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, 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:
10,573,534 common shares of the Company's common stock, $0.10 par
value, were issued and outstanding as of January 31, 1998.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets December 31, 1997 and March 31,
1997
Consolidated Statements of Operations Nine Months Ended
December 31, 1997, and 1996
Consolidated Statements of Cash Flows Nine Months Ended
December 31, 1997, and 1996
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended December 31, 1997
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. Other Information
Item 5. Reports on Form 8-K and Exhibits
Registrant's Signature Page
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 March 31, 1997
(Unaudited) (Audited)
----------------- ---------------
ASSETS
------
Current assets
Cash $ 78,319 $ 780,154
Investments 187,792 194,888
Accounts receivable 93,264 112,382
Inventories 75,065 88,250
Prepaid items 4,500 1,698
----------- -----------
Total current assets 438,940 1,177,372
Real estate (Note 4) 1,179,836 1,179,836
Advances to Joint Venture
Net of Gold Sale Proceeds
(Note 3) 19,205,973 15,693,766
Investment in Joint Venture
(Note 3) 7,016,360 7,016,360
----------- -----------
Total assets $27,841,109 $25,067,334
=========== ===========
LIABILITIES
-----------
Current liabilities
Accounts payable $ 499,485 $ 119,558
Notes and accrued interest
payable to related parties
(Note 5) 4,005,126 3,461,529
Notes and accrued interest
payable to others (Note 5) 707,794 646,809
Accrued salaries 1,479,015 1,344,015
Accrued directors' fees 9,600 0
Accrued legal fees 175,082 137,069
Other accrued expenses 118,523 150,135
---------- ----------
Total liabilities 6,994,625 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;
December 31, 1997 - none
(Note 10) $ 0 $ 1,515,000
Common stock, $0.10 par value:
Authorized 15,000,000 shares;
Issued and outstanding:
December 31, 1997 - 10,468,834 1,046,883
March 31, 1997 - 9,193,042 919,304
Additional paid in capital 16,285,643 14,359,037
Retained earnings (deficit) 3,513,958 2,414,878
----------- -----------
Total shareholders' equity 20,846,484 19,208,219
Total liabilities and ----------- -----------
shareholders' equity $27,841,109 $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
Third Quarter and Nine Months Ended December 31, 1997 and 1996
(Unaudited)
Three Month Nine Months Ended
Comparison December 31
December 31
1997 1996 1997 1996
------------------------ ------------------------
Revenues:
Campground income $ 12,598 $ 11,914 $ 55,925 $ 53,930
Interest income 393 19 3,018 38
Interest income Related
Joint Venture (Notes 6
& 11) 568,360 405,603 1,593,565 1,138,540
----------- ----------- ----------- ----------
Total revenue 581,351 417,536 1,652,508 1,192,508
Expenses:
General, administrative
and campground expenses 21,827 16,210 73,440 56,022
Interest expense 172,892 142,398 479,988 406,917
----------- ----------- ----------- ----------
Total expenses 194,719 158,608 553,428 462,939
----------- ----------- ----------- ----------
Net income (loss) from
operations 386,632 258,928 1,099,080 729,569
Credit (charge) for
income taxes 0 0 0 0
----------- ----------- ----------- ----------
Net income (loss) $ 386,632 $ 258,928 $ 1,099,080 $ 729,569
=========== =========== =========== ==========
Net income (loss) per
share (Note 2) $ .0377 $ .0322 $ .1072 $ .0908
=========== =========== =========== ==========
Average number of shares
outstanding (Note 2) 10,249,886 8,038,344 10,249,886 8,038,344
=========== =========== =========== ==========
Fully diluted income per
common share (Note 2) $ .0322 $ .0307 $ .0915 $ .0865
=========== =========== =========== ==========
Weighted average diluted
number of shares
(Note 2) 12,006,670 8,434,718 12,006,670 8,434,718
=========== =========== =========== ==========
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, 1997 and 1996 (Unaudited)
1997 1996
---- ----
Operating Activities:
Net income (loss) $1,099,080 $ 729,569
Changes in other operating assets and
liabilities (net):
Accounts receivable 19,118 16,921
Inventory 13,185 34,050
Other assets 4,294 2,872
Accounts payable 379,927 129,819
Accrued salaries 135,000 107,775
Accrued directors' fees 9,600 7,550
Accrued legal fees 38,013 51,512
Accrued liabilities (31,612) (183,917)
Accrued interest 10,353 (14,238)
Common stock issued for services 112,180 15,286
---------- ----------
Cash provided (used) by operating
activities 1,789,138 897,199
Investing activities:
Cash advances to Joint Venture (2,558,458) (1,753,783)
Noncash advances to Joint Venture (1,774,480) (1,305,389)
---------- ----------
Gross advances to Joint Venture (4,332,938) (3,059,172)
Less: gold sale proceeds 820,731 645,930
---------- ----------
Cash flows from investing activities (3,512,207) (2,413,242)
Financing activities:
Net borrowings 594,229 496,965
Preferred stock converted (1,515,000) 0
Common stock issued 1,942,005 1,127,433
---------- ----------
Cash provided by financing activities 1,021,234 1,624,398
Increase (decrease) in cash and cash
equivalents (701,835) 108,355
Cash at the beginning of the quarter 780,154 55,653
---------- ----------
Cash at the end of the quarter $ 78,319 $ 164,008
========== ==========
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 Period Ended December 31, 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 through
the Third Quarter
12/31/97 1,099,080
Common Shares Issued
this Period -
Net of Cancellations 1,275,792 127,579 1,926,606
---------- ---------- ----------- ----------
Balances 12/31/97 10,468,834 $1,046,883 $16,285,643 $3,513,958
========== ========== =========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
(1) The Company and Basis of Presentation of Financial Statements
(a) Commerce Group Corp. ("Commerce," the "Company" and/or
"Registrant") and its 82 1/2% owned subsidiary, San Sebastian
Gold Mines, Inc. ("Sanseb") have formed the Commerce/Sanseb
Joint Venture ("Joint Venture") for the purpose of performing
gold mining and related activities, including, but not limited
to, exploration, exploitation, development, extraction and
processing of precious metals in the Republic of El Salvador,
Central America. Gold bullion, the Joint Venture's principal
product, is produced (but not on a full production basis) in El
Salvador and refined and sold in the United States. Expansion
of exploration is taking place at the San Sebastian Gold Mine
("SSGM") which is located near the City of Santa Rosa de Lima.
Exploration is also taking place at two other mining
properties, all located in the Republic of El Salvador, Central
America.
Presently, the Joint Venture is in the pre-production and
development 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
two gold mine exploration prospects identified as the San
Felipe-El Potosi Mine, and its extension, the El Capulin Mine
and the Hormiguero 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
whichever is 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 whichever is lower, cost
or market value.
<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 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 December 31, 1997, the 1,530,650 option shares, the 170,400
borrowed shares, the 30,734 shares due for accrued interest, and
the 25,000 shares of stock rights were combined, they would total
1,756,784 shares. These shares added to the weighted average
calculated number of shares of 10,249,886 would amount to 12,006,670
and the profit per share for the period ended December 31, 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 December 31, 1997, the Company's advances were $18,615,708,
and three of the Company's wholly-owned subsidiaries' advances were
$590,265 for a total of $19,205,973.
<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 December 31, 1997, the Company, Sanseb and three of the
Company's wholly-owned subsidiaries have invested (including
carrying costs) the following in its Joint Venture:
The Company's advances since 09/22/87 $21,586,440
Less amounts received from gold sales (2,970,732)
The Company's net of gold sale proceeds advances -----------
since 09/22/87 18,615,708
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 20,977,172
-----------
Total: 46,609,240
Advances by the Company's three subsidiaries 590,265
-----------
Combined total investment $47,199,505
===========
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 SSGM minable proven gold
ore reserve area. While the Company is retrofitting, improving and
expanding its SCMP, the Company is active in attempting to obtain
adequate financing for the expansion of the SCMP and 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
SSGM minable gold ore reserves and at two other El Salvador mining
prospects. During this fiscal period gold is being produced at the
SCMP from SSGM virgin gold ore which is being trucked to 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 (Joint Venture) 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 in areas not
included in the concession, 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 existing 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.
<PAGE>
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;
(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. In the event that the Court should deny tax and duty
exemptions, then items (2), (3) and (4) will be automatically
cancelled.
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 and has made a claim for the added value tax refund.
<PAGE>
Gold Ore Reserves
The Joint Venture's geologists have determined that the minable and
estimated gold reserves are approximately 15,705,000 tons which
should contain 1,622,800 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 based on
the existing world-wide market price of gold.
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 and it
has entered into an agreement to purchase a third parcel of land
containing approximately five acres. 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, etc. 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.
<PAGE>
3. The Joint Venture will, when it is in production, employ all of
the 45 qualified members of the Cooperative providing that there
is a need for their particular skill or service.
4. The Joint Venture will furnish medicine and first aid medical
assistance to all of its employees to the extent that such
benefits are not provided by the Salvadoran Social Security
System.
5. An employee life insurance program is to be seriously considered
by the Joint Venture when production commences, providing that
the cost of such insurance is not excessive.
(4) Real Estate Ownership and Leases
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 57 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 two 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: 12/31/97 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) $4,005,126 $3,461,529
Other (consists primarily of
short-term notes with interest
accrued in the sum of $295,519 as of
December 31, 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. Also included are the
promissory notes issued in connection
with a bridge loan. 707,794
646,809
---------- ----------
Total: $4,712,920 $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 nine
months, for a total of $1,467,765.
<PAGE>
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, 1997:
The amount of funds which the Company has borrowed from its
President from time to time, together with accrued interest, amounts
to $2,137,272. To evidence this debt, the Company has issued to its
President a series of open-ended, secured, on-demand promissory
notes, with interest payable monthly at the prime rate plus two
percent, but not less than 16% per annum.
The Company had borrowed an aggregate of $451,922 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
163,400 common shares since April 1, 1997, and it owes him 26,534 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 December 31, 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.
<PAGE>
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, 1997, amounts to
$1,125,116; 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 December 31, 1997:
The President's wife's Individual Retirement Account ("IRA") has the
Company's open-ended, secured, on-demand promissory note in the sum
$233,869 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 other
arms-length purchases.
The Law Firm which represents the Company in which a son of the
President is a principal is owed the sum of $175,082 for legal
services rendered through December 31, 1997. 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 $56,947 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. At the same time 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 average lowest bid quote reflected in the NASDAQ Monthly
Statistical Summaries in the month preceding the exercise of this
right.
<PAGE>
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. The proceeds
from the sale of gold reduce the amount of advances. When full
production commences, these capitalized costs will be charged as an
expense based on a per ton production basis. The Company also
charges interest for its advances to the Joint Venture which
interest rate is established to be the prime rate quoted on the
first day of each month plus four percent and said interest is
payable monthly.
Company Net Advances to the Joint Venture
Total Interest
Advances Charges
----------- ----------
Balance April 1, 1990 $ 1,625,163 $ 252,060
Year Ended March 31, 1991 718,843 266,107
Year Ended March 31, 1992 698,793 312,004
Year Ended March 31, 1993 1,003,617 347,941
Year Ended March 31, 1994 1,155,549 451,180
Year Ended March 31, 1995 2,884,078 751,389
Year Ended March 31, 1996 3,122,766 1,286,739
Year Ended March 31, 1997 3,894,692 1,567,375
Through the Third Quarter
Ended December 31, 1997 3,512,207 1,593,565
----------- ----------
Balance December 31, 1997 $18,615,708 $6,828,360
Advances by three of the
Company's wholly-owned
subsidiaries 590,265 0
Total Net Advances After
Deducting the Gold Sale ----------- ----------
Proceeds as of December 31, 1997 $19,205,973 $6,828,360
=========== ==========
(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%
<PAGE>
(9) Income Taxes
At March 31, 1997, the Company and its subsidiaries, excluding the
Joint Venture, have estimated net operating losses remaining in a
sum of approximately $3,339,647 which may be carried forward to
offset future taxable income; the net operating losses expire at
various times in the future.
(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 10,468,834 shares were outstanding as of December 31, 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 December 31, 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 through the third quarter ended December
31:
1997 1996
------------------ ----------------
Weighted Weighted
Average Average
Amount Price Amount Price
------ ----- ------ -----
Outstanding, beg. year 1,591,360 $3.22 97,840 $2.66
Granted 239,400 $3.00
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 $3.27 323,360 $2.90
<PAGE>
A summary of the outstanding stock options as of December 31, 1997:
Weighted Average
Range of Amount Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- ----------------
$2.00 to $2.99 430,000 1.3726 years $2.50
$3.00 to $5.00 1,100,650 2.1421 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 from the sale date 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 a factor considered. On June 26, 1997, the Company entered
into a loan agreement with two of its shareholders in which they
agreed to loan 200,000 of their Company-owned shares to the Company.
One shareholder during this quarter received 167,000 restricted
common shares in payment of a share loan and the Company issued
10,020 restricted common shares in full payment for the interest
due. As of December 31, 1997, the Company owed a shareholder 70,000
of the Company's restricted common shares plus an additional 4,200
restricted common shares in payment for the interest earned, all in
accordance with the terms and conditions of the share loan
agreement.
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,
309,547 were issued and 190,453 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 December 31, 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>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
S.E.C. FORM 10-Q - DECEMBER 31, 1997
PART I - FINANCIAL INFORMATION
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 third quarter ended December 31, 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 it is excavating from an open pit 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 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 two gold mine prospects identified
as the San Felipe-El Potosi Mine, and its extension, the El Capulin
Mine and the Hormiguero Mine, all located in El Salvador, Central
America. Relative to the Modesto Mine and the Montemayor Mine, the
Company's El Salvadoran attorney is disputing procedures in which
the El Salvador Director of Energy, Mines and Hydrocarbons
disclaimed the Company's application for obtaining licenses to
extract minerals from the Modesto Mine and the Montemayor Mine. The
Company's El Salvadoran legal counsel, based on his legal findings,
has filed a challenge which calls for the revoking of the licenses
issued to others. The Company has made the U.S. Embassy aware of
the procedures taken by the El Salvadoran authorities and also the
actions taken by the Company's El Salvadoran legal counsel.
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 their own diamond core drilling and 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. It
has been estimated that the assessment phase will cost Teck
approximately U.S. $400,000. Results of Teck's findings are to be
made available to the Company. Teck is evaluating the mineral
potential and is in communication with the Company's independent
consulting geologists as well as with the Company's geologists to
obtain information to make a final determination.
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. The site preparation and the plans to
erect this crushing system are in process pending funding
availability.
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 which is dependent on having adequate funds to perform this
enlargement.
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 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 has to be considered; 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
(through the third quarter 1997 - $870,731; third quarter 1996 -
$645,930) from the gold sales by reducing the advances to the Joint
Venture, the results would have reflected a nominal profit.
<PAGE>
This production of gold broadens the Company's objectives and
enables the Company to commence a complementary operation while
continuing its endeavor to obtain sufficient funds to expand the
SCMP and 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 prime objectives and plans, through the Joint Venture,
are to expand the SCMP so that the earnings and cash flow will
provide the funding requirements to sustain all of the current
exploration programs and to operate at the SSGM site, a moderate
tonnage, low-grade, open-pit, heap-leaching, gold producing mine.
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 two other mines: the San Felipe-El Potosi, and its
extension, the El Capulin Mine, and the Hormiguero Mine; all
located in El Salvador.
Since the Joint Venture commenced producing gold at the SCMP, albeit
a very exiguous operation, and a forerunner of its greater goals,
the Company's revenues, profitability and cash flow will be greatly
influenced by the price of gold. Gold prices fluctuate widely and
are affected by numerous factors which will be beyond the Company's
control, such as, expectations for inflation, the strength of the
U.S. dollar, overproduction of gold, global and regional demand, or
political and economic conditions. The combined effect of these
factors is difficult; perhaps impossible to predict. Should the
market price of gold fall below the Company's production costs and
remain at such level for any sustained period, the Company could
experience losses. Under these circumstances, the Company could
choose to suspend operations in order to minimize losses.
The Company believes that neither it, nor any other competitor, has
a material effect on the precious metal markets and that the price
it will receive for its production is dependent upon world market
conditions over which it has no control.
Results of Operations for the Third Quarter Ended December 31, 1997
Compared to December 31, 1996
For the third quarter period ended December 31, 1997, the total
revenues amounted to $581,351 compared to revenues of $417,536 for
the same period in 1996. For the nine month period, the total
revenues for December 31, 1997 are $1,652,508 compared to $1,192,508
for the same 1996 period. 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 1997, the interest charged to the
Joint Venture by the Company was $1,593,565 compared to $1,138,540
for the same period in 1996, for an increase of $455,025 (40%)
which results from the advances to the Joint Venture being increased
to $18,615,708 (1997) from $13,622,051 (1996), for a total increase
of $4,993,657 or 37%.
The campground operating and general and administrative expenses
through the third quarter period ended December 31, 1997, were
$73,440 compared to $56,022 for the same 1996 period, reflecting an
increase of approximately 31%.
Interest expense through the third quarter (1997) amounted to
$479,988 compared to $406,917 for the same 1996 period for an
increase of $73,071 (18%) and was due to an increase in the notes
payable and accrued interest from $4,080,445 (1996) to $4,712,920
(1997) or an increase of $632,475 (15.5%).
The net profit through the period ended December 31, 1997, was
$1,099,080 compared to a net profit for the same period ended
December 31, 1996 of $729,569, or an increase of $369,511 (51%)
primarily due to the interest income charged to the Joint Venture.
<PAGE>
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 an expanded 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 parties.
During the past, the Joint Venture was engaged in exploration,
exploitation and development programs designed to increase its gold
ore reserves. The prospects of expanding the gold reserves are
positive. The funds needed by the Joint Venture were obtained from
the Company via net advances: $3,512,207 during this nine month
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
and revamp the SCMP and to use these funds 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 $19,205,973 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 the $13,000,000 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.
<PAGE>
Advances to the Joint Venture
Advances to the Joint Venture during the Company's first nine months
ended December 31, 1997 were derived from the sources, including
related parties as follows:
Funding Sources
From
----------------------
Related Other
Parties Sources Total
---------- ---------- ----------
Change in current assets $ $ 36,597 $ 36,597
Accounts payable & accruals etc. 510,221 20,707 530,928
Notes payable 543,597 60,985 604,582
Equity 1,343 537,842 539,185
Net income 1,099,080 1,099,080
---------- ---------- ----------
Totals $1,055,161 $1,755,211 $2,810,372
Change in cash & cash equivalents 701,835 701,835
---------- ---------- ----------
Advances to the Joint Venture $1,055,161 $2,457,046 $3,512,207
========== ========== ==========
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 and expansion 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 three exploration
targets for the purpose of increasing its gold ore reserves should
be $8 million. These programs will involve airborne geophysics,
stream chemistry, geological mapping trenching and drilling. The
Joint Venture believes that it may be able to joint venture these
exploration costs with other mining companies.
From September 1987 through December 31, 1997, the Company has
advanced to the Joint Venture, the sum of $18,615,708 and three of
the Company's wholly-owned subsidiaries have advanced the sum of
$590,265, for a total of $19,205,973. 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 Montemayor
Mine and the Hormiguero 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, for a community
place of worship, and many other related needs.
<PAGE>
SCMP Operations, SSGM & Other Mine Exploration
Items 1 and 2 of this report describe the Company's current
activities and status. The Company, through its Joint Venture, has
reduced its advances to the Company from its sale of gold, which
through December 31, 1997 amounted to $2,970,732, therefore, the
advances reported are after deducting these gold sale proceeds.
Presently the Company believes that the additional equipment needed
for the SCMP production expansion 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 (approximately $3 million) to proceed with its goals
which include the SCMP expansion, the installation of its crushing
system, and to have adequate working capital. During the last
fiscal quarter ended March 31, 1997, the Company did raise the sum
of $2.5 million by issuing Series A Convertible Preferred Stock and
the placement of additional equity securities.
Employees
The Joint Venture employs approximately 318 full-time persons from
El Salvador (up to 325 persons, including part-time employees) to
perform its exploration, exploitation, and development programs; to
produce gold from its SCMP facilities; and to handle the
administration of its activities. None of these employees are
covered by any collective bargaining agreements. It has developed a
continuous harmonious relationship with its employees. It believes
that the Joint Venture is the largest single non-agricultural
employer in El Salvador's Eastern Zone. Also, the Company employs
approximately four persons (plus part-time help) in the United
States.
Insurance
The Joint Venture has in existence insurance through an El Salvador
insurance company with the following general coverage: general
liability, vehicle liability and extended coverage, fire, explosion,
hurricane, cyclone, tornado, windstorm, hail, flood, storm,
earthquake, tremor or volcanic eruption, politically-motivated
violence, terrorism, strikes, work stoppages, riots, uprisings,
malicious acts, vandalism, and related acts. As additional
equipment and assets are acquired or improvements are made, the
insurance coverage is 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 mining business is very capital intensive.
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
nine months of this fiscal year, the Company was able to invest a
gross sum of $4,332,938 which was reduced by the $820,731 received
from the sale of gold proceeds and reflected a net investment of
$3,512,207 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>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
S.E.C. FORM 10-Q - DECEMBER 31, 1997
PART II - OTHER INFORMATION
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. Other Information
None.
Item 5. Reports on Form 8-K
There was one report on Form 8-K filed electronically with
the Securities and Exchange Commission's EDGARLink
Electronic Filing System and accepted on January 21, 1998.
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: February 9, 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.
December 31, 1997 Financial Statement is unaudited.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997 MAR-31-1998 MAR-31-1997
<PERIOD-END> DEC-31-1997 MAR-31-1997 DEC-31-1997 DEC-31-1996
<CASH> 270,611<F1> 976,740 0
0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 26,315,597<F2> 22,822,508<F2> 0
0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 1,254,901<F3> 1,268,086 0
0
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 0 0 0 0
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 27,841,109 25,067,334 0 0
<CURRENT-LIABILITIES> 6,994,625 5,859,115 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 1,515,000 0 0
<COMMON> 1,046,883 919,304 0 0
<OTHER-SE> 19,799,601 16,773,915 0 0
<TOTAL-LIABILITY-AND-EQUITY> 27,841,109 25,067,334 0 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 0 0 1,652,508 1,192,508
<CGS> 0 0 0 0
<TOTAL-COSTS> 0 0 0 0
<OTHER-EXPENSES> 0 0 73,440 56,022
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 479,988 406,917
<INCOME-PRETAX> 0 0 1,099,080 729,569
<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 1,099,080 729,569
<EPS-PRIMARY> 0 0 .107 .091
<EPS-DILUTED> 0 0 .092 .087
<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>
