UTAH INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. Income Taxes The provision for income taxes consisted of (in thousands): Nine Months _Year Ended October 31__ Ended July 31 1971 1972 1973 1974 1975 1975 1976 Federal and state Current................ $ 1,296 $ 2,484 $ 1,416 $ 1,518 $ 2,372 $ 1,837 $ 819 Deferred.............. 5,482 1,923 (4,112) 346 453 - 1,869 Foreign Current................ 600 401 13,105 34,465 92,038 72,375 97,011 Deferred.............. 8,371 16,115 21,032 33,747 12,514 11,341 112 $15,749(a) $20,923 $31,441 $70,076 $107,377 $85,553 $99,811 - (a) The 1971 provision for income taxes is classified as follows in the statement of consolidated income: provision for income taxes$13,731; income from discontinued operations$683; and gain on disposition of discontinued operations$1,335. Deferred income tax expense results from differences in the accounting period in which certain revenues, costs and expenses are recognized under Utah's financial and tax accounting methods. The sources of these differences and the tax effect of each were as follows (in thousands): Nine Months Year Ended October 31 Ended July 31 1974 1975 1975 1976 - - - Mine development costs.................................. $14,373 $ 403 $ $ 771 Accelerated deductions of foreign mining equipment and facilities.............................. 20,871 11,341 11,341 Other................................................................ (1,151) 1,223 1,210 $34,093 $12,967 $11,341 $1,981 Timing differences which occurred during the years 1971 through 1973 were 1) mine development costs and certain foreign mining equipment and facilities which were deferred or capitalized in the financial statements but deducted for tax purposes and 2) the earnings of affiliates which were reflected in the financial statements by use of the equity method but reported for tax purposes when earnings distributions were received. The income tax provisions are less than the amounts computed by applying the 48% U.S. Federal income tax rate to income before income taxes, minority interest and extraordinary item. The principal reasons for this difference are as follows (dollar amounts in thousands): Year Ended October 31_ _Nine Months Ended July 31_ 1974 _1975_ _1975_ _1976_ Amount Percentage Amount Percentage Amount Percentage Amount Percentage Computed tax expense..... $83,860 48.00% $123,517 48.00% $97,469 48.00% $115,162 48.00% Income in foreign countries subject to lower rates.............................. (3,733) (2.14) (13,284) (5.16) (10,354) (5.10) ( 0,245 4.27 Statutory depletion........... (7,019) (2.93) 85% domestic dividend deduction on earnings of affiliates................... (3,841) (2.20) (2,543) (.99) (2,759) (1.36) Canadian tax holiday for mining income earned through December 31, 1973...... (3.509) (2.01) Other......... (2,701) (1.54) (313) (.12) 1,197 .59 1,913 .80 $70,076 40.11% $107,377 41.73% $85,553 42.13% $ 99,811 41.60% F-40 UTAH INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Utah's effective income tax rate increased from 27.31% in 1971 to 41.60% for the nine months ended July 31, 1976. This increase was primarily caused by 1) a substantial increase in foreign source mining income subject to foreign tax rates which were higher than the U.S. income tax rate after the application of statutory depletion and 2) a decline in the proportionate income contribution from affiliates to which the 85% dividend deduction applies. In prior years, no provision was made for deferred income taxes applicable to differences arising from oil and gas exploration and development costs deducted for tax purposes but capitalized for financial statement purposes since future tax deductions attributable to statutory depletion were estimated to be in excess of the capitalized amounts. However, passage of the Tax Reduction Act of 1975 significantly reduced statutory depletion benefits as of January 1, 1975. Costs incurred prior to such date, for which deferred income taxes were not provided (nor required), approximate $20 million. Utah will provide for income taxes on these prior differences on a prospective basis as prescribed by a Financial Accounting Standards Board pronouncement issued during 1975. In addition, deferred taxes have been provided on timing differences originating after December 31, 1974; however, such provision did not affect net income for 1975 or the nine months ended July 31, 1976. 12. Contingent Liabilities and Commitments Utah is in the process of developing or expanding certain mining projects. This program will require an investment of approximately $190 million through 1980 in addition to the amount expended through October 31, 1975 ($170 million after July 31, 1976, excluding the Samarco project commitment discussed in subsequent paragraph). In addition, as of July 31, 1976, Utah's Board of Directors approved the purchase of up to five shipping vessels, at a cost not to exceed $66 million, to transport Samarco iron ore and Queensland coal. Utah has entered into an agreement dated October 30, 1975 with Marcona Corporation and several of its wholly owned subsidiaries providing for the purchase of certain assets by Utah. The assets to be purchased by Utah pursuant to the agreement include: 1) Marcona's 49% interest in Samarco Mineracao S.A. ("Samarco"), a company formed to develop an iron ore property in Brazil, the capital costs of which project at July 31, 1976 are expected to approach $600 million, and 2) Marcona's rights in a proposed steel production project in Saudi Arabia. The Samarco project, now under development, is expected to begin shipments during July 1977. Utah's acquisition of the Samarco interest from Marcona will require an investment of approximately $143 million including approximately $49 million payable to Marcona for its investment at cost at the date (October 1975) the purchase of Samarco from Marcona was agreed upon. Project loan takedowns subsequent to the date of the agreement, totaling $204.5 million at July 31, 1976, have been guaranteed by Utah. Utah in succeeding to Marcona's interest in the Samarco project guarantees the repayment of all amounts borrowed under the project loan agreements and guarantees the completion of the Samarco project although Marcona remains a primary obligor of the credits. Similar guarantees have been made by the 51% Samarco shareholder which is a major Brazilian company. In order to protect the delivery of coking coal under certain long-term sales agreements, Utah has entered into contracts of affreightment through 1988, with a minimum commitment of approximately $104 million ($75 million with affiliated companies) at July 31, 1976. With respect to those contracts of affreightment with affiliated companies referred to in the preceding paragraph, Utah is obligated to increase charter revenues in such amounts as will be sufficient to enable such affiliates to repay debts totaling approximately $20 million. Existing commitments to Utah permitted additional borrowings of approximately $38 million from lending institutions at October 31, 1975 ($60 million at July 31, 1976 and an additional $80 million in commitments agreed upon in August 1976). In the opinion of management, proceeds from borrowings together with current working capital and cash generated internally are sufficient to fund mining projects now underway, to finance the Samarco commitments and to meet the other cash requirements of Utah's business. F-41