MARCONA CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Note 1Ownership, operations and summary of accounting policies(Continued): Inventories Mineral inventories are carried at the lower of cost (determined on a first-in, first-out basis) or market. Operating materials and supplies are carried at the lower of average cost or net realizable value. Inventory amounts used in the computation of cost of minerals sold were as follows (as of December 31): 1970-$3,607,000; 1971 -$2,999,000; 1972-$4,423,000; 1973-$4,759,000; 1974-$4,490,000; 1975$1,181,000. Plant, vessels and equipment Plant, vessels and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed by use of the straight-line method based on the estimated useful lives of the assets. Maintenance and repairs are charged against earnings; major renewals and betterments are capitalized. The cost and accumulated depreciation of assets sold or retired are removed from the books and any profit or loss resulting from the disposal is credited or charged to earnings. Taxes on income Provision for appropriate U.S. income taxes is made on the cumulative undistributed earnings of foreign subsidiaries which are not intended to be invested for an indefinite period of time. Deferred income taxes arise as a result of differences in the treatment of certain revenues, costs and expenses for tax and financial reporting purposes and from providing for U.S. income taxes on the cumulative undistributed earnings of foreign subsidiaries not indefinitely invested. Retirement plan Employees of Marcona and certain subsidiary companies are eligible to participate in the Marcona Employees Retirement Plan. Pension plan expense, based upon the actuary's recommendations, was as follows (for the years ended December 31): 1971-$219,000; 1972-$ 180,000; 1973-$207,000; 1974_$243 000; 1975$317,000; and under the actuarial cost method used (the aggregate method) includes amortization of past service costs. Using the aggregate method, unfunded past service cost is not determinable. Marcona's policy is to fund pension costs accrued. Fund assets as of December 31, 1975 approximated vested benefits. Note 2Extraordinary item: (a) The loss for the year ended December 31, 1975 includes an extraordinary charge of $62,800,000 summarized as follows (in thousands): Provision for loss of Peruvian mining assets expropriated...................... $77,961 Provision for related costs........................................................................ 3,039 Related shipping losses............................................................................. 12,500 Income tax credits..................................................................................... Total extraordinary item........................................................... $62,800 Marcona Mining Company, since 1952, operated under a mining concession agreement with Empresa Minera del Peru ("Minero-Peru"), an agency of the Government of Peru, and a predecessor agency, F-50 MARCONA CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) Note 2Extraordinary item(Continued): which extended to November 1982 and under separate beneficiation concessions granted directly by the Peruvian government. The military government of Peru on a number of occasions confirmed a policy, initially decreed in 1971, providing for direct government participation in all major mining operations in the country. In late 1974, Marcona made a proposal for the sale of the operating assets in Peru under an arrangement which would have provided appropriate compensation, continued management by Marcona and continued participation in the marketing and transportation functions. Discussions were undertaken with government officials concerning this proposal and these discussions continued in progress through the first half of 1975. On July 25, 1975, the Peruvian government expropriated the iron ore mining properties and operations by decree providing for no compensation for the assets expropriated. An analysis of the net assets expropriated is as follows (in thousands): Net current assets...................................................................................... $18,510 Investments and other assets.................................................................... 12,841 Plant and equipment, net......................................................................... 58,605 89,956 Long-term liabilities and other credits..................................................... 11,994 Net assets................................................................................... $77,962 On the basis of the initial decree providing for no compensation, the net assets expropriated, including provision for liabilities payable outside Peru, employee repatriation expenses, severance payments, and other corporate retrenchment costs, less income tax credits of $30,700,000, have been written off as an extraordinary charge to earnings. In addition, as a result of the expropriation, iron ore shipments to traditional receivers were discontinued and had not recommenced at December 31, 1975. The resulting shipping losses of $12,500,000 incurred during the year ended December 31, 1975 have been included in the extraordinary charge to earnings. These losses related to operation of owned and chartered vessels which, were it not for the expropriation, would have been involved in transporting Peruvian iron ore, and include idle vessel costs, losses from alternate employment undertaken to mitigate losses which would be incurred with respect to these vessels had they otherwise been in idle status (including losses to be incurred in early 1976 on time charter and cargo commitments as of December 31, 1975), and provision for costs which may be incurred with respect to early redelivery of certain time chartered vessels. Marcona is pursuing all available avenues to obtain appropriate compensation for the assets expropriated and U.S. government representatives, working on Marcona's behalf, are actively negotiating with Peruvian government representatives to obtain such compensation and to resolve proposed additional tax assessments which have been asserted for prior years. Marcona considers that the substantial portion of the additional tax assessments has no valid basis under Peruvian laws; however, resolution of the additional tax assessments may have an effect on the amount of compensation received. Since the outcome of the negotiations cannot be determined with reasonable certainty, no amount of compensation has been included in the extraordinary item in 1975. Any net recovery obtained will be accounted for as an extraordinary credit when determined. The Peruvian mining operations, together with the related iron ore marketing and ocean transportation activities, constituted a significant portion of Marcona's gross revenues and earnings. Revenues from sales of Peruvian ore during the past five years were as follows: 1971$105,534,000; 1972$108,352,000; 1973-$ 119,484,000; 1974-$ 171,916,000; and $104,709,000 for 1975 prior to the expropriation. F-51