
|
|
Prepayment
Amount
|
|
|
July
30, 2011
|
|
|
8.3333
|
%
|
|
January
30, 2012
|
|
|
8.3333
|
%
|
|
July
30, 2012
|
|
|
16.6667
|
%
|
|
January
30, 2013
|
|
|
16.6667
|
%
|
|
July
30, 2013
|
|
|
25.0000
|
%
|
During
the twelve month period commencing January 30 of the years set forth below, the
Company may redeem the Senior Notes at the following percentage of the principal
amount:
|
Year
|
|
|
Percent
of
Principal
|
|
|
2009
|
|
|
108.0
|
%
|
|
2010
|
|
|
106.0
|
%
|
|
2011
|
|
|
104.0
|
%
|
|
2012
|
|
|
102.0
|
%
|
|
2013
and thereafter
|
|
|
100.0
|
%
|
Upon
the
happening of certain events defined in the indenture, the Company must offer
the
holders of the Senior Notes the right to require the Company to purchase the
Senior Notes in an amount equal to 105% of the aggregate principal amount
purchased plus accrued and unpaid interest on the Senior Notes purchased.
Payment
of Additional Interest
The
indenture requires the Company to pay additional interest at the rate of 3.0%
per annum of the Senior Notes if the Company has not obtained a listing of
its
common stock on the Nasdaq Global Market, the Nasdaq Capital Market or the
New
York Stock Exchange by January 29, 2009 and maintained such listing continuously
thereafter as long as the Senior Notes are outstanding. Pursuant to the
registration rights agreement (described herein), the Company has agreed to
pay
additional interest at the rate of 1.0% per annum of the Senior Notes principal
amount outstanding for each 90-day period in which the Company has failed to
comply with the registration obligations under the registration rights
agreement.
Covenants
The
indenture limits the Company's ability to incur debt and liens, make dividend
payments and stock repurchases, make investments, reinvest proceeds from asset
sales and enter into transactions with affiliates, among other things. The
indenture also requires the Company to maintain certain financial
ratios.
Investor
Rights Agreement
The
Company also entered into an investor rights agreement, pursuant to which,
as
long as an investor holds at least 10% of the aggregate principal amount of
the
Senior Notes issued and outstanding or at least 3% of the Company’s issued and
outstanding common stock pursuant to the warrants on an as-exercised basis
(“Minimum Holding”), the Company has agreed not to undertake certain corporate
actions without prior Investor approval. In addition, so long as an Investor
owns the Minimum Holding, such Investor shall have a right of first refusal
for
future debt securities offerings by the Company and the Company is subject
to
certain transfer restrictions on its securities and certain other
properties.
From
the
Closing Date and as long as the Investor continues to hold more than 10% of
the
outstanding shares of common stock on an as-converted, fully-diluted basis,
the
Investor shall be entitled to appoint one of the Company’s board of directors
(the “Investor Director”). The Investor Director shall be entitled to serve on
each committee of the board, except that, the Investor Director shall not serve
on the audit committee unless it is an independent director. Mr. Ji has agreed
to vote his shares for the election of the Investor Director.
The
Company is required to prepare and file a registration statement covering the
sales of all of the shares of common stock issuable upon exercise of the
warrants (the “Warrant Shares”), subject to any limitation required by
applicable of Rule 415 of the SEC pursuant to the Securities Act of 1933 and
to
have the registration statement declared effective by June 27, 2008. In the
event that the registration statement has not been declared effective by the
SEC
on or before June 27, 2008 or if effectiveness of the registration statement
is
suspended at any time other than pursuant to a suspension notice, for each
90-day period during which the registration default remains uncured, the Company
shall be required to pay additional interest at the rate of one percent (1%)
of
the Senior Notes.
Warrants
The
exercise price of the Warrants is adjusted on the first anniversary of issuance
and thereafter, at every six month anniversary beginning in the fiscal year
2009
if the volume weighted average price, or VWAP, (as defined therein) for the
15
trading days prior to the applicable reset date is less than the then applicable
exercise price, in which case the exercise price shall be adjusted downward
to
the then current VWAP; provided, however, that in no event shall the exercise
price be adjusted below $3.6826 per share.
If
the
Company’s consolidated net profit after tax does not reach the stated level for
2007 or 2008, the exercise price of the warrants shall be adjusted by
multiplying the current exercise price by a fraction, the numerator of which
is
the sum of (i) the number of shares of the Company’s common stock outstanding
immediately prior to such adjustment and (ii) 87,000, and the denominator of
which is the number of shares of the Company’s common stock outstanding
immediately prior to such adjustment. Pursuant to the terms of the warrant
agreement, a holder cannot exercise the Warrants to the extent that the number
of shares of Common Stock beneficially owned by the holder would, following
such
exercise, exceed 9.9% of the outstanding shares of common stock at the time
of
exercise.
The
above
description, which summarizes the material terms of the Securities Purchase
Agreement, the Amendment to the Securities Purchase Agreement, the Warrant
Agreement and other related agreements, is not complete. Please read the full
text of the Securities Purchase Agreement, the Amendment to the Securities
Purchase Agreement, the Warrant Agreement and other related agreements, which
have been filed with the Securities and Exchange Commission as Exhibits to
an
8-K Current Report on January 29, 2008. This foregoing description is qualified
in its entirety by the terms of the definitive documents or forms thereof which
are attached as exhibits to such 8-K Current Report and which are incorporated
by reference.