with this Limitation as at the last day of the recapture period immediately preceding the recapture period current on the effective date of this part and as at the last day of each consecutively succeeding recapture period shall be deemed to be Capital Held in Reserve, and shall not be taken into account in determining capital employed; except that during the initial recapture period of the first of one or more OperatingDifferential Subsidy Agreements, if consecutive and without interval, the sum of the balances in the Special Reserve Fund account and Deferred Operating-Differential Subsidy Receivable account, less the balance in Recapturable Profits-Maritime Administration account, shall be deemed to be Capital Held in Reserve and shall not be taken into account in determining capital employed.

For the purpose of applying this Limitation, the balance in the Special Reserve Fund and related accounts listed below, including accruals, as of the balance sheet date on which the determination of capital employed is based, shall include only the following:

(a) Actual amount on deposit (including securities valued as provided under applicable regulations) in the Special Reserve Fund of the operator;

(b) All accrued mandatory deposits into the Special Reserve Fund;

(c) Less-Approved transfers to the Capital Reserve Fund;

(d) Deferred Operating-Differential Subsidy Receivable;

(e) Less-Recapturable Profits-Maritime

Administration.

LIMITATION (3)

ADJUSTED WORKING CAPITAL

The excess, if any, of the balance of Adjusted Working Capital of the operator and its wholly-owned subsidiary companies as of the balance sheet date, after interim adjustments thereof, as provided in paragraph (d) of this section, and allocated to subsidized operations as provided in paragraph (e) of this section, over Limitation of Adjusted Working Capital in subsidized operations, as defined in Limitation (4), shall be deemed to be Capital Held in Reserve in the business and shall not be taken into account in determining capital employed.

For the purpose of applying this Limitation, Adjusted Working Capital shall include only the following accounts defined in Part 282 of this chapter:

Less: 400-534

495 500

Current liabilities (excluding mort-
gage notes-vessels, and other
liabilities payable from statutory
reserve funds).

Advance ticket sales and deposits.
Unterminated voyage revenue.

The provision for accrued deposits into the statutory reserve funds referred to in Accounts 100-199 hereinabove shall include, but is not limited to, the following:

(i) Accrued depreciation on vessels required to be deposited into the Capital Reserve Fund;

(ii) Proceeds from sale or loss of vessels and other amounts which, upon collection, are required to be deposited into the Capital Reserve Fund;

(iii) All accrued mandatory deposits into the Special Reserve Fund.

LIMITATION (4)

LIMITATION OF ADJUSTED WORKING CAPITAL Adjusted Working Capital as determined under Limitation (3) shall be allowed as capital employed to the extent of the Total Average Voyage Expenses employed in subsidized operations determined as follows:

Average Voyage Expenses shall be determined on the basis of the actual expenses of operating and maintaining the subsidized vessels (excluding lay-up expenses) for a period represented by the average length of time of all round voyages (excluding lay-up periods) calculated separately for each subsidized service (line). For the purposes of this Limitation, the term "line" shall be deemed to mean those described in Part I of the Operating-Differential Subsidy Agreement, or in instances where the routes or services described therein are not designated as lines, then the trade routes referred to in Part I of the Subsidy Agreement shall for such purposes be deemed to be lines: Provided, That in any event passenger services shall be deemed to be lines separate and distinct from freight services: And provided further, That, in instances where unsubsidized vessels are operated in subsidized services and are subject to the reserve and recapture provisions of the agreement, they shall not be considered as a separate category but shall be included with the subsidized vessels for the line involved.

This determination shall be made in the following manner:

First: By dividing the sum of such expenses for the accounting period involved applicable to the subsidized vessels in each such service (line) by the aggregate number of days (excluding lay-up days) consumed in all voyages of such vessels in each such service (line) terminating during such period;

Second: By multiplying the quotient thus obtained by the number of days (excluding lay-up days) in the average voyage in each such service (line); and

Third: By multiplying the resulting product by the quotient of the total number of days (excluding lay-up days) consumed in voyages of subsidized vessels in each such service (line) terminating during the accounting period divided by the number of calendar days within the accounting period.

The expense of operating and maintaining the subsidized vessels shall include overhead (Accounts 900-955 less Accounts 670 and 895) allocated to subsidized operations under § 286.4 and total Operating Expense—Terminated Voyages (Accounts 701-799 in Part 282 of this chapter). For the purpose of this Limitation, if, in any instance, the average subsidized voyage in any subsidized service (line), as determined above, is of less than ninety (90) days' duration, the expense of hull and machinery insurance (Account 755) and P & I insurance (Account 757) shall be determined to be that for a period of ninety (90) days: Provided, That such allowance for insurance expense shall not, in the aggregate, exceed the total actual insurance expense for the accounting period. Expenses used for this purpose shall be those included in the annual reports (Maritime Form MA 172) for each calendar year, and shall not be adjusted thereafter.

LIMITATION (5)

ACCOUNTS REPRESENTING THE REMAINDER OF ADJUSTED NET WORTH

Those accounts representing the remainder of adjusted net worth of the operator, and which have not been provided for in the calculation of capital employed under Limitations (1) through (4) of this section and paragraph (c) of this section, shall be included in capital employed to the extent to which they are allocable to subsidized operations as provided under paragraph (e) of this section, subject to final acceptance or rejection by the Maritime Administrator.

(b) Valuation of capital assets. Subsidized and unsubsidized vessels when included in capital employed shall be valued in accordance with Part 284 of this chapter, and other capital assets shall be valued at cost, including betterments and reconditioning costs, to the operator or to any former owner who at any time previous to the acquisition of such assets by the operator was a subsidiary, holding, affiliate, or associate company of the operator (referred to as a "related company"), whichever is the lower, less depreciation: Provided, That the cost of acquisition of any assets acquired in exchange for capital shares or other securities of the operator from other than a related company shall not be in excess of the fair value of such property at the date of acquisition. Except as provided for decreases in in

debtedness in paragraph (d)(3) of this section and costs of reconstructing and reconditioning in paragraph (d) (6) of this section, no adjustment shall be made in the computation of capital employed for the increase in equity in vessels represented by betterments or liquidation of mortgage indebtedness applicable thereto, or for the decrease in such equity represented by the accrual of depreciation, for the year or other accounting period during which such betterments are made, indebtedness is liquidated, or depreciation accrues.

(c) Allocation of vessel equity. (1) The equity of the operator in vessels (meaning the depreciated value thereof as determined in accordance with Part 284 of this chapter, less the outstanding balance of any mortgage obligations covering such vessels, including such proportion of any blanket mortgage obligations as the Maritime Administrator may determine to be applicable thereto) shall be included in capital employed only during the period of operation or maintenance thereof under the agreement.

(2) In the event that any of the subsidized vessels is withdrawn from operation in the subsidized service for part of any fiscal period, a corresponding reduction shall be made in the calculation of capital employed on the basis of the relation that the number of days during which such vessel is so withdrawn bears to the total number of days in the year or other accounting period involved. In instances where an unsubsidized vessel owned by the operator is operated in its subsidized service, unless otherwise stipulated by the Maritime Administrator in connection with his written approval of the operations of such vessel in the subsidized service, the equity of the operator in such vessel (meaning the depreciated value thereof as determined in accordance with Part 284 of this chapter, less the outstanding balance of any mortgage obligations covering such vessel, including such proportion of any blanket mortgage obligations as the Maritime Administrator may determine to be applicable thereto) shall be included ratably in the calculation of capital employed on the basis of the relation that the number of days during which such vessel is so operated bears to the total number of days in the year or other accounting period involved.

To the extent applicable to vessel equities, Part 281 of this chapter shall be controlling.

(d) Interim additions and deductions (required by this paragraph) shall be applicable only to individual transactions, any component of which before proration, is $200,000 or more. (1) Additions to capital, such as cash realized from the sale of stock, paid in surplus, etc., and withdrawals of capital, if and to the extent that such additions and withdrawals involve assets taken into account in the determinations of capital employed pursuant to the other provisions of this section, shall, subject to the limitations set forth in paragraph (a) of this section, be included or deducted, as the case may be, in the computation of capital employed, pro rata, on the basis of the proportion of such additions or withdrawals represented by the relation that the number of days from the date thereof to the end of the year or other accounting period involved bears to the total number of days within such period, this proportion to be allocated to or between capital employed in subsidized and in unsubsidized operations in the manner hereinafter prescribed.

(2) No interim adjustments shall be made for capital gains and capital losses (except those resulting from the acquisition, loss, sale, or other disposition of vessels) and earnings (or losses) during any accounting period, but they shall be included in the computation of capital employed only from the end of the year or other accounting period in which realized (or sustained). Dividends paid out of earnings that have not been included in capital employed shall not be deducted from capital employed. Dividends shall be deemed to have been paid from surplus at the beginning of the year or other accounting period involved, unless the Board of Directors shall declare the dividends to be payable out of the current year's earnings.

(3) If, during the accounting period, the operator increases his indebtedness and the consideration received therefor is not allowable under this section as an element of capital employed, there shall be an interim adjustment on account of the net decrease, if any, in capital employed resulting from such increase in indebtedness to be applied against the appropriate asset(s) if the indebtedness is secured by such asset(s) or against

Limitation of Adjusted Working Capital if not secured. If, during the accounting period, the operator decreases his indebtedness and the funds used therefor have not been allowed under this section as an element of capital employed, there shall be an interim adjustment on account of the net increase, if any, in capital employed resulting from such decrease in indebtedness to be applied against the appropriate asset(s) if the indebtedness is secured by such asset(s), or against Adjusted Working Capital if not secured. Indebtedness, for the purpose of this section, means any indebtedness secured by any asset (s) or any unsecured indebtedness other than routine trade indebtedness incurred in the ordinary conduct of business.

(4) The equity of the operator, determined in the manner prescribed in Part 284 of this chapter, in vessels acquired and in vessels sold, lost through marine disaster, or otherwise disposed of, during the year or other accounting period involved shall be included in the computation of capital employed, pro rata, on the basis of the proportion of such equity represented by the relation that the number of days of operation in the subsidized service under the agreement bears to the total number of Simultaneously, days in such period.

the consideration paid or received for such vessels (including receivables for gross trade-in allowances, and for claims from insurance underwriters on account of loss thereof, but subject to adjustment to an amount not in excess of final net settlements) shall be treated, for the purpose of determining capital employed, in the same manner as is hereinbefore prescribed with respect to additions to, and withdrawals of, capital. In those instances in which a vessel is acquired for operation in the subsidized services and there is an interim period of reconstruction, shifting, waiting for schedule, or other reasonable interim period prior to and related to the entrance of the vessel in subsidized service between the date of acquisition and the date of commencement of operation or maintenance of the vessel under the agreement, the equity in such a vessel will be included in capital employed from date of acquisition, and cost of reconstruction and other capitalized costs shall be included from date of completion.

(5) That portion, if any, of the balance on deposit, or accrued for deposit,

in the statutory Capital or Special Reserve Fund which has been deemed to be Capital Held in Reserve pursuant to the provisions of Limitations (1) and (2) of paragraph (a) (2) of this section and which is subsequently determined by the Maritime Administrator as being committed by the operator to complete the equity payments (that is, the cost of vessel designs and plans, other capitalizable items, and the sum of progress payments to be made by the operator during the period of construction or reconstruction) (after deduction of any trade-in allowance otherwise allowed for capital employed) of the operator's cost of a vessel or vessels with respect to which a construction or reconstruction contract requiring operation in the subsidized service is executed by the operator during the year or other accounting period with respect to which determination of capital employed is made, shall be included, pro rata, in the computation of capital employed. This computation shall be on the basis of the proportion of such part represented by the relation that the number of days from the date of the execution of such contract to the end of the year or other accounting period involved bears to the total number of days within such period: Provided, however, That insofar as the Special Reserve Fund is concerned, this paragraph shall be applicable only to amounts transferred, with the prior written approval of the Maritime Administrator, to the Capital Reserve Fund for such purposes from the date of such transfer.

(6) The costs of reconstructing or reconditioning a subsidized vessel shall be included in vessel's equity for the purpose of capital employed from the first day of the month following completion of such work. A corresponding reduction, calculated from date of adjustment to the end of the accounting period, shall be made to capital employed allowed elsewhere for the period, to the extent that interim adjustments for reconstruction or reconditioning costs otherwise would result in a duplicate allowance.

(e) Allocation between subsidized and unsubsidized activities. In instances where the operator engages in any other activities, in addition to the operation of the subsidized vessels, except extensive non-shipping operations (with respect to which the determination of the net assets allocable thereto shall be accorded

special consideration and shall be on such bases as the Maritime Administrator may determine to be fair and reasonable), the allocation of capital employed (other than the equity in vessels which is hereinbefore disposed of in paragraph (c) of this section), subject to such exceptions as the Maritime Administrator shall determine to be essential to the production of a fair and reasonable result, generally shall be made as follows:

(1) Assets (and liabilities) employed exclusively in the operation of the subsidized vessels and services incident thereto, such as deposits in the statutory Capital and Special Reserve Funds, net vessel trade-in allowance granted for construction of new subsidized vessel(s), collateral posted with the Maritime Administration in lieu of the performance bond required under the agreement, and progress payments on vessels under construction to replace the subsidized vessels or augment the subsidized service, shall be allocated entirely to subsidized operations in the computation of capital employed. Assets (and liabilities) allocated to subsidized operations as in this subparagraph provided shall be subject to the limitation relative to such assets (and liabilities) as provided in paragraph (a) of this section.

(2) Assets (and liabilities) not employed in the operation of the subsidized vessels and services incident thereto, as determined by the Maritime Administrator, including investments in, advances and loans to, and moneys on deposit with related companies, together with debt applicable thereto, shall be allocated entirely to unsubsidized operations in the computation of capital employed, except in instances where wholly-owned subsidiary companies perform services or supply facilities coming within the purview of section 803 of the act or the Subsidy Agreement of the operator, in which instances the underlying book value of such wholly-owned subsidiary companies shall be allocated between subsidized and unsubsidized operations on the same relative basis as the income and expense derived therefrom are allocated. The Adjusted Working Capital of the whollyowned subsidiary companies which is included in the underlying book value of such companies, to the extent allocated to subsidized operations as provided in this paragraph shall be combined with the operator's Adjusted Working Capital (paragraph (a) (2) of this section, Limitation (3)).

(3) The acquisition cost of inventories of spares earmarked for specific vessels and not interchangeable shall be allocated in the same manner as the vessels aboard which they are to be used. The acquisition cost of spares not earmarked for specific vessels but which are interchangeable between other vessels of the fleet of the operator shall be prorated between subsidized and unsubsidized operations on the basis of the relation that the number of subsidized and unsubsidized vessels of the type for which such spares are earmarked separately bears to the total of such type of vessels.

(4) Capital employed shall not include borrowed capital in any form. The indebtedness resulting from any such borrowing which is due and payable after one year shall be applied against the appropriate asset(s) if such indebtedness is secured by such asset(s), or against Adjusted Working Capital if not secured. Indebtedness, for the purposes of this subparagraph, means any indebtedness secured by any asset(s) or any unsecured indebtedness other than routine trade indebtedness incurred in the ordinary conduct of business.

(5) Assets (together with their respective reserves for amortization and depreciation) included in the following accounts:

Account 337-Other floating equipment. Account 343-Terminal property and equipment.

Account 349-Other and equipment.

shipping property

shall be allocated between subsidized and unsubsidized operations on the same relative bases as the income and expense derived therefrom are allocated.

(6) After the allocation of the operator's equity in the vessels, inventories of vessels' spares, and net assets directly and entirely allocable to subsidized or unsubsidized operations (the latter to include net assets allocable to nonshipping operations), the remainder of the adjusted net worth of the operator shall be allocated between subsidized and unsubsidized operations on the basis of the relation that the Vessel Operating and Maintenance Expenses incurred in subsidized and unsubsidized operations, separately (including a ratable proportion of such expenses on voyages in progress either (i) at the commencement and termination of each recapture period or (ii) at the beginning and ending of each annual accounting period, commencing

with the accounting period current with the publication of this provision, at the irrevocable election of the operator, to be made known to the Maritime Administrator in writing within 180 days after the issuance of this part and within 180 days after the end of the first year in each recapture period thereafter), bears to the total of such expenses incurred in both subsidized and unsubsidized operations. (The term "Vessel Operating and Maintenance Expenses," as used herein, means those expenses proper for inclusion in Account 700-Operating Expense-Terminated Voyages, excepting Account 760-Charter Hire, in Account 800-Inactive Vessels Expense, excepting Account 826-Charter Hire, as defined in the Uniform System of Accounts for Operating-Differential Subsidy Contractors, as adopted by the Maritime Administrator in Part 282 of this chapter. Vessel Operating and Maintenance Expenses used for this purpose shall be those included in the annual reports (Maritime Form MA 172) for each calendar year, and shall not be adjusted thereafter.) The amount so allocated to subsidized operations shall be deemed to be the proportion of such net assets to be included in capital employed, subject to the limitations prescribed in paragraph (a) (2) of this section.

(7) In instances where two or more Operating-Differential Subsidy Agreements are concurrently in effect between the United States and the operator for all or part of any year or other accounting period, the allocation of capital employed as between operations under each of such agreements shall be made, if necessary, on the same basis as is prescribed in this section for allocation between subsidized unsubsidized activities.

and