Document:

Exhibit
10.16

 

LOAN AGREEMENT

 

Dated as of

June 28, 2005 

Among

K-SEA OPERATING PARTNERSHIP L.P. 

(as the Borrower)

AND

CITIZENS ASSET FINANCE, 

a d/b/a of Citizens Leasing Corporation 

(as the Lender)

 

 

TABLE OF
CONTENTS

 

	
  SECTION 1.

  	
  DEFINITIONS

  	
   

  
	
  §1.1

  	
  Defined Terms

  	
   

  
	
  §1.2

  	
  Other Definitional and Interpretive
  Provisions

  	
   

  
	
  SECTION 2.

  	
  THE TERM LOAN

  	
   

  
	
  §2.1

  	
  Advances; Purposes

  	
   

  
	
  §2.2

  	
  Note; Repayment of Principal and
  Interest

  	
   

  
	
  §2.3

  	
  Prepayments

  	
   

  
	
  §2.4

  	
  Payments Generally

  	
   

  
	
  §2.5

  	
  Increased Costs and Reduced Return

  	
   

  
	
  §2.6

  	
  Payments Free and Clear of Taxes

  	
   

  
	
  §2.7

  	
  Mitigation Obligations

  	
   

  
	
  SECTION 3.

  	
  REPRESENTATIONS AND WARRANTIES

  	
   

  
	
  §3.1

  	
  Legal Existence and Good Standing, Etc.

  	
   

  
	
  §3.2

  	
  Limited Partnership Power; Consents;
  Absence of Conflict with Other Agreements Etc. 

  	
   

  
	
  §3.3

  	
  Title to Properties

  	
   

  
	
  §3.4

  	
  Financial Statements

  	
   

  
	
  §3.5

  	
  No Material Changes Etc.

  	
   

  
	
  §3.6

  	
  Franchises, Patents, Copyrights,
  Licenses, Etc.

  	
   

  
	
  §3.7

  	
  Litigation

  	
   

  
	
  §3.8

  	
  No Materially Adverse Contracts,
  Etc.

  	
   

  
	
  §3.9

  	
  Compliance with Other Instruments,
  Laws, Etc.

  	
   

  
	
  §3.10

  	
  Tax Status

  	
   

  
	
  §3.11

  	
  No Default

  	
   

  
	
  §3.12

  	
  Absence of Liens

  	
   

  
	
  §3.13

  	
  Use of Proceeds

  	
   

  
	
  §3.14

  	
  Pension Plans

  	
   

  
	
  §3.15

  	
  Holding Company and Investment
  Company

  	
   

  
	
  §3.16

  	
  Disclosure

  	
   

  
	
  §3.17

  	
  [Intentionally Omitted

  	
   

  
	
  §3.18

  	
  First Lien

  	
   

  

 

i

 

	
  §3.19

  	
  Environmental Matters

  	
   

  
	
  §3.20

  	
  Solvency

  	
   

  
	
  §3.21

  	
  Survival of Representations and
  Warranties, Etc.

  	
   

  
	
  SECTION 4.

  	
  CONDITIONS OF FUNDING THE FIRST
  ADVANCE

  	
   

  
	
  §4.1

  	
  Execution and Delivery

  	
   

  
	
  §4.2

  	
  Representations and Warranties

  	
   

  
	
  §4.3

  	
  Performance; No Default

  	
   

  
	
  §4.4

  	
  Certified Copies of Charter
  Documents

  	
   

  
	
  §4.5

  	
  Proof of Partnership or General
  Partner Action

  	
   

  
	
  §4.6

  	
  Incumbency Certificate

  	
   

  
	
  §4.7

  	
  No Material Adverse Effect

  	
   

  
	
  §4.8

  	
  Delivery of Notice of Borrowing

  	
   

  
	
  §4.9

  	
  Opinion of Counsel

  	
   

  
	
  §4.10

  	
  Proceedings and Documents

  	
   

  
	
  §4.11

  	
  Recorded Lien Searches

  	
   

  
	
  §4.12

  	
  Financing Statements

  	
   

  
	
  §4.13

  	
  Evidence of Insurance

  	
   

  
	
  §4.14

  	
  Delivery of Invoices

  	
   

  
	
  §4.15

  	
  Licenses, Permits and Consent

  	
   

  
	
  §4.16

  	
  Construction Contract

  	
   

  
	
  §4.18

  	
  Lien Waivers

  	
   

  
	
  SECTION 5.

  	
  CONDITIONS OF INTERIM ADVANCES

  	
   

  
	
  SECTION 6.

  	
  CONDITIONS OF FINAL ADVANCES OF THE
  LOAN

  	
   

  
	
  §6.1

  	
  Vessel Documentation

  	
   

  
	
  SECTION 7.

  	
  AFFIRMATIVE COVENANTS

  	
   

  
	
  §7.1

  	
  Punctual Payment

  	
   

  
	
  §7.2

  	
  Maintenance of Offices

  	
   

  
	
  §7.3

  	
  Records and Accounts

  	
   

  
	
  §7.4

  	
  Financial Statements, Certificates,
  and Other Information

  	
   

  
	
  §7.5

  	
  [Intentionally omitted

  	
   

  
	
  §7.6

  	
  Business and Limited Partnership
  Existence

  	
   

  

 

ii

 

	
  §7.7

  	
  Payment of Taxes

  	
   

  
	
  §7.8

  	
  Inspection of Properties and Books

  	
   

  
	
  §7.9

  	
  Licenses and Permits

  	
   

  
	
  §7.10

  	
  Pension Plans

  	
   

  
	
  §7.11

  	
  Environmental and Safety Matters

  	
   

  
	
  §7.12

  	
  Indemnities, Etc.

  	
   

  
	
  §7.13

  	
  Performance of Contracts

  	
   

  
	
  §7.14

  	
  Notice of Default

  	
   

  
	
  §7.15

  	
  Notice of Material Claims and
  Litigation

  	
   

  
	
  §7.16

  	
  No Disposition of Collateral

  	
   

  
	
  §7.17

  	
  Borrower’s Title; Lender’s Security
  Interest

  	
   

  
	
  §7.18

  	
  Compliance with Laws and
  Regulations

  	
   

  
	
  §7.19

  	
  Further Assurances

  	
   

  
	
  §7.20

  	
  Casualty Occurrence

  	
   

  
	
  SECTION 8.

  	
  NEGATIVE COVENANTS;
  FINANCIAL COVENANTS

  	
   

  
	
  §8.1

  	
  Transactions with
  Affiliates

  	
   

  
	
  §8.2

  	
  Terminate Pension
  Plan

  	
   

  
	
  §8.3

  	
  ERISA

  	
   

  
	
  §8.4

  	
  Incorporation of
  Financial Covenants Under Existing Revolver

  	
   

  
	
  SECTION 9.

  	
  EVENTS OF DEFAULT;
  ACCELERATION

  	
   

  
	
  §9.1

  	
  Events of Default

  	
   

  
	
  §9.2

  	
  Remedies

  	
   

  
	
  SECTION 10.

  	
  EXPENSES

  	
   

  
	
  SECTION 11.

  	
  SURVIVAL OF
  COVENANTS

  	
   

  
	
  SECTION 12.

  	
  CONFIDENTIALITY

  	
   

  
	
  SECTION 13.

  	
  SUCCESSORS AND
  ASSIGNS; PARTICIPATIONS

  	
   

  
	
  §13.1

  	
  Successors and
  Assigns

  	
   

  
	
  §13.2

  	
  Assignments

  	
   

  
	
  §13.3

  	
  Participations

  	
   

  
	
  §13.4

  	
  Disclosures

  	
   

  
	
  §13.5

  	
  Federal Reserve
  Bank

  	
   

  

 

iii

 

	
  §13.6

  	
  Register; Note

  	
   

  
	
  SECTION 14.

  	
  NOTICES

  	
   

  
	
  SECTION 15.

  	
  ENTIRE AGREEMENT

  	
   

  
	
  SECTION 16.

  	
  CONSENTS,
  AMENDMENTS, WAIVERS, ETC.

  	
   

  
	
  SECTION 17.

  	
  SEVERABILITY

  	
   

  
	
  SECTION 18.

  	
  SUBMISSION TO
  JURISDICTION; WAIVER

  	
   

  
	
  SECTION 19.

  	
  WAIVER OF JURY TRIAL

  	
   

  
	
  SECTION 20.

  	
  MISCELLANEOUS

  	
   

  
	
   

  	
   

  	
   

  
	
  SCHEDULES

  	
   

  	
   

  
	
  Schedule 1

  	
  Description of the Vessels

  	
   

  
	
   

  	
   

  	
   

  
	
  EXHIBITS

  	
   

  
	
  Exhibit A

  	
  Form of
  Term Note

  
	
  Exhibit B

  	
  Form of
  Notice of Borrowing

  
	
  Exhibit C

  	
  Form of
  Ship Mortgage

  
	
  Exhibit D

  	
  Form of Assignment
  and Acceptance

  
	
  Exhibit E

  	
  Form of
  Security Agreement

  
	
  Exhibit F

  	
  Form of
  Lien Certificate

  
	
  Exhibit G

  	
  Assignment of
  Project Documents

  
	
  Exhibit H

  	
  Contractor’s
  Consent

  

 

iv

 

LOAN AGREEMENT

 

This LOAN AGREEMENT (this “Agreement”), is made as of June 28,
2005, by and between K-SEA OPERATING PARTNERSHIP L.P., a Delaware limited partnership (the “Borrower”), and CITIZENS ASSET
FINANCE, a d/b/a of CITIZENS LEASING CORPORATION, a Rhode Island corporation,
(the “Lender”).

 

NOW THEREFORE, in consideration of the premises and of
the mutual agreements herein contained, the parties hereto agree as follows:

 

SECTION 1.                            DEFINITIONS

 

§1.1        Defined
Terms. As used in this Agreement the following terms shall have the
meanings assigned to them below:

 

“Advance” means an advance pursuant to §2.1.

 

“Advance Date” means the date fixed for the
making of an Advance in a Notice of Borrowing.

 

“Advance Termination Date” means June     ,
2006 or the date on which the Note is executed (whichever occurs first).

 

“Affiliate” means, as to any Person, any other
Person which, directly or indirectly, is in control of, is controlled by, or is
under direct or indirect common control with, such Person and, if such Person
is an individual, any member of the immediate family (including parents, spouse
and children) of such individual and any trust whose principal beneficiary is
such individual or one or more members of such immediate family and any Person
who is controlled by any such member or trust. 
As used herein, the term “control” (including the correlative meanings
of the terms “controlling”, “controlled by” and “under common control with”)
when used with respect to any Person, means the direct or indirect beneficial
ownership of more than twenty percent (20%) of the outstanding voting
securities or voting equity of such Person, or the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of voting securities or by
contract or otherwise.

 

“Agreement” - see preamble.

 

“Assignment of Project Documents” means the
Assignment of Project Documents, dated as of the date hereof, substantially in
the form of Exhibit G (including the consent of Bollinger in the
form appended thereto), pursuant to which the Borrower has granted to the
Lender a security interest in all of the Borrower’s rights, title and interest
under the Vessel Construction Agreement as security for the Obligations.

 

 

“Authorized Officer” means any person holding
the title of Chairman, President, Vice President, Chief Financial Officer or
Treasurer (or other officer performing the functions thereof).

 

“Bollinger” means Bollinger Marine Fabricators,
L.L.C., a Louisiana limited liability company.

 

“Borrower” - see preamble.

 

“Business Day” means any day on which banks in
Rhode Island and New York are open for the conduct of normal banking business.

 

“Capital Lease Obligations” means, with respect
to any Person, the obligations of such Person to pay rent or other amounts
under any lease of (or other arrangement conveying the right to use) real or
personal property, or a combination thereof, which obligations are required to
be classified and accounted for as capital leases on a balance sheet of such
Person under GAAP, and the amount of such obligations shall be the capitalized
amount thereof determined in accordance with GAAP.

 

“CBPA” means Citizens Bank of Pennsylvania.

 

“Change in Control” means (a) the
acquisition of ownership, directly or indirectly, beneficially or of record, by
any Person or group (within the meaning of the Securities Exchange Act of 1934
and the rules of the Securities and Exchange Commission thereunder as in
effect on the date hereof), of ownership interests representing more than 50%
of the general partnership interest in K-Sea or more than 50% of the aggregate
ordinary voting power represented by the issued and outstanding ownership
interests of Borrower or any Subsidiary Guarantor, or (b) for the period
of twelve (12) consecutive calendar months, a majority of the board of Borrower
or any Guarantor shall no longer be composed of individuals (i) who were
members of said board on the first day of such period, (ii) whose election
or nomination to said board was approved by individuals referred to in clause (i) above
constituting at the time of such election or nomination at least a majority of
said board, or (iii) whose election or nomination to said board was
approved by individuals referred to in clauses (i) and (ii) above
constituting at the time of such election or nomination at least a majority of
said board.

 

“Coast Guard” means the United States Coast
Guard, which is currently part of the United States Department of Homeland
Security.

 

“Code” shall mean the Internal Revenue Code of
1986, and the rules and regulations promulgated thereunder, as amended
from time to time.

 

“Collateral” means the Vessels, charter hire,
freights and earnings, fees and all other; amounts due or which become due and
payable to the Borrower arising out of the Vessels; all insurance proceeds
payable to the Borrower with respect to the Vessels; and all other property,

 

2

 

interests and rights now or at any time hereafter described, referred
to in or covered by the Security Documents.

 

“Controlled Group” means all trades or
businesses (whether or not incorporated) under common control that, together
with the Borrower, are treated as a single employer under Section 414(b) or
414(c) of the Code or Section 4001(a)(14) of ERISA.

 

“DBL 28” means a 28,000 barrel inland tank
barge being constructed for the Borrower by Bollinger pursuant to the Vessel
Construction Agreement.

 

“DBL 29” means a 28,000 barrel inland tank
barge being constructed for the Borrower by Bollinger pursuant to the Vessel
Construction Agreement.

 

“DBL 78” means a 78,000 barrel tank barge that
the Borrower intends to acquire in July, 2005 pursuant to the terms of an
Option Agreement dated as of December 6, 2004 between the Borrower and
EMI-PA, Inc.

 

“Default(s)” means the occurrence of any event
or condition which, after the giving of notice and/or the lapse of time (if
provided for in §9), would become an Event of Default.

 

“Default Rate” means an interest rate of 300
basis points per annum over the relevant interest rate in effect in accordance
with Section 2.2(b) and (c) or, if lower, the Highest Lawful
Rate.

 

“Dollars” and the sign “$” means dollars or
such coin or currency of the United States of America as at the time of payment
shall be legal funds for the payment of public and private debts in the United
States of America.

 

“Eligible Assignee” means any bank, insurance
company or other financial institution or finance company having a net worth in
excess of $50,000,000.

 

“Environmental Laws” means any and all federal,
state, local and foreign laws, statutes, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or
other governmental restrictions relating to fines, orders, injunctions,
penalties, damages, contribution, cost recovery compensation, losses or
injuries resulting from the Release or threatened Release of Hazardous
Materials or to the generation, storage, transportation, or disposal of
Hazardous Materials, in any manner applicable to the Borrower or any of its
properties, including the Comprehensive Environmental Response, Compensation,
and Liability Act (42 U.S.C. §9601 Qt seq.), the Hazardous Material
Transportation Act (49 U.S.C. §1801 Qt seq.), the Solid Waste Disposal Act (42
U.S.C. §6901 et seq.), the Federal Water Pollution Control Act (33
U.S.C. §1251 et seq.), the Clean Air Act (42 U.S.C. §7401 et. seq.),
the Toxic Substances Control Act (15 U.S.C. §2601 et. seq.), the
Occupational Safety and Health Act (29 U.S.C. §651 et. seq.) and the
Emergency Planning and Community Right-to-Know Act (42 U.S.C. §11001 et.
seq.), each as amended or supplemented, and any analogous future or present

 

3

 

local, state and federal or foreign statutes and rules and
regulations promulgated pursuant thereto, each as in effect on the date of
determination.

 

“ERISA” means the Employee Retirement Income
Security Act of 1974, as amended from time to time.

 

“Event of Default” means any of the events
specified in §9, provided that
there has been satisfied any requirement in connection with such event for the
giving of notice or the lapse of time, or both.

 

“Event of Loss” means, with respect to any
Vessel, the actual or constructive loss of such Vessel or the use thereof, due
to theft, destruction, damage beyond repair or damage from any reason
whatsoever, to an extent which makes repair uneconomical, or rendition thereof
unfit for normal use, or the condemnation, confiscation or seizure of, or
requisition of title to or use of, such Vessel by any Governmental Authority
(other than the United States pursuant to a requisition for hire) or any other
person, whether or not acting under color of Governmental Authority.

 

“Excluded Tax” means, with respect to the
Lender, any of the following Taxes:

 

(i)            any
Tax imposed on or with respect to, or calculated by reference to, the gross or
net income, capital, capital stock, net worth, assets or conduct of business of
the Lender by any national, state (or equivalent) or local jurisdiction under
the laws of which the Lender is incorporated or otherwise organized or in which
the Lender has an office or other fixed place of business;

 

(ii)           any
Tax imposed on or payable by a Lender by any Governmental Authority or other
taxing authority in any jurisdiction if the jurisdictional basis for such Tax
exists as a result of any activities, transactions or other connection of such
Lender (or any of its Affiliates) in or with such jurisdiction that is
unrelated to the Lender’s Loan to the Borrower pursuant to the Loan Documents;

 

(iii)          any
Tax arising from a transfer, assignment or other disposition by the Lender of
all or any part of its interest in or rights under the Loan or the Loan
Documents unless such transfer, assignment or other disposition occurs as the
result of an Event of Default and while such Event of Default is continuing;

 

(iv)          any
Tax to the extent consisting of a fine, interest, a penalty or other addition
to tax that would not have been required to be paid but for the failure of the
Lender to file any tax return or other tax document, or to pay any tax, in a
procedurally proper and timely matter;

 

(v)           any
Tax attributable to gross negligence or willful misconduct of the Lender or the
breach of any agreement of the Lender in the Loan Documents; and

 

4

 

(vi)          any
United States federal Tax imposed on, or required to be withheld from or with
respect to payments of, gross or net income (including any Tax imposed by Section 881,
884, 1441, 1442, or 3406 of the Code).

 

“Existing Revolver” means the transactions
contemplated by the Loan and Security Agreement dated as of March 24, 2005
by and between the Borrower, KeyBank National Association, LaSalle Bank
National Association and CBPA, as the same may be amended, modified or
supplemented from time to time.

 

“Federal Funds Rate” means, for any day, the
rate per annum equal to the weighted average of the rates on overnight Federal
funds transactions with members of the Federal Reserve System arranged by
Federal funds brokers on such day, as published by the Federal Reserve Bank of
New York on the Business Day next succeeding such day; provided that (a) if
such day is not a Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (b) if no such rate is
so published on such next succeeding Business Day, the Federal Funds Rate for
such day shall be the average rate (rounded upward, if necessary, to a whole
multiple of 1/100 of 1%) charged to K-Sea on such day on such transactions as
determined by the Lender.

 

“Financial Covenants” – see § 8.4(a).

 

“Financing Statements” means Uniform Commercial
Code financing statements naming the Borrower as debtor and the Lender as secured
party and filed or to be filed in the office of the Secretary of State of
Delaware and/or such other locations as may be required from time to time under
applicable law to perfect a security interest in certain of the Collateral.

 

“GAAP” means generally accepted accounting
principles in the United States of America, as may be determined by the
Financial Accounting Standards Board.

 

“Governmental Authority” means any government
or political subdivision or any agency, authority, bureau, central bank, commission,
department or instrumentality of either, or any court, tribunal, grand jury or
arbitrator, in each case whether foreign or domestic.

 

“Hazardous Materials” means (a) any oil,
petroleum or petroleum derived substance, any drilling fluids, produced waters
and other wastes associated with the exploration, development or production of
crude oil, any flammable substances or explosives, any radioactive materials,
any hazardous wastes or substances, any toxic wastes or substances or any other
materials or pollutants which (i) pose a hazard to any property of the
Borrower or to Persons on or about such property or (ii) cause such
property to be in violation of any Environmental Laws, (b) asbestos in any
form which is or could become friable, urea formaldehyde foam insulation,
electrical equipment which contains any oil or electric fluid containing levels
of polychlorinated biphenyls in excess of fifty parts per million; (c) any
chemical, material or substance defined as or included in the definition of “hazardous
substances,” “hazardous wastes,” “hazardous materials,” “extremely hazardous
waste,” restricted hazardous waste,” or “toxic substances” or words of 

 

5

 

similar import under any applicable local, state or
federal law or under the rules and regulations adopted or publications
promulgated pursuant thereto, including Environmental Laws, and (d) any
other chemical, material or substance, exposure to which is prohibited, limited
or regulated by any Governmental Authority having jurisdiction over the
Borrower, or any of its properties, including the Vessels.

 

“Hedging Agreement” means any interest rate
protection agreement, foreign currency exchange agreement, commodity price
protection agreement (excluding fuel surcharge) or other interest or currency
exchange rate of commodity price hedging agreement.

 

“Indebtedness” means, with respect to any
Person, without duplication, (a) all obligations of such Person for
borrowed money or with respect to deposits or advances of any kind, (b) all
obligations of such Person evidenced by bonds, debentures, notes or similar
instruments, (c) all obligations of such Person upon which interest
charges are customarily paid, (d) all obligations of such Person under
conditional sale or other title retention agreements relating to property
acquired by such Person, (e) all obligations of such Person in respect of
the deferred purchase price of property or services (excluding current accounts
payable incurred in the ordinary course of business), (f) all Indebtedness
of others secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien on property
owned or acquired by such Person, whether or not the Indebtedness secured
thereby has been assumed, (g) all guarantees by such Person of
Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all
operating lease obligations of such Person, (j) all obligations, contingent or
otherwise, of such Person as an account party in respect of letters of credit
and letters of guaranty, and (k) all obligations, contingent or otherwise, of
such Person in respect of bankers’ acceptances; provided, however, that “Indebtedness”
shall not include (x) secured nonrecourse obligations and (y) nonrecourse
obligations incurred in connection with leveraged lease transactions as
determined in accordance with GAAP.

 

“Indemnified Party” - see §7.11(d).

 

“Indemnified Tax” means any Tax (other than an
Excluded Tax) imposed on or with respect to (i) the execution, delivery,
recording, registration, notarization or other formalization, performance, or
enforcement of the Loan or the Note or any of the other Loan Documents or (ii) any
payment pursuant to the Loan Documents.

 

“Initial Lender” means Citizens Asset Finance,
a d/b/a of Citizens Leasing Corporation, a Rhode Island corporation.

 

“K-Sea Transportation” means K-Sea
Transportation Partners L.P., a Delaware limited partnership, and owner of a
99.99% limited partner interest in the Borrower.

 

“Law” means any law (including common law),
constitution, statute, treaty, convention, regulation, rule, ordinance, order,
injunction, writ, decree or award of any Governmental Authority.

 

6

 

“Lender(s)” – see the preamble.

 

“Lender Register” as defined in §13.6.

 

“LIBOR Rate” means relative to any one-month interest
period, the offered rate for delivery in two London Banking Days (as defined
below) of deposits of U.S. Dollars which the British Bankers Association fixes
as its LIBOR rate as of 11:00 a.m. London time on the day on which the
interest period commences, and for a period approximately equal to such
interest period.  If the first day of any
interest period is not a day which is both a (i) Business Day, and (ii) a
day on which US dollar deposits are transacted in the London interbank market
(a “London Banking Day”), the LIBOR Rate shall be determined in reference to
the next preceding day which is both a Business Day and a London Banking Day.  If for any reason the LIBOR Rate is
unavailable and/or the Lender is unable to determine the LIBOR Rate for any
such interest period, the LIBOR Rate shall be deemed to be equal to the Federal
Funds Rate plus 175 basis points.

 

“Lien” means, with respect to any property or
asset (or any income or profits therefrom of any Person) (in each case whether
the same is consensual or nonconsensual or arises by contract, operation of
law, legal process or otherwise) (a) any mortgage, pledge, hypothecation,
assignment, security interest, encumbrance, lien (statutory or otherwise),
levy, execution, attachment, seizure, garnishment or charge of any kind or
description, whether or not choate, vested, or perfected, thereupon or in
respect thereof and shall include any agreement to give any of the foregoing,
any conditional sale or other title retention agreement, any lease in the
nature thereof including any lease or similar arrangement with a public
authority executed in connection with the issuance of industrial development
revenue bonds or pollution control revenue bonds or other similar bonds, and
the filing of, or agreement to file any ship mortgage, financing statement or
other document with the Coast Guard or under the UCC, or similar law of any
jurisdiction, or (b) any other arrangement, express or implied, under
which the same is subordinated, transferred, sequestered or otherwise
identified so as to subject the same to, or make the same available for, the
payment or performance of any liability or obligation in priority to the
payment of the ordinary, unsecured creditors of such Person.

 

“Lien Certificates” – see §4.18.

 

“Loan” means, as at any date, the aggregate
outstanding principal amount of all Advances.

 

“Loan Documents” - collectively, this
Agreement, the Note, the Security Agreement, the Financing Statements, the Ship
Mortgages, the Assignment of Project Documents, and any other instruments or
agreements executed and delivered by the parties in connection with the
transactions contemplated by this Agreement, in each case as the same may be
amended, supplemented, restated, replaced or otherwise modified from time to
time.

 

“Material Adverse Effect” means a material
adverse effect on (a) the Collateral, (b) the property, business,
operations, financial condition, liabilities or capitalization of K-Sea 

 

7

 

Transportation and its consolidated Affiliates,
including, without limitation, Borrower, taken as a whole, (c) the ability
of Borrower to perform any of its obligations under this Agreement (including
the timely payment of all amounts due hereunder), (d) the rights of or
benefits available to the Lender under this Agreement, or (e) the validity
or enforceability of this Agreement.

 

“Note” - see §2.2(a).

 

“Notice of Borrowing” – see §2.1.

 

“Obligations” 
means all indebtedness, obligations and liabilities of the Borrower to
the Lender existing on the date of this Agreement or arising thereafter, direct
or indirect, joint or several, absolute or contingent, matured or unmatured,
liquidated or unliquidated, secured or unsecured, in each case arising by
contract, operation of law or otherwise under or in connection with (i) this
Agreement or in respect of the Loan and the Note or the other Loan Documents,
as all of the same may be amended, extended, renewed, replaced, restated or
otherwise modified from time to time, and (ii) any interest rate
agreement, currency swap agreement, interest rate cap agreement, interest rate
collar agreement, interest rate option contract, or any other similar interest
rate protection agreement or arrangement between the Borrower and the Lender or
any Affiliate of the Lender, in each case, respecting this Agreement or in
respect of the Loan and the Note or other Loan Documents.

 

“Officer’s Certificate” means a certificate
signed on behalf of the Borrower by an Authorized Officer of the Borrower.

 

“Original Vessel Documents” means the U.S.
Coast Guard Certificates of Documentation for each of the Vessels and the
American Bureau of Shipping Classification Certificates.

 

“Participant” – see §13.3.

 

“Permitted Lien” means (a) Liens granted
to the Lender pursuant to the Loan Documents; and (b):

 

(i)            Liens for
current crew’s wages, including wages of the master to the extent provided in
Public Law 90-293, for general average or salvage (including contract salvage)
or for wages of stevedores employed directly by the Borrower, the operator,
agent or master of the Vessels which in each case (A) are unclaimed or (B) shall
not have been due and payable for longer than ten (10) days after
termination of a voyage;

 

(ii)           Liens for
repairs or incident to current operations of the Vessels (other than those
referred to in clause (i)), but only to the extent in each case that such liens
are based on (x) claims not yet delinquent, (y) in the case of liens incident
to current operations, are incurred in the ordinary course of business and do
not exceed $250,000 in the aggregate, and (z) do not involve a significant risk
of a sale, forfeiture, hindrance to operation or loss of the Vessels;

 

8

 

(iii)          Liens
for amounts (including Taxes) that are not delinquent or that are due and
unpaid for not more than sixty (60) days after such amounts shall become due
that do not involve a significant risk of a sale, forfeiture, hindrance to
operation or loss of the Vessels;

 

(iv)          Liens for
amounts being contested by the Borrower in good faith by appropriate
procedures, diligently prosecuted or appealed which do not involve a significant
risk of a sale, forfeiture, hindrance to operation or loss of the Vessels;

 

(v)           Liens for
charges that, in the opinion of the Borrower or as indicated by the written
admission of liability therefor by an insurance company, are covered by
insurance;

 

(vi)          Liens
arising from the taking or requisition for use of the Vessels by the government
or any governmental body of the United States of America to the extent that the
creation or incurrence of such lien shall have been beyond the control of the
Borrower during such requisition, provided that all such liens referred to in
this clause (vi) shall be removed and discharged within thirty (30) days
after such requisition shall have terminated; and

 

(vii)         prior
to the delivery date of DBL 28 and DBL 29, respectively, liens arising as a
matter of law or in accordance with the terms of the Vessel Construction
Contract in favor of, or through Bollinger.

 

“Person” means a natural person, a partnership,
a corporation, a limited liability company, a limited partnership, a limited
liability partnership, a joint venture, a trust, an unincorporated
organization, or a government or any agency or political subdivision thereof.

 

“Plan” means at any time, an employee pension
or other benefit plan that is subject to Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Code and is either (i) maintained
by the Borrower or any member of the Controlled Group for employees of the
Borrower or any member of the Controlled Group, or (ii) maintained pursuant
to a collective bargaining agreement or any other arrangement under which more
than one employer makes contributions and to which the Borrower or any member
of the Controlled Group is then making or accruing an obligation to make
contributions or has within the preceding five Plan years made contributions.

 

“Prepayment Premium” means an additional amount
to be paid in connection with any prepayment made pursuant to §2.3(a), §2.3(b) (other
than relating to a prepayment arising as a result of an Event of Loss) or §9.2,
(a) if such prepayment occurs prior to the first anniversary of the
Advance Termination Date, an amount equal to three percent (3%) of the prepaid
principal thereof, (b) if such prepayment occurs on or after the first
anniversary of the Advance Termination Date, but prior to the second
anniversary of the Advance Termination Date, an amount equal to 2% of the
prepaid principal thereof, and (c) if such prepayment occurs on or after
the second anniversary of the Advance Termination Date, an amount equal to 1%
of the prepaid principal thereof, provided that the Borrower shall be entitled
to prepay up to an aggregate amount of Ten Million Dollars ($10,000,000.00) of
the principal amount of the Loan 

 

9

 

at any time after the date that is twelve (12) months
after the first of the month following Advance Termination Date without
incurring any Prepayment Premium.

 

“Proceeds” shall have the meaning assigned to
it under the UCC and, in any event, shall include, but not be limited to, the
following at any time whatsoever arising or receivable: (a) whatever is
received upon the collection, exchange, sale or other disposition of any
Collateral, and any property into which any of the Collateral is converted,
whether cash or non-cash proceeds, (b) any and all proceeds of any
insurance, indemnity, warranty or guarantee payable to the Borrower from time
to time with respect to any of the Collateral, (c) any and all payments
(in any form whatsoever) made or due and payable to the Borrower from time to
time in connection with any requisition, confiscation, condemnation, seizure or
forfeiture of any of the Collateral by any Governmental Authority (or any
Person acting under color of governmental authority), and (d) any and all
other amounts from time to time paid or payable under or in connection with any
of the Collateral.

 

“Registration Agent” as defined in §13.6.

 

“Release” means any release, spill, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching,
or migration in, by, from or related to any real property (including all
buildings, fixtures or other improvements located thereon) or personal property
owned, leased or operated by the Borrower into the indoor or outdoor
environment, including the movement of any Hazardous Material through air,
soil, surface water, groundwater or property.

 

“Revolving Lenders” means those lenders that,
at any time of determination, are parties to the Existing Revolver.

 

“Security Agreement” means the Security
Agreement, dated as of the date hereof, substantially in the form of Exhibit E
pursuant to which the Borrower has granted to the Lender, a security interest
in certain rights and assets of the Borrower relating to the Vessels as
security for the Obligations.

 

“Security Documents” means the Security
Agreement, the Ship Mortgages and the Assignment of Project Documents.

 

“Ship Mortgage(s)” means the three First
Preferred Ship Mortgages substantially in the form of Exhibit C,
each granted by the Borrower in favor of the Lender with respect to each
Vessel, as such mortgages may be amended, supplemented, restated, replaced or
otherwise modified from time to time.

 

“Subsidiary” means, as to any Person, (a) any
corporation of which more than fifty percent (50%) of the outstanding stock
having ordinary voting power to elect a majority of its board of directors (or
other governing body), regardless of the existence at the time of a right of
the holders of any class or classes (however designated) of securities of such
corporation to exercise such voting power by reason of the happening of any
contingency, or any partnership of which more than fifty percent (50%) of the
outstanding partnership interests is, at the time, 

 

10

 

owned by such Person, or by one or more Subsidiaries
of such Person, or by such Person and one or more Subsidiaries of such Person,
and (b) any other entity which is controlled or capable of being
controlled by such Person, or by one or more Subsidiaries of such Person, or by
such Person and one or more Subsidiaries of such Person.  Unless otherwise qualified, all references to
a “Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a
Subsidiary or Subsidiaries of the Borrower or a Subsidiary or Subsidiaries of
such Subsidiary or Subsidiaries.

 

“Taxes” means, with respect to any Person, any
and all present or future taxes, including any change in the basis of taxation
(except a change in the rate of taxation on the overall net income of such
Person, by the jurisdiction, or by any political subdivision or taxing
authority of any such jurisdiction, in which such Person has its principal
office), levies, imposts, duties, fees, assessments, deductions, withholdings
or other charges of whatever nature, including gross receipts, excise,
property, sales, transfer, license, payroll, social security and franchise
taxes now or hereafter imposed or levied by the United States of America, or
any state, local or foreign government or by any department, agency or other
political subdivision or taxing authority thereof and all interest, penalties,
additions to tax or similar liabilities with respect thereto.  Notwithstanding the foregoing, the definition
“Taxes” shall not include any taxes or other charges as mentioned above on or
with respect to the income of the Lender.

 

“UCC” means the Uniform Commercial Code as in
effect from time to time in the State of New York.

 

“Vessel(s)” means, collectively, DBL 28, DBL 29
and DBL 78, and individually, any one of them, as more particularly described
in Schedule 1 hereto.

 

“Vessel Construction Agreement” means the
Vessel Construction Agreement dated February 21, 2005 (including all
associated plans, specifications and related documents) between Bollinger and
the Borrower with respect to the construction by Bollinger of DBL 28 and DBL
29.

 

§1.2        Other
Definitional and Interpretive Provisions.

 

(a)           All
terms in this Agreement, the Exhibits and Schedules hereto shall have the same
defined meanings when used in any other Loan Documents, unless the context
shall require otherwise.

 

(b)           Except
as otherwise expressly provided herein, all accounting terms not specifically
defined or specified herein shall have the meanings generally attributed to
such terms under GAAP, including applicable statements and interpretations
issued by the Financial Accounting Standards Board and bulletins, opinions,
interpretations and statements issued by the American Institute of Certified
Public Accountants or its committees.

 

(c)           All
personal pronouns used in this Agreement, whether used in the masculine,
feminine or neuter gender, shall include all other genders; the singular shall
include the plural, and the plural shall include the singular.

 

11

 

(d)           The
words “hereof,” “herein” and “hereunder” and words of similar import when used
in this Agreement shall refer to this Agreement as a whole and not to any
particular provisions of this Agreement.

 

(e)           The
preamble hereto is part of this Agreement. 
Titles of Sections in this Agreement are for convenience only, do not
constitute part of this Agreement and neither limit nor amplify the provisions
of this Agreement, and all references in this Agreement to Sections,
Subsections, paragraphs, clauses, subclasses, Schedules or Exhibits shall refer
to the corresponding Section, Subsection, paragraph clause, subclause, Schedule or
Exhibit attached to this Agreement, unless specific reference is made to
the articles, sections or other subdivisions or divisions of such Schedule or
Exhibit to or in another document or instrument.

 

(f)            Each
definition of a document in this Agreement shall include such document as
amended, modified, supplemented, restated, renewed or extended from time to
time.

 

(g)           Except
where specifically restricted, reference to a party in a Loan Document includes
that party and its successors and assigns permitted hereunder or under such
Loan Document.

 

(h)           Unless
otherwise specifically stated, whenever a time is referred to in this Agreement
or in any other Loan Document, such time shall be the local time in Providence,
Rhode Island and New York, New York.

 

(i)            Any
list in this Agreement of one or more items preceded by the words “include or “including”
shall not be deemed limited to the stated items but shall be deemed without
limitation.

 

SECTION 2.                            THE
TERM LOAN.

 

§2.1        Advances;
Purposes.

 

(a)           Subject
to the terms and conditions set forth herein, and in reliance upon the
representations and warranties contained herein, during the period from the
date hereof through and including the Advance Termination Date, the Lender
shall make advances of the Loan (each, an “Advance,” and collectively, the “Advances”),
the principal amount of which, in aggregate shall not exceed $18,000,000.00
(the “Loan”).  To request Advances of the
Loan, the Borrower shall deliver to the Lender, not less than three Business Days before each requested funding date, a
written notice of borrowing in substantially the form of Exhibit B
attached hereto, with the appropriate insertions and additions therein (the “Notice
of Borrowing”) specifying, among other things, (A) the proposed Advance
Date (which shall be on or before the Advance Termination Date), and (B) the
amount of such Advance, (which shall not be less than $250,000.00).

 

12

 

(b)           The
proceeds of the Loan shall be used to make advances to the Borrower from time
to time (i) to finance construction period progress payments, in the case
of DBL 28 and DBL 29, and (ii) to finance the purchase by the Borrower
(for up to $10,000,000.00) of DBL 78.

 

(c)           The
Notice of Borrowing when given shall be irrevocable. Unless the Lender
determines that any of the applicable conditions set forth in §4, §5
or §6 have not then been satisfied, the Lender will make such Advance to
the order of the Borrower prior to the Lender’s close of business on each
Advance Date by (i) credit in immediately available funds to the Borrower’s
account maintained with the Lender or (ii) by wire transfer pursuant to
the Borrower’s instruction.

 

§2.2        Note;
Repayment of Principal and Interest.

 

(a)           The
obligations of the Borrower to repay the Loan, to pay interest thereon from and
after the Advance Termination Date, and all other sums which may become payable
with respect thereto, shall be evidenced with respect to the Loan by this
Agreement and by a promissory note of the Borrower substantially in the form of
Exhibit A (the “Note”), appropriately completed in accordance with
the provisions of this Agreement and dated as of the
Advance Termination Date.  The principal
amount of the Loan that is outstanding on the Advance Termination Date shall be
repaid in 84 consecutive monthly installments, the first such installment
becoming due and payable on the date that is one month after the Advance
Termination Date.  If not earlier prepaid
pursuant to §2.3, the entire remaining principal amount of the Loan
shall become immediately due and payable on the date which occurs
85 months after the Advance Termination Date, as set forth in the Note,
without presentment, demand or further notice of any kind, together with all
accrued interest and other amounts then owing by the Borrower to the Lender
hereunder and under the other Loan Documents. The principal balance of the Note
may be prepaid pursuant to §2.3, provided that
no amount of the Loan that is so prepaid shall be available for reborrowing.
Partial prepayments of the Note shall be applied to installment payments in the
inverse order of maturity.

 

(b)           Prior
to the Advance Termination Date, the obligations of the Borrower to repay the
Loan, to pay interest thereon, and all other sums which may become payable with
respect thereto, shall be evidenced by this Agreement.  Prior to the Advance Termination Date, the
outstanding principal amount of the Loan shall bear interest at the LIBOR Rate
plus 160 basis points (1.6%).  Interest
prior to the Advance Termination Date shall be due and payable monthly in
arrears, on the first day of each month, commencing on the date that is the
first day of the month immediately following the date of the initial Advance
hereunder, for the period commencing on the first day of the immediately
preceding month (or commencing on the date of the initial Advance with respect
to the first interest payment) and ending on and including the last day of such
month.

 

(c)           After
the Advance Termination Date, the outstanding principal amount of the Loan
shall bear interest at the rate, and such interest shall be payable on the
dates, as provided in the Note.

 

13

 

(d)           At
any time during the term of the Loan after the first anniversary of the date of
the Note, the Borrower may request that the rate of interest payable under the
Note be converted to a fixed rate.  If
accepted by the Borrower, such fixed rate shall be set for the remainder of the
term of the Loan and shall be offered by the Lender, as determined by the
Lender, based on the closest whole-year interest rate swaps reported in the
Federal Reserve H-15 Report of the day prior to fixing the rate, plus 200 basis
points (2.00%).

 

(e)           The
Borrower shall pay to the Lender interest at the Default Rate on the principal
of the Loan, and on any other amounts payable by the Borrower under this
Agreement or the other Loan Documents (including interest to the extent
permitted by law) that is not paid on the due date thereof, calculated from the
day following such due date.  In
addition, if any payment set forth in the Note or hereunder shall not be made
within ten (10) days of the due date, the Borrower shall pay as an
administrative and late charge an amount equal to 5% of the amount of any such
overdue payment.  All interest provided
for in this §2.2(e) shall be payable on demand.  The payment or acceptance of the rate provided
by this §2.2(e) or any such late charge shall not constitute a
waiver of any Default or Event of Default or an amendment to this Agreement or
otherwise prejudice or limit any rights or remedies of the Lender.

 

(f)            In
no event shall the amount of interest due or payable under the Loan, the Note
or any of the other Loan Documents, exceed the Highest Lawful Rate, and in the
event any such excess is paid by the Borrower or received by the Lender, then
such excess sum shall be deemed to be inadvertently paid or received and shall
be credited as a payment of principal, unless the Borrower shall notify the
Lender that the Borrower elects to have such excess returned to it
forthwith.  It is the express intent
hereof that the Borrower not pay and the Lender not receive, directly or
indirectly, in any manner whatsoever, interest in excess of that which may be
lawfully paid by the Borrower under applicable Law.

 

(g)           The
books and records of the Lender shall, absent demonstrable error, be conclusive
as to the outstanding amount of the Loan, all interest accrued thereon and all
other amounts owed by the Borrower hereunder.

 

§2.3        Prepayments.

 

(a)           Voluntary
Prepayments.  At any time subsequent
to the Advance Termination Date, the Borrower shall have the right to prepay the
Loan in whole or in part, together with accrued interest, provided
that such prepayment shall be accompanied by payment of the applicable
Prepayment Premium, and provided further that
the Borrower shall give the Lender notice of its intent to prepay the Loan or a
portion thereof not later than 2:00 p.m. on the date that is three
Business Days prior to the date of prepayment (which prepayment date must be a
date upon which a principal installment payment is due under the Note).  Such notice shall be irrevocable; once given,
the principal amount of the Loan designated in the Borrower’s notice shall
become due and payable on the prepayment date specified therein.

 

(b)           Mandatory
Prepayments.  The Borrower shall be
required to prepay the principal balance of the Note, subject to the
limitations set forth below in the “provided” clause, 

 

14

 

together with all accrued
interest and any other amounts then owing and constituting Obligations
(including the applicable Prepayment Premium), (i) without derogating in
any way from §7.16, in an amount equal to 100% of the net proceeds
received by the Borrower from the sale or other transfer of legal, equitable or
beneficial title of one or more Vessels or (ii) in an amount equal to 100%
of the proceeds of an Event of Loss sufficient to prepay in whole the Note on a
date that is not earlier than the date the insurance proceeds are received by
the Borrower upon the occurrence of an Event of Loss with respect to any
Vessel, provided that (A) if the Borrower
receives proceeds as a result of any of the events described in clauses (i) and
(ii) with respect to DBL 28 only the Borrower shall be required to prepay
only an amount equal to 20.59% of the then
outstanding principal balance of the Loan, (B) if the Borrower receives
proceeds as a result of any of the events described in clauses (i) and (ii) with
respect to the DBL 29 only the Borrower shall be required to prepay only an
amount equal to 20.59% of the then
outstanding principal balance of the Loan, and (C) if the Borrower
receives proceeds as a result of any of the events described in clauses (i) and
(ii) with respect to the DBL 78 only, the
Borrower shall be required to prepay only an amount equal to 58.82% of the then
outstanding principal balance of the Loan.

 

§2.4        Payments
Generally.

 

(a)           All
payments hereunder shall be made in Dollars and in immediately available funds
and shall be made prior to 2:00 p.m. on the date of payment to the
principal office of the Lender or such other office as the Lender shall
designate in writing.  Payments received
after 2:00 p.m. shall be deemed to be payments made prior to 2:00 p.m.
on the next succeeding Business Day. 
Interest on the Loan and fees due and payable hereunder and under the
Note or any of the other Loan Documents shall be computed on the basis of the
actual number of days elapsed over twelve (12) thirty (30) day months,
including the first day but excluding the last day of the relevant period.  Any payment which falls due on a day which is
not a Business Day shall be rescheduled to the next succeeding Business Day and
interest and fees shall continue to accrue to such rescheduled Business
Day.  The Borrower hereby irrevocably
authorizes the Lender to charge any and all of the Borrower’s accounts with the
Lender for the amount of each such payment (the Lender agreeing to give notice
to the Borrower contemporaneously thereof), with the Borrower remaining liable
for any deficiency.

 

(b)           The
Borrower agrees to pay principal, interest, fees and all other amounts due
hereunder or under the Note or under any other Loan Document without setoff,
recoupment or counterclaim.  All amounts
received by the Lender for application to the Obligations (whether voluntary or
mandatory payments or prepayments, proceeds from liquidation of Collateral, or
otherwise) shall be applied by the Lender in the following order of priority: (i) to
the payment of any fees then due and payable, (ii) to the payments of all
other amounts not otherwise referred to in this §2.4 then due and
payable hereunder or under the other Loan Documents (including any reasonable
costs and expenses incurred by the Lender as a result of a Default or an Event
of Default), (iii) to the payment of interest then due and payable on the
Loan, and (iv) to the payment of principal then due and payable on the
Loan, to be applied in the inverse order of maturity.  No application of payments will cure any
Event of Default or prevent acceleration, or 

 

15

 

continued acceleration,
of amounts payable under the Loan Documents or prevent the exercise, or
continued exercise, of rights and remedies of the Lender hereunder, under any
of the other Loan Documents or under applicable Law.

 

§2.5        Increased
Costs and Reduced Return.  The
Borrower agrees that if any Governmental Authority enacts or promulgates after
the date hereof any Law, or any
request, guideline or directive (whether or not having the force of law and
whether or not failure to comply therewith would be unlawful) or any change in
the interpretation or administration of any existing Law by any Governmental
Authority charged with the administration thereof, which shall either (a) impose,
affect, modify or deem applicable any reserve, special deposit, capital
maintenance or similar requirement against the Loan, or (b) impose on the
Lender any other condition regarding the Loan, this Agreement, or the Note, or (c) result
in any requirement regarding capital adequacy (including any risk-based capital
guidelines) affecting the Lender being imposed or modified or deemed applicable
to the Lender and the result of any event referred to in clause (a), (b) or
(c) above shall be to increase the cost to the Lender of making, funding
or maintaining the Loan or to reduce the amount of any sum receivable by the
Lender or the Lender’s rate of return on capital with respect to the Loan to a
level below that which the Lender could have achieved but for such imposition,
modification or deemed applicability (taking into consideration the Lender’s
policies with respect to capital adequacy) by an amount deemed by the Lender
(in the exercise of its reasonable discretion) to be material, then, upon
demand by the Lender in writing, the Borrower shall pay to the Lender, within
ten (10) Business Days after receipt of the Lender’s written demand and
the statement described in the following sentence, additional amounts which
shall be sufficient to compensate the Lender for such increased cost or reduced
rate of return, provided that the Borrower shall have no obligation to pay any
such amount (x) to the extent that such increased cost or reduction in rate of
return on capital is a result of any one or more of the following: (1) the
Lender’s transfer of its interest in the Loan and the Note to another lending
office, (2) circumstances applicable to the Lender but not of general
application to other similar lenders, (3) a downgrade in the credit rating
accorded the Lender (or an Affiliate of the Lender) by any credit rating
agency, or (4) the Lender’s unreasonably treating the Loan less favorably
than other similarly situated loans in the Lender’s loan portfolio, or (y)
except after an Event of Default shall have occurred, in the case of any Person
that becomes a Lender after the date hereof, to the extent that the amount of
the increased cost or reduction in rate of return on capital exceeds the amount
of the increased cost or reduction in rate of return on capital that would have
been suffered by the Initial Lender if the Initial Lender owned such Person’s
interest in the Loan.  In the absence of
manifest error, a statement setting forth the basis for requesting such
compensation and the method for, and reasonable calculations for, determining
the amount thereof, submitted by the Lender to the Borrower, shall be final,
conclusive and binding on all parties for all purposes.

 

§2.6        Payments
Free and Clear of Taxes.

 

(a)           Except
as provided in the following sentence, payments of principal, interest, fees
and other amounts under this Agreement, the Note or any other Loan Document or
otherwise paid or payable to the Lender (as used in this §2.6, “Payments”)
shall be made free and 

 

16

 

clear of, and without
deduction by reason of, Indemnified Taxes, all of which shall be paid by the
Borrower for its own account not later than the date when due.  If the Borrower is required by law or
regulation to deduct or withhold any Taxes from any Payment, it shall: (i) make
such deduction or withholding; (ii) pay the amount so deducted or withheld
to the appropriate taxing authority not later than the date when due; (iii) deliver
to the Lender, promptly and in any event within 15 days after the date on which
such Taxes become due, original tax receipts (if reasonably obtainable) or
other evidence satisfactory to the Lender of the payment when due of the full
amount of such Taxes; and (iv) pay to the Lender forthwith upon request
from time to time, such additional amounts as may be necessary so the Lender
receives, free and clear of all Taxes (other than Excluded Taxes), the full
amount of such Payment stated to be due under this Agreement, the Note or any
other Loan Document as if no such deduction or withholding had been made.

 

(b)           The
Borrower agrees to indemnify the Lender for the full amount of Indemnified
Taxes paid by the Lender and any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto within ten Business Days
after receipt of the Lender’s written demand therefore (which written demand
shall include or be accompanied by (x) a description in reasonable detail of
the Indemnified Tax involved and the calculation of the amount of indemnity
demanded and (y) a copy of each written communication which the Lender received
from any Governmental Authority or other taxing authority with respect to such
Indemnified Tax.

 

(c)           If
the Borrower pays any Indemnified Tax to any Governmental Authority or other
taxing authority, or pays any amount to the Lender pursuant to §§2.6(a)(iv) or
2.6(b) with respect to any Tax:

 

(i)            the
Borrower shall be subrogated to the rights of the Lender with respect to such
Tax, and the Lender shall take such action as the Borrower may reasonably
request to enable the Borrower to exercise those rights; and

 

(ii)           to
the extent that the Lender receives a refund of such Tax, the Lender shall pay
the amount of such refund to the Borrower within thirty (30) days after receipt
thereof.

 

(d)           Notwithstanding
any provision to the contrary in the Loan Documents, the Borrower shall have no
obligation to pay, or to indemnify the Lender for, any Tax pursuant to this §2.6
to the extent that such Tax has been taken into account in the calculation of
any amount paid or payable by the Borrower to the Lender pursuant to §2.5
or §10.

 

(e)           The
Borrower’s deduction or withholding from any Payment any withholding tax that
is an Excluded Tax and the Borrower’s payment of such Payment reduced by such
withholding tax in accordance with this §2.6 shall not be a Default or
an Event of Default.

 

(f)            If
the Lender receives a written claim from any Governmental Authority or other
taxing authority for any Indemnified Tax, the Lender shall send a copy of such
written 

 

17

 

claim to the Borrower promptly
after receipt thereof.  If requested by
the Borrower and the Borrower acknowledges, in writing, that such Tax is an
Indemnified Tax, the Lender shall contest (or permit the Borrower to contest)
such claim in accordance with applicable Law (including appealing any adverse
determination) and shall not concede, settle, compromise or discontinue such
contest without the Borrower’s prior written consent (which shall not be
unreasonably withheld), and the Borrower shall pay the reasonable expenses
incurred by the Lender in connection with such contest.

 

§2.7        Mitigation
Obligations  If the Lender
requests compensation under §2.5 hereof or if the Borrower is required
to pay any additional amount to any Lender (or to any Governmental Authority
for account of any Lender) pursuant to §2.6 hereof or if a change in Law
after the date hereof gives rise to a reasonable expectation that such a
request or requirement would (but for §2.7) occur, then (if reasonably
practicable) the Lender shall use reasonable efforts to designate a different
lending office for funding or booking the Loan or to assign its rights and
obligations hereunder to another of its offices, branches or Affiliates, if
such designation or assignment (i) would eliminate or reduce amounts
payable pursuant to §2.5 or §2.6 hereof, as the case may be, in
the future, and (ii) would not subject the Lender to any unreimbursed cost
or expense and would not otherwise be disadvantageous to such Lender.  The Borrower agrees to pay the reasonable
costs and expenses incurred by the Lender in connection with any such
designation or assignment.

 

If the Lender requests compensation under §2.5
hereof, or if the Borrower is required to pay any additional amount to the
Lender (or to any Governmental Authority for account of the Lender) pursuant to
§2.6 hereof, or if a change in Law after the date hereof gives rise to a
reasonable expectation that such a request or requirement would (but for this §2.7)
occur, or if the Lender defaults in its obligation to fund Advances hereunder,
then the Borrower may, at its sole expense, upon notice to the Lender, prepay
the Loan in whole, subject to the requirements of §2.3(a) hereof
other than the requirement to pay the applicable Prepayment Premium, provided, that the Lender shall have received payment of an
amount equal to the outstanding principal of its Loan, accrued interest
thereon, accrued fees and all other amounts payable to it hereunder, from the
Borrower.  The Borrower shall not be permitted
to make any such prepayment free of an otherwise applicable Prepayment Premium
under this §2.7 if, prior thereto, as a result of a waiver by such
Lender or otherwise, the circumstances entitling the Borrower to make such
prepayment under this paragraph cease to apply.

 

SECTION 3.                            REPRESENTATIONS
AND WARRANTIES

 

To induce the Lender to enter into this Agreement and
to make the Loan hereunder, the Borrower represents and warrants to the Lender
that:

 

§3.1        Legal
Existence and Good Standing, Etc.

 

(a)           The
Borrower is a limited partnership validly formed and existing under the laws of
the State of Delaware and has all requisite limited partnership or other power
to own 

 

18

 

the Vessels, its other
property and conduct its business substantially as presently conducted by it
and as proposed to be conducted by it.

 

(b)           The
Borrower maintains its chief executive office and principal place of business
at 3245 Richmond Terrace, Staten Island, New York 10303, at which place
its principal books and records are kept.

 

(c)           The
Borrower is qualified to do business and is in good standing in all
jurisdictions in which a failure to be so qualified and in good standing might
have a Materially Adverse Effect.

 

§3.2        Limited
Partnership Power; Consents; Absence of Conflict with Other Agreements Etc.
 The execution, delivery and performance of the Loan Documents by the
Borrower and the borrowings and transactions contemplated thereby:

 

(a)           are
within the Borrower’s powers as a limited partnership, and have been duly authorized
by all necessary limited partnership action of the Borrower and its general
partner;

 

(b)           do
not require any approval or consent of, or filing with, any Governmental
Authority bearing on the validity of such instruments and borrowings which is
required by any Law and are not in contravention of Law or the terms of the
Borrower’s partnership agreement or other organizational document, or any
amendment of any thereof;

 

(c)           will
not violate or result in any breach or contravention of or the creation of any
Lien under (except in favor of the Lender) any indenture, agreement, lease,
instrument or undertaking to which the Borrower is a party or by which it or
any of its properties are bound; and

 

(d)           are
and will be valid and legally binding obligations of the Borrower, enforceable
in accordance with their respective terms, except as such enforcement may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting generally the enforcement of creditors’ rights, and
except to the extent that the availability of equitable remedies with respect
to such obligations may be subject to the discretion of the court before which
any proceedings for such remedies may be brought.

 

§3.3        Title
to Properties.  K-Sea
Transportation and its Subsidiaries own all of their assets reflected in the
balance sheet of K-Sea Transportation and its Subsidiaries as at June 30,
2004, or acquired since that date, subject, in the case of the Vessels, to no
Liens of record on the Collateral except the relevant Mortgage on the DBL 78 at
the National Vessel Documentation Center. 
The Borrower has good and marketable title to all items of Collateral
pledged by it, free and clear of any Liens, except Permitted Liens.  On each Advance Date and thereafter, DBL 78
shall be properly documented as a vessel of the United States in the name of
the Borrower, and on the respective delivery date thereof and thereafter, DBL
28 and DBL 29 shall be properly documented as a vessel of the United States in
the name of the Borrower.

 

19

 

§3.4        Financial
Statements.  The Borrower has
furnished to the Lender a copy of K-Sea Transportation’s and its Subsidiaries
balance sheets as at March 31, 2005 and statements of income and changes
in financial position unaudited for the nine (9) months then ended.  All such financial statements have been
prepared in accordance with GAAP and fairly present the financial condition and
the results of operations of K-Sea Transportation and its Subsidiaries taken as
a whole as at the close of business on the date thereof.  There are no liabilities, contingent or
otherwise, of the Borrower involving material amounts, known to the officers of
the Borrower and not disclosed in said financial statements and the related
notes thereto or not reflected in the financial statements most recently
delivered in connection with §§7.4(a) or (b).

 

§3.5        No
Material Changes Etc.  No
material adverse changes have occurred in the financial condition or business
of K-Sea Transportation and its Subsidiaries taken as a whole as shown on or
reflected in the balance sheets or other financial statements delivered on or
before the date hereof or in the balance sheets or other financial statements
most recently delivered in connection with §§7.4(a) or (b).

 

§3.6        Franchises,
Patents, Copyrights, Licenses, Etc. 
The Borrower possesses franchises, patents, copyrights, trademarks,
trade names, licenses and permits, and rights in respect of the foregoing
adequate for the conduct of its business as now conducted without any known
conflict with any rights of others.

 

§3.7        Litigation.  There are no actions, suits, proceedings or
investigations of any kind pending or, to the best knowledge of the Borrower,
threatened against the Borrower before any court, tribunal or administrative
agency or board which, if adversely determined, might reasonably be expected
to, either in any case or in the aggregate have a Materially Adverse Effect or
result in any liability not adequately covered by insurance.

 

§3.8        No
Materially Adverse Contracts, Etc. 
The Borrower is not subject to any charter, limited partnership or other
legal restriction, or any judgment, decree, order, rule or regulation
which in the judgment of its officers has or is reasonably expected in the
future to have a Materially Adverse Effect. 
The Borrower is not a party to any contract or agreement which in the
judgment of its officers has or is reasonably expected to have any Materially
Adverse Effect, except as otherwise reflected in adequate reserves.

 

§3.9        Compliance
with Other Instruments, Laws, Etc. The Borrower is not in violation of
any provision of its charter documents or its partnership agreement or any
agreement, lease or other instrument by which it or any of its properties may
be bound, or any Law, decree, order, judgment, statute, license, rule or
regulation, in a manner which could reasonably be expected to result in the
imposition of substantial penalties or otherwise have a Materially Adversely
Effect.  There are no past or present
events, conditions, circumstances, activities, practices, incidents, actions or
plans known to the Borrower which reasonably could be expected to interfere
with or prevent continued compliance, or which reasonably could be expected to
give rise to any common law or statutory liability, under, relating to or in
connection with any Environmental Law or otherwise form the basis of any claim,
action, proceeding, hearing or investigation under applicable Law based on or
related to the manufacture, 

 

20

 

processing, distribution,
use, treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment, of any
pollutant, contaminant, or Hazardous Material or waste with respect to the
Borrower or its business which could reasonably be expected to have a
Materially Adverse Effect.

 

§3.10      Tax
Status.  The Borrower has filed
all material federal and state income and all other material tax returns,
reports and declarations which the Borrower is required by any applicable Law
of any jurisdiction to which it is subject or has obtained an extension for
filing such returns, reports and declarations which is still in effect; has
paid all taxes and other governmental assessments and charges shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith by appropriate proceedings diligently pursued;
and has set aside on its books provisions reasonably adequate for the payment
of all material taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. There are no material unpaid taxes
claimed to be due by the taxing authority of any jurisdiction, and the officers
of the Borrower know of no basis for any such claim.

 

§3.11      No
Default.  No Default or Event of
Default exists at the delivery of this Agreement.

 

§3.12      Absence
of Liens. At the time of the making of each Advance hereunder, there
will be no financing statement, security agreement or ship mortgage granted or
agreed to by the Borrower in effect which purports to cover, create, perfect or
give notice of any present or possible future Lien on the Vessel being financed
with such Advance or rights thereunder, or any other Liens thereon or on any of
the other Collateral, except for Permitted Liens and Liens in favor of the
Lender.

 

§3.13      Use
of Proceeds.  The proceeds of the
Loan shall be used as specified in §2.1(b).  No portion of the Loan is to be used for the
purpose of purchasing or carrying any “margin security” or “margin stock” in
contravention of Regulations U or X of the Board of Governors of the Federal
Reserve System, and the Borrower is not engaged in the business of extending
credit to others for such purpose.

 

§3.14      Pension
Plans.  Neither the Borrower nor
any other member of any Controlled Group that includes the Borrower maintains
or pays contributions to, or is required to pay contributions to, any Plan.

 

The Lender (i) represents and warrants to the Borrower
that none of the funds to be used by the Lender to make or maintain the Loan or
to acquire or hold the Note are or will be “assets” (as defined in the
regulations to Section 406 of ERISA) of an “employee benefit plan” (as
defined in Section 3(3) of ERISA) or of a “plan” (as defined in Section 4975(e)(1) of
the Code), and (ii) covenants that (notwithstanding anything herein or in
any other Loan Document to the contrary) the Lender will not sell, transfer,
assign, or grant a participation in, any part of its interest in the Loan, this
Agreement or the Note to any other Person unless such Person (A) makes (1) a
representation and warranty that is equivalent to the representation and
warranty contained in clause (i) and (2) the covenant contained in
this clause (ii), and (B) agrees to be 

 

21

 

bound by all of the provisions hereof and of all the
other Loan Documents applicable to the Lender.

 

§3.15      Holding
Company and Investment Company. 
The Borrower is not a “holding company” or a “subsidiary company” of a “holding
company” or an “affiliate” of a “holding company”, as such terms are defined in
the Public Utility Holding Company Act of 1935; nor is it a “registered
investment company” or an “affiliated company or a “principal underwriter” of a
“registered investment company”, as such terms are defined in the Investment
Company Act of 1940, as amended.

 

§3.16      Disclosure.  This Agreement and all certificates and
written statements furnished by or on behalf of the Borrower to the Lender in
connection herewith (all of which shall constitute representations and
warranties made by the Borrower hereunder) do not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements contained herein and therein not misleading.  There is no fact known to the Borrower which
has or is expected to have a Materially Adverse Effect, except as has been
disclosed previously to the Lender in writing.

 

§3.17      [Intentionally
Omitted]

 

§3.18      First
Lien.

 

(a)           Upon
filing the Financing Statements with the Delaware Secretary of State, the
Security Agreement will create a legal, valid and perfected first lien on and
first priority security interest in all of the Collateral (to the extent a lien
is perfectable by filing with the Delaware Secretary of State respecting any
item of Collateral) described therein (and any Proceeds thereof), as security
for the Obligations, free and clear of all other Liens whatsoever except
Permitted Liens.  No security agreement,
financing statement, equivalent security or lien instrument or continuation
statement covering all or any part of the Collateral, which has been signed by
the Borrower or which the Borrower has authorized any other Person to sign or file
or record, is on file or of record with any public office except in favor of
the Lender.

 

(b)           Upon
execution and filing for recording thereof with the Coast Guard, each Ship
Mortgage will create legal, valid and perfected first liens on and first priority
security interests in favor of the Lender with respect to all Collateral
described therein as security for the Obligations, free and clear of all other
Liens whatsoever other than Permitted Liens. 
No mortgage, pledge, security agreement, financing statement, equivalent
security or lien instrument or continuation statement covering all or any part
of the Collateral, which has been signed by the Borrower or any
predecessor-in-interest of the Borrower or which the Borrower has authorized
any other Person to sign or file or record, is on file or of record with the
Coast Guard or with any other public office except in favor of the Lender.

 

22

 

§3.19      Environmental
Matters.

 

(a)           The
Borrower and each of its Subsidiaries has obtained all material permits,
licenses and other authorizations which are required under all Environmental
Laws, except to the extent failure to have any such permit, license or
authorization would not have a Materially Adverse Effect.  The Borrower and each of its Subsidiaries is in compliance in all material respects with the terms
and conditions of all such permits, licenses and authorizations, and are also
in compliance in all material respects with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in any applicable Environmental Law or in
any regulation, code, plan, order, decree, judgment, injunction, notice or
demand letter issued, entered, promulgated or approved thereunder, except to
the extent failure to comply would not have a Materially Adverse Effect on
their business, financial condition or operations taken as a whole.

 

(b)           No
notice, notification, demand, request for information, citation, summons or
order has been issued, no complaint has been filed, no premium has been
assessed and no investigation or review is pending or, to the knowledge of the
Borrower without any independent verification, threatened by any governmental
or other entity with respect to any alleged failure by the Borrower or any of
its Subsidiaries to have any permit, license or authorization required in
connection with the conduct of its business or with respect to any
Environmental Laws, including Environmental Laws relating to the generation,
treatment, storage, recycling, transportation, disposal or release of any
Hazardous Materials.

 

(c)           Except
as set forth in the “Legal Proceedings” section of K-Sea Transportation’s
most recent Form 10-Q filed with the Securities and Exchange Commission,
no material oral or written notification of a release of a Hazardous Material
has been filed by or on behalf of the Borrower or any of its Subsidiaries and
no property now or previously owned, leased or used by the Borrower or any of
its Subsidiaries is listed or, to the Borrower’s knowledge without any
independent verification, proposed for listing on the National Priorities List
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, or on any similar state list of sites requiring
investigation or clean-up.

 

(d)           There
are no Liens or encumbrances arising under or pursuant to any Environmental
Laws on any of the real property or properties owned, leased or used by the
Borrower or any of its Subsidiaries other than Liens, if any, that do not (i) materially
detract from the value of the property or (ii) materially impair the use
thereof in the operation of the business of the Borrower or any of its
Subsidiaries or (iii) have a Materially Adverse Effect on the ability of
the Borrower or any of its Subsidiaries taken as a whole to perform its
obligations under the Loan Documents, and no governmental actions have been
taken or, to the knowledge of the Borrower without any independent
verification, are in process which might reasonably be expected to subject any
of such properties to such Liens or encumbrances or, as a result of which the
Borrower or any of its Subsidiaries would be required to place any notice or
restriction relating to the presence of Hazardous Materials at any property
owned by it in any deed to such property.

 

23

 

(e)           Neither
the Borrower nor any of its Subsidiaries, nor, to the knowledge of the Borrower
without any independent verification, any previous owner, tenant, occupant or
user of any property owned, leased or used by the Borrower or any of its
Subsidiaries has (i) engaged in or permitted any operations or activities
upon or any use or occupancy of such property, or any portion thereof, for the
purpose of or in any way involving the handling, manufacture, treatment,
storage, use, generation, release, discharge, refining, dumping or disposal of
any Hazardous Materials on, under, in or about such property, except in
compliance in all material respects with all Environmental Laws, or (ii) transported
any Hazardous Materials to, from or across such property except in compliance
in all material respects with all Environmental Laws; nor to the best knowledge
of the Borrower have any Hazardous Materials migrated from the properties upon,
about or beneath such property, nor, to the best knowledge of the Borrower, are
any Hazardous Materials presently constructed, deposited, stored or otherwise
located on, under, in or about such property except in compliance in all
material respects with all Environmental Laws.

 

§3.20      Solvency.  The Borrower, after giving effect to the
Loan, is solvent.

 

§3.21      Survival
of Representations and Warranties, Etc. All statements contained in any
certificate, financial statement or other instrument delivered by or on behalf
of the Borrower pursuant to or in connection with this Agreement or any of the
Loan Documents (including any such representation or warranty made or in
connection with any amendment thereto) shall constitute representations and
warranties made under this Agreement. 
All representations and warranties made under this Agreement shall be
deemed to be made at and as of the date hereof and as of the date of the making
of each Advance of the Loan.  All representations
and warranties made under this Agreement shall survive, and not be waived by,
the execution and delivery of this Agreement or any other Loan Document, any
investigation or inquiry by the Lender, or by making the Loan under this
Agreement.

 

SECTION 4.                            CONDITIONS
OF FUNDING THE FIRST ADVANCE.

 

The obligation of the Lender to fund the first Advance
of the Loan shall be subject to the prior satisfaction of the following
conditions precedent.  The request by the
Borrower for such Advance shall be deemed a certification by the Borrower that
the conditions precedent set forth in this §4 have been satisfied or
will be satisfied on such Advance date:

 

§4.1        Execution
and Delivery.  All of the Loan
Documents (other than the Ship Mortgages) shall have been executed and
delivered by the Borrower to the Lender.

 

§4.2        Representations
and Warranties.  The
representations and warranties contained in §3 shall have been true and
correct at and as of the date on which made and shall also be true and correct
at and as of the Advance Date with the same effect as if made at and as of such
date.

 

§4.3        Performance;
No Default.  The Borrower shall
have performed and complied with all terms and conditions of the Loan Documents
required to be performed or complied with by it prior to or at the time of the
Advance Date, and at the time of the Advance Date, there shall 

 

24

 

exist no Default or Event
of Default, nor shall any Default or Event of Default exist or occur after
giving effect to the funding of the first Advance of the Loan.

 

§4.4        Certified
Copies of Charter Documents.  The
Lender shall have received from the Borrower, copies, certified by an
Authorized Officer to be true and complete as of the Advance Date, of its
partnership agreement, or other organizational document, all as in effect on
such date.

 

§4.5        Proof
of Partnership or General Partner Action.  The Lender shall have received from the
Borrower copies, certified by an Authorized Officer to be true and complete as
of the first Advance Date, of the records of all partnership actions taken to
authorize: (a) its execution and delivery of the Loan Documents (b) its
performance of all of its agreements and obligations under each of such
documents, and (c) the borrowings and other transactions contemplated by
this Agreement.

 

§4.6        Incumbency
Certificate.  The Lender shall
have received from the Borrower an incumbency certificate, dated as of the
first Advance Date and signed by an Authorized Officer, giving the name and bearing
a specimen signature of each individual who shall be authorized: (i) to
sign the Loan Documents, in its name and on its behalf, (ii) to make
application for the Loan, and (iii) to give notices and to take other
action on its behalf under this Agreement.

 

§4.7        No
Material Adverse Effect.  No
event or change shall have occurred, in the sole judgment of the Lender that
has caused or evidences a Material Adverse Effect.

 

§4.8        Delivery
of Notice of Borrowing.   A
Notice of Borrowing (including the Authorization/Acceptance Certificate
appended thereto) for such Advance shall have been duly completed by the
Borrower and submitted to the Lender in accordance with §2.1.

 

§4.9        Opinion
of Counsel.  The Lender shall
have received on the first Advance Date from Holland & Knight LLP,
counsel for the Borrower, a favorable opinion addressed to the Lender and dated
such first Advance Date, in form and substance satisfactory to the Lender and
its counsel.

 

§4.10      Proceedings
and Documents.  All proceedings
in connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in substance and in
form to the Lender and its counsel, and the Lender and such counsel shall have
received all information and such counterpart originals or certified or other
copies of such documents as the Lender or such counsel may reasonably request.

 

§4.11      Recorded
Lien Searches.  The Lender shall
have received: (a) UCC search reports with respect to the records of the (i) Delaware
Secretary of State office, (ii) New York Secretary of State office, and (iii) Richmond
County office, and copies of executed Form UCC-3 Financing Statement
Amendments for all financing statements on record against the Borrower and that
otherwise would cover any of the Collateral, together with evidence of the
filing thereof, and (b) a U.S. Coast Guard Abstract of Title verifying
that there are no outstanding ship 

 

25

 

mortgages recorded with
the Coast Guard covering any of the Collateral or any other assets or rights
associated therewith.

 

§4.12      Financing
Statements.  The Lender shall
have received satisfactory evidence that the Financing Statements have been
duly filed with the office of the Secretary of State of Delaware and any other
filing locations required hereunder to create and perfect a first priority Lien
on all of the Collateral to the extent the Borrower has rights in the
Collateral as of such date.

 

§4.13      Evidence
of Insurance. The Lender shall have received certificates of insurance
covering the DBL 78 demonstrating compliance with the insurance requirements of
the Ship Mortgage covering such vessel and evidence Bollinger has insurance on
DBL 28 and DBL 29 that conforms to the Vessel Construction Agreement.

 

§4.14      Delivery of Invoices.  The Lender shall have received copies of all
vessel construction invoices and evidence of payment thereof with respect to
the Vessel(s) that are the subject of the Advance.

 

§4.15      Licenses,
Permits and Consent.  The Borrower
or Bollinger shall have obtained all licenses, permits and consents (including
from Governmental Authorities) required in connection with the construction of
DBL 28 and DBL 29 to the extent appropriately issued as of such date.

 

§4.16      Construction
Contract.  The Borrower shall
have furnished in form and substance satisfactory to the Lender an executed
copy of the Vessel Construction Agreement for DBL 28 and DBL 29.

 

§4.17      [Intentionally
Omitted].

 

§4.18      Lien
Waivers. 
The Borrower shall have obtained and attached to each application for an
Advance, including the Advance to cover final payment to Bollinger under the
Vessel Construction Agreement, executed lien certificates substantially in the
form of Exhibit F hereto (“Lien Certificates”), together with
acknowledgments of payments of all sums due and releases of laborer’s, mechanic’s
and materialmen’s liens, satisfactory to the Lender, from Bollinger respecting
it and any subcontractors and any other party having lien rights, which
acknowledgments of payment and releases of liens shall cover all work, labor,
equipment, materials done, supplied, performed, or furnished prior to such
application for an Advance.

 

SECTION 5.                            CONDITIONS
OF INTERIM ADVANCES

 

The conditions precedent set forth in §§4.2, 4.3,
4.7, 4.8, 4.10, 4.14, and 4.18 shall be
requirements for the first Advance and each subsequent Advance.  The conditions precedent set forth in §§4.1,
4.4,  4.5, 4.6, 4.9, 4.11, 4.12, 4.13,
4.15 and 4.16 shall be requirements of the first Advance only, provided that such conditions must remain satisfied
throughout the term of the Loan.  The
request by the Borrower for any such Advance shall be deemed a certification by
the 

 

26

 

Borrower that the applicable conditions precedent set
forth in this Section 5 have been satisfied or will be satisfied on such
Advance Date.

 

SECTION 6.                            CONDITIONS
OF FINAL ADVANCES OF THE LOAN

 

The Advances to be made to fund the final construction
payment to Bollinger with respect to DBL 28 and DBL 29, and the Advance to be
made to the Borrower to finance the purchase of DBL 78, shall be subject to the
additional conditions precedent set forth below (in each case as to the Vessel
that is the subject of such Advance). 
The request by the Borrower for any such Advance shall be deemed a
certification by the Borrower that the conditions precedent set forth in this Section 6
have been satisfied or will be satisfied on such Advance Date.

 

§6.1        Vessel
Documentation.  The Lender shall
have received or verified all of the following with respect to the applicable
Vessel:

 

(a)           The
Borrower shall have executed and delivered the Note in accordance with §2.1.

 

(b)           Evidence
satisfactory to the Lender that all work on the Vessel requiring inspection by
any Governmental Authority has been duly inspected and approved by such
authority, and that all parties performing work have been paid, or will be
paid, for such work;

 

(c)           Intentionally
omitted;

 

(d)           If
requested by Agent, a desktop appraisal of recent date, prepared and certified
by a qualified marine appraiser certifying the fair market value of the Vessel
as completed;

 

(e)           Acceptance
of the completed Vessel by the Borrower, as reflected by a completed Protocol
of Delivery and Acceptance;

 

(f)            That
the Borrower has received a final bill of sale or builder’s certificate,
application for documentation, and such Vessel has been documented as a United
States vessel with the United States Coast Guard and such vessel’s Certificate
of Documentation endorsed for the coastwise trade;

 

(g)           The
Borrower shall have executed and filed a Ship Mortgage with respect to the
Vessel, sufficient to grant to the Lender a first priority preferred ship
mortgage on the Vessel with the National Vessel Documentation Center;

 

(h)           Evidence
that the Borrower has obtained all insurance and protection and indemnity
coverages as are required under the Ship Mortgage with respect to the Vessel;

 

27

 

(i)            An
opinion letter of counsel to the Borrower with respect to the due execution and
delivery of the Ship Mortgage with respect to the Vessel and the first lien
priority of such mortgage; and

 

(j)            Evidence
satisfactory to the Lender that all licenses have been obtained by the Borrower
and are in full force and effect to operate the Vessel according to its
intended use, and that all advisable American Bureau of Shipping (ABS)
certifications have been obtained.

 

SECTION 7.                            AFFIRMATIVE
COVENANTS.

 

The Borrower covenants and agrees that so long as the
Loan remains outstanding and unpaid:

 

§7.1        Punctual
Payment.  The Borrower shall duly
and punctually pay or cause to be paid the installment payments of principal
and interest on the Loan, and any other amounts at any time owing hereunder or
under the Note or other Loan Documents, all in accordance with the terms of
this Agreement, the Note, and the other Loan Documents.

 

§7.2        Maintenance
of Offices.  The Borrower shall
maintain a place of business at the location specified in §13, or at
such other place in the United States of America as it shall designate upon
written notice, addressed as provided in §13, to the Lender where
notices, presentations and demands to or upon the Borrower in respect of the
Loan Documents may be given or made.

 

§7.3        Records
and Accounts.  The Borrower shall
keep true records and books of account in which full, true and correct entries
shall be made in accordance with GAAP and maintain adequate accounts and
reserves for all Taxes, all depreciation, depletion, obsolescence and amortization
of their properties, all contingencies, and all other reserves.

 

§7.4        Financial
Statements, Certificates, and Other Information.  If requested by Lender, the Borrower shall
deliver to the Lender:

 

(a)           As
soon as practicable and, in any event, within (i) 120 days after the end
of each fiscal year, consolidated balance sheets of K-Sea Transportation and
its Subsidiaries as at the end of such fiscal year, and consolidated statements
of income, cash flow and members’ equity, each for the fiscal year then ended
and each setting forth in comparative form the figures for the previous fiscal
year, all in reasonable detail and prepared in accordance with GAAP, and a
report and opinion of the Borrower’s independent accountants, which report and
opinion shall have been prepared in accordance with GAAP;

 

(b)           As
soon as practicable and, in any event, within 60 days after the end of each of
the first three quarters during each fiscal year of the Borrower, an unaudited
consolidated balance sheet of K-Sea Transportation and its Subsidiaries as at
the end of such quarter, and consolidated statement of income, cash flow and
members’ equity, each for the portion of the fiscal year then ended, each in
reasonable detail and prepared in accordance with GAAP (subject 

 

28

 

to year-end adjustments),
certified to the Lender by the chief financial officer or other financial
officer of such entity;

 

(c)           Promptly
upon receipt thereof, copies of all management letters and other reports of
substance which are submitted to the Borrower by its independent accountants in
connection with any annual or interim audit of the books of the Borrower made
by such accountants;

 

(d)           As
soon as practicable and, in any event, within 10 days after the issuance
thereof, copies of such other financial statements and reports as the Borrower
shall send to its partners, members or stockholders, and copies of all regular
and periodic reports which the Borrower may be required to file with the
Securities and Exchange Commission or any similar or corresponding governmental
commission, department or agency substituted therefore, or any similar or
corresponding governmental commission, department, board, bureau, or agency,
federal or state;

 

(e)           With
reasonable promptness, such financial information (including consolidating
financial statements) or other data as the Lender reasonably may request;

 

(f)            Simultaneously with the delivery of the
financial statements referred to in clauses (a) and (b) of this §7.4,
a copy of the certification signed by the principal executive officer and the
principal financial officer of K-Sea Transportation (each a “Certifying
Officer”) as required by Rule 13A-14 under the Securities Exchange Act
of 1934 and a copy of the internal controls disclosure statement by such
Certifying Officer as required by Rule 13A-15 under the Securities
Exchange Act of 1934, each as included in K-Sea Transportation’s Annual Report
on Form 10-K or Quarterly Report on Form 10-Q, for the applicable
fiscal period.

 

Notwithstanding the forgoing, the Lender agrees to
obtain the financial information required above in §§7.4(a), (b),
(c), and (d) via public filings made by K-Sea Transportation
with the Securities and Exchange Commission, so long as such information is
available via such public filings.

 

§7.5        [Intentionally
omitted.]

 

§7.6        Business
and Limited Partnership Existence.  
The Borrower shall (a) keep in full force and effect its limited
partnership existence and all rights, licenses, leases and franchises reasonably
necessary to the conduct of its business, and (b) comply with (i) the
applicable Laws wherever its business is conducted to the extent non-compliance
could reasonably be expected to have a Materially Adverse Effect, (ii) the
provisions of its partnership agreement, or other organizational document, and (iii) all
agreements, and instruments by which it or any of its properties may be bound
and all applicable decrees, orders and judgments to the extent non-compliance
could reasonably be expected to have a Materially Adverse Effect.

 

§7.7        Payment
of Taxes.  The Borrower shall pay
when due all lawful Taxes imposed upon it or upon its income or profit or upon
any property, real, personal or mixed, belonging to 

 

29

 

it, provided
that the Borrower shall not be required to pay any such Tax if the validity
thereof is being contested in good faith by appropriate proceedings and if the
Borrower shall have set aside on its books reasonable reserves with respect to
such Tax.

 

§7.8        Inspection
of Properties and Books.   So
long as the Note is outstanding the Lender or its designated agent or
representatives shall have the right to visit and inspect for any purpose the
Collateral, including the Vessels, to examine the books of account of the
Borrower and any other documents required of the Borrower hereunder or
otherwise reasonably related to the transactions contemplated hereunder (and to
make copies thereof and extracts therefrom), and to discuss the affairs, finances
and accounts of the Borrower with, and to be advised as to the same by, its
officers, all at such reasonable times and intervals as the Lender may
reasonably request.  The costs of any
such examination shall be for the account of the Lender, provided
that following the occurrence and during the continuation of any Default, all
such reasonable costs shall be charged to the Borrower.

 

§7.9        Licenses
and Permits.  If at any time
while the Note is outstanding, any authorization, consent, approval, permit or
license from any Governmental Authority shall become necessary or required in
order that the Borrower may fulfill any of its obligations hereunder, the
Borrower shall promptly take or cause to be taken all steps reasonably
necessary to obtain such authorization, consent, approval, permit or license
and furnish the Lender with evidence thereof.

 

§7.10      Pension
Plans.  With respect to any
period of time during which the Borrower or any other member of a Controlled
Group that includes the Borrower maintains or is required to pay contributions
to a Plan Borrower shall:

 

(a)           Fund,
or cause the Plan sponsor or adopting employer to fund, such Plan as required
by the provisions of Section 302 of ERISA and Section 412 of the Code
except where failure to do so would not result in a material liability to the
Borrower and make, or cause the Plan sponsor or adopting employer to make, all
material contributions to such Plan required pursuant to any applicable
collective bargaining agreement;

 

(b)           Furnish
promptly to the Lender a copy of any notice of termination of such Plan
required to be sent to the Pension Benefit Guaranty Corporation and a copy of
any notice, report or demand sent or received by or with respect to such Plan
pursuant to Sections 4041, 4041A, 4042, 4043, 4062, 4063, 4065, 4066 or 4068 of
ERISA or under subtitle E of Title IV of ERISA;

 

(c)           Furnish
promptly to the Lender a copy of all Forms 5500, Forms 5500-C and/or Forms 5500-R
relating to such Plan, together with all attachments thereto, including any
actuarial statement relating to such Plan required to be submitted under Section 103(d) of
ERISA;

 

(d)           Furnish
the Lender with copies of any request for waiver from the funding standards or
extension of the amortization periods required by Section 303 and 304 of ERISA
or 

 

30

 

Section 412 of the
Code with respect to any Plan no later than the date on which the request is
submitted to the Department of Labor or the Internal Revenue Service, as the
case may be;

 

(e)           Promptly
notify the Lender of any “complete withdrawal”, “partial withdrawal” or “reorganization”
with respect to any Plan as such terms are defined in ERISA; and

 

(f)            With
respect to any Plan, promptly notify the Lender upon the occurrence of any “reportable
event” as defined in Section 4043(c) of ERISA, other than a “reportable
event” for which the provision for 30-day notice to the Pension Benefit
Guaranty Corporation has been waived by regulation.

 

§7.11      Environmental
and Safety Matters.  The Borrower
shall:

 

(a)           Promptly
report to the Lender upon becoming aware thereof (a) the introduction of
any Hazardous Material onto any facility owned or operated by the Borrower if
the introduction thereof reasonably could be expected to have a Materially
Adverse Effect and (b) the initiation of any action, suit, proceeding,
investigation or regulatory action against the Borrower or in connection with
any such facility relating to any Release of Hazardous Materials if such could
reasonably be expected to have a Materially Adverse Effect.

 

(b)           Promptly
deliver to the Lender copies of (a) all reports (other than routine
reports regularly submitted in the ordinary course of business) submitted to
any Governmental Authority by the Borrower in connection with either the presence
of Hazardous Materials at any facility owned or operated by the Borrower or any
other environmental matter relating to such facility, and (b) all reports,
notices, and correspondence transmitted to the Borrower by any Governmental
Authority in connection with either the presence of any Hazardous Materials at
or near any such facility or any other environmental matter relating to such
facility.

 

(c)           Except
for Hazardous Materials that the Borrower uses, transports or stores or that a
lessee or charterer of the Borrower uses, stores or transports in the ordinary
course of its business and in compliance with all applicable Laws and in
accordance with the terms of any applicable lease or charter documents, keep
all of its properties or assets free of Hazardous Materials.  The Borrower shall comply with and use
commercially reasonable efforts to ensure compliance by all tenants and
subtenants with all Environmental Laws and all Laws relating to occupational
safety or health and shall obtain and comply with, and use commercially
reasonable efforts to ensure that all tenants and subtenants obtain and comply
with, any and all approvals, registrations or permits required thereunder.  The Borrower shall conduct and complete all
investigations, studies, sampling and testing, and all remedial, removal, and
other action necessary to clean up and remove all Hazardous Materials, on, from
or affecting any of its properties or assets as required by all applicable
material Laws, except as such laws, ordinances, rules, regulations, orders or
directives may be contested by the Borrower in good faith by appropriate
proceedings and for which adequate reserves have been established in conformity
with GAAP.

 

31

 

(d)           Defend,
indemnify, and hold harmless the Lender and its directors, officers, employees,
affiliates, representatives and agents (each an “Indemnified Party”) from and
against any and all penalties, fines, liabilities, damages, costs, or expenses
of whatever kind or nature asserted against such Indemnified Party (unless
resulting from the gross negligence or willful misconduct of an Indemnified
Party or occurring after the Lender shall have become a mortgagee in-possession
subsequent to an Event of Default), arising out of, or in any way related to: (a) the
Release or threatened Release of any Hazardous Materials on, at or from any
property at any time owned, operated or occupied by the Borrower; (b) any
personal injury (including wrongful death) or property damage (real or personal)
arising out of or related to such Hazardous Materials; (c) any lawsuit
brought or threatened, settlement reached, or government order relating to such
Hazardous Materials, and/or (d) any violation of Laws which are based upon
or in any way related to such Hazardous Materials or to any environmental
matter, including reasonable attorney and consultant fees, investigation and
laboratory fees, court costs, and litigation expenses actually incurred.

 

§7.12      Indemnities,
Etc.

 

(a)           The
Borrower shall indemnify and hold the Indemnified Parties harmless from and
against any and all claims, damages, losses, liabilities, costs, and expenses
(including reasonable legal fees) that may be incurred by or asserted or
awarded against any Indemnified Party, in each case arising out of or in
connection with or by reason of (including in connection with any
investigation, litigation, or proceeding or preparation of defense in
connection therewith) the ownership, operation or other use (whether authorized
or not) of the Vessels, the Loan Documents, any of the transactions
contemplated herein or the actual or proposed use of the proceeds of the Loan,
except to the extent that such claim, damage, loss, liability, cost, or expense
(i) is found in a final, non-appealable judgment by a court of competent
jurisdiction to have resulted from such Indemnified Party’s or such Lender’s
(as a mortgagee-in-possession) gross negligence or willful misconduct or (ii) is
a tax, levy, impost, duty, assessment, fee or other charge imposed by any
Governmental Authority or other taxing authority or a fine, penalty, interest
charge or other additional charge with respect thereto (it being agreed that §2.6
sets forth the Borrower’s obligations with respect to such liabilities, costs
and expenses), or (iii) is an ordinary and usual operating, administrative
or overhead expense of any Lender and is not caused directly by an Event of
Default.  In the case of an
investigation, litigation or other proceeding to which the indemnity in this §7.12
applies, such indemnity shall be effective whether or not such investigation,
litigation or proceeding is brought by the Borrower, its directors,
shareholders or creditors or an Indemnified Party or any other Person or any
Indemnified Party is otherwise is a party thereto and whether or not the
transactions contemplated hereby are consummated.  In respect of any litigation commenced with
respect to this §7.12, (i) the Borrower shall be entitled to
control and direct its defense if an Event of Default shall not have occurred
and be continuing and (ii) the Borrower shall be entitled to participate
with the Lender in the Borrower’s defense if no Event of Default shall have
occurred and be continuing hereunder provided that the Borrower, prior to
commencing its defense or participating in any defense of such litigation
pursuant to the foregoing clauses (i) and (ii), confirms and acknowledges,
in writing, its indemnification obligation with respect to such claim 

 

32

 

under this §7.12.  Notwithstanding the foregoing, the Borrower
shall not be required to indemnify any Indemnified Party for any settlement
reached without the prior consent of the Borrower (which consent shall not be
unreasonably withheld) or for any judgment entered into against an Indemnified
Party if the Borrower shall have not been afforded an opportunity to
participate, at its expense, in the defense of the claim.  The Borrower agrees not to assert any claim
against the Lender, any of its affiliates, or any of its respective directors,
officers, employees, attorneys, agents, and advisers, on any theory of
liability, for special, indirect, consequential, or punitive damages arising
out of or otherwise relating to the Loan Documents, any of the transactions contemplated
herein or the actual or proposed use of the proceeds of the Loan, other than
fraud or intentional misconduct.

 

(b)           Without
prejudice to the survival of any other agreement of the Borrower hereunder, the
agreements and obligations of the Borrower contained in this §7.12 shall
survive the payment in full of the Loan and all other amounts payable under
this Agreement.

 

§7.13      Performance
of Contracts.  The Borrower shall
perform and comply in all material respects with all of its obligations under
any contracts and all other agreements to which it is a party or by which it is
bound relating to the Collateral, and shall use reasonable efforts to cause
each other party thereto to so perform and comply.

 

§7.14      Notice
of Default.  The Borrower shall
promptly upon becoming aware thereof give written notice to the Lender of: (a) the
occurrence of any Default or Event of Default, (b) any litigation or
proceeding affecting the Borrower or any of its properties or assets of which,
if adversely determined, might have a Materially Adverse Effect, and (c) any
dispute between the Borrower and any Governmental Authority that might
materially interfere with its normal business operations.

 

§7.15      Notice
of Material Claims and Litigation. 
The Borrower shall promptly notify the Lender of the commencement of any
claims, actions, suits, proceedings or investigations of any kind pending or
threatened against the Borrower before any Governmental Authority in an amount
in excess of $500,000, if relating to one or all of the Vessels, or which, if
adversely determined, would have a Material Adverse Effect.

 

§7.16      No
Disposition of Collateral.  The
Borrower shall obtain the prior written consent of the Lender (which may be
granted or denied in the Lender’s sole discretion), prior to the sale,
conveyance, transfer, exchange, lease, or on a bareboat basis charter or
disposition by the Borrower of all or any part of the Collateral or the
Borrower’s otherwise relinquishing possession of any of the Collateral.

 

§7.17      Borrower’s
Title; Lender’s Security Interest.

 

(a) The
Borrower shall warrant and defend its good and marketable title to the
Collateral (to the extent the Borrower has rights in such items of Collateral)
and the Lender’s perfected first priority security interest in the Collateral
(to the extent the Borrower has rights in such items of Collateral), against
all claims and demands whatsoever.

 

33

 

(b)           The
Borrower shall, at its expense, take such action (including the obtaining and
recording of waivers) as may be necessary to prevent any third party from
acquiring any right to or interest in the Collateral other than Permitted Liens
(to the extent the Borrower has rights in such items of Collateral), and if at
any time any Person shall claim any such right or interest, the Borrower shall,
at its expense, cause such claim to be waived in writing or otherwise
eliminated to the Lender’s satisfaction within 30 days after such claim shall
have first become known to the Borrower.

 

§7.18      Compliance
with Laws and Regulations.  The
Borrower shall comply with all laws, regulations, directives and orders of any
and all local, state, federal and other governmental agencies and authorities
having jurisdiction over it or its property, non-compliance with which could
reasonably be expected to cause a Materially Adverse Effect.

 

§7.19      Further Assurances.  The Borrower shall promptly, at any time and
from time to time, at its sole expense, execute and deliver to the Lender such
further instruments and documents, (including the execution of a replacement
promissory note due to loss or destruction of the Note), and take such further
action, as the Lender may from time to time reasonably request in order to
carry out to the Lender’s satisfaction of the transactions contemplated by this
Agreement and to establish and protect the rights, interests and remedies
created, or intended to be created, in favor of the Lender, hereby and under
the other Loan Documents, including the execution, delivery, recordation and
filing of financing statements and continuation statements.  The Borrower hereby authorizes the Lender, in
such jurisdictions where such action is authorized by law, to effect any such
recordation or filing of financing statements without the signature of the
Borrower thereon and to file as valid financing statements in the applicable
financing statement records, any financing statement executed in connection
herewith.  The Borrower will pay, or
reimburse the Lender for, any and all reasonable fees, costs and expenses of
whatever kind or nature incurred in connection with the creation, preservation
and protection of the Lender’s security interest in the Collateral, including
all fees and taxes in connection with the recording or filing of instruments and
documents in public offices, payments or discharges of Taxes or Liens upon or
in respect of the Collateral, premiums for insurance required to be obtained
pursuant to the Loan Documents with respect to the Collateral and all other
reasonable fees, costs and expenses in connection with protecting, maintaining
or preserving the Collateral and the Lender’s interests therein, whether
through judicial proceedings or otherwise, or in connection with defending or
prosecuting any actions, suits or proceedings arising out of or related to the
Collateral; and all such reasonable amounts that are paid by the Lender shall,
until reimbursed by the Borrower, constitute Obligations of the Borrower
secured by the Collateral.

 

§7.20      Casualty
Occurrence.  In the event of any
material (involving damages to any party thereto in excess of $500,000)
casualty with respect to any Collateral or Vessel, the Borrower shall give the
Lender written notice of such casualty promptly after discovering or receiving
notice of the casualty, which notice shall identify the affected Collateral or
other Vessel.  The Borrower shall, within
a reasonable period of time, remedy or repair such casualty to bring the
Collateral into conformity with the provisions of this Agreement unless such
casualty shall constitute an Event of Loss and the provisions of §2.3(b) apply.

 

34

 

SECTION 8.                            NEGATIVE COVENANTS; FINANCIAL COVENANTS.

 

The Borrower covenants and agrees that so long as the
Loan remains outstanding and unpaid, it shall not:

 

§8.1                        Transactions
with Affiliates.  Except as
otherwise provided herein, enter into or consummate any transaction with any
Affiliate of the Borrower unless such transaction is:

 

(a)                                  entered into in the ordinary course of business of the
Borrower and pursuant to the reasonable requirements of the Borrower’s
business; and

 

(b)                                 is
upon terms no more or less favorable to the Borrower than would be the case if
such transaction were an arm’s-length transaction effected with a Person other
than an Affiliate.

 

§8.2                        Terminate
Pension Plan.  Terminate,
withdraw from, or permit the termination of any Plan unless the asset value of
such Plan is then at least equal to the value of the benefits guaranteed by the
Pension Benefit Guaranty Corporation if such termination could reasonably be
expected to have a Materially Adverse Effect.

 

§8.3                        ERISA.  Permit any Plan maintained by it to (a) engage
in any “prohibited transaction” (as defined in Section 4975 of the Code)
which could reasonably be expected to result in material liability for excise
taxes or fiduciary liability under Section 406 of ERISA, (b) incur
any material “accumulated funding deficiency” (as defined in Section 302
of ERISA) whether or not waived, or (c) terminate any Plan in a manner
that could reasonably be expected to result in the imposition of a lien or
encumbrance on the assets of the Borrower or any of its Subsidiaries pursuant
to Section 4068 of ERISA if the material liability described in clause (a) or
the accumulated funding deficiency described in clause (b) or the lien or
encumbrance described in clause (c) could reasonably be expected to have a
Materially Adverse Effect.

 

§8.4                        Incorporation
of Financial Covenants Under Existing Revolver.  Until the Obligations payable under the Loan
Documents shall have been paid in full, Borrower covenants and agrees with the
Lender that:

 

(a)                                  The
financial covenants of the Borrower as currently set forth in Section 6.01
of the Existing Revolver (the “Financial Covenants”) shall be considered to be
financial covenants of the Borrower under this Agreement as if set forth in
this Agreement in full.

 

(b)                                 Any
amendment or modification of the Financial Covenants by the Revolving Lenders
after the date hereof will be binding upon the Lender,
and applicable to the Borrower hereunder, as so amended or modified.

 

(c)                                  The
Borrower agrees to provide the Lender with a copy of all Financial Covenant
compliance certificates prepared by the Borrower and delivered to the Revolving
Lenders in connection with the Financial Covenants at the same time and on the
same frequency 

 

35

 

as required to be
delivered to Revolving Lenders under the Existing Revolver, provided that if at any time Financial Covenant compliance
certificates are no longer provided by the Borrower to the Revolving Lenders,
the Borrower will provide similar Financial Covenant compliance certificates to
the Lender on not less than a quarterly basis.

 

(d)                                 If
for any reason CBPA (or an Affiliate thereof) ceases to be a party to the
Existing Revolver, the Financial Covenants that are in effect under the
Existing Revolver on the last day that CBPA is a party thereto shall survive
and continue to be financial covenants of the Borrower under this Agreement as
if set forth in this Agreement in full.

 

SECTION 9.                            EVENTS OF DEFAULT; ACCELERATION.

 

§9.1                        Events
of Default.  The occurrence of
any one or more of the following events or conditions shall constitute an “Event
of Default” hereunder regardless of the reason for such event and whether it
shall be voluntary or involuntary or within or without the control of the
Borrower or be effected by operation of or pursuant to any Law:

 

(a)                                  if
the Borrower shall fail to make any payment not more than three (3) Business
Days after the due date thereof of any principal or interest due hereunder or
on the Note or other amount provided for hereunder whether at maturity or at
any date fixed for payment or prepayment or by declaration or otherwise; or

 

(b)                                 If
the Borrower shall default in the performance of or compliance with any term
contained in §§7.6, 7.10(a), 7.10(b), or 7.16; 7.17(a) or
§§8.2, 8.3 or 8.4; or

 

(c)                                  If
the Borrower shall default in the performance or compliance with any term
contained in §§7.9, 7.14 or 7.17(b), and such default
shall continue for more than thirty (30) days; or

 

(d)                                 if
the Borrower shall default in the performance of or compliance with any term
contained herein, or in the performance of or compliance with any other term
contained in any of the other Loan Documents (other than those referred to in
the foregoing paragraphs (a), (b) and (c)), and such default shall not
have been remedied within thirty (30) days after written notice thereof shall
have been given to the Borrower by the Lender; or

 

(e)                                  if
any representation, warranty or certification made in writing by or on behalf
of the Borrower herein or in connection with any of the transactions
contemplated hereby shall prove to have been false or incorrect in any material
respect on the date as of which made; or

 

(f)                                    if
the Borrower makes an assignment for the benefit of creditors, or petitions or
applies for the appointment of a liquidator or receiver or custodian (or
similar official) of itself or of any substantial part of its assets or
commences any proceeding or case relating to it under any bankruptcy,
reorganization, arrangements, insolvency, readjustment of debt, dissolution or
liquidation or similar law of any jurisdiction, now or hereafter in effect; or

 

36

 

(g)                                 if
any such petition or application is filed or any such proceeding or case is
commenced against the Borrower and such party indicates its approval thereof,
consent thereto or acquiescence therein or an order is entered appointing any
such liquidator or receiver or custodian (or similar official), or adjudicating
the Borrower bankrupt or insolvent, or approving a petition in any such
proceeding or a decree or order for relief is entered in respect of the
Borrower in an involuntary case under any bankruptcy, reorganization,
arrangements, insolvency, readjustment of debt, dissolution or liquidation or
similar law of any jurisdiction, now or hereafter in effect, and such order
remains in effect for more than sixty (60) days, whether or not consecutive; or

 

(h)                                 if
any order is entered in any proceeding by or against the Borrower decreeing or
permitting its dissolution or split-up or the winding up of its affairs; or

 

(i)                                     if
the Borrower shall generally not pay its debts as such debts become due, or
shall admit in writing its inability to pay its debt generally; or

 

(j)                                     if
there shall remain in force, undischarged, unsatisfied and unstayed, for more
than thirty (30) days, whether or not consecutive, any final unappealable
judgment against the Borrower, which with other outstanding final unappealable
judgments, undischarged, against the Borrower, exceed in the aggregate $500,000
(other than amounts that are subject to insurance coverage); or

 

(k)                                  if
any of the Security Documents shall for any reason cease to be in full force
and effect or any Security Document or the Lien purported to be granted thereby
shall become adjudged by a competent court to be invalid or unenforceable; or

 

(l)                                     if
the Borrower shall (i) default (as principal or guarantor or other surety)
in the payment of any principal of, premium, if any, or interest on any
Indebtedness to the Lender (or its affiliates) or under any other Indebtedness
owed to any other Person in excess of $500,000, in any single amount or in
aggregate, in respect of borrowed money or credit received, or (ii) default
in the performance of or compliance with any other term, covenant, provision or
obligation contained in any agreement or instrument evidencing or securing such
Indebtedness and, in each case, the holder or holders of such Indebtedness
shall have accelerated the maturity thereof or commenced the exercise of any
other remedies in respect of such default; or

 

(m)                               if
any “Mortgage Event of Default” as defined in any Ship Mortgage or any Event of
Default (as defined in the Security Agreement) shall occur; or

 

(n)                                 if the Borrower shall terminate its existence by merger,
consolidation, sale of substantially all of its assets, dissolution or
otherwise; or

 

(o)                                 if a Change in Control shall have occurred; or

 

37

 

(p)                                 if for any reason the Vessel Construction Agreement shall be
terminated prior to completion of DBL 28 and DBL 29, or if the Borrower shall
default under the Vessel Construction Agreement and Bollinger shall have
demanded arbitration thereunder.

 

§9.2                        Remedies.   (a)Upon the occurrence of an Event of
Default described in §§9.1(f), (g) or (h),
immediately and automatically, and upon the occurrence of any other Event of
Default, and at any time thereafter while such Event of Default is continuing,
at the option of the Lender and upon the Lender’s declaration:

 

(i)                                     the
unpaid principal amount of the Loan together with accrued interest and any
applicable Prepayment Premium, and all other Obligations shall become
immediately due and payable without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived; and

 

(ii)                                  the
Lender may exercise any and all rights the Lender has under this Agreement, the
Loan Documents, or any other documents or agreements executed in connection
herewith, or at law or in equity, and proceed to protect and enforce the Lender’s
rights by any action at law, in equity or other appropriate proceeding, whether
for the specific performance of any covenant or agreement contained in this
Agreement or any other Loan Document, including the obtaining of the ex-parte
appointment of a receiver, and, if such amount shall have become due, by
declaration or otherwise, proceed to enforce the payment thereof or any other
legal or equitable right of the Lender, including the exercise of remedies
against the Collateral under the Security Documents.

 

(iii)                               Right of Set-off; Adjustments.   During the continuance of any Event of
Default, the Lender (and each of its Affiliates) is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by the
Lender (or any of its affiliates) to or for the credit or the account of the
Borrower against any and all of the obligations of the Borrower now or
hereafter existing under this Agreement and the Note, irrespective of whether
the Lender shall have made any demand under this Agreement or the Note and
although such obligations may be unmatured. 
The Lender agrees promptly to notify the Borrower after any such set-off
and application made by the Lender; provided, however,
that the failure to give such notice shall not affect the validity of such
set-off and application.  The rights of
the Lender under this §9.2 are in addition to other rights and remedies
(including other rights of set-off) that the Lender may have.

 

(iv)                              Other Remedies.  Unless and except to the extent expressly
provided for to the contrary herein, the rights of the Lender specified herein
shall be in addition to, and not in limitation of, the Lender’s rights under
any statute or rule of law or equity, or under any other provision of any
of the Loan Documents, or under the provisions of any other document,
instrument or other writing executed by the Borrower or any third party in
favor of the Lender, all of which may be exercised successively or
concurrently.

 

38

 

(v)                                 Cash Collection System.  In addition to any other right of the Lender
hereunder and under applicable Law, effective upon demand by the Lender at any
time and from time to time that an Event of Default exists, and all payments
that the Borrower receives as a result of its ownership and operation of the
Vessels, to be deposited in a deposit account maintained at an Affiliate of the
Lender. The Borrower expressly authorizes the Lender hereunder to apply all
such funds deposited in such account to the obligations as they come due
hereunder and under the other Loan Documents in the manner set forth in §2.4(b)

 

(b)                                 Notwithstanding
anything to the contrary contained in clause (a) above, the Lender
shall not exercise any of the remedies set forth in clause (a) or any
other remedies available under applicable Law if the exercise of such remedies
shall invalidate the qualification of any of the Vessels to operate in the
coastwise trade.

 

SECTION 10.                     EXPENSES.

 

The Borrower will pay on demand all reasonable
out-of-pocket expenses of the Lender (including reasonable fees of outside
counsel) in connection with: the negotiation, preparation, execution, and
delivery of this Agreement, the other Loan Documents or other documents
executed in connection therewith; any advice or analysis from outside counsel,
accountants or other professionals retained by the Lender from time to time in
connection with this Agreement or the transactions contemplated hereby; any
amendment, waiver, or consent from time to time related thereto; and the Lender’s
exercise, preservation or enforcement of any of its rights, remedies or options
hereunder or thereunder after the occurrence and during the continuation of an
Event of Default, including in all such cases the reasonable fees of outside
legal counsel and any local counsel, accounting, consulting, brokerage or other
similar professional fees or expenses, and any reasonable fees or expenses
associated with any travel or other costs relating to any appraisals conducted
in connection with the Obligations or any Collateral therefore after the date
of this Agreement; and the amount of all such expenses shall, until paid, bear
interest at the interest rate applicable to principal hereunder (including any
default rate). After the occurrence and during
the continuance of an Event of Default, the Borrower shall pay the reasonable
costs of any field audit examinations that the Lender in its discretion may
conduct and shall also pay all reasonable out-of-pocket expenses of the Lender
in connection with the exercise, preservation or enforcement of any of its
rights, remedies or options under any of the Security Documents.

 

SECTION 11.                     SURVIVAL OF COVENANTS.

 

All covenants, agreements, representations and
warranties made herein and in any certificates or other papers delivered by or
on behalf of the Borrower pursuant hereto are material and shall be deemed to
have been relied upon by the Lender, notwithstanding any investigation
heretofore or hereafter made by them, and shall survive the making of the Loan,
as herein contemplated, and shall continue in full force and effect so long as the
Loan or other amounts due under the Loan Documents and the Note remain
outstanding and unpaid.  All statements
contained in any certificate or other paper delivered to the Lender at any time
by or 

 

39

 

on
behalf of the Borrower pursuant hereto or in connection with the transactions
contemplated hereby shall constitute representations and warranties by the
Borrower hereunder.

 

SECTION 12.                     CONFIDENTIALITY.

 

The Lender agrees to take and to cause its Affiliates
to take normal and reasonable precautions and exercise due care to maintain the
confidentiality of all information provided to the Lender by the Borrower,
under this Agreement or any other Loan Document, and neither the Lender nor any
of its Affiliates shall use any such information other than in connection with
or in enforcement of this Agreement and the other Loan Documents, except to the
extent such information (i) was or becomes generally available to the
public other than as a result of disclosure by the Lender or (ii) was or
becomes available on a non-confidential basis from a source other than the
Borrower, provided that the Lender may disclose
such information (A) at the request or pursuant to any requirement of any
governmental authority to which the Lender is subject or in connection with an
examination of the Lender by any such authority; (B) pursuant to subpoena
or other court process; (C) when required to do so in accordance with the
provisions of any applicable law; (D) to the extent required in connection
with any litigation or proceeding to which the Lender, or its respective
affiliates, may be party; (E) to the extent the Lender is required in
connection with the exercise of any remedy hereunder or under any other Loan
Document; (F) to the Lender’s independent auditors and other professional
advisors; (G) to any Eligible Assignee or participant (including
prospective institutions that may become assignees or participants pursuant to
§13), provided that such Person agrees
in writing to keep such information confidential to the same extent required of
the Lender hereunder; (H) as to the Lender or its Affiliate, as expressly
permitted under the terms of any other document or agreement regarding
confidentiality to which the Borrower is a party or is deemed a party with the
Lender or such Affiliate; and (I) to its Affiliates.

 

SECTION 13.                     SUCCESSORS AND ASSIGNS; PARTICIPATIONS.

 

§13.1                 Successors
and Assigns.   Whenever in this
Agreement any of the parties hereto is referred to, such reference shall be
deemed to include the successors and assigns of such party; and all covenants,
promises and agreements by or on behalf of the Borrower or the Lender shall
bind and inure to the benefit of their respective successors and assigns.  Notwithstanding the foregoing, the Borrower
shall not be entitled to assign any of its rights or obligations hereunder.

 

40

 

§13.2                 Assignments.

 

(a)                                  The
Lender may, at its expense (unless such assignment is initiated by the Borrower)
assign to one or more Eligible Assignees (but not to exceed five Lenders
hereunder at any one time) all or a portion (not less than $3,000,000) of its
interests, rights and obligations under this Agreement and the other Loan
Documents, including all or a portion of the Loan at the time made by or owing
to it, provided (i) that the parties to
each such assignment shall execute and deliver to the Lender an Assignment and
Acceptance in the form set forth as Exhibit D (an “Assignment and
Acceptance”).  Upon acceptance and
recording pursuant to §13.6, from and after the effective date specified
in each Assignment and Acceptance (which effective date shall be at least five
Business Days after the execution thereof), (A) the Eligible Assignee
shall be a party hereto and, to the extent provided in such Assignment and
Acceptance, have the same rights and obligations as the Lender under this
Agreement, and (B) the Lender shall be released from any obligations under
this Agreement with respect to the interests assigned, provided
that in the case of an Assignment and Acceptance covering all or the remaining
portion of the Lender’s rights and obligations under this Agreement, the Lender
shall continue to be entitled to the benefits of §2.5 and §2.6,
as well as to any fees or amounts accrued for its account hereunder and not yet
paid.  An Eligible Assignee shall be
entitled to sell participations in its interests, rights and obligations under
this Agreement and the other Loan Documents, as provided in §13.3, and
shall be entitled to grant assignments thereof pursuant to an Assignment and
Acceptance and otherwise in accordance with this §13.

 

(b)                                 By
executing and delivering an Assignment and Acceptance, the Lender and Eligible
Assignee shall be deemed to confirm to and agree with each other and the other
parties hereto as follows:  (i) other
than the representation and warranty that it is the legal and beneficial owner
of the interest being assigned thereby free and clear of any adverse claim, the
Lender makes no representation or warranty and assumes no responsibility with
respect to any statements, warranties or representations made in or in
connection with this Agreement or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement, any other
Loan Document or any other instrument or document furnished pursuant hereto, (ii) the
Lender makes no representation or warranty and assumes no responsibility with
respect to the financial condition of the Borrower or the performance or observance
by the Borrower of any of its obligations under this Agreement, any other Loan
Document or any other instrument or document furnished pursuant hereto, (iii) such
Eligible Assignee confirms that it has received a copy of this Agreement and
the other Loan Documents, together with copies of the most recent financial
statements delivered pursuant to §7.4 and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance, (iv) such Eligible
Assignee shall independently and without reliance upon the Lender or any other
Eligible Assignee or Participant and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit
decisions under this Agreement, and (v) such Eligible Assignee agrees that
it shall perform in accordance with their terms all the obligations which by
the terms of this Agreement are required to be performed by it as an Eligible
Assignee.

 

41

 

(c)                                  If,
pursuant to this §13.2, any interest in this Agreement is assigned to
any Eligible Assignee which is not incorporated or organized under the laws of
the United States or a state thereof, the Lender shall cause such Eligible
Assignee to agree that, on or prior to the effective date specified in the
Assignment and Acceptance, it will deliver to the Borrower (i) two valid,
duly completed copies of United States Internal Revenue Service Form W-8BEN
or W-8EC1 or applicable successor form, as the case may be, certifying in each
case that such Eligible Assignee is entitled to receive payments made under
this Agreement and the Note without deduction or withholding of any United
States federal income taxes, and (ii) a valid, duly completed Internal
Revenue Service Form W-8BEN or W-9 or applicable successor form, as the
case may be, to establish an exemption from United States backup withholding
tax.  The Eligible Assignee which
delivers to the Borrower a Form W-8BEN or W-8EC1 and Form W-8BEN or W-9
pursuant to the preceding sentence further undertakes to deliver to the
Borrower two copies of the Form W-8BEN or W-8EC1 and Form W-8BEN or W-9,
or applicable successor forms, or other manner of certification, as the case
may be, on or before the date that any such form expires or becomes obsolete or
otherwise is required to be resubmitted as a condition to obtaining an
exemption from withholding tax or after the occurrence of any event requiring a
change in the most recent form previously delivered by it to the Borrower, and
such extensions or renewals thereof as may reasonably be requested by the
Borrower, certifying in the case of a Form W-8BEN or W-8EC1 that such
Eligible Assignee is entitled to receive payments made under this Agreement and
the Note without deduction or withholding of any United States federal income
taxes, unless any change in treaty, law or regulation or official
interpretation thereof has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Eligible Assignee from duly completing and
delivering any such form with respect to it and such Eligible Assignee advises
the Borrower that it is not capable of receiving payments without any deduction
or withholding of United States federal income tax, and in the case of a Form W-8BEN
or W-9, establishing an exemption from United States backup withholding tax.

 

§13.3                 Participations.  The Lender and the Eligible Assignee may, at
their respective expense, sell to one or more Persons (each, a “Participant”)
participations in all or a portion (not less than $3,000,000) of its interests,
rights and obligations under this Agreement and the other Loan Documents
(including all or a portion of any Commitments and the Loans owing to it), provided that (i) the Lender or such Eligible Assignee
shall remain solely responsible for the performance of its obligations under
this Agreement, (ii) the Participant shall be entitled to the benefit of
the cost protection provisions and indemnities contained in §§2.5 and 7.12,
but shall not be entitled to receive any greater payment thereunder than the
selling Lender or Eligible Assignee would have been entitled to receive with
respect to the interest so sold if such interest had not been sold, and (iii) the
Borrower, the Lender (in the case of a sale of any participation interest by an
Eligible Assignee), and any Eligible Assignee shall continue to deal solely and
directly with the Lender or Eligible Assignee in connection with its rights and
obligations under this Agreement.  A
Participant shall not be entitled to require the Lender to take or omit to take
any action hereunder except in connection with any of the following:  (i) or any amendment that subjects the
Lender to any additional obligations; (ii) a reduction of the principal of
or interest on the Note, or of any fees payable hereunder; (iii) a
postponement of any date fixed for any 

 

42

 

payment
in respect of principal of or interest on the Note or any fees payable
hereunder; (iv) the release of any Collateral from the Lien of the Loan
Documents.

 

§13.4                 Disclosures.  The Lender and any Eligible Assignee may,
in connection with any proposed assignment (by such Lender) or participation
(by the Lender or the Eligible Assignee) pursuant to this §13, disclose
to the proposed Eligible Assignee or Participant any information in its
possession relating to the Borrower, provided that
prior to any such disclosure, each such Eligible Assignee or Participant or
proposed Eligible Assignee or Participant shall execute an agreement whereby
such Eligible Assignee or Participant shall agree (subject to customary
exceptions) to preserve the confidentiality of any confidential information
relating to any the Borrower received from such Participant.

 

§13.5                 Federal Reserve Bank.  The Lender, Eligible Assignee and
Participants may at any time pledge or assign all or any portion of their
rights under this Agreement to a Federal Reserve Bank.

 

§13.6                 Register;
Note.

 

(a)                                  The
Initial Lender agrees to act as agent for the Borrower (the “Registration Agent”)
and in that capacity to establish and shall maintain at its address referred to
in §14 a register (the “Lender Register”) in which it shall record the
name and address of each Lender hereunder and the principal amount of the Loan
owing to each Lender from time to time. 
The entries in the Lender Register shall be final and binding for all
purposes, absent manifest error, and the Borrower shall treat each Person whose
name is recorded in the Lender Register as a Lender for all purposes of the
Loan Documents.

 

(b)                                 Upon
receipt of a completed Assignment and Acceptance executed by an assigning
Lender and an Eligible Assignee, together with the Note or Note subject to such
assignment, the Registration Agent shall record the relevant information
contained in the Assignment and Acceptance in the Lender Register, and the
Borrower (i) shall execute and deliver to the Assignee in exchange for the
surrendered Note or Note a new Note made payable to the Assignee in an amount
equal to the principal amount of the Loan acquired by the Assignee, and (ii) if
the assigning Lender assigned less than its entire interest in the Loan,
execute and deliver to the assigning Lender a new Note made payable to the
assigning Lender in an amount equal to the principal amount of the Loan
retained by the assigning Lender.  The
sum of the principal amounts of the new Note shall be equal to the aggregate
outstanding principal amount of the surrendered Note or Note.  The new Note or Note shall be dated the
effective date of such Assignment and Acceptance and shall otherwise be in
substantially the form of the surrendered Note or Note.

 

(c)                                  The
Registration Agent may transfer its obligations under this §13.6 to an
Eligible Assignee in connection with the assignment of all (but not less than
all) of the Registration Agent’s interest in the Loan in accordance with §13.2,
in which event the Assignment and Acceptance shall be amended or supplemented
to effect such transfer of obligations as Registration Agent.

 

43

 

(d)                                 The
Registration Agent agrees to follow the reasonable requests of the Borrower
with respect to the maintenance of the Lender Register, provided that the
Registration Agent shall not be required to follow any such Borrower request if
an Event of Default shall have occurred and be continuing unless and until such
Event of Default shall be cured or otherwise cease to exist.

 

SECTION 14.                     NOTICES.

 

Except as otherwise specified herein, all notices and
other communications made or required to be given pursuant to this Agreement
shall be in writing and shall be delivered by hand, sent by facsimile, sent by
overnight express courier service or mailed by first-class mail, postage
prepaid, addressed as follows (or to such other address as any party may
designate by notice to the other parties):

 

	
  If to the Lender:

  	
   

  	
  Citizens Asset Finance,
  a d/b/a of Citizens Leasing Corporation

  
	
   

  	
   

  	
  One Citizens Plaza

  
	
   

  	
   

  	
  Mail Stop: RCE-150

  
	
   

  	
   

  	
  Providence, RI 02903

  
	
   

  	
   

  	
  Attention:

  	
  Team Leader

  
	
   

  	
   

  	
   

  	
  Direct Originations

  
	
   

  	
   

  	
  FAX:

  	
  (401) 459-3171

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Citizens Asset Finance,
  a d/b/a of Citizens Leasing Corporation

  
	
   

  	
   

  	
  One Citizens Plaza

  
	
   

  	
   

  	
  Mail Stop: RCE-150

  
	
   

  	
   

  	
  Providence, RI 02903

  
	
   

  	
   

  	
  Attention:

  	
  David T. Miele, Esq.

  
	
   

  	
   

  	
  FAX:

  	
  (401) 459-3171

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Day, Berry and Howard
  LLP

  
	
   

  	
   

  	
  260 Franklin Street

  
	
   

  	
   

  	
  Boston, Massachusetts
  02110-3179

  
	
   

  	
   

  	
  Attention:

  	
  William A. Hunter, Esq.

  
	
   

  	
   

  	
   

  	
  Britta L. Hyllengren, Esq.

  
	
   

  	
   

  	
  FAX:

  	
  (617) 345-4745

  
	
   

  	
   

  	
   

  
	
  If to the Borrower:

  	
   

  	
  K-Sea Operating
  Partnership L.P.

  
	
   

  	
   

  	
  3245 Richmond Terrace

  
	
   

  	
   

  	
  Staten Island, New York
  10303

  
	
   

  	
   

  	
  Attention: Chief
  Financial Officer

  
	
   

  	
   

  	
  Telephone: (718) 720-7207

  
	
   

  	
   

  	
  Fax: (718) 720-4358

  
	
   

  	
   

  	
  Email:
  jnicola@k-sea.com

  

 

44

 

	
  With a copy to:

  	
   

  	
  Holland &
  Knight LLP

  
	
   

  	
   

  	
  195 Broadway

  
	
   

  	
   

  	
  New York, New York
  10007

  
	
   

  	
   

  	
  Attention: Christopher
  G. Kelly, Esq.

  
	
   

  	
   

  	
  Phone: 212-513-3200

  
	
   

  	
   

  	
  Fax: 212-385-9010

  
	
   

  	
   

  	
  Email: ckelly@hklaw.com

  

 

Any notice so addressed and mailed by registered or
certified mail shall be deemed to have been given when mailed.

 

SECTION 15.                     ENTIRE AGREEMENT.

 

This Agreement and any other documents executed in
connection herewith express the entire understanding of the parties with
respect to the transactions contemplated hereby.  Neither this Agreement nor any term hereof
may be changed, waived, discharged or terminated orally or in writing, except
as provided in §16.

 

SECTION 16.                     CONSENTS, AMENDMENTS, WAIVERS, ETC.

 

Any provision of this Agreement or any other Loan
Document may be amended or waived if, but only if,
such amendment or waiver is in writing and is signed by the Borrower and the
Lender.

 

SECTION 17.                     SEVERABILITY.

 

Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or unenforceability
in any jurisdiction shall not invalidate or render unenforceable such provision
in any other jurisdiction.

 

SECTION 18.                     SUBMISSION TO JURISDICTION; WAIVER.

 

EACH OF THE BORROWER AND THE LENDER HEREBY IRREVOCABLY
AND UNCONDITIONALLY:

 

(a)                                  SUBMITS
FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING DIRECTLY
OR INDIRECTLY TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR FOR RECOGNITION
AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE
GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK LOCATED IN
MANHATTAN AND COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, THE COURTS OF THE
UNITED STATES OF AMERICA FOR THE

 

45

 

DISTRICT
OF MASSACHUSETTS AND THE SOUTHERN DISTRICT OF NEW YORK AND APPELLATE COURTS
FROM ANY THEREOF.

 

(b)                                 CONSENTS
THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS, AND
WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY
SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING
WAS BROUGHT IN AN INCONVENIENT FORUM AND AGREES NOT TO PLEAD OR CLAIM THE SAME;

 

(c)                                  WAIVES
PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND AGREES THAT ALL SUCH
SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY
MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY
SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO THE BORROWER AT ITS ADDRESS SET
FORTH IN §13 OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE
BEEN NOTIFIED PURSUANT THERETO AND THAT SERVICE SO MADE SHALL BE DEEMED TO BE
COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT OR THREE BUSINESS DAYS AFTER THE
SAME SHALL HAVE BEEN POSTED TO THEIR RESPECTIVE ADDRESS AS SET FORTH IN §13;

 

(d)                                 WAIVES
ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING THE
LENDER TO EXERCISE ANY REMEDIES SET FORTH HEREIN OR IN ANY OF THE OTHER LOAN
DOCUMENTS; AND

 

(e)                                  AGREES
THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT OR OTHERWISE AFFECT THE RIGHT OF
THE OTHER PARTY TO BRING ANY ACTION OR PROCEEDING AGAINST THE OTHER PARTY OR
ITS PROPERTY IN THE COURTS OF OTHER JURISDICTIONS.

 

SECTION 19.                     WAIVER OF JURY TRIAL.

 

THE BORROWER AND THE LENDER HEREBY INTENTIONALLY AND
VOLUNTARILY WAIVE ANY RIGHT WHICH EITHER OF THEM MAY HAVE TO A TRIAL BY
JURY IN CONNECTION WITH ANY MATTER DIRECTLY OR INDIRECTLY RELATING TO THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT. 
THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND
ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT
MATTER OF THE TRANSACTIONS DESCRIBED IN THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, INCLUDING, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND
ALL OTHER COMMON LAW AND STATUTORY CLAIMS. 
THE BORROWER AND THE LENDER EACH ACKNOWLEDGE THAT THIS WAIVER IS A
MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS
ALREADY RELIED ON THE WAIVER IN 

 

46

 

ENTERING INTO THIS
AGREEMENT, AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED
FUTURE DEALINGS.  THE BORROWER
ACKNOWLEDGES THAT NEITHER THE LENDER NOR ANY PERSON ACTING ON BEHALF OF THE
LENDER HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY
JURY OR IN ANY WAY MODIFY OR NULLIFY ITS EFFECT.  THE BORROWER FURTHER ACKNOWLEDGES THAT IT HAS
BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING
OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL
COUNSEL, SELECTED OF ITS OWN FREE WILL. 
THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED
EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR THE
OTHER LOAN DOCUMENTS.  IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY
THE COURT.

 

SECTION 20.                     MISCELLANEOUS.

 

THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, UNITED
STATES OF AMERICA, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW (OTHER THAN
TITLE 14 OF ARTICLE 5 OF THE GENERAL OBLIGATIONS LAW).  The rights and remedies herein expressed are
cumulative and not exclusive of any other rights which the Lender would
otherwise have.  Any instruments required
by any of the provisions hereof to be in the form annexed hereto as an exhibit
shall be substantially in such form with such changes therefrom, if any, as may
be approved by the Lender.  This
Agreement or any amendment may be executed in separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
together shall constitute one instrument. 
In making proof of this Agreement, it shall not be necessary to produce
or account for more than one such counterpart signed by the party against whom
enforcement is sought.

 

47

 

IN WITNESS WHEREOF, the parties have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.

 

	
   

  	
  K-SEA
  OPERATING PARTNERSHIP L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  K-Sea
  OLP GP, LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John J.
  Nicola

  
	
   

  	
  Name: John J. Nicola

  
	
   

  	
  Title: Chief Financial
  Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CITIZENS
  ASSET FINANCE, A D/B/A OF 

  CITIZENS LEASING CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John M.
  Young

  
	
   

  	
  Name: John M. Young

  
	
   

  	
  Title: Senior Vice
  President

  

 

Signature page to 

Loan Agreement

 

 

SCHEDULE 1

 

DESCRIPTION OF VESSELS

 

 

(1) Barge

Name:  DBL 28

Hull No. 496

 

(2) Barge

Name:  DBL 29

Hull No. 497

 

(3) Barge

Name:  DBL 78

Official Number: 1102126 

 

 

Exhibit A

 

Barge DBL 28

Official No.                     

Barge DBL 29

Official No.                     

Barge DBL 78

Official No.                     

 

TERM NOTE

 

	
  $[                               ]

  	
   

  	
  New York, New York

  
	
   

  	
   

  	
                           ,
  2006

  

 

FOR VALUE RECEIVED, the undersigned, K-SEA OPERATING
PARTNERSHIP L.P., a Delaware limited partnership (the “Borrower”), hereby
absolutely and unconditionally promises to pay in lawful money of the United
States to CITIZENS ASSET FINANCE, A D/B/A OF CITIZENS LEASING CORPORATION, a
Rhode Island corporation (the “Lender”), at One Citizens Plaza, Providence,
Rhode Island 02903, or at such other place as Lender may from time to time
designate in writing, the principal amount of [                                                                               ]
Dollars ($[                       ]),
together with interest thereon from the date hereof per annum, as follows:

 

(a)                                  The
term of this Note is eighty-four (84) months commencing on the date hereof;

 

(b)                                 The
outstanding principal amount hereunder shall bear interest payable at the LIBOR
Loan Rate (as defined on Exhibit A hereto) unless or until the
interest rate shall have been converted to a fixed rate as provided in Section 2.2(d) of
the Loan Agreement dated [                      ],
2005 between the Borrower and the Lender, as the same may be amended, modified,
supplemented or restated form time to time (the “Loan Agreement”).  Interest shall be due and payable monthly in
arrears, on the first day of each month, commencing on [                  ],
2006, for the period commencing on the first day of the immediately preceding
month (or commencing on the date hereof with respect to the first interest
payment) and ending on and including the last day of such month;

 

(c)                                  Eighty-four
(84) consecutive monthly payments of principal, each in the amount of $[                      ],
shall be due and payable on the first day of each month, commencing on [                        ],
200  ; and

 

(d)                                 A
final payment consisting of the entire remaining principal balance of this
Note, together with interest thereon in arrears, shall be due and payable on [                      ],
2012.

 

This Note is the Note referred to in, evidences
borrowings under and has been issued by the Borrower in accordance with the
terms of, the Loan Agreement.  The Lender
and any holder hereof shall be bound by and entitled to the benefits of the
Loan Agreement and may enforce the agreements of the Borrower contained
therein, and any holder may exercise the respective remedies provided for
thereby or otherwise available in respect thereof, all in accordance with 

 

 

the terms thereof. All
capitalized terms used in this Note and not otherwise defined herein shall have
the same meanings herein as in the Loan Agreement.

 

The Borrower has the right under certain circumstances
and the obligation under certain other circumstances to prepay in whole or part
the principal of this Note, together with accrued interest thereon, on the
terms and conditions specified in Section 2.3 of the Loan Agreement,
provided that such prepayment shall be accompanied by payment of the applicable
Prepayment Premium, if any.

 

If any one or more of the Events of Default shall
occur, the entire unpaid principal amount of this Note and all unpaid interest
accrued hereunder may become or be declared due and payable in the manner and
with the effect provided in Section 9.2 of the Loan Agreement. After the
occurrence and during the continuance of an Event of Default, the principal
balance evidenced hereby shall bear interest at the Default Rate as provided in
the Loan Agreement and certain other late charges may apply, all as provided in
the Loan Agreement.

 

The Borrower hereby waives presentment, demand,
notice, protest and all other demands and notices in connection with the
delivery acceptance, performance, default or enforcement of this Note (except
as otherwise specifically provided in the Loan Agreement), assents to any
extension of postponement of the time of payment or any other indulgence, to
any substitution, exchange or release of collateral, and to the addition or
release of any other party or person primarily or secondarily liable.

 

This Note is secured by mortgage liens on and security
interests in certain assets of the Borrower pursuant to the terms of the
Security Documents.

 

All of the provisions of this Note shall be binding
upon and inure to the benefit of the Borrower and the Lender and their
respective successors and assigns.

 

This Note is in registered form.  The Person whose name is recorded as the
owner of the Note in the Lender Register maintained by the Registration Agent
shall be treated as the owner of this Note for all purposes of the Loan
Documents.  This Note may be transferred
only in accordance with the provisions of Sections 13.2 and 13.6 of the
Loan Agreement.

 

THIS NOTE SHALL IN ALL RESPECTS BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, UNITED STATES
OF AMERICA, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE,
WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW (OTHER THAN TITLE 14 OF ARTICLE 5
OF THE GENERAL OBLIGATIONS LAW).

 

[This
space intentionally left blank]

 

2

 

IN
WITNESS WHEREOF, the Borrower has caused this Note to be executed by its duly
authorized undersigned officer as of the date first written above.

 

 

	
   

  	
   

  	
  K-SEA OPERATING PARTNERSHIP L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  K-Sea OLP GP, LLC, its General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
  John J. Nicola

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Chief Financial Officer

  
						

 

 

Exhibit A

Defined Terms for

Term Note with LIBOR Pricing

 

For purposes of
the Term Note to which this Exhibit A is attached, the following terms
shall have the following meanings:

 

“LIBOR
Loan Rate” means a rate per annum equal to the LIBOR Rate plus 175 basis
points.

 

“LIBOR
Rate” means relative to any one-month interest period, the offered rate for
delivery in two London Banking Days (as defined below) of deposits of U.S.
Dollars which the British Bankers Association fixes as its LIBOR rate as of
11:00 a.m. London time on the day on which such interest period commences,
and for a period approximately equal to such interest period.  If the first day of any such interest period
is not a day which is both a (i) Business Day, and (ii) a day on
which US dollar deposits are transacted in London interbank market (a “London
Banking Day”), the LIBOR Rate shall be determined in reference to the next
preceding day which is both a Business Day and a London Banking Day.  If for any reason the LIBOR Rate is
unavailable and/or the Lender is unable to determine the LIBOR Rate for any
such interest period, the LIBOR Rate shall be deemed to be equal to the Federal
Funds Rate plus 175 basis points.

 

 

Exhibit B

 

FORM OF
NOTICE OF BORROWING

(§2.1)

 

To:                              Citizens
Asset Finance, a d/b/a of

Citizens Leasing Corporation

One Citizens Plaza, Mail Stop RCE-150

Providence, Rhode Island 02903

 

Reference is hereby made to the Loan Agreement, dated
as of [               ],
2005 (as amended, modified or supplemented from time to time, the “Loan
Agreement”) by and among K-Sea Operating Partnership L.P., a Delaware limited
partnership (the “Borrower”), and Citizens Asset Finance, a d/b/a of Citizens
Leasing Corporation, a Rhode Island corporation (the “Lender”).  Capitalized terms used but not defined herein
shall have the respective meanings therefor set forth in the Loan Agreement.

 

The Borrower hereby confirms its request for an
Advance in the following amount and with the following Advance date:

 

	
  Advance 

  Date(1)

  	
   

  	
  Amount

  	
   

  
	
   

  	
   

  	
  $

  	
  11,557,100

  	
   

  
					

 

The Borrower hereby certifies, (a) that the
representations and warranties of the Borrower set forth in § 3 of the
Loan Agreement and in the other Loan Documents were true and correct when made
and are true and correct at and as of the date hereof with the same effect as
if made herein; (b) that the Borrower has performed and complied with all
terms and conditions of the Loan Documents required to be performed and
complied with by it on or before the Advance Date and as of the date hereof;
and (c) no Default or Event of Default exists under the Loan Agreement or
any other Loan Document, nor shall the making of the requested Advance result
in a Default or Event of Default.

 

(1) At
least three (3) Business Days after date hereof or of telephonic notice.

 

 

Please distribute by wire transfer the proceeds of the
Advance as follows:

 

	
  $10,000,000

  	
   

  	
  [EMI wire transfer restrictions to come]

  
	
   

  	
   

  	
   

  
	
  $1,557,100 to:

  	
   

  	
  JP Morgan Chase Bank 

  ABA #021000021 

  A/C Name – K-Sea Transportation, Inc. 

  A/C # 530389509

  

 

 

Dated the      
day of             ,
2005.

	
   

  	
  K-SEA OPERATING PARTNERSHIP L.P.

  
	
   

  	
   

  
	
   

  	
  By: K-Sea OLP GP, LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name: John J. Nicola

  
	
   

  	
   

  	
  Title: Chief Financial Officer

  

 

 

Exhibit C

 

[Vessel
Name]

 

FIRST
PREFERRED SHIP MORTGAGE

 

THIS FIRST PREFERRED SHIP MORTGAGE (this “Mortgage”)
made as of the          day of                            ,
2005, by and between K-SEA OPERATING PARTNERSHIP L.P., a limited partnership
organized and existing under the laws of the State of Delaware, with an address
at 3245 Richmond Terrace, Staten Island, New York, 10303(the “Mortgagor”),
and CITIZENS ASSET FINANCE, A D/B/A OF CITIZENS LEASING CORPORATION (the “Mortgagee”),
a Rhode Island corporation organized and existing under the laws of the State
of Rhode Island with an office at One Citizens Plaza, Providence, Rhode
Island, 02903.

 

WHEREAS:

 

(a)                                  The
Mortgagor is the sole owner (100%) of the whole of the vessel [insert name]               ,
Official No.                 ,
                   
domestic gross tons (                   
international gross tons); duly documented in the name of the Mortgagor under
the laws and flag of the United States of America at the National Vessel
Documentation Center (“NVDC”), having its hailing port at New York, New York;

 

(b)                                 Pursuant
to the terms and conditions of a Loan Agreement dated as of June    ,
2005, between the Mortgagor and the Mortgagee (as the same may be amended,
supplemented, or modified from time to time, the “Loan Agreement”), the
Mortgagee has, at Mortgagor’s request, agreed to make loan advances to the
Mortgagor in the aggregate principal amount of up to $18,000,000 (the “Loan”).  The principal amount of $                 
has been advanced to the Mortgagor on or before the date hereof.  The entire proceeds of the Loan shall be used
by the Mortgagor to finance the construction of two United States flag vessels,
and to finance the acquisition by the Borrower of a third United States flag
vessel, including the Vessel (as defined below).  The obligations of the Mortgagor with respect
to the Loan are evidenced by the Loan Agreement and by a term promissory note
(the “Note”) (as defined in the Loan Agreement), to be dated as of the
Advance Termination Date (as defined in the Loan Agreement), and are secured by
this Mortgage and the other Security Documents (as defined in the Loan
Agreement).  The form of the Loan
Agreement is attached hereto as Exhibit 1 (together with the form
of the Note attached thereto) and is hereby made a part hereof as though set
forth fully herein;

 

(c)                                  Terms
used herein and not otherwise defined herein are used as defined in, or by
reference in, the Loan Agreement.

 

To secure, among other things, the payment of
principal, fees and other amounts from time to time due to the Mortgagee, and
the payment of all other sums that hereafter may be secured by this Mortgage
and the other Loan Documents in accordance with the terms hereof, and to secure
the performance and observance of, and compliance with, all of the agreements,
covenants and conditions of this Mortgage, the Mortgagor has duly authorized
the execution and delivery of this First Preferred Ship Mortgage.

 

 

NOW, THEREFORE, in consideration of the premises and
for other good and valuable consideration, the receipt and adequacy whereof is
duly acknowledged, and in order to secure the payment and performance of (i) all
Obligations, undertakings and liabilities of Mortgagor, now existing or
hereafter incurred, under, arising out of, or in connection with the Loan
Agreement and the other Loan Documents; (ii) the unpaid principal amount
of, and accrued interest on, the Note; (iii) all obligations, undertakings
and liabilities of Mortgagor now existing or hereafter incurred, under, arising
out of or in connection with this Mortgage; and (iv) any and all other present
and future indebtedness, obligations, undertakings and liabilities of any kind
whatsoever of Mortgagor to Mortgagee in connection with the Loan Agreement and
the other Loan Documents or from time to time reduced and thereafter increased,
and to secure the performance of all the covenants and conditions herein
contained (all the foregoing included within the meaning of Obligations, as
defined in the Loan Agreement), the Mortgagor by these presents does grant,
bargain, sell, convey, transfer, mortgage, set over and confirm unto the
Mortgagee all of the following described property:

 

The whole of the
certain vessel called:  

 

	
  Name:
  [                                  ]

  	
  Official Number:
  [                                  ]

  

 

together with all its engines, boilers, machinery,
masts, rigging, boats, anchors, chains, cables, tackle, apparel, furniture,
equipment, and all other appurtenances thereunto belonging, and any and all
additions, improvements and replacements hereafter made in, on or to the said
vessel or any part thereof; and in, on or to its equipment and appurtenances
aforesaid, all the foregoing being hereinafter referred to as the “Vessel.”

 

TO HAVE AND TO HOLD the Vessel unto the Mortgagee
forever:

 

PROVIDED ALWAYS, and the condition of these presents
is such, that if the Mortgagor and its successors and assigns shall pay, or
cause to be paid, to the Mortgagee the Obligations aforesaid, as and when the
same shall become due and payable by maturity or otherwise, and shall pay any
and all advances hereafter made or expended by the Mortgagee to the Mortgagor
for the maintenance, repairs, preservation or insurance of the Vessel or any
part thereof and shall keep, perform and observe all the covenants and promises
in these presents expressed or implied to be kept, performed and observed by or
on the part of the Mortgagor, then this Mortgage and the estate and rights
hereby granted shall cease, determine and be void; otherwise to remain in full
force and effect.

 

The Mortgagor hereby covenants and agrees that the
Vessel and all replacements hereafter made in or to the same is to be held by
the Mortgagee subject to the further covenants, conditions and uses hereinafter
set forth as follows:

 

2

 

ARTICLE I

REPRESENTATIONS, WARRANTIES

AND COVENANTS OF MORTGAGOR

 

THE MORTGAGOR HEREBY COVENANTS AND AGREES THAT:

 

Section 1.1   Citizenship; Title.  Mortgagor is and shall continue to be a
citizen of the United States as defined in Section 2 of the Shipping Act of
1916, as amended, entitled to own and operate the Vessel under its Certificate
of Documentation, which Mortgagor shall maintain in full force and effect, and
is duly qualified to engage in the coastwise trade.  The Mortgagor lawfully owns and is lawfully
possessed of the Vessel, and covenants and warrants that the same is free from
any mortgage, security interest, Lien, charge or encumbrance whatsoever other
than Permitted Liens, and that the Mortgagor will warrant and defend the title
and possession thereto and every part thereof for the benefit of the Mortgagee
against the claims and demands of all persons whomsoever.

 

Section 1.2   U.S. Code, Tit.
46, Ch. 313.  The Mortgagor will, at
its expense and at no cost to the Mortgagee, comply with and satisfy all the
provisions of the U.S. Code, Tit. 46, Ch. 313, as amended, in order to
establish, record and maintain this Mortgage as a First Preferred Ship Mortgage
thereunder upon the Vessel, and will do all such other acts and execute all
such instruments, deeds, conveyances, mortgages and assurances as the Mortgagee
shall reasonably require in order to subject the Vessel to the lien of this
Mortgage as aforesaid.

 

Section 1.3   Liens. 
Neither the Mortgagor, any charterer, the master of the Vessel nor any
other person has or shall have any right, power or authority to create, incur
or permit to be placed or imposed or continued upon the Vessel, its freights,
profits or hires, any Lien, security interest, encumbrances or charge
whatsoever other than Permitted Liens. 
Mortgagor agrees to hold a certified copy of this Mortgage in
safekeeping with the Vessel’s papers with the Vessel’s Certificate of
Documentation and at the principal office of Mortgagor and on demand to exhibit
the same to any person having business with such Vessel, or to any
representative of Mortgagee.  Mortgagor
shall also place and cause to be displayed in a prominent place and in a
durable manner with the Vessel’s Certificate of Documentation 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, reading as follows:

 

NOTICE
OF MORTGAGE

 

This vessel is owned by K-Sea Operating Partnership
L.P. and is covered by a First Preferred Ship Mortgage under Chapter 313
of Title 46 of the United States Code, as amended, in favor of Citizens Asset Finance, a d/b/a of Citizens
Leasing Corporation, as Mortgagee.  Under
the terms of said Mortgage, neither the owner of this Vessel,
nor anyone on the owner’s behalf, nor the master of this Vessel has any right,
power or authority to create, incur or permit to be imposed upon the
Vessel any liens, maritime or otherwise other than liens for wages of the crew
or the master of 

 

3

 

this Vessel arising from the
current voyage, for wages of stevedores when employed directly by the Vessel,
or for general average or salvage.

 

Such notice shall be amended at the sole cost and
expense of Mortgagor, upon request of Mortgagee, to reflect the identity of any
successor Mortgagee.

 

Section 1.4   Removal of
Liens.  The Mortgagor will not suffer
to be continued any Lien, encumbrance or charge on the Vessel other than this
Mortgage and Permitted Liens, and in due course and in any event within thirty
(30) days after the same shall become due and payable, will pay or caused to be
discharged or make adequate provisions for the satisfaction or discharge of all
claims or demands secured by any Lien, charge or encumbrance (including
Permitted Liens) on the Vessel and will cause such Vessel to be released or
discharged from any such Lien, encumbrance or charge thereon.  After an Event of Default shall have occurred
and be continuing, the Mortgagee may elect to take such actions as it
reasonably deems necessary to pay or cause to be paid, discharge, settle,
compromise or satisfy any such Liens, claims, or encumbrances.

 

Section 1.5   Libel or
Attachment.  If a libel shall be
filed against the Vessel, or if the Vessel shall be levied upon or taken into
custody, or detained by any proceeding in any court or tribunal, the Mortgagor
will within fifteen (15) days thereafter cause such Vessel to be released, and
any Lien thereon, other than this Mortgage, to be discharged.  In the event a libel is filed against the
Vessel, or in the event the Vessel is levied upon or taken into custody or
detained by any authority whatsoever, the Mortgagor shall notify the Mortgagee
forthwith by facsimile or telegram, confirmed by overnight letter as provided
in the Loan Agreement.

 

Section 1.6   Maintenance of Vessel.  At all times, at the Mortgagor’s own cost and
expense, the Mortgagor will maintain and preserve the Vessel in as good
condition, working order and repair as on the date of this Mortgage, so that
the Vessel shall be tight, staunch, strong and well and sufficiently tackled,
appareled, furnished, equipped and in every respect seaworthy and in good order
and operating condition, ordinary wear and tear excepted.  The Mortgagor will comply with and cause the
Vessel to comply with all applicable United States Coast Guard
regulations.  The Mortgagor shall cause
the Vessel to be drydocked, cleaned and painted whenever required by good
commercial marine maintenance practice and the requirements of any insurance
policy or entries respecting the Vessel. 
All maintenance and repairs will be made in a good and workmanlike
manner by persons of appropriate skill and experience whose work will not
adversely affect the service life or marketability of the Vessel.  All repairs, parts, mechanisms, devices,
replacements, improvements, changes, additions and alterations to the Vessel
shall immediately and without further act, become part of such Vessel and
subject to this Mortgage.  The Mortgagor
shall promptly furnish to the Mortgagee copies of each damage survey with
respect to damage to the Vessel where the survey does not specifically quantify
the cost of total damages or where the survey states total damage in excess of
$500,000.00.  Mortgagor shall afford
Mortgagee or their authorized representatives reasonable
access to the Vessel for the purpose of inspecting the same, her cargoes and
ship’s papers.

 

4

 

Section 1.7   Changes in Vessel.  The Mortgagor will not make, or permit to be
made, any material change in the structure or type of the Vessel or in its rig,
unless it shall have received the prior written consent thereto of the
Mortgagee.

 

Section 1.8   Governmental Assessments.  The Mortgagor will pay and discharge when due
and payable from time to time all taxes, assessments, governmental charges,
fines and penalties imposed on the Vessel except those being contested in good
faith by the Mortgagor and for which adequate reserves have been made.

 

Section 1.9   Reimbursement.  The Mortgagor will reimburse the Mortgagee
promptly for any and all expenditures which the Mortgagee may elect to make
from time to time to protect the security granted hereunder (in the event of
the Mortgagor’s failure to do so), including payment of taxes, repairs,
insurance premiums, the discharge of any lien, libel or seizure of the Vessel,
and expenses, including reasonable attorney’s fees, incurred by the Mortgagee
in retaking or selling the Vessel; and any such payment made by the Mortgagee
shall be for the account of the Mortgagor, and the making thereof by the
Mortgagee shall not cure the Mortgagor’s Default in that regard nor constitute
a waiver of any right or remedy granted to the Mortgagee hereunder, and all
sums so expended by the Mortgagee or any liability incurred by them shall be
deemed to be an indebtedness of the Mortgagor and secured by this Mortgage, and
until paid shall bear interest at the Default Rate.

 

Section 1.10   Sale or Other Disposition of Vessel.

 

(a) 
The Mortgagor will not sell, mortgage, nor transfer the title to the Vessel
without the written consent of the Mortgagee first having been obtained, except
where accompanied by a simultaneous prepayment of the Obligations made in
accordance with §2.3(b) of the Loan Agreement.  Any such sale, mortgage, or transfer, or any
charter of the Vessel shall be subject to the provisions of this Mortgage and
to the lien it creates.  The Mortgagor
will not charter the Vessel to, or permit any Vessel to serve under any
contract of affreightment with, a person included within the definition of
designated foreign country or a national of a designated foreign country in the
foreign Assets Control Regulations or Cuban Assets Control Regulations of the
United States Treasury Department, 31 C.F.R. Chapter V, as amended, within the
meaning of said regulations or of any regulation, interpretation or ruling
issued thereunder.

 

(b) 
Mortgagor shall not enter into any bareboat or demise charter respecting the
Vessel with any entity without (i) obtaining the prior written consent of
the Mortgagee, which consent shall not be withheld unreasonably, (ii) providing
Mortgagee a copy thereof and (iii) without first obtaining the written
agreement of such charterer in each case to the collateral assignment by
Mortgagor to Mortgagee of a first priority lien and security interest in the
charter hire and earnings of such charter, such consent to be in form
reasonably acceptable to Mortgagee. 
Mortgagor undertakes and covenants that any such charter shall contain a
provision prohibiting the charterer and any other persons from incurring or
acquiring any lien on any Vessel.

 

Section 1.11   Insurance.

 

(a) 
Hull and Machinery Insurance. At the Mortgagor’s own expense, so long as
the Obligations remain in any part outstanding, the Mortgagor shall maintain or
cause to be 

 

5

 

maintained
insurance with financially sound and reputable underwriters and through
responsible brokers, all in good standing and satisfactory to the Mortgagee,
fully and adequately protecting the Vessel and the Mortgagee’s interest therein
in at least such amounts and against such risks as are usually insured against
in the same general area as that in which the Mortgagor is located and by
companies engaged in the same or similar businesses, and in any case, in such
amounts as the Lender shall require, against all marine perils and disasters
and all hazards, risks and liabilities in any wise arising out of the
ownership, operation or maintenance of said Vessel, including insurance as
follows:

 

(i)                                     Hull
and machinery insurance and if necessary to satisfy the proviso of this
subparagraph, policies of increased value insurance, and war risk hull and
machinery insurance on an agreed value basis on the Vessel against loss,
damage, fire and covering confiscation, expropriation, nationalization, and
seizure (if operating outside U.S. or Canadian coastal waters) and covering
such other perils and in such amounts as are maintained on vessels engaged in
the same or a similar business under blanket fleet policies with respect to
vessels of like size, character and marine activity; provided,
however, that, in no event shall the amount of such insurance, subject to such
deductible, if any, as permitted by Mortgagee, at any time be less than the
full commercial value of the Vessel.

 

(ii)                                  In
the event of (A) the actual or constructive loss of the Vessel, (B) any
event referred to in Section 1.12 hereof with respect to the Vessel, or (C) any
casualty, accident or damage to the Vessel in excess of $500,000.00, the Mortgagor
will give written notice thereof (containing full particulars), within three
business days of the occurrence thereof, to the Mortgagee.

 

(b) 
Protection and Indemnity Insurance. 
Protection and indemnity insurance maintained with financially sound and
reputable insurers or protection and indemnity associations and policies of
protection and indemnity war risk insurance protecting the interests of
Mortgagor, and Mortgagee, against liability for property damage to third
persons (including liability to any governmental authority or other person with
respect to pollution liability) and personal injury or death to any person
arising out of the maintenance, use, operation and ownership of the Vessel,
cargo damage or loss, contractual liability and wreck removal, tower’s
liability, crew liability, collision liability and pollution liability in such
amounts as are usually carried by persons engaged in the same or similar
businesses; provided, however, that in no event
shall the amount of such insurance per person and per occurrence (subject to
such deductible, reasonably acceptable to the Mortgagee) be less than the
customary amount of cover available on the market from time to time with
respect to vessels of the same type, age and trade as the Vessel.  Such liability insurance shall name each of
the Mortgagor, Mortgagee, and other interested persons as insureds (or in the
case of the Mortgagee as co-insureds), as their respective interests may
appear, but the proceeds of such policies shall be payable to the Person
actually suffering the loss in respect of which such proceeds are payable; provided, however, that if Mortgagee shall have first
notified the underwriters or brokers that a Mortgage Event of Default hereunder
has occurred then all such proceeds otherwise payable to the Mortgagor shall be
thereafter payable to Mortgagee for distribution to itself and others as their
interests may appear as hereinafter set forth.

 

6

 

(c) 
Deductibles. Unless a Mortgage Event of Default hereunder shall have
occurred, or is continuing hereunder, Mortgagee consents to (a) a
deductible of $250,000.00 for Hull and Machinery or Protection and Indemnity
coverages, not to exceed $250,000.00 for any single occurrence, subject also to
(b) a $1,000,000.00 annual aggregate fleet deductible for all of Mortgagor’s
vessels applied on a fleet wide basis.

 

(d) 
Port Risk Insurance. Mortgagor shall maintain or cause to be maintained
when and while the Vessel is laid up, and in lieu of the aforesaid navigating
hull insurance referred to in Section 1.11(a)(i) of this section,
port risk insurance under forms of port risk policies approved by the
Mortgagee.

 

(e) 
Employers Liability Insurance. 
Mortgagor shall maintain or cause to be maintained employers liability
insurance, including workmen’s compensation for any state in or from which the
Vessel shall operate and also coverage under the Longshore
and Harbor Workers’ Compensation Act, the Jones Act, and for such other
rights of seamen as may give rise to employers’ liability.

 

(f) 
Pollution Insurance. Mortgagor shall maintain or cause to be maintained
pollution insurance in amounts adequate to obtain and maintain Federal
Certificates of Financial Responsibility for Pollution Liability, and such additional
coverage for the Vessel in respect of pollution liability as from time to time
may be required by law now or hereafter in effect or customary among owners of
similar vessels engaged in trade in the United States.

 

(g) 
Continuation of Insurance Coverages.

 

(i)                                     The
Mortgagor expressly covenants and agrees to keep the policies renewed from time
to time, to keep the same valid at all times for the amounts aforesaid, and to
keep the premiums thereon fully paid at all times.  The Mortgagor shall not do any act nor
voluntarily suffer or permit any act to be done whereby insurance is or may be
suspended, impaired or defeated, and shall not suffer nor permit the Vessel to
engage in any voyage or to carry any cargo not permitted under the policy or
policies of insurance in effect, unless and until the Mortgagor shall first
cover the Vessel to the amount herein provided for by insurance satisfactory to
the Mortgagee for such voyage or for the carriage of such cargo.

 

(ii)                                  In
the event the Mortgagor fails to procure any of the insurance hereinabove
mentioned, or fails to perform any of the covenants and agreements contained
herein, the Mortgagee may, but shall be under no duty to, procure such
insurance or coverage as Mortgagee may reasonably deem advisable in the
premises.  The Mortgagor shall reimburse
the Mortgagee on demand, with interest at the Default Rate for any and all
expenditures which the Mortgagee may from time to time make, lay out or expend
in providing protection in respect of insurance.  Such obligation of the Mortgagor to reimburse
the Mortgagee, together with interest as provided above, shall be an additional
indebtedness due from the Mortgagor, secured by this Mortgage, and shall be
payable by the Mortgagor on demand.  The
Mortgagee, though privileged so to do, shall be under 

 

7

 

no
obligation to the Mortgagor or to any other person to make any such
expenditures, nor shall the making thereof relieve the Mortgagor of any Default
in that respect.

 

(h) 
Mortgagee as Additional Insured and Loss Payee. All insurance policies
covering the Vessel shall provide, during any period which the Mortgagee holds
a mortgage on the Vessel, that the Mortgagee shall be an additional assured
(co-insured in respect of liability insurance) and loss payee, as applicable,
under to the insurances required by this Section 1.11.

 

(i) 
Insurance Proceeds, Partial Loss. 
The proceeds of any such insurance recoveries shall be applied 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 agreed or compromised total loss of the Vessel, (i) all amounts up
to $500,000.00 may be paid to Mortgagor for the purpose of repairing any damage
which may have resulted from the accident, occurrence or event so long as no
Mortgage Event of Default has occurred, or (ii) with respect to amounts of
$500,000.00 or greater or with respect to any amount if a Mortgage Event of
Default has occurred, the Mortgagee may, in its discretion, if a written
request therefor shall have been made by the Mortgagor, apply the proceeds of
insurance to pay for repairs, liabilities, salvage or other charges and
expenses (including labor charges due or paid by the Mortgagor), covered by the
policies, or to the extent that the Mortgagor shall have repaired the damage
and paid the cost thereof or discharged or paid such liabilities, salvage
claims or other charges and expenses (such fact having been certified to in a
certificate of an officer of the Mortgagor (an “Officer’s Certificate”)
delivered to the Mortgagee, accompanied by written confirmation by the
underwriter, a surveyor, an adjuster or a marine insurance broker), apply the
proceeds of insurance to reimburse, or consent that the underwriters reimburse,
the Mortgagor therefor, and (after all known damage with respect to the
particular loss shall have been repaired, except to the extent the Mortgagor
and the Mortgagee agree that said repair is 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, such fact having been
certified to by an Officer’s Certificate delivered to the Mortgagee, accompanied
by a written confirmation by the underwriter, a surveyor, an adjuster or a
marine insurance broker), pay, or consent that the underwriters pay, any
balance of the proceeds of insurance to the Mortgagee for application to the
Obligations as provided in §2.3(b) of the Loan Agreement, and the excess,
if any, paid to the Mortgagor.

 

(j)  Constructive Total Loss.  In the event of an accident, occurrence or
event resulting in a constructive total loss of the Vessel, the Mortgagor shall
have the right to claim a constructive total loss of such Vessel and if both (i) 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 (ii) payment in
full is made in cash under such policies and applied to repay all outstanding
Obligations in accordance with Section 2.3(b) of the Loan Agreement,
then the Mortgagor shall have the right at its election, to abandon such Vessel
to the underwriters under such policies, free from the lien of this Mortgage.

 

(k)  Agreed or Compromised Total Loss.  In the event of an accident, occurrence or
event of damage to the Vessel, the Mortgagor with consent of the Mortgagee,
which shall not be withheld unreasonably, shall have the right in its
discretion to enter into an agreement or compromise with underwriters providing
for an agreed or compromised total loss of such Vessel.

 

8

 

(l)  Carriers; Approvals.  All insurance required under this Section shall
be placed and kept with American, British, or other insurance companies,
underwriters’ associations, clubs or underwriting funds approved by the
Mortgagee.  Any approval of a policy
under this Section 1.11 shall be effective until the end of the policy
period or until thirty (30) days after the Mortgagee shall notify the Mortgagor
of a desired change (consistent with the terms hereof except as set forth in
the next following sentence) in the form and/or amount thereof, whichever shall
first occur.  Notwithstanding the
foregoing, Mortgagee may require changes on shorter notice if such changes are
necessary or desirable to comply with requirements of or insure against
liabilities created or increased by any change, modification, amendment in the
law (including judicial or administrative decisions), regulations, rules,
policies or practices of the United States government or the government of any
state, territory, or possession thereof or of any other place where the Vessel
may be operating or whose laws may apply.

 

(m)  Additional Provisions.  All insurance required under this Section 1.11
shall, unless otherwise first agreed in writing by the Mortgagee, provide that (i) there
shall be no recourse against the Mortgagee for the payment of premiums,
supplemental or back calls or commissions, (ii) at least thirty (30) days’
(fourteen days with respect to matters covered in the protection and indemnity
coverage and seven (7) days in the case of war risk) prior written notice
of any cancellation, reduction in amount or change in coverage or other
material change of such insurance shall be given to the Lender by the insurance
underwriters, (iii) no insurance shall be excess over other coverage but
shall be primary insurance and shall not require any contribution from any
excess insurance on the Vessel which may be carried by Mortgagee without
interferring with the Mortgagor’s insurance coverage, and (iv) the
insurers agree to advise Mortgagee promptly in writing of any default in the
payment of any premium and of any other act or omission of which such insurer
has knowledge which might invalidate or render unenforceable, in whole or in
part, any such policy.  The policies
shall provide for severability of interest as through separate policies were
issued to each additional insured except with respect to the limits of
liability.

 

(n)  Reports.  Prior to the date hereof and upon renewal or
replacement of each policy or entry thereafter, Mortgagor shall furnish to the
Mortgagee a report by a nationally recognized first-class marine insurance
broker acceptable to the Mortgagee, describing in reasonable detail the
insurance then carried and maintained on and with respect to the Vessel and
certifying that such insurance complies with the terms hereof.  Mortgagor shall obtain for the benefit of
Mortgagee the undertaking of Mortgagor’s insurance agent or broker to promptly
advise the Mortgagee in writing of any act or omission of which such agent or
broker has knowledge which might invalidate or render unenforceable, in whole
or in part, any such policy.

 

Section 1.12   Requisition.

 

(a) 
Title.  In the event that the
title or ownership of the Vessel shall be requisitioned, purchased or taken by
any government of any country or any present or future law, proclamation,
decree, order or otherwise, the lien of this Mortgage shall be deemed to have
attached to the claim for compensation and the Mortgagor agrees that it will
turn over to the Mortgagee, immediately upon receipt, the compensation,
purchase price, reimbursement or award for such requisition, purchase or other
taking of such title or ownership and all of the foregoing shall be payable to
the Mortgagee, who shall be entitled to receive the same and shall apply it as
provided 

 

9

 

in
Section 2.3(b) of the Loan Agreement. 
In the event of any such requisition, purchase or taking, the Mortgagor
shall promptly execute and deliver to the Mortgagee such documents, if any, and
shall promptly do and perform such acts, if any as in the reasonable opinion of
the Mortgagee may be necessary or useful to facilitate or expedite the
collection by the Mortgagee of such compensation, purchase price, reimbursement
or award.

 

(b) 
Requisition of Use.  In the event
that any government of any country or any department, agency or representative
thereof shall not take over the title or ownership of the Vessel but shall
requisition, charter or in any manner take over the use of such Vessel pursuant
to any present or future law, proclamation, decree, order or otherwise and
shall, as a result of such requisitioning, chartering or taking of the use of
the Vessel, pay or become liable to pay sums by reason of the loss of or injury
to or depreciation of the Vessel, and, if a Mortgage Event of Default shall
have occurred and be continuing, any such sum is hereby made payable to the
Mortgagee, who shall be entitled to receive the same and shall apply it as
provided in the Loan Agreement.  In the
event of any such requisitioning, chartering or taking of the use of the
Vessel, the Mortgagor shall promptly execute and deliver to the Mortgagee such
documents, if any, and shall promptly do and perform such acts, if any, as in
the reasonable opinion of the Mortgagee may be necessary or useful to
facilitate or expedite the collection by the Mortgagee of such claims arising
out of the requisitioning, chartering or taking of the use of the Vessel as
provided hereinabove.

 

ARTICLE II

DEFAULT; REMEDIES UPON DEFAULT

 

Section 2.1   Mortgage Events of Default. Mortgagor
shall be in default hereunder upon the happening of any one or all of the
following events or conditions (each a “Mortgage Event of Default”):

 

(a) 
An Event of Default (as defined in the Loan Agreement); or

 

(b) 
Failure by the Mortgagor to observe or perform any covenant or agreement
contained in Sections 1.1, 1.2, 1.7, 1.10(a) or 1.11(a) through (f)(inclusive);

 

(c) 
Failure by the Mortgagor to observe or perform any covenant or agreement in
this Mortgage (other than those referred to in the foregoing paragraph (b) and
such failure shall not have been remedied within thirty (30) days after written
notice thereof shall have been given to the Mortgagor by the Mortgagee);

 

(d) 
The breach in any material respect of any warranty, or the falsity of any
material representation or statement made or furnished to the Mortgagee by or
on behalf of the Mortgagor; or

 

(e) 
If Mortgagor or any charterer shall abandon the Vessel or the remove or attempt
to remove the Vessel beyond the limits of the United States except on a voyage
with the intention of returning to the United States; or

 

(f) 
Dissolution of the Mortgagor.

 

10

 

Section 2.2   Remedies.  Upon the occurrence of a Mortgage Event of
Default the Mortgagee may pursue any or all of the following remedies:

 

(a) 
Demand.  Declare all obligations
secured hereby to be immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby expressly waived;

 

(b) 
Remedies.  Exercise all the rights
and remedies in foreclosure and otherwise given to mortgagees by the provisions
of Chapter 313 of Title 46, United States Code, as amended, or other applicable
law including the laws of any other applicable jurisdiction;

 

(c) 
Enforcement.  Bring suit at law,
in equity or in admiralty, as appropriate, to receive judgment for any and all
amounts due hereunder, and collect the same out of any and all property of the
Mortgagor whether covered by this Mortgage or otherwise, or initiate and
prosecute such other judicial, extra-judicial, or administrative proceedings as
it may consider appropriate to recover any and all sums due, or declared due,
on the Note, and all other Obligations due, with the right to enforce payment
of said sums against any assets of the Mortgagor, whether they are covered by
this Mortgage or otherwise;

 

(d) 
Possession.  Retake the Vessel
with or without legal process wherever the same may be found, and the Mortgagor
or other person in possession forthwith shall upon demand of the Mortgagee
shall surrender to the Mortgagee possession of the Vessel, and, the Mortgagee
may hold, lay-up, or (if authorized to do so by the Vessel’s certificate of
documentation) lease, charter, operate, or otherwise use the Vessel for such
time and upon such terms as it may deem to be for its best advantage,
accounting for the net profits, if any, arising from such use of the Vessel as
set forth in Section 2.3, below; and if at any time the Mortgagee shall
avail itself of the right herein given it to retake the Vessel and shall retake
it, the Mortgagee shall have the right to dock the Vessel for a reasonable time
at any dock, pier or other premises of the Mortgagor without charge, or to dock
it at any other place at the cost and expense of the Mortgagor;

 

(e) 
Sale.  Sell the Vessel upon such
terms and conditions as it may specify, at public or private sale, by sealed
bids or otherwise, on such terms and conditions as the Mortgagee deems best,
free of any claim, commitment or encumbrance, regardless of the nature thereof,
in favor of the Mortgagor and except as provided by law, in favor of any other
person.  If a public sale is to be used,
the Mortgagee shall first give advance notice of ten (10) consecutive days
published in any newspaper authorized to publish legal notices of that kind in
the port of documentation and the places of sale of such Vessel and shall send
notice of each such sale at least fourteen (14) days prior to the date fixed
for such sale to the Mortgagor pursuant to §14 of the Loan
Agreement.  In the event that the Vessel
shall be offered for sale by private sale, no newspaper publication of notice
shall be required nor notice of adjournment of sale.  Sale may be held at such place and at such
time as the Mortgagee by notice may have specified, or may be adjourned by the
Mortgagee from time to time by announcement at the time and place appointed for
such sale or for such adjourned sale, and, without further notice or
publication, the Mortgagee may make any such sale at the time and place to
which the same shall be so adjourned; and any sale may be conducted without
bringing the Vessel to the place designated for such sale and in such manner as
the Mortgagee deems, and the Mortgagee may become the purchaser at any public
sale, and shall have the right to credit on the purchase price any and all sums
of money due to the 

 

11

 

Mortgagee under
the Note and the Loan Agreement, or otherwise due to the Mortgagee hereunder or
under the Loan Agreement or any other Loan Document, or under any other
instrument evidencing any Obligations.

 

(f) 
Finality of Sale.  A sale of the
Vessel made pursuant to this Mortgage, whether under the power of sale hereby
granted or any judicial proceedings, shall operate to divest all right, title
and interest of any nature whatsoever of the Mortgagor therein and thereto, and
shall bar the Mortgagor, its successors and assigns, and all persons claiming
by, through or under them.  No purchaser
shall be bound to inquire whether notice has been given or whether any Default
has occurred, or as to the propriety of the sale, or as to application of the
proceeds thereof.  In case of any such
sale, any purchaser who is the holder of this Mortgage shall be entitled, for
the purpose of making settlement or payment for the Vessel, to apply the
balance due under this Mortgage or a part thereof as part or all
of the purchase price to the extent of the amount remaining due and
unpaid.  At any such sale, the holder of
this Mortgage may bid for and purchase the Vessel and upon compliance with the
terms of sale may hold, retain and dispose of the Vessel without further
accountability.

 

(g) 
Appointment of Attorney.  The
Mortgagor does hereby irrevocably appoint the Mortgagee the true and lawful
attorney of the Mortgagor, in Mortgagor’s name and stead to make all necessary
transfers of the Vessel and to execute all necessary instruments of assignment
and transfer, the Mortgagor hereby ratifying and confirming all that said
attorney shall lawfully do by virtue hereof. 
Nevertheless, the Mortgagor shall, if so requested by the Mortgagee,
ratify and confirm such sale by executing and delivering to the purchaser of
the Vessel such proper bill of sale, conveyance, instrument of transfer and
releases as may be designated in such request.

 

(h) 
Coastwise Qualification. 
Notwithstanding anything to the contrary contained in this Section 2.2,
the Mortgagee shall not exercise any of the remedies set forth above in this Section 2.2
or any other remedies available under applicable law if the exercise of such
remedies shall invalidate the qualification of the Vessel to operate in the
United States coastwise trade.

 

Section 2.3   Disposition of Proceeds of Sale.  After an Event of Default shall have occurred
and be continuing, the proceeds of any sale of the Vessel (after paying or
deducting in the case of sale under any judicial proceedings the fees, costs
and other charges therein), and the net earnings from any management, charter
or other use of the Vessel by Mortgagee under any of the powers above
specified, and the proceeds of any claim for damages on account of such Vessel
received by the Mortgagee while exercising any such power, and the proceeds of
any insurance on the Vessel concerned (subject to the provisions of this agreement)
shall be applied by Mortgagee as provided in Section 2.4(b) of
the Loan Agreement.

 

Section 2.4   Powers and Rights of Mortgagee Upon
Occurrence of a Mortgage Event of Default.

 

(a) 
Each and every power and remedy herein specifically given to the Mortgagee or
otherwise in this Mortgage shall be cumulative and shall be in addition to
every other power and remedy herein specifically given or now or hereafter
existing at law, in equity, admiralty or by statute, and each and every power
and remedy whether specifically herein given or otherwise existing may be
exercised from time to time and as often and in such order as may be deemed 

 

12

 

expedient
by the Mortgagee, and the exercise or the beginning of the exercise of any
power or remedy shall not be construed to be a waiver of the right to exercise
at the same time or thereafter any other power or remedy.  No delay or omission by the Mortgagee in the
exercise of any right or power or in the pursuance of any remedy occurring upon
any Mortgage Event of Default as above defined shall impair any such right,
power or remedy or be construed to be a waiver of any such event of default or
to be any acquiescence therein; nor shall the acceptance by the Mortgagee of
any security or of any payment of or on account of any installment of the Note
maturing after any Mortgage Event of Default or of any payment on account of
any past default be construed to be a waiver of any right to take advantage of
any future Mortgage Event of Default or of any past Mortgage Event of Default
not completely cured thereby.

 

(b) 
Revenues and Proceeds of Vessel. 
The Mortgagee is hereby irrevocably appointed attorney-in-fact of the
Mortgagor, upon the happening of any Mortgage Event of Default, in the name of
the Mortgagor to demand, collect, receive, compromise and sue for, so far as
may be permitted by law, all freights, hire, earnings, issues, revenues, income
and profits of the Vessel, and all amounts due from underwriters under any
insurance thereon as payment of losses or as return premiums or otherwise,
salvage awards and recoveries, recoveries in general average or otherwise, and
all other sums due or to become due in respect of the Vessel or in respect of
any insurance thereon from any person whomsoever, and to make, give and execute
in the name of the Mortgagor acquittances, receipts, releases or other
discharges for the same, whether under seal or otherwise, and to endorse and
accept in the name of the Mortgagor all checks, notes, drafts, warrants,
agreements and all other instruments in writing with respect to the foregoing,
the Mortgagor hereby confirming and ratifying the same.

 

(c) 
Additional Rights.  The Mortgagor
covenants and agrees that in addition to any and all other rights, powers and
remedies elsewhere in this Mortgage granted to and conferred upon the
Mortgagee, and including in any suit to enforce any of its rights, powers or
remedies, if a Mortgage Event of Default shall have occurred and shall not have
been waived by the Mortgagee, the Mortgagee shall be entitled as a matter of
right and not as a matter of discretion, but subject to Section 2.2(h) of
this Article 2 (i) to the appointment of a receiver or receivers of
the Vessel and collection of the freights, hire, earnings, issues, revenues,
income and profits due or to become due arising from any operation of the
Vessel, and any receiver or receivers so appointed shall have full right and
power to use and operate the Vessel, and (ii) to a decree ordering and
directing the sale and disposal of the Vessel, and the Mortgagee may become the
purchaser at such sale and shall have the right to credit on the purchase price
any and all sums of money due under the Note or otherwise due to the Mortgagee
pursuant to the terms of the Loan Agreement or under any other instrument
evidencing any Obligations.  The
Mortgagee shall not be required to have the Vessel marshaled (upon any sale of
the Vessel pursuant to this Mortgage or otherwise) or be required to realize on
any other collateral prior to realization on the Vessel.

 

ARTICLE III

GENERAL POWERS OF MORTGAGEES

 

Section 3.1   Arrest or Detention of Vessel.  In the event that an Event of Default shall
have occurred hereunder and the 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 

 

13

 

or by any
government or other Person, the Mortgagor does hereby authorize and empower the
Mortgagee, from the date of arrest or detention, in the name of the Mortgagor,
or its successors or assigns, to apply for and receive possession of and to
take possession of such Vessel with all the rights and powers that the
Mortgagor, or its successors or assigns, might have, possess or exercise in any
such event; and this power of attorney shall be irrevocable and may be
exercised not only by the Mortgagee but also by their appointee or appointees,
with full power of substitution, to the same extent as if the said appointee or
appointees had been named as one of the attorneys above named by express
designation.

 

Section 3.2   Appearance.  In the event an Event of Default shall have
occurred hereunder, the Mortgagor also authorizes and empowers the Mortgagee or
its appointees or any of them to appear in the name of the Mortgagor, its
successors or assigns, in any court of any country or nation of the world where
a suit is pending against the Vessel because of or on account of any alleged
lien against such Vessel from which such Vessel has not been released and to
take such proceedings as to them may seem proper towards the defense of such
suit and the discharge of such lien, and all expenditures made or incurred by
them or any of them for the purpose of such defense or discharge shall be a
debt due from the Mortgagor, its successors and assigns, to the Mortgagee, and
shall be secured by the lien of this Mortgage in like manner and extent as if
the amount and description thereof were written herein.

 

ARTICLE IV

INDEMNITY

 

The Mortgagor assumes liability for, and agrees to
indemnify and hold the Mortgagee harmless from, all claims, costs, expenses
(including reasonable legal fees and expenses), damages and liabilities arising
from or pertaining to this Mortgage or the ownership, use, possession or
operation of the Vessel; provided that the Mortgagor shall have no
obligation for indemnified liabilities arising from the gross negligence or
willful misconduct of Mortgagee or arising from the acts or omissions of the
Mortgagee as mortgagee-in-possession. 
The agreements and indemnities contained in this Article shall
survive the maturity or earlier discharge of this Mortgage and payment in full
of the Note.

 

ARTICLE V

MORTGAGOR’S USE AND POSSESSION

 

Until some one or more of the Mortgage Events of
Default hereinbefore described shall happen, the Mortgagor shall be suffered
and permitted to retain exclusive actual possession and use of the Vessel.

 

ARTICLE VI

MISCELLANEOUS

 

Section 6.1   Counterparts.  This Mortgage may be executed simultaneously
in any number of counterparts and all such counterparts executed and delivered
each as an original shall 

 

14

 

constitute
but one and the same instrument.  The
invalidity of any provision of this Mortgage shall not affect the remainder,
which shall in such event be construed as if the invalid provisions had not
been inserted.

 

Section 6.2   Binding Effect.  All the covenants, promises, stipulations and
agreements of the Mortgagor in this Mortgage shall bind the Mortgagor and its
successors and shall inure to the benefit of the Mortgagee and its assigns,
whether so expressed or not.  All of the
covenants, promises, stipulations and agreements of the Mortgagee, if any,
shall bind the Mortgagee and its assigns, whether so expressed or not.

 

Section 6.3   No Waiver of Preferred Status.  Nothing in this Mortgage shall be construed
as a waiver of the preferred status of this Mortgage by the Mortgagee.  In the event that any provision of this
mortgage would, as a matter of law, operate to waive the preferred status
thereof, such provision shall be deemed eliminated therefrom, the same for all
intents and purposes as though such provision had never been inserted herein.

 

Section 6.4   Nature of
Agreements Hereunder.  The
agreements, terms, conditions, rights, remedies and indemnities provided herein
are in addition to, not in limitation of, and shall not be limited by, each of
the agreements, terms, conditions, rights, remedies and indemnities contained
in the Loan Agreement.

 

Section 6.5   Citizenship.  Notwithstanding any other language in this
Mortgage to the contrary, the Mortgagee shall not take any action in violation
of Section 9 of the Shipping Act, 1916, as amended by Public Law 100-710
(46 U.S.C. Chapter 313).  To the extent
any provision of this Mortgage contravenes Section 9 of the Shipping Act, 1916, such provision may be deemed void without affecting
the validity and enforceability of the other provisions of this Mortgage.

 

Section 6.6   Construction.  Any provision of this Mortgage which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, any such prohibition or
unenforceability shall not invalidate or render unenforceable such provision in
any other jurisdiction to the extent permitted by law, Mortgagor hereby waives
any provision of law which renders any provision hereof prohibited or
unenforceable in any respect.  To the
extent that this Mortgage is not governed by the federal maritime law and
federal statutes and regulations, this Mortgage shall be construed in
accordance with the laws of the State of New York.

 

Section 6.7   All exhibits attached hereto are by this
reference incorporated fully herein.  The
term “this Mortgage” shall be considered to include all such exhibits. The rules of
interpretation specified in §1.2 of the Loan Agreement shall be
applicable to this Mortgage.

 

Section 6.8   This Mortgage and any provisions hereof may
not be modified, amended, waived, extended, changed, discharged or terminated
orally, or by any act or failure to act on the part of the Mortgagor or the
Mortgagee, but only by an agreement in writing signed by the party against whom
the enforcement of any modification, amendment, waiver, extension, change,
discharge or termination is sought.

 

15

 

Section 6.9   Consent to Forum.  The provisions of Section 18 of the Loan
Agreement shall apply as though fully set forth herein.

 

ARTICLE VII

TOTAL AMOUNT OF THIS MORTGAGE

 

For the purposes of this First Preferred Ship Mortgage
and for purposes of recording this First Preferred Ship Mortgage as required by
Chapter 313 of United States Code, Title 46, Sec. 922(c)), the total amount is
Eighteen Million and No/100 Dollars ($18,000,000.00), interest thereon,
prepayment premium, if any, and performance of the Mortgage covenants; and the
total discharge amount is the same as the total amount.

 

16

 

IN WITNESS
WHEREOF, the Mortgagor has executed this Mortgage as of the
      day of [                ],
2005. 

 

	
   

  	
  K-SEA OPERATING PARTNERSHIP L.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  K-Sea OLP GP, LLC, its General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name: John J. Nicola 

  
	
   

  	
   

  	
   

  	
  Title: Chief Financial Officer

  

 

 

	
  STATE OF NEW
  YORK

  	
   

  
	
  COUNTY OF
  RICHMOND, ss.

  	
   

  

 

Be it known, that
on this       day of
                     ,
2005, personally appeared John J. Nicola who being duly sworn deposed and said
that he is Chief Financial Officer of K-SEA OPERATING PARTNERSHIP L.P., the
Limited Partnership which is described in and executed the within instrument at
whose order he signed his name and acknowledged the within instrument to be the
free act and deed of the said Limited Partnership.

 

In Witness Whereof,
I have hereby set my hand and seal this
         day of
                     ,
2005.

 

 

	
   

  	
   

  
	
   

  	
  Notary
  Public

  
	
   

  	
  My
  Commission Expires:

  

 

18

 

Exhibit D

 

ASSIGNMENT AND ACCEPTANCE

 

                           ,
20  

 

Reference is made
to the Loan Agreement dated as of [                          ],
2005 (the “Loan Agreement”), among K-Sea Operating Partnership L.P., a Delaware
limited partnership (the “Borrower”), and the lenders which are parties thereto
(each a “Lender”).  Capitalized terms
used but not defined herein shall have the meanings assigned to such terms in
the Loan Agreement.

 

                  
(the “Assignor”) and                   
(the “Assignee”) agree as follows:

 

1.                                       The
Assignor hereby irrevocably sells, assigns and delegates to the Assignee, and
the Assignee hereby purchases and assumes from the Assignor, a       %
interest in and to all the Assignor’s rights and obligations under the Loan
Agreement and the other Loan Documents as of the Effective Date (as defined
below) with respect to the Loan (including, without limitation, such percentage
interest in all unpaid interest with respect to such Loan).

 

2.                                       The
Assignor (i) represents that as of the date hereof, the outstanding principal
amount of the Loan (without giving effect to assignments thereof which have not
yet become effective) is $              ;
(ii) makes no representation or warranty and assumes no responsibility with
respect to any statements, warranties or representations made in or in
connection with the Loan Agreement or the other Loan Documents or the
execution, legality, validity, enforceability, genuineness, sufficiency or
value of the Loan Agreement or the other Loan Documents or any other instrument
or document furnished pursuant thereto, other than that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim created by, through or under
the Assignor; and (iii) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Borrower or the
performance of any of its obligations under the Loan Agreement, any of the Loan
Documents or any other instrument or document furnished pursuant hereto or
thereto.

 

3.                                       The
Assignee (i) represents and warrants that it is legally authorized to enter
into this Assignment and Acceptance; (ii) confirms that it has received a copy
of the Loan Agreement and the other Loan Documents, together with copies of the
most recent financial statements delivered pursuant to Section 7.4
thereof and such other documents and information as it has deemed appropriate
to make its own credit analysis and decision to enter into this Assignment and
Acceptance; (iii) agrees that it will, independently and without reliance upon
the Assignor or any other person which has become a Lender and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under the Loan
Agreement and the other Loan Documents; (iv) agrees that it will be bound by
the provisions of the Loan Agreement and will perform in accordance with their
terms all the obligations which by the terms of the Loan Agreement and the
other Loan Documents are required to be performed by it as a Lender; (v) (if an
assignment of Assignor’s entire interest in the Loan) agrees to act as
successor Registration Agent and to perform the duties of the Registration
Agent in accordance with Section 13.6 of the Loan Agreement; (vi) agrees that
it will be bound by the provisions of the Loan Agreement and will perform in

 

 

accordance with its terms all the obligations which by
the terms of the Loan Agreement are required to be performed by it as a Lender
including, if it is organized under the laws of a jurisdiction outside the
United States, its obligation to deliver to the Borrower, on or before the
Effective Date, the United States Internal Revenue Service forms specified in
Section 13.2(c) of the Loan Agreement; and (vii) confirms that the Assignee is
an “Eligible Assignee” under the terms of the Loan Agreement.

 

4.                                       The
effective date of this Assignment and Acceptance shall be               ,
20     (the “Effective Date”).

 

5.                                       From
and after the Effective Date, (i) the Assignee shall be a party to the Loan
Agreement and the other Loan Documents, to the extent provided in this
Assignment and Acceptance, have the rights and obligations of a Lender
thereunder and shall be bound by the provisions thereof and (ii) the Assignor
shall, to the extent provided in this Assignment and Acceptance, relinquish its
rights and be released from its obligations under the Loan Agreement and the
other Loan Documents.

 

6.                                       The
Assignor agrees to give written notice of this Assignment and Acceptance to the
Registration Agent, each other Lender and the Borrower, which written notice
shall include the address, payment instructions and related information with
respect to the Assignee.

 

7.                                       THIS
ASSIGNMENT AND ACCEPTANCE SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF
AMERICA, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE,
WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW (OTHER THAN TITLE 14 OF
ARTICLE 5 OF THE GENERAL OBLIGATIONS LAW).

 

2

 

IN WITNESS
WHEREOF, the Assignor and Assignee have caused this Assignment and Acceptance
to be executed and delivered as of the date first above written.

 

	
   

  	
  [NAME OF
  ASSIGNOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  [NAME
  OF ASSIGNEE]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
					

 

 

Exhibit E

 

SECURITY
AGREEMENT

 

K-SEA OPERATING PARTNERSHIP L.P.,

 

 

as the Borrower

 

 

to

 

 

CITIZENS ASSET FINANCE, A D/B/A OF

CITIZENS LEASING CORPORATION,

as the Lender

 

Dated as of June    , 2005

 

 

SECURITY AGREEMENT

 

SECURITY
AGREEMENT, dated as of  [                             ],
2005 (this “Agreement”) between K-SEA OPERATING PARTNERSHIP L.P., a Delaware
limited partnership (the “Borrower”), and CITIZENS ASSET FINANCE, A D/B/A OF CITIZENS
LEASING CORPORATION (the “Lender”).

 

(i)                                     Pursuant
to the terms and conditions of a Loan Agreement dated as of the date hereof,
between the Borrower and the Lender (as the same may be amended, supplemented,
or modified from time to time, the “Loan Agreement”), the Lender has, at
Borrower’s request, agreed to make loan advances to the Borrower in the
aggregate principal amount of up to $17,000,000 (the “Loan”), the entire
proceeds of which shall be used by the Borrower to finance the construction of
two United States flag vessels, and to finance the acquisition by the Borrower
of a third United States flag vessel, which are described on Schedule  A
hereto (the “Vessels”).  The obligations
of the Borrower with respect to the Loan are evidenced by the Loan Agreement
and by a term promissory note (the “Note”), to be dated as of the Advance
Termination Date (as defined in the Loan Agreement), and are secured by the
Security Documents (as defined in the Loan Agreement).

 

(ii)                                  It
is a condition precedent to the obligation of the Lender to make the Loan to
the Borrower that, among other things, the Borrower shall have executed and
delivered this Agreement to the Lender as additional security for the Obligations.

 

(iii)                               The
Borrower wishes to grant security interests in favor of the Lender as herein
provided.

 

NOW, THEREFORE, in
consideration of the foregoing recitals, the promises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

 

1.                                      DEFINITIONS.  All capitalized terms used herein without
definitions shall have the respective meanings provided therefore in the Loan
Agreement.  The term “State”, as used
herein, means the State of New York.  All
terms defined in the Uniform Commercial Code of the State and used herein shall
have the same definitions herein as specified therein.  However, if a term is defined in Article 9 of
the Uniform Commercial Code of the State differently than in another Article of
the Uniform Commercial Code of the State, the term has the meaning specified in
Article 9.

 

2.                                      GRANT
OF SECURITY INTEREST.  (a)  The Borrower hereby grants to the Lender, to
secure the payment and performance in full of all of the Obligations, a
security interest in and pledges and assigns to the Lender all of the Borrower’s
rights, title and interest, as collateral security, in and to (i) the Vessels,
(ii) amounts due under any and all charter agreements, whether bareboat or
demise, time or voyage charters, contracts of affreightment or other contracts
for the use or employment of the Vessels, including the transportation of cargo
or passengers, (iii) all

 

 

charter hires, fees, and all other amounts due and
payable to the Borrower arising out of the Vessels, (iv) all policies and
contracts of insurance (which expression includes all entries of the Vessels in
one or more protection and indemnity or risks associations) which are or have
been from time to time taken out or entered into by Borrower in respect of the
Vessels or their earnings, including, but not limited to insurances on and with
respect to all freight, charter hire, and passage monies, remuneration for
salvage and towage services, general average contributions, demurrage and
detention monies and any other proceeds whatsoever relating to Vessel
insurances, whether now, previously, or hereafter effected, and all renewals of
or replacements for the same, all claims and returns of premiums and other
monies and claims for monies due and to become due under said insurances or in
respect of said insurances, and all other rights of the Borrower under or in
respect of said insurances, (v) the Vessel Construction Agreement dated
February 21, 2005 between the Borrower and Bollinger Marine Fabricators,
L.L.C., including any payment or performance bonds or refunds thereunder
relating to DBL 28 or DBL 29 and all insurances and other amounts due to
Borrower thereunder, (vi) all other property, interests and rights now or at
any time hereafter relating to the Vessels, wherever located; in all of the
foregoing cases, whether now owned or in existence or hereafter acquired or
arising, and all proceeds and products thereof including, but not limited to,
(A) whatever is received upon the collection, exchange, sale or other
disposition of any Collateral and any property unto which any of the Collateral
is converted, whether cash or non-cash proceeds, (B) any and all proceeds of
any insurance, indemnity, warranty or guarantee payable to the Borrower from
time to time with respect to the Collateral, (C) any and all payments (in any
form whatsoever) made or due and payable to the Borrower from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of any of the Collateral by any Governmental Authority (or any
Person acting under order of governmental authority), and (D) any and all other
amounts from time to time paid or payable under or in connection with any of
the Collateral (all of the same being hereinafter called the “Collateral”).

 

(b)                                 the
Borrower agrees to give a notice of assignment of insurances in the form
attached hereto as Exhibit  A and that insurance loss payable
clauses shall be in the form of Exhibit  B.

 

3.                                      AUTHORIZATION
TO FILE FINANCING STATEMENTS.  The
Borrower hereby irrevocably authorizes the Lender at any time and from time to
time to file in any Uniform Commercial Code jurisdiction any initial financing
statements and amendments thereto that (a) indicate the Collateral (i) as all
assets of the Borrower or words of similar effect relating to the Vessels,
regardless of whether any particular asset comprised in the Collateral falls
within the scope of Article 9 of the Uniform Commercial Code of the State or
such jurisdiction, or (ii) as being of an equal or lesser scope or with greater
detail, and (b) contain any other information required by part 5 of Article 9 of the Uniform Commercial Code of the State
for the sufficiency or filing office acceptance of any financing statement or
amendment, including whether the Borrower is an organization, the type of
organization and any organization identification number issued to the
Borrower.  The Borrower agrees to furnish
any such information to the Lender promptly upon request.

 

2

 

3.1                               OTHER
ACTIONS.   The Borrower further
agrees to take any action reasonably requested by the Lender to ensure the
attachment, perfection and first priority of, and the ability of the Lender to
enforce, the Lender’s security interest in any and all of the Collateral
including, without limitation, (a) executing, delivering and, where
appropriate, filing financing statements and amendments relating thereto under
the Uniform Commercial Code, to the extent, if any, that the Borrower’s
signature thereon is required therefor, (b) causing the Lender’s name to be
noted as secured party on any certificate of title for a titled good if such
notation is a condition to attachment, perfection or priority of, or ability of
the Lender to enforce, the Lender’s security interest in such Collateral, (c)
complying with any provision of any statute, regulation or treaty of the United
States as to any Collateral if compliance with such provision is a condition to
attachment, perfection or priority of, or ability of the Lender to enforce, the
Lender’s security interest in such Collateral, (d) obtaining governmental and
other third party consents and approvals, including without limitation any
consent of any licensor, lessor, charterer, lessee or other person obligated
respecting the Collateral, and (e) taking all actions required by any earlier
versions of the Uniform Commercial Code or by other law, as applicable in any
relevant Uniform Commercial Code jurisdiction, or by other law as applicable in
any foreign jurisdiction.

 

4.                                      RELATION
TO OTHER SECURITY DOCUMENTS.  The
provisions of this Agreement supplement the provisions of the Ship Mortgage(s)
and the Assignment of Project Documents granted, and to be granted, by the
Borrower to the Lender and securing the payment or performance of any of the
Obligations. Nothing contained in any Ship Mortgage or the Assignment of
Project Documents shall derogate from any of the rights or remedies of the
Lender hereunder.

 

5.                                      REPRESENTATIONS
AND WARRANTIES CONCERNING BORROWER’S LEGAL STATUS.  The Borrower has previously delivered to
the Lender a certificate signed by the Borrower and entitled “Perfection
Certificate” (the “Perfection Certificate”). 
The Borrower represents and warrants to the Lender as follows: (a) the
Borrower’s exact legal name is that indicated on the Perfection Certificate and
on the signature page hereof, (b) the Borrower is an organization of the type,
and is organized in the jurisdiction, set forth in the Perfection Certificate,
(c) the Perfection Certificate accurately sets forth the Borrower’s
organizational identification number or accurately states that the Borrower has
none, (d) the Perfection Certificate accurately sets forth the Borrower’s place
of business or, if more than one, its chief executive office as well as the
Borrower’s mailing address if different and (e) all other information set forth
on the Perfection Certificate pertaining to the Borrower is accurate and
complete.

 

6.                                      COVENANTS
CONCERNING BORROWER’S LEGAL STATUS. 
The Borrower covenants with the Lender as follows: (a) without providing
at least 30 days prior written notice to the Lender, the Borrower will not
change its name; its place of business or, if more than one, its chief executive
office; or its mailing address or organizational identification number if it
has one, (b) if the Borrower does not have an organizational identification
number and later obtains one, the Borrower shall forthwith notify the Lender of
such organizational identification number,

 

3

 

and (c) the Borrower will not change its type of
organization, jurisdiction of organization or other legal structure.

 

7.                                      REPRESENTATIONS
AND WARRANTIES CONCERNING COLLATERAL, ETC.  The Borrower warrants to the Lender all
representations and warranties in §3 of the Loan Agreement as if all such
representations and warranties were set out in full herein.  The Borrower further represents and warrants
to the Lender as follows: (a) the Borrower has good and marketable title to all
items of the Collateral (but only as of the date hereof, to the extent it has “rights
in the Collateral” as such term is used in the UCC) pledged by it, free and
clear of any Liens, except Permitted Liens, (b) none of the Collateral
constitutes, or is the proceeds of, “farm products” as defined in § 9-102(a)(34) of the Uniform Commercial Code of the State
and (c) all other information set forth on the Perfection Certificate
pertaining to the Collateral is accurate and complete.

 

8.                                      COVENANTS
CONCERNING COLLATERAL, ETC.  The Borrower further covenants with the Lender as follows: (a)
except for the security interest herein granted and Permitted Liens and except
as may be specifically set forth in any insurances or entries of a Vessel in a
protection and indemnity association, (x) the Borrower shall be the owner of
the Collateral respecting DBL 78 free from any lien, security interest or other
encumbrance and (y) upon the respective delivery dates of each of DBL 28 and
DBH 29 to the Borrower by the builder thereof, the Borrower shall be owner of
the Collateral respecting DBL 28 and DBH 29 respectively free from any lien,
security interest or other encumbrance, in each case, and the Borrower shall
warrant and defend the same against all claims and demands of all persons at
any time claiming the same or any interests therein adverse to the Lender, and
shall, at its expense, cause such claim to be waived in writing or otherwise
eliminated to the Lender’s satisfaction within 30 days after such claim shall
become due and payable (except with respect to DBL 28 and DBL 29 prior to
delivery thereof from the Builder to the Borrower), (c) the Borrower shall not
pledge, mortgage or create, or suffer to exist a security interest in the
Collateral in favor of any person other than the Lender except for Permitted
Liens (except with respect to DBL 28 and DBL 29 prior to delivery thereof from
the Builder to the Borrower), (d) the
Borrower will keep the Collateral in good order and repair (except with respect
to DBL 28 and DBL 29 prior to delivery thereof from the Builder to the
Borrower) and will not use the same in violation of law or any policy of
insurance thereon, (e) the Borrower will pay promptly when due all taxes,
assessments, governmental charges and levies upon the Collateral or incurred in
connection with the use or operation of the Collateral incurred in connection
with this Agreement, and (f) upon Lender’s request, Borrower will give the
Lender notice and copies of all other leases, charters or other agreements in
the nature thereof entered into from time to time with respect to the Vessels
and having a term of six (6) months or longer.

 

9.                                      INSURANCE.

 

The Borrower will maintain insurance in accordance with the
terms of the Ship Mortgages covering DBL 78 and, upon delivery respectively of
DBL 28 and DBL 29, in accordance with those respective Ship Mortgages.

 

4

 

10.                               COLLATERAL
PROTECTION EXPENSES; PRESERVATION OF COLLATERAL.

 

10.1                        EXPENSES
INCURRED BY LENDER.  After the
occurrence of an Event of Default, the Lender may discharge taxes and other
encumbrances at any time levied or placed on any of the Collateral, make
repairs thereto, maintain the Collateral and pay any necessary filing fees or,
if the debtor fails to do so, insurance premiums.  The Borrower agrees to reimburse the Lender
on demand for any and all expenditures so made. 
The Lender shall have no obligation to the Borrower to make any such
expenditures, nor shall the making thereof relieve the Borrower of any default.

 

10.2                        LENDER’S
OBLIGATIONS AND DUTIES.  Anything
herein to the contrary notwithstanding, the Borrower shall remain liable under
each contract or agreement comprised in the Collateral to be observed or performed
by the Borrower thereunder.  The Lender
shall not have any obligation or liability under any such contract or agreement
by reason of or arising out of this Agreement or the receipt by the Lender of
any payment relating to any of the Collateral, nor shall the Lender be
obligated in any manner to perform any of the obligations of the Borrower under
or pursuant to any such contract or agreement, to make inquiry as to the nature
or sufficiency of any payment received by the Lender in respect of the Collateral
or as to the sufficiency of any performance by any party under any such
contract or agreement, to present or file any claim, to take any action to
enforce any performance or to collect the payment of any amounts which may have
been assigned to the Lender or to which the Lender may be entitled at any time
or times.  The Lender’s sole duty with
respect to the custody, safekeeping and physical preservation of the Collateral
in its possession, under § 9-207 of the
Uniform Commercial Code of the State or otherwise, shall be to deal with such
Collateral in the same manner as the Lender deals with similar property for its
own account.

 

11.                               NOTIFICATION
TO ACCOUNT DEBTORS AND OTHER PERSONS OBLIGATED ON COLLATERAL.  If an Event of Default shall have
occurred and be continuing, the Borrower shall, at the request of the Lender,
notify account debtors, charterers, and other persons obligated respecting any
of the Collateral of the Lender in any account, charter, chattel paper, general
intangible, instrument or other Collateral and that payment thereof is to be
made directly to the Lender or to any financial institution designated by the
Lender as the Lender’s agent therefor, and the Lender may itself, if an Event
of Default shall have occurred and be continuing, without notice to or demand
upon the Borrower, so notify account debtors and other persons obligated on
Collateral.  After the making of such a
request or the giving of any such notification, the Borrower shall hold any proceeds
of collection of accounts, charters, chattel paper, general intangibles,
instruments and other Collateral received by the Borrower as trustee for the
Lender without commingling the same with other funds of the Borrower and shall
turn the same over to the Lender in the identical form received, together with
any necessary endorsements or assignments. 
The Lender shall apply the proceeds of collection of accounts, charters,
chattel paper, general intangibles, instruments and other Collateral received
by the Lender to the Obligations, pursuant to § 2.4(b)
of the Loan Agreement, such proceeds to be

 

5

 

immediately entered after final payment in cash or
other immediately available funds of the items giving rise to them.

 

12.                               POWER
OF ATTORNEY.

 

12.1                        APPOINTMENT
AND POWERS OF LENDER.  The Borrower
hereby irrevocably constitutes and appoints the Lender and any officer or agent
thereof, with full power of substitution, as its true and lawful
attorney-in-fact with full irrevocable power and authority in the place and
stead of the Borrower or in the Lender’s own name, for the purpose of carrying
out the terms of this Agreement, to take any and all appropriate action and to
execute any and all documents and instruments that may be necessary or
desirable to accomplish the purposes of this Agreement and, without limiting
the generality of the foregoing, hereby gives said attorneys the power and
right, on behalf of the Borrower, without notice to or assent by the Borrower,
to do the following:

 

(a)                                  upon
the occurrence and during the continuance of an Event of Default, generally to
sell, transfer, pledge, make any agreement with respect to or otherwise deal
with any of the Collateral in such manner as is consistent with the Uniform
Commercial Code of the State and any other applicable law, and as fully and
completely as though the Lender were the absolute owner thereof for all
purposes, and to do at the Borrower’s expense, at any time, or from time to
time, all acts and things which the Lender deems necessary or advisable to
protect, preserve or realize upon the Collateral and the Lender’s security
interest therein, in order to effect the intent of this Agreement, all as fully
and effectively as the Borrower might do, including, without limitation, the
execution, delivery and recording, in connection with any sale or other
disposition of any Collateral, of the endorsements, assignments or other
instruments of conveyance or transfer with respect to such Collateral; and

 

(b)                                 to
the extent that the Borrower’s authorization given in §3 is not sufficient, to
file such financing statements with respect hereto, with or without the
Borrower’s signature, or a photocopy of this Agreement in substitution for a
financing statement, as the Lender may deem appropriate and to execute in the
Borrower’s name such financing statements and amendments thereto and
continuation statements which may require the Borrower’s signature.

 

12.2                        RATIFICATION
BY BORROWER.  To the extent permitted
by law, the Borrower hereby ratifies all that said attorneys shall lawfully do
or cause to be done by virtue hereof. This power of attorney is a power coupled
with an interest and shall be irrevocable.

 

12.3                        NO
DUTY ON LENDER.  The powers conferred
on the Lender hereunder are solely to protect its interests in the Collateral
and shall not impose any duty upon it to exercise any such powers.  The Lender shall be accountable only for the
amounts that it actually receives as a result of the exercise of such powers
and neither it nor any of its officers, directors, employees or agents shall be
responsible to the Borrower for any act or failure to act, except for the
Lender’s own gross negligence or willful misconduct.

 

6

 

13.                               REMEDIES.  If an Event of Default
shall have occurred and be continuing, the Lender may, without notice to or
demand upon the Borrower, declare this Agreement to be in default, and, in
accordance with applicable law, the Lender shall thereafter have in any
jurisdiction in which enforcement hereof is sought, in addition to all other
rights and remedies, the rights and remedies of a secured party under the
Uniform Commercial Code of the State or of any jurisdiction in which the
Collateral is located, including, without limitation, the right to take
possession of the Collateral, and for that purpose the Lender may, so far as
the Borrower can give authority therefore, enter upon any premises on which the
Collateral may be situated and remove the same therefrom.  The Lender may in its discretion require the
Borrower to assemble all or any part of the Collateral at such location or
locations within the jurisdiction(s) of the Borrower’s principal office(s) or
at such other locations as the Lender may reasonably designate.  Unless the Collateral are perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, the Lender shall give to the Borrower at least ten (10)
Business Days prior written notice of the time and place of any public sale of
the Collateral or of the time after which any private sale or any other
intended disposition is to be made.  The
Borrower hereby acknowledges that ten (10) Business Days prior written notice
of such sale or sales shall be reasonable notice.  In addition, the Borrower waives any and all
rights that it may have to a judicial hearing in advance of the enforcement of
any of the Lender’s rights hereunder, including, without limitation, its right
following an Event of Default to take immediate possession of the Collateral
and to exercise its rights with respect thereto.  Notwithstanding anything contained hereinto
the contrary, the Lender agrees not to exercise any remedies hereunder in such
a way as to disqualify the Vessels from the United States coastwise trade.

 

14.                               STANDARDS
FOR EXERCISING REMEDIES.  To the
extent that applicable law imposes duties on the Lender to exercise remedies in
a commercially reasonable manner, the Borrower acknowledges and agrees that it
is not commercially unreasonable for the Lender (a) to fail to incur expenses
reasonably deemed significant by the Lender to prepare the Collateral for
disposition or otherwise to complete raw material or work in process into
finished goods or other finished products for disposition, (b) to fail to
obtain third-party consents for access to Collateral to be disposed of, or to
obtain or, if not required by other law, to fail to obtain governmental or
third party consents for the collection or disposition of Collateral to be
collected or disposed of, (c) to fail to exercise collection remedies against
account debtors or other persons obligated on Collateral or to remove liens or
encumbrances on or any adverse claims against Collateral, (d) to exercise
collection remedies against account debtors and other persons obligated on
Collateral directly or through the use of collection agencies and other
collection specialists, (e) to advertise dispositions of Collateral through
publications or media of general circulation, whether or not the Collateral is
of a specialized nature, (f) to contact other persons, whether or not in the
same business as the Borrower, for expressions of interest in acquiring all or
any portion of the Collateral, (g) to hire one or more professional auctioneers
to assist in the disposition of Collateral, whether or not the Collateral is of
a specialized nature, (h) to dispose of Collateral by utilizing Internet sites
that provide for the auction of assets of the types included in the Collateral
or that have the reasonable capability of doing so, or that match buyers and
sellers of assets, (i) to dispose of assets in wholesale rather than retail
markets, (j) to disclaim disposition warranties, or (k) to the extent deemed
appropriate by the Lender, to obtain the services of brokers, investment

 

7

 

bankers, consultants and other professionals to assist
the Lender in the collection or disposition of any of the Collateral.  The Borrower acknowledges that the purpose of
this §14 is to provide nonexhaustive
indications of what actions or omissions by the Lender would not be
commercially unreasonable in the Lender’s exercise of remedies against the
Collateral and that other actions or omissions by the Lender shall not be
deemed commercially unreasonable solely on account of not being indicated in
this §14.  Without limitation upon the
foregoing, nothing contained in this §14 shall be construed to grant any rights
to the Borrower or to impose any duties on the Lender that would not have been
granted or imposed by this Agreement or by applicable law in the absence of
this §14.

 

15.                               NO
WAIVER BY LENDER, ETC.  The Lender shall not be deemed to have waived any of its rights
upon or under the Obligations or the Collateral unless such waiver shall be in
writing and signed by the Lender.  No
delay or omission on the part of the Lender in exercising any right shall
operate as a waiver of such right or any other right.  A waiver on any one occasion shall not be
construed as a bar to or waiver of any right on any future occasion.  All rights and remedies of the Lender with
respect to the Obligations or the Collateral, whether evidenced hereby or by
any other instrument or papers, shall be cumulative and may be exercised
singularly, alternatively, successively or concurrently at such time or at such
times as the Lender deems expedient.

 

16.                               SURETYSHIP
WAIVERS BY BORROWER.  The Borrower
waives demand, notice, protest, notice of acceptance of this Agreement, notice
of loans made, credit extended, Collateral received or delivered or other action
taken in reliance hereon and all other demands and notices of any
description.  With respect to both the
Obligations and the Collateral, the Borrower assents to any extension or
postponement of the time of payment or any other indulgence, to any substitution,
exchange or release of or failure to perfect any security interest in any
Collateral, to the addition or release of any party or person primarily or
secondarily liable, to the acceptance of partial payment thereon and the
settlement, compromising or adjusting of any thereof, all in such manner and at
such time or times as the Lender may deem advisable.  The Lender shall have no duty as to the
collection or protection of the Collateral or any income thereon, nor as to the
preservation of rights against prior parties, nor as to the preservation of any
rights pertaining thereto beyond the safe custody thereof as set forth in §10.  The Borrower
further waives any and all other suretyship defenses.

 

17.                               MARSHALLING.  The Lender shall not be required to marshal
any present or future collateral security (including but not limited to this
Agreement and the Collateral) for, or other assurances of payment of, the
Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order, and all of its rights hereunder
and in respect of such collateral security and other assurances of payment
shall be cumulative and in addition to all other rights, however existing or
arising. To the extent that it lawfully may, the Borrower hereby agrees that it
will not invoke any law relating to the marshalling of collateral which might
cause delay in or impede the enforcement of the Lender’s rights under this
Agreement or under any other instrument creating or evidencing any of the
Obligations or under which any of the Obligations is outstanding or by which
any of the Obligations is secured or

 

8

 

payment thereof is otherwise assured, and, to the
extent that it lawfully may, the Borrower hereby irrevocably waives the
benefits of all such laws.

 

18.                               PROCEEDS
OF DISPOSITIONS; EXPENSES.  The
Borrower shall pay to the Lender on demand amounts equal to any and all
expenses, including, without limitation, reasonable attorneys’ fees and disbursements,
incurred or paid by the Lender in protecting, preserving or enforcing the
Lender’s rights under or in respect of any of the Obligations or any of the
Collateral. After deducting all of said expenses, the residue of any proceeds
of collection or sale of the Obligations or Collateral shall, to the extent
actually received in cash, be applied to the payment of the Obligations in such
order or preference as the Lender may determine, proper allowance and provision
being made for any Obligations not then due. 
Upon the final payment and satisfaction in full of all of the
Obligations and after making any payments required by § 9-608(a)(1)(C)
or 9-615(a)(3) of the Uniform Commercial Code of the State, any excess shall be
returned to the Borrower, and the Borrower shall remain liable for any
deficiency in the payment of the Obligations.

 

19.                               OVERDUE
AMOUNTS.  Until paid, all amounts due
and payable by the Borrower hereunder shall be a debt secured by the Collateral
and shall bear, whether before or after judgment, interest at Default Rate
pursuant to §2.2(e) of the Loan Agreement.

 

20.                               GOVERNING
LAW.  THIS AGREEMENT SHALL IN ALL
RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK, UNITED STATES OF AMERICA, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, WITHOUT REFERENCE TO PRINCIPLES OF
CONFLICTS OF LAW (OTHER THAN TITLE 14 OF ARTICLE 5 OF THE GENERAL OBLIGATIONS
LAW).

 

21.                               INDEMNIFICATION.  Without limiting any of its indemnification
obligation under the other Loan Documents, the Borrower hereby agrees to
indemnify and hold the Lender harmless from and against any and all claims,
demands, liabilities, losses, causes of action, judgments, costs, and expenses
(including reasonable attorneys’ fees, court costs and investigation expenses)
to which the Lender may become exposed, or which the Lender may incur, by
reason of any act or omission of the Borrower under any charter or other
agreement comprising Collateral or by the Lender exercising any of its rights
under this Agreement, provided that
this indemnity does not extend to liability incurred by the Lender solely
through its gross negligence or willful misconduct or acts and omissions as a
mortgagee-in-possession.  The provisions
of this Section 21 shall remain operative and in full force and effect
regardless of the termination of this Agreement or any other Loan Document, the
consummation of the transactions contemplated hereby or thereby, the repayment
of any of the Obligations, the validity or unenforceability of any term or
provision of this Agreement or any other Loan Document or any investigation
made by or on behalf of the Lender.

 

22.                               MISCELLANEOUS.  The headings of each section of this
Agreement are for convenience only and shall not define or limit the provisions
thereof.  This Agreement and all rights
and obligations hereunder shall be binding upon the Borrower and its respective

 

9

 

successors and assigns, and shall inure to the benefit
of the Lender and its successors and assigns. 
If any term of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity of all other terms hereof shall in no way be
affected thereby, and this Agreement shall be construed and be enforceable as
if such invalid, illegal or unenforceable term had not been included herein. If
at any time there is any inconsistency between the terms of this Agreement and
any other Security Document, the terms of such other Security Document shall
govern.  The Borrower acknowledges
receipt of a copy of this Agreement

 

10

 

IN WITNESS WHEREOF, intending
to be legally bound, the Borrower has caused this Agreement to be duly executed
as of the date first above written.

 

 

	
   

  	
  K-SEA OPERATING PARTNERSHIP L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  K-Sea OLP GP, LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  John J. Nicola

  
	
   

  	
   

  	
  Title:

  	
  Chief Financial Officer

  
	
   

  
	
  Accepted:

  
	
   

  
	
  CITIZENS ASSET FINANCE, A D/B/A OF

  CITIZENS LEASING CORPORATION

  
	
   

  
	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  John M. Young

  
	
   

  	
  Title:

  	
  Senior Vice President

  
									

 

 

Schedule A

 

	
  Barge DBL 28

  	
  Hull No. 496

  
	
   

  	
   

  
	
  Barge DBL 29

  	
  Hull No. 497

  
	
   

  	
   

  
	
  Barge DBL 78

  	
  Official No.
  1102126

  

 

 

PERFECTION CERTIFICATE

 

(U.C.C. Financing Statements)

 

The undersigned, the
Chief Financial Officer of K-Sea Operating Partnership L.P., a Delaware limited
partnership (the “Borrower”), hereby certifies, with reference to a certain
Security Agreement dated as of [                          ],
2005 (terms defined in such Security Agreement having the same meanings herein
as specified therein), between the Borrower and Citizens Asset Finance, a d/b/a of Citizens
Leasing Corporation (the “Lender”), to the Lender as follows:

 

1.                                      NAME.  The exact legal name of the Borrower as that
name appears on its Certificate of Formation is as follows:  K-Sea Operating Partnership L.P.

 

Source:  U.C.C. § 9-503(a).

 

2.                                      OTHER
IDENTIFYING FACTORS.

 

	
  (a)

  	
   

  	
  The
  following is the mailing address of the Borrower:

  	
  3245
  Richmond Terrace

  
	
   

  	
   

  	
   

  	
  Staten
  Island, New York

  
	
   

  	
   

  	
   

  	
  10303-0003

  

 

Source:  U.C.C. § 9-516(b)(5)(A).

 

(b)                                 If
different from its mailing address, the Borrower’s place of business or, if
more than one, its chief executive office is located at the following address:

 

	
  Address

  	
   

  	
  County

  	
   

  	
  State

  	
   

  
	
  N/A

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Source:  U.C.C. §§ 9-301(1),
9-307; former U.C.C. §§ 9-103(3), (4),
9-401(6).

 

(c)                                  The
following is the type of organization of the Borrower: Limited Partnership

 

Source:  U.C.C. § 9-516(b)(5)(C).

 

(d)                                 The
following is the jurisdiction of the Borrower’s organization: Delaware

 

Source:  U.C.C. § 9-516(b)(5)(C).

 

(e)                                  The
following is the Borrower’s state issued organizational identification number [state “None” if the state does not issue such a number]:

 

	
  Source: U.C.C. § 9-5l6(b)(5)(C).

  	
   

  	
  Del ID: 3698236

  

 

 

3.                                      OTHER
NAMES, ETC.

 

(a)                                  The
following is a list of all other names (including trade names or similar
appellations) used by the Borrower, or any other business or organization to
which the Borrower became the successor by merger, consolidation, acquisition,
change in form, nature or jurisdiction of organization or otherwise, now or at
any time during the past five years:

 

Source:  U.C.C. § 9-507(c);
former U.C.C. § 9-402(7) (second and third
sentences).  N/A

 

(b)                                 Attached
hereto as Schedule 3 is the information required in §2 for any other
business or organization to which the Borrower became the successor by merger,
consolidation, acquisition, change in form, nature or jurisdiction of
organization or otherwise, now or at any time during the past five
years:     N/A

 

Source:  U.C.C. § 9-316; former
U.C.C. § 9-402(7) (second and third
sentences).

 

4.                                      OTHER
CURRENT LOCATIONS.

 

(a)                                  The
following are all other locations in the United States of America in which the
Borrower maintains any books or records relating to any of the Collateral
consisting of accounts, instruments, chattel paper, general intangibles or
mobile goods:

 

	
  Address

  	
   

  	
  County

  	
   

  	
  State

  	
   

  
	
  Same as Item 2

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Source:  U.C.C. § 9-301(2), (3); former U.C.C, § 9-103(3), (4), 9-401(6).

 

(b)                                 The
following are all other places of business of the Borrower in the United States
of America:

 

	
  Address

  	
   

  	
  County

  	
   

  	
  State

  	
   

  
	
  N/A

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Source:  U.C.C. § 9-301(2), (3); former U.C.C. §§ 9-103(1), 9-401(1) (Third Alternative).

 

5.                                      PRIOR
LOCATIONS.

 

(a)                                  Set
forth below is the information required by § 4(a) or (b)
with respect to each location or place of business previously maintained by the
Borrower at any time during the past five years in a state in which the Borrower
has previously maintained a location or place of business at any time during the
past four months:

 

	
  Address

  	
   

  	
  County

  	
   

  	
  State

  	
   

  
	
  N/A

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

2

 

Source:  Former U.C.C. §§ 9-103(3)(e),
9-401(3).

 

6.                                      FIXTURES.  Attached hereto as Schedule 6 is
the information required by U.C.C. § 9-502(b) or former U.C.C. § 9-402(5) of each state in which any of the Collateral
consisting of fixtures are or are to be located and the name and address of
each real estate recording office where a mortgage on the real estate on which
such fixtures are or are to be located would be recorded.

 

Source:  U.C.C. §§ 9-502(b),
9-516(b)(3)(D); former U.C.C. §§ 9-401(1),
9-402(5).       N/A

 

7.                                      UNUSUAL
TRANSACTIONS.  Except for those
purchases, acquisitions and other transactions described on Schedule 3
or on Schedule 7 attached hereto, all of the Collateral has been
originated by the Borrower in the ordinary course of the Borrower’s business or
consists of goods which have been acquired by the Borrower in the ordinary
course from a person in the business of selling goods of that kind.          N/A

 

Source:  U.C.C. §§ 9-102(a)(64), 9-203(f), 9-301(2),
9-315(a), 9-316; former U.C.C. §§ 1-201(9), 9-306(2), 9-402(7) (third
sentence); see also former U.C.C. § 9-301(l)(c).

 

3

 

IN WITNESS WHEREOF, the
undersigned has signed this Certificate on [                      ],
2005.

 

 

	
   

  	
  K-SEA OPERATING PARTNERSHIP L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  K-SEA OLP GP, LLC

  its General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
  John J. Nicola 

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Chief Financial Officer

  
						

 

4

 

Exhibit A

 

Notice of Assignment of Insurance

 

The undersigned,
K-SEA OPERATING PARTNERSHIP L.P., the Owner of the United States flag Vessel [                            ],
Official Number [                             ],
hereby gives you notice that by a Security Agreement dated as of [                             ],
2005 (the “Assignment”), entered into by us with Citizens Asset Finance, a d/b/a of Citizens
Leasing Corporation (hereinafter called the “Assignee”), there has been
assigned by us to the Assignee as Mortgagee all insurances effected and to be
effected in respect thereof including the insurances constituted by the policy
whereon this Notice is endorsed.  The undersigned
requests that this Notice of Assignment and the applicable loss payable clauses
in the form hereto attached as Annex I are to be endorsed on all policies and
certificates of entry evidencing such insurance.

 

 

Dated:  [                         ],
2005

 

	
   

  	
  K-SEA
  OPERATING PARTNERSHIP L.P.,

  by its general partner K-Sea OLP GP, LLC,

  as Owner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
   

  	
  Name: John J. Nicola 

  
	
   

  	
   

  	
  Title: Chief Financial Officer

  
				

 

 

Exhibit B

 

LOSS PAYABLE CLAUSES

 

Hull and Machinery

 

Loss, if any,
payable to Citizens Asset
Finance, a d/b/a of Citizens Leasing Corporation (the “Mortgagee”), for
distribution by the Mortgagee first to itself and then to K-Sea Operating
Partnership L.P., a Delaware limited partnership, as owner (the “Owner”), as
their respective interests may appear, or order, except that, unless
Underwriters have been otherwise instructed by notice in writing from the
Mortgagee, in the case of any loss involving any damage to the Vessels or
liability of the Vessels, the Underwriters may pay directly for the repair,
salvage, liability or other charges involved or, if the Owner shall have first
fully repaired the damage and paid the cost thereof, or discharged the
liability or paid all of the salvage or other charges, then the Underwriters
may pay the Owner as reimbursement therefor; provided, however,
that if such damage involves a loss in excess of U.S. $250,000 or its
equivalent, the Underwriters shall not make such payment without first
obtaining the written consent thereto of the Mortgagee.

 

In the event of an
actual or constructive total loss or a compromised or arranged total loss of
the Vessel or requisition of title, all insurance payments therefor shall be
paid to the Mortgagee, for distribution by it in accordance with the terms of
the applicable ship Mortgage.

 

Protection and Indemnity

 

Loss, if any,
payable to Citizens Asset
Finance, a d/b/a of Citizens Leasing Corporation (the “Mortgagee”), for
distribution by the Mortgagee first to itself and then to K-Sea Operating
Partnership L.P., a Delaware limited partnership, as owner (the “Owner”), as
their respective interests may appear, or order, except that, unless and until
the Underwriters have been otherwise instructed by notice in writing from the
Mortgagee, any loss may be paid directly to the person to whom the liability
covered by this insurance has been incurred, or to the Owner to reimburse it
for any loss, damage or expenses incurred by it and covered by this insurance, provided
the Underwriters shall have first received evidence that the liability insured
against has been discharged.

 

 

Exhibit F

 

K-SEA OPERATING PARTNERSHIP L.P.

 

Compliance Certificate Under Loan Agreement 

dated as of [              ],
2005

 

K-SEA OPERATING
PARTNERSHIP L.P. (“Borrower”), hereby certifies that:

 

This Certificate
is furnished pursuant to §8.4 of the Loan Agreement dated as of [                    ],
2005 (the “Loan Agreement”) by and among the Borrower and Citizens Asset Finance, a d/b/a of Citizens
Leasing Corporation (the “Lender”). 
Unless otherwise defined herein, the terms used in this Certificate have
the meanings given to them in the Loan Agreement.

 

As required by
§8.4 of the Loan Agreement, consolidated financial statements of K-Sea
Transportation Partners L.P. and its Subsidiaries (“K-Sea”) for the period
ended
                      ,
20    (the “Financial Statements”), prepared in accordance with
GAAP consistently applied, accompany this Certificate.  The Financial Statements present fairly the
consolidated financial position of K-Sea as at the date thereof and the
consolidated results of operations of K-Sea for the period covered thereby
(subject in the case of interim Financial Statements only to normal recurring
year-end adjustments).

 

All of the
representations and warranties made by the Borrower in §3 of the Loan Agreement
were true and correct when made and are true and correct at and as of the date
hereof with the same effect as if made herein.

 

The activities of
the Borrower during the period covered by the Financial Statements have been
reviewed by the Chief Financial Officer or by employees or agents under his or
her immediate supervision.  Based on such
review, to the best knowledge and belief of the Chief Financial Officer, and as
of the date of this Certificate, no Default or Event of Default has occurred.

 

 

WITNESS my hand this         day of
                      ,
20   .

 

	
   

  	
  K-SEA OPERATING PARTNERSHIP L.P.

  
	
   

  	
   

  
	
   

  	
  By:K-Sea OLP GP, LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name: John J. Nicola 

  
	
   

  	
   

  	
  Title: Chief Financial
  Officer

  

 

 

Exhibit F

 

LIEN
CERTIFICATE

 

	
  RE:

  	
  K-Sea Operating
  Partnership L.P.

  
	
   

  	
   

  
	
  NAME OF
  PROJECT:

  	
  DBL 28, DBL
  29 (the “Vessels,” and each, a “Vessel”)

  
	
   

  	
   

  
	
  NAME OF
  OWNER’S LENDER:

  	
  Citizens
  Asset Finance, a d/b/a of Citizens Leasing Corporation

  

 

Reference is made
to the Loan Agreement (the “Agreement”) dated as of June   ,
2005, between K-Sea Operating Partnership L.P. (“K-Sea”) and Citizens Asset
Finance, a d/b/a of Citizens Leasing Corporation (“CLC”).  Capitalized terms used but not defined herein
shall have the meanings set forth in the Agreement.

 

The undersigned
hereby acknowledges to CLC that the undersigned has received prior payment(s)
in the amount of One million five hundred fifty-seven thousand one hundred and
no/100 ($1,557,100.00) Dollars, and does hereby release pro  tanto
any mechanic’s lien, laborer and materialmen’s lien, stop notice or equitable
lien, to the extent of such payment and all prior payments received in respect
of each Vessel.  The undersigned hereby
certifies that no subcontractors or any other third party are known by the
undersigned to have any Lien rights with respect to each Vessel, other than
those for which we have received contemporaneous releases.  This release is for the benefit of, and may
be relied upon by CLC.

 

	
   

  	
  BOLLINGER
  MARINE FABRICATORS, L.L.C.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Date:                     ,
  20   

  

 

 

Exhibit G

 

ASSIGNMENT OF PROJECT DOCUMENTS

 

THIS ASSIGNMENT OF
PROJECT DOCUMENTS (this “Assignment”) is made and entered into as of this
     day of          ,
2005, by K-SEA OPERATING PARTNERSHIP L.P., a Delaware limited partnership (“Borrower”),
to CITIZENS ASSET FINANCE, a d/b/a of CITIZENS LEASING CORPORATION, a Rhode
Island corporation (“Lender”), under a certain Loan Agreement dated as of the
date hereof (the “Loan Agreement”) between Borrower and Lender; and

 

WHEREAS, pursuant
to the Loan Agreement, Lender has agreed to make a loan to Borrower in the
aggregate principal amount of up to $18,000,000 (the “Loan”), on the terms and
conditions set forth therein, among other things, to finance the construction
of two United States flag vessels (individually, a “Vessel” and together, the “Vessels”)
that are the subject of the Construction Contract (as defined below); and

 

WHEREAS, as
evidence of the indebtedness incurred under the Loan, Borrower has executed and
delivered to Lender the Loan Agreement and will, on the Advance Termination
Date (as defined in the Loan Agreement), execute and deliver to Lender a
certain promissory note, payable to Lender in the aggregate principal face
amount of $18,000,000 (the “Note”), payment of which is secured by a Security
Agreement of even date herewith (the “Security Agreement”) from Borrower
covering the property described in the Security Agreement as well as certain
other security; and

 

WHEREAS, the
execution and delivery of this Assignment is a condition precedent to the
performance by Lender of its obligations under the Loan Agreement;

 

NOW, THEREFORE, in
consideration of the recitals set forth above and incorporated herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Borrower hereby covenants and agrees as follows:

 

1.                                       Borrower
hereby grants, transfers and assigns to Lender, 
all right, title and interest of Borrower in, to and under the following
agreements, contracts, guaranties, warranties, plans, licenses, permits and
other items of personal property, whether now or hereafter executed, granted,
received, acquired or issued:

 

(i)                                     that
certain Agreement, dated as of February 21, 2005, between Borrower and
Bollinger Marine Fabricators, L.L.C., a Louisiana limited liability company
(the “Contractor”), relating to the construction of the Vessels (hereinafter
together with any and all extensions, modifications, amendments and renewals
thereof, referred to as the “Construction Contract”);

 

(ii)                                  all
contracts and subcontracts, together with any and all extensions,
modifications, amendments and renewals thereof, which are entered into by
Borrower in connection with the performance of the work or the supply of labor,
services or materials required for the construction of the Vessels.

 

 

(iii)                               all
guarantees, warranties and other undertakings, whether written, oral or
statutory, covering the quality or performance of the work or the quality of
the materials required by the Construction Contract, contracts and subcontracts
(including, but in no way limited to, any and all payment and performance bonds
relating to the work under the Construction Contract), together with any claims
which may be asserted thereunder;

 

(iv)                              all
plans, specifications, drawings, surveys, renderings and models prepared for
the construction of the Vessels in existence from time to time, together with
all revisions and modifications thereof and all sketches and notes related
thereto.

 

The items referred
to in paragraphs (i) through (iv) above are sometimes hereinafter collectively
referred to as the “Project Documents” and individually referred to as a “Project
Document”.

 

This Assignment is
made for the purpose of securing:  (a)
the full and prompt payment when due, whether by acceleration or otherwise,
with such interest as may accrue thereon, either before or after maturity
thereof, of all amounts due under the Loan Agreement and (when executed) the
Note; (b) the full and prompt payment and performance of any and all
obligations of Borrower to Lender hereunder and under the Loan Agreement, the
Security Agreement, and any other agreements, documents or instruments now or
hereafter evidencing, securing or otherwise relating to the indebtedness evidenced
by the Loan Agreement or Note (the Note, the Loan Agreement, the Security
Agreement and said other agreements, documents or instruments, together with
all renewals, amendments, extensions, consolidations and modifications thereof,
are hereinafter collectively referred to as the “Loan Documents” and
individually referred to as a “Loan Document”); and (c) any and all other
indebtedness under the Loan Documents, however incurred, which may now or
hereafter be due and owing from Borrower, to Lender, now existing or hereafter
coming into existence, however and whenever incurred or evidenced, whether
expressed or implied, direct or indirect, absolute or contingent, or due or to
become due, and all renewals, modifications, consolidations and extensions thereof.

 

2.                                       Borrower
hereby covenants and agrees:

 

A.                                   To
faithfully abide by, perform and discharge each and every obligation, covenant,
condition and agreement of the Project Documents to be performed by Borrower
and to enforce performance by each other party thereto of each and every
obligation, covenant, condition and agreement to be performed by such other
party.

 

B.                                     To
promptly provide Lender with copies of any and all notices received or given by
Borrower which allege, either directly or indirectly, that Borrower is in
default in the performance of any obligation, covenant, condition or agreement
of the Project Documents to be performed by Borrower, or that any other party
to the Project Documents is in default in the performance of any obligation, covenant,
condition or agreement of the Project Documents to be performed by such other
party.

 

C.                                     That
the term “Event of Default”, whenever used in this Assignment, shall have the
same meaning as set forth in the Loan Agreement.

 

2

 

D.                                    That
an Event of Default by Borrower under this Assignment shall constitute a
default under all of the Loan Documents.

 

E.                                      That
upon the occurrence of any Event of Default, Lender may at its option, with or
without notice or demand of any kind (except as may be provided herein or in
any of the Loan Documents), and without waiving such Event of Default, exercise
any or all of the following rights and remedies:  (1) declare any part or all of the
indebtedness evidenced or secured hereby or by the Loan Documents to be
immediately due and payable in accordance with the terms of the Loan Agreement,
whereupon the same shall become immediately due and payable; (2) exercise any
and all rights and remedies provided for hereunder or under the Loan Documents
as well as such remedies as may be available at law or in equity; and (3) cure
any such Event of Default in such manner and to such extent as Lender may deem
necessary to protect the security hereof, including specifically, without limitation,
the right (but not the obligation) to appear in and defend any action or
proceeding purporting to affect the security hereof or the rights or powers of
Lender, and also the right (but not the obligation) to perform and discharge
each and every obligation, covenant, condition and agreement of Borrower under
the Project Documents, and, in exercising any such powers, to pay necessary
costs and expenses, employ counsel and incur and pay attorneys’ fees and
expenses.  Lender shall not be obligated
to perform or discharge, nor does it undertake to perform or discharge, any
obligation, duty or liability of Borrower under any of the Project Documents,
or by reason of this Assignment, it being agreed that Lender shall be treated
as agreeing to perform or discharge such obligation, duty or liability if (but
only if) Lender shall, by written notice sent to the other contracting party
to, or grantor or licensor of, such Project Document, expressly so elect.

 

F.                                      That
at any time after the occurrence of any Event of Default, Lender may, at its
option, without notice, and without regard to the adequacy of security for the
indebtedness hereby secured, with or without bringing any action or proceeding,
or by a receiver to be appointed by a court at any time hereafter, exercise or
enforce for their own benefit every right, power and authority under the
Project Documents, or any of them, as fully as Borrower could itself.

 

G.                                     That
the Contractor, upon receipt of written notice from Lender of the occurrence of
any Event of Default and Lender’s election to exercise its rights under this
Assignment, shall be and is hereby irrevocably directed and authorized by
Borrower to recognize and accept Lender, as “owner” under the Construction
Contract, or as holder of such other Project Document, as the case may be, for
any and all purposes as fully as it would recognize and accept Borrower and the
performance of Borrower thereunder, and to perform such Project Document for
the benefit of Lender in accordance with the terms and conditions thereof,
without any obligation to determine whether or not any such Event of Default
has in fact occurred.

 

H.                                    That
further, and without limitation of the foregoing remedies, upon the occurrence
of any Event of Default, Lender shall have the rights and remedies of a secured
party under the Uniform Commercial Code as in effect in the State of New York
from time to time with respect to each and every Project Document in which a
security

 

3

 

interest
may be obtained, in addition to the rights and remedies otherwise provided for
by law or in equity or in any of the Loan Documents.

 

I.                                         Except
as expressly provided by law, that in the exercise of the powers herein granted
to Lender, no liability shall be asserted or enforced against Lender, all such
liability being hereby expressly waived and released by Borrower.  Borrower hereby agrees to indemnify and hold
Lender free and harmless from and against any and all claims, demands,
liability, expense, cost, loss or damage (including all costs, expenses and
attorneys’ fees incurred in the defense thereof) which may be asserted against,
imposed on or incurred by Lender by reason of any act or omission of Borrower
under any of the Project Documents or by reason of this Assignment or the
exercise of Lender’s rights and remedies under this Assignment or under any of
the Project Documents or by reason of any alleged obligation or undertaking of
Lender to perform or discharge any obligation, duty or liability of Borrower
under any of the Project Documents, provided that
nothing herein shall be construed to obligate Borrower to indemnify and hold
Lender free and harmless from and against any claim, demand, liability,
expense, cost, loss or damage asserted against, imposed on or incurred by
Lender by reason of Lender’s willful misconduct or gross negligence.  Should Lender incur any such liability,
expense, cost, loss or demands, for which it is to be indemnified by Borrower
as aforesaid, the amount thereof shall be secured by this Assignment, the
Security Agreement and the other Loan Documents (whether or not such amount,
when aggregated with other sums secured by the Security Agreement and the other
Loan Documents, exceeds the aggregate principal face amount due under the Loan
Agreement or the Note), shall bear interest at the default rate specified in
the Loan Agreement from the date incurred until paid, and shall be due and
payable immediately upon demand by Lender.

 

J.                                        That
Lender shall have the right in accordance with the terms of the Loan Agreement
to assign to any subsequent holder of the Note or the Security Agreement, or to
any person acquiring title to the Vessel(s), the Project Documents and all the
right, title, interest, power and authority of the Borrower in, under and by
virtue of the Project Documents hereby or hereafter assigned.

 

3.                                       Borrower
further hereby covenants, represents and warrants to Lender that
(i) Borrower has not previously assigned, sold, pledged, transferred,
mortgaged, hypothecated or otherwise encumbered the Project Documents or any of
them, or its right, title and interest therein, (ii) Borrower shall not assign,
sell, pledge, transfer, mortgage, hypothecate or otherwise encumber its
interests in the Project Documents or any of them, (iii) Borrower has not
performed, and will not perform, any act which might prevent Borrower from
performing its undertakings hereunder or which might prevent Lender from
operating under or enforcing any of the terms and conditions hereof or which
would limit Lender in such operation or enforcement, (iv) Borrower is not in
default under the Project Documents, or any of them, and to the best knowledge
of Borrower, no other party to the respective Project Documents is in default
thereunder except as disclosed in writing to Lender, (v) except as provided in
the Loan Agreement, no material amendments to any of the Project Documents will
be made without the prior written consent of Lender, and (vi) upon execution of
any of the Project Documents, (and upon the subsequent execution of any
material amendments to any of the Project Documents)Borrower will deliver a
copy of such Project Document (or the original at Lender’s

 

4

 

request) to Lender and will require such of the
parties thereto as Lender may designate to execute and deliver to Lender a
consent to this Assignment.

 

4.                                       All
notices, demands, elections or requests provided for or permitted to be given
pursuant to this Assignment shall be in writing and shall be deemed to have been
sufficiently given when delivered or mailed in the manner set forth in the Loan
Agreement.

 

5.                                       Any
provision in the Loan Agreement that pertains to this Assignment shall be
deemed to be incorporated herein as if such provision were fully set forth in this
Assignment.  In the event of any conflict
between the terms of this Assignment and the terms of the Loan Agreement, the
terms of the Loan Agreement shall prevail. 
A provision in this Assignment shall not be deemed to be inconsistent
with the Loan Agreement by reason of fact that no provision in the Loan
Agreement covers such provision in this Assignment.

 

6.                                       Although
this Assignment constitutes a present, current and absolute assignment of the
Project Documents, so long as there shall exist no Event of Default, Borrower
shall have the right to exercise every right, power and authority under the
Project Documents, and to perform and enforce performance of all obligations
under the Project Documents.  This
Assignment shall terminate when the indebtedness evidenced by the Loan
Agreement and the Note is paid in full and all obligations, covenants,
conditions and agreements of Borrower contained herein and in the Loan
Documents are performed and discharged, and, in such event, upon the request of
Borrower, Lender shall execute and deliver to Borrower instruments effective to
evidence the termination of the Assignment.

 

7.                                       This
Assignment constitutes the granting by Borrower to Lender of a security
interest, under the Uniform Commercial Code as enacted in the State of New York
from time to time, in the right, title and interest of Borrower in, to and
under each and every Project Document in which a security interest may be
obtained.  Borrower agrees to execute and
deliver to Lender, at any time or times during which this Assignment shall be
in effect, such further instruments as Lender may deem necessary to make
effective this Assignment and the security interest created hereby.  To evidence such security interest, at the request
of Lender, Borrower shall, in a form satisfactory to Lender, join with Lender
in executing one or more financing statements or other notices of security
interest, and any continuation thereof, and shall pay the cost for filing
thereof.

 

8.                                       The
exercise of any rights or remedies under this Assignment shall not be deemed to
cure or waive any Event of Default, or waive, modify or affect any notice of
default under any of the Loan Documents, or invalidate any act done pursuant to
such notice.  The rights and remedies of
Lender herein provided shall be in addition to and not in substitution for the
rights and remedies vested in Lender in any of the Loan Documents or at law or
in equity, all of which rights and remedies are specifically reserved by
Lender.  The remedies herein provided or
otherwise available to Lender shall be cumulative and may be exercised
concurrently.  The failure to exercise
any of the remedies herein provided shall not constitute a waiver thereof, nor
shall use of any of the remedies herein provided prevent the subsequent or
concurrent resort to any other remedy or remedies.

 

5

 

9.                                       This
Assignment shall be interpreted, construed and enforced according to laws of
the State of New York.

 

10.                                 It
is expressly intended, understood and agreed that this Assignment and the Loan
Documents are made and entered into for the sole protection and benefit of
Borrower and Lender, and their respective legal representatives, successors and
assigns (but in the case of assigns of Borrower, only if and to the extent that
Lender has consented in writing to Borrower’s assignment of its rights or
obligations hereunder or thereunder to such assigns); that no other person or
persons shall have any right at any time to act hereon or rights to the
proceeds of the Loan; that such proceeds of the Loan do not constitute a trust
fund for the benefit of any third party; that no third party shall under any
circumstances be entitled to any equitable lien on any such undisbursed
proceeds of the Loan at any time; and that Lender shall have a lien upon and
right to direct application of any such undisbursed proceeds of the Loan as
provided in the Loan Documents.

 

11.                                 The
relationship between Lender and Borrower is solely that of lender and borrower,
and nothing contained herein or in any of the Loan Documents shall in any
manner be construed as making the parties hereto partners, joint venturers or
any other relationship other than lender and borrower.

 

12.                                 Borrower
and Lender intend and believe that each provision in this Assignment comports
with all applicable local, state or federal laws and judicial decisions.  However, if any provision or provisions, or
if any portion of any provision or provisions, in this Assignment is found by a
court of law to be in violation of any applicable local, state or federal
ordinance, statute, law, administrative or judicial decision or public policy,
and if such court should declare such portion, provision or provisions of this
Assignment to be illegal, invalid, unlawful, void or unenforceable as written,
then it is the intent of Borrower and Lender that such portion, provision or
provisions shall be given force to the fullest possible extent that they are
legal, valid and enforceable, that the remainder of this Assignment shall be construed
as if such illegal, invalid, unlawful, void or unenforceable portion, provision
or provisions were not contained therein and that the rights, obligations and
interests of Borrower and Lender under the remainder of this Assignment shall
continue in full force and effect.

 

13.                                 Capitalized
terms used but not defined herein shall have the meanings set forth in the Loan
Agreement.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

6

 

IN WITNESS
WHEREOF, Borrower has executed this Assignment, as of the day, month and year
first above written.

 

 

	
   

  	
  K-SEA
  OPERATING PARTNERSHIP L.P.

  
	
   

  	
   

  
	
   

  	
  By:  K-Sea OLP GP, LLC, its
  General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
						

 

 

Exhibit H

 

CONTRACTOR’S
CONSENT

 

1.                                       The
undersigned BOLLINGER MARINE FABRICATORS, L.L.C., a Louisiana Limited Liability
Company (“Contractor”), understands that CITIZENS ASSET FINANCE, a d/b/a of
Citizens Leasing Corporation, a Rhode Island corporation (“Lender”), will be
making a loan (the “Loan”) to K-SEA OPERATING PARTNERSHIP L.P., a Delaware
limited partnership (“Owner”), to finance a portion of the costs of the
construction of two vessels (the “Vessels”), pursuant to that certain Loan
Agreement of even date herewith (the “Loan Agreement”), between Lender and
Owner. The Loan will be secured by, among other things, that certain Security
Agreement of even date herewith, from Owner to Lender (the “Security Agreement”).  The construction of the Vessels is to be
performed by Contractor pursuant to that certain Agreement dated as of February
21, 2005 (the “Construction Contract”), between Contractor and Owner. To
further secure the Loan and the obligations of Owner to Lender under the Loan
Agreement, Owner has assigned all of its right, title and interest in and to
the Construction Contract to Lender, pursuant to that certain Assignment of
Project Documents of even date herewith (the “Assignment”).

 

2.                                       Contractor
acknowledges receipt of the Assignment, consents to the Assignment, and agrees
to act in accordance with the terms thereof, provided, however, that Contractor
shall not be obligated to Lender for the performance or payment of any of the
obligations of Borrower under the Loan Agreement, Security Agreement or the
Assignment.

 

3.                                       If
Owner fails to perform any obligation under the Construction Contract, and
Contractor deems such failure a default under the Construction Contract,
Contractor shall give written notice thereof to Lender and give Lender 30 days
from Lender’s receipt of Contractor’s notice of default to cure such default, provided that Contractor’s failure to give such notice shall
not create any liability to Lender or affect Contractor’s rights under the
Construction Contract.

 

4.                                       Upon
receipt by Contractor of written notice from Lender stating that (a) Owner is
in default under the Loan Agreement or any other agreement, document or
instrument evidencing, securing or otherwise relating to the Loan, and (b)
Lender is electing to exercise its rights under the Assignment to replace Owner
as “Owner” under the Construction Contract, Lender shall succeed to all of the
rights of Owner under the Construction Contract (including Owner’s rights to
the Drawings and the Specifications, as those terms are defined in the
Construction Contract) and Contractor shall continue performance on Lender’s
behalf under the Construction Contract in accordance with the terms thereof,
regardless of any default by Owner under the Construction Contract, provided that Lender pays Contractor for all work, labor,
services and materials rendered by Contractor in accordance with the terms of
the Construction Contract and otherwise complies with all of Owner’s
obligations thereunder.  Prior to such
notice of election by Lender, Lender shall not be deemed by virtue of the
Assignment or any action taken thereunder to have assumed any obligations of
Owner under the Construction Contract, nor shall Lender incur any liability of
any kind to Contractor under the Construction Contract by reason of any breach
of such obligations by Owner.  Lender
hereby ratifies and agrees to abide by all acts of Owner taken prior to such
notice of election by Lender.

 

 

Executed as of
                                   ,
2005.

 

	
   

  	
  BOLLINGER
  MARINE FABRICATORS, L.L.C.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

[Contractor’s Consent]Exhibit 10.29

 

[ * ] = Certain
confidential information contained in this document, marked by brackets, has
been omitted and filed separately with the Securities and Exchange Commission
pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Execution Copy

 

DRUG
DISCOVERY COLLABORATION AGREEMENT

 

This DRUG DISCOVERY
COLLABORATION AGREEMENT (the “Agreement”), effective as of September 13,
2002 (the “Effective Date”), is made by and between Array BioPharma Inc., a
Delaware corporation, having a principal place of business at 3200 Walnut
Street, Boulder, Colorado 80301 (“Array”), and InterMune, Inc., a Delaware
corporation, having a principal place of business at 3280 Bayshore Boulevard,
Brisbane, California 94005 (“InterMune”).

 

BACKGROUND

 

A.                                   InterMune
has experience and expertise in the biological components of drug discovery,
development and commercialization of therapeutics.

 

B.                                     Array
has developed novel and proprietary methods for the generation of compound
libraries, and has skills, expertise and experience in lead generation and
optimization to produce clinical candidates from drug discovery programs.

 

C.                                     InterMune
and Array desire to collaborate to identify orally active small molecule-based
therapeutics for modulating the Target (as defined below), with the goal of
developing compounds with desired activity and selectivity.

 

D.                                    InterMune
wishes to acquire an exclusive license to develop and commercialize Products
(as defined below), and Array wishes to grant to InterMune such license, on the
terms and conditions herein.

 

NOW, THEREFORE, for and
in consideration of the covenants, conditions and undertakings hereinafter set
forth, it is agreed by and between the Parties as follows:

 

ARTICLE 1

DEFINITIONS

 

As used herein, the
following terms will have the meanings set forth below:

 

1.1                                 “Affiliate”
shall mean any corporation or other entity, whether de jure or de facto,
which is directly or indirectly controlling, controlled by or under common
control of a Party hereto for so long as such control exists.  For the purposes of this Section 1.2, “control”
shall mean the direct or indirect ownership of at least fifty percent (50%) of
the outstanding shares or other voting rights of the subject entity having the
power to vote on or direct the affairs of the

 

1

 

entity, or if not
meeting the preceding, the maximum voting right that may be held by the
particular Party under the laws of the country where such entity exists.

 

1.2                                 “Agreement
Term” shall mean the term of this Agreement, as determined in accordance
with Article 12.

 

1.3                                 “Collaboration
Technology” shall mean all Collaboration Patents and Collaboration
Know-How.

 

1.4                                 “Collaboration
Patents” shall mean all patents and patent applications anywhere in the
world claiming an invention first conceived and/or reduced to practice solely
or jointly by Array and/or InterMune personnel in the course of performing the
Research Collaboration, including without limitation any such invention
comprising a Hit Compound, Lead Compound or Product, or method of use or
process for the synthesis thereof or composition-of-matter containing such Hit
Compound, Lead Compound or Product.  The
Collaboration Patents may include the following types of patent applications
and patents:  divisionals, continuations,
continuations-in-part, reissues, reexaminations, renewals or extensions,
substitutions, confirmations, registrations and revalidations.

 

1.5                                 “Collaboration
Know-How” shall mean all Know-How made or developed solely or jointly by
Array and/or InterMune in the course of performing the Research Collaboration,
in each case, which is necessary or useful for the development, manufacture,
use, sale or other commercialization of any Hit Compound, Lead Compound or
Product.  Collaboration Know-How does not
include patentable inventions claimed in the Collaboration Patents.

 

1.6                                 “Consumer
Price Index” or “CPI” means the Consumer Price Index, All Urban Consumers,
as published by the U.S. Bureau of Labor Statistics.

 

1.7                                 “Control”
shall mean, with respect to any patent application, patent or Know-How, the
ownership of, or possession of a license under, such patent application, patent
or Know-How, together with the right to grant a license to the other Party
thereunder as provided in this Agreement.

 

1.8                                 “Field”
shall mean the discovery, development and commercialization of chemical
entities for the therapeutic or prophylactic treatment of diseases and
conditions in humans, a mechanism of action of which chemical entities is to
modulate the activity of a Target.

 

1.9                                 “FTE”
shall mean a full-time person dedicated to the Research Collaboration, or in
the case of less than a full-time, dedicated person, a full-time equivalent
person year, based upon a total of one thousand eight hundred eighty (1,880)
hours per year of work in connection with the Research Collaboration.

 

2

 

1.10                           “JRC”
or “Joint Research Committee” shall have the meaning set forth in Section 3.1.

 

1.11                           “Hit
Compound” shall mean any chemical entity that meets the Hit Compound
Criteria.

 

1.12                           “Hit
Compound Criteria” shall mean (i) those criteria set forth in the
Research Plan to be “Hit Compound Criteria,” and/or (ii) such other
criteria as are approved by the JRC and agreed in writing by the Parties. If
the Parties agree to any such other criteria, then their writing shall clearly
set forth whether such criteria are in addition to, or alternative to, such
criteria set forth in the Research Plan as of the Effective Date.

 

1.13                           “Know-How”
shall mean ideas, inventions, data, instructions, processes, formulas, expert
opinions and other information (including, without limitation, biological,
chemical, pharmacological, toxicological, pharmaceutical, physical, analytical,
clinical, safety, manufacturing and quality control data and information).

 

1.14                           “Lead
Compound” shall mean any chemical entity that meets the Lead Compound
Criteria.

 

1.15                           “Lead
Compound Criteria” shall mean (i) those criteria set forth in the
Research Plan to be “Lead Compound Criteria,” and/or (ii) such other
criteria as are approved by the JRC and agreed in writing by the parties.  If the Parties agree to any such other
criteria, then their writing shall clearly set forth whether such criteria are
in addition to, or alternative to, such criteria set forth in the Research Plan
as of the Effective Date.

 

1.16                           “NDA”
shall mean a New Drug Application, as defined in the U.S. Food, Drug and
Cosmetic Act and the regulations promulgated thereunder, or any corresponding
foreign application, registration or certification.

 

1.17                           “Net
Sales” shall mean [ * ].

 

1.18                           “Party”
or “Parties” shall mean, respectively, Array or InterMune individually,
or Array and InterMune collectively.

 

1.19                           “Phase
II” shall mean the phase of human clinical trials for which the primary
endpoints include a determination of dose ranges and/or a preliminary
determination of efficacy in patients in the United States or a country other
than the United States.  Phase II
specifically excludes that phase of human clinical trials commonly referred to
as “Phase I” clinical trials, which are solely intended to determine safety but
not definitive dosing and efficacy of a pharmaceutical.

 

3

 

1.20                           “Phase
III” shall mean the phase of human clinical trials the principal purpose of
which are to establish safety and efficacy of one or more particular doses in
patients being studied, and which will (or are intended to) satisfy the
requirements of a pivotal trial for purposes of obtaining approval of a product
in a country by the health regulatory authority in such country to market such
product.

 

1.21                           “Preparatory
Know-How” shall mean all Know-How made or developed by Array [ * ] that relates to the subject
matter of the Research Collaboration and/or to any Hit Compound, Lead Compound
or Product, to the extent Controlled by Array.

 

1.22                           “Preparatory
Patents” shall mean all patent applications and patents anywhere in the
world claiming any invention conceived and/or reduced to practice by Array [ * ] that relates to the subject
matter of the Research Collaboration and/or to any Hit Compound, Lead Compound
or Product, in each case to the extent Controlled by Array.

 

1.23                           “Product”
shall mean any diagnostic, therapeutic or prophylactic product incorporating as
an active ingredient a Hit Compound or a Lead Compound.

 

1.24                           “Research
Collaboration” shall mean the research activities undertaken by the Parties
during the Research Term pursuant to Sections 2.1 to 2.3 below.

 

1.25                           “Research
Plan” shall mean the written research plan that the Parties have agreed to
on or before the Effective Date.  The
Research Plan may be amended from time to time by mutual agreement of the
Parties, and shall be updated as set forth in Section 2.2.2.

 

1.26                           “Research
Term” shall mean the term of the Research Collaboration, as provided in Section 2.3
below.

 

1.27                           “Reserved
Target” shall mean those targets identified in Exhibit A as “Reserved
Targets.”

 

1.28                           “Sublicensee”
shall mean, with respect to a particular Product, a Third Party to whom
InterMune has granted a license or sublicense under the Collaboration
Technology to make and sell such Product. 
As used in this Agreement, “Sublicensee” shall specifically exclude a
Third Party to whom InterMune has granted the right to distribute such Product,
provided that the economics of
the distribution relationship involve payment of a transfer price by the
distributor, but not a royalty to InterMune calculated as a percentage of net
sales of the Product by the distributor.

 

1.29                           “Target(s)”
shall mean (i) the target identified in Exhibit A as the “Target,”
and (ii) any Reserved Target selected in accordance with Section 2.2.1
below for use in the Research Collaboration.

 

4

 

1.30                           “Third
Party” shall mean any person or entity other than Array and InterMune, and
their respective Affiliates.

 

1.31                           “Valid
Claim” shall mean [ * ].

 

ARTICLE 2

RESEARCH COLLABORATION

 

2.1                                 Goals.  The goal of the Research Collaboration is the
discovery and optimization of patentable compositions that are orally active
small molecule inhibitors in the Field pursuant to the Research Plan.

 

2.2                                 Conduct
of the Research Collaboration. 
Subject to the terms and conditions set forth herein, the Parties agree
to conduct research under the Research Collaboration, which shall be funded as
set forth in Article 5 below. 
During the Research Term, Array and InterMune shall collaborate and each
use their commercially reasonable efforts to conduct their respective responsibilities
under the Research Collaboration in accordance with the Research Plan, within
the time frames contemplated therein.  In
particular, Array shall devote the numbers of FTEs set forth for it to devote
in the Research Plan to carrying out the tasks assigned to Array at the times
set forth therein.

 

2.2.1                        Target
Selection.  The initial subject of
the Research Collaboration shall be the Target identified in the Research Plan
as of the Effective Date.  During the
Research Term, either Party may propose in writing that the Research
Collaboration be expanded to include research involving one of more Reserved
Target(s).  Upon written consent of the other Party, each Reserved Target so
proposed shall cease to be a Reserved Target for purposes of this Agreement and
shall thereafter be deemed a Target.

 

2.2.2                        Research
Plan.  The Research Collaboration
shall be carried out in accordance with the Research Plan.  The Research Plan as it exists as of the
Effective Date establishes specific research objectives and the general
research tasks to be performed and resources to be provided by each Party.  Promptly after the Effective Date, the
Parties shall meet and agree on the more specific tasks to be undertaken to
achieve such research objectives and general tasks, the specific anticipated
timelines for such specific tasks, and an FTE schedule setting forth how
many FTEs Array will devote to the performance of the tasks assigned to it in
each quarter of the Research Term. 
Within thirty (30) days after the Effective Date, the JRC shall meet to
discuss and approve such an update to the Research Plan to cover such subject
matter.  Thereafter, the Research Plan
shall be reviewed on an ongoing basis and may be amended by the Joint Research
Committee in accordance with Article 3, or by the Parties in accordance
with Section 4.4.

 

5

 

2.3                                 Term
and Termination of Research Collaboration.  
The Research Collaboration shall commence on the Effective Date and
shall end upon the first to occur of (i) two (2) years after the
Effective Date, (ii) the termination of this Agreement, or (iii) ninety
(90) days after written notice from InterMune that InterMune elects (in its
sole discretion) to early terminate the Research Collaboration, such notice to
be given no earlier than nine (9) months after the Effective Date (such
period beginning on the Effective Date and ending upon the earliest of (i), (ii) and
(iii), the “Research Term”).  InterMune
shall have the right to extend the Research Term for up to an additional two (2) years.  To exercise such right, InterMune shall
provide written notice to Array on or before the date ninety (90) days before
the second anniversary of the Effective Date.

 

2.4                                 Selection
of Candidates for Further Development. 
From time to time, either Party may suggest that the JRC consider a
particular Hit Compound or Lead Compound to be recommended to InterMune for
selection for further development.  The
JRC’s recommendation is not binding on InterMune.  The purpose of having the JRC make any such
recommendation is to foster collaboration and scientific exchange between the
Parties during the Research Term. 
InterMune agrees to inform Array of any Hit Compounds and Lead Compounds
researched hereunder for which InterMune is undertaking any GLP toxicology
studies in the next report under Section 7.2 after such studies commence.

 

2.5                                 Records;
Inspection.

 

(a)                                  Records.  Array and InterMune shall maintain records of
the Research Collaboration (or cause such records to be maintained) in
sufficient detail and in good scientific manner as will properly reflect all
work done and results achieved in the performance of the Research Collaboration
(including all data in the form required under any applicable governmental
regulations and as directed by the JRC).

 

(b)                                 Reports
and Information Exchange.  Each Party
shall keep the other Party, including the Joint Research Committee, informed as
to its progress under the Research Plan. 
During the Research Term, Array and InterMune shall each provide the
other, at least once quarterly, a reasonably detailed written summary of
research activities and results in connection with the Research
Collaboration.  In addition, if requested
in writing by InterMune, Array shall provide InterMune with copies of its
records required to be kept pursuant to Section 2.5(a), including without
limitation the relevant portions of laboratory notebooks of Array personnel
participating in the Research Collaboration.

 

2.6                                 Post
Research Collaboration Activities. 
For each Hit Compound, Lead Compound and Product, as between the
Parties, InterMune shall be responsible, at its sole expense, for conducting
all clinical development of such Lead Compound or Product following the
termination of the Research Term, and all commercialization of such Hit
Compound, Lead Compound or Product.

 

6

 

2.7                                 Exclusivity.

 

2.7.1                        General.  Except in performing pursuant to the Research
Collaboration, Array and its Affiliates shall not knowingly [ * ], alone or with a Third
Party, [ * ]
specifically directed to (i) [ * ],
during the Research Term and for a period of [ * ]
thereafter, (ii) or [ * ],
during the Research Term.  It is
understood and agreed that [ * ]
shall not be deemed a violation of this Section 2.7.

 

2.7.2                        Option.  During the Research Term, prior to Array or
any of its Affiliates entering into material or substantial negotiations with a
third party in connection with [ * ],
other than a Target or a Reserved Target, or using [ * ], Array will notify InterMune in writing of
such intent.  Within thirty (30) days
after receipt of such notice, InterMune will notify Array in writing whether
InterMune is interested in pursuing such activities in collaboration with
Array, under terms equivalent to those contained in the Agreement.  If so, InterMune and Array will negotiate in
good faith an agreement under which Array and InterMune would collaborate on
such compound discovery research.  If the
parties have not agreed upon terms and conditions of such an agreement within
ninety (90) days after receipt of InterMune’s notice, or if InterMune does not
indicate its interest within such thirty (30) day period, then Array and its
Affiliates shall be free to pursue [ * ]
that was the subject of Array’s notice to InterMune, alone or with a Third
Party, without further obligation to InterMune, [ * ].

 

2.7.3                        Change
of Control.  Notwithstanding the
provision of Sections 2.7.1 and 2.7.2, in the event of a Change of Control (as
defined below) of Array, the provisions of such Sections shall not apply to any
research or development program that a portion of the surviving entity that was
not Array (prior to the Change of Control) had ongoing as of immediately prior
to the date of such Change of Control. 
For purposes of this Section 2.7, a “Change of Control” shall mean
the merger, consolidation, sale of substantially all of its assets or similar
transaction or series of transactions, as a result of which Array’s
shareholders before such transaction or series of transactions own less than
fifty percent (50%) of the total number of voting securities of the surviving
entity immediately after such transaction or series of transactions.  For clarity, if as a result of any such Change
of Control, Array exists as a wholly owned subsidiary of a parent, then the
provisions of this Section 2.7 shall continue to apply to Array, but not
to such parent.

 

2.8                                 Existing
Library Compounds.  As of the
Effective Date, the Parties will focus upon new compound libraries created
pursuant to the Research Collaboration, and the Parties will not engage in high
throughput screening against pre-existing or separate compound libraries of
Array pursuant to the Research Collaboration.

 

7

 

ARTICLE 3

MANAGEMENT

 

3.1                                 Joint
Research Committee.  Promptly after
the Effective Date, InterMune and Array will establish a committee (the “Joint
Research Committee” or “JRC”) to oversee, review and recommend direction of the
Research Collaboration, and provide advice regarding prosecution of
jointly-owned patent applications directed to inventions within the
Collaboration Technology.  The
responsibilities of the Joint Research Committee shall include, among other
things: (i) setting priorities and modifying the Research Plan; (ii) recommending
the number of FTEs to be provided for in the Research Plan; (iii) monitoring
and reporting research progress and ensuring open and frequent exchange between
the Parties regarding Research Collaboration activities; and (iv) recommending
Hit Compounds and Lead Compounds for selection by InterMune as candidates for
further development.  The JRC (and any of
its subcommittees) shall have no authority to amend or waive compliance with
this Agreement.  The JRC’s
decision-making shall be as set forth in Section 3.4.

 

3.2                                 Membership.  The JRC shall include two (2) representatives
of each of InterMune and Array.  Each
Party’s members shall be selected by that Party.  Array and InterMune may each replace its JRC
representatives at any time, upon written notice to the other Party.  From time to time, the JRC may establish
subcommittees, to oversee particular projects or activities, and such
subcommittees will be constituted as the JRC agrees.

 

3.3                                 Meetings.  During the Research Term, the JRC shall meet
at least quarterly, or as agreed by the Parties, at such locations as the
Parties agree, and will otherwise communicate regularly by telephone,
electronic mail, facsimile and/or video conference.  With the consent of the Parties, other
representatives of Array or InterMune may attend JRC meetings as nonvoting
observers.  Each Party shall be
responsible for all of its own expenses associated with attendance of such
meetings.  The first meeting of the JRC
shall occur within forty-five (45) days after the Effective Date.

 

3.4                                 Decision
Making.  Decisions of the JRC shall
be made by unanimous agreement.  In the
event that unanimity is not achieved within the JRC, then, other than with
respect to setting criteria for Hit Compounds and Lead Compounds, InterMune
shall have the deciding vote; provided,
however, that notwithstanding the foregoing, Array shall not be
obligated, as a result of such a deciding vote by InterMune, to violate any
obligation or agreement it may have to or with any Third Party; provided that the obligation to or
agreement with the Third Party is not in conflict with this Agreement as
originally executed or the activities that would be required or contemplated of
Array under the Research Plan as it exists as of the Effective Date.  Disputes among the JRC or the Parties as to
whether to change or add to the Hit Compound Criteria and/or the Lead Compound
Criteria shall be non-justiciable, and the Hit Compound Criteria and the Lead
Compound Criteria shall remain as they exist as of the Effective Date unless
the Parties otherwise agree in writing.

 

8

 

ARTICLE 4

LICENSES

 

4.1                                 Research
Licenses.

 

4.1.1                        Grant
from InterMune.  InterMune hereby
grants Array a worldwide, non-exclusive, non-transferable, non-sublicensable,
royalty-free, right and license, under InterMune’s interest in the
Collaboration Technology, solely to conduct the Research Collaboration during
the Research Term.

 

4.1.2                        Grant
from Array.  Array hereby grants
InterMune a worldwide, non-exclusive, non-transferable, non-sublicensable,
royalty-free, right and license, under Array’s interest in the Collaboration
Technology and under the Preparatory Patents and the Preparatory Know-How,
solely to conduct the Research Collaboration during the Research Term.

 

4.2                                 Commercial
License.

 

4.2.1                        License
to Lead Compounds, Development Candidates and Corresponding Products.  Subject to the terms and conditions of this
Agreement, Array hereby grants to InterMune a worldwide, exclusive,
royalty-bearing right and license under Array’s interest in the Collaboration
Technology and under the Preparatory Patents, to research, develop, make, have
made, use, import, offer for sale and sell Hit Compounds, Lead Compounds and
Products worldwide.

 

4.2.2                        Preparatory
Know-How.  Subject to the terms and
conditions of this Agreement, Array hereby grants to InterMune a worldwide,
non-exclusive, royalty-bearing right and license under the Preparatory Know-How to research, develop, make, have made,
use, import, offer for sale and sell Hit Compounds, Lead Compounds and Products
worldwide.

 

4.2.3                        Sublicenses.  Subject to the terms and conditions of this
Agreement, InterMune shall have the right to sublicense the rights granted in Section 4.2.1
above through one (1) or more tiers of sublicensees.  Each sublicense granted by InterMune shall be
consistent with all the terms and conditions of this Agreement, and shall
automatically terminate with respect to the patents and know-how licensed
hereunder when this Agreement terminates.  
InterMune shall remain responsible to Array for the compliance of each
such Sublicensee with this Agreement as applicable to such Sublicensee, and the
payment of any amounts due hereunder as a result of the activities of
Sublicensees.

 

4.2.4                        Marketing
Rights.  InterMune shall have the
exclusive right to market, sell and distribute Products.  In exercising such rights, InterMune may
select trademarks for such Products, and InterMune shall own all right, title
or interest in such trademarks (subject to any pre-existing rights of Array or
Third Parties).

 

4.3                                 License
to Array.  InterMune hereby grants to
Array a worldwide, non-exclusive, transferable, royalty-free right and license,
with the right to grant and authorize sublicenses, 

 

9

 

under InterMune’s
interest in the Collaboration Technology, to exploit the same outside the scope
of Array’s exclusive license to InterMune pursuant to Section 4.2.

 

4.4                                 Third-Party
Licenses.  In the event that the
Parties agree to acquire additional technologies from a Third Party
specifically for use in the conduct of the Research Collaboration in the Field,
InterMune will be responsible for the payment of any amounts due to Third
Parties for the license of intellectual property which directly applies to any
Target, and the costs of negotiating, preparing and executing any such license,
unless the Parties otherwise mutually agree in writing.  InterMune shall use its reasonable efforts to
negotiate in good faith and obtain all Third Party licenses that it agrees to
seek because they are necessary or useful for the conduct of the Research
Collaboration.  If, during the Research
Term, InterMune is unable, despite such efforts, to obtain any license
necessary for the conduct of the Research Collaboration, and the Parties are
unable to agree to amend the Research Plan such that such license is no longer
necessary to the conduct of the Research Collaboration, then InterMune shall
have the right to terminate this Agreement upon thirty (30) days notice.

 

4.5                                 No
Implied Licenses.  Only the licenses
granted pursuant to the express terms of this Agreement shall be of any legal
force or effect.  No other license or
rights shall be created by implication, estoppel or otherwise.

 

4.6                                 No
Products Other than Products.  Except
as otherwise agreed in writing or specifically provided in the terms of this
Agreement, neither InterMune nor its Affiliates nor Sublicensees shall,
directly or indirectly, commercialize any Hit Compound or Lead Compound itself
or the method of manufacture or use of which is claimed by the Collaboration
Patents or uses the Collaboration Know-How, other than as a Product in
accordance with this Agreement (i.e., any Products sold by InterMune, its
Affiliates and Sublicensees in exercise of the license granted InterMune in Section 4.2.1
shall be milestone and royalty-bearing to the extent set forth in this
Agreement).

 

ARTICLE 5

PAYMENTS

 

5.1                                 Research
Collaboration Funding.

 

5.1.1                        Research
Phase Payment Schedule.  InterMune agrees
to pay Array research funding for the conduct of the Research Collaboration
quarterly, in advance, in an amount equal to one quarter (1/4) of [ * ] FTEs (or, if lesser, the
number of Array FTEs scheduled in the Research Plan to be provided by Array in
the upcoming quarter), multiplied by the applicable Array FTE Rate (as defined
below in Section 5.1.2).  The
initial quarterly payment shall be made on or before the date Array FTEs are
first deployed in accordance with the Research Plan, and subsequent payments
shall be made on or before the first day of each calendar quarter
thereafter.  Such payments are
non-creditable and non-refundable, subject to the

 

10

 

remainder of this Section 5.1.1.  Within thirty (30) days after the end of each
calendar quarter during which InterMune is funding Array FTEs devoted to the
Research Collaboration, Array shall notify InterMune in writing of the number
of FTEs Array actually devoted to the Research Collaboration during such
calendar quarter.  If such actual FTEs
are less than the number of FTEs for which InterMune paid, then InterMune may
credit the overpayment against the next payment due Array under this Agreement.  If no payment will be due Array within the
next three (3) months after Array was required to notify InterMune of such
actual FTEs, Array shall promptly refund the overpayment to InterMune.  In addition, InterMune may audit Array’s FTE
records relating to the Research Collaboration, in the same manner and subject
to the same restrictions as those set forth for Array’s audits pursuant to Section 6.4,
and any discrepancies shall be trued-up as provided in the foregoing two (2) sentences.  In no event shall InterMune be required to
fund a greater number of Array FTEs in any calendar quarter than one quarter
(1/4) of [ * ] FTEs, or,
if lesser, those provided in the Research Plan for Array to provide in such
quarter.

 

5.1.2                        FTE
Rate.  The “Array FTE Rate” shall be
equal to [ * ] per FTE
per year.  Effective after the first
anniversary of the Effective Date, the FTE Rate shall increase no more than
once annually by the percentage increase, if any, in the Consumer Price Index
for all Urban Consumers, as published by the U.S. Department of Labor, Bureau
of Statistics, since the Effective Date or the last adjustment hereunder,
whichever is later.

 

5.1.3                        Non-FTE
Costs.  Non-FTE costs and research
requirements associated with performance of the Research Collaboration at Array
shall be borne by Array, except that Array shall not be required to incur any
extraordinary [ * ]
costs without Array’s prior written consent. 
Extraordinary [ * ]
costs means material costs in excess of [ * ].

 

5.1.4                        PK
Outsourcing.  In the event that the
Parties agree, in the course of the Research Collaboration, to enter into one
or more agreements with a Third Party(ies) for the performance of [ * ] with respect to a
particular Hit Compound(s) and/or Lead Compound(s), the Parties shall be
responsible for the payment of the aggregate amounts due such Third Party(ies)
under such agreements as follows:  (i) Array
shall be responsible for payment of [ * ]
due during each of (1) the period commencing on the Effective Date and
ending on the first anniversary thereof, and (2) the following twelve (12)
months (unless the Research Term is earlier terminated); and (ii) InterMune
shall responsible for the payment of all additional amounts that are approved
in advance by InterMune.  The Parties
anticipate that they will contract with Third Parties for [ * ] in each year of the
Research Term.  The Parties will mutually
agree the specific studies to be conducted, and the specific Third Parties that
will conduct the studies.  Array shall
not unreasonably withhold its agreement to particular such studies, or withhold
its consent to the Parties contracting for any such studies on the grounds of
the cost of the studies.

 

5.2                                 Development
Funding.  In addition to the funding
obligations set forth in Section 5.1, InterMune shall be responsible for
all costs and expenses for otherwise developing and

 

11

 

commercializing
the Products, including without limitation, preclinical development, clinical
development, premarketing and commercial activities.  For clarity, this means that as between the
Parties, InterMune is responsible for the costs of activities in exercise of
the license granted it in Section 4.2.1.

 

5.3                                 Milestones.  InterMune shall pay to Array the following
amounts [ * ] following
the first achievement by Array or by InterMune or its Affiliates, Sublicensees
or other designees, as the case may be, of each of the following milestones
with respect any [ * ]
or Product that itself, or the manufacture, use or sale of which is claimed by
a Valid Claim or that incorporates as its active ingredient a Hit Compound that
was identified as such pursuant to the Research Collaboration (a “Milestone
Product”).

 

	
  Milestones

  	
   

  	
  Payment Amount

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  1.[ * ]

  	
   

  	
  $

  	
  [ * ]

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2.[ * ]

  	
   

  	
  $

  	
  [ * ]

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  3.[ * ]

  	
   

  	
  $

  	
  [ * ]

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  4.[ * ]

  	
   

  	
  $

  	
  [ * ]

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  5.[ * ]

  	
   

  	
  $

  	
  [ * ]

  	
   

  

 

5.3.1                        Milestone
payments [ * ] set forth
above shall each be payable [ * ]
upon the achievement of the corresponding milestone event with a Milestone
Product [ * ], and [ * ] upon the achievement of the
corresponding milestone event with a Milestone Product [ * ].  Milestone payment [ * ] set forth above shall be due [ * ], and milestone payments [ * ] set forth above shall be
due [ * ], regardless of
the number of additional times the corresponding milestone events are achieved with
one (1) or multiple [ * ]
or Milestone Products.

 

5.3.2                        In the
event that one or more milestone payments described above becomes due (a “Later
Milestone”) in relation to the achievement of a corresponding milestone event
with a Milestone Product [ * ],
and one or more of the earlier-stage milestone payments has not been paid to
Array in relation to the achievement of a corresponding milestone event with a
Milestone Product [ * ],
then all earlier-stage milestone payments in relation to the achievement of a
corresponding milestone event with a Milestone Product [ * ] that have not been paid
shall be paid together with the Later Milestone payment.  Similarly, if a Later Milestone becomes due
in relation to the achievement of the corresponding milestone event with a
Milestone Product [ * ],
then all earlier stage milestone payments in relation to the achievement of the
corresponding milestone events with a Milestone Product [ * ] shall be paid together with
such Later Milestone. For clarity, nothing in this Section 5.3.2 shall be
deemed to contradict the limits

 

12

 

set forth in Section 5.3.1
as to the number of times each milestone payment is available under this
Agreement.

 

5.3.3                        For
purposes of this Section 5.3, a clinical trial shall be deemed initiated
upon the first dosing of the first patient in such trial.

 

5.4                                 Royalties.

 

5.4.1                        Products.  InterMune shall pay Array a running royalty
of [ * ] of Net Sales of
each Product during the time periods and in countries in which its manufacture,
use or sale of such Product is claimed by a Valid Claim.  Such rate shall not be increased
if multiple Valid Claims claim the manufacture, use or sale of such
Product.  Notwithstanding the foregoing,
if and when the only Valid Claim claiming such manufacture, use or sale is a
claim directed to a method of use or manufacture solely invented by
InterMune (an “InterMune Sole Non-composition Claim”), then no such running royalty shall be due.  No running royalties shall be due hereunder
on the basis of the use of the Collaboration Know-How.

 

5.4.2                        Royalty
Term.  InterMune’s obligation to pay
royalties to Array under this Section 5.4 shall continue for each Product
that itself or the method of manufacture or use of which is claimed by a Valid
Claim, on a country-by-country basis, until such time as there are no Valid
Claims (other than InterMune Sole Non-composition Claims) which but for the
licenses granted herein would be infringed by the manufacture, use or sale of
such Product in such country.  Upon the
expiration of such term of royalties in any country with respect to any
Product, InterMune’s license under Section 4.2 with respect to such
Product in such country shall automatically become fully paid, nonexclusive and
perpetual.

 

5.4.3                        Third
Party Royalties.  In the event that (i) it
becomes necessary or useful for InterMune to obtain a license under a valid,
issued patent of a Third Party, where such patent covers the composition,
methods of therapeutic use, or all practical methods of synthesis of a Product,
and such patent would be infringed, but for the existence of the Third-Party
license, by the discovery, research, development or sale of such Product, and (ii) InterMune
must pay such Third Party for such license a royalty on Net Sales of such
Product in a particular country, then InterMune may deduct [ * ] of the royalties reasonably
so paid to such Third Party against royalties due Array on Net Sales of such
Product; provided that the
royalties otherwise due to Array in any quarter will not be lower than [ * ] (the “Floor”) by operation
of an offset provided for in this Section 5.4.3.  Amounts that InterMune is unable to deduct in
a particular calendar quarter due to the Floor may be carried forward and
deducted in future calendar quarters, subject always to the Floor in the future
calendar quarters.

 

5.4.4                        Combination
Products. If InterMune sells any Product in the form of a combination
product containing one or more active ingredients in addition to the active
ingredient that is a Lead Compound (which may be either combined in a single
formulation or

 

13

 

packaged as
separate formulations sold as a single package), Net Sales for such combination
product will be calculated by multiplying actual Net Sales of such combination
product by the fraction A/(A+B) where A is the invoice price of the Lead
Compound portion of the combination product if sold separately, and B is the
total invoice price of the other active ingredient or ingredients in the
combination, if sold separately.  If, on
a country-by-country basis, the other active ingredient or ingredients in the
combination are not sold separately in said country, Net Sales for the purpose
of determining royalties due hereunder on the combination product shall be
calculated by multiplying actual Net Sales of such combination product by the
fraction A/C where A is the invoice price of the Lead Compound portion of the
combination product if sold separately, and C is the invoice price of the
combination product.  If, on a
country-by-country basis, the Licensed Product is not sold separately in said
country, Net Sales for the purposes of determining royalties of the combination
product shall be determined by the Parties in good faith on the basis of the
fair market values of the different active ingredients of the combination
Product.

 

5.4.5                        Compulsory
License.  If either Party learns that
a Third Party other than an InterMune Affiliate or Sublicensee has obtained a
compulsory license in any country under the Collaboration Patents, or
Identified Patents or Preparatory Patents exclusively licensed to InterMune
hereunder, to sell a Competitive Product (as defined below), then such Party
shall promptly notify the other Party of such occurrence.  If the royalty rate payable to Array under
such compulsory license is less than the royalty rate otherwise applicable in
such country hereunder, then, in each calendar year in which the Competitive
Product is being sold in such country, and units of the Competitive Product
equal at least [ * ] of
the total combined units of such Competitive Product and the Product in the
particular country, sold in such calendar year, then the royalty rate set forth
in Section 5.4.1 shall be reduced, with respect to Net Sales in such
country, to the lower royalty rates applicable in such country pursuant to such
compulsory license.  Any reduction in the
royalty due Array as a result of sales of such Competitive Product shall be
available to InterMune only with respect to Net Sales in those calendar years
and in those countries described by the foregoing sentence.  For the purposes of this Section 5.4.5,
a “Competitive Product” shall mean any product the manufacture, use or sale of
which is claimed by any of the foregoing patents, and which competes with any
Product in the relevant country.  If such
compulsory license is required to be granted by InterMune, then the amounts
received by InterMune pursuant to such compulsory license shall be deemed to be
Net Sales hereunder (in lieu of the sales pursuant to the compulsory license
being included in Net Sales).

 

5.4.6                        Later
Claims.  If (a) InterMune was
not required to pay royalties on Net Sales of any Product during a time period
when and in a country where a pending claim that would have qualified as a
Valid Claim but for claiming a first priority to more than five (5) years
from the date pendency was determined (that was “Temporarily Disqualified”,
with derivative forms being interpreted accordingly), and that covers such
Product itself or the method of manufacture or use thereof in such country, and
(b) such claim later issues as an issued Valid Claim covering such Product
itself or the method of manufacture or use thereof in such country,

 

14

 

then (c) with
the next royalty report due pursuant to Section 6.1 after such issuance
(but no sooner than thirty (30) days after such issuance), InterMune shall
report and pay to Array the royalties that would have been due pursuant to Section 5.4.1
on Net Sales of such Product in such country but for the Temporary
Disqualification of such claim.

 

ARTICLE 6

PAYMENTS; BOOKS AND RECORDS

 

6.1                                 Royalty
Reports and Payments.  After the
first sale of a Product on which royalties are payable by InterMune or its
Affiliates or Sublicensees hereunder, InterMune shall make quarterly written
reports to Array within [ * ]
after the end of each calendar quarter, stating in each such report, separately
for InterMune and each Affiliate and Sublicensee, the aggregate Net Sales, by
country, of each Product sold during the calendar quarter upon which a royalty
is payable under Section 5.4 above. 
InterMune shall pay to Array royalties due at the rates specified in Section 5.4.

 

6.2                                 Payment
Method.  All payments due under this
Agreement shall be made from a bank located in the United States by bank wire
transfer in immediately available funds to a bank account designated by
Array.  All payments hereunder shall be
made in U.S. dollars.  In the event that
the due date of any payment subject to Article 5 hereof is a Saturday,
Sunday or national holiday, such payment may be paid on the following business
day.  Any payments that are not paid on
the date such payments are due under this Agreement shall bear interest to the
extent permitted by applicable law at the prime rate as reported by the Chase
Manhattan Bank, New York, New York, on the date such payment is due, plus an
additional [ * ],
calculated on the number of days such payment is delinquent.

 

6.3                                 Place
of Royalty Payment; Currency Conversion. 
If any currency conversion shall be required in connection with the
calculation of royalties hereunder, such conversion shall be made using the
selling exchange rate for conversion of the foreign currency into U.S. Dollars,
quoted for current transactions reported in The Wall Street Journal
(U.S., Western Edition), averaged over all business days of the calendar
quarter to which such payment pertains.

 

6.4                                 Records;
Inspection.  InterMune and its
Affiliates and Sublicensees shall keep complete, true and accurate books of
account and records for the purpose of determining the royalty amounts payable
under this Agreement.  Such books and
records shall be kept by such party for at least [ * ] following the end of the calendar quarter to
which they pertain.  Such records will be
open for inspection during such [ * ]
period by a public accounting firm to whom InterMune has no reasonable
objection, solely for the purpose of verifying royalty statements
hereunder.  Such public accounting firm
shall be under written obligations of confidentiality and non-use no less
stringent than those set forth in Article 9.  Such inspections may be made no more than
once each calendar year, at reasonable times and on reasonable notice.  Inspections conducted under this Section 6.4
shall be at the expense of Array, unless a variation or error

 

15

 

producing an
increase exceeding [ * ]
of the amount stated for the period covered by the inspection is established in
the course of any such inspection, whereupon all reasonable costs relating to
the inspection for such period and any unpaid amounts that are discovered will
be paid promptly by InterMune to Array together with interest thereon from the
date such payments were due at the lesser of the prime rate as reported by the
Chase Manhattan Bank, New York, New York, plus an additional [ * ] or the maximum rate
permitted by law.

 

6.5                                 Taxes.  Each Party shall bear and, except as
otherwise expressly provided in this Section 6.5, pay any and all taxes,
duties, levies, and other similar charges (and any related interest and
penalties), however designated, imposed on that party as a result of the
existence or operation of this Agreement. 
If laws or regulations require that taxes be withheld, the paying Party
will (i) deduct those taxes from the remittable payment, (ii) timely
pay the taxes to the proper taxing authority, and (iii) send proof of
payment to the other Party within sixty (60) days following that payment.

 

ARTICLE 7

DUE DILIGENCE

 

7.1                                 Due
Diligence.  InterMune shall use
commercially reasonable efforts to develop and commercialize at least one (1) Product,
and to obtain the optimum commercial return for it in the major markets of the
world for it, consistent with high professional standards for the research,
development, commercialization, and marketing of pharmaceutical products of
similar commercial value potential and patent coverage; provided, however, that, and only if, at
least one (1) Lead Compound is identified pursuant to the Research
Collaboration.  Such diligence obligation
shall be the sole diligence obligation of InterMune with respect to such
development and commercialization, express or implied, under this Agreement or
available in relation hereto at law or in equity.  For the avoidance of doubt, the overriding
goal of the Research Collaboration is to identify Lead Compounds, one of the
criteria for which compounds is that the composition of matter of each (as
distinct from their methods of use and manufacture) be patentable.  If no such Lead Compound is identified in the
Research Collaboration, then the Research Collaboration shall not have been
successful in the way that the Parties had anticipated when the Parties entered
into this Agreement and InterMune agreed to fund the Research Collaboration to
the extent provided for hereunder.  It is
therefore the Parties’ intent that in such event, in recognition of InterMune’s
sponsorship of the Research Collaboration to the extent provided for hereunder:  (a) InterMune shall be entitled to
retain its license pursuant to Section 4.2, and (b) InterMune shall
have no diligence obligation with respect to the subject matter of such
license.

 

7.2                                 Reports.  Until first commercial introduction of each
royalty-bearing Product by or on behalf of InterMune hereunder, InterMune shall
keep Array apprised of the status of the pre-clinical, clinical and commercial
development of such Product by annually providing Array with a written report
summarizing such activities with respect to the applicable Product (and the

 

16

 

Lead Compound from
which such Product is being developed) during the Agreement Term. The reports
described in this Section 7.2 shall contain sufficient information to
allow Array to monitor InterMune’s compliance with this Agreement, including
without limitation, InterMune’s obligations with respect to the payment of the
milestones set forth in Section 5.3. All reports and information provided
under this Section 7.2 shall be deemed Confidential Information of
InterMune.  InterMune’s obligations
pursuant to this Section 7.2 are subject to Section 13.4 regarding
successors in interest to and Affiliates of Array.

 

ARTICLE 8

INTELLECTUAL PROPERTY

 

8.1                                 Disclosure
and Ownership of Inventions.

 

8.1.1                        Each Party
shall promptly disclose to the other any patentable inventions conceived or
first reduced to practice pursuant to the Research Collaboration by or on
behalf of such Party promptly after such conception or reduction to
practice.  In addition, each Party shall
disclose to the other any Collaboration Know-How promptly after it is made or
developed.

 

8.1.2                        Inventorship
of inventions that would be claimed by a Collaboration Patent shall be
determined in accordance with U.S. laws of inventorship.  Solely invented such inventions, together
with the Collaboration Patents claiming such sole inventions, shall be solely
owned by the Party whose personnel made the invention.  The Parties joint inventions that would be
claimed by Collaboration Patents, together with the Collaboration Patents
claiming them, shall be jointly owned by the Parties.  Such joint ownership shall be in accordance
with the default rights enjoyed by co-inventors under U.S. patent law in the
absence of a written agreement to the contrary (throughout the world to the
maximum extent permitted by law), such that, without limitation and except as
restricted by the licenses granted in Sections 4.1 and 4.2, financial
commitments set forth in Article 5 and prosecution and enforcement
provisions set forth in this Article 8, each Party may practice the
subject matter of the jointly owned Collaboration Patents without a duty of
accounting to the Party.

 

8.1.3                        Ownership
of Collaboration Know-How shall be determined in accordance with the laws of
the state of New York.

 

8.2                                 Patent
Prosecution.

 

8.2.1                        Collaboration
Technology.  InterMune shall have the
right, [ * ], to (i) prepare,
file, prosecute and maintain Collaboration Patents directed to Hit Compounds,
Lead Compounds and/or Products; pharmaceutical compositions containing a Hit
Compound, Lead Compound, and/or a Product; and methods of making or using any
of the foregoing; and (ii) conduct any interferences, re-examinations,
reissues and oppositions relating thereto. 
InterMune shall keep Array fully informed as to the status of such
patent matters, including without

 

17

 

limitation, by
providing Array the opportunity, as far in advance of filing dates as possible,
to fully review and comment on any documents which will be filed in any patent
office; reasonably considering Array’s comments thereon; and providing Array
copies of any substantive documents relating to the Collaboration Patents that
InterMune receives from patent offices promptly after receipt, including notice
of all interferences, reissues, re-examinations, oppositions or requests for
patent term extensions.  InterMune may
elect, upon thirty (30) days prior
notice, to discontinue prosecution of any such patent applications
and/or not to file or conduct any further activities with respect to such
patent applications or patents.  In the
event InterMune declines to file or, having filed, fails to further prosecute
or maintain any such patent applications or patents, or conduct any proceedings
including, but not limited to, interferences, re-examinations, reissues,
oppositions relating thereto, then Array shall have the right to prepare, file,
prosecute and maintain such patent applications and patents in such countries
as it deems appropriate, and conduct such proceedings, at its sole
expense.  In such case, InterMune shall
promptly execute all necessary documents that may be required in order to
enable Array to file, prosecute and maintain such patent applications and to
conduct any such proceedings.

 

8.2.2                        Preparatory
Patents.  Section 8.2.1 shall
apply mutatis mutandis to the
preparation, filing, prosecution and maintenance of solely those Preparatory
Patents that are directed primarily to Hit Compound(s) and/or Product(s)
themselves, or the method of manufacture or use of any of them (“Primary
Preparatory Patents”), as it does to that of Collaboration Patents, except to
the extent that Array cannot grant InterMune preparation, filing, prosecution
and/or maintenance rights due to rights granted to a Third Party by Array with
regard to any Primary Preparatory Patent prior to the Effective Date.  Array will keep InterMune reasonably informed
of the preparation filing, prosecution and maintenance of the other Preparatory
Patents to the extent relevant to any Hit Compound, Lead Compound or
Product.  It is understood and agreed
that InterMune’s rights under this Section 8.2.2 shall accrue with respect
to a particular patent or patent application at the time Array identifies such
patent or patent application as being a Preparatory Patent; provided that Array will make reasonable
efforts to timely identify the Preparatory Patents.

 

8.2.3                        Other
Technology.  This Agreement does not
alter the Parties’ responsibilities with respect to patent applications and
patents that are not Collaboration Patents or Preparatory Patents.  Accordingly, each Party shall be responsible,
at its own expense and in its sole discretion, for preparing, filing,
prosecuting and maintaining, in such countries as it deems appropriate, any and
all patent applications and patents (other than Collaboration Patents and
Preparatory Patents) directed to inventions owned or controlled by such Party
and conducting any interferences, re-examinations, reissues and oppositions
relating to such patent applications and patents.

 

8.2.4                        Cooperation.  InterMune and Array shall each reasonably
cooperate with and assist the other at its own expense in connection with the
activities described in

 

18

 

Section 8.2.1,
at the other Party’s reasonable request, including without limitation by making
scientists and scientific records reasonably available to the prosecuting
Party.

 

8.2.5                        Certain
Circumstances.  This Section 8.2
is subject to the provisions of Section 13.4 regarding successors in
interest to and Affiliates of Array.

 

8.3                                 Enforcement
and Defense.

 

8.3.1                        Notice.  Each Party shall promptly notify the other of
any knowledge it acquires of any potential infringement of the Collaboration
Patents and Preparatory Patents by a Third Party.

 

8.3.2                        InterMune.  In the event that a Party believes a Third
Party is infringing any Collaboration Patent, InterMune shall have the first
right, but not the obligation, to take reasonable legal action to enforce such
Collaboration Patent and defend any declaratory judgment action relating to
such infringement, at its sole cost and expense.  If, within six (6) months following
receipt of notice from Array of such infringement, InterMune fails to take such
action to halt a commercially significant infringement of a patent filed
pursuant to Section 8.2.1, Array shall, in its sole discretion, have the
right, at its sole expense, to take such action; provided that if such Collaboration Patent is solely owned
by InterMune, Array’s action shall be limited to the prevention of infringing
activities with products that are competitive with Products then being
commercialized by InterMune (the “Back-Up Right”).  Prior to the Back-Up Right becoming effective
for a given Collaboration Patent, Array shall not notify any Third Party of
their alleged infringement of that Collaboration Patent without InterMune’s
advance written consent.  The foregoing
in this Section 8.3.2 shall apply mutatis
mutandis to the enforcement of Primary Preparatory Patents (as
defined in Section 8.2.2), except to the extent that Array cannot grant
InterMune preparation, filing, prosecution and/or maintenance rights due to
rights granted to a Third Party by Array with regard to any Primary Preparatory
Patent prior to the Effective Date.  In
addition, the foregoing regarding the Back-Up Right shall apply mutatis mutandis to permit InterMune to
enforce Preparatory Patents that are not Primary Preparatory Patents in the
same manner and subject to the same limitations as Array’s Back-Up Right with
respect to Collaboration Patents, including without limitation the requirement
not to notify infringers until the Back-Up Right becomes effective.

 

8.3.3                        Cooperation;
Costs and Recoveries.  Each Party
agrees to render such reasonable assistance as the enforcing Party may request,
at the enforcing Party’s expense. 
Amounts recovered from enforcing a Collaboration Patent or Preparatory
Patent, whether as payment in settlement or otherwise, shall first be used to
reimburse the Parties for their expenses in enforcing the patent (including
attorneys’ and experts’ fees), with the remainder, if any, to be divided as
follows:

 

19

 

(a)                                  if
InterMune prosecuted the action, then (i) Array shall be paid an amount
equal to (x) the proportion that the royalties that would have been due upon
sales of the infringing product if the infringing sales had been Net Sales of a
Product sold by InterMune bear to the total recovery multiplied by (y) such
remaining recovery, and (ii) the remaining portion of such remaining
recovery shall be paid to InterMune; and

 

(b)                                 if
Array prosecuted the action, then Array shall be paid twice the amount it would
have received under (a) had InterMune prosecuted the action, and InterMune
shall be paid the remaining portion of such remaining recovery.

 

Notwithstanding the
foregoing, if the patent that was enforced was a Preparatory Patent other than
a Primary Preparatory Patent (as defined in Section 8.2.2), the action was
prosecuted by Array, and the enforcement action extended to infringing
activities competitive with Array’s or Array’s other licensees’ products, then
the recovery shall be split between (i) an amount to be shared between
Array and its other licensees as they may agree amongst themselves, and (ii) an
amount to be shared between Array and InterMune in accordance with
8.3.3(b).  The division between (i) and
(ii) shall be made based on the extent to which the infringement was
competitive with Array’s and its other licensees’ products, relative to the
extent to which it was competitive with Products.

 

ARTICLE 9

CONFIDENTIALITY

 

9.1                                 Confidential
Information.  Except as otherwise
expressly provided herein, the Parties agree that, for [ * ], the receiving Party shall
not, except as expressly provided in this Article 9, disclose to any Third
Party or use for any purpose any Confidential Information furnished to it by
the disclosing Party hereto pursuant to this Agreement, or any results of the Research
Collaboration (“Results”).  For purposes
of this Article 9, “Confidential Information” shall mean any information,
which if disclosed in tangible form is marked “confidential” or with other
similar designation to indicate its confidential or proprietary nature, or, if
disclosed orally, is indicated orally to be confidential or proprietary at the
time of such disclosure and is confirmed in writing as confidential or
proprietary within forty-five (45) days after such disclosure.  The Results to the extent relating to Hit
Compounds and/or Lead Compounds shall be deemed to be the Confidential
Information of InterMune. 
Notwithstanding the foregoing, Confidential Information shall not
include any information that can be established by the receiving Party by
competent proof that such information:

 

(a)                                  was
already known to the receiving Party at the time of disclosure;

 

(b)                                 was
generally available to the public or otherwise part of the public domain at the
time of its disclosure to the receiving Party;

 

20

 

(c)                                  became
generally available to the public or otherwise part of the public domain after
its disclosure and other than through any act or omission of the receiving
Party in breach of this Agreement;

 

(d)                                 was
independently developed by the receiving Party as demonstrated by documented
written evidence prepared contemporaneously with such independent development;
or

 

(e)                                  was
disclosed to the receiving Party, other than under an obligation of
confidentiality, by a Third Party who had no obligation to the disclosing Party
not to disclose such information to others.

 

9.2                                 Permitted
Use and Disclosures.  Each Party
hereto may use or disclose Confidential Information disclosed to it by the
other Party or Results to the extent such use or disclosure is reasonably
necessary and permitted in the exercise of the rights granted hereunder in
filing or prosecuting patent applications, prosecuting or defending litigation,
complying with applicable governmental laws, regulations or court order or
otherwise submitting information to tax or other governmental authorities,
conducting clinical trials, or making a permitted sublicense or otherwise
exercising license rights expressly granted by the other Party to it pursuant
to the terms of this Agreement; provided that
if a Party is required to make any such disclosure, other than pursuant to a
confidentiality agreement, it will give reasonable advance notice to the other
Party of such disclosure and, save to the extent inappropriate in the case of
patent applications, will use its reasonable efforts to secure confidential
treatment of such information in consultation with the other Party prior to its
disclosure (whether through protective orders or otherwise) and disclose only
the minimum necessary to comply with such requirements.

 

9.3                                 Termination
of Prior Agreement.  This Agreement
supersedes the Confidentiality Agreement between the Parties dated June 6,
2002.  All information exchanged between
the Parties under that the Confidentiality Agreement shall be deemed
Confidential Information hereunder and shall be subject to the terms of this Article 9.

 

9.4                                 Nondisclosure
of Terms.  Each of the Parties hereto
agrees that it and its Affiliates shall not to disclose the material terms of
this Agreement to any Third Party without the prior written consent of the
other Party hereto, which consent shall not be unreasonably withheld, except to
such Party’s attorneys, advisors, investors and others on a need to know basis
under circumstances that reasonably ensure the confidentiality thereof, or to
the extent required by law. 
Notwithstanding the foregoing, the Parties shall agree upon a press
release and timing to announce the execution of this Agreement, together with a
corresponding Q&A outline for use in responding to inquiries about the
Agreement.  Thereafter, Array and
InterMune may each disclose to Third Parties the information contained in such
press release and Q&A without the need for further approval by the
other.  In addition, InterMune and Array
may make public statements regarding the progress of the Research Collaboration
and the achievement of

 

21

 

milestones and
fees with respect thereto, following consultation and mutual agreement, the
consent of neither Party to be unreasonably withheld, subject to Section 9.5
as regards the results of the Research Collaboration.  Advance review and
consultation shall not be required to repeat information contained in a press
release that had itself been the subject of such procedures.  Either Party may disclose the terms of this
Agreement to potential investors (other than investors through the public
markets) who are bound in writing by obligations of non-disclosure and non-use
of the terms of this Agreement at least as stringent as those contained in this
Article 9.  The Parties acknowledge
that either or both of the Parties may be obligated to file a copy of this
Agreement with the U.S. Securities and Exchange Commission (the “SEC”), and
each Party shall be entitled to make such a required filing, provided that it requests confidential
treatment of the more sensitive terms hereof to the extent such confidential
treatment is reasonably available to the filing Party under the circumstances
then prevailing.  In the event of any
such filing, the filing Party will provide the non-filing Party with an advance
copy of the Agreement marked to show provisions for which the filing Party
intends to seek confidential treatment and shall obtain such other Party’s written
consent to the set of provisions for which the filing Party will initially seek
confidential treatment, such consent not to be unreasonably withheld.

 

9.5                                 Publication.  Reasonably in advance of any oral or written
presentation, or written submission for publication of any manuscript, that
would disclose any patentable invention conceived or reduced to practice by
Array (solely or jointly with InterMune) pursuant to the Research Collaboration
for which invention a patent application has not been filed in any of the
United States, Japan, with the European Patent Office or pursuant to the Patent
Cooperation Treaty, the Party wishing to make such a publication shall notify
the other Party and the Parties will discuss filing patent applications
claiming such intention.  In addition,
during the Agreement Term, Array shall not make any oral or written
presentation, or written submission for publication, of any data or information
produced pursuant to the Research Collaboration or otherwise relating to Collaboration
Products developed or commercialized by InterMune, its Affiliates or
Sublicensees without InterMune’s advance written consent, which InterMune shall
be entitled to withhold in InterMune’s sole discretion.  Any publication of the results of the Research
Collaboration shall include an acknowledgment of the contributions of each
Party, to the extent consistent with customary scientific norms.

 

ARTICLE 10

REPRESENTATIONS AND WARRANTIES

 

10.1                           InterMune.  InterMune represents, warrants and covenants
(as applicable) on its own behalf and on behalf of its Affiliates that:  (i) it has the legal power, authority
and right to enter into this Agreement and to perform all of its obligations
hereunder; (ii) this Agreement is a legal and valid obligation binding upon
it and enforceable in accordance with its terms; (iii) it has the full
right to enter into this Agreement, and to fully perform its obligations
hereunder; and (iv) it has not previously granted, and during the term of
this Agreement will not knowingly

 

22

 

make any
commitment or grant any rights which are in conflict in any way with the rights
and licenses granted herein.

 

10.2                           Array.  Array represents, warrants and covenants (as
applicable) on its own behalf and on behalf of its Affiliates that: (i) it
has the legal right and power to extend the rights granted in this Agreement; (ii) this
Agreement is a legal and valid obligation binding upon it and enforceable in
accordance with its terms; (iii) it has the full right to enter into this
Agreement, and to fully perform its obligations hereunder; (iv) it has not
previously granted, and during the term of this Agreement will not knowingly
make any commitment or grant any rights which are in conflict in any way with
the rights and licenses granted herein and (v) other than as included in
the Preparatory Patents and Preparatory Know-How, as of the Effective Date,
Array and its Affiliates do not own or control any patent applications, patents
or inventions claiming or constituting any Target, Reserved Target, or a method
of manufacture or use of any of the foregoing, or specifically claiming a
chemical entity identified by screening against a Target or Reserved Target,
where identification by such screening is a limitation of the patent
claim.  Array makes no representation or
warranty with respect to patents or other intellectual property rights of Third
Parties covering any Target or Reserved Target.

 

10.3                           Disclaimer.  InterMune and Array specifically disclaim any
guarantee that the Research Collaboration will be successful, in whole or in
part.  The failure of the Parties to
successfully develop Hit Compounds, Lead Compounds and/or Products will not
constitute a breach of any representation or warranty or other obligation under
this Agreement.  EXCEPT AS OTHERWISE
EXPRESSLY SET FORTH IN THIS AGREEMENT, ARRAY AND INTERMUNE MAKE NO
REPRESENTATIONS AND EXTEND NO WARRANTIES OR CONDITIONS OF ANY KIND, EITHER
EXPRESS OR IMPLIED, WITH RESPECT TO THE COLLABORATION TECHNOLOGY, HIT
COMPOUNDS, LEAD COMPOUNDS, INFORMATION DISCLOSED HEREUNDER OR PRODUCTS
INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, VALIDITY OF ANY COLLABORATION TECHNOLOGY, PATENTED OR
UNPATENTED, OR NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES.

 

ARTICLE 11

INDEMNIFICATION

 

11.1                           InterMune.  InterMune agrees to indemnify, defend and
hold Array and its Affiliates and their respective directors, officers,
employees, agents and their respective successors, heirs and assigns (the “Array
Indemnitees”) harmless from and against any losses, costs, damages, liabilities
or expense (including reasonable attorneys’ and professional fees and other
expenses of litigation) (collectively, “Liabilities”) arising, directly or
indirectly out of or in connection with Third-Party claims, suits, actions,
demands or judgments, relating to (i) the development manufacture, use,
sale or other distribution by or on behalf of InterMune, its

 

23

 

Affiliates or
Sublicensees or other designees of any Hit Compounds, Lead Compounds and
Products (including, without limitation, product liability and patent
infringement claims), (ii) InterMune’s conduct of the Research
Collaboration; and/or (iii) any breach by InterMune of the
representations, warranties and covenants made in Article 10 of this
Agreement, except, in each case, to the extent such Liabilities result from the
gross negligence or intentional misconduct of Array or are subject to
indemnification by Array under Section 11.2.

 

11.2                           Array.  Array agrees to indemnify, defend and hold
InterMune and its Affiliates and their respective directors, officers,
employees, agents and their respective heirs and assigns (the “InterMune Indemnitees”)
harmless from and against any Liabilities arising, directly or indirectly out
of or in connection with Third Party claims, suits, actions, demands or
judgments, relating to (i) Array’s conduct of the Research Collaboration,
and/or (ii) any breach by Array of its representations, warranties and
covenants made in Article 10 of this Agreement, except, in each case, to
the extent such Liabilities result from the negligence or intentional
misconduct of InterMune or are subject to indemnification by InterMune under Section 11.1.

 

11.3                           Indemnification
Procedure.  A Party that intends to
claim indemnification (the “Indemnitee”) under this Article 11 shall
promptly notify the other Party (the “Indemnitor”) in writing of any claim,
complaint, suit, proceeding or cause of action with respect to which the
Indemnitee intends to claim such indemnification (for purposes of this Section 11.3,
each a “Claim”), and the Indemnitor shall have sole control of the defense
and/or settlement thereof; provided that the Indemnitee shall have the right to
participate, at its own expense, with counsel of its own choosing in the
defense and/or settlement of such Claim. 
The indemnification obligations of the Parties under this Article 11
shall not apply to amounts paid in settlement of any Claim if such settlement
is effected without the consent of the Indemnitor, which consent shall not be
withheld or delayed unreasonably.  The
failure to deliver written notice to the Indemnitor within a reasonable time
after the commencement of any such Claim, if prejudicial to its ability to
defend such action, shall relieve such Indemnitor of any liability to the
Indemnitee under this Article 11, but the omission so to deliver written
notice to the Indemnitor shall not relieve the Indemnitor of any liability to
any Indemnitee otherwise than under this Article 11.  The Indemnitee under this Article 11,
and its employees, at the Indemnitor’s request and expense, shall provide full
information and reasonable assistance to Indemnitor and its legal
representatives with respect to such Claims covered by this
indemnification.  It is understood that
only InterMune may claim indemnity under this Article 11 (on its own
behalf or on behalf of a InterMune Indemnitee), and other InterMune Indemnitees
may not directly claim indemnity hereunder. 
Likewise, it is understood that only Array may claim indemnity under
this Article 11 (on its own behalf or on behalf of an Array Indemnitee),
and other Array Indemnitees may not directly claim indemnity hereunder.  If the Parties cannot agree as to the
application of Sections 11.1 and 11.2 to any particular Claim, then each Party
may conduct its own defense against same, and each reserves the right to claim
indemnity hereunder from the other Party upon resolution of the underlying
Claim.

 

24

 

ARTICLE 12

TERM AND TERMINATION

 

12.1                           Term.  The term of this Agreement shall commence on
the Effective Date, and shall continue in full force and effect on a
country-by-country and Product-by-Product basis until InterMune and its
Sublicensees have no remaining royalty payment obligations in a country, unless
terminated earlier as provided in Section 4.4 or this Article 12.  In accordance with Section 5.4.2, upon
expiration of this Agreement with respect to a particular Product in a
particular country, InterMune shall have a fully paid, non-exclusive and
perpetual license under the Collaboration Technology in such country for such
Product.

 

12.2                           Termination
for Breach.  Either Party to this
Agreement may terminate the Research Collaboration and this Agreement in the
event the other Party hereto shall have materially breached this Agreement, and
such breach shall have continued for sixty (60) days after written notice
thereof was provided to the breaching Party by the non-breaching Party.  Any termination shall become effective at the
end of such sixty (60) day period unless the breaching Party (or any other
Party on its behalf) has cured any such breach or default prior to the
expiration of the sixty (60) day period (or, in the case of a breach incapable
of cure within such period, provided a written plan to cure such breach as soon
as reasonably practicable, together with an undertaking to carry out such
plan); provided, however, in the
case of a failure to pay any amount due hereunder, such default may be the
basis of termination thirty (30) days following the date that notice of such
default was provided to the breaching Party; provided
that the unpaid amount is not in dispute. 
If one Party alleges material breach and the other Party disputes
whether such a breach has occurred, then this Agreement shall not terminate
pursuant to this Section 12.2 until and unless such dispute is resolved
and a material breach is determined to have occurred.

 

12.3                           Termination
for Insolvency.  If voluntary or
involuntary proceedings by or against a Party are instituted in bankruptcy
under any insolvency law, or a receiver or custodian is appointed for such
Party, or proceedings are instituted by or against such Party for corporate
reorganization, dissolution, liquidation or winding-up of such Party, which
proceedings, if involuntary, shall not have been dismissed within sixty (60)
days after the date of filing, or if such Party makes an assignment for the benefit
of creditors, or substantially all of the assets of such Party are seized or
attached and not released within sixty (60) days thereafter, the other Party
may immediately terminate the Research Collaboration and/or this Agreement,
effective upon notice of such termination.

 

12.4                           Permissive
Termination.  After the first
anniversary of the Effective Date, InterMune shall have the right to terminate
this Agreement upon [ * ]
written notice to Array.

 

25

 

12.5                           Effect
of Breach or Termination.

 

12.5.1                  Accrued
Rights and Obligations.  Termination
of this Agreement for any reason shall not release either Party hereto from any
liability which, at the time of such termination, has already accrued to the
other Party or which is attributable to a period prior to such termination nor
preclude either Party from pursuing any rights and remedies it may have
hereunder or at law or in equity with respect to any breach of this Agreement.

 

12.5.2                  Return of
Materials.  Upon any termination of
this Agreement, InterMune and Array shall promptly return to the other all
Confidential Information (including, without limitation, all Know-How that is
Confidential Information) received from the other Party, except one copy of
which may be retained for archival purposes.

 

12.5.3                  Survival
Sections.  [ * ] of this Agreement shall survive the expiration
or termination of this Agreement for any reason.  In the event of termination by InterMune
under Section 12.2 or 12.3, [ * ]
shall survive such termination in addition to the above-referenced [ * ]; InterMune shall have [ * ] to enforce the
Collaboration Patents and Primary Preparatory Patents (as defined in 8.2.2)
licensed to InterMune hereunder against infringing products that would be competitive
with Products; and [ * ]
shall survive until [ * ].

 

ARTICLE 13

MISCELLANEOUS

 

13.1                           Governing
Laws.  This Agreement and any dispute
arising from the construction, performance or breach hereof shall be governed
by and construed, and enforced in accordance with, the laws of the state of New
York, without reference to
conflicts of laws principles.  Any such
dispute, if not resolved informally between the Parties, shall be resolved by
submission to a court of competent subject matter jurisdiction located within
the federal district division in which the Party that is the defendant in the
suit as initially filed is located (for InterMune, the San Francisco division
of the Northern District of the State of California, and for Array, the Boulder
division of the District for the State of Colorado) Each Party hereby consents
to the jurisdiction and venue of all courts located within the appropriate
district in accordance with the foregoing sentence and waives all defenses such
Party may have to the jurisdiction and venue of such courts, including without
limitation the defense of forum non
conveniens or that such a court may not assert personal jurisdiction
over such Party.

 

13.2                           Waiver.  It is agreed that no waiver by either Party
hereto of any breach or default of any of the covenants or agreements herein
set forth shall be deemed a waiver as to any subsequent and/or similar breach
or default.

 

13.3                           Assignment.  This Agreement shall not be assignable by
either Party to any Third Party hereto without the written consent of the other
Party hereto.  Notwithstanding the

 

26

 

foregoing, either
Party may assign this Agreement, without such consent, to an entity that
acquires all or substantially all of the business or assets of such Party to
which this Agreement pertains, whether by merger, reorganization, acquisition,
sale, or otherwise; provided, however, that
within thirty (30) days of such an assignment, the assignee shall agree in
writing to be bound by the terms and conditions of this Agreement.  This Agreement shall be binding upon and
accrue to the benefit any permitted assignee, and any such assignee shall agree
to perform the obligations of the assignor.

 

13.4                           Certain
Companies.  If any entity having any
research or development program relating to [ * ]
(“Competing Program”) succeeds in interest hereunder to Array (the “Competitor”),
then (a) InterMune shall thereafter not be required to make the reports
that would otherwise be required pursuant to Section 7.2; (b) the
entity that was Array immediately prior to such succession in interest (“Original
Array”) shall not disclose any patent-related information (including without
limitation draft filings) received from InterMune pursuant to Section 8.2
to the Competitor, including without limitation by involvement of Original
Array personnel with any Competing Program; (c) the rights to review and
provide comments regarding patent prosecution, to have such comments considered
by InterMune, and the back-up prosecution rights provided for in Section 8.2.1
may be exercised only by personnel of Original Array not involved in any way
with any Competing Program, and shall not otherwise inure to the Competitor; (d) Original
Array shall maintain sufficient capacity and resources to fulfill its
obligations under the Research Collaboration for the remainder of the Research
Term, if any; (e) Original Array shall not disclose non-public
Collaboration Technology to the Competitor for use in research, development or
commercialization activities directed to a Target or chemical entities active
against such Target (or during the Research Term, directed to a Reserved Target
or chemical entities active against such Reserved Target), including without
limitation by allowing personnel having had access to any Collaboration
Technology to have any involvement in any Competing Program; and (f) Preparatory
Patents and Preparatory Know-How shall not include any intellectual property or
subject matter that, prior to the succession in interest, was held or
controlled by the Assignee.  The
foregoing in this Section 13.4, except for clause (a), shall apply mutatis mutandis to any situation in which
a Competitor becomes an Affiliate of Array, as it does to a Competitor’s
succession in interest hereunder to Array. 
This Section 13.4 shall not be deemed to limit Article 9.

 

13.5                           Independent
Contractors.  The relationship of the
Parties hereto is that of independent contractors.  The Parties hereto are not deemed to be
agents, partners or joint venturers of the others for any purpose as a result
of this Agreement or the transactions contemplated thereby.

 

13.6                           Compliance
with Laws.  In exercising their
rights under this license, the Parties shall fully comply in all material
respects with the requirements of any and all applicable laws, regulations, rules and
orders of any governmental body having jurisdiction over the exercise of

 

27

 

rights under this
license including, without limitation, those applicable to the discovery,
development, manufacture, distribution, import and export and sale of Products
pursuant to this Agreement.

 

13.7                           Patent
Marking.  InterMune agrees to mark
and have its Affiliates and Sublicensees mark all Products sold pursuant to
this Agreement in accordance with the applicable statute or regulations
relating to patent marking in the country or countries of manufacture and sale
thereof, to the extent commercially reasonable for it to do so.

 

13.8                           Notices.  All notices, requests and other communications
hereunder shall be in writing and shall be personally delivered or by
registered or certified mail, return receipt requested, postage prepaid, in
each case to the respective address specified below, or such other address as
may be specified in writing to the other Parties hereto and shall be deemed to
have been given upon receipt:

 

	
  If to InterMune:

  	
   

  	
  InterMune, Inc.

  
	
   

  	
   

  	
  3280 Bayshore
  Boulevard

  
	
   

  	
   

  	
  Brisbane,
  California 94005

  
	
   

  	
   

  	
  Attention:
  General Counsel

  
	
   

  	
   

  	
  Facsimile:
  (408) 508-0006

  
	
   

  	
   

  	
   

  
	
  If to Array:

  	
   

  	
  Array BioPharma
  Corporation

  
	
   

  	
   

  	
  3200 Walnut
  Street

  
	
   

  	
   

  	
  Boulder, CO
  80301

  
	
   

  	
   

  	
  Attention: Chief
  Operating Officer

  
	
   

  	
   

  	
  Facsimile: (303)
  381-6697

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Array BioPharma
  Corporation

  
	
   

  	
   

  	
  3200 Walnut
  Street

  
	
   

  	
   

  	
  Boulder, CO
  80301

  
	
   

  	
   

  	
  Attention:
  General Counsel

  
	
   

  	
   

  	
  Facsimile: (303)
  381-6639

  

 

13.9                           Severability.  Each Party hereby agrees that it does not
intend to violate any public policy, statutory or common laws, rules,
regulations, treaty or decision of any government agency or executive body
thereof of any country or community or association of countries.  Should one or more provisions of this
Agreement be or become invalid, the Parties hereto shall substitute, by mutual
consent, valid provisions for such invalid provisions which valid provisions in
their economic effect are sufficiently similar to the invalid provisions that
it can be reasonably assumed that the Parties would have entered into this
Agreement with such valid provisions.  In
case such valid provisions cannot be agreed upon, the invalidity of one or
several provisions of its Agreement shall not affect the validity of this
Agreement as a whole, unless the invalid

 

28

 

provisions are of
such essential importance to this Agreement that it is to be reasonably assumed
that the Parties would not have entered into this Agreement without the invalid
provisions.

 

13.10                     Advice of
Counsel.  Array and InterMune have
each consulted counsel of their choice regarding this Agreement, and each
acknowledges and agrees that this Agreement shall not be deemed to have been
drafted by one Party or another and will be construed accordingly.

 

13.11                     Performance
Warranty.  Each Party hereby warrants
and guarantees the performance of any and all rights and obligations of this
Agreement by its Affiliates and Sublicensees.

 

13.12                     Force
Majeure.  Neither Party shall lose
any rights hereunder or be liable to the other Party for damages or losses
(except for payment obligations) on account of failure of performance by the
defaulting Party if the failure is occasioned by war, strike, fire, Act of God,
act of terrorism, earthquake, flood, lockout, embargo, governmental acts or
orders or restrictions, failure of suppliers, or any other reason where failure
to perform is beyond the reasonable control and not caused by the negligence,
intentional conduct or misconduct of the non-performing Party and such Party
has exerted all reasonable efforts to avoid or remedy such force majeure;
provided, however, that in no event shall a Party be required to settle any
labor dispute or disturbance.

 

13.13                     Complete
Agreement.  This Agreement with its
Exhibits, constitutes the entire agreement, both written and oral, between the
Parties with respect to the subject matter hereof, and all prior agreements
respecting the subject matter hereof, either written or oral, express or
implied, shall be abrogated, canceled, and are null and void and of no
effect.  No amendment or change hereof or
addition hereto shall be effective or binding on either of the Parties hereto
unless reduced to writing and executed by the respective duly authorized
representatives of Array and InterMune.

 

13.14                     Consultation.  If an unresolved dispute arises out of or
relates to this Agreement, or the breach thereof, either Party may refer such
dispute to the Chief Executive Officer of InterMune and the Chief Executive
Officer of Array, who shall meet in person or by telephone within forty-five
(45) days after such referral to attempt in good faith to resolve such dispute.

 

13.15                     Headings.  The captions to the several Sections hereof
are not a part of this Agreement, but are included merely for convenience of
reference and shall not affect its meaning or interpretation.

 

13.16                     Counterparts.  This Agreement may be executed in counterparts,
each of which shall be deemed to be an original and all of which together shall
be deemed to be one and the same agreement.

 

29

 

IN WITNESS WHEREOF, the
Parties hereto have caused this Agreement to be duly executed by their
authorized representatives and delivered in duplicate originals as of the
Effective Date.

 

	
  INTERMUNE, INC.

  	
   

  	
  ARRAY BIOPHARMA,
  INC.

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Title:

  	
   

  
									

 

30

 

EXHIBIT A

 

TARGETS

 

Reserved
Targets

 

1.                                         [ * ]

 

2.                                         [ * ]

 

3.                                         [ * ]

 

4.                                         [ * ]

 

Target

 

1.                                       [ * ]

 

31

 

[ * ] = Certain confidential information contained in this document,
marked by brackets, has been omitted and filed separately with the Securities
and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended.

 

CONFIDENTIAL

 

VIA FAX AND FEDERAL EXPRESS

 

May 8, 2003

 

Patrice Lee

Array BioPharma, Inc.

3200 Walnut Street

Boulder, CO 80301

 

RE:
Amendment No. 1 to the Drug Discovery Collaboration Agreement

 

Dear Ms. Lee:

 

As you know, InterMune, Inc. (“InterMune”) and Array BioPharma, Inc.
(“Array”) are parties to that certain Drug Discovery Collaboration Agreement
dated September 13, 2002 (the “Agreement”).   Because InterMune now wishes to transfer to
Array, and Array wishes to accept, the materials described on Exhibit A hereto
(the “Materials”), the parties hereby agree to add a new Section 9.6 to
the Agreement as follows:

 

“9.6         Transfer of Materials.

 

(a)           Array shall use the
Materials solely to perform its obligations under the Agreement.  Array will not sell, transfer, disclose or
otherwise provide access to the Materials, or any method or process relating
thereto or any material that could not have been made but for access to the
foregoing, to any person or entity without the prior express written consent of
InterMune.  Ownership of the Materials
will remain solely and exclusively with InterMune, and Array will not acquire
any right, title or interest in or to the Materials. 

 

(b)           Array acknowledges
that the Materials may have biological and/or chemical properties that are
unpredictable and unknown at the time of transfer, that they are to be used
with caution and prudence and that they are not to be used for testing in or
treatment of humans.

 

(c)           Array will, at
InterMune’s written directions, return or dispose of any unused portions of the
Material.  Any such disposal will conform
to prescribed federal, state and local guidelines.

 

 

(d)           THE MATERIALS ARE
SUPPLIED WITH NO WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR THAT THEY ARE FREE FROM THE RIGHTFUL CLAIM OF ANY THIRD PARTY BY WAY OF
INFRINGEMENT OR THE LIKE.  INTERMUNE
MAKES NO REPRESENTATIONS THAT THE USE OF THE MATERIALS WILL NOT INFRINGE ANY
PATENT OR OTHER PROPRIETARY RIGHTS OF ANY THIRD PARTIES.

 

(e)           This Section 9.6
will survive any expiration or termination of the Agreement.

 

Except as set forth above, all terms and conditions of the Agreement
will remain in full force and effect. 
Any capitalized term used herein and not otherwise defined will have the
same meaning as set forth in the Agreement.

 

Please acknowledge your agreement to the above by having an authorized
Array representative countersigning both enclosed copies of this letter where
indicated below, and returning one original to the attention of Corina Hughes,
Manager, Legal Affairs, at InterMune.  We
would be happy to proceed based on receipt of a facsimile copy while awaiting
the original.

 

Sincerely,

 

 

Stephen N. Rosenfield

Executive Vice President of Legal Affairs

 

Acknowledged
and Agreed:

 

ARRAY BIOPHARMA, INC.

 

	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  
							

 

General Counsel, Array
BioPharma

 

Chief Operating
Officer,  Array BioPharma

 

2

 

EXHIBIT A

 

[ * ].

 

3

 

[ * ] = Certain confidential information contained in this document,
marked by brackets, has been omitted and filed separately with the Securities
and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended.

 

CONFIDENTIAL

 

 

VIA FAX AND FEDERAL EXPRESS

 

January 7, 2004

 

David L. Snitman, Ph.D.

Chief Operating Officer

Array BioPharma, Inc.

3200 Walnut Street

Boulder, CO 80301

 

RE:                            Amendment No. 2 to the
Drug Discovery Collaboration Agreement (“Amendment No. 2”)

 

Dear Dr. Snitman:

 

As you know, InterMune, Inc. (“InterMune”) and Array
BioPharma, Inc. (“Array”) are parties to that certain Drug
Discovery Collaboration Agreement dated September 13, 2002, as amended May 8,
2003 (the “Agreement”).   The
parties agree that the Agreement is hereby amended as follows, effective as of
the date of this Amendment No. 2 (“Amendment Effective Date”):

 

1.                                       The [ * ]
is hereby removed as a [ * ]
of the Agreement solely for the purpose of Array entering into an [ * ] arrangement with a third party (the “Third
Party”) for [ * ],
and subject to the terms of this Amendment No. 2.  Accordingly:

 

(a)                                  InterMune hereby waives its option to [ * ] under Section 2.7.2 of the Agreement
solely with respect to such arrangement with the Third Party.

 

(b)                                 If such arrangement with the Third Party has
not been concluded within three (3) months from the Amendment Effective
Date as evidenced by an executed written agreement, then [ * ] automatically will be reinstated as a [ * ] of the Agreement, and all of InterMune’s
rights and Array’s obligations under the Agreement with respect to [ * ] will be reinstated in full.  InterMune agrees that Array does not need to
provide InterMune

 

 

with
a copy of such written agreement, so long as InterMune receives by three (3) months
from the Amendment Effective Date a written certification, in the form attached
as Exhibit A hereto, from an authorized officer of Array that a written
agreement for such [ * ]
arrangement has been executed.  Any
material misrepresentation set forth in such certification will be deemed a
material breach of this Amendment No. 2.

 

(c)                                  If such arrangement is concluded with the
Third Party, but the [ * ]
thereafter revert to Array for any reason, then [ * ] automatically will be reinstated as a [ * ] of the Agreement, and all of InterMune’s
rights and Array’s obligations under the Agreement with respect to [ * ] will be reinstated in full.   Array will give InterMune prompt written
notice of any such reversion.

 

(d)                                 Nothing in this Amendment No. 2 will be
deemed to:

 

(i)            grant to Array any further right, title or
interest in or to any intellectual property (including, without limitation, any
patent rights) Controlled by InterMune other than as expressly stated in
Sections 4.1.1 and 4.3 of the Agreement;

 

(ii)           permit Array to use any Hit Compound, Lead Compound or Product for any
purpose other than the Research Collaboration conducted in accordance with the
Agreement; nor

 

(iii)          permit Array to grant to any third party any right, title or interest
in or to any Hit Compound, Lead Compound or Product.

 

2.                                       In consideration for InterMune’s agreement as
set forth in Section 1 above, and irrespective of the outcome of the
negotiations or arrangement between Array and the Third Party:

 

(a)                                  (i)            During
the Research Term, Array shall provide, at its sole cost and expense, [ * ] additional FTEs to conduct the Research
Collaboration.  Such additional FTEs will
bring the present number of FTEs conducting the Research Collaboration from [ * ] to [ * ].  Each such individual shall have the
appropriate skills, training, experience and ability to perform his or her
responsibilities under the Research Plan.

 

(ii)           If Array fails to provide such
additional FTEs as described in subsection (a)(i) above, then in
addition to any other remedies available to InterMune at law or equity,
InterMune shall be entitled to offset the costs of such additional FTEs (based
on the Array FTE Rate, as defined in Section 5.1.2 of the Agreement)
against any amounts due to Array

 

 

under
the Agreement, including, without limitation, any milestone and/or royalty
payments.

 

(b)                                 Except for purposes of the Research
Collaboration conducted in accordance with the Agreement, Array shall not
develop (either pre-clinically or clinically), use, import, make, have made,
sell or offer for sale any Hit Compound, Lead Compound or Product, including,
without limitation, in conjunction with any other compound or product.

 

(c)                                  Array shall not enable (including without
limitation through the grant of a license or covenant) any Array Affiliate or
Third Party to develop (either pre-clinically or clinically), use, import,
make, have made, sell or offer for sale any Hit Compound, Lead Compound or
Product, including, without limitation, in conjunction with any other compound
or product.

 

3.                                       If Array materially breaches this Amendment
Number 2, then InterMune will be entitled to seek any and all remedies
available at law and or equity.  Without
limiting the generality of the foregoing, in the event of any such material
breach:  (i) [ * ] automatically will be reinstated as a [ * ] of the Agreement; and (ii) all of
InterMune’s rights and Array’s obligations under the Agreement with respect to [ * ] will be reinstated in full.

 

Except as set forth above, all terms and conditions of the Agreement
will remain in full force and effect. 
Any capitalized term used herein and not otherwise defined will have the
same meaning as set forth in the Agreement.

 

Please acknowledge your agreement to the above by having an authorized
Array representative countersign both enclosed copies of this Amendment No. 2
where indicated below, and returning one original to the attention of Gloria
Lopez, Contracts Administrator, at InterMune. 
We would be happy to proceed based on receipt of a facsimile copy while
awaiting the original.

 

Sincerely,

 

 

Larry Blatt

Vice President of Biopharmacology Research

 

 

Acknowledged
and Agreed:

 

ARRAY BIOPHARMA, INC.

 

	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
					

 

 

	
  cc:

  	
   

  	
  Paul Resnick, InterMune

  
	
   

  	
   

  	
  General Counsel, Array
  BioPharma

  

 

EXHIBIT A

 

ARRAY BIOPHARMA, INC.

 

OFFICER’S CERTIFICATE

 

The
undersigned,                 ,
hereby certifies that {he/she} is
the duly elected or appointed {Title}
of ARRAY BIOPHARMA, INC., a Delaware corporation (the “Company”), and acting in
such capacity hereby certifies that:

 

(a)           As of {Date}, the Company entered into a written
agreement with a third party (the “Third Party Agreement”) setting forth the
terms of an [ * ]
arrangement regarding the [ * ],
which agreement is effective and binding on the Company.

 

(b)           The Third Party
Agreement does not conflict with any obligation of the Company under the Drug
Discovery Collaboration Agreement between the Company and InterMune, Inc.
(“InterMune”) dated September 13, 2002, as amended (the “Agreement”).

 

(c)           The Company will
promptly notify InterMune in writing upon any termination of the Third Party
Agreement or of any reversion of [ * ]
to the Company.

 

(d)           Any material
misrepresentation set forth in this Certificate will be deemed a material
breach of the Agreement, and InterMune will be entitled to seek any and all
remedies available at law and or equity.

 

All capitalized terms used and not otherwise defined in this
Certificate shall have the same meanings as in the Agreement.

 

IN WITNESS WHEREOF, I have hereunto set my hand as of the    day
of           , 2004.

 

 

[ * ] = Certain confidential information contained in this document,
marked by brackets, has been omitted and filed separately with the Securities
and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended.

 

CONFIDENTIAL

 

 

 

VIA FAX AND FEDERAL EXPRESS

 

September 10, 2004

 

David L. Snitman, Ph.D.

Chief Operating Officer

Array BioPharma, Inc.

3200 Walnut Street

Boulder, CO 80301

 

RE:                            Amendment No. 3 to the
Drug Discovery Collaboration Agreement (“Amendment No. 3”)

 

Dear Dr. Snitman:

 

As you know, InterMune, Inc. (“InterMune”) and Array
BioPharma, Inc. (“Array”) are parties to that certain Drug
Discovery Collaboration Agreement dated September 13, 2002, as amended May 8,
2003 and January 7, 2004 (the “Agreement”).

 

The parties to the Agreement hereby agree, effective as of the date of
this Amendment No. 3 (“Amendment Effective Date”), that:

 

1.                                       Section 2.3 of the Agreement is amended
in its entirety to read as follows:

 

“2.3         Term and Termination of Research
Collaboration.  The Research
Collaboration shall commence on the Effective Date and shall end upon the first
to occur of (i) June 30, 2005, (ii) the termination of this
Agreement, or (iii) [ * ]
after written notice from InterMune that InterMune elects (in its sole
discretion) to early terminate the Research Collaboration (such period
beginning on the Effective Date and ending upon the earliest of (i), (ii) and
(iii), the “Research Term”). 
InterMune shall have the right to extend the Research Term for
additional six-month periods after June 30, 2005 on the same terms and
conditions as previously conducted.  To
exercise such right, InterMune shall

 

 

provide
written notice to Array on or before the date ninety (90) days before the end
of any such six-month period.”

 

2.                                       The Joint Research Committee shall work
together to produce a new Exhibit A Research Plan pursuant to Article 3
of the Agreement as soon as practicable after the execution of this Amendment No. 3.

 

Except as set forth above, all terms and conditions of the Agreement
will remain in full force and effect. 
Any capitalized term used herein and not otherwise defined will have the
same meaning as set forth in the Agreement.

 

Please acknowledge your agreement to the above by having an authorized
Array representative countersign both enclosed copies of this Amendment No. 3
where indicated below, and returning one original to the attention of Gloria
Lopez, Senior Contracts Administrator, at InterMune.  We would be happy to proceed based on receipt
of a facsimile copy while awaiting the original.

 

Sincerely,

 

 

Tom Kassberg

Senior Vice President, Business Development

 

 

Acknowledged
and Agreed:

 

ARRAY BIOPHARMA, INC.

 

	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  
					

 

2

 

Exhibit A

 

[ * ]

 

3

 

[ * ] = Certain confidential information contained in this document,
marked by brackets, has been omitted and filed separately with the Securities
and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended.

 

VIA FAX AND FEDERAL EXPRESS

 

December 7, 2004

 

David L. Snitman, Ph.D.

Chief Operating Officer

Array BioPharma, Inc.

3200 Walnut Street

Boulder, CO 80301

 

RE:
Amendment No. 4 to the Drug Discovery Collaboration Agreement

 

Dear Dr. Snitman:

 

As you know, InterMune, Inc. (“InterMune”) and Array
BioPharma Inc. (“Array”) are parties to that certain Drug Discovery
Collaboration Agreement dated September 13, 2002, as amended May 8,
2003, January 7, 2004 and September 10, 2004 (collectively, the “Agreement”).   The parties agree that the Agreement is
hereby amended as follows, effective as of the date of this letter (“Amendment
Effective Date”):

 

1.                                       The first sentence of Section 5.1.1 of
the Agreement is hereby amended in its entirety to read as follows:

 

“InterMune
agrees to pay Array research funding for the conduct of the Research
Collaboration quarterly, in advance, in an amount equal to one quarter (1/4) of
[ * ] (or, if lesser,
the number of Array FTEs scheduled in the Research Plan to be provided by Array
in the upcoming quarter), multiplied by the applicable Array FTE Rate (as
defined below in Section 5.1.2).”

 

2.                                       The last sentence of Section 5.1.1 of
the Agreement is hereby amended in its entirety to read as follows:

 

“In
no event shall InterMune be required to fund a greater number of Array FTEs in
any calendar quarter than one quarter (1/4) of [ * ], or, if lesser, those provided in the Research
Plan for Array to provide in such quarter.”

 

3.                                       Array hereby acknowledges that (a) it
devoted [ * ] to the
conduct of the Research Collaboration during November 2004, and (b) it
will devote [ * ] to the
conduct of the Research Collaboration during December 2004.  The Joint

 

 

Research
Committee shall amend the Research Plan to reflect such number of FTEs.  Upon execution of this Amendment No. 4,
InterMune shall pay to Array an amount equal to [ * ] of the current FTE rate to fund such FTEs
during such period.

 

4.                                       The Agreement is hereby amended to insert a
new Section 4.2.1, and, as a result, the old sections 4.2.1, 4.2.2, 4.2.3
and 4.2.4 are hereby renumbered to be new Sections 4.2.2, 4.2.3, 4.2.4 and
4.2.5:

 

“4.2.1
Immediately upon receipt by Array of a cash payment of [ * ] with respect to a
particular Lead Compound, Array shall [ * ].  It is understood and agreed that the
provisions of this Section 4.2.1 shall not apply to any [ * ], nor shall such provisions
affect InterMune’s license under Section 4.2.2.  Array hereby acknowledges the prior payment
of a cash payment of [ * ]
with respect to [ * ],
and shall immediately following the Amendment Effective Date [ * ].”

 

5.                                       Section 4.3 of the Agreement is hereby
amended in its entirety to read as follows:

 

“Subject
to the terms and conditions of this Agreement, including, without limitation,
the limitation on Array’s rights hereunder set forth in the last sentence of
this Section 4.3, InterMune hereby grants to Array a worldwide,
non-exclusive, transferable, royalty-free right and license, with the right to
grant and authorize sublicenses, under InterMune’s interest in the
Collaboration Technology, to exploit the same other than in the research, development,
making, having made, using, importing, offering for sale or selling Hit
Compounds, Lead Compounds or Products worldwide.  To the extent that any Collaboration
Technology included in the license granted to Array under this Section 4.3
comprises a claim of a patent or patent application, the subject matter of
which was invented solely by Array personnel, Array’s license under such patent
claim(s) to exploit the same other than in the research, development, making,
having made, using, importing, offering for sale or selling Hit Compounds, Lead
Compounds or Products worldwide shall be exclusive.  Notwithstanding the foregoing, Array’s
license under this Section 4.3 shall not include any right to make, have
made, use or sell any chemical entity, the composition of matter of which is
claimed in a Collaboration Patent assigned by Array to InterMune pursuant to Section 4.2.1
above.”

 

6.                                       Section 4.6 of the Agreement is hereby
amended by adding, in the parenthetical, following the words “in exercise of
the” the following phrase:  “intellectual
property rights assigned or” and replacing “4.2.1” with “4.2.”

 

2

 

7.                                       Section 5.2 of the Agreement is hereby
amended by replacing the last sentence with the following:

 

“For
clarity, this means that as between the Parties, InterMune is responsible for
the costs of activities in exercise of its rights under Section 4.2.”

 

8.                                       Section 5.4.3 of the Agreement is hereby
amended by adding the following as the last sentence:

 

“[ * ]”

 

9.                                       Section 8.1.2 of the Agreement is hereby
amended by replacing the last sentence with the following:

 

“Such
joint ownership shall be in accordance with the default rights enjoyed by
co-inventors under U.S. patent law in the absence of a written agreement to the
contrary (throughout the world to the maximum extent permitted by law), such
that, without limitation and except as restricted by the assignment provisions
of Section 4.2, licenses granted in Sections 4.1 and 4.2, financial
commitments set forth in Article 5 and prosecution and enforcement
provisions set forth in this Article 8, each Party may practice the
subject matter of the jointly owned Collaboration Patents without a duty of
accounting to the Party.”

 

10.                                 The Agreement is amended by including a new Section 8.1.4
of the Agreement:

 

“8.1.4.
Array shall, and shall cause its employees and agents to, promptly execute all
papers and instruments as are necessary (i) to fully effect the assignment
of ownership of Collaboration Patents provided for in Section 4.1.2, and (ii) 
to enable InterMune to record any such assignment in any country.”

 

11.                                 Section 8.2.1 of the Agreement is hereby
amended by adding the following sentence at the end thereof:

 

“InterMune
shall use reasonable efforts to prosecute the Collaboration Patents so that
there will be claims specifically directed to the making, having made, use and
sale of compositions of matter, including, without limitation, Hit Compounds,
Lead Compounds and Products, and (as appropriate based on the disclosure) other
claims in separate Collaboration Patents specifically directed to areas
included within Array’s license set forth in Section 4.3, such as, for
example, by the filing of divisional patent applications.”

 

12.                                 Section 8.2.1 of the Agreement is hereby
amended by adding the following sentence as the third sentence of such Section:

 

3

 

“Notwithstanding
the foregoing, following assignment of a Collaboration Patent pursuant to Section 4.2.1,
InterMune shall only be required to keep Array fully informed as to patent
matters relating to claims contained in any such Collaboration Patent as to
which Array has license rights under Section 4.3.”

 

13.                                 The Agreement is hereby amended to include
the following Section 8.3.3:

 

“8.3.3  Array. 
In the event that a Party believes a Third Party is infringing any
Collaboration Patent right included within the license granted Array pursuant
to Section 4.3 above, Array shall have the right, but not the obligation,
to take reasonable legal action to enforce such Collaboration Patent and defend
any declaratory judgment action relating to such infringement, at its sole cost
and expense.  Array shall keep InterMune
reasonably informed of the progress of any such enforcement action as it
relates to such Collaboration Patent, and Array shall not enter into any
settlement or other agreement or make any other admission that relates to the
validity or enforceability of any such Collaboration Patent owned or Controlled
by InterMune without the prior written consent of InterMune, which consent
shall not be unreasonably withheld.  Any
amount recovered by Array in an action brought pursuant to this Section 8.3.3
shall be retained by Array.  To the
extent that InterMune has to be joined in any legal action pursuant to this Section 8.3.3,
InterMune shall be entitled to employ counsel of its choosing and to
reimbursement by Array for reasonable attorneys’ fees and expenses incurred in
connection with such activities.”

 

14.                                 Section 8.3.3 of the Agreement is hereby
renumbered to be new Section 8.3.4, and is hereby amended by adding, at
the end of the third line thereof, after the phrase “Collaboration Patent or
Preparatory Patent”, the following phrase: 
“pursuant to Section 8.3.2”.

 

15.                                 Section 12.2 of the Agreement is hereby
amended by adding the following sentence at the end thereof:

 

Any
such dispute related to payment obligations or alleged breaches thereof shall
be resolved by binding arbitration in accordance with Section 13.12.

 

16.                                 Section 12.4 of the Agreement is hereby
deleted in its entirety.

 

17.                                 Section 12.5.3 of the Agreement is
hereby amended in its entirety to read as follows:

 

“12.5.3  Survival Sections.  [ * ]
of this Agreement shall survive the expiration or termination of this Agreement
for any reason.  In the event of
termination by InterMune under Section 12.2 or 12.3, [ * ] shall survive such
termination in addition to the above-referenced [ * ]; InterMune shall have the [ * ] right to

 

4

 

enforce
the Collaboration Patents and Primary Preparatory Patents (as defined in Section 8.2.2)
assigned or licensed to InterMune hereunder against infringing products that
would be competitive with Products; and [ * ]
shall survive until [ * ].
In the event of termination by Array under Section 12.2 or 12.3, [ * ] shall survive such
termination in addition to the above-referenced Articles and Sections; and
InterMune shall immediately grant to Array a worldwide, non-exclusive, fully
paid-up license under InterMune’s interest in the Collaboration Patents
previously assigned to InterMune pursuant to Section 4.1.2 to research,
develop, make, have made, use, import, offer for sale and sell Hit Compounds,
Lead Compounds and Products; provided that, to the extent that any such
assigned Collaboration Patent was invented solely by Array personnel, Array’s
license under such Collaboration Patent shall be exclusive.  InterMune shall ensure that any licenses of
Collaboration Patents granted by InterMune or its Affiliates to third parties
are made subject to Array’s license grant-back rights set forth in this Section 12.5.3.”

 

18.                                 The Agreement is hereby amended to include
the following Section 13.12 and, as a result, the old sections 13.12,
13.13, 13.14, 13.15 and 13.16 are hereby renumbered to be new Sections 13.13,
13.14, 13.15, 13.16 and 13.17:

 

“13.12  Short-Form Arbitration.  If
the Parties do not agree upon a payment dispute under Section 12.2, then
such matters in issue shall be determined by binding arbitration conducted
pursuant to this Section 13.12 by one (1) arbitrator.  In such arbitration, the arbitrator shall be
a mutually acceptable, independent, conflict-free individual not affiliated
with either Party, with scientific, technical and regulatory experience with
respect to development of pharmaceutical products.  If the Parties are unable to agree on an
arbitrator, the arbitrator shall be an independent expert meeting the criteria
set forth in the immediately preceding sentence selected by the American
Arbitration Association within seven (7) days of being approached by a
Party.  Within fifteen (15) days of
designation of the expert hereunder, each Party shall prepare and submit to the
expert and to the other Party a written statement setting forth its position
with respect to the substance of the dispute. 
Each Party shall have an additional ten (10) days from receipt of
the other Party’s submission to submit a written response thereto.  The expert shall have the right to meet with
the Parties, either alone or together, as necessary to make a
determination.  The arbitration shall
take place in the county in which the executive offices of the Party which is
alleged to be in breach are situated. 
The expert shall select one of the Party’s positions as his decision,
and shall not have authority to render any substantive decision other than to
so select the position of either InterMune or Array.  The costs of such arbitration (including
without limitation, the costs of the expert) shall be shared equally by the
Parties, and each Party shall bear its own expenses in connection with such
arbitration.  Any such arbitration shall
to the greatest extent possible, be concluded within sixty (60) days after
designation of the expert hereunder.”

 

5

 

19.                                 Section 13.15 of the Agreement is hereby
amended by adding the following phrase at the beginning thereof:

 

“Except
as set forth in Sections 12.2 and 13.12 of this Agreement,”

 

Except as set forth above, all terms and conditions of the Agreement
will remain in full force and effect. 
Any capitalized term used herein and not otherwise defined will have the
same meaning as set forth in the Agreement.

 

In consideration of the current [ * ]
of Collaboration Patents described in Section 4 above, and the amendment
to the rights of InterMune set forth in this Amendment No. 4, InterMune
shall pay to Array a [ * ]
within [ * ] of the
Amendment Effective Date.  In addition,
InterMune agrees to pay to Array [ * ]
as a cash payment pursuant to Section 4.2.1 of the Agreement with respect
to [ * ].  Following receipt of such payment, Array
shall immediately effectuate [ * ].  Array acknowledges its continuing obligation
to [ * ] Collaboration
Patents as set forth in Section 4.2.1 of the Agreement.

 

Please acknowledge your agreement to the above by having an authorized
Array representative countersign both enclosed copies of this Amendment No. 4
where indicated below, and returning one original to the attention of Gloria
Lopez. Contracts Administrator, at InterMune. 
We would be happy to proceed based on receipt of a facsimile copy while
awaiting the original.

 

Sincerely,

 

 

Larry Blatt

Vice President of Biopharmacology Research

 

 

Acknowledged
and Agreed:

 

ARRAY BIOPHARMA, INC.

 

 

	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  
					

 

6

 

	
  cc:

  	
   

  	
  Paul Resnick, InterMune

  
	
   

  	
   

  	
  General Counsel, Array BioPharma

  

 

7

 

[ * ] = Certain confidential
information contained in this document, marked by brackets, has been omitted
and filed separately with the Securities and Exchange Commission pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

CONFIDENTIAL

 

VIA FAX AND FEDERAL EXPRESS

 

March 10, 2005

 

David L. Snitman, Ph.D.

Chief Operating Officer

Array BioPharma, Inc.

3200 Walnut Street

Boulder, CO 80301

 

RE:   Drug Discovery Collaboration Agreement

 

Dear Dave

 

As you know, InterMune, Inc. (“InterMune”) and Array
BioPharma Inc. (“Array”) are parties to that certain Drug Discovery
Collaboration Agreement dated September 13, 2002, as amended May 8,
2003, January 7, 2004, September 10, 2004 and December 7, 2004
(collectively, the “Agreement”). 
Any capitalized term used herein and not otherwise defined will have the
same meaning as set forth in the Agreement.

 

Pursuant to Section 4.2.1 of the Agreement, InterMune has the
right to make a cash payment to Array of [ * ]
with respect to a Lead Compound in return for Array’s [ * ] to InterMune of any Collaboration
Patent which contains a Valid Claim covering the composition of matter of such
Lead Compound (and any Product containing such Lead Compound).  As of the date hereof, in return for the
appropriate payments made by InterMune to Array, Array has already [ * ] to InterMune certain
Collaboration Patents with respect to Lead Compounds [ * ] and [ * ]
pursuant to the Agreement.

 

InterMune desires to obtain the [ * ],
notwithstanding the fact that [ * ].

 

Accordingly, InterMune and Array hereby agree as follows:

 

1.                                       InterMune shall pay to Array [ * ] in cash; and

 

2.                                       Following Array’s receipt of such cash
payment and in the spirit of Section 4.2.1 of the Agreement, Array shall
immediately (i) effectuate the [ * ]
to InterMune of [ * ]
which claims the composition of matter of

 

 

chemical
compounds, one of which shall be [ * ]
in accordance with the Agreement within [ * ]
after the date of this Agreement, and (ii) have the continuing obligation
to [ * ] to InterMune
any Collaboration Patent containing a Valid Claim covering the composition of
matter of such Lead Compound (and any Product containing such Lead Compound) in
accordance with the Agreement.  In the
event InterMune [ * ],
InterMune shall, at Array’s request, [ * ]
to Array [ * ] to
InterMune under this letter agreement.

 

Except as set forth above, all terms and conditions of the Agreement
will remain in full force and effect.

 

Please acknowledge your agreement to the above by having an authorized
Array representative countersign both enclosed copies of this letter agreement
where indicated below, and returning one original to the attention of Gloria
Lopez. Contracts Administrator, at InterMune. 
We would be happy to proceed based on receipt of a facsimile copy while
awaiting the original.

 

Sincerely,

 

 

Larry Blatt

Vice President of
Biopharmacology Research

 

 

Acknowledged and Agreed:

 

ARRAY
BIOPHARMA INC.

 

 

	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  
					

 

2

 

cc:           General Counsel, Array BioPharma

 

3

 

[ * ] = Certain confidential
information contained in this document, marked by brackets, has been omitted
and filed separately with the Securities and Exchange Commission pursuant to
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

June 30, 2005

 

VIA FAX AND
FEDERAL EXPRESS 

 

David L. Snitman, Ph.D.

Chief Operating Officer

Array BioPharma, Inc.

3200 Walnut Street

Boulder, CO 80301

 

RE:   Amendment No. 5 to the Drug
Discovery Collaboration Agreement

 

Dear Dr. Snitman:

 

As
you know, InterMune, Inc. (“InterMune”) and Array BioPharma Inc. (“Array”)
are parties to that certain Drug Discovery Collaboration Agreement dated September 13,
2002, as amended May 8, 2003, January 7, 2004, September 10,
2004 and December 7, 2004 (collectively, and as further amended pursuant
to this letter, the “Agreement”). 
The parties agree that the Agreement is hereby amended as follows,
effective as of the date of this letter (“Amendment Effective Date”):

 

1.                                       Section 1.24
of the Agreement is hereby amended in its entirety to read as follows:

 

“1.24       Research Collaboration shall mean
the research (including pre-clinical toxicology), manufacturing process and
scale-up activities as well as manufacture of GLP/GMP lots of designated Lead
Compounds undertaken by the Parties during the Research Term pursuant to
Sections 2.1 to 2.3 below.”

 

2.                                       Section 2.3 of the Agreement is hereby
amended in its entirety to read as follows:

 

“2.3         Term and Termination of Research
Collaboration.  The Research
Collaboration shall commence on the Effective Date and shall end upon the first
to occur of (i) June 30, 2006, (ii) the termination of this
Agreement, or (iii) [ * ] after written notice from InterMune that
InterMune elects (in its sole discretion) to early terminate the Research
Collaboration (such period beginning on the Effective Date and ending

 

 

upon
the earliest of (i), (ii) and (iii), the “Research Term”).  InterMune shall have the right to extend the
Research Term for up to an additional twelve (12)-month period after June 30,
2006 on the same terms and conditions as previously conducted (except as
otherwise set forth in this Agreement). 
To exercise such right, InterMune shall provide written notice to Array
on or before March 31, 2006.”

 

3.                                       A new last sentence is hereby added to Section 2.5(b) of
the Agreement as follows:

 

“Finally,
at least once quarterly, and within sixty (60) days of the end of the Research
Term, Array shall provide to InterMune a reasonably detailed written summary of
manufacture process and scale-up activities performed by and information
generated by Array under the Research Collaboration, including, without
limitation, those reports or other information specifically identified in the
Research Plan.”

 

4.                                       The first sentence of Section 5.1.1 of
the Agreement is hereby amended in its entirety to read as follows:

 

“InterMune
agrees to pay Array funding for the conduct of the Research Collaboration
quarterly, in advance, in an amount equal to one quarter (1/4) of the Allocated
Array FTEs (or, if less, the number of Array FTEs described in this Section 5.1.1
or otherwise scheduled in the Research Plan to be provided by Array in the
upcoming quarter), multiplied by the applicable Array FTE Rate (as defined
below in Section 5.1.2).  The
Allocated Array FTEs shall be as follows: 
(a) [ * ] Array FTEs devoted to [ * ] for the period of time set forth below in this Section 5.1.1
(or such other number scheduled in the Research Plan) (the “Discovery FTEs”); (b) [ * ] Array FTEs devoted to [ * ] for the period of time set forth below in
this Section 5.1.1 (or such other number scheduled in the Research Plan)
(the “Manufacture FTEs”); and (c) [ * ] Array FTEs devoted to [ * ] for the period of time set forth below in this Section 5.1.1
(or such other number scheduled in the Research Plan) (the “Research FTEs”).”

 

5.                                       The last sentence of Section 5.1.1 of
the Agreement is hereby amended in its entirety to read as follows:

 

2

 

“In
no event shall InterMune be required to fund a greater number of Array FTEs in
any calendar quarter than one quarter (1/4) of the Allocated Array FTEs for
such calendar quarter, or, if lesser, those provided in the Research Plan for
Array to provide in such calendar quarter.”

 

6.                                       A new last sentence is hereby added to Section 5.1.1
of the Agreement as follows:

 

“The
Discovery FTEs shall be funded by InterMune beginning July 1, 2005 through
June 30, 2006, with an option exercisable by InterMune to extend such
funding by extending the Research Term as set forth in Section 2.3 of this
Agreement.  The Manufacture FTEs shall be
funded by InterMune beginning July 1, 2005 until delivery of the GLP/GMP
lots of Lead Compounds, including the second GMP campaign contemplated for formulation
and bridging pharmacokinetic studies. 
The Research FTEs shall be funded by InterMune beginning July 1,
2005 through December 31, 2005, with an option exercisable by InterMune to
extend such funding for an additional six (6)-month period.”

 

7.                                       Section 5.1.2 of the Agreement is hereby
amended in its entirety to read as follows:

 

“5.1.2      FTE Rate.  The “Array FTE Rate” shall be equal to [ * ] per FTE per year. 
Effective after the first anniversary of the Amendment Effective Date,
the FTE Rate shall increase no more than once annually by the percentage
increase, if any, in the Consumer Price Index for all Urban Consumers, as
published by the U.S. Department of Labor, Bureau of Statistics, since the
Effective Date or the last adjustment hereunder, whichever is later.”

 

8.                                       Section 5.1.3 of the Agreement is hereby
amended in its entirety to read as follows:

 

“5.1.3      Non-FTE Costs.  Non-FTE costs and research requirements
associated with performance of the Research Collaboration at Array shall be
borne by Array, except that (a) Array shall not be required to incur any
extraordinary [ * ] costs without Array’s prior written
consent, (b) Array may bill InterMune for materials used in the course of
manufacture and

 

3

 

analytic
activities and of process research at a rate of [ * ]
and (c) Array may bill InterMune no more frequently than once per calendar
quarter for reasonable costs incurred by Array in connection with the permitted
outsourcing of activities by Array as provided in the Research Plan at a rate
of [ * ]. 
Extraordinary chemical or screening costs means material costs in excess
of [ * ]. 
InterMune shall pay any invoices received pursuant to Section 5.1.3(b) within
[ * ] of receipt.”

 

9.                                       A new Section 5.1.5 is hereby added to
the Agreement as follows:

 

“[ * ]”

 

Except
as set forth above, all terms and conditions of the Agreement will remain in
full force and effect.  Any capitalized
term used herein and not otherwise defined will have the same meaning as set
forth in the Agreement.

 

[Remainder of This Page Intentionally Left Blank]

 

4

 

Please
acknowledge your agreement to the above by having an authorized Array
representative countersign both enclosed copies of this Amendment No. 5
where indicated below, and returning one original to the attention of Robin
Steele, General Counsel, at InterMune. 
We would be happy to proceed based on receipt of a facsimile copy while
awaiting for the original.

 

	
   

  	
  Sincerely,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Lawrence M. Blatt

  
	
   

  	
  Senior Vice
  President—Preclinical and

  
	
   

  	
  Applied Research

  

 

cc:           Robin Steele, Esq., InterMune, Inc.

General Counsel, Array
BioPharm, Inc.

 

*     *     *    
*     *     *    
*     *

 

AGREED TO AND ACCEPTED:

 

 

ARRAY
BIOPHARMA, INC.

 

 

	
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