d convertible into common stock of utah at 37 per share subject to adjustment under certain conditions these debentures may be redeemed by payment of a premium beginning in 1973 e secured only by the related land and real estate — these obligations do not represent claims against other corporate assets utah capitalizes financing costs of identifiable new borrowings associated with the development of new mining projects these capitalized costs amounted to 1,983,000 in 1972 and 6,494,000 in 1971 4 restrictions on 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 outstanding capital stock and convertible debentures retained earnings of 56,156,000 were free of such restrictions at october 31 1972 5 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 50 interest the balance of the note is approximately 3,500,000 at october 31 1972 utah is in the process of developing or expanding certain mining projects this program will re quire an investment of approximately 131 million in addition to the amount expended through october 31 1972 commitments have been obtained by utah which permit additional borrowings of approximately 104 million from lending institutions outside the united states and 10 million from lending insti tutions 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 underway and to finance the other cash requirements of utah's business the supreme court of peru has affirmed a 1971 decision of an appellate court to the effect that a marcona subsidiary's operations on a mining concession assigned from an instrumentality of the government of peru did not qualify for depletion deductions in computing income taxable in peru based upon this decision additional taxes and penalties have been assessed for the years 1957 1969 aggregating approximately 17.9 million after crediting approximately 2 million for tax over payments in prior years the subsidiary has arranged with the peruvian banco de la nacion for payment of the additional assessment in monthly installments over a period of ten years peruvian counsel have advised marcona that under the provisions of the concession assignment agreement the peruvian government instrumentality is obligated to indemnify the marcona sub sidiary against liability for the additional assessment based upon this advice marcona considers that no loss will be sustained as a result of the additional assessment accordingly no liability for this item has been recorded in marcona's financial statements marcona and the government of peru are engaged in negotiations which contemplate that an agency of the government will purchase a 25 interest in the subsidiary's peruvian assets for cash at fair value following this transaction if consummated the peruvian mining operations would be conducted by the parties as a special mining enterprise owned 75 by marcona which would also manage the operation certain lawsuits are pending in the u.s district court in arizona the u.s circuit court of ap peals for the ninth circuit and the state courts of new mexico against officials of the u.s govern ment and the owners of the four corners power plant in new mexico concerning the environmental effects of the plant which is fueled by coal supplied from utah's navajo mine utah considers that these lawsuits are without merit but has not decided whether it should intervene to assure that its rights and interests are fully protected certain individuals who have received royalties based upon the early activity at a marcona subsidiary's mining operations in peru have brought an action against both utah and marcona alleging breach of contract and fraud the managements of utah and marcona consider this suit to be substantially without merit and believe that the result of this action will not have a material effect upon the consolidated financial statements 6 reserved common stock at october 31 , 1 972 1 05,665 shares of common stock were reserved for future issuance to officers and key employees as restricted stock bonuses over an indefinite number of years and 120,785 shares were reserved for issuance upon conversion of the 53a subordinated guaranteed debentures 7 revenue a substantial portion of utah's gross revenue from operations results from sales of iron ore coal and copper concentrate to japanese and european companies under long-term sales agreements in 1972 sales to japanese and european companies amounted to about 58 and 11 of gross revenue respectively for marcona these sources accounted for about 72 and 8 of revenue substantially all of the output of certain mining projects recently completed or under develop ment is expected to be sold to both japanese and european customers approximately 84 of utah's mineral sales backlog is under long-term sales agreements which contain escalation clauses affording protection against future cost increases 8 income taxes utah's effective income tax rate is lower than the normal statutory rate for corpor ations principally because of the percentage depletion allowance on mining income and the 85 domestic dividend deduction applicable to the earnings of affiliates principally marcona and pima in recent years the effective rate has been increasing because parent company and sub sidiary income has increased faster than utah's share of affiliate income which is taxed at lower effective rates the provision for income taxes consists of in thousands 1972 1971 taxes currently payable deferred income taxes less taxes applicable to — discontinued operations extraordinary item $ 2,497 18,038 20,535 $ 1,224 13,853 683 1,335 9 discontinued operations in 1971 utah sold substantially all of its dredging assets the gain from this transaction has been classified as an extraordinary item in the statement of consolidated income accordingly all revenues and costs including applicable income taxes relating to dredg ing and other discontinued construction activities have been reclassified to income from discon tinued operations for 1971 . 10 earnings per share earnings per common share were computed based upon the weighted average number of shares of common stock outstanding during each period 14,353,981 for 1972 and 14,213 529 for 1971 earnings per common share assuming full dilution were determined based upon the assumed conversion of the 5 subordinated guaranteed debentures for purposes of this computation net income was increased by 126,000 in 1972 and 91,000 in 1971 the amounts of the related interest expense on the debentures net of income taxes the adjusted totals of shares outstanding used for this computation were 14,496,314 for 1972 and 14,509,604 for 1971 auditors report to the stockholders and board of directors of . ¦ j . utah international inc we have examined the consolidated balance sheet of utah international inc a delaware cor poration and subsidiaries as of october 31 1972 and 1971 and the related statements of consoli dated income stockholders equity and changes in financial position for each of the years then ended our examination was made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances we did not examine the financial statements of certain affiliated companies the investments in which are recorded using the equity method of accounting see note 1 to the consolidated financial statements but were furnished with reports of other public accountants thereon our opinion expressed herein insofar as it relates to the amounts included for such affiliates is based solely upon the reports of other public accountants in our opinion based upon our examination and the reports of other public accountants the ac companying consolidated financial statements present fairly the financial position of utah inter national inc and subsidiaries as of october 31 1972 and 1971 and the results of their operations and the changes in their financial position for each of the years then ended in conformity with generally accepted accounting principles applied on a consistent basis during the two years san francisco california december 4 1972 arthur andersen & co