UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ To __________
Commission file number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 39-6050862
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6001 North 91st Street
Milwaukee, Wisconsin 53225-1795
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 462-5310
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 10,274,657 common
shares of the Company's common stock, $0.10 par value, were issued and
outstanding as of June 30, 1997.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE FIRST QUARTER ENDED JUNE 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets June 30, 1997 and March 31, 1997
Consolidated Statements of Operations Three Months Ended June
30, 1997, and 1996
Consolidated Statements of Cash Flows Three Months Ended June
30, 1997, and 1996
Consolidated Statements of Changes in Shareholders' Equity Three
Months Ended June 30, 1997, and Year Ended March 31, 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Change in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Reports on Form 8-K and Exhibits
Registrant's Signature Page
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 March 31, 1997
(Unaudited) (Audited)
------------- --------------
ASSETS
------
Current assets
Cash $ 263,508 $ 780,154
Investments 194,888 194,888
Accounts receivable 101,916 112,382
Inventories 88,510 88,250
Prepaid items 3,544 1,698
----------- -----------
Total current assets 652,366 1,177,372
Real estate (Note 4) 1,179,836 1,179,836
Advances to Joint Venture
Net of Gold Sale Proceeds
(Note 3) 17,133,968 15,693,766
Investment in Joint Venture
(Note 3) 7,016,360 7,016,360
----------- -----------
Total assets $25,982,530 $25,067,334
=========== ===========
LIABILITIES
-----------
Current liabilities
Accounts payable $ 287,797 $ 119,558
Notes and accrued interest
payable to related parties
(Note 5) 3,617,838 3,461,529
Notes and accrued interest
payable to others (Note 5) 655,877 646,809
Accrued salaries 1,385,265 1,344,015
Accrued directors' fees 3,200 0
Accrued legal fees 148,139 137,069
Other accrued expenses 133,813 150,135
---------- ----------
Total liabilities 6,231,929 5,859,115
Commitments and contingencies
(Notes 3, 5, 6, 7, 10 and 14)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
1997 - 1,515 shares;
June 30, 1997 - none (Note 10) $ 0 $ 1,515,000
Common stock, $0.10 par value:
Authorized 15,000,000 shares;
Issued and outstanding:
June 30, 1997 - 10,274,657 1,027,466
March 31, 1997 - 9,193,042 919,304
Additional paid in capital 15,964,031 14,359,037
Retained earnings (deficit) 2,759,104 2,414,878
----------- -----------
Total shareholders' equity 19,750,601 19,208,219
Total liabilities and ----------- -----------
shareholders' equity $25,982,530 $25,067,334
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30 (Unaudited)
1997 1996
---- ----
Revenues:
Campground income $ 22,080 $ 22,025
Interest income 2,091 19
Interest income Related Joint
Venture (Notes 6 & 11) 489,008 351,169
----------- -----------
Total revenue 513,179 373,213
Expenses:
General, administrative and
campground expenses 20,194 19,074
Interest expense 148,759 134,107
----------- -----------
Total expenses 168,953 153,181
----------- -----------
Net income (loss) from operations 344,226 220,032
Credit (charge) for income taxes 0 0
----------- -----------
Net income (loss) $ 344,226 $ 220,032
=========== ===========
Net income (loss) per share
(Note 2) $ .034 $ .028
=========== ===========
Average number of shares
outstanding (Note 2) 9,985,950 7,877,123
=========== ===========
Fully diluted income per common
share (Note 2) $ .030 $ .028
=========== ===========
Weighted average diluted number
of shares assuming all rights and
options were exercised on
June 30, 1997 and June 30, 1996 11,603,514 7,981,383
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30 (Unaudited)
1997 1996
---- ----
Operating activities:
Net income (loss) $ 344,226 $ 220,032
Changes in other operating assets and
liabilities (net):
Accounts receivable and inventory 10,206 108,011
Other assets (1,846) (2,213)
Accounts payable 168,239 53,487
Accrued salaries 41,250 31,388
Accrued directors' fees 3,200 2,000
Accrued legal fees 11,070 22,167
Accrued liabilities (16,322) 4,910
Accrued interest 9,068 (4,361)
Common stock issued for services 74,968 0
Cash provided (used) by operating ---------- ----------
activities 644,059 435,421
Investing activities:
Cash advances to Joint Venture (1,182,170) (589,408)
Noncash advances to Joint Venture (547,710) (409,391)
---------- ----------
Gross advances to Joint Venture (1,729,880) (998,799)
Less: gold sale proceeds 289,678 179,380
---------- ----------
Cash flows from investing activities (1,440,202) (819,419)
Financing activities:
Net borrowings 156,309 (78,694)
Preferred stock converted (1,515,000) 0
Common stock issued 1,638,188 643,625
---------- ----------
Cash provided by financing activities 279,497 564,931
Increase (decrease) in cash and cash
equivalents (516,646) 180,933
Cash at the beginning of the quarter 780,154 55,653
---------- ----------
Cash at the end of the quarter $ 263,508 $ 236,586
========== ==========
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 Period Ended June 30, 1997
Common Stock
-----------------------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
----------- --------- ----------- ----------
Balances 03/31/96 7,792,209 $779,221 $12,973,006 $1,407,280
Net Income for Fiscal
Year 03/31/97 1,007,598
Common Shares Issued
this Period 1,400,833 140,083 1,386,031
---------- ---------- ----------- ----------
Balances 03/31/97 9,193,042 919,304 14,359,037 2,414,878
Net Income First Quarter
06/30/97 344,226
Common Shares Issued this
Period 1,081,615 108,162 1,604,994
---------- ---------- ----------- ----------
Balances 06/30/97 10,274,657 $1,027,466 $15,964,031 $2,759,104
========== ========== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
(1) The Company and Basis of Presentation of Financial Statements
(a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant")
and its 82 1/2% owned subsidiary, San Sebastian Gold Mines, Inc.
("Sanseb") have formed the Commerce/Sanseb Joint Venture ("Joint
Venture") for the purpose of performing gold mining and related
activities, including, but not limited to, exploration,
exploitation, development, extraction and processing of precious
metals in the Republic of El Salvador, Central America. Gold
bullion, the Joint Venture's principal product, is produced (but not
on a full production basis) in El Salvador and refined and sold in
the United States. Expansion of exploration is taking place at the
San Sebastian Gold Mine ("SSGM") which is located near the City of
Santa Rosa de Lima. Exploration is also taking place at 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
with payment pending on the settlement date.
(f) Inventory consists of processed ores and precious metals-in-process
which are stated at the lower of average cost or market.
<PAGE>
(2) Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the operations of the
Company and all of its majority-owned subsidiaries: Homespan Realty Co.,
Inc. ("Homespan"); Piccadilly Advertising Agency, Inc. ("Piccadilly");
San Luis Estates, Inc. ("SLE"); Universal Developers, Inc. ("UDI"); San
Sebastian Gold Mines, Inc. ("Sanseb"); and Mineral San Sebastian, S.A. de
C.V. ("Misanse"). The Company does not include in its financial
statements the operations of the Joint Venture. Other than the Joint
Venture, all significant intercompany accounts and transactions have been
eliminated. For further information regarding consolidated subsidiaries
see Note 8.
Income Taxes
The Company files a consolidated Federal Income Tax return with its
subsidiaries (See Note 9).
Income (Loss) Per Common Share
Net income per share is calculated based on the weighted average number
of common shares issued and outstanding during this first quarter period.
The Company does not include in this calculation any common stock
equivalent, rights or contingent issuances of common stock.
In computing the shares on a fully diluted basis, the net income per
share is based on the assumption that all rights and options were
exercised on the last day of the period that is being reported.
If on June 30, 1997, the 1,530,650 option shares, the 80,000 borrowed
shares, and the 6,914 shares due for accrued interest were combined, they
would total 1,617,564 shares. These shares added to the weighted average
calculated number of shares of 9,985,950 would amount to 11,603,514, and
the profit per share for the period ended June 30, 1997, would be as
reflected in the consolidated statements of operations. The same
assumptions were used for the same period in 1996.
Foreign Currency
The Company itself is not involved in any foreign currency transactions
as it deposits U.S. funds primarily through bank wire transfer of funds
from its U.S. bank account into the Joint Venture's El Salvador bank
accounts. The Joint Venture is obligated to repay the Company for funds
advanced in U.S. dollars. El Salvador has a freely convertible currency
that at present trades about 8.74 colones per U.S. dollar. In this
environment, based on the free convertibility of the colon, foreign
businesses have no problem making remittances of profits, repatriating
capital or bringing in capital for additional investments. There is no
unusual delay in exchanging dollars for colones or vice versa.
<PAGE>
Major Customer
The Joint Venture produces gold and silver. It sells its gold to a
refinery located in the United States. Given the nature of the precious
metals that are sold, and because many potential purchasers of gold and
silver exist, it is not believed that the loss of any customer would
adversely affect either the Company or the Joint Venture (Note 3).
(3) Commerce/Sanseb Joint Venture ("Joint Venture")
The Company is in a joint venture with and owns 82 1/2% of the total
common stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada
chartered (1968) corporation. The balance of Sanseb's stock is held by
approximately 180 non-related shareholders, including the President of
the Company who owns 2,073 common shares. Sanseb was formed to explore,
exploit, research, and develop adequate gold reserves. It produced gold
from SSGM from 1972 through February 1978.
On September 22, 1987, the Company and Sanseb entered into a joint
venture agreement to formalize their relationship with respect to the
mining venture and to account for the Company's substantial investment in
Sanseb. Under the terms of the agreement, the Company is authorized to
supervise and control all of the business affairs of the Joint Venture
and has the authority to do all that is necessary to resume mining
operations at the SSGM on behalf of the Joint Venture. The net pre-tax
profits of the Joint Venture will be distributed as follows: Company 90%;
and Sanseb 10%. Since the Company owns 82 1/2% of the authorized and
issued shares of Sanseb, the Company in effect has over a 98% interest in
the Joint Venture activities.
The joint venture agreement further provides that the Company has the
right to be compensated for its general and administrative expenses in
connection with managing the Joint Venture.
Under the joint venture agreement, agreements signed by the Company for
the benefit of the Joint Venture create obligations binding upon the
Joint Venture.
The Joint Venture is registered to do business in the State of Wisconsin
and in the Republic of El Salvador, Central America.
Accounting Matters
The Joint Venture records all costs and expenses as capital items which
are reduced by the gold sale proceeds and it will write off these
cumulative costs on a unit of production method at such time as it begins
producing gold derived from the virgin gold ore on a full production
basis. If the prospect of gold production, due to different conditions
and circumstances becomes unlikely, all of these costs may be written off
in the year that this occurs.
Advances to Joint Venture
As of June 30, 1997, the Company's advances were $16,543,703, and three
of the Company's wholly-owned subsidiaries' advances were $590,265 for a
total of $17,133,968.
<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 June 30, 1997, the Company, Sanseb and three of the Company's
wholly-owned subsidiaries have invested (including carrying costs) the
following in its Joint Venture:
The Company's advances since 09/22/87 $19,573,736
Less amounts received from gold sales (2,439,768)
The Company's net of gold sale proceeds advances
since 09/22/87 17,133,968
The Company's initial investment in the Joint Venture 3,508,180
Sanseb's investment in the Joint Venture 3,508,180
Sanseb's investment in the mining projects and amount
due to the Company 19,900,312
-----------
Total: 44,050,640
Advances by the Company's three subsidiaries 590,265
-----------
Combined total investment $44,640,905
===========
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 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) 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;
<PAGE>
(2) From the profits earned, five percent of the gross wages paid to the
full-time employees shall be paid into a pension fund;
(3) From the profits earned, a sum of 500,000 colones annually
(equivalent to $57,208 at the present rate of exchange) will be paid
by the Joint Venture as a social tax for the benefit of the
community in the SSGM area which said funds are to be used for
social, economic, educational, recreational, health, welfare,
medical or for such other beneficial community services as
determined by the Joint Venture;
(4) At such time as the Government of El Salvador forms a cooperative
for the benefit of the employees, the Joint Venture has agreed to
contribute from its annual pre-tax earnings, the sum of five percent
of its pre-tax profits, but, in any event, not less than a minimum
amount equal to five percent of eight percent of the total assets;
(5) Pursuant to an agreement with the El Salvador Minister of Economy,
at the request of the Company or the Joint Venture to the El
Salvador Central Reserve Bank and/or office of the El Salvador
Minister of Foreign Commerce, it will be able to convert the El
Salvador currency into United States' currency for the payment of
its loans, interest, and any other obligations, including the
payment of dividends. Presently, there are no restrictions to
convert the El Salvador colones into United States' currency. (Note
2)
On November 30, 1987, the El Salvador Minister of Foreign Commerce issued
a project approval for the gold mining operation which was ratified on
April 15, 1988.
In consideration for the obligations agreed to by the Joint Venture the
Government of El Salvador agreed to exempt the Joint Venture from the
payment of all import duty, fiscal or municipal taxes whatsoever. The El
Salvador Department of Customs refused to recognize this exemption. On
November 15, 1993, the Joint Venture's attorneys filed a declaratory
proceeding with the El Salvador Constitutional Supreme Court ("Court")
informing the Court that the Joint Venture's rights were being violated
and that the Court should restrain the Department of Customs from
attempting to collect any duty.
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 Land Ownership
The Company has purchased two contiguous parcels of land located on the
Modesto Mine site near the City of Paisnal, El Salvador. The first
22-acre parcel of land was purchased on November 27, 1994 while the
second parcel of land consisting of 30 acres was purchased on August 31,
1996. The second parcel of land was used as collateral in connection
with a mortgage and promissory note that was issued to the lender.
San Felipe-El Potosi Mine ("Potosi") Real Estate Lease Agreement
The Joint Venture entered into a lease agreement with the San Felipe-El
Potosi Cooperative ("Cooperative") of the City of Potosi, El Salvador on
July 6, 1993, to lease the real estate encompassing the San Felipe-El
Potosi Mine for a period of 30 years and with an option to renew the
lease for an additional 25 years, for the purpose of mining and
extracting minerals 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.
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.
<PAGE>
(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 leases and ownership.
(5) Notes Payable and Accrued Interest
Notes payable consist of the following: 06/30/97 03/31/97
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) $3,617,838 $3,461,529
Other (consists primarily
of short-term notes and accrued
interest in the sum of $294,030 as of
June 30, 1997, and $285,166 as of
March 31, 1997) issued to trade
creditors and others, interest of
varying amounts, in lieu of actual
cash payments) and a mortgage on a
certain parcel of land located in El
Salvador. 655,877 646,809
---------- ----------
Total: $4,273,715 $4,108,338
========== ==========
(6) Related Party Transactions
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 16 years and three months,
for a total of $1,385,265.
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 June 30, 1997:
The amount of funds which the Company has borrowed from its President
from time to time, together with accrued interest, amounts to $1,917,582.
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.
<PAGE>
The Company had borrowed an aggregate of $417,126 including accrued
interest, from the Company's President's Rollover Individual Retirement
Account (RIRA). These loans are evidenced by the Company's open-ended,
secured, on-demand promissory note, with interest payable monthly at the
prime rate plus four percent per annum, but not less than 16% per annum.
In order to satisfy the Company's cash requirements from time to time,
the Company's President has sold or pledged as collateral for loans,
shares of the Company's common stock owned by him. In order to
compensate its President for selling or pledging his shares on behalf of
the Company, the Company has made a practice of issuing him the number of
restricted shares of common stock equivalent to the number of shares sold
or pledged, plus an additional number of shares equivalent to the amount
of accrued interest calculated at the prime rate plus three percent per
annum and payable monthly. The Company received all of the net cash
proceeds from the sale or from the pledge of these shares. The Company
borrowed a total of 80,000 common shares since April 1, 1997, and it owes
him 6,914 of its restricted common shares for unpaid interest for the
shares loaned or pledged as collateral for the benefit of the Company.
It may owe additional common shares for such shares loaned or pledged by
him for collateral purposes to others for the benefit of the Company, all
in accordance with the terms and conditions of Director approved
open-ended loan agreements dated June 20, 1988, October 14, 1988, May 17,
1989, and April 1, 1990.
On February 16, 1987, the Company granted its President, by unanimous
consent of the Board of Directors compensation in the form of a bonus in
the amount of two percent of the pre-tax profits realized by the Company
from its gold mining operations in El Salvador, payable annually over a
period of twenty years commencing on the first day of the month following
the month in which gold production commences.
The President presently owns a total of 467 Misanse common shares. There
are a total of 2,600 Misanse shares issued and outstanding.
Also with the consent and approval of the Directors, a company in which
the President has a 55% ownership entered into the following agreements,
and the status is reflected as of June 30, 1997.
The Company leased approximately 4,032 square feet on a month-to-month
basis for its corporate headquarters office; the monthly rental charge
was $2,789.
On January 10, 1997, this related party, in connection with the purchase
of the Company's restricted shares, received a four-year stock option
expiring on January 9, 2001, to purchase 68,000 of the Company's
restricted common shares at a price of $3.00 for each share. This
transaction had the same terms as were entered into with other
independent arms-length transactions.
The same related company provides consulting, administrative services,
use of data processing equipment, use of its vehicles and other property
as required by the Company.
In lieu of cash payments for the office space rental and for the
consulting, administrative services, etc., these amounts due are added
each month to this related company's open-ended, secured, on-demand
promissory note issued by the Company.
<PAGE>
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 June 30, 1997, amounts to $1,014,708; 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 June 30, 1997:
The President's wife's Individual Retirement Account ("IRA") has the
Company's open-ended, secured, on-demand promissory note in the sum
$215,862 which bears interest at an annual rate of prime plus three
percent, but not less than 16% and the interest is payable monthly. On
December 14, 1996, in connection with the purchase of the Company's
restricted shares, she acquired a four-year stock option to purchase
83,900 of the Company's restricted common shares at a price of $3.00 each
which expires December 13, 2001. This transaction is under the same
terms entered into with arms-length other purchases.
The Law Firm which represents the Company in which a son of the President
is a principal is owed the sum of $148,139 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 $52,560 which bears interest at an annual rate of 16% payable monthly.
The Directors, by their agreement, have deferred cash payment of their
Director fees beginning on January 1, 1981, until such time as the
Company's operations are profitable. Effective from October 1, 1996,
the Director fees were increased from $750 to $1,200 for each quarterly
meeting and $400 for attendance at any other Directors' meeting. 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.
The Company advances funds, allocates and charges its expenses to the
Joint Venture. The Joint Venture in turn capitalizes all of these
advances, costs and expenses until such time as it resumes its gold mine
operation at its full production capacity. When full production
commences, these capitalized costs will be charged as an expense based on
a per ton production basis. The Company also charges interest for its
advances to the Joint Venture which interest rate is established to be
the prime rate quoted on the first day of each month plus four percent
and said interest is payable monthly.
<PAGE>
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
First Quarter Ended June 30, 1997 1,440,202 489,008
----------- ----------
Balance June 30, 1997 $16,543,703 $5,723,803
Advances by three of the Company's
wholly-owned subsidiaries 590,265 0
----------- ----------
Total Net Advances After Deducting
the Gold Sale Proceeds June 30, 1997 $17,133,968 $5,723,803
=========== ==========
(7) Commitments
Reference is made to Notes (3), (5), (6), (10), (13) and (14).
(8) Consolidated Subsidiaries
The following subsidiaries, all majority-owned by the Company, are
included in the consolidated financial statements of the Company. All
intercompany balances and transactions have been eliminated.
Percentage of Ownership
-----------------------
Homespan Realty Co., Inc. 100.0%
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.
<PAGE>
(10) Description of Securities
a. Common Stock
The Company's Certificate of Incorporation authorizes the issuance of
15,000,000 shares of common stock, $0.10 par value per share of which
10,274,657 shares were outstanding as of June 30, 1997. Holders of
shares of common stock are entitled to one vote for each share on all
matters to be voted on by the shareholders. Holders of common stock have
no cumulative voting rights. Holders of shares of common stock are
entitled to share ratably in dividends, if any, as may be declared, from
time to time by the Board of Directors in its discretion, from funds
legally available therefore. In the event of a liquidation, dissolution
or winding up of the Company, the holders of shares of common stock are
entitled to share pro rata all assets remaining after payment in full of
all liabilities. Holders of common stock have no preemptive rights to
purchase the Company's common stock. There are no conversion rights or
redemption or sinking fund provisions with respect to the common stock.
All of the outstanding shares of common stock are validly issued, fully
paid and non-assessable.
b. Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
250,000 shares of preferred stock, $0.10 par value, of which 2,500 shares
of Series A Convertible Preferred Stock were issued as of January 30,
1997, and as of June 30, 1997, all of the shares were converted into
common shares.
The preferred shares are issuable in one or more series. The Board of
Directors is authorized to fix or alter the dividend rate, conversion
rights (if any), voting rights, rights and terms of redemption (including
any sinking fund provisions), redemption price or prices, liquidation
preferences and number of shares constituting any wholly unissued series
of preferred shares.
c. Stock option activity during the first quarter ended June 30:
1997 1996
---------------------- ---------------------
Weighted Weighted
Average Average
Amount Price Amount Price
------ --------- ------ --------
Outstanding, beg. year 1,591,360 $3.22 97,840 $2.66
Granted
Exercised options (60,000) $2.00
Forfeited (710) $4.00
Expired 0 $0.00 (13,880) $3.00
--------- ----- -------- -----
Outstanding, end of
first quarter 1,530,650 $3.27 83,960 $2.61
<PAGE>
A summary of the outstanding stock options as of June 30, 1997:
Weighted Average
Range of Amount Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- ----------------
$2.00 to $2.99 430,000 2.33 years $2.50
$3.00 to $5.00 1,100,650 3.37 years $3.57
d. Stock Rights - To The President
Reference is made to Note 6, Related Party Transactions, of the Company's
financial statements which disclose the terms and conditions of the share
loans to the Company by the President and the interest which is payable
to him by the Company's issuance of its common shares.
Said interest payable is for shares loaned to the Company and/or for such
shares loaned or pledged for collateral purposes, or for unpaid interest,
all in accordance with the terms and conditions of Director approved
open-ended loan agreements dated June 20, 1988, October 14, 1988, May 17,
1989 and April 1, 1990.
e. Stock Rights - Others
The Company has agreed to issue up to 25,000 of its restricted common
shares in connection with a certain funding agreement entered into on
December 19, 1996.
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. The
restricted stock holding period required by the Securities and Exchange
Commission is also considered.
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, 282,647 were issued and
217,353 shares are authorized to be issued.
<PAGE>
(11) Interest Income on Advances to the Joint Venture
From time to time the Company advances funds, services, etc. to the Joint
Venture. The interest rate charged is the prime interest rate fixed on
the first day of each month plus four percent. The interest is payable
monthly. (Note 6)
(12) Litigation
There is no litigation.
(13) Contingent Liabilities
In the event the El Salvador Constitutional Supreme Court should decide
that the Joint Venture is subject to the payment of custom duty taxes,
then the Company would have a contingent liability as it has, on behalf
of the Joint Venture, agreed to reimburse an El Salvador Insurance
Company the funds that may be disbursed to the El Salvador customs'
office in connection with the payment of guarantee bonds it has issued in
lieu of cash payment for the import duties. The total sum of payment
guarantee bonds issued by the Insurance Company through June 30, 1997,
amounts to approximately $20,000.
(14) Unaudited Financial Statements
The consolidated financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The financial information included herein is
unaudited; however, the Company believes that the information reflects
all adjustments (consisting solely of normal recurring adjustments) that
are, in the opinion of management, necessary to be a fair presentation of
the financial position, results of operations, and cash flows for the
interim periods. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements
be read in connection with the financial statements and the notes thereto
included in the Company's latest annual report and the filing of the
required Securities and Exchange Commission annual Form 10-K.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion provides information on the results of
operations for the two periods ended June 30, 1997 and 1996 and the
financial condition, liquidity and capital resources for the same
quarterly periods. The financial statements of the Company and the notes
thereto contain detailed information that should be referred to in
conjunction with this discussion.
Introduction
The Joint Venture is producing gold on a limited basis from the virgin
gold ore and tailings it is extracting at the SSGM and it simultaneously
is performing four separate operations. First, it has commenced a
limited production of gold by processing the SSGM tailings and now these
tailings are being blended with the virgin ore at its SCMP facility which
is located approximately 15 miles from the SSGM site. Second, it is
installing a pilot open-pit, heap-leaching gold process on the SSGM
site. Third, it is continuing its SSGM site preparation, the expansion
of its exploration and exploitation targets, and the enlargement and
development of its gold ore reserves. Fourth, it is exploring the
potential of the 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.
Current Status
The Company's geologists have reported that, on the SSGM site, a total of
26 diamond drill holes were completed with an average depth of 118 meters
(387 lineal feet) each for a total of approximately 3,068 meters (10,062
lineal feet) of drilling. The drill holes were spaced about 100 meters
(328 feet) apart and covered an area of one square kilometer (.386 square
miles, approximately 250 acres). The angle of the drill holes varied
from 45 degrees to 90 degrees.
This preliminary drilling confirms the Company's geologists' expectations
that there are four basic types of rock: basalt, conglomerate, quartz
monzonite, and trachyte. The mineralization and alteration is well
distributed and even though low grade values of 0.68 grams (0.02 oz.) of
gold per ton are found in the quartz monzonite, the economic values are
found in the trachyte. In the trachyte, one hole intercepted a 12.2
meter (40 foot) vein of gold with an average grade of 15.08 grams (0.44
oz.) of gold per ton. The Company's geologists firmly believe that the
potential of increasing the gold ore reserves is excellent.
<PAGE>
On May 22, 1997, the Company entered into a Joint Venture Agreement with
Teck Corporation (Teck), a company that is extensively involved in
worldwide mining operations. Based on the terms and conditions contained
in the agreement, Teck had its personnel in El Salvador on May 29, 1997
to launch their commitment. From June 1, 1997, Teck has supervised the
diamond core drilling and presently the reverse circulation drilling.
Teck had its metallurgist observe the SCMP and is presently assessing the
expansion of the mill for a minimum capacity of 300 tons per day.
On the SSGM site, Teck has opened and resampled selected surface channel
trenches to confirm the gold value and it is conducting such
metallurgical and mineralogical studies as it deems necessary. Teck has
agreed to a program of 1,500 meters of drilling. It has been estimated
that the assessment phase will cost Teck approximately U.S. $400,000 and
it has agreed to perform the assessment phase within four months.
Results of Teck's findings are available to the Company.
In the event that the assessment performed by Teck relative to the
expansion of the SCMP is compatible with the plans of the Company, the
Company can then proceed to expand the SCMP. Then, if Teck proceeds with
the exploration and feasibility phase, it will reimburse the company for
such expansion.
In keeping with the expansion of the SCMP, the Company purchased,
shipped, and delivered to the SSGM site sixteen standard and special size
ocean shipping containers (40 feet long, eight feet wide, and
approximately eight feet high) of a used crushing system it purchased in
the United States. This plant consists of primary and secondary cone
crushers, a vibrating screen, belt conveyor, rain cover structured steel
and sheeting, and related equipment. It has a capacity of crushing the
gold ore at a rate of 75 tons per hour to a size of one quarter inch.
This equipment is being erected on the SSGM site.
In addition, many improvements have taken place at the SCMP. This mill
and plant is presently being conditioned for the expansion of its present
production capacity (approximately 200 tons of virgin gold ore per day)
to a production capacity of 300 to 400 tons per day.
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 (first quarter 1997 - $289,678; first quarter 1996 -
$179,380) 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.
<PAGE>
Since the Joint Venture commenced producing gold at the SCMP, albeit a
very exiguous operation, and a forerunner of its greater goals, the
Company's revenues, profitability and cash flow will be greatly
influenced by the price of gold. Gold prices fluctuate widely and are
affected by numerous factors which will be beyond the Company's control,
such as, expectations for inflation, the strength of the U.S. dollar,
overproduction of gold, global and regional demand, or political and
economic conditions. The combined effect of these factors is difficult;
perhaps impossible to predict. Should the market price of gold fall
below the Company's production costs and remain at such level for any
sustained period, the Company could experience losses. Under these
circumstances, the Company could choose to suspend operations in order to
minimize losses.
The Company believes that neither it, nor any other competitor, has a
material effect on the precious metal markets and that the price it will
receive for its production is dependent upon world market conditions over
which it has no control.
Results of Operations for the First Quarters Ended June 30, 1997
Compared to June 30, 1996
For the three months ended June 30, 1997, the total revenues amounted to
$513,179 compared to revenues of $373,213 for the same period in 1996.
The increase in revenues resulted primarily from interest charged to the
Joint Venture.
Interest is being charged to the Joint Venture on advances made to it.
In the first quarter of 1997, the interest charged to the Joint Venture
by the Company was $489,008 compared to $351,169 for the same period in
1996, for an increase of $137,839 (39%) which results from the advances
to the Joint Venture being increased to $16,543,703 (1997) from
$12,028,228 (1996), for a total increase of $4,515,475 or 38%.
The campground operating and general and administrative expenses for the
first quarter period ended June 30, 1997, were $20,194 compared to
$19,074 for the same 1996 period, reflecting an increase of approximately
6%.
Interest expense for this first quarter (1997) amounted to $148,759
compared to $134,107 for the same 1996 period for an increase of
($14,652) (11%) and was due to a slight increase in the notes payable.
The net profit for the period ended June 30, 1997, was $344,226 compared
to a profit for the period ended June 30, 1996 of $220,032, or an
increase of $124,194 (56%).
Almost all of the costs and expenses incurred by the Company are
allocated and charged to the Joint Venture. The Joint Venture
capitalizes all of these costs and expenses and will continue to do so
until such time as it resumes its gold mine operation at its full
production capacity. At the time production commences, these capitalized
costs will be charged as an expense based on a per unit basis. If the
prospect of gold production becomes unlikely, all of these costs will be
written off in the year that this occurs.
Liquidity and Capital Resources
The Company continues to be cognizant of its cash liquidity until it is
able to produce adequate profits from its gold production or if it
reduces its exploration activities. It will attempt to obtain
sufficient funds to assist the Joint Venture in placing the SSGM into
production, however the anticipated SCMP profits (unless accumulated over
a period of time) will not be sufficient to meet the SSGM capital and
the other mining exploration needs. In order to continue obtaining funds
to conduct the Joint Venture's exploration, exploitation, development,
expansion programs, and the production of gold from the SSGM open-pit,
heap-leaching operation, it may be necessary for the Company to obtain
funds from other sources. The Company may be required to borrow funds by
issuing open-ended, secured, on-demand or unsecured promissory notes or
by selling its shares to its directors, officers and other interested
investors or by entering into a joint venture with other companies.
<PAGE>
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: $1,440,202 during this first quarter period. The Company
believes that these advances significantly contributed to the value of
the SSGM and to the value of its other mining prospects as the results
of the exploratory efforts evidence a potential substantial increase of
gold ore reserves, which add value to the Joint Venture and to the
Company. Throughout the years, the Company was able to obtain sufficient
funds to retrofit the SCMP, to purchase consumable inventory, to purchase
certain hauling and loading equipment, to purchase a crushing system, to
perform a certain amount of diamond drilling on the SSGM, to upgrade the
SCMP and to use for working capital purposes. The Company has been able
to obtain the funds required for its and the Joint Venture's undertaking
via a debt and equity structure of funding. Since September 1987, the
Company and three of its wholly-owned subsidiaries advanced a sum of
$17,133,968 to the Joint Venture, exclusive of funds it received from
gold sales.
The Company estimates that it will need at least U.S. $13 million to
start a 2,000 ton-per-day open-pit, heap-leaching operation and over time
to increase the production capacity to 6,000 tons per day at the SSGM.
The use of 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 first quarter ended
June 30, 1997 were derived from the sources, including related parties as
follows:
Funding Sources
From
--------------------
Related Other
Parties Sources Total
-------- -------- -------
Change in current assets $ $ 8,360 $ 8,360
Accounts payable & accruals
etc. 250,125 (42,688) 207,437
Notes payable 156,309 9,068 165,377
Equity 198,156 198,156
Net income 344,226 344,226
-------- ---------- ----------
Totals $406,434 $ 517,122 $ 923,556
Increase in cash & cash
equivalents 516,646 516,646
-------- ---------- ----------
Advances to the Joint Venture $406,434 $1,033,768 $1,440,202
======== ========== ==========
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.
<PAGE>
From September 1987 through June 30, 1997, the Company has advanced to
the Joint Venture, the sum of $16,543,703 and three of the Company's
wholly-owned subsidiaries have advanced the sum of $590,265, for a total
of $17,133,968. 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.
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.
<PAGE>
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.
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 first quarter of its fiscal year, the Company was
able to invest a gross sum of $1,729,880 which was reduced by the
$289,678 received from the sale of gold proceeds and reflected a net
investment of $1,440,202, into the El Salvador operations. This
includes allocation of the Company's expenditures. The Company believes
that it will be able to obtain adequate financing from the same sources
as in the past to conduct the present operations during the fiscal year
ending March 31, 1998.
<PAGE>
Item 1. Legal Proceedings
There is no adverse litigation that could materially affect the
Company.
Item 2. Changes in Securities
Reference is made to the financial statements which explain the
common shares issued and to be issued.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None, except those routine business matters included in the proxy
statement dated August 1, 1997 submitted to the shareholders of
record as of July 31, 1997, and relating to an annual meeting of
shareholders to be held on September 26, 1997.
Item 5. Other Information
None.
Item 6. Reports on Form 8-K
None.
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant/Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMERCE GROUP CORP.
Registrant/Company
/s/ Edward L. Machulak
_________________________________________
Date: August 12, 1997 Edward L. Machulak President, Chief Executive,
Operating and Financial Officer and Treasurer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
March 31, 1997 Financial Statement is from an audited financial statement.
June 30, 1997 Financial Statement is unaudited.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997 MAR-31-1998 MAR-31-1997
<PERIOD-END> JUN-30-1997 MAR-31-1997 JUN-30-1997 JUN-30-1996
<CASH> 461,940<F1> 976,740<F1> 0
0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 24,252,244<F2> 22,822,508<F2> 0
0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 1,268,346<F3> 1,268,086<F3> 0
0
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 0 0 0 0
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 25,982,530 25,067,334 0 0
<CURRENT-LIABILITIES> 6,231,929 5,859,115 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 1,515,000 0 0
<COMMON> 1,027,466 919,304 0 0
<OTHER-SE> 18,723,135 16,773,915 0 0
<TOTAL-LIABILITY-AND-EQUITY> 25,982,530 25,067,334 0 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 0 0 513,179 373,213
<CGS> 0 0 0 0
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 0 0 20,194 19,074
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 148,759 134,107
<INCOME-PRETAX> 0 0 344,226 220,032
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 0 0 344,226 220,032
<EPS-PRIMARY> 0 0 .034 .028
<EPS-DILUTED> 0 0 .030 .028
<FN>
<F1>Includes investments and prepaid items.
<F2>Accounts receivable, advances and investment in Joint Venture.
<F3>Including real estate held for sale.
</FN>
</TABLE>
