UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ To __________
Commission file number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 39-6050862
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6001 North 91st Street
Milwaukee, Wisconsin 53225-1795
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 462-5310
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 10,446,434 common
shares of the Company's common stock, $0.10 par value, were issued and
outstanding as of October 31, 1997.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE SECOND QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets September 30, 1997 and March 31,
1997
Consolidated Statements of Operations Six Months Ended September
30, 1997, and 1996
Consolidated Statements of Cash Flows Six Months Ended September
30, 1997, and 1996
Consolidated Statements of Changes in Shareholders' Equity Six
Months Ended September 30, 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Change in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Reports on Form 8-K and Exhibits
Registrant's Signature Page
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 March 31, 1997
(Unaudited) (Audited)
------------------ ---------------
ASSETS
------
Current assets
Cash $ 153,087 $ 780,154
Investments 187,792 194,888
Accounts receivable 87,577 112,382
Inventories 91,091 88,250
Prepaid items 5,010 1,698
------------------ ---------------
Total current assets 524,557 1,177,372
Real estate (Note 4) 1,179,836 1,179,836
Advances to Joint Venture
Net of Gold Sale Proceeds
(Note 3) 18,221,122 15,693,766
Investment in Joint Venture
(Note 3) 7,016,360 7,016,360
------------------ ---------------
Total assets $ 26,941,875 $ 25,067,334
================== ===============
LIABILITIES
-----------
Current liabilities
Accounts payable $ 612,919 $ 119,558
Notes and accrued interest
payable to related parties
(Note 5) 3,786,888 3,461,529
Notes and accrued interest
payable to others (Note 5) 664,378 646,809
Accrued salaries 1,426,515 1,344,015
Accrued directors' fees 6,400 0
Accrued legal fees 151,697 137,069
Other accrued expenses 134,700 150,135
------------------ ---------------
Total liabilities 6,783,497 5,859,115
Commitments and contingencies
(Notes 3, 5, 6, 7, 10 and 14)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
1997 - 1,515 shares;
September 30,1997 - none
(Note 10) $ 0 $ 1,515,000
Common stock, $0.10 par value:
Authorized 15,000,000 shares;
Issued and outstanding:
September 30, 1997 - 10,299,174 1,029,917
March 31, 1997 - 9,193,042 919,304
Additional paid in capital 16,001,135 14,359,037
Retained earnings (deficit) 3,127,326 2,414,878
------------------ ---------------
Total shareholders' equity 20,158,378 19,208,219
------------------ ---------------
Total liabilities and
shareholders' equity $ 26,941,875 $ 25,067,334
================== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Six Months Ended September 30, 1997 and 1996 (Unaudited)
Three Three
Months Months
Ended Ended Six Six
(Second (Second Months Months
Quarter) Quarter) Ended Ended
09/30/97 09/30/96 09/30/97 09/30/96
---------- ---------- ---------- -----------
Revenues:
Campground income $ 21,247 $ 19,990 $ 43,327 $ 42,015
Interest income 534 0 2,625 19
Interest income Related
Joint Venture (Note 3) 536,197 381,768 1,025,205 732,937
---------- ---------- ---------- ----------
Total revenue 557,978 401,758 1,071,157 774,971
Expenses:
General, administrative
and campground expenses 31,419 20,738 51,613 39,812
Interest expense 158,337 130,412 307,096 264,519
---------- ---------- ---------- ----------
Total expenses 189,756 151,150 358,709 304,331
---------- ---------- ---------- ----------
Net income (loss) from
operations 368,222 250,608 712,448 470,640
Credit (charge) for
income taxes 0 0 0 0
---------- ---------- ---------- ----------
Net income (loss) $ 368,222 $ 250,608 $ 712,448 $ 470,640
========== ========== ========== ==========
Net income (loss) per
share (Note 2) $ .03574 $ .0314 $ .0691 $ .0589
========== ========== ========== ==========
Weighted average shares
outstanding (Note 2) 10,304,102 7,987,334 10,304,102 7,987,334
========== ========== ========== ==========
Fully diluted income
per common share
(Note 2) $ .0303 $ .0309 $ .0587 $ .0580
========== ========== ========== ==========
Weighted average
diluted number of
shares (Note 2) 12,148,380 8,118,926 12,145,380 8,118,926
========== ========= ========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended September 30, 1997 and 1996 (Unaudited)
1997 1996
---------- ----------
Operating Activities:
Net income (loss) $ 712,448 $ 470,640
Changes in other operating assets and
liabilities (net):
Accounts receivable 24,805 58,687
Inventory (2,841) 30,946
Other assets 3,784 2,362
Accounts payable 493,361 337,173
Accrued salaries 82,500 62,775
Accrued directors' fees 6,400 4,500
Accrued legal fees 14,628 39,130
Accrued liabilities (15,435) (14,479)
Accrued interest 8,290 5,144
Common stock issued for services 89,990 10,500
---------- ----------
Cash provided (used) by operating
activities 1,417,930 1,007,378
Investing activities:
Cash advances to Joint Venture (1,968,938) (1,102,704)
Noncash advances to Joint Venture (1,135,098) (843,769)
----------- -----------
Gross advances to Joint Venture (3,104,036) (1,946,473)
Less: gold sale proceeds 576,680 393,098
----------- -----------
Cash flows from investing activities (2,527,356) (1,553,375)
Financing activities:
Net borrowings 334,638 42,828
Preferred stock converted (1,515,000) 0
Common stock issued 1,662,721 687,675
----------- ------------
Cash provided by financing activities 482,359 730,503
Increase (decrease) in cash and cash
equivalents (627,067) 184,506
Cash at the beginning of the quarter 780,154 55,653
----------- ------------
Cash at the end of the quarter $ 153,087 $ 240,159
=========== ============
The accompany notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Period Ended September 30, 1997
Common Stock
---------------------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
---------- --------- ----------- ----------
Balances 03/31/96 7,792,209 $ 779,221 $12,973,006 $1,407,280
Net Income for Fiscal Year
03/31/97 1,007,598
Common Shares Issued this
Period 1,400,833 140,083 1,386,031
---------- --------- ---------- ----------
Balances 03/31/97 9,193,042 919,304 14,359,037 2,414,878
Net Income through the Second
Quarter 09/30/97 712,448
Common Shares Issued this
Period -
Net of Cancellations 1,106,132 110,613 1,642,097
---------- --------- ---------- ----------
Balances 09/30/97 10,299,174 1,029,917 16,001,134 $3,127,326
========== ========= ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
(1) The Company and Basis of Presentation of Financial Statements
(a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant")
and its 82 1/2% owned subsidiary, San Sebastian Gold Mines, Inc.
("Sanseb") have formed the Commerce/Sanseb Joint Venture ("Joint
Venture") for the purpose of performing gold mining and related
activities, including, but not limited to, exploration,
exploitation, development, extraction and processing of precious
metals in the Republic of El Salvador, Central America. Gold
bullion, the Joint Venture's principal product, is produced (but not
on a full production basis) in El Salvador and refined and sold in
the United States. Expansion of exploration is taking place at the
San Sebastian Gold Mine ("SSGM") which is located near the City of
Santa Rosa de Lima. Exploration is also taking place at two other
mining properties, all located in the Republic of El Salvador,
Central America.
Presently, the Joint Venture is in the pre-production and
development stage at the SSGM and it simultaneously is performing
four separate programs: it has started to produce gold on a start
up (not full production) basis at its San Cristobal Mill and Plant
("SCMP") which is located approximately 15 miles from the SSGM site;
the second program is to begin its open-pit, heap-leaching process
on the SSGM site; the third program is to continue its SSGM site
preparation, the expansion of its exploration and exploitation
targets, and the enlargement and development of its gold ore
reserves; and the fourth program is to explore the potential of two
gold mine exploration prospects identified as the San Felipe-El
Potosi Mine, and its extension, the El Capulin Mine and the
Hormiguero Mine, all located in El Salvador, Central America.
Concurrently, it also is in the process of obtaining the necessary
funding for each of these separate programs while its Joint Venture
continues its gold production, exploration, exploitation and
development operations.
(b) The Company, a United States' corporation (incorporated as a
Wisconsin corporation in 1962 and consolidated with a Delaware
corporation in 1971), presents its consolidated financial statements
in U.S. dollars.
(c) The preparation of the financial statements, in accordance with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(d) The investment consists of precious stones which are stated at the
lower cost or market value.
(e) Accounts receivable consist of gold bullion shipped to the refinery
with payment pending on the settlement date.
(f) Inventory consists of processed ores and precious metals-in-process
which are stated at the lower of average cost or market.
<PAGE>
(2) Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the operations of the
Company and all of its majority-owned subsidiaries: Homespan Realty Co.,
Inc. ("Homespan"); Piccadilly Advertising Agency, Inc. ("Piccadilly");
San Luis Estates, Inc. ("SLE"); Universal Developers, Inc. ("UDI"); San
Sebastian Gold Mines, Inc. ("Sanseb"); and Mineral San Sebastian, S.A. de
C.V. ("Misanse"). The Company does not include in its financial
statements the operations of the Joint Venture. Other than the Joint
Venture, all significant intercompany accounts and transactions have been
eliminated. For further information regarding consolidated subsidiaries
see Note 8.
Income Taxes
The Company files a consolidated Federal Income Tax return with its
subsidiaries (See Note 9).
Income (Loss) Per Common Share
Net income per share is calculated based on the weighted average number
of common shares issued and outstanding during this first quarter period.
The Company does not include in this calculation any common stock
equivalent, rights or contingent issuances of common stock.
In computing the shares on a fully diluted basis, the net income per
share is based on the assumption that all rights and options were
exercised on the last day of the period that is being reported.
If on September 30, 1997, the 1,530,650 option shares, the 263,000
borrowed shares, the 25,628 shares due for accrued interest, and the
25,000 shares of stock rights were combined, they would total 1,844,278
shares. These shares added to the weighted average calculated number of
shares of 10,304,102 would amount to 12,148,380, and the profit per share
for the period ended September 30, 1997, would be as reflected in the
consolidated statements of operations. The same assumptions were used
for the same period in 1996.
Foreign Currency
The Company itself is not involved in any foreign currency transactions
as it deposits U.S. funds primarily through bank wire transfer of funds
from its U.S. bank account into the Joint Venture's El Salvador bank
accounts. The Joint Venture is obligated to repay the Company for funds
advanced in U.S. dollars. El Salvador has a freely convertible currency
that at present trades about 8.74 colones per U.S. dollar. In this
environment, based on the free convertibility of the colon, foreign
businesses have no problem making remittances of profits, repatriating
capital or bringing in capital for additional investments. There is no
unusual delay in exchanging dollars for colones or vice versa.
<PAGE>
Major Customer
The Joint Venture produces gold and silver. It sells its gold to a
refinery located in the United States. Given the nature of the precious
metals that are sold, and because many potential purchasers of gold and
silver exist, it is not believed that the loss of any customer would
adversely affect either the Company or the Joint Venture (Note 3).
(3) Commerce/Sanseb Joint Venture ("Joint Venture")
The Company is in a joint venture with and owns 82 1/2% of the total
common stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada
chartered (1968) corporation. The balance of Sanseb's stock is held by
approximately 180 non-related shareholders, including the President of
the Company who owns 2,073 common shares. Sanseb was formed to explore,
exploit, research, and develop adequate gold reserves. It produced gold
from SSGM from 1972 through February 1978.
On September 22, 1987, the Company and Sanseb entered into a joint
venture agreement to formalize their relationship with respect to the
mining venture and to account for the Company's substantial investment in
Sanseb. Under the terms of the agreement, the Company is authorized to
supervise and control all of the business affairs of the Joint Venture
and has the authority to do all that is necessary to resume mining
operations at the SSGM on behalf of the Joint Venture. The net pre-tax
profits of the Joint Venture will be distributed as follows: Company 90%;
and Sanseb 10%. Since the Company owns 82 1/2% of the authorized and
issued shares of Sanseb, the Company in effect has over a 98% interest in
the Joint Venture activities.
The joint venture agreement further provides that the Company has the
right to be compensated for its general and administrative expenses in
connection with managing the Joint Venture.
Under the joint venture agreement, agreements signed by the Company for
the benefit of the Joint Venture create obligations binding upon the
Joint Venture.
The Joint Venture is registered to do business in the State of Wisconsin
and in the Republic of El Salvador, Central America.
Accounting Matters
The Joint Venture records all costs and expenses as capital items which
are reduced by the gold sale proceeds and it will write off these
cumulative costs on a unit of production method at such time as it begins
producing gold derived from the virgin gold ore on a full production
basis. If the prospect of gold production, due to different conditions
and circumstances becomes unlikely, all of these costs may be written off
in the year that this occurs.
Advances to Joint Venture
As of September 30, 1997, the Company's advances were $17,630,857, and
three of the Company's wholly-owned subsidiaries' advances were $590,265
for a total of $18,221,122.
<PAGE>
Investment in El Salvador Mining Projects
During the fiscal year, the Company has advanced funds, performed
services, and allocated its general and administrative costs to the Joint
Venture.
As of September 30, 1997, the Company, Sanseb and three of the Company's
wholly-owned subsidiaries have invested (including carrying costs) the
following in its Joint Venture:
The Company's advances since 09/22/87 $20,357,537
Less amounts received from gold sales (2,726,680)
-----------
The Company's net of gold sale proceeds advances since
09/22/87 17,630,857
The Company's initial investment in the Joint Venture 3,508,180
Sanseb's investment in the Joint Venture 3,508,180
Sanseb's investment in the mining projects and amount
due to the Company 20,431,649
-----------
Total: 45,078,866
Advances by the Company's three subsidiaries 590,265
-----------
Combined total investment $45,669,131
===========
SSGM Activity
The Company had no significant activity at the SSGM site from February
1978 through January 1987. The present status is that, the Company,
since January 1987, and thereafter, the Joint Venture, since September
1987, has completed certain of the required mining pre-production
preliminary stages in the minable proven gold ore reserve area, and while
the Company is improving and expanding its SCMP, the Company is active in
attempting to obtain adequate financing for the proposed open-pit,
heap-leaching operations on this site. The Joint Venture is also engaged
in the exploration and the expansion program to develop additional gold
ore reserves in the area surrounding the minable gold ore reserves and at
two other El Salvador mining prospects. During this fiscal period gold
is being produced by trucking tailings and virgin ore for processing at
the SCMP.
Mineral San Sebastian S.A. de C.V. ("Misanse")
(a) Misanse Corporate Structure
The SSGM real estate is owned by and leased to the Joint Venture by
Misanse, a Salvadoran chartered corporation. The Company owns 52% of the
total of Misanse's issued and outstanding shares. The balance is owned
by approximately one hundred El Salvador, Central American, and United
States' citizens. The Company has the right to select six of Misanse's
ten directors. (Note 6)
<PAGE>
(b) SSGM Mining Lease
On July 28, 1975, an amended lease agreement between Misanse as lessor
and Sanseb as tenant was signed by the parties giving the tenant all the
possessions and mining rights that pertain to the SSGM as well as other
claims to mineral rights that may already have or could be claimed in the
future within the 595 hectares (1,470 acres) plat of land encompassing
the SSGM. The 25-year lease, which begins on the date gold production
begins, was further amended to run concurrently with the concession
described herein and may be extended for an additional 25 years by the
tenant as long as the tenant has paid the rent and has complied with
other obligations under the lease and the concession. The lease further
provides that the tenant will pay rent equivalent to five percent of the
gross gold production revenue obtained from the leased SSGM and further
commits itself to maintain production taking into consideration market
and other conditions. In no case will the rent be less than eighteen
hundred "colones" per month (approximately $206 per month at the current
rate of exchange). The lease further provides that, in the event the
lessor wishes to sell the property, it must first give preference to the
tenant; the lease further provides that the tenant must give preference
to employ former mining employees and Misanse shareholders, providing
they qualify for the available position. The lease agreement was
assigned on January 29, 1987 to the Company and Sanseb together with the
mining concession application.
The lease is freely assignable by the Joint Venture without notice to
Misanse. The lease may also be canceled by the Joint Venture on thirty
day's notice to Misanse, and thereafter, all legal responsibilities
thereunder shall cease.
In the event that additional gold ore is discovered, Misanse is required
to make proper claim for it under the jurisdiction of the Ministry of
Economy of El Salvador's Director of Energy, Mines, and Hydrocarbons, and
include it in the present concession. Such addition to the lease is
required to be made without any changes to the rental payment, except
that the expenses for expanding the concession shall be borne by the
Joint Venture.
(c) Mineral Concession
On January 27, 1987, the Government granted a right to the mining
concession ("concession") to Misanse which was subject to the performance
of the El Salvador Mining law requirements. These rights were
simultaneously assigned to the Company and Sanseb.
On July 23, 1987, the Government of El Salvador delivered and granted to
the Company's 52% owned subsidiary, Misanse, possession of the mining
concession. This is the right to extract and export minerals for a term
of 25 years (plus a 25-year renewal option) beginning on the first day
of production from the real estate which encompasses the SSGM owned by
Misanse. Misanse assigned this concession to the Joint Venture.
Effective February 1996, the Government of El Salvador passed a law which
will require mining companies to pay to it three percent of its gold sale
receipts and an additional one percent is to be paid to the El Salvador
municipality which has jurisdiction of the mine site.
<PAGE>
Under the terms of the concession and agreements referred to in the
concession, the Joint Venture has agreed to the following:
(1) Preference is to be given to the former Sanseb employees and Misanse
shareholders in filling any job vacancies, providing that there is a
need for their skills or services;
(2) From the profits earned, five percent of the gross wages paid to the
full-time employees shall be paid into a pension fund;
(3) From the profits earned, a sum of 500,000 colones annually
(equivalent to $57,208 at the present rate of exchange) will be paid
by the Joint Venture as a social tax for the benefit of the
community in the SSGM area which said funds are to be used for
social, economic, educational, recreational, health, welfare,
medical or for such other beneficial community services as
determined by the Joint Venture;
(4) At such time as the Government of El Salvador forms a cooperative
for the benefit of the employees, the Joint Venture has agreed to
contribute from its annual pre-tax earnings, the sum of five percent
of its pre-tax profits, but, in any event, not less than a minimum
amount equal to five percent of eight percent of the total assets;
(5) Pursuant to an agreement with the El Salvador Minister of Economy,
at the request of the Company or the Joint Venture to the El
Salvador Central Reserve Bank and/or office of the El Salvador
Minister of Foreign Commerce, it will be able to convert the El
Salvador currency into United States' currency for the payment of
its loans, interest, and any other obligations, including the
payment of dividends. Presently, there are no restrictions to
convert the El Salvador colones into United States' currency. (Note
2)
On November 30, 1987, the El Salvador Minister of Foreign Commerce issued
a project approval for the gold mining operation which was ratified on
April 15, 1988.
In consideration for the obligations agreed to by the Joint Venture the
Government of El Salvador agreed to exempt the Joint Venture from the
payment of all import duty, fiscal or municipal taxes whatsoever. The El
Salvador Department of Customs refused to recognize this exemption. On
November 15, 1993, the Joint Venture's attorneys filed a declaratory
proceeding with the El Salvador Constitutional Supreme Court ("Court")
informing the Court that the Joint Venture's rights were being violated
and that the Court should restrain the Department of Customs from
attempting to collect any duty.
<PAGE>
On May 18, 1994, the El Salvador Constitutional Supreme Court of Justice
declared that the Joint Venture is entitled to be temporarily exempt from
the payment of all fiscal and municipal taxes and import duty on the
import of any item relating to the needs of the SSGM pending its review
of the petition filed on November 15, 1993, and that the Company's
constitutional rights are to be preserved. The El Salvador Department of
Customs takes a position that the Supreme Court could deny the exemption,
therefore, in lieu of paying the Custom's duty, it is accepting a payment
guarantee bond in an amount of the Custom's duty until a final decision
is made. It is charging the Company a ten percent added value tax prior
to June 30, 1995, and 13% thereafter which is refundable to the extent of
six percent of the value of the Joint Venture's exports. The Joint
Venture intends to export all of its gold.
Gold Ore Reserves
The Joint Venture's geologists have determined that the minable and
estimated gold reserves are approximately 15,705,000 tons which should
contain 1,622,800 ounces of gold. The value of this gold ore reserve is
not reflected in the balance sheet and since gold production has
commenced on a limited start-up basis these gold ore reserves will have a
significant impact on future earnings.
SCMP Land and Building Lease
On November 12, 1993, the Joint Venture entered into an agreement with
Corporacion Salvadorena de Inversiones ("Corsain"), a governmental agency
of El Salvador, to lease for a period of ten years, approximately 166
acres of land and buildings on which its gold processing mill, plant and
related equipment (the SCMP) are located, and which is approximately 15
miles east of the SSGM site. The annual lease payment is U.S. $11,500
(payable in El Salvador colones at the then current rate of exchange),
payable annually in advance, and subject to an annual increase based on
the annual United States' inflation rate. As agreed, a security deposit
of U.S. $11,500 was paid on the same date and this deposit will be
subject to increases based on any United States' inflationary rate
adjustments.
Modesto Mine Land Ownership
The Company has purchased two contiguous parcels of land located on the
Modesto Mine site near the City of Paisnal, El Salvador and it has
entered into an agreement to purchase a third parcel of land containing
approximately five acres. The first 22-acre parcel of land was purchased
on November 27, 1994 while the second parcel of land consisting of 30
acres was purchased on August 31, 1996. The second parcel of land was
used as collateral in connection with a mortgage and promissory note that
was issued to the lender.
San Felipe-El Potosi Mine ("Potosi") Real Estate Lease Agreement
The Joint Venture entered into a lease agreement with the San Felipe-El
Potosi Cooperative ("Cooperative") of the City of Potosi, El Salvador on
July 6, 1993, to lease the real estate encompassing the San Felipe-El
Potosi Mine for a period of 30 years and with an option to renew the
lease for an additional 25 years, for the purpose of mining and
extracting minerals, etc. and under the following basic terms and
conditions:
<PAGE>
1. The lease payment will be five percent of the gross receipts derived
from the production of precious metals from this site which will be
payable monthly.
2. The Joint Venture will advance to the Cooperative the funds required
to obtain the mining concession from the El Salvador Department of
Energy, Mines and Hydrocarbons and all related costs which will be
reimbursed or will become a deduction from future rental payments.
3. The Joint Venture will, when it is in production, employ all of the
45 qualified members of the Cooperative providing that there is a
need for their particular skill or service.
4. The Joint Venture will furnish medicine and first aid medical
assistance to all of its employees to the extent that such benefits
are not provided by the Salvadoran Social Security System.
5. An employee life insurance program is to be seriously considered by
the Joint Venture when production commences, providing that the cost
of such insurance is not excessive.
(4) Real Estate Ownership
The Company and its subsidiaries own a 331-acre campground located on the
Lake of the Ozarks, Camden County, Missouri; 40 lots in the San Luis
North Estate Subdivision, Costilla County, Colorado; and 12 lots in the
City of Fort Garland, Costilla County, Colorado. Misanse owns the 1,470
acre SSGM site located near the City of Santa Rosa de Lima in the
Department of La Union, El Salvador. Other real estate ownership or
leases in El Salvador are as follows: it owns a total of approximately
57 acres at the Modesto Mine: the Joint Venture leases the SCMP land and
buildings on which its mill, plant and equipment are located. In
addition the Joint Venture has entered into lease arrangements based on
the production of gold payable in the form of royalties with one of the
two other mining prospects in the Republic of El Salvador. Reference is
made to Note 3 for other real estate leases and ownership.
(5) Notes Payable and Accrued Interest
09/30/97 03/31/97
Notes payable consist of the following: -------- --------
Mortgage and promissory notes to
related parties, interest ranging from
one percent to four percent over prime
rate, but not less than 16%, payable
monthly, due on demand, using the
undeveloped land, real estate and all
other assets owned by the Company, its
subsidiaries and the Joint Venture as
collateral (Note 6) $ 3,786,888 $ 3,461,529
Other (consists primarily of short-term
notes and accrued interest in the sum
of $302,320 as of September 30, 1997,
and $285,166 as of March 31, 1997)
issued to trade creditors and others,
interest of varying amounts, in lieu
of actual cash payments) and a mortgage
on a certain parcel of land located in
El Salvador. 664,378 646,809
----------- -----------
Total: $ 4,451,266 $ 4,108,338
=========== ===========
<PAGE>
(6) Related Party Transactions
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 16 years and six months, for
a total of $1,426,515.
In addition, with the consent and approval of the Directors, the
President of the Company, as an individual and not as a Director or
Officer of the Company, entered into the following financial transactions
with the Company, the status of which is reflected as of September 30,
1997:
The amount of funds which the Company has borrowed from its President
from time to time, together with accrued interest, amounts to $2,004,512.
To evidence this debt, the Company has issued to its President a series
of open-ended, secured, on-demand promissory notes, with interest
payable monthly at the prime rate plus two percent, but not less than 16%
per annum.
The Company had borrowed an aggregate of $434,175 including accrued
interest, from the Company's President's Rollover Individual Retirement
Account (RIRA). These loans are evidenced by the Company's open-ended,
secured, on-demand promissory note, with interest payable monthly at the
prime rate plus four percent per annum, but not less than 16% per annum.
In order to satisfy the Company's cash requirements from time to time,
the Company's President has sold or pledged as collateral for loans,
shares of the Company's common stock owned by him. In order to
compensate its President for selling or pledging his shares on behalf of
the Company, the Company has made a practice of issuing him the number of
restricted shares of common stock equivalent to the number of shares sold
or pledged, plus an additional number of shares equivalent to the amount
of accrued interest calculated at the prime rate plus three percent per
annum and payable monthly. The Company received all of the net cash
proceeds from the sale or from the pledge of these shares. The Company
borrowed a total of 96,000 common shares since April 1, 1997, and it owes
him 15,608 of its restricted common shares for unpaid interest for the
shares loaned or pledged as collateral for the benefit of the Company.
It may owe additional common shares for such shares loaned or pledged by
him for collateral purposes to others for the benefit of the Company, all
in accordance with the terms and conditions of Director approved
open-ended loan agreements dated June 20, 1988, October 14, 1988, May 17,
1989, and April 1, 1990.
On February 16, 1987, the Company granted its President, by unanimous
consent of the Board of Directors compensation in the form of a bonus in
the amount of two percent of the pre-tax profits realized by the Company
from its gold mining operations in El Salvador, payable annually over a
period of twenty years commencing on the first day of the month following
the month in which gold production commences.
The President presently owns a total of 467 Misanse common shares. There
are a total of 2,600 Misanse shares issued and outstanding.
Also with the consent and approval of the Directors, a company in which
the President has a 55% ownership entered into the following agreements,
and the status is reflected as of September 30, 1997.
<PAGE>
The Company leased approximately 4,032 square feet on a month-to-month
basis for its corporate headquarters office; the monthly rental charge
was $2,789.
On January 10, 1997, this related party, in connection with the purchase
of the Company's restricted shares, received a four-year stock option
expiring on January 9, 2001, to purchase 68,000 of the Company's
restricted common shares at a price of $3.00 for each share. This
transaction had the same terms as were entered into with other
independent arms-length transactions.
The same related company provides consulting, administrative services,
use of data processing equipment, use of its vehicles and other property
as required by the Company.
In lieu of cash payments for the office space rental and for the
consulting, administrative services, etc., these amounts due are added
each month to this related company's open-ended, secured, on-demand
promissory note issued by the Company.
In addition, this related company does use its credit facilities to
purchase items needed for the Joint Venture's mining needs.
This related company has been issued an open-ended, secured, on-demand
promissory note which at September 30, 1997, amounts to $1,068,806; the
annual interest rate is four percent plus the prime rate, but not less
than 16%, and it is payable monthly.
The Company's Directors have consented and approved the following
transactions which status are reflected as of September 30, 1997:
The President's wife's Individual Retirement Account ("IRA") has the
Company's open-ended, secured, on-demand promissory note in the sum
$224,685 which bears interest at an annual rate of prime plus three
percent, but not less than 16% and the interest is payable monthly. On
December 14, 1996, in connection with the purchase of the Company's
restricted shares, she acquired a four-year stock option to purchase
83,900 of the Company's restricted common shares at a price of $3.00 each
which expires December 13, 2001. This transaction is under the same
terms entered into with arms-length other purchases.
The Law Firm which represents the Company in which a son of the President
is a principal is owed the sum of $151,697 for legal services rendered
through August 1997. Also, the son of the President and his son's wife
have the Company's open-ended, on-demand promissory note in the sum of
$54,710 which bears interest at an annual rate of 16% payable monthly.
The Directors, by their agreement, have deferred cash payment of their
Director fees beginning on January 1, 1981, until such time as the
Company's operations are profitable. Effective from October 1, 1996,
the Director fees were increased from $750 to $1,200 for each quarterly
meeting and $400 for attendance at any other Directors' meeting. At the
same time the Executive Committee Director fees were increased from $250
to $400 for each meeting. The Directors and Officers have a right to
exchange the amount due to them for the Company's common shares.
<PAGE>
On September 16, 1994, the Directors adopted a resolution offering the
Directors and Officers of the Company a right to exchange the
compensation due to them for the Company's common shares valued at the
average lowest bid quote reflected in the NASDAQ Monthly Statistical
Summaries in the month preceding the exercise of this right.
The Company advances funds, allocates and charges its expenses to the
Joint Venture. The Joint Venture in turn capitalizes all of these
advances, costs and expenses until such time as it resumes its gold mine
operation at its full production capacity. When full production
commences, these capitalized costs will be charged as an expense based on
a per ton production basis. The Company also charges interest for its
advances to the Joint Venture which interest rate is established to be
the prime rate quoted on the first day of each month plus four percent
and said interest is payable monthly.
Company Net Advances to the Joint Venture
Total Interest
Advances Charges
------------ -----------
Balance April 1, 1990 $ 1,625,163 $ 252,060
Year Ended March 31, 1991 718,843 266,107
Year Ended March 31, 1992 698,793 312,004
Year Ended March 31, 1993 1,003,617 347,941
Year Ended March 31, 1994 1,155,549 451,180
Year Ended March 31, 1995 2,884,078 751,389
Year Ended March 31, 1996 3,122,766 1,286,739
Year Ended March 31, 1997 3,894,692 1,567,375
Through the Second Quarter Ended
September 30, 1997 2,527,356 1,025,205
----------- ----------
Balance September 30, 1997 $17,630,857 $6,260,000
Advances by three of the Company's
wholly-owned subsidiaries 590,265 0
----------- ----------
Total Net Advances After
Deducting the Gold Sale Proceeds
as of September 30, 1997 $18,221,122 $6,260,000
=========== ==========
(7) Commitments
Reference is made to Notes (3), (5), (6), (10), (13) and (14).
<PAGE>
(8) Consolidated Subsidiaries
The following subsidiaries, all majority-owned by the Company, are
included in the consolidated financial statements of the Company. All
intercompany balances and transactions have been eliminated.
Percentage of Ownership
-----------------------
Homespan Realty Co., Inc. 100.0%
Mineral San Sebastian, S.A. de C.V. 52.0%
Piccadilly Advertising Agency, Inc. 100.0%
San Luis Estates, Inc. 100.0%
San Sebastian Gold Mines, Inc. 82.5%
Universal Developers, Inc. 100.0%
(9) Income Taxes
At March 31, 1997, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of
approximately $3,339,647 which may be carried forward to offset future
taxable income; the net operating losses expire at various times in the
future.
(10) Description of Securities
a. Common Stock
The Company's Certificate of Incorporation authorizes the issuance of
15,000,000 shares of common stock, $0.10 par value per share of which
10,299,174 shares were outstanding as of September 30, 1997. Holders of
shares of common stock are entitled to one vote for each share on all
matters to be voted on by the shareholders. Holders of common stock have
no cumulative voting rights. Holders of shares of common stock are
entitled to share ratably in dividends, if any, as may be declared, from
time to time by the Board of Directors in its discretion, from funds
legally available therefore. In the event of a liquidation, dissolution
or winding up of the Company, the holders of shares of common stock are
entitled to share pro rata all assets remaining after payment in full of
all liabilities. Holders of common stock have no preemptive rights to
purchase the Company's common stock. There are no conversion rights or
redemption or sinking fund provisions with respect to the common stock.
All of the outstanding shares of common stock are validly issued, fully
paid and non-assessable.
b. Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
250,000 shares of preferred stock, $0.10 par value, of which 2,500 shares
of Series A Convertible Preferred Stock were issued as of January 30,
1997, and as of September 30, 1997, all of the shares were converted into
common shares.
<PAGE>
The preferred shares are issuable in one or more series. The Board of
Directors is authorized to fix or alter the dividend rate, conversion
rights (if any), voting rights, rights and terms of redemption (including
any sinking fund provisions), redemption price or prices, liquidation
preferences and number of shares constituting any wholly unissued series
of preferred shares.
c. Stock option activity through the second quarter ended September 30:
1997 1996
-------------------- -----------------
Weighted Weighted
Average Average
Amount Price Amount Price
--------- ------ ------ ------
Outstanding, beg. year 1,591,360 $3.22 97,840 $2.66
Granted
Exercised options (60,000) $2.00
Forfeited (710) $4.00
Expired 0 $0.00 (13,880) $3.00
--------- ----- -------- -----
Outstanding, end of first quarter 1,530,650 $3.27 83,960 $2.61
A summary of the outstanding stock options as of September 30, 1997:
Weighted Average
Range of Amount Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- ----------------
$2.00 to $2.99 430,000 1.6247 years $2.50
$3.00 to $5.00 1,100,650 2.3942 years $3.57
d. Stock Rights - To The President
Reference is made to Note 6, Related Party Transactions, of the Company's
financial statements which disclose the terms and conditions of the share
loans to the Company by the President and the interest which is payable
to him by the Company's issuance of its common shares.
Said interest payable is for shares loaned to the Company and/or for such
shares loaned or pledged for collateral purposes, or for unpaid interest,
all in accordance with the terms and conditions of Director approved
open-ended loan agreements dated June 20, 1988, October 14, 1988, May 17,
1989 and April 1, 1990.
e. Stock Rights - Others
The Company has agreed to issue up to 25,000 of its restricted common
shares in connection with a certain funding agreement entered into on
December 19, 1996.
<PAGE>
f. Share Loans - Others
A series of borrowings of the Company's common shares were made under the
provision that the owners would sell said shares as the Company's
designee, with the proceeds payable to the Company. In exchange, the
Company agreed to pay these shares loaned within 31 days or less from the
sale date by issuing its restricted common shares, together with interest
payable in restricted common shares payable at a negotiated rate of
interest. The restricted stock holding period required by the Securities
and Exchange Commission is also a factor considered. On June 26, 1997,
the Company entered into a loan agreement with two of its shareholders in
which they agreed to loan 200,000 of their Company-owned shares to the
Company. As of September 30, 1997, the Company owed them 167,000 of the
Company's restricted common shares plus an additional 10,020 restricted
common shares in payment for the interest earned, all in accordance with
the terms and conditions of the share loan agreement.
S.E.C. Form 8 Registration
On April 4, 1994, the Company filed its Securities and Exchange
Commission Form 8 Registration Statement No. 33-77226 under the
Securities Act of 1933, to register 500,000 of the Company's $.10 par
value common stock for the purpose of distributing shares pursuant to the
guidelines of the Company's 1994 Services and Consulting Compensation
Plan. From the 500,000 shares registered, 297,147 were issued and
202,853 shares are authorized to be issued.
(11) Interest Income on Advances to the Joint Venture
From time to time the Company advances funds, services, etc. to the Joint
Venture. The interest rate charged is the prime interest rate fixed on
the first day of each month plus four percent. The interest is payable
monthly. (Note 6)
(12) Litigation
There is no litigation.
(13) Contingent Liabilities
In the event the El Salvador Constitutional Supreme Court should decide
that the Joint Venture is subject to the payment of custom duty taxes,
then the Company would have a contingent liability as it has, on behalf
of the Joint Venture, agreed to reimburse an El Salvador Insurance
Company the funds that may be disbursed to the El Salvador customs'
office in connection with the payment of guarantee bonds it has issued in
lieu of cash payment for the import duties. The total sum of payment
guarantee bonds issued by the Insurance Company through September 30,
1997, amounts to approximately $20,000.
<PAGE>
(14) Unaudited Financial Statements
The consolidated financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The financial information included herein is
unaudited; however, the Company believes that the information reflects
all adjustments (consisting solely of normal recurring adjustments) that
are, in the opinion of management, necessary to be a fair presentation of
the financial position, results of operations, and cash flows for the
interim periods. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements
be read in connection with the financial statements and the notes thereto
included in the Company's latest annual report and the filing of the
required Securities and Exchange Commission annual Form 10-K.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion provides information on the results of
operations for the two periods ended September 30, 1997 and 1996 and the
financial condition, liquidity and capital resources for the same
quarterly periods. The financial statements of the Company and the notes
thereto contain detailed information that should be referred to in
conjunction with this discussion.
Introduction
The Joint Venture is producing gold on a limited basis from the virgin
gold ore and tailings it is extracting at the SSGM and it simultaneously
is performing four separate operations. First, it has commenced a
limited production of gold by processing the SSGM tailings and now these
tailings are being blended with the virgin ore at its SCMP facility which
is located approximately 15 miles from the SSGM site. Second, it is
installing a pilot open-pit, heap-leaching gold process on the SSGM
site. Third, it is continuing its SSGM site preparation, the expansion
of its exploration and exploitation targets, and the enlargement and
development of its gold ore reserves. Fourth, it is exploring the
potential of the two gold mine prospects identified as the San Felipe-El
Potosi Mine, and its extension, the El Capulin Mine and the Hormiguero
Mine, all located in El Salvador, Central America. Relative to the
Modesto Mine and the Montemayor Mine, the Company's El Salvadoran
attorney is disputing procedures in which the El Salvador Director of
Energy, Mines and Hydrocarbons disclaimed the Company's application for
obtaining licenses to extract minerals from the Modesto Mine and the
Montemayor Mine. The Company's El Salvadoran legal counsel, based on his
legal findings, has filed a challenge which calls for the revoking of the
licenses issued to others. The Company has made the U.S. Embassy aware
of the procedures taken by the El Salvadoran authorities and also the
actions taken by the Company's El Salvadoran legal counsel.
Concurrently, it also is in the process of obtaining the necessary
funding for each of these separate operations while it continues its
limited production of gold and the exploration, exploitation and
development of its mining prospects. The more than twelve-year El
Salvador war and the general disbelief that peace will prevail had been a
material deterrent in obtaining funding for the resumption of the SSGM
operations and for the restoration of the SCMP. On December 15, 1992,
through the auspices of the United Nations, the end of the war was
declared contingent upon a three-year term to comply with all of the
conditions of this pact. Presently peace prevails.
Current Status
The Company's geologists have reported that, on the SSGM site, a total of
26 diamond drill holes were completed with an average depth of 118 meters
(387 lineal feet) each for a total of approximately 3,068 meters (10,062
lineal feet) of drilling. The drill holes were spaced about 100 meters
(328 feet) apart and covered an area of one square kilometer (.386 square
miles, approximately 250 acres). The angle of the drill holes varied
from 45 degrees to 90 degrees.
<PAGE>
This preliminary drilling confirms the Company's geologists' expectations
that there are four basic types of rock: basalt, conglomerate, quartz
monzonite, and trachyte. The mineralization and alteration is well
distributed and even though low grade values of 0.68 grams (0.02 oz.) of
gold per ton are found in the quartz monzonite, the economic values are
found in the trachyte. In the trachyte, one hole intercepted a 12.2
meter (40 foot) vein of gold with an average grade of 15.08 grams (0.44
oz.) of gold per ton. The Company's geologists firmly believe that the
potential of increasing the gold ore reserves is excellent.
On May 22, 1997, the Company entered into a Joint Venture Agreement with
Teck Corporation (Teck), a company that is extensively involved in
worldwide mining operations. Based on the terms and conditions contained
in the agreement, Teck had its personnel in El Salvador on May 29, 1997
to launch their commitment. From June 1, 1997, Teck has supervised their
own diamond core drilling and reverse circulation drilling. Teck had its
metallurgist observe the SCMP and is presently assessing the expansion of
the mill for a minimum capacity of 300 tons per day.
On the SSGM site, Teck has opened and resampled selected surface channel
trenches to confirm the gold value and it is conducting such
metallurgical and mineralogical studies as it deems necessary. It has
been estimated that the assessment phase will cost Teck approximately
U.S. $400,000 and it has agreed to perform the assessment phase within
four months. Results of Teck's findings are available to the Company.
Teck is evaluating the mineral potential and is in communication with the
Company's independent consulting geologists as well as with the Company's
geologists to obtain as much information as possible to make a final
determination.
In the event that the assessment performed by Teck relative to the
expansion of the SCMP is compatible with the plans of the Company, the
Company can then proceed to expand the SCMP. Then, if Teck proceeds with
the exploration and feasibility phase, it will reimburse the company for
such expansion.
In keeping with the expansion of the SCMP, the Company purchased,
shipped, and delivered to the SSGM site sixteen standard and special size
ocean shipping containers (40 feet long, eight feet wide, and
approximately eight feet high) of a used crushing system it purchased in
the United States. This plant consists of primary and secondary cone
crushers, a vibrating screen, belt conveyor, rain cover structured steel
and sheeting, and related equipment. It has a capacity of crushing the
gold ore at a rate of 75 tons per hour to a size of one quarter inch.
The site preparation and the plans to erect this crushing system are in
process.
In addition, many improvements have taken place at the SCMP. This mill
and plant is presently being conditioned for the expansion of its present
production capacity (approximately 200 tons of virgin gold ore per day)
to a production capacity of 300 to 400 tons per day which is dependent on
having adequate funds to perform this enlargement.
The Company, on February 23, 1993, through its Joint Venture acquired the
SCMP, a precious metals' leaching mill and plant which has the capacity
of processing 200 tons of virgin ore per day. While the Joint Venture did
achieve at times to operate the mill to its full capacity by processing
tailings, it encountered operational problems which compelled it to
operate the mill at a lower production rate. Considerable time and
capital was consumed to bring the SCMP to a favorable operating
condition. A new labor force had to be trained to operate the SCMP;
mechanical problems occurred, metallurgical differences had to be
resolved; the rainy (hurricane) season has to be considered; the head
grade varied and problems were encountered with the handling of the
separation of the coarse material. Taking into account all of the
factors affecting the SCMP, if the Joint Venture had not offset all of
the revenues (through the second quarter 1997 - $576,680; second quarter
1996 - $393,098) from the gold sales by reducing the advances to the
Joint Venture, the results would have reflected a nominal profit.
<PAGE>
This production of gold broadens the Company's objectives and now enables
the Company to commence a complementary operation while continuing its
endeavor to obtain sufficient funds for the SSGM open-pit, heap-leach
operation which is its major and original goal and presently is in the
developmental stage. The Company's main objective and plan, through the
Joint Venture, is to operate at the SSGM site, a moderate tonnage,
low-grade open-pit, heap-leaching, gold-producing mine and it intends to
commence this major gold-mining operation as soon as adequate funding is
in place. Dependent on the grade of gold ore processed, it then
anticipates producing approximately 12,000 ounces of gold from the SCMP
operation and 40,000 ounces of gold from its SSGM open-pit, heap-leaching
operation during the first twelve full operating months. The Joint
Venture continues to conduct an exploration program to develop additional
gold ore reserves at the SSGM and at the following two other mines: the
San Felipe-El Potosi, and its extension, the El Capulin Mine, and the
Hormiguero Mine; all located in El Salvador.
Since the Joint Venture commenced producing gold at the SCMP, albeit a
very exiguous operation, and a forerunner of its greater goals, the
Company's revenues, profitability and cash flow will be greatly
influenced by the price of gold. Gold prices fluctuate widely and are
affected by numerous factors which will be beyond the Company's control,
such as, expectations for inflation, the strength of the U.S. dollar,
overproduction of gold, global and regional demand, or political and
economic conditions. The combined effect of these factors is difficult;
perhaps impossible to predict. Should the market price of gold fall
below the Company's production costs and remain at such level for any
sustained period, the Company could experience losses. Under these
circumstances, the Company could choose to suspend operations in order to
minimize losses.
The Company believes that neither it, nor any other competitor, has a
material effect on the precious metal markets and that the price it will
receive for its production is dependent upon world market conditions over
which it has no control.
Results of Operations for the Second Quarter Ended September 30, 1997
Compared to September 30, 1996
For the three months ended September 30, 1997, the total revenues
amounted to $557,978 compared to revenues of $401,758 for the same period
in 1996. For the six month period, the total revenues for September 30,
1997 are $1,071,157 compared to $774,971 for the same 1996 period. The
increase in revenues resulted primarily from interest charged to the
Joint Venture.
Interest is being charged to the Joint Venture on advances made to it.
Through the second quarter of 1997, the interest charged to the Joint
Venture by the Company was $1,025,025 compared to $732,937 for the same
period in 1996, for an increase of $292,088 (40%) which results from the
advances to the Joint Venture being increased to $17,630,857 (1997) from
$15,103,501 (1996), for a total increase of $2,527,356 or 17%.
The campground operating and general and administrative expenses through
the second quarter period ended September 30, 1997, were $51,613
compared to $39,812 for the same 1996 period, reflecting an increase of
approximately 30%.
Interest expense through the second quarter (1997) amounted to $307,096
compared to $264,519 for the same 1996 period for an increase of $42,577
(16%) and was due to an increase in the notes payable from $3,631,452
(1996) to $4,451,266 (1997) or a 22.6% increase.
<PAGE>
The net profit through the period ended September 30, 1997, was $712,448
compared to a net profit for the same period ended September 30, 1996 of
$470,640, or an increase of $241,808 (51%).
Almost all of the costs and expenses incurred by the Company are
allocated and charged to the Joint Venture. The Joint Venture
capitalizes all of these costs and expenses and will continue to do so
until such time as it resumes its gold mine operation at its full
production capacity. At the time production commences, these capitalized
costs will be charged as an expense based on a per unit basis. If the
prospect of gold production becomes unlikely, all of these costs will be
written off in the year that this occurs.
Liquidity and Capital Resources
The Company continues to be cognizant of its cash liquidity until it is
able to produce adequate profits from its gold production or if it
reduces its exploration activities. It will attempt to obtain
sufficient funds to assist the Joint Venture in placing the SSGM into an
expanded production, however the anticipated SCMP profits (unless
accumulated over a period of time) will not be sufficient to meet the
SSGM capital and the other mining exploration needs. In order to
continue obtaining funds to conduct the Joint Venture's exploration,
exploitation, development, expansion programs, and the production of gold
from the SSGM open-pit, heap-leaching operation, it may be necessary
for the Company to obtain funds from other sources. The Company may be
required to borrow funds by issuing open-ended, secured, on-demand or
unsecured promissory notes or by selling its shares to its directors,
officers and other interested investors or by entering into a joint
venture with other companies.
During the past, the Joint Venture was engaged in exploration,
exploitation and development programs designed to increase its gold ore
reserves. The prospects of expanding the gold reserves are positive.
The funds needed by the Joint Venture were obtained from the Company via
net advances: $2,527,356 during this six month period. The Company
believes that these advances significantly contributed to the value of
the SSGM and to the value of its other mining prospects as the results
of the exploratory efforts evidence a potential substantial increase of
gold ore reserves, which add value to the Joint Venture and to the
Company. Throughout the years, the Company was able to obtain sufficient
funds to retrofit the SCMP, to purchase consumable inventory, to purchase
certain hauling and loading equipment, to purchase a crushing system, to
perform a certain amount of diamond drilling on the SSGM, to upgrade and
revamp the SCMP and to use these funds for working capital purposes.
The Company has been able to obtain the funds required for its and the
Joint Venture's undertaking via a debt and equity structure of funding.
Since September 1987, the Company and three of its wholly-owned
subsidiaries advanced a sum of $18,221,122 to the Joint Venture,
exclusive of funds it received from gold sales.
The Company estimates that it will need at least U.S. $13 million to
start a 2,000 ton-per-day open-pit, heap-leaching operation and over time
to increase the production capacity to 6,000 tons per day at the SSGM.
The use of the $13,000,000 proceeds is as follows: $7,000,000 for mining
equipment and a crushing system; $3,689,776 for the processing equipment
and site and infrastructure costs; and $2,310,224 for the working
capital.
<PAGE>
Advances to the Joint Venture
Advances to the Joint Venture during the Company's first six months ended
September 30, 1997 were derived from the sources, including related
parties as follows:
Funding Sources
From
----
Related Other
Parties Sources Total
-------- ---------- ----------
Change in current assets $ $ 25,748 $ 25,748
Accounts payable & accruals etc. 346,390 235,064 581,454
Notes payable 325,358 17,570 342,928
Equity 933 236,778 237,711
Net income 712,448 712,448
-------- ---------- ----------
Totals $672,681 $1,227,608 $1,900,289
Change in cash & cash equivalents 627,067 627,067
-------- ---------- ----------
Advances to the Joint Venture $672,681 $1,854,675 $2,527,356
======== ========== ==========
Therefore, the Company continues to rely on its directors, officers,
related parties and others for its funding needs. The Company believes
that it will be able to obtain such short-term funds as are required from
the same sources as it has in the past. In turn, then it can advance the
funds required by the Joint Venture to continue the exploration,
exploitation and development of the SSGM, and the other exploration
prospects, for the operation of SCMP and for other necessary Company
expenditures. Anticipated profits from the SCMP gold production provide
a limited amount of cash for corporate purposes. It further believes
that the funding needed to proceed with the continued exploration of the
three exploration targets for the purpose of increasing its gold ore
reserves should be $8 million. These programs will involve airborne
geophysics, stream chemistry, geological mapping trenching and drilling.
The Joint Venture believes that it may be able to joint venture these
exploration costs with other mining companies.
From September 1987 through September 30, 1997, the Company has advanced
to the Joint Venture, the sum of $17,630,857 and three of the Company's
wholly-owned subsidiaries have advanced the sum of $590,265, for a total
of $18,221,122. The funds advanced to the Joint Venture were used
primarily for the exploration, exploitation, and development of the SSGM,
for the construction of the Joint Venture laboratory facilities on real
estate owned by the Company near the SSGM site, for the operation of the
laboratory, for the purchase of a 200-ton per day used SCMP precious
metals' cyanide leaching mill and plant, for the retrofitting, repair,
modernization and expansion of its SCMP facilities, for consumable
inventory, for working capital to commence the production of gold, for
exploration costs for the San Felipe-El Potosi Mine, and its extension,
the El Capulin Mine, the Modesto Mine, the Montemayor Mine and the
Hormiguero Mine, for SSGM infrastructure, including rewiring and
repairing about two miles of the Company's electric lines to provide
electrical service, for the purchase of equipment, laboratory chemicals,
and supplies, for parts and supply inventory, for the maintenance of the
Company-owned dam and reservoir, for extensive road extension and
preservation, for its participation in the construction of a community
bridge, for community telephone building and facilities, for the purchase
and advance lease payment of the real estate on the Modesto Mine, for the
purchase of a crushing system, for diamond drilling at the SSGM, for a
community place of worship, and many other related needs.
<PAGE>
SCMP Operations, SSGM & Other Mine Exploration
Items 1 and 2 of this report describe the Company's current activities
and status. The Company, through its Joint Venture, has reduced its
advances to the Company from its sale of gold, which through September
30, 1997 amounted to $2,726,680, therefore, the advances reported are
after deducting these gold sale proceeds. Presently the Company believes
that the additional equipment needed for the SCMP production expansion
would permit it to reach its goal of processing up to 400 tons of virgin
ore each day of operation. In the event the Joint Venture's goals are
reached, then the profits and cash flow should provide funds that could
be used to commence the SSGM open-pit, heap-leaching operation. The
Company estimates that it will need at least U.S. $13 million to start a
2,000 ton-per-day open-pit, heap-leaching operation and over time to
increase the production capacity to 6,000 tons per day at the SSGM. The
profit and cash flow projections reflect that the invested capital could
be recovered during the first 18 months of full production. It further
believes that it should be able to raise adequate funds (approximately $3
million) to proceed with its goals which include the SCMP expansion, the
installation of its crushing system, and to have adequate working
capital. During the last fiscal quarter ended March 31, 1997, the
Company did raise the sum of $2.5 million by issuing Series A
Convertible Preferred Stock and the placement of additional equity
securities.
Employees
The Joint Venture employs approximately 318 full-time persons from El
Salvador (up to 325 persons, including part-time employees) to perform
its exploration, exploitation, and development programs; to produce gold
from its SCMP facilities; and to handle the administration of its
activities. None of these employees are covered by any collective
bargaining agreements. It has developed a continuous harmonious
relationship with its employees. It believes that the Joint Venture is
the largest single non-agricultural employer in El Salvador's Eastern
Zone. Also, the Company employs approximately four persons (plus
part-time help) in the United States.
Insurance
The Joint Venture has in existence insurance through an El Salvador
insurance company with the following general coverage: general
liability, vehicle liability and extended coverage, fire, explosion,
hurricane, cyclone, tornado, windstorm, hail, flood, storm, earthquake,
tremor or volcanic eruption, politically-motivated violence, terrorism,
strikes, work stoppages, riots, uprisings, malicious acts, vandalism, and
related acts. As additional equipment and assets are acquired or
improvements are made, the insurance coverage is increased accordingly.
Related Party Loans, Obligations and Transactions
The related party transactions are included in detail in the Notes to the
Consolidated Financial Statements.
Efforts to Obtain Capital
Since the concession was granted, and through the present time,
substantial effort is exercised in securing funding through various
sources, all with the purpose to resume and expand the operations of the
SCMP and SSGM and to continue the exploration of its other mining
prospects. The mining business is very capital intensive.
The Company, Sanseb, and the Joint Venture consider the past political
situation in the Republic of El Salvador to have been unstable, and
believe that the final peace declaration on December 16, 1992, has put an
end to war. Presently, interested investors continue to be apprehensive
and skeptical about the political status of the Republic of El Salvador
and therefore continue to be hesitant to invest the funds required.
However, during the first six months of this fiscal year, the Company was
able to invest a gross sum of $3,104,036 which was reduced by the
$576,680 received from the sale of gold proceeds and reflected a net
investment of $2,527,356 into the El Salvador operations. This includes
allocation of the Company's expenditures. The Company believes that it
will be able to obtain adequate financing from the same sources as in the
past to conduct the present operations during the fiscal year ending
March 31, 1998.
<PAGE>
Item 1. Legal Proceedings
There is no adverse litigation that could materially affect the
Company.
Item 2. Changes in Securities
Reference is made to the financial statements which explain the
common shares issued and to be issued.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On September 26, 1997, the Company held its annual meeting of
shareholders. The following three items were voted upon by the
shareholders at the meeting:
Proposal I was the election of one Class I Director of the
Company: Edward A. Machulak, for a term of three years expiring
at the annual meeting of shareholders to be held in 2000. The
proposal electing this Director passed with votes of 8,831,471
"for" and 82,120 "withheld authority" respectively.
Proposal II was to ratify the appointment of Bruce M. Redlin,
C.P.A. as the Company's independent public accountants for its
fiscal year ended March 31, 1998. The proposal passed with
votes of 8,864,724 "for"; 30,312 "against"; and 18,555
"abstaining."
Proposal from the floor was to ratify the acts of the Directors
and Officers, including all related party transactions. This
proposal passed with votes of 8,913,591 "for"; and none
"against."
Item 5. Other Information
None.
Item 6. Reports on Form 8-K
There were no reports on Form 8-K filed during the second
quarter period ended September 30, 1997.
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant/Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMERCE GROUP CORP.
Registrant/Company
/s/ Edward L. Machulak
___________________________________________
Date: November 1, 1997 Edward L. Machulak
President, Chief Executive, Operating and
Financial Officer and Treasurer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
March 31, 1997 Financial Statement is from an audited financial statement.
June 30, 1997 Financial Statement is unaudited.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR 6-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997 MAR-31-1998 MAR-31-1997
<PERIOD-END> SEP-30-1997 MAR-31-1997 SEP-30-1997 SEP-30-1996
<CASH> 345,889<F1> 976,740<F1> 0
0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 25,325,059<F2> 22,822,508<F2> 0
0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 1,270,927<F3> 1,268,086 0
0
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 0 0 0 0
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 26,941,875 25,067,334 0 0
<CURRENT-LIABILITIES> 6,783,497 5,859,115 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 1,515,000 0 0
<COMMON> 1,029,917 919,304 0 0
<OTHER-SE> 19,128,461 16,773,915 0 0
<TOTAL-LIABILITY-AND-EQUITY> 26,941,875 25,067,334 0 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 0 0 1,071,157 774,971
<CGS> 0 0 0 0
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 0 0 51,613 39,812
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 307,096 264,519
<INCOME-PRETAX> 0 0 712,448 470,640
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 0 0 712,448 470,640
<EPS-PRIMARY> 0 0 .069 .059
<EPS-DILUTED> 0 0 .059 .058
<FN>
<F1>Includes investments and prepaid items.
<F2>Accounts receivable, advances and investment in Joint Venture.
<F3>Including real estate held for sale.
</FN>
</TABLE>
