Document:

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                                                                    EXHIBIT 4.01

THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER
REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION ("DTC"), TO A NOMINEE OF DTC OR BY DTC OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC
TO CITIGROUP GLOBAL MARKETS HOLDINGS INC. OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

No. R-1                                           INITIAL PRINCIPAL AMOUNT
CUSIP  173073 44 6                                REPRESENTED $82,000,000
                                                  representing 8,200,000 ELKS
                                                  ($10 per ELKS)

                     CITIGROUP GLOBAL MARKETS HOLDINGS INC.
       Equity Linked Securities (ELKS(R)) based upon the Common Stocks of
    Applied Materials, Inc., General Electric Company, The Home Depot, Inc.,
           J.P. Morgan Chase & Co. and Pfizer Inc. due August 30, 2004

      Citigroup Global Markets Holdings Inc., a New York corporation
(hereinafter referred to as the "Company", which term includes any successor
corporation under the Indenture herein referred to), for value received and on
condition that this Note is not redeemed by the Company prior to August 30, 2004
(the "Stated Maturity Date"), hereby promises to pay to CEDE & CO., or its
registered assigns, the Maturity Payment (as defined below), on the Stated
Maturity Date. This Note will bear semi-annual payments of interest, is not
subject to any sinking fund, is not subject to redemption at the option of the
Holder thereof prior to the Stated Maturity Date, and is not subject to the
defeasance provisions of the Indenture.

      Payment of the Maturity Payment with respect to this Note shall be made
upon presentation and surrender of this Note at the corporate trust office of
the Trustee in the Borough of Manhattan, The City and State of New York, in such
coin or currency of the United States as at the time of payment is legal tender
for payment of public and private debts or, if applicable, in the common stocks
of Applied Materials, Inc. ("Applied Materials"), General Electric Company
("General Electric"), The Home Depot, Inc. ("Home Depot"), J.P. Morgan Chase &
Co. ("J.P. Morgan Chase") and Pfizer Inc. ("Pfizer").

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      This Note is one of the series of Equity Linked Securities based upon the
common stocks of Applied Materials, General Electric, Home Depot, J.P. Morgan
Chase and Pfizer due August 30, 2004 (the "ELKS").

COUPON

      A coupon of $0.6000 per ELKS will be paid in cash on February 27, 2004 and
a coupon of $0.6100 per ELKS will be paid in cash on August 30, 2004. The
February 27, 2004 coupon will be composed of $0.0649 of interest and a partial
payment of an option premium in the amount of $0.5351. The August 30, 2004
coupon will be composed of $0.0660 of interest and a partial payment of an
option premium in the amount of $0.5440. Coupon payments will be payable to the
persons in whose names the ELKS are registered at the close of business on the
fifth Business Day preceding each Interest Payment Date. If an Interest Payment
Date falls on a day that is not a Business Day, the coupon payment to be made on
such Interest Payment Date will be made on the next succeeding Business Day with
the same force and effect as if made on such Interest Payment Date, and no
additional interest will accrue as a result of such delayed payment.

      "Business Day" means any day that is not a Saturday, a Sunday or a day on
which the AMEX or banking institutions or trust companies in the City of New
York are authorized or obligated by law or executive order to close.

      The interest portion of the coupon will represent interest accruing at a
rate of 1.2975% per annum from August 27, 2003 or from the most recent Interest
Payment Date to which the interest portion of the coupon has been paid or
provided for until maturity. The interest portion of the coupon will be computed
on the basis of a 360-day year of twelve 30-day months.

PAYMENT AT MATURITY

      On the Stated Maturity Date, Holders of the ELKS will receive for each
ELKS the Maturity Payment described below.

DETERMINATION OF THE MATURITY PAYMENT

      The Maturity Payment for each ELKS will equal either:

      -     a number of shares of the underlying stock that has experienced the
            greatest Percentage Decline equal to the Exchange Ratio for that
            underlying stock, if the Closing Price of that stock on the third
            Trading Day before the Stated Maturity Date is less than 85% of its
            Initial Share Price, or

      -     $10 in cash.

      In lieu of any fractional share of any stock otherwise payable in respect
of any ELKS, at the Stated Maturity Date, the Holder of this Note will receive
an amount in cash equal to the value of such fractional share. The number of
full shares of stock, and any cash in lieu of a

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fractional share, to be delivered at the Stated Maturity Date to the Holder of
this Note will be calculated based on the aggregate number of ELKS held by such
Holder.

      For purposes of calculating the Maturity Payment, the "Percentage Decline"
experienced by any underlying stock shall be equal to a fraction, the numerator
of which is (a) the Initial Share Price of that underlying stock minus (b) the
Closing Price of that underlying stock on the third Trading Day before the
Stated Maturity Date, and the denominator of which is the Initial Share Price of
that underlying stock. If the numerator of the fraction described in the
preceding sentence is a negative number with respect to any underlying stock,
the Percentage Decline experienced by that underlying stock will be deemed to
equal zero.

      The "Initial Share Price" equals:

      -     $21.32 with respect to the common stock of Applied Materials, the
            Closing Price of that common stock on August 22, 2003;

      -     $29.88 with respect to the common stock of General Electric, the
            Closing Price of that common stock on August 22, 2003;

      -     $32.80 with respect to the common stock of Home Depot, the Closing
            Price of that common stock on August 22, 2003;

      -     $33.92 with respect to the common stock of J.P. Morgan Chase, the
            Closing Price of that common stock on August 22, 2003; and

      -     $29.55 with respect to the common stock of Pfizer, the Closing Price
            of that common stock on August 22, 2003.

      The "Exchange Ratio" equals:

      -     0.55182 with respect to the common stock of Applied Materials;

      -     0.39373 with respect to the common stock of General Electric;

      -     0.35868 with respect to the common stock of Home Depot;

      -     0.34684 with respect to the common stock of J.P. Morgan Chase; and

      -     0.39813 with respect to the common stock of Pfizer.

      The "Closing Price" of any underlying stock (or any other security for
which a Closing Price must be determined) on any date of determination will be
(1) if that underlying stock or security is listed on a national securities
exchange on that date of determination, the closing sale price or, if no closing
sale price is reported, the last reported sale price on that date on the
principal U.S. exchange on which that underlying stock or security is listed or
admitted to trading, (2) if that underlying stock or security is not listed on a
national securities exchange on that date of determination, or if the closing
sale price or last reported sale price is not obtainable (even if that
underlying stock or security is listed or admitted to trading on such exchange),
and that underlying stock or security is quoted on the Nasdaq National Market,
the closing sale price or, if no closing sale price is reported, the last
reported sale price on that date as reported on the Nasdaq, and (3) if that
underlying stock or security is not quoted on the Nasdaq on that date of

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determination or, if the closing sale price or last reported sale price is not
obtainable (even if that underlying stock or security is quoted on the Nasdaq),
the last quoted bid price for that underlying stock or security in the
over-the-counter market on that date as reported by the OTC Bulletin Board, the
National Quotation Bureau or a similar organization. If no closing sale price or
last reported sale price is available pursuant to clauses (1), (2) or (3) of the
preceding sentence or if there is a Market Disruption Event, the Closing Price
on any date of determination will be the arithmetic mean, as determined by the
calculation agent, of the bid prices of the applicable underlying stock or
security obtained from as many dealers in such stock or security (which may
include Citigroup Global Markets Inc. or any of our other subsidiaries or
affiliates), but not exceeding three such dealers, as will make such bid prices
available to the calculation agent. A security "quoted on the Nasdaq National
Market" will include a security included for listing or quotation in any
successor to such system and the term "OTC Bulletin Board" will include any
successor to such service.

      A "Market Disruption Event" means the occurrence or existence of any
suspension of or limitation imposed on trading (by reason of movements in price
exceeding limits permitted by any exchange or market or otherwise) of, or the
unavailability, through a recognized system of public dissemination of
transaction information, of accurate price, volume or related information in
respect of, (1) the shares of any underlying stock (or any other security for
which a Closing Price must be determined) on any exchange or market, or (2) any
options contracts or futures contracts relating to the shares of any underlying
stock (or other security), or any options on such futures contracts, on any
exchange or market if, in each case, in the determination of the calculation
agent, any such suspension, limitation or unavailability is material.

      A "Trading Day" means a day, as determined by the calculation agent, on
which trading is generally conducted (or was scheduled to have been generally
conducted, but for the occurrence of a Market Disruption Event) on the New York
Stock Exchange, the AMEX, the Nasdaq National Market, the Chicago Mercantile
Exchange and the Chicago Board Options Exchange, and in the over-the-counter
market for equity securities in the United States.

      If two or more underlying stocks have experienced the same percentage
decline in price from August 22, 2003 to the third Trading Day before maturity,
as determined by the calculation agent, and if their closing prices on the third
Trading Day before maturity are less than 85% of their Initial Share Prices,
then the Holder of this Note will receive at maturity shares of each of those
underlying stocks. The number of shares of each of those underlying stocks that
the Holder of this Note will receive per ELKS in this case will be equal to the
Exchange Ratio for that underlying stock divided by the number of underlying
stocks that have experienced the same percentage decline in price.

DILUTION ADJUSTMENTS

      If the issuer of any underlying stock, after the closing date of the
offering of the ELKS,

      (1)   pays a stock dividend or makes a distribution with respect to its
            common stock in shares of the stock,

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      (2)   subdivides or splits the outstanding shares of its common stock into
            a greater number of shares,

      (3)   combines the outstanding shares of its common stock into a smaller
            number of shares, or

      (4)   issues by reclassification of shares of its common stock any shares
            of other common stock of that issuer,

then, in each of these cases, the Exchange Ratio for that underlying stock will
be multiplied by a dilution adjustment equal to a fraction, the numerator of
which will be the number of shares of common stock outstanding immediately after
the event, plus, in the case of a reclassification referred to in (4) above, the
number of shares of other common stock of that issuer, and the denominator of
which will be the number of shares of common stock outstanding immediately
before the event. The Initial Share Price of that underlying stock will also be
adjusted in that case in the manner described below.

      If the issuer of an underlying stock, after the closing date, issues, or
declares a record date in respect of an issuance of, rights or warrants to all
holders of its common stock entitling them to subscribe for or purchase shares
of its common stock at a price per share less than the Then-Current Market Price
of that underlying stock, other than rights to purchase common stock pursuant to
a plan for the reinvestment of dividends or interest, then, in each of these
cases, the Exchange Ratio for that underlying stock will be multiplied by a
dilution adjustment equal to a fraction, the numerator of which will be the
number of shares of common stock of that issuer outstanding immediately before
the adjustment is effected, plus the number of additional shares of common stock
offered for subscription or purchase pursuant to the rights or warrants, and the
denominator of which will be the number of shares of common stock of that issuer
outstanding immediately before the adjustment is effected by reason of the
issuance of the rights or warrants, plus the number of additional shares of
common stock which the aggregate offering price of the total number of shares of
common stock offered for subscription or purchase pursuant to the rights or
warrants would purchase at the Then-Current Market Price of that underlying
stock, which will be determined by multiplying the total number of shares so
offered for subscription or purchase by the exercise price of the rights or
warrants and dividing the product obtained by the Then-Current Market Price of
that underlying stock. To the extent that, after the expiration of the rights or
warrants, the shares of common stock offered thereby have not been delivered,
the Exchange Ratio for that underlying stock will be further adjusted to equal
the Exchange Ratio which would have been in effect had the adjustment for the
issuance of the rights or warrants been made upon the basis of delivery of only
the number of shares of common stock actually delivered. The Initial Share Price
of that underlying stock will also be adjusted in that case in the manner
described below.

      If the issuer of any underlying stock, after the closing date, declares or
pays a dividend or makes a distribution to all holders of the common stock of
any class of its capital stock, the capital stock of one or more of its
subsidiaries, evidences of its indebtedness or other non-cash assets, excluding
any dividends or distributions referred to in the above paragraph, or issues to
all holders of its common stock rights or warrants to subscribe for or purchase
any of its or one

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or more of its subsidiaries' securities, other than rights or warrants referred
to in the above paragraph, then, in each of these cases, the Exchange Ratio for
that underlying stock will be multiplied by a dilution adjustment equal to a
fraction, the numerator of which will be the Then-Current Market Price of one
share of that underlying stock, and the denominator of which will be the
Then-Current Market Price of one share of that underlying stock, less the fair
market value (as determined by a nationally recognized independent investment
banking firm retained for this purpose by the Company, whose determination will
be final) as of the time the adjustment is effected of the portion of the
capital stock, assets, evidences of indebtedness, rights or warrants so
distributed or issued applicable to one share of that underlying stock. The
Initial Share Price of that underlying stock will also be adjusted in that case
in the manner described below.

      Notwithstanding the foregoing, in the event that, with respect to any
dividend or distribution to which the above paragraph would otherwise apply, the
denominator in the fraction referred to in the above formula is less than $1.00
or is a negative number, then the Company may, at its option, elect to have the
adjustment provided by the above paragraph not be made and, in lieu of this
adjustment, the Closing Price of the applicable underlying stock on the third
Trading Date before the Stated Maturity Date will be deemed to be equal to the
fair market value of the capital stock, assets, evidences of indebtedness,
rights or warrants (determined, as of the date this dividend or distribution is
made, by a nationally recognized independent investment banking firm retained
for this purpose by the Company, whose determination will be final) so
distributed or issued applicable to one share of that underlying stock and, if
that underlying stock has experienced the greatest Percentage Decline, each
holder of the ELKS will have the right to receive at maturity cash in an amount
per ELKS equal to the Exchange Ratio for that underlying stock multiplied by
such fair market value.

      If the issuer of any underlying stock, after the closing date, declares a
record date in respect of a distribution of cash, other than any Permitted
Dividends described below, any cash distributed in consideration of fractional
shares of common stock and any cash distributed in a Reorganization Event
referred to below, by dividend or otherwise, to all holders of its common stock,
or makes an Excess Purchase Payment, then the Exchange Ratio for that underlying
stock will be multiplied by a dilution adjustment equal to a fraction, the
numerator of which will be the Then-Current Market Price of that underlying
stock, and the denominator of which will be the Then-Current Market Price of
that underlying stock on the record date less the amount of the distribution
applicable to one share of common stock which would not be a Permitted Dividend,
or, in the case of an Excess Purchase Payment, less the aggregate amount of the
Excess Purchase Payment for which adjustment is being made at the time divided
by the number of shares of common stock outstanding on the record date. The
Initial Share Price of that underlying stock will also be adjusted in that case
in the manner described below.

      For the purposes of these adjustments:

      A "Permitted Dividend" in respect of any underlying stock is any quarterly
cash dividend in respect of that underlying stock, other than a quarterly cash
dividend that exceeds the immediately preceding quarterly cash dividend, and
then only to the extent that the per share amount of this dividend results in an
annualized dividend yield on that underlying stock in excess of 10%.

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      An "Excess Purchase Payment" in respect of any underlying stock is the
excess, if any, of (x) the cash and the value (as determined by a nationally
recognized independent investment banking firm retained for this purpose by the
Company, whose determination will be final) of all other consideration paid by
the issuer of that underlying stock with respect to one share of underlying
stock acquired in a tender offer or exchange offer by that issuer, over (y) the
Then-Current Market Price of that underlying stock.

      Notwithstanding the foregoing, in the event that, with respect to any
dividend or distribution or Excess Purchase Payment to which the fifth paragraph
in this section would otherwise apply, the denominator in the fraction referred
to in the formula in that paragraph is less than $1.00 or is a negative number,
then the Company may, at its option, elect to have the adjustment provided by
the fifth paragraph in this section not be made, and, in lieu of this
adjustment, the Closing Price of the applicable underlying stock on the third
Trading Day before the Stated Maturity Date will be deemed to be equal to the
sum of the amount of cash and the fair market value of other consideration
(determined, as of the date this dividend or distribution is made, by a
nationally recognized independent investment banking firm retained for this
purpose by the Company, whose determination will be final) so distributed or
applied to the acquisition of the stock in the tender offer or exchange offer
applicable to one share of that underlying stock and, if that underlying stock
has experienced the greatest Percentage Decline, each holder of the ELKS will
have the right to receive at maturity cash in an amount per ELKS equal to the
Exchange Ratio for that underlying stock multiplied by such sum.

      If any adjustment is made to the Exchange Ratio for any underlying stock
as set forth above, an adjustment will also be made to the Initial Share Price
for that stock. The required adjustment will be made by dividing the Initial
Share Price for that stock by the relevant dilution adjustment. If, during any
period of ten Trading Days used to calculate the Then-Current Market Price,
there occurs any event requiring an adjustment to be effected as described
herein, then the Closing Price for each Trading Day in such period of ten
Trading Days occurring prior to the day on which such adjustment is effected
will be adjusted by being divided by a relevant dilution adjustment.

      Each dilution adjustment will be effected as follows:

      -     in the case of any dividend, distribution or issuance in respect of
            any underlying stock, at the opening of business on the Business Day
            next following the record date for determination of holders of that
            stock entitled to receive this dividend, distribution or issuance
            or, if the announcement of this dividend, distribution, or issuance
            is after this record date, at the time this dividend, distribution
            or issuance was announced by the issuer of that stock,

      -     in the case of any subdivision, split, combination or
            reclassification in respect of any underlying stock, on the
            effective date of the transaction,

      -     in the case of any Excess Purchase Payment in respect of any
            underlying stock for which the issuer of that stock announces, at or
            prior to the time it commences the

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            relevant share repurchase, the repurchase price per share for shares
            proposed to be repurchased, on the date of the announcement, and

      -     in the case of any other Excess Purchase Payment in respect of any
            underlying stock, on the date that the holders of the repurchased
            shares become entitled to payment in respect thereof.

      All dilution adjustments will be rounded upward or downward to the nearest
1/10,000th or, if there is not a nearest 1/10,000th, to the next lower
1/10,000th. No adjustment in the Exchange Ratio for any underlying stock will be
required unless the adjustment would require an increase or decrease of at least
one percent therein, provided, however, that any adjustments which by reason of
this sentence are not required to be made will be carried forward (on a
percentage basis) and taken into account in any subsequent adjustment. If any
announcement or declaration of a record date in respect of a dividend,
distribution, issuance or repurchase in respect of any underlying stock
requiring an adjustment as described herein is subsequently canceled by the
issuer of that stock, or this dividend, distribution, issuance or repurchase
fails to receive requisite approvals or fails to occur for any other reason,
then, upon the cancellation, failure of approval or failure to occur, the
Exchange Ratio and the Initial Share Price for that stock will be further
adjusted to the Exchange Ratio and the Initial Share Price which would then have
been in effect had adjustment for the event not been made. If a Reorganization
Event described below occurs after the occurrence of one or more events
requiring an adjustment as described herein, the dilution adjustments previously
applied to the Exchange Ratio will not be rescinded but will be applied to the
Reorganization Event as provided for below.

      The "Then-Current Market Price" of any underlying stock, for the purpose
of applying any dilution adjustment, means the average Closing Price per share
of that stock for the 10 Trading Days immediately before this adjustment is
effected or, in the case of an adjustment effected at the opening of business on
the Business Day next following a record date, immediately before the earlier of
the date the adjustment is effected and the related Ex-Date. For purposes of
determining the Then-Current Market Price, the determination of the Closing
Price by the calculation agent in the event of a Market Disruption Event, as
described in the definition of Closing Price, may be deferred by the calculation
agent for up to five consecutive Trading Days on which a Market Disruption Event
is occurring.

      The "Ex-Date" with respect to any dividend, distribution or issuance in
respect of any underlying stock is the first date on which the shares of that
stock trade in the regular way on their principal market without the right to
receive this dividend, distribution or issuance.

      In the event of any of the following "Reorganization Events":

      -     any consolidation or merger of the issuer of any underlying stock,
            or any surviving entity or subsequent surviving entity of that
            issuer, with or into another entity, other than a merger or
            consolidation in which that issuer is the continuing corporation and
            in which the common stock outstanding immediately before the merger
            or consolidation is not exchanged for cash, securities or other
            property of that issuer or another issuer,

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      -     any sale, transfer, lease or conveyance to another entity of the
            property of the issuer of any underlying stock or any successor as
            an entirety or substantially as an entirety,

      -     any statutory exchange of securities of the issuer of any underlying
            stock or any successor of that issuer with another issuer, other
            than in connection with a merger or acquisition, or

      -     any liquidation, dissolution or winding up of the issuer of any
            underlying stock or any successor of that issuer,

the Closing Price of that underlying stock will be deemed to be equal to the
Transaction Value in respect of that underlying stock.

      The "Transaction Value" in respect of any underlying stock will be the sum
of:

      (1)   for any cash received in a Reorganization Event, the amount of cash
            received per share of the underlying stock,

      (2)   for any property other than cash or Marketable Securities received
            in a Reorganization Event, an amount equal to the market value on
            the date the Reorganization Event is consummated of that property
            received per share of the underlying stock, as determined by a
            nationally recognized independent investment banking firm retained
            for this purpose by the Company, whose determination will be final,
            and

      (3)   for any Marketable Securities received in a Reorganization Event, an
            amount equal to the Closing Price per share of these Marketable
            Securities on the third Trading Day before the Stated Maturity Date
            multiplied by the number of these Marketable Securities received for
            each share of the underlying stock.

      "Marketable Securities" are any perpetual equity securities or debt
securities with a stated maturity after the maturity date, in each case that are
listed on a U.S. national securities exchange or reported by the Nasdaq Stock
Market. The number of shares of any equity securities constituting Marketable
Securities included in the calculation of Transaction Value pursuant to clause
(3) above will be adjusted if any event occurs with respect to the Marketable
Securities or the issuer of the Marketable Securities between the time of the
Reorganization Event and maturity that would have required an adjustment as
described above, had it occurred with respect to any underlying stock or any
issuer of underlying stock. Adjustment for these subsequent events will be as
nearly equivalent as practicable to the adjustments described above.

      If the underlying stock that has experienced the greatest Percentage
Decline has been subject to a Reorganization Event, then each Holder will have
the right to receive at maturity cash in an amount per ELKS equal to the
Exchange Ratio for that underlying stock multiplied by the Transaction Value.

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GENERAL

      This Note is one of a duly authorized issue of Debt Securities of the
Company, issued and to be issued in one or more series under a Senior Debt
Indenture, dated as of October 27, 1993, as supplemented by a First Supplemental
Indenture, dated as of November 28, 1997, a Second Supplemental Indenture, dated
as of July 1, 1999, and as further supplemented from time to time (the
"Indenture"), between the Company and The Bank of New York, as Trustee (the
"Trustee", which term includes any successor trustee under the Indenture), to
which Indenture reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and the Holders of the ELKS, and the terms upon which the ELKS are,
and are to be, authenticated and delivered.

      If an Event of Default with respect to the ELKS shall have occurred and be
continuing, the principal of the ELKS may be declared due and payable in the
manner and with the effect provided in the Indenture. In such case, the amount
declared due and payable upon any acceleration permitted by the Indenture will
be determined by the calculation agent and will be equal to, with respect to
this Note, the Maturity Payment calculated as though the Stated Maturity Date of
this Note were the date of early repayment. In case of default at Maturity of
this Note, this Note shall bear interest, payable upon demand of the beneficial
owners of this Note in accordance with the terms of the ELKS, from and after
Maturity through the date when payment of such amount has been made or duly
provided for, at the rate of 2% per annum on the unpaid amount (or the cash
equivalent of such unpaid amount) due.

      The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Debt Securities of each series to
be affected under the Indenture at any time by the Company and a majority in
aggregate principal amount of the Debt Securities at the time Outstanding of
each series affected thereby. The Indenture also contains provisions permitting
the Holders of specified percentages in aggregate principal amount of the Debt
Securities of any series at the time Outstanding, on behalf of the Holders of
all Debt Securities of such series, to waive compliance by the Company with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.

      The Holder of this Note may not enforce such Holder's rights pursuant to
the Indenture or the Notes except as provided in the Indenture. No reference
herein to the Indenture and no provision of this Note or of the Indenture shall
alter or impair the obligation of the Company to pay the Maturity Payment with
respect to this Note, and to pay any interest on any overdue amount thereof at
the time, place and rate, and in the coin or currency, herein prescribed.

      All terms used in this Note which are defined in the Indenture but not in
this Note shall have the meanings assigned to them in the Indenture.

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      Unless the certificate of authentication hereon has been executed by the
Trustee by manual signature, this Note shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purposes.

                                       11
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      IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.

                                    CITIGROUP GLOBAL MARKETS HOLDINGS INC.

                                    By:     /s/ Mark I. Kleinman
                                            ---------------------------------
                                            Name: Mark I. Kleinman
                                            Title:  Executive Vice President
                                                    and Treasurer

Corporate Seal
Attest:

By:  /s/ Douglas C. Turnbull
     -----------------------------
     Name:  Douglas C. Turnbull
     Title:    Assistant Secretary

Dated August 27, 2003

CERTIFICATE OF AUTHENTICATION
    This is one of the Notes referred to in
    the within-mentioned Indenture.

The Bank of New York,
as Trustee

By:  /s/ Marie E. Trimboli
     -----------------------------
     Authorized Signatory

                                       12exv4w1

 

Exhibit 4.1

CERTIFICATE OF DESIGNATIONS,

PREFERENCES AND RIGHTS

of

1998-E SERIES CONVERTIBLE PREFERRED STOCK

of

HearUSA, Inc.

(Pursuant to Section 151 of the

Delaware General Corporation Law)

     HearUSA, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the “Corporation”), hereby certifies
that the following resolutions were adopted by the Board of Directors of the
Corporation pursuant to authority of the Board of Directors as required by
Section 151 of the Delaware General Corporation Law:

     RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the “Board of Directors” or the
“Board”) in accordance with the provisions of its Restated Certificate of
Incorporation, as amended, the Board of Directors hereby authorizes a series of
the Corporation’s previously authorized Preferred Stock, par value $1.00 per
share (the “Preferred Stock”), and hereby states the designation and number of
shares, and fixes the relative rights, preferences, privileges, powers and
restrictions thereof as follows:

     1998-E Series Convertible Preferred Stock:

I.      Designation and Amount

     The designation of this series, which consists of 4,563 shares of
Preferred Stock, is 1998-E Series Convertible Preferred Stock (the “1998-E
Series Convertible Preferred Stock”) and the stated value shall be One Thousand
Dollars ($1,000) per share (the “Stated Value”).

II.      Rank

     All 1998-E Series Convertible Preferred Stock shall rank (i) prior to the
Corporation’s Common Stock, par value $.10 per share (the “Common Stock”); (ii)
prior to any class or series of capital stock of the Corporation hereafter
created (unless, with the consent of the holders of 1998-E Series Convertible
Preferred Stock obtained in accordance with Article IX hereof, such class or
series of capital stock specifically, by its terms, ranks senior to or pari
passu with the 1998-E Series Convertible Preferred Stock) (collectively, with
the Common Stock, “Junior Securities”); (iii) pari passu with any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of 1998-E Series Convertible Preferred Stock obtained in
accordance with Article IX hereof) specifically ranking, by its terms, on
parity with the 1998-E Series Convertible Preferred Stock (the
“Pari Passu
Securities”); and (iv) junior to any class or series of capital stock of the
Corporation hereafter created (with the consent of the holders of 1998-E Series
Convertible Preferred Stock obtained in accordance with Article IX hereof)
specifically ranking, by its terms,

 

 

senior to the 1998-E Series Convertible Preferred Stock and the
Corporation’s Series J Preferred Stock (collectively, the “Senior Securities”),
in each case as to distribution of assets upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.

III.      No Dividends

     The 1998-E Series Convertible Preferred Stock will bear no dividends, and
the holders of the 1998-E Series Convertible Preferred Stock shall not be
entitled to receive dividends on the 1998-E Series Convertible Preferred Stock.

IV.      Liquidation Preference

     A.     If the Corporation shall commence a voluntary case under the Federal
bankruptcy laws or any other applicable Federal or State bankruptcy, insolvency
or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or State bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of sixty (60) consecutive days and, on account of any such event (a
“Liquidation Event”), the Corporation shall liquidate, dissolve or wind up, or
if the Corporation shall otherwise liquidate, dissolve or wind up, no
distribution shall be made to the holders of any shares of capital stock of the
Corporation (other than Senior Securities) upon liquidation, dissolution or
winding up unless prior thereto, the holders of shares of 1998-E Series
Convertible Preferred Stock, subject to Article VII, shall have received the
Liquidation Preference (as defined in Article IV.C) with respect to each share.
If upon the occurrence of a Liquidation Event, the assets and funds available
for distribution among the holders of the 1998-E Series Convertible Preferred
Stock and holders of Pari Passu Securities shall be insufficient to permit the
payment to such holders of the preferential amounts payable thereon, then the
entire assets and funds of the Corporation legally available for distribution
to the 1998-E Series Convertible Preferred Stock and the Pari Passu Securities
shall be distributed ratably among such shares in proportion to the ratio that
the Liquidation Preference payable on each such share bears to the aggregate
Liquidation Preference payable on all such shares.

     B.     At the option of any holder of 1998-E Series Convertible Preferred
Stock, the sale, conveyance, transfer or disposition of all or substantially
all of the assets of the Corporation, the effectuation by the Corporation of a
transaction or series of related transactions in which more than 50% of the
voting power of the Corporation is disposed of, or the consolidation, merger or
other business combination of the Corporation with or into any other Person (as
defined below) or Persons when the Corporation is not the survivor shall
either: (i) be deemed to be a liquidation, dissolution or winding up of the
Corporation for purposes of this

2

 

Article IV; or (ii) be treated pursuant to Article VII.C hereof “Person”
shall mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.

     C.     For purposes hereof, the “Liquidation Preference” with respect to a
share of the 1998-E Series Convertible Preferred Stock shall mean an amount
equal to the sum of (i) the Stated Value thereof plus (ii) an amount equal to
ten percent (10%) per annum of such Stated Value for the period beginning on
August 27, 1998 and ending on the date of final distribution to the holder
thereof.

V.      Payment of Premium by Corporation;

Redemption of 1998-E Series Convertible Preferred Stock

     A.     (a)     The Corporation shall have the right, in its sole discretion, upon
receipt of a Notice of Conversion pursuant to Article VII.D or otherwise from
time to time, to redeem any portion of the Premium (as defined in Article VII.A
below) subject to a conversion or to pay otherwise accrued and unpaid Premium
for a sum of cash. All cash payments hereunder shall be paid by wire transfer
of immediately available funds of lawful money of the United States of America
at such address for the holder as appears on the record books of the
Corporation (or at such other address as such holder shall hereafter give to
the Corporation by written notice). In the event the Corporation elects,
pursuant to this Article V.A, to redeem all or any portion of the Premium in
cash upon an Optional Conversion (as defined in Article VIII.A) and fails to
pay such holder the applicable amount to which such holder is entitled by
depositing a check in the U.S. Mail to such holder within three (3) business
days after receipt by the Corporation of a Notice of Conversion, the
Corporation shall thereafter forfeit its right to redeem such Premium in cash
and such Premium shall thereafter be converted into shares of Common Stock in
accordance with Article VII hereof, as applicable.

              (b)     Each holder of 1998-E Series Convertible Preferred Stock shall have
the right to require the Corporation to provide advance notice to such holder
stating whether the Corporation will elect to redeem all or any portion of the
Premium in cash upon an Optional Conversion (as defined in Article VII.A)
pursuant to the Corporation’s redemption rights discussed in subparagraph (a)
of this Article V.A as set forth herein. A holder may exercise such right from
time to time by sending notice (an “Election Notice”) to the Corporation, by
facsimile, requesting that the Corporation disclose to such holder whether the
Corporation would elect to redeem any portion of the Premium for cash in lieu
of issuing Common Stock in accordance with Article VII. The Corporation shall,
no later than the close of business on the second business day following
receipt of an Election Notice, disclose to such holder whether the corporation
would elect to redeem any portion of a Premium in connection with a conversion
pursuant to a Conversion Notice delivered over the subsequent five (5) business
day period following the Corporation’s reply. If the Corporation does not
respond to such holder within such two (2) business day period via facsimile,
the Corporation shall, with respect to any conversion pursuant to a Conversion
Notice delivered within the subsequent five (5) business day period, forfeit
its right to redeem such Premium in accordance with subparagraph (a) of this
Article V.A and shall be required to convert such Premium into shares of Common
Stock in accordance with Article VII hereof, as applicable.

3

 

     B.     In the event (each of the events described in clauses (i)-(iii) below
after expiration of the applicable cure period (if any) being a “Redemption
Event”):

     (i)     the Corporation fails, and any such failure continues uncured for five
(5) business days after the Corporation has been notified thereof in writing by
the holder, to remove any restrictive legend on any certificate or any shares
of Common Stock issued to the holders of 1998-E Series Convertible Preferred
Stock upon conversion of the 1998-E Series Convertible as and when required by
this Certificate of Designation;

     (ii)   the Corporation provides to any holder of 1998-E Series Convertible
Preferred Stock, including by way of public announcement, at any time, notice
of its intention not to issue shares of Common Stock to any holder of 1998-E
Series Convertible Preferred Stock upon conversion in accordance with the terms
of this Certificate of Designation; or

     (iii)  a holder of shares of 1998-E Series Convertible Preferred Stock
submits a Notice of Conversion, and the Corporation does not have sufficient
authorized but unissued shares of Common Stock available to effect such
conversion in accordance with the provisions of Article VII (in which case the
Corporation shall immediately notify such holder of such occurrence);

then, upon the occurrence of any such Redemption Event, each holder of shares
of 1998-E Series Convertible Preferred Stock shall thereafter have the option,
exercisable in whole or in part at any time and from time to time by delivery
of notice from a holder requiring a redemption (a “Redemption Notice”) to the
Corporation while such Redemption Event continues, to require the Corporation
to purchase for cash any or all of the then outstanding shares of 1998-E Series
Convertible Preferred Stock held by such holder for an amount per share equal
to the Redemption Amount (as defined in Paragraph C below) in effect at the
time of the redemption hereunder. Notwithstanding anything to the contrary
herein, in the event of a Redemption Event described in subparagraph (iii)
above, only the holders who have submitted a Notice of Conversion shall be
entitled to elect redemption and receive the Redemption Amount and then such
holders shall be entitled to receive the Redemption Amount only in respect of
that portion of the 1998-E Series Convertible Preferred Stock for which the
Corporation has insufficient shares of Common Stock to facilitate the
conversion which is the subject of such Notices of Conversion. For the
avoidance of doubt, the occurrence of an event described in clause (ii) above
shall immediately constitute a Redemption Event and there shall be no cure
period. If the Corporation fails to pay the Redemption Amount for each share
within two (2) business days after receipt of a Redemption Notice, then the
holder of 1998-E Series Convertible Preferred Stock delivering such Redemption
Notice (i) shall be entitled to interest thereon at a rate per annum equal to
the lower of thirty-six percent (36%) and the highest rate permitted by
applicable law until the date of redemption hereunder (“Redemption Default
Interest”), and (ii) except with respect to the Redemption Event described in
subparagraph (iii) above, shall have the right, at any time and from time to
time, to require the Corporation, upon written notice, to immediately convert
(in accordance with the terms of Paragraph A of Article VII below) all or any
portion of the Redemption Amount, plus interest as aforesaid, into shares of
Common Stock at the lowest Conversion Price in effect during the period
beginning on the date of the Redemption Notice and ending on the Conversion
Date with respect to the conversion of such Redemption Amount. In the event
more than one holder delivers a Redemption Notice on a given day and the
Corporation is not, at the

4

 

effective date of such Redemption Notice, able to redeem all of the shares of
1998-E Series Convertible Preferred Stock subject to Redemption Notices, the
Corporation shall select the shares of 1998-E Series Convertible Preferred
Stock to be redeemed from each holder pro rata, based on the total number of
shares of 1998-E Series Convertible Preferred Stock included by such holder in
the Redemption Notice relative to the total number of shares of 1998-E Series
Convertible Preferred Stock in all of the Redemption Notices.

     C.     The “Redemption Amount” with respect to any redemption of a share of
1998-E Series Convertible Preferred Stock means an amount equal to:

	 	 	 	 	 	 	 	 	 
	 	 	
1000 + P
CP
	 	x
	 	M
	 	 

where:

     “P” means the accrued and unpaid Premium on such share of 1998-E Series
Convertible Preferred Stock through the date of redemption;

     “CP” means the Conversion Price in effect on the date of the Redemption
Notice;

     and

     “M” means the highest closing price of the Corporation’s Common Stock
during the period beginning on the date of the Redemption Notice and ending on
the date of the redemption, as reported on the American Stock Exchange (the
“AMEX”) (or the principal securities exchange or trading market on which the
Common Stock is traded).

VI.      Mandatory Redemption

     A.     Each share of 1998-E Series Convertible Preferred Stock issued and
outstanding on December 18, 2006 shall be redeemed by the Corporation at a
price equal to 108% of its Stated Value plus any accrued and unpaid Premium
(the “Mandatory Redemption Amount”). The holder shall deliver to the
Corporation the certificates representing the 1998-E Series Convertible
Preferred Stock and upon receipt of such certificates, the Corporation shall
pay the Mandatory Redemption Amount by wire transfer of immediately available
funds to such holder within two (2) business days and, if such payment is not
made within such two (2) business day period, then the holders of the 1998-E
Series Convertible Preferred Stock shall be entitled to Redemption Default
Interest on the outstanding Mandatory Redemption Amount.

     B.     The Corporation shall have the right to redeem all or any portion of
the shares of the 1998-E Series Convertible Preferred Stock outstanding at a
price during the first sixteen (16) months after the initial issuance of shares
of the 1998-E Series Convertible Preferred Stock equal to its Stated Value plus
any accrued and unpaid Premium and thereafter at a price equal to 108% of its
Stated Value plus any accrued and unpaid Premium upon written notice to a
holder of the Corporation’s intention to redeem such 1998-E Series Convertible
Preferred Stock (which notice shall include a written representation that the
Corporation has sufficient funds to effect such redemption). If the
Corporation so elects, the holder shall deliver to the

5

 

Corporation the certificates representing the 1998-E Series Convertible
Preferred Stock that was the subject of the redemption notice and upon receipt
of such certificates, the Corporation shall pay the redemption price to such
holder within two (2) business days.

VII.      Conversion at the Option of the Holder

     A.     (a)     Each holder of shares of 1998-E Series Convertible Preferred Stock
may, at its option, convert its shares of 1998-E Series Convertible Preferred
Stock into Common Stock (an “Optional Conversion”). Each share of 1998-E Series
Convertible Preferred Stock shall be convertible into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing (x) the
sum of (i) the Stated Value thereof, plus (ii) unless the Corporation has
previously paid or timely redeemed such Premium in accordance with Article V.A,
an amount equal to 10% per annum of such Stated Value for the period beginning
on August 27, 1998 and ending on the Conversion Date (the “Premium”), by (y)
the then effective Conversion Price (as defined below).

              (b)     If, however, the closing price of the Corporation’s Common Stock as
reported by AMEX (or on the principal securities exchange or other securities
market on which the Common Stock is then being traded) on the date prior to any
Conversion Date (as hereinafter defined) is less than $10.00, and a holder
elects to convert 1998-E Series Convertible Preferred Stock as otherwise
permitted hereunder, the Corporation, at its option, may redeem the 1998-E
Series Convertible Preferred Stock which is the subject of a Notice of
Conversion at a price equal to 108% of its Stated Value plus any accrued and
unpaid Premium (the “Optional Redemption Amount”) in lieu of converting such
1998-E Series Convertible Preferred Stock to Common Stock, provided that the
Corporation gives written notice to such holder of the Corporation’s intention
to redeem such 1998-E Series Convertible Preferred Stock by 8:00 p.m., New York
City time, on the date such Notice of Conversion is received by the Corporation
(which notice shall include a written representation that the Corporation has
sufficient funds to effect such redemption). If the Corporation so elects, the
holder shall deliver to the Corporation the certificates representing the
1998-E Series Convertible Preferred Stock which was the subject of the Notice
of Conversion and upon receipt of such certificates, the Corporation shall pay
the Optional Redemption Amount to such holder within two (2) business days. In
the event the Corporation fails to make such payment, it shall forfeit its
right under this Article VII.A.(b) with respect to all then outstanding shares
of 1998-E Series Convertible Preferred Stock, and the holder may, at its
election, within the next five (5) business days, proceed to convert the shares
of 1998-E Series Convertible Preferred Stock in accordance with the original
Notice of Conversion or rescind such Notice of Conversion.

              (c)     Notwithstanding anything to the contrary contained herein, in no event
shall a holder of shares of 1998-E Series Convertible Preferred Stock be
entitled to convert any such shares in excess of that number of shares upon
conversion of which the sum of (x) the number of shares of Common Stock
beneficially owned by the holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of
the unconverted portion of the shares of 1998-E Series Convertible Preferred
Stock or the unexercised or unconverted portion of any other securities of the
Corporation (including, without limitation, any warrants) subject to a
limitation on conversion or exercise analogous to the limitations contained

6

 

herein) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of 1998-E Series Convertible Preferred Stock with
respect to which the determination of this sentence is being made would result
in beneficial ownership by the holder and its affiliates of more than 4.99% of
the outstanding shares of Common Stock. For purposes of the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and Rule
13d-3 thereunder, except as otherwise provided in clause (x) above. The
restriction contained in the first sentence of this paragraph of this Article
VII.A shall not be altered, amended, deleted or changed in any manner
whatsoever unless the holders of a majority of the Common Stock, voting as a
separate class, and each holder of 1998-E Series Convertible Preferred Stock
shall approve such alteration, amendment, deletion or change.

     B.     (a)     Subject to subparagraph (b) below, the “Conversion Price” shall be
the lesser of (i) the average of the Closing Bid Prices (as defined below) for
the Common Stock for any five (5) trading days chosen by the holder of 1998-E
Series Convertible Preferred Stock during the period beginning on the twentieth
trading day prior to the Conversion Date for such conversion and ending on such
Conversion Date (subject to equitable adjustment for any stock splits, stock
dividends, reclassifications or similar events during such 20-trading day
period), and shall be subject to adjustment as provided herein (the “Variable
Conversion Price”), and (ii) $18.00 (the “Fixed Conversion Price”) (subject to
equitable adjustments from time to time pursuant to the antidilution provisions
of Article VII.C below). “Closing Bid Price” means, for any security as of any
date, the closing bid price of such security on the principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg Financial Markets or a comparable reporting service of national
reputation selected by the Corporation and reasonably acceptable to holders of
a majority of the then outstanding shares of 1998-E Series Convertible
Preferred Stock. If Bloomberg Financial Markets is not then reporting closing
bid prices of such security (collectively, “Bloomberg”), or if the foregoing
does not apply, the last reported bid price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no bid price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the “pink sheets” by the National Quotation Bureau, Inc. If the
Closing Bid Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Bid Price of such security on such date shall
be the fair market value as reasonably determined by an investment banking firm
selected by the Corporation and reasonably acceptable to holders of a majority
of the then outstanding shares of 1998-E Series Convertible Preferred Stock,
with the costs of such appraisal to be borne by the Corporation.

              (b)     Notwithstanding anything contained in subparagraph (a) of this
Paragraph B to the contrary, in the event the Corporation (i) makes a public
announcement that it intends to consolidate or merge with any other corporation
(other than a merger in which the Corporation is the surviving or continuing
corporation and its capital stock is unchanged) or sell or transfer all or
substantially all of the assets of the Corporation or (ii) any person, group or
entity (including the Corporation) publicly announces a tender offer to
purchase 50% or more of the Corporation’s Common Stock (the date of the
announcement referred to in clause (i) or (ii) is hereinafter referred to as
the “Announcement Date”), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the Adjusted Conversion Price
Termination Date (as defined below), be equal to the Conversion Price which
would have been applicable for an

7

 

Optional Conversion occurring on the Announcement Date. From and after the
Adjusted Conversion Price Termination Date, the Conversion Price shall be
determined as set forth in subparagraph (a) of this Article VII.B. For purposes
hereof, “Adjusted Conversion Price Termination Date” shall mean, with respect
to any proposed transaction or tender offer for which a public announcement as
contemplated by this subparagraph (b) has been made, the date upon which the
Corporation (in the case of clause (i) above) or the person, group or entity
(in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer which caused this
subparagraph (b) to become operative.

     C.     The Conversion Price shall be subject to adjustment from time to time
as follows:

              (a)      Adjustment to Fixed Conversion Price Due to Stock Split, Stock
Dividend, Etc. If at any time when the 1998-E Series Convertible Preferred
Stock is issued and outstanding, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, or other similar event,
the Fixed Conversion Price shall be proportionately reduced, or if the number
of outstanding shares of Common Stock is decreased by a reverse stock split,
combination or reclassification of shares, or other similar event, the Fixed
Conversion Price shall be proportionately increased. In such event the
Corporation shall notify the Transfer Agent of such change on or before the
effective date thereof.

              (b)      Adjustment to Variable Conversion Price. If at any time when 1998-E
Series Convertible Preferred Stock is issued and outstanding, the number of
outstanding shares of Common Stock is increased or decreased by a stock split,
stock dividend, combination, reclassification or other similar event, which
event shall have taken place during the reference period for determination of
the Conversion Price for any Optional Conversion or Mandatory Conversion of the
1998-E Series Convertible Preferred Stock, then the Variable Conversion Price
shall be calculated giving appropriate effect to the stock split, stock
dividend, combination, reclassification or other similar event for the
applicable number of trading days immediately preceding the Conversion Date or
the date of the Mandatory Conversion, as applicable.

              (c)      Adjustment Due to Merger, Consolidation, Etc. If, at any time when
1998-E Series Convertible Preferred Stock is issued and outstanding and prior
to the conversion or redemption of all 1998-E Series Convertible Preferred
Stock, there shall be (i) any reclassification or change of the outstanding
shares of Common Stock (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a
subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other corporation (other than a merger in which the
Corporation is the surviving or continuing corporation and its capital stock is
unchanged), (iii) any sale or transfer of all or substantially all of the
assets of the Corporation or (iv) any share exchange pursuant to which all of
the outstanding shares of Common Stock are converted into other securities or
property, then the holders of 1998-E Series Convertible Preferred Stock shall,
upon being given at least thirty (30) days prior written notice of such
transaction, thereafter have the right to purchase and receive upon conversion
of 1998-E Series Convertible Preferred Stock, upon the basis and upon the terms
and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such shares of stock and/or
securities or other property as may be issued or payable with respect to or in

8

 

exchange for the number of shares of Common Stock immediately theretofore
receivable upon the conversion of 1998-E Series Convertible Preferred Stock
held by such holders had such merger, consolidation, exchange of shares,
recapitalization, reorganization or other similar event not taken place (but
utilizing the Conversion Price determined in accordance with Paragraph B(b) of
this Article VII, if applicable), and in any such case appropriate provisions
shall be made with respect to the rights and interests of the holders of the
1998-E Series Convertible Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares issuable upon conversion of the 1998-E Series
Convertible Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any shares of stock or securities thereafter
deliverable upon the conversion thereof. The Corporation shall not effect any
transaction described in this subsection (c) unless (i) each holder of 1998-E
Series Convertible Preferred Stock has received written notice of such
transaction at least thirty (30) days prior thereto and in no event later than
ten (10) days prior to the record date for the determination of shareholders
entitled to vote with respect thereto, and (ii) the provisions of this
paragraph have been complied with. The above provisions shall similarly apply
to successive reclassifications, consolidations, mergers, sales, transfers or
share exchanges.

              (d)      No Fractional Shares. If any adjustment under this Article VII.C would
create a fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be disregarded and the
number of shares of Common Stock issuable upon conversion shall be the next
higher number of shares.

     D.     In order to convert 1998-E Series Convertible Preferred Stock into full
shares of Common Stock, a holder shall: (i) fax a copy of the fully executed
notice of conversion in the form attached hereto (“Notice of Conversion”) to
the Corporation at the office of the Corporation or its designated Transfer
Agent, if any, for the 1998-E Series Convertible Preferred Stock that the
holder elects to convert the same, which notice shall specify the number of
shares of 1998-E Series Convertible Preferred Stock to be converted, the
applicable Conversion Price and a calculation of the number of shares of Common
Stock issuable upon such conversion (together with a copy of the first page of
each certificate to be converted) prior to Midnight, New York City time (the
“Notice of Conversion Deadline”) on the date of conversion specified on the
Notice of Conversion; and (ii) surrender the original certificates representing
the 1998-E Series Convertible Preferred Stock being converted (the “Preferred
Stock Certificates”), duly endorsed, along with a copy of the Notice of
Conversion as soon as practicable thereafter to the office of the Corporation
or the Transfer Agent, if any, for the 1998-E Series Convertible Preferred
Stock; provided, however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
conversion unless either the Preferred Stock Certificates are delivered to the
Corporation or its Transfer Agent as provided above, or the holder notifies the
Corporation or its Transfer Agent that such certificates have been lost, stolen
or destroyed (subject to the requirements of subparagraph (a) below). In the
case of a dispute as to the calculation of the Conversion Price, the
Corporation shall promptly issue such number of shares of Common Stock to
purchase shares of Common Stock that are not disputed in accordance with
subparagraph (b) below. The Corporation shall submit the disputed calculations
to its outside accountant via facsimile within two (2) business days of receipt
of the Notice of Conversion. The accountant shall audit the calculations and
notify the Corporation and the holder of the results no later

9

 

than 48 hours from the time it receives the disputed calculations. The
accountant’s calculation shall be deemed conclusive absent manifest error.

              (a)      Lost or Stolen Certificates. Upon receipt by the Corporation of
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificates representing shares of 1998-E Series Convertible Preferred Stock,
and (in the case of loss, theft or destruction) of indemnity or security
reasonably satisfactory to the Corporation, and upon surrender and cancellation
of the Preferred Stock Certificate(s), if mutilated, the Corporation shall
execute and deliver new Preferred Stock Certificate(s) of like tenor and date.
However, the Corporation shall not be obligated to reissue such lost or stolen
Preferred Stock Certificate(s) if the holder contemporaneously requests the
Corporation to convert such 1998-E Series Convertible Preferred Stock.

              (b)      Delivery of Common Stock Upon Conversion. Upon the surrender of
certificates as described above from a holder of 1998-E Series Convertible
Preferred Stock accompanied by a Notice of Conversion, the Corporation shall
issue and, within two (2) business days (the “Delivery Period”) after such
surrender (or, in the case of lost, stolen or destroyed certificates, after
provision of agreement and indemnification pursuant to subparagraph (a) above),
deliver to or upon the order of the holder (i) that number of shares of Common
Stock for the portion of the shares of 1998-E Series Convertible Preferred
Stock converted as shall be determined in accordance herewith and (ii) a
certificate representing the balance of the shares of 1998-E Series Convertible
Preferred Stock not converted, if any. If the Corporation’s transfer agent is
participating in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer program, and so long as the certificates therefor do not bear a legend
and the holder thereof is not then required to return such certificate for the
placement of a legend thereon, the Corporation may cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion to the holder
by crediting the account of the holder or its nominee with DTC through its
Deposit Withdrawal Agent Commission system (“DTC Transfer”). If the
aforementioned conditions to a DTC Transfer are not satisfied or a DTC Transfer
is otherwise not effected, the Corporation shall deliver to the holder physical
certificates representing the Common Stock issuable upon conversion. Further, a
holder may instruct the Corporation to deliver to the holder physical
certificates representing the Common Stock issuable upon conversion in lieu of
delivering such shares by way of DTC Transfer. In addition to any other
remedies available to the holder, including actual damages and/or equitable
relief, the Corporation shall pay to a holder $250 in cash for the first day
beyond such Delivery Period that the Corporation fails to deliver Common Stock
issuable upon surrender of shares of 1998-E Series Convertible Preferred Stock
with a Notice of Conversion and $500 per day in cash for each day thereafter
until such time as the earlier of the date that the Corporation has delivered
all such Common Stock and the tenth day beyond such Delivery Period. Such cash
amount shall be paid to such holder by the fifth day of the month following the
month in which it has accrued. In the event the Corporation fails to deliver
such Common Stock prior to the expiration of the ten (10) business day period
after the Delivery Period for any reason (whether due to a requirement of law
or a stock exchange or otherwise), such holder shall be entitled to (in
addition to any other remedies available to the holder) Conversion Default
Payments in accordance with Article VII.E hereof beginning on the expiration of
such ten (10) business day period. Nothing herein shall limit the holder’s
right to pursue actual damages for the Corporation’s failure to deliver shares
of Common Stock upon conversion of 1998-E Series Convertible Preferred Stock as
required pursuant to the terms

10

 

hereof, and each holder shall have the right to pursue all remedies
available at law or in equity (including a decree of specific performance
and/or injunctive relief).

              (c)      No Fractional Shares. If any conversion of 1998-E Series Convertible
Preferred Stock would result in a fractional share of Common Stock or the right
to acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion,
and the number of shares which may be acquired upon exercise of any Warrant
issuable upon conversion, of the 1998-E Series Convertible Preferred Stock
shall be the next higher number of shares.

              (d)      Conversion Date. The “Conversion Date” shall be the date specified in
the Notice of Conversion, provided (i) that the advance copy of the Notice of
Conversion is faxed to the Corporation before 4 o’clock p.m., New York City
time, on the Conversion Date, and (ii) that the original Preferred Stock
Certificate(s), duly endorsed, are surrendered along with a copy of the Notice
of Conversion as soon as practicable thereafter to the office of the
Corporation or the Transfer Agent for the 1998-E Series Convertible Preferred
Stock. The person or persons entitled to receive the shares of Common Stock
issuable upon conversion shall be treated for all purposes as the record holder
or holders of such securities as of the Conversion Date and all rights with
respect to the shares of 1998-E Series Convertible Preferred Stock surrendered
shall forthwith terminate except the right to receive the shares of Common
Stock or other securities or property issuable on such conversion.

     E.     A number of shares of the authorized but unissued Common Stock to
provide for the conversion of the 1998-E Series Convertible Preferred Stock
outstanding at the then current Conversion Price shall at all times be reserved
by the Corporation, free from preemptive rights, for such conversion.
Notwithstanding anything to the contrary herein, shares of Common Stock so
reserved shall be allocated for issuance upon conversion of the 1998-E Series
Convertible Preferred Stock pro rata among the holders of 1998-E Series
Convertible Preferred Stock based on the number of shares of 1998-E Series
Convertible Preferred Stock held by each such holder relative to the total
number of authorized shares of 1998-E Series Convertible Preferred Stock. If
the Corporation shall issue any securities or make any change in its capital
structure which would change the number of shares of Common Stock into which
each share of the 1998-E Series Convertible Preferred Stock shall be
convertible at the then current Conversion Price, the Corporation shall at the
same time also make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free from
preemptive rights, for conversion of the outstanding 1998-E Series Convertible
Preferred Stock on the new basis. In addition to any rights a holder may have
pursuant to Article V.B hereof, if at any time a holder of shares of 1998-E
Series Convertible Preferred Stock submits a Notice of Conversion, the
Corporation does not have sufficient authorized but unissued shares of Common
Stock available to effect such conversion in accordance with the provisions of
this Article VII (a “Conversion Default”), the Corporation shall issue to each
holder such holder’s pro rata share of all of the shares of Common Stock which
are available to effect such conversion and shall thereafter use its best
efforts to obtain, as soon as practicable, shareholder approval to authorize
the issuance of sufficient shares of Common Stock to effect conversion of the
1998-E Series Convertible Preferred Stock then outstanding. The number of
shares of 1998-E Series Convertible Preferred Stock included in the Notice of
Conversion which exceeds the amount which is then convertible into

11

 

available shares of Common Stock (the “Excess Amount”) shall,
notwithstanding anything to the contrary contained herein, not be convertible
into Common Stock in accordance with the terms hereof until (and at the
holder’s option at any time after) the date additional shares of Common Stock
are authorized by the Corporation to permit such conversion, at which time the
Conversion Price in respect thereof shall be the lesser of (i) the Conversion
Price on the Conversion Date specified in the Notice of Conversion and (ii) the
Conversion Price on a Conversion Date subsequently elected by the holder in
respect thereof. The Corporation shall pay to the holder payments (“Conversion
Default Payments”) for a Conversion Default in the amount of (N/365) multiplied
by the sum of the Stated Value with respect to each share of 1998-E Series
Convertible Preferred Stock multiplied by the Excess Amount, multiplied by .36,
where N = the number of days from the Conversion Date specified in the Notice
of Conversion to the date (the “Authorization Date”) that the Corporation
authorizes a sufficient number of shares of Common Stock to effect conversion
of the full number of shares of 1998-E Series Convertible Preferred Stock. The
Corporation shall send notice to the holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of holder’s
accrued Conversion Default Payments. The accrued Conversion Default Payments
for each calendar month shall be paid in cash or shall be convertible into
Common Stock at the Conversion Price, at the holder’s option, as follows:

              (a)     In the event holder elects to take such payment in cash, cash payment
shall be made to holder by the fifth day of the month following the month in
which it has accrued; and

              (b)     In the event holder elects to take such payment in Common Stock, the
holder may convert such payment amount into Common Stock at the Conversion
Price (as in effect at the time of Conversion) at any time after the fifth day
of the month following the month in which it has accrued in accordance with the
terms of this Article VII.

     Nothing herein shall limit the holder’s right to pursue actual damages for the
Corporation’s failure to maintain a sufficient number of authorized shares of
Common Stock, and each holder shall have the right to pursue all remedies
available at law or in equity (including a decree of specific performance
and/or injunctive relief).

     F.     Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Article VII, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of 1998-E Series
Convertible Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of 1998-E Series Convertible Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth (i) such
adjustment or readjustment, (ii) the Conversion Price at the time in effect and
(iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of a
share of 1998-E Series Convertible Preferred Stock.

12

 

VIII.      Voting Rights

     The holders of the 1998-E Series Convertible Preferred Stock have no
voting power whatsoever, except as otherwise provided by the Delaware General
Corporation Law (“DGCL”), and in this Article VIII, and in Article IX below.

     Notwithstanding the above, the Corporation shall provide each holder of
1998-E Series Convertible Preferred Stock with prior notification of any
meeting of the shareholders (and copies of proxy materials and other
information sent to shareholders). In the event of any taking by the
Corporation of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation or recapitalization) any share of
any class or any other securities or property, or to receive any other right,
or for the purpose of determining shareholders who are entitled to vote in
connection with any proposed sale, lease or conveyance of all or substantially
all of the assets of the Corporation, or any proposed liquidation, dissolution
or winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least ten (10) days prior to the record date specified therein (or
30 days prior to the consummation of the transaction or event, whichever is
earlier), of the date on which any such record is to be taken for the purpose
of such dividend, distribution, right or other event, and a brief statement
regarding the amount and character of such dividend, distribution, right or
other event to the extent known at such time; provided, however that the
Corporation shall not deliver such notice to the extent it contains material,
non-public information which is not concurrently being publicly disclosed.

     To the extent that under the DGCL the vote of the holders of the 1998-E
Series Convertible Preferred Stock, voting separately as a class or series as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the shares
of the 1998-E Series Convertible Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of a majority of the
shares of 1998-E Series Convertible Preferred Stock (except as otherwise may be
required under the DGCL) shall constitute the approval of such action by the
class. To the extent that under the DGCL holders of the 1998-E Series
Convertible Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of 1998-E Series
Convertible Preferred Stock shall be entitled to a number of votes equal to the
number of shares of Common Stock into which it is then convertible using the
record date for the taking of such vote of shareholders as the date as of which
the Conversion Price is calculated. Holders of the 1998-E Series Convertible
Preferred Stock shall be entitled to notice of (and copies of proxy materials
and other information sent to shareholders) all shareholder meetings or written
consents with respect to which they would be entitled to vote, which notice
would be provided pursuant to the Corporation’s by-laws and the DGCL.

IX.      Protection Provision

     So long as shares of 1998-E Series Convertible Preferred Stock are
outstanding, the Corporation shall not, without first obtaining the approval
(by vote or written consent, as provided by the DGCL) of the holders of at
least a majority of the then outstanding shares of 1998-E Series Convertible
Preferred Stock:

13

 

              (a)     alter or change the rights, preferences or privileges of the 1998-E
Series Convertible Preferred Stock or any Senior Securities so as to affect
adversely the 1998-E Series Convertible Preferred Stock;

              (b)     create any new class or series of capital stock having a preference
over the 1998-E Series Convertible Preferred Stock as to dividends and as to
distribution of assets upon liquidation, dissolution or winding up of the
Corporation (as previously defined in Article II hereof, “Senior Securities”);

              (c)     create any new class or series of capital stock ranking pari passu
with the 1998-E Series Convertible Preferred Stock as to dividends and as to
distribution of assets upon liquidation, dissolution or winding up of the
Corporation (as previously defined in Article II hereof, “Pari Passu
Securities”);

              (d)     increase the authorized number of shares of 1998-E Series Convertible
Preferred Stock;

              (e)     do any act or thing not authorized or contemplated by this Certificate
of Designation which would result in taxation of the holders of shares of the
1998-E Series Convertible Preferred Stock under Section 305 of the Internal
Revenue Code of 1986, as amended (or any comparable provision of the Internal
Revenue Code as hereafter from time to time amended); or

              (f)     issue any Senior Securities or Pari Passu Securities.

     In the event holders of at least a majority of the then outstanding shares
of 1998-E Series Convertible Preferred Stock (voting together as a single
class) agree to allow the Corporation to alter or change the rights,
preferences or privileges of the shares of 1998-E Series Convertible Preferred
Stock, pursuant to subsection (a) above, so as to affect the 1998-E Series
Convertible Preferred Stock, then the Corporation will deliver notice of such
approved change to the holders of the 1998-E Series Convertible Preferred Stock
that did not agree to such alteration or change (the “Dissenting Holders”) and
Dissenting Holders shall have the right for a period of thirty (30) days to
convert pursuant to the terms of this Certificate of Designation as they exist
prior to such alteration or change or continue to hold their shares of 1998-E
Series Convertible Preferred Stock.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

14

 

     IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation this 25th day of August, 2003.

	 	 	 	 	 
	 	 	HEARUSA, INC.
	 	 	 	 	 
	 	 	
By:	 	/s/ Stephen J. Hansbrough
	 	 	 	 	

Stephen J. Hansbrough

Chief Executive Officer

15

 

NOTICE OF CONVERSION

(To be Executed by the Registered Holder

in order to Convert the 1998-E Series Convertible Preferred Stock)

     The
undersigned hereby irrevocably elects to convert
       shares of 1998-E
Series Convertible Preferred Stock (the “Conversion”), represented by stock
certificate Nos(s).        (the “Preferred Stock Certificates”), into shares
of common stock (“Common Stock”) of HearUSA, Inc. (the “Corporation”) according
to the conditions of the Statement of Designation, Rights and Preferences of
the 1998-E Series Convertible Convertible Preferred Stock of HearUSA, Inc. (the
“Statement of Designation”), as of the date written below. If securities are to
be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto. No fee will be
charged to the holder for any conversion, except for transfer taxes, if any. A
copy of each Preferred Stock Certificate is attached hereto (or evidence of
loss, theft or destruction thereof).

     The undersigned requests that the Corporation electronically transmit the
Common Stock issuable pursuant to this Notice of Conversion to the account of
the undersigned or its nominee (which is      ) with DTC through its
Deposit Withdrawal Agent Commission System (“DTC Transfer”).

     The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of
the 1998-E Series Convertible Preferred Stock shall be made pursuant to
registration of the Common Stock under the Securities Act of 1933, as amended
(the “Act”), or pursuant to an exemption from registration under the Act.

     In lieu of receiving the shares of Common Stock issuable pursuant to this
Notice of Conversion by way of DTC Transfer, the undersigned hereby requests
that the Corporation issue and deliver to the undersigned physical certificates
representing such shares of Common Stock.

	 	Date of

Conversion:______________________________

	 	Applicable Conversion

Price:______________________________

	 	Number of Shares of Common

	 	Stock to be Issued:

______________________________

	 	Signature:___________________________

	 	Name:_____________________________

	 	Address:____________________________

	 	              ____________________________

16

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