UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
Commission File Number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 39-6050862
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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).
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 13, 1997, was
approximately $17,023,171.
Common shares outstanding as of March 31, 1997, were 9,193,042.
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.
<PAGE>
COMMERCE GROUP CORP.
1997 FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended March 31, 1997
TABLE OF CONTENTS
Page
Glossary of Mining and Financial Terms . . . . . . . . . . . . . . . 3
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . .29
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . .47
Item 4. Submission of Matters to a Vote of Security Holders. . .48
Item 4(a). Executive Officers of the Company. . . . . . . . . . . .48
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholders' Matters . . . . . . . . . . . . . . . . .50
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . .51
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . .51
Item 8. Financial Statements and Supplementary Data. . . . . . .57
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . .79
PART III
Item 10. Directors and Executive Officers of the Registrant . . .79
Item 11. Management Remuneration and Transactions . . . . . . . .79
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . .79
Item 13. Certain Relationships and Related Transactions . . . . .79
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . .80
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.
This document includes certain "forward-looking statements" within the meaning
of Section 21E of the United States Securities Exchange Act of 1934, as amended.
All statements, other than statements of historical fact, included herein,
including without limitation, statements regarding potential mineralization and
reserves, exploration results, and future plans and objectives of Commerce Group
Corp. ("Commerce"), are forward-looking statements that involve various risks
and uncertainties. There can be no assurance that such statements will prove to
be accurate, and actual results and future events could differ materially from
those anticipated in such statements. Important factors that could cause actual
results to differ materially from Commerce's expectations are disclosed under
various sections of this and other documents filed from time to time with the
United States Securities and Exchange Commission, the Boston Stock Exchange,
Inc., and the National Association of Security Dealers Automated Systems.
<PAGE>
Glossary of Mining and Financial Terms
Adit - horizontal or nearly horizontal passage driven from 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 is essential to
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 either 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 geophysical 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 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 produce a cylindrical core that is used for geological study and assays.
Used in exploration.
<PAGE>
Infill drilling - drilling at shorter intervals between holes, used to provide
greater geological detail 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 to the surface of examination.
Reverse circulation drilling - type of rotary drilling that uses a
double-walled drill pipe. Compressed air, water, or other drilling medium is
forced down the space between the two pipes to the drill bit and the drilled
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, that 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 vein or deposit.
Heap leaching - economical process used for the recovery of ore. Ore is placed
in a heap on an 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 leach solution is collected and does not
escape from the circuit.
Leach - to wash or to drain by percolation. To dissolve minerals or metals 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.
<PAGE>
Leach pad - pad used as base for ore; the pad prevents the leach solution from
escaping and can be used continually.
Leach pile - mineralized materials stacked so as to permit wanted minerals to be
effectively and selectively dissolved by 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 into 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 plane.
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 of 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.
Shaft - excavation of limited area compared with its depth, made for finding or
mining ore 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.
<PAGE>
Stope - excavation from which ore has been excavated in a series of steps.
Usually applied to highly inclined 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 of barium, lead, strontium, and calcium are fairly soluble in water.
Sulfide - a compound of sulfur with more than one element. A salt or an 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 - material removed from a milling circuit after separation of the
valuable minerals.
Waste material - a part of the ore deposit too low in grade to be of economic
value at the time, but this material may be stored separately in the hope that
it can be profitably treated later.
Winze - a vertical or inclined opening , or excavation, connecting two levels in
a mine, differing from a raise only in 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.
<PAGE>
PART I
Item 1. Business
Introduction
Commerce Group Corp. ("Commerce," the "Company," and/or the "Registrant") is a
developmental stage Delaware corporation 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 in the Joint
Venture (detailed below) which owns the concession rights to extract gold in the
San Sebastian Gold Mine ("SSGM"). It is exploring four other potential gold
prospects located in El Salvador. There are approximately 1.7 million ounces of
proven and estimated gold ore reserves at the SSGM, and at three of the other El
Salvador gold mines (see chart on page 9). 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.
Currently the Joint Venture is processing on a limited basis, a blend of virgin
gold ore and tailings at its San Cristobal Mill and Plant (SCMP). The gold ore
is from the open pit and the tailings are waste material left as a 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 the
Joint Venture thereafter made substantial renovations and modifications to the
plant and equipment before and after placing this facility in a limited
operation. From 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 and virgin ore. In
the fiscal year ended March 31, 1997, 3,653 ounces of bullion containing 2,492
ounces of gold and 430 ounces of silver were produced. 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 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
capacity of processing 400 tons of tailings per day. Commerce will also continue
to drill test holes at previously unexplored areas at the site of the SSGM and
it plans to drill 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").
<PAGE>
Commerce was incorporated in Wisconsin in September 1962, and it merged into a
Delaware corporation in July 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 ten percent to
Sanseb, and because Commerce owns 82 1/2% of the authorized and issued shares of
Sanseb, Commerce in effect has an 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 five
percent 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 two and one-half percent of the SSGM gold production.
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, 1997, 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 $42,098,447. 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 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 Company's organizational structure is as follows: Commerce Group Corp. was
originally a Wisconsin Corporation (September 14, 1962) that merged into a
Delaware Corporation on July 26, 1971. It owns 52% of Mineral San Sebastian S.A.
de C.V. (Misanse), an El Salvadoran corporation that was formed on May 8, 1960,
reinstated on January 25, 1975 and reincorporated on October 22, 1993 and it
owns 82 1/2% of the San Sebastian Gold Mines, Inc. (SSGM). Misanse has a mining
concession with the government of El Salvador and is the real estate owner of
the SSGM. Misanse also has a gold mine lease and assignment of the mining
concession with the Commerce/Sanseb Joint Venture (Comseb), the mining operator
formed on September 22, 1987, and with SSGM, a Nevada corporation formed on
September 4, 1968. Comseb operates the SCMP (the gold processing plant in the
City of El Divisadero acquired on February 23, 1993) and has conducted
exploration and exploitation in its five El Salvador gold mines as follows: SSGM
(in the City of Santa Rosa de Lima since October 1968), Potosi (near the City of
El Potosi since September 1993) as well as its extension Capulin (near the City
of El Potosi since May 1995); Modesto (near the City of El Paisnal since August
1993); Hormiguero (near the City of Comacaron since September 1993) and
Montemayor (northwest of SSGM since March 1995).
<PAGE>
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 applied for certain exploration rights to sites known
as the Modesto (August 1993), the San Felipe-El Potosi (September 1993), the
Hormiguero (September 1993) and the Montemayor (March 1995). The Company
maintains a business office in San Miguel, El Salvador, and employs over 318
professionals and skilled, semi-skilled, mill personnel and miners at the sites
of its operations.
At the current stage of the exploration and development, the Company's
geologists have defined the following gold reserves:
Contained Oz.
Tons Grade Ounces Probable
---- ----- --------- --------
1. San Sebastian Gold Mine
(a) Tailings 10,000 0.030 300
(b) Dump waste (av. grade) 960,000 0.100 96,000
(c) Stope fill 1,000,000 0.340 340,000
(d) Open pit-virgin ore 13,400,000 0.087 1,165,800
---------- --------- -------
15,370,000 1,262,100 340,000
2. San Felipe-El Potosi
(a) Tailings 185,000 0.060 11,100
3. Modesto Mine 80,000 0.235 12,800 6,000
4. Hormiguero Mine
(a) Tailings 150,000 0.0644 9,600
---------- --------- -------
Total Contained Ounces 15,785,000 1,295,600 346,000
========== ========= =======
In management's opinion, the Company's ongoing exploration, exploitation and
development at the five sites will significantly 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 two and one-half 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 as it was considered at that time to be too low of a grade of ore to
process economically. The stope fill also was considered to be too low of a
grade of ore to process economically therefore it 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 in the open
pit and readily available for processing; it also includes the undeveloped
underground gold ore.
<PAGE>
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 underground operations used by the
Company and others 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.
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 seven
percent 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, improvements in technology,
and the depletion of better grading material.
There is good access to the SSGM. The City of Santa Rosa de Lima (three 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. Three major United States' commercial airlines provide
daily scheduled flights to San Salvador. An airline commuter service provides
daily 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 five percent 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.
<PAGE>
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.
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 San Sebastian Gold Mine concession and the 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. The entire amount
due has been paid or is held in escrow for those persons that cannot
be located.
(b) 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.
(c) From the SSGM profits earned, five percent 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 $57,143 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 five percent of its pre-tax
profits, but, in any event, not less than a minimum amount equal to five
percent of eight percent of the total assets.
(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.
<PAGE>
(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.
(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 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 or cash in an amount of the
Custom's duty until a final decision is made. It is charging the Company the 13%
added value tax as of July 1995, which is refundable to the extent of six
percent 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 the then 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.
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.
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
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.
<PAGE>
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.
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.
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 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.
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 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.
<PAGE>
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 modifications, has taken place during the last year.
Initial production was from the SSGM tailings. Since the tailings' resource is
almost exhausted, virgin gold ore is excavated from the SSGM surface and hauled
to the SCMP site.
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 and
mechanical 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 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, dependent on the market
price of gold from the higher grade and recovery of gold ore, will be
substantially more than the cost involved, providing that the world gold market
price does not decline below $200 an ounce.
SCMP Continued Operating Plans
The virgin ore and/or tailings are referred to herein as "gold ore." The gold
ore from the SSGM open-pit is loaded onto 20-25 ton dump trucks for transport to
the SCMP. Trucks then haul the gold ore approximately 15 miles from the SSGM.
Mine employees are responsible for the mining activities including the
determination of areas to be excavated, trucking and loading operations, head
sampling and sample analysis.
The gold ore is received at the SCMP where it is weighed, logged, and sampled.
Weighing is performed utilizing a conveyor belt scale and/or a truck scale
located on the SCMP site. The excess gold ore is then unloaded at the SCMP site
and stockpiled in an area which was developed to allow storage of more than
15,000 tons.
SSGM gold ore is 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). The feed is fed at a controlled rate onto a conveyor, which
transfers the ore 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 and transports the material into the ball
mills which serve as a repulper for the tailings and as a grinding process for
the virgin ore. Virgin ore is fed through the first ball mill for grinding. The
pulp is pumped to a cyclone where it is classified. The underflow goes to the
second ball mill for regrinding and the overflow (fines) goes to a 20 mesh
static sieve bend screen to remove any oversize or trash material. The second
ball mill discharges a product and joins the first ball mill sump pumping making
it a closed circuit with the use of the cyclone. Water is added to the solids in
the ball mill to a pulp density of approximately 32% solids by weight and lime
is added to raise the alkalinity of the pulp to approximately PH 10.5. After
grinding, the slurry is transferred into the thickener. The excess water is
removed from the thickener to raise the pulp density to approximately 45% solids
which is an ideal density for the cyanidation process. The pulp is transferred
by pump to the CIL system's #1 tank. Lime and liquid cyanide are added to the
first leach tank to dissolve the gold. It then enters into a series of seven
agitated leach tanks utilized for cyanide leaching of the pulp. This provides
approximately 24 hours of leach retention time. An eighth tank is maintained in
operable condition as a standby unit.
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 cylindrical stationary interstage screen (.030 mesh)
for retention of carbon and downstream gravity transfer of pulp. A 24 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 a supply of three 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 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 provide the power needed.
<PAGE>
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.
SSGM Open-Pit, Heap-Leaching Operation
The Joint Venture has placed the SCMP into a limited operation. 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, borrowings, equity sales, 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 $340 per ounce market price of gold. Pursuant to the geologists' report,
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 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.
A 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 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 exploration at the following El Salvador
locations:
(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 north of San Salvador, 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 prospects and alternations, and historical records
evidence that 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 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 start-up
basis, its revenues, profitability and cash flow will be greatly influenced by
the price of gold. The gold world market 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.
At this time the Joint Venture believes it will not be a major gold producer
based on the size of existing gold mining companies and its financial capacity.
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, financial resources and large gold ore reserves
than the Company. The Company believes that the expertise of the Joint Venture's
experienced key personnel employees, its ability to train its employees, its low
overhead, its gold ore resources and its projected low cost of production will
allow it to compete effectively and to produce reasonable profits.
<PAGE>
To date, inflation, currency and interest rate fluctuations have not had a
material impact on the Company or its results of operations.
Environmental Matters
In order to make certain that the exploration, development, mining and ore
processing do meet acceptable environmental impact acceptability, an
environmental impact study has been prepared by an independent consultant and
submitted for review to the Government of El Salvador.
The Joint Venture's consultant believes that the report relating to the 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 contained in this report will meet
the Government of El Salvador's approval.
Political Environment in El Salvador
The following information is an excerpt from a report from the American Embassy
San Salvador, Economic/Commercial /Agriculture Section entitled, "Country
Commercial Guide, August 1996":
"Chapter III - POLITICAL ENVIRONMENT
"A major milestone in El Salvador's peace process was reached in the Spring of
1994 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 emerged as the second largest political
party in the 84-seat legislative assembly. The presidential election was won by
Armando Calderon Sol, the candidate of the right-of-center ARENA party, which
won 39 seats in the Assembly. While most of the requirements of the peace
accords have been fulfilled, some commitments are still pending; for example, in
the area of land distribution, human settlements, and legal and judicial reform.
In recognition of the progress in fulfilling the accords, the U.N.
monitoring presence has been steadily reduced.
"Since its early inception as an anti-communist nationalistic party in the early
1980s, ARENA has moderated its policies, particularly during the previous
administration of President Alfredo Cristiani. Under his administration, the
government ended the 12-year civil war, greatly liberalized the economy and
reduced corruption. President Calderon Sol has continued these policies.
"Shortly after the 1994 elections the FMLN split into two parties, one keeping
the FMLN name and the other naming itself the Democratic Party (PD). The PD has
advocated a more moderate political line than the FMLN. While taking a more
radical tone, the FMLN has strongly supported the democratic process. The
center-left Christian Democratic Party (PDC) has seen its support slowly erode
since controlling the Presidency and Assembly in the mid-1980s. There are
several other small parties, the largest of which, the Social Christian
Revolution Party (PRSC), is a PDC breakaway.
<PAGE>
"El Salvador has an excellent relationship with the United States, solidified by
12 years of close cooperation during the Salvadoran civil war and strong U.S.
support for reconstruction and reconciliation in the aftermath of the 1992 peace
accords. 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. The political environment is expected to remain stable over the next ten
years."
Economy Status
The following selected information on El Salvador was obtained from excerpts of
the "The World Factbook page on El Salvador" on the internet:
"Economy
"Economic overview: El Salvador possesses a fast-growing entrepreneurial
economy in which 90% of economic activity is in private hands, with
growth averaging 5% since 1990. Yet, because the 1980s were a decade of
civil war and stagnation, per capita GDP has not regained the level of
the late 1970s. The rebound in the 1990s stems from the government
program, in conjunction with the IMF, of privatization, deregulation, and
fiscal stabilization. The economy now is oriented more toward
manufacturing and services compared with agriculture. The sizable trade
deficits are in the main covered by remittances from the large number of
Salvadorans abroad.
GDP: purchasing power parity - $11.4 billion (1995 est.)
GDP real growth rate: 6.3% (1995 est.)
GDP per capita: $1,950 (1995 est.)
GDP composition by sector:
agriculture: NA%
industry: NA%
services: NA%
Inflation rate (consumer prices): 11.4% (1995 est.)
Labor force: 1.7 million (1982 est.)
by occupation: agriculture 40%, commerce 16%, manufacturing 15%,
government 13%, financial services 9%, transportation
6%, other 1%
Unemployment rate: 6.7% (1993)
Budget:
revenues: $846 million
expenditures: $890 million, including capital expenditures of $NA
(1992 est.)
Industries: food processing, beverages, petroleum, tobacco,
chemicals, textiles, furniture
Industrial production growth rate: 7.6% (1993)
Electricity:
capacity: 750,000 kW
production: 2.4 billion kWh
consumption per capita: 408 kWh (1993)
Agriculture: coffee, sugarcane, corn, rice, beans, oilseed; beef, dairy
products; shrimp . . .
Exports: $1.6 billion (f.o.b., 1995 est.)
commodities: coffee, sugarcane, shrimp
partners: US, Guatemala, Costa Rica, Germany
Imports: $3.3 billion (c.i.f., 1995 est.)
commodities: raw materials, consumer goods, capital goods
partners: US, Guatemala, Mexico, Venezuela, Germany
External debt: $2.6 billion (December 1992)
Economic aid:
recipient: ODA, $777 million (1993)
note: US has committed $250 million in aid to El Salvador for 1992-96
Currency: 1 Salvadoran colon (C) = 100 centavos
Exchange rates: Salvadoran colones (C) per US$1 - 8.755 (December 1995),
8.755 (1995), 8.750 (1994), 8.670 (1993), 9.170 (1992), 8.080 (1991)
Fiscal year: calendar year."
<PAGE>
Investment Climate in El Salvador
The following information is an excerpt from a report from the American Embassy
San Salvador, Economic/Commercial /Agriculture Section entitled, "Country
Commercial Guide, August 1996":
"Chapter VII - INVESTMENT CLIMATE
" 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 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.
<PAGE>
"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 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 and to remove restrictions on
ownership of newly-privatized banks. There are now no restrictions on ownership
of banks.
"Investment Climate
"Privatization
"The Government of El Salvador is proceeding with the privatization of both the
telephone company (ANTEL) and the electric distribution companies. In February
1996 the Privatization Commission request proposals from international
consulting firms principally investment banks, for advisory services on the
privatization process. Six banks including American, Swiss, British, German and
French firms were asked to participate. An American firm was selected to act in
an advisory capacity on this privatization project.
"The privatization of the electric company (CEL) is also moving ahead. Four
distribution companies are being formed and will be sold off by the end of the
fourth quarter of 1996. The remainder of CEL will be broken up and sold in 1997
under a scheme that encourages maximum competition. The privatization should
provide good opportunities for U.S. investors and exporters.
The GOES still lacks approval from the Legislative Assembly for the
privatization process. Legislation was introduced in May 1996 outlining
duties and powers of a proposed Regulatory Entity. It would be modeled
after a Public Utilities Commission and would oversee telecommunications,
electricity, ports, airports, railroads, and future tollroads. . . .
"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)
<PAGE>
"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 community, there has not been 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)
"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
telecommunications, are scheduled to be privatized in 1996 under competitive
rules that allow for foreign involvement and investment. 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 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 governments are working towards but have not yet
reached agreement on a Tax Information Exchange Agreement.
<PAGE>
"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.
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 also participating in the Multilateral Investment
Guarantee Agency (MIGA).
"Labor
"Of El Salvador's labor force of approximately 1.5 million workers, 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 1995 was 7.7 percent. Underemployment is probably much higher,
although there are no reliable estimates. However, some construction contractors
cannot find sufficient skilled workers, due to the number 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.
"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 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.
<PAGE>
"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.
The Company has been successful in obtaining investment funds that were required
to retrofit and operate its SCMP, conduct its various exploration and drilling
program, and for its current needs. It also raised capital in a sum of $2.5
million during 1997 to purchase a crushing system and to perform diamond core
drilling at the SSGM site. 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, time and effort 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,
however, drainage, survey, staking, and water rights adjudication have been
completed.
As of March 31, 1997, there remained an inventory of 40 five-acre parcels of
real estate which represents less than four percent 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.
<PAGE>
SLE believes that it is in compliance with the requirements 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.
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.
The Company owns 52 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.
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.
<PAGE>
Patents and License Agreements
On July 23, 1987, the Government of El Salvador delivered and granted to
Misanse, possession of a mining concession. On September 25, 1996, the SSGM
concession was reconfirmed to comply with the 1996 El Salvadoran Mining Law. The
Joint Venture believes that its SSGM concession begins on the date it was
issued--July 1987. The pending case with the El Salvadoran Supreme Court may
determine the outcome of which set of mining regulations will apply. The
concession provides 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, export, or any 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 under the February
1996 Mining Law for 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 ten percent of its consolidated
revenues except for the sale of gold which the Joint Venture is producing. The
gold in dore form is refined and then sold at the world market price to a
refinery located in the United States.
Miscellaneous
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.
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.
The Company believes that the federal, state and local provisions regulating the
discharge of materials into the environment should not have a substantial effect
on the capital expenditures, earnings or competitive position of the Company or
any of its majority-owned subsidiaries as the Company does not have any mining
activity in the United States.
Financial Information About Industry Segments Lines of Business
Operation
Campground: For the years ended March 31, 1997, 1996 and 1995, revenues have
been generated from the campground business. Although Homespan owns the
campground real estate, the Company is the campground operator.
<PAGE>
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. At such time
as funds are available, the Company intends to process its SSGM gold ore via an
open-pit, heap-leaching system.
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 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, 1997, the Joint Venture employed approximately 318 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.
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.
<PAGE>
Industry Segments
1. Unaffiliated Sales Year Ended March 31,
------------------ --------------------
Industry Location 1997 1996 1995
-------- -------- ----------- ------------ -----------
Mining (*a) El Salvador $ 0 $ 0 $ 0
Campground Missouri, USA 59,009 55,692 54,600
Real Estate Colorado, USA 0 0 9,000
2. There Were No Intersegment Sales
--------------------------------
3. Total Revenues Year Ended March 31,
--------------- --------------------
Industry Location 1997 1996 1995
-------- -------- ----------- ------------ -----------
Mining (*a) El Salvador $ 0 $ 0 $ 0
Campground Missouri, USA 59,009 55,692 54,600
Real Estate Colorado, USA 0 0 9,000
Other Delaware/Wis., USA 1,571,207 1,289,568 759,581
----------- ----------- -----------
Total: $ 1,630,216 $ 1,345,260 $ 823,181
4. Operating Profit (Loss) Year Ended March 31,
----------------------- --------------------
Industry Location 1997 1996 1995
-------- -------- ----------- ----------- -----------
Mining (*a) El Salvador $ 0 $ 0 $ 0
Campground Missouri, USA (1,976) (6,741) (7,336)
Real Estate Colorado, USA 0 0 7,676
Interest El Salvador/Delaware
Income Wisconsin, USA 1,009,574 794,543 274,407
----------- ----------- -----------
Total: $ 1,007,598 $ 787,802 $ 274,747
5. Identifiable Assets Year Ended March 31,
------------------- --------------------
Industry Location 1997 1996 1995
-------- -------- ----------- ----------- -----------
Mining (*a) El Salvador $22,733,462 $18,838,770 $15,692,668
Campground Missouri, USA 1,135,500 1,135,500 1,135,500
Real Estate Colorado, USA 21,000 21,000 21,000
Corporate Assets 1,177,372 517,845 768,305
----------- ----------- -----------
Total: $25,067,334 $20,513,115 $17,617,473
(*a) The proceeds from the sale of gold and the gold inventory received from the
Joint Venture ($2,150,000--$969,721-1997; $1,180,279-1996) were used to reduce
the advances to the Joint Venture account.
<PAGE>
Item 2. Properties
Corporate Headquarters
The Company leases approximately 4,032 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 monthly
rental charge of $2,789 on a month-to-month basis. 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
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
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 were, and now virgin gold ore is being transported to the
SCMP site to produce gold. SCMP is gradually being expanded and improved
technically to increase its virgin ore tonnage process to a capacity of 300 to
400 tons per day. It is mining virgin gold ore from its open pit and it plans to
extract the stope fill from underground to produce gold on the SSGM site. The
property consists of 1,470 acres. SSGM is located approximately two and one-half
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 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 core drilling) surrounding the main body of gold ore in order
to increase its gold ore reserves.
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 funding, 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.
<PAGE>
In 1997, a diamond drilling program with an independent contractor was initiated
at the SSGM mine area to substantiate and expand the gold reserves. At the same
time, pit walls were excavated and the old vein system was exposed to facilitate
systematic sampling of the wallrock. This program demonstrated that true widths
of up to 100 feet of altered and mineralized trachyte occur frequently in the
open-pit and adjacent areas. Panel and surface channel sampling of these
exposures revealed assays in the 0.03 to 0.20 ounce per ton gold range. In
addition, under ground workings on the Limon, Guaramal, Santa Elena, and
Taladron veins are being rehabilitated.
SSGM Geology
The ore deposit consists of contact-fissure veins carrying gold-bearing pyrite.
The veins occur at the contact between 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.
The geology of the SSGM deposit is integrally linked to the presence of a quartz
monzonite intrusive. This quartz monzonite has the appearance of being a high
level sill and is probably coeval with the surrounding tertiary aged trachytes
that form the main SSGM ridge. The geometric configuration of the quartz
monzonite controls the localization of quartz veins and alteration of the
trachytes. The overall structural control is east-west; according to historic
mine records, the monzonite contacts with depth, but successive level plans
suggest a funnel shaped structure plunging to the southeast. On a detailed
scale, the quartz veins are controlled by a master set of parallel veins
preferentially oriented east-west. The vein branch generally dips north and is
interconnected by southeast dipping diagonal veins of variable strike. Mapping
records describe veins as sinuous, further suggesting brittle stress regimens,
with veins occupying dilational zones. These fissure style veins are up to five
feet in width, and generally occur in trachyte or at the contact between
trachyte and monzonite.
Pre and post mineral faulting is common throughout the deposit. The deposit is
said to diminish when a basalt "basement" contact is approached at a depth,
however basalt on top of San Juan Hill is also recognized. The funnel shape of
the deposit, suggests however a potential synvolcanic structural control, with a
source to the southeast. The San Juan area has not been tested by modern
exploration techniques.
Based on data available at present, the hydrothermal system focused on SSGM has
a dimension of approximately 3,500 feet in strike, a vertical extension of 1,100
feet (minimum) and an approximate width of 500 feet. The volume of
hydrothermally altered rocks in the system prior to erosion is likely to have
been in the magnitude of up to 200 million tons.
Gold occurs in the native form and also occurs rarely as a telluride. Pyrite is
the predominant sulphide mineral in the deposit and it is the most common host
to the fine grained gold. Copper minerals including bormite, chalcopyrite,
chalcocite, tetrahedrite, enargite and luzonite have been identified. Gold
mineralization is accompanied by silicification; other gangue minerals include
kaolimite and sericite and more rarely barite. High grade gold streaks are
associated with barite.
<PAGE>
The SSGM deposit represents a bonanza gold system formed within a coeval high
level alkaline intrusive-extrusive complex. Mineralization is more consistent
with an acid sulphate system generated within an intracratonic caldera setting.
The potential for SSGM to host millions of ounces of gold is considered to be
excellent.
SSGM Ore Reserves
As of March 31, 1997, 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. About one million tons of stope fill with a grade of 0.34 ounces per
ton and approximately 960,000 tons of dump material with an average grade of
0.10 ounces of gold 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, 1997, the following exploration has been
performed on the SSGM site: surface channel trenching, 34,594 meters (114,160
feet/21.6 miles); test pit hole excavations, 655 vertical meters (2,162 feet/.41
miles); underground workings and adit openings, 1,054 meters (3,478 feet/.66
miles). The surface samples from the trenching averaged 0.026 ounces of gold per
ton over an area approximately 1,000 feet in width and approximately 5,000 feet
in length. A total of 46,619 SSGM gold ore samples were fire assayed at the
Joint Venture laboratory.
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 from 402 fire assay samples 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.
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.
<PAGE>
Gold laden steel wool cathodes will be periodically removed from the
electrowinning cells and transferred to the replating cell. In the 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.
In 1904, Mr. Butters, believing that the SSGM was a valuable 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.
<PAGE>
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 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.
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 adits, 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 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,
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.
<PAGE>
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 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 owned by the Company, Misanse
and Sanseb.
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.
In September 1987 the Commerce/Sanseb Joint Venture was formed to conduct and
manage the El Salvadoran business operations.
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 surface 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.
<PAGE>
During this twelve-month period ended March 31, 1997, 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
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 a foreclosure 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.
The Joint Venture completed a certain stage of the retrofitting, rehabilitation,
repairing and restoring of the SCMP's plant and it continues to perform such
plant and equipment alterations, modifications and improvements to expand the
SCMP's capacity to process 300/400 tons of virgin ore per day. It presently is
producing gold on a limited production basis by processing the virgin ore from
its SSGM.
SCMP Gold Ore Sources
The Joint Venture has several sources of gold ore to process at the SCMP: 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 an up to
92% recovery grade or better at a rate of 300/400 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 up to 92% or more of the gold which recovery is
substantially more than the expected 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.
<PAGE>
Current Status
The start-up, testing and adjustment stage of processing the remaining 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 was about 0.08 ounces of
gold per ton.
During this fiscal year the Joint Venture did process at the SCMP approximately
75,000 dry tons (approximately 101,000 wet tons) of tailings which yielded 4,332
ounces of dore and accounted for 2,595 ounces of gold and 594 ounces of silver.
The gross receipts amounted to $969,721. 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.
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 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.
<PAGE>
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
A total of 2,100 meters (6,930 feet) of channel trenching was excavated with a
grade ranging from 0.01 to 0.50 per ton. A total of 686 meters (2,264 feet) of
adits has been restored for entry into the old workings. A tabulation of the
work completed by the Joint Venture is as follows:
1. Surface
a. An exploration consisting of twenty-seven surface channel trenches were
excavated consisting of 1,010 meters (3,333 feet). A total of 1,232
samples were fire assayed reflecting an average grade of gold of 0.02
ounces per ton. Two veins were intercepted which assays averaged 0.051
ounces of gold per ton. One vein encountered was 3.50 meters (11.55 feet)
in width, while the other was 0.70 meters (2.31 feet) in width.
2. Potosi Underground Workings
a. Guayabito Adit: This adit was opened for a distance of 132.9 meters (439
feet) and a cross cut was encountered at 25 meters (83 feet) running to
the west at which point a 0.40 meter (1.32 feet) thick vein was
intercepted. The 399 samples that were fire assayed reflected an average
grade of gold of 0.012 ounces per ton.
b. Guarumo Adit: At a point south 15 degrees east a 1.70 meter (5.61 feet)
thick vein dips 60 degrees to the west. This adit is all vein area. A
total of seven meters (23 feet) was cleaned and the three fire assay
samples proved an average of 0.05 ounces of gold per ton.
c. San Isidro Adit: A total of 158 meters (521 feet) was cleaned and from the
entrance a sub level 25 meters (83 feet) was developed on a vein running
south 13 degrees east. This sub level is located 5.65 meters (19 feet)
below the entry level. The vein is 2.80 meters (nine feet) thick from
which more than 243 samples reflected an average grade of gold of 0.022
ounces per ton.
<PAGE>
d. Cacho de Oro Adit: A total of 57 meters (188 feet) was cleaned in this
adit. At a point 34 meters (112 feet), a crosscut was encountered which
was advanced 23 meters (76 feet). A total of 59 fire assay samples
reflected an average grade of 0.07 ounces of gold per ton.
e. Canon 821: Exploration progress continues at Canon 821 Adit, Winze 821,
the General Winze and Adit 2A. Pillars were found in Adit 2A about 105
meters (347 feet) from the entry.
3. The El Capulin Mine
a. A total of more than 29 surface trenches was excavated over a distance of
537 meters (1,772 feet) and the 404 fire assay samples revealed an average
grade of 0.10 ounces of gold per ton. A backlog of samples are in the
process of being assayed.
b. In the Capulin adit, a total of 188 meters (620 feet) was cleaned; the
goal is to reach the Capulin vein. The seven fire assay samples averaged a
grade of 0.25 ounces of gold per ton.
4. Tailings
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 and/or reverse circulation drilling,
mapping and sampling of the known mineralized areas to determine if there is any
commercial gold mineralization on this property. Diamond drilling may be
utilized to outline the more promising shoots and to check for continuity of
gold.
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. An application for an exploration concession was filed on
May 8, 1997 in order to comply with the current mining regulations adopted by
the Government of El Salvador in February 1996. 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.
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 five percent of the gross receipts derived from the
production of precious metals from this site and will be payable monthly.
<PAGE>
3. 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 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 and History
From its geologist and from the records available to the Joint Venture, the
following information was obtained:
Two persistent veins "Paredon" 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 Paredon 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 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.)
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.
<PAGE>
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.
Modesto Mine Ore Reserves and Exploration Results
The exploration through March 31, 1997, has accomplished the following: Four
bodies of gold ore have been blocked which contain approximately 18,800 ounces
of a proven and probable grade 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,
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. A total of 84 surface channel trenches was excavated; the
2,369 fire assay samples revealed an average grade of 0.035 ounces per ton.
The status of the three vein systems is as follows:
(1) Chicharron Vein: Over a length of 2,550 meters (8,415 feet), 69 surface
channel trenches were dug consisting of 567.0 lineal meters (1,871 feet)
from which 2,015 samples were taken which averaged a grade of 0.05 ounces of
gold per ton. This vein strike is at north 50 degrees east with a dip 70
degrees and consists of milky, brownish grey and white quartz surrounded by
andesite.
(2) Intermidy Vein: This vein is at an offset angle to the Paredon vein. A total
of 495 meters (1,634 feet) of surface channel trenching was excavated and
265 assay samples reflected an average grade of 0.025 ounces of gold per
ton.
(3) Paredon Vein: This vein was explored by excavating five surface channel
trenches over 1,200 meters (3,960 feet) and 89 fire assay samples reflected
an average grade of 0.015 ounces of gold per ton.
Underground workings:
(1) Taladron Adit: From this adit entrance to a point of 257 meters (848 feet)
along the north 85 degrees west strike, all of the blockage was removed to
penetrate it. A total of 80 fire assay samples were taken in the basalt and
barren quartz monzonite veinlits which assays averaged 0.035 ounces of gold
per ton. This adit changed its direction to south 70 degrees west and at a
point of 131 meters (423 feet) a broken vein with a basalt horse was
intercepted. The former vein was found at the end of this adit which turned
to the west and encountered the Chicharron vein which at this point was 13
meters (43 feet) in width and 26 meters (86 feet) from the top of the hill.
More than 20 assay samples are waiting to be fire assayed.
<PAGE>
(2) Adit No. 10: This adit is above the Taladron Adit and it is the highest adit
on this property. A total of 47 meters (155 feet) has been excavated and the
310 fire assay samples confirmed an average grade of 0.03 ounces of gold per
ton. This adit follows a strike vein south 50 degrees west with a 55 degree
easterly dip and encounters a vein at a width of 4.50 meters or 15 feet.
(3) Shaft No. 5: From the adit entrance, a total of 13.4 meters (44 feet) was
cleaned. A sub level was discovered and this was cleaned at both ends north
and south for a distance of 95.7 meters (316 feet) and 327 samples were fire
assayed disclosing an average grade of 0.37 ounces of gold per ton. A total
of 490 samples were taken from this sub level and from interconnecting
levels. 75 samples were fire assayed revealing an average grade of 0.11
ounces of gold per ton.
(4) Shaft No. 7: This adit was recently opened to follow a vein and it is
too premature to provide meaningful results.
The Joint Venture employs from 25 to 30 employees to work at this mine
exploration program.
Modesto Mine Present Status
After completing the necessary surveying, mapping and planning, the Joint
Venture proceeded to clean and trench the surface and adit vein exposure. Since
August 1993, 3,084 metric feet of surface channel trenching (10,177 feet) and
866 meters (2,858 feet) of adit cleaning were completed. In addition, four
inclines have been completed. A total of 4,027 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
submitted to the El Salvador Director of Energy, Mines and Hydrocarbons. Also,
the Joint Venture had submitted its original plan to this governmental agency on
January 24, 1994, outlining its exploration program. In order to comply with the
current mining regulations adopted by the Government of El Salvador during
February 1996, the Joint Venture filed an exploration concession application on
April 21, 1997.
Hormiguero Mine ("Hormiguero")
Hormiguero Location
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. In order to comply with the El Salvadoran Mining
Law adopted during February 1996, a current exploration application was filed on
April 21, 1997.
<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 could evidence the mineralization of unexplored veins.
1. Tailings: In an area of approximately 15,744 square meters (approximately
four acres) 35 test pit holes at a total depth of 322 meters (1,063 feet)
were excavated and the 705 samples that were fire assayed showed an average
of 0.064 ounces of gold per ton times 150,000 tons should contain 9,600
ounces of gold.
2. A total of 11 surface channel trenches consisting of 310 meters (1,023 feet)
were dug perpendicular to the Guadalupe vein and from a total of 155 samples,
96 samples verified an average grade of 0.0177 ounces of gold per ton.
3. Taladron Adit: The purpose is to clean this adit in an attempt to
intercept the Guadalupe vein at 61 meters (201 feet) below surface.
So far 35 meters (116 feet) have been cleaned.
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 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.
<PAGE>
"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 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.
"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:
<PAGE>
Proven: (U.S. dollar values based on a $20.00 per ounce gold price and a
$0.385 per ounce silver price.)
Tons Grade Dollar Value Per Ton
------ ----- --------------------
Guadalupe Hanging Wall Vein 11,208 0.353 $7.06
Guadalupe Footwall Vein 7,528 0.319 $6.37
Hormiguero and Gallardo 10,000 0.400 $8.00
------
Total: 28,736
Probable:
Tons Grade Dollar Value Per Ton
------ ----- --------------------
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.
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 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":
"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.
<PAGE>
"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.
"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, 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.
<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.
"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."
Montemayor Current Status
1. Surface channel trenching: From July 19, 1995, 55 surface channel trenches
were excavated over a 920 meter (3,036 feet) length . In the Banadero area,
from 29 trenches, 375 fire assay samples contained an average grade of 0.036
ounces of gold per ton.
The remaining 26 surface channel trenches were excavated in the Montemayor
area: the 103 fire assay samples averaged 0.022 ounces of gold per ton.
<PAGE>
2. Underground adits and workings: Av.
Advancement Assay
No. of Grade
Adit Name Comments Meters Feet Samples /Ton
--------- -------- ------ ---- ------- ------
A. Montemayor Mine
1. Polvorera Adit No. 1 56.0 185 15 0.016
2. Polvorera Adit No. 2 Crosscut encountered 140.0 462 27 0.010
3. Lechuza Adit Crosscut encountered 136.0 449 42 0.010
4. Cablote Adit #2 Used to explore
Montanita vein 7.0 23
5. Montanita Stope #2 Unaccessible entry
a. Communication 1 Along side of Montanita 107.0 353 79 0.150
b. Communication 2 Along side of Montanita 8.5 28 8 0.040
6. Guascanal Adit 19.0 63 11 no assays
7. Sirena Adit All in barren andesitic
rock 90.0 297
8. Sirena Adit No. 2 7.0 23
9. El Indio Adit All in barren andesitic
rock 29.0 96
10. Guaruma Winze 21.7 72 22 0.03
11. Tempisque Sub level .90 meter (three feet)
vein 9.0 30 8
12. El Indio Winze-excessive cave-ins 29.0 96
13. Limon Adit 6.0 20
14. La Encajonada Adit 12.0 40
----- ---- ---
Totals: 677.2 2237 212
===== ==== ===
B. El Banadero Mine 3.5 kilometers
(2.2 miles) west of
Montemayor
1. Saravia Adit Crosscut with .70 meters
(2.31 feet) vein 44.4 147
2. Caraguito No. 1 14.0 46
3. Caraguito No. 2 30.0 99
4. Demetrio Adit 1.1 meter (3.63 feet)
vein 5.0 17
5. El Salto Adit 12.0 40
----- ---
Totals: 105.4 349
===== ===
Approximately 20 to 25 employees are employed at this site. On April 22, 1997, a
current exploration concession was filed with the Minister of Economy's office
in order to comply with the El Salvadoran Mining Law adopted on February 1996.
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 four employees for each of the twelve-hour
shifts. A total of 58,924 samples of fire assays have been completed through
March 31, 1997. Approximately four employees are working during the two
eight-hour shifts at the SCMP laboratory.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were brought to a vote of security holders in the fourth quarter
ended March 31, 1997.
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, 1997.
Executive Period
Age as of Offices Held Served
Name March 31, 1997 With Company (1) In Office (2)
- ------------------ -------------- ---------------- -------------
Edward L. Machulak 70 President,
Chief Executive
Officer, and
Operating
and Financial
Officer 09/14/62 to present
Treasurer 06/78 to present
Edward A. Machulak 45 Executive Vice
(Son of 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 55 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
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.
Directors', Officers', and Key Management's Experience
The business experience of each of the Directors, Officers, and Key Management
is as follows:
<PAGE>
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 as a Director 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 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; and he was involved in other corporate real estate ventures
and business 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
The Company's common shares are traded on the Boston Stock Exchange under the
symbol "CMG" or "CMG.BN," on a fully listed basis since February 10, 1976, and
on the National Association of Securities Dealers Automated Quotation System
Small-Cap Issue (NASDAQ) under the symbol "CGCO" since March 23, 1987.
The following table reflects the range of high and low prices of the common
shares as reported by NASDAQ for the period ended March 31, 1996 and the highest
and lowest trade price during each quarter through the period ended March 31,
1997. The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission, and do not necessarily represent actual transactions.
For the period ended March 31, 1997 March 31, 1996
High Low High Low
----- ----- ----- -----
First quarter ending June 30 $4.38 $2.38 $4.63 $3.75
Second quarter ending September 30 $3.25 $2.38 $3.75 $3.00
Third quarter ending December 31 $3.25 $1.88 $3.25 $2.63
Fourth quarter ending March 31 $4.00 $1.88 $3.25 $2.75
(b) Approximate Number of Holders of Common Shares
As of March 31, 1997, the common shares were held by approximately 3,000
shareholders of which a high percentage are United States' residents.
As of March 31, 1997, there were approximately 2,138 holders of record of the
Company's common shares. The number of shareholders of the Company who
beneficially own shares in nominee or "street name" or through similar
arrangements are estimated by the Company to be approximately 862.
As of March 31, 1997, there were outstanding: (a) 9,193,042 shares of common
stock; (b) 1,591,360 stock options to purchase common stock; and (c) 1,515
shares of Series A Convertible Preferred Stock which subsequently were converted
into 989,965 common shares.
(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,
1997. 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
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.
Year Ended March 31,
--------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
Income Statement Data
Total revenue $ 1,630,211 $ 1,345,260 $ 823,181 $ 507,964 $ 403,242
=========== =========== =========== =========== ===========
Income from
continuing
operations $ 1,007,598 $ 787,802 $ 274,747 $ 66,852 $ 41,970
=========== =========== =========== =========== ===========
Income (loss) from
continuing operations
per share:
Primary $ .124 $ 0.107 $ 0.046 $ 0.01 $ 0.01
=========== =========== =========== =========== ===========
Fully diluted $ .104 $ 0.106 $ 0.045 $ 0.01 $ 0.01
=========== =========== =========== =========== ===========
Weighted average
shares outstanding 8,136,286 7,368,058 5,941,950 4,828,496 4,451,853
=========== =========== =========== =========== ===========
Balance Sheet
Working capital $ 660,596 $ (92,398) $ 322,944 $ (90,620) $ 67,772
=========== =========== =========== =========== ===========
Total assets $25,067,334 $20,513,115 $17,617,423 $14,204,563 $13,568,374
=========== =========== =========== =========== ===========
Short-term
obligations* $ 5,594,557 $ 5,185,298 $ 4,250,139 $ 4,487,511 $ 3,927,365
=========== =========== =========== =========== ===========
Long-term
obligations $ 145,000 $ 20,259 $ 120,000 $ 245,000 $ 245,000
=========== =========== =========== =========== ===========
Shareholders'
equity $19,208,219 $15,159,507 $13,024,911 $ 9,365,870 $ 8,928,591
=========== =========== =========== =========== ===========
Cash dividends $ 0 $ 0 $ 0 $ 0 $ 0
=========== =========== =========== =========== ===========
*Most of the short-term obligations are owed to related parties.
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, 1997, 1996 and 1995 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 producing gold on a limited basis from the virgin gold ore
and tailings it is extracting at the SSGM and it simultaneously is performing
four separate operations. First, it has commenced a limited production of gold
by processing the SSGM tailings and now they are being blended with the virgin
ore at its SCMP facility which is located approximately 15 miles from the SSGM
site. Second, it is installing a pilot open-pit, heap-leaching gold process on
the SSGM site. Third, it is continuing its SSGM site preparation, the expansion
of its exploration and exploitation targets, and the enlargement and development
of its gold ore reserves. Fourth, it is exploring the potential of the 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
operations while it continues its limited production of gold and the
exploration, exploitation and development of its mining prospects. The more than
twelve-year El Salvador war and the general disbelief that peace will prevail
had been a material deterrent in obtaining funding for the resumption of the
SSGM operations and for the restoration of the SCMP. On December 15, 1992,
through the auspices of the United Nations, the end of the war was declared
contingent upon a three-year term to comply with all of the conditions of this
pact. Presently peace prevails.
<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. While the Joint
Venture did achieve at times to operate the mill to its full capacity by
processing tailings, it encountered operational problems which compelled it to
operate the mill at a lower production rate. Considerable time and capital was
consumed to bring the SCMP to a favorable operating condition. A new labor force
had to be trained to operate the SCMP; mechanical problems occurred,
metallurgical differences had to be resolved; the rainy (hurricane) season was
unusually severe; the head grade varied and problems were encountered with the
handling of the separation of the coarse material. Taking into account all of
the factors affecting the SCMP, if the Joint Venture had not offset all of the
revenues ($969,721 - 1997; $1,180,279 - 1996) from the gold sales by reducing
the advances to the Joint Venture, it would have reflected 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 open-pit, heap-leach operation which is its
major and original goal and presently is in the developmental stage. The
Company's main objective and plan, through the Joint Venture, is to operate at
the SSGM site, a moderate tonnage, low-grade open-pit, heap-leaching,
gold-producing mine and it intends to commence this major gold-mining operation
as soon as adequate funding is in place. Dependent on the grade of gold ore
processed, it then anticipates producing approximately 12,000 ounces of gold
from the SCMP operation and 40,000 ounces of gold from its SSGM open-pit,
heap-leaching operation during the first twelve full operating months. The Joint
Venture continues to conduct an exploration program to develop additional gold
ore reserves at the SSGM and at the following 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.
Results of Operation Fiscal Years March 31, 1997 Compared to March 31,
1996
The Company had a net gain of $1,007,598 or $.124 per share for its fiscal year
ended March 31, 1997 compared to a net gain of $787,802 or $.107 per share for
the previous fiscal year or an increase of 28%. 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 $1,567,375 compared to
the prior fiscal year's interest earnings of $1,286,733. This gain results
primarily from a charge of interest due to the advances to the Joint Venture
which amounted to $15,693,766 for this period or a net increase of $3,894,692
(33%) from the last fiscal period which equalled $11,799,074. The total advances
to the Joint Venture amounted to $16,663,487 but were reduced by the $969,721
revenues received from the gold sales.
<PAGE>
Likewise the Company's borrowings have increased from $3,583,480 (1996) to
$4,108,338 (1997) or approximately 15% and the interest expense for 1996 has
increased from $470,710 to $554,636 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, 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 187%. 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
primarily from a charge of interest due to the advances to the Joint Venture
which amounted to $11,799,074 for this period or a net increase of $3,122,766
(36%) from the last fiscal period which totalled $8,676,308. The total advances
to the Joint Venture during this fiscal period equalled $12,979,353, but were
reduced by the $1,180,279 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.
Liquidity and Capital Resources
The Company continues to be cognizant of its cash liquidity until it is able to
produce adequate profits from its gold production. 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 or by entering into a joint venture with other companies.
During the past, the Joint Venture was engaged in exploration, exploitation and
development programs designed to increase its gold ore reserves. The prospects
of expanding the gold reserves are positive. The funds needed by the Joint
Venture were obtained from the Company via net advances: $3,894,692 in fiscal
1997. 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 retrofit the SCMP, to purchase consumable
inventory, to purchase certain hauling and loading equipment, to purchase a
crushing system, to perform diamond drilling on the SSGM, to upgrade 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. Since September 1987, the Company and three of its wholly-owned
subsidiaries advanced a sum of $15,693,766 to the Joint Venture, exclusive of
gold sale proceeds.
<PAGE>
The Company estimates that it will need at least U.S. $13 million to start a
2,000 ton-per-day open-pit, heap-leaching operation and over time to increase
the production capacity to 6,000 tons per day at the SSGM. The use of proceeds
is as follows: $7,000,000 for mining equipment and a crushing system; $3,689,776
for the processing equipment and site and infrastructure costs; and $2,310,224
for the working capital.
Advances to the Joint Venture
Advances to the Joint Venture during the Company's fiscal year ended March 31,
1997 were derived from the various sources including related parties as follows:
Funding Sources From
Related Other
Parties Sources Total
----------- ---------- ----------
Accounts payable &
accruals etc. $ (59,524) $ 105,147 $ 45,623
Notes payable 377,159 147,699 524,858
Equity 890,921 2,150,193 3,041,114
Net income 1,007,598 1,007,598
---------- ---------- ----------
Totals $1,208,556 $3,410,637 $4,619,193
Increase in cash
& cash equivalents (724,501) (724,501)
---------- ---------- ----------
Advances to the Joint Venture $1,208,556 $2,686,136 $3,894,692
========== ========== ==========
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, 1997, the Company has advanced to the
Joint Venture, the sum of $15,103,501 and three of the Company's wholly-owned
subsidiaries have advanced the sum of $590,265, for a total of $15,693,766. The
funds advanced to the Joint Venture were used primarily for the exploration,
exploitation, and development of the SSGM, for the construction of the Joint
Venture laboratory facilities on real estate owned by the Company near the SSGM
site, for the operation of the laboratory, for the purchase of a 200-ton per day
used SCMP precious metals' cyanide leaching mill and plant, for the
retrofitting, repair, modernization and expansion of its SCMP facilities, for
consumable inventory, for working capital to commence the production of gold,
for exploration costs for the San Felipe-El Potosi Mine, and its extension, the
El Capulin Mine, the Modesto Mine, the 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
community bridge, for community telephone building and facilities, for the
purchase and advance lease payment of the real estate on the Modesto Mine, for
the purchase of a crushing system, for diamond drilling at the SSGM, 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
additional equipment needed for the SCMP would permit it to reach its goal of
processing up to 400 tons of virgin ore each day of operation. In the event the
Joint Venture's goals are reached, then the profits and cash flow should provide
funds that could be used to commence the SSGM open-pit, heap-leaching operation.
The Company estimates that it will need at least U.S. $13 million to start a
2,000 ton-per-day open-pit, heap-leaching operation and over time to increase
the production capacity to 6,000 tons per day at the SSGM. The profit and cash
flow projections reflect that the invested capital could be recovered during the
first 18 months of full production. It further believes that it should be able
to raise adequate funds to proceed with its goals which include the SCMP
expansion and the installation of its crushing system. During the last fiscal
quarter ended March 31, 1997, the Company did raise the sum of $2.5 million by
issuing Series A Convertible Preferred Stock and the placement of additional
equity securities.
Employees
The Joint Venture employs approximately 318 full-time persons from El Salvador
(up to 325 persons, including part-time employees) to perform its exploration,
exploitation, and development programs; to produce gold from its SCMP
facilities; and to handle the administration of its activities. None of these
employees are covered by any collective bargaining agreements. It has developed
a continuous harmonious relationship with its employees. It believes that the
Joint Venture is the largest single non-agricultural employer in El Salvador's
Eastern Zone. Also, the Company employs approximately four persons (plus
part-time help) in the United States.
Insurance
The Joint Venture has in existence insurance through an El Salvador insurance
company with the following general coverage: general liability, vehicle
liability and extended coverage, fire, explosion, hurricane, cyclone, tornado,
windstorm, hail, flood, storm, earthquake, tremor or volcanic eruption,
politically-motivated violence, terrorism, strikes, work stoppages, riots,
uprisings, malicious acts, vandalism, and related acts. As additional equipment
and assets are acquired or improvements are made, the insurance coverage 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, 1997, the Company, and three of its
subsidiaries, have advanced to the Joint Venture $15,693,766. Included in the
total advances is the interest charged to the Joint Venture by the Company and
this charge amounts to $5,234,795 through March 31, 1997. The Company furnishes
all of the funds required by the Joint Venture.
<PAGE>
Efforts to Obtain Capital
Since the concession was granted, and through the present time, substantial
effort is exercised in securing funding through various sources, all with the
purpose to resume and expand the operations of the SCMP and SSGM and to continue
the exploration of its other mining prospects.
The 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 gross sum of $4,864,413 which was reduced by the
$969,721 received from the sale of gold proceeds and reflected a net investment
of $3,894,692, into the El Salvador operations. This includes allocation of the
Company's expenditures. The Company believes that it will be able to obtain
adequate financing from the same sources as in the past to conduct the present
operations during the fiscal year ended March 31, 1998.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
And Supplementary Financial Data
Page
Report of Independent Certified Public Accountants . . . . . . . . . 58
Financial Statements:
Consolidated Balance Sheets, Years Ended March 31, 1997 and 1996 . . 59
Consolidated Statements of Income, Years Ended March 31, 1997, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Consolidated Statements of Changes in Shareholders' Equity Years
Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . 61
Consolidated Statements of Cash Flows, Years Ended March 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 63
Quarterly Financial Data (Unaudited) . . . . . . . . . . . . . . . . 77
Supplementary Financial Data:
Report of Independent Accountants on the Financial Statements
Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
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
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, 1997
and 1996, 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, 1997, 1996, and 1995. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the periods ended March 31, 1997, 1996, and 1995, in
accordance with accounting principles generally accepted in the United States.
BRUCE M. REDLIN
Certified Public Accountants
Milwaukee, Wisconsin
April 28, 1997
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheets--March 31
1997 1996
------------ ---------------
ASSETS
------
Current assets
Cash $ 780,154 $ 55,653
Investments 194,888 198,982
Accounts receivable 112,382 143,476
Inventories 88,250 118,748
Prepaid items 1,698 986
------------- --------------
Total current assets 1,177,372 517,845
Real estate (Note 4) 1,179,836 1,179,836
Advances to Joint Venture
Net of Gold Sale Proceeds
(Note 3) 15,693,766 11,799,074
Investment in Joint Venture
(Note 3) 7,016,360 7,016,360
----------- -----------
Total assets $25,067,334 $20,513,115
LIABILITIES
-----------
Current liabilities
Accounts payable $ 119,558 $ 148,051
Notes and accrued interest
payable to related parties
(Note 5) 3,461,529 3,084,370
Notes and accrued interest
payable to others (Note 5) 646,809 499,110
Accrued salaries 1,344,015 1,204,140
Accrued legal fees 137,069 76,883
Other accrued expenses 150,135 341,054
----------- --------------
Total liabilities 5,859,115 5,353,608
Commitments and contingencies (Notes 3, 5, 6, 7, 10 and 14)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
1997-1,515 shares; 1996-none (Note 10) $ 1,515,000 $ 0
Common Stock, $0.10 par value: Authorized 15,000,000 shares; Issued and
outstanding:
1997-9,193,042 (Note 10) 919,304
1996-7,792,209 (Note 10) 779,221
Additional paid in capital 14,359,037 12,973,006
Retained earnings (deficit) 2,414,878 1,407,280
----------- -----------
Total shareholders' equity 19,208,219 15,159,507
----------- -----------
Total liabilities and shareholders'
equity $25,067,334 $20,513,115
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Consolidated Statements of Income--March 31
1997 1996 1995
---------- ---------- ----------
Revenues:
Campground income $ 59,009 $ 55,692 $ 54,600
Land sales 0 0 9,000
Interest income 3,832 2,669 6,172
Interest income Joint
Venture (Notes 3 & 11) 1,567,375 1,286,739 751,389
Miscellaneous income 0 160 2,020
---------- --------- ----------
Total revenue 1,630,216 1,345,260 823,181
Expenses:
Cost of land sales 0 0 1,325
General, administrative and
campground expenses 67,982 86,748 80,505
Interest expense 554,636 470,710 466,604
---------- --------- ---------
Total expenses 622,618 557,458 548,434
---------- --------- ---------
Net income (loss) 1,007,598 787,802 274,747
Credit (charges) for
income taxes 0 0 0
---------- ---------- ----------
Net income (loss) after income
tax credit (charge) $1,007,598 $ 787,802 274,747
========== ========== =========
Net income (loss) per share
(Note 2) $ .124 $ .107 $ .046
========== ========== =========
Weighted av. shares
outstanding (Note 2) 8,136,286 7,368,058 5,941,950
========== ========== =========
Fully diluted income per
common share $ .104 $ .106 $ .045
========== ========= =========
Weighted average diluted number of shares and assuming all rights and options
were exercised on March 31
(Note 2) 9,727,646 7,465,898 6,101,006
========== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statement Of Changes in Shareholders' Equity
For the Years Ended March 31, 1997, 1996, and 1995
Common Stock
------------------------------------------
Capital in
Excess Retained
Number of Par of Par Earnings
Shares Value Value (Deficit)
--------- -------- ---------- ----------
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
Net income for FY March 31, 1997 1,007,598
Dir./off./employee/services comp. 66,563 6,656 122,875
Payment of debt 381,043 38,104 762,792
Cash 953,227 95,323 1,526,927
Preferred conv. stock issuance costs:
Current (404,466)
Deferred (622,097)
--------- -------- ----------- ----------
Balance March 31, 1997 9,193,042 $919,304 $14,359,037 $2,414,878
========= ======== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31
1997 1996 1995
--------- -------- --------
Operating activities:
Net income (loss) $1,007,598 $787,802 $274,747
Changes in other operating assets
and liabilities (net):
Accounts receivable and inventory 61,592 (262,224) 0
Other assets 3,382 (366) 973
Accounts payable (28,493) (74,372) 116,241
Accrued salaries 139,875 (53,050) 267,550
Accrued directors' fees 0 (47,950) (6,850)
Accrued legal fees 60,186 (89,473) (113,257)
Accrued liabilities (190,919) 167,425 (1,260)
Common stock issued for services 129,531 114,607 152,070
--------- -------- ---------
Cash provided (used)
by operating activities 1,182,752 542,399 690,214
Investing activities:
Cash advances to Joint Venture (3,027,882)(2,845,282)(1,865,869)
Non cash advances to Joint Venture (1,836,531)(1,457,763)(1,018,209)
--------- --------- ---------
Gross advances to Joint Venture (4,864,413)(4,303,045)(2,884,078)
Less: gold sale proceeds 969,721 1,180,279 0
--------- --------- ---------
Net advances to Joint Venture (3,894,692)(3,122,766)(2,884,078)
Financing activities:
Net borrowings 524,858 858,466 (508,555)
Preferred stock issued 1,515,000 0 0
Common stock issued 1,396,583 1,232,187 3,232,224
--------- --------- ---------
Funds provided by financing
activities 3,436,441 2,090,653 2,723,669
Increase (decrease) in cash and
cash equivalents 724,501 (489,714) 529,805
Cash - beg. of year 55,653 545,367 15,562
---------- ---------- ----------
Cash - end of year $ 780,154 $ 55,653 $ 545,367
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES Notes to
Consolidated Financial Statements March 31, 1997
(1) The Company and Basis of Presentation of Financial Statements
(a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant") and its
82 1/2% owned subsidiary, San Sebastian Gold Mines, Inc. ("Sanseb") have
formed the Commerce/Sanseb Joint Venture ("Joint Venture") for the purpose
of performing gold mining and related activities, including, but not limited
to, exploration, exploitation, development, extraction and processing of
precious metals in the Republic of El Salvador, Central America. Gold
bullion, the Joint Venture's principal product, is produced (but not on a
full production basis) in El Salvador and refined and sold in the United
States. Expansion of exploration is taking place at the San Sebastian Gold
Mine ("SSGM") which is located near the City of Santa Rosa de Lima.
Exploration is also taking place at 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.
(c) The preparation of the financial statements, in accordance with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(d) The investment consists of precious stones which are stated at the lower
cost or market value.
(e) Accounts receivable consist of gold bullion shipped to the refinery pending
the settlement date.
(f) Inventory consists of processed ores and metal-in-process which are stated
at the lower of average cost or market.
<PAGE>
(2) Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the operations of the
Company and all of its majority-owned subsidiaries: Homespan Realty Co.,
Inc. ("Homespan"); Piccadilly Advertising Agency, Inc. ("Piccadilly");
San Luis Estates, Inc. ("SLE"); Universal Developers, Inc. ("UDI"); San
Sebastian Gold Mines, Inc. ("Sanseb"); and Mineral San Sebastian, S.A. de
C.V. ("Misanse"). The Company does not include in its financial
statements the operations of the Joint Venture. Other than the Joint
Venture, all significant intercompany accounts and transactions have been
eliminated. For further information regarding consolidated subsidiaries
see Note 8.
Income Taxes
The Company files a consolidated Federal Income Tax return with its subsidiaries
(See Note 9).
Income (Loss) Per Common Share
Net income per share is calculated based on the weighted average number of
common shares issued and outstanding during this 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. No allowance was made for the common
shares that will be issued upon the conversion of the Series A Convertible
Preferred Stock as the exact number of shares to be issued are undeterminable
until the conversion date.
If on March 31, 1997, 1,591,360 option shares would be added to the weighted
average calculated number of shares which amounts to 8,136,286 (under the
assumption that all of the stock options would be exercised), the total number
of the weighted average fully diluted shares would be 9,727,646, and the profit
per share for the fiscal year ended March 31, 1997, would be $.104 per share.
The same assumptions were used for the same 1996 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. El
Salvador has a freely convertible currency that at present trades about 8.75
colones per U.S. dollar. In this environment, based on the free convertibility
of the colon, foreign businesses have no problem making remittances of profits,
repatriating capital or bringing in capital for additional investments. There is
no delay in exchanging dollars for colones or vice versa.
<PAGE>
Major Customer
The Joint Venture produces gold and silver. It sells its gold to a refinery
located in the United States. Given the nature of the precious metals that are
sold, and because many potential purchasers of gold and silver exist, it is not
believed that the loss of any customer would adversely affect either the Company
or the Joint Venture (Note 3).
(3) Commerce/Sanseb Joint Venture ("Joint Venture")
The Company is in a joint venture with and owns 82 1/2% of the total common
stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada chartered (1968)
corporation. The balance of Sanseb's stock is held by approximately 180
non-related shareholders, including the President of the Company who owns 2,073
common shares. Sanseb was formed to explore, exploit, research, and develop
adequate gold reserves. It produced gold from SSGM from 1972 through February
1978.
On September 22, 1987, the Company and Sanseb entered into a joint venture
agreement to formalize their relationship with respect to the mining venture and
to account for the Company's substantial investment in Sanseb. Under the terms
of the agreement, the Company is authorized to supervise and control all of the
business affairs of the Joint Venture and has the authority to do all that is
necessary to resume mining operations at the SSGM on behalf of the Joint
Venture. The net pre-tax profits of the Joint Venture will be distributed as
follows: Company 90%; and Sanseb 10%. Since the Company owns 82 1/2% of the
authorized and issued shares of Sanseb, the Company in effect has over a 98%
interest in the Joint Venture activities.
The joint venture agreement further provides that the Company has the right to
be compensated for its general and administrative expenses in connection with
managing the Joint Venture.
Under the joint venture agreement, agreements signed by the Company for the
benefit of the Joint Venture create obligations binding upon the Joint Venture.
The Joint Venture is registered to do business in the State of Wisconsin and in
the Republic of El Salvador, Central America.
Accounting Matters
The Joint Venture records all costs and expenses as capital items which are
reduced by the gold sale proceeds and it will write off these cumulative costs
on a unit of production method at such time as it begins producing gold derived
from the virgin gold ore on a full production basis. If the prospect of gold
production, due to different conditions and circumstances becomes unlikely, all
of these costs may be written off in the year that this occurs.
Advances to Joint Venture
As of March 31, 1997, the Company's advances were $15,103,501, and three of the
Company's wholly-owned subsidiaries' advances were $590,265 for a total of
$15,693,766.
<PAGE>
Investment in El Salvador Mining Projects
During the fiscal year, the Company has advanced funds, performed services, and
allocated its general and administrative costs to the Joint Venture.
As of March 31, 1997, the Company, Sanseb and three of the Company's
wholly-owned subsidiaries have invested (including carrying costs) the following
in its Joint Venture:
The Company's advances since 09/22/87 $17,253,501
Less amounts received from gold sales (2,150,000)
The Company's net of gold sale proceeds
advances since 09/22/87 15,103,501
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 19,388,321
-----------
Total: 41,508,182
Advances by the Company's three subsidiaries 590,265
-----------
Combined total investment $42,098,447
===========
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. During
this fiscal period gold is being produced by trucking the tailings and virgin
ore for processing at the SCMP.
Mineral San Sebastian S.A. de C.V. ("Misanse")
(a) Misanse Corporate Structure
The SSGM real estate is owned by and leased to the Joint Venture by Misanse, a
Salvadoran chartered corporation. The Company owns 52% of the total of Misanse's
issued and outstanding shares. The balance is owned by approximately one hundred
El Salvador, Central American, and United States' citizens. The Company has the
right to select six of Misanse's ten directors. (Note 6)
<PAGE>
(b) SSGM Mining Lease
On July 28, 1975, an amended lease agreement between Misanse as lessor and
Sanseb as tenant was signed by the parties giving the tenant all the possessions
and mining rights that pertain to the SSGM as well as other claims to mineral
rights that may already have or could be claimed in the future within the 595
hectares (1,470 acres) plat of land encompassing the SSGM. The 25-year lease,
which begins on the date gold production begins, was further amended to run
concurrently with the concession described herein and may be extended for an
additional 25 years by the tenant as long as the tenant has paid the rent and
has complied with other obligations under the lease and the concession. The
lease further provides that the tenant will pay rent equivalent to five percent
of the gross gold production revenue obtained from the leased SSGM and further
commits itself to maintain production taking into consideration market and other
conditions. In no case will the rent be less than eighteen hundred "colones" per
month (approximately $206 per month at the current rate of exchange). The lease
further provides that, in the event the lessor wishes to sell the property, it
must first give preference to the tenant; the lease further provides that the
tenant must give preference to employ former mining employees and Misanse
shareholders, providing they qualify for the available position. The lease
agreement was assigned on January 29, 1987 to the Company and Sanseb together
with the mining concession application.
The lease is freely assignable by the Joint Venture without notice to Misanse.
The lease may also be canceled by the Joint Venture on thirty day's notice to
Misanse, and thereafter, all legal responsibilities thereunder shall cease.
In the event that additional gold ore is discovered, Misanse is required to make
proper claim for it under the jurisdiction of the Ministry of Economy of El
Salvador's Director of Energy, Mines, and Hydrocarbons, and include it in the
present concession. Such addition to the lease is required to be made without
any changes to the rental payment, except that the expenses for expanding the
concession shall be borne by the Joint Venture.
(c) Mineral Concession
On January 27, 1987, the Government granted a right to the mining concession
("concession") to Misanse which was subject to the performance of the El
Salvador Mining law requirements. These rights were simultaneously assigned to
the Company and Sanseb.
On July 23, 1987, the Government of El Salvador delivered and granted to the
Company's 52% owned subsidiary, Misanse, possession of the mining concession.
This is the right to extract and export minerals for a term of 25 years (plus a
25-year renewal option) beginning on the first day of production from the real
estate which encompasses the SSGM owned by Misanse. Misanse assigned this
concession to the Joint Venture.
Effective February 1996, the Government of El Salvador passed a law which will
require mining companies to pay to it three percent of its gold sale receipts
and an additional one percent is to be paid to the El Salvador municipality
which has jurisdiction of the mine site.
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. $57,143 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 entire
amount due has been paid or placed in escrow for those persons that cannot
be located.
<PAGE>
(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, five percent of the gross wages paid to the
full-time employees shall be paid into a pension fund;
(4) From the profits earned, a sum of 500,000 colones annually
(equivalent to $57,143 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 five percent of its pre-tax
profits, but, in any event, not less than a minimum amount equal to five
percent of eight percent of the total assets;
(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 to
convert the El Salvador colones into United States' currency. (Note
2)
On November 30, 1987, the El Salvador Minister of Foreign Commerce issued a
project approval for the gold mining operation which was ratified on April 15,
1988.
In consideration for the obligations agreed to by the Joint Venture the
Government of El Salvador agreed to exempt the Joint Venture from the payment of
all import duty, fiscal or municipal taxes whatsoever. The El Salvador
Department of Customs refused to recognize this exemption. On November 15, 1993,
the Joint Venture's attorneys filed a declaratory proceeding with the El
Salvador Constitutional Supreme Court ("Court") informing the Court that the
Joint Venture's rights were being violated and that the Court should restrain
the Department of Customs from attempting to collect any duty.
On May 18, 1994, the El Salvador Constitutional Supreme Court of Justice
declared that the Joint Venture is entitled to be temporarily exempt from the
payment of all fiscal and municipal taxes and import duty on the import of any
item relating to the needs of the SSGM pending its review of the petition filed
on November 15, 1993, and that the Company's constitutional rights are to be
preserved. The El Salvador Department of Customs takes a position that the
Supreme Court could deny the exemption, therefore, in lieu of paying the
Custom's duty, it is accepting a payment guarantee bond in an amount of the
Custom's duty until a final decision is made. It is charging the Company a ten
percent added value tax prior to June 30, 1995, and 13% thereafter which is
refundable to the extent of six percent of the value of the Joint Venture's
exports. The Joint Venture intends to export all of its gold.
<PAGE>
Gold Ore Reserves
The Joint Venture's geologists have determined that the minable and estimated
gold reserves are approximately 15,785,000 tons which should contain 1,641,600
ounces of gold. The value of this gold ore reserve is not reflected in the
balance sheet and since gold production has commenced on a limited start-up
basis these gold ore reserves will have a significant impact on future earnings.
SCMP Land and Building Lease
On November 12, 1993, the Joint Venture entered into an agreement with
Corporacion Salvadorena de Inversiones ("Corsain"), a governmental agency of El
Salvador, to lease for a period of ten years, approximately 166 acres of land
and buildings on which its gold processing mill, plant and related equipment
(the SCMP) are located, and which is approximately 15 miles east of the SSGM
site. The annual lease payment is U.S. $11,500 (payable in El Salvador colones
at the then current rate of exchange), payable annually in advance, and subject
to an annual increase based on the annual United States' inflation rate. As
agreed, a security deposit of U.S. $11,500 was paid on the same date and this
deposit will be subject to increases based on any United States' inflationary
rate adjustments.
Modesto Mine
(a) Real Estate
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. On August 31, 1996, the Company purchased this parcel of
land. This land was used as collateral in connection with a mortgage and a
promisssory note that was issued.
On November 27, 1994, the Company entered into an agreement to purchase
approximately 22 acres of land which abuts the land formerly leased at the
Modesto Mine site. The Company owns a total of 52 acres.
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 five percent of the gross receipts derived from
the production of precious metals from this site which will be payable
monthly.
<PAGE>
2. The Joint Venture will advance to the Cooperative the funds required to
obtain the mining concession from the El Salvador Department of Energy,
Mines and Hydrocarbons and all related costs which will be reimbursed or
will become a deduction from future rental payments.
3. The Joint Venture will, when it is in production, employ all of the 45
qualified members of the Cooperative providing that there is a need for
their particular skill or service.
4. The Joint Venture will furnish medicine and first aid medical assistance to
all of its employees to the extent that such benefits are not provided by
the Salvadoran Social Security System.
5. An employee life insurance program is to be seriously considered by the
Joint Venture when production commences, providing that the cost of such
insurance is not excessive.
(4) Real Estate Ownership
The Company and its subsidiaries own a 331-acre campground located on the Lake
of the Ozarks, Camden County, Missouri; 40 lots in the San Luis North Estate
Subdivision, Costilla County, Colorado; and 12 lots in the City of Fort Garland,
Costilla County, Colorado. Misanse owns the 1,470 acre SSGM site located near
the City of Santa Rosa de Lima in the Department of La Union, El Salvador. Other
real estate ownership or leases in El Salvador are as follows: it owns a total
of approximately 52 acres at the Modesto Mine: the Joint Venture leases the SCMP
land and buildings on which its mill, plant and equipment are located. In
addition the Joint Venture has entered into lease arrangements based on the
production of gold payable in the form of royalties with one of the four other
mining prospects in the Republic of El Salvador. Reference is made to Note 3 for
other real estate ownership.
(5) Notes Payable and Accrued Interest
March 31
Notes payable consist of the following: 1997 1996
---------- -----------
Mortgage and promissory notes to related parties, interest ranging from one
percent to four percent over prime rate, but not less than 16%, payable monthly,
due on demand, using the undeveloped land, real estate and all other assets
owned by the Company, its subsidiaries and the Joint Venture as
collateral (Note 6) $3,461,529 $3,084,370
Other (consists primarily of short-term notes and accrued 1996 interest of
$262,955 (1995, $242,988.21) issued to trade creditors and others, interest of
varying amounts, in lieu of actual cash payments) and a mortgage on a certain
parcel of land located in El Salvador. 646,809 499,110
---------- ----------
Total: $4,108,338 $3,583,480
========== ==========
<PAGE>
(6) Related Party Transactions
The Company, in an attempt to preserve cash, had prevailed on its President to
accrue his salary for the past 16 years, for a total of $1,344,015.
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, 1997:
The amount of funds which the Company has borrowed from its President from time
to time, together with accrued interest, amounts to $1,839,465. To evidence this
debt, the Company has issued to its President a series of open-ended, secured,
on-demand promissory notes, with interest payable monthly at the prime rate plus
two percent, but not less than 16% per annum.
The Company had borrowed, as of March 31, 1997, an aggregate of $400,919,
including accrued interest, from the Company's President's Rollover Individual
Retirement Account (RIRA). These loans are evidenced by the Company's
open-ended, secured, on-demand promissory note, with interest payable monthly at
the prime rate plus four percent per annum, but not less than 16% per annum.
In order to satisfy the Company's cash requirements from time to time, the
Company's President has sold or pledged as collateral for loans, shares of the
Company's common stock owned by him. In order to compensate its President for
selling or pledging his shares on behalf of the Company, the Company has made a
practice of issuing him the number of restricted shares of common stock
equivalent to the number of shares sold or pledged, plus an additional number of
shares equivalent to the amount of accrued interest calculated at the prime rate
plus three percent per annum. 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 (58,900) borrowed from him during this fiscal period and it issued
26,887 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 two
percent of the pre-tax profits realized by the Company from its gold mining
operations in El Salvador, payable annually over a period of twenty years
commencing on the first day of the month following the month in which gold
production commences.
The President presently owns a total of 467 Misanse common shares. There are a
total of 2,600 Misanse shares issued and outstanding.
Also with the consent and approval of the Directors, a company in which the
President has a 55% ownership entered into the following agreements, and the
status is reflected as of March 31, 1997.
<PAGE>
The Company leased approximately 4,032 square feet on a month-to-month basis for
its corporate headquarters office; the monthly rental charge was $2,789. The
annual amount charged for the past three fiscal years is as follows: 1997,
$33,468; 1996, $28,316 and 1995, $25,740.
On June 10, 1996, in consideration for the partial cancellation of the Company's
debt due ($292,500) to this related party, 130,000 restricted common shares were
issued to it.
On January 10, 1997, this related party purchased 68,000 of the Company's
restricted common shares at a price of $2.00 a share. It also received a
four-year stock option expiring on January 9, 2001, to purchase 68,000 of the
Company's restricted common shares at a price of $3.00 for each share. This
transaction had the same terms as were entered into with other independent
arms-length transactions.
The same related company provides consulting, administrative services, use of
data processing equipment, use of its vehicles and other property as required by
the Company. Total charges for these services were as follows: 1997, $7,950;
1996, $7,920 and 1995, $7,620.
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, 1997, amounts to $963,152; the annual
interest rate is four percent plus the prime rate, but not less than 16%, and it
is payable monthly.
The Company's Directors have consented and approved the following transactions
which status are reflected as of March 31, 1997:
The President's wife's Individual Retirement Account ("IRA") has the Company's
open-ended, secured, on-demand promissory note in the sum $207,475 which bears
interest at an annual rate of prime plus three percent, but not less than 16%
and the interest is payable monthly. The President's wife on December 14, 1996,
purchased 83,900 restricted common shares, $0.10 par value, for a sum of
$167,800. She simultaneously acquired a four-year stock option to purchase
83,900 of the Company's restricted common shares at a price of $3.00 each which
expires December 13, 2001. This transaction is under the same terms entered into
with arms-length other purchases.
The Law Firm which represents the Company in which a son of the President is a
principal is owed the sum of $137,069 for legal services rendered throughout the
past years. 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 $50,518 which bears interest
at an annual rate of 16% payable monthly.
<PAGE>
The Directors, by their agreement, have deferred cash payment of their Director
fees beginning on January 1, 1981, until such time as the Company's operations
are profitable. Effective from October 1, 1996, the Director fees were increased
from $750 to $1,200 for each quarterly meeting and $400 for attendance at any
other Directors' meeting. The Executive Committee Director fees were increased
from $250 to $400 for each meeting. The Directors and Officers have a right to
exchange the amount due to them for the Company's common shares.
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 Summaries during a twelve-month period preceding the
exercise of this right. As of March 31, 1997, pursuant to the S.E.C. Form 8
Registration Statement effective as of April 4, 1994, the Directors/Officers
exercised their rights to purchase 8,613 shares at a price of $1.875 per share
in payment of all compensation due to them as of March 31, 1997.
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.
Company Net Advances to the Joint Venture
Total Interest
Advances Charges
---------- --------
Balance April 1, 1990 $ 1,625,163 252,060
Year Ended March 31, 1991 718,843 266,107
Year Ended March 31, 1992 698,793 312,004
Year Ended March 31, 1993 1,003,617 347,941
Year Ended March 31, 1994 1,155,549 451,180
Year Ended March 31, 1995 2,884,078 751,389
Year Ended March 31, 1996 3,122,766 1,286,739
Year Ended March 31, 1997 3,894,692 1,567,375
----------- ----------
Balance March 31, 1997 $15,103,501 $5,234,795
Advances by three of the Company's
wholly-owned subsidiaries 590,265 0
----------- ----------
Total Net Advances March 31, 1997 $15,693,766 $5,234,795
(7) Commitments
Reference is made to Notes (3), (5), (6), (10) and (14).
<PAGE>
(8) Consolidated Subsidiaries
The following subsidiaries, all majority-owned by the Company, are included in
the consolidated financial statements of the Company. All intercompany balances
and transactions have been eliminated.
Percentage of Ownership
Homespan Realty Co., Inc. 100.0%
Mineral San Sebastian, S.A. de C.V. 52.0%
Piccadilly Advertising Agency, Inc. 100.0%
San Luis Estates, Inc. 100.0%
San Sebastian Gold Mines, Inc. 82.5%
Universal Developers, Inc. 100.0%
(9) Income Taxes
At March 31, 1996, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of approximately
$4,347,244 which may be carried forward to offset future taxable income; the net
operating losses expire at various times to the year of 2012.
(10) Description of Securities
a. Common Stock
The Company's Certificate of Incorporation authorizes the issuance of 15,000,000
shares of common stock, $0.10 par value per share of which 9,193,042 shares were
outstanding as of March 31, 1997. Holders of shares of common stock are entitled
to one vote for each share on all mattters to be voted on by the shareholders.
Holders of common stock have no cumulative voting rights. Holders of shares of
common stock are entitled to share ratably in dividends, if any, as may be
declared, from time to time by the Board of Directors in its discretion, from
funds legally available therefore. In the event of a liquidation, dissolution or
winding up of the Company, the holders of shares of common stock are entitled to
share pro rata all assets remaining after payment in full of all liabilities.
Holders of common stock have no preemptive rights to purchase the Company's
common stock. There are no conversion rights or redemption or sinking fund
provisions with respect to the common stock. All of the outstanding shares of
common stock are validly issued, fully paid and non-assessable.
b. Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of 250,000
shares of preferred stock, $0.10 par value, of which 2,500 shares of Series A
Convertible Preferred Stock were issued as of January 30, 1997, and as of March
31, 1997, there remained 1,515 preferred shares issued and outstanding and none
were issued as of March 31, 1996.
The number of shares of common stock issuable upon conversion of each of the
2,500 shares of preferred stock, and the consequent number of shares of common
stock available for resale under this prospectus, is based upon a conversion
ratio which is $1,000 divided by the lower of (a) $2.90 or (b) 65% of the
closing bid price of the common stock on NASDAQ averaged over the five trading
days immediately prior to the date of conversion. The holders that converted
these Series A Convertible Preferred Shares received 655,227 common shares.
<PAGE>
The remaining preferred shares are issuable in one or more series. The Board of
Directors is authorized to fix or alter the dividend rate, conversion rights (if
any), voting rights, rights and terms of redemption (including any sinking fund
provisions), redemption price or prices, liquidation preferences and number of
shares constituting any wholly unissued series of preferred shares.
c. Stock option activity during 1997, 1996, and 1995 was as follows:
03/31/97 03/31/96 03/31/95
------------------ ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Amount Price Amount Price Amount Price
-------- ----- ------- ----- ------- -----
Outstanding, beg. yr. 97,840 $2.66 154,850 $2.66 709,760 $1.51
Granted 1,507,400 $3.38 3,250 $5.00 94,590 $2.56
Exercised $0.00 (60,260 $2.42 (649,500) $1.46
Forfeited (13,880) $3.00 0 $0.00 0 $0.00
Expired 0 $0.00 0 $0.00 0 $0.00
--------- ----- ------ ----- ------- -----
Outstanding, end of yr. 1,591,360 $3.22 97,840 $2.66 154,850 $2.34
========= ===== ====== ===== ======= =====
A summary of the outstanding stock options as of March 21, 1997, follows:
Weighted Average
Range of Amount Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- ----------------
$2.00 to $2.99 490,000 1.14 years $2.44
$3.00 to $5.00 1,101,360 2.43 years $3.56
d. Stock Rights - To The President
Reference is made to Note 6, Related Party Transactions, of the Company's
financial statements which disclose the terms and conditions of the share loans
to the Company by the President and the interest which is payable to him by the
Company's issuance of its common shares.
Said interest payable is for shares loaned to the Company and/or for such shares
loaned or pledged for collateral purposes, or for unpaid interest, all in
accordance with the terms and conditions of Director approved open-ended loan
agreements dated June 20, 1988, October 14, 1988, May 17, 1989 and April 1,
1990. <PAGE>
e. Stock Rights - Others
The Company has agreed to issue up to 25,000 of its restricted common shares in
connection with a certain funding agreement entered into on December 19, 1996.
f. Share Loans - Others
A series of borrowings of the Company's common shares were made under the
provision that the owners would sell said shares as the Company's designee, with
the proceeds payable to the Company. In exchange, the Company agreed to pay
these shares loaned within 31 days or less by issuing its restricted common
shares, together with interest payable in restricted common shares payable at a
negotiated rate of interest normally payable in advance for a period of two
years; no shares were borrowed from other non-related parties during the period
ended March 31, 1997.
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, 258,747
were issued and 241,253 shares are authorized to be issued.
(11) Interest Income on Advances to the Joint Venture
From time to time the Company advances funds, services, etc. to the Joint
Venture. The interest rate charged is the prime interest rate fixed on the first
day of each month plus four percent. The interest is payable monthly. (Note 6)
(12) Litigation
There is no litigation.
<PAGE>
(13) Quarterly Financial Data (Unaudited)
The following is a tabulation of unaudited selected quarterly operating results
for March 31, 1997, and March 31, 1996:
Net Income
Net Income (Loss)
Revenues (a) (Loss) (b) Per Share
------------ ----------- -----------
First quarter 06/30/95 $ 299,687 $ 173,459 $ .024
Second quarter 09/30/95 329,240 207,139 .028
Third quarter 12/31/95 355,729 206,487 .028
Fourth quarter 03/31/96 360,604 200,717 .027
---------- ---------- ------
Total as of 03/31/96 $1,345,260 $ 787,802 $ .107
========== ========== ======
First quarter 06/30/96 $ 373,213 $ 220,032 $ .030
Second quarter 09/30/96 401,758 250,608 .030
Third quarter 12/31/96 417,536 258,928 .030
Fourth quarter 03/31/97 437,709 278,030 .034
---------- ---------- ------
Total as of 03/31/97 $1,630,216 $1,007,598 $ .124
========== ========== ======
(a) Includes interest income from Joint Venture.
(b) Includes interest expense incurred on funds borrowed and then advanced to
the Joint Venture.
(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 a contingent liability as it has, on behalf of the Joint Venture,
agreed to reimburse an El Salvador Insurance Company the funds that may be
disbursed to the El Salvador customs' office in connection with the payment of
guarantee bonds it has issued in lieu of cash payment for the import duties. The
total sum of payment guarantee bonds issued by the Insurance Company through
March 31, 1997, amounts to approximately $20,000.
<PAGE>
(15) Supplemental Cash Flow Information
Supplemental disclosure of cash flow information for the years ended March 31,
1997, 1996 and 1995 is as follows:
1997 1996 1995
------ ------- ----
Cash paid during the year for:
Interest $1,350 $ 0 $0
Income taxes $ 0 $ 0 $0
Non-cash financing activities
Equipment capital leases $ 0 $35,775 $0
<PAGE>
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 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
(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 . . 86
Schedule IV (1) Indebtedness of Related Parties. . . . . . . . . . . . . . 87
Schedule IV (2) Indebtedness to Related Parties. . . . . . . . . . . . . . 88
Schedule X (1) Supplementary Income Statement Information March 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90
(b) Reports on Form 8-K
Form 8-K dated June 11, 1996 regarding the Company's acceptance of letter of
intent with National Securities Corporation of Seattle, Washington.
(Incorporated by reference as this Form 8-K was filed electronically through the
EDGARLink Electronic Filing System on June 26, 1996.)
Form 8-K dated January 30, 1997 regarding the sale of Regulation S shares.
(Incorporated by reference as this Form 8-K was filed electronically through the
EDGARLink Electronic Filing System on February 11, 1997.)
Subsequent to March 31, 1997, a Form 8-K dated May 28, 1997 regarding the
agreement the Company entered into with Teck Corporation was filed.
(Incorporated by reference as this Form 8-K was filed electronically through the
EDGARLink Electronic Filing System on June 5, 1997.)
(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.
<PAGE>
4.1 Three-Year Stock Option Agreement dated
May 27, 1994, (30,000 common shares).
(Incorporated by reference to Exhibit 10.14 of
the Company's Form 10-K for the year ended March 31, 1994.)
4.2 Three-Year Stock Option Agreement dated May 31, 1994, (30,000 common
shares). (Incorporated by reference to Exhibit 10.15 of the Company's
Form 10-K for the year ended March 31, 1994.)
4.3 30-Month Stock Option Agreement dated March 22, 1995 (20,710 common
shares). (Incorporated by reference to Exhibit 4.14 of the Company's
Form 10-K for the year ended March 31, 1995.)
4.4 Two-Year Stock Option Agreement dated March 30, 1996 (1,375 common
shares). (Incorporated by reference to Exhibit 4.9 of the Company's
Form 10-K for the year ended March 31, 1996.)
4.5 Two-Year Stock Option Agreement dated March 30, 1996 (1,875 common
shares). (Incorporated by reference to Exhibit 4.10 of the Company's
Form 10-K for the year ended March 31, 1996.)
4.6* Three-Year Stock Option Agreement dated October 1, 1996 to purchase
22,500 common shares at $3.00 per share.
4.7* Four-Year Stock Option Agreement dated December 9, 1996 to purchase
3,000 common shares at $3.00 per share.
4.8* Four-Year Stock Option Agreement dated December 11, 1996 to purchase
15,000 common shares at $3.00 per share.
4.9* Four-Year Stock Option Agreement dated December 11, 1996 to purchase
60,000 common shares at $3.00 per share.
4.10* Four-Year Stock Option Agreement dated December 14, 1996 to purchase
83,900 common shares at $3.00 per share.
4.11* Four-Year Stock Option Agreement dated December 27, 1996 to purchase
30,000 common shares at $2.50 per share.
4.12* Four-Year Stock Option Agreement dated December 31, 1996 to purchase
25,000 common shares at $3.00 per share.
4.13* Four-Year Stock Option Agreement dated January 10, 1997 to purchase
68,000 common shares at $3.00 per share.
<PAGE>
4.14 Two-Year Stock Option Agreement is to be issued effective as of
January 30, 1997 to purchase 100,000 common shares at $3.22 per share
and an additional 100,000 common shares at $4.22 per share.
4.15 One, Two, Three, Four and Five-Year Stock Option Agreements are to be
issued effective as of January 23, 1997, to purchase 200,000 shares
each of the years during a five-year period as follows: year one,
$2.25; year two $2.75; year three, $3.25; year four $3.75; and year
five $4.25.
9 Voting Trust Agreement--not applicable.
10 Material contracts regarding sale of assets and deferred
compensation.
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 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.)
10.8 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.)
11* Schedule of Computation of Net Income Per Share
<PAGE>
13 Annual Report to security holders, Form 10-Q or Quarterly
Report to security holders:
Annual Report for the period ended March 31, 1997, will include the
Form 10-K and will be submitted 120 days within the fiscal year end.
21* Subsidiaries of the Company.
23.1* Consent of the independent auditors of the Company.
99.0 Additional Exhibits
99.1* Confirmation agreement, General Lumber & Supply Co., Inc.,
April 14, 1997.
99.2* Confirmation Agreement, Edward L. Machulak, April 14, 1997.
99.3* Confirmation Agreement, Edward L. Machulak Rollover Individual
Retirement Account, April 14, 1997.
99.4* Confirmation Agreement, Sylvia Machulak Rollover Individual
Retirement Account, April 14, 1997.
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 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) *Commerce/Sanseb Joint Venture certified financial statements for
the fiscal year ending March 31, 1997.
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>
99.11 S.E.C. Form S-3 Registration Statement No. 333-23203 filed
under the Securities Act of 1933 as amended and declared
effective at 10:00 a.m. on March 26, 1997.
99.12 Preliminary S.E.C. Form S-3 Registration Statement No. 333-25797
filed April 24, 1997, and which includes the stock options to
purchase one million two hundred thousand of the Company's common
shares during a five-year period ending November 29, 2001 at an
issuance price ranging from $2.25 to $4.25 for each restricted
share.
<PAGE>
COMMERCE GROUP CORP. FORM 10-K - MARCH 31, 1997
PART IV
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 28, 1997.
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 the April 28, 1997
- ----------------------- Board of Directors
Edward L. Machulak Member of Executive Committee,
Director-Emeritus,
President and Treasurer
/s/ Edward A. Machulak Director, Member of Executive April 28, 1997
- ----------------------- Committee, Executive Vice President
Edward A. Machulak and Secretary
/s/ Clayton H. Tebo Director April 28, 1997
- -----------------------
Clayton H. Tebo
<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, 1997, 1996, 1995, 1994 and 1993, 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.
BRUCE M. REDLIN
Certified Public Accountant
Milwaukee, Wisconsin
April 28, 1997
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV (1)
INDEBTEDNESS OF RELATED PARTIES - NOT CURRENT
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
Balance at Additions to Deletions to
Beginning of Indebtedness Indebtedness Balance at
Name of Person (1) Period (2) (3) End of Period
- ------------------ ------------ ------------- ------------- -------------
Year ended
March 31, 1997
Joint Venture $11,799,074 $3,894,682 $0 $15,693,766
Year ended
March 31, 1996
Joint Venture $ 8,676,308 $3,122,766 $0 $11,799,074
Year ended
March 31, 1995
Joint Venture $ 5,792,230 $2,884,078 $0 $8,676,308
(1) Commerce Group Corp. and San Sebastian Gold Mines, Inc., Joint Venture
("Joint Venture").
(2) The purpose of the advances is to continue the exploration, exploitation and
development of the SSGM and the other mining prospects managed by the Joint
Venture and which are located in the Republic of El Salvador, Central
America. Also, funds were used to retrofit, rehabilitate, repair and to
renovate the San Cristobal Mill and Plant acquired by the Joint Venture for
the purpose of producing gold.
(3) Beginning with September 30, 1987, the total indebtedness includes the
advances of $590,265 from three of the Company's wholly-owned subsidiaries.
Balance at Additions to Deletions to Balance at
Beginning of Indebtedness Indebtedness End of
Name of Person (1) Period (2) (3) Period
- ------------------ ------------ ------------- ------------- -----------
Year ended
March 31, 1997
SSGM $17,503,414 $1,884,907 $0 $19,388,321
Year ended
March 31, 1996
SSGM $15,725,444 $1,777,970 $0 $17,503,414
Year ended
March 31, 1995
SSGM $14,270,925 $1,454,519 $0 $15,725,444
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV(2)
INDEBTEDNESS TO RELATED PARTIES
CURRENT YEARS ENDED MARCH 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Balance at Additions to Deletions to Balance at
Identity of Debtor Beginning of Indebtedness Indebtedness End of
(1) Period (2) (3) Period
- ------------------ ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended
March 31, 1997
President of the
Company $ 1,346,304 $ 493,161(a) $ 0 $ 1,839,465
President's IRA 342,002 58,917(b) 0 400,919
President's Affiliated
Company 1,175,984 215,668(c) 428,500(a) 963,152
Others 220,080 37,913(d) 0 257,993
----------- -------------- -------------- ------------
Total, notes payable $ 3,084,370 $ 805,659 $ 428,500 $ 3,461,529
=========== ============== ============= ============
President's Accrued
Salary $ 1,204,140 $ 139,875(e) $ 0 $ 1,344,015
=========== ============== ============= ============
Legal fees (President's
son is a Principal) $ 76,883 $ 60,186(f) $ 0 $ 137,069
=========== ============== ============= ============
Year ended
March 31, 1996
President of the
Company $ 841,168 $ 651,386(a) $ 146,250(a) $ 1,346,304
President's IRA 291,617 50,385(b) 0 342,002
President's Affiliated
Company 961,012 214,972(c) 0 1,175,984
Others 163,037 70,668(d) 13,625(c) 220,080
----------- -------------- -------------- ------------
Total, notes payable $ 2,256,834 $ 987,411 $ 159,875 $ 3,084,370
=========== ============== ============= ============
President's Accrued
Salary $ 1,089,390 $ 114,750(e) $ 0 $ 1,204,140
=========== ============== ============ ===========
Legal fees(President's
son is a principal) $ 166,355 $ 36,178(f) $ 125,650 $ 76,883
=========== ============== ============= ============
Year ended
March 31, 1995
President of the
Company $ 1,275,561 $ 188,755(a) $ 623,148(a) $ 841,168
President's IRA 248,763 42,854(b) 0 291,617
President's Affiliated
Company 926,852 199,160(c) 165,000(c) 961,012
Others 186,530 26,507(d) 50,000(d) 163,037
----------- -------------- -------------- ------------
Total, notes payable $ 2,637,706 $ 457,276 $ 838,148 $ 2,256,834
=========== ============== ============= ============
President's Accrued
Salary $ 974,640 $ 114,750(e) $ 0 $ 1,089,390
=========== ============== ============= ============
Legal fees (President's
son is a principal) $ 279,612 $ 5,967 $ 119,274(f) $ 166,355
=========== ============== ============= ============
<FN>
Additions to Indebtedness
(2)(a)(b) The additions to the open-ended, secured, on-demand promissory notes
issued to the President of the Company and his IRA result from cash
advances and/or accrued interest.
(2)(c) The President owns 55% of an Affiliated Company's common shares. The
additions to the open-ended, secured, on-demand promissory note issued
to an Affiliated Company result from cash advances, accrued interest,
accrued office rent, vehicle rental, computer use and other expenses
paid on behalf of the Company.
(2)(d) The additions by others resulted from cash advances and accrued
interest.
(2)(e) The President's salary was accrued for the entire fiscal year.
(2)(f) The addition of the amounts due to the Law Firm results from legal
services rendered.
(3) Deletions to Indebtedness:
(3)(a) President's Affiliated Company. Cancellation of debt in exchange
for a purchase of 130,000 (06/10/96) and 68,000 (01/10/97) of the
Company's restricted common shares.
</FN>
</TABLE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE X (1) - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Years Ended March 31,
---------------------
1997 1996 1995
------- ------- -------
Depreciation of property and equipment $ 0.00 $ 0.00 $ 0.00
Property taxes, other than income
taxes and payroll $ 2,111 $ 2,065 $ 2,250
Advertising and promotion costs $ 965 $ 679 $ 100
Repairs and maintenance $13,054 $15,523 $15,535
Amounts for amortization of intangible assets and similar deferrals, income
taxes, and royalties are not currently presented, as such amounts represent less
than one percent of total revenues or are not applicable.
