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 December 31, 1996
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:
8,323,415 common shares of the Company's common stock, $0.10 par
value, were issued and outstanding as of December 31, 1996.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE SECOND QUARTER ENDED DECEMBER 31, 1996
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
December 31, 1996 and March 31, 1996. . . . . . . . . . .3
Consolidated Statements of Operations
Nine Months Ended December 31, 1996, and 1995 . . . . . .4
Consolidated Statements of Cash Flows
Nine Months Ended December 31, 1996, and 1995 . . . . . .5
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended December 31, 1996, and Year Ended
March 31, 1996 . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . .7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 21
Liquidity and Capital Resources . . . . . . . . . . . . 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 27
Item 2. Change in Securities . . . . . . . . . . . . . . . . . 27
Item 3. Default Upon Senior Securities . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Security Holders . . 27
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 27
Item 6. Reports on Form 8-K and Exhibits . . . . . . . . . . . 27
Registrant's Signature Page . . . . . . . . . . . . . . 27
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 March 31, 1996
(Unaudited) (Audited)
------------------ --------------
ASSETS
------
Current assets
Cash $ 164,008 $ 55,653
Investments 194,888 198,982
Accounts receivable 126,555 143,476
Inventories 84,698 118,748
Prepaid items 2,208 986
----------- -----------
Total current assets 572,357 517,845
Real estate (Note 4) 1,179,836 1,179,836
Advances to Joint Venture
Net of Gold Sale Proceeds
(Note 3) 14,212,316 11,799,074
Investment in Joint Venture
(Note 3) 7,016,360 7,016,360
----------- -----------
Total assets $22,980,869 $20,513,115
=========== ===========
LIABILITIES
-----------
Current liabilities
Accounts payable $ 277,870 $ 148,051
Notes and accrued interest
payable to related parties
(Note 5) 3,441,801 3,084,370
Notes and accrued interest
payable to others (Note 5) 638,644 499,110
Accrued salaries 1,311,915 1,204,140
Accrued directors' fees 7,550 0
Accrued legal fees 128,395 76,883
Other accrued expenses 142,899 341,054
----------- -----------
Total liabilities 5,949,074 5,353,608
Commitments and contingencies
(Notes 3, 5, 6, 7, 10, 13 and 14)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
December 1996-none;
March 1996-none (Note 10) $ 0 $ 0
Common stock, $0.10 par value:
Authorized 15,000,000 shares;
Issued and outstanding:
December 31, 1996-8,323,415 832,342
March 31, 1996-7,792,209 779,221
Additional paid in capital 14,062,604 12,973,006
Retained earnings (deficit) 2,136,849 1,407,280
----------- -----------
Total shareholders' equity 17,031,795 15,159,507
Total liabilities and ----------- -----------
shareholders' equity $22,980,869 $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
Third Quarter and Nine Months Ended December 31, 1996 and 1995
(Unaudited)
Three Month Comparison Nine Months Ended
December 31, December 31,
1996 1995 1996 1995
---------- ---------- ---------- ----------
Revenues:
Campground income $ 11,914 $ 13,011 $ 53,930 $ 52,917
Interest income 19 46 38 2,669
Interest income
Related Joint Venture
(Notes 6 & 11) 405,603 342,672 1,138,540 929,070
---------- ----------- ----------- ----------
Total revenue 417,536 355,729 1,192,508 984,656
Expenses:
General, administrative
and campground expenses 16,210 13,988 56,022 65,776
Interest expense 142,398 135,254 406,917 331,795
---------- ---------- ---------- ----------
Total expenses 158,608 149,242 462,939 397,571
Net income (loss) from ---------- ---------- ---------- ----------
operations 258,928 206,487 729,569 587,085
Credit (charge) for
income taxes 0 0 0 0
---------- ---------- ---------- ----------
Net income (loss) $ 258,928 $ 206,487 $ 729,569 $ 587,085
========== ========== ========== ==========
Net income (loss) per
share (Note 2) $ .03 $ .03 $ .09 $ .08
========== ========== ========== ==========
Average number of shares
outstanding (Note 2) 8,038,344 7,319,069 8,038,344 7,319,609
========== ========== ========== ==========
Fully diluted income
per common share
(Note 2) $ .03 $ .03 $ .09 $ .08
========== ========== ========== ==========
Weighted average diluted
number of shares
(Note 2) 8,434,718 7,597,065 8,434,718 7,597,065
========== ========== ========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended December 31, 1996 and 1995 (Unaudited)
1996 1995
---- ----
Operating Activities:
Net income (loss) $ 729,569 $ 587,085
Changes in other operating assets
and liabilities (net):
Other assets 53,843 (876)
Accounts payable 129,819 316,521
Accrued salaries 107,775 94,163
Accrued directors' fees 7,550 6,350
Accrued legal fees 51,512 19,776
Accrued liabilities (198,155) 10,131
------------ ------------
Cash provided (used)
by operating activities 881,913 1,033,150
Investing activities:
Advances to Joint Venture (2,413,242) (2,559,984)
Cash provided (used) ------------ ------------
by investing activities (2,413,242) (2,559,984)
------------ ------------
Financing activities:
Net borrowings 496,965 752,540
Issuance of common stock 1,142,719 346,183
Cash provided (used) by ------------ ------------
financing activities 1,639,684 1,098,723
Increase (decrease) in cash ------------ ------------
and cash equivalents 108,355 (428,111)
Cash and cash equivalents -
beginning of period 55,653 545,367
------------ -----------
Cash and cash equivalents -
end of period $ 164,008 $ 117,256
============ ============
Supplemental disclosure of cash
flow information:
Income taxes paid or accrued $ None $ None
The accompany notes are an integral part
of the consolidated financial statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended
December 31, 1996 and for the Year Ended March 31, 1996
Common Stock
-----------------------------------------------
Capital in Retained
Number of Par Excess of Earnings
Shares Value Par Value (Deficit)
--------- ------- ---------- -----------
Balance 03/31/95 7,294,719 729,472 $11,675,961 $ 619,478
Net Income for
FY 03/31/96 787,802
Common Shares Issued-
FY 03/31/96 497,490 49,749 1,297,045
--------- ------- ----------- -----------
Balances 03/31/96 7,792,209 779,221 12,973,006 1,407,280
Net Income Third Quarter
12/31/96 729,569
Common Shares Issued
this period 531,206 53,121 1,089,598
--------- -------- ----------- -----------
Balances 12/31/96 8,323,415 $832,342 $14,062,604 $ 2,136,849
========= ======== =========== ===========
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, extraction and processing of gold in the
Republic of El Salvador, Central America. Gold bullion, the
Joint Venture's principal product, is produced in El Salvador
and sold in the United States. Exploration, exploitation,
development and leach pad preparation are 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 at the SSGM.
(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) Accounts receivable consist of gold bullion shipped to the
refinery, which payment is due on the settlement date.
(e) Inventories consist of gold on hand at the SCMP mill site.
<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.
If on December 31, 1996, the 323,360 option shares, the 53,900
borrowed shares, and the 19,114 shares due for accrued interest were
combined, they would total 396,374 shares. These shares added to
the weighted average calculated number of shares of 8,038,344 would
amount to 8,434,718, and the profit per share on a fully diluted
basis for the period ended December 31, 1996, would be
approximately the same as the profit on a non-diluted basis. The
same assumptions were used for the same period in 1995.
Foreign Currency
The Company itself is not involved in any foreign currency
transactions as it deposits U.S. funds primarily through bank wire
transfer of funds from its U.S. bank account into the Joint
Venture's El Salvador bank accounts. The Joint Venture is obligated
to repay the Company for funds advanced in U.S. dollars.
Major Customer
The Joint Venture produces gold and silver. It sells its gold to a
refinery located in the United States. Given the nature of the
precious metals that are sold, and because many potential purchasers
of gold and silver exist, it is not believed that the loss of any
customer would adversely affect either the Company or the Joint
Venture (Note 3).
<PAGE>
(3) Commerce/Sanseb Joint Venture ("Joint Venture")
The Company is in a joint venture with and owns 82 1/2% of the total
common stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada
chartered (1968) corporation. The balance of Sanseb's stock is held
by approximately 180 non-related shareholders, including the
President of the Company who owns 2,073 common shares. Sanseb was
formed to explore, exploit, research, and develop adequate gold
reserves and then it produced gold from SSGM from 1972 through
February 1978.
On September 22, 1987, the Company and Sanseb entered into a joint
venture agreement to formalize their relationship with respect to
the mining venture and to account for the Company's substantial
investment in Sanseb. Under the terms of the agreement, the Company
is authorized to supervise and control all of the business affairs
of the Joint Venture and has the authority to do all that is
necessary to resume mining operations at the SSGM on behalf of the
Joint Venture. The net pre-tax profits of the Joint Venture will be
distributed as follows: Company 90%; and Sanseb 10%.
The joint venture agreement further provides that the Company has
the right to be compensated for its general and administrative
expenses in connection with managing the Joint Venture.
Under the joint venture agreement, agreements signed by the Company
for the benefit of the Joint Venture create obligations binding upon
the Joint Venture.
The Joint Venture is registered to do business in the State of
Wisconsin and in the Republic of El Salvador, Central America.
Accounting Matters
The Joint Venture records all costs and expenses as capital items
which is reduced by the gold sale proceeds and it will write off
these cumulative costs on a unit of production method at such time
as it is in full production. 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 December 31, 1996, the Company's advances, net of gold sale
proceeds, were $13,622,051, and three of the Company's wholly-owned
subsidiaries' advances were $590,265 for a total of $14,212,316.
Investment in El Salvador Mining Projects
During the fiscal year, the Company has advanced funds, performed
services, and allocated its general and administration costs to the
Joint Venture.
<PAGE>
As of December 31, 1996, the Company, Sanseb and three of the
Company's wholly-owned subsidiaries have invested (including
carrying costs) the following in its Joint Venture:
The Company's advances since 09/22/87;
net of gold sale proceeds $13,622,051
The Company's 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 18,902,469
-----------
Total 39,540,880
Advances by the Company's three subsidiaries 590,265
-----------
Combined total investment $40,131,145
===========
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. The Company is currently active in attempting to
obtain adequate financing for the proposed SSGM open-pit,
heap-leaching operations for the purchase of additional equipment
and expenses of the SCMP and for the drilling programs on each of
its mining sites. The Joint Venture is also engaged in the
exploration and the expansion program to develop additional gold ore
reserves in the SSGM area surrounding the minable gold ore reserves
and at four other El Salvador mining prospects.
Mineral San Sebastian S.A. de C.V. ("Misanse")
(a) Misanse Corporate Structure
The SSGM real estate is owned by and leased to the Joint Venture by
Misanse, a Salvadoran chartered corporation. The Company owns 52%
of the total of Misanse's issued and outstanding shares. The
balance is owned by approximately one hundred El Salvador, Central
American, and United States' citizens. The Company has the right to
select six of Misanse's ten directors. (Note 6)
(b) SSGM Mining Lease
On July 28, 1975, an amended lease agreement between Misanse as
lessor and Sanseb as tenant was signed by the parties giving the
tenant all the possessions and mining rights that pertain to the
SSGM as well as other claims to mineral rights that may already have
or could be claimed in the future within the 595 hectares (1,470
acres) plat of land encompassing the SSGM. The 25-year lease, which
begins on the date gold production begins, was further amended to
run concurrently with the concession described herein and may be
extended for an additional 25 years by the tenant as long as the
tenant has paid the rent and has complied with other obligations
under the lease and the concession. The lease further provides that
the tenant will pay rent equivalent to 5% of the gross gold
production revenue obtained from the leased SSGM and further commits
itself to maintain production taking into consideration market and
other conditions. In no case will the rent be less than eighteen
hundred "colones" per month (approximately $206 per month at the
current rate of exchange). The lease further provides that, in the
event the lessor wishes to sell the property, it must first give
preference to the tenant; the lease further provides that the tenant
must give preference to employ former mining employees and Misanse
shareholders, providing they qualify for the available position.
The lease agreement was assigned on January 29, 1987 to the Company
and Sanseb together with the mining concession application.
<PAGE>
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
Department of Energy, Mines and Hydrocarbons, a division of the El
Salvador Minister of Economy's office, 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. Under the concession and
applicable El Salvador law, the Joint Venture has the right to
export said minerals for five years beginning with the first day of
production without imposition of mineral or export taxes. It also
has the right to import free of duty, equipment and all other items
necessary to operate the SSGM. (Reference is made to the last two
paragraphs in this category.)
Effective February 1, 1996, the Government of El Salvador passed a
law which will require mining companies to pay to it three percent
of its gold sale receipts and an additional one percent is to be
paid to the El Salvador municipality which has jurisdiction of the
mine site.
Under the terms of the concession and agreements referred to in the
concession, the Joint Venture has agreed to the following:
(1) The Joint Venture will pay to 270 former El Salvador employees
pursuant to a settlement agreement dated June 1985, as
follows: A sum of approximately 500,000 colones (approximately
U.S. $57,208 at the current rate of exchange) in three (3)
installments contingent upon the production and sale of gold,
to wit: one-third is to be paid from the sale of the first
production of gold; one-third is to be paid one (1) year
thereafter; and one-third is to be paid two (2) years after the
first payment. The sum of 311,167 colones has been paid which
reduces the total amount due as of September 30, 1996 to
188,833 colones or U.S. $21,606.
<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, 5% 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 $57,208 at the present rate of exchange) will be
paid by the Joint Venture as a social tax for the benefit of
the community in the SSGM area which said funds are to be used
for social, economic, educational, recreational, health,
welfare, medical or for such other beneficial community
services as determined by the Joint Venture;
(5) At such time as the Government of El Salvador forms a
cooperative for the benefit of the employees, the Joint Venture
has agreed to contribute from its annual pre-tax earnings, the
sum of 5% of its pre-tax profits, but, in any event, not less
than a minimum amount equal to 5% of 8% of the total assets;
and
(6) Pursuant to an agreement with the El Salvador Minister of
Economy, at the request of the Company or the Joint Venture to
the El Salvador Central Reserve Bank and/or office of the El
Salvador Minister of Foreign Commerce, it will be able to
convert the El Salvador currency into United States' currency
for the payment of its loans, interest, and any other
obligations, including the payment of dividends. Presently,
there are no restrictions into converting the El Salvador
colones into United States' currency.
On November 30, 1987, the El Salvador Minister of Foreign Commerce
issued a project approval for the gold mining operation which was
ratified on April 15, 1988.
In consideration for the obligations agreed to by the Joint Venture,
the Government of El Salvador agreed to exempt the Joint Venture
from the payment of all import duty, fiscal or municipal taxes
whatsoever. The El Salvador Department of Customs refused to
recognize this exemption. On November 15, 1993, the Joint Venture's
attorneys filed a declaratory proceeding with the El Salvador
Constitutional Supreme Court of Justice ("Supreme Court") informing
the Supreme Court that the Joint Venture's rights were being
violated and that the Supreme Court should restrain the Department
of Customs from attempting to collect any duty.
On May 18, 1994, the Supreme Court declared that the Joint Venture
is entitled to be temporarily exempt from the payment of all import
duty, fiscal and municipal taxes on the import of any item relating
to the needs of the SSGM pending its review of the petition filed on
November 15, 1993, and that the Company's constitutional rights are
to be preserved. The El Salvador Department of Customs takes a
position that the Supreme Court could ultimately 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 13% added
value tax which is refundable to the extent of 6% of the value of
the Joint Venture's exports. The Joint Venture is exporting all of
its gold.
<PAGE>
Gold Reserves
The Joint Venture's geologists have determined that the minable and
estimated gold ore reserves are approximately 15,875,000 tons which
should contain 1,680,500 ounces of gold. The value of this gold ore
reserve is not reflected in the balance sheet and since gold
production has commenced on a limited start-up basis these gold ore
reserves will have a significant impact on future earnings.
SCMP Land and Building Lease
On November 12, 1993, the Joint Venture entered into an agreement
with Corporacion Salvadorena de Inversiones ("Corsain"), a
governmental agency of El Salvador, to lease for a period of ten
years, approximately 166 acres of land and buildings on which its
gold processing mill, plant and related equipment (the SCMP) are
located, and which is approximately 15 miles east of the SSGM site.
The annual lease payment is U.S. $11,500 (payable in El Salvador
colones at the then current rate of exchange), payable annually in
advance, and subject to an annual increase based on the annual
United States' inflation rate. As agreed, a security deposit of
U.S. $11,500 was paid on the same date and this deposit will be
subject to increases based on any United States' inflationary rate
adjustments.
Modesto Mine
(a) Real Estate Lease
On August 26, 1994, the Company entered into a fifteen-year lease
agreement to lease approximately 30 acres of key vacant land located
at the Modesto Mine site, near the City of El Paisnal, El Salvador,
at a cost of one thousand colones per manzana per year or
approximately U.S. $67 per acre. A condition of the lease was a
five-year prepayment provision of 87,500 colones or approximately
U.S. $10,011. On August 31, 1996, the Company purchased this parcel
of land.
(b) Real Estate Ownership
On November 27, 1994, the Company purchased approximately 22 acres
of land which abuts the land formerly leased at the Modesto Mine
site.
(c) Concession
The Joint Venture believes that it has an extendible exploration
concession from the El Salvador Director of Energy, Mines and
Hydrocarbons effective April 5, 1994, and thereafter extended.
<PAGE>
San Felipe-El Potosi Mine ("Potosi") and its extension, the El
Capulin Mine ("Capulin")
(a) Real Estate Lease Agreement
The Joint Venture entered into a lease agreement with the San
Felipe-El Potosi Cooperative ("Cooperative") of the City of Potosi,
El Salvador on July 6, 1993, to lease the real estate encompassing
the San Felipe-El Potosi Mine for a period of 30 years and with an
option to renew the lease for an additional 25 years, for the
purpose of mining and extracting minerals and under the following
basic terms and conditions:
1. The lease payment will be 5% of the gross receipts derived from
the production of precious metals from this site which will be
payable monthly.
2. The Joint Venture will advance to the Cooperative the funds
required to obtain the mining concession from the El Salvador
Department of Energy, Mines and Hydrocarbons and all related
costs which will be reimbursed or will become a deduction from
future rental payments.
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.
(b) Exploration Concession
The exploration concession application was filed on September 6,
1993, with the Department of Energy, Mines and Hydrocarbons, a
division of the El Salvador Minister of Economy's office, by the
owners of the real estate, the Cooperative San Felipe-El Potosi.
The concession consists of approximately 6,100 acres.
(4) Real Estate Ownership
The Company and its subsidiaries own a 331-acre campground located
on the Lake of the Ozarks, Camden County, Missouri; 40 lots in the
San Luis North Estates Subdivision, Costilla County, Colorado; and
12 lots in the City of Fort Garland, Costilla County, Colorado.
Misanse owns the 1,470 acre SSGM site located near the City of Santa
Rosa de Lima in the Department of La Union, El Salvador. Other real
estate in El Salvador is as follows: the Joint Venture leases the
SCMP land and buildings on which its mill, plant and equipment are
located. In addition the Joint Venture has entered into lease
arrangements based on the production of gold payable in the form of
royalties with one of the three other mining prospects in the
Republic of El Salvador. Reference is made to Note 3 for other real
estate ownership or leases.
<PAGE>
(5) Notes Payable and Accrued Interest
Notes payable consist
of the following Dec. 31, 1996 March 31, 1996
------------- --------------
Mortgage and promissory
notes to related parties,
interest ranging from 1% to
4% over prime rate, but not
less than 16%, payable
monthly, due on demand,
using the undeveloped land,
real estate and all other
assets owned by the Company,
its subsidiaries and the
Joint Venture as collateral
(Note 6) $3,441,801 $3,084,370
Other (consists primarily of
short and long-term secured
and unsecured notes and
accrued interest of $277,193
as of December 31, 1996
(March 31, 1996, $262,955).
638,644 499,110
---------- ----------
Totals $4,080,445 $3,583,480
========== ==========
(6) Related Party Transactions
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary since April 1, 1981 (15 years and
nine months: 11 years at $67,740 annually ($745,140); four years
and six months at $114,750 annually ($516,375) and three months at
$13,750 ($41,250) for a total of $1,302,765.
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 December 31, 1996:
The amount of funds which the Company has borrowed from its
President from time to time, together with accrued interest, amounts
to $1,712,201. To evidence this debt, the Company has issued its
President a series of open-ended, secured, on-demand promissory
notes, with interest payable monthly at the prime rate plus 2%, but
not less than 16% per annum.
The Company had borrowed an aggregate of $385,509, including accrued
interest, from the Company's President's Rollover Individual
Retirement Account (RIRA). These loans are evidenced by the
Company's open-ended, secured, on-demand promissory note, with
interest payable monthly at the prime rate plus 4% per annum, but
not less than 16% per annum.
In order to satisfy the Company's cash requirements from time to
time, the Company's President has sold or pledged as collateral for
loans, shares of the Company's common stock owned by him. In order
to compensate its President for selling or pledging his shares on
behalf of the Company, the Company has made a practice of issuing
him the number of restricted shares of common stock equivalent to
the number of shares sold or pledged, plus an additional number of
shares equivalent to the amount of accrued interest calculated at
the prime rate plus 3% per annum, 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 53,900
common shares from him since April 1, 1996, and it owes him 19,114
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 (at least 200,000 shares) 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.
<PAGE>
On February 15, 1987, the Company granted its President, by
unanimous consent of the Board of Directors compensation in the form
of a bonus in the amount of 2% of the pre-tax profits realized by
the Company from its gold mining operations in El Salvador, payable
annually over a period of twenty years commencing on the first day
of the month following the month in which gold production commences.
Prior financial statements have detailed that the President has
acquired on December 10, 1993, the ownership of 203 Misanse common
shares. In addition, effective as of June, 1995, he personally, for
his own account, purchased an additional 264 Misanse common shares
from a Misanse shareholder in an arms-length transaction.
Therefore, he presently owns a total of 467 Misanse common shares.
There are a total of 2,600 Misanse shares issued and outstanding.
Also with the consent and approval of the Directors, a company in
which the President has a 55% ownership entered into the following
agreements, and the status is reflected as of December 31, 1996.
The Company leases approximately 4,032 square feet on a
month-to-month basis for its corporate headquarters office at a
monthly rental charge of $2,789.
The same related company provides consulting, administrative
services, use of data processing equipment, use of its vehicles and
other property as required by the Company.
In lieu of cash payments for the office space rental and for the
consulting, administrative services, etc., these amounts due are
added each month to this related company's open-ended, secured,
on-demand promissory note issued by the Company.
In addition, this related company does use its credit facilities to
purchase items needed for the Joint Venture's mining needs.
This related company has been issued an open-ended, secured,
on-demand promissory note which at December 31, 1996, amounts to
$1,096,014 the annual interest rate is 4% plus the prime rate, but
not less than 16%, and it is payable monthly.
The Company's Directors have consented and approved the following
transactions which status are reflected as of December 31, 1996:
The President's wife's Individual Retirement Account ("IRA") has the
Company's open-ended, secured, on-demand promissory note in the sum
$199,500 which bears interest at an annual rate of prime plus 3%,
but not less than 16% and the interest is payable monthly.
<PAGE>
The Law Firm which represents the Company in which a son of the
President is a principal is owed the sum of approximately $128,395
for legal services rendered. Also, the son of the President and his
son's wife have the Company's open-ended, on-demand promissory note
in the sum of $48,577 which bears interest at an annual rate of 16%
payable monthly.
The Directors, by their agreement, have deferred cash payment of
their Director fees beginning on January 1, 1981, until such time as
the Company's operations are profitable. The Director fees were
$750 for each quarterly meeting and $250 for attendance at any other
Directors' meeting. The Executive Committee Director fees were
fixed at $250 for each meeting. 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. Effective November 1,
1996, the quarterly Directors' fees are $1,200 and the monthly
Executive Committee Director and Director fees effective October 1,
1996, are $400 per meeting.
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 virgin
ore 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 Advances
(Net of Gold Sale Proceeds)
to the Joint Venture Total Advances Interest
- ---------------------------- -------------- -----------
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
Through the Third Quarter
Ended December 31, 1996 2,413,242 1,138,540
----------- ----------
Balance December 31, 1996 $13,622,051 $4,805,960
Advances by three of the Company's
wholly-owned subsidiaries 590,265 0
----------- ----------
Total Advances December 31, 1996 $14,212,316 $4,805,960
=========== ==========
(7) Commitments
Reference is made to Notes (3), (5), (6), (7), (10), (13) and (14).
<PAGE>
(8) Consolidated Subsidiaries
The following subsidiaries, all majority-owned by the Company, are
included in the consolidated financial statements of the Company.
All intercompany balances and transactions have been eliminated.
Percentage of Ownership
-----------------------
Homespan Realty Co., Inc. 100.0%
Mineral San Sebastian, S.A. de C.V. 52.0%
Piccadilly Advertising Agency, Inc. 100.0%
San Luis Estates, Inc. 100.0%
San Sebastian Gold Mines, Inc. 82.5%
Universal Developers, Inc. 100.0%
(9) Income Taxes
At March 31, 1996, the Company and its subsidiaries 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) Stock Options, Rights, Preferred Stock, and Stock Loans
The following stock options are in existence:
Issue Expiration Term with Option Price Option
Date Date Extensions Per Share Shares
- -------- ---------- ---------- ------------ --------
05/27/94 05/27/97 3 years $2.00 30,000
05/31/94 05/31/97 3 years $2.00 30,000
03/22/95 09/22/97 30 months $4.00 20,710
03/30/96 03/29/98 2 years $5.00 1,375
03/30/96 03/29/98 2 years $5.00 1,875
10/01/96 10/01/99 3 years $3.00 22,500
12/09/96 12/08/00 4 years $3.00 3,000
12/11/96 12/10/00 4 years $3.00 75,000
12/14/96 12/13/00 4 years $3.00 83,900
12/27/96 12/27/00 4 years $3.00 30,000
12/31/96 12/31/00 4 years $3.00 25,000
-------
Total Options issued and outstanding 323,360
=======
<PAGE>
Stock Rights
Reference is made to Note 6, Related Party Transactions, 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.
Reference is made to Note 6, whereas the Directors and Officers have
a right to exchange their fees and/or salaries in payment for the
Company's common shares.
Share Loans - Others
A series of borrowings of the Company's common shares were made
under the provision that the owners would sell said shares as the
Company's designee, with the proceeds payable to the Company. In
exchange, the Company agreed to pay these shares loaned within 31
days or less by issuing its restricted common shares, together with
interest payable in restricted common shares at a rate of 6% per
annum in advance for a minimum period of two years.
Preferred Stock
The Directors of the Company have the authority to issue an
unlimited number of preferred shares. There are 250,000 shares
$0.10 par value of authorized shares; none are issued or
outstanding.
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.
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,
198,884 were issued and 301,116 shares are authorized to be issued.
(11) Interest Income on Advances to the Joint Venture
From time to time the Company advances funds, services, etc. to the
Joint Venture. The interest rate charged is the prime interest rate
fixed on the first day of each month plus 4%. The interest is
payable monthly. (Note 6)
<PAGE>
(12) Litigation
There is no litigation.
(13) Contingent Liabilities
In the event the El Salvador Constitutional Supreme Court of Justice
should decide that the Joint Venture is subject to the payment of
custom duty taxes, then the Company would have contingent liability
as it has, on behalf of the Joint Venture, agreed to reimburse an El
Salvador Insurance Company the funds that may be disbursed to the El
Salvador Customs' office in connection with the payment of guarantee
bonds it has issued in lieu of cash payment for the import duties.
The total sum of payment guarantee bonds issued by the Insurance
Company through December 31, 1996, 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 December 31, 1995 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 in the pre-production stage at the SSGM and it
simultaneously is performing four separate programs. First, it has
commenced a limited production of gold by processing the SSGM
tailings at its SCMP facility which is located approximately 15
miles from the SSGM site. Second, it is installing a pilot
open-pit, heap-leaching gold process on the SSGM site. Third, it is
continuing its SSGM site preparation, the expansion of its
exploration and exploitation targets, and the enlargement and
development of its gold ore reserves. Fourth, it is exploring the
potential of the four gold mine prospects identified as the San
Felipe-El Potosi Mine, and its extension, the El Capulin Mine, the
Hormiguero Mine, the Montemayor Mine, and the Modesto Mine, all
located in El Salvador, Central America. Concurrently, it also is
in the process of obtaining the necessary funding for each of these
separate programs while it continues its limited production of gold
and the exploration, exploitation and development of its mining
prospects. The more than twelve-year El Salvador war and the
general disbelief that peace will prevail had been a material
deterrent in obtaining funding for the resumption of the SSGM
operations and for the restoration and expansion of the SCMP. On
December 15, 1992, through the auspices of the United Nations, the
end of the war was declared contingent upon a three-year term to
comply with all of the conditions of this pact. Peace definitely
prevails.
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 (tailings at a rate of 400 tons per
day, after retrofitting, etc. is achieved). While the Joint
Venture did achieve at times to operate the mill to its full
capacity, it encountered inconsistencies which compelled it to
operate the mill at a lower production rate than its anticipated 400
tons per day. 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 it; substantial modifications had to be
made; metallurgical differences had to be resolved; the rainy season
was unusually severe (Hurricane Cesar/Douglas); there were head
grade variances; and problems were encountered with the handling of
the separation of the coarse material in the tailings.
This production of gold broadens the Company's objectives and now
enables the Company to commence a complementary operation while
continuing its endeavor to obtain sufficient funds for the SSGM
which is its major and original goal and presently is in the
developmental stage. The Company's main objective and plan, through
the Joint Venture, is to operate at the SSGM site, a moderate
tonnage, low-grade open-pit, heap-leaching, gold-producing mine and
it intends to commence this major gold-mining operation as soon as
adequate funding is in place. Dependent on the grade of ore
processed, it then anticipates producing approximately 12,000 ounces
of gold from the SCMP operation and 40,000 ounces of gold from its
SSGM open-pit, heap-leaching operation during the first twelve full
operating months. The Joint Venture continues to conduct an
exploration program to develop additional gold ore reserves at the
SSGM and at the following four other mines: the San Felipe-El
Potosi, and its extension, the El Capulin Mine, the Modesto Mine,
the Hormiguero Mine, and the Montemayor Mine; all located in El
Salvador.
<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 Third Quarter Ended December 31, 1996
Compared to December 31, 1995
For the nine months ended December 31, 1996, the total revenues
amounted to $1,192,508 compared to revenues of $984,656 for the same
period in 1995. The increase in revenues resulted primarily from
interest charged to the Joint Venture.
Interest is being charged to the Joint Venture on advances made to
it. Through the third quarter of 1996, the interest charged to the
Joint Venture by the Company was $1,138,540 compared to $929,070 for
the same period in 1995, for an increase of $209,470 (23%) which
results from the advances to the Joint Venture being increased to
$13,622,051 (1996) from $11,208,809 (1995) (for an increase of
$2,413,242 or 22%) however, there was a slight decrease in the prime
interest rate which affects the rate of interest charged.
The campground operating and general and administrative expenses
through the third quarter period ended December 31, 1996, were
$56,022 compared to $65,776 for the same 1995 period. The decrease
in expenses resulted from there being no extraordinary filing
fee/charges.
Interest expense for this third quarter (1996) amounted to $406,917
compared to $331,795 for the same 1995 period for an increase of
($75,122) (23%) and was due to an increase in the notes payable.
The net profit for the nine month period ended December 31, 1996,
was $729,569 compared to a profit for the period ended December 31,
1995 of $587,085 an increase of $142,484 (24%).
<PAGE>
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 to
sustain the SCMP and all of the exploration projects.
On June 11, 1996, the Company accepted a letter of intent from
National Securities Corporation, an investment banking and brokerage
firm headquartered in Seattle, Washington, to act as the exclusive
private placement agent on a best efforts basis in connection with
the proposed placement of debentures of the Company in the aggregate
principal amount of $20,000,000 and 1,500,000 warrants secured by
gold ore reserves of equal value. The Debentures and the Warrants
shall hereinafter be referred to collectively as the "Securities."
The Securities will only be offered to "accredited investors"
pursuant to Regulation D of the General Rules and Regulations under
the Securities Act of 1933, as amended. The Debentures will mature
5 years after issuance and shall have an interest rate of 12% per
annum payable annually in arrears. The Company has filed a S.E.C.
Form 8-K providing the details of this funding arrangement.
Assuming the entire amount will be funded, the funds will be used
for the construction of an open-pit, heap-leaching operation and as
a processing facility at its SSGM site at an estimated cost of $13
million, for the expansion, equipment and improvement of its SCMP
facilities at an estimated cost of $2 million, and the balance of
the funds will be used for diamond or reverse circulation drilling
on all of the mines, working capital, and transaction expenses.
However, it will continue to 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 protracted
period of time) will not be sufficient to meet the SSGM capital and
the other mining exploration needs. In order to continue obtaining
funds to conduct the Joint Venture's exploration, exploitation,
development, expansion programs, and the production of gold from the
SSGM open-pit, heap-leaching operation, it may be necessary for
the Company to obtain funds from other sources. The Company may be
required to borrow funds by issuing open-ended, secured, on-demand
or unsecured promissory notes or by selling its shares to its
directors, officers and other interested investors.
During the past, the Joint Venture was engaged in exploration,
exploitation and development programs designed to increase its gold
ore reserves. The prospects of expanding the gold ore reserves are
positive. The funds needed by the Joint Venture were obtained from
the Company via net advances: $2,413,242 through the third quarter.
The Company believes that these advances significantly contributed
to the value of the SSGM, the SCMP, 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 will
add value to the Joint Venture and to the Company. The Company was
able to obtain sufficient funds to continue to retrofit and expand
the SCMP, to purchase consumable inventory, to purchase certain
hauling and loading equipment and for working capital use. The
Company has been able to obtain the funds required for its and the
Joint Venture's undertaking via a debt and equity structure of
funding. Since September, 1987, the Company and three of its
wholly-owned subsidiaries advanced a sum of $14,212,316 to the Joint
Venture, exclusive of gold sale proceeds.
<PAGE>
Advances to the Joint Venture
Advances to the Joint Venture through the Company's third quarter
ended December 31, 1996 were derived from the various sources
including related parties as follows:
Funding Sources From
-----------------------
Related Other
Parties Sources Total
-------- ----------- ----------
Accounts payable, accruals, etc. $165,371 $ (13,027) $ 152,344
Notes payable and accrued interest 357,431 139,534 496,965
Equity 399,344 743,375 1,142,719
Net income 729,569 729,569
-------- ----------- -----------
Totals $922,146 $1,599,451 $2,521,597
Increase in cash & cash
equivalents (108,355) (108,355)
-------- ------------ -----------
Advances to the Joint Venture $922,146 $1,491,096 $2,413,242
======== ============ ===========
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 the 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 about $10
million. These exploration 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 December 31, 1996, the Company has
advanced to the Joint Venture, the sum of $13,622,051 and three of
the Company's wholly-owned subsidiaries have advanced the sum of
$590,265, for a total of $14,212,316. 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 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 real estate at the
Modesto Mine, and many other related needs.
<PAGE>
SCMP Operations, SSGM & Other Mine Exploration
This report describes 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 during the past nine months
($645,930), therefore, the advances reported are after deducting
these gold sale proceeds. Presently the Company believes that the
technical SCMP corrections will permit it to reach its goal of
processing 400 tons of tailings each day of operation. In the event
the Joint Venture's goals are reached, then the profits and cash
flow should provide funds that could be used to commence the SSGM
open-pit, heap-leaching operation. The Company estimates that it
will need at least U.S. $13 million to start a 2,000 ton per day
heap-leaching operation and over time to increase the production
capacity to 6,000 tons per day at the SSGM. The profit and cash
flow projections reflect that the invested capital could be
recovered during the first 18 months of full production based on
gold selling at $390 an ounce. The selling price of gold presently
is approximately $355 an ounce. It further believes that it should
be able to raise adequate funds to proceed with its goals which
include the SCMP expansion and the acquirement of a crushing system.
Employees
The Joint Venture employs approximately 325 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 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) at
its United States' corporate headquarters.
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 may 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.
<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 operations of the SCMP and
SSGM and to continue the exploration of its other mining prospects.
Reference is made to the disclosure of the Company's entering into
an agreement with an investment banking and brokerage firm which has
demonstrated its abilities to obtain funds for other businesses.
The filing of Securities and Exchange Commission Form 8-K on or
about June 11, 1996, describes in detail the agreement to acquire
the contemplated capital.
<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 since the Annual Shareholders' Meeting held on
September 27, 1996. The details of this meeting were
reported in the September 30, 1996 U.S. Securities and
Exchange Commission Form 10-Q.
Item 5. Other Information
None.
Item 6. Reports on Form 8-K
(a) No exhibits are filed with this Form 10-Q
(b) Reports on Form 8-K:
As of the date of this filing, there were no reports on
Form 8-K filed during the third quarter period ended
December 31, 1996.
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: January 13, 1997 Edward L. Machulak
President, Chief Executive, Operating and
Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
December 31, 1996 (unaudited) March 31, 1996 (audited) Financial Statements.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1996 MAR-31-1997 MAR-31-1996
<PERIOD-END> DEC-31-1996 MAR-31-1996 DEC-31-1996 DEC-31-1995
<CASH> 361,104<F1> 255,621<F1> 0
0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 21,355,231<F2> 18,958,910<F2> 0
0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 1,264,534<F3> 1,298,584<F3> 0
0
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 0 0 0 0
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 22,980,869 20,513,115 0 0
<CURRENT-LIABILITIES> 5,949,074 5,353,608 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 832,342 779,221 0 0
<OTHER-SE> 16,199,453 14,380,286 0 0
<TOTAL-LIABILITY-AND-EQUITY> 22,980,869 20,513,115 0 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 1,192,508 984,656<F4> 417,536
355,729
<CGS> 0 0 0 0
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 56,022 65,776<F4> 16,210
13,988
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 406,917 331,795<F4> 142,398
135,254
<INCOME-PRETAX> 462,939 397,571<F4> 258,928
206,487
<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> 729,569 587,085<F4> 258,928
206,487
<EPS-PRIMARY> .09 .08<F4> .03
.03
<EPS-DILUTED> .09 .08<F4> .03
.03
<FN>
<F1>Cash, investments and prepaid items.
<F2>Accounts receivable, advances and investment in Joint Venture.
<F3>Inventory and real estate held for sale.
<F4>P&L 3 months 1995.
</FN>
</TABLE>
