UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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.
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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.
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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.
REDLIN AND ASSOCIATES
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.
REDLIN AND ASSOCIATES
Certified Public Accountants
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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1996 MAR-31-1995
<PERIOD-END> MAR-31-1997 MAR-31-1996 MAR-31-1995
<CASH> 780,154 55,653 0<F3>
<SECURITIES> 0 0 0<F3>
<RECEIVABLES> 23,019,094<F1> 19,158,878<F1> 0<F3>
<ALLOWANCES> 0 0 0<F3>
<INVENTORY> 1,268,086<F2> 1,298,584<F2> 0<F3>
<CURRENT-ASSETS> 0 0 0<F3>
<PP&E> 0 0 0<F3>
<DEPRECIATION> 0 0 0<F3>
<TOTAL-ASSETS> 25,067,334 20,513,115 0<F3>
<CURRENT-LIABILITIES> 5,859,115 5,353,608 0<F3>
<BONDS> 0 0 0<F3>
0 0 0<F3>
1,515,000 0 0
<COMMON> 919,304 779,221 0<F3>
<OTHER-SE> 16,773,915 14,380,286 0<F3>
<TOTAL-LIABILITY-AND-EQUITY> 25,067,334 20,513,115 0<F3>
<SALES> 0 0 0
<TOTAL-REVENUES> 1,630,216 1,345,260 823,181
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 67,982 86,748 81,830
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 554,636 470,710 466,604
<INCOME-PRETAX> 1,007,598 787,802 274,747
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,007,598 787,802 274,747
<EPS-PRIMARY> .124 .11 .046
<EPS-DILUTED> .104 .11 .045
<FN>
<F3>Balance sheet is not required.
<F1>Investments, advances and investment in Joint Venture, accounts receivable and
prepaid items.
<F2>Gold held in inventory and real estate held for sale.
</FN>
</TABLE>
