12% CONVERTIBLE DEBENTURE DUE [FOUR MONTHS FROM DATE OF ISSUANCE]

 

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                                                                    EXHIBIT 4.1

 

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE

HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE

SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM

REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES

ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN

EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN

AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION

REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE

SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO

SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE

COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS

SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER

LOAN SECURED BY SUCH SECURITIES.

 

 

Original Issue Date: [________________________

Original Conversion Price (subject to adjustment herein): $0.20 OR A 10%

DISCOUNT TO THE PURCHASE PRICE OF EACH SHARE OF COMMON STOCK (OR CONVERSION

PRICE PER SHARE OF COMMON STOCK) ISSUED IN THE NEXT PRIVATE PLACEMENT CONDUCTED

BY THE COMPANY

 

                                                                $_______________

 

 

                            12% CONVERTIBLE DEBENTURE

                     DUE [FOUR MONTHS FROM DATE OF ISSUANCE]

 

         THIS DEBENTURE is one of a series of duly authorized and issued 12%

Convertible Debentures of China Evergreen Environmental Corp., a Nevada

corporation, having a principal place of business at 5/F, Guowei Building, 73

Xianlie Middle Road, Guangzhou, Guangdong, People's Republic of China (the

"COMPANY"), designated as its 12% Convertible Debenture, due [FOUR MONTHS FROM

DATE OF ISSUANCE] (the "DEBENTURE(S)").

 

         FOR VALUE RECEIVED, the Company promises to pay to ____________________

or its registered assigns (the "HOLDER"), or shall have paid pursuant to the

terms hereunder, the principal sum of $_______________ by [____________ , or

such earlier date as the Debentures are required or permitted to be repaid as

provided hereunder (the "MATURITY DATE"), and to pay interest to the Holder on

the aggregate unconverted and then outstanding principal amount of this

Debenture in accordance with the provisions hereof. This Debenture is subject to

the following additional provisions:

 

SECTION 1.         DEFINITIONS.

----------         ------------

 

         For the purposes hereof, in addition to the terms defined elsewhere in

this Debenture: (a) capitalized terms not otherwise defined herein have the

meanings given to such terms in the Subscription Agreement, and (b) the

following terms shall have the following meanings:

 

                  "ALTERNATE CONSIDERATION" shall have the meaning set forth in

         Section 5(d).

 

                  "BASE CONVERSION PRICE" shall have the meaning set forth in

         Section 5(b).

 

                  "BUSINESS DAY" means any day except Saturday, Sunday and any

         day which shall be a federal legal holiday in the United States or a

         day on which banking institutions in the State of New York are

         authorized or required by law or other government action to close.

 

                  "BUY-IN" shall have the meaning set forth in Section 4(d)(v).

 

                  "CHANGE OF CONTROL TRANSACTION" means the occurrence after the

         date hereof of any of (i) an acquisition after the date hereof by an

         individual or legal entity or "group" (as described in Rule 13d-5(b)(1)

         promulgated under the Exchange Act) of effective control (whether

         through legal or beneficial ownership of capital stock of the Company,

 

 

                                       1

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         by contract or otherwise) of in excess of 33% of the voting securities

         of the Company, or (ii) the Company merges into or consolidates with

         any other Person, or any Person merges into or consolidates with the

         Company and, after giving effect to such transaction, the stockholders

         of the Company immediately prior to such transaction own less than 33%

         of the aggregate voting power of the Company or the successor entity of

         such transaction, or (iii) the Company sells or transfers its assets,

         as an entirety or substantially as an entirety, to another Person and

         the stockholders of the Company immediately prior to such transaction

         own less than 33% of the aggregate voting power of the acquiring entity

         immediately after the transaction, (iv) a replacement at one time or

         within a three year period of more than one-half of the members of the

         Company's board of directors which is not approved by a majority of

         those individuals who are members of the board of directors on the date

         hereof (or by those individuals who are serving as members of the board

         of directors on any date whose nomination to the board of directors was

         approved by a majority of the members of the board of directors who are

         members on the date hereof), or (v) the execution by the Company of an

         agreement to which the Company is a party or by which it is bound,

         providing for any of the events set forth above in (i) or (iv).

 

                  "COMMON STOCK" means the common stock, par value $0.001 per

         share, of the Company and stock of any other class into which such

         shares may hereafter have been reclassified or changed.

 

                  "CONVERSION DATE" shall have the meaning set forth in Section

         4(a).

 

                  "CONVERSION PRICE" shall have the meaning set forth in Section

         4(b).

 

                  "CONVERSION SHARES" means the shares of Common Stock issuable

         upon conversion of Debentures.

 

                  "DEBENTURE REGISTER" shall have the meaning set forth in

         Section 2(c).

 

                   "DILUTIVE ISSUANCE" shall have the meaning set forth in

         Section 5(b).

 

                  "DILUTIVE ISSUANCE NOTICE" shall have the meaning set forth in

         Section 5(b).

 

                  "EFFECTIVENESS PERIOD" shall have the meaning given to such

         term in the Registration Rights Agreement.

 

                  "EVENT OF DEFAULT" shall have the meaning set forth in Section

         8.

 

                  "EXCHANGE ACT" means the Securities Exchange Act of 1934, as

         amended.

 

                  "FUNDAMENTAL TRANSACTION" shall have the meaning set forth in

         Section 5(d).

 

                  "INTEREST PAYMENT DATE" shall have the meaning set forth in

         Section 2(a).

 

                  "LATE FEES" shall have the meaning set forth in Section 2(d).

 

                  "MANDATORY PREPAYMENT AMOUNT" for any Debentures shall equal

         the sum of (i) the greater of: (A) 130% of the principal amount of

         Debentures to be prepaid, plus all accrued and unpaid interest thereon,

         or (B) the principal amount of Debentures to be prepaid, plus all other

         accrued and unpaid interest hereon, divided by the Conversion Price on

         (x) the date the Mandatory Prepayment Amount is demanded or otherwise

          due or (y) the date the Mandatory Prepayment Amount is paid in full,

         whichever is less, multiplied by the VWAP on (x) the date the Mandatory

         Prepayment Amount is demanded or otherwise due or (y) the date the

         Mandatory Prepayment Amount is paid in full, whichever is greater, and

         (ii) all other amounts, costs, expenses and liquidated damages due in

         respect of such Debentures.

 

                  "NEW YORK COURTS" shall have the meaning set forth in Section

          9(d).

 

                  "NOTICE OF CONVERSION" shall have the meaning set forth in

         Section 4(a).

 

 

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<PAGE>

 

                  "ORIGINAL ISSUE DATE" shall mean the date of the first

         issuance of the Debentures regardless of the number of transfers of any

         Debenture and regardless of the number of instruments which may be

         issued to evidence such Debenture.

 

                  "PERSON" means a corporation, an association, a partnership,

         organization, a business, an individual, a government or political

         subdivision thereof or a governmental agency.

 

                  "REGISTRATION RIGHTS AGREEMENT" means Section 5 of the

         Subscription Agreement, entitled "Registration Rights".

 

                  "REGISTRATION STATEMENT" means a registration statement

         meeting the requirements set forth in the Registration Rights

         Agreement, covering among other things the resale of the Conversion

         Shares and naming the Holder as a "selling stockholder" thereunder.

 

                  "SECURITIES ACT" means the Securities Act of 1933, as amended,

         and the rules and regulations promulgated thereunder.

 

                  "SUBSCRIPTION AGREEMENT" means the subscription agreement to

         which the Company and each original Holder is a party, with respect to

         the private placement which commenced on February 1, 2005.

 

                  "SUBSIDIARY" shall have the meaning given to such term in the

         Subscription Agreement.

 

                  "THRESHOLD PERIOD" shall have the meaning given to such term

         in Section 6(d).

 

                  "TRADING DAY" means a day on which the Common Stock is traded

         on a Trading Market.

 

                  "TRADING MARKET" means the following markets or exchanges on

         which the Common Stock is listed or quoted for trading on each date in

         question: the Nasdaq Over-the-Counter Bulletin Board, the Nasdaq

         SmallCap Market, the American Stock Exchange, the New York Stock

         Exchange or the Nasdaq National Market.

 

                  "TRANSACTION DOCUMENTS" shall mean this Debenture, the

         Subscription Agreement, the Warrants and any other documents or

         agreements executed in connection with the transactions contemplated

         under the Subscription Agreement.

 

                  "VWAP" means, for any date, the price determined by the first

         of the following clauses that applies: (a) if the Common Stock is then

         listed or quoted on a Trading Market, the daily volume weighted average

         price of the Common Stock for such date (or the nearest preceding date)

         on the Trading Market on which the Common Stock is then listed or

          quoted as reported by Bloomberg Financial L.P. (based on a Trading Day

         from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the

         Common Stock is not then listed or quoted on a Trading Market and if

         prices for the Common Stock are then quoted on the OTC Bulletin Board,

         the volume weighted average price of the Common Stock for such date (or

         the nearest preceding date) on the OTC Bulletin Board; (c) if the

         Common Stock is not then listed or quoted on the OTC Bulletin Board and

         if prices for the Common Stock are then reported in the "Pink Sheets"

         published by the Pink Sheets, LLC (or a similar organization or agency

         succeeding to its functions of reporting prices), the most recent bid

         price per share of the Common Stock so reported; or (c) in all other

         cases, the fair market value of a share of Common Stock as determined

         by an independent appraiser selected in good faith by the Holders and

          reasonably acceptable to the Company.

 

 

                                       3

<PAGE>

 

SECTION 2.         INTEREST.

----------         ---------

 

         a) PAYMENT OF INTEREST IN CASH OR KIND. The Company shall pay interest

to the Holder on the aggregate unconverted and then outstanding principal amount

of this Debenture at the rate of 12% per annum, payable monthly on the monthly

anniversary of the Original Issue Date, beginning on the first such date after

the Original Issue Date and on the Maturity Date (except that, if any such date

is not a Business Day, then such payment shall be due on the next succeeding

Business Day) (each such date, an "INTEREST PAYMENT DATE"), in cash.

 

         b) INTENTIONALLY OMITTED.

 

         c) INTEREST CALCULATIONS. Interest shall be calculated on the basis of

a 360-day year and shall accrue daily commencing on the Original Issue Date

until payment in full of the principal sum, together with all accrued and unpaid

interest and other amounts which may become due hereunder, has been made.

Payment of interest in shares of Common Stock shall otherwise occur pursuant to

Section 4(d)(ii) and only for purposes of the payment of interest in shares, the

Interest Payment Date shall be deemed the Conversion Date. Interest shall cease

to accrue with respect to any principal amount converted, provided that the

Company in fact delivers the Conversion Shares within the time period required

by Section 4(d)(ii). Interest hereunder will be paid to the Person in whose name

this Debenture is registered on the records of the Company regarding

registration and transfers of Debentures (the "DEBENTURE REGISTER"). Except as

otherwise provided herein, if at any time the Company pays interest partially in

cash and partially in shares of Common Stock, then such payment shall be

distributed ratably among the Holders based upon the principal amount of

Debentures held by each Holder.

 

         d) LATE FEE. All overdue accrued and unpaid interest to be paid

hereunder shall entail a late fee at the rate of 18% per annum (or such lower

maximum amount of interest permitted to be charged under applicable law) ("LATE

FEES") which will accrue daily, from the date such interest is due hereunder

through and including the date of payment. Notwithstanding anything to the

contrary contained herein, if on any Interest Payment Date the Company has

elected to pay interest in Common Stock and is not able to pay accrued interest

in the form of Common Stock because it does not then satisfy the conditions for

payment in the form of Common Stock set forth above, then, at the option of the

Holder, the Company, in lieu of delivering either shares of Common Stock

pursuant to this Section 2 or paying the regularly scheduled cash interest

payment, shall deliver, within three Trading Days of each applicable Interest

Payment Date, an amount in cash equal to the product of the number of shares of

Common Stock otherwise deliverable to the Holder in connection with the payment

of interest due on such Interest Payment Date and the highest VWAP during the

period commencing on the Interest Payment Date and ending on the Trading Day

prior to the date such payment is made.

 

         e) PREPAYMENT. Except as otherwise set forth in this Debenture, the

Company may not prepay any portion of the principal amount of this Debenture

without the prior written consent of the Holder.

 

SECTION 3.         REGISTRATION OF TRANSFERS AND EXCHANGES.

----------         ----------------------------------------

 

         a) DIFFERENT DENOMINATIONS. This Debenture is exchangeable for an equal

aggregate principal amount of Debentures of different authorized denominations,

as requested by the Holder surrendering the same. No service charge will be made

for such registration of transfer or exchange.

 

         b) INVESTMENT REPRESENTATIONS. This Debenture has been issued subject

to certain investment representations of the original Holder set forth in the

Subscription Agreement and may be transferred or exchanged only in compliance

with the Subscription Agreement and applicable federal and state securities laws

and regulations.

 

         c) RELIANCE ON DEBENTURE REGISTER. Prior to due presentment to the

Company for transfer of this Debenture, the Company and any agent of the Company

may treat the Person in whose name this Debenture is duly registered on the

Debenture Register as the owner hereof for the purpose of receiving payment as

herein provided and for all other purposes, whether or not this Debenture is

overdue, and neither the Company nor any such agent shall be affected by notice

to the contrary.

 

 

                                       4

<PAGE>

 

SECTION 4.           CONVERSION.

----------           ----------

 

         a) VOLUNTARY CONVERSION. At any time after the Original Issue Date

until this Debenture is no longer outstanding, this Debenture shall be

convertible into shares of Common Stock at the option of the Holder, in whole or

in part at any time and from time to time (subject to the limitations on

conversion set forth in Section 4(c) hereof). The Holder shall effect

conversions by delivering to the Company the form of Notice of Conversion

attached hereto as ANNEX A (a "NOTICE OF CONVERSION"), specifying therein the

principal amount of Debentures to be converted and the date on which such

conversion is to be effected (a "CONVERSION DATE"). If no Conversion Date is

specified in a Notice of Conversion, the Conversion Date shall be the date that

such Notice of Conversion is provided hereunder. To effect conversions

hereunder, the Holder shall not be required to physically surrender Debentures

to the Company unless the entire principal amount of this Debenture plus all

accrued and unpaid interest thereon has been so converted. Conversions hereunder

shall have the effect of lowering the outstanding principal amount of this

Debenture in an amount equal to the applicable conversion. The Holder and the

Company shall maintain records showing the principal amount converted and the

date of such conversions. The Company shall deliver any objection to any Notice

of Conversion within 1 Business Day of receipt of such notice. In the event of

any dispute or discrepancy, the records of the Holder shall be controlling and

determinative in the absence of manifest error. The Holder and any assignee, by

acceptance of this Debenture, acknowledge and agree that, by reason of the

provisions of this paragraph, following conversion of a portion of this

Debenture, the unpaid and unconverted principal amount of this Debenture may be

less than the amount stated on the face hereof.

 

         b) CONVERSION PRICE. The conversion price in effect on any Conversion

Date shall be equal to the lesser of (i) $0.20 or (ii) a 10% discount to the

purchase price of each share of Common Stock (or conversion price per share of

Common Stock) issued in the next private placement conducted by the Company

(subject to adjustment herein)(the "CONVERSION PRICE").

 

         c) CONVERSION LIMITATIONS. The Company shall not effect any conversion

of this Debenture, and the Holder shall not have the right to convert any

portion of this Debenture, pursuant to Section 4(a) or otherwise, to the extent

that after giving effect to such conversion, the Holder (together with the

Holder's affiliates), as set forth on the applicable Notice of Conversion, would

beneficially own in excess of 4.99% of the number of shares of the Common Stock

outstanding immediately after giving effect to such conversion. For purposes of

the foregoing sentence, the number of shares of Common Stock beneficially owned

by the Holder and its affiliates shall include the number of shares of Common

Stock issuable upon conversion of this Debenture with respect to which the

determination of such sentence is being made, but shall exclude the number of

shares of Common Stock which would be issuable upon (A) conversion of the

remaining, nonconverted portion of this Debenture beneficially owned by the

Holder or any of its affiliates and (B) exercise or conversion of the

unexercised or nonconverted portion of any other securities of the Company

(including, without limitation, any other Debentures or the Warrants) subject to

a limitation on conversion or exercise analogous to the limitation contained

herein beneficially owned by the Holder or any of its affiliates. Except as set

forth in the preceding sentence, for purposes of this Section 4(c), beneficial

ownership shall be calculated in accordance with Section 13(d) of the Exchange

Act. To the extent that the limitation contained in this section applies, the

determination of whether this Debenture is convertible (in relation to other

securities owned by the Holder) and of which a portion of this Debenture is

convertible shall be in the sole discretion of such Holder. To ensure compliance

with this restriction, the Holder will be deemed to represent to the Company

each time it delivers a Notice of Conversion that such Notice of Conversion has

not violated the restrictions set forth in this paragraph and the Company shall

have no obligation to verify or confirm the accuracy of such determination. For

purposes of this Section 4(c), in determining the number of outstanding shares

of Common Stock, the Holder may rely on the number of outstanding shares of

Common Stock as reflected in (x) the Company's most recent Form 10-QSB or Form

10-KSB, as the case may be, (y) a more recent public announcement by the Company

or (z) any other notice by the Company or the Company's Transfer Agent setting

forth the number of shares of Common Stock outstanding. Upon the written or oral

request of the Holder, the Company shall within two Trading Days confirm orally

and in writing to the Holder the number of shares of Common Stock then

outstanding. In any case, the number of outstanding shares of Common Stock shall

be determined after giving effect to the conversion or exercise of securities of

the Company, including this Debenture, by the Holder or its affiliates since the

 

 

                                       5

<PAGE>

 

date as of which such number of outstanding shares of Common Stock was reported.

The provisions of this Section 4(c) may be waived by the Holder upon, at the

election of the Holder, not less than 61 days' prior notice to the Company, and

the provisions of this Section 4(c) shall continue to apply until such 61st day

(or such later date, as determined by the Holder, as may be specified in such

notice of waiver).

 

         d) MECHANICS OF CONVERSION

 

                  i. CONVERSION SHARES ISSUABLE UPON CONVERSION OF PRINCIPAL

         AMOUNT. The number of shares of Common Stock issuable upon a conversion

         hereunder shall be determined by the quotient obtained by dividing (x)

         the outstanding principal amount of this Debenture to be converted by

         (y) the Conversion Price.

 

                  ii. DELIVERY OF CERTIFICATE UPON CONVERSION. Not later than

          three Trading Days after any Conversion Date, the Company will deliver

         to the Holder (A) a certificate or certificates representing the

         Conversion Shares which shall be free of restrictive legends and

         trading restrictions (other than those required by the Subscription

         Agreement) representing the number of shares of Common Stock being

         acquired upon the conversion of Debentures (including, if so timely

         elected by the Company, shares of Common Stock representing the payment

         of accrued interest) and (B) a bank check in the amount of accrued and

         unpaid interest (if the Company is required to pay accrued interest in

         cash). The Company shall, if available and if allowed under applicable

         securities laws, use its best efforts to deliver any certificate or

         certificates required to be delivered by the Company under this Section

         electronically through the Depository Trust Corporation or another

         established clearing corporation performing similar functions.

 

                  iii. FAILURE TO DELIVER CERTIFICATES. If in the case of any

         Notice of Conversion such certificate or certificates are not delivered

         to or as directed by the applicable Holder by the third Trading Day

         after a Conversion Date, the Holder shall be entitled by written notice

         to the Company at any time on or before its receipt of such certificate

         or certificates thereafter, to rescind such conversion, in which event

         the Company shall immediately return the certificates representing the

         principal amount of Debentures tendered for conversion.

 

                  iv. OBLIGATION ABSOLUTE; PARTIAL LIQUIDATED DAMAGES. If the

         Company fails for any reason to deliver to the Holder such certificate

         or certificates pursuant to Section 4(d)(ii) by the third Trading Day

         after the Conversion Date, the Company shall pay to such Holder, in

         cash, as liquidated damages and not as a penalty, for each $1000 of

         principal amount being converted, $10 per Trading Day (increasing to

         $20 per Trading Day after 5 Trading Days after such damages begin to

         accrue) for each Trading Day after such third Trading Day until such

         certificates are delivered. The Company's obligations to issue and

         deliver the Conversion Shares upon conversion of this Debenture in

         accordance with the terms hereof are absolute and unconditional,

          irrespective of any action or inaction by the Holder to enforce the

         same, any waiver or consent with respect to any provision hereof, the

         recovery of any judgment against any Person or any action to enforce

         the same, or any setoff, counterclaim, recoupment, limitation or

         termination, or any breach or alleged breach by the Holder or any other

         Person of any obligation to the Company or any violation or alleged

         violation of law by the Holder or any other person, and irrespective of

         any other circumstance which might otherwise limit such obligation of

         the Company to the Holder in connection with the issuance of such

         Conversion Shares; PROVIDED, HOWEVER, such delivery shall not operate

         as a waiver by the Company of any such action the Company may have

         against the Holder. In the event a Holder of this Debenture shall elect

         to convert any or all of the outstanding principal amount hereof, the

         Company may not refuse conversion based on any claim that the Holder or

         any one associated or affiliated with the Holder of has been engaged in

         any violation of law, agreement or for any other reason, unless, an

         injunction from a court, on notice, restraining and or enjoining

         conversion of all or part of this Debenture shall have been