notes to consolidated financial statements — october 31 1971 note 1 principles of consolidation the consolidated financial statements include the accounts of utah international inc utah construction & mining co prior to october 18 1971 and all subsidiary companies utah after elimination of significant intercompany items and transactions in addition the statements include utah's equity in the net income of affiliated companies in which utah does not have a majority interest equity in such earnings is recorded based upon the affiliates audited fin ancial statements as of their most recent fiscal year-end and upon subsequent interim reports submitted by the respec tive companies an appropriate provision for related in come taxes payable on such earnings when distributed has been made in the accompanying consolidated financial statements the following is a summary of the unaudited financial statements of marcona corporation marcona utah's most significant affiliate and of all affiliates combined as of oc tober 31 1971 in thousands 46 owned affiliates after an exclusion for estimated taxes payable by marcona upon distribution of earnings by its subsidiaries for which no reserve has been provided on its books the composition of utah's investment in all affiliated com panies at october 31 1971 is as follows in thousands equity in undistributed earnings of affiliates — included in retained earnings 73,531 included in liability for deferred income taxes payable upon distribution of earnings 6,778 cost of i 80,309 14,813 95,122 note 2 currency translation the accounts of foreign branches subsidiaries and affiliates have been translated to u.s dollars at the exchange rates in effect at the respective year-ends except for a equipment and facilities accounts which have been translated at the exchange rates in effect at the dates of acquisition and b stockholders equity income and expense accounts which have been translated at the exchange rates in effect when transactions occurred fluctuations in these exchange rates had no significant effect upon the accompanying consoli dated financial statements in august 1971 president nixon announced new eco nomic measures and policies which have caused most foreign currencies to have greater value in relation to the u.s dollar the extent of any further changes in currency relationships is not readily determinable at this time since in its foreign mining operations utah incurs costs in local currencies while its sales revenues are received in u.s cur rency operating margins could be affected as a result of any further changes in currency relationships in the opin ion of management future transactions in foreign curren cies will not have any material adverse effect upon utah's business taken as a whole note 3 income taxes a substantial portion of utah's income is derived from divi dends and earnings from mining operations with a result ing depletion allowance in excess of cost depletion as permitted by the u.s internal revenue code both of which are taxed at effective rates lower than those appli cable to ordinary income utah follows the practice of de ferring the amount of the investment credit and amortizing it over the average lives of the respective assets the invest ment credit had no significant effect upon the statement of consolidated income the provisions for income taxes consist of the following in thousands taxes currently payable deferred income taxes less taxes applicable to — discontinued operations extraordinary item note 4 restriction of retained earnings utah's long-term agreements with lending institutions con tain restrictive provisions on certain payments unless utah has adequate consolidated retained earnings as defined such provisions include limitations on the payment of cash dividends and on the purchase or redemption of outstand ing capital stock and convertible debentures retained earn ings in the amount of 38,908,000 were free of such restric tions at october 31 1971 note 5 long-term liabilities interest rates on most notes change with the applicable prime rate and range from prime to 1 above prime assessment liens and purchase money obligations including notes and contracts payable on land purchases are secured only by the related land and real estate and do not represent claims against other corporate assets the 5 subordinated guaranteed debentures of utah international finance corp a wholly owned subsidiary due september 15 1983 are guaranteed on a subordinated basis by the parent company and are convertible into com mon stock of the parent company at a price of 37 per share subject to adjustment under certain conditions the deben tures may be redeemed prior to maturity by payment of a premium beginning in 1973 utah capitalizes financing costs on identifiable new bor rowings made to finance development o mining projects not yet in operation such capitalized costs which amounted to s6,494,000 in 1971 and 1,489,000 in 1970 will be amortized over the productive lives of the properties note 6 contingent liabilities and commitments utah has agreed to purchase a note on demand the note is secured by a deed of trust on certain property owned by an affiliate in which utah has a fifty-percent interest the bal ance of the note is approximately 3,600,000 at october 31 1971 utah is in the process of developing or expanding certain mining projects this program will require an investment of approximately 104 million of which about 33 million has been expended at october 31 1971 commitments have been obtained by utah which permit additional borrowings of approximately 52 million from lending institutions outside the united states and 16 mil lion from lending institutions within the united states in the opinion of management proceeds from borrowings to gether with current working capital and cash generated internally are sufficient to fund mining projects now under way and to finance the other cash requirements of utah's business the taxing authorities in peru have taken the position that a marcona subsidiary's operations on a mining conces sion assigned from an instrumentality of the government of peru did not qualify it for depletion deductions in com puting peruvian taxable income in 1969 a peruvian civil court issued a decision in favor of the subsidiary however government authorities appealed this decision and an appel late court issued a decision adverse to the subsidiary in october 1971 the subsidiary has appealed before the supreme court peruvian counsel has advised marcona that under the terms of an existing agreement any result ing tax liability would be satisfied by the instrumentality which assigned the mining concession approximately forty percent of the stockholders equity in marcona is represented by net assets located in peru historically prior to the current fiscal year approximately forty to sixty percent of marcona's net income has been derived from its peruvian mining operations shipping ac tivities have been the primary source of remaining income during the 1971 fiscal year substantially all of marcona's net income was derived from its shipping operations as mining facilities operated at near breakeven levels this de cline in earnings from mining activities is in part attributed to reduced production volume caused by several strike in terruptions during the year and by the shutdown of the power and pellet plants for maintenance requirements certain lawsuits are pending in the federal district court in arizona and the district court for san juan county new