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As required by Title XI, the Secretary of Commerce has approved Grace Line "as possessing the ability, experience, financial resources, and other qualifications necessary to the adequate operation and maintenance of the mortgaged property". Also, as provided by the statute, the Secretary has approved Chemical Corn Exchange Bank (the Trustee) as "responsible and able to service the mortgage properly" and has found that the project "will be, in his opinion, economically sound." (Sections 1104(a)(1) and 1104(c).)

In accord with the statute, the principal amount of the Insured Bonds does not exceed 75% of the "actual cost" of the Santa Rosa paid by or for the account of Grace Line, as determined by the Secretary of Commerce (Section 1104(a)(2)). In fact, when all payments have been made, the actual percentage will be less than 65%.

In the opinion of counsel for Grace Line and counsel for the Underwriters, the Insured Bonds are a "security . . . guaranteed by the United States" within the meaning of Section 3(a)(2) of the Securities Act of 1933, as amended, and, therefore, exempt from registration under that

statute.

OPERATING-DIFFERENTIAL SUBSIDIES

Operating-differential subsidies are intended to put qualified operators of U. S. flag vessels in a position to compete in world trade with their lower cost foreign competitors (Merchant Marine Act, Title VI). No operating subsidy may be paid for the operation of a ship on a voyage on which it engages in coastwise or intercoastal trade (Section 605(a)). However, subsidy may be paid in reduced amounts on certain voyages in foreign trade on which a ship carries cargo or passengers in intercoastal trade or to or from an island possession or island territory of the United States (Section 605(a)). Although Grace Line stops at more than one U. S. port on some voyages, it does not carry cargo or passengers in coastwise or intercoastal trade.

The basis of the subsidy is set by a contract between the Government and the operator, which may extend for not more than 20 years (Section 603(a)). Grace Line's current contract became effective at the beginning of 1958 and extends through 1977.

In return for operating-differential subsidy, the operator must agree to meet various requirements. Subsidized ships must be built and, except in case of emergency, repaired in U. S. shipyards (Sections 601 and 606). They must remain under the American flag and, with minor exceptions, must be manned by United States citizens upon each departure from the United States (Section 302). The operator of a subsidized ship must maintain a

predetermined level of service on specified essential foreign trade routes covered by subsidy.

Subsidies are not generally paid for the operation of ships which are more than 20 years old (Section 605(b)).

The financial stability of a subsidized operator is increased through the required maintenance of capital and special reserve funds under the joint control of the United States and the operator (Section 607). These funds are intended to ensure the continued maintenance and successful operation of the subsidized ships, the replacement of the ships, and the payment of obligations to the United States. Withdrawals can be made from the capital reserve fund to meet principal payments due on the Insured Bonds without U. S. approval (Section 607(b)).

The United States shares equally with the subsidized operator all "net profits" arising from subsidized operations in excess of an annual average of 10% of the "capital necessarily employed" in those operations. The U. S. share is "recaptured" by the United States and the balance of the excess over 10% is placed in a "special reserve fund" of the operator. Preliminary determinations of the amount to be recaptured are, as a matter of practice, made at the end of each year (and this amount withheld from subsidy) with a final determination made at the end of each 10 years of subsidized operations (and also at the end of subsidized operations). Recaptured profits cannot exceed the operating-differential subsidy paid during each 10-year period (Section 606).

Grace Line's current operating-differential subsidy agreement ("the Subsidy Agreement") is more fully discussed under "Operating-Differential Subsidy Agreement".

CONSTRUCTION-DIFFERENTIAL SUBSIDIES

Construction-differential subsidies are intended to assure the maintenance of U. S. shipbuilding facilities and skills so that they will be available in time of war or national emergency. Accordingly, in recognition of the operator's agreement to build or reconstruct his ship in a U. S. shipyard at higher cost, the United States pays a subsidy to the shipyards so as to equalize the shipbuilding costs in this country with the lower costs in a representative foreign yard (Merchant Marine Act, Title V).

Without special legislation the constructiondifferential subsidy may not exceed 50% of the cost of construction or reconditioning. This does not include national defense features which are paid for in full by the United States if they are required by the Department of the Navy.

Both the ship and the operator must meet statutory qualifications. The ship must meet the requirements of U. S. foreign commerce, aid in

the promotion and development of that commerce, and be suitable for use by the United States for national defense or military purposes in time of war or national emergency. The applicant must possess "the ability, experience, financial resources, and other qualifications necessary to enable it to operate and maintain the proposed new vessel." (Section 501.)

Grace Line purchased the Santa Rosa under a construction-differential subsidy contract providing for a subsidy of about 42% of total cost (exclusive of defense features which are paid for by the United States). A subsidy in the same percentage is being paid towards the cost of the Santa Paula-sister ship of the new Santa Rosa.

Ships built under construction-differential subsidy must remain under the U. S. flag for at least 20 years (Section 503). Also, they must operate in foreign trade or on a round-the-world

voyage. These latter requirements are subject to certain limited exceptions and also to temporary U. S. waivers permitting operation in domestic trade. The statute contemplates repayment of a part of the construction-differential subsidy if the ship operates in domestic trade (Section 506).

If the United States purchases or requisitions the title of a ship upon which constructiondifferential subsidy has been paid, the maximum the shipowner may be paid is the greater of (1) the depreciated construction cost of the ship (excluding defense features) less the depreciated amount of the construction-differential subsidy (the depreciation to be computed on the schedule adopted by the Internal Revenue Service for income-tax purposes) and (2) the ship's scrap value as determined by the United States (Section 802). This amount is also determinative of the value of such a ship if its use is requisitioned by the United States (Section 902).

THE SANTA ROSA

The Insured Bonds are to be secured by a first preferred ship mortgage on the Santa Rosa (as well as by the Insurance Contract under Title XI).

Delivered to Grace Line in June, 1958, the Santa Rosa is a completely modern and fully airconditioned ship with a gross tonnage of 15,366 tons and accommodations for 300 passengers in outside first class state rooms-each with a private bath.

Outfitted and designed for year-round cruise and business travel to the Caribbean and South America, the Santa Rosa's scheduled itinerary calls for departure every other week from New York with such ports of call as Willemstad in Curaçao, La Guaira (which is the port city of Caracas, Venezuela), Kingston in Jamaica, Nassau in the Bahamas and Port Everglades between Palm Beach and Miami, Florida.

With an overall length of 584 feet and an 84-foot beam, the twin-screw Santa Rosa is driven by steam turbines developing 20,000 S.H.P. and has a sustained sea speed of at least 20 knots and a cruising radius of about 11,700 miles. The Santa Rosa is the first U. S. flag ship equipped with gyro stabilizers with retractable fins. These 14-foot fins substantially reduce roll and so increase passenger comfort.

The Santa Rosa has a dry cargo capacity of approximately 337,000 cubic feet and a refrigerated cargo capacity of approximately 81,000 cubic feet (including about 13,000 cubic feet of capacity for frozen cargo).

Scheduled for delivery on October 9 of this year, the new Santa Paula is to be a twin of the Santa Rosa and is proposed to have the same scheduled itinerary, with sailings from New York in alternate weeks.

DESIGN AND CONSTRUCTION

The Santa Rosa and the Santa Paula were each designed to Grace Line's specifications by Gibbs & Cox Incorporated, naval architects of New York, and built by Newport News Shipbuilding and Dry Dock Company of Newport News, Virginia. The contract for the construction of the ships was awarded to Newport News after competitive bidding.

COST OF THE SANTA ROSA

The total cost of the Santa Rosa is estimated at $24.8 million, and the cost to Grace Line (after

construction-differential subsidy) is an estimated $14.4 million.

At the time of the issue of the Insured Bonds, the estimated balance payable to the shipbuilder under the construction contract is to be deposited in the "Construction Fund" under the Trust Indenture securing the Bonds.

CARGO HANDLING

Advanced equipment has been installed in the Santa Rosa for the mechanized handling of cargo to make the operation rapid and efficient and to achieve major savings. Hatch covers of the rolling jack-knife design are provided for the faster

opening and closing of hatches. Along the sides of the ship, all 14 cargo side ports are hydraulically operated. Two cargo ports on each side have equipment which efficiently stows away or discharges palletized cargo through the automatic synchronization of an outboard conveyor, a cargo elevator in the ship, and another conveyor in the hold. The gyro stabilizers mentioned above substantially lessen roll and are expected to cut down cargo damage.

SAFETY AND NAVIGATING EQUIPMENT

The Santa Rosa is equipped with the latest scientific aids to navigation, including Radar for

detecting other ships and objects above the surface of the water, electric and supersonic depth sounders, Loran for fixing the ship's position from shore-based stations, and a radio direction finder.

Water-tight transverse bulkheads with watertight doors may be electrically or manually controlled to divide the ship into 12 compartments.

Aluminum has been used extensively in the structure and decorations of the ship because of its light weight and fire-resistant properties. The Santa Rosa's fire protection equipment includes a carbon dioxide smothering system, a smoke detection system, and an automatic electrical firedetection system.

GRACE LINE SHIPS AND OPERATIONS

Grace Line provides regularly scheduled (liner) passenger, cargo and mail service between the U. S. Atlantic Coast, the Caribbean and the Pacific Coast of South America and between the Pacific Coast of the United States and British Columbia and the Pacific Coast of Mexico, Central America and South America.

SHIPS

Grace Line owns the following fleet of 34 ships (excluding the new Santa Rosa's sister ship, the new Santa Paula, which is under construction and scheduled for delivery on October 9 of this year):

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A. Total deadweight tonnage indicated is the number of long tons of cargo, fuel, water, stores, etc., a ship is authorized to carry at maximum draft in salt water.

B. A gross ton represents 100 cubic feet of enclosed space. Gross register tonnage represents the internal cubic capacity of a ship (excluding certain space) as shown on the ship's documents.

C. One of these twin ships has been replaced by the new Santa Rosa and the other ship will be replaced by the new Santa Paula. One is being offered for sale and plans for the other are still under consideration.

D. Two C2 type combination passenger and freight ships and six C2 type freighters are subject to ship mortgages to the U. S. Maritime Administration (see "Capitalization").

As of July 1, 1958, these ships had a net book value after depreciation of $36.6 million. They are insured against total loss for $68.2 million.

The ships are fully seaworthy and are maintained in the highest classification in accord with Grace Line policy and regulatory requirements.

Maintenance is assured by periodic inspections, surveys and drydockings.

Grace Line maintains marine navigating and port risk insurance with United States and British insurance underwriters covering the ships of its fleet at not less than their estimated commercial

market values and in accord with regulatory requirements. It also carries marine protection and indemnity insurance in amounts it considers adequate, covering, among other things, liabilities for injury to persons and property through the opera

TRADE ROUTES

tion of the ships. War risk insurance is also maintained and, under existing law, will be provided by the United States when it cannot be commercially obtained on reasonable terms (Merchant Marine Act, Title XII).

Under its Subsidy Agreement, Grace Line operates under sailing schedules approved by the United States over the following major trade routes declared by the United States to be essential to its foreign commerce (the information being given as of July 15, 1958)—

Ships Assigned

Required and Permitted Service (Note 1)

Privilege Ports of Call and Service (Notes 1 and 2)

Line A (between U. S. Atlantic Coast and South American Pacific Coast via Panama Canal):

6 C2 type combination freight and passenger ships, accommodating 52 passengers per ship and with weekly sailings from New York; and

4 C2 type freighters, with approximately weekly sailing schedule from New York, Baltimore, Philadelphia and other U. S. Atlantic Coast ports as cargo offers (Note 3).

Between U. S. Atlantic Coast (excluding Key West) and the South American Pacific Coast (Colombia through Chile), with permissive calls in the Panama Canal Zone and on the Pacific Coast of Panama south of Balboa.

Line B (between U. S. Pacific Coast and Pacific Coast of Mexico, Central and

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Privilege Ports of Call and Service (Notes 1 and 2)

Between U. S. South Atlantic Coast (North Carolina through Florida, excluding Key West) and a foreign port or ports on the required service; northbound from Jamaica to U. S. Atlantic Coast; limited privileges from Dominican Republic to U. S. Atlantic Coast; with U. S. approval, between U. S. Atlantic Coast and a port or ports in Cuba and Haiti and southbound to Dominican Republic and Jamaica.

Between U. S. South Atlantic Coast (North Carolina through Florida, excluding Key West) and a foreign port or ports on the required service; with U. S. approval, between U. S. Atlantic Coast and Cuba, Haiti, Dominican Republic and Jamaica.

1. The Subsidy Agreement provides that cargo and passengers moving between the required areas shall be accorded preference (Article 1-2).

2 Under the Subsidy Agreement, privilege calls may be cancelled by the United States for good cause after opportunity for hearing (Article 1-2).

3. The operations of two of these freighters are not subsidized. An application for operating-differential subsidy as to these operations is pending.

4. Effective March 1, 1958, the permitted maximum number of subsidized sailings per year on Line B was increased from 41 to 50 and Grace Line discontinued the then privileged Line B service between the U. S. Pacific Coast and the Colombian North Coast, Venezuela and the Netherlands West Indies.

In addition to the 26 ships mentioned in the above table, on July 15, 1958 (the date of the table), 3 C2 type freighters were under short-term charter pursuant to charters which began in April-July, 1958, 4 C2 type freighters had been laid up since April-July, 1958 and were being offered for short-term charter, and the combination passenger and freight ship which was replaced by the new Santa Rosa in June, 1958 was being held for sale.

At present 8 C2 type freighters are under short-term charter to outside firms and 2 C2 type freighters are in lay-up and available for charter or for return to service. The service provided by the 3 C2 type freighters from Line C is, at the present, being provided by the C2 type combination freight and passenger freighters on that route.

OPERATIONS

The following tables show the number of terminated voyages and the terminated voyage revenues from the beginning of 1953 to July 31, 1958

January through July

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NOTE: Terminated voyages are, in general, voyages originating and terminating in the continental United States, determined as provided in U. S. regulations.

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