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 September 30, 1998
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 Identification
incorporation or organization) 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:
11,113,670 common shares of the Company's common stock, $0.10 par
value, were issued and outstanding as of September 30, 1998.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE SECOND QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements have been prepared
by Commerce Group Corp. ("the Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed and omitted pursuant to
such SEC rules and regulations.
These consolidated financial statements should be read in
conjunction with the financial statements and accompanying notes
included in the Company's Form 10-K for the year ended March 31,
1998.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Reports on Form 8-K
Registrant's Signature Page
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Balance Sheets
September 30, 1998 March 31, 1998
(Unaudited) (Audited)
------------------ --------------
ASSETS
------
Current assets
Cash $ 102,666 $ 61,287
Investments 186,182 187,792
Accounts receivable 287,980 452,534
Inventories 202,894 205,300
Prepaid items and deposits 46,028 49,939
----------- -----------
Total current assets 825,750 956,852
Real estate (Note 5) 1,179,836 1,179,836
Property, plant and equipment, net 3,212,393 3,332,303
Mining resources investment 21,504,605 20,330,660
----------- -----------
Total assets $26,722,584 $25,799,651
=========== ===========
LIABILITIES
-----------
Current liabilities
Accounts payable $ 345,014 $ 342,298
Notes and accrued interest
payable to related parties
(Notes 6 & 7) 4,436,642 4,175,120
Notes and accrued interest
payable to others (Note 6) 1,278,193 743,071
Accrued salaries 1,599,015 1,509,015
Accrued director fees 8,800 0
Accrued legal fees 178,875 175,082
Other accrued expenses 498,661 461,186
----------- -----------
Total liabilities 8,345,200 7,405,772
Commitments and contingencies (Notes 2, 4, 5, 6, 7, 8 & 12)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
1998-none; 1997-none shares
(Note 10) $ 0 $ 0
Common stock, $0.10 par value:
Authorized 15,000,000 shares;
Issued and outstanding:
March 31, 1998-11,039,670
(Note 10) 1,103,967
September 30, 1998-11,113,670
(Note 10) 1,111,367
Capital in excess of par value 17,032,393 16,969,724
Retained earnings (deficit) 233,624 320,188
----------- -----------
Total shareholders' equity 18,377,384 18,393,879
----------- -----------
Total liabilities and
shareholders' equity $26,722,584 $25,799,651
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Operations
For the Six Months Ended September 30 (Unaudited)
Three Months Ended
Second Quarter Six Months Ended
09/30/98 09/30/97 09/30/98 09/30/97
-------- -------- -------- --------
Revenues:
Gold sales $ 148,152 $ 287,002 $ 392,624 $ 576,680
Campground income 22,668 21,247 43,360 43,327
----------- ---------- ----------- ----------
Total revenues 170,820 308,249 435,984 620,007
Expenses:
Cost of gold sales $ 105,803 $ 242,889 $ 248,113 $ 402,576
Depreciation 84,849 53,198 168,775 105,835
General and
administrative 54,459 112,767 162,308 163,506
----------- ---------- ----------- ----------
Total expenses 245,111 408,854 579,196 671,917
Other income:
Interest income $ 242 $ 534 $ 249 $ 2,625
El Salvador added
value tax refund 28,200 28,199 56,399 56,398
----------- ---------- ----------- ----------
Other income 28,442 28,733 56,648 59,023
Net profit (loss) $ (45,849) $ (71,872) $ (86,564) $ 7,113
Credit (charges)
for income taxes 0 0 0 0
------------ ----------- ------------ ----------
Net income (loss)
after income tax
credit (charge) $ (45,849) $ (71,872) $ (86,564) $ 7,113
============ =========== ============ ==========
Net income (loss)
per share (Note 2)
basic $ (.0041) $ (.0089) $ (.0078) $ .0009
============ =========== ============ ==========
Net income (loss)
per share (Note 2)
diluted $ (.0035) $ (.0088) $ (.0066) $ .0009
============ =========== ============ ==========
Weighted av. common
shares outstanding
(Note 2) 11,090,085 7,987,334 11,090,085 7,987,334
=========== ========== =========== ==========
Weighted av. diluted
common shares
(Note 2) 13,095,481 8,118,926 13,095,481 8,118,926
=========== ========== =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Changes in Shareholders' Equity
Through the Period Ended September 30, 1998 (Unaudited)
Common Stock
-------------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
---------- --------- ---------- ---------
Balance
March 31, 1997 9,193,042 $ 919,304 $14,359,037 $201,585
Net Income (Loss)
for FY
March 31, 1998 118,603
Common Shares
Issued Through
March 31, 1998 1,846,628 184,663 2,610,687
---------- ---------- ----------- ---------
Balance
March 31, 1998 11,039,670 $1,103,967 $16,969,724 $320,188
Net Income (Loss)
Second Quarter
9/30/98 (86,564)
Common Shares
Issued Through
Second Quarter
9/30/98 74,000 7,400 62,669
---------- ---------- ----------- ---------
Balance as of
09/30/98 11,113,670 $1,111,367 $17,032,393 $233,624
========== ========== =========== ========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Cash Flows
For the Six Months Ended September 30 (Unaudited)
09/30/98 09/30/97
-------- --------
Operating activities:
Net income (loss) $ ( 86,564) $ 7,113
------------ ------------
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation 162,308 105,835
Changes in assets and liabilities
Decrease (increase) in account
receivables 164,554 (29,567)
Decrease (increase) in investments 1,610 7,096
Decrease (increase) in inventories 2,406 (46,555)
Decrease (increase) in prepaid
items and deposits 3,911 (10,546)
Increase (decrease) in accounts
payable and accrued liabilities 40,191 513,764
Increase (decrease) in director
fees 8,800 6,400
Increase (decrease) in accrued
salaries 90,000 82,500
Increase (decrease) in accrued
legal fees 3,793 14,628
----------- ------------
Total adjustments 477,573 643,555
----------- ------------
Net cash provided by (used in)
operating activity 391,009 650,668
Investing activities:
Investment in mining resources (1,216,343) (1,976,378)
------------ -------------
Net cash used in investing
activities (1,976,378)
Financing activities:
Net borrowings 796,644 342,929
Preferred stock redeemed 0 (1,515,000)
Common stock issued 70,069 1,890,665
----------- -------------
Net cash provided by (used in)
financing activities 866,713 718,594
Net increase (decrease) in cash
and cash equivalents 41,379 (607,116)
Cash - beg. of year 61,287 796,106
----------- -------------
Cash - end of year $ 102,666 $ 188,990
=========== =============
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Cash Flows, continued
Supplemental disclosures of cash information for the six month
period ended September 30, 1998 and 1997:
1. The following amounts of interest expense accrued were
capitalized: $362,570 (1998), $307,097 (1997).
2. The interest expense paid in cash for the six month period was
$407 (1998) and $16,875 (1997).
3. The Company paid no income taxes during the 1998 or 1997
periods.
4. The investment consists of precious stones which are stated at
the lower of cost or market value.
5. Accounts receivable consist of gold bullion shipped to the
refinery pending the settlement date, an amount due from the
Government of El Salvador for an added value tax refund and
miscellaneous receivables.
6. Inventory consists of processed ores, metal-in-process and
consumable items which are stated at the lower of average cost
or market.
Supplemental schedule of non-cash investing and financing activities
during the six month period ended September 30:
1. The Company issued the following common shares for the values
shown for services rendered:
Shares Value
------ -----
1998 3,500 $ 3,031
1997 38,400 $98,830
2. A total of 1,515 Series A Convertible Stock in the principal
amount of $1,515,000 was converted into 989,965 common shares in
the year ended March 31, 1998 and 985 shares of the same issue
in the principal amount of $985,000 were converted into 655,227
common shares in the year ended March 31, 1997.
3. The gross proceeds from the sale of gold for 1998 amounted to
$392,624 and $576,680 for 1997.
4. Other non-cash items were for unpaid salaries, legal and
director fees which amounted to $102,593 for 1998 and $103,528
for 1997.
5. Non-cash equipment financing activities were none for 1998 and
none for 1997.
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1998
(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 precious
metal 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 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 several 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 goal is to begin its open-pit, heap-leaching
process on the SSGM site; the third goal 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 goal is to explore the
potential of other 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.
(2) Significant Accounting Policies
- ------------------------------------
Restatement of Prior Period Financial Statements
The Company changed its consolidation policy to include the assets,
liabilities and equity and the income and expenses of its Joint
Venture rather than represent it as an investment on the balance
sheet. The consolidated balance sheets for March 31, 1998 and 1997
and the consolidated statements of changes in shareholders' equity,
consolidated statements of cash flows and consolidated statements of
operations for the years ended March 31, 1998, 1997 and also 1996
were restated to reflect this change.
<PAGE>
The balance sheet effect of the restatement was to reduce the Joint
Venture advances by a total of $3,574,460 which consisted of the
following amounts: $1,511,895 for 1998; $1,012,739 for 1997;
$816,029 for 1996; and $233,797 for prior years. Retained earnings
were reduced by an offsetting amount for both 1998 and 1997 and
prior years. The consolidated statements of changes in
shareholders' equity was also restated to reflect these changes.
The consolidated statements of operations for the years ended March
31, 1998, 1997 and 1996 were restated to eliminate interest income
from the Joint Venture. The amounts were $1,511,895, $1,012,739,
and $816,029 for 1998, 1997 and 1996 respectively.
The consolidated statements of cash flows for 1998 and 1997 and
prior years were also restated to reflect the changes in operating
profits (losses) that are outlined in the above paragraphs.
Principles of Consolidation
The Joint Venture and the following subsidiaries are all
majority-owned by the Company and are included in the consolidated
financial statements of the Company. All significant intercompany
balances and transactions have been eliminated.
% Ownership
-----------
Homespan Realty Co., Inc. ("Homespan") 100.0
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0
Piccadilly Advertising Agency, Inc. ("Piccadilly") 100.0
San Luis Estates, Inc. ("SLE") 100.0
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5
Universal Developers, Inc. ("UDI") 100.0
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0
Investments
The investments consist of precious stones which are stated at the
lower of cost or market value.
Accounts Receivable
The accounts receivable account consists of gold bullion produced
and shipped to the refinery, pending payment, a refund due for an
added value tax refund, and miscellaneous items.
<PAGE>
Inventory
Inventories consist of the following as of September 30:
1998 1997
---- ----
Gold in process (1) (Stated at market value) $ 76,545 $ 91,091
Materials and supplies (Stated at cost) 126,349 114,209
--------- ---------
$202,894 $205,300
(1) Includes all direct and indirect costs of mining, crushing,
processing and mine site overhead expenses.
Deferred Mining Costs
The Company, in order to avoid expense and revenue unbalance,
capitalizes all costs directly associated with acquisition,
exploration and development of specific properties, until these
properties are put into operation, sold or are abandoned. Gains or
losses resulting from the sale or abandonment of mining properties
will be included in operations. These capitalized costs and
expenses will be written off 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.
The Company regularly evaluates its carrying value of exploration
properties in light of their potential for economic mineralization
and the likelihood of continued work by either the Company or a
joint venture partner. The Company may, from time to time, reduce
its carrying value to an amount that approximates fair market value
based upon an assessment of such criteria.
Revenue Recognition
Revenue from the sale of gold and industrial minerals is recognized
when title passes to the buyer.
Property, Plant and Equipment
Property, plant, and equipment is stated at the lower of depreciated
cost or estimated net realizable value. Mining properties and
development costs and certain plant and equipment are depreciated by
using the U.S. Internal Revenue Service's depreciation guidelines
and by using the units of production method based upon proven and
probable reserves. Other assets are depreciated using the
straight-line method over estimated useful lives of five to ten
years. Depreciation and amortization expense includes the
amortization of assets acquired under capital leases. Replacements
and major improvements are capitalized. Maintenance and repairs are
charged to expense based on average estimated equipment usage.
Interest costs incurred in the construction or acquisition of
property, plant, and equipment are capitalized and amortized over
the useful lives of the related assets.
Mineral Exploration and Development Costs
Significant property acquisition payments for active exploration
properties are capitalized. If no minable ore body is discovered,
previously capitalized costs are expensed in the period the property
is abandoned. Expenditures for the development of new mines, to
define further mineralization at and adjacent to existing ore
bodies, and to expand the capacity of operating mines, are
capitalized and amortized on the units of production basis over
proven and probable reserves.
<PAGE>
Statement of Financial Accounting Standards
The Company evaluates the carrying value of producing properties and
equipment by applying the provisions of Statement of Financial
Accounting Standards No. 121 (SFAS 121), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of in 1995. SFAS 121 requires that an impairment loss be
recognized when the estimated future cash flows (undiscounted and
without interest) expected to result from the use of an asset are
less than the carrying amount of the asset. Measurement of an
impairment loss is based on fair value of the asset if the asset is
expected to be held and used, which would be computed using
discounted cash flows. Measurement of an impairment loss for an
asset held for sale would be based on fair market value less
estimated costs to sell.
Management's estimates of gold and other metal prices, recoverable
proven and probable reserves, operating, capital, and reclamation
costs are subject to certain risks and uncertainties which may
affect the recoverability of the Company's investment in property,
plant, and equipment. Although management has made its best
estimate of these factors based on current conditions, it is
reasonably possible that changes could occur in the near-term which
could adversely affect management's estimate of the net cash flows
expected to be generated from its operating properties.
Deferred Financing Costs
Costs incurred to obtain debt financing are capitalized and
amortized over the life of the debt facilities using the effective
interest method.
Interest Capitalization
Interest costs are capitalized as part of the historical cost of
facilities and equipment, if material.
Income Taxes
The Company files a consolidated Federal Income Tax return with its
subsidiaries (See Note 9).
Earnings (Loss) Per Common Share
The Company has in the past many years reported its "Earnings per
Share" which presently complies with SFAS No. 128. As required by
this new standard, the Company reports two earnings per share
amounts, basic net income and diluted net income per share. Basic
net income per share is computed by dividing income available to
common shareholders (the numerator) by the weighted average number
of common shares outstanding (the denominator). The computation of
diluted net income per share is similar to the computation of basic
net income per share except that the denominator is increased to
include the dilutive effect of the additional common shares that
would have been outstanding if all convertible securities stock
options, rights, etc. had been converted to common shares during the
period.
<PAGE>
In computing the shares on a fully diluted basis, the net income per
share is based on the assumption that all rights and options were
exercised on the last day of the period that is being reported. No
allowance was made for the common shares that would be issued upon
the conversion of the Series A Convertible Preferred Stock as the
exact number of shares to be issued at that time were
indeterminable.
If on September 30, 1998, 1,332,400 option shares, the 47,761 loan
shares, and the 625,235 stock rights would be added to the weighted
average calculated number of shares which amounts to 11,090,085 the
total number of the weighted average fully diluted shares would be
13,095,481, and the loss per share for the fiscal period ended
September 30, 1998, would be much less than $.01 per share. The
same assumptions were used for the same 1997 fiscal period and the
gain is much less than $.01 per share.
Foreign Currency
The Company is involved in 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 and this exchange rate was stable during this fiscal
year. In this environment, based on the free convertibility of the
colon, foreign businesses have no problem making remittances of
profits, repatriating capital or bringing in capital for additional
investments. There is no delay or required government approvals to
exchange dollars for colones (El Salvador currency) or vice versa.
Major Customer
The Joint Venture produces gold and silver. It sells its gold at the
world market price 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.
(3) Property, Plant, Equipment, Net and Mining Resource Investments
- -------------------------------------------------------------------
The following is a summary of the net book value of plant and
equipment, and of mining properties and development costs by
property as of September 30, 1998:
Mining
Plant and Resource Total
Equipment Investment 09/30/98
---------- ----------- -----------
San Sebastian Gold Mine/
Other Mining Properties $ 103,072 $21,504,605 $21,607,677
San Cristobal Mill and Plant 3,109,321 0 3,109,321
---------- ----------- -----------
Total Investment $3,212,393 $21,504,605 $24,716,998
========== =========== ===========
(4) 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.
<PAGE>
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.
Investments in Joint Venture
As of September 30, 1998, the Company's investments including
charges for interest expense and deductions for gold sale proceeds
were $21,450,200, and three of the Company's wholly-owned
subsidiaries' advances were $590,265 for a total of $22,040,465.
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 September 30, 1998 and 1997, the Company, Sanseb and three of
the Company's wholly-owned subsidiaries have invested (including
carrying costs) the following in its Joint Venture:
1998 1997
------ ------
The Company's net of gold sale
proceeds advances since 09/22/87 $21,450,199 $17,630,857
The Company's initial investment 3,508,180 3,508,180
Sanseb's investment in the Joint
Venture 3,508,180 3,508,180
Sanseb's investment in the mining
projects and amount due to the
Company 22,683,275 20,431,649
----------- -----------
Total: 51,149,834 45,078,866
Advances by the Company's three
subsidiaries 590,265 590,265
----------- -----------
Combined total investment $51,740,099 $45,669,131
=========== ===========
<PAGE>
SSGM Activity
The Company had no significant activity at the SSGM site from
February 1978 through January 1987 due to the civil unrest in the
Republic of El Salvador. The present status is that, the Company,
since January 1987, and thereafter, the Joint Venture, formed in
September 1987, has completed certain of the required mining
pre-production preliminary stages in the minable and proven gold
ore reserve area, and the Company is active in attempting to obtain
adequate financing for the expansion of its SCMP facilities and the
proposed open-pit, heap-leaching operations on this site. The Joint
Venture is also engaged in the exploration and the expansion program
to develop additional gold ore reserves in the area surrounding the
minable gold ore reserves and at its other El Salvador mining
prospects. During this fiscal period gold is being produced by
trucking the virgin ore from this site for processing at the SCMP.
Mineral San Sebastian S.A. de C.V. ("Misanse")
(a) Misanse Corporate Structure
The SSGM real estate is owned by and leased to the Joint Venture by
Misanse, a Salvadoran chartered corporation. The Company owns 52%
of the total of Misanse's issued and outstanding shares. The
balance is owned by approximately one hundred El Salvador, Central
American, and United States' citizens. The Company has the right to
select six of Misanse's ten directors.
(b) SSGM Mining Lease
On July 28, 1975, an amended lease agreement between Misanse as
lessor and Sanseb as tenant was signed by the parties giving the
tenant all the possessions and mining rights that pertain to the
SSGM as well as other claims to mineral rights that may already have
or could be claimed in the future within the 595 hectares (1,470
acres) plat of land encompassing the SSGM. The 25-year lease, which
begins on the date gold production begins, was further amended to
run concurrently with the concession described herein and may be
extended for an additional 25 years by the tenant as long as the
tenant has paid the rent and has complied with other obligations
under the lease and the concession. The lease further provides that
the tenant will pay rent equivalent to five percent of the gross
gold production revenue obtained from the leased SSGM and further
commits itself to maintain production taking into consideration
market and other conditions. In no case will the rent be less than
eighteen hundred "colones" per month (approximately $206 per month
at the current rate of exchange). The lease further provides that,
in the event the lessor wishes to sell the property, it must first
give preference to the tenant; the lease further provides that the
tenant must give preference to employ former mining employees and
Misanse shareholders, providing they qualify for the available
position. The lease agreement was assigned on January 29, 1987 to
the Company and Sanseb together with the mining concession
application.
The lease is freely assignable by the Joint Venture without notice
to Misanse. The lease may also be canceled by the Joint Venture on
thirty days' notice to Misanse, and thereafter, all legal
responsibilities thereunder shall cease.
(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.
<PAGE>
Effective February 1996, the Government of El Salvador passed a law
which requires mining companies to pay to it three percent of its
gross gold sale receipts and an additional one percent is to be paid
to the El Salvador municipality which has jurisdiction of the mine
site. The Company, in compliance with the new law, has filed its
applications for all of the mining concessions in which it has an
interest.
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
The Company owns 52 acres of land which are a key part of the
Modesto Mine that is located near the city of El Paisnal, El
Salvador. It also has contracted to purchase additional acreage
which transfer will take place after it receives clear title. Part
of this real estate is subject to a mortgage.
San Felipe-El Potosi Mine ("Potosi")
(a) Real Estate Lease Agreement
The Joint Venture entered into a lease agreement with the San
Felipe-El Potosi Cooperative ("Cooperative") of the city of Potosi,
El Salvador on July 6, 1993, to lease the real estate encompassing
the San Felipe-El Potosi Mine for a period of 30 years and with an
option to renew the lease for an additional 25 years, for the
purpose of mining and extracting minerals and under the following
basic terms and conditions:
1. The lease payment will be five percent of the gross receipts
derived from the production of precious metals from this site
which will be payable monthly.
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.
<PAGE>
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.
Montemayor Mine
The Joint Venture has leased approximately one hundred sixty prime
acres of land that it considers to be key locations of the mines on
these properties. The terms of the various leases are one year with
automatic renewal rights. This property is located 14 miles
northwest of the SCMP, six miles northwest of the SSGM, and about
two miles east of the city of San Francisco Gotera in the Department
of Morazan, El Salvador.
(5) Synopsis of Real Estate Ownership and Leases
- -------------------------------------------------
The Company and its subsidiaries own a 331-acre campground located
in 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 ownership or leases in El Salvador are as follows: it owns
a total of approximately 52 acres at the Modesto Mine; the Joint
Venture leases the SCMP land and buildings on which its mill, plant
and equipment are located. In addition, the Joint Venture has
entered into a lease agreement to lease approximately 675 acres
based on the production of gold payable in the form of royalties
with a mining prospect in the Department of San Miguel and it leases
approximately 169 acres in the Department of Morazan in the Republic
of El Salvador.
(6) Notes Payable and Accrued Interest
- ---------------------------------------
Notes payable consist of the following: 09/30/98 03/31/98
-------- --------
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 7) $4,436,642 $4,175,120
Other (consists primarily of
short-term notes and accrued
interest of $326,228 as of
September 30, 1998 and $305,578
as of March 31, 1998 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.
(Note 10(f)) 1,278,193 743,071
---------- ----------
Total: $5,714,835 $4,918,191
========== ==========
(7) Related Party Transactions
- -------------------------------
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 17 years and three
months which amounts to $1,591,515.
<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 September 30, 1998:
The amount of funds which the Company has borrowed from its
President from time to time, together with accrued interest, amounts
to $2,291,967. 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 $508,971 which includes
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 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. Interest is
also accrued on the shares pledged as collateral. 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 6,500
shares from him during this six month fiscal period and it owes him
11,261 common shares for the interest earned on common shares he
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 September 30, 1998.
The Company leases approximately 4,032 square feet on a
month-to-month basis for its corporate headquarters office; the
monthly rental charge is $2,789 and it also provides administrative
services, use of data processing equipment, use of its vehicles and
other property as required by the Company.
In lieu of cash payments for the office space rental and for the
consulting, administrative services, etc., these amounts due are
added each month to this related company's open-ended, secured,
on-demand promissory note issued by the Company.
<PAGE>
In addition, this related company does use its credit facilities to
purchase items needed for the Joint Venture's mining needs.
This related company has been issued an open-ended, secured,
on-demand promissory note which amounts to $1,308,175; 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 September 30, 1998:
The President's wife's Individual Retirement Account ("IRA") has the
Company's open-ended, secured, on-demand promissory note in the sum
of $263,393 which bears interest at an annual rate of prime plus
three percent, but not less than 16% and the interest is payable
monthly.
The Law Firm which represents the Company in which a son of the
President is a principal is owed the sum of $178,875 for legal
services rendered throughout the past years. Also, the son of the
President and his son's wife have the Company's open-ended,
on-demand promissory note in the sum of $64,136 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 are $1,200 for each quarterly meeting and
$400 for attendance at any other Directors' meeting. The Executive
Committee Director fees are $400 for each meeting. The Directors
and Officers have a right to exchange the amount due to them for the
Company's common shares.
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 on a full production basis, then these
capitalized costs will be charged as an expense based on a per ton
production charge. 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. (The interest charges
are eliminated in these financial statements; reference is made to
Note 2 - Restatement of prior period financial statements.)
Company Net Advances to the Joint Venture
Total Advances Interest 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
Year Ended March 31, 1998 4,397,007 2,179,731
Through Second Quarter Ended
September 30, 1998 1,949,691 1,277,257
----------- ----------
Balances 21,450,199 8,691,783
Advances by three of the
Company's wholly-owned
subsidiaries 590,265 0
----------- ----------
Total Advances After
Deducting Gold Sale
Proceeds as of
September 30, 1998 $22,040,464 $8,691,783
=========== ==========
<PAGE>
(8) Commitments
- ----------------
Reference is made to Notes 2, 4, 5, 6, 7, and 12.
(9) Income Taxes
- -----------------
As of the fiscal year ended March 31, 1997, the Company and its
subsidiaries, excluding the Joint Venture, have estimated net
operating losses remaining in a sum of approximately $3,339,645
which may be carried forward to offset future taxable income; the
net operating losses expire at various times to the year of 2013.
An automatic extension of time to file its income taxes for the
period March 31, 1998 has been filed with the Internal Revenue
Service. There will not be any income tax liability for the fiscal
year ended March 31, 1998.
(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 11,113,670 shares were outstanding as of September 30, 1998.
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. 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
Six Month Period- Fiscal Year Ended
September 30, 1998 March 31, 1998
------------------ -----------------
Weighted Weighted
Average Average
Amount Price Amount Price
--------- ------- --------- -----
Outstanding, beg. yr. 1,327,400 $3.42 1,591,360 $3.22
Granted 0 $0.00 0 $0.00
Exercised 0 $0.00 (60,000) $2.00
Forfeited 0 $0.00 (710) $4.25
Expired (20,000) $0.00 (203,250) $2.25
---------- ----- ---------- -----
Outstanding, end of period 1,307,400 $3.40 1,327,400 $3.42
========== ===== ========== =====
<PAGE>
A summary of the outstanding stock options as of September 30,
1998, follows:
Weighted Average Weighted
Range of Amount Remaining Average
Exercise Prices Outstanding Contractual Life Exercise Price
- ----------------- ----------- ----------------- --------------
$2.00 to $2.99 230,000 1.28 years $2.72
$3.00 to $5.00 1,077,400 1.83 years $3.55
d. Stock Rights - To The President
Reference is made to Note 7, 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. As of September 30, 1998, there are a total of
17,761 restricted common shares due to him.
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 consulting agreement.
f. Share Loans - Others
A series of borrowings of the Company's common shares were made
under the provision that the owners would sell said shares as the
Company's designee, with the proceeds payable to the Company. In
exchange, the Company agreed to pay these shares loaned within 31
days or less by issuing its restricted common shares, together with
interest payable in restricted common shares payable at a negotiated
rate of interest normally payable in advance for a period of two
years; as of September 30, 1998; 30,000 shares are due to this
party.
On June 1, 1998 correspondence, together with a loan agreement, had
been submitted to a lender in connection with the Company's
understanding of a stock loan arrangement. The Company borrowed
125,300 common shares of a non-related, publicly-held corporation
and sold them for approximately $529,425. The lender, until January
15, 2000, will have the option of demanding payment of the principal
amount of the stock loan in return for the 125,300 shares borrowed
plus interest in the form of 64,485 of the Company's restricted
common shares or in lieu of the 125,300 shares of the non-related,
publicly-held corporation borrowed, may accept payment in the form
of 560,750 of the Company's restricted common shares.
g. S.E.C. Form 8 Registration
On April 4, 1994, the Company filed its Securities and Exchange
Commission Form S-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 common shares
pursuant to the guidelines of the Company's 1994 Services and
Consulting Compensation Plan. From the 500,000 shares registered,
481,697 were issued and 18,303 shares are authorized to be issued.
<PAGE>
On July 16, 1998, the Company filed its second Securities and
Exchange Commission Form S-8 Registration Statement No. 333-59209
under the Securities Act of 1933 and registered 1,000,000 of the
Company's $0.10 par value common stock for the purpose of
distributing its common shares pursuant to the guidelines in the
prospectus. No shares have been issued as of the filing date of
this report.
(11) Litigation
- ----------------
There is no material litigation.
(12) Commitments and Contingencies
- -----------------------------------
Based upon current knowledge, the Company believes that it is in
material compliance with environmental laws and regulations as
currently promulgated. However, the exact nature of environmental
control problems, if any, which the Company may encounter in the
future cannot be predicted, primarily because of the increasing
number, complexity and changing character of environmental
requirements that may be enacted or of the standards being
promulgated by governmental authorities.
(13) Recently Issued Financial Accounting Standards
- ----------------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income. SFAS 130 is designed to report a
measure of all changes in equity of an enterprise that result from
recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners.
Besides net income, other comprehensive income would include foreign
currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and
equity securities. The provisions of SFAS 130 will be effective for
fiscal years beginning after March 31, 1998. Upon adoption, the
Company does not anticipate a material impact on its financial
statements.
In June 1997 the FASB issued Statement of Financial Accounting
Standards No. 131 (SFAS 131), Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 established standards
for the way that public business enterprises determine operating
segments and report information about those segments in annual
financial statements. SFAS 131 also requires those enterprises to
report selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 further
establishes standards for related disclosure about products and
services, geographic areas, and major customers. The provisions of
SFAS 131 will be effective for fiscal years beginning after March
31, 1998. Upon adoption, the Company does not anticipate a material
impact on its reported disclosures.
(14) Year 2000 Issue
- ---------------------
Computer programs written decades ago utilized a two digit format to
identify the applicable year. Without modification, any date
sensitive software beyond December 31, 1999 could fail, as the date
would be reset to 1900. This could result in, amongst other
things, disruptions to operations and the inability to process
financial transactions. The Company is in the process of making an
assessment of the impact of the year 2000 issue. The Company is
initiating communications with its equipment suppliers in which a
computer is utilized and with its computer manufacturers (hardware
and software) for the processing of financial information to
determine the extent to which the issue may impact the Company. In
addition, the Company will inquire of other entities who are
significant suppliers of consumables used in its operations and of
others it currently interacts with electronically (financial
institutions, etc.) to determine the extent to which it may be
vulnerable to those third p arties' failure to remediate their own
year 2000 issue.
<PAGE>
(15) 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 incl uded in the Company's latest annual report
and the filing of the most recent required Securities and Exchange
Commission annual Form 10-K.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - SEPTEMBER 30, 1998
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
- --------------------------------------------------------------------
and Results of Operations
- -------------------------
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995
The matters discussed in this report on Form 10-Q, when not
historical matters, are forward-looking statements that involve a
number of risks and uncertainties that could cause actual results to
differ materially from projected results. Such factors include,
among others, the speculative nature of mineral exploration,
commodity prices, production and reserve estimates, environmental
and government regulations, availability of financing, force majeure
events, and other risk factors as described from time to time in the
Company's filings with the United States Securities and Exchange
Commission. Many of these factors are beyond the Company's ability
to control or predict. The Company disclaims any intent or
obligation to update its forward-looking statements, whether as a
result of receiving new information, the occurrence of future
events, or otherwise.
The following discussion provides information on the results of
operations, financial condition, liquidity and capital resources for
the six month period of its fiscal years ended September 30, 1998
and September 30, 1997. The financial statements of the Company and
the notes thereto contain detailed information that should be
referred to in conjunction with this discussion.
Restatement of Prior Period Financial Statements
- ------------------------------------------------
Overview
- --------
A redefined structure of the financial statements for the fiscal
years ended March 31, 1998 and March 31, 1997, for the six month
periods ended September 30, 1998 and September 30, 1997, and for
prior years reflects and includes the Commerce Group Corp./Sanseb
Joint Venture (Joint Venture) on a consolidated basis. Prior to
this change, the Company reported the investment in the Joint
Venture as advances to the Joint Venture and the Company's advances
included the interest earned on these advances in anticipation of
the interest being reimbursed. The payment of interest and
principal is a priority to the distribution of the anticipated
future profits earned by the Joint Venture. In this report, these
advances are restated and combined with the Company's Consolidated
Financial Statements. Although the elimination of interest income
reduces the retained earnings, it does not eliminate the interest
charged and earned by the Company which is due, payable and
maintained as a separate a ccounting. In effect, this restructuring
modifies only the financial reporting and at the time that the cash
or profits from the gold mining operation are distributed, the
interest earned on these advances will be paid first to the Company
pursuant to the contractual agreement entered into by both joint
venture parties.
For this fiscal quarterly period, the Company was able to segregate
the disbursements to the Joint Venture to identify the category to
be charged. Reference is made to Note 2 in the financial statements
for additional details.
<PAGE>
The Joint Venture is producing gold on a limited basis from the gold
ore it is excavating from its SSGM open pit and which it is
processing at its SCMP facility which is located approximately 15
miles from the SSGM site. It is proceeding to install a pilot
open-pit, heap-leaching gold process on the SSGM site. The cone
crushing system is being reconstructed at this site. It also is
continuing its SSGM site preparation, the expansion of its
exploration and exploitation targets, and the enlargement and
development of its gold ore reserves. It is exploring the potential
of the other gold mine prospects identified as the San Felipe-El
Potosi Mine, and its extension, the El Capulin Mine and the
Hormiguero Mine. The Montemayor Mine and the Modesto Mine have been
placed on a standby basis pending the submission of an application
for a concession (license) on the property it owns or holds leases.
All of the mining properties are located in the Republic of El
Salvador, Central America. Concurrently, it also is in the process
of obtaining the necessary funding for each of these separate
operations while it continues its limited production of gold.
Current Status
- --------------
The Company currently has purchased and shipped a rod mill and a
rotary kiln for carbon reactivation. It is the Company's belief
that the rod mill which has been installed should increase the
processing of 200 tons of ore to 350 tons of ore per day. With this
75% increase of processing gold ore per day at the SCMP, and
providing the price of gold maintains near the $300 per ounce level,
the operations are expected to be profitable and the cash flow
should be increased to assist the current operating cash needs. The
recent hurricane named "Mitch" did not cause any bodily harm to its
employees or any damage to its equipment, but it did severely
curtail production. Another event that restricted production was
the major repair of one of its two ball mills. The installation of
the rod mill also caused a temporary close down of the operations.
The rotary kiln for carbon reactivation will not only regenerate the
carbon to make the carbon more effective, but this process should
increase the production of gold. The cone crushing system is being
assembled and should also be a cost saving factor. The Company will
seek funds to start a heap-leaching operation at the SSGM. Instead
of casting aside the low grade of ore and handling it twice, it
could place it on heap-leaching pads which should increase both
revenue and profits.
This enhancement in gold production and particularly profits, should
broaden the Company's objectives. It could enable the Company to
commence an expanded complementary operation while continuing its
endeavor to obtain sufficient funds for the SSGM open-pit,
heap-leach operation. The Company's main objective and plan,
through the Joint Venture, is to operate at the SSGM site, a
moderate tonnage, low-grade, open-pit, heap-leaching, gold-producing
mine and it intends to commence this major gold-mining operation as
soon as adequate funding is in place. Dependent on the grade of
gold ore processed and the funds it is able to obtain it then
anticipates producing annually approximately 8,000 ounces of gold
from the SCMP operation and eventually up to 40,000 ounces of gold
from its SSGM open-pit, heap-leaching operation. The Joint Venture
continues to conduct an exploration program to develop additional
gold ore reserves at the SSGM and at the following other mines:
the San Felipe-El Potosi Mine, 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.
<PAGE>
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 gold is dependent upon world market
conditions over which it has no control.
Results of Operation Fiscal Quarter Ended September 30, 1998
- ------------------------------------------------------------
Compared to September 30, 1997 on a Restated Basis
- --------------------------------------------------
The Company, on a consolidated restated basis which includes the
Joint Venture and excludes the interest income due from the Joint
Venture, had a net loss of $86,564 or less than $.01 cent per share
for the six month period ended September 30, 1998 compared to a
nominal profit of $7,113 or less than $.01 cent per share for the
same 1997 period. This loss was primarily attributable to the lower
gold world market selling price and to the lower production of gold.
During the first six months ended September 30, 1998, the Company
sold 1,345 ounces of gold and 360 ounces of silver at an average
realized gold price of $294 an ounce and for a gross total of
$392,624. In addition, the 259 ounces of gold held in its inventory
was valued at $76,545 which amounts to a nominal valuation reduction
inventory value. This compares with $576,680 in gold sales for
1,757 ounces of gold produced during the same period in 1997. The
following schedule reflects the cost to produce gold during this
fiscal period:
San Sebastian Gold Mine
Cost Per Ounce of Gold Sold
Six months ended September
1998 1997(1)
---- -------
Cash operating (1) $240 $263
Total cash costs (2) $266 $293
Total production costs (3) $391 $353
(1) All direct and indirect costs of the operation, excluding
royalties. Includes inventory value changes.
(2) Cash operating costs, general and administrative, selling
expense, royalties and amounts due to the Government of El
Salvador.
(3) Total cash costs plus depreciation which amount to $125 per
ounce in 1998 and $60 per ounce in 1997.
Operating costs at the San Sebastian Gold Mine during the first six
months of 1998 were slightly lower due to a reduction in labor costs
and higher efficiency.
There was no current or deferred provision for income taxes during
1998 or 1997. Additionally, although the Company has operating loss
carryforwards, the Company has not recorded a net deferred tax asset
in either 1997 or 1996 due to an assessment of the "more likely than
not" realization criteria required by Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
<PAGE>
The Company adopted Statement of Financial Accounting Standards No.
128 (SFAS128), Earnings per Share in prior years. SFAS128's
objective is to simplify the computation of earnings per share (EPS)
and to make the U.S. standard more compatible with that of other
countries and the International Accounting Standards Committee.
SFAS128 supersedes APB Opinion 15, replacing the presentation of
"primary" and "fully diluted" EPS with "basic" and "diluted" EPS.
Basic EPS is computed by dividing income available to common
shareholders (net income less any dividends declared on preferred
stock and any dividends accumulated on cumulative preferred stock)
by the weighed average number of common shares outstanding. Diluted
EPS requires an adjustment to the denominator to include the number
of additional common shares that would have been outstanding if
dilutive potential common shares had been issued. The numerator is
adjusted to add back any convertible preferred dividends and the
after-tax amount of interest recognized with any convertible debt.
The Company's basic and diluted EPS computations are reflected in
the consolidated statements of operations.
In October 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123 (SFAS
123), Accounting For Stock-Based Compensation. SFAS 123 defines a
"fair value" based method of accounting for employee options or
similar equity instrument. SFAS 123 encourages, but does not require
the method of accounting prescribed by the Statement, and does allow
for an entity to continue to measure compensation cost as prescribed
by APB Opinion No. 25. (APB 25), Accounting for Stock Issued to
Employees. Entities electing to remain with APB 25 must make
proforma disclosures of net income and earnings per share as if the
fair value based method had been applied, effective for fiscal years
beginning after December 15, 1995. The Company has not issued any
employee options nor has it made elections to do so as of this date.
Inflation did not have a material impact on the operations. At this
time management of the Company does not anticipate that inflation
will have a significant impact on continuing operations.
The interest expense in the sum of $362,570 was capitalized by the
Joint Venture for the fiscal quarter ended September 30, 1998 and
$307,097 for the same period in 1997.
Almost all of the costs and expenses incurred by the Company are
allocated and charged to the Joint Venture. The Joint Venture
capitalizes or expenses these costs and expenses and will continue
to do so until such time when it is in full production on each of
its mining projects. 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.
Financing Activities, Liquidity and Capital Resources
- -----------------------------------------------------
During this six month period the Company borrowed a sum of
$796,644; $261,522 was from related parties which included cash and
accrued interest; the balance of $535,122 was from unrelated parties
and included cash and accrued interest.
The Company expects to continue operating its SSGM by expanding its
SCMP production capacity. Additional equipment has been purchased
and has been delivered. It is believed that the recently installed
rod mill will increase the processing level from approximately 200
to 350 tons per day which is a 75% increase. Additional needed
equipment will be purchased or leased. At this level of processing
with a grade of gold ore as has been processed in the past and at a
$300 per ounce gold selling price, the Company anticipates a
sufficient cash flow to operate on a self-sustaining basis. Funds
to explore the expansion of the SSGM gold ore reserves and to
explore the other mining prospects will have to be sought by raising
additional capital or through a joint venture or by other creative
means.
<PAGE>
The Company will endeavor to commence an open-pit, heap-leaching
operation at the SSGM as there is a substantial amount of gold ore
that grades less than 0.04 ounces per ton. The Company's engineers
had determined that a 1,000 ton-per-day open-pit, heap-leach
operation could produce an additional 500 ounces of gold per month
It is necessary to raise adequate funds for this operation; the
amount needed is dependent on the targeted daily volume. An ideal
amount of funds to have would be U.S. $13 million which would start
the open-pit, heap-leach at a rate of 2,000 tons per day and the
profits and cash flow then could be used to expand to 6,000 tons per
day.
The Company continues to be cognizant of its cash liquidity until it
is able to produce adequate profits from its SSGM gold production.
It will attempt to obtain sufficient funds to assist the Joint
Venture in placing the SSGM into production as the anticipated SCMP
profits (unless accumulated over a period of time) appear not to be
sufficient to meet the SSGM capital and the other mining
exploration requirements. In order to continue obtaining funds to
conduct the Joint Venture's exploration, exploitation, development,
expansion programs, and the production of gold from the SSGM
open-pit, heap-leaching operation, it may be necessary for the
Company to obtain funds from other sources. The Company may be
required to borrow funds by issuing open-ended, secured, on-demand
or unsecured promissory notes or by selling its shares to its
directors, officers and other interested investors or by entering
into a joint venture with other companies. The Company is currently
examining sev eral options with respect to project financing
however, there can be no assurances of such arrangements being
finalized. Should this Company not be able to obtain funding, the
expansion progress could be delayed.
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 Company believes that these invested funds
significantly contributed to the value of the SSGM and to the value
of its other mining prospects as the results of the exploratory
efforts evidence a potential substantial increase of gold ore
reserves, which add value to the Joint Venture and to the Company.
The Company was able to obtain sufficient funds during the past to
continue to modify and retrofit the SCMP, to purchase consumable
inventory, to purchase certain hauling and loading equipment, to
purchase a crushing system, to purchase additional equipment to
improve its grinding circuitry, to perform diamond drilling on the
SSGM, to continue its exploration projects, 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.
The Company estimates that it will need up to U.S. $13 million to
start a 2,000 ton-per-day open-pit, heap-leaching operation and over
time and additional capital to increase the production capacity to
6,000 tons per day at the SSGM. The use of proceeds is as follows:
$7,000,000 for mining equipment and a crushing system; $3,689,776
for the processing equipment and site and infrastructure costs; and
$2,310,224 for the working capital.
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 and/or
equity funds as are required from similar sources as it has in the
past. In turn, then it can invest the funds required by the Joint
Venture to continue the exploration, exploitation and development of
the SSGM, and the other exploration prospects, for the operation of
SCMP and for other necessary Company expenditures. Anticipated
profits from the SCMP gold production provide a limited amount of
cash for corporate purposes. It further believes that the funding
needed to proceed with the continued exploration of the other
exploration targets for the purpose of increasing its gold ore
reserves should be approximately $10 million. These programs will
involve airborne geophysics, stream chemistry, geological mapping,
trenching and drilling. The Joint Venture believes that it may be
able to joint venture these exploration costs with other mining
companies.
<PAGE>
From September 1987 through September 30, 1998, the Company has
invested in the Joint Venture, including interest charges payable to
the Company, the sum of $21,450,199 and three of the Company's
wholly-owned subsidiaries have advanced the sum of $590,265, for a
total of $22,040,464. The funds invested in 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 SS
GM 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 a community place
of worship, for the purchase of the real estate on the Modesto Mine,
for leasing the Montemayor real estate, for the purchase of a cone
crushing system, for diamond drilling at the SSGM, recently for the
purchase and installation of a rod mill and a rotary kiln for carbon
reactivation, and for many other related needs.
Employees
- ---------
The Joint Venture employs approximately 300 full-time residents of
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) in
the United States.
Insurance
- ---------
The Joint Venture has in existence insurance through an El Salvador
insurance company with the following insurance coverage: general
liability, vehicle liability and extended coverage, fire, explosion,
hurricane, cyclone, tornado, windstorm, hail, flood, storm,
earthquake, tremor or volcanic eruption, politically-motivated
violence, terrorism, strikes, work stoppages, riots, uprisings,
malicious acts, vandalism, and related acts. As additional
equipment and assets are acquired or improvements are made, the
insurance coverage will be increased accordingly.
Related Party Loans, Obligations and Transactions
- -------------------------------------------------
The related party transactions are included in detail in the Notes
to the Consolidated Financial Statements.
Efforts to Obtain Capital
- -------------------------
Since the concession was granted, and through the present time,
substantial effort is exercised in securing funding through various
sources, all with the purpose to resume and expand the operations of
the SCMP and SSGM and to continue the exploration of its other
mining prospects.
<PAGE>
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, although much time has
lapsed, 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, as explained in this report, the Company was able to obtain
a sum of funds to invest in the expansion and retrofitting of its
SCMP and for the exploration of its other mining prospects. The
decline in the price of gold hit its lowest price in 18 years and
therefore depressed the market price of the Company's shares as well
as the shares of most of the world-wide mining companies. This
decline in the stock market price places the Company in a situation
of diluting its shares in order to raise capital. 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
this fiscal year ended March 31, 1999.
Environmental Regulations
- -------------------------
Based upon current knowledge, the Company believes that it is in
material compliance with all applicable environmental laws and
regulations as currently promulgated. However, the exact nature of
environmental control problems, if any, which the Company may
encounter in the future cannot be predicted, primarily because of
the increasing number, complexity and changing character of
environmental requirements that may be enacted or of the standards
being promulgated by federal and state authorities.
Recently Issued Financial Accounting Standards
- ----------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income and Statement of Financial Accounting
Standards No. 131 (SFAS 131), Disclosures about Segments of an
Enterprise and Related Information. The provisions of SFAS 130 and
SFAS 131 will be effective for fiscal years beginning after December
15, 1997. SFAS 130 is designed to report a measure of all changes
in equity of an enterprise that result from recognized transactions
and other economic events of the period other than transactions with
owners in their capacity as owners. Besides net income, other
comprehensive income would include foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses on
certain investments in debt and equity securities. SFAS 131
establishes standards for the way that public business enterprises
determine operating segments and report information about those s
egments in annual financial statements. SFAS 131 also requires
those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. SFAS
131 further establishes standards for related disclosures about
products and services, geographic areas, and major customers. Upon
adoption of SFAS 130, the Company does not anticipate a material
impact on its financial statements. Upon adoption of SFAS 131, the
Company does anticipate a material impact on its on its reported
disclosures.
Dividends
- ---------
For the foreseeable future, it is anticipated that the Company will
use its earnings to finance its growth and that dividends will not
be paid to shareholders.
<PAGE>
Safe Harbor
- -----------
Some of the statements contained in this report are forward-looking
statements, such as estimates and statements that describe the
Company's future plans, objectives or goals, including words to the
effect that the Company or management expects a stated condition or
result to occur. Since forward-looking statements address future
events and conditions, by their very nature, they involve inherent
risks and uncertainties. Actual results in each case could differ
materially from those currently anticipated in such statements by
reason of factors such as production at the Company's mines, changes
in operating costs, changes in general economic conditions and
conditions in the financial markets, changes in demand and prices
for the products the Company produces, litigation, legislative,
environmental and other judicial, regulatory, political and
competitive developments in areas in which the Company operates and
technological and operational difficulties encountered in connection
with mining activities.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - SEPTEMBER 30, 1998
PART II - FINANCIAL 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. Submission of Matters to a Vote of Security Holders
On October 16, 1998, the Company held its annual meeting of
shareholders. The shareholders voted affirmatively on the
following four items at the meeting:
Proposal I was the election of two Class III Directors of
the Company: Edward L. Machulak and Sidney Sodos both were
elected as Class III Directors for a term of three years
expiring at the annual meeting of shareholders to be held
in the year of 2001. The proposal electing Edward L.
Machulak passed with votes of 9,505,163 in favor of the
proposal; 162,330 votes withheld authority. The proposal
electing Sidney Sodos passed with votes of 9,518,569 in
favor of the proposal; 148,924 votes withheld authority.
Proposal II was to reincorporate from a Delaware
corporation to a Wisconsin corporation by merger into the
Company's wholly-owned subsidiary, CGC of Wisconsin, Inc.
The proposal passed with 6,391,681 votes in favor of the
proposal; 157,740 votes were against the proposal and
46,761 votes abstained.
Proposal III was to ratify the appointment of Bruce Michael
Redlin, C.P.A. as the Company's independent public
accountant for its fiscal year ended March 31, 1999. The
proposal passed with 9,519,696 votes in favor of the
proposal; 91,301 votes were against the proposal and 56,496
votes abstained.
There was a proposal from the floor to ratify the acts of
the Directors and Officers, including all related party
transactions. The proposal passed with 9,667,493 votes in
favor of the proposal and none against it.
<PAGE>
Item 5. Other Information
The Company was recently informed by the Nasdaq Stock
Market (Nasdaq) that the Company was not in compliance with
the minimum per share price requirement for stock traded on
Nasdaq. The Company would be in compliance if its stock
trades at or above the minimum bid price of $1.00. The
Company was informed that its shares may be delisted from
trading if it cannot meet the Nasdaq requirements. The
Company requested an oral hearing and it did meet with a
Panel authorized by the National Association of Securities
Dealers, Inc. Board of Governors on November 12, 1998. The
Company's position was that it needed additional time to
meet Nasdaq's requirements and asked not to be delisted.
Nasdaq may delist the shares from trading and if it does,
the Company may request a hearing to appeal the delisting.
Item 6. Reports on Form 8-K
Form 8-K dated October 22, 1998 regarding the discussions
and actions that took place at the Company's Annual
Shareholders' meeting held on October 16, 1998.
(Incorporated by reference as this Form 8-K was filed
electronically through the EDGARLink Electronic Filing
System on October 23, 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
Date: November 13, 1998 /s/ Edward L. Machulak
------------------------
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>
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<LEGEND>
March 31, 1998 Financial Statement is from an audited financial statement.
September 30, 1998 Financial Statement is unaudited.
</LEGEND>
<S> <C> <C> <C> <C>
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