Document:

Exhibit 4.1

                         FORM OF FIXED RATE SENIOR NOTE

REGISTERED                                                       REGISTERED
No. FXR-1                                                        U.S. $
                                                                 CUSIP:

     Unless this certificate is presented by an authorized representative of
The Depository Trust Company (55 Water Street, New York, New York) to the
issuer or its agent for registration of transfer, exchange or payment, and any
certificate issued is registered in the name of Cede & Co. or such other name
as requested by an authorized representative of The Depository Trust Company
and any payment is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered
owner hereof, Cede & Co., has an interest herein.

<PAGE>

<TABLE>
                                                 MORGAN STANLEY
                                    SENIOR GLOBAL MEDIUM-TERM NOTE, SERIES F
                                                  (Fixed Rate)

                                         HIGH INCOME TRIGGER SECURITIES

                                            % HITS DUE APRIL 20, 2007
                                            MANDATORILY EXCHANGEABLE
                                         FOR SHARES OF COMMON STOCK OF
                                 XM SATELLITE RADIO HOLDINGS INC. (the "HITS")
<S>                              <C>                            <C>                          <C>
-----------------------------------------------------------------------------------------------------------------------
ORIGINAL ISSUE DATE:             INITIAL REDEMPTION DATE: N/A   INTEREST RATE:    % per      MATURITY DATE: See
                                                                   annum                        "Maturity Date" below.
-----------------------------------------------------------------------------------------------------------------------
INTEREST ACCRUAL DATE:           INITIAL REDEMPTION             INTEREST PAYMENT DATE(S):    OPTIONAL REPAYMENT
                                    PERCENTAGE: N/A                See "Interest Payment        DATE(S):  N/A
                                                                   Dates" below.
-----------------------------------------------------------------------------------------------------------------------
SPECIFIED CURRENCY: U.S.         ANNUAL REDEMPTION              INTEREST PAYMENT PERIOD:     APPLICABILITY OF MODIFIED
   dollars                          PERCENTAGE REDUCTION: N/A      Quarterly                    PAYMENT UPON
                                                                                                ACCELERATION OR
                                                                                                REDEMPTION: See
                                                                                                "Alternate Exchange
                                                                                                Calculation in Case of
                                                                                                an Event of Default"
                                                                                                below.
-----------------------------------------------------------------------------------------------------------------------
IF SPECIFIED CURRENCY OTHER      REDEMPTION NOTICE PERIOD:      APPLICABILITY OF ANNUAL      If yes, state Issue Price:
   THAN U.S. DOLLARS, OPTION        N/A                            INTEREST PAYMENTS: N/A       N/A
   TO ELECT PAYMENT IN U.S.
   DOLLARS: N/A
-----------------------------------------------------------------------------------------------------------------------
EXCHANGE RATE AGENT: N/A         TAX REDEMPTION AND PAYMENT     PRICE APPLICABLE UPON        ORIGINAL YIELD TO
                                    OF ADDITIONAL AMOUNTS: NO      OPTIONAL REPAYMENT: N/A      MATURITY: N/A
-----------------------------------------------------------------------------------------------------------------------
OTHER PROVISIONS: See below.     IF YES, STATE INITIAL
                                    OFFERING DATE: N/A
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

Stated Principal Amount......    $      per HITS

Underlying Company...........    XM Satellite Radio Holdings Inc. ("XM
                                 Satellite")

Underlying Stock.............    The common stock of XM Satellite

Pricing Date.................

Denominations................    $      and integral multiples thereof

Initial Share Price..........    $

Trigger Level................         % of the Initial Share Price

Trigger Price................    $

Acceleration Trigger Price...    $

Exchange Ratio...............         ,  which is equal to the Stated
                                 Principal Amount divided by the Initial Share
                                 Price

Exchange Factor..............         ,  subject to adjustment  upon the
                                 occurrence of certain extraordinary dividends
                                 and corporate events affecting the Underlying
                                 Stock through and including the Determination
                                 Date, as described under "Antidilution
                                 Adjustments" below.

Interest Payment Dates.......    July 20, 2006, October 20, 2006, January 20,
                                 2007 and the Maturity Date.

                                 If the scheduled Maturity Date is postponed due
                                 to a Market Disruption Event or otherwise, the
                                 Issuer shall pay interest on the Maturity Date
                                 as postponed rather than on the scheduled
                                 Maturity Date, but no interest shall accrue on
                                 this HITS or on such payment during the period
                                 from or after the scheduled Maturity Date.

Maturity Date................    April 20, 2007, subject to acceleration as
                                 described below in "Price Event Acceleration"
                                 and "Alternate Exchange Calculation in Case of
                                 an Event of Default" and subject to extension
                                 if the Determination Date is postponed in
                                 accordance with the following paragraph.

                                 If the Determination Date is postponed due to a
                                 Market Disruption Event or otherwise, the
                                 Maturity Date shall be postponed so that the
                                 Maturity Date shall be the second Trading Day
                                 following the Determination Date.

Determination Date...........    April 18, 2007; provided that if such date is
                                 not a Trading Day or if a Market Disruption
                                 Event occurs on such day, the Determination
                                 Date shall be the immediately succeeding
                                 Trading Day on which no Market Disruption Event
                                 occurs.

                                 In the event that the Determination Date and
                                 Maturity Date are postponed as described in the
                                 two immediately preceding paragraphs, the
                                 Issuer shall, or

                                       3

<PAGE>

                                 shall cause the Calculation Agent to, give
                                 notice of such postponement and, once it has
                                 been determined, of the date to which the
                                 Maturity Date has been rescheduled, as promptly
                                 as possible, and in no case later than 10:30
                                 a.m. on the Trading Day immediately prior to
                                 the Maturity Date (but if such Trading Day is
                                 not a Business Day, prior to the close of
                                 business on the Business Day preceding the
                                 Maturity Date) (i) to the holder of this HITS
                                 by mailing notice of such postponement by first
                                 class mail, postage prepaid, to the holder's
                                 last address as it shall appear upon the
                                 registry books, (ii) to the Trustee by
                                 telephone or facsimile confirmed by mailing
                                 such notice to the Trustee by first class mail,
                                 postage prepaid, at its New York office and
                                 (iii) to the Depositary by telephone or
                                 facsimile confirmed by mailing such notice to
                                 the Depositary by first class mail, postage
                                 prepaid. Any notice that is mailed in the
                                 manner herein provided shall be conclusively
                                 presumed to have been duly given, whether or
                                 not the holder of this HITS receives the
                                 notice.

Record Date..................    Notwithstanding the definition of "Record Date"
                                 on page 20 hereof, the Record Date for each
                                 Interest Payment Date, including the Interest
                                 Payment Date scheduled to occur on the Maturity
                                 Date, shall be the date 5 calendar days prior
                                 to such scheduled Interest Payment Date,
                                 whether or not that date is a Business Day.

Payment at Maturity..........    Unless the maturity of the HITS has been
                                 accelerated, on the Maturity Date, upon
                                 delivery of this HITS to the Trustee, each
                                 Stated Principal Amount of this HITS shall be
                                 applied by the Issuer as payment for, and the
                                 Issuer shall deliver, either:

                                 (i) if the Trading Price of the Underlying
                                 Stock has not decreased to or below the Trigger
                                 Price at any time on any Trading Day from and
                                 including the Pricing Date to and including the
                                 Determination Date, an amount in cash equal to
                                 the Stated Principal Amount per HITS, or

                                 (ii) if the Trading Price of the Underlying
                                 Stock has decreased to or below the Trigger
                                 Price at any time on any Trading Day from and
                                 including the Pricing Date to and including the
                                 Determination Date, a number of

                                       4
<PAGE>

                                 shares of the Underlying Stock equal to the
                                 product of the Exchange Ratio and the Exchange
                                 Factor, each determined as of the Determination
                                 Date by the Calculation Agent. See "Exchange
                                 Factor" above and "Antidilution Adjustments"
                                 below.

                                 The number of any shares of the Underlying
                                 Stock to be delivered at maturity shall be
                                 subject to any applicable adjustments (i) to
                                 the Exchange Factor and (ii) in the Exchange
                                 Property, as defined in paragraph 5 under
                                 "Antidilution Adjustments" below, to be
                                 delivered instead of, or in addition to, such
                                 Underlying Stock as a result of any corporate
                                 event described under "Antidilution
                                 Adjustments" below, in each case, required to
                                 be made up to the close of business on the
                                 Determination Date.

                                 The Issuer shall, or shall cause the
                                 Calculation Agent to, provide written notice to
                                 the Trustee at its New York Office and to the
                                 Depositary, on which notice the Trustee and
                                 Depositary may conclusively rely, on or prior
                                 to 10:30 a.m. on the Trading Day immediately
                                 prior to the Maturity Date (but if such Trading
                                 Day is not a Business Day, prior to the close
                                 of business on the Business Day preceding the
                                 Maturity Date), of the amount of cash or
                                 Underlying Stock (or the amount of Exchange
                                 Property), as applicable, to be delivered with
                                 respect to each Stated Principal Amount of this
                                 HITS and, in the event of a delivery of the
                                 Underlying Stock, of the amount of any cash to
                                 be paid in lieu of any fractional share of the
                                 Underlying Stock (or of any other securities
                                 included in Exchange Property, if applicable);
                                 provided that, if the Maturity Date of this
                                 HITS is accelerated because of a Price Event
                                 Acceleration (as defined below) or because of
                                 an Event of Default Acceleration (as defined in
                                 "Alternate Exchange Calculation in Case of an
                                 Event of Default" below), the Issuer shall, or
                                 shall cause the Calculation Agent to, give
                                 notice of such acceleration and of the amount
                                 of cash or Underlying Stock (or any Exchange
                                 Property) payable in connection therewith as
                                 promptly as possible and in no event later than
                                 (A) in the case of an Event of Default
                                 Acceleration, two Trading Days after the date
                                 of such acceleration (but if such second
                                 Trading Day is not a Business Day, prior to the
                                 close of business on the Business Day preceding
                                 such

                                       5
<PAGE>

                                 second Trading Day) and (B) in the case of a
                                 Price Event Acceleration, 10:30 a.m. on the
                                 Trading Day immediately prior to the date of
                                 acceleration (but if such Trading Day is not a
                                 Business Day, prior to the close of business on
                                 the Business Day preceding the date of
                                 acceleration), (i) to the holder of this HITS
                                 by mailing notice of such acceleration by first
                                 class mail, postage prepaid, to the holder's
                                 last address as it shall appear upon the
                                 registry books, and (ii) to the Trustee by
                                 telephone or facsimile confirmed by mailing
                                 such notice to the Trustee by first class mail,
                                 postage prepaid, at its New York office and
                                 (iii) to the Depositary by telephone or
                                 facsimile confirmed by mailing such notice to
                                 the Depositary by first class mail, postage
                                 prepaid. Any notice that is mailed in the
                                 manner herein provided shall be conclusively
                                 presumed to have been duly given, whether or
                                 not the holder of this HITS receives the
                                 notice. If the maturity of this HITS is
                                 accelerated in the manner described above, no
                                 interest on the amounts payable with respect to
                                 this HITS shall accrue for the period from and
                                 after such accelerated maturity date; provided
                                 that the Issuer has deposited with the Trustee
                                 the Underlying Stock, the Exchange Property or
                                 any cash due with respect to such acceleration
                                 by such accelerated maturity date.

                                 The Issuer shall, or shall cause the
                                 Calculation Agent to, deliver any such cash or
                                 shares of Underlying Stock (or any Exchange
                                 Property), as applicable, and cash in respect
                                 of interest and any fractional shares of
                                 Underlying Stock (or any Exchange Property) and
                                 cash otherwise due upon any acceleration
                                 described above to the Trustee for delivery to
                                 the holder of this HITS. The Calculation Agent
                                 shall determine the Exchange Factor applicable
                                 at the maturity of this HITS.

                                 If this HITS is not surrendered for exchange at
                                 maturity or upon acceleration, it shall be
                                 deemed to be no longer Outstanding under, and
                                 as defined in, the Senior Indenture, except
                                 with respect to the holder's right to receive
                                 the Underlying Stock (and, if applicable, any
                                 Exchange Property) and any cash in respect of
                                 interest and any fractional shares of
                                 Underlying Stock (or any Exchange Property) and
                                 any other cash due at maturity as described in
                                 the preceding paragraph under this heading.

                                       6
<PAGE>

                                 References to payment "per HITS" refer to each
                                 Stated Principal Amount of this HITS.

Price Event Acceleration.....    If on any two consecutive Trading Days during
                                 the period prior to and ending on the third
                                 Business Day immediately preceding the Maturity
                                 Date, the product of the Closing Price per
                                 share of Underlying Stock, as determined by the
                                 Calculation Agent, and the Exchange Factor is
                                 less than the Acceleration Trigger Price, the
                                 Maturity Date of this HITS shall be deemed to
                                 be accelerated to the third Business Day
                                 immediately following such second Trading Day
                                 (the "date of acceleration"). Upon such
                                 acceleration, the holder of this HITS shall
                                 receive per Stated Principal Amount of this
                                 HITS on the date of acceleration:

                                     (i) a number of shares of Underlying Stock
                                     equal to the product of the Exchange Ratio
                                     and the Exchange Factor, as of such date of
                                     acceleration; and

                                     (ii) accrued but unpaid interest to but
                                     excluding the date of acceleration plus an
                                     amount of cash, as determined by the
                                     Calculation Agent, equal to the sum of the
                                     present values of the remaining scheduled
                                     payments of interest on this HITS
                                     (excluding any portion of such payments of
                                     interest accrued to the date of
                                     acceleration) discounted to the date of
                                     acceleration based on the comparable yield
                                     that the Issuer would pay on a non-interest
                                     bearing, senior unsecured debt obligation
                                     of the Issuer having a maturity equal to
                                     the term of each such remaining scheduled
                                     payment, as determined by the Calculation
                                     Agent.

                                 The holder of this HITS shall not be entitled
                                 to receive the return of each Stated Principal
                                 Amount of this HITS upon a Price Event
                                 Acceleration.

No Fractional Shares.........    Upon delivery of this HITS to the Trustee at
                                 maturity (including as a result of acceleration
                                 other than an acceleration resulting from an
                                 Event of Default), and if applicable, the
                                 Issuer shall deliver the aggregate number of
                                 shares of Underlying Stock due with respect to
                                 this HITS, as described above, but the Issuer
                                 shall pay cash in lieu of delivering any
                                 fractional share of

                                       7
<PAGE>

                                 Underlying Stock in an amount equal to the
                                 corresponding fractional Closing Price of such
                                 fraction of a share of Underlying Stock as
                                 determined by the Calculation Agent as of the
                                 Determination Date.

Closing Price................    The Closing Price for one share of Underlying
                                 Stock (or one unit of any other security for
                                 which a Closing Price must be determined) on
                                 any Trading Day (as defined below) means:

                                     (i) if the Underlying Stock (or any such
                                     other security) is listed or admitted to
                                     trading on a national securities exchange,
                                     the last reported sale price, regular way,
                                     of the principal trading session on such
                                     day on the principal United States
                                     securities exchange registered under the
                                     Securities Exchange Act of 1934, as amended
                                     (the "Exchange Act"), on which the
                                     Underlying Stock (or any such other
                                     security) is listed or admitted to trading,

                                     (ii) if the Underlying Stock (or any such
                                     other security) is a security of the Nasdaq
                                     National Market (and provided that the
                                     Nasdaq National Market is not then a
                                     national securities exchange), the Nasdaq
                                     official closing price published by The
                                     Nasdaq Stock Market, Inc. on such day, or

                                     (iii) if the Underlying Stock (or any such
                                     other security) is neither listed or
                                     admitted to trading on any national
                                     securities exchange nor a security of the
                                     Nasdaq National Market but is included in
                                     the OTC Bulletin Board Service (the "OTC
                                     Bulletin Board") operated by the National
                                     Association of Securities Dealers, Inc.,
                                     the last reported sale price of the
                                     principal trading session on the OTC
                                     Bulletin Board on such day.

                                 If the Underlying Stock (or any such other
                                 security) is listed or admitted to trading on
                                 any national securities exchange or is a
                                 security of the Nasdaq National Market but the
                                 last reported sale price or Nasdaq official
                                 closing price, as applicable, is not available
                                 pursuant to the preceding sentence, then the
                                 Closing Price for one share of Underlying Stock
                                 (or one unit of any such other security) on any
                                 Trading Day shall mean the last reported sale
                                 price of the principal

                                       8
<PAGE>

                                 trading session on the over-the-counter market
                                 as reported on the Nasdaq National Market or
                                 the OTC Bulletin Board on such day. If, because
                                 of a Market Disruption Event (as defined below)
                                 or otherwise, the last reported sale price or
                                 Nasdaq official closing price, as applicable,
                                 for the Underlying Stock (or any such other
                                 security) is not available pursuant to either
                                 of the two preceding sentences, then the
                                 Closing Price for any Trading Day shall be the
                                 mean, as determined by the Calculation Agent,
                                 of the bid prices for the Underlying Stock (or
                                 any such other security) for such Trading Day
                                 obtained from as many recognized dealers in
                                 such security, but not exceeding three, as
                                 shall make such bid prices available to the
                                 Calculation Agent. Bids of MS & Co. or any of
                                 its affiliates may be included in the
                                 calculation of such mean, but only to the
                                 extent that any such bid is the highest of the
                                 bids obtained. The term "security of the Nasdaq
                                 National Market" shall include a security
                                 included in any successor to such system, and
                                 the term "OTC Bulletin Board Service" shall
                                 include any successor service thereto.

Intraday Price...............    The Intraday Price for one share of the
                                 Underlying Stock (or one unit of any other
                                 security for which an Intraday Price must be
                                 determined) at any time during any Trading Day
                                 (including at the close) means:

                                     (i) if the Underlying Stock (or any such
                                     other security) is listed or admitted to
                                     trading on a national securities exchange,
                                     the most recently reported sale price,
                                     regular way, at such time during the
                                     principal trading session on such day on
                                     the principal United States securities
                                     exchange registered under the Exchange Act
                                     on which the Underlying Stock (or any such
                                     other security) is listed or admitted to
                                     trading,

                                     (ii) if the Underlying Stock (or any such
                                     other security) is a security of the Nasdaq
                                     National Market (and provided that the
                                     Nasdaq National Market is not then a
                                     national securities exchange), the most
                                     recently reported sale price at such time
                                     quoted by The Nasdaq Stock Market, Inc. on
                                     such day, or

                                       9
<PAGE>

                                     (iii) if the Underlying Stock (or any such
                                     other security) is neither listed or
                                     admitted to trading on any national
                                     securities exchange nor a security of the
                                     Nasdaq National Market but is included in
                                     the OTC Bulletin Board, the most recently
                                     reported sale price at such time during the
                                     principal trading session on the OTC
                                     Bulletin Board on such day.

Trading Price................    Trading Price means the product of (i) the
                                 Intraday Price of one share of the Underlying
                                 Stock and (ii) the Exchange Factor, each as
                                 determined by the Calculation Agent at any time
                                 on any Trading Day.

Trading Day..................    A day, as determined by the Calculation Agent,
                                 on which trading is generally conducted on the
                                 New York Stock Exchange, Inc. ("NYSE"), the
                                 American Stock Exchange LLC, the Nasdaq
                                 National Market, the Chicago Mercantile
                                 Exchange and the Chicago Board of Options
                                 Exchange, and in the over-the-counter market
                                 for equity securities in the United States and,
                                 if the principal trading market for the
                                 Underlying Stock is outside the United States,
                                 in such principal trading market.

Calculation Agent............    Morgan Stanley & Co. Incorporated ("MS & Co.")
                                 and its successors.

                                 All determinations made by the Calculation
                                 Agent shall be at the sole discretion of the
                                 Calculation Agent and shall, in the absence of
                                 manifest error, be conclusive for all purposes
                                 and binding on the holder of this HITS, the
                                 Trustee and the Issuer.

                                 All calculations with respect to the Exchange
                                 Ratio and the Exchange Factor for this HITS
                                 shall be made by the Calculation Agent and
                                 shall be rounded to the nearest one
                                 hundred-thousandth, with five one-millionths
                                 rounded upward (e.g., .876545 would be rounded
                                 to .87655), and all dollar amounts paid to the
                                 holder of this HITS in the aggregate related to
                                 interest payments or the payment at maturity
                                 resulting from such calculations shall be
                                 rounded to the nearest cent with one-half cent
                                 rounded upward.

Antidilution Adjustments.....    The Exchange Factor shall be adjusted as
                                 follows:

                                       10
<PAGE>

                                 1. If the Underlying Stock is subject to a
                                 stock split or reverse stock split, then once
                                 such split has become effective, the Exchange
                                 Factor shall be adjusted to equal the product
                                 of the prior Exchange Factor and the number of
                                 shares issued in such stock split or reverse
                                 stock split with respect to one share of the
                                 Underlying Stock.

                                 2. If the Underlying Stock is subject (i) to a
                                 stock dividend (issuance of additional shares
                                 of the Underlying Stock) that is given ratably
                                 to all holders of shares of the Underlying
                                 Stock or (ii) to a distribution of the
                                 Underlying Stock as a result of the triggering
                                 of any provision of the corporate charter of
                                 the Underlying Company, then once the dividend
                                 has become effective and the Underlying Stock
                                 is trading ex-dividend, the Exchange Factor
                                 shall be adjusted so that the new Exchange
                                 Factor shall equal the prior Exchange Factor
                                 plus the product of (i) the number of shares
                                 issued with respect to one share of the
                                 Underlying Stock and (ii) the prior Exchange
                                 Factor.

                                 3. If the Underlying Company issues rights or
                                 warrants to all holders of the Underlying Stock
                                 to subscribe for or purchase the Underlying
                                 Stock at an exercise price per share less than
                                 the Closing Price of the Underlying Stock on
                                 both (i) the date the exercise price of such
                                 rights or warrants is determined and (ii) the
                                 expiration date of such rights or warrants, and
                                 if the expiration date of such rights or
                                 warrants precedes the maturity of this HITS,
                                 then the Exchange Factor shall be adjusted to
                                 equal the product of the prior Exchange Factor
                                 and a fraction, the numerator of which shall be
                                 the number of shares of the Underlying Stock
                                 outstanding immediately prior to the issuance
                                 of such rights or warrants plus the number of
                                 additional shares of the Underlying Stock
                                 offered for subscription or purchase pursuant
                                 to such rights or warrants and the denominator
                                 of which shall be the number of shares of the
                                 Underlying Stock outstanding immediately prior
                                 to the issuance of such rights or warrants plus
                                 the number of additional shares of the
                                 Underlying Stock which the aggregate offering
                                 price of the total number of shares of the
                                 Underlying Stock so offered for subscription or
                                 purchase pursuant to such rights or warrants
                                 would purchase at the Closing Price on the
                                 expiration date of

                                       11
<PAGE>

                                 such rights or warrants, which shall be
                                 determined by multiplying such total number of
                                 shares offered by the exercise price of such
                                 rights or warrants and dividing the product so
                                 obtained by such Closing Price.

                                 4. There shall be no adjustments to the
                                 Exchange Factor to reflect cash dividends or
                                 other distributions paid with respect to the
                                 Underlying Stock other than distributions
                                 described in paragraph 2, paragraph 3 and
                                 clauses (i), (iv) and (v) of paragraph 5 below
                                 and Extraordinary Dividends as described below.
                                 A cash dividend or other distribution with
                                 respect to the Underlying Stock shall be deemed
                                 to be an "Extraordinary Dividend" if such cash
                                 dividend or distribution (a) is defined by the
                                 Underlying Company as an extraordinary or
                                 special dividend or distribution, or (b)
                                 exceeds the immediately preceding
                                 non-Extraordinary Dividend for the Underlying
                                 Stock by an amount equal to at least 5% of the
                                 Closing Price of the Underlying Stock (as
                                 adjusted for any subsequent corporate event
                                 requiring an adjustment hereunder, such as a
                                 stock split or reverse stock split) on the
                                 Trading Day preceding the ex-dividend date
                                 (that is, the day on and after which
                                 transactions in the Underlying Stock on the
                                 primary U.S. organized securities exchange or
                                 trading system on which the Underlying Stock is
                                 traded or trading system no longer carry the
                                 right to receive that cash dividend or that
                                 cash distribution) for the payment of such
                                 Extraordinary Dividend. If an Extraordinary
                                 Dividend occurs with respect to the Underlying
                                 Stock, the Exchange Factor with respect to the
                                 Underlying Stock shall be adjusted on the
                                 ex-dividend date with respect to such
                                 Extraordinary Dividend so that the new Exchange
                                 Factor shall equal the product of (i) the then
                                 current Exchange Factor and (ii) a fraction,
                                 the numerator of which is the Closing Price on
                                 the Trading Day preceding the ex-dividend date,
                                 and the denominator of which is the amount by
                                 which the Closing Price on the Trading Day
                                 preceding the ex-dividend date exceeds the
                                 Extraordinary Dividend Amount. The
                                 "Extraordinary Dividend Amount" with respect to
                                 an Extraordinary Dividend for the Underlying
                                 Stock shall equal (i) in the case of cash
                                 dividends or other distributions that
                                 constitute regular dividends, the amount per
                                 share of such Extraordinary

                                       12
<PAGE>

                                 Dividend minus the amount per share of the
                                 immediately preceding non-Extraordinary
                                 Dividend for the Underlying Stock or (ii) in
                                 the case of cash dividends or other
                                 distributions that do not constitute regular
                                 dividends, the amount per share of such
                                 Extraordinary Dividend. To the extent an
                                 Extraordinary Dividend is not paid in cash, the
                                 value of the non-cash component shall be
                                 determined by the Calculation Agent, whose
                                 determination shall be conclusive. A
                                 distribution on the Underlying Stock described
                                 in clause (i), (iv) or (v) of paragraph 5 below
                                 that also constitutes an Extraordinary Dividend
                                 shall cause an adjustment to the Exchange
                                 Factor pursuant only to clause (i), (iv) or (v)
                                 of paragraph 5, as applicable.

                                 5. If (i) there occurs any reclassification or
                                 change of the Underlying Stock, including,
                                 without limitation, as a result of the issuance
                                 of any tracking stock by the Underlying
                                 Company, (ii) the Underlying Company or any
                                 surviving entity or subsequent surviving entity
                                 of the Underlying Company (an "Underlying
                                 Company Successor") has been subject to a
                                 merger, combination or consolidation and is not
                                 the surviving entity, (iii) any statutory
                                 exchange of securities of the Underlying
                                 Company or any Underlying Company Successor
                                 with another corporation occurs (other than
                                 pursuant to clause (ii) above), (iv) the
                                 Underlying Company is liquidated, (v) the
                                 Underlying Company issues to all of its
                                 shareholders equity securities of an issuer
                                 other than the Underlying Company (other than
                                 in a transaction described in clause (ii),
                                 (iii) or (iv) above) (a "Spin-off Event") or
                                 (vi) a tender or exchange offer or
                                 going-private transaction is consummated for
                                 all the outstanding shares of the Underlying
                                 Stock (any such event in clauses (i) through
                                 (vi), a "Reorganization Event"), the method of
                                 determining the amount payable upon exchange at
                                 maturity for each HITS shall be adjusted to
                                 provide that holders shall be entitled to
                                 receive at maturity, in respect of the stated
                                 principal amount of each HITS either:

                                     (a) if (x) the trading price of the
                                     Underlying Stock at any time on any Trading
                                     Day from and including the Pricing Date to
                                     and including the effective date of the
                                     Reorganization Event, or (y) the Exchange

                                       13
<PAGE>

                                     Property Value (as defined below) at any
                                     time on any Trading Day from and including
                                     the effective date of the Reorganization
                                     Event to and including the Determination
                                     Date has not decreased to or below the
                                     Trigger Price, and amount of cash equal to
                                     the stated principal amount of each HITS,
                                     or

                                     (b) if (x) the trading price of the
                                     Underlying Stock at any time on any Trading
                                     Day from and including the Pricing Date to
                                     and including the effective date of the
                                     Reorganization Event, or (y) the Exchange
                                     Property Value (as defined below) at any
                                     time on any Trading Day from and including
                                     the effective date of the Reorganization
                                     Event to and including the Determination
                                     Date has decreased to or below the Trigger
                                     Price, securities, cash or any other assets
                                     distributed to holders of the Underlying
                                     Stock in or as a result of any such
                                     Reorganization Event, including (A) in the
                                     case of the issuance of tracking stock, the
                                     reclassified share of the Underlying Stock,
                                     (B) in the case of a Spin-off Event, the
                                     share of the Underlying Stock with respect
                                     to which the spun-off security was issued,
                                     and (C) in the case of any other
                                     Reorganization Event where the Underlying
                                     Stock continues to be held by the holders
                                     receiving such distribution, the Underlying
                                     Stock (collectively, the "Exchange
                                     Property"), in an amount equal to the
                                     amount of Exchange Property delivered with
                                     respect to a number of shares of the
                                     Underlying Stock equal to the Exchange
                                     Ratio times the Exchange Factor each
                                     determined at the time of the
                                     Reorganization Event.

                                 If Exchange Property consists of more than one
                                 type of property, the Issuer shall deliver to
                                 the Depositary, as holder of the HITS, at
                                 maturity a pro rata share of each such type of
                                 Exchange Property. If Exchange Property
                                 includes a cash component, holders shall not
                                 receive any interest accrued on such cash
                                 component. In the event Exchange Property
                                 consists of securities, such securities shall,
                                 in turn, be subject to the antidilution
                                 adjustments set forth in paragraphs 1 through
                                 5.

                                       14
<PAGE>

                                 For purposes of determining whether or not the
                                 Exchange Property Value has decreased to or
                                 below the Trigger Level at any time on any
                                 Trading Day from and including the time of the
                                 Reorganization Event to and including the
                                 Determination Date, "Exchange Property Value"
                                 means (i) for any cash received in any
                                 Reorganization Event, the value, as determined
                                 by the Calculation Agent, as of the date of
                                 receipt, of such cash received for one share of
                                 the Underlying Stock, as adjusted by the
                                 Exchange Factor as the time of such
                                 Reorganization Event, (ii) for any property
                                 other than cash or securities received in any
                                 such Reorganization Event, the market value, as
                                 determined by the Calculation Agent in its sole
                                 discretion, as of the date of receipt, of such
                                 Exchange Property received for one share of the
                                 Underlying Stock, as adjusted by the Exchange
                                 Factor at the time of such Reorganization Event
                                 and (iii) for any security received in any such
                                 Reorganization Event, an amount equal to the
                                 Intraday Price, as of the time at which the
                                 Exchange Property Value is determined, per
                                 share of such security multiplied by the
                                 quantity of such security received for each
                                 share of the Underlying Stock, as adjusted by
                                 the Exchange Factor at the time of such
                                 Reorganization Event.

                                 For purposes of paragraph 5 above, in the case
                                 of a consummated tender or exchange offer or
                                 going-private transaction involving
                                 consideration of particular types, Exchange
                                 Property shall be deemed to include the amount
                                 of cash or other property delivered by the
                                 offeror in the tender or exchange offer (in an
                                 amount determined on the basis of the rate of
                                 exchange in such tender or exchange offer or
                                 going-private transaction). In the event of a
                                 tender or exchange offer or a going-private
                                 transaction with respect to Exchange Property
                                 in which an offeree may elect to receive cash
                                 or other property, Exchange Property shall be
                                 deemed to include the kind and amount of cash
                                 and other property received by offerees who
                                 elect to receive cash.

                                 Following the occurrence of any Reorganization
                                 Event referred to in paragraph 5 above, (i)
                                 references to the "Underlying Stock" under "No
                                 Fractional Shares," "Price Event Acceleration"
                                 and "Alternate Exchange

                                       15
<PAGE>

                                 Calculation in Case of an Event of Default"
                                 shall be deemed to also refer to any other
                                 security received by holders of the Underlying
                                 Stock in any such Reorganization Event, and
                                 (ii) all other references in this HITS to
                                 "Underlying Stock" shall be deemed to refer to
                                 the Exchange Property into which this HITS is
                                 thereafter exchangeable and references to a
                                 "share" or "shares" of the Underlying Stock
                                 shall be deemed to refer to the applicable unit
                                 or units of such Exchange Property, unless the
                                 context otherwise requires.

                                 No adjustment to the Exchange Factor shall be
                                 required unless such adjustment would require a
                                 change of at least 0.1% in the Exchange Factor
                                 then in effect. The Exchange Factor resulting
                                 from any of the adjustments specified above
                                 shall be rounded to the nearest one
                                 hundred-thousandth, with five one-millionths
                                 rounded upward. Adjustments to the Exchange
                                 Factor shall be made up to the close of
                                 business on the Determination Date.

                                 No adjustments to the Exchange Factor or method
                                 of calculating the Exchange Factor shall be
                                 required other than as specified above.

                                 The Calculation Agent shall be solely
                                 responsible for the determination and
                                 calculation of any adjustments to the Exchange
                                 Factor or method of calculating the Exchange
                                 Factor and of any related determinations and
                                 calculations with respect to any distributions
                                 of stock, other securities or other property or
                                 assets (including cash) in connection with any
                                 corporate event described in paragraphs 1
                                 through 5 above, and its determinations and
                                 calculations with respect thereto shall be
                                 conclusive in the absence of manifest error.

                                 The Calculation Agent shall provide information
                                 as to any adjustments to the Exchange Factor or
                                 to the method of calculating the amount payable
                                 at maturity of this HITS made pursuant to
                                 paragraph 5 above upon written request by any
                                 holder of this HITS.

Market Disruption Event......    Market Disruption Event means, with respect to
                                 the Underlying Stock:

                                       16
<PAGE>

                                     (i) a suspension, absence or material
                                     limitation of trading of the Underlying
                                     Stock on the primary market for the
                                     Underlying Stock for more than two hours of
                                     trading or during the one-half hour period
                                     preceding the close of the principal
                                     trading session in such market; or a
                                     breakdown or failure in the price and trade
                                     reporting systems of the primary market for
                                     the Underlying Stock as a result of which
                                     the reported trading prices for the
                                     Underlying Stock during the last one-half
                                     hour preceding the close of the principal
                                     trading session in such market are
                                     materially inaccurate; or the suspension,
                                     absence or material limitation of trading
                                     on the primary market for trading in
                                     options contracts related to the Underlying
                                     Stock, if available, during the one-half
                                     hour period preceding the close of the
                                     principal trading session in the applicable
                                     market, in each case as determined by the
                                     Calculation Agent in its sole discretion;
                                     and

                                     (ii) a determination by the Calculation
                                     Agent in its sole discretion that any event
                                     described in clause (i) above materially
                                     interfered with the ability of the Issuer
                                     or any of its affiliates to unwind or
                                     adjust all or a material portion of the
                                     hedge with respect to the HITS.

                                 For purposes of determining whether a Market
                                 Disruption Event has occurred: (1) a limitation
                                 on the hours or number of days of trading shall
                                 not constitute a Market Disruption Event if it
                                 results from an announced change in the regular
                                 business hours of the relevant exchange, (2) a
                                 decision to permanently discontinue trading in
                                 the relevant options contract shall not
                                 constitute a Market Disruption Event, (3)
                                 limitations pursuant to NYSE Rule 80A (or any
                                 applicable rule or regulation enacted or
                                 promulgated by the NYSE, any other
                                 self-regulatory organization or the Securities
                                 and Exchange Commission of scope similar to
                                 NYSE Rule 80A as determined by the Calculation
                                 Agent) on trading during significant market
                                 fluctuations shall constitute a suspension,
                                 absence or material limitation of trading, (4)
                                 a suspension of trading in options contracts on
                                 the Underlying Stock by the primary securities
                                 market

                                       17
<PAGE>

                                 trading in such options, if available, by
                                 reason of (x) a price change exceeding limits
                                 set by such securities exchange or market, (y)
                                 an imbalance of orders relating to such
                                 contracts or (z) a disparity in bid and ask
                                 quotes relating to such contracts shall
                                 constitute a suspension, absence or material
                                 limitation of trading in options contracts
                                 related to the Underlying Stock and (5) a
                                 suspension, absence or material limitation of
                                 trading on the primary securities market on
                                 which options contracts related to the
                                 Underlying Stock are traded shall not include
                                 any time when such securities market is itself
                                 closed for trading under ordinary
                                 circumstances.

Alternate Exchange
  Calculation in Case of an
  Event of Default...........    In case an Event of Default with respect to the
                                 HITS shall have occurred and be continuing, the
                                 amount declared due and payable per each Stated
                                 Principal Amount of this HITS upon any
                                 acceleration of this HITS (an "Event of Default
                                 Acceleration") shall be determined by the
                                 Calculation Agent and shall be an amount in
                                 cash equal to either (i) the Stated Principal
                                 Amount of this HITS plus accrued but unpaid
                                 interest to but excluding the date of such
                                 acceleration or (ii) if the Trading Price of
                                 the Underlying Stock has decreased to or below
                                 the Trigger Price at any time on any Trading
                                 Day from and including the Pricing Date to and
                                 including the date of such acceleration, (x)
                                 the value, as determined based on the Closing
                                 Price of the Underlying Stock on the date of
                                 such acceleration, of a number of shares of the
                                 Underlying Stock at the Exchange Ratio
                                 multiplied by the Exchange Factor as of the
                                 date of acceleration and (y) accrued but unpaid
                                 interest to but excluding the date of such
                                 acceleration.

Treatment of HITS for
  United States Federal
  Income Tax Purposes........    The Issuer, by its sale of this HITS, and the
                                 holder of this HITS (and any successor holder
                                 of, or holder of a beneficial interest in, this
                                 HITS), by its respective purchase hereof, agree
                                 (in the absence of an administrative
                                 determination or judicial ruling to the
                                 contrary) to characterize each Stated Principal
                                 Amount of this HITS for all tax purposes as a
                                 unit consisting of (i) an option (the "Option")
                                 granted by the holder to enter into a forward
                                 contract (the "Forward Contract"),

                                       18
<PAGE>

                                 pursuant to which Forward Contract the holder
                                 of this HITS will be required to purchase from
                                 us the Underlying Stock, for an amount equal to
                                 the Stated Principal Amount (the "Forward
                                 Price") at maturity or, alternatively, upon an
                                 earlier redemption of this HITS and (ii) a
                                 deposit with the Issuer of a fixed amount of
                                 cash, equal to the issue price per each Stated
                                 Principal Amount of this HITS, to secure the
                                 holder's obligation to purchase the Underlying
                                 Stock pursuant to the Forward Contract (the
                                 "Deposit"). The Issuer has determined that the
                                 Deposit bears a quarterly compounded yield of
                                     % per annum, and the remainder of the
                                 interest payments on this HITS ( % per annum)
                                 is attributable to premiums on the Option.
                                 Notwithstanding the foregoing, any interest
                                 payments on this HITS made to non-U.S.
                                 investors will generally be withheld upon at a
                                 rate of 30%.

                                       19
<PAGE>

     Morgan Stanley, a Delaware corporation (together with its successors and
assigns, the "Issuer"), for value received, hereby promises to pay to CEDE &
CO., or registered assignees, the amount of cash or Underlying Stock (or the
amount of Exchange Property), as applicable, as determined in accordance with
the provisions set forth under "Payment at Maturity" above, due with respect to
the principal sum of U.S. $       (UNITED STATES DOLLARS               ) on the
Maturity Date specified above (except to the extent redeemed or repaid prior to
maturity) and to pay interest thereon at the Interest Rate per annum specified
above, from and including the Interest Accrual Date specified above until the
principal hereof is paid or duly made available for payment weekly, monthly,
quarterly, semiannually or annually in arrears as specified above as the
Interest Payment Period on each Interest Payment Date (as specified above),
commencing on the Interest Payment Date next succeeding the Interest Accrual
Date specified above, and at maturity (or on any redemption or repayment date);
provided, however, that if the Interest Accrual Date occurs between a Record
Date, as defined below, and the next succeeding Interest Payment Date, interest
payments will commence on the second Interest Payment Date succeeding the
Interest Accrual Date to the registered holder of this Note on the Record Date
with respect to such second Interest Payment Date; and provided, further, that
if this Note is subject to "Annual Interest Payments," interest payments shall
be made annually in arrears and the term "Interest Payment Date" shall be deemed
to mean the first day of March in each year.

     Interest on this Note will accrue from and including the most recent date
to which interest has been paid or duly provided for, or, if no interest has
been paid or duly provided for, from and including the Interest Accrual Date,
until but excluding the date the principal hereof has been paid or duly made
available for payment. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, subject to certain exceptions
described herein, be paid to the person in whose name this Note (or one or more
predecessor Notes) is registered at the close of business on the date 15
calendar days prior to such Interest Payment Date (whether or not a Business Day
(as defined below)) (each such date, a "Record Date"); provided, however, that
interest payable at maturity (or any redemption or repayment date) will be
payable to the person to whom the principal hereof shall be payable. As used
herein, "Business Day" means any day, other than a Saturday or Sunday, (a) that
is neither a legal holiday nor a day on which banking institutions are
authorized or required by law or regulation to close (x) in The City of New York
or (y) if this Note is denominated in a Specified Currency other than U.S.
dollars, euro or Australian dollars, in the principal financial center of the
country of the Specified Currency, or (z) if this Note is denominated in
Australian dollars, in Sydney and (b) if this Note is denominated in euro, that
is also a day on which the Trans-European Automated Real-time Gross Settlement
Express Transfer System ("TARGET") is operating (a "TARGET Settlement Day").

     Payment of the principal of this Note, any premium and the interest due at
maturity (or any redemption or repayment date), unless this Note is denominated
in a Specified Currency other than U.S. dollars and is to be paid in whole or in
part in such Specified Currency, will be made in immediately available funds
upon surrender of this Note at the office or agency of the Paying Agent, as
defined on the reverse hereof, maintained for that purpose in the Borough of
Manhattan, The City of New York, or at such other paying agency as the Issuer
may determine, in U.S. dollars. U.S. dollar payments of interest, other than
interest due at maturity or on any

                                       20
<PAGE>

date of redemption or repayment, will be made by U.S. dollar check mailed to the
address of the person entitled thereto as such address shall appear in the Note
register. A holder of U.S. $10,000,000 (or the equivalent in a Specified
Currency) or more in aggregate principal amount of Notes having the same
Interest Payment Date, the interest on which is payable in U.S. dollars, shall
be entitled to receive payments of interest, other than interest due at maturity
or on any date of redemption or repayment, by wire transfer of immediately
available funds if appropriate wire transfer instructions have been received by
the Paying Agent in writing not less than 15 calendar days prior to the
applicable Interest Payment Date.

     If this Note is denominated in a Specified Currency other than U.S.
dollars, and the holder does not elect (in whole or in part) to receive payment
in U.S. dollars pursuant to the next succeeding paragraph, payments of interest,
principal or any premium with regard to this Note will be made by wire transfer
of immediately available funds to an account maintained by the holder hereof
with a bank located outside the United States if appropriate wire transfer
instructions have been received by the Paying Agent in writing, with respect to
payments of interest, on or prior to the fifth Business Day after the applicable
Record Date and, with respect to payments of principal or any premium, at least
ten Business Days prior to the Maturity Date or any redemption or repayment
date, as the case may be; provided that, if payment of interest, principal or
any premium with regard to this Note is payable in euro, the account must be a
euro account in a country for which the euro is the lawful currency, provided,
further, that if such wire transfer instructions are not received, such payments
will be made by check payable in such Specified Currency mailed to the address
of the person entitled thereto as such address shall appear in the Note
register; and provided, further, that payment of the principal of this Note, any
premium and the interest due at maturity (or on any redemption or repayment
date) will be made upon surrender of this Note at the office or agency referred
to in the preceding paragraph.

     If so indicated on the face hereof, the holder of this Note, if denominated
in a Specified Currency other than U.S. dollars, may elect to receive all or a
portion of payments on this Note in U.S. dollars by transmitting a written
request to the Paying Agent, on or prior to the fifth Business Day after such
Record Date or at least ten Business Days prior to the Maturity Date or any
redemption or repayment date, as the case may be. Such election shall remain in
effect unless such request is revoked by written notice to the Paying Agent as
to all or a portion of payments on this Note at least five Business Days prior
to such Record Date, for payments of interest, or at least ten calendar days
prior to the Maturity Date or any redemption or repayment date, for payments of
principal, as the case may be.

     If the holder elects to receive all or a portion of payments of principal
of, premium, if any, and interest on this Note, if denominated in a Specified
Currency other than U.S. dollars, in U.S. dollars, the Exchange Rate Agent (as
defined on the reverse hereof) will convert such payments into U.S. dollars. In
the event of such an election, payment in respect of this Note will be based
upon the exchange rate as determined by the Exchange Rate Agent based on the
highest bid quotation in The City of New York received by such Exchange Rate
Agent at approximately 11:00 a.m., New York City time, on the second Business
Day preceding the applicable payment date from three recognized foreign exchange
dealers (one of which may be the Exchange Rate Agent unless such Exchange Rate
Agent is an affiliate of the Issuer) for the purchase by the quoting dealer of
the Specified Currency for U.S. dollars for settlement on such payment date in

                                       21
<PAGE>

the amount of the Specified Currency payable in the absence of such an election
to such holder and at which the applicable dealer commits to execute a contract.
If such bid quotations are not available, such payment will be made in the
Specified Currency. All currency exchange costs will be borne by the holder of
this Note by deductions from such payments.

     Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.

     Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Note shall
not be entitled to any benefit under the Senior Indenture, as defined on the
reverse hereof, or be valid or obligatory for any purpose.

                                       22
<PAGE>

        IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed.

DATED:                              MORGAN STANLEY

                                    By:
                                           -------------------------------------
                                           Name:
                                           Title:

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

JPMORGAN CHASE BANK, N.A.,
   as Trustee

By:
       --------------------------------------------
       Authorized Officer

                                       23
<PAGE>

                           FORM OF REVERSE OF SECURITY

     This Note is one of a duly authorized issue of Senior Global Medium-Term
Notes, Series F, having maturities more than nine months from the date of issue
(the "Notes") of the Issuer. The Notes are issuable under a Senior Indenture,
dated as of November 1, 2004, between the Issuer and JPMorgan Chase Bank, N.A.
(formerly known as JPMorgan Chase Bank), as Trustee (the "Trustee," which term
includes any successor trustee under the Senior Indenture) (as may be amended or
supplemented from time to time, the "Senior Indenture"), to which Senior
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties and immunities
of the Issuer, the Trustee and holders of the Notes and the terms upon which the
Notes are, and are to be, authenticated and delivered. The Issuer has appointed
JPMorgan Chase Bank, N.A. at its corporate trust office in The City of New York
as the paying agent (the "Paying Agent," which term includes any additional or
successor Paying Agent appointed by the Issuer) with respect to the Notes. The
terms of individual Notes may vary with respect to interest rates, interest rate
formulas, issue dates, maturity dates, or otherwise, all as provided in the
Senior Indenture. To the extent not inconsistent herewith, the terms of the
Senior Indenture are hereby incorporated by reference herein.

     Unless otherwise indicated on the face hereof, this Note will not be
subject to any sinking fund and, unless otherwise provided on the face hereof in
accordance with the provisions of the following two paragraphs, will not be
redeemable or subject to repayment at the option of the holder prior to
maturity.

     If so indicated on the face hereof, this Note may be redeemed in whole or
in part at the option of the Issuer on or after the Initial Redemption Date
specified on the face hereof on the terms set forth on the face hereof, together
with interest accrued and unpaid hereon to the date of redemption. If this Note
is subject to "Annual Redemption Percentage Reduction," the Initial Redemption
Percentage indicated on the face hereof will be reduced on each anniversary of
the Initial Redemption Date by the Annual Redemption Percentage Reduction
specified on the face hereof until the redemption price of this Note is 100% of
the principal amount hereof, together with interest accrued and unpaid hereon to
the date of redemption. If the face hereof indicates that this Note is subject
to "Modified Payment upon Acceleration or Redemption", the amount of principal
payable upon redemption will be limited to the aggregate principal amount hereof
multiplied by the sum of the Issue Price specified on the face hereof (expressed
as a percentage of the aggregate principal amount) plus the original issue
discount accrued from the Interest Accrual Date to the date of redemption
(expressed as a percentage of the aggregate principal amount), with the amount
of original issue discount accrued being calculated using a constant yield
method (as described below). Notice of redemption shall be mailed to the
registered holders of the Notes designated for redemption at their addresses as
the same shall appear on the Note register not less than 30 nor more than 60
calendar days prior to the date fixed for redemption or within the Redemption
Notice Period specified on the face hereof, subject to all the conditions and
provisions of the Senior Indenture. In the event of redemption of this Note in
part only, a new Note or Notes for the amount of the unredeemed portion hereof
shall be issued in the name of the holder hereof upon the cancellation hereof.

                                       24
<PAGE>

     If so indicated on the face of this Note, this Note will be subject to
repayment at the option of the holder on the Optional Repayment Date or Dates
specified on the face hereof on the terms set forth herein. On any Optional
Repayment Date, this Note will be repayable in whole or in part in increments of
$1,000 or, if this Note is denominated in a Specified Currency other than U.S.
dollars, in increments of 1,000 units of such Specified Currency (provided that
any remaining principal amount hereof shall not be less than the minimum
authorized denomination hereof) at the option of the holder hereof at a price
equal to 100% of the principal amount to be repaid, together with interest
accrued and unpaid hereon to the date of repayment, provided that if the face
hereof indicates that this Note is subject to "Modified Payment upon
Acceleration or Redemption", the amount of principal payable upon repayment will
be limited to the aggregate principal amount hereof multiplied by the sum of the
Issue Price specified on the face hereof (expressed as a percentage of the
aggregate principal amount) plus the original issue discount accrued from the
Interest Accrual Date to the date of repayment (expressed as a percentage of the
aggregate principal amount), with the amount of original issue discount accrued
being calculated using a constant yield method (as described below). For this
Note to be repaid at the option of the holder hereof, the Paying Agent must
receive at its corporate trust office in the Borough of Manhattan, The City of
New York, at least 15 but not more than 30 calendar days prior to the date of
repayment, (i) this Note with the form entitled "Option to Elect Repayment"
below duly completed or (ii) a telegram, telex, facsimile transmission or a
letter from a member of a national securities exchange or the National
Association of Securities Dealers, Inc. or a commercial bank or a trust company
in the United States setting forth the name of the holder of this Note, the
principal amount hereof, the certificate number of this Note or a description of
this Note's tenor and terms, the principal amount hereof to be repaid, a
statement that the option to elect repayment is being exercised thereby and a
guarantee that this Note, together with the form entitled "Option to Elect
Repayment" duly completed, will be received by the Paying Agent not later than
the fifth Business Day after the date of such telegram, telex, facsimile
transmission or letter; provided, that such telegram, telex, facsimile
transmission or letter shall only be effective if this Note and form duly
completed are received by the Paying Agent by such fifth Business Day. Exercise
of such repayment option by the holder hereof shall be irrevocable. In the event
of repayment of this Note in part only, a new Note or Notes for the amount of
the unpaid portion hereof shall be issued in the name of the holder hereof upon
the cancellation hereof.

     Interest payments on this Note will include interest accrued to but
excluding the Interest Payment Dates or the Maturity Date (or any earlier
redemption or repayment date), as the case may be. Unless otherwise provided on
the face hereof, interest payments for this Note will be computed and paid on
the basis of a 360-day year of twelve 30-day months.

     In the case where the Interest Payment Date or the Maturity Date (or any
redemption or repayment date) does not fall on a Business Day, payment of
interest, premium, if any, or principal otherwise payable on such date need not
be made on such date, but may be made on the next succeeding Business Day with
the same force and effect as if made on the Interest Payment Date or on the
Maturity Date (or any redemption or repayment date), and no interest on such
payment shall accrue for the period from and after the Interest Payment Date or
the Maturity Date (or any redemption or repayment date) to such next succeeding
Business Day.

                                       25
<PAGE>

     This Note and all the obligations of the Issuer hereunder are direct,
unsecured obligations of the Issuer and rank without preference or priority
among themselves and pari passu with all other existing and future unsecured and
unsubordinated indebtedness of the Issuer, subject to certain statutory
exceptions in the event of liquidation upon insolvency.

     This Note, and any Note or Notes issued upon transfer or exchange hereof,
is issuable only in fully registered form, without coupons, and, if denominated
in U.S. dollars, unless otherwise stated above, is issuable only in
denominations of U.S. $1,000 and any integral multiple of U.S. $1,000 in excess
thereof. If this Note is denominated in a Specified Currency other than U.S.
dollars, then, unless a higher minimum denomination is required by applicable
law, it is issuable only in denominations of the equivalent of U.S. $1,000
(rounded to an integral multiple of 1,000 units of such Specified Currency), or
any amount in excess thereof which is an integral multiple of 1,000 units of
such Specified Currency, as determined by reference to the noon dollar buying
rate in The City of New York for cable transfers of such Specified Currency
published by the Federal Reserve Bank of New York (the "Market Exchange Rate")
on the Business Day immediately preceding the date of issuance.

     The Trustee has been appointed registrar for the Notes, and the Trustee
will maintain at its office in The City of New York a register for the
registration and transfer of Notes. This Note may be transferred at the
aforesaid office of the Trustee by surrendering this Note for cancellation,
accompanied by a written instrument of transfer in form satisfactory to the
Issuer and the Trustee and duly executed by the registered holder hereof in
person or by the holder's attorney duly authorized in writing, and thereupon the
Trustee shall issue in the name of the transferee or transferees, in exchange
herefor, a new Note or Notes having identical terms and provisions and having a
like aggregate principal amount in authorized denominations, subject to the
terms and conditions set forth herein; provided, however, that the Trustee will
not be required (i) to register the transfer of or exchange any Note that has
been called for redemption in whole or in part, except the unredeemed portion of
Notes being redeemed in part, (ii) to register the transfer of or exchange any
Note if the holder thereof has exercised his right, if any, to require the
Issuer to repurchase such Note in whole or in part, except the portion of such
Note not required to be repurchased, or (iii) to register the transfer of or
exchange Notes to the extent and during the period so provided in the Senior
Indenture with respect to the redemption of Notes. Notes are exchangeable at
said office for other Notes of other authorized denominations of equal aggregate
principal amount having identical terms and provisions. All such exchanges and
transfers of Notes will be free of charge, but the Issuer may require payment of
a sum sufficient to cover any tax or other governmental charge in connection
therewith. All Notes surrendered for exchange shall be accompanied by a written
instrument of transfer in form satisfactory to the Issuer and the Trustee and
executed by the registered holder in person or by the holder's attorney duly
authorized in writing. The date of registration of any Note delivered upon any
exchange or transfer of Notes shall be such that no gain or loss of interest
results from such exchange or transfer.

                                       26
<PAGE>

     In case this Note shall at any time become mutilated, defaced or be
destroyed, lost or stolen and this Note or evidence of the loss, theft or
destruction thereof (together with the indemnity hereinafter referred to and
such other documents or proof as may be required in the premises) shall be
delivered to the Trustee, the Issuer in its discretion may execute a new Note of
like tenor in exchange for this Note, but, if this Note is destroyed, lost or
stolen, only upon receipt of evidence satisfactory to the Trustee and the Issuer
that this Note was destroyed or lost or stolen and, if required, upon receipt
also of indemnity satisfactory to each of them. All expenses and reasonable
charges associated with procuring such indemnity and with the preparation,
authentication and delivery of a new Note shall be borne by the owner of the
Note mutilated, defaced, destroyed, lost or stolen.

     The Senior Indenture provides that (a) if an Event of Default (as defined
in the Senior Indenture) due to the default in payment of principal of, premium,
if any, or interest on, any series of debt securities issued under the Senior
Indenture, including the series of Senior Medium-Term Notes of which this Note
forms a part, or due to the default in the performance or breach of any other
covenant or warranty of the Issuer applicable to the debt securities of such
series but not applicable to all outstanding debt securities issued under the
Senior Indenture shall have occurred and be continuing, either the Trustee or
the holders of not less than 25% in aggregate principal amount of the
outstanding debt securities of each affected series, voting as one class, by
notice in writing to the Issuer and to the Trustee, if given by the
securityholders, may then declare the principal of all debt securities of all
such series and interest accrued thereon to be due and payable immediately and
(b) if an Event of Default due to a default in the performance of any other of
the covenants or agreements in the Senior Indenture applicable to all
outstanding debt securities issued thereunder, including this Note, or due to
certain events of bankruptcy, insolvency or reorganization of the Issuer, shall
have occurred and be continuing, either the Trustee or the holders of not less
than 25% in aggregate principal amount of all outstanding debt securities issued
under the Senior Indenture, voting as one class, by notice in writing to the
Issuer and to the Trustee, if given by the securityholders, may declare the
principal of all such debt securities and interest accrued thereon to be due and
payable immediately, but upon certain conditions such declarations may be
annulled and past defaults may be waived (except a continuing default in payment
of principal or premium, if any, or interest on such debt securities) by the
holders of a majority in aggregate principal amount of the debt securities of
all affected series then outstanding.

     If the face hereof indicates that this Note is subject to "Modified Payment
upon Acceleration or Redemption," then (i) if the principal hereof is declared
to be due and payable as described in the preceding paragraph, the amount of
principal due and payable with respect to this Note shall be limited to the
aggregate principal amount hereof multiplied by the sum of the Issue Price
specified on the face hereof (expressed as a percentage of the aggregate
principal amount) plus the original issue discount accrued from the Interest
Accrual Date to the date of declaration (expressed as a percentage of the
aggregate principal amount), with the amount of original issue discount accrued
being calculated using a constant yield method (as described in the next
paragraph), (ii) for the purpose of any vote of securityholders taken pursuant
to the Senior Indenture prior to the acceleration of payment of this Note, the
principal amount hereof shall equal the amount that would be due and payable
hereon, calculated as set forth in clause (i)

                                       27
<PAGE>

above, if this Note were declared to be due and payable on the date of any such
vote and (iii) for the purpose of any vote of securityholders taken pursuant to
the Senior Indenture following the acceleration of payment of this Note, the
principal amount hereof shall equal the amount of principal due and payable with
respect to this Note, calculated as set forth in clause (i) above.

     The constant yield shall be calculated using a 30-day month, 360-day year
convention, a computing period that, except for the initial period (as defined
below), corresponds to the shortest period between Interest Payment Dates (with
ratable accruals within a compounding period), and an assumption that the
maturity will not be accelerated. If the period from the Original Issue Date to
the first Interest Payment Date (the "initial period") is shorter than the
compounding period for this Note, a proportionate amount of the yield for an
entire compounding period will be accrued. If the initial period is longer than
the compounding period, then the period will be divided into a regular
compounding period and a short period with the short period being treated as
provided in the preceding sentence.

     If the face hereof indicates that this Note is subject to "Tax Redemption
and Payment of Additional Amounts," this Note may be redeemed, as a whole, at
the option of the Issuer at any time prior to maturity, upon the giving of a
notice of redemption as described below, at a redemption price equal to 100% of
the principal amount hereof, together with accrued interest to the date fixed
for redemption (except that if this Note is subject to "Modified Payment upon
Acceleration or Redemption," the amount of principal so payable will be limited
to the aggregate principal amount hereof multiplied by the sum of the Issue
Price specified on the face hereof (expressed as a percentage of the aggregate
principal amount) plus the original issue discount accrued from the Interest
Accrual Date to the date of redemption (expressed as a percentage of the
aggregate principal amount), with the amount of original issue discount accrued
being calculated using a constant yield method (as described above)), if the
Issuer determines that, as a result of any change in or amendment to the laws
(including a holding, judgment or as ordered by a court of competent
jurisdiction), or any regulations or rulings promulgated thereunder, of the
United States or of any political subdivision or taxing authority thereof or
therein affecting taxation, or any change in official position regarding the
application or interpretation of such laws, regulations or rulings, which change
or amendment occurs, becomes effective or, in the case of a change in official
position, is announced on or after the Initial Offering Date hereof, the Issuer
has or will become obligated to pay Additional Amounts, as defined below, with
respect to this Note as described below. Prior to the giving of any notice of
redemption pursuant to this paragraph, the Issuer shall deliver to the Trustee
(i) a certificate stating that the Issuer is entitled to effect such redemption
and setting forth a statement of facts showing that the conditions precedent to
the right of the Issuer to so redeem have occurred, and (ii) an opinion of
independent legal counsel satisfactory to the Trustee to such effect based on
such statement of facts; provided that no such notice of redemption shall be
given earlier than 60 calendar days prior to the earliest date on which the
Issuer would be obligated to pay such Additional Amounts if a payment in respect
of this Note were then due.

     Notice of redemption will be given not less than 30 nor more than 60
calendar days prior to the date fixed for redemption or within the Redemption
Notice Period specified on the face hereof, which date and the applicable
redemption price will be specified in the notice.

                                       28
<PAGE>

     If the face hereof indicates that this Note is subject to "Tax Redemption
and Payment of Additional Amounts," the Issuer will, subject to certain
exceptions and limitations set forth below, pay such additional amounts (the
"Additional Amounts") to the holder of this Note who is a U.S. Alien as may be
necessary in order that every net payment of the principal of and interest on
this Note and any other amounts payable on this Note, after withholding or
deduction for or on account of any present or future tax, assessment or
governmental charge imposed upon or as a result of such payment by the United
States, or any political subdivision or taxing authority thereof or therein,
will not be less than the amount provided for in this Note to be then due and
payable. The Issuer will not, however, make any payment of Additional Amounts to
any such holder who is a U.S. Alien for or on account of:

     (a) any present or future tax, assessment or other governmental charge that
would not have been so imposed but for (i) the existence of any present or
former connection between such holder, or between a fiduciary, settlor,
beneficiary, member or shareholder of such holder, if such holder is an estate,
a trust, a partnership or a corporation for U.S. federal income tax purposes,
and the United States, including, without limitation, such holder, or such
fiduciary, settlor, beneficiary, member or shareholder, being or having been a
citizen or resident thereof or being or having been engaged in a trade or
business or present therein or having, or having had, a permanent establishment
therein or (ii) the presentation by or on behalf of the holder of this Note for
payment on a date more than 15 calendar days after the date on which such
payment became due and payable or the date on which payment thereof is duly
provided for, whichever occurs later;

     (b) any estate, inheritance, gift, sales, transfer, excise or personal
property tax or any similar tax, assessment or governmental charge;

     (c) any tax, assessment or other governmental charge imposed by reason of
such holder's past or present status as a controlled foreign corporation or
passive foreign investment company with respect to the United States or as a
corporation which accumulates earnings to avoid U.S. federal income tax or as a
private foundation or other tax-exempt organization or a bank receiving interest
under Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended;

     (d) any tax, assessment or other governmental charge that is payable
otherwise than by withholding or deduction from payments on or in respect of
this Note;

     (e) any tax, assessment or other governmental charge required to be
withheld by any Paying Agent from any payment of principal of, or interest on,
this Note, if such payment can be made without such withholding by any other
Paying Agent in a city in Western Europe;

     (f) any tax, assessment or other governmental charge that would not have
been imposed but for the failure to comply with certification, information or
other reporting requirements concerning the nationality, residence or identity
of the holder or beneficial owner of this Note, if such compliance is required
by statute or by regulation of the United States or of any political subdivision
or taxing authority thereof or therein as a precondition to relief or exemption
from such tax, assessment or other governmental charge;

                                       29
<PAGE>

     (g) any tax, assessment or other governmental charge imposed by reason of
such holder's past or present status as the actual or constructive owner of 10%
or more of the total combined voting power of all classes of stock entitled to
vote of the Issuer or as a direct or indirect subsidiary of the Issuer; or

     (h) any combination of items (a), (b), (c), (d), (e), (f) or (g).

In addition, the Issuer shall not be required to make any payment of Additional
Amounts (i) to any such holder where such withholding or deduction is imposed on
a payment to an individual and is required to be made pursuant to any law
implementing or complying with, or introduced in order to conform to, any
European Union Directive on the taxation of savings; or (ii) by or on behalf of
a holder who would have been able to avoid such withholding or deduction by
presenting this Note or the relevant coupon to another Paying Agent in a member
state of the European Union. Nor shall the Issuer pay Additional Amounts with
respect to any payment on this Note to a U.S. Alien who is a fiduciary or
partnership or other than the sole beneficial owner of such payment to the
extent such payment would be required by the laws of the United States (or any
political subdivision thereof) to be included in the income, for tax purposes,
of a beneficiary or settlor with respect to such fiduciary or a member of such
partnership or a beneficial owner who would not have been entitled to the
Additional Amounts had such beneficiary, settlor, member or beneficial owner
been the holder of this Note.

     The Senior Indenture permits the Issuer and the Trustee, with the consent
of the holders of not less than a majority in aggregate principal amount of the
debt securities of all series issued under the Senior Indenture then outstanding
and affected (voting as one class), to execute supplemental indentures adding
any provisions to or changing in any manner the rights of the holders of each
series so affected; provided that the Issuer and the Trustee may not, without
the consent of the holder of each outstanding debt security affected thereby,
(a) extend the final maturity of any such debt security, or reduce the principal
amount thereof, or reduce the rate or extend the time of payment of interest
thereon, or reduce any amount payable on redemption thereof, or change the
currency of payment thereof, or modify or amend the provisions for conversion of
any currency into any other currency, or modify or amend the provisions for
conversion or exchange of the debt security for securities of the Issuer or
other entities or for other property or the cash value of the property (other
than as provided in the antidilution provisions or other similar adjustment
provisions of the debt securities or otherwise in accordance with the terms
thereof), or impair or affect the rights of any holder to institute suit for the
payment thereof or (b) reduce the aforesaid percentage in principal amount of
debt securities the consent of the holders of which is required for any such
supplemental indenture.

     Except as set forth below, if the principal of, premium, if any, or
interest on this Note is payable in a Specified Currency other than U.S. dollars
and such Specified Currency is not available to the Issuer for making payments
hereon due to the imposition of exchange controls or other circumstances beyond
the control of the Issuer or is no longer used by the government of the country
issuing such currency or for the settlement of transactions by public
institutions within the international banking community, then the Issuer will be
entitled to satisfy its obligations to the holder of this Note by making such
payments in U.S. dollars on the basis of the Market Exchange Rate on the date of
such payment or, if the Market Exchange Rate is not

                                       30
<PAGE>

available on such date, as of the most recent practicable date; provided,
however, that if the euro has been substituted for such Specified Currency, the
Issuer may at its option (or shall, if so required by applicable law) without
the consent of the holder of this Note effect the payment of principal of,
premium, if any, or interest on any Note denominated in such Specified Currency
in euro in lieu of such Specified Currency in conformity with legally applicable
measures taken pursuant to, or by virtue of, the Treaty establishing the
European Community, as amended. Any payment made under such circumstances in
U.S. dollars or euro where the required payment is in an unavailable Specified
Currency will not constitute an Event of Default. If such Market Exchange Rate
is not then available to the Issuer or is not published for a particular
Specified Currency, the Market Exchange Rate will be based on the highest bid
quotation in The City of New York received by the Exchange Rate Agent at
approximately 11:00 a.m., New York City time, on the second Business Day
preceding the date of such payment from three recognized foreign exchange
dealers (the "Exchange Dealers") for the purchase by the quoting Exchange Dealer
of the Specified Currency for U.S. dollars for settlement on the payment date,
in the aggregate amount of the Specified Currency payable to those holders or
beneficial owners of Notes and at which the applicable Exchange Dealer commits
to execute a contract. One of the Exchange Dealers providing quotations may be
the Exchange Rate Agent unless the Exchange Rate Agent is an affiliate of the
Issuer. If those bid quotations are not available, the Exchange Rate Agent shall
determine the market exchange rate at its sole discretion.

     The "Exchange Rate Agent" shall be Morgan Stanley & Co. Incorporated,
unless otherwise indicated on the face hereof.

     All determinations referred to above made by, or on behalf of, the Issuer
or by, or on behalf of, the Exchange Rate Agent shall be at such entity's sole
discretion and shall, in the absence of manifest error, be conclusive for all
purposes and binding on holders of Notes and coupons.

     So long as this Note shall be outstanding, the Issuer will cause to be
maintained an office or agency for the payment of the principal of and premium,
if any, and interest on this Note as herein provided in the Borough of
Manhattan, The City of New York, and an office or agency in said Borough of
Manhattan for the registration, transfer and exchange as aforesaid of the Notes.
The Issuer may designate other agencies for the payment of said principal,
premium and interest at such place or places (subject to applicable laws and
regulations) as the Issuer may decide. So long as there shall be such an agency,
the Issuer shall keep the Trustee advised of the names and locations of such
agencies, if any are so designated. If any European Union Directive on the
taxation of savings comes into force, the Issuer will, to the extent possible as
a matter of law, maintain a Paying Agent in a member state of the European Union
that will not be obligated to withhold or deduct tax pursuant to any such
Directive or any law implementing or complying with, or introduced in order to
conform to, such Directive.

     With respect to moneys paid by the Issuer and held by the Trustee or any
Paying Agent for payment of the principal of or interest or premium, if any, on
any Notes that remain unclaimed at the end of two years after such principal,
interest or premium shall have become due and payable (whether at maturity or
upon call for redemption or otherwise), (i) the Trustee or such Paying Agent
shall notify the holders of such Notes that such moneys shall be repaid to the

                                       31
<PAGE>

Issuer and any person claiming such moneys shall thereafter look only to the
Issuer for payment thereof and (ii) such moneys shall be so repaid to the
Issuer. Upon such repayment all liability of the Trustee or such Paying Agent
with respect to such moneys shall thereupon cease, without, however, limiting in
any way any obligation that the Issuer may have to pay the principal of or
interest or premium, if any, on this Note as the same shall become due.

     No provision of this Note or of the Senior Indenture shall alter or impair
the obligation of the Issuer, which is absolute and unconditional, to pay the
principal of, premium, if any, and interest on this Note at the time, place, and
rate, and in the coin or currency, herein prescribed unless otherwise agreed
between the Issuer and the registered holder of this Note.

     Prior to due presentment of this Note for registration of transfer, the
Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the
holder in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and none of the Issuer, the
Trustee or any such agent shall be affected by notice to the contrary.

     No recourse shall be had for the payment of the principal of, premium, if
any, or the interest on this Note, for any claim based hereon, or otherwise in
respect hereof, or based on or in respect of the Senior Indenture or any
indenture supplemental thereto, against any incorporator, shareholder, officer
or director, as such, past, present or future, of the Issuer or of any successor
corporation, either directly or through the Issuer or any successor corporation,
whether by virtue of any constitution, statute or rule of law or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.

     This Note shall for all purposes be governed by, and construed in
accordance with, the laws of the State of New York.

     As used herein, the term "U.S. Alien" means any person who is, for U.S.
federal income tax purposes, (i) a nonresident alien individual, (ii) a foreign
corporation, (iii) a nonresident alien fiduciary of a foreign estate or trust or
(iv) a foreign partnership one or more of the members of which is, for U.S.
federal income tax purposes, a nonresident alien individual, a foreign
corporation or a nonresident alien fiduciary of a foreign estate or trust.

     All terms used in this Note which are defined in the Senior Indenture and
not otherwise defined herein shall have the meanings assigned to them in the
Senior Indenture.

                                       32
<PAGE>

                                  ABBREVIATIONS

     The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:

      TEN COM   -     as tenants in common

      TEN ENT   -     as tenants by the entireties

      JT TEN    -     as joint tenants with right of survivorship and not as
                      tenants in common

     UNIF GIFT MIN ACT - ___________________Custodian ______________________
                               (Minor)                       (Cust)

     Under Uniform Gifts to Minors Act ______________________________
                                                 (State)

     Additional abbreviations may also be used though not in the above list.

                            _______________________

                                       33
<PAGE>

     FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto

____________________________________________
[PLEASE INSERT SOCIAL SECURITY OR OTHER
     IDENTIFYING NUMBER OF ASSIGNEE]

_______________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________________
[PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE]

the within Note and all rights thereunder, hereby irrevocably constituting and
appointing such person attorney to transfer such note on the books of the
Issuer, with full power of substitution in the premises.

Dated:_______________________

NOTICE:   The signature to this assignment must correspond with the name as
          written upon the face of the within Note in every particular without
          alteration or enlargement or any change whatsoever.

                                       34
<PAGE>

                            OPTION TO ELECT REPAYMENT

     The undersigned hereby irrevocably requests and instructs the Issuer to
repay the within Note (or portion thereof specified below) pursuant to its terms
at a price equal to the principal amount thereof, together with interest to the
Optional Repayment Date, to the undersigned at

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________
         (Please print or typewrite name and address of the undersigned)

     If less than the entire principal amount of the within Note is to be
repaid, specify the portion thereof which the holder elects to have repaid:
_________________; and specify the denomination or denominations (which shall
not be less than the minimum authorized denomination) of the Notes to be issued
to the holder for the portion of the within Note not being repaid (in the
absence of any such specification, one such Note will be issued for the portion
not being repaid): __________________.

Dated:________________________          _______________________________________

                                        NOTICE: The signature on this Option to
                                        Elect Repayment must correspond with the
                                        name as written upon the face of the
                                        within instrument in every particular
                                        without alteration or enlargement.

                                       35
<PAGE>EX-10.1

 

Exhibit 10.1

EMPLOYMENT AGREEMENT

     THIS AGREEMENT, dated as of March 20, 2006, is made by and between The Connecticut Water
Company, a Connecticut corporation having its principal place of business in Clinton, Connecticut,
(“Company”), Connecticut Water Service, Inc., a Connecticut corporation and holder of all of the
outstanding capital stock of Company (“Parent”) and Eric W. Thornburg, a resident of Old Saybrook,
Connecticut (“Employee”).

WITNESSETH:

     WHEREAS, Company and Parent desire to reward Employee for Employee’s valuable, dedicated
service to Company and Parent should Employee’s service be terminated under circumstances
hereinafter described: and

     WHEREAS, Employee has been and continues to be employed by Company and Parent in an Employee
capacity and the parties wish to enter into an Employment Agreement between Employee and Company
and Parent dated as of March 20, 2006 which becomes effective upon a “Change-in-Control,” as
defined herein, of Company or Parent; and

     WHEREAS, Employee, Company and Parent are willing to enter into this Employment Agreement
(“Agreement”) on the terms herein set forth;

     NOW, THEREFORE, to assure Company and Parent of Employee’s continued dedication and the
availability of Employee’s advice and counsel in the event of any such proposal, to induce Employee
to remain in the employ of Company and Parent and to reward Employee for Employee’s valuable
dedicated service to Company and Parent should Employee’s service be terminated under circumstances
hereinafter described, and for other good and valuable consideration, the receipt and adequacy of
which each party acknowledges, effective March 15, 2006, Company, Parent and Employee agree as
follows:

     1. Definitions. For purposes of this Agreement, the following terms shall have the
following meanings:

          (a) “Cause” shall mean Employee’s serious, willful misconduct in respect of Employee’s duties
under this Agreement, including conviction for a felony or perpetration by Employee of a common law
fraud upon Company or Parent which has resulted or is likely to result in material economic damage
to Company or Parent, as determined by a vote of at least seventy-five percent (75%) of all of the
Directors (excluding Employee) of each of Company’s and Parent’s Board of Directors;

          (b) “Change-in-Control” shall be deemed to have occurred if after the date hereof (i) a public
announcement shall be made or a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Securities Exchange

 

 

Act of 1934 (the “Act”) disclosing that any Person (as defined below), other than Company or
Parent or any employee benefit plan sponsored by Company or Parent, is the beneficial owner (as the
term is defined in Rule 13d-3 under the Act) directly or indirectly, of twenty percent (20%) or
more of the total voting power represented by Company’s or Parent’s then outstanding voting common
stock (calculated as provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights to
acquire voting common stock); or (ii) any Person, other than Company or Parent or any employee
benefit plan sponsored by Company or Parent, shall purchase shares pursuant to a tender offer or
exchange offer to acquire any voting common stock of Company or Parent (or securities convertible
into such voting common stock) for cash, securities or any other consideration, provided that after
consummation of the offer, the Person in question is the beneficial owner directly or indirectly,
of twenty percent (20%) or more of the total voting power represented by Company’s or Parent’s then
outstanding voting common stock (all as calculated under clause (i)); or (iii) the stockholders of
Company or Parent shall approve (A) any consolidation or merger of Company or Parent in which
Company or Parent is not the continuing or surviving corporation (other than a merger of Company or
Parent in which holders of the outstanding capital stock of Company or Parent immediately prior to
the merger have the same proportionate ownership of the outstanding capital stock of the surviving
corporation immediately after the merger as immediately before), or pursuant to which the
outstanding capital stock of Company or Parent would be converted into cash, securities or other
property, or (B) any sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all the assets of Company or Parent; or (iv) there
shall have been a change in the composition of the Board of Directors of Company or Parent at any
time during any consecutive twenty-four (24) month period such that “continuing directors” cease
for any reason to constitute at least a majority of the Board unless the election, or the
nomination for election of each new Director was approved by a vote of at least two-thirds (2/3) of
the Directors then still in office who were Directors at the beginning of such period; or (v) the
Board of Directors of Company or Parent, by a vote of a majority of all the Directors (excluding
Employee) adopts a resolution to the effect that a “Change-in-Control” has occurred for purposes of
this Agreement.

          (c) “Disability” shall mean the incapacity of Employee by illness or any other cause as
determined under the long-term disability insurance plan of Company in effect at the time in
question, or if no such plan is in effect, then such incapacity of Employee as prevents Employee
from performing the essential functions of Employee’s position with or without reasonable
accommodation for a period in excess of two hundred forty (240) days (whether or not consecutive),
or one hundred eighty (180) days consecutively, as the case may be, during any twelve (12) month
period.

          (d) “Effective Date” shall be the date on which a Change-in-Control occurs. Anything in this
Agreement to the contrary notwithstanding, if Employee’s employment is terminated prior to the date
on which a Change-in-Control occurs, and it is reasonably demonstrated that such termination (i)
was at the request of a third party who has taken steps reasonably calculated to effect a
Change-in-Control or (ii) otherwise arose in connection with or anticipation of a
Change-in-Control, then for all purposes of this Agreement the “Effective Date” shall mean the date
immediately prior to the date of such termination.

 

 

          (e) “Good Reason” shall mean the occurrence of any action which (i) removes or changes
Employee’s title or reduces Employee’s job responsibilities or base salary; (ii) results in a
significant worsening of Employee’s work conditions; or (iii) moves Employee’s place of employment
to a location that increases Employee’s commute by more than thirty (30) miles over the length of
Employee’s commute from Employee’s place of principal residence at the time the move is requested.
For purposes of this subparagraph (e), any good faith determination by Employee that any such
action has occurred shall be conclusive. Notwithstanding the foregoing, at any time during the
period commencing on the Effective Date and ending on the 30th day after the first
anniversary of the Effective Date, except for purposes of Paragraph 5(g), “Good Reason” shall mean
any reason or no reason.

          (f) “Person” shall mean any individual, corporation, partnership, company or other entity,
and shall include a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934.

     2. Employment.

          (a) As of the Effective Date, Company hereby agrees to continue to employ Employee and
Employee agrees to remain in the employ of Company for the Term of this Agreement upon the terms
and conditions hereinafter set forth. Subject to the provisions of subparagraph (b) of this
Paragraph 2, and to the provisions of Paragraph 6 below, “Term” shall mean a continuously
renewing period of three (3) years commencing on the Effective Date.

          (b) At any time during the Term, the Board of Directors of Company and Parent may, by written
notice to Employee, advise Employee of their desire to modify or amend any of the terms or
provisions of this Agreement or to delete or add any terms or provisions. Any such notice
(“Notice”) shall describe the proposed modifications in reasonable detail. In the event a Notice
shall be given to Employee, then Company, Parent and Employee agree to discuss the proposed
modification(s) and to attempt in good faith to reach agreement with respect thereto and to reduce
such agreement to writing in an amendment to be executed by all the parties (“Amendment”). If a
Notice is given hereunder and an Amendment shall not have been executed on or before the sixtieth
(60th) day following the date on which Notice is given, then the Term shall thereupon be
automatically converted to a fixed period ending three (3) years after the expiration of such sixty
(60) days.

     3. Duties of Employment.

          (a) During the Term, Employee’s position (including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall be at least commensurate in all
material respects with the most significant of those held, exercised and assigned at any time
during the ninety (90)-day period immediately preceding the Effective Date and Employee’s services
shall be performed at such location as Employee shall determine.

          (b) During the Term, Employee will serve Company faithfully, diligently and competently and
will devote full-time to Employee’s employment and will hold, in addition to the offices held on
the Effective Date, such other Employee offices of Company or Parent, or

 

 

their respective subsidiaries and affiliates, to which Employee may be elected, appointed or
assigned by the Boards of Directors of Company or Parent from time to time and will discharge such
Employee duties in connection therewith. Nothing in this Agreement shall preclude Employee, with
the prior approval of the Board of Directors of Company, from devoting reasonable periods of time
required for (i) serving as a director or member of a committee of any organization involving no
conflict of interest with Company or Parent, or (ii) engaging in charitable, religious and
community activities, provided, that such directorships, memberships or activities do not
materially interfere with the performance of Employee’s duties hereunder.

     4. Compensation. During the Term, Company shall pay to Employee as compensation for
the services to be rendered by Employee hereunder the following:

          (a) A base salary at a rate equal to the highest base salary paid or payable to Employee by
Company during the twelve (12)-month period immediately preceding the month in which the Effective
Date occurs, or such larger sum as the Company may from time to time determine in connection with
regular periodic performance reviews pursuant to Company’s policies and practices. Such
compensation shall be payable in accordance with the normal payroll practices of Company. Employee
shall receive an annual increase in base salary at each normal pay adjustment date during the Term,
but no later than one (1) year after the date of Employee’s last increase and annually thereafter
during the Term, of not less than the percentage increase in the cost-of-living since Employee’s
last pay adjustment, as measured by the Consumer Price Index-All Urban Consumers of the U.S. Bureau
of Labor Statistics.

          (b) In addition, Company shall pay to Employee an annual bonus, payable in cash or other
form of compensation, for which he would have been eligible in accordance with the Company’s
practice or plan in effect at that time for annual bonuses for said employee for the year
preceding the fiscal year in which the Effective Date occurs.

     5. Benefits. During the Term, Employee shall be entitled to the following benefits:

          (a) Incentive, Savings and Retirement Plans. In addition to base salary and bonus
payable as hereinabove provided, Employee shall be entitled to participate during the Term in all,
savings and retirement plans, practices, policies and programs applicable to employees of Company
as may be in effect from time to time. Such plans, practices, policies and programs, in the
aggregate, shall provide Employee with compensation, benefits and reward opportunities at least as
favorable as the most favorable of such compensation, benefits and reward opportunities provided
by Company for Employee under such plans, practices, policies and programs as in effect at any
time during the ninety (90)-day period immediately preceding the Effective Date or, if more
favorable to Employee, as provided at any time thereafter with respect to other key employees of
Company or Parent.

          (b) Welfare Benefit Plans. During the Term, Employee and/or Employee’s family, as
the case may be, shall be eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs applicable to Employee employees of
Company (including, without limitation, medical, prescription, dental, disability, salary
continuance, employee life, group life,) at least as favorable as the most favorable of such
plans,

 

 

practices, policies and programs in effect at any time during the ninety (90)-day period
immediately preceding the Effective Date or, if more favorable to Employee and/or Employee’s
family, as in effect at any time thereafter with respect to other key employees of Company or
Parent.

          (c) Expenses. During the Term, Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by Employee in accordance with the most
favorable policies, practices and procedures of Company in effect at any time during the ninety
(90)-day period immediately preceding the Effective Date or, if more favorable to Employee, as in
effect at any time thereafter with respect to other key employees of Company or Parent.

          (d) Fringe Benefits. During the Term, Employee shall be entitled to fringe benefits,
including use of an automobile and payment of related expenses or payment of an allowance for
automobile related expenses, in accordance with the most favorable plans, practices, programs and
policies of Company in effect at any time during the ninety (90)-day period immediately preceding
the Effective Date or, if more favorable to Employee, as in effect at any time thereafter with
respect to other key employees of Company or Parent.

          (e) Office and Support Staff. During the Term, Employee shall be entitled to an
office or offices of a size and with furnishings and other appointments, and to secretarial and
other assistance, at least equal to the most favorable of the foregoing provided to Employee by
Company at any time during the ninety (90)-day period immediately preceding the Effective Date or,
if more favorable to Employee, as provided at any time thereafter with respect to other key
employees of Company or Parent.

          (f) Vacation. During the Term, Employee shall be entitled to paid vacation in
accordance with the most favorable plans, policies, programs and practices of Company as in effect
at any time during the ninety (90)-day period immediately preceding the Effective Date or, if more
favorable to Employee, as in effect at any time thereafter with respect to other key employees of
Company or Parent.

          (g) Stay-on Bonus: (i) If Employee is employed on a date on which the Board of
Directors of Company or Parent approves a transaction described in clause (iii) of Paragraph 1(b)
and the shareholders of Company or Parent, as applicable subsequently approve such transaction,
provided that such transaction qualifies as a “Change in Control” within the meaning of Section
409A of the Code and regulations issued thereunder, Employee shall receive a lump sum equal to the
base salary of Employee, at the rate in effect immediately prior to such date, plus an amount
equal to the target percentage of the midpoint of Employee’s salary grade under the Company’s
Officers Incentive Program for the year in which such date occurs; provided Employee is employed
on the fifth (5th) day following the closing of such transaction. Payment hereunder
shall be made on the fifth (5th) business day following the closing of such a
transaction. (ii) If the Employee’s employment is terminated by the Company following such
approval by the applicable Board of Directors of a transaction described in subparagraph (i) of
this Paragraph (g) (provided that such transaction qualifies as a “Change in Control” within the
meaning of Section 409A of the Code and regulations issued thereunder), and prior to the fifth
(5th) day following the closing of such transaction for any reason other than
for Cause, or

 

 

Employee’s death, or Employee’s attainment of age sixty-five (65), or if Employee’s
employment is terminated during such period by reason of Employee’s Disability, or if Employee
shall voluntarily terminate Employee’s employment during such period for Good Reason, then, in
addition to the amounts payable to Employee pursuant to Section 7, Employee shall be paid a lump
sum equal to the base salary of Employee, at the rate in effect immediately prior to the date of
termination, plus an amount equal to the target percentage of the midpoint of Employee’s salary
grade under the Company’s Officers Incentive Program for the year in which termination occurs.
Payment under (ii) shall be made on the later of the first day of the seventh (7th)
month following the Employee’s termination of Employment, or on the fifth (5th)
business day following the closing of such transaction.

     6. End of Term and Notice of Termination.

          (a) End of Term. The Term shall end upon the occurrence of any of the following
events:

	 	(i)	 	Termination of Employee’s employment by Company for Cause.
	 
	 	(ii)	 	The voluntary termination of Employee’s
employment by Employee other than for Good Reason.
	 
	 	(iii)	 	The death of Employee.
	 
	 	(iv)	 	Employee’s attainment of age sixty-five (65).
	 
	 	(v)	 	Full compliance by Company with the provisions
of Paragraph 7(e) below, if Employee’s employment shall have been
terminated by Company during the Term for any reason other
than Cause, or if Employee’s employment shall have been terminated
by reason of Employee’s Disability, or if Employee shall have
voluntarily terminated Employee’s employment during the Term for Good
Reason.

          (b) Notice of Termination. Any termination by Company for Cause or by Employee for
Good Reason or on account of Employee’s Disability shall be communicated by notice to the other
party hereto given in accordance with Section 16 of this Agreement. For purposes of this
Agreement, a “notice” means a written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Employee’s employment under the
provision so indicated and (iii) if the date of termination (as defined below) is other than the
date of receipt of such notice, specifies the termination date (which date shall be not more than
fifteen (15) days after the giving of such notice).

          (c) Date of Termination. The date of termination means the date of receipt of the
notice of termination or any later date specified therein, as the case may be; provided,
however, that (i) if Employee’s employment is terminated by Company other than for Cause
or

 

 

on account of Employee’s Disability, the date of termination shall be the date on which
Company notifies Employee of such termination and (ii) if Employee’s employment is terminated by
reason of death, the date of termination shall be the date of death of Employee.

          (d) Termination of Employment. In order for the Employee to be considered to have
terminated employment with the Company, the Employee must have incurred a separation from service
from the Company (and all related companies) within the meaning of Section 409A of the Code.

     7. Payment Upon Termination.

          (a) If Employee’s employment is terminated by Company for Cause, as defined in Paragraph
1(a), the obligations of Company under this Agreement shall cease and Employee shall forfeit all
right to receive any compensation or other benefits under this Agreement except only compensation
or benefits accrued or earned and vested (if applicable) by Employee as of the date of
termination, including base salary through the date of termination, benefits payable under the
terms of any qualified or nonqualified retirement plans or deferred compensation plans maintained
by Company, any accrued vacation pay as of the date of termination not yet paid by Company and any
benefits required to be paid by law such as continued health care coverage pursuant to the
Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) (collectively, the “Accrued
Obligations”).

          (b) If Employee shall voluntarily terminate Employee’s employment during the Term, other than
for Good Reason, as defined in Paragraph 1(e), the obligations of Company under this Agreement
shall cease and Employee shall forfeit all right to receive any compensation or other benefits
under this Agreement except only the Accrued Obligations.

          (c) In the event of the death of Employee during the Term, then, in addition to the Accrued
Obligations and any other benefits which may be payable by Company in respect of the death of
Employee, the base salary then payable hereunder shall continue to be paid at the then current
rate for a period of six (6) months after such death to such beneficiary as shall have been
designated in writing by Employee, or if no effective designation exists, then to the estate of
Employee. Such payment shall be made in accordance with the Company’s normal payment practice.

          (d) If Employee’s employment is terminated by reason of Employee’s attainment of age
sixty-five (65), the obligations of Company under this Agreement shall cease and Employee shall
forfeit all right to receive any compensation or other benefits under this Agreement except only
the Accrued Obligations.

          (e) If Employee’s employment is terminated by Company during the Term for any reason other
than for Cause, or Employee’s death, or Employee’s attainment of age sixty-five (65), or if
Employee’s employment is terminated during the Term by reason of Employee’s Disability, or if
Employee shall voluntarily terminate Employee’s employment during the Term for Good Reason,
Employee shall be entitled to receive, and Company shall be obligated to pay and provide Employee,
the following amounts:

 

 

               (i) An amount in consideration of the covenants by Executive set forth in Paragraphs 8 and 9
below to be determined by a nationally recognized independent certified public accounting firm
selected and retained by Company to be the reasonable value of said covenants as of the date of
termination of Employee’s employment, but in no event shall such amount be greater than the
aggregate value of the benefits provided in subparagraphs (e)(ii), (iii), (iv), (v) and (viii)
hereinbelow. The benefits otherwise payable to Executive pursuant to said subparagraphs shall be
offset by the amount, if any, payable to Executive in respect of the covenants by Employee set
forth in Paragraphs 8 and 9 below. Said amount paid in consideration of the covenants by Executive
set forth in Paragraphs 8 and 9 below shall be paid in accordance with subparagraphs (e)(ii),
(iii), (iv), (v) and (viii) below, and this subparagraph (i) shall not alter the time or form of
payment of such amounts.

               (ii) An amount equal to three (3) times the base salary of Employee, at the rate in effect
immediately prior to the date of termination, plus an amount equal to three (3) times the target
percentage of the midpoint of Employee’s salary grade under the Company’s Officers Incentive
Program for the year in which termination occurs if the employee is a participant in such plan at
the time of the Change-in-Control. There shall be subtracted from the aggregate amount determined
in accordance with the immediately preceding sentence the amount, if any, payable to Employee under
any then effective severance pay plan of Company. Such amount so determined shall be divided into
thirty-six (36) equal amounts. Seven (7) such equal amounts shall be paid to the Employee on the
date which is seven (7) months following the date of termination of employment. The twenty-nine
(29) remaining equal amounts shall be payable on the first day of each month subsequent to the date
of the first payment (one payment per month) until the payments are completed. Payments shall be
treated as supplemental wage payments under applicable Treasury Regulations subject to federal tax
withholding at the flat percentage rate applicable thereto.

               (iii) An amount equal to the aggregate amounts that Company would have contributed on behalf
of Employee under Company’s qualified defined contribution retirement plan(s), if any such plan(s)
shall be in effect (other than amounts attributable to Employee’s before-tax contributions to such
plan(s)) plus estimated earnings thereon had Employee continued in the employ of Company for the
three (3)-year period commencing on the date of termination and made contributions under said
plan(s) at a rate, as a percentage of salary, equal to the rate at which Employee had made
contributions to said plan(s) in the plan year immediately preceding Employee’s termination, to be
payable in a lump sum to Employee thirty (30) days after the expiration of the two (2) year
non-competition period specified in Paragraph 9(a) of this Agreement and in no event earlier than
seven (7) months following the Employee’s termination of employment, provided that Employee shall
not have breached said non-competition provisions.

               (iv) An amount equal to the difference between: (A) benefits which would have been payable to
Employee under any deferred compensation agreement between Company and Employee, if any such
agreement shall be in effect, had Employee continued in the employ of Company for the three
(3)-year period commencing on the date of termination, received compensation at least equal to that
specified in Paragraph 4 of this Agreement during

 

 

such time, and deferred pursuant to said deferred compensation agreement the amount of
compensation specified therein; and (B) the benefits actually payable to Employee under such
deferred compensation agreement; such amount to be payable in a lump sum to Employee thirty (30)
days after the expiration of the two (2) year non-competition period specified in Paragraph 9(a) of
this Agreement and in no event earlier than seven (7) months following the Employee’s termination
of employment, provided that Employee shall not have breached said non-competition provisions.

               (v) Additional retirement benefits equal to the difference between: (A) the annual pension
benefits that would have been payable to Employee under Company’s qualified defined benefit
retirement plan (the “Plan”) and under any nonqualified supplemental Employee retirement plan
covering Employee (the “Supplemental Plan”), if any such Plan or Supplemental Plan shall be in
effect, if Employee had been continued in the employ of Company for the three (3)-year period
commencing on the date of termination and had received compensation at least equal to that
specified in Paragraph 4(a) of this Agreement during such time and had been fully vested in the
benefits payable under any such Plan and Supplemental Plan; and (B) the annual benefits actually
payable to Employee under any such Plan and Supplemental Plan. The discounted present value of
such additional benefits, shall be payable to Employee in a lump sum, as calculated by the
independent actuary for the Plan using the assumptions specified in the Plan, thirty (30) days
after the expiration of the two (2) year non-competition period specified in Paragraph 9(a) of this
Agreement and in no event earlier than seven (7) months following the Employee’s termination of
employment, provided that Employee shall not have breached said non-competition provisions.

               (vi) At the date of termination of Employee’s employment, Employee shall be fully vested in
any form of compensation previously granted to Employee (other than benefits payable under a
qualified retirement plan), such as, by way of example only, restricted stock, stock options, and
performance share awards.

               (vii) If Employee’s employment is terminated by reason of Employee’s Disability, Employee
shall be entitled to receive, in addition to the other benefits provided under this Paragraph 7(e),
disability benefits payable in accordance with any bona fide disability plan maintained by Company
or Parent, to the extent Employee qualifies for benefits under the terms of such bona fide
disability plan.

               (viii) A lump sum cash payment equal to three (3) times the sum of the average of the annual
contributions, payments, credits or allocations made by the Company on behalf of the Employee for
coverage under all life, health, disability and similar welfare benefit plans and programs and
other perquisites maintained by the Company during the three (3) calendar year period preceding his
termination of employment. Such payment shall be made on the first day of the seventh
(7th) month following the Employee’s termination of employment.

               (ix) Company shall reimburse Employee for the amount of any reasonable legal or accounting
fees and expenses incurred by Employee to obtain or enforce any right or benefit provided to
Employee by Company hereunder or as confirmed or acknowledged hereunder, provided that no such
reimbursement shall be made earlier than seven (7) months

 

 

following the Employee’s termination and in no event any later than December 31 of the second
calendar year following the calendar year in which the termination of employment occurred.

               (x) Company shall provide the Employee with reasonable outplacement services from a firm
selected by the Company for a period of one (1) year commencing on the date of termination, or
until Employee accepts other employment, if earlier.

     8. Confidential Information. Employee understands that in the course of Employee’s
employment by Company, Employee will receive or have access to confidential information concerning
the business or purposes of Company and Parent, and which Company and Parent desire to protect.
Such confidential information shall be deemed to include, but not be limited to, Company’s
customer lists and information, and employee lists, including, if known, personnel information and
data. Employee agrees that Employee will not, at any time during the period ending two (2) years
after the date of termination of Employee’s employment, reveal to anyone outside Company or Parent
or use for Employee’s own benefit any such information without specific written authorization by
Company or Parent. Employee further agrees not to use any such confidential information or trade
secrets in competing with Company or Parent at any time during or in the two (2) year period
immediately following the date of termination of Employee’s employment with Company.

     9. Covenants by Employee Not to Compete With Company or Parent.

          (a) Upon the date of termination of Employee’s employment with Company for any reason,
Employee covenants and agrees that Employee will not at any time during the period of two (2)
years from and after such date of termination directly or indirectly in any manner or under any
circumstances or conditions whatsoever be or become interested, as an individual, partner,
principal, agent, clerk, employee, stockholder, officer, director, trustee, or in any other
capacity whatsoever, except as a nominal owner of stock of a public corporation, in any other
business which, at the date of Employee’s termination, is a Competitor (as defined herein), either
directly or indirectly, with Company or Parent, or engage or participate in, directly or
indirectly (whether as an officer, director, employee, partner, consultant, holder of an equity or
debt investment, lender or in any other manner or capacity), or lend Employee’s name (or any part
or variant thereof) to, any business which, at the date of Employee’s termination, is a
Competitor, either directly or indirectly, with Company or Parent, or as a result of Employee’s
engagement or participation would become, a Competitor, either directly or indirectly, with any
aspect of the business of Company or Parent as it exists at the time of Employee’s termination, or
solicit any officer, director, employee or agent of Company or Parent or any subsidiary or
affiliate of Company or Parent to become an officer, director, employee or agent of Employee,
Employee’s respective affiliates or anyone else. Ownership, in the aggregate, of less than one
percent (1 %) of the outstanding shares of capital stock of any corporation with one or more
classes of its capital stock listed on a national securities exchange or publicly traded in the
over-the-counter market shall not constitute a violation of the foregoing provision. For the
purposes of this Agreement, a Competitor is any business which is similar to the business of
Company or Parent or in any way in competition with the business of Company or Parent within any
of the then-existing water utility service areas of Company.

 

 

          (b) Employee hereby acknowledges that Employee’s services are unique and extraordinary, and
are not readily replaceable, and hereby expressly agrees that Company and Parent, in enforcing the
covenants contained in Paragraphs 8 and 9 herein, in addition to any other remedies provided for
herein or otherwise available at law, shall be entitled in any court of equity having jurisdiction
to an injunction restraining Employee in the event of a breach, actual or threatened, of the
agreements and covenants contained in these Paragraphs.

          (c) The parties hereto believe that the restrictive covenants of these Paragraphs are
reasonable. However, if at any time it shall be determined by any court of competent jurisdiction
that these Paragraphs or any portion of them as written, are unenforceable because the restrictions
are unreasonable, the parties hereto agree that such portions as shall have been determined to be
unreasonably restrictive shall thereupon be deemed so amended as to make such restrictions
reasonable in the determination of such court, and the said covenants, as so modified, shall be
enforceable between the parties to the same extent as if such amendments had been made prior to the
date of any alleged breach of said covenants.

          (d) The provisions of this Paragraph 9 shall not apply if Company and Parent shall be
prohibited under Paragraph 15 below from making any payments to Employee pursuant to Paragraph 7
above.

     10. No Obligation to Mitigate. So long as Employee shall not be in breach of any
provision of Paragraph 8 or 9, Employee shall have no duty to mitigate damages in the event of a
termination and if Employee voluntarily obtains other employment (including self-employment), any
compensation or profits received or accrued, directly or indirectly, from such other employment
shall not reduce or otherwise affect the obligations of Company and Parent to make payments
hereunder.

     11. Resignation. In the event that Employee’s services hereunder are terminated under
any of the provisions of this Agreement (except by death), Employee agrees that Employee will
deliver Employee’s written resignation as an officer of Company or Parent, or their subsidiaries
and affiliates, to the Board of Directors, such resignation to become effective immediately, or, at
the option of the Board of Directors, on a later date as specified by the Board.

     12. Insurance. Company shall have the right at its own cost and expense to apply for
and to secure in its own name, or otherwise, life, health or accident insurance or any or all of
them covering Employee, and Employee agrees to submit to the usual and customary medical
examination and otherwise to cooperate with Company in connection with the procurement of any such
insurance, and any claims thereunder.

     13. Release. As a condition of receiving payments or benefits provided for in this
Agreement, at the request of Company or Parent, Employee shall execute and deliver for the
benefit of Company and Parent, and any subsidiary or affiliate of Company or Parent, a general
release in the form set forth in Attachment A, and such release shall become effective in
accordance with its terms. The failure or refusal of Employee to sign such a release or the
revocation of such a release shall cause the termination of any and all obligations of Company
and Parent to make payments or provide benefits hereunder, and the forfeiture of the right of

 

 

Employee to receive any such payments and benefits. Employee acknowledges that Company and
Parent have advised Employee to consult with an attorney prior to signing this Agreement and
that Employee has had an opportunity to do so.

     14. Additional Benefits. In addition to the other benefits payable to Employee
pursuant to this Agreement, in the event that any payment or benefit received or to be received by
Employee under this Agreement (a “Payment”) is subject to the excise tax (the “Excise Tax”)
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any
successor to such Section, as determined by a nationally recognized independent certified public
accounting firm selected by the Company (the “Tax Advisor”), then the Company shall make an
additional payment to Employee in a lump sum seven (7) months following termination in an amount
such that after receipt of such lump sum and payment of all excise and income taxes imposed with
respect to such receipt and receipt of the Payment, Employee will have received an after-tax
amount equal to the amount the Employee would have received had the Excise Tax had not been
applicable to the Payment. The determination of the Tax Advisor as provided herein shall be
completed not later than forty-five (45) days following Employee’s date of termination of
employment, and such determination shall be communicated in writing to Company, with a copy to
Employee within said forty-five (45) day period. The determination of the Tax Advisor as provided
herein shall be deemed conclusive and binding on Company and Employee. Company shall pay the fees
and other costs of the Tax Advisor hereunder.

     15. Regulatory Limitation. Notwithstanding any other provision of this Agreement,
Company shall not be obligated to make, and Employee shall have no right to receive, any payment,
benefit or amount under this Agreement which would violate any law, regulation or regulatory order
applicable to Company or Parent at the time such payment, benefit or amount is due (“Prohibited
Payment”). In such event, however, payment shall be made at the earliest date at which Company
reasonably anticipates that the making of the payment will not cause such a violation.

     16. Notices. All notices under this Agreement shall be in writing and shall be
deemed effective when delivered in person to Employee or to the Secretary of Company and Parent,
or if mailed, postage prepaid, registered or certified mail, addressed, in the case of Employee,
to Employee’s last known address as carried on the personnel records of Company, and, in the case
of Company and Parent, to the corporate headquarters, attention of the Secretary, or to such other
address as the party to be notified may specify by notice to the other party.

     17. Successors and Binding Agreement.

          (a) Company and Parent will require any successor, whether direct or indirect, by purchase,
merger, consolidation or otherwise to all or substantially all of the business and/or assets of
Company and/or Parent, as the case may be, expressly to assume and agree to perform this Agreement
in the same manner and to the same extent that Company and Parent are required to perform it.
Failure of Company and Parent to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement. As used in this Agreement, “Company” and
“Parent” shall include any successor to Company’s and/or Parent’s,

 

 

as the case may be, business and/or assets as aforesaid which assumes and agrees to perform
this Agreement by operation of law, or otherwise.

          (b) This Agreement shall inure to the benefit of, and be enforceable by, Employee’s
personal or legal representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee dies while any amount is still payable hereunder, all such
amounts shall be paid in accordance with the terms of this Agreement to Employee’s devisee,
legatee or other designee or, if there is no such designee, to Employee’s estate.

     18. Arbitration. Any dispute which may arise between the parties hereto may, if both
parties agree, be submitted to binding arbitration in the State of Connecticut in accordance with
the Rules of the American Arbitration Association; provided that any such dispute shall first be
submitted to Company’s Board of Directors in an effort to resolve such dispute without resort to
arbitration.

     19. Severability. If any of the terms or conditions of this Agreement shall be
declared void or unenforceable by any court or administrative body of competent jurisdiction, such
term or condition shall be deemed severable from the remainder of this Agreement, and the other
terms and conditions of this Agreement shall continue to be valid and enforceable.

     20. Amendment. This Agreement may be modified or amended only by an instrument in
writing executed by the parties hereto.

     21. Construction. This Agreement shall supersede and replace all prior agreements
and understandings between the parties hereto on the subject-matter covered hereby.
This Agreement shall be governed and construed under the laws of the State of Connecticut. Words
of the masculine gender mean and include correlative words of the feminine gender. Paragraph
headings are for convenience only and shall not be considered a part of the terms and provisions
of the Agreement.

     22. Deferred Compensation. This Agreement has been prepared with reference to
Section 409A of the Internal Revenue Code and should be interpreted and administered in a manner
consistent with Section 409A. In the event that any part of this Agreement is determined to be in
violation of 409A, such part of the Agreement shall be automatically revised to be in compliance
with 409A in such way as most closely approximates the intent of the parties.

     23. Assignment Prohibited. Benefits hereunder shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or
garnishment by creditors of the Employee, his spouse, beneficiary, or estate, and any attempt to
anticipate, alienate, transfer, assign or attach the same shall be void. The Employee, his
spouse, beneficiary or estate shall only have a contractual right to benefits hereunder and shall
have the status of general unsecured creditors.

 

 

     IN WITNESS WHEREOF, Company and Parent have caused this Agreement to be executed by an
authorized officer, and Employee has hereunto set Employee’s hand, this 20th day of
March 2006.

	 	 	 	 	 
	 	 	The Connecticut Water Company
	 
	 	 	 	 
	 

	 	By
	 	/s/ Michele G. DiAcri
	 

	 	 	 	 
	 	 	Michele G. DiAcri, Corporate Secretary
	 
	 	 	 	 
	 	 	Connecticut Water Service, Inc.
	 
	 	 	 	 
	 

	 	By
	 	/s/ Michele G. DiAcri
	 

	 	 	 	 
	 	 	Michele G. DiAcri, Corporate Secretary
	 
	 	 	 	 
	 	 	/s/ Eric W. Thornburg
	 	 	 
	 	 	Eric W. Thornburg

 

 

ATTACHMENT A

RELEASE

     We advise you to consult an attorney before you sign this Release. You have until the
date which is seven (7) days after the Release is signed and returned to                     
(“Company”) to change your mind and revoke your Release. Your Release shall not become
effective or enforceable until after that date.

In consideration for the benefits provided under your Employment Agreement dated

                         with Company and                     (“Parent”), and more specifically enumerated in Exhibit 1 hereto, by your
signature below you agree to accept such benefits and not to make any claims of any kind against
Company, its past and present and future parent corporations, subsidiaries, divisions,
subdivisions, affiliates and related companies or their successors and assigns, including without
limitation Parent, or any and all past, present and future Directors, officers, fiduciaries or
employees of any of the foregoing (all parties referred to in the foregoing are hereinafter
referred to as the “Releasees”) before any agency, court or other forum, and you agree to release
the Releasees from all claims, known or unknown, arising in any way from any actions taken by the
Releasees up to the date of this Release, including, without limiting the foregoing, any claim for
wrongful discharge or breach of contract or any claims arising under the Age Discrimination in
Employment Act of 1967, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities
Act of 1990, the Employee Retirement Income Security Act of 1974, Connecticut’s Fair Employment
Practices Act or any other federal, state or local statute or regulation and any claim for
attorneys’ fees, expenses or costs of litigation.

     THE PRECEDING PARAGRAPH MEANS THAT BY SIGNING THIS RELEASE YOU WILL HAVE WAIVED ANY RIGHT YOU
MAY HAVE TO BRING A LAWSUIT OR MAKE ANY LEGAL CLAIM AGAINST THE RELEASEES BASED ON ANY ACTIONS
TAKEN BY THE RELEASEES UP TO THE DATE OF THIS RELEASE.

     By signing this Release, you further agree as follows:

1. You have read this Release carefully and fully understand its terms;

2. You have had at least twenty-one (21) days to consider the terms of the Release;

     3. You have seven (7) days from the date you sign this Release to revoke it by written
notification to Company. After this seven (7) day period, this Release is final and
binding and may not be revoked;

 

 

     4. You have been advised to seek legal counsel and have had an opportunity to do so;

     5. You would not otherwise be entitled to the benefits provided under your Employment
Agreement with Company and Parent had you not agreed to waive any right you have to bring a lawsuit
or legal claim against the Releasees; and

     6. Your agreement to the terms set forth above is voluntary.

	 	 	 	 	 	 	 
	Name:
	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	Signature:

	 	 	 	Date:	 	 
	 

	 	 
	 	 	 	 
	 
	 	 	 	 	 	 
	Received by:

	 	 	 	Date:	 	 
	 

	 	 
	 	 	 	 

 

 

EXHIBIT 1

1.

2.

3.

4.

5.

Etc.

NOTE: THIS EXHIBIT IS TO BE COMPLETED AT THE TIME OF TERMINATION TO REFLECT ALL BENEFITS AND
PAYMENTS MADE UNDER THE EMPLOYMENT AGREEMENT.

Acknowledged and Agreed:

	 	 	 	 	 	 	 
	THE CONNECTICUT WATER COMPANY	 	 	 	EMPLOYEE
	 
	 	 	 	 	 	 
	By
	 	 	 	 	 	 
	 

	 	 
	 	 	 	 
	 

	 	Its	 	 	 	 
	 
	 	 	 	 	 	 
	CONNECTICUT WATER SERVICE, INC.	 	 	 	 
	 
	 	 	 	 	 	 
	By
	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Its

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