EX-10.13


	


Appendix III to Guarantee Commitment 

Document 7.01


Contract No. MA-13552


SECURITY AGREEMENT


SPECIAL PROVISIONS


     THIS SECURITY AGREEMENT, dated
December __, 1999 (the "Security Agreement"), between ENSCO OFFSHORE
COMPANY, a Delaware corporation (the "Shipowner") and THE UNITED
STATES OF AMERICA (the "United States"), represented by the Secretary
of Transportation, acting by and through the Maritime Administrator (the
"Secretary"), pursuant to Title XI of the Act.


RECITALS


     A. The Shipowner has entered into
the Construction Contract with Friede Goldman Offshore Texas, Limited
Partnership (formerly known as TDI Halter, L.P.) (the "Shipyard") for the Construction of the Vessel.


     B. On the date hereof, the Secretary
entered into, and the Shipowner accepted a Commitment to Guarantee Obligations,
Contract No. MA-13550, whereby the United States has committed itself to
guarantee the payment in full of all the unpaid interest on, and the unpaid
principal balance of, Obligations (as defined herein) in the aggregate principal
amount equal to 87.5% of the Depreciated Actual Cost or the Actual Cost of the
Vessel, as the case may be, on the Closing Date, which amounts are set out in
Table A.


     C. To aid in financing the purchase
of the Vessel, the Shipowner has duly executed the Indenture, has duly
authorized the issuance thereunder of the Obligations and has entered, or will
enter, into (i) on the date hereof, a floating interest rate term loan facility
agreement (the "Credit Agreement") providing for a loan of up to the
aggregate principal amount of One Hundred Ninety Four Million Seven Hundred
Thirty Six Thousand United States Dollars (US$194,855,000) with Govco
Incorporated (the "Primary Lender") and Citibank, N.A. (the
"Alternate Lender") (the Primary Lender and the Alternate Lender,
collectively the "Lenders") to be evidenced by one or more promissory
notes (the "Note") duly issued by the Shipowner pursuant to Section
2.01 of Exhibit 1 of the Indenture, designated "United States Government
Ship Financing Note, 1999 Series," having the maturity date and interest
rate set forth therein, and, (ii) on or before the Bond Closing Date, the bond
purchase agreement (the "Bond Purchase Agreement") with the purchasers
named therein, providing for the sale and delivery of up to the aggregate
principal amount of One Hundred Ninety Four Million Eight Hundred Fifty-Five
Thousand United States Dollars (US$194,855,000) bonds (the "Bonds")
duly issued by the Shipowner pursuant to Section 2.01 of Exhibit 1 of the
Indenture, designated "United States Government Guaranteed Ship Financing
Bonds, 7500 Series" having the maturity date and interest rate set forth
therein. The Note and the Bonds issued (as the case may be) shall be known as
the "Obligations".


     D. On the date hereof, the Secretary
and the Indenture Trustee executed the Authorization Agreement, Contract No.
MA-13551, which authorizes the Indenture Trustee to endorse, execute, and
authenticate the Secretary's Guarantee on each of the Obligations.


     E. As security for the due and
timely payment of the Secretary's Note, issued this day by the Shipowner, and
for the Secretary's issuance of the Guarantees, the Shipowner has executed and
delivered the Security Agreement, Contract No. MA-13552, and the Financial
Agreement, Contract No. MA-13553, granting the Secretary a security interest in,
among other things, the Construction Contract and certain other property,
tangible and intangible, which the Shipowner now has or hereafter will acquire,
and all of the proceeds thereof and on the Delivery Date the Shipowner will
execute and deliver the Mortgage, Contract No.13554 creating a preferred ship
mortgage on the Vessel.


     F. As further security to the
Secretary and in consideration of the Secretary's agreeing to issue the
Guarantees, the Shipowner has granted the Secretary a security interest in the
Construction Contract and will assign to the Secretary all of the Shipowner's
security interests in the Vessel, its hull, component parts, machinery, and
equipment during the construction period and has caused the Shipyard to have
executed on this date the Consent of Shipyard to the assignment of the
Construction Contract to the Secretary.


     G. In order to implement certain
aspects of the transactions contemplated by the Security Agreement and the
Financial Agreement, the Secretary, the Shipowner and Chase Bank of Texas,
National Association, a national banking association (the
"Depository") have entered into the Depository Agreement, Contract No.
MA-13555, on the date hereof.


     NOW, THEREFORE, in consideration of
the premises and the mutual covenants herein contained, and of other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and in order to provide security to the Secretary for the
Secretary's Note provided for herein, the parties hereto hereby agree as
follows:


     1. Concerning these Special and
General Provisions. This Security Agreement shall consist of two parts: the
Special Provisions and the General Provisions attached hereto as Exhibit 1 of
the Security Agreement and incorporated herein by reference. In the event of any
conflict, or inconsistency between the Special Provisions of this Security
Agreement and Exhibit 1, the Special Provisions shall control.


     2. The following additions,
deletions and amendments are hereby made to the Security Agreement:


     (a) Each reference in Exhibit 1 to
the Security Agreement to the terms "Vessels", "each
Vessel", "any Vessel" or "such Vessel" shall be amended
to read "the Vessel".


     (b) Each reference in Exhibit 1 to
the Security Agreement to the term "Proportionate Part" is hereby
deleted.


     (c) Concerning Section 1.03(a).
Section 1.03(a) is hereby amended and restated as follows:


     SECTION 1.03. Granting Clause. (a)
In order to create a present security interest in the Secretary, the Shipowner
does hereby grant, sell, convey, assign, transfer, mortgage, pledge, set over
and confirm unto the Secretary continuing security interests in all of the
right, title and interest of the Shipowner in and to all of the following,
whether now owned or existing or hereafter arising or acquired:


     (1) The Construction Contract
(insofar as it relates to the Construction of the Vessel), together with all
other contracts, whether now in existence or hereafter entered into, relating to
the Construction of the Vessel. Said right, title and interest in and to the
Construction Contract, and the other contracts conveyed to the Secretary by this
subsection are hereinafter referred to collectively as the "Rights Under
the Construction and Related Contracts."


     (2) The Shipowner's rights to
receive all moneys which from time to time may become due to the Shipowner with
respect to the Construction of the Vessel regardless of the legal theory by
which moneys are recovered. Said right, title and interest in and to the moneys,
cash, bonds, claims, and securities conveyed by this subsection are herein
referred to collectively as the "Moneys Due with Respect to the
Construction of the Vessel." Subject to the provisions of this Security
Agreement, the Secretary acknowledges and agrees that the Moneys Due with
Respect to the Construction of the Vessel will be paid directly to the
Depository for application in accordance with this Security Agreement and the
Indenture.


     (3) All goods, whether equipment or
inventory appertaining to or relating to the Vessel, whether or not on board or
ashore and not covered by the Mortgage, and any charter hire relating to the
Vessel.


     (4) The Drilling Contract, and all
of the Shipowner's rights to receive moneys which may from time to time become
due to the Shipowner thereunder.


     (5) The Halter Guaranty, and all of
the Shipowner's rights to receive moneys which may from time to time become due
to the Shipowner thereunder.


     (6) The Title XI Reserve Fund (if
applicable) and all moneys, instruments, negotiable documents, chattel paper,
and proceeds thereof currently on deposit or hereafter deposited in the Title XI
Reserve Fund.


     (7) The Construction Fund and all
moneys, instruments, negotiable documents, chattel paper and proceeds thereof
currently on deposit or hereafter deposited in the Construction Fund.


     (8) All moneys, instruments,
negotiable documents, chattel paper and proceeds thereof held by the Depository
under the Depository Agreement.


     (9) Proceeds of Policies of
Insurance relating to the Vessel and, whether or not insured, any general
average claims or loss of hire claims Shipowner may have with respect to the
Vessel.


     (10) The Shipyard Security
Agreement, and all right, title and interest of the Shipowner therein.


     (11) All proceeds of the  collateral
described in  paragraphs  (1) through
(10) of this Section.


     The Secretary shall have, upon
execution and delivery thereof, as further security, certain right, title and
interest in and to the following:


     (12) The Mortgage, to be executed
and delivered by the Shipowner to the Secretary, as mortgagee, on the Delivery
Date, covering the Vessel.


     (d) Concerning Section 2.01(a).
Section 2.01(a) is hereby amended and restated as follows:


     (1) The Shipowner is duly organized,
validly existing and in good standing under the laws of the jurisdiction
designated in the initial paragraph of the Special Provisions hereof and shall
maintain such existence. The Shipowner has not failed to qualify to do business
in any jurisdiction in the United States in which its business or properties
require such qualification, except where such failure to qualify would not have
a material adverse effect on the business or financial condition of the
Shipowner or its ability to perform its obligations hereunder, and had and has
full legal right, power and authority to own its own properties and assets and
conduct its business as it is presently conducted;


     (e) Concerning Section 2.01(a)(4).
Section 2.01(a)(4) is hereby amended and restated as follows:


     (4) the consummation of the
transactions contemplated by and compliance by the Shipowner of all the terms
and provisions of the Documents will not violate any provisions of the formation
documents of the Shipowner and will not result in a breach of the terms and
provisions of, or constitute a default under any other agreement or undertaking
by the Shipowner or by which the Shipowner is bound, except where such breach
would not have a material adverse effect on the business or financial condition
of the Shipowner or its ability to perform its obligations hereunder, or any
order of any court or administrative agency entered into in any proceedings to
which the Shipowner is or has been a party; and


     (f) Concerning Section 2.02(b)(1).
Section 2.02(b)(1) is deleted and the following substituted in lieu thereof:


(b) Sale, Mortgage, Transfer or Charter of the Vessel.


     (1) The Shipowner shall not, without
the prior written consent of the Secretary, sell, mortgage, demise charter or
transfer the Vessel, except the foregoing shall not apply to (i) Government
Uses, (ii) mergers or consolidations permitted by Article VIII or the Financial
Agreement, (iii) the Drilling Contract, or (iv) any subsequent drilling contract
or contracts, or charters that are not demise or bareboat charters.


     (g) Concerning Section 2.02(b)(2).
Section 2.02(b)(2) is hereby deleted.


     (h) Concerning Section 2.02(d)(1).
Section 2.02(d)(1) is hereby amended and restated as follows:


     (1) As a condition precedent to each
payment by the Shipowner under the Construction Contract, the Shipowner shall
require an Officer's Certificate from the Shipyard stating that once the
Shipyard receives said payment, there will be no liens or rights in rem against
the respective Vessel in respect of the work, services or materials represented
by such payment. At the Delivery Date of the Vessel, the Shipowner and the
Shipyard shall provide an Officer's Certificate stating that there are no liens
or rights in rem against the Vessel except for the Mortgage.


     (i) Concerning Section 2.02(d)(3).
Section 2.02(d)(3) is hereby deleted and the following substituted in lieu
thereof:


     (3) Except for Permitted Liens
neither the Shipowner, any charterer, the master of any Vessel, nor any other
Person has or shall have any right, power or authority, without the Secretary's
prior written consent, to create, incur or permit to be placed or imposed on the
Vessel any lien, encumbrance, security interest, charge, or rights in rem, and
statutory liens incident to current operations unless such statutory liens are
subordinate to the Mortgage.


     (j) Concerning Section 2.02(e).
Section 2.02(e) is hereby amended and restated as follows:


     (e) Compliance with Applicable Laws.
The Shipowner shall at all times be in compliance with all applicable U.S. laws,
except where the non-compliance therewith would not materially and adversely
affect the Secretary's security interests hereunder. In addition, the Vessel (1)
shall be designed to meet, and on the Delivery Date thereof and at all times
thereafter shall meet all requirements of applicable laws, treaties and
conventions, and of applicable rules and regulations thereunder, and (2) shall
have on board valid certificates showing compliance therewith; provided that the
foregoing shall not apply if (A) the Vessel is in Government Use; (B) there has
been an actual or constructive total loss or an agreed or compromised total loss
of such Vessel; or (C) there has been any other loss with respect to such Vessel
and the Shipowner shall not have had a reasonable time to repair the same.


     (k) Concerning Section 2.02(f).
Section 2.02(f) is deleted and the following substituted in lieu thereof:


     (f) Operation of the Vessel. The
Shipowner shall not (unless otherwise required by any military authority of the
United States and except during a Government Use (1) cause or permit the Vessel
to be operated in any manner contrary to law or to any lawful rules or
regulations of the Maritime Administration, or (2) unless there has been an
actual or constructive total loss or an agreed or compromised total loss of the
Vessel, abandon the Vessel in any foreign port.


     (l) Concerning Section 2.02(h).
Section 2.02(h) is deleted and the following substituted in lieu thereof:


     (i) Material Changes in the Vessel.
After the Delivery Date of the Vessel, the Shipowner shall not make, or permit
to be made, any material change in the general dimensions or characteristics of
the Vessel which changes the capacity of the Vessel to perform as originally
intended by the Construction Contract, unless the Shipowner shall have received
the Secretary's prior written consent thereto.


     (m) Concerning Section 2.03(a).
Section 2.03(a) is hereby amended as follows:


     (a) The Construction Contract shall
be maintained in full force and effect insofar as it relates to the due
performance by the Shipowner and the Shipyard of all their respective
obligations thereunder and the Shipowner shall not, without the Secretary's
prior written consent, amend, modify, assign or terminate the Construction
Contract or consent to any change in the Construction Contract which releases
the Shipyard from its obligations to comply with the provisions of the
Construction Contract or any applicable laws, treaties, conventions, rules and
regulations; provided that, the Secretary's prior written consent shall not be
necessary, but prompt written notice to the Secretary shall be given for (1) any
mandatory or regulatory change to the Construction Contract as a result of any
requirements of any governmental agency, or (2) any non-mandatory changes that
Shipyard and Shipowner desire to make which do not exceed, with respect to any
item of the Vessel's construction, two (2%) percent of the Actual Cost and which
do not, in the aggregate, cause the Actual Cost to be increased more than five
(5%) percent or the delivery and completion date of the Vessel to be extended
more than fifteen (15) days. Notwithstanding the foregoing, no change shall be
made in the general dimensions and/or characteristics of the Vessel which
changes the capacity of the Vessel to perform as originally intended by the
Construction Contract without the Secretary's prior written consent. The
Secretary will nonetheless retain its authority to review work done under a
change order to ascertain whether the work should be included in Actual Cost and
whether the price charged is fair and reasonable. No Advances may be made for
work that is not determined to be includable in Actual Cost.


     (n) Concerning Section 2.03. A new
subsection (c) is hereby added to Section 2.03 and reads as follows:


     "(c) Notwithstanding anything
herein contained to the contrary, the Shipowner shall have the exclusive right
following and during the continuation of any default by the Shipyard under the
Construction Contract to negotiate with the Shipyard with respect to the
resolution of such default or to otherwise enforce whatever remedies may be
available to the Shipowner, either at law or in equity, arising out of or in
connection with such default, for a period of thirty (30) days and thereafter
for so long as the Shipowner continues to diligently prosecute (or demonstrate
its good faith intent to diligently prosecute) the enforcement of such remedies
so as to reasonably protect the interests of the Shipowner and the Secretary;
provided that the Shipowner shall give prompt written notice to the Secretary of
any such default and of the resolution thereof; and provided further that the
Shipowner may not amend, terminate or modify the Construction Contract except in
a manner as provided in Section 2.03(a)."


     (o) Concerning Section 2.05(a).
Section 2.05(a) is hereby amended and restated as follows:


     (a) Prior to the Delivery Date of
the Vessel, the Shipowner shall, without cost to the Secretary or, shall insure
that the Shipyard has procured insurance for the Vessel as provided in the
Construction Contract and as contemplated by the Consent of Shipyard; provided
that, the insurance required by this Section shall be approved by the Secretary.


     (p) Concerning Section 2.05. (1) In
connection with Section 2.05(a) and clause (ii) of the initial paragraph of
Section 2.05(c), the Secretary shall permit payment of losses up to the amount
of $1,000,000 to be made directly to the Shipowner under the circumstances
specified therein; and (2) In connection with Sections 2.05(b)(3) and the last
paragraph of Section 2.05(e) the maximum amount of self-insurance permitted to
the Shipowner under the last paragraph thereof shall be $1,000,000 on an annual
aggregate basis after application of the $250,000 per accident deductible.


     (q) Concerning Section 2.05(e). In
connection with Section 2.05(e), as evidence of insurance maintained under
Section 2.05, the Shipowner may submit a cover note or certificate of insurance
setting forth the terms of the policy.


     (r) Concerning Section 2.11.
Notwithstanding the provisions of Section 2.11, in the absence of a Default, the
Shipowner shall not be required to give written notice to any customer hiring
the Vessel of the Secretary's security interest in the proceeds or revenues from
such drilling contract. The Secretary shall not give such notice to any customer
hiring the Vessel unless there exists a Default. These provisions do not apply
to any UCC statement filed in the United States.


     (s) Concerning Section 2.14. Section
2.14 is hereby amended by adding a sentence to the end thereof that reads as
follows:


     "Notwithstanding the foregoing,
the Shipowner shall not be required to cause to be procured or maintained a
Surety Bond for so long as the Halter Guaranty remains in full force and effect
and the rights thereunder have been assigned by the Shipowner to the
Secretary."


     (t) Concerning Section 4.02(a).
Section 4.02(a) is hereby amended as follows:


     (a) In the event that (i) a payment
is otherwise required under the terms of the Financial Agreement to be made into
the Title XI Reserve Fund, and (ii) the Shipowner shall receive any moneys from
any Person in connection with the Construction of the Vessel other than the
proceeds of insurance that may be paid directly to the Shipowner pursuant to
Section 2.05(a) of this Security Agreement, the Shipowner shall give written
notice thereof to the Secretary and shall promptly pay the same over to the
Depository to be held in the Title XI Reserve Fund.


     (u) Concerning Section 5.03(a)(1).
Section 5.03(a)(1) is hereby amended as follows:


     (1) Responsible Officer of the
Shipowner shall deliver an Officer's Certificate, in form and substance
satisfactory to the Secretary, stating that (A) there is neither a Default under
the Construction Contract nor the Security Agreement; (B) there have been no
occurrences which have or would adversely and materially affect the condition of
the Vessel, its hull or any of its component parts; (C) the amount of the
Request is in accordance with the Construction Contract including the approved
disbursement schedule and each item in these amounts is properly included in the
Secretary's approved estimate of Actual Cost; (D) with respect to the Request,
once the Contractor is paid there will be no liens or encumbrances on the
applicable Vessel, its hull or component parts for which the withdrawal is being
requested except for those already approved by the Secretary; and (E) if the
Vessel has already been delivered, it is in class without recommendations
affecting class. The Shipowner shall also attach an Officer's Certificate of the
Shipyard, in form and substance satisfactory to the Secretary, stating that
there are no liens or encumbrances as provided in clause (D) of this subsection
and attaching the invoices and receipts supporting each proposed withdrawal to
the satisfaction of the Secretary.


     (v) Concerning Section 6.01. Section
6.01 of Exhibit 1 hereto is hereby amended by adding the following events which
shall constitute a "Security Default":


     Failure of the Shipowner to repay
the Note by issuance of the Bonds within eighteen (18) months of the Delivery
Date, unless such period is otherwise extended by the Secretary.


     (w) Concerning Section 6.01(b)(2).
Section 6.01(b)(2) is hereby amended as follows:


     (2) Default by the Shipowner
continued after five (5) business days following written notice specifying such
failure by certified or registered mail to the Shipowner from the Secretary in
the due and punctual observance and performance of any provision in Sections
2.02(a), (d), (e), (f), and (g), 2.05 (except (g) and (k) thereof), 2.07, and
2.13.


     (x) Concerning Section 6.01(b)(5).
Section 6.01(b)(5) is hereby amended as follows:


(5) Any default by the  Shipowner  in the due and punctual  observance  and

performance of any provision in the


Financial Agreement or the Construction Contract;


     (y) Concerning Section 9.01. Subject
to Section 9.01 of the Security Agreement, any notice, request, demand,
direction, consent, waiver, approval or other communication, when given to a
party hereto, shall be addressed to:


Secretary as:

SECRETARY OF TRANSPORTATION

c/o Maritime Administrator

U.S. Department of Transportation

400 Seventh Street, S.W.

Washington, D.C. 20590


Shipowner as:


ENSCO OFFSHORE COMPANY


2700 Fountain Place

1445 Ross Avenue

Dallas, Texas, 75202


Attention: Chief Financial Officer


Indenture Trustee as:


BANKERS TRUST COMPANY


Corporate Trust and Agency Services

Four Albany Street

New York, New York 10006

Attention:       Project Finance Group


     (z) Governing Law. This Security
Agreement and the rights and obligations of the parties hereto shall be governed
by and construed in accordance with maritime laws of the United States and, to
the extent such laws are not applicable, in accordance with the internal laws of
the State of Texas.


     IN WITNESS WHEREOF, this Security
Agreement has been executed by the parties as of the day and year first written.



	 





	Attest:

               
          		SHIPOWNER:
ENSCO OFFSHORE COMPANY




BY:               
             
              
   

NAME:        
              
              
   
TITLE:       
              
           
         
	 	
     	 	
     	 	
	 	
     	 	
     	 	
	 	
     	 	
     	 	
		 	UNITED STATES OF AMERICA

SECRETARY OF TRANSPORTATION

MARITIME ADMINISTRATOR
	 	
     	 	
     	 	
	Attest:          
               	  	BY:              
               
         

      Secretary
      Maritime Administration
	 	
     	 	
     	 	



	
Exhibit 1--General Provisions Incorporated into the Security Agreement by Reference

Schedule X -- Schedule of Definitions

Exhibit 2 -- Form of Secretary's Note

Exhibit 3 -- Form of First Preferred Fleet Mortgage

Exhibit 4 -- Form of Financial Agreement

Exhibit 5 -- Form of Consent of Shipyard

Exhibit 6 -- Form of Construction Contract

Exhibit 7 -- Form of Depository Agreement
	 

	TABLE A

	 

	
     The Actual Cost of the Vessel as of
the date hereof as determined by the Secretary, namely, (i) the amounts paid by
or for the account of the Shipowner as of the date hereof for the Construction
of the Vessel, plus (ii) the amount which the Shipowner was on said date
obligated under the Construction Contract or otherwise to pay from time to time
thereafter for the Construction of the Vessel less the Depreciation of the
Vessel as of the date hereof as determined by the Secretary is $222,556,179,
both calculated and itemized for the Vessel as follows:






		 
Amount
Paid	Amount
Obligated
To be Paid	 
 
Total
	 
	Contract Price	 	 	 	$  68,700,000	 	 	 
	Changes and Extras	 	 	 	$  23,672,700	 	 	 
	Owner Furnished Items	 	 	 	$100,926,240	 	 	 
	Engineering and Inspection	 	 	 	$  12,000,000	 	 	 
	Interest and Commitment Fees	 	 	 	$  11,600,000	 	 	 
	Estimated Escalation	 	 	 	 	 	 	 
	Estimated Guarantee Fee	 	 	 	$    5,792,817	 	 	 
	Total Actual Cost	 	 	 	$222,691,757	 	 	 



	

Schedule X to the Security Agreement

Document 7.03


Schedule of Definitions


"Act" means the Merchant Marine Act, 1936, as amended
and in effect on the Closing Date.


"Actual Cost" means the actual cost of the Vessel, as
set forth in Table A of the Security Agreement or as subsequently redetermined
by the Secretary pursuant to the Security Agreement and the Act.


"Audited Financial Statements" mean the annual audit of
the Guarantor's accounts in accordance with generally accepted auditing
standards by independent certified public accountants or independent licensed
public accountants, certified or licensed by a regulatory authority of a state
or other political subdivision of the United States, who may be the Guarantor's
regular auditors.


"Authorization Agreement" means the Authorization
Agreement, Contract No. MA-13551 between the Secretary and the Indenture
Trustee, whereby the Secretary authorizes the Guarantee of the United States to
be endorsed on the Obligations, as the same is originally executed, or as
modified, amended or supplemented therein.


"Authorized Newspapers" means The Wall Street Journal
and The Journal of Commerce or if either ceases to exist, then in such other
newspapers as the Secretary may designate.


"Bond Purchase Agreement" means the agreement for the
purchase of the Obligations, executed by the Shipowner and the purchaser named
therein, as originally executed, modified or supplemented.


"Business  Day" means a day which is not a Saturday,  Sunday or a bank  holiday  under the laws of the United  States or the State of New
York.

"Chapter 313" means the provisions of 46 United States
Code Chapter 313, as amended.


"Classification Society" means the American Bureau of
Shipping or as specified in the Special Provisions of the Security Agreement,
either a member of the International Association of Classification Societies
("AIACS") that has been ISO 9000 series registered or an IACS member that meets
the requirements of the International Maritime Organization, is qualified under
a Quality Systems Certificate Scheme and recognized by the United States Coast
Guard and the Secretary as meeting acceptable standards.


"Closing Date" or "Closing" means the date
when the Security Agreement is executed and delivered by the Shipowner.


"Commitment to Guarantee Obligations" has the same meaning as the term Guarantee Commitment.


"Consent of Shipyard" means each, and "Consents of
Shipyards" means every, document evidencing such Shipyard's consent to the
assignment of a Construction Contract to the Secretary under the Security
Agreement as originally executed, modified, amended or supplemented.


"Construction" means construction of the Vessel,
including designing, inspecting, outfitting and equipping thereof.


"Construction Contract" means each, and
"Construction Contracts" means every, contract relating to the
Construction of the Vessel between the Shipowner and the Shipyard, as originally
executed or as modified or supplemented pursuant to the applicable provisions
thereof.


"Construction Fund" has the meaning specified in Article IV of the Security Agreement.


"Default" when used in the Security Agreement has the
meaning attributed to it in Article VI thereof.


"Delivery Date" means the date on which the Vessel is delivered to and accepted by the Shipowner.


"Depository" shall mean the institution designated in the Depository Agreement or any successor.


"Depository Agreement" shall mean the Depository
Agreement, Contract No. MA-13555 among the Shipowner, the Secretary and the
Depository, as originally executed or as modified or supplemented in accordance
with the applicable provisions thereof.


"Depreciated Actual Cost" means the depreciated actual
cost of the Vessel, as set forth in Table A of the Security Agreement or as
subsequently redetermined by the Secretary pursuant to the Security Agreement
and the Act.


"Drilling  Contract" means the Drilling  Contract dated
June 24, 1998 between the Shipowner and Burlington  Resources Oil and Gas Company,
as amended and supplemented from time to time.


"Eligible Investment" has the meaning given by Section
5 of the Financial Agreement.


""Escrow Fund" means the account held by the Secretary,  established under Section 1108 of the Act and administered  pursuant to Article V
of the Security Agreement.


"Financial  Agreement"  means the Title XI Reserve Fund and Financial  Agreement,  Contract No.  MA-13553,  executed by the Shipowner and

the Secretary, as originally executed or as modified, amended  or supplemented.


"Financial Asset" has the meaning given by Article 8-102(a)(9) of the UCC.


"Government Use" means the use of the Vessel or
requisition of its title required by a government or governmental body of the
United States of America.


"Guarantee" means each, and the "Guarantees"
means every, guarantee of an Obligation by the United States pursuant to Title
XI of the Act, as provided in the Authorization Agreement.


"Guarantee Commitment" means the Commitment to Guarantee
Obligations, Contract No. MA-13550, dated as of December __, 1999, executed by
the Secretary and accepted by the Shipowner relating to the Guarantees, as
originally executed or as modified, amended or supplemented.


"Halter  Guaranty"  means the Guaranty of Friede  Goldman  Halter,  Inc.  (formerly  known as Halter Marine Group,  Inc.) in favor of the

Shipowner in respect of performance by the Shipyard under the Construction Contract.


"Increased Security" means the Secretary's Note, the
Security Agreement, the Vessel, the Security, the Escrow Fund, the Title XI
Reserve Fund, the Construction Fund, and any other security agreement between
the Secretary and the Shipowner relating to any vessels financed under the Act,
and the Policies of Insurance, and the proceeds of the foregoing.


"Indenture" means the Trust Indenture dated as of the
Closing Date between the Shipowner and the Indenture Trustee, as originally
executed, or as modified, amended or supplemented.


"Indenture Default" has the meaning specified in Article VI of the Indenture.


"Indenture Trustee" means Bankers Trust Company, a New
York corporation, and any successor trustee under the Indenture.


"Interest Payment Date" means with respect to any
Obligation, the date when any installment of interest on such Obligation is due
and payable.


"Long Term Debt" means, as of any date, the total notes,
bonds, debentures, equipment obligations and other evidence of indebtedness that
would be included in long term debt in accordance with generally accepted
accounting principles. There shall also be included any guarantee or other
liability for the debt of any other Person, not otherwise included on the
balance sheet.


"Maturity" when used with respect to any Obligation,
means the date on which the principal of such Obligation becomes due and payable
as therein provided, whether at the Stated Maturity or by redemption,
declaration of acceleration or otherwise.


"Moneys Due with Respect to Construction of the Vessel"
has the meaning specified in Section 1.03 of the Security Agreement.


"Mortgage" means the first preferred ship mortgage on
the Vessel, Contract No. MA-13554, by the Shipowner to the Secretary, as
originally executed, modified, amended or supplemented.


"Mortgagee" means the Secretary, as mortgagee under the Mortgage.


"Mortgagor" means the Shipowner, as mortgagor under the Mortgage.


"Net Worth" means, as of any date, the total of paid-in
capital stock, paid-in surplus, earned surplus and appropriated surplus, and all
other amounts that would be included in net worth in accordance with generally
accepted accounting principles, but exclusive of (1) any receivables from any
stockholder, director, Officer or employee of the Company or from any Related
Party (other than current receivables arising out of the ordinary course of
business and not outstanding for more than 60 days) and (2) any increment
resulting from the reappraisal of assets.


"Obligation" means each, and "Obligations"
means every, obligation of the Shipowner bearing a Guarantee that is
authenticated and delivered under the Authorization Agreement and Indenture.


"Obligee" means each, and "Obligees" means every, holder of an Obligation.


"Offering Circular" means the offering circular relating to the issuance and sale the Bonds.


"Officer's  Certificate" means a certificate  conforming  to Section 1.02 of the Security  Agreement or the Indenture as the context may
require.


"Outstanding" when used with reference to the
Obligations, shall mean all Obligations theretofore issued under the Indenture,
except: (1) Obligations Retired or Paid; and (2) Obligations in lieu of which
other Obligations have been issued under the Indenture.


"Paying Agent" means any bank or trust company meeting
the qualifications in Section 7.02(a) of the Indenture and appointed by the
Shipowner under Section 4.02 of the Indenture to pay the principal of (and
premium, if any) or interest on the Obligations on behalf of the Shipowner.


"Payment Default" has the meaning specified in Section 6.01 of the Security Agreement.


"Permitted Liens" means


(1) liens for Taxes not at the time delinquent or thereafter
         payable without penalty or being contested in good faith, provided
         provision is made to the extent required by generally accepted
         accounting principles for the eventual payment thereof in the event it
         is found that such are payable by the Shipowner,


(2) liens of carriers, warehousemen, mechanics, materialmen
         and landlords incurred in the ordinary course of business for sums not
         overdue or being contested in good faith, provided provision is made to
         the extent required by generally accepted accounting principles for the
         eventual payment thereof in the event it is found that such sums are
         payable by the Shipowner;


(3) maritime liens


     (A) arising in the ordinary
         course of business by operation of law payable consistent with past
         practice, and in any event no more than thirty (30) days past due, or
         that are being contested in good faith by appropriate proceedings and
         for which reserves have been made to the reasonable satisfaction of the
         Secretary or


     (B) arising in connection with
salvage and general average; or


     (C) arising in connection with crew
wages claimed but not paid;


(4) liens incurred in the ordinary course of business in
         connection with workmen's compensation, unemployment insurance or other
         forms of governmental insurance or benefits, or to secure performance
         of tenders and statutory obligations entered into in the ordinary
         course of business or to secure obligations on surety or appeal bonds
         in the ordinary course of business; and


(5) the lien of the Mortgage.


"Person" or "Persons" means any individual,
corporation, partnership, joint venture, association, limited liability company,
joint-stock company, trust, unincorporated organization, government, or any
agency or political subdivision thereof.


"Policies of Insurance" and "policies" means
all cover notes, binders, policies of insurance and certificates of entry in a
protection and indemnity association, club or syndicate with respect to the
Vessel, (including all endorsements and riders thereto), including but not
limited to all insurance required under Section 2.05 of the Security Agreement.


"Redemption Date" means a date fixed for the redemption of an Obligation by  the Indenture.


"Related Party" means one that can exercise control or significant
influence over the management and/or operating policies of another Person, to
the extent that one of the Persons may be prevented from fully pursuing its own
separate interests. Related parties consist of all affiliates of an enterprise,
including (1) its management and their immediate families, (2) its principal
owners and their immediate families, (3) its investments accounted for by the
equity method, (4) beneficial employee trusts that are managed by the management
of the enterprise, and (5) any Person that may, or does, deal with the
enterprise and has ownership of, control over, or can significantly influence
the management or operating policies of another Person to the extent that an
arm's-length transaction may not be achieved.


"Request" means a written request to a Person for the
action therein specified, signed by a Responsible Officer of the Person making
such request.


"Responsible Officer" means (1) in the case of any
business entity, the chairman of the board of directors, the president, any
executive or senior vice president, the secretary, the treasurer, member or
partner, (2) in the case of any commercial bank, the chairman or vice-chairman
of the executive committee of the board of directors or trustees, the president,
any executive or senior vice president, the secretary, the treasurer, any trust
officer, and (3) with respect to the signing or authentication of Obligations
and Guarantees by the Indenture Trustee, any person specifically authorized by
the Indenture Trustee to sign or authenticate Obligations.


"Retired or Paid," as applied to Obligations and the
indebtedness evidenced thereby, means that such Obligations shall be deemed to
have been so retired or paid and shall no longer be entitled to any rights or
benefits provided in the Indenture if: (1) such Obligations shall have been paid
in full; (2) such Obligations shall have been canceled by the Indenture Trustee;
or (3) such Obligations shall have become due and payable at Maturity and funds
sufficient for the payment of such Obligations (including interest to the date
of Maturity, or in the case of a payment after Maturity, to the date of payment,
together with any premium thereon) and available for such payment and are held
by the Indenture Trustee or any Paying Agent with irrevocable directions, to pay
such Obligations; provided that, the foregoing definition is subject to Section
6.08 of the Indenture.


"Rights  Under the  Construction  Contracts  and Related  Contracts"  shall have the meaning  specified  in Section  1.03 of the Security
Agreement.


"Secretary" means the Secretary of Transportation or any
officials duly authorized to perform the functions of the Secretary of
Transportation under Title XI of the Act.


"Secretary's Note" means a promissory note or promissory
notes issued and delivered by the Shipowner to the Secretary substantially in
the form of Exhibit 2 of the Security Agreement, including any promissory note
issued in substitution for, or any endorsement or supplement thereof.


"Secretary's Notice" means a notice from the Secretary
to the Indenture Trustee that a Default, within the meaning of Section 6.01(b)
of the Security Agreement has occurred.


"Security" has the meaning specified in Section 1.03 of the Security Agreement.


"Securities Account" has the meaning given by Article 8-501 of the
UCC.


"Securities Intermediary" has the meaning given by Article
8-102(a)(14) of the UCC and also means the Depository.


"Security Agreement" means the security agreement,
Contract No. MA-13552, dated as of the Closing Date, consisting of the special
provisions, the general provisions and this schedule X, executed by the
Shipowner as security for the Secretary, as originally executed or as modified,
amended or supplemented.


"Security Default" has the meaning specified in Section 6.01 of the Security Agreement.


"Shipowner" means ENSCO Offshore Company, a Delaware
corporation, and shall include its successors and assigns.


"Shipyard" means Friede Goldman Offshore Texas, Limited
Partnership, formerly known as TDI-Halter, L.P., a Louisiana limited
partnership.


"Shipyard Security Agreement" means the security
agreement by the Shipyard in favor of the Shipowner in respect of the Vessel
under construction at the Shipyard.


"Stated Maturity" means the date determinable as set
forth in any Obligation as the final date on which the principal of such
Obligation is due and payable.


"Successor" means a Person formed by or surviving a
consolidation or merger with the Shipowner or to which the Vessels have been
sold.


"Title XI" means Title XI of the Act.


"Title XI Reserve Fund" has the meaning specified in the Financial Agreement.


"Title XI Reserve Fund and Financial Agreement" means the Financial Agreement.


"UCC" means the Uniform Commercial Code as enacted in the State of
Texas.


"Vessel" means the semi-submersible drilling unit to be
named ENSCO 7500, and financed with the Obligations.


"Working Capital" shall mean the excess of current assets over
current liabilities, both determined in accordance with generally accepted
accounting principles and adjusted as follows:


     (1) In determining current assets,
there shall also be deducted: (A) Any securities, obligations or evidence of
indebtedness of a Related Party or of any stockholder, director, officer or
employee (or any member of his family) of the Company or of such Related Party,
except advances to agents required for the normal current operation of the
Company's vessels and current receivables arising out of the ordinary course of
business and not outstanding for more than 60 days; and (B) An amount equal to
any excess of unterminated voyage revenue over unterminated voyage expenses;


     (2) In determining current
liabilities, there shall be deducted any excess of unterminated voyage expenses
over unterminated voyage revenue; and


     (3) In determining current
liabilities, there shall be added one half of all annual charter hire and other
lease obligations (having a term of more than six months) due and payable within
the succeeding fiscal year, other than charter hire and such other lease
obligations already included and reported as a current liability on the
Company's balance sheet.






	


	




	Exhibit 1 to the Security Agreement

Document 7.02

GENERAL PROVISIONS
	TABLE OF CONTENTS
 
	ARTICLE I

DEFINITIONS; OFFICER'S CERTIFICATES; GRANTING CLAUSE



			Page
	SECTION 1.01	 	Definitions	 	1	 
	SECTION 1.02	 	Officer's Certificate	 	1	 
	SECTION 1.03	 	Granting Clause	 	1	 



	ARTICLE II

SHIPOWNER'S REPRESENTATIONS AND AGREEMENTS



			 
	SECTION 2.01	 	Shipowner's Representations, Agreements,
Organization and Existence	 	 	 
	 	 	     (b)  Shipowner's United
States Citizenship	 	3	 
	 	 	     (c)  Taxes	 	3	 
	SECTION 2.02	 	Covenants Concerning the Vessels	 	 	 
	 	 	     (a)  Title to and
Possession of the Vessels	 	4	 
	 	 	     (b)  Sale,
Mortgage, Transfer or Charter of Vessels	 	4	 
	 	 	     (c)  
Taxes and Governmental Charges	 	4	 
	 	 	     (d)  
Liens	 	4	 
	 	 	     (e)
  Compliance with Applicable Laws	 	5	 
	 	 	     (f)
  Vessels' Operation	 	5	 
	 	 	     (g)
  Vessels' Condition and Maintenance	 	5	 
	 	 	     (h)
  Material Changes in the Vessels	 	6	 
	 	 	     (i)
  Documentation of the Vessels	 	6	 
	SECTION 2.03	 	Maintenance of Construction Contract	 	6	 
	SECTION 2.04	 	Delivery Requirements	 	7	 
	SECTION 2.05	 	Insurance	 	7	 
	SECTION 2.06	 	Inspection of the Vessels; Examination
of Shipowner's Records	 	13	 
	SECTION 2.07	 	Requisition of Title, Termination of Construction
Contract or
Total Loss of a Vessel	 	13	 
	SECTION 2.08	 	Notice of Mortgate	 	14	 
	SECTION 2.09	 	Compliance with 46 U.S.C. Chapter 313	 	15	 
	SECTION 2.10	 	Performance of Shipowner's Agreements
by the Secretary	 	15	 
	SECTION 2.11	 	Uniform Commerical Code Filings; Further
Assurances	 	15	 
	SECTION 2.12	 	Modification of Formation Agreements
	 	15	 
	SECTION 2.13	 	Members of LImited Liability Companies	 	16	 
	SECTION 2.14	 	Concerning the Performance and Payment
Bonds	 	16	 





	ARTICLE III

THE SECRETARY'S NOTE



			 
	SECTION 3.01	 	Secretary's Note	 	17	 
	SECTION 3.02	 	Termination of the Guarantees	 	17	 
	SECTION 3.03	 	Execution of Additional Secretary's Note	 	17	 



	ARTICLE IV

CONSTRUCTION FUND; MONEYS DUE WITH RESPECT TO

CONSTRUCTION OF THE VESSELS



			 
	SECTION 4.01	 	Construction Fund	 	17	 
	SECTION 4.02	 	Moneys Due with Respect to Construction
of the Vessels	 	18	 



	ARTICLE V

ACTUAL COST; THE ESCROW FUND



			 
	SECTION 5.01	 	Actual Cost Determinations	 	18	 
	SECTION 5.02	 	Escrow Fund Deposits	 	19	 
	SECTION 5.03	 	Escrow Fund Withdrawals	 	19	 
	SECTION 5.04	 	Investment and Liquidation
of the Escrow Fund	 	21	 
	SECTION 5.05	 	Income on the Escrow Fund	 	21	 
	SECTION 5.06	 	Termination Date of the Escrow Fund	 	21	 



	ARTICLE VI

DEFAULTS AND REMEDIES



			 
	SECTION 6.01	 	What Constitutes "Defaults";
Continuance of Defaults	 	22	 
	SECTION 6.02	 	Acceleration of Maturity of the
Secretary's Note	 	23	 
	SECTION 6.03	 	Waivers of Default
	 	23	 
	SECTION 6.04	 	Remedies After Default	 	24	 
	SECTION 6.05	 	Application of Proceeds	 	26	 
	SECTION 6.06	 	General Powers of the Secretary	 	27	 



	ARTICLE VII

AMENDMENTS AND SUPPLEMENTS TO THE

SECURITY AGREEMENT, MORTGATE AND INDENTURE



			 
	SECTION 7.01	 	Amendments and Supplements to the Security
Agreement
and the Mortgage	 	27	 
	SECTION 7.02	 	Amendments and Supplements to the Indenture
	 	27	 





	ARTICLE VIII

CONSOLIDATION, MERGER OR SALE



			 
	SECTION 8.01	 	Consolidation, Merger, or Sale	 	28	 
	SECTION 8.02	 	Transfer of a General Partner's
or a Joint Venturer's Interest	 	28	 




	ARTICLE IX

NOTICES



			 
	SECTION 9.01	 	Notices	 	29	 
	SECTION 9.02	 	Waivers of Notice	 	29	 
	SECTION 9.03	 	Shipowner's Name or Address Change	 	29	 






	ARTICLE X

DISCHARGE OF SECURITY AGREEMENT AND THE MORTGAGE



			 
	SECTION 10.01	 	Discharge of Security Agreeent and the Mortgage	 	29	 



	ARTICLE XI

MISCELLANEOUS



			 
	SECTION 11.01	 	Successors and Assigns	 	30	 
	SECTION 11.02	 	Execution in Counterparts	 	30	 
	SECTION 11.03	 	Shipowner's Rights in Absence of Default	 	30	 
	SECTION 11.04	 	Surrender of Vessels' Documents	 	30	 
	SECTION 11.05	 	Applicable Regulations	 	30	 
	SECTION 11.06	 	Table of Contents, Titles and Headings	 	30	 



	


ARTICLE I


DEFINITIONS; OFFICER’S CERTIFICATES;
GRANTING CLAUSE


        SECTION 1.01.
Definitions.  All capitalized  terms used but, not defined herein,
shall have the meaning ascribed in Schedule X.


        SECTION
1.02. Officer’s Certificates. To
satisfy a covenant or condition provided for in this Security Agreement, the
Responsible Officer of the Person making such Officer’s Certificate shall
certify that the officer (a) has read such covenant or condition; (b) has made
or caused to be made such examination or investigation as is necessary to enable
the Officer to express an informed opinion with respect to such covenant or
condition; and (c) believes to the best of the Officer’s knowledge that
such condition or covenant has been met. An Officer’s Certificate shall set
forth the pertinent supporting information and shall be subject to the
Secretary’s review of its adequacy and accuracy. 


         SECTION
1.03. Granting Clause. (a) In order to
create a present security interest in the Secretary, the Shipowner does hereby
grant, sell, convey, assign, transfer, mortgage, pledge, set over and confirm
unto the Secretary continuing security interests in all of the right, title and
interest of the Shipowner in and to all of the following, whether now owned or
existing or hereafter arising or acquired: 


        (1) Each
Construction Contract (insofar as it relates to the Construction of a Vessel
under its related Construction Contract), together with all other contracts,
whether now in existence or hereafter entered into, relating to the Construction
of each Vessel. Said right, title and interest in and to the Construction
Contracts, and the other contracts conveyed to the Secretary by this subsection
are hereinafter referred to collectively as the “Rights Under the
Construction and Related Contracts.” 


        (2) The
Shipowner’s rights to receive all moneys which from time to time may become
due to the Shipowner with respect to the Construction of each Vessel regardless
of the legal theory by which moneys are recovered. Said right, title and
interest in and to the moneys, cash, bonds, claims, and securities conveyed by
this subsection are herein referred to collectively as the “Moneys Due with
Respect to the Construction of the Vessels.” The Secretary acknowledges and
agrees that the Moneys Due with Respect to the Construction of the Vessels will
be paid directly to the Depository for application in accordance with this
Security Agreement and the Indenture. 


        (3) All goods,
whether equipment or inventory appertaining to or relating to each Vessel,
whether or not on board or ashore and not covered by the Mortgage, and any
charter hire relating to each Vessel. 


        (4) The Title XI
Reserve Fund and all moneys, instruments, negotiable documents, chattel paper,
and proceeds thereof currently on deposit or hereafter deposited in the Title XI
Reserve Fund. 


        (5)  The Construction
Fund and all moneys, instruments, negotiable documents, chattel paper and proceeds


        (6) All moneys,  instruments,  negotiable documents,  chattel paper and proceeds thereof held by the Depository under
the Depository Agreement.


        (7) Proceeds of
Policies of Insurance relating to each Vessel and, whether or not insured, any
general average claims or loss of hire claims Shipowner may have with respect to
each Vessel. 


        (8) All proceeds
of the collateral described in paragraphs (1) through (7) of this Section. 


        The Secretary shall have,
upon execution and delivery thereof,  as further security,  certain right, title and interest in and
to the following:


        (9) The Mortgage,
to be executed and delivered by the Shipowner to the Secretary,  as mortgagee,  on the date hereof,
covering each Vessel.


        (b) The right,
title and interest of the Secretary pursuant to Section 1.03(a) is herein,
collectively, called the “Security.” The Secretary shall hold the
Security as collateral security for all of the obligations and liabilities of
the Shipowner under the Secretary’s Note and as collateral security for and
with respect to the Guarantees whether now made or hereafter entered into. 


        (c)
Notwithstanding paragraphs (a) and (b) of this Section, (1) the Shipowner shall
remain liable to perform its obligations under each Construction Contract and
the above-mentioned other contracts; (2) the Secretary shall not, by virtue of
this Security Agreement, have any obligations under any of the documents
referred to in clause (1) or be required to make any payment owing by the
Shipowner thereunder; and (3) if there is no existing Default, the Shipowner
shall (subject to the rights of the Secretary hereunder) be entitled to exercise
all of its rights under each of the documents referred to in this Section and
shall be entitled to receive all of the benefits accruing to it thereunder as if
paragraphs (a) and (b) of this Section were not applicable. 


        (d) The Shipowner  hereby agrees with the  Secretary  that the Security is to be held by the Secretary  subject to the further
agreements and conditions set forth herein.


ARTICLE II
SHIPOWNER’S REPRESENTATIONS
AND AGREEMENTS


        The  Shipowner  hereby  represents  and  agrees,  so long as this  Security  Agreement  shall  not have  been  discharged,  as
follows:


        SECTION 2.01.  Shipowner's  Representations,  Agreements,  Organization  and  Existence.  (a)  General  Representations.  The
Shipowner  hereby  represents and warrants that the following are true statements as of the date hereof and further  warrants that they
shall remain true thereafter:


        (1) The
Shipowner is duly organized, validly existing and in good standing under the
laws of the jurisdiction designated in the initial paragraph of the Special
Provisions hereof and shall maintain such existence. The Shipowner has not
failed to qualify to do business in any jurisdiction in the United States in
which its business or properties require such qualification, and had and has
full legal right, power and authority to own its own properties and assets and
conduct its business as it is presently conducted; 


        (2) the
Shipowner had and has legal power and authority to enter into and carry out the
terms of the Guarantee Commitment, the Construction Contract, Bond Purchase
Agreement, Obligations, Indenture, Security Agreement, Secretary’s Note,
Mortgage, Financial Agreement, and Depository Agreement (the
“Documents”); 


        (3) each of the
Documents has been duly authorized, executed and delivered by the Shipowner and
constitutes, in accordance with its respective terms, legal, valid and binding
instruments enforceable against the Shipowner, except to the extent limited by
applicable bankruptcy, reorganization, insolvency, moratorium or similar laws of
general application relating to or affecting the enforcement of creditors rights
as from time to time in effect; 


        (4) the
consummation of the transactions contemplated by and compliance by the Shipowner
of all the terms and provisions of the Documents will not violate any provisions
of the formation documents of the Shipowner and will not result in a breach of
the terms and provisions of, or constitute a default under any other agreement
or undertaking by the Shipowner or by which the Shipowner is bound or any order
of any court or administrative agency entered into in any proceedings to which
the Shipowner is or has been a party; and 


        (5) there is no
litigation, proceeding or investigation pending or, to the best of the
Shipowner’s knowledge, threatened, involving the Shipowner or any of its
property which could prevent or jeopardize the performance by the Shipowner of
its obligations under the Documents; 


        (b)
Shipowner’s United States Citizenship.
The Shipowner is a citizen of the United States within the meaning of Section 2
of the Shipping Act, 1916, as amended, and shall remain such a citizen for
operation in the trades in which the Shipowner proposes to operate the Vessels
and in the event the Shipowner shall cease to be such a citizen, the Shipowner
shall notify the Secretary immediately of such fact. 


        (c)
Taxes. The Shipowner has paid or caused to be
paid all taxes assessed against it, unless the same are being contested in good
faith or an authorized extension of time has been granted. 


        SECTION
2.02.Covenants Concerning the
Vessels. (a) Title to and Possession of the
Vessels. On the date of this Security Agreement, the
Shipowner represents and warrants that it lawfully owns each Vessel free from
any liens, encumbrances, security interests, charges, or rights
in rem
(subject only to (1) the equity of the Shipyard under the Construction Contract,
if any, (2) liens on any undelivered Vessel which the Shipyard is obligated to
discharge under the Construction Contract, (3) any security interest
subordinated to the Secretary’s security interest permitted under the
Special Provisions hereof, (4) the Secretary’s rights hereunder and (5) the
liens permitted by paragraph (d)(3) of this Section). The Shipowner shall, for
the Secretary’s benefit, warrant and defend the title to, and possession
of, each Vessel and every part thereof against the claims and demands of all
Persons whomsoever. 


        (b)
Sale, Mortgage, Transfer or Charter of the
Vessels. (1) The Shipowner shall not, without the
Secretary’s prior written consent, sell, mortgage, demise charter or
transfer any Vessel to any Person (or charter the Vessel to a Related Party
under any form of charter). 


        (2) The
Shipowner hereby covenants that: (A) it will not enter into any time charter of
the Vessels in excess of six months unless the time charter contains the
following provision, “This time charter is subject to each of the rights
and remedies of the Secretary of Transportation and has been assigned to the
Secretary under a Security Agreement and Mortgage, each executed by the
Shipowner in favor of the Secretary with respect to the Vessels being
chartered.” and (B) it shall, within 10 calendar days of entering into any
time charter in excess of six months, transmit a copy of the time charter to the
Secretary. 


        (c)
Taxes and Governmental Charges. The Shipowner
shall pay and discharge, or cause to be paid and discharged, on or before the
same shall become delinquent, all taxes, assessments, government charges, fines
and penalties lawfully imposed upon each Vessel, unless the same are being
contested in good faith. 


        (d)
Liens. (1) As a condition precedent to each
payment by the Shipowner under the Construction Contract, the Shipowner shall
require an Officer’s Certificate from the Shipyard stating that once the
Shipyard receives said payment, there will be no liens or rights
in rem
against the respective Vessel. At the Delivery Date of each Vessel, the
Shipowner and the Shipyard shall provide an Officer’s Certificate stating
that there are no liens or rights in
rem against the respective Vessel except for
the Mortgage. 


        (2) After the
Delivery Date of each Vessel, the Shipowner shall satisfy, or cause to be
satisfied, within 30 days of its knowledge thereof, any lien or encumbrance or
right in
rem which shall be filed against such Vessel
unless the same is being contested in good faith; and 


        (3) Neither the
Shipowner, any charterer, the master of any Vessel, nor any other Person has or
shall have any right, power or authority, without the Secretary’s prior
written consent, to create, incur or permit to be placed or imposed on any
Vessel any lien, encumbrance, security interest, charge, or rights
in rem,
and statutory liens incident to current operations unless such statutory liens
are subordinate to the Mortgage. 


        (e)
Compliance with Applicable Laws. The
Shipowner shall at all times be in compliance with all applicable U.S. laws. In
addition, each Vessel (1) shall be designed to meet, and on the Delivery Date
thereof and at all times thereafter shall meet all requirements of applicable
laws, treaties and conventions, and of applicable rules and regulations
thereunder, and (2) shall have on board valid certificates showing compliance
therewith; provided that the foregoing shall
not apply if (A) the Vessel is in Government Use; (B) there has been an actual
or constructive total loss or an agreed or compromised total loss of such
Vessel; or (C) there has been any other loss with respect to such Vessel and the
Shipowner shall not have had a reasonable time to repair the same. 


        (f)
Vessels’ Operation. Except when the
Vessel is in Government Use, the Shipowner shall not (1) cause or permit the
Vessels to be operated in any manner contrary to law or to any lawful rules or
regulations of the Maritime Administration, (2) remove or attempt to remove the
Vessels beyond the limits of the United States without the Secretary’s
prior written consent except on voyages with the intention of returning to the
United States, or (3) abandon such Vessels in any foreign port unless there has
been an actual or constructive total loss or an agreed or compromised total loss
of any of the Vessels. 


        (g)
Vessels’ Condition and Maintenance. (1)
Each Vessel shall be constructed, maintained and operated so as to meet, at all
times, the highest classification, certification, rating and inspection
standards for Vessels of the same age and type as my be imposed by the
Classification Society; provided
that, the foregoing shall not apply if the
Vessel has been (i) under Government Use, (ii) an actual or constructive total
loss or an agreed or compromised total loss of such Vessel, or (iii) any other
loss with respect to such Vessel and the Shipowner shall not have had a
reasonable time to repair the same; 


        (2) On the
Delivery Date of each Vessel, the Shipowner shall furnish to the Secretary an
Interim Class Certificate issued for each such Vessel by the Classification
Society and promptly after the Delivery Date of each Vessel, furnish to the
Secretary a Certificate of Class with respect to such Vessel issued by the
Classification Society. Subsequently, the Shipowner shall annually (A) furnish
to the Secretary a Certificate of Confirmation of Class issued by the
Classification Society showing that the above-mentioned classification and
rating have been retained for each Vessel and (B) furnish to the Secretary
copies of all Classification Society reports, including periodic and damage
surveys for each Vessel; provided
that, the foregoing shall not apply if the
Vessel is in Government Use and the governmental body does not permit
classification and rating of the Vessel. 


        (3)
Notwithstanding Section 2.02(g)(2), if the Vessel is a barge which is not
classed, then the Shipowner shall, at all times, at its own cost and expense
maintain and preserve each Vessel, so far as may be practicable, in at least as
good order and condition, ordinary wear and tear excepted, as at the Delivery
Date of such Vessel, and shall perform or cause to be performed at least once
every five years and at any other time reasonably required by the Secretary, a
survey and inspection of the Vessels by an independent marine surveyor approved
by the Secretary; and provided that, no such
surveys will be required within the last three years prior to the final Stated
Maturity of the Obligations. The Shipowner shall furnish two copies of the
report of such independent marine surveyor to the Secretary within 15 days of
such survey and inspection. The Shipowner shall deliver to the Secretary
annually an Officer’s Certificate stating the condition and maintenance of
each Vessel; provided
further, that none of this Section shall
apply when the Vessel is in Government Use. 


        (h)
Material Changes in the Vessels. After the
Delivery Date of any undelivered Vessel or the Closing Date of any already
delivered Vessel, the Shipowner shall not make, or permit to be made, any
material change in the structure, means of propulsion, type or speed of such
Vessel or in its rig, without the Secretary’s prior written consent. 


        (i)  Documentation
of the Vessels.  Upon the Delivery Date and thereafter,  each Vessel shall be and shall remain  documented
under the laws of the United States of America. 


        SECTION
2.03. Maintenance of Construction
Contract. (a) The Construction Contract shall be
maintained in full force and effect insofar as it relates to the due performance
by the Shipowner and the Shipyard of all their respective obligations thereunder
and the Shipowner shall not, without the Secretary’s prior written consent,
amend, modify, assign or terminate the Construction Contract or consent to any
change in the Construction Contract which releases the Shipyard from its
obligations to comply with the provisions of the Construction Contract or any
applicable laws, treaties, conventions, rules and regulations;
provided
that, the Secretary’s prior written
consent shall not be necessary, but prompt written notice to the Secretary shall
be given for (1) any mandatory or regulatory change to the Construction Contract
as a result of any requirements of any governmental agency, or (2) any
non-mandatory changes that Shipyard and Shipowner desire to make which do not
exceed, with respect to any item of the Vessel’s construction, one (1%)
percent of the Vessel’s Contract Price and which do not, in the aggregate,
cause the Vessel’s Contract Price to be increased more than five (5%)
percent or the delivery and completion date of the Vessel to be extended more
than ten (10) days. Notwithstanding the foregoing, no change shall be made in
the general dimensions and/or characteristics of the Vessels which changes the
capacity of the Vessels to perform as originally intended by the Construction
Contract without the Secretary’s prior written consent. The Secretary will
nonetheless retain its authority to review work done under a change order to
ascertain whether the work should be included in Actual Cost and whether the
price charged is fair and reasonable. No withdrawals may be made from the Escrow
Fund for work that is not determined to be includable in Actual Cost. 


        (b)
Notwithstanding anything to the contrary contained in the Construction Contract
or herein, no changes to the payment milestones and disbursement schedules shall
be made without the Secretary’s prior written consent, except to the extent
reasonably required to reflect the change orders under paragraph (a) of this
Section. 


        SECTION 2.04.  Delivery Requirements.  At or prior to the Delivery Date,
the Shipowner shall have: 


        (a) documented the Vessel under the laws of the United States with the
United States Coast Guard; 


        (b) executed and  delivered to the  Secretary  the Mortgage (or mortgage  supplement)  substantially  in the form of Exhibit 3
annexed hereto; 


        (c) recorded the Mortgage (or, if  appropriate,  a mortgage  supplement) in the National  Vessel  Documentation  Center of the
United States Coast Guard, or its successor; 


        (d) delivered to
the Secretary an Officer’s Certificate (1) from the Shipowner and the
Shipyard certifying that the Vessel is free of any claim, lien, charge,
mortgage, or other encumbrance of any character except as permitted under
Section 2.02(d); (2) certifying that there has not occurred and is not then
continuing any event which constitutes (or after any period of time or any
notice, or both, would constitute) a default under the Security Agreement; (3)
that the marine insurance as required under Section 2.05 will be in full force
and effect at the time of Vessel delivery; (4) certifying that the Vessel was
constructed substantially in accordance with the plans and specifications of the
Construction Contract; (5) certifying that there have been no unusual
occurrences (or a full description of such occurrences, if any) which would
adversely affect the condition of the delivered Vessel. 


        (e) delivered to
the Secretary (1) an opinion of counsel substantially in the form of Exhibit A
to the form of Mortgage; and (2) a certificate of delivery and acceptance from
the Shipowner and the Shipyard to the Secretary with respect to the delivered
Vessel; 


        SECTION
2.05. Insurance. (a) Prior to the
Delivery Date of each Vessel, the Shipowner shall, without cost to the Secretary
or, with respect to war risk builder’s risk insurance mentioned below,
without cost to the Shipyard, cause each Vessel to be insured as provided in the
Construction Contract and as contemplated by the Consent of Shipyard;
provided that, the insurance required by this
Section shall be approved by the Secretary. 


        (b) Upon the
Delivery Date of each Vessel and at all times thereafter, the Shipowner shall,
without cost to the Secretary, keep such Vessel insured as indicated below and
with such additional insurance as may be specified by the Secretary in an amount
in U.S. dollars equal to 110% of the unpaid principal amount of the
Proportionate Part of the Secretary’s Note, or such greater sum, up to and
including the full commercial value of such Vessel as may be required by the
Secretary. The Shipowner shall provide 30 days prior written notice to the
Secretary of all insurance renewals. 


        (1) Marine and
war risk hull insurance under the latest (at the time of issue of the policies
in question) forms of American Institute of Marine Underwriters’ policies
approved by the Secretary and/or policies issued by or for the Maritime
Administration (or under such other forms of policies as the Secretary may
approve in writing) insuring such Vessel against the usual risks covered by such
forms (including, at the Shipowner’s option, such amounts of increased
value and other forms of “total loss only” insurance as are permitted
by said hull insurance policies); and 


        (2) While any
Vessel is laid up, at the Shipowner’s option and in lieu of the
above-mentioned marine and war risk hull insurance or marine and war risk hull
and increased value insurance, port risk insurance under the latest (at the time
of issue of the policies in question) forms of American Institute of Marine
Underwriters’ policies approved by the Secretary and/or policies issued by
or for the Maritime Administration (or under such other forms of policies as the
Secretary may approve in writing) insuring such Vessel against the usual risks
covered by such forms. 


        (3)
Notwithstanding the foregoing, the Shipowner, with the Secretary’s prior
written consent, shall have the right to self-insure up to the amount specified
in the Special Provisions hereof for any loss resulting from any one accident or
occurrence (other than an actual or constructive total loss of any Vessel). 


        (c) All policies
of insurance under this Section shall provide, so long as this Security
Agreement has not been discharged, that payment of all losses shall be made
payable to the Secretary for distribution by him to himself, the Shipowner and
(in the case of the insurance required by paragraph (a) of this Section) the
Shipyard, except that (i) as provided in paragraph (e) of this Section and (ii)
under the policies required by paragraph (b) of this Section, payment of all
losses up to the amount specified in the Special Provisions hereof by all
insurance underwriters with respect to any one accident, occurrence or event may
be made directly to the Shipowner unless there is an existing Default, or if the
Secretary shall have assumed the Shipowner’s rights and duties under the
Indenture and the Obligations and made any payments in default under the terms
of Section 6.09 of the Indenture, in which event payment of all losses shall be
made payable to the Secretary as aforesaid. 


        Any such
insurance recoveries to which the Secretary shall be so entitled shall be
applied as follows: 


        (1) In the event
that insurance becomes payable under said policies on account of an accident,
occurrence or event not resulting in an actual or constructive total loss or an
agreed or compromised total loss of any Vessel, the Secretary shall (A) if there
is no existing Default and if none of the events described in Section 2.07 has
occurred, in accordance with a Shipowner’s Request, pay, or consent that
the underwriters pay, direct for repairs, liabilities, salvage claims or other
charges and expenses (including sue and labor charges due or paid by the
Shipowner) covered by the policies, or (to the extent that, as stated in an
Officer’s Certificate delivered to the Secretary, accompanied by written
confirmation by the underwriter or a surveyor or adjuster, the damage shall have
been repaired and the cost thereof paid of such liabilities, salvage claims, or
other charges and expenses discharged or paid) reimburse, or consent that the
underwriters reimburse, the Shipowner therefor and (after all known damage with
respect to the particular loss shall have been repaired, except to the extent
the Shipowner, with the Secretary’s written consent, deems the said repair
inadvisable, and all known costs, liabilities, salvage claims, charges and
expenses, covered by the policies, with respect to such loss shall have been
discharged or paid, as stated in an Officer’s Certificate delivered to the
Secretary, accompanied by written confirmation by the underwriters or a surveyor
or adjuster) pay, or consent that the underwriters pay, any balance to the
Shipowner; or (B) if there is an existing Default, in accordance with a Request
of Shipowner, pay, or consent that the underwriters pay, direct for the
Shipowner’s proportion of such repairs, liabilities, salvage claims or
other charges and expenses (including sue and labor charges due or paid by the
Shipowner) covered by the policies and hold any balance until the same may be
paid or applied under clauses A, C or D of this subsection, whichever is
applicable; or (C) if the Guarantees shall have terminated pursuant to Section
3.02(c) or if the Secretary shall have assumed the Shipowner’s rights and
duties under the Indenture and the Obligations and made any payments in default
under the terms of Section 6.09 of the Indenture and none of the events
described in Section 2.07 has occurred, apply the insurance as provided in
Section 6.05; or (D) if the Guarantees shall have terminated pursuant to Section
3.02(b) or (d), pay the insurance to the Shipowner; 


        (2) In the event
of an accident, occurrence or event resulting in an actual or constructive total
loss of any Vessel prior to the Delivery Date of such Vessel, the Shipowner
shall forthwith deposit with the Secretary any insurance moneys which the
Shipowner receives on account thereof under policies of insurance required by
paragraph (a) of this Section, and any such insurance moneys shall be held by
the Secretary for 10 days (or such lesser or further time as the Shipowner and
the Secretary may agree upon). Upon the expiration of said period of time, (A)
if there is no existing Default and if the Shipowner, the Shipyard and the
Secretary shall have elected not to construct such Vessel under the Construction
Contract, then said insurance moneys shall be applied, to the extent necessary
and required pursuant to Section 2.07; or (B) if there is no existing Default
and if the Shipowner, the Shipyard and the Secretary shall not have made the
election contemplated by clause (A) of this subsection, then said insurance
moneys (together with the Shipowner’s funds to the extent, if any, required
by the Secretary for deposit on account of interest under clause (ii) below)
shall be deposited in the Escrow Fund, in such amount and to the extent
available, so that the moneys in the Escrow Fund after such deposit shall be
equal to (i) the principal amount of the Proportionate Part of the Outstanding
Obligations relating to such Vessel at the time of such deposit and (ii) such
interest on said deposit, if any, as may be required by the Secretary (said
moneys to be subject to withdrawal in the same manner as moneys originally
deposited in said Escrow Fund); and the balance, if any, of such insurance
moneys held by the Secretary shall be paid to the Shipowner; and 


        (3) In the event
of an accident, occurrence or event resulting in an actual or constructive total
loss or an agreed or compromised total loss of any Vessel, whether prior to or
after the Delivery Date of such Vessel, and the insurance moneys have not been
applied as provided in paragraph (c)(2) of this Section, the Shipowner shall
forthwith deposit with the Secretary any insurance moneys which the Shipowner
receives on account thereof under policies of insurance required by this
Section, and any such insurance moneys received by the Secretary, whether from
the Shipowner or otherwise, or held by the Secretary pursuant to paragraph
(c)(2) of this Section, shall (A) if there is no existing Default, be applied,
to the extent necessary, pursuant to Section 2.07; (B) if there is an existing
Security Default, be held until the same may be applied under clauses (A), (C),
or (D) of this subsection, whichever is applicable; (C) if the guarantees shall
have terminated pursuant to Section 3.02(c) or if the Secretary shall have
assumed the Shipowner’s rights and duties under the Indenture and the
Obligations and made any payments in default under the terms of Section 6.09 of
the Indenture, be applied as provided in Section 6.05;
provided
that, notwithstanding the foregoing clauses
(A), (B) and (C) of this subsection, the Shipowner shall not be required to so
deposit with the Secretary insurance moneys in an amount which, together with
funds otherwise available for the redemption of Obligations is in excess of that
required for the redemption of the Proportionate Part of the Outstanding
Obligations pursuant to Section 3.05 of the Indenture and for the payment to the
Secretary of a Proportionate Part of all other sums that may be secured by this
Security Agreement and the Mortgage; or (D) if the Guarantees shall have
terminated pursuant to Section 3.02(b) or 3.02(d), be paid to the Shipowner. 


        (d) In the event
of an accident, occurrence or event resulting in a constructive total loss of
any Vessel, the Secretary shall have the right (with the prior written consent
of the Shipowner, unless there is an existing Default, and at any time prior to
the Delivery Date of such Vessel also with the prior written consent of the
Shipyard) to claim for a constructive total loss of such Vessel. If (1) such
claim is accepted by all underwriters under all policies then in force as to
such Vessel under which payment is due for total loss and (2) payment in full is
made in cash under such policies to the Secretary, then the Secretary shall have
the right to abandon such Vessel to the underwriters of such policies, free from
lien of this Security Agreement and the Mortgage. 


        (e) Commencing
on the Delivery Date of each Vessel, the Shipowner shall, without cost to the
Secretary, keep each such Vessel insured against marine and war risk protection
and indemnity risks and liabilities by policies of insurance approved by the
Secretary as to form and amount; provided
that, (1) the Shipowner shall, as soon as possible
before such Delivery Date, present any such policy to the Secretary (who shall
promptly approve or disapprove the same), (2) any approval of a policy under
this subsection shall be effective until the end of the policy period or until
60 days after the Secretary shall notify the Shipowner of a desired change in
the form and/or amount thereof, whichever shall first occur, and (3) war
protection and indemnity insurance shall be required unless the Secretary gives
written notice to the Shipowner stating that such insurance is not required. 


        Such policies
may provide that (1) if the Shipowner shall not have incurred the loss, damage,
or expense in question, any loss under such insurance may be paid directly to
the Person to whom any liability covered by such policies has been incurred
(whether or not a Default then exists), and (2) if the Shipowner shall have
incurred the loss, damage or expense in question, any such loss shall be paid to
the Shipowner in reimbursement if there is no existing Default of which the
underwriter has written notice from the Shipowner or the Secretary, or, if there
is such an existing Default, to the Secretary to be held and applied as follows:
(A) applied as provided in Section 6.05 in the event the Guarantees shall have
terminated pursuant to Section 3.02(c) or if the Secretary shall have assumed
the Shipowner’s rights and duties under the Indenture and the Obligations
and made any payments in default under the terms of Section 6.09 of the
Indenture, or (B) to the extent not theretofore applied pursuant to Section
6.05, paid forthwith to the Shipowner upon its Request in the event there is no
existing Default or the Guarantees shall have terminated pursuant to Section
3.02(b) or (d) at the date of delivery of such Request; provided
that, irrespective of the foregoing, with the
Secretary’s prior written consent, the Shipowner shall have the right to
self-insure in an amount up to the limit specified in the Special Provisions
hereof with respect to each accident, occurrence or event, except that, with
respect to cargo or property carried, the Shipowner, with the Secretary’s
prior written consent, shall have the right to self-insure in an amount up to
the limit specified in the Special Provisions hereof with respect to each cargo
or property carried. 


        (f) All
insurance required under this Section shall be placed and kept with the United
States Government or with American and/or British (and/or other foreign, if
permitted by the Secretary in writing) insurance companies, underwriters’
association or underwriting funds approved by the Secretary. All insurance
required under this subsection shall be arranged through marine insurance
brokers and/or underwriting agents as chosen by the Shipowner and approved by
the Secretary. 


        (g) The
Secretary shall not have the right to enter into an agreement or compromise
providing for an agreed or compromised total loss of any Vessel without prior
written consent of (i) the Shipyard (prior to the Delivery Date of such Vessel)
and (ii) (unless there is an existing Default) the Shipowner. If (1) the
Shipowner shall have given prior consent thereto or (2) there is an existing
Default, the Secretary shall have the right in his discretion, and with the
prior written consent of the Shipyard prior to the Delivery Date of such Vessel,
to enter into an agreement or compromise providing for an agreed or compromised
total loss of such Vessel; provided that, if
the aggregate amount payable to the Shipowner and/or the Secretary under such
agreement or compromise, together with funds held by the Secretary and available
for the redemption of Obligations, is not sufficient to redeem or pay the
Proportionate Part of the Outstanding Obligations pursuant to Section 2.07, the
Secretary shall not enter into such agreement or compromise without the
Shipowner’s prior written consent. 


        (h) During the
continuance of (1) a taking or requisition of the use of any Vessel by any
government or governmental body, or (2) a charter, with the Secretary’s
prior written consent, of the use of any Vessel by the United States Government
or by any governmental body of the United States, or by any other government or
governmental body, the provisions of this Section shall be deemed to have been
complied with in all respects if such government or governmental body shall have
agreed to reimburse, in a manner approved by the Secretary in writing, the
Shipowner for loss or damage covered by the insurance required hereunder or
resulting from the risks under paragraphs (a), (b), and (e) of this Section or
if the Shipowner shall be entitled to just compensation therefor. In addition,
the provisions of this Section shall be deemed to have been complied with in all
respects during any period after (A) title to any Vessel shall have been taken
or requisitioned by any government or governmental body or (B) there shall have
been an actual or constructive total loss or an agreed or compromised total loss
of any Vessel. In the event of any taking, requisition, charter or loss
contemplated by this paragraph, the Shipowner shall promptly furnish to the
Secretary an Officer’s Certificate stating that such taking, requisition,
charter or loss has occurred and, if there shall have been a taking, requisition
or charter of the use of any Vessel, that the government or governmental body in
question has agreed to reimburse the Shipowner, in a manner approved by the
Secretary, for loss or damage resulting from the risks under paragraphs (a),
(b), and (e) of this Section or that the Shipowner is entitled to just
compensation therefor. 


        (i) All
insurance required (A) under paragraph (a) of this Section shall be taken out in
the names of the Shipowner, the United States and the Shipyard as assureds, and
(B) under paragraph (b) and (c) of this Section shall be taken out in the names
of the Shipowner and the United States as assureds. All policies for such
insurance so taken out shall, unless otherwise consented to by the Secretary,
provide that (1) there shall be no recourse against the United States for the
payment of premiums or commissions, (2) if such policies provide for the payment
of club calls, assessments or advances, there shall be no recourse against the
United States for the payment thereof, and (3) at least 10 days’ prior
written notice of any cancellation for the nonpayment of premiums, commissions,
club calls, assessments or advances shall be given to the Secretary by the
insurance underwriters. 


        (j) The
Shipowner shall not, without the Secretary’s prior written consent, (1) do
any act, nor voluntarily suffer or permit any act to be done, whereby any
insurance required by this Section shall or may be suspended, impaired or
defeated or (2) suffer or permit any Vessel to engage in any voyage or to carry
any cargo not permitted under the policies of insurance then in effect without
first covering such Vessel with insurance satisfactory in all respects for such
voyage or the carriage of such cargo;
provided
that, this paragraph shall be subject to the
requirements of any military authority of the United States and shall not apply
in the case of such Vessel if and so long as the title or use of such Vessel
shall have been taken, requisitioned or chartered by any government or
governmental body as contemplated by Section 2.07. 


        (k) In the event
that any claim or lien is asserted against any Vessel for loss, damage or
expense which is covered by insurance hereunder and it is necessary for the
Shipowner to obtain a bond or supply other security to prevent arrest of such
Vessel or to release such Vessel from arrest on account of said claim or lien,
the Secretary, on the Shipowner’s Request, may, at the Secretary’s
sole option, assign to any Person executing a surety or guaranty bond or other
agreement to save or release such Vessel from such arrest, all right, title and
interest of the Secretary in and to said insurance covering such loss, damage or
expense as collateral security to indemnify against liability under said bond or
other agreement. 


        (l) Except as
the Secretary shall otherwise direct by notice in writing to the Shipowner, the
Shipowner shall deliver to the Secretary the original policies evidencing
insurance maintained under this Section; provided
that, if any such original policy shall have been
delivered previously to the Secretary or to a mortgagee by the Shipowner under
another ship mortgage of the Shipowner, the Shipowner shall deliver a duplicate
or pro forma copy of such policy to the Secretary. The Secretary or any agent
thereof (who may also be an agent of the issuer) shall at all times hold the
policies delivered as aforesaid; provided
that, if one or more of said policies are held by an
agent of the Secretary, the Shipowner shall, upon the Secretary’s request,
deliver a duplicate or pro forma copy thereof to the Secretary, and
provided further, that if the Shipowner shall
deliver to the Secretary a Request (1) stating that delivery of such policy to
the insurer is necessary in connection with the collection, enforcement or
settlement of any claim thereunder (including claims for return premiums and any
other amounts payable by the insurer) and (2) setting forth the name and address
of the Person to whom such policy is to be delivered or mailed for such purpose,
and if the Secretary approves such Request, the Secretary shall, at the
Shipowner’s expense, deliver or mail (by registered or certified mail,
postage prepaid) such policy in accordance with such Request, accompanied by a
written direction to the recipient to redeliver such policy directly to the
Secretary or an agent thereof when it has served the purpose for which so
delivered. The Shipowner agrees that, in case it shall at any time so cause the
delivery or mailing of any policy to any Person as aforesaid, the Shipowner will
cause such policy to be promptly redelivered to the Secretary or an agent
thereof as aforesaid. The Secretary shall have no duty to see to the redelivery
of such policy, but shall have the duty to request the redelivery thereof at
intervals of 60 days thereafter. 


        (m) Nothing in
this Section shall limit the insurance coverage which the Secretary may require
under any contract or agreement to which the Secretary and the Shipowner are
parties. 


        The requirements
of this Section are expressly subject to the Special Provisions of this Security
Agreement. 


        SECTION
2.06. Inspection of the Vessels; Examination of Shipowner’s
Records. The Shipowner will: (a) afford the Secretary,
upon reasonable notice, access to the Vessels, their cargoes and papers for the
purpose of inspecting the same; (b) maintain records of all amounts paid or
obligated to be paid by or for the account of the Shipowner for each
Vessel’s Construction; and (c) at reasonable times permit the Secretary,
upon request, to make reasonable, material and pertinent examination and audit
of books, records and accounts maintained by the Shipowner, and to take
information therefrom and make transcripts or copies thereof. 


        SECTION
2.07. Requisition of Title, Termination of Construction Contract or
Total Loss of a Vessel. In the event of requisition of
title to or seizure or forfeiture of such Vessel, termination of the
Construction Contract relating to such Vessel, or the occurrence of the
circumstances referred to in Section 2.05(c)(3), then all of the following shall
apply: 


        
(a) The Shipowner shall promptly give written notice thereof to the Secretary.


        
(b) The Shipowner shall promptly pay all amounts it receives by reason of such requisition,  seizure, forfeiture,  termination
or total loss ("Loss Event") to the Secretary.


        (c) After the
Secretary has received sufficient funds to retire a Proportionate Part of the Outstanding  Obligations  affected
by the Loss Event:


        (1) if there is
no existing Default, (A) the Secretary and the Shipowner shall give notice to
the Indenture Trustee of a redemption of Proportionate Part of the Outstanding
Obligations pursuant to Section 3.05 of the Indenture, (B) such amount, if any,
held by the Secretary, shall be paid by the Secretary to the Indenture Trustee
not earlier than 10 days prior to, nor later than the opening of business on,
the Redemption Date required by Section 3.05 of the Indenture, (C) the remainder
shall next be applied by the Secretary for the payment of a Proportionate Part
of all other sums that may be secured hereby, and (D) the balance shall be paid
to the Shipowner including any interest earned on the proceeds which are in
excess of the amount required to redeem the Obligations; 


        (2) if there is
an existing Default and the Guarantees shall not have terminated pursuant to
Section 3.02, such amounts shall be held until the same may be applied or paid
under paragraphs (1), (3), or (4) of this subsection, whichever is applicable; 


        (3) if the
Guarantees shall have terminated pursuant to Section 3.02(c) or if the Secretary
shall have assumed the Shipowner’s rights and duties under the Indenture
and the Obligations and made any payments in default under the terms of Section
6.09 of the Indenture, such amounts shall be applied as provided in Section
6.05; or 


        (4) if the Guarantees shall have terminated  pursuant to Section 3.02(b) or 3.02(d) such amounts shall be paid by the
Secretary to the Shipowner.


Provided that,
notwithstanding the foregoing, the Shipowner shall not be required to pay the
Secretary any amount which the Secretary agrees is in excess of the amount
needed for redemption of the Proportionate Part of the Outstanding Obligations
affected by the Loss Event. 


        SECTION
2.08. Notice of Mortgage. (a) A properly
certified copy of the Mortgage shall be carried on board each self-propelled
Vessel with that Vessel’s documents and shall be exhibited on demand to any
Person having business with such Vessel or to any Secretary’s
representative. 


        (b) A notice
printed in plain type of such size that the paragraph of reading matter shall
cover a space not less than six inches wide by nine inches high, and framed,
shall be placed and kept prominently exhibited in the chart room and in the
master’s cabin of a self-propelled Vessel. 


        (c) The notice
referred to in paragraph (b) of this Section shall read as follows: 



“NOTICE OF FLEET MORTGAGE”






	
This
Vessel is owned by(Insert name of Shipowner), a (Insert jurisdiction)
corporation (“Shipowner”), and is covered by
a First Preferred Ship Mortgage in favor of the United States of America, under
authority of Chapter 313, Title 46 of the United States Code. Under the terms of
said Mortgage neither the Shipowner, any charterer, the master or agent of this
Vessel nor any other person has any right, power or authority to create, incur
or permit to be placed or imposed upon this Vessel any lien other than statutory
liens incident to current operations that are subordinate to the Mortgage.”


	 



	

        SECTION 2.09.
Compliance with 46 U.S.C. Chapter 313.
The Shipowner shall comply with and satisfy all of the provisions of Chapter
313, in order to establish and thereafter to maintain the Mortgage as a
preferred mortgage upon each Vessel. 


        SECTION
2.10. Performance of Shipowner’s Agreements by the
Secretary. If the Shipowner shall fail to perform any
of its agreements hereunder or under the Mortgage, the Secretary may, in its
discretion, at any time during the continuance of an event which by itself, with
the passage of time, or the giving of notice, would constitute a Default,
perform all acts and make all necessary expenditures to remedy such failure.
Notwithstanding the foregoing, the Secretary shall not be obligated to (and
shall not be liable for the failure to) perform such acts and make such
expenditures. All funds advanced and expenses and damages incurred by the
Secretary relating to such compliance shall constitute a debt due from the
Shipowner to the Secretary and shall be secured hereunder and under the Mortgage
prior to the Secretary’s Note and shall be repaid by the Shipowner upon
demand, together with interest at the rate that would have been paid by the
Department of Treasury on the expended funds plus 1%. 


        SECTION
2.11. Uniform Commercial Code Filings; Further
Assurances. The Shipowner shall (a) furnish evidence
satisfactory to the Secretary that financing statements under the UCC shall have
been filed against the Shipowner and/or the Shipyard in all offices in which it
may be necessary or advisable in the opinion of the Secretary to perfect the
Secretary’s security interests, and (b) from time to time execute and
deliver such further instruments and take such action as may reasonably be
required to more effectively subject the Security to the lien of this Security
Agreement and the Mortgage as contemplated thereby, including but not limited
to, legal opinions from an independent counsel for the Shipowner to the effect
that all UCC Financing Statements have been filed to perfect the
Secretary’s interests in the Security as valid and enforceable first
priority perfected security interests. 


        SECTION
2.12. Modification of Formation
Agreements. (a) If the Shipowner is organized as a
general partnership, limited partnership, limited liability company or joint
venture, then for so long as there is Outstanding any indebtedness to the United
States of America pursuant to the Act, the partnership agreement, operating
agreement, limited liability agreement, joint venture agreement (or any
agreement constituting such an entity) shall not be amended, modified or
voluntarily terminated without the Secretary’s prior written consent. 


        (b) In the event
where any action by the Shipowner, any member of the Shipowner or the management
of the Shipowner results or would result in dissolution of the Shipowner
pursuant to its limited liability company agreement or governing law, each
member of the Shipowner shall forthwith take all steps necessary to reform and
reestablish the Shipowner. 


        SECTION
2.13. Members of Limited Liability
Companies. All existing and future members of a
Shipowner which is a limited liability company (each being a
“Member”), upon becoming a Member, shall forthwith enter into an
agreement with the Secretary, in form and substance satisfactory to the
Secretary, whereby each Member agrees: (1) that any amounts owed by the
Shipowner to a Member with respect to its interest (as that or the equivalent
term is used in the Shipowner’s limited liability company agreement) (the
“Distributions”) shall be subordinated to the Shipowner’s payment
of the Secretary’s Note and debts under the Security Agreement, provided
that such Distributions may be paid to the extent the Shipowner is permitted to
pay dividends under the Financial Agreement; (2) that in the event of default by
the Shipowner under the Security Agreement, the Member shall be subordinated in
its rights to receive any Distribution or to be paid any sums whatsoever by the
Shipowner until the Secretary has made a full recovery of any and all amounts
owed under the Secretary’s Note and the Security Agreement. 


        SECTION
2.14. Concerning the Performance and Payment
Bonds. During the Construction, the Shipowner shall
cause to be maintained Performance Bonds and Payment Bonds naming the Shipowner
and the Secretary as co-obligees (the “Surety Bonds”) in form and
substance satisfactory to the Secretary, to be obtained by the Shipyard in the
amount of the Construction Contract, issued by such surety company or companies
as shall be satisfactory to the Secretary (the “Surety”). In the event
that the price for the work to be performed under the Construction Contract is
increased, then the Surety Bonds shall be increased simultaneously in a
corresponding amount. The Shipowner hereby agrees that the Secretary shall be
the sole loss payee under the Surety Bonds and the Surety shall pay such amounts
directly to the Secretary for distribution to the co-obligees as their interests
may appear. The Shipowner hereby agrees that its interest as a co-obligee under
each of the Surety Bonds is and shall be, upon the occurrence of a Default under
the Security Agreement, fully subject and subordinate to the rights and
interests of the Secretary therein. In the event of a default under the Security
Agreement, which default results in a payment under any of the Surety Bonds,
then the Surety Bonds proceeds shall be distributed by the Secretary in
accordance with the provisions of Section 6.05 hereof. The Shipowner hereby
irrevocably appoints the Secretary, the true and lawful attorney of the
Shipowner, in its name and stead, to execute all consents, approvals,
settlements and agreements on behalf of the Shipowner with respect to any rights
related to the Surety Bonds. 


ARTICLE III
THE SECRETARY’S NOTE


        SECTION 3.01.  Secretary's  Note.  On this date,  the  Shipowner  has duly
executed  and  delivered  and the  Secretary  has
accepted the Secretary's Note payable in an amount equal to the principal amount of the Obligations.


        SECTION
3.02. Termination of the Guarantees.
Except as provided in Section 6.08 of the Indenture, the Guarantee with respect
to a particular Obligation, shall terminate only when, one or more of the
following events shall occur: 


        (a) Such Obligation shall have been Retired or Paid;


        (b) The Obligees
of all the Obligations then Outstanding shall have elected to terminate the
Guarantees, and the Secretary has been so notified by the Indenture Trustee or
all Obligees in writing; provided that, such
termination shall not prejudice any rights accruing hereunder prior to such
termination; 


        (c) Such
Guarantee shall have been paid in full in cash by the Secretary; or


        (d) The  Indenture  Trustee  and each  Obligee  shall have  failed to demand  payment of such  Guarantee  as  provided  in the
Indenture, Guarantee, or the Act.


        SECTION
3.03. Execution of Additional Secretary’s
Note. (a) In the event and when each new issue of
Obligations is executed, authenticated and delivered on a date or dates
subsequent to the date hereof, as contemplated by, and pursuant to the
Indenture, the Shipowner shall, at the time of the issuance of such Obligations,
execute and deliver to the Secretary an additional Secretary’s Note or, at
the Secretary’s discretion, an endorsement to the Secretary’s Note in
an amount equal to the principal amount of, and at the interest rate borne by,
such issue of Obligations, on the terms stated in the Secretary’s Note. 


        (b) Each
Secretary’s Note or endorsement executed and delivered in accordance with
Section 3.03 shall together with the Secretary’s Note be secured by this
Security Agreement and the Mortgage. 


ARTICLE IV
CONSTRUCTION FUND; MONEYS DUE WITH
RESPECT TO


CONSTRUCTION OF THE VESSELS


        SECTION
4.01. Construction Fund. (a) The
Shipowner has deposited in the Construction Fund with the Depository the amount,
if any, indicated in the Depository Agreement from the proceeds of the
Obligation to be held by the Depository in a Securities Account in accordance
with the terms of the Depository Agreement. This Securities Account together
with any future deposits and the proceeds from the investment of the amounts on
deposit shall be called the “Construction Fund.” 


        (b) The
Shipowner may withdraw money from the Construction Fund under the same
procedures and conditions as the Shipowner may withdraw money from the Escrow
Fund under Section 5.03, except that the Shipowner’s Request for withdrawal
will not be subject to Section 5.03(a)(2)(A) or 5.03(h). The administration of
the Construction Fund shall also be subject to the terms and conditions of
Sections 5.04 and 5.05. 


        SECTION
4.02. Moneys Due with Respect to Construction of the
Vessels. (a) In the event that the Shipowner shall
receive any moneys from any Person in connection with the Construction of any
Vessel, the Shipowner shall give written notice thereof to the Secretary and
shall promptly pay the same over to the Depository to be held in the Title XI
Reserve Fund. 


        (b) Upon and
after a final determination of Actual Cost in accordance with Section 5.01, in
the absence of a Default, any moneys held by the Depository which are not to be
applied for the redemption of Obligations under Section 3.04 of the Indenture
shall be paid to the Shipowner. 


        (c) In the event there is an existing  Default,  the money shall be held by the  Depository in accordance  with the provisions
of the Depository Agreement.


        (d) In the event
the Secretary assumes the Shipowner’s rights and duties under Section 6.09
of the Indenture or pays the Guarantees, the Depository shall promptly pay all
moneys including all Moneys Due with Respect to Construction of the Vessels to
the Secretary, who will apply it in accordance with Section 6.05. 


ARTICLE V
ACTUAL COST; THE ESCROW FUND


        SECTION 5.01.
Actual Cost  Determinations.  (a) The Actual Cost of each Vessel (and the  aggregate  Actual Cost of all of the
Vessels), determined as of the date of this Security Agreement, is as set forth in Table A hereof.


        (b) The
Secretary agrees to: (1) make a final determination of the Actual Cost of each
Vessel, limited to amounts paid by or for the account of the Shipowner on
account of the items set forth in Table A hereof and, to the extent approved by
the Secretary, any other items or any increase in the amounts of such items,
such determination to be made as of the time of payment by or for the account of
the Shipowner of the full amount of said Actual Cost of such Vessel, excluding
any amounts which are not to become due and payable, and (2) promptly give
written notice to the Shipowner, of the results of said final determination;
provided that, the Shipowner shall have
requested such determination not less than 60 days in advance and shall have
furnished to the Secretary not less than 30 days in advance of such
determination along with a Shipowner’s Officer’s Certificate and a
statement by an independent certified (or, with the Secretary’s prior
written consent, an independent) public accountant or firm of accountants of the
total amounts paid or obligated to be paid by or for the account of the
Shipowner for the Construction of such Vessel, together with a breakdown of such
totals according to the items for which paid or obligated to be paid. 


        SECTION
5.02. Escrow Fund Deposits. At the time
of the sale of the Obligations, the Shipowner shall deposit with the Secretary
in the Escrow Fund all of the proceeds of that sale unless the Shipowner is
entitled to withdraw funds under Section 5.03. If the Obligations are issued
before the delivery of all of the Vessels, then the Shipowner shall also deposit
into the Escrow Fund on the Closing Date an amount equal to six months interest
at the rate borne by the Obligations. 


        SECTION
5.03. Escrow Fund Withdrawals. (a) The
Secretary shall within a reasonable time after written Request from the
Shipowner, disburse from the Escrow Fund directly to the Indenture Trustee, any
Paying Agent for such Obligations, the Shipyard, or any other Person entitled
thereto, any amount which the Shipowner is obligated to pay, or to the Shipowner
for any amounts it has paid, on account of the items and amounts or any other
items set forth in Table A annexed hereto or subsequently approved by the
Secretary, provided that, the Secretary is
satisfied with the accuracy and completeness of the information contained in the
following submissions: 


        (1) A
Responsible Officer of the Shipowner shall deliver an Officer’s
Certificate, in form and substance satisfactory to the Secretary, stating that
(A) there is neither a Default under the Construction Contract nor the Security
Agreement; (B) there have been no occurrences which have or would adversely and
materially affect the condition of the Vessel, its hull or any of its component
parts; (C) the amounts of the Request is in accordance with the Construction
Contract including the approved disbursement schedule and each item in these
amounts is properly included in the Secretary’s approved estimate of Actual
Cost; (D) with respect to the Request, once the Contractor is paid there will be
no liens or encumbrances on the applicable Vessel, its hull or component parts
for which the withdrawal is being requested except for those already approved by
the Secretary; and (E) if the Vessel has already been delivered, it is in class
and is being maintained in the highest and best condition. The Shipowner shall
also attach an Officer’s Certificate of the Shipyard, in form and substance
satisfactory to the Secretary, stating that there are no liens or encumbrances
as provided in clause (D) of this subsection and attaching the invoices and
receipts supporting each proposed withdrawal to the satisfaction of the
Secretary. 


        (2) No payment
or reimbursement under this Section shall be made (A) to any Person until the
Construction Fund, if any, has been exhausted, (B) to any Person until the total
amount paid by or for the account of the Shipowner from sources other than the
proceeds of such Obligations equals at least 12-l/2% of the Actual Cost of the
related Vessel is made; (C) to the Shipowner which would have the effect of
reducing the total amounts paid by the Shipowner pursuant to clause (B) of this
subsection; or (D) to any Person on account of items, amounts or increases
representing changes and extras or owner furnished equipment, if any, set forth
in Table A annexed hereto, unless such items, amounts and increases shall have
been previously approved by the Secretary;
provided,
however, that when the amount guaranteed by
the Secretary equals 75% or less of the Actual Cost, then after the initial 12
1/2% of Actual Cost has been paid by or on behalf of the Shipowner for such
Vessel and up to 37 1/2% of Actual Cost has been withdrawn from the Escrow Fund
for such Vessel, the Shipowner shall pay the remaining Shipowner’s equity
of at least 12 1/2% (as determined by the Secretary) before additional monies
can be withdrawn from the Escrow Fund relating to such Vessel. 


        (b) The excess,
as determined by the Secretary, of any amount on deposit in the Escrow Fund
which represents interest on the principal amount deposited, over and above the
amount of interest due on the next Interest Payment Date on the principal
amount, as determined by the Secretary, remaining on deposit on such Interest
Payment Date, may, unless there is an existing Default, be disbursed by the
Secretary upon the Shipowner’s Request made not more than 10 Business Days
prior to such Interest Payment Date or made within at least 60 days after such
Interest Payment Date. 


        (c) The
Secretary shall not be required to make any disbursement pursuant to this
Section except out of the cash available in the Escrow Fund. If sufficient cash
is not available to make the requested disbursement, additional cash shall be
provided by the maturity or sale of securities in accordance with instructions
pursuant to Section 5.04. If any sale or payment on maturity shall result in a
loss in the principal amount of the Escrow Fund invested in securities so sold
or matured, the requested disbursement from the Escrow Fund shall be reduced by
an amount equal to such loss, and the Shipowner shall, no later than the time
for such disbursement, pay to the Indenture Trustee, any Paying Agent, the
Shipyard, or any other Person entitled thereto, the balance of the requested
disbursement from the Shipowner’s funds other than the proceeds of such
Obligations. 


        (d) If the
Secretary assumes the Shipowner’s rights and duties under the Indenture and
the Obligations, and makes any payments in default under the Indenture, or the
Secretary pays the Guarantees, all amounts in the Escrow Fund (including
realized income which has not yet been paid to the Shipowner), shall be paid to
the Secretary and be credited against any amounts due or to become due to the
Secretary under the Security Agreement and the Secretary’s Note. To the
extent payment of the Escrow Fund to the Secretary is not required, said amounts
or any balance thereof, shall be paid to the Shipowner. 


        (e) At any time
the Secretary shall have determined that there has been, for any reason, a
disbursement from the Escrow Fund contrary to this Section, the Secretary shall
give written notice to the Shipowner of the amount improperly disbursed, the
amount to be deposited or redeposited into the Escrow Fund on account thereof,
and the reasons for such determination. The Shipowner shall thereafter promptly
deposit or redeposit, as appropriate, such amount (with interest, if any)
required by the Secretary into the Escrow Fund. 


        (f)
Notwithstanding any other provision of this Section, the Shipowner shall not
seek or receive reimbursement for any amount paid to the Shipyard or any Person
by the Secretary. 


        (g) In the event
that one of the events described in Section 2.07 has occurred with respect to
one or more of the Vessels or the Secretary shall have paid the Guarantees or
shall have assumed the Shipowner’s rights and duties under Section 6.09 of
the Indenture, the Secretary may direct that moneys remaining on deposit in the
Escrow Fund may be withdrawn in whole or in part for one of the following
purposes: (1) application as provided in Section 3.05 of the Indenture (but in
no event shall any such disbursement for such purpose be in an amount greater
than the related Proportionate Part of the Outstanding Obligations); (2) payment
to the Shipowner, or its order, in the event all Outstanding Obligations are
Retired or Paid, other than by payment of the Guarantees; or (3) application as
provided in Section 6.05, if the Secretary shall have paid the Guarantees or
shall have assumed the Shipowner’s rights and duties under the Indenture
and the Obligations. 


        (h) Any amounts
remaining in the Escrow Fund on the Termination Date of the Escrow Fund which
are in excess of 87 1/2% or 75% of Actual Cost, as the case may be, shall be
applied pursuant to Section 3.04 of the Indenture to retire a Proportionate Part
of the Outstanding Obligations. 


        SECTION
5.04. Investment and Liquidation of the Escrow
Fund. The Secretary may invest the Escrow Fund in
obligations of the United States with such maturities that the Escrow Fund will
be available as required for the purposes hereof. The Secretary shall deposit
the Escrow Fund into an account with the Treasury Department and upon agreement
with the Shipowner, shall deliver to the Treasury Department instructions for
the investment, reinvestment and liquidation of the Escrow Fund. The Secretary
shall have no liability to the Shipowner for acting in accordance with such
instructions. 


        SECTION
5.05. Income on the Escrow Fund. Except
as provided in Section 5.03, any income realized on the Escrow Fund shall,
unless there is an existing Default, be paid to the Shipowner upon receipt by
the Secretary of such income. For the purpose of this Section, the term
“income realized on the Escrow Fund,” shall mean with respect to the
Escrow Fund (1) the excess of the cash received from the sale of securities over
their cost (less any losses from sale not already paid pursuant to Section
5.03(c)) and (2) cash received from the payment of principal and interest on
securities. 


        SECTION
5.06. Termination Date of the Escrow
Fund. The Escrow Fund will terminate 90 days after the
Delivery Date of the last Vessel covered by this Security Agreement (herein
called the “Termination Date of the Escrow Fund”). In the event that
on such date the payment by or for the account of the Shipowner of the full
amount of the aggregate Actual Cost of all of the Vessels set forth in Table A
hereof has not been made or the amounts with respect to such Actual Cost are not
then due and payable, then the Shipowner and the Secretary by written agreement
shall extend the Termination Date of the Escrow Fund for such period as shall be
determined by the Shipowner and the Secretary as sufficient to allow for such
contingencies. If the Secretary shall have earlier made a final determination of
the aggregate Actual Cost of all of the Vessels in accordance with Section 5.01,
the Termination Date of the Escrow Fund shall be deemed to be the date of such
final determination; provided that, if as a
result of such final determination, a redemption of Obligations is required
pursuant to Section 3.04 of the Indenture, the Termination Date shall be the
date specified as the Redemption Date in the notice of redemption given pursuant
to Section 3.08 of the Indenture. 


ARTICLE VI
DEFAULTS AND REMEDIES


        SECTION  6.01.  What  Constitutes  "Defaults;"  Continuance  of Defaults.  Each of the  following  events  shall  constitute a
"Default" within the meaning of Section 6.01:


        (a) A default in
the payment of the whole or any part of the interest on any of the Outstanding
Obligations when the same shall become due and payable; or default in the
payment of the whole or any part of the principal of any of the Outstanding
Obligations when the same shall become due and payable, whether by reason of
Maturity, redemption, acceleration, or otherwise, or any default referred to in
Section 6.08 of the Indenture; and continuation of such default for a period of
30 days shall constitute and is herein called a “Payment Default.” Any
corresponding default with respect to the interest on, or the principal of, the
Secretary’s Note is also deemed to be a Payment Default; 


        (b) The
following shall constitute and each is herein called a "Security Default:"


        (1) Default by
the Shipowner in the due and punctual observance and performance of any
provision in Sections 2.01(b), 2.02(b) and (i), 2.03, 2.04, 2.09, 2.11, 2.12,
2.14, 8.01 and 8.02; 


        (2) Default by
the Shipowner continued after written notice specifying such failure by
certified or registered mail to the Shipowner from the Secretary in the due and
punctual observance and performance of any provision in Sections 2.02(a), (d),
(e), (f), and (g), 2.05 (except (g) and (k) thereof), 2.07, and 2.13. 


        (3) Default by
the Shipowner continued for 30 days after written notice by certified or
registered mail to the Shipowner from the Secretary in the due and punctual
observance of any other agreement in this Security Agreement or in the Mortgage; 


        (4) The
Shipowner shall become insolvent or bankrupt or shall cease paying or providing
for the payment of its debts generally, or the Shipowner shall be dissolved or
shall, by a court of competent jurisdiction, be adjudged a bankrupt, or shall
make a general assignment for the benefit of its creditors, or shall lose its
charter by forfeiture or otherwise; or a petition for reorganization of the
Shipowner under the Bankruptcy Code shall be filed by the Shipowner, or such
petition be filed by creditors and the same shall be approved by such a court of
competent jurisdiction; or a reorganization of the Shipowner under said Code
shall be approved by a court, whether proposed by a creditor, a stockholder or
any other Person whomsoever; or a receiver or receivers of any kind whatsoever,
whether appointed in admiralty, bankruptcy, common law or equity proceedings,
shall be appointed, by a decree of a court of competent jurisdiction, with
respect to any Vessel, or all or substantially all of the Shipowner’s
property, and such decree shall have continued unstayed, on appeal or otherwise,
and in effect for a period of 60 days; 


        (5) Any default in the due and punctual  observance and  performance  of any provision in the Financial  Agreement or
the Construction Contract;


        (6) Any
representation or warranty made relating to the execution and delivery of this
Security Agreement, the Mortgage, the Guarantee Commitment or the Financial
Agreement, or in any certificate required to be furnished pursuant thereto,
shall prove to be incorrect in any material respect; 


        (7) Any event
constituting a Default under any security agreement or preferred mortgage under
Chapter 313, relating to any other vessel or vessels owned by the Shipowner and
financed under the Act; 


        (8) Any
additional Security Default prescribed in the Special Provisions hereof; and


        (9) Any event
constituting a default under any bareboat or time charter or contract of
affreightment of the Vessel. 


        At any time  following the  occurrence  of a Security  Default,  the  Secretary  may give the Indenture  Trustee a Secretary's
Notice with respect to such Security  Default,  after which the Indenture  Trustee and the Obligees shall have the right to make demand
for payment of the  Guarantees  in  accordance  with the Indenture and the  Authorization  Agreement,  unless the Secretary  shall have
assumed the  Shipowner's  rights and duties under the  Indenture  and the  Obligations,
and made any payments in default under Section 6.09 of the Indenture.


        SECTION
6.02. Acceleration of Maturity of the Secretary’s
Note. The Secretary may, by giving written notice to
the Shipowner, declare the principal of the Secretary’s Note and interest
accrued thereon to be immediately due and payable, at any time after (a) the
Secretary shall have been obligated to pay the Guarantees pursuant to the terms
of the Indenture and the Authorization Agreement, or (b) the Secretary shall
have assumed the Shipowner’s rights and duties under the Indenture and the
Obligations, and made any payments in default under the terms of Section 6.09 of
the Indenture. Thereupon, the principal of and interest on the Secretary’s
Note shall become immediately due and payable, together with interest at the
same rates specified in the Secretary’s Note. 


        SECTION
6.03. Waivers of Default. (a) If the
Secretary shall not have assumed the Shipowner’s rights and duties under
the Indenture and the Obligations, and made any payments in default under the
terms of Section 6.09 of the Indenture, and if the Secretary determines that an
event which, with the passage of time, would become a Payment Default, has been
remedied within 30 days after the occurrence of such event, upon a Request by
the Shipowner, the Secretary shall waive the consequences of such event. 


        (b) If the
Secretary shall not have assumed the Shipowner’s rights and duties under
the Indenture and the Obligations, and made any payments in default under the
terms of Section 6.09 of the Indenture, and if the Secretary shall have
determined prior to payment of the Guarantees that a Payment Default has been
remedied after the expiration of the aforesaid 30-day period, but prior to the
date of demand by the Indenture Trustee or an Obligee for payment under the
Guarantees, upon a Request by the Shipowner, the Secretary shall waive such
Default. 


        (c) If the
Secretary shall have determined prior to the expiration of the period required
for payment of the Guarantees that a Payment Default had not occurred or has
been subsequently remedied by the Shipowner (and if the Secretary shall not have
assumed the Shipowner’s rights and duties under the Indenture and the
Obligations, and made any payments in default under the terms of Section 6.09 of
the Indenture and prior to any payment of Guarantees), the Secretary shall
notify the Indenture Trustee and the Shipowner of such determination, and, the
Secretary shall waive such Default. 


        (d) The
Secretary, in its sole discretion, may waive any Security Default or any event
which by itself, or with the passage of time or the giving of notice, or both,
would give rise to a Security Default; provided
that, such Default is waived prior to the Secretary
giving to the Indenture Trustee the Secretary’s Notice. 


        (e) The
Secretary shall notify the Shipowner and the Indenture Trustee in writing of any
determinations made under paragraphs (a), (b), and (c) of this Section, and the
Secretary shall waive the consequences of any such Default, and annul any
declaration under Section 6.02, and the consequences thereof. 


        (f) No waiver  under  this  Section  shall  extend to or affect  any  subsequent  or other  Default,  nor impair any rights or
remedies consequent thereon.


        (g) No waiver
under this Section shall be deemed to have occurred because the Secretary shall
have assumed the Shipowner’s rights and duties under the Indenture and the
Obligations, and made any payments in default under the terms of Section 6.09 of
the Indenture. 


        SECTION
6.04. Remedies After Default. (a) In
the event of a Default, and before and after the payment of the Guarantees or
the assumption by the Secretary of the Shipowner’s rights and duties under
the Indenture and the Obligations, and the making of any payments in default
under the terms of Section 6.09 of the Indenture, the Secretary shall have the
right to take the Vessels without legal process wherever the same may be (and
the Shipowner or other Person in possession shall forthwith surrender possession
of the Vessels to the Secretary upon demand) and hold, lay up, lease, charter,
operate, or otherwise use the Vessels for such time and upon such terms as the
Secretary may reasonably deem to be in the Secretary’s best interest,
accounting only for the net profits, if any, arising from the use of the
Vessels, and charging against all receipts from the use of the Vessels, all
reasonable charges and expenses relating to such Vessel’s use. 


        (b) Upon either
(i) payment of the Guarantees or (ii) the Secretary’s assumption of the
Shipowner’s rights and duties under the Indenture and the Obligations, and
the making of any payments in default under Section 6.09 of the Indenture, the
Secretary shall have the right to: 


        (1) Exercise all the rights and remedies in foreclosure and otherwise
given to mortgagees by Chapter 313;


        (2) Bring suit
at law, in equity or in admiralty to recover judgment for any and all amounts
due under the Secretary’s Note, this Security Agreement and the Mortgage,
collect the same out of any and all of Shipowner’s property, whether or not
the same is subject to the lien of the Mortgage, and in connection therewith,
obtain a decree ordering the sale of any Vessel in accordance with paragraph
(b)(4) of this Section; 


        (3) Have a
receiver of the Vessels appointed as a matter of right in any suit under this
Section (and any such receiver may have the rights of the Secretary under
paragraph (b)(4) of this Section); 


        (4) Sell any
Vessel, free from any claim of the Shipowner, by a public extrajudicial sale,
held at such time and place and in such manner as the Secretary may reasonably
deem advisable, after twice publishing notice of the time and place of such sale
prior to the proposed sale in the Authorized Newspapers to the Shipowner. Such
publication and mailing is to be made at least 10 Business Days prior to the
date fixed for such sale; provided that, such
sale may be adjourned from time to time without further publication or notice
(other than announcement at the time and place appointed to such sale or
adjourned sale). It shall not be necessary to bring any such Vessel to the place
appointed for such sale or adjourned sale; 


        (5) Accept a
conveyance of title to, and to take without legal process (and the Shipowner or
other Person in possession shall forthwith surrender possession to the
Secretary), the whole or any part of any Vessel and the Security wherever the
same may be, and to take possession of and to hold the same; 


        (6) In the
Secretary’s discretion, take any and all action authorized by Sections
1105(c), 1105(e) and 1108(b) of the Act and any and all action provided for, or
authorized, or permitted by, or with respect to the Increased Security; 


        (7) Receive, in
the event of an actual or constructive total loss, or an agreed or compromised
total loss, or a requisition of title to or use of any Vessel, all insurance or
other payments therefor to which the Shipowner would otherwise be entitled, such
insurance moneys to be applied by the Secretary in accordance with Section 6.05;
and 


        
(8) Pursue to final  collection of all the claims  arising  under this Security  Agreement and to collect such claims
from, the Increased Security.


        (c) The
Shipowner hereby irrevocably appoints the Secretary the true and lawful attorney
of the Shipowner, in its name and stead, to make all necessary transfers of the
whole or any part of the Increased Security in connection with a sale, use or
other disposition pursuant to Section 6.04(a) or 6.04(b), and for that purpose
to execute all necessary instruments of assignment and transfer. Nevertheless,
the Shipowner shall, if so requested by the Secretary in writing, ratify and
confirm such sale by executing and delivering to any purchaser of the whole or
any part of the Increased Security, such proper bill of sale, conveyance,
instrument of transfer, or release as may be designated in such request. 


        (d) No remedy shall be exclusive of any other  remedy,  and each and every remedy shall be  cumulative  and in addition to any
other remedy.


        (e) No delay or
omission  to exercise  any right or remedy  shall  impair any such right or remedy
or shall be deemed to be a waiver of any Default.


        (f) The exercise
of any right or remedy shall not constitute an election of remedies by the Secretary.


        (g) If the Secretary  discontinues  any proceeding,  the rights and remedies of the Secretary and of the Shipowner shall be as
though no such proceeding had been taken.


        SECTION
6.05. Application of Proceeds. (a) The
proceeds (from sale or otherwise) of the whole or any part of the Increased
Security and use thereof by the Secretary under any of the foregoing powers, (b)
the proceeds of any judgment collected by the Secretary for any default
hereunder, (c) the proceeds of any insurance and of any claim for damages to the
whole or any part of the Increased Security received by the Secretary while
exercising any such power, and (d) all other amounts received by the Secretary,
including amounts which are required by Sections 2.05 and 2.07 shall be applied
by the Secretary as follows: 


        (1) to the payment of all advances and all reasonable charges by the
Secretary pursuant to this Security Agreement;


        (2) to the payment of the whole amount of the interest then due and
unpaid upon the Secretary's Note;


        (3) to the payment of the whole amount of the principal then due and
unpaid upon the Secretary's Note;


        (4) to the
Secretary for application to any other debt of the Shipowner due to the
Secretary under any other financing insured or guaranteed by the Secretary under
to the Act; 


        (5) to the Indenture
Trustee for its reasonable fees and expenses; and


        (6) any balance
thereof remaining shall be paid to the Shipowner.


        SECTION
6.06. General Powers of the Secretary.
(a) In the event any Vessel shall be arrested or detained by a marshal or other
officer of any court of law, equity or admiralty jurisdiction in any country or
nation of the world or by any government or other authority, and shall not be
released from arrest or detention within 15 days from the date of arrest or
detention, the Shipowner hereby authorizes the Secretary, in the name of the
Shipowner, to apply for and receive possession of and to take possession of such
Vessel with all the rights and powers that the Shipowner might have, possess and
exercise in any such event. This authorization is irrevocable. 


        (b) The
Shipowner irrevocably authorizes the Secretary or its appointee (with full power
of substitution) to appear in the name of the Shipowner in any court of any
country or nation of the world where a suit is pending against the whole or any
part of the Increased Security because of or on account of any alleged lien or
claim against the whole or any part of the Increased Security, from which the
whole or said part of the Increased Security has not been released. 


        (c) The
following shall constitute a debt due from the Shipowner to the Secretary, and
shall be repaid by the Shipowner upon demand: all reasonable expenses incurred
pursuant to paragraphs (a) or (b) of this Section and all reasonable expenses
incurred incident to the exercise by the Secretary of any remedies pursuant to
Section 6.04(b) or the assumption by the Secretary of the rights and duties of
the Shipowner under the Indenture and the Obligations, and the making of any
payments in default under the terms of Section 6.09 of the Indenture (including,
but not limited to, fees paid to the Indenture Trustee for expenses incident to
said assumption of the Indenture by the Secretary), together with interest at
the rate that would have been paid by the Department of Treasury on the expended
funds plus 1%. The Secretary shall not be obligated to (nor be liable for the
failure to) take any action provided for in paragraphs (a) and (b) of this
Section. 


ARTICLE VII
AMENDMENTS AND SUPPLEMENTS TO


THE SECURITY AGREEMENT, MORTGAGE AND INDENTURE


        SECTION
7.01. Amendments and Supplements to the Security Agreement and
the Mortgage. This Security Agreement and the Mortgage
may not be amended or supplemented orally, but may be amended or supplemented
from time to time only by an instrument in writing executed by the Shipowner and
the Secretary. 


        SECTION
7.02. Amendments and Supplements to the
Indenture. Notwithstanding any provisions in the
Indenture, the Shipowner agrees that no amendments or supplements will be made
to the Indenture without the Secretary’s prior written consent, and any
purported action contrary to this Section shall be null and void
ab initio
and of no force and effect. 


ARTICLE VIII
CONSOLIDATION, MERGER OR SALE


        SECTION
8.01. Consolidation, Merger or Sale. (a)
Nothing in this Security Agreement or the Mortgage shall prevent any lawful
consolidation or merger of the Shipowner with or into any other Person, or any
sale of a Vessel or Vessels to any other Person lawfully entitled to acquire and
operate such Vessel or Vessels, or any sale by the Shipowner of all or
substantially all of its assets to any other Person; provided
that, the Secretary shall have given its prior written
consent to such succession, merger, consolidation or sale. 


        (b) Any
Successor shall (by indenture supplemental to the Indenture, and by instrument
amending or supplementing this Security Agreement, and the Mortgage, as may be
necessary), expressly assume the payment of the principal of (and premium, if
any) and interest on the Outstanding Obligations in accordance with the terms of
the Obligations, shall execute and deliver to the Secretary, an endorsement to
the Secretary’s Note in form satisfactory to the Secretary, shall expressly
assume the payment of the principal of and interest on the Secretary’s
Note, and shall expressly assume the performance of the agreements of the
Shipowner in the Indenture, this Security Agreement, the Mortgage and any
related document. 


        (c) Upon the
assumption of the documents listed in paragraph (b) of this Section, the
Secretary shall consent to the surrender of each Vessel’s documents
pursuant to 46 U.S.C. 12110(c)(3), as amended;
provided
that, concurrently with such surrender, such
Vessel shall be redocumented under the laws of the United States. 


        (d) In the event
of any sale of less than all the Vessels, the Secretary shall determine if there
will remain adequate security for the Guarantees after discharge of any such
Vessel or Vessels from the Security Agreement and Mortgage, and (1) the
Shipowner shall redeem, together with any premium and/or accrued interest
thereof, the Proportionate Part of the Outstanding Obligations relating to such
Vessel or Vessels in accordance with the provisions of Article Third of the
Indenture, or (2) the Person to which such sale shall have been made (the
“Transferee”), shall assume the documents listed in paragraph (b) of
this Section. Upon any such assumption, the Transferee shall succeed to and be
substituted for the Shipowner with the same force and effect as if it had been
named in the Indenture, the Obligations, this Security Agreement and the
Mortgage (and such other documents) to the extent the same relate to such
Proportionate Part of the Outstanding Obligations and to such Vessel or Vessels. 


        SECTION
8.02. Transfer of a General Partner’s or a Joint
Venturer’s Interest. (a) If the Shipowner is
organized as a partnership or a joint venture, a general partner or a joint
venturer may lawfully transfer its respective interests under the terms of the
partnership or joint venture agreement to any Person and may be released from
all of their obligations thereunder and under this Security Agreement or the
Mortgage; provided that, (i) the Secretary
shall have given its prior written consent to the proposed transaction and (ii)
the transferee shall assume in full all of the existing obligations which the
transferring general partner or joint venturer has under the applicable
partnership or joint venture agreement, this Security Agreement, the Mortgage
and any related document. 


ARTICLE IX


NOTICES


        SECTION
9.01. Notices. Except as otherwise
provided in this Security Agreement or by the Act, all notices, requests,
demands, directions, consents, waivers, approvals or other communications may be
made or delivered in person or by registered or certified mail, postage prepaid,
addressed to the party at the address of such party specified in the Special
Provisions hereof, or at such other address as such party shall advise each
other party by written notice, and shall be effective upon receipt by the
addressee thereof. 


        SECTION
9.02. Waivers of Notice. In any case
where notice by publication, mail or otherwise is provided for by this Security
Agreement, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall be
deemed the equivalent of such notice. 


        SECTION
9.03. Shipowner’s Name or Address
Change. The Shipowner shall not change its name or its
address without first providing written notice to the Secretary of the new name
and/or the change in address. 


ARTICLE X
DISCHARGE OF SECURITY AGREEMENT AND
THE MORTGAGE


        SECTION 10.01.
Discharge of Security Agreement and the
Mortgage. (a) If the Obligations and the related
Secretary’s Note shall have been satisfied and discharged, and if the
Shipowner shall pay or cause to be paid all other sums that may have become
secured under this Security Agreement and the Mortgage, then this Security
Agreement, the Mortgage and the liens, estate and rights and interests hereby
and thereby granted, shall cease, determine, and become null and void, and the
Secretary, on the Shipowner’s Request and at the Shipowner’s cost and
expense, shall forthwith cause satisfaction and discharge and duly acknowledge
such satisfaction and discharge of this Security Agreement and the Mortgage to
be entered upon its and other appropriate records, and shall execute and deliver
to the Shipowner such instruments as may be necessary, and forthwith the estate,
right, title and interest of the Secretary in and to the Security, the Increased
Security, and any other securities, cash, and any other property held by it
under this Security Agreement and the Mortgage, shall thereupon cease, determine
and become null and void, and the Secretary shall transfer, deliver and pay the
same to the Shipowner. 


        (b) If all of
the Guarantees on the Outstanding Obligations shall have been terminated
pursuant to Sections 3.02(b) or 3.02(d), the Secretary shall assign to the
Shipowner this Security Agreement, the Mortgage and the liens, estate, rights
and interests hereby and thereby granted. 


ARTICLE XI


MISCELLANEOUS


        SECTION
11.01. Successors and Assigns. All the
covenants, promises, stipulations and agreements of the Secretary and Shipowner
in this Security Agreement shall bind the Secretary and Shipowner and its
respective successors and assigns. This Security Agreement is for the sole
benefit of the Shipowner, the Secretary, and their respective successors and
assigns, and no other Person shall have any right hereunder. 


        SECTION  11.02.   Execution  in  Counterparts.  This  Security  Agreement  may be executed in any number of  counterparts.  All
such counterparts shall be deemed to be originals and shall together constitute
but one and the same instrument.


        SECTION
11.03. Shipowner’s Rights in Absence of
Default. Except during the existence of a Default, the
Shipowner (1) shall be permitted to retain actual possession and use of the
Vessel, and (2) shall have the right, from time to time, in its discretion and
without the consent of or release by the Secretary, to dispose of, free from the
lien hereof and of the Mortgage, any and all engines, machinery, masts, boats,
anchors, cables, chains, rigging, tackle, apparel, furniture, capstans, outfit,
tools, pumps, pumping and other equipment, and all other appurtenances to the
Vessels, and also any and all additions, improvements and replacements in or to
the Vessels or said appurtenances, after first or simultaneously replacing the
same with items of at least substantially equal value. 


        SECTION
11.04. Surrender of Vessels’
Documents. The Secretary shall consent to the
surrender of each Vessel’s documents in connection with any redocumentation
of such Vessel required on account of alterations to such Vessel which are not
prohibited by this Security Agreement and by the Mortgage. 


        SECTION 11.05.
Applicable  Regulations.  Only the provisions of the regulations issued under Title XI
of the Act as in effect
on the date hereof (46 C.F.R. 298) shall control the Security Agreement provisions.


        SECTION
11.06. Table of Contents, Titles and
Headings. The table of contents, and titles of the
Articles and the headings of the Sections are not a part of this Security
Agreement and shall not be deemed to affect the meaning or construction of any
of its provisions.