Exhibit 10.29


                                                               EXECUTION COPY
APPENDIX III TO GUARANTEE COMMITMENT                              Document 11
                                                       Contract No. MA- 13674


                               SECURITY AGREEMENT

                               SPECIAL PROVISIONS

         THIS SECURITY AGREEMENT, dated October 31, 2001 (the "Security
Agreement"), between Chiles Galileo LLC, a Delaware limited liability company
(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
AMFELS, Inc., (the "Shipyard") for the Construction of an ultra-premium jack-up
drilling rig of the KFELS Mod V (B) design, Hull No. P-187 (the "Vessel").

         B. On the date hereof, the Secretary entered into, and the Shipowner
accepted a Commitment to Guarantee Obligations, Contract No. MA-13672, 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 871/2% of the
Depreciated Actual Cost or the Actual Cost of Hull No. P. 87 under construction
by AMFELS, Inc. (the "Vessel") on the Closing Date, which amounts are set out in
Table A.

         C. The Shipowner has entered into the Credit Agreement providing for
the sale and delivery, of Obligations in the aggregate principal amount of
$81,000,000 to be designated "United States Government Guaranteed Export Ship
Financing Notes, Galileo Series" (the "Obligations") having the maturity date
and interest rate set forth in the Credit Agreement, the Indenture and the
Notes.

         D. On the date hereof, the Shipowner and U.S. Bank National
Association, a national banking association as Indenture Trustee, executed and
delivered the Trust Indenture (the "Indenture") pursuant to which the Shipowner
will issue the Obligations.

         E. On the date hereof, the Secretary and the Indenture Trustee executed
the Authorization Agreement, Contract No. MA-13673, which authorizes the
Indenture Trustee to endorse, execute, and authenticate the Secretary's
Guarantee on each of the Obligations.

         F. 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-13674, and the Financial Agreement,


                                       1

<PAGE>

Contract No. MA-13676, granting the Secretary a security interest in, among
other things, the Construction Contract, the Vessel and certain other property,
tangible and intangible, which the Shipowner now has or hereafter will acquire,
and all of the proceeds thereof.

         G. As further security to the Secretary and in consideration of the
Secretary's agreeing to issue the Guarantees, (i) the Shipyard has granted the
Secretary a security interest in the Vessel, its hull, component parts,
machinery, and equipment during the construction period and has executed on this
date the Consent of Shipyard to the assignment of the Construction Contract to
the Secretary, and (ii) on the Delivery Date, the Shipowner will execute and
deliver to the Secretary a First Preferred Ship Mortgage on the Vessel.

         H. In order to implement certain aspects of the transactions
contemplated by the Security Agreement and the Financial Agreement, the
Secretary, the Shipowner and U.S. Bank National Association, a national banking
association (the "Depository") have entered into the Depository Agreement,
Contract No. MA-13677, 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, said
Special Provisions shall control.

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

               (a) Granting Clause. Section 1.03(a) of Exhibit 1 hereto is
         amended to read 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 AMFELS Hull No. P-187 (the "Vessel") and all work,
         materials, goods and components, incorporated in, attached to, or
         intended to be incorporated in or attached to the hull or the Vessel
         vesting in the Shipowner on the earlier of the date (a) when the
         Shipowner makes the next installment payment required by the
         Construction Contract to the Shipyard following receipt of the
         materials, goods, or components or performance of the work by the
         Shipyard. (such items are hereinafter called the "Equipment"), or (b)
         when work


                                       2

<PAGE>

         is performed on any of the Equipment or materials, goods, or
         components are incorporated in or attached to any of the Equipment,
         whether or not such work, materials, goods, or components have been
         paid by the Shipowner.

               (2) 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 the subsection are hereinafter referred to collectively as
         the "Rights Under the Construction and Related Contracts."

               (3) 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." 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 Indenture.

               (4) All goods, whether equipment or inventory appertaining to or
         relating to the Vessel, including owner-furnished equipment, whether or
         not on board or ashore and not covered by the Mortgage.

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

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

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

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

               (9) The Shipowner's rights and any security interests granted to
         it by the Shipyard under the Security Agreement dated the date hereof
         between the Shipowner and the Shipyard.

               (10) All proceeds of the collateral described in paragraphs (1)
         through (9) of this Section.


                                       3

<PAGE>

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

               (11) The Mortgage, in form and substance satisfactory to the
         Secretary to be executed and delivered by the Shipowner to the
         Secretary, as mortgagee, on the Delivery Date, covering the Vessel.

               (b) Concerning Section 2.01(b). Section 2.01(b) shall not apply
         except as provided in Section 2.01 (j).

               (c) Concerning Section 2.02.

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

                            (f) Operation of the Vessel. The Shipowner shall
                        not (except when the Vessel is in 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.

                    (2) In connection with Section 2.02(g), the Vessel shall, on
               and after the Delivery Date, meet all requirements to entitle it
               to the highest classification and rating for vessels of the same
               age and type in the American Bureau of Shipping ("ABS"). While
               the Obligations are Outstanding, the Vessel shall be maintained
               in ABS class. The Shipowner shall submit a certificate annually
               stating that the Vessel continues to remain in ABS class.

                    (3) Section 2.02(h) is deleted and the following substituted
               in lieu thereof:

                            (h) 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
                        structure of the Vessel, unless the Shipowner shall
                        have received the Secretary's prior written consent
                        thereto.

                    (4) A new subsection (j) is added to Section 2.02 reading as
               follows:

                            (j) Coastwise Trade. Prior to the Shipowner or any
                        bareboat


                                       4

<PAGE>

                        charterer of the Vessel operating the Vessel in the
                        United States coastwise trade, the Shipowner and
                        the bareboat charterer shall furnish to the Secretary
                        an affidavit of citizenship under the requirements of
                        46 C.F.R. 355 which affidavit shall have been accepted
                        by the Secretary.

               (d) Concerning Section 2.03. Section 2.03(a) is deleted and the
         following substituted in lieu thereof:

                    (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 classification
               society, 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, provided however, that any
               non-mandatory changes for which the Secretary's -------- -------
               consent is not obtained shall not be included in Actual Cost.
               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 withdrawals may be
               made from the Escrow Fund for work that is not determined to be
               includable in Actual Cost.

               (e) Concerning Section 2.04. Section 2.04 (a) and (c) are deleted
         in their entirety and the following is inserted in lieu thereof: "(a)
         The Vessel will be documented under the laws of the Republic of Panama
         and the Mortgage will be recorded under the laws of the Republic of
         Panama." The remainder of Section 2.04 shall remain the same except
         that subparagraphs (d) and (e) are redesignated as (c) and (d).

               (f) Concerning Section 2.05.


                                       5

<PAGE>

               (1) In connection with Section 2.05(a), declared war risk
         insurance is not required prior to the Delivery Date of the Vessel.

               (2) In connection with Section 2.05(b)(3) and the last paragraph
         of 2.05(e), the maximum amount of self-insurance permitted to the
         Shipowner under the last paragraph thereof shall be $1,000,000 per
         occurrence.

               (3) In connection with clause (ii) of the initial paragraph of
         Section 2.05(c), the Secretary shall permit payment of losses up to the
         amount of $500,000 to be made directly to the Shipowner under the
         circumstances specified therein.

               (4) In connection with Section 2.05(c), if there is no existing
         Default, at the Request of the Shipowner the Secretary shall pay or
         reimburse or consent that the underwriters pay or reimburse the
         Shipowner or Shipbuilder, as the case may be, within 30 days of the
         Secretary's receipt of the Request of the Shipowner and supporting
         documentation required by the Security Agreement, unless the Secretary
         determines that a Default is imminent.

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

         (g) Concerning Section 2.14. Section 2.14 is deleted in its entirety
         and the following is inserted in lieu thereof: "The Shipowner shall
         cause the Parent Guarantee of the Shipyard's obligations under the
         Construction Contract to be executed and delivered to the Secretary in
         lieu of performance and payment bonds, on or prior to the date of the
         Security Agreement."

         (i) Concerning Section 5.02. The Secretary has determined that a
         deposit of six months interest on the principal amount deposited in the
         Escrow Fund is not required.

         (j) Concerning Section 5.03.

               (1) Each Request under Section 5.03(a) for a disbursement to the
         Shipyard shall be signed by both the Shipowner and the Shipyard.

               (2) The first paragraph of Section 5.03(a) is modified by
         eliminating the colon at the end thereof and adding "; and provided
         further that, in the case of disbursements to pay for changes under
         Paragraph 5 of the Construction Contract, the Shipowner may not
         withdraw any funds from the escrow fund to pay for such changes unless
         the Secretary is satisfied that the withdrawal request is consistent
         with the percentage of completion of the change."

               (3) Each Request under Section 5.03(a) for a disbursement from
         the Escrow


                                       6

<PAGE>

         Fund shall be accompanied by a certification of a Certified
         Public Accountant satisfactory to the Secretary, or except in the case
         of the final disbursement from the Escrow Fund, other evidence
         satisfactory to the Secretary, stating: (A) the amount of the Actual
         Cost paid to date, and (B) that each amount paid to date has been for
         an item of Actual Cost.

               (4) Section 5.03(a)(2) is modified by changing "12 1/2%" to "20%"
         on the fourth line thereof and by changing the language after
         "provided, however" to read:

                        That after 50% of the Actual Cost of the
                        Vessel has been paid, the Shipowner shall
                        pay an additional 9.34% of the Actual Cost
                        of the Vessel from sources other than the
                        proceeds of the Obligations before any
                        additional funds can be withdrawn from the
                        Escrow Fund.

         (k) Concerning Disbursements under the Credit Agreement. Within a
         reasonable time after receipt of a Certificate Authorizing
         Disbursements (the "Certificate") in the form of Annex A to the Credit
         Agreement together with the submissions required by Section 5.03(a)(1)
         including the requirements set forth in Sections 2(j) of these Special
         Provisions, the Secretary shall approve the Certificate provided that
         the Secretary has received and is satisfied with the accuracy and
         completeness of the information contained in the certificate and the
         information contained in the submissions required by Section 5.03(a)(1)
         and provided that the Secretary concludes that the provisions of
         section 5.03(a)(2) are also satisfied. Upon receipt of the Secretary's
         written approval of the Certificate, the Shipowner may draw down under
         the Credit Agreement the amount permitted in the Certificate as
         approved by the Secretary, in the manner permitted by the Credit
         Agreement. (b)

         (1)     Concerning Section 6.01.

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

                        (10) Failure of the Shipowner to redeem the Notes on
                    any Mandatory Redemption Date;

                        (11) Failure of Chiles Offshore Inc. to perform any of
                    its obligations under the Subordination Agreement or the
                    Subordinated Loan Commitment;

                        (12) Failure of the Shipowner to provide annual audited
                    financial statements of Chiles Offshore Inc. as required
                    under Paragraph 6 of the Subordinated Loan Commitment;

                        (13) Failure to convert the Notes to Bonds upon the
                    Trigger Event; and


                                       7

<PAGE>

                        (14) Failure of Keppel FELS to perform any of its
                    obligations, or make any payments due, under the Parent
                    Guarantee.

               (2) The following paragraph is hereby added to the end of Section
         6.01 of Exhibit 1:

                    (c) "In the event that a Security Default shall occur, the
               Secretary shall be entitled, but not required, to deliver to the
               Depository a written notice that the Secretary is thereby
               exercising exclusive control over the Securities Accounts (as
               such term is defined in the Depository Agreement) ("Notice of
               Exclusive Control"). As further provided in the Depository
               Agreement following the Depository's receipt of and pursuant to
               said Notice of Exclusive Control, the Secretary and the Shipowner
               hereby acknowledge and agree that (i) the Secretary shall be
               entitled, but not required, to issue to the Depository an
               instruction, notice or any other type of directive that would
               constitute an "entitlement order" within the meaning of Section
               8-102(a)(8) of the Uniform Commercial Code of the District of
               Columbia (collectively, an "Entitlement Order") concerning the
               Securities Accounts and (ii) the Depository shall immediately
               cease complying with any Request, Request for Payment,
               instruction, notice or any other type of directive that would
               constitute and Entitlement Order from the Shipowner. In the event
               that a Default has been cured or waived as provided in Article VI
               hereof, the Secretary and the Shipowner hereby acknowledge and
               agree that the Secretary shall deliver a written notice to the
               Depository that (i) the Secretary is no longer exercising
               exclusive control over the Securities Accounts and that the
               Notice of Exclusive Control previously delivered is theretofore
               without effect and (ii) the Depository shall thereafter comply
               with any Request, Request for Payment, instruction, notice or any
               other type of directive that would constitute an Entitlement
               Order from the Shipowner."

         (m) 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.


                                       8

<PAGE>

                                    Washington, D.C. 20590

         Shipowner as:              CHILES GALILEO LLC
                                    11200 Richmond Avenue
                                    Suite 490
                                    Houston, TX 77082
                                    Attn.:  Chief Financial Officer


         Indenture Trustee as:      U.S. BANK NATIONAL ASSOCIATION
                                    180 East Fifth Street
                                    St. Paul, MN 55101
                                    Attn.:  Mr. Richard Prokosch

               (n) Additional Covenants. On the date of delivery of the
               Vessel, the Shipowner shall provide the Secretary with an
               Officer's Certificate certifying that there have been no
               occurrences which would adversely or materially affect the
               condition of the Vessel.


               (o) Governing Law. This Security Agreement and the rights
               and obligations of the parties hereto shall be governed by and
               construed in accordance with the laws of the United States of
               America and, to the extent they are inappropriate, the laws of
               the District of Columbia.


                                       9

<PAGE>

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


SHIPOWNER:                            CHILES GALILEO LLC



                                      BY         /s/ DICK FAGERSTAL
                                          ------------------------------------
                                          Senior Vice President






                                      UNITED STATES OF AMERICA
(SEAL)                                SECRETARY OF TRANSPORTATION
                                      MARITIME ADMINISTRATOR
Attest:


/s/ PATRICIA E. BYRNE                 BY:      /s/ JOEL C. RICHARD
--------------------------                ------------------------------------
Assistant Secretary                       Secretary
Maritime Administration


<PAGE>

                       EXHIBITS TO THE SECURITY AGREEMENT
                       ----------------------------------


Doc.
No.     Document

1.      Exhibit 1  -  General Provisions Incorporated into the Security
                      Agreement by Reference
2.      Schedule X -  Schedule of Definitions
3.      Exhibit 2  -  Form of Secretary's Note
4.      Exhibit 3  -  Form of Mortgage
5.      Exhibit 4  -  Financial Agreement
6.      Exhibit 5  -  Form of Consent of Shipyard
7.      Exhibit 6  -  Construction Contract
8.      Exhibit 7  -  Form of Parent Guarantee
9.      Exhibit 8  -  Form of Subordinated Loan Commitment
10.     Exhibit 9  -  Form of Subordination Agreement
11.     Exhibit 10 -  Depository Agreement

<PAGE>



                                     TABLE A

         The aggregate 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 is $114,632,879, both calculated and itemized as
follows:

<TABLE>
<CAPTION>
                                                                     AMOUNT
                                                AMOUNT        OBLIGATED TO BE PAID
                                                 PAID                 PAID                    TOTAL
                                                 ----                 ----                    -----
<S>                                            <C>             <C>                          <C>
Contract Price                                 37,500,000          38,540,000               76,040,000

Owner Furnished Items, Changes and
Contingency                                             0          23,800,901               23,800,901

Yard Supervision/Corporate                              0              4,500,000             4,500,000

Net Interest During Construction                        0              6,763,000             6,763,000

Guarantee Fees                                  3,528,978                      0             3,528,978
                                                ---------          --------------           ----------

Total Actual Cost                              41,028,978             73,603,901           114,632,879
</TABLE>


<PAGE>


                                                                 EXECUTION COPY
EXHIBIT 1 TO SECURITY AGREEMENT                                     Document 12

                                                             GENERAL PROVISIONS

                               TABLE OF CONTENTS

                                   ARTICLE I
              DEFINITIONS; OFFICER'S CERTIFICATES; GRANTING CLAUSE
                                                                           PAGE
SECTION 1.01.
                  DEFINITIONS...............................................  1
SECTION 1.02.     OFFICER'S CERTIFICATES....................................  1
SECTION 1.03.     GRANTING CLAUSE...........................................  1


                                   ARTICLE II
                   SHIPOWNER'S REPRESENTATIONS AND AGREEMENTS

SECTION 2.01. SHIPOWNER'S REPRESENTATIONS, AGREEMENTS, ORGANIZATION
             AND EXISTENCE   (A) GENERAL REPRESENTATIONS....................  2
                             (B) SHIPOWNER'S UNITED STATES CITIZENSHIP......  3
                             (C) TAXES......................................  3
SECTION 2.02. COVENANTS CONCERNING THE VESSEL.
                             (A) TITLE TO AND POSSESSION OF THE VESSELS.......3
                             (B) SALE, MORTGAGE, TRANSFER OR CHARTER OF THE
                                 VESSELS....................................  4
                             (C) TAXES AND GOVERNMENTAL CHARGES.............  4
                             (D) LIENS......................................  4
                             (E) COMPLIANCE WITH APPLICABLE LAWS, ETC.......  4
                             (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.....................................  6
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 MORTGAGE........................................ 14
SECTION 2.09.     COMPLIANCE WITH 46 U.S.C. CHAPTER 313..................... 14
SECTION 2.10.     PERFORMANCE OF SHIPOWNER'S AGREEMENTS BY THE SECRETARY.... 14
SECTION 2.11.     UNIFORM COMMERCIAL CODE FILINGS; FURTHER ASSURANCES....... 15
SECTION 2.12.     MODIFICATION OF FORMATION AGREEMENTS...................... 15
SECTION 2.13.     MEMBERS OF LIMITED LIABILITY COMPANIES.................... 15
SECTION 2.14.     CONCERNING THE PERFORMANCE AND PAYMENT BOND............... 16

                                       i
<PAGE>
                                  ARTICLE III
                              THE SECRETARY'S NOTE

SECTION 3.01.     SECRETARY'S NOTE.......................................... 16
SECTION 3.02.     TERMINATION OF THE GUARANTEE.............................. 16
SECTION 3.03.     EXECUTION OF ADDITIONAL SECRETARY'S NOTE.................. 16

                                   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.... 17

                                   ARTICLE V
                          ACTUAL COST; THE ESCROW FUND

SECTION 5.01.     ACTUAL COST DETERMINATIONS................................ 18
SECTION 5.02.     ESCROW FUND DEPOSITS...................................... 18
SECTION 5.03.     ESCROW FUND WITHDRAWALS................................... 18
SECTION 5.04.     INVESTMENT AND LIQUIDATION OF THE ESCROW FUND............. 20
SECTION 5.05.     INCOME ON THE ESCROW FUND................................. 20
SECTION 5.06.     TERMINATION DATE OF THE ESCROW FUND....................... 21

                                   ARTICLE VI
                             DEFAULTS AND REMEDIES

SECTION 6.01.     WHAT CONSTITUTES "DEFAULTS"; CONTINUANCE OF DEFAULTS...... 21
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................................... 25
SECTION 6.06.     GENERAL POWERS OF THE SECRETARY........................... 26

                                  ARTICLE VII
                       AMENDMENTS AND SUPPLEMENTS TO THE
                SECURITY AGREEMENT, MORTGAGE AND LOAN AGREEMENT

SECTION 7.01.     AMENDMENTS AND SUPPLEMENTS TO THE SECURITY AGREEMENT
                  AND THE MORTGAGE.......................................... 27
SECTION 7.02.     AMENDMENTS AND SUPPLEMENTS TO THE LOAN AGREEMENT.......... 27


                                      ii

<PAGE>
                                  ARTICLE VIII
                         CONSOLIDATION, MERGER OR SALE

SECTION 8.01.     CONSOLIDATION, MERGER, OR SALE............................ 27
SECTION 8.02.     TRANSFER OF A GENERAL PARTNER'S OR A JOINT VENTURER'S
                  INTEREST.................................................. 28

                                   ARTICLE IX
                                    NOTICES
SECTION 9.01.     NOTICES................................................... 28
SECTION 9.02.     WAIVERS OF NOTICE......................................... 28
SECTION 9.03.     SHIPOWNER'S  NAME OR ADDRESS CHANGE....................... 28

                                   ARTICLE X
                DISCHARGE OF SECURITY AGREEMENT AND THE MORTGAGE

SECTION 10.01.    DISCHARGE OF SECURITY AGREEMENT AND THE MORTGAGE.......... 29

                                   ARTICLE XI
                                 MISCELLANEOUS

SECTION 11.01.    SUCCESSORS AND ASSIGNS.................................... 29

SECTION 11.02.    EXECUTION IN COUNTERPARTS................................. 29
SECTION 11.03.    SHIPOWNER'S RIGHTS IN ABSENCE OF DEFAULT.................. 29
SECTION 11.04.    SURRENDER OF VESSELS' DOCUMENTS........................... 30
SECTION 11.05.    APPLICABLE REGULATIONS.................................... 30
SECTION 11.06.    TABLE OF CONTENTS, TITLES AND HEADINGS.................... 30

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                                   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 thereof currently on deposit
or hereafter deposited in said Fund.

                                       1

<PAGE>
                  (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:

                                       2
<PAGE>

                  (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)

                                       3
<PAGE>
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.


                                       4
<PAGE>
         (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 may 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

                                       5
<PAGE>
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;

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<PAGE>
         (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

                                       7
<PAGE>
                  (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

                                       8
<PAGE>
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

                                       9
<PAGE>
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

                                      10
<PAGE>
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.


                                      11
<PAGE>
         (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 paragraphs (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

                                      12
<PAGE>
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

                                      13
<PAGE>
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.

                                      14
<PAGE>
         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.

                                      15
<PAGE>
         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.


                                      16
<PAGE>
         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

                                      17
<PAGE>
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

                                      18
<PAGE>
parts; (C) the amounts of the Request are 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

                                      19
<PAGE>
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

                                      20
<PAGE>
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

                                      21
<PAGE>
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

                                      22
<PAGE>
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

                                      23
<PAGE>
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;

                                      24
<PAGE>
                  (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:

                                      25
<PAGE>
               (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.

                                      26
<PAGE>
                                  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

                                      27
<PAGE>
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.



                                      28
<PAGE>
                                   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.

                                      29
<PAGE>
         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.



                                      30


<PAGE>

SCHEDULE X TO SECURITY AGREEMENT                                    Document 13


                             SCHEDULE OF DEFINITIONS

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

"ACT OF OBLIGEES" means any request, demand, authorization, direction, notice,
consent, waiver or other action to be given or taken by the Obligees and
embodied in one or more documents as required by the Indenture.

"ACTUAL COST" means the actual cost of a 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 Shipowner'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 Shipowner's regular auditors.

"AUTHORIZATION AGREEMENT" means the Authorization Agreement, Contract No.
MA-13673, 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.

"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; provided, that
with respect to any determination of LIBOR or matters relating thereto a
Business Day means any such day described above on which dealings in Dollar
deposits are carried on in the London interbank market and on which commercial
banks in London are open for domestic and foreign exchange business.


                                       1

<PAGE>

"CASH" OR "CASH EQUIVALENTS" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the Untied
States of America is pledged in support thereof) having maturities of not more
than ninety (90) days from the date of acquisition, (ii) time deposits and
certificates of deposit of any commercial bank of recognized standing having
capital and surplus in excess of Five Hundred Million Dollars ($500,000,000),
(iii) repurchase obligations with a term of not more than seven (7) days for
underlying securities of the types described in (i) above entered into with any
bank meeting the qualifications specified in (ii) above, and (iv) commercial
paper issued by any parent corporation of any commercial bank of recognized
standing organized under the laws of the United States of America or any state
thereof having capital and surplus in excess of Five Hundred Million Dollars
($500,000,000), and commercial paper rated at least A-1 or the equivalent
thereof by S&P or at least P-1 or the equivalent thereof by Moody's, and in each
case maturing within ninety (90) days after the date of acquisition;

"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 ("IACS") 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 Vessels, 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.


                                       2

<PAGE>

"CORPORATE TRUST OFFICE" means the principal office of the Indenture Trustee at
which, at any time, its corporate trust business is administered, which office
is currently located at U.S. Bank National Association, 180 East Fifth Street,
St. Paul, Minnesota 55101.

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

"DELIVERY DATE" means the date on which a 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-13677 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 a 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.

"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-13676, 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 a Vessel or requisition of its title required
by a 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-13672, dated the Closing Date, executed by the Secretary and accepted by
the Shipowner relating to the Guarantees, as originally executed or as modified,
amended or supplemented.


                                       3

<PAGE>

"HOLDER" means each, and "Holders" means every, registered holder of an
Obligation.

"INCREASED SECURITY" means the Secretary's Note, the Security Agreement, the
Vessels, 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 U.S Bank National Association, a national banking
association, and any successor trustee under the Indenture.

"KEPPEL FELS" means Keppel FELS Limited, a coproration organized and existing
under the laws of the Republic of Singapore.

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

"MORTGAGE" means the first preferred fleet mortgage on the Vessels (or the first
preferred ship mortgage on the Vessel, as the case may be), Contract No.
MA-13675, 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


                                       4

<PAGE>

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, including the Note or any Bond, and authenticated
and delivered pursuant to the Indenture and the Authorization Agreement.

"OBLIGATION REGISTER" has the meaning specified in Section 2.07 of the
Indenture.

"OBLIGEE" means each, and "OBLIGEES" means every, Holder of an Obligation.

"OFFERING CIRCULAR" means the offering circular relating to the issuance and
sale of each Obligation.

"OFFICER'S CERTIFICATE" means a certificate conforming to Section 1.02 of the
Security Agreement or the Indenture as the context may require.

"ORIGINAL ISSUE DATE" means a date on which an Obligation was initially
authenticated by the Indenture Trustee even if the Obligation is subsequently
given a later date by reason of transfer, exchange or substitution.

"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.

"PARENT GUARANTEE" means the guarantee by Keppel FELS of the performance of the
Shipyard under the Construction Contract, as originally executed or as modified
or supplemented pursuant to the applicable provisions thereof.

"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.

"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


                                       5

<PAGE>

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.

"PROPORTIONATE PART" means with respect to the item in question, the portion of
the item in question, as of the date of any calculation, which bears the same
proportion to the entire amount of the item in question as: (x) the Depreciated
Actual Cost of the Vessel as of the date of such calculation as it bears to (y)
the Depreciated Actual Cost of all the Vessels as of such date (excluding the
Depreciated Actual Cost of any Vessel upon which its Obligations have been
redeemed pursuant to Section 3.06 of the Indenture), all as determined by the
Secretary.

"REDEMPTION DATE" means a date fixed for the redemption of an Obligation by the
Indenture.

"REDEMPTION PRICE" means the price at which an Obligation is redeemed under 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 and shall have
been delivered to the Indenture Trustee for cancellation; 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,


                                       6

<PAGE>

to the date of payment, together with any premium thereon) and available for
such payment (whether as a result of payment pursuant to the Guarantees or
otherwise) shall be held by the Indenture Trustee or any Paying Agent in trust
for that purpose, or with irrevocable directions, to apply the same; 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.

"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.

"SECRETARY'S SUPPLEMENTAL INDENTURE" means a Supplemental Indenture, pursuant to
Section 6.09 of the Indenture, evidencing the succession of the Secretary to the
Shipowner, and the Secretary's assumption of the Shipowner's obligations under
the Indenture.

"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-13674, 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 Chiles Galileo LLC a Delaware limited liability company, and
shall include its successors and assigns.

"SHIPYARD" means each, and "SHIPYARDS" means every, Shipyard identified in
Recital A to the Guarantee Commitment.


                                       7

<PAGE>

"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.

"SUPPLEMENTAL INDENTURE" shall mean any indenture supplemental to the Indenture
entered into pursuant to Article X of the Indenture.

"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.

"VESSEL" means AMFELS Hull No. P-187.

"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.


                                       8