UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
Commission File Number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 39-6050862
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Shares $0.10 par value Boston Stock Exchange
National Association of Security
Dealers Automated Systems (NASDAQ)
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X).
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The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the quote of the NASDAQ Small Cap Issue on May 15, 1996, was
approximately $ 15,216,165.
Common shares outstanding as of March 31, 1996, were 7,792,209.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporated by reference from the registrant's definitive Proxy
Statement for its Annual Meeting of Shareholders to be filed, pursuant to
Regulation 14A, no later than 120 days after the close of the registrant's
fiscal year.
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COMMERCE GROUP CORP.
1996 FORM 10-K ANNUAL REPORT
Fiscal Year Ended March 31, 1996
TABLE OF CONTENTS
PART I
Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . 41
Item 4. Submission of Matters to a Vote of Security Holders. . 41
Item 4(a). Executive Officers of the Company . . . . . . . . . . 41
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholders'Matters. . . . . . . . . . . . . . . . . 43
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . 44
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 44
Item 8. Financial Statements and Supplementary Data. . . . . . 50
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . 70
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PART III
Item 10. Directors and Executive Officers of the Registrant . . 70
Item 11. Management Remuneration and Transactions. . . . . . . 70
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . 70
Item 13. Certain Relationships and Related Transactions . . . . 70
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . 71
The Company will furnish a copy of any exhibit filed as a part of this report to
any shareholder of record upon receipt of a written request from such person and
payment of the Company's reasonable expenses for furnishing such exhibit.
Requests should be made to the Assistant Secretary of the Company at the address
set forth on the cover page of this report.
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PART I
Item 1. Business
Introduction
Commerce Group Corp. ("Commerce," the "Company," and the "Registrant") is a
developmental stage company based in Milwaukee, Wisconsin, primarily engaged in
the business of developing mines and producing gold in the Republic of El
Salvador, Central America, through its Commerce/Sanseb Joint Venture ("Joint
Venture"). Commerce holds a nearly 100% interest (detailed below) in the San
Sebastian Gold Mine ("SSGM") and is exploring four other potential gold
prospects located in El Salvador. There are approximately 1.7 million ounces of
proven gold ore reserves at the SSGM, and at two of the other El
Salvador gold mines. Currently and for all financial statement periods presented
herein, SSGM is the only one of the Company's properties which has generated
revenues, although there are strong initial indications of gold ore present at
the other sites.
Commerce is currently producing gold at a facility referred to in this report as
the San Cristobal Mill and Plant ("SCMP") by
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processing tailings from the SSGM. These tailings are waste material left as the
by-product of past mining operations at the SSGM. The SCMP is located
approximately 13 miles from the SSGM. Commerce acquired this facility on
February 23, 1993, and thereafter made substantial renovations and modifications
to the plant and equipment before and after placing this facility in operation.
Production began on March 31, 1995, and during the fiscal year ending March 31,
1996, 5,993 ounces of bullion containing 3,161 ounces of gold and 1,489 ounces
of silver were produced at this facility from these tailings. Revenues from this
production were used primarily to fund further exploration of virgin ore
reserves at the SSGM, to fund the development of the four other mining
prospects, and to fund improvements at the SCMP.
Commerce's current business plan is to secure sufficient capital to
substantially increase its production of gold to at least 40,000 ounces per year
and to develop additional gold ore reserves. The Company expects to increase
production by developing an open-pit mine and a heap-leach operation on site at
the SSGM and by acquiring additional mining equipment which will permit it to
process virgin ore at the SCMP. The heap-leach operation will have the
capability of producing (through processing a higher volume of ore)
significantly more gold than could be produced at the SCMP, which has a present
maximum capacity of 400 tons per day. Commerce will also continue to drill test
holes at previously unexplored areas at the site of the SSGM and at its four
other potential mining prospects.
Aside from its mining operations, Commerce independently and through its
partially and wholly-owned subsidiaries conducts other business activities,
which at present are substantially less significant than its gold production and
exploration in El Salvador: (1) land acquisition and real estate development
through its wholly-owned subsidiaries, San Luis Estates, Inc. ("SLE") and
Universal Developers, Inc. ("UDI"); (2) real estate sales, through its
wholly-owned subsidiary, Homespan Realty Co., Inc. ("Homespan"); (3) the
operation of a 331-acre campground known as Standing Rock Campground, which is
owned by Homespan and operated by the Company; and (4) advertising, through its
wholly-owned subsidiary, Piccadilly Advertising Agency, Inc. ("Piccadilly").
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Commerce was incorporated in Wisconsin in September 1962, and it
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merged into a Delaware corporation in 1971. Its common shares have been publicly
traded since 1968. Commerce acquired 82 1/2% of the authorized and issued shares
of San Sebastian Gold Mines, Inc. ("Sanseb"), a Nevada corporation. The balance
of Sanseb's shares are held by approximately 200 unrelated shareholders. From
1969 forward, Commerce has provided substantially all of the capital required to
develop a mining operation at the SSGM, to fund exploration, and to acquire and
refurbish the SCMP. On September 22, 1987, Commerce and Sanseb entered into a
joint venture agreement (named the "Commerce/Sanseb Joint Venture" and sometimes
referred to herein as the "Joint Venture" or "Comseb") to formalize the
relationship between Commerce and Sanseb with respect to the mining venture and
to divide profits commensurately with Commerce's substantial investment. The
terms of this agreement authorize Commerce to supervise and control all of the
business affairs of the Joint Venture. Under this agreement 90% of the net
pre-tax profits of the Joint Venture will be distributed to Commerce and 10% to
Sanseb, and because Commerce owns 82 1/2% of the authorized and issued shares of
Sanseb, Commerce in effect has over 98% interest in the activities of the Joint
Venture.
The Joint Venture leases the SSGM from a 52%-owned subsidiary, Mineral San
Sebastian, S.A. de C.V. ("Misanse"), an El Salvador corporation. Although
Misanse owns the real estate comprising the site of the SSGM, the lease
agreement grants Comseb the right to all gold produced in exchange for a 5%
royalty over a term of 25 years beginning on the first day gold is produced,
which Comseb may, at its option, extend for an additional 25 years. Because
Commerce owns 52% of Misanse, Comseb in effect pays a royalty amounting to less
than 2 1/2% of its gold production to parties other than its own shareholders.
The Joint Venture is registered as an operating entity to do business in the
State of Wisconsin, U.S.A. and in the Republic of El Salvador, Central America.
Under the Joint Venture Agreement, Commerce is authorized to sign agreements on
behalf of the Joint Venture.
As of March 31, 1996, the total investment in the El Salvador mining projects by
Commerce, three of Commerce's wholly-owned subsidiaries, Sanseb, and the Joint
Venture amounted to $36,318,848. The profitability and viability of the Joint
Venture is dependent upon, not only the price of gold in the world market (which
can be unstable), but also upon the political stability of El Salvador and
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the availability of adequate funding for either the SCMP operation or the SSGM
open-pit, heap-leaching operation or for the four other exploration projects.
The following chart illustrates the ownership of the Company's subsidiaries and
joint ventures.
Commerce Group Corp., a Delaware corporation ("Company")
1. 82.5% Subsidiary, San Sebastian Gold Mines, Inc. ("Sanseb").
Nevada
corporation operates Joint Venture, under which arrangement
Company receives
90% of pre-tax profits and SanSeb receives 10% [Effective
economic interest in
Joint Venture is 98%].
2. 52% Subsidiary, Mineral San Sebastian, SA de CV. El Salvador
corporation -
owns the SSGM and leases to Sanseb for 25 years, plus 25 year
extension, for
50% of gold production.
3. 100% Subsidiary, San Luis Estates, Inc., Colorado corporation,
developer of 7,000
areas of land in Costella County, Colorado.
4. 100% Susbsidiary, Universal Developers, Inc., Wisconsin
corporation, inactive.
5. 100% Subsidiary, Homespan Realty Co., Inc., a Wisconsin
corporation, owns and
operates a 331-acre campground in Missouri.
6. 100% Subsidiary, Piccadilly Advertising Agency, Inc.,
Wisconsin corporation,
provides advertising services only to the Company and its
subsidiaries.
Certain specialized mining terms are defined herein under "Glossary" below.
The Mining Properties
The Company, through the Comseb Joint Venture, is currently engaged in the
mining activities at five separate sites in the country of El Salvador. From its
first involvement with Sanseb in 1968 and until 1993, all of the Company's
exploration and development of its mining activities took place at one site, the
San Sebastian Gold Mine. On February 23, 1993, the Company acquired the San
Cristobal Mill and Plant, which is located approximately 13 miles from the SSGM.
Subsequently the Company acquired certain exploration rights to sites known as
the Modesto (August, 1993), the San Felipe-El Potosi (in September 1993), the
Hormiguero (in September, 1993) and the Montemayor (in March, 1995). The Company
maintains a business office in San Miguel, El Salvador, and employs over 300
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professionals and skilled, semi-skilled, mill personnel and miners
at the sites of its operations.
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At the current stage of the exploration and development, the Company's
geologists have defined the following gold reserves:
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Contained
Tons Grade Ounces
1. San Sebastian Gold Mine
(a) Tailings 250,000 0.080 20,000
(b) Dumps waste (average grade) 960,000 0.130 124,800
(c) Stope fill (estimated) 1,000,000 0.340 340,000
(d) Open pit--virgin ore 13,400,000 0.087 1,165,800
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15,610,000 1,650,600
2. San Felipe-El Potosi
(a) Tailings 185,000 0.060 11,100
3. Modesto Mine
(a) Virgin ore (proven and
probable) 80,000 0.235 18,800
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Total: 15,875,000 1,680,500
In management's opinion, the Company's ongoing exploration and development at
the five sites will substantially increase the Company's proven ore reserves.
The San Sebastian Gold Mine
The SSGM is situated on a mountainous tract of land consisting of approximately
1,470 acres of explored and unexplored mining prospects. The SSGM is located
approximately three miles off of the Pan American Highway, northwest of the City
of Santa Rosa de Lima, El Salvador. The tract is typical of the numerous
volcanic mountains of the coast range of southeastern El Salvador. The
topography is mountainous with elevations ranging from 300 to 1,500 feet above
sea level. The mountain slopes are steep, the gulches are well defined, and the
drainage is excellent.
The tailings, dump material, and stope fill at the SSGM, are the by-products of
past mining operations. The tailings are the residue of higher grade ore once
milled and processed to recover the then economically feasible fraction of gold
present in the material. The dump material is actually gold ore which has been
mined in the search for higher grades of gold ore and piled to the side of past
excavations. The stope fill was primarily used to fill the voids in the
underground workings of the past SSGM mining activities. Virgin gold ore, as the
term is used in this report, is gold ore which is
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in the open pit and readily available for processing; it also includes the
undeveloped underground gold ore.
Virgin gold ore at the SSGM represents the majority of the material (13.4
million tons) included in the Company's reserves. The Company plans to use
open-pit mining and truck the gold ore to one or more heap-leaching pads
developed on site at the SSGM site. The use of open-pit mining and heap-leaching
techniques will enable the Company to process a higher volume of gold ore than
can be processed at the SCMP or through the type of tunnelling operations used
by the Company in the past. The Company plans to continue to operate the SCMP
after developing a leach-pad operation at the SSGM, using the facility to
process the higher grade ore it encounters in the course of mining at the SSGM.
The milling operation at the SCMP is expected to return a higher rate of gold
recovery than can be expected from heap-leaching techniques.
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To date, production has focused on the tailings. There are approximately 250,000
tons of tailings available for processing, and these tailings have shown a
consistent assay average grade of at least 0.10 ounces of gold per ton. In an
article published by Mining & Scientific Press, dated September 8, 1917,
entitled "Geology of the San Sebastian Mine, El Salvador," it was observed: "The
tailings from the mill contain approximately 0.10 oz. gold regardless of the
value of the heading assay. Gold telluride has occasionally been found, but even
when the ore is roasted prior to cyaniding, the tailings still contain about
0.10 oz. gold." The first year's production has shown a lack of grade
consistency, therefore, the grade is unbalanced and greatly varies.
The 960,000 tons of dump material present at the SSGM site has grades ranging
from 0.082 to 0.178 ounces of gold per ton. An analysis of the stope fill was
made by the Company's consulting geologist who has confirmed that about 7% of
the stope fill had been removed and processed during the 1973-1978 period. The
grade of the stope fill averages 0.34 ounces of gold per ton. It is estimated
that there are about one million tons available for treatment from the
underground operations. It is necessary to remove the material which has caved
in the adits to reach the stope fill areas.
All residue from the contemplated operations will be stockpiled for potential
future processing dependent upon the price of gold,
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improvements in technology, and the depletion of better grading
material.
There is good access to the SSGM. The City of Santa Rosa de Lima (3 miles from
the SSGM) is a substantial trading center. The SSGM is approximately 30 miles
from San Miguel, which is El Salvador's second largest city, and approximately
108 miles southeast of El Salvador's capital city, San Salvador. SSGM is also
approximately 26 miles from the City of La Union which has port and railroad
facilities. Several major commercial airlines provide daily flights to San
Salvador. An airline commuter service provides daily scheduled flights to the
cities of Santa Rosa de Lima, San Miguel, and La Union.
The Company (through the Comseb Joint Venture) leases the SSGM from
Mineral San Sebastian, S. A. ("Misanse"), an El Salvadoran
corporation. The Company owns 52% of the total of Misanse's issued
and outstanding shares. The balance of the shares are owned by
about 100 El Salvador, Central American and United States' citizens.
(Reference is made to Note 6 of the financial statements for related
party interests.)
Misanse Mining Lease
On July 28, 1975, an amended lease agreement between Misanse as lessor and
Sanseb as tenant was executed by the parties giving the tenant all the
possessions and mining rights that pertain to the SSGM as well as other claims
that may already have or could be claimed in the future within the 1,470 acre
plat of land encompassing the SSGM. The lease was further amended to run
concurrently with the concession described herein and may be extended for one or
more equal periods 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 to equal 5% of the gross gold
production revenues obtained from the leased SSGM and further commits itself to
maintain production taking into consideration market, political, and other
conditions. In no case will the rent be less than 1,800 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 its former mining employees and Misanse
shareholders.
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The lease is freely assignable by the Joint Venture without notice to Misanse.
The lease may also be cancelled by the Joint Venture on thirty day's notice to
Misanse and thereafter all legal obligations thereunder shall cease.
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In the event that new extended bodies of ore are discovered, Misanse may be
required to make proper claim for them through the Ministry of Economy of El
Salvador's Department of Energy, Mines and Hydrocarbons, and include such claims
in the present lease. Such addition to the lease is required to be made without
additional rental payment, except that the expenses for procuring the concession
shall be borne by the Joint Venture.
Misanse Concession Agreement
On July 23, 1987, in an official ceremony in the City of Santa Rosa de Lima, El
Salvador, President Jose Napoleon Duarte of the Republic of El Salvador,
presented the "concession" which is the official decree granting rights to
extract gold ore from the SSGM. In order to obtain the mining concession from
the Government of El Salvador, on December 22, 1986, the Company and Sanseb
entered into an agreement (incorporated by reference to Exhibit I of the
Company's S.E.C. Form 10-K filed for the period ended March 31, 1988) with
Misanse as follows:
Under the terms of the concession and agreement referred to in the concession,
the Joint Venture has agreed to the following:
(a) The Joint Venture will pay to approximately 270 former El
Salvador employees pursuant to a settlement agreement dated
June, 1985, as follows: A sum of approximately 500,000 colones
(approximately U.S. $57,208 at the current rate of exchange)
in three (3) installments contingent upon the production and
sale of gold, to wit: one-third is to be paid from the sale of
the first production of gold; one-third is to be paid one (1)
year thereafter; and one-third is to be paid two (2) years
after the first payment; a sum of 205,214 colones has been paid
which reduces the total amount due as of March 31, 1996, to
294,786 colones or U.S. $33,728.
(b) Preference is to be given to the former Sanseb employees and
Misanse shareholders in filling any job vacancies, providing
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that there is a need for their skills or services.
(c) From the SSGM profits earned, 5% of the gross wages paid to the full-time
employees shall be paid into a newly created pension fund for the benefit
of the employees.
(d) From the SSGM 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.
(e) 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 5% of its pre-tax profits, but, in
any event, not less than a minimum amount equal to 5% of 8% of the total
assets.
(f) Pursuant to an agreement with the El Salvador Minister of
Economy, at the request of the Company 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 in
converting the El Salvador colones into United States'
currency. The Company, as a foreign investor, may hold dollar
accounts in El Salvador banks and may use these accounts to
obtain local financing.
(g) 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.
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(h) 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
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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.
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 import duty, fiscal and municipal taxes 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 Joint Venture'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 bond in an amount of the Custom's duty
until a final decision is made. It is charging the Company the 10% added value
tax (as of July 1995, 13%) which is refundable to the extent of 6% of the value
of the Joint Venture's exports. The Joint Venture plans to export all of its
gold.
Misanse Mineral Concession-Government of El Salvador
On January 27, 1987, the Government granted a right to the SSGM 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 Joint Venture.
On July 23, 1987, the Government of El Salvador delivered and granted to
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. Under
the concession and applicable El Salvador law, the Joint Venture has the right
to export said minerals for five years beginning with the first day of
production without imposition of mineral or export taxes. It also has the right
to import free of duty, equipment and all other items necessary to operate the
SSGM.
The concession, or the right to mine gold, is subject to cancellation by the
Government of El Salvador if there is an abandonment of the property such as if
there is no demonstration that the concession holder intends to carry out
exploration, exploitation, or development of the property in good faith during a
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six-month period after the concession is granted or if the work of exploration,
exploitation or development is suspended for six months or if the exploration,
exploitation or development is reduced to an extent that the effort used cannot
be regarded as being reasonable in relation to the importance and resources of
the mining property.
In the event of public disaster or disturbance of the public order, all mines in
the given locality shall be regarded as being in exploration, exploitation or
development without the necessity of any special formality. Such event did occur
when, on November 11, 1989, the guerrillas attempted to seize the Country of El
Salvador. On January 16, 1992, a peace accord and cease-fire agreement was
entered into by the Government of El Salvador and its opposition. The transition
from war to peace was effected without any serious occurrences and final peace
was declared on December 15, 1992, with a three-year period to comply with the
terms of the peace pact.
The work of a concession may be suspended by permission of a competent authority
for a reasonable period not to exceed one year. An exception would be in case of
acts of God or force majeure in which case the period may be extended
successively as long as such reasons exist.
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A concession may be fortified for lack of security measure, or if its condition
would endanger the lives of workers, or for failure to comply with provisions of
the Mining Code or other provisions enacted with respect to any aspect of
exploitation in the mining industry, unless corrected within a reasonable
period.
The Complimentary Mining Law states that, in addition to the cases mentioned in
the El Salvador Mining Code, abandonment of the mine will be presumed if after a
significant reduction or exhaustion of the veins, beds, or other formation in
exploitation, three months is allowed to pass without adequate efforts either to
exploit other deposits existing in the concession or to discover new deposits
suitable for exploitation.
By Article 22 of the El Salvador Mining Code, a concession may be granted for an
unlimited time, as long as the concession holder complies with the conditions
imposed by law. The Joint Venture's concession is for a period of twenty-five
years, beginning on the first day of production, and with a right to extend it
for an
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additional twenty-five years.
In addition, the El Salvador Constitution contains certain provisions which,
although not referring specifically to mining, are applicable thereto. Article
138, for example, prohibits confiscation of property as a penalty or for any
other reasons, but, in the event that any authority violates this prohibition,
the confiscated property is imprescriptible.
During February 1996, and effective 120 days thereafter, the Government of El
Salvador adopted a revised mining law. This law grants longer exploration and
exploitation terms. It also contains a provision that three percent of the gold
receipts will be paid to the Government of El Salvador and an additional one
percent is to be paid to the municipality where the mine is located. There are
other provisions that the Company is reviewing to obtain a clear status of the
mining law.
Proposed Mining, Mill, Heap-Leaching and Exploration Operations
San Cristobal Mill and Plant ("SCMP") Recovery and Processing
Systems
On February 23, 1993, the Company, on behalf of the Joint Venture acquired SCMP,
a precious metals' cyanide leaching mill and plant rated with a capacity of
processing 200 tons per day which utilized the following unit operations:
crushing, grinding, thickening, agitated leaching, counter current decantation
of leach solution, recovery of precious metals by zinc precipitation
(Merrill-Crowe), and direct smelting of precipitates to produce precious metals
as dore and tailings' disposal.
The Company's engineers recommended that this processing system be retrofitted
and converted to process the SSGM tailings by a cyanidation carbon-in-leach
(CIL) system to recover the residual cyanide soluble precious metals. The
retrofitting has been completed and the first pouring of gold on a test basis
took place on March 31, 1995. The SCMP is being operated on a "start-up and
build-up" to a gradual full capacity system during this trial and modification
period.
Although the Joint Venture owns the mill, plant and related equipment, it does
not own the land and certain buildings. Since February 23, 1993, the Joint
Venture attempted to either lease or
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purchase this real estate from an Agency of the El Salvador Government,
Corporacion Salvadorena de Inversiones ("Corsain"). On November 12, 1993, the
Joint Venture entered into an agreement with Corsain to lease approximately 166
acres of land and the buildings for a period of ten years. The annual rental
charge is U.S. $11,500 payable in advance and subject to annual increases based
on the United States' percentage rate of inflation. Also as agreed, an $11,500
security deposit was required and this deposit is subject to an annual increase
based on the U.S. inflation rate. The premises are strategically located to
process gold ore from three of the four other mining prospects that are in the
exploration stage.
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SCMP Project Operating Plan
Production Schedule
Preproduction development, consisting primarily of expansive road and site
improvements to the mine and mill sites, and delivery of tailings' reclaim and
expansive mill equipment modification, has taken place during the last year.
Initial production is from the SSGM tailings. After that tailings' resource is
exhausted, tailings will come from the San Felipe-El Potosi Mine (Potosi), or in
the event that crushing and grinding equipment is acquired, then the Joint
Venture plans to process the higher grade ore from the SSGM.
The Joint Venture dedicated extraordinary efforts to attain its production
goals, but there were delays in establishing the SCMP in a mode to accomplish
its expectations. Substantial modifications had to take place and a completely
new force of labor had to be seasoned to operate the SCMP. An unusual rainy
aftermath of the hurricane season caused hauling problems and many metallurgical
differences were encountered due to the unbalance of the tailings' grade and
consistency; in the handling of the tailings, coarse material separation was
encountered creating difficulties in achieving its production goal. Other
related factors delayed the Joint Venture from realizing its goals.
Nevertheless, the operations, if recorded on a profit or loss basis, would have
reflected a nominal profit. It is expected that the ongoing technical changes
should activate the increase of the profits to meet the projections.
The other sources of gold ore from the SSGM to be used at the SCMP
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operation will be obtained from the stope fill or higher grade gold ore after
obtaining access through the underground workings from the main ore body. This
gold ore will have to be crushed and pulverized which increases the cost, but
then the yield is expected to be at a 92% recovery. The income from the higher
recovery of gold ore will be substantially more than the greater cost involved,
providing that the world gold market price does not decline below $200 an ounce.
SCMP Continued Operating Plans
Tailings from SSGM and/or Potosi are reclaimed utilizing a rubber-tired wheel
loader and loaded into 20-25 ton trucks for transport to the SCMP. Trucks then
haul the tailings approximately 15 miles from the SSGM or approximately 30 miles
from Potosi to the SCMP. Mine employees are responsible for tailings' reclaim
activities including determination of areas to be reclaimed, truck and loader
operating and maintenance, and head sampling and sample analysis.
The tailings are received at the SCMP where they are weighed, logged, and
sampled. Weighing is performed utilizing a conveyor belt scale and/or a truck
scale located on the SCMP site. The tailings are then unloaded at the SCMP site
and stockpiled. An area was developed to allow stockpiling of more than 15,000
tons on the SCMP site.
SSGM tailings are transferred from the stockpile to a feed bin utilizing a
rubber-tired wheel loader. The feed bin has a capacity of approximately 10 cubic
yards (13.5 tons). Feed is fed at a controlled rate onto a conveyor, which
transfers the feed to the next part of the process. The conveyor includes a belt
scale (weightometer) for instantaneous determination of feed rate and totalizing
of tonnage fed to the process.
<PAGE>
The conveyor discharges into a chute which transports the material into the ball
mill which serves as a repulper. Water is added to the solids in the ball mill
to a pulp density of approximately 40% to 50% solids by weight, and lime is
added to raise the alkalinity of the pulp to approximately PH 10.5. The repulp
tank includes a mixing agitator for suspension and conditioning of the slurry.
The slurry is transferred from the repulp tank to the leaching process utilizing
a slurry transfer pump.
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Slurry transferred from the repulp tank is directed to a 20 mesh static sieve
bend screen to remove any oversize or trash material. The slurry then enters the
first of six agitated leach tanks utilized for cyanide leaching of the pulp.
This provides for approximately 24 hours leach retention time. A seventh tank is
maintained in operable condition as a standby unit. Liquid cyanide is added to
the first leach tank to dissolve the gold.
Precious metals recovery is accomplished by utilizing carbon-in-leach (CIL)
methods where activated carbon is utilized to adsorb the gold from the solution.
Each leach tank is equipped with an air lift pump for inter-stage advancement of
carbon, and an air swept stationary screen for retention of carbon and
downstream gravity transfer of pulp. A 20 mesh carbon safety screen is attached
to the end of the leaching circuit. An air blower provides air for operation of
the air lifts and air sweep on the screens. Pulp loaded with precious metals in
the carbon from the CIL process is passed over a carbon recovery screen where
the carbon is retained and washed, and the pulp is directed back to the CIL
process. The carbon is moved counter-current to the pulp flow in order that the
highest possible gold loadings are obtained and highly active fresh carbon is
maintained in the last leach tanks.
Liquid ferrous sulfate is added to the tailings to destroy any residual cyanide.
Tailings from the CIL process are directed to the tailings' impoundment area
using a slurry transfer pump. Tailings are stored in a tailings' impoundment
area with tailings' water reclaimed as required.
Loaded (gold containing) carbon is transferred from the carbon recovery screen
to the strip and acid wash circuits. The carbon is stripped utilizing
atmospheric Zadra desorption methods, with the resulting pregnant strip solution
reporting to electrowinning, where gold containing sludge is formed, which is
pyrometallurgically refined on-site to dore metal. The carbon is acid washed to
remove detrimental impurities prior to being transferred back to the CIL
circuit.
Reagents (cyanide, lime) are made up in separate agitated mix tanks. The cyanide
mix tank holds up to three days worth of 20% cyanide by weight solution. The
lime mix tank holds up to one eight-hour shifts worth of 20% lime by weight
slurry. The lime is pumped to the repulp tank and CIL process as required for
alkalinity control. The cyanide is pumped to the CIL process and carbon strip
circuit as
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required.
Process water is provided from mine sources and stored in a 40' thickener.
Process water is pumped from the thickener to various locations throughout the
process. If water treatment is required it is done by utilizing the thickener as
a mixing/precipitation device.
Electricity is supplied by local public utilities. In the event power is
discontinued for any reason whatsoever, an emergency generator to produce power
is on site to maintain and take over the process system.
SCMP Personnel
The SCMP employees, during this past year's start-up testing period (including
its own trained security personnel) totals about 144 persons. The SCMP is
operated 24 hours per day, seven days per week and 52 weeks per year.
<PAGE>
SSGM Open-Pit, Heap-Leaching Operation
The Joint Venture has placed the SCMP into operations. It now intends to obtain
a sum of $6 million or more to commence an open-pit, heap-leaching operation at
the SSGM site. An additional $7 million or more is estimated to be required for
the crushing system and mining equipment if the Joint Venture were unable to
lease this equipment. After these funds are obtained, the Joint Venture intends
to start processing gold ore from its open pit at a production level of 2,000
tons per day. During the second year, the production level plans are to expand
production to 3,000 tons per day (the funds for this expansion could be
generated from profits). An increase to process 4,000 tons of gold ore per day
would take place during the third year and another expansion to process 6,000
tons per day would take place at the beginning of the fifth year, and all funds
for this expansion should be available through a combination of earned profits,
borrowing, or other sources. The independent feasibility study and the Company's
Project Summary report comfortably support this program as the estimated
projected production costs are substantially lower than a current $390 per ounce
market price of gold. The total volume of proven gold ore reserves from the
open-pit area amount to 13.4 million tons with an average grade of 0.087 ounces
of gold per ton. With the anticipated
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production volume, there is at least an eight-year supply of gold ore. More gold
ore would be developed during this period of time as it is believed that a
substantial amount of gold ore can be proven.
The leach pad site consisting of approximately 3.7 acres on the SSGM property
was chosen because of the relatively even grade level, the access to water
supply, electric power, roads, telephone service, and because of its close
proximity to the open-pit area.
Gold ore will be crushed to produce stones of a size which will maximize gold
recovery. If required, lime and cement will be added "agglomerated" to such gold
bearing material that will require this process to assist the heap-leaching
operation, in accordance with metallurgical recommendations.
This leach pad will be constructed with a plastic liner sandwiched between
layers of gravel to protect its integrity. On top, the liner will be protected
with a six-foot layer of one-inch gravel comprised of gold-bearing material.
Material to be processed and agglomerated if necessary will, in stages, be
heaped an additional 20 feet on top of this protective layer, and then removed
at the end of the leaching cycle.
Basically, this process involves the placement of material containing gold onto
a "pad" which is impermeable to liquids, sprinkling the "heap" with a
water-based chemical solution which will dissolve the gold as it percolates
through the material, collecting the solution at the bottom of the heap as it
runs off the pad, and then recovering the gold from the solution. The chemical
solution is actually recycled through the heap many times before it is
processed, in order to maximize the recovery of gold and to recycle the
chemicals.
Gold laden cyanide solution will be collected at the base of the pad and then
will be filtered through a series of carbon adsorption columns (a series of
open-topped tanks) where the gold will be drawn out of the solution and into
beds of granular activated carbon. Next, the carbon from the columns will be
washed with acid to strip the gold from the carbon into a more concentrated
solution. Lastly, gold will be removed from this acid solution by electrolysis
(the same process used in gold-plating) first by collecting the gold on steel
wool type cathodes, and then by electrolytically transferring the gold to a
charged metal plate in another acid solution. After their use in processing a
batch of gold, the cyanide and acid
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<PAGE>
solutions, as well as the carbon, will be replenished and recycled to process
the next batch. This procedure is similar to the existing SCMP process.
<PAGE>
Exploration Projects
The Joint Venture is performing the following El Salvador exploration programs:
(1) At the SSGM site which is located approximately two and one-half miles
northwest of the City of Santa Rosa de Lima, Department of La Union, El
Salvador.
(2) At the San Felipe-El Potosi Mine and its extension, the El Capulin Mine,
which are located near the City of Potosi, Department of San Miguel, El
Salvador (approximately 18 miles northwest of the City of San Miguel).
(3) At the Hormiguero Mine which is located about five miles southeast of
the SCMP near the City of Comacaron in the Departments of San Miguel and
Morazan, El Salvador.
(4) At the Modesto Mine which is located near the City of El Paisnal about
19 miles from the Capital City in the Department of San Salvador, El
Salvador.
(5) At the Montemayor Mine which is located about 14 miles northeast of
SCMP, about six miles northwest of SSGM, and two and one-half miles east
of the City of San Francisco Gotera in the Department of Morazan.
All of the above mines were formerly in production and did produce gold and/or
silver. In addition to the channel trenching, test pit holes, and underground
adit openings, the Joint Venture has acquired its own diamond drilling rig to
explore in depth, the above described potential targets. All of the properties
have promising geologic surroundings and alternations, and all have been mined
and produced gold in the past.
Also, the Joint Venture has its own SSGM on-site laboratory with full-time,
trained personnel working three shifts to fire assay the gold ore samples. It
also has two full-time surveying crews
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consisting of ten persons. (Reference is made to Item 2.
Properties for additional detailed information.)
Gold Prices, Sales, Marketing and Competition
Since the Joint Venture is in operation and producing gold on a limited basis,
its revenues, profitability and cash flow will be greatly influenced by the
price of gold. The gold price is unpredictable, can fluctuate widely and is
affected by numerous factors beyond the Company's control, including, but not
limited to, expectations for inflation, the relative strength of the United
States' dollar in relation to other major currencies, political and economic
conditions, and production costs in major gold-producing
regions. The supply and demand for gold also affects the price. The Company has
not and does not expect in the forseeable future to engage in hedging or other
transactions to minimize the risk of fluctuations in gold prices or currencies.
Gold and silver can be sold on numerous markets throughout the world, and the
market price is readily ascertainable for such metal. There are many refiners
and smelters available to process these precious metals. Refined gold and silver
can also be sold to a large number of precious metal dealers on a competitive
basis. The Joint Venture's SCMP operation which produces dore is refined by
Handy & Harman's refinery located in the United States.
The Joint Venture will not be a major gold producer of gold based on the size of
existing gold mining companies. The Company believes no single gold-producing
Company has a large impact to offset either the price or supply of gold in the
world market. There are many companies in the world producing gold. Many of
these companies have substantially greater technical and financial resources
than the Company. The Company believes that the expertise of the Joint Venture's
experienced employees, its low overhead and its projected low cost of production
will allow it to compete effectively and to produce reasonable profits.
To date inflation, currency and interest rate fluctuations have not had a
material impact on the Company or its results of operations.
Environmental Matters
The exploration, development and production processes conducted by the Joint
Venture in the Republic of El Salvador presently are not subject to any
categorical regulations regarding environmental protection.
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The Joint Venture believes that it is in its best interest to use similar
environmental standards as are enforced in the United States regarding safety
precautions, employee health and safety, air quality standards, pollution of
stream and fresh water sources, waste material, odor, noise, dust and other
reasonable environmental protection practices.
Political Environment in El Salvador
The following information is an excerpt from a report entitled,
"U.S. Embassy--San Salvador Country Commercial Guide for the fiscal
year 1995":
"El Salvador's successful two-year peace process recently came to culmination
with peaceful presidential, legislative, and municipal elections, in which the
political party of the ex-guerrillas, the FMLN, participated. Though losing the
presidential election, the FMLN and a coalition of other left of center parties
won 22 seats in the 84-seat Legislative Assembly, becoming the second major
political force in the country. The [1994] presidential election was won by
Armando Calderon Sol, the candidate of the right-of-center Arena party, which
won 39 seats in the Assembly. Arena moderated its right-wing policies during the
administration of outgoing President Alfredo Cristiani, ending the 12-year civil
war as well as greatly liberalizing the economy and reducing corruption.
"El Salvador has an excellent relationship with the United States, solidified by
12 years of close cooperation during the Salvadoran civil war. Leaders of the
FMLN have established close relations with the U.S. government, seeing it as an
honest broker during the peace process. The vast majority of Salvadoran people
also view the U.S. in a favorable light, a sentiment augmented by the fact that
almost a million Salvadorans live in the U.S.
"El Salvador has a Presidential political system, with a unicameral Legislative
Assembly and an independent judiciary dominated by the Supreme Court. Elections
for President are held every five years; for the Assembly and municipalities,
every three years. They were concurrent in 1994. Arena is the strongest
political party in the country, currently controlling the executive, a working
majority in the assembly (with the help of a smaller party), and the vast
majority of municipalities. The FMLN controls the second largest number of seats
in the Assembly and came in second in the first round of the Presidential
election. The center-left Christian
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Democratic Party (PDC) has seen its support slowly erode since controlling the
Presidency and Assembly in the mid-1980s. It still controls, however, eighteen
seats in the new Assembly. There are several other small, insignificant
parties."
Economy Status
The following selected information on El Salvador was obtained from excerpts of
the "Central Intelligence Agency World Fact Book":
"Overview: The agricultural sector accounts for 24% of GDP, employs about 40% of
the labor force, and contributes about 66% to total exports. Coffee is the major
commercial crop, accounting for 45% of export earnings. The manufacturing
sector, based largely on food and beverage processing, accounts for 19% of GDP
and 15% of employment. In 1992-94 the government made substantial progress
toward privatization and deregulation of the economy. Growth in national output
in 1991-94 nearly averaged 5%, exceeding growth in population for the first time
since 1987; and inflation in 1994 of 10% was down from 19% in 1993. National
product:
<PAGE>
"National product: GDP - purchasing power parity - $9.8 billion
(1994 est.)
"National product real growth rate: 5% (1994 est.)
"National product per capita: $1,710 (1994 est.)
"Inflation rate (consumer prices): 10% (1994 est.)
"Unemployment rate: 6.7% (1993)
"Budget:
"revenues: $846 million "expenditures: $890 million,
including capital expenditures of $NA (1992 est.)
"Exports: $823 million (f.o.b., 1994 est.)
"commodities: coffee, sugarcane, shrimp
"partners: US, Guatemala, Costa Rica, Germany
"Imports: $2.1 billion (c.i.f., 1994 est.)
"commodities: raw materials, consumer goods, capital goods
25
<PAGE>
"partners: US, Guatemala, Mexico, Venezuela, Germany
"External debt: $2.6 billion (December 1992)
"Industrial production: growth rate 7.6% (1993)
" . . .
"Industries: food processing, beverages, petroleum, nonmetallic
products, tobacco, chemicals, textiles, furniture
"Agriculture: accounts for 24% of GDP and 40% of labor force
(including fishing and forestry); coffee most important commercial
crop; other products - sugarcane, corn, rice, beans, oilseeds, beef,
dairy products, shrimp; not self-sufficient in food
" . . .
"Economic aid:
"recipient: US commitments, including Ex-Im (FY70-90), $2.95 billion (plus $250
million for 1992-96); Western (non-US) countries, ODA and OOF bilateral
commitments (1970-89), $525 million
"Currency: 1 Salvadoran colon (C) = 100 centavos
"Exchange rates: Salvadoran colones (C) per US$1 - 8.760 (January
1995), 8.750 (1994), 8.670 (1993), 8.4500 (1992), 8.080 (1991),
8.0300 (1990)
"Fiscal year: calendar year"
<PAGE>
Investment Climate in El Salvador
The following information is reproduced from a report prepared by
the U.S. Embassy named, "U.S. Embassy - San Salvador Country
Commercial Guide FY 1996":
"- Openness to Foreign Investment
"The Salvadoran Government is committed to attracting foreign investment.
Companies from the United States, Canada, Germany, Korea, Taiwan, and Mexico
have made investments here with favorable
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<PAGE>
results. The primary legislation governing foreign investment in El Salvador is
the 1990 Export Reactivation Law; and the 1988 Foreign Investment Promotion and
Guarantee law.
"The 1988 Foreign Investment and Promotion Law is a comprehensive statute. To
investors who register with the Ministry of Economy this law provides:
"-Unrestricted remittance of net profits for investors in industrial
activities.
"-Remittance of net profits up to fifty percent of the registered foreign
capital per year for investors in commercial and service activities. In
practice, however, there is free convertibility of capital.
"-Unrestricted remittance of funds obtained from the liquidation of a business
in proportion to the foreign funds invested.
"-Unrestricted remittance of royalties and fees for use of foreign patents,
trademarks, technical assistance and other similar services.
"-Foreign investors may hold dollar accounts in El Salvador and may use these
accounts to obtain local financing.
"...
"Under the Export Reactivation Law of 1990, firms not located in free zones and
exporting less than one hundred percent of their production may apply for tax
rebates of six percent of the FOB value of these exports. However, the paperwork
to obtain this rebate is cumbersome.
"In 1994 the government announced that it was setting up a one-stop office for
foreign investment in the Ministry of Economy, where investors now register
their investments. To date, no concrete steps have been taken towards this end.
The registration process is supposed to be non-discriminatory and is not
considered an impediment to investment.
"It is not necessary to have a local partner in El Salvador. Some
maquila operations are completely foreign-owned. Three
multinational oil companies operate in El Salvador, and two of these
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companies share a small refinery. Two U.S. banks have offices in El
Salvador. The banking law has been modified to encourage other
foreign banks to enter the country. Although foreign investment in
newly-privatized banks is limited, there are no restrictions on
ownership of new banks.
<PAGE>
"Conversion and Transfer Policies
"El Salvador has a freely convertible currency that trades at approximately 8.75
colones per dollar. This currency is buoyed by family remittances of nearly one
billion dollars per year from Salvadorans who reside outside the nation. The
nation's banks and many foreign exchange houses actively trade dollars and
colons. Foreign businesses freely remit profits, repatriate capital, and bring
in capital for additional investments. Banks publish their exchange rates daily
in local newspapers.
"Expropriation and Compensation
"The last case of expropriation began in 1986, when the government nationalized
the assets of CAESS, San Salvador's electric distribution company. Six years
later, shareholders received the first payment of ten million dollars. In March
1993, the government concluded payments of cash and bonds and the case was
settled to the satisfaction of all parties.
"In 1960 the United States and Salvadoran governments signed an investment
guarantee treaty, which guaranteed U.S. investors against losses that could
arise from currency inconvertibility or expropriation. As of July 1995, the US
and El Salvador have nearly completed negotiating a bilateral investment treaty
(BIT) that would encompass all aspects of investment. It has not been signed for
technical reasons.
" . . .
"Political Violence (as it may affect investments)
"El Salvador continues its transition to a peacetime society after 12 years of
civil conflict. There have been few confirmed acts of political violence since
the elections in mid-1994. Although general crime levels are high and are of
concern to the business
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community, we are not aware of political violence specifically aimed at foreign
investors, their businesses or their property.
"Performance Requirements
"El Salvador's investment legislation does not require investors to export
specific amounts, transfer technology, incorporate set levels of local content,
or fulfill other performance criteria.
"Right to Private Ownership and Establishment
"Foreign citizens and private companies can freely establish businesses in El
Salvador. However, foreigners are prohibited from operating small businesses
with start-up capital of less than the equivalent of USD 25,000 dollars. This is
not seen as an impediment to foreign investment, and does not seem to be
strictly enforced. There are several sectors shielded from foreign and local
private investment or competition. The national telephone company (ANTEL), the
water and sewer company (ANDA), and the electric company (CEL) are owned by the
state, but their monopolies are slowly being dismantled. For example, private
power generation is now allowed (although for practical purposes, it must be
sold to CEL for distribution), and a U.S. company has formed a partnership with
ANTEL to operate the country's cellular phone system. Artesanal fishing within
12 miles of the coast is limited to citizens of El Salvador. Commercial fishing
between 12 to 200 miles from the coast can be undertaken by Salvadoran citizens,
foreigners legally residing in El Salvador, or joint ventures legally registered
with the government. Commercial fishing licenses must be obtained from
CENDEPESCA, a government entity. Foreigners may engage in sport fishing without
restriction in any of El Salvador's coastal waters.
" . . .
"Regulatory System (laws and procedures as they pertain to
investment)
<PAGE>
"The laws and policies of El Salvador are relatively transparent and generally
foster competition. Bureaucratic procedures, although cumbersome, have improved
in recent years and are relatively streamline for foreign investors. Sectors
that are still regulated or owned by the state, such as electricity, water and
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telecommunications, are slowly moving towards privatization or de-regulation
that will allow for investment and competition. The superintendent of Banks
supervises the banking system, but interest rates are determined by market
forces. Banking-law reforms have attracted two new foreign banks to the country
in the last year, and several new financial institutions have been established
by Salvadoran investors. Gasoline prices are `controlled' by the government, but
are actually based on an average of U.S. Gulf Coast refinery prices.
"Bilateral Investment Treaties
"The United States and El Salvador signed an investment guarantee treaty in 1960
designed to protect U.S. investors against expropriation or currency
inconvertibility. The United States and El Salvador also have a framework
agreement for a Trade and Investment Council (TIC). An all-encompassing
bilateral investment treaty which would address issues such as [as] national
treatment for foreign investors, transfers, expropriation, investment disputes,
tax policies, etc., is being negotiated, but has not been signed for technical
reasons. The US and Salvadoran government are working towards but have not yet
reached agreement on a Tax Information Exchange Agreement.
"El Salvador is a member of the Central American Common Market, and has
approximately 50 commercial and technical cooperation treaties in effect. Three
of these treaties (Mexico, Spain, and Venezuela) look to promote coinvestment.
Mexico's economic difficulties have led to the deferral of planned negotiations
on a free trade agreement. El Salvador is a member of the World Trade
Organization.
"OPIC
"The Overseas Investment Corporation (OPIC) has a bilateral agreement with El
Salvador. OPIC has approved insurance coverage for the expansion of a U.S. bank
in El Salvador, and is considering several other projects. OPIC insures currency
inconvertibility, expropriation and civil strife, as well as corporate
financing. El Salvador is a member of the Multilateral Investment Guarantee
Agency (MIGA).
"Labor
"Of El Salvador's labor force of approximately 1.5 million workers,
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34 percent work in the agricultural sector. This is followed by services (21
percent), commerce (18 percent) and manufacturing (15 percent). The minimum wage
in the industrial and commerce sectors is 1050 colons roughly 120 dollars a
month. Urban employees with minimal skills generally earn at least twenty
percent more than the minimum wage. Although the minimum wage is less for
agricultural workers, coffee plantation owners report that they pay above the
minimum wage to attract workers during the harvest.
"According to a Planning Ministry survey of 5,000 urban and rural families,
unemployment in 1994 was 7.7 percent. Visible underemployment could add three to
seven percent to that figure. However, some construction contractors cannot find
sufficient skilled workers, due to the amount of projects now underway in El
Salvador. According to the above survey, 150,000 more people are employed in
1994 than 1993. The statistics from this survey are not considered precise, but
do indicate trends.
"Salvadoran labor is perceived as hard working and trainable. The general
educational level is low, which may inhibit the development of industries
needing skilled, educated labor. In addition, there is a lack of middle
management-level talent, which often results in foreigners being brought in to
perform such tasks.
<PAGE>
"The Constitution of December 1983 guarantees the right of employees to organize
into associations and unions. Employers are free to hire union or non-union
labor. Closed shops are illegal.
". . .
"Capital Outflow Policy
"There are no restrictions on capital outflow for Salvadorans, nor are there any
specific incentives to invest capital outside El Salvador. Regarding investment
outflow, Salvadoran investors have interests in hotels, real estate and industry
in Mexico, Guatemala, Honduras, Costa Rica, Panama and the U.S. Accurate
statistics about the size of these investments are not available.
"Major Foreign Investors
"Coastal Technologies - owner/operators of the Nejapa
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<PAGE>
power-generating plant. Estimated value over USD 140 million
dollars.
"Kimberley Clark de C.A. - owns a paper products factory.
"Texaco Caribbean - fuel storage and lubricant blending plant in Acajutla, and
service station/grocery markets throughout the country.
"Esso Standard Oil - together with Shell, owns and operates a small oil refinery
in Acajutla. Also own service station/grocery marts throughout the country.
"Shell El Salvador - shares an oil refinery with Esso, and owns service
station/grocery marts throughout the country.
"Bayer de El Salvador - owns a modern pharmaceutical processing
plant.
"Sara Lee Knit Products - owns a clothing assembly plant in the El Pedregal free
trade zone.
"Xerox de El Salvador - sells and services office equipment and
computers.
"Western Petroleum - produces and exports alcohol to the U.S.
"British American Tobacco - manufactures cigarettes."
Efforts to Obtain Capital
Substantial consideration, time and effort continue to be given to secure
investment capital through various financial arrangements for the operation of
the SCMP, the SSGM, and the other exploration projects. The Company, Sanseb, and
the Joint Venture have considered the past political situation in El Salvador to
have been unstable and a great deterrent to the investment community. The stigma
of the past political unrest still continues as a barrier to investors.
<PAGE>
The Company has been successful in obtaining investment funds that were required
to retrofit and operate its SCMP, conduct its various
32
<PAGE>
exploration and drilling program, and for its current needs. It believes that it
will be able to obtain the funds it will require to conduct its business affairs
until the Joint Venture begins earning profits and has adequate cash flow. An
investment of approximately U.S. $13 million will be needed for its contemplated
SSGM open-pit, heap-leaching operation. It is estimated that an additional $2
million would be required to expand the SCMP facilities and $10 million is
needed for a drilling program on the five exploration projects. Plans for
obtaining these funds are in process.
Land Acquisition and Development
During the past years, the Company has substantially reduced its activities in
the business of land acquisition and real estate development which was conducted
principally through its two wholly-owned subsidiaries, San Luis Estates, Inc.
("SLE"), a Colorado Corporation, and Universal Developers, Inc. ("UDI"), a
Wisconsin Corporation.
SLE had been the developer of a large tract of land for recreation, retirement
and other individual purposes consisting of approximately 7,000 acres of land
which was subdivided in the San Luis North Estates Subdivision located in
Costilla County, Colorado, which abuts the Town of San Luis, Colorado, and which
lies between the San Juan and Sangre de Cristo mountain ranges in southern
Colorado. This tract of land had been subdivided into 1,205 five-acre or larger
parcels, unimproved except for gravel roads now maintained by Costilla County,
drainage, survey, staking, and water rights adjudication.
As of March 31, 1996, there remained an inventory of 40 five-acre parcels of
real estate which represents less than 4% of the total lots developed in this
subdivision. It is the intent of the Company to sell the remaining lot inventory
as a bulk sale for cash or to exchange it for other assets or to reduce its
debts. This land inventory is not considered material or significant to the
Company's operations.
SLE believes that it is in compliance with the requirement of the Department of
Housing and Urban development ("HUD") to sell its remaining lots in the San Luis
North Estates Subdivision; if necessary, it intends to maintain its registration
effective with HUD in anticipation of selling its remaining lots unless it finds
that it is exempt from the HUD rules and regulations.
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<PAGE>
SLE also owns twelve improved lots located in the City of Fort Garland, Costilla
County, Colorado. The assets of SLE have served as a source of collateral for
funds advanced to the Company and its majority-owned subsidiaries.
The Company's wholly-owned subsidiary, Homespan, owns a 331-acre campground
known as Standing Rock Campground located in Camden County, Missouri. This
recreational resort includes approximately three quarters of a mile of lake
frontage on the Lake of the Ozarks, 130 campsites of which 120 campsites include
hook ups for electricity, water, sewer, and a pad for recreational vehicle
parking. A clubhouse and also several ancillary buildings are on the premises.
The Company is the operator of the campground and is leasing space to campers
and others on a daily, weekly, or monthly basis.
Misanse, the Company's majority-owned subsidiary (52%) owns the SSGM real estate
consisting of approximately 1,470 acres which is located approximately two and
one-half miles northwest of the City of Santa Rosa de Lima, off of the Pan
American Highway, and about 108 miles southeast of the Capital City of San
Salvador, El Salvador, and it is about 11 miles west from the border of the
Country of Honduras. It is also about 26 miles from the City of La Union which
has railroad and port facilities. An airline commuter service provides daily
scheduled flights to the City of Santa Rosa de Lima.
<PAGE>
On November 27, 1994, the Company purchased 22 acres of land on the Modesto Mine
site which is located due north of the City of Paisnal and approximately 19
miles north of San Salvador, the capital city of El Salvador. Reference is made
to "Item 2. Properties," for additional information.
Real Estate Sales
Homespan, the local real estate marketing subsidiary of the Company is presently
inactive. It has no significant activity and is not material to the Company's
operation. Homespan holds the title to the real estate located in Colorado and
the Standing Rock Campground ("SRC"), located in the Lake of the Ozarks. SRC is
operated by the Company. Assets of Homespan have also served as a source of
collateral for funds loaned to the Company and its majority-owned subsidiaries.
34
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Advertising
The Company owns 100% of the outstanding common stock of Piccadilly Advertising
Agency, Inc. ("Piccadilly"), a Wisconsin Corporation. Piccadilly provides, when
required, advertising services to the Company and its other subsidiaries when
they are needed. It was and still may be able to obtain advertising discounts
because of its agency status. Piccadilly's operations are not significant or
material to the Company's operations.
Patents and License Agreements
On July 23, 1987, the Government of El Salvador delivered and granted to
Misanse, possession of a 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 owned by Misanse and
encompassing the SSGM. Misanse assigned this concession to the Joint Venture.
Under the concession and applicable El Salvador law, including a bi-lateral
agreement, the Joint Venture has the right to export said minerals for five
years beginning with the first day of production, without imposition of mineral
or export taxes. It also has the right to import free of duty, equipment and all
other items necessary to operate the SSGM. (Reference is made to "Item 1.
Concession Agreement")
The Joint Venture has applications pending with the El Salvador Department of
Energy, Mines and Hydrocarbons for the exploration rights of the following
mining properties located in El Salvador: San Felipe-El Potosi Mine, and its
extension, the El Capulin Mine, the Hormiguero Mine, the Modesto Mine, and the
Montemayor Mine. The Company and its subsidiaries hold no patents or trademarks.
Significant Customers
The Company presently has no individual significant customers in which the loss
of one or more would have an adverse effect on any segment of its operations or
from whom the Company has received more than 10% of its consolidated revenues;
however, since the Joint Venture is producing gold, the gold in dore form is
sold at the world market price to a refinery located in the United States.
Miscellaneous
35
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Backlog orders are not significant to either the Company's or its majority-owned
subsidiaries' areas of operations, or at this time is any portion of their
operations subject to renegotiation of profits or termination of contracts at
the election of the United States' Government.
<PAGE>
Neither the Company nor its majority-owned subsidiaries conduct any material
research and development activities, except as indicated in this report with
respect to the Joint Venture and its mining exploration and exploitation
programs.
Federal, state and local provisions regulating the discharge of materials into
the environment will not have a substantial effect on the capital expenditures,
earnings or competitive position of the Company or any of its majority-owned
subsidiaries.
Financial Information About Industry Segments Lines of Business
Operation
Campground: For the years ended March 31, 1996, 1995 and 1994, revenues have
been generated from the campground business. Although Homespan owns the
campground real estate, the Company is the campground operator.
Land Sales
The Company intends to sell its remaining lots in Colorado on a bulk basis.
Mining
The Company's primary strategy, through its Joint Venture, is to use its SCMP
facilities to process gold ore transported from SSGM and other exploration
opportunities located in the Republic of El Salvador. The Joint Venture has
produced gold from its SCMP operations during this start-up period.
The Company anticipates that the capital required for the purchase of equipment
and working capital can be obtained from the sale of its common or preferred
shares, bonds, equity offerings, loans, leases, partial sale of its gold
reserves, sale of gold, or from a
36
<PAGE>
combination of these and other creative funding possibilities.
Competition
The Company believes that neither it, nor any other competitor, has a material
effect on the precious metal markets, and that the price that the Joint Venture
will receive for its sale of gold is dependent upon world market conditions over
which neither it nor any other single competitor has control.
Employees
As of March 31, 1996, the Joint Venture employed approximately 304 full-time
persons from El Salvador 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 harmonious relationship
with its employees, and it believes that it is the largest single
non-agricultural employer in the El Salvador Eastern Zone. Also, the Company
employs approximately four persons (plus part-time help) in the United States.
<PAGE>
Insurance
The Joint Venture has in existence insurance through an El Salvador insurance
company with the following 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 can be
increased accordingly.
Industry Segments
-----------------
1. Unaffiliated Sales Year Ended March 31,
Industry Location 1996 1995 1994
- ------------ ------------- ---------- ---------- -----------
37
<PAGE>
Mining El Salvador $ 0 $ 0 $ 0
Campground Missouri, USA 55,692 54,600 54,804
Real Estate Colorado, USA 0 9,000 0
2. There Were No Intersegment Sales
3. Total Revenues Year Ended March 31,
Industry Location 1996 1995 1994
- ------------ ------------- ----------- ----------- ------------
Mining El Salvador $ 0 $ 0 $ 0
Campground Missouri, USA 55,692 54,600 54,804
Real Estate Colorado, USA 0 9,000 0
Other Delaware/Wis.,
USA 1,289,568 759,581 453,160
----------- ----------- -----------
Total: $ 1,345,260 $ 823,181 $ 507,964
4. Operating Profit (Loss) Year Ended March 31,
Industry Location 1996 1995 1994
- ------------ ------------- ----------- ----------- -----------
Mining El Salvador $ 0 $ 0 $ 0
Campground Missouri, USA (6,741) (7,336) (8,325)
Real Estate Colorado, USA 0 7,676 0
Interest Income El Salvador/
Delaware
Wisconsin, USA 794,543 274,407 75,177
----------- ----------- -----------
Total: $ 787,802 $ 274,747 $ 66,852
5. Identifiable Assets Year Ended March 31,
Industry Location 1996 1995 1994
- ------------ ------------- ----------- ----------- -----------
Mining El Salvador $18,838,770 $15,692,668 $12,808,590
Campground Missouri, USA 1,135,500 1,135,500 1,135,500
Real Estate Colorado, USA 21,000 21,000 22,325
Corporate Assets 517,845 768,305 238,148
----------- ----------- -----------
Total: $20,513,115 $17,617,473 $14,204,563
Glossary of Mining and Financial Terms
38
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Adit - horizontal or nearly horizontal passage driven form the surface for the
working or unwatering of a mine. If driven through the hill or mountain to the
surface on the opposite side it would be a tunnel. A passage driven into a mine
from the side of a hill.
Agitated leaching - vigorous stirring of pulp in a tank by low-pressure air or
mechanical means to prevent settlement used in the leaching of gold and other
minerals from finely ground aqueous suspension in which oxygen its essential as
chemical reaction, for example, the cyanide process.
Breccia - fragmental rock, the components of which are angular, and therefore,
it is distinguished from a conglomerate in that its components are not
waterworn. There are friction or fault breccias, talus breccias, and eruptive
breccias. Any rock formation essentially composed of uncemented, or loosely
consolidated, small angular-shaped fragments.
Carbon adsorption - extracting dissolved gold and silver from solvents in which
soluble complexes of gold and silver physically adhere to activated carbon
particles.
CIL - carbon-in-leach, a process for the recovery of gold from the ore. Ore is
ground finely and mixed with a dilute sodium-cyanide solution to dissolve the
gold which is absorbed onto carbon. The gold enriched carbon is stripped of the
gold and the gold is recovered wither through electrolysis or precipitation.
CIP - carbon-in-pulp, a process similar to CIL except that the ore is leached
with cyanide prior to carbon loading.
Contained ounces - estimate of the total number of ounces of gold contained in
an ore body, a portion of which are not recoverable.
Country rock - rock traversed by or adjacent to an ore deposit. Applied to the
rocks surrounding and penetrated by mineral veins or invaded by and surrounding
an igneous intrusion. The rock in which a mineral deposit or an intrusion is
enclosed.
Cross section or cross cut - profile portraying an interpretation of a vertical
section of the earth explored by geographical and/or geological methods. A
cutting or a section across. A section at right angles to, especially the longer
axis of anything.
Dore - gold and silver bullion which remains in a cupelling furnace after the
lead has been oxidized and skimmed off. An unrefined bar of bullion containing
an alloy of gold silver and impurities.
Drill rig - a drill machine complete with all tools and accessory equipment
needed to drill boreholes.
Drilling - act or process of making a circular hole with a drill. Use of a
compressed-air rock drill to prepare rock for blasting. The operation of making
deep holes with a drill for
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prospecting, exploration, or valuation.
Blasthole drilling - drilling of holes in rock to insert an explosive
charge. The drill holes are usually 3-8 meters apart. The blast breaks
up the rock so it can be dug out.
Diamond drilling - drilling with a hollow bit which has a diamond
cutting rim to product a cylindrical core that is used for geological
study and assays. Used in exploration.
Infill drilling - drilling at shorter intervals between holes, used to
provide greater geological details and to help establish reserve
estimates.
Rotary drilling - drilling with a bit that breaks the rock into chips
rather than core. Faster and cheaper than diamond drilling, the chips
are forced by water and air tot he surface of examination.
Reverse circulation drilling - type of rotary drilling that uses a
double-waited drill pipe. Compressed air, water, or other drilling
medium is forced down the space between the two pipes to the drill bit
and the grilled chips are flushed back up to the surface through the
center tube of the drill pipe.
Dump material - spoil heap at the surface of a mine stored for further
reclamation.
Electrowinning - recovery of metal from an ore by means of electrochemical
processes.
Extraction - process of mining and removal of ore from a mine. The separation of
a metal or valuable mineral from an ore or concentrate.
Fire assay - assaying of metallic ores, usually gold and silver, by methods
requiring a furnace heat. It commonly involves the processes of scorification,
cupellation, etc.
Flotation - method of mineral separation in which a froth created in water by a
variety of reagents floats some finely crushed minerals, whereas other minerals
sink.
Footwall - wall or rock under a vein. It is called the floor in bedded deposits.
Opposite wall from hanging wall, the underside of vein or lens in relation to
dip of ore deposit. In metal mining, the part of the country rock which lies
below the ore deposit.
Grade - classification of an ore according to the desired or worthless material
in it or according to value.
Hanging wall - rock on the upper side of a mineral vain or deposit.
Heap leaching - economical process used for the recovery of ore. Ore is placed
in a heap on an
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<PAGE>
impermeable pad and cyanide is sprinkled over the heap and collected at the
bottom after percolating through the ore and dissolving the metals.
Heap leach pad ("heap") - large, impermeable foundation or pad used as a base
for ore during heap leaching. The solution is collected and does not escape from
the circuit.
Leach - to wash or to drain by percolation. To dissolve minerals out of the ore,
as by the use of cyanide or chlorine solutions, acids, or water.
Leaching - removal in solution of the more soluble minerals by percolating
waters. Extracting soluble metallic compound from an ore by selectively
dissolving it in a suitable solvent. The solvent is usually recovered by
precipitation of the metal or by other methods.
Leach material - material sufficiently mineralized to be economically
recoverable by selectively dissolving the wanted mineral in a suitable solvent.
Leach pad - pad used as base for ore; the pad prevents the leach solution from
escaping and can be used continually.
41
<PAGE>
Leach pile - mineralized materials so as to permit wanted materials to be
effectively and selectively dissolved by the application of suitable solute.
Merrill-Crowe process - process utilized to recover soluble gold and silver
values from a sodium-cyanide leaching solution by precipitating with zinc dust
after the leaching solution is clarified and deoxygenated by vacuum treatment.
Metric conversion - 1 acre = 0.4047 hectare 1 foot = 0.3048 meters 1 mile =
1.6093 kilometers 1 ton = 0.9072 tonne 1 troy ounce = 31.1034 grams
1 ounce per ton = 34.2848 grams per tonne
Mill - reducing plant where ore is concentrated and/or metals recovered. The
whole mineral treatment plant in which crushing, wet grinding, and further
treatment of the ore is conducted.
Mineralization - process of converting or being converted in to a mineral, as a
metal into an oxide, sulfide, etc. The processes taking place in the earth's
crust resulting in the formation of valuable minerals or ore bodies.
Mineralized zone - mineral-bearing belt or area extending across or through a
district. It is usually distinguished from a vein or lode as being wide, the
mineralization extending in some cases hundreds of feet from a fissure of
contact place.
Mining lease - legal contract for the right to work a mine and extract the
mineral or other
valuable deposits from it under prescribed conditions of time, price, rental
or royalties. Also
called mineral lease.
Open-pit mining - form of operation designed to extract minerals that lie near
the surface.
Ore-reserves - the term is usually restricted to ore of which the grade and
tonnage have been established with reasonable assurance by drilling and other
means. The total tonnage and average value or proved ore, plus the total tonnage
and value (assumed) of the probable ore.
Ounce - troy ounce, which is equivalent to 31.1034 grams
Pyrites - the term pyrites as frequently used, literally, means a mineral that
strikes fire. It is applied to any of a number of metallic-looking sulfides, of
which iron pyrites (pyrite) are the most common.
Recovery - amount of gold ore metal, expressed in weight or money per ton which
is obtained from the treatment of ore.
42
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43
<PAGE>
Shaft - evacuation of limited area compared with its depth, made for finding or
mining or ventilating underground workings. The term is often specifically
applied to approximately vertical shafts, as distinguished from an incline or
inclined shaft. A shaft in metal mining may be sunk upon a vein, even if the
inclination is but slight.
Stope - excavation from which ore has been excavated in a series of steps.
Usually applied to highly incline or verticle veins. To excavate ore in a vein
by driving horizontally upon it a series of workings, one immediately over the
other, or vice versa. Each horizontal working is called a stope. Also workings
in a mine, or the activity by which ore is broken from blocks in ore reserves
and other areas.
Sulfate - a salt or an ester of sulfuric acid, of which most of the salts except
those barium, lead, strontium , and calcium are fairly soluble in water.
Sulfide - a compound of sulfur with more than one element. A salt or na ester of
hydrogen sulfide. Except for the sulfides of the alkali metals, the metallic
sulfides are usually insoluble in water and occur in many cases as minerals.
Tailings - those portions of washed ore regarded too poor to be treated further
after economically recoverable metals have been extracted by milling. This
material may be recrushed or retreated.
Waste material - a part of the ore deposit too low in grade of economic value at
the time, but this material may be store separately in the hope that it can be
profitable treated later.
Winze - a vertical or inclined opening, or excavation, connecting two levels in
a mine, deferring from a raise only construction. A winze is sunk underhand and
a rise is put up overhand. When the connection is completed, and one is standing
at the top, the opening is referred to as a winze, and when at the bottom, as a
raise, or rise. Also, it is usually a connection between two levels, and is sunk
in the ore body; interior mine shaft.
Item 2. Properties
Corporate Headquarters
The Company leased approximately 3,100 square feet of office space for its
corporate headquarters on the second floor of the building known as the General
Building located at 6001 North 91st Street,
Milwaukee, Wisconsin, at a rental charge of $2,145 on a month-to-month basis.
As of December
1, 1995, the Company increased
the space it rents to 4,032 square feet with a monthly rental charge
of $2,789. The lessor is General Lumber & Supply Co., Inc. ("General
Lumber"), a Wisconsin Corporation. The Company's President, Edward
L. Machulak owns 55% of the common stock of General Lumber. Edward
L. Machulak disclaims any interest in the balance of General Lumber
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<PAGE>
common stock which is owned by two of Mr. Machulak's brothers, his wife, and a
trust for the benefit of his children. In addition, the Company shares
proportionately any increase in real property taxes and any increase in general
fire and extended coverage insurance on the property. In lieu of cash payment,
the Lessor has agreed to apply the monthly rental payments owed to the
open-ended, secured, on-demand promissory note(s) due to it.
Real Estate Holdings
The following chart summarizes the Company's real estate holdings:
<TABLE>
<CAPTION>
Cost to Anticipated
Name of Nature of Date Bring into Date of
Property Property Acquired Cost Operations Operations
San Sebastian
<S> <C> <C> <C> <C> <C>
Gold Mine Leasehold 1968 -- operational operational
San Cristabal Mill
and Plant Ownership and Lease 1993 1,323,280*** * *
Modesto Lease 1994 26,469*** ** **
San Felipe -
El Potosi Lease 1993 ** **
Hormiguero Explor. rights 1993 ** **
Montemayor Explor. rights 1995 ** **
San Luis Estates Ownership 1971 21,000 * *
Standing Rock
Campground Ownership 1983 1,135,000 * *
Misanse Ownership 1968 23,336 ** **
Laboratory and
Real Estate Ownership 1968 29,789*** ** **
</TABLE>
* Not applicable since these properties are held for sale or are already
operational.
** Currently operational.
*** Represents investment by Sanseb joint venture.
Until such time as test drilling can be completed, the Company cannot
predict the cost or timing of bringing any mining property into
operations.
A description of the Company's real estate holdings are set forth in "Item 1.
Land Acquisition and Development." Real estate assets have served as a source of
collateral for funds loaned to the Company and its wholly and partially-owned
subsidiaries.
San Sebastian Gold Mine ("SSGM")
Tailings from the SSGM are being transported to the SCMP site to produce gold.
SCMP is gradually increasing its tonnage process to its full capacity of 400
tons per day. It plans to mine virgin
45
<PAGE>
gold ore from its open pit and to extract the stope fill from underground to
produce gold on its own site. The property consists of 1,470 acres. SSGM is
located approximately 2 1/2 miles northwest of the City of Santa Rosa de Lima in
the Department of La Union, Republic of El Salvador, Central America.
SSGM Current Status
The Joint Venture has commenced producing gold at the SCMP site. It processed
approximately 100,000 tons of the 360,000 tons of tailings during the last
fiscal year. Plans are to gradually increase its daily tonnage until it is up to
the full capacity of the SCMP.
The Company, through its Joint Venture is conducting the following activities:
It is in the development and pre-production mining stage which consists of
completing its survey, mapping, site preparation, infrastructure, construction,
planning, and in the performance of the auxiliary work needed to begin gold
production at the SSGM site. The Joint Venture's geologists have determined that
SSGM has minable gold ore reserves via an open pit of approximately 13.4 million
tons of gold ore which should contain approximately 1.166 million ounces of
gold. In addition, it has approximately 960,000 tons of dump material, and about
one million tons of stope fill. Presently, the Company is seeking funding to
purchase equipment, to purchase inventory, and to use for working capital for
its on-site proposed open-pit, heap-leaching operation. In addition, the Company
is actively engaged in the exploration and development of the peripheral area
(including diamond drilling) surrounding the main body of gold ore in order to
increase its gold ore reserves.
<PAGE>
The Company's main objective and plan, through the Joint Venture, is to operate
a moderate tonnage, low-grade, open-pit, heap-leaching operation to produce gold
on its SSGM site. Dependent on the grade of ore and the tonnage processed, it
anticipates producing more than 40,000 ounces of gold from its open-pit,
heap-leaching operations during the first twelve full operating months and more
thereafter.
SSGM Geology
The ore deposit consists of contact-fissure veins carrying
gold-bearing pyrite. The veins occur at the contact between
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quartz-monzonite porphyry dike and surrounding eruptives which are basalt capped
by trachyte. All the rocks are of recent age, probably late tertiary. The SSGM
lies within a silicified and hydrothermally altered zone of acid to basic
volcanoes roughly within a two-square kilometer area.
The occurrence is typical of the late stage deposition associated with
instrusives in Island Arc plate tectonics dating millions of years (four to 65
million) ago. These are typically polymetallic precious metal-base deposits with
high grade veining in large haloes of low grade resembling in part the Kuroko
deposits in Japan. The dike is shaped like a flattened "s" and consists of a
2,800 foot long essentially vertical east-west segment, a northwest striking
western section "dragged" sharply north for 800 feet and dipping 70 degrees
northeast and a vertical south-east striking east.
Its geologists state that it is similar in size and physical characteristics to
the large low-grade, open-pit Pueblo Viejo Mine located in the Dominican
Republic.
SSGM Ore Reserves
As of March 31, 1996, the SSGM has approximately 13.4 million tons of virgin
proven gold ore reserves, grading 0.087 ounces of gold per ton and containing
about 1.2 million ounces of gold. Overall the stripping ratio is low, ranging
from zero in the Coseguina Hill area which is highly mineralized and consists of
a series of high angle vertical veins to a possible stripping ratio of 1:3 to
1:8. It is planned to use these reserves; they will be screened, crushed and, if
required, they will be agglomerated and placed on a proposed leach pad on the
SSGM site. In addition, there are approximately 250,000 tons of tailings with a
grade of 0.08 ounces of gold per ton and about one million tons of stope fill
with a grade of 0.34 ounces per ton. (For additional information, reference is
made to "Item 1. Proposed Mining, Mill, Heap-Leaching and Exploration
Operations.")
Since July, 1987 through March 31, 1996, the following exploration has been
performed on the SSGM site: surface channel trenching, 33,386 meters (110,173
feet/20.9 miles); test pit hole excavations, 655 vertical meters (2,162 feet/.41
miles); underground workings and adit openings, 962 meters (3,175 feet/.60
miles). Also, 42,234 assay samples were completed at the Joint Venture's
laboratory located near the SSGM site. The surface samples averaged 0.026
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ounces of gold per ton over an area approximately 1,000 feet in width and
approximately 5,000 feet in length.
SSGM Diamond Drilling Program
The Joint Venture has completed eight diamond drill holes at the SSGM site. Five
were on the San Juan Hill which ranged in depth from 106 feet to 172 feet and
the grade varied (dependent on the rock encountered) from 0.01 to 0.15 ounces of
gold per ton. Three drill holes were drilled in the Coseguina area from 62 feet
to 255 feet. The grade of gold varied from 0.01 to 0.54 ounces of gold per ton.
In some areas former adits were encountered which prevented the drilling to go
to a deeper depth. It presently is working two shifts and ten to 15 persons are
employed.
<PAGE>
SSGM Proposed Mining Open-Pit, Heap-Leaching Operations at the SSGM
Site
The open-pit ore will be loaded into trucks by wheel loaders and hauled to the
recovery plant area. The ore will then be placed into a vibrating screen hopper
which will remove gold ore larger than 3/4 inches in size. Lime, cement and
cyanide solution will be added if needed to this crushed ore. If needed, it will
then be placed into an agglomerator to convert the fine material into small
stable pellets saturated with cyanide solution. The material will be conveyed to
the leach pad and stacked using conveyors.
The first step will be to load the first sections of the pad with the crushed
ore. Belt conveyors will be used to transfer ore to a stacking conveyor to build
a heap. After loading is completed, the ore cures and the top surface of the
heap will be manually levelled. Leaching of the heap proceeds by distributing
barren sodium cyanide leach solution to the heap with sprinklers or by drip
irrigation.
The gold will be recovered via a carbon column system where the porous carbon
recovers the solvent gold by adsorption. The carbon will be stripped and the
solution will flow through an electrowinning cell where gold will be recovered
from the strip solution by electroplating onto stainless steel wool cathodes.
Gold laden steel wool cathodes will be periodically removed from the
electrowinning cells and transferred to the replating cell. In the
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<PAGE>
replating cell the gold will be electrolytically stripped from the steel wool
and plated onto stainless steel cathode sheets.
The gold will be recovered from the cathodes, mixed with fluxes, placed in a
crucible, and heated in a furnace until melted. The gold will then be poured
into molds to form dore bars.
SSGM Ownership of the Property
The San Sebastian Gold Mine real estate consisting of approximately 1,470 acres,
is owned by Misanse, a Salvadoran Corporation. The Company owns 52% of Misanse
common shares that are issued and outstanding.
History and Development-SSGM
The San Sebastian Gold Mine has a long history of gold production.
Unquestionably, the SSGM deposit was the jewel of the El Salvador mining
industry and one of the most prolific gold mines in Central America.
Prior to 1880, the SSGM was probably known to the natives of the area and
Spaniards, and may have produced gold during colonial days; however, no records
of production exist. Numerous artifacts in the Santa Rosa River below the
present day SSGM provide mute evidence of primitive early day mining operations.
In 1883, an American company hired Mr. Charles Butters to conduct experimental
metallurgical tests on ore from the SSGM in his laboratory in New York. He
determined that amalgamation and gravity concentration could not be effectively
employed, but that the gold was amenable to recovery by chlorination.
From 1885-1888, the first effective exploration work at the SSGM was done by the
above-mentioned American company. Mr. Butters was contracted to build a
30-ton-per-day chlorination plant at the SSGM site. This small scale operation
proved unsuccessful, and the SSGM ceased production.
In 1898, the property was purchased by General Lisandro Letona.
<PAGE>
In 1904, Mr. Butters, believing that the SSGM was a valuable
49
<PAGE>
property which had been grossly mismanaged, acquired the property in association
with Mr. David J. Pullinger of Johannesburg, South Africa, for $100,000. Within
a year of acquisition, Mr. Butters had established ore reserves of 42,560 tons
with an average content of 2.75 ounces per ton. Their operations mined
approximately $1,000,000 worth of gold from ore bearing gold at two and three
quarter ounces or more per ton.
From 1904 to 1908, three investigations were made at the SSGM site by Mr.
Butters and his staff regarding the type of beneficiation process best suited to
the SSGM ores. It was determined that roasting, followed by cyanidation, and the
recovery of the gold by means of combined electrolytic and zinc precipitation,
was the most effective method. In later years, roasting of the ores was
discontinued.
(During the period 1890-1898, Mr. Butters had been active in the development of
cyanidation of gold ores at the Rand Mine in South Africa, and recognized the
process as a revolutionary metallurgical practice.)
Continuous operations at the SSGM by Butters Salvador Mines were performed from
1908 to 1917, at which time operations ceased due to exhaustion of what they
believed to be all of the high grade (two ounces or more of gold per ton) ore
body. Butters Salvador Mines was voluntarily liquidated in October, 1917.
Initially, mill capacity was 20 tons per day; it later increased to 40 tons,
then to 100 tons, and finally, 120 tons per day. For a period of several years,
mill heads averaged no less than two ounces of gold per ton. The SSGM was
considered among the richest gold mines in the world. During the peak years of
operation (1908-1917), more than 1,500 people were employed at the SSGM. During
this interval of time, the SSGM is reported to have produced 950,000 ounces of
gold.
From 1917 to 1921, small operations at the SSGM, under the direction of Mr.
Butters, yielded approximately 150,000 ounces of gold.
In 1924, Mr. G. Swanquist, a former member of Mr. Butters' staff,
obtained the rights to develop the SSGM, but did no work worthy of
mention.
From 1933 to 1953, owing to the increase in the world price of gold
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from $20.67 per ounce to $35.00 per ounce, operations were renewed under the
name of Butters Salvador Mines, Ltd. Initially, only the richest ore shoots were
mined; later, level and shaft pillars were exploited. In 1933, the rate of
milling was approximately 40 tons per day. Diminishing grade and labor problems
forced closure in 1953. During the period 1933 to 1945, approximately 150,000
ounces of gold were produced, and from 1945 to 1953, 30,000 ounces of gold were
produced.
In 1953, when Butters Salvador Mines, Ltd. ceased operations, members of the
labor union acquired the property in lieu of a severance pay settlement. The
members of the union organized Misanse, an El Salvador Corporation, and managed
monthly shipments of approximately 70 tons of surface oxide ore and old fill to
the nearby Mina Lola mill.
In 1964, a ten-ton-per-day flotation and cyanide plant operated intermittently
on an unprofitable basis.
From 1967 to 1968, there were unprofitable small-scale high-grading operations
on an intermittent basis by various local miners working under a contract system
with Misanse.
<PAGE>
The Company's investment in Sanseb dates back to 1969. Sanseb acquired its lease
to mine gold from Misanse in 1968. During March of 1973, the Company acquired
control of Sanseb, and since then, owns 2,002,037 (82 1/2%) of Sanseb's issued
and outstanding common shares.
From 1969 to 1972, work advanced in reopening collapsed SSGM tunnels and
workings, with limited mining-milling operations. A straight cyanidation plant
was installed using zinc box (shavings) precipitation and operating on an
intermittent basis with limited daily production.
From February of 1973 to 1978, reorganization of Sanseb under the control of the
Company, with continuous and increased production from the SSGM, was commenced
along with extensive plant modifications, including conversion to Merrill Crowe
type (zinc dust) precipitation. The existing mill was upgraded to 100 tons per
day when this plant was installed. The underground tunnels and workings were
rehabilitated. While the SSGM produced significant
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revenue, heavy exploration and development costs strained the cash
flow of the operation.
On February 6, 1978, Sanseb ordered operations at the SSGM suspended due to the
unavailability of investment capital and the lack of continuity in management,
both exacerbated by labor and primarily due to the political unrest,
particularly in the Eastern Zone of El Salvador where the SSGM is located. On
May 6, 1978, as a result of the decision to suspend operations, former employees
of Sanseb claimed that Sanseb was obligated under El Salvador law for the
payment of severance pay to its former employees. Sanseb's legal position was
that it temporarily suspended operations due to the political instability and
since it did not terminate all activities, it was not liable at that time for
the severance pay. In January of 1979, a lower El Salvador Court awarded
possession of the mining rights (not the real estate) to the former employees.
It is believed that the Court had no right to award a concession as only the
Government of El Salvador has this right and authority.
During 1979, when the embargo was in effect, Mr. Robert Villatoro contracted to
operate the SSGM. From the reports provided by his employees, it is believed
that he extracted more than 10,000 ounces of gold. Mr. Villatoro ceased
operations during 1981 or 1982 when the guerrillas were extremely active in the
eastern part of El Salvador which includes the SSGM area.
During this time a dramatic increase in the world market price of gold (a peak
of over $800/oz. in 1980) as well as developments in the technology of gold
extraction presented new opportunities for the Company and Sanseb at the SSGM.
In February, 1985, the Company made an on-site inspection of the mill and SSGM
site, which disclosed that the buildings, offices, machine shop, laboratory,
mill and equipment were completely destroyed. Also, the SSGM tunnels and
workings consisting of approximately 37 miles were demolished and collapsed. The
Company consulted with geologists and engineers to develop a new plan of
extracting gold from the reserves developed in the Company's exploration and
development program and to process gold via an open-pit, heap-leaching
operation.
In June, 1985, the Company and Sanseb settled the claims of Sanseb's
former employees by agreeing to compensate them for the severance
pay with proceeds attained from future gold production. The El
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Salvador Court, on June 6, 1985, had decreed, in a non-appealable order, to the
nullification of all previous acts of the previous Court's orders, and removed
the embargo previously decreed. In addition, the El Salvador Court ordered the
return of all of the assets, rights and everything else whatsoever previously
owed to the Company, Misanse and Sanseb.
<PAGE>
The Company had no significant activity at the SSGM site from February, 1978
through January 1987. The present status is that, since January, 1987, the
Company, through the Joint Venture, has completed certain of the required mining
pre-production preliminary stages in the minable proven gold ore reserve area,
and it is active in attempting to obtain financing for the project. It 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.
On July 27, 1987, El Salvador President Jose Napoleon Duarte, at an official
ceremony in the City of Santa Rosa de Lima, personally presented the mining
concession to Misanse, which simultaneously was assigned to Commerce Group Corp.
and San Sebastian Gold Mines, Inc.
During October, 1989, the Joint Venture set up in the City of San Miguel, its
own laboratory equipment and began performance of assays from its SSGM ore
sample. It trained its personnel to use this modern laboratory which was
equipped with modern technical equipment.
Since 1990 to present date, extensive channel trenching, adit openings and test
pit excavations developed thousands of fire assay samples. They were assayed at
the Joint Venture laboratory. This laboratory was relocated to a Company-owned
site near the SSGM. Extensive dirt roads and a bridge were constructed. Electric
lines to the laboratory were restored. A diamond drilling program has been
initiated to determine if there are additional gold ore reserves on this site.
During this twelve-month period ended March 31, 1996, the Company has advanced
funds, performed services, and allocated its general and administrative costs to
the Joint Venture.
San Cristobal Mill and Plant ("SCMP") Recovery and Processing System
53
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SCMP Location
SCMP is located near the City of El Divisadero, (off of the Pan American
Highway), and is approximately 13 miles east of the City of San Miguel, the
second largest City in the Republic of El Salvador, Central America.
SCMP Lease Agreement
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 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 which also will be
increased annually to correspond with the annual U.S. inflation rate.
SCMP Mill and Plant Process Description
On February 23, 1993, at an auction held by an El Salvador Court, the Company,
on behalf of the Joint Venture, was the successful bidder in acquiring SCMP, a
precious metals' cyanide leaching mill and plant rated with a capacity of
processing 200 tons of virgin ore per day consisting of the following unit
operations: crushing, grinding, thickening, agitated leaching, counter current
decantation of leach solution, recovery of precious metals by zinc precipitation
(Merrill-Crowe), and direct smelting of precipitates to produce precious metals
as dore and tailings' disposal.
Instead of utilizing the existing recovery system, the Joint Venture's engineers
have designed a carbon-in-leach (CIL) process which is described in detail under
Project Operating Plan.
<PAGE>
The advantage of beginning the processing of gold ore with the tailings is that
the tailings do not have to be mined, ground or pulverized. The cost of
processing this material is substantially low, and it is expected to recover 70%
of the gold from the SSGM
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tailings (70% from the Potosi tailings) during a twelve-hour cycling
period.
The Joint Venture completed the retrofitting, rehabilitation, repairing and
restoring of the SCMP's plant and presently is producing gold on a limited
production basis by processing the tailings from its SSGM.
SCMP Gold Ore Sources
The Joint Venture has several sources of gold ore to process at the SCMP: the
approximately 250,000 tons of SSGM tailings (the residue of the higher grade ore
processed in the past) which have an average grade of at least 0.08 ounces of
gold per ton; the 185,000 tons of Potosi tailings which have an average grade of
0.06 ounces of gold per ton; the SSGM open-pit virgin ore; the dump material;
and the ore and stope fill from the underground workings.
The other sources of gold ore to be used at the SCMP operations are the higher
grade gold ore (0.13 ounces or higher) which could be processed with a 92%
recovery grade, but at a lower volume of 200 tons per day. The income from the
higher recovery of gold ore will be substantially more than the greater cost
involved in this process. There is a sufficient amount of dump material, stope
fill and higher grade virgin gold ore that could be used via the SCMP crushing
and grinding process to recover 92% or more of the gold which recovery is
substantially more than the 60% recovery of gold through the heap-leaching
process. The Joint Venture's geologists estimate that there are more than one
million tons of higher grade ore from the stope fill (underground) to be
processed via the SCMP. It is intended to expand the SCMP to a larger production
capacity.
Current Status
The start-up, testing and adjustment stage of processing the remaining 250,000
tons of SSGM tailings via trucking this ore to the SCMP has commenced and the
Joint Venture is in this preliminary stage of producing gold. The SCMP is
designed to process 400 tons per day by utilizing 12-hour cycles that should
recover approximately 70% of the gold from the tailings. The average grade is
now about 0.08 ounces of gold per ton.
During this fiscal year the Joint Venture did process at the SCMP approximately
74,000 dry tons (approximately 100,000 wet tons) of
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tailings which yielded 5,993 ounces of dore and accounted for 3160.64 ounces of
gold and 1488.86 ounces of silver. The gross receipts amounted to $1,238,612.
The average selling price of gold was $391.00/oz. and silver was sold at
$4.91/oz. The proceeds from the sale of gold and silver were used to reduce the
amount of Company advances to the Joint Venture.
San Felipe-El Potosi Mine ("Potosi") and its extension the El
Capulin Mine ("El Capulin")
Potosi Location
The Joint Venture has commenced an exploration program on the Potosi property
which is located approximately 18 miles northwest of the City of San Miguel, the
second largest city in the Republic of El Salvador, on a paved road 15 miles to
the City of Chapalteque and then west three miles on a gravel road to the City
of Potosi. The historical records indicate that the potential of developing a
gold mine is above average.
<PAGE>
Potosi Historical Information
Historical records evidence that exploration and production of gold took place
in 1899 and that Potosi was worked intermittently from 1906 through 1952. The
main production period in six levels was from 1938 through 1952 at a rate of 35
to 50 tons per day. Production data avouch that 30,000 ounces of gold were
produced from 1945 through 1952 after which the mine became dormant. During this
time a limited underground exploration program confirmed that the gold ore
reserves were of commercial value. The gold assays from some of the former drill
hole samples on the southern extension of the north-south portion of this
property showed a grade of 0.10 to 0.35 ounces of gold per ton of ore.
Potosi Geology
The Potosi vein type occurrences are very strong, persistent, poor
quartz-calcite fissure fillings from two to ten feet wide and up to 3,400 feet
in length. On a regional scale, the veins are fairly straight-forward type
structures but in detail they can be complicated. Dips in the north-south veins
are steeper than in the lattice systems such as the 50 degrees to 90 degrees in
the Potosi
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type. The proportion of gold-to-silver increases in north-south striking veins
or in veins of any orientation whose dips more closely approach the vertical.
Two relatively narrow north-south veins, 450 feet apart, have been worked in the
past by vertical and an inclined shaft for up to 2,100 feet along the strike and
to depths of between 180 and 440 feet below surface on four to six levels. The
veins are contained in coarse-grained augite andesites. The larger of the veins
is up to ten feet in width, dipping 55 degrees to 75 degrees west. The second
vein is weaker in structure and about three feet in width. Gold values seem to
be indiscriminately associated with quartz and do not seem to diminish at depth.
Assay plans and ore reserve sections completed in 1952 show 30 blocks with an
average grade of 0.6563 ounces of gold per ton. Holes drilled from the projected
extension of the north-south portion of one of the veins returned various
five-foot sludge samples grading 0.10 to 0.35 ounces of gold per ton with a one
foot of core length grading at 0.39 ounces of gold per ton. It appears that the
deposition took place at higher temperatures than attributed to silver, thus the
vertical zoning of gold deposition is deeper or has a larger vertical dimension
than silver; therefore the possibility of considerable ore below levels is a
realistic one. The age mineralization is past laramide with the host rock being
rhyolite. The previous gold-silver ratio was 0.3:1.
Potosi Tailings' Reserve
Since October 25, 1993, Comseb has had a full-time crew, ranging from 25 to 30
employees, conducting an exploration program consisting of surveys, channel
trenching, adit openings, test pit holes, excavation and drilling of the
tailings to determine its gold content.
Twenty-four test pit hole excavations have been plotted and drilled on this
four-acre site of tailings. The depth to the bottom of the tailings' pile varied
from 7.00 to 10.2 meters (23 to 34 vertical feet) and a total of 137.6 meters
(454 feet) of test pit hole excavations were completed. The 573 fire assay
samples (tailings) indicated an average grade of gold per ounce to be 0.06 (0.06
times 185,000 tons should contain 11,100 ounces of gold times a 70% recovery
should yield about 7,770 ounces of gold).
Potosi and El Capulin Exploration Undertakings
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A total of 1,354 meters (4,467 feet) of channel trenching were achieved. A total
of 548 meters (1,808 feet) of adits have been restored for entry into the old
workings. A tabulation of the work completed by the Joint Venture is as follows:
<PAGE>
1. Surface
a. Twenty surface channel trenches were completed and the 1,180 samples that
were fire assayed reflected a grade of gold of 0.02 ounces per ton. Two
surface veins were intercepted, reflecting a grade of gold of 0.05 ounces
per ton.
2. Potosi Underground Workings
a. Guayabito Adit: No veins were discovered; the 399 samples
that were fire assayed reflected an average grade of gold of
0.01 ounces per ton.
b. Guarumo Adit: The three samples that were fire assayed
reflected an average grade of gold of 0.05 ounces per ton.
c. San Isidro Adit: The 243 samples that were fire assayed reflected a
grade of gold of 0.02 ounces per ton and four samples that were fire
assayed from an intercepted vein show a grade of gold of 0.04 ounces per
ton.
d. Cacho de Oro: The 59 samples that were fire assayed
reflected an average grade of gold of 0.07 ounces per ton.
This vein appears to correspond with the Guarumo vein
system.
e. Canon 821: The 34 samples that were fire assayed reflected
an average grade of gold of 0.05 ounces per ton.
3. The El Capulin Mine
Surface: The 109 samples that were fire assayed reflected an average grade of
gold of 0.09 ounces per ton. The 228 samples that were fire assayed from an area
1,000 to 1,300 feet away from the above-surface ore reflected a grade of gold of
0.03 ounces per ton
4. Tailings
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The 573 samples that were fire assayed reflected a grade of gold of 0.06 ounces
per ton.
Exploration on this property will continue with channel trenching, re-opening of
former adits, and to include diamond core drilling, mapping and sampling of the
known mineralized areas to determine if there is any other gold mineralization
on this property. Diamond drilling may be utilized to outline the more promising
shoots and to check for continuity at depth.
Potosi Exploration Concession
The exploration concession application was filed on September 6, 1993, with the
Department of Energy, Mines and Hydrocarbons, a division of the El Salvador's
Minister of Economy's office, by the owners of the real estate, the Cooperative
San Felipe-El Potosi. The concession consists of approximately 6,100 acres.
While the concession application is pending, it precludes any others from
performing exploration on this site. Upon assessing that the property has
potential mining prospects, the Joint Venture has the right to apply for the
mining concession.
<PAGE>
Potosi Lease Agreement
The Joint Venture entered into a lease agreement with the San Felipe Potosi
Cooperative ("Cooperative") of the City of Potosi, El Salvador on July 6, 1993,
to lease the real estate 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 and under
the following basic terms and conditions:
1. The term of the lease will be for a period of 30 years plus an option to
automatically extend the lease for an additional 25 years.
2. The lease payment will be 5% of the gross receipts derived from the
production of precious metals from this site and will be payable monthly.
3. The Joint Venture will advance to the Cooperative the funds
required to obtain the mining concession from the El Salvador
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Department of Energy, Mines and Hydrocarbons and all related costs will be
reimbursed or will become a deduction from future rental payments.
4. 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.
5. 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
El Salvador Social Security System.
6. 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.
Modesto Mine
Modesto Mine Location
The Modesto Mine is located due north of the town of El Paisnal, approximately
19 miles north of the Capital City, San Salvador. The Joint Venture considers
this property as a good gold mining prospect and since August, 1993, it has
proceeded with an exploration program.
Modesto Mine Geology
From its geologist and from the records available to the Joint Venture, the
following information was obtained:
Two persistent veins "Paderon" and "Chicharron" outcrop along the crests of two
parallel hogback ridges 1,900 meters apart, and are composed of thick flat-lying
andesite flows capped by discontinuous patches of rhyolite. These were examined
in 1948-1950 by M. Buell along strike (45 degrees) for 2,240 meters and 2,760
meters respectively and down dip (60 degrees to 80 degrees southeast) a maximum
of 25 meters. The Paderon vein was barren but the north-eastern 1,320 meters of
the Chicharron returned the following values:
1. "D" winze, five meters deep, northeast end: 0.46 ounces of
silver, 0.82 ounces of gold over 61 meters horizontally; 0.71
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ounces of silver, 0.61 ounces of gold over 3.1 meters vertically from
quartz of undetermined orientation in rhyolite; 0.30 ounces of silver, 1.20
ounces of gold from a 15-ton dump and a value of $14.653 per ton from a
ten-ton dump. (The market price of gold was pegged at $35 an ounce.)
<PAGE>
2. "S" winze, 420 meters southwest of "D" winze: no values.
3. "5" winze, 882 meters southwest of "D" winze: 1.85 ounces of
silver, 0.65 ounces of gold over an average of 1.0 meter to a
depth of 11 meters below outcrop. A 30-ton dump ran 2.28
ounces of silver and 0.82 ounces of gold.
4. "14" winze, 1,320 meters southwest of "D": 0.78 ounces of
silver, 0.22 ounces of gold to 19 meters below outcrop. A
60-ton dump ran 0.15 ounces of silver, 1.14 ounces of gold;
average of six dump samples was 0.68 ounces of silver, 0.31
ounces of gold. A surface sample representing a ten-meter
width of vein structure gave 0.06 ounces of silver, 0.09 ounces
of gold, including 1.5 meters of 0.40 ounces of silver and 0.50
ounces of gold on the footwall.
A 155 meter crosscut, driven to intersect the vein 62 meters vertically below
surface and 80 meters northeast of "14" winze encountered only weak quartz
mineralization. Of 20 samples taken in 45 meters of drift, one returned 10.25
ounces of silver and 0.35 ounces of gold over 1.20 meters and the remaining 19
averaged less than 0.40 ounces of silver and 0.05 ounces of gold.
On 30 meters of drifting up to seven meters below surface at "5" winze, 1,095.6
tons grading 1.66 ounces of silver and 0.505 ounces of gold were indicated.
The mineralization is the Potosi type, very finely banded, milky, aphanitic,
sulfide-free quartz, with a gold-silver ratio similar to El Dorado's. No calcite
was seen on the dumps. Wall rock alteration is not noticeable on surface,
however fine grained silicification and pyritization of the andesite appears on
the "5" winze dumps.
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Modesto Mine Ore Reserves and Exploration Results
The exploration through March 31, 1996, has accomplished the following: Four
bodies of gold ore have been blocked which contain approximately 18,800 ounces
of gold in 80,000 tons of ore with an average grade of 0.235 ounces of gold per
ton.
The Modesto Mine appears to be a very good gold prospect. Since October 1993
through August 1995, three veins were discovered which extend over a length of
one and one-half miles and a width of about one mile. The width of this area has
a series of perpendicular and oblique tiny veins well dispersed which is a
desirable ore for an open-pit operation.
There are three vein systems:
(1) In the Chicharron Vein, 59 surface channel trenches were hand
excavated in a one and one-half mile length and over 1,895
assay samples were taken. The vein width averages about 17
feet and the surface grade averaged 0.04 ounces of gold per
ton. In the land that the Company has purchased, the average
surface grade is 0.20 ounces of gold per ton, over a length of
1,250 feet. A preliminary ore reserve calculation of this
small area using a depth of 100 feet reflects a potential of
another 21,000 ounces of gold.
(2) The Intermidy Vein is located 1,170 feet south of the Chicharron Vein. Ten
channel trenches were hand excavated for a distance of 1,065 feet. The vein
widths ranged from four feet to seven feet. Over 265 fire assay samples
reflected an average of 0.02 ounces of gold per ton. The gold in this area
is well distributed.
(3) The Paredon Vein is located about one mile from the Chicaharron Vein. The
eight trenches over a length of 1,881 feet and 68 assay samples reflected a
grade of 0.02 ounces of gold per ton.
<PAGE>
There are three underground workings:
(1) Adit No. 10 - the highest adit in 165 feet of workings is 4.29
feet in width. 310 assay samples showed an average of 0.03
ounces of gold per ton.
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(2) Winze No. 5 is located 660 feet north of the Taladron Adit and is about 44
feet in depth. About 28 feet from the surface, the first crosscut was found
and followed. The dump material assayed from 327 samples averaged 0.35
ounces of gold per ton.
(3) Taladron Adit (597 feet area) was cleared with an average width of about
seven feet. A total of 60 assay samples were taken mainly from the basalt
area. Some of the stope fill material proved a grade of gold ranging from
0.02 to 0.45 ounces of gold per ton. At a depth of 150 vertical feet, the
Chicharron Vein was intercepted.
The Joint Venture employs from 22 to 28 employees to work at this mine
exploration program.
Modesto Mine Present and Proposed Exploration Program
After completing the necessary surveying, mapping and planning, the Joint
Venture proceeded to clean and trench the vein exposure. Since August, 1993,
2,104 metric feet of surface channel trenching (6,943 feet) and 345 meters
(1,139 feet) of adit cleaning were completed. In addition, four inclines have
been completed. A total of 3,400 fire assay samples were performed. The Joint
Venture will continue the channel trenching and the reopening of the former
adits as well as to formalize its own drilling program.
Modesto Mine Concession/Ownership
On or about September 2, 1993, the Joint Venture through one of its employees,
filed an application with the El Salvador Department of Energy, Mines and
Hydrocarbons to explore the 4,000 hectares (9,800 acres) of property known as
the Modesto Mine. The application, together with the consent to explore this
area from the property owners owning more than 25% of total area, has been
acknowledged as being received by the Director of the El Salvador Agency. The
Joint Venture had submitted its original plan to the El Salvador Director of
Energy, Mines and Hydrocarbons on January 24, 1994, outlining its exploration
program.
Hormiguero Mine ("Hormiguero")
Hormiguero Location
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The Hormiguero is located approximately five miles southeast from SCMP off of
the Pan American Highway in the Departments of San Miguel and Morazan, Comacaran
Jurisdiction, in the Republic of El Salvador. The Joint Venture plans to survey,
map, plat, plan and develop an exploration program.
Hormiguero Current Status
The Joint Venture continues to develop an exploration program on the 5,000 acre
site. An application for exploration has been filed on September 6, 1993 with
the Department of Energy, Mines and Hydrocarbons, a division of the El Salvador
Minister of Economy's office.
<PAGE>
The Hormiguero property continues to be in the stages of being mapped
geologically and topographically on a referenced grid in order to provide a base
to plan a drilling program with the objective to prove that a commercial body of
ore may extend below the bottom of the former workings. This drilling activity
would also determine if the faulted north end of the Gallardo vein continues.
Further drilling would evidence the mineralization of four explored veins: La
Gloria, Victoria, Tecolote and El Dorado.
Hormiguero Geology and Historical Information
The following information was obtained from a report entitled, "Mining in El
Salvador-United Nations Development Programs
1968-1971,":
". . . From 1913 to 1918 the Comacaran Gold Mining Co. produced
607,062 ounces of silver and 72,142 ounces of gold from 208,096
tons. (Swanquist), and when this company liquidated in 1919 the El
Salvador Silver Mining Co., formed by some of the Butters Co.
personnel, continued operations on a small scale until 1921. In
1930 the mine was reopened by the original property owners, the
Gonzalez family, and functioned periodically until 1948, producing
during the last 3 years about 21,000 ounces of silver and 3700
ounces of gold. "Straight arithmetic averaging from the production
figures gives an overall recovered grade of 0.351 oz. gold and 2.92
oz. silver for the period 1913-1918, or assuming a 10% mill less, a
mill head of 0.386 oz. gold and 3.21 oz. silver. Mill records for
1917, the only surviving technical data, give a bullion production
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of 139,369.36 ounces of silver and 17,193.84 ounces of gold from 61,890 tons. A
mill head calculated from this, again at 10% mill loss, was probably 0.30 ounces
gold and 2.47 ounces silver."
"Although known locally . . . as `Hormiguero' the deposit is actually a
composite of three separate sections, the Gallardo, Guadalupe and Hormiguero,
all in coarse-grained andesite, grouped about and formerly connected by aerial
tramway to a central mill situated immediately southwest of the Canton
Hormiguero. The Gallardo and Guadalupe veins are strong, persistent structures
striking 045 [degrees] and 020 [degrees] respectively and forming thin ridges
500 feet east and 1,750 feet west of the central mill. Both are composite and
slightly braided structures composed of two main parallel branches 70 feet
apart, and several interconnecting sub-branches, all dipping greater than 60
[degrees] west. Vein material is banded and crustiform quartz-calcite, secondary
manganese oxides and probaly [sic] rhodochrosite, weakly mineralized with
pyrite, spalerite, galena and chalcopyrite. Strong proplylitization accompanied
by considerable pyrite has attacked the andesites outward for about ten feet
from the walls resulting in the formation of yellowish red, clayey oxidation
products on surface.
"The Gallardo has been worked on six levels for 2050 feet along strike and
400 feet vertically. Access was through the Benjamin adit at the extreme
southwest end and an inclined (61 [degrees]) shaft 350 feet from the northeast
end. Two vertically plunging ore shoots 300 and 600 long and 500 feet apart were
stoped to the 5th level where the larger bottomed, according to notations on a
long section made by the El Salvador Silver Mining Co. in 1920. Limited stoping
above the Benjamin adit suggests a third shoot in that area and a possible
unexplored prolongation of the vein towards the southwest. An abrupt cut-off of
the north (larger) ore shoot coincident with the north end of the mine may be
due to lateral fault displacement; an undeveloped segment of the vein might
therefore be anticipated further north.
"Horizontal development of the Guadalupe vein opened a 1600 foot strike
length on both a hanging wall and footwall branch, but the dip, exposed on five
levels to 350 feet has been examined in an unsystematic manner more suitable for
exploration than exploitation. Little ore has in fact been taken from
underground; most of the production appears to have come from open cuts. The
only regular mining has been confined to a 400 foot lens on the footwall branch,
150 feet south of the main three-compartment production shaft, which
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was from surface 200 feet vertically to the third level, and from a small
irregular shoot directly opposite it in the footwall branch. Outside of these,
the underground layout leaves the general impression that the distribution of
ore grade mineralization is highly erratic and randomly dispersed.
<PAGE>
"1100 feet, and north of the Gallardo and Guadalupe mines, five steeply north
(?) dipping, parallel, curving veins (Emilio, Oriente Emilio, Hormiguero, San
Francisco and 4 de Julio) evenly spaced over a width of 200 feet, constitute the
separate Hormiguero mine. They lie between the hypothetical northward
prolongation of the Gallardo and Guadalupe structures and have been worked over
an aggregate strike length of 1200 feet starting from a point 700 feet west of
the Guadalupe projection first 500 feet east-west then through a 700 foot arc
curving to the southwest into alignment width, and 900 feet north of the north
end of the Gallardo vein. At least 7 levels were developed to a depth of over
400 feet from a vertical 2 compartment shaft. The amount of stoping is unknown;
the available data show that irregular 100 to 200 foot long shoots were worked
to depths of 300 and 400 feet on the east-west striking portions of the San
Francisco and 4 Julio veins.
"Four other virtually unexplored veins known as La Gloria or Esperanza,
Victoria or Tilden, Tecolote and El Dorado, occur 500 to 900 feet west of the
Gallardo and Hormiguero mines. The Gloria and Tecolote strike east-west; the
remaing [sic} two are roughly parallel to the Gallardo. In a letter dated 1919,
a geologist named Mr. Swanquist states that initial exploration and very limited
mining obtained `encouraging results' from the Tecolote and `fair ore' from the
El Dorado.
"The same letter mentions two additional prospects, the Consuelo of unknown
location but `700 feet from the plant and just being opened up' and the La Posa,
on the Las Garzas river, north of Canton Hormiguero from which ore grading
$10.92 per ton ($20.00 gold and $1.11? [.385] silver), with values mainly in
silver, was mined over 4 to 5 foot widths, in a 35 foot winze."
In 1921, i.e. during El Salvador Silver Mine's final year of operation, the
following ore reserves were blocked out:
Proven: (U.S. dollar values based on a $20.00 per ounce gold price
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and a $0.385 per ounce silver price.)
Dollar Value
Tons Grade Per Ton
------ ----- -------
(a) Guadalupe Hanging Wall Vein 11,208 0.353 $7.06
Guadalupe Footwall Vein 7,528 0.319 $6.37
(b) Hormiguero and Gallardo 10,000 0.400 $8.00
------
Total 28,736
Probable:
(a) Guadalupe Hanging Wall Vein 21,900 0.295 $5.89
Guadalupe Footwall Vein 23,556 0.340 $6.80
------
Total 45,456
(Proven and probable gold and silver ore reserves total 74,192 tons.)
Exploration should center on the undeveloped veins, on the possibility of
extending the Hormiguero veins farther to the east and west, and on the
unexplored ground between the north end of the Gallardo vein and the Hormiguero.
<PAGE>
Hormiguero Ownership
The surface is owned by various individuals and families.
Montemayor Mine ("Montemayor")
Montemayor Location/Ownership
The Joint Venture has obtained permission from a number of property owners which
permits the Joint Venture to enter their property for the purpose of exploring,
exploiting and developing the property and then, if feasible, to mine and
extract minerals from this property. The term of this permission is for an
infinite period. Montemayor is located about 14 miles northeast of the SCMP, six
miles northwest of the SSGM and about two miles east of the City of San
Francisco Gotera in the Department of Morazan, Republic of El Salvador.
Historical records evidence that the potential for the
67
<PAGE>
Montemayor to become an exploration and development gold-producing prospect is
good.
Montemayor Geology and Historical Information
The following information was obtained from a report entitled, "Mining in El
Salvador-United Nations Development Program
1968-1971":
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<PAGE>
"Montemayor-Lola Area
"The eastern and northeastern limits of the Three Corners area are defined by a
scattering of three small mines and numerous prospects distributed along the
course of the south-flowing Rio Montemayor in a system of parallel normal faults
collectively known as the `Montemayor lineament'. Consistent with the origin
proposed under `General Geology' these have been probably induced by subsidence
along the northern margin of the central graben, resulting in a progressive
tensional failure that has sliced the pyroclastic rocks of the area into a
series of tabular blocks stepped successively upward to the northeast end
culminating in the steep serrated ridges of the Copetillos escarpment. This has
resulted in the creation of a 13,000 foot-wide regional `sheeted' zone composed
of closely spaced, northwest striking, west dipping parallel faults, stretching
for five miles northeast along the river and has imported to the river gorge an
assymetric cross section whose higher, northeast slope is underlain by deeply
dissected acid to basic tuffs and lower southwest slope by the low rolling
andesitic, Three Corners terrain.
"Extensive veining in the fragmentals has produced a lengthy mineralized zone
roughly coincident with the `sheating,' which includes the Montemayor deposit
near the headwaters of the river and, arranged in en-echelon alignment
downstream, the Tebanco, Lola, and Tepeyac occurrences and the minor Salamanca,
Jimerito, Mina Grande, Copetilla and La Joya showings.
"The veins, which dip almost universally 50 degrees to 80 degrees southwest, are
normal quartz-calcite, sulfide-poor fracture fillings, distinguished by their
remarkable lateral persistence and unfortunate paucity of workable ore shoots.
Sporadically distributed in lenses three to eight feet wide and up to 200 feet
long and separated by longer stretches of barren ground, these have so far
yielded enough tonnage to sustain mining operations only at the marginal Mina
Lola. On the whole, however, the area is little explored.
<PAGE>
"Montemayor
"The Montemayor property embraces a group of small mine openings and prospects
aligned along a series of parallel southeast striking veins following the course
of the Montemayor river for 16,000 feet,
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<PAGE>
from its headwaters to the beginning of the pronounced `S' bend enclosing the
old Tabanco mine. Some confusion over the names and locations of these various
workings has always existed; for the purpose of this report, the following
nomenclature, adapted from early maps of the district, will be employed.
Proceeding upstreams [sic], the workings are:
"(a) Montemayor-comprises the Montemayor, Montanita and Santa Gertrudis
sections, extending for 2700 feet upstream from the Caserio Montemayor.
"(b) Tempisque-4800 feet north of the Caserio Montemayor and 1200 feet up the
east bank of the river.
"(c) Banadero-Carao-Carago-4500 to 8000 feet upstream from
Tempisque.
"Mining was confined to Montemayor; appreciable underground exploration to
Montemayor and Tempisque. No motor road reaches the properties; access is either
by five kms. of the mule trail along the southwest bank of the river from the
end of the Santa Rosa de Lima-Caserio El Tabanco road or cross-country about the
same distance by mule trail from a north branch of the Gigante road. Trails also
lead into the headwater area from the town of Sociedad.
"Historical information is sketchy. The area was almost certainly
worked in conjunction with the Tabanco mine, first by the English
company until about 1855, then the Cia. Francesa de Minas de El
Salvador who operated it some time between 1856 and 1882 (Guzman).
Until 1914 (?) no information is forthcoming; then the mine was
comprehensively sampled by the Butters Co. and its successors
between 1915 and 1921 and by the R.W. Habard Co. and Central
American Mines around 1936. Apparently the only production from
1856 to 1936 was obtained by the English and French companies but
the figures are unknown.
"Roberts and Irving report that the mine was again functioning at 60 tons per
day in 1945 under Sr. Benjamin Gonzalez, yielded a value of $233,818 over a
three year period. Grebe (1955) does not confirm this and the data may refer to
the Hormiguero mine which Sr. Gonzalez had in production at that time. Finally
in 1963 the principal showings were taken up by a local enterprise, Minas
Montemayor, S.A. and received a little more attention up until 1967.
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<PAGE>
"The vein system is apparently controlled by a simple set of poorly exposed,
northwest striking faults paralleling the river and outcropping occasionally in
the river bed and rarely on the steep east slope of the river gorge. Dips are to
the southwest between 50 degrees and 60 degrees. Vein mineralization is
quartz-calcite with weak disseminated pyrite and a small quantity of
chalcopyrite, spalerite and galena. The host rocks are a succession of coarse
andesitic tuffs and agglomerates, fine acid tuffs and flows propylitized along
the veins, and locally silicified towards the north end of the zone of
mineralization.
"Formal mining was confined to three parallel veins spaced over a 500 foot
interval up the east bank from the creek, at Montemayor. The footwall Montanita
vein was opened for 200 and 250 feet respectively on two levels about 70 feet
apart, served by a winze and two crosscuts, and stoped over 100(?) feet on the
upper level and 200(?) feet on the lower. Two levels opened at 115 and 215 feet
off a 2 compartment shaft traced the middle (Montemayor) vein for 640 feet and
disclosed a 200 foot long ore shoot, centered on the shaft and partially stoped
before 1917, that might have graded around 12 ounces silver and 0.29 ounces
gold. On this same structure, 1250 feet north of the shaft in the separate Santa
Gertrudis section, perhaps 9000 tons grading $31.00 at gold and silver $0.507
were extracted from a 90 by 220 foot area, averaging 7 feet wide, developed on
four levels through a second vertical shaft.
<PAGE>
"The hanging wall `sulfide' vein located 40 feet west of the Montemayor is
apparently more heavily mineralized but contained no ore over 75 feet of
drifting driven from the lower Montemayor level.
"On the Tempisque showing, two levels, 30 feet apart vertically and
served by two adits, have revealed 520 feet of the Tempisque vein
running 5.49 oz. silver and 0.14 oz gold over a 2.7 foot width,
according to sampling by the R.W. Hebard Co. in 1936. Check
sampling by the present owners in 1966 returned an indicated grade
of 3.68 oz. silver and 0.115 oz. gold over four feet, on the lower
level.
"Work on the Carago section has been purely exploratory; the only surviving
records (map MM-8) show an average width of 2.3 feet of 9.95 ounces silver and
0.16 ounces gold in a 60 foot shaft and a 160 foot long drift, spaced 280 feet
apart."
71
<PAGE>
Montemayor Current Status
From July 19, 1995 to March 31, 1996, the following exploration was achieved:
surface channel trenching was performed in an area of over 270 meters (891
feet); and ten channel trenches were performed in an area of over 97 meters (320
feet). From this trenching, 100 fire assay samples were shipped to the Joint
Venture's laboratory.
A total of 48 samples of fire assays were completed. They varied from 0.01 to
0.14 ounces of gold per ton with an over-all average of 0.035. The Joint Venture
has 11 underground adits and workings in the process of being cleaned. They are:
Polvorera Adit No. 1 56 meters (185 feet)
Polvorera Adit No. 2 100 meters (330 feet)
Lechuza Adit 60 meters (198 feet)
Cablote Adit 7 meters (23 feet)
Montanita Adit 75 meters (248 feet)
Guascanal Adit 19 meters (63 feet)
Sirena Adit 7 meters (23 feet)
El Indio Adit 29 meters (96 feet)
Tempisque Sub Level No. 2 9 meters (30 feet)
El Indio Winze 10 meters (33 feet)
Guaruma Winze 12 meters (40 feet)
Total 384 meters (1,269 feet)
A total of 309 samples of fire assays were taken. Only 48 samples of fire assays
were completed. Between 20 to 30 employees are employed at this site.
Comseb Laboratories (Lab)
The Joint Venture has two laboratories: one located at the SCMP facilities and
the other on real estate owned by the Company near the SSGM site. At the SSGM
Lab, the Joint Venture employs five employees for each eight-hour shift and it
recently has been working three shifts per day. A total of 51,165 samples of
fire assays have been completed through March 31, 1996. Approximately six
employees are working at the SCMP laboratory.
<PAGE>
Item 3. Legal Proceedings
72
<PAGE>
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 4(a). Executive Officers and Managers of the Company
Listed below are the names and ages of each of the present executive officers
and managers of the Company together with the principal positions and offices
held by each as of the end of the Company's fiscal year ended March 31, 1996.
Executive
Age as of Offices Held Period Served
Name March 31, 1996 With Company(1) In Office (2)
- -------------------------------------------------------------------
Edward L. Machulak 69 President, Chief
Executive Officer,
and Operating and
Financial Officer 9/19/62 to present
Treasurer 06/78 to present
Edward A. Machulak 44 Executive Vice
(Son of the President) President 10/16/92 to present
Secretary 1/12/87 to present
Assistant Secretary 4/15/86 to 1/12/87
Luis A. Limay 54 Project and Mine
Manager 10/86 to 1995
Manager of El
Salvador Operations 03/95 to present
(1) Neither have there been nor are there any arrangements nor understandings
between any Executive Officer and any other person pursuant to which any
Executive Officer was elected as an Executive Officer.
(2) Executive Officers are elected by the Directors for a term expiring at the
Directors' Annual Meeting and/or hold such positions until their successors
have been elected and have qualified.
Family relationships
73
<PAGE>
Edward A. Machulak, presently a Director, Member of the Directors' Executive
Committee, Executive Vice President, and Secretary, is the son of Edward L.
Machulak, the Company's Chairman of the Board of Directors who is also a
Member of the Directors' Executive Committee, and is the President and
Treasurer of the Company. Attorney John E. Machulak (son of Edward L.
Machulak) of the law firm of Machulak, Hutchinson, Robertson, Dwyer & O'Dess,
S.C. is the legal counsel for the Company.
<PAGE>
Directors', Officers', and Key Management's Experience
The business experience of each of the Directors, Officers, and Key
Management is as follows:
Edward L. Machulak has been employed by the Company since September, 1962.
Mr. Machulak has served as the President, Director, and Chairman of the Board
of Directors of the Company since 1962, Treasurer since 1978, and on March
11, 1991, he was elected as a Member of the Directors' Executive Committee.
He is a Director and the President for each of the Company's subsidiaries:
Homespan Realty Co., Inc.; Piccadilly Advertising Agency, Inc.; San Luis
Estates, Inc.; San Sebastian Gold Mines, Inc.; and Universal Developers, Inc.
He is the authorized representative of the Commerce/Sanseb Joint Venture. He
is a Director and Treasurer of Mineral San Sebastian S.A. de C.V. Also he is
involved in various capacities with the following companies: General Lumber &
Supply Co., Inc., Director; Edjo, Ltd., Director and Secretary; and Landpak,
Inc., Director and Secretary.
Edward A. Machulak was elected and holds the following Company positions:
Director as of October 28, 1985; a member of the Directors' Executive
Committee as of March 11, 1991; Executive Vice President as of October 16,
1992; Secretary as of January 12, 1987; and he was the Assistant Secretary
from April 15, 1986 through January 12, 1987. His business experience is as
follows: Director and Corporate Secretary of General Lumber & Supply Co.,
Inc., a building material wholesale and retail distribution yard from April
1, 1970 to November 1983; Director and President of Gamco, Inc., a marketing
and advertising company, from November
74
<PAGE>
1983 to present; Director and President of Circular Marketing, Inc., an
advertising and marketing business, from March 1986 to present; Director and
President of Edjo, Ltd., a company involved in the development, subdividing
and sale of land and real estate from June 7, 1973 to present; Director and
President of Landpak, Inc., a corporation which owns, operates, manages and
sells real estate from September 1985 to present; Partner of WEEM
Investments, a real estate oriented business from May 1976 through 1995; and
he was involved in other corporate real estate ventures and activities since
1976.
Clayton H. Tebo has been a Director of the Company since March 11, 1991. Mr.
Tebo had been a Director of the Company from the Company's inception,
September, 1962, through March 1, 1969. Mr. Tebo has been retired since March
6, 1969, however, he has been retained from time to time by the Company as a
consultant for special projects. He also was the special assistant to the
President prior to and after his 1969 retirement.
Luis Alfonso Limay was appointed to the position of Project and Mine Manager
since October 1986 and is responsible for managing the daily affairs of the
Joint Venture. During March, 1995, Mr. Limay was appointed to the position of
Manager of El Salvador operations which now supersedes his position as
Project and Mine Manager. Mr. Limay was employed by Sanseb from 1977 through
March 1978 as its chief geologist. He obtained degrees in geology and
engineering from the National University of San Marlos, Lima, Peru, and the
University of Toronto. He was employed as chief geologist by Rosario
Resources in a Honduran underground mining operation and he held the same
position with Canadian Javelin in El Salvador.
<PAGE>
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholders' Matters
(a) Principal Market and Common Stock Price
75
<PAGE>
The Company's common shares are traded on the Boston Stock Exchange under the
symbol "CMG" or "CMG.BN," since November 29, 1974, and on the National
Association of Securities Dealers Automated Quotation System Small-Cap Issue
(NASDAQ) under the symbol "CGCO" since March 23, 1987, and the shares are listed
daily in the Milwaukee Journal Sentinel, a Wisconsin newspaper, under "Wisconsin
Stocks," under the name of "Commerce Group." The common shares are also listed
in many nationwide newspapers.
The following table sets forth the range of high ask and low bid prices of the
common shares as reported by NASDAQ for the periods indicated. Such quotations
reflect inter-dealer prices without retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions.
For the period ended March 31, 1996 March 31, 1995
High Low High Low
----- ----- ----- -----
First quarter ending June 30 $4.63 $3.75 $2.75 $1.63
Second quarter ending September 30 $3.75 $3.00 $3.50 $2.63
Third quarter ending December 31 $3.25 $2.63 $3.13 $2.38
Fourth quarter ending March 31 $3.25 $2.75 $4.50 $3.50
(b) Approximate Number of Holders of Common Shares
As of March 31, 1996, the common shares were held by approximately 3,000
shareholders of record of which more than 99% are United States' residents.
(c) Dividend History
Subject to the rights of holders of any outstanding series of preferred shares
to receive preferential dividends, and to other applicable restrictions and
limitations, holders of shares of common shares are entitled to receive
dividends if and when declared by the Board of Directors out of funds legally
available. No dividends were payable during the last fiscal year ended March 31,
1996. The declaration of future dividends will be determined by the Board of
Directors in light of the Company's earnings, cash requirements and other
relevant considerations.
<PAGE>
Item 6. Selected Financial Data
76
<PAGE>
The following table sets forth certain consolidated financial data for the
respective periods presented and should be read with the Consolidated Financial
Statements and the related notes thereto, and Management's Discussion and
Analysis of Financial Condition and
Results of Operations.
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Year ended March 31:
Total revenue $ 1,345,260 $ 823,181 $ 507,964 $ 403,242 $ 364,747
=========== =========== =========== =========== ===========
77
<PAGE>
Income from
continuing
operations $ 787,802 $ 274,747 $ 66,852 $ 41,970 $ 22,583
=========== =========== =========== =========== ===========
Income (loss) from
continuing operations
per share:
Primary $ 0.11 $ 0.046 $ 0.01 $ 0.01 $ 0.01
=========== =========== =========== =========== ===========
Fully diluted $ 0.11 $ 0.045 $ 0.01 $ 0.01 $ 0.00
=========== =========== =========== =========== ===========
Cash dividends
declared per common
share $ 0 $ 0 $ 0 $ 0 $ 0
=========== =========== =========== =========== ===========
At year end:
Total assets $20,513,115 $17,617,423 $14,204,563 $13,568,374 $12,156,852
=========== =========== =========== =========== ===========
Long-term notes
payable $ 20,259 $ 120,000 $ 245,000 $ 245,000 $ 0
=========== =========== =========== =========== ===========
Convertible preferred
stock 0 0 0 0 250,000
=========== =========== =========== =========== ===========
Total long-term
obligations and
convertible preferred
stock $ 20,259 $ 120,000 $ 245,000 $ 245,000 $ 250,000
=========== =========== =========== =========== ===========
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion provides information on the results of operations for
the three years ended March 31, 1996, 1995 and 1994 and the financial condition,
liquidity and capital resources for the same three-year period. 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 in the pre-production stage at the SSGM and it
simultaneously is performing four separate programs. First, it has
78
<PAGE>
commenced a limited production of gold by processing the SSGM tailings 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 four gold
mine prospects identified as the San Felipe-El Potosi Mine, and its extension,
the El Capulin Mine, the Hormiguero Mine, the Montemayor Mine, and the Modesto
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 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. Peace
prevails.
<PAGE>
Current Status
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 gold ore and
precious metals' ore per day or 400 tons of tailings. While the Joint Venture
did operate the mill to its full capacity for a few months commecing March 1995,
the mill has operated at a lower production rate of 204 tons per day due to the
following factors. A new labor force had to be trained to operate the SCMP;
metallurgical differences had to be resolved; the rainy season was unusually
severe; the head grade variances; and problems were encountered with the
handling of the separation of the coarse material in the tailings. Taking into
account all of the factors affecting the SCMP, if the Joint Venture had not
offset all of the revenues ($1,238,612) from the gold sales by reducing the
advances to the Joint Venture, it would have earned a nominal profit.
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 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
79
<PAGE>
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 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
four other mines: the San Felipe-El Potosi, and its extension, the El Capulin
Mine, the Modesto Mine, the Hormiguero Mine, and the Montemayor 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.
<PAGE>
Results of Operation Fiscal Years March 31, 1996 Compared to March
31, 1995
The Company had a net gain of $787,802 or $.11 per share for its fiscal year
ended March 31, 1996 compared to a net gain of $274,747 or $.046 per share for
the previous fiscal year or an increase of 287%. This increase was attributable
primarily to the additional interest income earned from the advances to the
Joint Venture. This fiscal year the interest earned was $1,286,739 compared to
the prior fiscal year's interest earnings of $751,389. This gain results
80
<PAGE>
primarily from a charge of interest due to the increase of advances to the Joint
Venture of $11,799,074 for this period or a net increase of $3,122,766 (36%)
from the last fiscal period which amounted to $8,676,308. The total advances to
the Joint Venture during this fiscal period amounted to $13,037,686 but were
reduced by the $1,238,612 revenues received from the gold sales.
Likewise the Company's borrowings have increased from $2,725,014 (1995) to
$3,583,480 (1996) or approximately 32% and the interest expense for 1996 has
increased slightly from $466,604 to $470,710 for the last year.
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 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.
Results of Operation Fiscal Years March 31, 1995 Compared to March
31, 1994
The Company had a net gain of $274,747 or $0.046 per share earnings for its
fiscal year ended March 31, 1995, compared to a net gain of $66,852 for the year
ended March 31, 1994, an increase of over 400%. The basic reason for an increase
in income was due to the additional interest income earned from the Joint
Venture $751,389 (1995) compared to $451,180 (1994). This increase of interest
income was attributable to an increase of advances to Joint Venture from
$5,792,230 in 1994 to $8,676,308 in 1995 (50% increase). Furthermore, the
interest expense, due to an increase in interest rates, was increased to
$466,604 (1995) compared to $357,391 (1994).
The general administrative and campground expenses of $80,505 in 1995 compared
to $83,721 in 1994 was slightly lower due to a decrease in the cost associated
with the repair and maintenance of campground buildings. The increase in
interest expense of $109,213 in 1995 was primarily attributable to the increase
of the prime interest rate which is the basis for the interest rate charged.
Liquidity and Capital Resources
81
<PAGE>
The Company continues to be cognizant of its cash liquidity until it is able to
produce adequate profits from its gold production. It will attempt to obtain
sufficient funds to assist the Joint Venture in placing the SSGM into production
as 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.
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: $3,122,761 in fiscal
1996. 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. The Company
was able to obtain sufficient funds to complete the retrofitting of the SCMP, to
purchase consumable inventory, to purchase certain hauling and loading equipment
and for working capital use. 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. From September, 1987 to March 31, 1996, the Company and
three of its wholly-owned subsidiaries advanced a sum of $11,799,074 to the
Joint Venture, exclusive of gold sale proceeds.
<PAGE>
Advances to the Joint Venture
Advances to the Joint Venture during the Company's fiscal year ended March 31,
1996 were derived from the various sources including related parties as follows:
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<PAGE>
Funding Sources From
Related Other
Parties Sources Total
----------- ----------- -----------
Accounts payable &
accruals etc. $ (2,074) $ (357,936) $ (360,010)
Notes payable 827,536 30,930 858,466
Equity 774,306 572,488 1,346,794
Net income 787,802 787,802
----------- ----------- -----------
Totals $1,599,768 $1,033,284 $2,633,052
Increase in cash &
cash equivalents 489,714 489,714
----------- ----------- -----------
Advances to
the Joint Venture $1,599,768 $1,522,998 $3,122,766
=========== =========== ===========
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 five exploration targets for the purpose of increasing its gold ore reserves
should be $10 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 March 31, 1996, the Company has advanced to the Joint
Venture, the sum of $11,208,809 and three of the Company's wholly-owned
subsidiaries have advanced the sum of $590,265, for a total of $11,799,074. 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
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<PAGE>
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
and modernization 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 Hormiguero Mine, and the Montemayor 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 bridge, for community telephone
building and facilities, for the purchase and advance lease payment of the real
estate on the Modesto Mine, 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, therefore, the advances reported are after
deducting these gold sale proceeds. Presently the Company believes that the
technical SCMP problems will be resolved to permit it to reach its goal of
processing 400 tons of tailings 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 heap-leaching operation and over time to increase the production
capacity to 6,000 tons per day at the SSGM. These funds would be expended in
excavation and equipment costs of $6 million to develop the open pit mine and
constuct a leach pad, and mining equipment and crushing equipment at a cost of
$7 million to extract and process the ore. 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 to proceed with its goals which include the SCMP expansion and the
acquirement of a crushing system. These plans include the raising of $2.1 in net
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<PAGE>
proceeds from the sale of Series A Convertible Preferred Stock in fiscal 1997
and the placement of additional equity securities on similar terms Management
believes that these funds, together with with additional placements and proceeds
of gold sales, will be sufficient to operate the SCMP and SSGM during fiscal
1998.
Employees
The Joint Venture employs approximately 304 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.
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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 will be
increased accordingly.
Related Party Loans, Obligations and Transactions
The related party transactions are included in detail in the Notes to the
Consolidated Financial Statements.
Company Advances to the Joint Venture
Since September 1987 through March 31, 1996, the Company, and three of its
subsidiaries, have advanced to the Joint Venture $11,799,074. Included in the
total advances is the interest charged to the Joint Venture by the Company and
this charge amounts to $3,667,420 through March 31, 1996. The Company furnishes
all of the funds required by the Joint Venture.
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 operations of the SCMP and SSGM and to continue the
exploration of its other mining prospects.
<PAGE>
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 past fiscal year, the
Company was able to invest a sum of $3,122,766, net of the additional $1,238,612
received from the sale of gold.
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<PAGE>
Therefore, a total of $4,361,378 has been reinvested 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 to conduct the
present operations during the fiscal year ended March 31, 1997.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
And Supplementary Financial Data
Page
Report of Independent Certified Public Accountants . . . . . . . . 51
Financial Statements:
Consolidated Balance Sheets, Years Ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . 52
Consolidated Statements of Income, Years Ended
March 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . 53
Consolidated Statements of Changes in Shareholders' Equity
Years Ended March 31, 1996, 1995 and 1994 . . . . . . . . . . . 54
Consolidated Statements of Cash Flows,
Years Ended March 31, 1996, 1995 and 1994 . . .. . . . . . . . . 55
Notes to Consolidated Financial Statements . . . . . . . . . . . . 56
Quarterly Financial Data (Unaudited) . . . . . . . . . . . . . . . 68
Supplementary Financial Data:
Report of Independent Accountants on the Financial
Statements Schedules . . . . . . . . . . . . . . . . . . . . . . 78
Financial statements schedules other than those listed herein have been omitted
since they are either not required, are not applicable, or the required
information is included in the financial statements and related notes.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
87
<PAGE>
To the Shareholders and Board of Directors of Commerce Group Corp.
and Consolidated Subsidiaries:
We have audited the consolidated balance sheets of Commerce Group Corp.
("Company"), a Delaware Corporation, and its subsidiaries, as of March 31, 1996
and 1995, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows, for each of the three fiscal years in the
periods ended March 31, 1996, 1995, and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commerce Group Corp. and its subsidiaries as of March 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the periods ended March 31, 1996, 1995, and 1994, in
accordance with accounting principles generally accepted in the United States.
REDLIN AND ASSOCIATES
Certified Public Accountants
Milwaukee, Wisconsin
April 13, 1996
<PAGE>
88
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheets--March 31
1996 1995
ASSETS ----------- -----------
Current Assets
Cash $ 55,653 $ 545,367
Investments 198,982 198,982
Accounts receivable 143,476 0
Inventories 118,748 0
Prepaid items 986 620
----------- -----------
Total current assets 517,845 744,969
Real estate (Note 4) 1,179,836 1,179,836
Advances to Joint Venture
Net of Gold Sale Proceeds (Note 3) 11,799,074 8,676,308
Investment in Joint Venture (Note 3) 7,016,360 7,016,360
----------- -----------
Total assets $20,513,115 $17,617,473
=========== ===========
LIABILITIES
Current liabilities
Accounts payable $ 148,051 $ 222,423
Notes and accrued interest
payable to related parties
(Note 5) 3,084,370 2,256,834
Notes and accrued interest
payable to others (Note 5) 499,110 468,180
Accrued salaries 1,204,140 1,257,190
Accrued directors' fees 0 47,950
Accrued legal fees 76,883 166,355
Other accrued expenses 341,054 173,630
---------- ----------
Total liabilities 5,353,608 4,592,562
Commitments and contingencies
(Notes 3, 5, 6, 7 & 14)
SHAREHOLDERS'EQUITY
89
<PAGE>
Preferred Stock
Preferred Stock, $0.10 par
value
Authorized 250,000 shares:
Issued and outstanding
1996-none; 1995-none (Note 10) $ 0 $ 0
Common stock, $0.10 par value: Authorized 15,000,000 shares; issued and
outstanding:
1996 - 7,792,209 779,221
1995 - 7,294,719 729,472
Additional paid in capital 12,973,006 11,675,961
Retained earnings (deficit) 1,407,280 619,478
----------- -----------
Total shareholders' equity 15,159,507 13,024,911
----------- -----------
Total liabilities and
shareholders' equity $20,513,115 $17,617,473
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Income--March 31
1996 1995 1994
---------- ---------- ----------
Revenues:
Campground income $ 55,692 $ 54,600 $ 54,804
Land Sales 0 9,000 0
Interest income 2,669 6,172 1,980
Interest income-Joint
Venture (Notes 3 & 13) 1,286,739 751,389 451,180
Miscellaneous Income 160 2,020 0
---------- ---------- ----------
Total revenue 1,345,260 823,181 507,964
Expenses:
Cost of Land Sales 0 1,325 0
General and administrative
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and campground expenses 86,748 80,505 83,721
Interest expense 470,710 466,604 357,391
---------- ---------- ----------
Total expenses 557,458 548,434 441,112
---------- ---------- ----------
Net income (Loss) 787,802 274,747 66,852
Credit (charges) for
income taxes 0 0 0
---------- ---------- ----------
Net income (loss) after
income tax credit
(charge) $ 787,802 $ 274,747 $ 66,852
========== ========== ==========
Net income (loss) per
shares (Note 2) $.11 $.046 $.01
========== ========== ==========
Weighted av. shares
outstanding (Note 2) 7,368,058 5,941,950 4,828,496
========== ========== ==========
Fully diluted income
per common share $.11 $.045 $.01
========== ========== ==========
Weighted average diluted
number of shares and
assuming all rights and
options were exercised
on March 31, 1996 (Note 2) 7,465,898 6,101,006 5,808,274
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements Of Change in Shareholders'
Equity For the Years Ended March 31, 1996, 1995 and 1994
Common Stock
---------------------------------------------
Capital in Retained
Number Excess of Earnings
of Shares Par Value Par Value (Deficit)
---------- --------- ---------- ----------
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<PAGE>
Balance March 31, 1993 4,773,253 $477,325 $ 8,173,387 $ 277,879
Net income for FY
March 31, 1994 66,852
Common shares issued
Cash 145,000 14,500 130,500
Cancellation of debt 168,707 16,871 208,556
---------- -------- ----------- ---------
Balance March 31, 1994 5,086,960 508,696 8,512,443 344,731
Net income for FY
March 31, 1995 274,747
Common shares issued
Dir./off./employee/
services comp. 101,800 10,180 141,890
Payment of debt 859,076 85,908 1,543,359
Stock options/rights 978,066 97,807 1,005,151
Cash/equipment
lease/purchase 268,817 26,881 473,118
---------- -------- ----------- ---------
Balance March 31, 1995 7,294,719 729,472 11,675,961 619,478
Net income for FY
March 31, 1996 787,802
Common shares issued
Dir./off./employee/
services comp. 45,384 4,538 110,069
Payment of debt 248,468 24,847 739,090
Stock options/rights 60,260 6,026 139,624
Cash/equipment lease/
purchase 143,378 14,338 308,262
---------- -------- ----------- ----------
Balance March 31, 1996 7,792,209 $779,221 $12,973,006 $1,407,280
========== ======== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
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<PAGE>
<TABLE>
<CAPTION>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31
1996 1995 1994
Operating Activities:
<S> <C> <C> <C>
Net Income (loss) $ 787,802 $ 274,747 $ 88,852
Changes in other operating assets and
liabilities (net):
Accounts receivable & inventory (262,224) 0 0
Other assets (366) 973 (268)
Accounts payable (74,372) 116,241 48,764
Accrued salaries (53,050) 267,550 129,750
Accrued directors' fees (47,950) (6,850) 7,860
Accrued legal fees (89,473) (113,257) 14,562
Accrued liabilities 167,425 (1,260) 49,451
Common stock issued for service 114,607 152,070 0
Cash provided (used) by
operating activities $ 542,399 $ 690,214 $ 316,971
Investing Activities:
Cash advances to joint venture (2,845,282) (1,865,869) (589,619)
Non cash advances to joint venture (1,516,096) (1,018,209) (565,930)
Gross advances to joint venture (4,361,378) (2,884,078) (1,555,549)
Less: gold sale proceeds 1,238,612 0 0
Net advances to joint venture $ (3,122,766) $ (2,884,078) $ (1,155,549)
Financing Activities
Net borrowings 858,466 (508,555) 358,523
Common stock issuance 1,232,187 3,232,224 370,427
Funds provided by financing activities 2,090,653 2,723,669 728,950
Increase (decrease) in cash and cash equivalents (489,714) 529,805 (109,628)
Cash-beginning of year 545,367 15,562 125,190
Cash-end of year $ 55,653 $ 545,367 $ 15,526
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements. The accompanying notes are an integral part of the
consolidated financial statements.
93
<PAGE>
<PAGE>
94
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996
(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, extraction and processing of gold in the
Republic of El Salvador, Central America. Gold bullion, the
Joint Venture's principal product, is produced in El Salvador
and sold in the United States. 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 four other mining properties, all located in the Republic
of El Salvador, Central America.
Presently, the Joint Venture is in the pre-production 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 four gold
mine exploration prospects identified as the San Felipe-El Potosi Mine,
and its extension, the El Capulin Mine, the Hormiguero Mine, the Modesto
Mine, and the Montemayor 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.
95
<PAGE>
96
<PAGE>
(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) Accounts receivable consist of gold bullion shipped to the refinery
pending the settlement date.
(e) Inventories consist of gold on hand at the El Salvador mill
site.
(f) Investments consist of precious stones which are stated at the lower
of cost or market value.
(2) Significant Accounting Policies
<PAGE>
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.
<PAGE>
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
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<PAGE>
number of common shares issued and outstanding during this fiscal year. 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 March 31, 1996, 97,840 option shares would be added assuming that all of
the stock options would be exercised, and if these shares would be added on the
last day of this fiscal year period to the weighted average calculated number of
shares which amounts to 7,368,058, the total number of shares would be
7,465,898, and the profit per share for the fiscal year ended March 31, 1996,
would be approximately the same. The same assumptions were used for the same
1995 fiscal period.
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.
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 and then it produced gold from SSGM from 1972 through
February 1978.
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<PAGE>
<PAGE>
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%.
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 is
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. 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 March 31, 1996, the Company's advances were $11,208,809, and three of the
Company's wholly-owned subsidiaries' advances were $590,265 for a total of
$11,799,074.
Investment in El Salvador Mining Projects
During the fiscal year, the Company has advanced funds, performed services, and
allocated its general and administration costs to the Joint Venture.
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<PAGE>
As of March 31, 1996, 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;
net of gold sale proceeds $11,208,809
The Company's initial investment 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 17,503,414
-----------
Total: 35,728,583
Advances by the Company's three subsidiaries 590,265
-----------
Combined total investment $36,318,848
===========
<PAGE>
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 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 four other El Salvador mining prospects.
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)
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<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 5% 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.
<PAGE>
(c) Mineral Concession
On January 27, 1987, the Government granted a right to the mining
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<PAGE>
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. Under the concession and applicable El Salvador
law, the Joint Venture has the right to export said mineral for five years
beginning with the first day of production without imposition of mineral or
export taxes. It also has the right to import free of duty, equipment and all
other items necessary to operate SSGM. (Reference is made to (h) in this
category.)
Effective February 1, 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.
Under the terms of the concession and agreements referred to in the concession,
the Joint Venture has agreed to the following:
(1) The Joint Venture will pay to 270 former El Salvador
employees pursuant to a settlement agreement dated June,
1985, as follows: A sum of approximately 500,000 colones
(approximately U.S. $57,208 at the current rate of exchange)
in three (3) installments contingent upon the production and
sale of gold, to wit: one-third is to be paid from the sale
of the first production of gold; one-third is to be paid one
(1) year thereafter; and one-third is to be paid two (2)
years after the first payment. The sum of 205,214 colones
has been paid which reduces the total amount due as of March
31, 1996, to 294,786 colones or U.S. $33,728.
(2) 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;
(3) From the profits earned, 5% of the gross wages paid to the
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full-time employees shall be paid into a pension fund;
(4) 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;
(5) 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 5% of its pre-tax profits,
but, in any event, not less than a minimum amount equal to 5% of 8% of
the total assets;
<PAGE>
(6) 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 into converting the El
Salvador colones into United States' currency.
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.
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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 import duty, fiscal and municipal taxes 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 10%
added value tax prior to June 30, 1995, and 13% thereafter which is refundable
to the extent of 6% of the value of the Joint Venture's exports. The Joint
Venture intends to export all of its gold.
Gold Reserves
The Joint Venture's geologists have determined that the minable and estimated
gold reserves are approximately 15,875,000 tons which should contain 1,680,500
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.
<PAGE>
Modesto Mine
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(a) Real Estate Lease
On August 26, 1994, the Company entered into a fifteen-year lease agreement to
lease approximately 30 acres of key vacant land located at the Modesto Mine
site, near the City of El Paisnal, El Salvador, at a cost of one thousand
colones per manzana per year or approximately U.S. $67 per acre. A condition of
the lease was a five-year prepayment provision of 87,500 colones or
approximately U.S. $10,011. Also, the Company has a first right of refusal to
purchase this land.
(b) Real Estate Ownership
On November 27, 1994, the Company entered into an agreement to purchase
approximately 22 acres of land which abuts the land leased at the Modesto Mine
site.
(c) Concession
The Joint Venture has acquired an extendible exploration concession from the El
Salvador Director of Energy, Mines and Hydrocarbons effective April 5, 1994, and
thereafter extended.
San Felipe-El Potosi Mine ("Potosi")
(a) 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 and under the following basic
terms and conditions:
1. The lease payment will be 5% 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.
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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.
<PAGE>
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(b) Exploration Concession
The exploration concession application was filed on September 6, 1993, with the
Department of Energy, Mines and Hydrocarbons, a division of the El Salvador
Minister of Economy's office, by the owners of the real estate, the Cooperative
San Felipe-El Potosi. The concession consists of approximately 6,100 acres.
(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 in El Salvador is as follows: 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 three other mining
prospects in the Republic of El Salvador. Reference is made to Note 3 for other
real estate ownership or leases.
(5) Notes Payable and Accrued Interest
March 31
Notes payable consist of the following: 1996 1995
---------- ----------
Mortgage and promissory notes to related parties, interest ranging from 1% to 4%
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) $3,084,370 $2,256,834
Other (consists primarily of
short-term notes and accrued
1996 interest of $262,955
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(1995, $242,988.21) issued to
trade creditors and others,
interest of varying amounts,
in lieu of actual cash payments) 499,110 468,180
---------- ----------
Total: $3,583,480 $2,725,014
========== ==========
(6) Related Party Transactions
The Company, in an attempt to preserve cash, had prevailed on its President to
accrue his salary for the past 15 years: 11 years at $67,740 annually
($745,140); and four years at $114,750 annually ($459,000) for a total of
$1,204,140.
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 March 31, 1996:
<PAGE>
The amount of funds which the Company has borrowed from its President from time
to time, together with accrued interest, amounts to $1,346,304. To evidence this
debt, the Company has issued its President a series of open-ended, secured,
on-demand promissory notes, with interest payable monthly at the prime rate plus
2%, but not less than 16% per annum.
The Company had borrowed, as of March 31, 1996, an aggregate of $342,002,
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 4% 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
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shares equivalent to the amount of accrued interest calculated at the prime rate
plus 3% per annum. The Company received all of the net cash proceeds from the
sale or from the pledge of these shares. The Company returned all of the shares
(70,100) borrowed from him during this fiscal period and it issued 24,096 of its
common shares for the payment of 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 15, 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 2%
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.
Prior financial statements have detailed that the President has acquired on
December 10, 1993, the ownership of 203 Misanse common shares. In addition,
effective as of June, 1995, he personally, for his own account, purchased an
additional 264 Misanse common shares from a Misanse shareholder in an
arms-length transaction. Therefore, he 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 March 31, 1996.
The Company leased approximately 3,100 square feet on a month-to-month basis for
its corporate headquarters office; the monthly rental charge was $2,145, and
beginning on December 1, 1995, the Company increased the amount of space it
rents to 4,032 square feet and the monthly rental charge was increased
accordingly to $2,789. The annual amount charged for the past three fiscal years
is as follows: 1996, $28,316; 1995, $25,740; and 1994, $25,740.
<PAGE>
The same related company provides consulting, administrative services, use of
data processing equipment, use of its vehicles and
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other property as required by the Company. Total charges for these
services were as follows: 1996, $7,920; 1995, $7,620; and 1994,
$4,320.
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 March 31, 1996, amounts to $1,175,984; the annual
interest rate is 4% 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 March 31, 1996:
The President's wife's Individual Retirement Account ("IRA") has the Company's
open-ended, secured, on-demand promissory note in the sum $176,985 which bears
interest at an annual rate of prime plus 3%, but not less than 16% and the
interest is payable monthly.
The Law Firm which represents the Company in which a son of the President is a
principal is owed the sum of $76,883 for legal services rendered. 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 $43,095 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. The Director fees are $750 for each quarterly meeting and $250
for attendance at any other Directors' meeting. The Executive Director fees are
fixed at $250 for each meeting. The Directors and Officers have a right to
exchange the amount due to them for the Company's common shares.
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 lowest bid quote reflected in the
NASDAQ Monthly Statistical
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Summaries during a twelve-month period preceding the exercise of this right. As
of March 31, 1996, pursuant to the S.E.C. Form 8 Registration Statement
effective as of April 4, 1994, the Directors/Officers exercised their rights to
purchase 5,048 shares at a price of $2.625 per share in payment of all
compensation due to them as of March 31, 1996.
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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. 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.
<PAGE>
Company 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
----------- ----------
Balance March 31, 1996 $11,208,809 $3,667,420
Advances by three of the Company's
wholly-owned subsidiaries 590,265 0
----------- ----------
Total Advances March 31, 1996 $11,799,074 $3,667,420
=========== ==========
(7) Commitments
Reference is made to Notes (3), (5), (6) and (14).
(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%
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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, 1996, the Company and its subsidiaries have estimated net operating
losses remaining in a sum of approximately $5,400,000 which may be carried
forward to offset future taxable income; the net operating losses expire at
various times to the year of 2011.
<PAGE>
(10) Stock Options, Rights, Preferred Stock, and Stock Loans
The following stock options are in existence:
Expiration Term with Option Price Option
Issue Date Date Extensions Per Share Shares
- ---------- ---------- ---------- ------------ ------
05/27/94 05/27/97 3 years $2.00 30,000
05/31/94 05/31/96 2 years $3.00 10,880
05/31/94 05/31/97 3 years $2.00 30,000
06/02/94 06/02/96 2 years $3.00 2,000
06/02/94 06/02/96 2 years $3.00 1,000
03/22/95 09/22/97 30 months $4.00 20,710
03/30/96 03/29/98 2 years $5.00 1,375
03/30/96 03/29/98 2 years $5.00 1,875
-------
Total Options issued and outstanding $97,840
=======
To the President - Stock Rights
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
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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.
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 by issuing its restricted common
shares, together with interest payable in restricted common shares at a rate of
6% per annum in advance for a minimum period of two years: a total of 74,300
shares were borrowed through March 31, 1996, and 74,300 restricted common shares
were issued in payment. In addition, a total of 8,916 restricted common shares
were earned for the interest due.
Preferred Stock
The Directors of the Company have the authority to issue an unlimited number of
preferred shares. There are 250,000 shares $0.10 par value of authorized shares;
none were issued or outstanding during the two fiscal years ended March 31, 1996
and 1995.
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.
<PAGE>
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,
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192,184 were issued and 307,816 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 4%. The interest is payable monthly. (Note 6)
(12) Litigation
There is no litigation.
(13) Quarterly Financial Data (Unaudited)
The following is a tabulation of unaudited selected quarterly operating results
for March 31, 1996, and March 31, 1995:
Net Income
Net Income (Loss) Per
Revenues(a) (Loss)(b) Share
---------- --------- ------
First quarter 06/30/95 $ 299,687 $ 173,459 $ .02
Second quarter 09/30/95 329,240 207,139 .03
Third quarter 12/31/95 355,729 206,487 .03
Fourth quarter 03/31/96 360,604 200,717 .03
---------- --------- -----
Total as of 03/31/96 $1,345,260 $ 787,802 $ .11
========== ========= =====
First quarter 06/30/94 $ 174,708 $ 31,636 $.005
Second quarter 09/30/94 183,895 42,214 .007
Third quarter 12/31/94 223,475 74,837 .013
Fourth quarter 03/31/95 241,103 126,060 .021
---------- --------- -----
Total as of 03/31/95 $ 823,181 $ 274,747 $.046
========== ========= =====
(a) Includes interest income from Joint Venture
(b) Includes interest expense incurred on funds borrowed and then advanced to
the Joint Venture.
<PAGE>
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(14) 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 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
March 31, 1996, amounts to approximately $20,000.
(15) Supplemental Cash Flow Information
Supplemental Disclosure of cash flow information for the years ended March 31,
1996, 1995, and 1994 is as follows:
Cash paid during the year for: 1996 1995 1994
Interest $ 0 $ 0 $ 0
Income taxes 0 0 0
Non-cash financing activities
Equipment capital leases $ 35,775 $ 0 $ 0
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information called for by Item 10 is incorporated by reference from
information under the caption "Election of Directors" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A no later than
120 days after the close of its fiscal
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year. The information on Executive Officers is contained in Part I,
Item 4(a) of this Form 10-K.
Item 11. Executive Compensation
The information called for by Item 11 is incorporated by reference from
information under the caption "Executive Compensation" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A no later than
120 days after the close of its fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information called for by Item 12 is incorporated by reference from
information under the caption "Voting Securities" and "Principal Shareholders
and Ownership by Management" in the Company's definitive proxy statement to be
filed pursuant to Regulation 14A no later than 120 days after the close of its
fiscal year.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons beneficially owning greater than
ten percent of the outstanding shares, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission. Based solely on a
review of the copies of such forms furnished to the Company or representations
that no Form 5 was required, the Company believes that all Section 16(a) filing
requirements were complied with as required.
Item 13. Certain Relationships and Related Transactions
The information called for by Item 13 is incorporated by reference from
information under the caption "Certain Relationships and Related Transactions"
in the Company's definitive proxy statement to be filed pursuant to Regulation
14A no later than 120 days after the close of its fiscal year.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
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<PAGE>
(a) Financial Statements and Schedules
See index to Consolidated Financial Statements, Supplementary Data, Consolidated
Financial Statements of the Registrant and its subsidiaries and Financial
Schedules in Part II, Item 8 of this report.
Report of Independent Accountants on the
Financial Statement Schedules . . . . . . . . . . . . . . . . . 78
Schedule IV (1) Indebtedness of Related Parties. . . . . . . . . 79
Schedule IV (2) Indebtedness to Related Parties. . . . . . . . . 80
Schedule X (1) Supplementary Income Statement Information
March 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . .82
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibit numbers in the following list correspond to the numbers assigned to
such exhibits in Item 601 of Regulation S-K. The exhibit numbers noted by an
asterisk (*) indicate exhibits actually filed with this Annual Report on Form
10-K. All other exhibits are incorporated by reference into this Annual Report
on Form 10-K.
Exhibit No. Description of Exhibit Page
3.1 Articles of Incorporation of the
Company (Incorporated by reference to
the Company's Registration Statement
No. 2-66932 on Form S-I filed on April
22, 1980.)
3.2 By-laws of the Company. (Incorporated
by reference to Exhibit 3.2 to the
Company's Form 10-K for the year ended
March 31, 1993.)
4 Instruments defining the rights of
security holders, including indentures.
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<PAGE>
4.1 Subscription Agreement, and Two-Year
Stock Option (10,000 shares), Robert C.
Skeen, both dated July 10, 1992
(Incorporated by reference to Exhibit
4.10 of the Company's Form 10-K for the
year ended March 31, 1993.) Option was
exercised on July 10, 1995.
4.2 Two-Year Stock Option, Machulak,
Hutchinson, Robertson, Dwyer & O'Dess,
S.C., May 11,1992 (Incorporated by
reference to Exhibit 4.11 of the
Company's Form 10-K for the year ended
March 31, 1993.)
<PAGE>
4.2(a) Agreement dated May 13, 1994, to extend
the Machulak, Hutchinson, Robertson,
Dwyer & O'Dess, S.C. Stock Option
expiration date to expire November 11,
1995. (Incorporated by reference to
Exhibit 4.11(a) of the Company's Form
10-K for the year ended March 31,
1994.)
4.2(b) Agreement dated March 14, 1995, to
extend the Machulak, Hutchinson,
Robertson, Dwyer & O'Dess, S.C. Stock
Option expiration date to expire
February 11, 1996. 50,000 partial
option exercised, February 27, 1995
remaining option shares, 50,260 were
exercised on February 8, 1996.
(Incorporated by reference to Exhibit
4.8(b) of the Company's Form 10-K for
the year ended March 31, 1995.)
4.3 Three-Year Stock Option Agreement dated
May 27, 1994, (30,000 Shares).
(Incorporated by reference to Exhibit
10.14 of the Company's Form 10-K for
the year ended March 31, 1994.)
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4.4 Three-Year Stock Option Agreement dated
May 31, 1994, (30,000 Shares).
(Incorporated by reference to Exhibit
10.15 of the Company's Form 10-K for
the year ended March 31, 1994.)
4.5 Two-Year Stock Option Agreement dated
May 31, 1994, (10,880 Shares).
(Incorporated by reference to Exhibit
10.16 of the Company's Form 10-K for
the year ended March 31, 1994.)
4.6 Two-Year Stock Option Agreement dated
June 2, 1994 (2,000 Shares).
(Incorporated by reference to Exhibit
4.12 of the Company's Form 10-K for the
year ended March 31, 1995.)
4.7 Two-Year Stock Option Agreement dated
June 2, 1994 (1,000 Shares).
(Incorporated by reference to Exhibit
4.13 of the Company's Form 10-K for the
year ended March 31, 1995.)
4.8 30-Month Stock Option Agreement dated
March 22, 1995 (20,710 Shares).
(Incorporated by reference to Exhibit
4.14 of the Company's Form 10-K for
the year ended March 31, 1995.)
4.9* Two-Year Stock Option Agreement dated
March 30, 1996 (1,375 Shares). 83
4.10* Two-Year Stock Option Agreement dated
March 30, 1996 (1,875 Shares). 87
9 Voting Trust Agreement--not applicable.
10 Material contracts regarding sale of
assets and deferred compensation.
120
<PAGE>
<PAGE>
10.1 Bonus compensation, Edward L. Machulak,
February 16, 1987 (Incorporated by
reference to Exhibit 7 of the Company's
Form 10-K for the year ended March 31,
1987.)
10.2 Loan Agreement and Promissory Note,
Edward L. Machulak, June 20, 1988
(Incorporated by reference to Exhibit
10.2 of the Company's Form 10-K for the
year ended March 31, 1993.)
10.3 Loan Agreement and Promissory Note,
Edward L. Machulak, October 14, 1988
(Incorporated by reference to Exhibit
10.3 of the Company's Form 10-K for the
year ended March 31, 1993.)
10.4 Loan Agreement and Promissory Note,
Edward L. Machulak, May 17, 1989
(Incorporated by reference to Exhibit
10.4 of the Company's Form 10-K for the
year ended March 31, 1993.)
10.5 Loan Agreement and Promissory Note,
Edward L. Machulak, April 1, 1990
(Incorporated by reference to Exhibit
10.5 of the Company's Form 10-K for the
year ended March 31, 1993.)
10.6 Letter Agreement, Edward L. Machulak,
October 10, 1989 (Incorporated by
reference to Exhibit 10.6 of the
Company's Form 10-K for the year ended
March 31, 1993.)
10.7 Michael J. Dwyer: Subscription
Agreement, February 18, 1993, Security
Agreement, February 23, 1993,
Promissory Note, February 23, 1993,
Two-Year Stock Option, March 26, 1993
(Incorporated by reference to Exhibit
121
<PAGE>
10.7 of the Company's Form 10-K for the year ended March 31,
1993.) Option was exercised on December 12, 1994.
10.8 Edward L. Machulak: Subscription
Agreement, February 18, 1993, Security
Agreement, February 23, 1993,
Promissory Note, February 23, 1993
(Incorporated by reference to Exhibit
10.8 of the Company's Form 10-K for the
year ended March 31, 1993.) This
promissory note was converted into
restricted common shares on March 22,
1996.
10.9 John E. Machulak: Subscription
Agreement, February 22, 1993, Security
Agreement, February 23, 1993,
Promissory Note, February 23, 1993,
Two-Year Stock Option, March 26, 1993
(Incorporated by reference to Exhibit
10.9 of the Company's Form 10-K for the
year ended March 31, 1993.) Option was
exercised on December 12, 1994. This
promissory note was converted into
restricted common shares on March 22,
1996.
10.10 Loan Agreement and Promissory Note dated January 19, 1994.
(Incorporated by reference to Exhibit 10.10 of the Company's Form
10-K for the year ended March 31, 1995.)
<PAGE>
10.11 Robert C. Skeen and Lillian M. Skeen:
Loan Agreement and Promissory Note
dated February 23, 1994. (Incorporated
by reference to Exhibit 10.12 of the
Company's Form 10-K for the year ended
March 31, 1994.)
10.11(a) Robert C. Skeen and Lillian M. Skeen:
122
<PAGE>
February 23, 1994 Loan Agreement Amendment #1 dated May 27, 1994.
(Incorporated by reference to Exhibit 10.12(a) of the Company's
Form 10-K for the year ended March 31, 1994.)
10.11(b) Robert C. Skeen and Lillian M. Skeen:
February 23, 1994 Loan Agreement
Amendment #2 dated July 6, 1994.
(Incorporated by reference to Exhibit
10.11(b) of the Company's Form 10-K for
the year ended March 31, 1995.)
10.11(c) Robert C. Skeen and Lillian M. Skeen:
February 23, 1994 Loan Agreement
Amendment #3 dated August 11, 1994.
(Incorporated by reference to Exhibit
10.11(c) of the Company's Form 10-K for
the year ended March 31, 1995.)
10.11(d) Robert C. Skeen and Lillian M. Skeen:
February 23, 1994 Loan Agreement
Amendment #4 dated March 16, 1995.
(Incorporated by reference to Exhibit
10.11(d) of the Company's Form 10-K for
the year ended March 31, 1995.)
10.11(e) Robert C. Skeen and Lillian M. Skeen:
February 23, 1994 Loan Agreement
Amendment #5 dated March 22, 1995.
(Incorporated by reference to Exhibit
10.11(e) of the Company's Form 10-K for
the year ended March 31, 1995.)
10.12 John A. O'Brien, Loan Agreement and
Promissory Note dated May 10, 1994.
This exhibit was inadvertently omitted
in the March 31, 1994, U.S. Securities
and Exchange Commission Form 10-K
filing. (Incorporated by reference to
Exhibit 10.12 of the Company's Form
10-K for the year ended March 31,
1995.)
123
<PAGE>
10.13 Paul E. Machulak, Loan Agreement and
Promissory Note dated June 3, 1994.
(Incorporated by reference to Exhibit
10.13 of the Company's Form 10-K for
the year ended March 31, 1995.)
10.13(a) Paul E. Machulak, June 3, 1994 Loan
Agreement Amendment #1 dated March 27,
1995. (Incorporated by reference to
Exhibit 10.13(a) of the Company's Form
10-K for the year ended March 31,
1995.)
10.14 John E. Machulak and Susan R.
Robertson, Loan Agreement and
Promissory Note dated June 3, 1994.
(Incorporated by reference to Exhibit
10.14 of the Company's Form 10-K for
the year ended March 31, 1995.)
10.15 Anthony J. Strigenz, Loan Agreement
and Promissory Note dated August 11,
1994. (Incorporated by reference to
Exhibit 10.15 of the Company's Form
10-K for the year ended March 31,
1995.)
<PAGE>
10.16 Elizabeth Ann Strigenz, Loan Agreement
and Promissory Note dated March 24,
1995. (Incorporated by reference to
Exhibit 10.16 of the Company's Form
10-K for the year ended March 31,
1995.)
11* Schedule of Computation of Net Income
Per Share. 91
13 Annual Report to security holders, Form
10-Q or Quarterly Report to security
holders:
Annual Report for the period ended
124
<PAGE>
March 31, 1996, will include the Form 10-K and will be submitted
120 days within the fiscal year end.
21* Subsidiaries of the Company. 92
23.1* Consent of the independent auditors of
the Company. 93
99.0 Additional Exhibits
99.1* Confirmation agreement, General Lumber
& Supply Co., Inc., April 5, 1996. 94
99.2* Confirmation Agreement, Edward L.
Machulak, April 5, 1996. 106
99.3* Confirmation Agreement, Edward L.
Machulak Rollover Individual Retirement
Account, April 5, 1996. 118
99.4* Confirmation Agreement, Sylvia Machulak
Rollover Individual Retirement Account,
April 5, 1996. 124
99.5 Concession Agreement Assignment to the
Company by Misanse (Incorporated by
reference to Exhibit 1 of the Company's
Form 10-K for the year ended March 31,
1988.)
99.6 Other Material Information:
Restatement of prior period financial
statements (Incorporated by reference
to Item 7 of the Company's Form 10-K
for the year ended March 31, 1989.)
99.7 The El Salvador Constitutional Supreme
Court of Justice order issued on May
12, 1994, suspending immediately any
charges to the Joint Venture for import
duty taxes of any kind and dated May
18, 1994 (English and Spanish.)
(Incorporated by reference to Exhibit
125
<PAGE>
28.6 of the Company's Form 10-K for the
year ended March 31, 1994.)
99.8 Form S-8 Registration Statement
effective date April 4, 1994, File No.
33-77226. (Incorporated by Reference
as this S-8 Registration has been
filed.)
99.9(d)(1)* Certified financial statements
Commerce/Sanseb Joint Venture for the
fiscal year ending March 31, 1996. 134
<PAGE>
99.10(d)(2) Individual financial statements of majority-owned companies have
been omitted because these companies do not constitute a
significant or material contribution to the Company.
<PAGE>
COMMERCE GROUP CORP. FORM 10-K - MARCH 31, 1996
PART IV
126
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized on April 30, 1996.
COMMERCE GROUP CORP.
(Company)
By: /s/Edward L. Machulak
-------------------------------
Edward L. Machulak Director,
Chairman of the Board of Directors,
Member of Executive Committee,
Director-Emeritus, President,
Treasurer, Chief Executive,
Operating and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons, on behalf of the Company and in
the capacities and on the dates indicated:
Name Office Date
/s/ Edward L. Machulak Director, Chairman of April 30, 1996
- ---------------------- the Board of Directors --------------
Edward L. Machulak Member of Executive Committee,
Director-Emeritus, President
and Treasurer
/s/ Edward A. Machulak Director, Member of April 30, 1996
- ---------------------- Executive Committee, --------------
Edward A. Machulak Executive Vice President
and Secretary
/s/ Clayton H. Tebo Director April 30, 1996
- ---------------------- --------------
Clayton H. Tebo
127
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT
SCHEDULES
Our report on the consolidated financial statements of Commerce Group Corp. for
its fiscal years ended March 31, 1996, 1995, 1994, 1993 and 1992, is included in
this Form 10-K. In connection with our audits of such financial statements, we
have also audited the following: supplementary income statement information,
selected financial data report, and the related financial statement schedules
listed in Item 14(a) of this Form 10-K.
In our opinion, the consolidated financial statement information and schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein, all in accordance with accounting principles
generally accepted in the United States.
REDLIN AND ASSOCIATES
Certified Public Accountants
Milwaukee, Wisconsin
April 13, 1996
