UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
Commission File Number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 39-6050862
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
6001 North 91st Street
Milwaukee, Wisconsin 53225-1795
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 462-5310
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
---------------------- ---------------------
Common Shares $0.10 par value Boston Stock Exchange
National Association of Security Dealers
Automated Systems (NASDAQ)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by nonaffiliates
of the registrant based on the quote of the NASDAQ Small Cap Issue on
May 8, 1998, was approximately $8,263,502.
Common shares outstanding as of March 31, 1998, were 11,039,670.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporated by reference from the registrant's definitive
Proxy Statement for its Annual Meeting of Shareholders to be filed,
pursuant to Regulation 14A, no later than 120 days after the close of
the registrant's fiscal year.
<PAGE>
COMMERCE GROUP CORP.
1998 FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended March 31, 1998
TABLE OF CONTENTS
Page
Glossary of Mining and Financial Terms
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 4(a). Executive Officers of the Company
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholders' Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K
This document includes certain "forward-looking statements" within
the meaning of Section 21E of the United States Securities Exchange Act
of 1934, as amended. All statements, other than statements of
historical fact, included herein, including without limitation,
statements regarding potential mineralization and reserves,
exploration results, and future plans and objectives of Commerce Group
Corp. ("Commerce"), are forward-looking statements that involve various
risks and uncertainties. There can be no assurance that such
statements will prove to be accurate, and actual results and future
events could differ materially from those anticipated in such
statements. Important factors that could cause actual results to
differ materially from Commerce's expectations are disclosed under
various sections of this and other documents filed from time to time
with the United States Securities and Exchange Commission, the
Boston Stock Exchange, Inc., and the National Association of Security
Dealers Automated Systems.
<PAGE>
Glossary of Mining and Financial Terms
Adit - horizontal or nearly horizontal passage driven from the
surface for the working or unwatering of a mine. If driven through
the hill or mountain to the surface on the opposite side it would be a
tunnel. A passage driven into a mine from the side of a hill.
Agitated leaching - vigorous stirring of pulp in a tank by low-
pressure air or mechanical means to prevent settlement used in the
leaching of gold and other minerals from finely ground aqueous
suspension in which oxygen is essential to chemical reaction, for
example, the cyanide process.
Breccia - fragmental rock, the components of which are angular, and
therefore, it is distinguished from a conglomerate in that its
components are not waterworn. There are friction or fault breccias,
talus breccias, and eruptive breccias. Any rock formation
essentially composed of uncemented, or loosely consolidated,
small angular-shaped fragments.
Carbon adsorption - extracting dissolved gold and silver from
solvents in which soluble complexes of gold and silver physically adhere
to activated carbon particles.
CIL - carbon-in-leach, a process for the recovery of gold from the
ore. Ore is ground finely and mixed with a dilute sodium- cyanide
solution to dissolve the gold which is absorbed onto carbon. The
gold enriched carbon is stripped of the gold and the gold is recovered
either through electrolysis or precipitation.
CIP - carbon-in-pulp, a process similar to CIL except that the ore is
leached with cyanide prior to carbon loading.
Contained ounces - estimate of the total number of ounces of gold
contained in an ore body, a portion of which are not recoverable.
Country rock - rock traversed by or adjacent to an ore deposit.
Applied to the rocks surrounding and penetrated by mineral veins or
invaded by and surrounding an igneous intrusion. The rock in which a
mineral deposit or an intrusion is enclosed.
Cross section or cross cut - profile portraying an
interpretation of a vertical section of the earth explored by
geophysical and/or geological methods. A cutting or a section
across. A section at right angles to, especially the longer axis of
anything.
Dore - gold and silver bullion which remains in a cupelling
furnace after the lead has been oxidized and skimmed off. An
unrefined bar of bullion containing an alloy of gold, silver and
impurities.
Drill rig - a drill machine complete with all tools and
accessory equipment needed to drill boreholes.
Drilling - act or process of making a circular hole with a drill.
Use of a compressed-air rock drill to prepare rock for blasting. The
operation of making deep holes with a drill for prospecting,
exploration, or valuation.
Blasthole drilling - drilling of holes in rock to insert an
explosive charge. The drill holes are usually 3-8 meters apart.
The blast breaks up the rock so it can be dug out.
<PAGE>
Diamond drilling - drilling with a hollow bit which has a
diamond cutting rim to produce a cylindrical core that is used for
geological study and assays. Used in exploration.
Infill drilling - drilling at shorter intervals between holes, used
to provide greater geological detail and to help establish
reserve estimates.
Rotary drilling - drilling with a bit that breaks the rock into
chips rather than core. Faster and cheaper than diamond drilling,
the chips are forced by water and air to the surface of examination.
Reverse circulation drilling - type of rotary drilling that uses
a double-walled drill pipe. Compressed air, water, or other
drilling medium is forced down the space between the two pipes to
the drill bit and the drilled chips are flushed back up to the
surface through the center tube of the drill pipe.
Dump material - spoil heap at the surface of a mine stored for
further reclamation.
Electrowinning - recovery of metal from an ore by means of
electrochemical processes.
Extraction - process of mining and removal of ore from a mine. The
separation of a metal or valuable mineral from an ore or
concentrate.
Fire assay - assaying of metallic ores, usually gold and silver, by
methods requiring a furnace heat. It commonly involves the processes
of scorification, cupellation, etc.
Flotation - method of mineral separation in which a froth created in
water by a variety of reagents floats some finely crushed minerals,
whereas other minerals sink.
Footwall - wall or rock under a vein. It is called the floor in bedded
deposits. Opposite wall from hanging wall. The underside of vein or
lens in relation to dip of ore deposit. In metal mining, that part
of the country rock which lies below the ore deposit.
Grade - classification of an ore according to the desired or
worthless material in it or according to value.
Hanging wall - rock on the upper side of a mineral vein or
deposit.
Heap leaching - economical process used for the recovery of ore. Ore
is placed in a heap on an impermeable pad and cyanide is sprinkled
over the heap and collected at the bottom after percolating
through the ore and dissolving the metals.
Heap leach pad ("heap") - large, impermeable foundation or pad used
as a base for ore during heap leaching. The leach solution is collected
and does not escape from the circuit.
Leach - to wash or to drain by percolation. To dissolve minerals or
metals out of the ore, as by the use of cyanide or chlorine solutions,
acids, or water.
Leaching - removal in solution of the more soluble minerals by
percolating waters. Extracting soluble metallic compound from an ore
by selectively dissolving it in a suitable solvent. The solvent is
usually recovered by precipitation of the metal or by other methods.
<PAGE>
Leach material - material sufficiently mineralized to be
economically recoverable by selectively dissolving the wanted
mineral in a suitable solvent.
Leach pad - pad used as base for ore; the pad prevents the leach
solution from escaping and can be used continually.
Leach pile - mineralized materials stacked so as to permit wanted
minerals to be effectively and selectively dissolved by
application of suitable solute.
Merrill-Crowe process - process utilized to recover soluble gold and
silver values from a sodium-cyanide leaching solution by
precipitating with zinc dust after the leaching solution is
clarified and deoxygenated by vacuum treatment.
Metric conversion -
1 acre = 0.4047 hectare
1 foot = 0.3048 meters
1 mile = 1.6093 kilometers
1 ton = 0.9072 tonne
1 troy ounce = 31.1034 grams
1 ounce per ton = 34.2848 grams per tonne
Mill - reducing plant where ore is concentrated and/or metals
recovered. The whole mineral treatment plant in which crushing, wet
grinding, and further treatment of the ore is conducted.
Mineralization - process of converting or being converted into a
mineral, as a metal into an oxide, sulfide, etc. The processes taking
place in the earth's crust resulting in the formation of valuable
minerals or ore bodies.
Mineralized zone - mineral-bearing belt or area extending across or
through a district. It is usually distinguished from a vein or lode as
being wide, the mineralization extending in some cases hundreds of feet
from a fissure of contact plane.
Mining lease - legal contract for the right to work a mine and
extract the mineral or other valuable deposits from it under
prescribed conditions of time, price, rental or royalties. Also called
mineral lease.
Open-pit mining - form of operation designed to extract minerals that
lie near the surface.
Ore reserves - the term is usually restricted to ore of which the grade
and tonnage have been established with reasonable assurance by drilling
and other means. The total tonnage and average value of proved ore,
plus the total tonnage and value (assumed) of the probable ore.
Ounce - troy ounce, which is equivalent to 31.1034 grams.
Pyrites - the term pyrites as frequently used, literally, means a
mineral that strikes fire. It is applied to any of a number of
metallic-looking sulfides, of which iron pyrites (pyrite) are the most
common.
Recovery - amount of gold ore metal, expressed in weight or money
per ton which is obtained from the treatment of ore.
<PAGE>
Shaft - excavation of limited area compared with its depth, made for
finding or mining ore or ventilating underground workings. The term
is often specifically applied to approximately vertical shafts, as
distinguished from an incline or inclined shaft. A shaft in metal
mining may be sunk upon a vein, even if the inclination is but
slight.
Stope - excavation from which ore has been excavated in a series of
steps. Usually applied to highly inclined or vertical veins. To
excavate ore in a vein by driving horizontally upon it a series of
workings, one immediately over the other, or vice versa. Each
horizontal working is called a stope. Also workings in a mine, or the
activity by which ore is broken from blocks in ore reserves and other
areas.
Sulfate - a salt or an ester of sulfuric acid, of which most of the
salts except those of barium, lead, strontium, and calcium are fairly
soluble in water.
Sulfide - a compound of sulfur with more than one element. A salt
or an ester of hydrogen sulfide. Except for the sulfides of the alkali
metals, the metallic sulfides are usually insoluble in water and occur
in many cases as minerals.
Tailings - material removed from a milling circuit after
separation of the valuable minerals.
Waste material - a part of the ore deposit too low in grade to be of
economic value at the time, but this material may be stored separately
in the hope that it can be profitably treated later.
Winze - a vertical or inclined opening, or excavation, connecting two
levels in a mine, differing from a raise only in
construction. A winze is sunk underhand and a rise is put up
overhand. When the connection is completed, and one is standing at
the top, the opening is referred to as a winze, and when at the
bottom, as a raise, or rise. Also, it is usually a connection
between two levels, and is sunk in the ore body; interior mine
shaft.
<PAGE>
PART I
ITEM 1. BUSINESS
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-K, 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 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.
General
Commerce Group Corp. ("Commerce," the "Company," and/or the
"Registrant") is a Delaware corporation, with its corporate
headquarters based in Milwaukee, Wisconsin. It was organized in 1962
and its common shares have been publicly traded since 1968 on the
over-the-counter market. Its common shares have been traded on the
Boston Stock Exchange from February 1975 to the present date and on
the Nasdaq Small-Cap Market from March 1987 to the present date.
Commerce presently is engaged in the exploration and development
of gold and silver mines in the Republic of El Salvador,
Central America, through its Commerce/Sanseb Joint Venture ("Joint
Venture"). Commerce holds a nearly 100% interest in the Joint
Venture which owns the concession rights to extract gold from the
San Sebastian Gold Mine ("SSGM").
Commerce's objective is to enhance the value of its shares by
profits and cash flow. This can be achieved by its continuing to be
a low cost gold producer and by expanding its gold ore reserves.
Commerce's current goal is to secure sufficient capital to
increase its production of gold to 40,000 ounces per year and to
develop additional gold ore reserves. The Company expects to
increase production by developing an open-pit, heap-leach
operation on site at the SSGM and by acquiring additional mining
equipment which will permit it to process higher grade virgin ore at the
San Cristobal Mill and Plant ("SCMP"). The heap-leach operation will
have the capability of producing (through processing a higher
volume of ore) significantly more gold than could be produced at the
SCMP which has a present capacity of processing 200 tons of gold
ore per day. Commerce will also continue to drill test holes at
previously unexplored areas at the site of the SSGM and it also is
planning drill programs at the other potential mining prospects.
Operations
Currently the Joint Venture is processing gold ore on a limited basis
at its SCMP. The gold ore is from the SSGM open pit. The SCMP is
located approximately 13 miles west of the SSGM. Commerce
acquired the SCMP facility on February 23, 1993, and the Joint Venture
thereafter made and continues to make substantial renovations and
modifications to the plant and equipment before and after placing
this facility in a limited operation. From March 31, 1995, and
through the fiscal year ending March 31, 1998, 10,482 ounces of
bullion containing 5,400 ounces of gold and 1,920 ounces of silver
were sold. In the fiscal year ended March 31, 1998, 5,604 ounces of
bullion containing 3,667 ounces of gold and 1,416 ounces of silver were
sold. Revenues from this production were used primarily to fund further
exploration of ore reserves at the SSGM, to fund the exploration of the
other mining prospects, and to fund improvements at the SCMP.
<PAGE>
There are approximately 1.6 million ounces of proven and
estimated gold ore reserves at the SSGM and the other El Salvador gold
mines. Currently, and for all financial statement periods presented
herein, the SSGM is the only one of the Company's properties which
has generated revenues, although there are strong initial
indications of commercial gold ore present at the other sites.
At the current stage of the exploration and development, the
Company's geologists have defined the following gold reserves:
Average Contained Probable
Tons Grade Ounces Ounces
---- ----- ------- --------
1. San Sebastian Gold Mine
(a) Dump waste (av. grade) 960,000 0.100 96,000
(b) Stope fill 1,000,000 0.340 340,000
(c) Open pit-virgin ore 13,400,000 0.087 1,165,800
---------- --------- -------
15,360,000 1,261,800 340,000
2. San Felipe-El Potosi
(a) Tailings 185,000 0.060 11,100
3. Hormiguero Mine
(a) Tailings 150,000 0.064 9,600
---------- --------- -------
Total Ounces 15,695,000 1,282,500 340,000
========== ========= =======
The anticipated recovery for processing via the SCMP will range from 85%
to 90% and for heap leaching from 65% to 70%.
As of March 31, 1998, the total investment in the El Salvador mining
projects by Commerce, three of Commerce's wholly-owned subsidiaries,
Sanseb, and the Joint Venture amounted to $48,632,108.
SSGM Joint Venture Arrangements
Commerce acquired 82 1/2% of the authorized and issued shares of San
Sebastian Gold Mines, Inc. ("Sanseb"), a Nevada corporation formed on
September 4, 1968. The balance of Sanseb's shares are held by
approximately 200 unrelated shareholders. From 1969 forward,
Commerce has provided substantially all of the capital required to
develop a mining operation at the SSGM, to fund exploration, and to
acquire and refurbish the SCMP.
On September 22, 1987, Commerce and Sanseb entered into a joint
venture agreement (named the "Commerce/Sanseb Joint Venture" and
sometimes referred to herein as the "Joint Venture" or "Comseb") to
formalize the relationship between Commerce and Sanseb with respect
to the mining venture and to divide profits. The terms of this
agreement authorize Commerce to supervise and control all of the
business affairs of the Joint Venture. Under this agreement 90%
of the net pre-tax profits of the Joint Venture will be distributed
to Commerce and ten percent to Sanseb, and because Commerce owns 82
1/2% of the authorized and issued shares of Sanseb, Commerce in
effect has an over 98% interest in the activities of the Joint Venture.
<PAGE>
The Joint Venture leases the SSGM from the Company's 52%-owned
subsidiary, Mineral San Sebastian, S.A. de C.V. ("Misanse"), an El
Salvadoran corporation. Although Misanse owns the real estate
comprising the site of the SSGM, the lease agreement grants Comseb
the right to all gold produced in exchange for a five percent
royalty over a term of 25 years beginning on the first day gold is
produced, which Comseb may, at its option, extend for an additional 25
years. Because Commerce owns 52% of Misanse, Comseb in effect pays a
royalty amounting to less than two and one-half percent of the SSGM
gold production.
The Joint Venture is registered as an operating entity to do
business in the State of Wisconsin, U.S.A. and in the Republic of El
Salvador, Central America. Under the Joint Venture Agreement, Commerce
is authorized to sign agreements on behalf of the Joint Venture.
Organizational Structure
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
Commerce was originally formed as a Wisconsin corporation
(September 14, 1962) which then merged into a Delaware
corporation on July 26, 1971. It owns 52% of Misanse, an El
Salvadoran corporation that was formed on May 8, 1960, reinstated on
January 25, 1975 and reincorporated on October 22, 1993. Commerce
owns 82 1/2% of the San Sebastian Gold Mines, Inc. (SSGM).
Misanse has a mining concession with the government of El Salvador and
is the real estate owner of the SSGM. Misanse also has a gold mine
lease and has assigned the mining concession to the Commerce/Sanseb
Joint Venture (Comseb), the mining operator formed on September 22,
1987. Comseb operates the SCMP (the gold processing plant near the
city of El Divisadero acquired on February 23, 1993) and has
conducted exploration and exploitation at the following El Salvador gold
mines: SSGM (near the city of Santa Rosa de Lima since October 1968),
San Felipe-El Potosi (near the city of El Potosi since September 1993)
as well as its extension Capulin (near the city of El Potosi since
May 1995); Modesto (near the city of El Paisnal since August 1993);
Hormiguero (near the city of Comacaron since September 1993) and
Montemayor (northwest of SSGM since March 1995).
The Government of El Salvador has issued the Modesto and
Montemayor mining concessions to others. Commerce's attorneys have
challenged the legality of the issuance of these concessions.
Commerce owns properties believed to be crucial to the Modesto
Mine and it holds leases to the key property of the Montemayor Mine.
It is in the process of applying for concessions on the property it
owns (Modesto) and on the property that it leases (Montemayor).
<PAGE>
All of the mines mentioned were formerly in production and did
produce gold and/or silver. In addition to the channel
trenching, test pit holes, and underground adit openings, the Joint
Venture has acquired its own diamond drilling rig to explore in
depth, the above described potential targets. All of the properties
have promising geologic prospects, alternations, and historical
records that evidence all have been mined and produced gold on a
commercial basis in the past.
World Gold Market Price, Customers and Competition
Since the Joint Venture is in operation and producing gold on a
limited start-up basis, its revenues, profitability and cash flow will
be greatly influenced by the price of gold. The gold world market price
is unpredictable, volatile, can fluctuate widely and is affected by
numerous factors beyond the Company's control, including, but not
limited to, expectations for inflation, the relative strength of the
United States' dollar in relation to other major currencies,
political and economic conditions, and production costs in major
gold-producing regions. The supply and demand for gold also affects the
price. The Company has not and does not expect in the foreseeable
future to engage in hedging or other transactions to minimize the risk
of fluctuations in gold prices or currencies. Gold and silver can be
sold on numerous markets throughout the world, and the market price
is readily ascertainable for such precious metals. There are many
refiners and smelters available to refine these precious metals.
Refined gold and silver can also be sold to a large number of
precious metal dealers on a competitive basis. The Joint Venture's
SCMP operation which produces dore is refined by and sold to Handy &
Harman's refinery located in the United States.
At this time the Joint Venture believes that due to its financial
capacity it may not be a major gold producer based on the size of larger
existing gold mining companies. The Company believes no single
gold-producing Company has a large impact to offset either the price or
supply of gold in the world market. There are many entities in the
world producing gold. Many of these companies have substantially
greater technical, financial resources and larger gold ore reserves
than the Company. The Company believes that the expertise of the
Joint Venture's experienced key personnel employees, its ability to
train its employees, its low overhead, its gold ore resources and its
projected low cost of production will allow it to compete effectively
and to produce reasonable profits. The Company's present and past
practice has been to sell its gold and silver at spot prices.
The profitability and viability of the Joint Venture is dependent upon,
not only the price of gold in the world market (which can be
unstable), but also upon the political stability of El Salvador
and the availability of adequate funding for either the SCMP operation
or the SSGM open-pit, heap-leaching operation or for the other
exploration projects.
As of this date, inflation, currency and interest rate
fluctuations have not had a material impact on the Company or its
results of operations.
Seasonality
Seasonality does not have a material impact on the Company's
operations.
Environmental Matters
Since the Government of El Salvador has established a new mining law
effective February 1996, its exploration, development, and production
programs are subject to environmental protection. The El Salvador
Department of Mines and Hydrocarbons, a division of the Minister of
Economy's office regulates the mining operations.
<PAGE>
Environmental regulations add to the cost and time needed to bring
new mines into production and add to operating and closure costs for
mines already in operation. As the Company places more mines into
production, the costs associated with regulatory compliance can be
expected to increase. Such costs are a normal cost of doing business
in the mining industry, and may require significant capital and
operating expenditures in the future. The Company's policy is to
adhere to North American standards in its El Salvador operations.
The Company cannot accurately predict or estimate the impact of any
future laws or regulations developed in El Salvador that would
affect the Company's operations.
All operations by the Company involving the exploration for or the
production of minerals are subject to existing laws and regulations
relating to exploration procedures, safety precautions,
employee health and safety, air quality standards, pollution of water
sources, waste materials, odor, noise, dust and other environmental
protection requirements adopted by the El Salvador governmental
authorities. The Company may be required to prepare and present to
such authorities data pertaining to the effect or impact that any
proposed exploration for or production of minerals may have upon the
environment. The requirements imposed by any such authorities may be
costly, time consuming and may delay operations. Future
legislation and regulations designed to protect the environment,
as well as future interpretations of existing laws and
regulations, may require substantial increases in equipment and
operating costs to the Company and delays, interruptions, or a
termination of operations. The Company cannot accurately predict or
estimate the impact of any such future laws or regulations, or
future interpretations of existing laws and regulations, on its
operations.
The Company has submitted an environmental impact study prepared by an
independent El Salvadoran consultant which is under review.
Political Environment in El Salvador
The following information is an excerpt from the "U.S. Embassy - San
Salvador Country Commercial Guide 1996-97":
"Chapter III - POLITICAL ENVIRONMENT
"El Salvador has an excellent relationship with the United
States, solidified by 12 years of close cooperation during the
Salvadoran civil war and strong U.S. support for reconstruction and
reconciliation in the aftermath of the 1992 peace accords. Leaders of
the FMLN have established close relationships with the U.S. government,
seeing it as an honest broker during the peace process. The vast
majority of Salvadoran people also view the U.S. in a favorable light,
a sentiment augmented by the fact that almost a million Salvadorans
live in the U.S. The political environment is expected to remain
stable over the next ten years.
"In March 1997, Salvadorans held the second elections since the end
of the war and the reinsertion of former guerillas into society.
The FMLN increased its strength as the second largest political party
in the legislature, falling one seat short of the strength of the
governing party, the center-right ARENA. The FMLN also won
important municipal contests and a coalition in which it
participated won the mayorship of San Salvador. President
Armando Calderon Sol (ARENA), elected in 1994, will serve until June
1999.
<PAGE>
"ARENA was begun as an anti-Communist nationalistic party in 1980 by
Roberto D'Aubuisson. Even before D'Aubuisson's death, however,
ARENA had moderated its outlook. During the administration
of President Alfredo Cristiani (1989-1994), the ARENA government
negotiated peace with the FMLN, liberalized the economy and attacked
corruption. President Calderon Sol has continued these policies.
"The FMLN, transformed from a guerrilla organization to a
political party after the Peace Accords, has sought to pursue a
pragmatic, center-left policy. The FMLN's economic policy
leaders have described its goal as a mixed economy, with free
enterprise and investment and with government regulation to ensure
that social interest are taken into account.
"The parties of the center include the Christian Democratic Party (PDC),
which governed in the administration of Jose Napoleon Duarte
(1984-1989) but whose support has eroded in the intervening
years. The PDC has generated several splinter parties over the
years, including the Social Christian Renovation Party (PRSC). Parties
which were sympathetic to the FMLN during the war, but which
operated legally, coalesced to form the Democratic Convergence (CD).
The CD is a small party, but its candidates have headed coalitions
backed by the FMLN in the 1994 presidential campaign (Ruben Zamora, who
lost) and in the 1997 San Salvador mayoral election with the
U.S.-born Hector Silva who won and is now mayor."
"Economy Status
The following selected information on El Salvador was obtained from
excerpts of the 1997 World Factbook on El Salvador:
"Economy
"Economy - overview: El Salvador possesses a fast-growing
entrepreneurial economy in which 90% of economic activity is in
private hands, with growth averaging 5% since 1990. Yet, because the
1980s were a decade of civil war and stagnation, per capita GDP has not
regained the level of the late 1970s. The rebound in the 1990s stems
from the government program, in conjunction with the IMF, of
privatization, deregulation, and fiscal stabilization. The
economy now is oriented more toward manufacturing and services
compared with agriculture. The sizable trade deficits are in the
main covered by remittances from the large number of Salvadorans
abroad.
"GDP: purchasing power parity - $12.2 billion (1996 est.)
"GDP - real growth rate: 3% (1996 est.)
"GDP - per capita: purchasing power parity - $2,080 (1996 est.)
"GDP - composition by sector:
agriculture: 14%
industry: 27%
services: 59% (1995)
"Inflation rate - consumer price index: 7.4% (1996)
<PAGE>
"Labor force: total: 2.2 million (1996 est.) by occupation:
agriculture 40%, commerce 16%, manufacturing 15%, government 13%,
financial services 9%, transportation 6%, other 1%
"Unemployment rate: 7.6% (1996 est.) . . .
"Economic aid:
recipient: ODA, $763 million (1996)
note: US has committed $250 million in aid to El Salvador for
1992-96"
Investment Climate in El Salvador
The following information is an excerpt from the "U.S. Embassy - San
Salvador Country Commercial Guide 1996-97":
"Chapter VII - INVESTMENT CLIMATE
"Openness to Foreign Investment
"The Salvadoran Government is committed to attracting foreign
investment. Companies from the United States, Canada, Germany, Korea,
Taiwan, and Mexico have made investments here with favorable
results. The primary legislation governing foreign investment in
El Salvador is the 1990 Export Reactivation Law; and the 1988 Foreign
Investment Promotion and Guarantee law.
"The 1988 Foreign Investment and Promotion Law is a
comprehensive statute. To investors who register with the
Ministry of Economy this law provides:
"-- Unrestricted remittance of net profits for investors in
industrial activities.
"-- Remittance of net profits up to fifty percent of the
registered foreign capital per year for investors in commercial and
service activities. In practice, however, there is free
convertibility of capital.
"-- Unrestricted remittance of funds obtained from the
liquidation of a business in proportion to the foreign funds
invested.
"-- Unrestricted remittance of royalties and fees for use of
foreign patents, trademarks, technical assistance and other
similar services.
"-- Foreign investors may hold dollar accounts in El Salvador and
may use these accounts to obtain local financing. . . .
"Under the Export Reactivation Law of 1990, firms not located in free
zones and exporting less than one hundred percent of their production
may apply for tax rebates of six percent of the FOB value of these
exports. However, the paperwork to obtain this rebate is cumbersome.
"In 1996 the government set up a one-stop office for foreign
investment located at the National Commercial Registry, where
investors now register their investments. The registration
process is supposed to be non-discriminatory and is not
considered an impediment to investment.
<PAGE>
"It is not necessary to have a local partner in El Salvador. Some
maquila operations are completely foreign-owned. Three
multinational oil companies operate in El Salvador, and two of these
companies share a small refinery. Two U.S. banks have offices in
El Salvador. The banking law has been modified to encourage other
foreign banks to enter the country and to remove restrictions on
ownership of newly-privatized banks. There are now no restrictions on
ownership of banks.
"Investment Climate
"Privatization
"The privatization of state-owned entities has proceeded more slowly
than originally projected. The government hopes to quickly
resolve the political disputes that have stalled the sale of the
telephone company and complete its privatization before the end of
1997. The privatization of the electric company (CEL) is moving
ahead, albeit in a limited way. Four distribution companies have
been formed and will be sold off in mid 1997. The remainder of CEL
remain in government hands. The privatization should provide good
opportunities for U.S. investors and exporters. . . .
"Conversion and Transfer Policies
"El Salvador has a freely convertible currency that trades at
approximately 8.75 colones per dollar. This currency is buoyed by
family remittances of nearly one billion dollars per year from
Salvadorans who reside outside the nation. The country's banks and
many foreign exchange houses actively trade dollars and colons.
Foreign businesses freely remit profits, repatriate capital, and
bring in capital for additional investments. Banks publish their
exchange rates daily in local newspapers.
"Expropriation and Compensation
"The last case of expropriation began in 1986, when the
government nationalized the assets of CAESS, San Salvador's
electric distribution company. Six years later, shareholders
received the first payment of ten million dollars. In March 1993,
the government concluded payments of cash and bonds and the case was
settled to the satisfaction of all parties.
"In 1960 the United States and Salvadoran governments signed an
investment guarantee treaty, which guaranteed U.S. investors
against losses that could arise from currency inconvertibility or
expropriation. As of July 1995, the US and El Salvador have nearly
completed negotiating a bilateral investment treaty (BIT) that would
encompass all aspects of investment. It has not been signed for
technical reasons. . . .
"Political Violence (as it may affect investments)
"El Salvador continues its transition to a peacetime society after
12 years of civil conflict. There have been few confirmed acts of
political violence since the elections in mid-1994. Although
general crime levels are high and are of concern to the business
community, there has not been political violence specifically
aimed at foreign investors, their businesses or their property.
"Performance Requirements
"El Salvador's investment legislation does not require investors to
export specific amounts, transfer technology, incorporate set levels of
local content, or fulfill other performance criteria.
<PAGE>
"Right to Private Ownership and Establishment
"Foreign citizens and private companies can freely establish
businesses in El Salvador. However, foreigners are prohibited from
operating small businesses with start-up capital of less than the
equivalent of USD 25,000 dollars. This is not seen as an impediment
to foreign investment, and does not seem to be strictly enforced.
There are several sectors shielded from foreign and local private
investment or competition. The national telephone company (ANTEL),
the water and sewer company (ANDA), and the electric company (CEL) are
owned by the state, but their monopolies are slowly being dismantled.
For example, private power generation is now allowed (although for
practical purposes, it must be sold to CEL for distribution), and a
U.S. company has formed a partnership with ANTEL to operate the
country's cellular phone system. Artesanal fishing within 12 miles
of the coast is limited to citizens of El Salvador. Commercial
fishing between 12 to 200 miles from the coast can be undertaken by
Salvadoran citizens, foreigners legally residing in El Salvador, or
joint ventures legally registered with the government. Commercial
fishing licenses must be obtained from CENDEPESCA, a government
entity. Foreigners may engage in sport fishing without restriction
in any of El Salvador's coastal waters. . . .
"Regulatory System (laws and procedures as they pertain to
investment)
"The laws and policies of El Salvador are relatively transparent and
generally foster competition. Bureaucratic procedures, although
cumbersome, have improved in recent years and are relatively
streamline for foreign investors. Sectors that are [or] owned by
the state, such as electricity, water and telecommunications, are
regulated by an independent authority and operate under competitive
rules which allow for foreign involvement and investment. The
Superintendent of Banks supervises the banking system, but interest
rates are determined by market forces. Banking-law reforms have
attracted two new foreign banks to the country in the last year, and
several new financial institutions have been established by
Salvadoran investors. Gasoline prices are `controlled' by the
government, but are actually based on an average of U.S. Gulf Coast
refinery prices.
"Bilateral Investment Treaties
"The United States and El Salvador signed an investment guarantee treaty
in 1960 designed to protect U.S. investors against expropriation
or currency inconvertibility. The United States and El Salvador also
have a framework agreement for a Trade and Investment Council
(TIC). An all-encompassing bilateral investment treaty which
would address issues such as national treatment for foreign
investors, transfers, expropriation, investment disputes, tax
policies, etc., is being negotiated, but has not been signed for
technical reasons. The US and Salvadoran governments are working
towards but have not yet reached agreement on a Tax Information
Exchange Agreement.
"El Salvador is a member of the Central American Common Market, and
has approximately 50 commercial and technical cooperation treaties in
effect. Three of these treaties (Mexico, Spain, and Venezuela) look
to promote co-investment. El Salvador is a member of the World
Trade Organization.
"OPIC
"The Overseas Investment Corporation (OPIC) has a bilateral
agreement with El Salvador. OPIC has approved insurance coverage for
the expansion of a U.S. bank in El Salvador, and is considering
several other projects. OPIC insures currency inconvertibility,
expropriation and civil strife, as well as corporate financing. El
Salvador is also participating in the Multilateral Investment
Guarantee Agency (MIGA).
<PAGE>
"Labor
"Of El Salvador's labor force of approximately 1.5 million
workers, 34 percent work in the agricultural sector. This is
followed by services (21 percent), commerce (18 percent) and
manufacturing (15 percent). The minimum wage in the industrial and
commerce sectors is 1150 colons[.] roughly 132 dollars a month.
Urban employees with minimal skills generally earn at least twenty
percent more than the minimum wage. Although the minimum wage is less
for agricultural workers, coffee plantation owners report that they
pay above the minimum wage to attract workers during the harvest.
"According to a Planning Ministry survey of 5,000 urban and rural
families, unemployment in 1995 was 7.5 percent. Underemployment is
probably much higher, although there are no reliable estimates.
However, some construction contractors cannot find sufficient skilled
workers, due to the number of projects now underway in El Salvador.
According to the above survey, 150,000 more people are employed in
1994 than 1993. The statistics from this survey are not considered
precise, but do indicate trends.
"Salvadoran labor is perceived as hard working and trainable. The
general educational level is low, which may inhibit the development
of industries needing skilled, educated labor. In addition, there
is a lack of middle management-level talent, which often results in
foreigners being brought in to perform such tasks.
"The Constitution of December 1983 guarantees the right of
employees to organize into associations and unions. Employers are
free to hire union or non-union labor. Closed shops are illegal. .
. .
"Capital Outflow Policy
"There are no restrictions on capital outflow for Salvadorans, nor
are there any specific incentives to invest capital outside El
Salvador. Regarding investment outflow, Salvadoran investors have
interests in hotels, real estate and industry in Mexico, Guatemala,
Honduras, Costa Rica, Panama and the U.S. Accurate statistics about
the size of these investments are not available.
"Major Foreign Investors
"Coastal Technologies - owner/operators of the Nejapa
power-generating plant. Estimated value over USD 140 million
dollars.
"Kimberley Clark de C.A. - owns a paper products factory.
"Texaco Caribbean - fuel storage and lubricant blending plant in
Acajutla, and service station/grocery markets throughout the
country.
"Esso Standard Oil - together with Shell, owns and operates a small
oil refinery in Acajutla. Also own service station/grocery marts
throughout the country.
"Shell El Salvador - shares an oil refinery with Esso, and owns
service station/grocery marts throughout the country.
"Bayer de El Salvador - owns a modern pharmaceutical processing plant.
"Sara Lee Knit Products - owns a clothing assembly plant in the El
Pedregal free trade zone.
<PAGE>
"Xerox de El Salvador - sells and services office equipment and
computers.
"Western Petroleum - produces and exports alcohol to the U.S.
"British American Tobacco - manufactures cigarettes.
"Colgate Palmolive - Produces and distributes cleaning products.
"McCormick & Co. - Produce and distribute sauces, condiments, spices
and teas.
"Nestle, El Salvador - processes and exports coffee and coffee
products."
Efforts to Obtain Capital
Substantial consideration, time and effort continue to be given to
secure investment capital through various financial
arrangements for the operation of the SCMP, the SSGM, and the other
exploration projects. The Company, Sanseb, and the Joint Venture have
considered the past political situation in El Salvador to have
been unstable and a great deterrent to the investment community.
The stigma of the past political unrest still continues to be a
concern to investors. During the past year there was much concern
relating to the falling price of gold, the sale of gold by
certain central banks, and the uncertainty over the future price of
gold.
The Company has been successful in obtaining investment funds that
were required to partially retrofit and operate its SCMP, conduct its
various exploration and drilling programs, and for its current
needs. It also raised capital in a sum of $2.5 million during 1997
to purchase a crushing system and to perform diamond core drilling at
the SSGM site. It believes that it will be able to obtain the funds
it will require to conduct its business affairs until the Joint
Venture begins earning sufficient profits and has adequate cash
flow. An investment of approximately U.S. $13 million will be
needed for its contemplated SSGM open-pit, heap-leaching
operation. It is estimated that an additional $2 million would be
required to expand the SCMP facilities and $10 million is needed
for a drilling program on the exploration projects. Plans, time and
effort for obtaining these funds are in process.
Operations, Other Than Mining
Aside from its mining operations, Commerce independently and
through its partially and wholly-owned subsidiaries conducts other
business activities, which at present are substantially less
significant than its gold production and exploration in El Salvador:
(1) land acquisition and real estate development through its
wholly-owned subsidiaries, San Luis Estates, Inc. ("SLE") and
Universal Developers, Inc. ("UDI"); (2) real estate sales, through its
wholly-owned subsidiary, Homespan Realty Co., Inc. ("Homespan"); (3)
the operation of a 331-acre campground known as Standing Rock
Campground, which is owned by Homespan and operated by the Company;
and (4) advertising, through its wholly-owned subsidiary,
Piccadilly Advertising Agency, Inc. ("Piccadilly").
Land Acquisition, Development and Ownership
During the past years, the Company has substantially reduced its
activities in the business of land acquisition and real estate
development which was conducted principally through its two
wholly-owned subsidiaries, San Luis Estates, Inc. ("SLE"), a
Colorado corporation, and Universal Developers, Inc. ("UDI"), a
Wisconsin corporation.
<PAGE>
SLE had been the developer of a large tract of land for
recreation, retirement and for other individual purposes. This land
consists of approximately 7,000 acres. It was subdivided in the San
Luis North Estates Subdivision located in Costilla County, Colorado,
abuts the Town of San Luis, Colorado, and lies between the San Juan
and Sangre de Cristo mountain ranges in southern Colorado. This
tract of land had been subdivided into 1,205 five-acre or larger
parcels, unimproved except for gravel roads now maintained by
Costilla County, however, drainage, survey, staking, and water
rights adjudication have been completed.
As of March 31, 1998, there remained an inventory of 40 five-acre
parcels of real estate which represents less than four percent of the
total lots developed in this subdivision. It is the intent of the
Company to sell the remaining lot inventory as a bulk sale for cash
or to exchange it for other assets or to reduce its debts. This
land inventory is not considered material or significant to the
Company's operations.
SLE believes that it is in compliance with the requirements of the
Department of Housing and Urban Development ("HUD") to sell its
remaining lots in the San Luis North Estates Subdivision; if necessary,
it intends to maintain its registration effective with HUD in
anticipation of selling its remaining lots unless it finds that it is
exempt from the HUD rules and regulations.
SLE also owns twelve improved lots located in the city of Fort
Garland, Costilla County, Colorado. The assets of SLE have served
as a source of collateral for funds advanced to the Company and
its majority-owned subsidiaries.
The Company's wholly-owned subsidiary, Homespan, owns a 331-acre
campground known as Standing Rock Campground located in Camden
County, Missouri. This recreational resort includes
approximately three quarters of a mile of lake frontage on the Lake
of the Ozarks, 130 campsites of which 120 campsites include hook ups
for electricity, water, sewer, and a pad for recreational
vehicle parking. A clubhouse and also several ancillary buildings
are on the premises. The Company is the operator of the
campground and is leasing space to campers and others on a daily,
weekly, or monthly basis.
Misanse, the Company's majority-owned subsidiary (52%) owns the SSGM
real estate consisting of approximately 1,470 acres which is located
approximately two and one-half miles northwest of the city of Santa
Rosa de Lima, off of the Pan American Highway, and about 108 miles
southeast of the capital city of San Salvador, El Salvador, and it is
about 11 miles west from the border of the Country of Honduras. It is
also about 26 miles from the city of La Union which has railroad and
port facilities. An airline commuter service provides daily scheduled
flights to the city of Santa Rosa de Lima.
The Company owns 57 acres of land on the Modesto Mine site which is
located due north of the city of Paisnal and approximately 19 miles
north of San Salvador, the capital city of El Salvador. It also leases
vacant land in the Department of Morazan.
Reference is made to "Item 2. Properties," for additional
information.
Real Estate Sales
Homespan, the local real estate marketing subsidiary of the
Company is presently inactive. It has no significant activity and
is not material to the Company's operation. Homespan holds the title
to the real estate located in Colorado and the Standing Rock Campground
("SRC"), located in the Lake of the Ozarks. SRC is operated by the
Company. Assets of Homespan have also served as a source of collateral
for funds loaned to the Company and its majority-owned subsidiaries.
<PAGE>
Advertising
The Company owns 100% of the outstanding common stock of
Piccadilly Advertising Agency, Inc. ("Piccadilly"), a Wisconsin
corporation. Piccadilly provides, when required, advertising
services to the Company and its other subsidiaries when they are
needed. It was and still may be able to obtain advertising
discounts because of its agency status. Piccadilly's operations are
not significant or material to the Company's operations.
Patents and License Agreements
On July 23, 1987, the Government of El Salvador delivered and
granted to Misanse, possession of a mining concession (license). On
September 25, 1996, the SSGM concession was reconfirmed to comply
with the 1996 El Salvadoran Mining Law. The Joint Venture believes
that its SSGM concession begins on the date it was issued--July
1987. The concession provides the right to extract and export
minerals for a term of 25 years (plus a 25-year renewal option)
beginning on the first day of production from the real estate owned by
Misanse and encompassing the SSGM. Misanse assigned this concession
to the Joint Venture. (Reference is made to "Item 2." for additional
information)
The Joint Venture has applications pending with the El Salvador
Department of Energy, Mines and Hydrocarbons for the exploration rights
under the February 1996 Mining Law for the following mining
properties located in El Salvador: San Felipe-El Potosi Mine, and its
extension, the El Capulin Mine, and the Hormiguero Mine. It will apply
for concessions for the Modesto Mine and the Montemayor Mine. The
Company and its subsidiaries hold no patents or trademarks.
Significant Customers
The Company presently has no individual significant customers in which
the loss of one or more would have an adverse effect on any segment of
its operations or from whom the Company has received more than ten
percent of its consolidated revenues except for the sale of gold which
the Joint Venture is producing. The gold in dore form is refined and
then sold at the world market price to a refinery located in the United
States.
Miscellaneous
Backlog orders are not significant to either the Company's or its
majority-owned subsidiaries' areas of operations, or at this time is
any portion of their operations subject to renegotiation of profits or
termination of contracts at the election of the United States'
Government.
Neither the Company nor its majority-owned subsidiaries conduct any
material research and development activities, except as indicated
in this report with respect to the Joint Venture and its mining
exploration and exploitation programs.
The Company believes that the federal, state and local provisions
regulating the discharge of materials into the environment should not
have a substantial effect on the capital expenditures, earnings
or competitive position of the Company or any of its majority-owned
subsidiaries as the Company does not have any mining activity in the
United States.
<PAGE>
Financial Information About Industry Segments Lines of Business
Operation
Campground: For the years ended March 31, 1998, 1997 and 1996,
revenues have been generated from the campground business.
Although Homespan owns the campground real estate, the Company is the
campground operator.
Land Sales
The Company intends to sell its remaining lots in Colorado on a bulk
basis.
Mining
The Company's primary strategy, through its Joint Venture, is to use
its SCMP facilities to process gold ore transported from SSGM and
other exploration opportunities located in the Republic of El
Salvador. The Joint Venture has produced gold from its SCMP
operations during this start-up period. At such time as funds are
available, the Company intends to process its SSGM gold ore via an
open-pit, heap-leaching system.
The Company anticipates that the capital required for the
purchase of equipment and working capital can be obtained from the
sale of its common or preferred shares, bonds, equity offerings,
loans, leases, partial sale of its gold reserves, sale of gold, or
from a combination of these and other creative funding
possibilities.
Competition
The Company believes that neither it, nor any other competitor, have
a material effect on the precious metal markets, and that the price
that the Joint Venture will receive for its sale of gold is dependent
upon world market conditions over which neither it nor any other single
competitor have control.
Employees
As of March 31, 1998, the Joint Venture employed approximately 300
full-time persons in El Salvador to perform its exploration,
exploitation, and development programs; to produce gold from its SCMP
facilities; and to handle the administration of its activities.
None of these employees are covered by any collective bargaining
agreements. It has developed a harmonious relationship with
its employees, and it believes that it is the largest single
non-agricultural employer in the El Salvador Eastern Zone. Also,
the Company employs approximately four persons (plus part-time help)
in the United States.
Insurance
The Joint Venture has in existence insurance through an El
Salvador insurance company with the following coverage: general
liability, vehicle liability and extended coverage, fire,
explosion, hurricane, cyclone, tornado, windstorm, hail, flood, storm,
earthquake, tremor or volcanic eruption,
politically-motivated violence, terrorism, strikes, work
stoppages, riots, uprisings, malicious acts, vandalism, and
related acts. As additional equipment and assets are acquired or
improvements are made, the insurance coverage can be increased
accordingly.
<PAGE>
Industry Segments
-----------------
1. Unaffiliated Sales Year Ended March 31,
------------------ --------------------
Industry Location 1998 1997 1996
-------- --------- ---- ---- ----
Mining (*a) El Salvador $ 1,234,443 $ 0 $ 0
Campground Missouri, USA 61,465 59,009 55,692
2. There Were No Intersegment Sales
-----------------------------------
3. Total Revenues Year Ended March 31,
-------------- --------------------
Industry Location 1998 1997 1996
-------- -------- ---- ---- ----
Mining (*b) El Salvador $ 1,347,391 $ 0 $ 0
Campground Missouri, USA 61,465 59,009 55,692
Other Delaware/Wis., USA 3,025 3,832 2,669
----------- ----------- -----------
Total: $ 1,411,881 $ 62,841 $ 58,361
4. Operating Profit (Loss) Year Ended March 31,
------------------------- --------------------
Industry Location 1998 1997 1996
-------- -------- ---- ---- ----
Mining (*a) El Salvador $ 117,699 $ 0 $ 0
Campground Missouri, USA (2,121) (8,973) (31,056)
Interest Income El Salvador
/Delaware
Wisconsin, USA 3,025 3,832 2,669
----------- ----------- -----------
Total: $ 118,603 $ (5,141) $ (28,387)
5. Identifiable Assets Year Ended March 31,
------------------- --------------------
Industry Location 1998 1997 1996
-------- -------- ---- ---- ----
Mining (*a) El Salvador $24,386,843 $21,035,881 $18,228,070
Campground Missouri, USA 1,135,500 1,135,500 1,135,500
Real Estate Colorado, USA 21,000 21,000 21,000
Corporate Assets 256,308 976,740 256,621
----------- ----------- -----------
Total: $25,799,651 $23,169,121 $19,641,191
(*a) The proceeds from the sale of gold and the gold inventory
received from the Joint Venture ($2,150,000-- $969,721-1997;
$1,180,279-1996) were used to reduce the advances tothe Joint
Venture account.
(*b) Includes $112,948 received from the Government of El Salvador as
an added tax value refund.
<PAGE>
ITEM 2. PROPERTIES
Mining Properties and Real Estate
The table below provides a summary of the most significant mining
properties in which the Company has an interest. More detailed
information regarding each of these properties is provided in the text
that follows:
Commerce Group Corp./San Sebastian Gold Mines, Inc. Joint Venture
Properties all located in the Republic of El Salvador, Central America
Amount
of Funds Date
Date to Make Mine
Interest Cost Property will be
Property Nature of was of Opera- Opera-
Description Interest Acquired Interest tional tional
----------- -------- -------- -------- ------ ------
1. San Sebastian Mineral concession 1968 5% of the This is In opera-
Gold Mine consisting of 100% gross dependent tion on
located two ownership of the precious on the a limited
and one-half precious metals metal scale of basis.
miles north- extracted from this proceeds production
west of the mine. or $206 that management
city of Santa a month decides to
Rosa de Lima whichever perform. The
and the Pan is higher. amount of
Anerican investment
Highway. from $5 million
to $100 million.
2. San Felipe- Application 07/06/93 5% of the Undetermined Undeter-
El Potosi/ pending for gross until a mined.
Capulin Mine mineral precious preliminary
located near concession metal drilling
the city of for 100% proceeds. program is
Potosi, 18 ownership completed;
miles north- of the precious estimated cost
west of the metals extracted of drilling is
city of San from this mine. $2 million.
Miguel.
3. Hormiguero Application 09/93 Dependent Undetermined Undeter-
Mine located pending for if this until a mined.
five miles mineral will be preliminary
southeast concession an under- drilling program
of the San for 100% ground or is completed;
Cristobal ownership of surface estimated cost
Mill and the precious operation. of drilling is
Plant near metals extracted If under- $2 million.
the city of from this mine. ground, Mine surface
Comacaron. minimal channel trenching
cost. If and adit cleaning
surface, should be performed
the use to determine
of land drilling cost.
(rent) is
to be ne-
gotiated.
4. Modesto Mine Application 09/93 It Undetermined Undeter-
located near to be submitted appears until a mined.
the city of for a mineral as if preliminary
Paisnal and concession to this will drilling program
about 19 own 100% of the be an is completed;
miles north precious metals under- estimated cost
of San extracted from the ground of drilling is
Salvador, real estate owned operation $2 million.
the capital by the Company. in the
city. Company-
owned land.
Therefore,
no cost for
interest.
5. Montemayor Application 07/95 It Undetermined Undeter-
Mine located to be submitted appears until a pre- mined.
about 14 for a mineral that this liminary
miles north- concession to will be drilling
east of SCMP own 100% of the an under- program is
and about precious metals ground completed;
six miles extracted from mine, estimated
northwest the areas the therefore cost of
of SSGM. the Company leases. current drilling is
leases $2 million.
will have
to be
extended.
6. San Cristobal Mill and Plant Equip- Equipment To expand Limited
Mill and owned by the ment purchased the plant, produc-
Plant located Joint Venture. 02/23/93 and exten- including tion
off the Pan The real estate Lease sive a crush- commenced
American is owned by an 11/12/93 retrofit- ing system March
Highway west agency of the ting was to a capa- 1995
of the city Government of performed. city of 400 expansion
of El El Salvador. Through tons per program
Divisadero. 03/31/98 day; an in pro-
a total estimated gress.
of sum of up
$3,332,303 to $3 million
has been may be required,
invested all dependent
in this whether new or
plant used equipment
and will be purchased.
equipment.
The San Sebastian Gold Mine
General Location and Accessibility
The SSGM is situated on a mountainous tract of land consisting
of approximately 1,470 acres of explored and unexplored mining
prospects. The SSGM is located approximately two and one-half
miles off of the Pan American Highway, northwest of the city of Santa
Rosa de Lima in the Department of La Union, El Salvador. The tract is
typical of the numerous volcanic mountains of the coast range of
southeastern El Salvador. The topography is mountainous with
elevations ranging from 300 to 1,500 feet above sea level. The
mountain slopes are steep, the gulches are well defined, and the
drainage is excellent.
There is good roadway access to the SSGM site. The city of Santa Rosa
de Lima (approximately three miles from the SSGM) is a substantial
trading center. The SSGM is approximately 30 miles from San Miguel,
which is El Salvador's second largest city, and approximately 108 miles
southeast of El Salvador's capital city, San Salvador. SSGM is
also approximately 26 miles from the city of La Union which has port
and railroad facilities. Major United States' commercial airlines
provide daily scheduled flights to the Comalapa Airport which is
located on the outskirts of the city of San Salvador. An airline
commuter service provides daily flights to the cities of Santa Rosa
de Lima, San Miguel, and La Union as well as other cities throughout
El Salvador.
<PAGE>
SSGM Reserves and Operation
Statistical production and financial data for the San Sebastian
Gold Mine (SSGM) are shown on the following table:
San Sebastian Gold Mine (SSGM) Operation
03/31/98 03/31/97
-------- --------
PRODUCTION
Tons ore mined and processed 59,596 74,350
Gold grade of ore (oz./ton) 0.087 0.080
Strip ratio (tons waste/tons ore) N/A N/A
Gold production (oz.)
(includes 259 oz. in inventory) 3,927 2,601
Silver production (oz.) 1,416 596
Recoverable gold inventory (oz.) 259 259
FINANCIAL
Ounces of gold sold 3,667 2,601
Average gold price realized $ 315 $ 368
Revenue from mine operations (1) $1,234,443 $ 956,261
Cash operating cost per ore ton mined $ 14.72 N/A
Cash operating cost per ounce (2) $ 198.24 N/A
Total production cost per ounce (2) $ 276.43 N/A
Operating earnings (3)(4) $ 117,700 N/A
MINEABLE RESERVES (03/31/98)
Contained
Average Gold
Tons Grade(5) Ounces
---- ------- ---------
Ore - open pit 13,400,000 0.087 1,165,800
Dump waste 960,000 0.100 96,000
Stope fill (estimated) 1,000,000 0.340 340,000
---------- ---------
Totals 15,360,000 1,601,800
(1) Proceeds from 1997 gold sales credited against equipment
purchases and development costs.
(2) As calculated under The Gold Institute's Production Cost
Standard including $208,254 depreciation or $53.04 per ounce.
(3) Including a deduction for general administrative expenses of
$36.67 an ounce.
(4) Excludes exploration and development drilling.
(5) The estimated recoverable ounces of gold by processing SCMP 82% -
heap leach - 60%.
<PAGE>
The tailings, dump material, and stope fill at the SSGM are the
by-products of past mining operations. The tailings are the residue of
higher grade ore once milled and processed to recover the then
economically feasible fraction of gold present in the material. Most
of the tailings have been processed. The dump material is actually
gold ore which has been mined in the search for higher grades of gold
ore and piled to the side of past excavations as it was considered at
that time to be too low of a grade of ore to process economically.
The stope fill also was considered to be too low of a grade of ore to
process economically therefore it was primarily used to fill the
voids in the underground workings of the past SSGM mining activities.
Virgin gold ore, as the term is used in this report, is gold ore which
is in the open pit and readily available for processing; it also
includes the undeveloped underground gold ore.
Virgin gold ore at the SSGM represents the majority of the material
(13.4 million tons) included in the Company's reserves. The
Company plans to use an open-pit mining method and will truck the
lower grade gold ore to one or more heap-leaching pads developed on
site at the SSGM site. The use of open-pit mining and heap-leaching
techniques will enable the Company to process a higher volume of gold
ore than can be processed at the SCMP or through underground
operations used by the Company and others in the past. The Company
plans to continue to operate the SCMP after developing a
leach-pad operation at the SSGM, using the facility to process the
higher grade ore it encounters in the course of mining at the SSGM. The
milling operation at the SCMP is expected to return a higher rate
of gold recovery than can be expected from heap-leaching techniques.
The 960,000 tons of dump material present at the SSGM site has grades
ranging from 0.082 to 0.178 ounces of gold per ton. An analysis
of the stope fill which is all underground material was made by
the Company's consulting geologist who has confirmed that about seven
percent of the stope fill had been removed and processed during
the 1973-1978 period. The grade of the stope fill averages 0.34 ounces
of gold per ton. It is estimated that there are about one million
tons available for SCMP treatment from the underground operations. It
is necessary to remove the material which has caved in the adits to
reach the stope fill areas.
All residue from the contemplated operations will be stockpiled
for potential future processing dependent upon the price of gold,
improvements in technology, and the depletion of better grading
material.
Misanse Mining Lease
The Company (through the Comseb Joint Venture) leases the SSGM from
Mineral San Sebastian, S. A. ("Misanse"), an El Salvadoran corporation.
The Company owns 52% of the total of Misanse's issued and outstanding
shares. The balance of the shares are owned by about 100 El
Salvador, Central American and United States' citizens. (Reference is
made to Note 7 of the financial statements for related party
interests.)
On July 28, 1975, an amended lease agreement between Misanse as lessor
and Sanseb as tenant was executed by the parties giving the tenant all
the possessions and mining rights that pertain to the SSGM as well as
other claims that may already have or could be claimed in the future
within the 1,470 acre plat of land encompassing the SSGM. The lease
was further amended to run concurrently with the concession described
herein and may be extended for one or more equal periods by the tenant
as long as the tenant has paid the rent and has complied with other
obligations under the lease and the concession. The lease further
provides that the tenant will pay rent to equal five percent of the
gross gold production revenues obtained from the leased SSGM and further
commits itself to maintain production taking into consideration
market, political, and other conditions. In no case will the rent be
less than 1,800 colones per month (approximately $206 per month at the
current rate of exchange). The lease further provides that, in the
event the lessor wishes to sell the property, it must first give
preference to the tenant; the lease further provides that the tenant
must give preference to employ its former mining employees and Misanse
shareholders.
<PAGE>
The lease is freely assignable by the Joint Venture without notice to
Misanse. The lease may also be cancelled by the Joint Venture on
thirty day's notice to Misanse and thereafter all legal obligations
thereunder shall cease.
In the event that new extended bodies of ore are discovered, Misanse may
be required to make proper claim for them through the Ministry of
Economy of El Salvador's Department of Energy, Mines and Hydrocarbons,
and include such claims in the present lease. Such addition to the
lease is required to be made without additional rental payment,
except that the expenses for procuring the concession shall be borne by
the Joint Venture.
Misanse Mineral Concession-Government of El Salvador
In El Salvador, the rights to minerals are vested with the government.
Mineral rights are granted by the government through concessions or
licenses.
On January 27, 1987, the Government granted a right to the SSGM mining
concession ("concession") to Misanse which was subject to the
performance of the El Salvador Mining law requirements. These rights
were simultaneously assigned to the Joint Venture.
On July 23, 1987, the Government of El Salvador delivered and granted
to Misanse, possession of the mining concession. This is the right to
extract and export minerals for a term of 25 years (plus a 25-year
renewal option) beginning on the first day of production from the
real estate which encompasses the SSGM owned by Misanse. Misanse
assigned this concession to the Joint Venture. Under this concession and
the then applicable El Salvador law, the Joint Venture has the right
to export said minerals for five years beginning with the first
day of production without imposition of mineral or export taxes.
It also has the right to import free of duty, equipment and all other
items necessary to operate the SSGM.
During February 1996, and effective 120 days thereafter, the Government
of El Salvador adopted a revised mining law. This law grants longer
exploration and exploitation terms. It also contains a provision that
three percent of the gold receipts will be paid to the Government of El
Salvador and an additional one percent is to be paid to the
municipality where the mine is located.
The concession, or the right to mine gold, is subject to cancellation
by the Government of El Salvador if there is an abandonment of the
property such as if there is no demonstration that the concession
holder intends to carry out exploration, exploitation, or
development of the property in good faith during a six-month period
after the concession is granted or if the work of exploration,
exploitation or development is suspended for six months or if the
exploration, exploitation or development is reduced to an extent that
the effort used cannot be regarded as being reasonable in relation to
the importance and resources of the mining property.
In the event of public disaster or disturbance of the public order, all
mines in the given locality shall be regarded as being in exploration,
exploitation or development without the necessity of any special
formality. Such event did occur when, on November 11, 1989, the
guerrillas attempted to seize the Country of El Salvador. On January
16, 1992, a peace accord and cease-fire agreement was entered into by
the Government of El Salvador and its opposition. The transition
from war to peace was effected without any serious occurrences and
final peace was declared on December 15, 1992, with a three-year period
to comply with the terms of the peace pact.
<PAGE>
The work of a concession may be suspended by permission of a competent
authority for a reasonable period not to exceed one year. An
exception would be in case of acts of God or force majeure in which
case the period may be extended successively as long as such reasons
exist.
A concession may be fortified for lack of security measure, or if its
condition would endanger the lives of workers, or for failure to comply
with provisions of the Mining Code or other provisions enacted with
respect to any aspect of exploitation in the mining industry, unless
corrected within a reasonable period.
The Complimentary Mining Law states that, in addition to the cases
mentioned in the El Salvador Mining Code, abandonment of the mine will
be presumed if after a significant reduction or exhaustion of
the veins, beds, or other formation in exploitation, three months is
allowed to pass without adequate efforts either to exploit other
deposits existing in the concession or to discover new deposits
suitable for exploitation.
A concession may be granted for an unlimited time, as long as the
concession holder complies with the conditions imposed by law. The
Joint Venture's concession is for a period of twenty-five years,
beginning on the first day of production, and with a right to extend it
for an additional twenty-five years.
In addition, the El Salvador Constitution contains certain provisions
which, although not referring specifically to mining, are applicable
thereto. Article 138, for example, prohibits confiscation of property
as a penalty or for any other reasons, but, in the event that any
authority violates this prohibition, the confiscated property
is imprescriptible.
SSGM Current Status
The Company, through its Joint Venture is conducting the following
activities: It is in the exploration, development and pre-production
mining stage which consists of completing its survey, mapping, site
preparation, infrastructure, construction, planning, and in the
performance of the auxiliary work needed to begin gold production at
the SSGM site. Presently, the Company is seeking funding to purchase
equipment, to purchase inventory, and to use for working capital for
its on-site proposed open-pit, heap-leaching operation. In addition,
the Company is actively engaged in the exploration and development of
the peripheral area (including diamond core drilling) surrounding the
main body of gold ore in order to increase its gold ore reserves.
The Company's main objective and plan, through the Joint Venture, is
to operate a moderate tonnage, low-grade, open-pit, heap-leaching
operation to produce gold on its SSGM site. Dependent on the funding,
the grade of ore, and the tonnage processed, it anticipates producing
more than 40,000 ounces of gold from its open-pit, heap-leaching
operations during the first twelve full operating months and more
thereafter.
<PAGE>
A diamond drilling program with an independent contractor was
initiated at the SSGM mine area to substantiate and expand the gold
reserves. At the same time, pit walls were excavated and the old vein
system was exposed to facilitate systematic sampling of the
wallrock. This program demonstrated that true widths of up to 100
feet of altered and mineralized trachyte occur frequently in the
open-pit and adjacent areas. Panel and surface channel sampling of
these exposures revealed assays in the 0.03 to 0.20 ounce per ton
gold range. In addition, underground workings on the Limon, Guaramal,
Santa Elena, and Taladron veins are being rehabilitated.
SSGM Geology
The ore deposit consists of contact-fissure veins carrying gold-bearing
pyrite. The veins occur at the contact between quartz-monzonite
porphyry dike and surrounding eruptives which are basalt capped by
trachyte. All the rocks are of recent age, probably late tertiary. The
SSGM lies within a silicified and hydrothermally altered zone of acid to
basic volcanoes roughly within a two-square kilometer area.
The occurrence is typical of the late stage deposition associated
with instrusives in Island Arc plate tectonics dating millions of
years (four to 65 million) ago. These are typically polymetallic
precious metal-base deposits with high grade veining in large haloes of
low grade resembling in part the Kuroko deposits in Japan. The dike is
shaped like a flattened "s" and consists of a 2,800 foot long
essentially vertical east-west segment, a northwest striking western
section "dragged" sharply north for 800 feet and dipping 70 degrees
northeast and a vertical south-east striking east.
The geology of the SSGM deposit is integrally linked to the presence of
a quartz monzonite intrusive. This quartz monzonite has the
appearance of being a high level sill and is probably coeval with
the surrounding tertiary aged trachytes that form the main SSGM
ridge. The geometric configuration of the quartz monzonite
controls the localization of quartz veins and alteration of
the trachytes. The overall structural control is east-west;
according to historic mine records, the monzonite contacts with depth,
but successive level plans suggest a funnel shaped structure plunging
to the southeast. On a detailed scale, the quartz veins are controlled
by a master set of parallel veins preferentially oriented east-west.
The vein branch generally dips north and is interconnected by
southeast dipping diagonal veins of variable strike. Mapping
records describe veins as sinuous, further suggesting brittle
stress regimens, with veins occupying dilational zones. These fissure
style veins are up to five feet in width, and generally occur in
trachyte or at the contact between trachyte and monzonite.
Pre and post mineral faulting is common throughout the deposit.
The deposit is said to diminish when a basalt "basement" contact is
approached at a depth, however basalt on top of San Juan Hill is also
recognized. The funnel shape of the deposit, suggests however
a potential synvolcanic structural control, with a source to
the southeast. The San Juan area has not been tested by modern
exploration techniques.
Based on data available at present, the hydrothermal system focused on
SSGM has a dimension of approximately 3,500 feet in strike, a vertical
extension of 1,100 feet (minimum) and an approximate width of 500
feet. The volume of hydrothermally altered rocks in the system
prior to erosion is likely to have been in the magnitude of up to 200
million tons.
Gold occurs in the native form and also occurs rarely as a telluride.
Pyrite is the predominant sulphide mineral in the deposit and it is
the most common host to the fine grained gold. Copper minerals
including bormite, chalcopyrite, chalcocite, tetrahedrite,
enargite and luzonite have been identified. Gold mineralization
is accompanied by silicification; other gangue minerals include kaolimite
and sericite and more rarely barite. High grade gold streaks are
associated with barite.
<PAGE>
The SSGM deposit represents a bonanza gold system formed within a
coeval high level alkaline intrusive-extrusive complex.
Mineralization is more consistent with an acid sulphate system
generated within an intracratonic caldera setting. The potential for
SSGM to host millions of ounces of gold is considered to be excellent.
SSGM Ore Reserves
As of March 31, 1998, the SSGM has approximately 13.4 million
tons of virgin proven gold ore reserves, grading 0.087 ounces of
gold per ton and containing about 1.2 million ounces of gold. Overall
the stripping ratio is low, ranging from zero in the Coseguina Hill area
which is highly mineralized and consists of a series of high angle
vertical veins to a possible stripping ratio of 1:3 to 1:8. It is
planned to use these reserves; they will be screened, crushed
and, if required, they will be agglomerated and placed on a
proposed leach pad on the SSGM site. In addition, the Company's
geologists have defined about one million tons of stope fill with a
grade of 0.34 ounces per ton and approximately 960,000 tons of dump
material with an average grade of 0.10 ounces of gold per ton.
Since July 1987 through March 31, 1998, the following exploration
has been performed on the SSGM site: surface channel trenching,
34,946 meters (115,322 feet/21.8 miles); test pit hole excavations,
655 vertical meters (2,162 feet/.41 miles); underground workings and
adit openings, 1,119 meters (3,693 feet/.70 miles). The surface
samples from the trenching averaged 0.026 ounces of gold per ton over
an area approximately 1,000 feet in width and approximately 5,000
feet in length. A total of 66,610 SSGM gold ore samples were fire
assayed at the Joint Venture laboratory.
SSGM Diamond Drilling Program
The Company's geologists have reported that on the SSGM site a total of
26 diamond drill holes were completed. The average depth of each hole
was approximately 118 meters (387 lineal feet). Therefore,
approximately 3,068 meters were drilled (10,062 lineal feet). The
drill holes were spaced about 100 meters (328 feet) apart and covered an
area of one square kilometer (.386 square miles or approximately 250
acres). The drilling angle of each hole varied from 45 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. Additional drilling is required to
expand the gold ore reserves.
<PAGE>
Proposed SSGM Open-Pit, Heap-Leaching Operation
The Joint Venture has placed the SCMP into a limited operation.
It now intends to obtain a sum of $6 million or more to commence an
open-pit, heap-leaching operation at the SSGM site. An additional
$7 million or more is estimated to be required for the crushing
system and mining equipment if the Joint Venture were unable to lease
this equipment. After these funds are obtained, the Joint Venture
intends to start processing gold ore from its open pit at a production
level of 2,000 tons per day. During the second year, the production
level plans are to expand production to 3,000 tons per day (the
funds for this expansion could be generated from profits). An increase
to process 4,000 tons of gold ore per day would take place during
the third year and another expansion to process 6,000 tons per day would
take place at the beginning of the fifth year; all funds for this
expansion should be available through a combination of earned profits,
borrowings, equity sales, or other sources. The independent feasibility
study and the Company's Project Summary report comfortably support this
program as the estimated projected production costs are substantially
lower than a current $300 per ounce market price of gold. Pursuant to
the geologists' report, the total volume of proven gold ore reserves
from the open-pit area amount to 13.4 million tons with an average
grade of 0.087 ounces of gold per ton. With the anticipated
production volume, there is at least an eight-year supply of gold ore.
More gold ore would be developed during this period of time as it is
believed that a substantial amount of gold ore can be proven.
The leach pad site consisting of approximately three acres on the
SSGM property was chosen because of the relatively even grade level,
the access to water supply, electric power, roads, telephone service,
and because of its close proximity to the open-pit area.
Gold ore will be crushed to produce stones of a size which will
maximize gold recovery. If required, lime and cement will be added
"agglomerated" to such gold bearing material that will require this
process to assist the heap-leaching operation, in accordance with
metallurgical recommendations.
A leach pad will be constructed with a plastic liner sandwiched
between layers of gravel to protect its integrity. On top,
the liner will be protected with a six-foot layer of one-inch gravel
comprised of gold-bearing material. Material to be processed and
agglomerated will be heaped in stages an additional 20 feet on top
of this protective layer if necessary and then removed at the end of the
leaching cycle.
Basically, this process involves the placement of material containing
gold onto a "pad" which is impermeable to liquids, sprinkling the
"heap" with a water-based chemical solution which will dissolve the
gold as it percolates through the material, collecting the solution at
the bottom of the heap as it runs off the pad, and then recovering the
gold from the solution. The chemical solution is actually recycled
through the heap many times before it is processed, in order to maximize
the recovery of gold and to recycle the chemicals.
Gold laden cyanide solution will be collected at the base of the pad and
then will be filtered through a series of carbon adsorption columns (a
series of open-topped tanks) where the gold will be drawn out of the
solution and into beds of granular activated carbon. Next, the
carbon from the columns will be washed with acid to strip the gold from
the carbon into a more concentrated solution. Lastly, gold will be
removed from this acid solution by electrolysis (the same process used
in gold-plating) first by collecting the gold on steel wool type
cathodes, and then by electrolytically transferring the gold to a
charged metal plate in another acid solution. After their use in
processing a batch of gold, the cyanide and acid solutions, as well as
the carbon, will be replenished and recycled to process the next batch.
The balance of this procedure is similar to the existing SCMP
process.
<PAGE>
Also, the Joint Venture has its own SSGM on-site laboratory with
full-time, trained personnel working three shifts to fire assay the
gold ore samples. It also has two full-time surveying crews consisting
of ten persons.
SSGM Ownership of the Property
The San Sebastian Gold Mine real estate consisting of
approximately 1,470 acres, is owned by Misanse, a Salvadoran corporation.
The Company owns 52% of Misanse common shares that are issued and
outstanding. Over 75,075 fire assay samples have been performed
through March 31, 1998.
Environmental Matters
Since the Government of El Salvador has established a new mining law
effective February 1996, its exploration, development, and
production programs are subject to environmental protection. The
El Salvador Department of Mines and Hydrocarbons, a division of
the Minister of Economy's office regulates the mining operations.
Environmental regulations add to the cost and time needed to bring new
mines or mills into production and add to operating and closure
costs for mines already in operation. As the Company places more mines
into production, the costs associated with regulatory compliance can be
expected to increase. Such costs are a normal cost of doing business in
the mining industry, and may require significant capital and operating
expenditures in the future. The Company's policy is to adhere to North
American standards in its El Salvador operations. The Company cannot
accurately predict or estimate the impact of any future laws or
regulations developed in El Salvador that would affect the Company's
operations.
All operations by the Company involving the exploration for or the
production of minerals are subject to existing laws and regulations
relating to exploration procedures, safety precautions, employee
health and safety, air quality standards, pollution of water
sources, waste materials, odor, noise, dust and other
environmental protection requirements adopted by the El Salvador
governmental authorities. The Company may be required to prepare and
present to such authorities data pertaining to the effect or impact that
any proposed exploration for or production of minerals may have upon
the environment. The requirements imposed by any such authorities
may be costly, time consuming and may delay operations. Future
legislation and regulations designed to protect the environment, as well
as future interpretations of existing laws and regulations, may require
substantial increases in equipment and operating costs to the
Company and delays, interruptions, or a termination of operations.
The Company cannot accurately predict or estimate the impact of any
such future laws or regulations, or future interpretations of existing
laws and regulations, on its operations.
The Company has submitted an environmental impact study prepared by
an independent El Salvadoran consultant which is under review.
<PAGE>
San Felipe-El Potosi Mine ("Potosi") and its extension the El Capulin
Mine ("El Capulin")
Potosi Location
The Joint Venture has commenced an exploration program on the Potosi
property which is located approximately 18 miles northwest of the city of
San Miguel, the second largest city in the Republic of El Salvador,
Central America, on a paved road 15 miles to the city of Chapalteque and
then west three miles on a gravel road to the city of Potosi.
The historical records indicate that the potential of developing a gold
mine is above average.
Potosi Historical Information
Historical records evidence that exploration and production of gold
took place in 1899 and that Potosi was worked intermittently from
1906 through 1952. The main production period in six levels was from
1938 through 1952 at a rate of 35 to 50 tons per day. Production data
avouch that 30,000 ounces of gold were produced from 1945 through 1952
after which the mine became dormant. During this time a limited
underground exploration program confirmed that the gold ore reserves
were of commercial value. The gold assays from some of the former
drill hole samples on the southern extension of the north-south
portion of this property showed a grade of 0.10 to 0.35 ounces of gold
per ton of ore.
Potosi Geology
The Potosi vein type occurrences are very strong, persistent,
poor quartz-calcite fissure fillings from two to ten feet wide and up to
3,400 feet in length. On a regional scale, the veins are fairly
straight-forward type structures but in detail they can be
complicated. Dips in the north-south veins are steeper than in the
lattice systems such as the 50 degrees to 90 degrees in the Potosi
type. The proportion of gold-to-silver increases in north-south
striking veins or in veins of any orientation whose dips more closely
approach the vertical.
Two relatively narrow north-south veins, 450 feet apart, have been
worked in the past by vertical and an inclined shaft for up to 2,100
feet along the strike and to depths of between 180 and 440 feet below
surface on four to six levels. The veins are contained in
coarse-grained augite andesites. The larger of the veins is up to ten
feet in width, dipping 55 degrees to 75 degrees west. The second
vein is weaker in structure and about three feet in width. Gold
values seem to be indiscriminately associated with quartz and do
not seem to diminish at depth. Assay plans and ore reserve sections
completed in 1952 show 30 blocks with an average grade of 0.6563
ounces of gold per ton. Holes drilled from the projected
extension of the north-south portion of one of the veins returned
various five-foot sludge samples grading 0.10 to 0.35 ounces of gold per
ton with a one foot of core length grading at 0.39 ounces of gold
per ton. It appears that the deposition took place at higher
temperatures than attributed to silver, thus the vertical zoning of gold
deposition is deeper or has a larger vertical dimension than
silver; therefore the possibility of considerable ore below levels is
a realistic one. The age mineralization is past laramide with the host
rock being rhyolite. The previous gold-silver ratio was 0.3:1.
<PAGE>
Potosi Tailings' Reserve
Since October 25, 1993, Comseb has had a full-time crew, ranging
from 25 to 30 employees, conducting an exploration program consisting
of surveys, channel trenching, adit openings, test pit holes,
excavation and drilling of the tailings to determine its gold content.
Twenty-four test pit hole excavations have been plotted and drilled on
this four-acre site of tailings. The depth to the bottom of the
tailings' pile varied from 7.00 to 10.2 meters (23 to 34 vertical
feet) and a total of 137.6 meters (454 feet) of test pit hole excavations
were completed. The 573 fire assay samples (tailings) indicated an
average grade of gold per ounce to be 0.06 (0.06 times 185,000
tons should contain 11,100 ounces of gold times a 70% recovery should
yield about 7,770 ounces of gold).
Potosi and El Capulin Exploration Undertakings
A total of 2,388 meters (7,880 feet) of channel trenching was
excavated with a grade ranging from 0.01 to 0.05 ounces of gold per
ton. A total of 729 meters (2,406 feet) of adits has been restored
for entry into the old workings. A total of 3,082 fire assay samples
were completed with the results encouraging a drilling program. A
tabulation of the work completed by the Joint Venture is as follows:
1. Potosi Surface
a. The exploration and excavation of 2,388 meters of surface
channel trenches produced a total of 1,232 assay samples.
These assay samples were fire assayed and reflected an average
grade of gold of 0.02 ounces per ton. Two veins were
intercepted which assays averaged 0.051 ounces of gold per
ton. One vein encountered was 3.50 meters (11.55 feet) in
width, while the other was 0.70 meters (2.31 feet) in width.
2. Potosi Underground Workings
a. Guayabito Adit: This adit was opened for a distance of 132.9
meters (439 feet) and a cross cut was encountered at 25 meters
(83 feet) running to the west at which point a 0.40 meter
(1.32 feet) thick vein was intercepted. The samples that
were fire assayed reflected an average grade of gold of 0.012
ounces per ton.
b. Guarumo Adit: At a point south 15 degrees east a 1.70 meter
(5.61 feet) thick vein dips 60 degrees to the west. This
adit is all vein area. The fire assay samples proved an
average of 0.05 ounces of gold per ton.
c. San Isidro Adit: From the entrance to sub level 25 meters
(83 feet), a vein running south 13 degrees east was encountered.
This sub level is located 5.65 meters (19 feet) below the entry
level. The vein is 2.80 meters (nine feet) thick from which
the assay samples reflected an average grade of gold of 0.022
ounces per ton.
d. Cacho de Oro Adit: This adit was cleared for entry and at a
point 34 meters (112 feet), a crosscut was encountered
which was advanced 23 meters (76 feet). The fire assay
samples reflected an average grade of 0.07 ounces of gold per
ton.
e. Canon 821: Exploration progress continues at this adit, Winze
821, the General Winze and Adit 2A. Pillars were found in Adit
2A about 105 meters (347 feet) from the entry.
3. The El Capulin Mine
a. The surface trench excavations over a distance of 750 meters
(2,475 feet) and more than 400 fire assay samples revealed
an average grade of 0.10 ounces of gold per ton. An area
was outlined which estimated that there are more than 40,000
tons of gold ore with a grade that varies from 0.12 to 0.23
ounces of gold per ton.
b. In the Capulin Adit, a total of 188 meters (620 feet) was
cleaned for entry; the goal is to reach the Capulin vein. The
fire assay samples averaged a grade of 0.25 ounces of gold per
ton.
<PAGE>
4. Tailings
The 573 samples that were fire assayed reflected a grade of gold of 0.06
ounces per ton.
Exploration on this property will continue with channel trenching,
re-opening of former adits, and to include diamond core and/or
reverse circulation drilling, mapping and sampling of the known
mineralized areas to determine if there is any commercial gold
mineralization on this property. Diamond drilling may be utilized to
outline the more promising shoots and to check for continuity of gold.
Potosi Exploration Concession
The exploration concession application was filed on September 6,
1993, with the Department of Energy, Mines and Hydrocarbons, a division
of the El Salvador's Minister of Economy's office, by the owners of
the real estate, the Cooperative San Felipe-El Potosi. An
application for an exploration concession was filed on May 8, 1997 in
order to comply with the current mining regulations adopted by the
Government of El Salvador in February 1996. The concession consists of
approximately 6,100 acres.
While the concession application is pending, it precludes any others
from performing exploration on this site. Upon assessing that the
property has potential mining prospects, the Joint Venture has the right
and did apply for the mining concession.
Potosi Lease Agreement
The Joint Venture entered into a lease agreement with the San Felipe
Potosi Cooperative ("Cooperative") of the city of Potosi, El Salvador
on July 6, 1993, to lease the real estate for a period of 30 years
and with an option to renew the lease for an additional 25 years, for
the purpose of mining and extracting minerals and under the following
basic terms and conditions:
1. The term of the lease will be for a period of 30 years plus an
option to automatically extend the lease for an additional 25
years.
2. The lease payment will be five percent of the gross receipts
derived from the production of precious metals from this site and
will be payable monthly.
<PAGE>
3. The Joint Venture will advance to the Cooperative the funds
required to obtain the mining concession from the El Salvador
Department of Energy, Mines and Hydrocarbons and all related costs
will be reimbursed or will become a deduction from future rental
payments.
4. The Joint Venture will, when it is in production, employ all of
the 45 qualified members of the Cooperative, providing that
there is a need for their particular skill or service.
5. The Joint Venture will furnish medicine and first aid medical
assistance to all of its employees to the extent that such
benefits are not provided by the El Salvador Social Security
System.
6. An employee life insurance program is to be seriously considered
by the Joint Venture when production commences, providing
that the cost of such insurance is not excessive.
Environmental Matters
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies except that no environmental impact
study is being conducted at Potosi or El Capulin at this time.
Hormiguero Mine ("Hormiguero")
Hormiguero Location
The Hormiguero is located approximately five miles southeast from the
SCMP off of the Pan American Highway in the Departments of San
Miguel and Morazan, Comacaran Jurisdiction, in the Republic of
El Salvador, Central America. The Joint Venture plans to survey, map,
plat, plan and develop an exploration program.
Hormiguero Current Status
The Joint Venture continues to develop an exploration program on
the 5,000 acre site. An application for exploration has been
filed on September 6, 1993 with the Department of Energy, Mines and
Hydrocarbons, a division of the El Salvador Minister of Economy's
office. In order to comply with the El Salvadoran Mining Law
adopted during February 1996, an exploration application was filed on
April 21, 1997.
The Hormiguero property continues to be in the stages of being
mapped geologically and topographically on a referenced grid in
order to provide a base to plan a drilling program with the
objective to prove that a commercial body of ore may extend below
the bottom of the former workings. This drilling activity would
also determine if the faulted north end of the Gallardo vein
continues. Further drilling could evidence the
mineralization of unexplored veins.
1. Tailings: In an area of approximately 15,744 square meters
(approximately four acres) 35 test pit holes at a total depth of 322
meters (1,063 feet) were excavated and the 705 samples that were
fire assayed showed an average of 0.064 ounces of gold per ton;
(0.064 ounces per ton multiplied by 150,000 tons should contain 9,600
ounces of gold).
2. The surface channel trenches consisting of 436 meters (1,439 lineal
feet) were dug perpendicular to the Guadalupe vein and from a
total of 155 samples in this area, 96 samples verified an average
grade of 0.0177 ounces of gold per ton.
3. Taladron Adit: The purpose is to clean this adit for entry, in an
attempt to intercept the Guadalupe vein at 61 meters (201 feet)
below surface. A total of 122 meters (403 lineal feet) have been
cleaned and the 188 fire assay samples reflected a grade of 0.07
ounces of gold per ton.
4. The more than 6,000 tons of broken ore (dump material) averaged a
grade of 0.055 ounces of gold per ton. The same grade average was
encountered in the Las Hormigas vein system in the Guadelupe dump
material.
Hormiguero Geology and Historical Information
The following information was obtained from a report entitled,
"Mining in El Salvador-United Nations Development Programs 1968-1971,":
". . . From 1913 to 1918 the Comacaran Gold Mining Co. produced
607,062 ounces of silver and 72,142 ounces of gold from 208,096 tons.
(Swanquist), and when this company liquidated in 1919 the El Salvador
Silver Mining Co., formed by some of the Butters Co. personnel,
continued operations on a small scale until 1921. In 1930 the mine was
reopened by the original property owners, the Gonzalez family, and
functioned periodically until 1948, producing during the last 3
years about 21,000 ounces of silver and 3700 ounces of gold.
"Straight arithmetic averaging from the production figures
gives an overall recovered grade of 0.351 oz. gold and 2.92 oz. silver
for the period 1913-1918, or assuming a 10% mill less, a mill head of
0.386 oz. gold and 3.21 oz. silver. Mill records for 1917, the only
surviving technical data, give a bullion production of 139,369.36
ounces of silver and 17,193.84 ounces of gold from 61,890 tons. A
mill head calculated from this, again at 10% mill loss, was probably
0.30 ounces gold and 2.47 ounces silver.
"Although known locally . . . as `Hormiguero' the deposit is
actually a composite of three separate sections, the Gallardo,
Guadalupe and Hormiguero, all in coarse-grained andesite,
grouped about and formerly connected by aerial tramway to a
central mill situated immediately southwest of the Canton
Hormiguero. The Gallardo and Guadalupe veins are strong,
persistent structures striking 045 [degrees] and 020 [degrees]
respectively and forming
thin ridges 500 feet east and 1,750 feet west of the central mill. Both
are composite and slightly braided structures composed of two main
parallel branches 70 feet apart, and several interconnecting
sub-branches, all dipping greater than 60 west. Vein material is
banded and crustiform quartz-calcite, secondary manganese oxides and
probaly [sic] rhodochrosite, weakly mineralized with pyrite,
spalerite, galena and chalcopyrite. Strong proplylitization
accompanied by considerable pyrite has attacked the andesites
outward for about ten feet from the walls resulting in the
formation of yellowish red, clayey oxidation products on surface.
"The Gallardo has been worked on six levels for 2050 feet along
strike and 400 feet vertically. Access was through the Benjamin
adit at the extreme southwest end and an inclined (61 [degrees])
shaft 350 feet from the northeast end. Two vertically plunging
ore shoots 300 and 600 long and 500 feet apart were stoped to the
5th level where the larger bottomed, according to notations on a long
section made by the El Salvador Silver Mining Co. in 1920.
Limited stoping above the Benjamin
adit suggests a third shoot in that area and a possible unexplored
prolongation of the vein towards the southwest. An abrupt cut-off of
the north (larger) ore shoot coincident with the north end of the mine
may be due to lateral fault displacement; an undeveloped segment of the
vein might therefore be anticipated further north.
<PAGE>
"Horizontal development of the Guadalupe vein opened a 1600 foot
strike length on both a hanging wall and footwall branch, but the dip,
exposed on five levels to 350 feet has been examined in an unsystematic
manner more suitable for exploration than exploitation. Little ore has
in fact been taken from underground; most of the production appears
to have come from open cuts. The only regular mining has been confined
to a 400 foot lens on the footwall branch, 150 feet south of the main
three-compartment production shaft, which was from surface 200 feet
vertically to the third level, and from a small irregular shoot directly
opposite it in the footwall branch. Outside of these, the underground
layout leaves the general impression that the distribution of ore grade
mineralization is highly erratic and randomly dispersed.
"1100 feet, and north of the Gallardo and Guadalupe mines, five
steeply north (?) dipping, parallel, curving veins (Emilio, Oriente
Emilio, Hormiguero, San Francisco and 4 de Julio) evenly spaced over
a width of 200 feet, constitute the separate Hormiguero mine. They
lie between the hypothetical northward prolongation of the Gallardo and
Guadalupe structures and have been worked over an aggregate strike
length of 1200 feet starting from a point 700 feet west of the
Guadalupe projection first 500 feet east-west then through a 700 foot
arc curving to the southwest into alignment width, and 900 feet north of
the north end of the Gallardo vein. At least 7 levels were developed to
a depth of over 400 feet from a vertical 2 compartment shaft. The
amount of stoping is unknown; the available data show that irregular
100 to 200 foot long shoots were worked to depths of 300 and 400 feet
on the east-west striking portions of the San Francisco and 4 Julio
veins.
"Four other virtually unexplored veins known as La Gloria or
Esperanza, Victoria or Tilden, Tecolote and El Dorado, occur 500 to
900 feet west of the Gallardo and Hormiguero mines. The Gloria and
Tecolote strike east-west; the remaing [sic] two are roughly parallel to
the Gallardo. In a letter dated 1919, a geologist named Mr.
Swanquist states that initial exploration and very limited mining
obtained `encouraging results' from the Tecolote and `fair ore' from
the El Dorado.
"The same letter mentions two additional prospects, the Consuelo of
unknown location but `700 feet from the plant and just being opened up'
and the La Posa, on the Las Garzas river, north of Canton Hormiguero
from which ore grading $10.92 per ton ($20.00 gold and $1.11? [.385]
silver), with values mainly in silver, was mined over 4 to 5 foot
widths, in a 35 foot winze."
<PAGE>
In 1921, i.e. during El Salvador Silver Mine's final year of operation,
the following ore reserves were blocked out:
Proven: (U.S. dollar values based on a $20.00 per ounce gold price
and a $0.385 per ounce silver price.)
Dollar Value
Tons Grade Per Ton
---- ----- -------------
Guadalupe Hanging Wall Vein 11,208 0.353 $7.06
Guadalupe Footwall Vein 7,528 0.319 $6.37
Hormiguero and Gallardo 10,000 0.400 $8.00
------
Total: 28,736
Probable:
Dollar Value
Tons Grade Per Ton
---- ----- -------------
Guadalupe Hanging Wall Vein 21,900 0.295 $5.89
Guadalupe Footwall Vein 23,556 0.340 $6.80
------
Total: 45,456
(Proven and probable gold and silver ore reserves total 74,192
tons.)
Exploration should center on the undeveloped veins, on the possibility
of extending the Hormiguero veins farther to the east and west, and
on the unexplored ground between the north end of the Gallardo vein and
the Hormiguero.
Hormiguero Ownership
This real estate is owned by various individuals and families and
the Joint Venture has received permission from the land owners to
explore approximately 150 acres of the core of the mining property.
Environmental Matters
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies except that no environmental impact
study is being conducted at Hormiguero at this time.
Modesto Mine
Modesto Mine Location
The Modesto Mine is located due north of the town of El Paisnal,
approximately 19 miles north of the capital city, San Salvador, in
the Republic of El Salvador, Central America.
Modesto Mine Geology and History
From its geologist and from the records available to the Joint
Venture, the following information was obtained:
Two persistent veins "Paredon" and "Chicharron" outcrop along the
crests of two parallel hogback ridges 1,900 meters apart, and are
composed of thick flat-lying andesite flows capped by discontinuous
patches of rhyolite. These were examined in 1948-1950 by M. Buell
along strike (45 degrees) for 2,240 meters and 2,760 meters respectively
and down dip (60 degrees to 80 degrees southeast) a maximum of 25 meters.
The Paredon vein was barren but the north-eastern 1,320 meters of
the Chicharron returned the following values:
<PAGE>
1. "D" winze, five meters deep, northeast end: 0.46 ounces of
silver, 0.82 ounces of gold over 61 meters horizontally; 0.71
ounces of silver, 0.61 ounces of gold over 3.1 meters vertically
from quartz of undetermined orientation in rhyolite; 0.30 ounces
of silver, 1.20 ounces of gold from a 15-ton dump and a value of
$14.653 per ton from a ten-ton dump. (The market price of gold
was pegged at $35 an ounce.)
2. "S" winze, 420 meters southwest of "D" winze: no values.
3. "5" winze, 882 meters southwest of "D" winze: 1.85 ounces of
silver, 0.65 ounces of gold over an average of 1.0 meter to a
depth of 11 meters below outcrop. A 30-ton dump ran 2.28 ounces
of silver and 0.82 ounces of gold.
4. "14" winze, 1,320 meters southwest of "D": 0.78 ounces of silver,
0.22 ounces of gold to 19 meters below outcrop. A 60-ton
dump ran 0.15 ounces of silver, 1.14 ounces of gold; average of
six dump samples was 0.68 ounces of silver, 0.31 ounces of gold.
A surface sample representing a ten-meter width of vein
structure gave 0.06 ounces of silver, 0.09 ounces of gold, including
1.5 meters of 0.40 ounces of silver and 0.50 ounces of gold on the
footwall.
A 155 meter crosscut, driven to intersect the vein 62 meters vertically
below surface and 80 meters northeast of "14" winze encountered only
weak quartz mineralization. Of 20 samples taken in 45 meters of
drift, one returned 10.25 ounces of silver and 0.35 ounces of gold
over 1.20 meters and the remaining 19 averaged less than 0.40
ounces of silver and 0.05 ounces of gold.
On 30 meters of drifting up to seven meters below surface at "5" winze,
1,095.6 tons grading 1.66 ounces of silver and 0.505 ounces of gold were
indicated.
The mineralization is the Potosi type, very finely banded, milky,
aphanitic, sulfide-free quartz, with a gold-silver ratio similar to El
Dorado's. No calcite was seen on the dumps. Wall rock alteration is
not noticeable on surface, however fine grained silicification and
pyritization of the andesite appears on the "5" winze dumps.
Modesto Mine Ore Reserves and Exploration Results
The exploration through July 1997, has accomplished the following:
Four bodies of gold ore have been blocked which contain approximately
18,800 ounces of a proven and probable grade of gold in 80,000
tons of ore with an average grade of 0.235 ounces of gold per ton.
The Modesto Mine appears to be a very good gold prospect. Since
October 1993, three veins were discovered which extend over a length of
one and one-half miles and a width of about one mile. The width of
this area has a series of perpendicular and oblique tiny veins well
dispersed which is a desirable ore for an open-pit operation.
<PAGE>
The three vein systems disclosed the following:
(1) Chicharron Vein: Over a length of 2,550 meters (8,415 feet),
69 surface channel trenches were dug consisting of 567.0 lineal
meters (1,871 feet) from which 2,015 samples were taken which
averaged a grade of 0.05 ounces of gold per ton. This vein strike
is at north 50 degrees east with a dip 70 degrees and consists of
milky, brownish gray and white quartz surrounded by andesite.
(2) Intermidy Vein: This vein is at an offset angle to the Paredon
vein. A total of 495 meters (1,634 feet) of surface channel
trenching was excavated and 265 assay samples reflected an
average grade of 0.025 ounces of gold per ton.
(3) Paredon Vein: This vein was explored by excavating five surface
channel trenches over 1,200 meters (3,960 feet) and 89 fire
assay samples reflected an average grade of 0.015 ounces of gold
per ton.
Underground workings:
(1) Taladron Adit: From this adit entrance to a point of 257 meters (848
feet) along the north 85 degrees west strike, all of the blockage
was removed to penetrate it. A total of 80 fire assay samples were
taken in the basalt and barren quartz monzonite veinlits which
assays averaged 0.035 ounces of gold per ton. This adit changed its
direction to south 70 degrees west and at a point of 131 meters
(423 feet) a broken vein with a basalt horse was intercepted. The
former vein was found at the end of this adit which turned to the
west and encountered the Chicharron vein which at this point was
13 meters (43 feet) in width and 26 meters (86 feet) from the
top of the hill.
(2) Adit No. 10: This adit is above the Taladron Adit and it is the
highest adit on this property. A total of 47 meters (155 feet) has
been excavated and the 310 fire assay samples confirmed an average
grade of 0.03 ounces of gold per ton. This adit follows a strike
vein south 50 degrees west with a 55 degree easterly dip
and encounters a vein at a width of 4.50 meters or 15 feet.
(3) Shaft No. 5: From the adit entrance, a total of 13.4 meters (44 feet)
was cleared for entry. A sub level was discovered and this was
cleaned at both ends north and south for a distance of 95.7
meters (316 feet) and 327 samples were fire assayed disclosing an
average grade of 0.37 ounces of gold per ton. A total of 490
samples were taken from this sub level and from
interconnecting levels. 75 samples were fire assayed revealing
an average grade of 0.11 ounces of gold per ton.
Modesto Mine Present Status
After completing the necessary surveying, mapping and planning,
the Joint Venture proceeded to clean and trench the surface and adit
vein exposure. Since August 1993, 3,084 metric feet of surface channel
trenching (10,177 feet) and 866 meters (2,858 feet) of adit cleaning were
completed. In addition, four inclines have been excavated for entry.
A total of 4,027 fire assay samples were performed revealing an average
grade of 0.035 ounces per ton. The Joint Venture suspended its
exploration during July 1997 as the Government of El Salvador awarded
the concession of the property to another mining company. The Company
believes that it owns the key property, therefore permission from the
Company will be required before entry can be made by others. The Joint
Venture, upon advice of legal counsel, intends to file an application
for a concession (license) on the property it owns.
<PAGE>
Modesto Mine Concession/Ownership
On or about September 2, 1993, the Joint Venture through one of its
employees, filed an application with the El Salvador Department of
Energy, Mines and Hydrocarbons to explore the 4,000 hectares (9,800
acres) of property known as the Modesto Mine. The application,
together with the consent to explore this area from the property owners
owning more than 25% of total area, has been submitted to the El
Salvador Director of Energy, Mines and Hydrocarbons. Also, the Joint
Venture had submitted its original plan to this governmental agency on
January 24, 1994, outlining its exploration program. In order
to comply with the current mining regulations adopted by the
Government of El Salvador during February 1996, the Joint Venture
filed an exploration concession application on April 21, 1997.
Environmental Matters
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies except that no environmental impact
study is being conducted at Modesto at this time.
Montemayor Mine ("Montemayor")
Montemayor Location/Ownership
The Joint Venture has obtained leases for more than 175 acres of the
surface rights from a number of property owners which permits the Joint
Venture to enter their property for the purpose of exploring,
exploiting and developing the property and then, if feasible, to
mine and extract minerals from this property. The term of this
permission is for an infinite period. The Company believes that this
real estate contains the "heart" of the mine. Montemayor is located
about 14 miles northeast of the SCMP, six miles northwest of the SSGM
and about two and one-half miles east of the city of San Francisco
Gotera in the Department of Morazan, Republic of El Salvador.
Historical records evidence that the potential for the Montemayor to
become an exploration and development gold-producing prospect is good.
Montemayor Geology and Historical Information
The following information was obtained from a report entitled,
"Mining in El Salvador-United Nations Development Program 1968-1971":
"Montemayor-Lola Area
"The eastern and northeastern limits of the Three Corners area are
defined by a scattering of three small mines and numerous prospects
distributed along the course of the south-flowing Rio Montemayor in a
system of parallel normal faults collectively known as the
`Montemayor lineament'. Consistent with the origin proposed under
`General Geology' these have been probably induced by subsidence
along the northern margin of the central graben, resulting in a
progressive tensional failure that has sliced the pyroclastic
rocks of the area into a series of tabular blocks stepped
successively upward to the northeast end culminating in the steep
serrated ridges of the Copetillos escarpment. This has resulted in the
creation of a 13,000 foot-wide regional `sheeted' zone composed of
closely spaced, northwest striking, west dipping parallel faults,
stretching for five miles northeast along the river and has imported to
the river gorge an assymetric cross section whose higher, northeast
slope is underlain by deeply dissected acid to basic tuffs and lower
southwest slope by the low rolling andesitic, Three Corners terrain.
<PAGE>
"Extensive veining in the fragmentals has produced a lengthy mineralized
zone roughly coincident with the `sheating,' which includes the
Montemayor deposit near the headwaters of the river and, arranged in
en-echelon alignment downstream, the Tebanco, Lola, and Tepeyac
occurrences and the minor Salamanca, Jimerito, Mina Grande, Copetilla
and La Joya showings.
"The veins, which dip almost universally 50 degrees to 80 degrees
southwest, are normal quartz-calcite, sulfide-poor fracture fillings,
distinguished by their remarkable lateral persistence and unfortunate
paucity of workable ore shoots. Sporadically distributed in lenses
three to eight feet wide and up to 200 feet long and separated by longer
stretches of barren ground, these have so far yielded enough tonnage to
sustain mining operations only at the marginal Mina Lola. On the
whole, however, the area is little explored.
"Montemayor
"The Montemayor property embraces a group of small mine openings
and prospects aligned along a series of parallel southeast striking
veins following the course of the Montemayor river for 16,000 feet,
from its headwaters to the beginning of the pronounced `S' bend
enclosing the old Tabanco mine. Some confusion over the names and
locations of these various workings has always existed; for the
purpose of this report, the following nomenclature, adapted from early
maps of the district, will be employed. Proceeding upstreams
[sic], the workings are:
"(a) Montemayor-comprises the Montemayor, Montanita and Santa
Gertrudis sections, extending for 2700 feet upstream from the
Caserio Montemayor.
"(b) Tempisque-4800 feet north of the Caserio Montemayor and 1200 feet up
the east bank of the river.
"(c) Banadero-Carao-Carago-4500 to 8000 feet upstream from Tempisque.
"Mining was confined to Montemayor; appreciable underground exploration
to Montemayor and Tempisque. No motor road reaches the properties;
access is either by five kms. of the mule trail along the southwest bank
of the river from the end of the Santa Rosa de Lima-Caserio El
Tabanco road or cross-country about the same distance by mule trail
from a north branch of the Gigante road. Trails also lead into the
headwater area from the town of Sociedad.
"Historical information is sketchy. The area was almost certainly
worked in conjunction with the Tabanco mine, first by the English
company until about 1855, then the Cia. Francesa de Minas de El
Salvador who operated it some time between 1856 and 1882 (Guzman).
Until 1914 (?) no information is forthcoming; then the
mine was comprehensively sampled by the Butters Co. and its
successors between 1915 and 1921 and by the R.W. Habard Co. and Central
American Mines around 1936. Apparently the only production from 1856 to
1936 was obtained by the English and French companies but the figures are
unknown.
<PAGE>
"Roberts and Irving report that the mine was again functioning
at 60 tons per day in 1945 under Sr. Benjamin Gonzalez, yielded a
value of $233,818 over a three year period. Grebe (1955) does not
confirm this and the data may refer to the Hormiguero mine which Sr.
Gonzalez had in production at that time. Finally in 1963 the
principal showings were taken up by a local enterprise, Minas
Montemayor, S.A. and received a little more attention up until 1967.
"The vein system is apparently controlled by a simple set of poorly
exposed, northwest striking faults paralleling the river and
outcropping occasionally in the river bed and rarely on the steep east
slope of the river gorge. Dips are to the southwest between 50 degrees
and 60 degrees. Vein mineralization is quartz-calcite with weak
disseminated pyrite and a small quantity of chalcopyrite, spalerite and
galena. The host rocks are a succession of coarse andesitic tuffs and
agglomerates, fine acid tuffs and flows propylitized along the
veins, and locally silicified towards the north end of the zone of
mineralization.
"Formal mining was confined to three parallel veins spaced over a 500
foot interval up the east bank from the creek, at Montemayor. The
footwall Montanita vein was opened for 200 and 250 feet respectively on
two levels about 70 feet apart, served by a winze and two crosscuts, and
stoped over 100(?) feet on the upper level and 200(?) feet on the lower.
Two levels opened at 115 and 215 feet off a 2 compartment shaft traced
the middle (Montemayor) vein for 640 feet and disclosed a 200
foot long ore shoot, centered on the shaft and partially stoped before
1917, that might have graded around 12 ounces silver and 0.29 ounces
gold. On this same structure, 1250 feet north of the shaft in the
separate Santa Gertrudis section, perhaps 9000 tons grading $31.00 at
gold and silver $0.507 were extracted from a 90 by 220 foot area,
averaging 7 feet wide, developed on four levels through a second
vertical shaft.
"The hanging wall `sulfide' vein located 40 feet west of the Montemayor
is apparently more heavily mineralized but contained no ore over
75 feet of drifting driven from the lower Montemayor level.
"On the Tempisque showing, two levels, 30 feet apart vertically
and served by two adits, have revealed 520 feet of the Tempisque vein
running 5.49 oz. silver and 0.14 oz gold over a 2.7 foot width,
according to sampling by the R.W. Hebard Co. in 1936. Check sampling
by the present owners in 1966 returned an indicated grade of 3.68
oz. silver and 0.115 oz. gold over four feet, on the lower level.
"Work on the Carago section has been purely exploratory; the only
surviving records (map MM-8) show an average width of 2.3 feet of 9.95
ounces silver and 0.16 ounces gold in a 60 foot shaft and a 160 foot
long drift, spaced 280 feet apart."
Montemayor Current Status
1. Surface channel trenching:
From July 19, 1995 through July 1997, 55 surface channel
trenches were excavated over a 920 meter (3,036 feet) length. In
the Banadero area, from 29 trenches, 375 fire assay samples
contained an average grade of 0.036 ounces of gold per ton.
The remaining 26 surface channel trenches were excavated
in the Montemayor area: the 103 fire assay samples averaged 0.022
ounces of gold per ton.
<PAGE>
2. Underground adits and workings:
The underground adits consisting of more than 763 meters
(2,518 lineal feet) revealed a variable range of gold and silver
ore grade. From the 368 samples assayed, the gold/silver grade
ranged from 0.01 to 0.20 ounces per ton.
On April 22, 1997, a current exploration concession was filed with
the Minister of Economy's office in order to comply with the El
Salvadoran Mining Law adopted on February 1996. During July 1997, the
Department of Mines and Hydrocarbons has awarded the concession to
others. Since the Joint Venture has leases on the surface of key
real estate, it cannot be forced to allow others on this key part of the
property. The Joint Venture, upon advice of its legal counsel,
intends to file an application for a concession (license) on the
property it leases.
Environmental Matters
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies except that no environmental impact
study is being conducted at Montemayor at this time.
San Cristobal Mill and Plant ("SCMP") Recovery and Processing
System
SCMP Location
SCMP is located near the city of El Divisadero (off of the Pan
American Highway), and is approximately 13 miles east of the city of
San Miguel, the second largest city in the Republic of El Salvador,
Central America.
SCMP Lease Agreement
Although the Joint Venture owns the mill, plant and related equipment,
it does not own the land and certain buildings. Since February 23,
1993, the Joint Venture attempted to either lease or purchase this real
estate from an Agency of the El Salvador Government, Corporacion
Salvadorena de Inversiones ("Corsain"). On November 12, 1993, the
Joint Venture entered into an agreement with Corsain to lease
approximately 166 acres of land and the buildings for a period of
ten years. The annual rental charge is U.S. $11,500 payable in
advance and subject to annual increases based on the United States'
percentage rate of inflation. Also as agreed, an $11,500 security
deposit was required and this deposit is subject to an annual increase
based on the U.S. inflation rate. The premises are strategically
located to process gold ore from the other mining prospects that are in
the exploration stage.
SCMP Mill and Plant Process Description
On February 23, 1993, at a foreclosure auction held by an El Salvador
Court, the Company, on behalf of the Joint Venture, was the successful
bidder in acquiring SCMP, a precious metals' cyanide leaching mill
and plant rated with a capacity of processing 200 tons of virgin
ore per day consisting of the following unit operations:
crushing, grinding, thickening, agitated leaching, counter current
decantation of leach solution, recovery of precious metals by zinc
precipitation (Merrill-Crowe), and direct smelting of precipitates to
produce precious metals as dore and tailings' disposal.
<PAGE>
Instead of utilizing the existing recovery system, the Joint Venture's
engineers have designed a carbon-in-leach (CIL) process.
On February 23, 1993, the Company, on behalf of the Joint Venture
acquired SCMP, a precious metals' cyanide leaching mill and plant rated
with a capacity of processing 200 tons per day which utilized the
following unit operations: crushing, grinding, thickening, agitated
leaching, counter current decantation of leach solution, recovery of
precious metals by zinc precipitation (Merrill-Crowe), and direct
smelting of precipitates to produce precious metals as dore and
tailings' disposal.
The Company's engineers recommended that this processing system be
retrofitted and converted to process the SSGM tailings by a
cyanidation carbon-in-leach (CIL) system to recover the residual
cyanide soluble precious metals. The first pouring of gold on a test
basis took place on March 31, 1995. The SCMP is being operated on a
"start-up and build-up" to a gradual full capacity system during
this trial and modification period.
Current Status
The start-up, testing and adjustment stage of processing the remaining
SSGM tailings via trucking this ore to the SCMP has continued and
the Joint Venture is still in its preliminary stage of producing
gold. The SCMP is being designed to process 300/400 tons of virgin
ore per day. The average grade was about 0.087 ounces of gold per ton.
During this fiscal year the Joint Venture did process at the SCMP
approximately 60,000 dry tons (approximately 81,000 wet tons) of
tailings which yielded 5,604 ounces of dore and accounted for 3,927
ounces of gold and 1,416 ounces of silver. The cash gross receipts
amounted to $1,154,920.
SCMP Project Operating Plan
Production Schedule
Preproduction development, consisting primarily of expansive road and
site improvements to the mine and mill sites, and delivery of virgin
ore and expansive mill equipment modifications, has taken place
during the last year. Initial production was from the SSGM tailings.
Since SSGM's tailings' resource is exhausted, virgin gold ore is
excavated from the SSGM surface and hauled to the SCMP site.
The other sources of gold ore from the SSGM to be used at the SCMP
operation will be obtained from the stope fill or higher grade gold
ore after obtaining access through the underground workings from the
main ore body. This gold ore will have to be crushed and pulverized
which increases the cost, but then the yield is expected to be about
a 92% recovery. The income, dependent on the market price of gold from
the higher grade and recovery of gold ore, will be substantially
more than the cost involved, providing that the world gold market
price does not decline below $200 an ounce.
The virgin ore and/or tailings are referred to herein as "gold ore."
The gold ore from the SSGM open-pit is loaded onto 20-25 ton dump
trucks for transport to the SCMP. Trucks then haul the gold ore
approximately 15 miles from the SSGM. Mine employees are responsible
for the mining activities including the determination of areas to
be excavated, trucking and loading operations, head sampling and
sample analysis.
<PAGE>
The gold ore is received at the SCMP where it is weighed, logged, and
sampled. Weighing is performed utilizing a conveyor belt scale and/or
a truck scale located on the SCMP site. The excess gold ore is then
unloaded at the SCMP site and stockpiled in an area which was
developed to allow storage of more than 15,000 tons.
SSGM gold ore is transferred from the stockpile to a feed bin
utilizing a rubber-tired wheel loader. The feed bin has a capacity of
approximately 10 cubic yards (13.5 tons). The feed is fed at a
controlled rate onto a conveyor, which transfers the ore to the next
part of the process. The conveyor includes a belt scale
(weightometer) for instantaneous determination of feed rate and
totalizing of tonnage fed to the process.
The Joint Venture completed a certain stage of the
retrofitting, rehabilitation, repairing and restoring of the SCMP's
plant and it continues to perform such plant and equipment
alterations, modifications and improvements to expand the SCMP's
capacity to process 300/400 tons of virgin ore per day. It presently
is producing gold on a limited production basis by processing the virgin
ore from its SSGM open pit.
The Joint Venture has several sources of gold ore to process at the SCMP:
the 185,000 tons of Potosi tailings which have an average grade of 0.06
ounces of gold per ton; the SSGM open-pit virgin ore; the dump
material; and the ore and stope fill from the underground workings.
During the last fiscal period, primarily all of the processed
ore at the SCMP operations came from the SSGM which could be
processed with an up to 92% recovery grade or better. There is a
sufficient amount of open-pit virgin gold ore that is being mined and
transported to the SCMP. The recovery is about 90% or more of the
gold which is substantially more than the expected 60% recovery of
gold through the heap-leaching process.
The gold ore is transported via truck and placed in a primary
crusher to reduce the size to approximately one half inch or less. A
conveyor discharges into a chute and transports the material into the
ball mills which serve as a repulper for the tailings and as a grinding
process for the virgin ore. Virgin ore is fed through the first ball
mill for grinding. The pulp is pumped to a cyclone where it is
classified. The underflow goes to the second ball mill for regrinding
and the overflow (fines) goes to a 20 mesh static sieve bend screen to
remove any oversize or trash material. The second ball mill discharges
a product and joins the first ball mill sump pumping making it a
closed circuit with the use of the cyclone. Water is added to the
solids in the ball mill to a pulp density of approximately 32% solids
by weight and lime is added to raise the alkalinity of the pulp to
approximately PH 10.5. After grinding, the slurry is transferred into
the thickener. The excess water is removed from the thickener to
raise the pulp density to approximately 45% solids which is an ideal
density for the cyanidation process. The pulp is transferred by pump
to the CIL system's #1 tank. Lime and liquid cyanide are added to the
first leach tank to dissolve the gold. It then enters into a series
of seven agitated leach tanks utilized for cyanide leaching of the
pulp. This provides approximately 24 hours of leach retention time.
One tank is maintained in operable condition as a standby unit.
<PAGE>
Precious metals recovery is accomplished by utilizing
carbon-in-leach (CIL) methods where activated carbon is utilized to
adsorb the gold from the solution. Each leach tank is equipped with
an air lift pump for inter-stage advancement of carbon, and an
air swept cylindrical stationary interstage screen (.030 mesh) for
retention of carbon and downstream gravity transfer of pulp. A 24
mesh carbon safety screen is attached to the end of the leaching
circuit. An air blower provides air for operation of the air lifts
and air sweep on the screens. Pulp loaded with precious metals in the
carbon from the CIL process is passed over a carbon recovery screen
where the carbon is retained and washed, and the pulp is directed
back to the CIL process. The carbon is moved counter-current to the
pulp flow in order that the highest possible gold loadings are
obtained and highly active fresh carbon is maintained in the last leach
tanks.
Liquid ferrous sulfate is added to the tailings to destroy any
residual cyanide. Tailings from the CIL process are directed to the
tailings' impoundment area using a slurry transfer pump. Tailings
are stored in a tailings' impoundment area with tailings' water
reclaimed as required.
Loaded (gold containing) carbon is transferred from the carbon
recovery screen to the strip and acid wash circuits. The carbon is
stripped utilizing atmospheric Zadra desorption methods, with the
resulting pregnant strip solution reporting to electrowinning, where
gold containing sludge is formed, which is pyrometallurgically
refined on-site to dore metal. The carbon is acid washed to remove
detrimental impurities prior to being transferred back to the CIL
circuit.
Reagents (cyanide, lime) are made up in separate agitated mix tanks.
The cyanide mix tank holds up to three days worth of 20% cyanide by
weight solution. The lime mix tank holds up to a supply of three
eight-hour shifts worth of 20% lime by weight slurry. The lime is
pumped to the repulp tank and CIL process as required for alkalinity
control. The cyanide is pumped to the CIL process and carbon strip
circuit as required.
Process water is provided from mine sources and stored in a 40'
thickener. Process water is pumped from the thickener to various
locations throughout the process. If water treatment is required it
is done by utilizing the thickener as a mixing/precipitation device.
Electricity is supplied by local public utilities. In the event power
is discontinued for any reason whatsoever, an emergency generator to
produce power is on site to maintain and provide the power needed.
SCMP Personnel
The SCMP employees, during this past year's start-up testing period
(including its own trained security personnel) total about 144 persons.
The SCMP is operated 24 hours per day, seven days per week and 52 weeks
per year.
Environmental Matters
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies.
Comseb Laboratories (Lab)
The Joint Venture has two laboratories: one located at the SCMP
facilities and the other on real estate owned by the Company near the
SSGM site. At the SSGM Lab, the Joint Venture employs four employees
for each of the twelve-hour shifts where a total of 70,075 samples of
fire assays have been completed through March 31, 1998. Approximately
four employees are working during the two eight-hour shifts at the
SCMP laboratory.
<PAGE>
Corporate Headquarters
The Company leases approximately 4,032 square feet of office space for
its corporate headquarters on the second floor of the building known as
the General Building located at 6001 North 91st Street, Milwaukee,
Wisconsin, at a monthly rental charge of $2,789 on a month-to-month
basis. The lessor is General Lumber & Supply Co., Inc. ("General
Lumber"), a Wisconsin corporation. The Company's President, Edward L.
Machulak owns 55% of the common stock of General Lumber. Edward L.
Machulak disclaims any interest in the balance of General Lumber common
stock which is owned by two of Mr. Machulak's brothers, his wife,
and a trust for the benefit of his children. In addition, the
Company shares proportionately any increase in real property taxes and
any increase in general fire and extended coverage insurance on the
property. In lieu of cash payment, the Lessor has agreed to apply
the monthly rental payments owed to the secured open-ended, on-demand
promissory note(s) due to it.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of security holders in the fourth
quarter ended March 31, 1998.
4(a). EXECUTIVE OFFICERS AND MANAGERS OF THE COMPANY
Listed below are the names and ages of each of the present executive
officers and managers of the Company together with the principal
positions and offices held by each as of the end of the Company's fiscal
year ended March 31, 1998.
Age as of Executive Offices Period
March 31, Held Served
Name 1998 With Company (1) In Office (2)
---- ---- ----------------- -------------
Edward L. Machulak 71 President, Chief
Executive Officer,
and Operating and
Financial Officer 9/14/62 to present
Treasurer 06/78 to present
Edward A. Machulak 46 Executive Vice President 10/16/92 to present
(Son of the Secretary 1/12/87 to present
President) Assistant Secretary 4/15/86 to 1/12/87
Luis A. Limay 56 Project and Mine Manager 10/86 to 1995
Manager of El Salvador
Operations 03/95 to present
(1) Neither have there been nor are there any arrangements nor
understandings between any Executive Officer and any other
person pursuant to which any Executive Officer was elected as an
Executive Officer.
(2) Executive Officers are elected by the Directors for a term expiring
at the Directors' Annual Meeting and/or hold such positions until
their successors have been elected and have qualified.
<PAGE>
Family Relationships
Edward A. Machulak, presently a Director, Member of the Directors'
Executive Committee, Executive Vice President, and Secretary, is the
son of Edward L. Machulak, the Company's Chairman of the Board of
Directors who is also a Member of the Directors' Executive Committee,
and is the President and Treasurer of the Company. Attorney John E.
Machulak (son of Edward L. Machulak) of the law firm of Machulak,
Hutchinson, Robertson, O'Dess & Reilly, S.C. is the legal counsel for
the Company.
Officers', and Key Management's Experience
The business experience of each of the Directors, Officers, and Key
Management is as follows:
Edward L. Machulak has been employed by the Company since September
1962. Mr. Machulak has served as the President, Director, and
Chairman of the Board of Directors of the Company since 1962,
Treasurer since 1978, and on March 11, 1991, he was elected as a Member
of the Directors' Executive Committee. On February 9, 1998, he was
appointed as a member of the Audit Committee.
He is a Director and the President for each of the Company's
subsidiaries: Homespan Realty Co., Inc.; Piccadilly Advertising
Agency, Inc.; San Luis Estates, Inc.; San Sebastian Gold Mines,
Inc.; and Universal Developers, Inc. He is the authorized
representative of the Commerce/Sanseb Joint Venture. He is a Director
and Treasurer of Mineral San Sebastian S.A. de C.V. Also he is
involved in various capacities with the following companies: General
Lumber & Supply Co., Inc., Director; Edjo, Ltd., Director and
Secretary; and Landpak, Inc., Director and Secretary.
Edward A. Machulak is a Director and holds the following Company
positions: Director as of October 28, 1985; a member of the
Directors' Executive Committee as of March 11, 1991; Executive Vice
President as of October 16, 1992; Secretary as of January 12, 1987;
and he was the Assistant Secretary from April 15, 1986 through January
12, 1987. His business experience is as follows: Director and
Corporate Secretary of General Lumber & Supply Co., Inc., a building
material wholesale and retail distribution yard from April 1, 1970 to
November 1983; Director and President of Gamco, Inc., a marketing and
advertising company, from November 1983 to present; Director and
President of Circular Marketing, Inc., an advertising and marketing
business, from March 1986 to present; Director and President of Edjo,
Ltd., a company involved in the development, subdividing and sale of
land and real estate from June 7, 1973 to present; Director and
President of Landpak, Inc., a corporation which owns, operates, manages
and sells real estate from September 1985 to present; and he was involved
in other corporate real estate ventures and business activities since
1976.
Luis Alfonso Limay was appointed to the position of Project and Mine
Manager since October 1986 and is responsible for managing the daily
affairs of the Joint Venture. During March 1995, Mr. Limay was
appointed to the position of Manager of El Salvador operations which
now supersedes his position as Project and Mine Manager. Mr.
Limay was employed by Sanseb from 1977 through March 1978 as its chief
geologist. He obtained degrees in geology and engineering from the
National University of San Marlos, Lima, Peru, and the University of
Toronto. He was employed as chief geologist by Rosario Resources
in a Honduran underground mining operation and he held the same position
with Canadian Javelin in El Salvador. PART II
<PAGE>
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDERS'
MATTERS
(a) Principal Market and Common Stock Price
The Company's common shares are traded on the Boston Stock Exchange
under the symbol "CMG" or "CMG.BN," on a fully listed basis since
February 10, 1976, and on the National Association of Securities Dealers
Automated Quotation System Small-Cap Issue (NASDAQ) under the symbol
"CGCO" since March 23, 1987.
The following table reflects the range of high and low prices of
the common shares as reported by NASDAQ for the period ended March 31,
1998 and the highest and lowest trade price during each quarter through
the period ended March 31, 1997. The quotations reflect inter-dealer
prices without retail mark-up, mark-down or commission, and do
not necessarily represent actual transactions.
For the period ended March 31, 1998 March 31, 1997
High Low High Low
---- --- ---- ---
First quarter ending June 30 $3.625 $2.125 $4.38 $2.38
Second quarter ending September 30 $2.625 $1.625 $3.25 $2.38
Third quarter ending December 31 $2.000 $ .875 $3.25 $1.88
Fourth quarter ending March 31 $1.281 $ .844 $4.00 $1.88
(b) Approximate Number of Holders of Common Shares
As of March 31, 1998, the common shares were held by
approximately 4,500 shareholders of which over 95% are United
States' residents.
As of March 31, 1998, there were approximately 2,207 holders of record
of the Company's common shares. The number of shareholders of the
Company who beneficially own shares in nominee or "street name" or
through similar arrangements are estimated by the Company to be
approximately 2,293.
As of March 31, 1998, there were outstanding: (a) 11,039,670 shares of
common stock; (b) 1,327,400 stock options to purchase common stock;
and 80,000 common shares due on share loans and rights.
(c) Dividend History
Subject to the rights of holders of any outstanding series of
preferred shares to receive preferential dividends, and to other
applicable restrictions and limitations, holders of shares of common
shares are entitled to receive dividends if and when declared by the
Board of Directors out of funds legally available. No dividends were
payable during the last fiscal year ended March 31, 1998. The
declaration of future dividends will be determined by the Board
of Directors in light of the Company's earnings, cash
requirements and other relevant considerations.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial
data for the respective periods presented and should be read in
conjunction with the Consolidated Financial Statements and the
related notes thereto, and Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Year Ended March 31
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Income statement data
Total revenue $ 1,295,908 $ 59,009 $ 55,692 $ 71,792 $ 56,784
============ =========== =========== =========== ===========
Income from
continuing
operations $ 118,603 $ (5,141) $ (28,387) $ (10,038) $ (26,937)
=========== =========== =========== =========== ===========
Income (loss) from
continuing operations
per share:
Basic $ .01 $ .00 $ .00 $ .00 $ .00
=========== =========== =========== =========== ===========
Diluted $ .01 $ .00 $ .00 $ .00 $ .00
=========== =========== =========== ============ ============
Weighted average
shares - basic 10,358,132 8,136,286 7,368,058 5,941,950 4,828,496
=========== =========== =========== =========== ==========
Cash dividends
per common
share $ 0 $ 0 $ 0 $ 0 $ 0
=========== =========== =========== =========== ===========
Balance sheet data
Working
capital*1 $ 614,554 $ 660,596 $ (92,398) $ 322,944 $ (90,620)
=========== =========== =========== =========== ===========
Total assets $25,799,651 $23,196,121 $19,640,191 $17,573,464 $14,583,153
=========== =========== =========== =========== ===========
Short-term
obligations*1 $ 7,270,772 $ 6,029,195 $ 5,660,979 $ 4,932,918 $ 5,176,295
=========== =========== =========== =========== ===========
Long-term
obligations $ 135,000 $ 145,000 $ 20,259 $ 120,000 $ 245,000
=========== =========== =========== =========== ===========
Shareholders'
equity $18,393,879 $16,994,926 $13,958,953 $12,640,546 $ 9,416,858
=========== =========== =========== =========== ===========
*1 Although the short-term obligations are due on demand, these
obligations have the affect of being long-term as most of the debt is
due to related parties who have not called for the payment except for
nominal amounts and payment of their short-term loans made on behalf
of the Company during the past five or more years.
<PAGE>
ITEM 7. 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-K, 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 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 for the three years ended March 31, 1998, 1997 and 1996 and
the financial condition, liquidity and capital resources for the same
three-year period. The financial statements of the Company and the
notes thereto contain detailed information that should be
referred to in conjunction with this discussion.
Restatement of Prior Period Financial Statements
Overview
A redefined structure of the financial statements for the fiscal years
ended March 31, 1998, 1997 and 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. 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 by and earned by the Company which
is due and payable and which is maintained additionally with a separate
accounting. In effect, this restructuring modifies only the financial
reporting and at the time that the profits for the gold mining operation
are distributed, the interest earned on these advances will be paid
first to the Company pursuant to the contract entered into by both joint
venture parties.
For the fiscal year ended March 31, 1998, 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.
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
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.
<PAGE>
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 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, there should be an increase of profits and cash
flow to assist the current cash needs.
The rotary kiln for carbon reactivation will not only regenerate
the carbon, 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 it could place it on heap-leaching pads to increase
additional revenue and profits.
This increase in production of gold broadens the Company's objectives.
It now enables the Company to commence an expanded complementary
operation while continuing its endeavor to obtain sufficient funds
for the SSGM open-pit, heap-leach operation. This is its major and
original goal. 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
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.
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.
<PAGE>
Results of Operation Fiscal Years March 31, 1998 Compared to March 31,
1997 on a Restated Basis
The Company, on a consolidated basis, including the Joint Venture and
excluding the interest income due from the Joint Venture, had a net gain
of $118,603 or $.01 per share for its fiscal year ended March 31, 1998
compared to a nominal loss of $5,141 or $-0- per share for the
previous fiscal year. This gain results primarily from the gold
mining operations, including an added tax value refund of $112,948.
The production costs for March 31, 1997 were not separated to reflect
the cost, but it is believed that an inconsequential profit was
earned. All of the gold proceeds ($969,721) were applied to the
reduction of the investment in the Joint Venture.
During the fiscal year ended March 31, 1998, the Company sold 3,667
ounces of gold and 1,416 ounces of silver at an average realized price
of $315 an ounce and for a gross total of $1,154,920. In
addition, the Joint Venture transferred the 259 ounces of gold held in
its inventory to the Company at a value of $79,523. Therefore, a
total of 3,926 ounces of gold were produced at a value of $1,234,443.
The following schedule reflects the cost to produce gold during this
fiscal period:
Total Per Ounce
----- ---------
Direct mining expense $ 736,743 $187.64
Third party smelting,
refining and
transportation cost 41,611 10.60
---------- -------
Cash operating cost 778,354 198.24
Royalties (52% belongs to the Company) 61,722 15.72
Government tax 37,033 9.43
---------- -------
Total cash cost 877,109 223.39
Depreciation 208,254 53.04
---------- -------
Total production costs $1,085,363 $276.43
========== =======
Direct mining expense includes all expenditures incurred at the SCMP
site, including inventory changes and specific corporate charges.
Exploration expenditures are not included in the direct mining
expense.
The comparisons to the fiscal year ended March 31, 1997 are irrelevant
as no gold sale expenses in producing gold were included in 1997.
The most significant change was the elimination of interest income
and expense which are not shown on the consolidated statements of
operations.
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 the same for 1997 and 1996.
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 as of this date.
Inflation did not have a material impact on operations in 1997 or
1996. Management of the Company does not anticipate that inflation will
have a significant impact on continuing operations.
The interest expense in the sum of $667,836 was capitalized by the
Joint Venture for the fiscal year ended March 31, 1998 and $554,636 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.
Results of Operation Fiscal Years March 31, 1997 Compared to March 31,
1996 on a Restated Basis
The Company had a net loss of $5,141 or $-0- per share for its fiscal
year ended March 31, 1997 compared to a net loss of $28,387 or $-0- per
share for the previous fiscal year. This decrease was attributable
primarily to a reduction of general and administrative expenses in
1997. The interest expense of $554,636 (1997) and $470,710
(1996) was capitalized by the Joint Venture.
Financing Activities, Liquidity and Capital Resources
During this fiscal year the Company borrowed a sum of $809,853;
$713,591 was from related parties which included cash and accrued
interest; the balance of $96,262 was from unrelated parties and included
cash and accrued interest.
<PAGE>
A total of 1,846,628 common shares were issued for a sum of $2,795,350
during this fiscal year. These shares were issued for the
following: cash, 34,477 shares ($74,025); directors, officers
employees, and for services, 169,250 shares ($230,661); payment of
debt and miscellaneous, 592,936 shares ($855,663); exercise of stock
options, 60,000 shares ($120,000); and 1,515 shares of Series A
Convertible Preferred Stock were converted in exchange for 989,965
common shares ($1,515,000).
The Company expects to continue operating its SSGM by expanding
its mill production capacity. Additional equipment has been
purchased and has been delivered or is in route of delivery. It is
believed that the rod mill purchased should 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 should have a sufficient cash
flow to operate for a long period of time. 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 by a
joint venture or by other means.
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 540 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 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.
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 amount of $3,402,089 was supplied to the Joint Venture
in fiscal 1998. 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 this fiscal year 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 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.
<PAGE>
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
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.
From September 1987 through March 31, 1998, the Company has invested in
the Joint Venture, including interest charges payable to the Company,
the sum of $19,500,508 and three of the Company's wholly-owned
subsidiaries have advanced the sum of $590,265, for a total of
$20,090,773. 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 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 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, and many other related needs.
Employees
The Joint Venture employs approximately 300 full-time persons from
El Salvador (up to 325 persons, including part-time employees) to
perform its exploration, exploitation, and development programs; to
produce gold from its SCMP facilities; and to handle the administration
of its activities. None of these employees are covered by any
collective bargaining agreements. It has developed a continuous
harmonious relationship with its employees. It believes that the
Joint Venture is the largest single non-agricultural employer in El
Salvador's Eastern Zone. Also, the Company employs approximately four
persons (plus part-time help) in the United States.
<PAGE>
Insurance
The Joint Venture has in existence insurance through an El Salvador
insurance company with the following 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.
Company Advances to the Joint Venture
Since September 1987 through March 31, 1998, the Company, and three
of its subsidiaries, have advanced to the Joint Venture $20,090,773.
Included in the total advances is the interest charged to the Joint
Venture by the Company and this charge amounts to $7,414,526 through
March 31, 1998. The Company furnishes all of the funds required by the
Joint Venture.
Efforts to Obtain Capital
Since the concession was granted, and through the present time,
substantial effort is exercised in securing funding through various
sources, all with the purpose to resume and expand the operations of
the SCMP and SSGM and to continue the exploration of its other mining
prospects.
The Company, Sanseb, and the Joint Venture consider the past political
situation in the Republic of El Salvador to have been unstable, and
believe that the final peace declaration on December 16, 1992, has put
an end to war. Presently, interested investors continue to be
apprehensive and skeptical about the political status of the Republic
of El Salvador and therefore continue to be hesitant to invest the
funds required. However, 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 the fiscal year ended March 31, 1999.
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, 1998 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 has not yet made an assessment of
the impact of the year 2000 issue. The Company expects to initiate
communications with all of 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
parties' failure to remediate their own year 2000 issue.
<PAGE>
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 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 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 any 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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
And Supplementary Financial Data
Page
Report of Independent Certified Public Accountant
Financial Statements:
Consolidated Balance Sheets, Years Ended March 31, 1998 and 1997
Consolidated Statements of Operations, Years Ended March 31, 1998, 1997
and 1996
Consolidated Statements of Changes in Shareholders' Equity Years
Ended March 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows, Years Ended March 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements
Supplementary Financial Data:
Report of Independent Accountants on the Financial Statements Schedules
Financial statements schedules other than those listed herein have
been omitted since they are either not required, are not applicable,
or the required information is included in the financial statements
and related notes.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To the Shareholders and Board of Directors of Commerce Group Corp.:
I have audited the consolidated balance sheets of Commerce Group Corp.
("Company"), a Delaware Corporation, and its subsidiaries, as of March
31, 1998 and 1997, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows, for each
of the three fiscal years in the periods ended March 31, 1998, 1997
and 1996. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion
on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted
auditing standards. Those standards require that I plan and perform
the audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. I believe that my audits provide a reasonable
basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Commerce Group Corp. and its subsidiaries as of March 31,
1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three fiscal years in the periods
ended March 31, 1998, 1997 and 1996, in accordance with accounting
principles generally accepted in the United States.
Bruce Michael Redlin
Certified Public Accountant
Milwaukee, Wisconsin
May 19, 1998
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Balance Sheets--March 31
1998 1997
ASSETS ---- ----
Current assets
Cash $ 61,287 $ 796,106
Investments 187,792 194,888
Accounts receivable 452,534 299,746
Inventories 205,300 191,250
Prepaid items and deposits
49,939 38,167
----------- -----------
Total current assets 956,852 1,520,157
Real estate (Note 5) 1,179,836 1,179,836
Property, plant and equipment, net 3,332,303 1,812,612
Mining resources investment 20,330,660 18,656,516
----------- -----------
Total assets $25,799,651 $23,169,121
=========== ===========
LIABILITIES
Current liabilities
Accounts payable $ 342,298 $ 144,033
Notes and accrued interest payable to
related parties (Notes 6 & 7) 4,175,120 3,461,529
Notes and accrued interest payable to
others (Note 6) 743,071 646,809
Accrued salaries 1,509,015 1,344,015
Accrued legal fees 175,082 137,069
Other accrued expenses 461,186 440,740
----------- -----------
Total liabilities 7,405,772 6,174,195
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; 1997-1,515 shares
(Note 10) $ 0 $ 1,515,000
Common stock, $0.10 par value:
Authorized 15,000,000 shares;
Issued and outstanding:
1998-11,039,670 (Note 10) 1,103,967
1997-9,193,042 (Note 10) 919,304
Capital in excess of par value 16,969,724 14,359,037
Retained earnings (deficit) 320,188 201,585
----------- -----------
Total shareholders' equity 18,393,879 16,994,926
----------- -----------
Total liabilities and
shareholders' equity $25,799,651 $23,169,121
=========== ===========
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 Year Ended March 31
1998 1997 1996
Revenues: ---- ---- ----
Gold sales $ 1,234,443 $ 0 $ 0
Campground income 61,465 59,009 55,692
----------- ---------- ----------
Total revenues 1,295,908 59,009 55,692
Expenses:
Cost of gold sales 877,109 0 0
Depreciation 208,254 0 0
General and administrative 207,915 67,982 86,748
----------- ---------- ----------
Total expenses 1,293,278 67,982 86,748
Other income:
Interest income 3,025 3,832 2,669
El Salvador added
value tax refund 112,948 0 0
----------- ---------- ----------
Other income 115,973 3,832 2,669
----------- ---------- ----------
Net profit (loss) $ 118,603 $ (5,141) $ (28,387)
Credit (charges) for
income taxes 0 0 0
----------- ---------- ----------
Net income (loss) after income
tax credit (charge) $ 118,603 $ (5,141) $ (28,387)
=========== ========== ==========
Net income (loss) per share
(Note 2) basic $ .01 $ .00 $ .00
=========== ========== ==========
Net income (loss) per share
(Note 2) diluted $ .01 $ .00 $ .00
=========== ========== ==========
Weighted av. common shares
outstanding (Note 2) 10,358,132 8,136,286 7,368,058
=========== ========== ==========
Weighted av. diluted common
shares (Note 2) 11,783,532 9,727,646 7,465,898
=========== ========== ==========
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
For the Years Ended March 31, 1998, 1997 and 1996
Common Stock
---------------------------------------
Number Retained
of Excess of Earnings
Shares Par Value Par Value (Deficit)
------ --------- --------- ---------
Balance March 31, 1995 7,294,719 $ 729,472 $11,675,961 $235,113
Net income (loss) for FY (28,387)
March 31, 1996
Common Shares Issued
Dir./off./employee/services 45,384 4,538 110,069
comp.
Payment of debt 248,468 24,847 739,090
Stock options/rights 60,260 6,026 139,624
Cash/equipment lease/purchase 143,378 14,338 308,262
---------- ---------- ----------- --------
Balance March 31, 1996 7,792,209 779,221 12,973,006 206,726
Net income (loss) for FY
March 31, 1997 (5,141)
Dir./off./employee/services
comp. 66,563 6,656 122,875
Payment of debt 381,043 38,104 762,792
Cash 953,227 95,323 1,526,927
Preferred conv. stock
issuance costs:
Current (404,466)
Deferred (622,097)
---------- ---------- ----------- --------
Balance March 31, 1997 9,193,042 $ 919,304 $14,359,037 $201,585
Net income (loss) for FY
March 31, 1998 118,603
Dir./off./employee/services
comp. 169,250 16,925 213,736
Payment of debt 592,936 59,293 796,370
Cash 34,477 3,448 70,577
Preferred stock converted 989,965 98,997 1,416,004
Stock options 60,000 6,000 114,000
---------- ---------- ----------- --------
Balance March 31, 1998 11,039,670 $1,103,967 $16,969,724 $320,188
========== ========== =========== ========
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 Years Ended March 31
1998 1997 1996
Operating activities: ---- ---- ----
Net income (loss) $ 118,603 $ (5,141) $ (28,387)
----------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation 208,254 203,341 229,253
Changes in assets and liabilities
Decrease (increase) in account
receivables (152,788) 37,998 (88,918)
Decrease (increase) in inventories (14,050) 13,011 (129,953)
Decrease (increase) in prepaid items
and deposits (4,676) 21,012 (7,797)
Increase (decrease) in accounts
payable and accrued liabilities 198,265 (11,201) (67,950)
Increase (decrease) in other
liabilities 20,446 (220,761) 148,276
Increase (decrease) in accrued
salaries 165,000 139,875 (101,000)
Increase (decrease) in accrued
legal fees 38,013 60,186 (89,472)
----------- ----------- -----------
Total adjustments 458,464 243,461 (107,561)
----------- ----------- -----------
Net cash provided by (used in)
operating activity 577,067 238,320 (135,948)
Investing activities:
Investment in mining resources (3,402,089) (3,080,901) (2,518,674)
----------- ----------- -----------
Net cash used in investing
activities (3,402,089) (3,080,901) (2,518,674)
Financing activities:
Net borrowings 809,853 524,858 858,466
Common stock issued 1,280,350 3,041,114 1,346,794
----------- ----------- -----------
Net cash provided by (used in)
financing activities 2,090,203 3,565,972 2,205,260
Net increase (decrease) in cash and
cash equivalents (734,819) 723,391 (449,362)
Cash - beg. of year 796,106 72,715 522,077
----------- ----------- -----------
Cash - end of year $ 61,287 $ 796,106 $ 72,715
=========== =========== ===========
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:
1. The following amounts of interest expense paid or accrued were
capitalized: $667,836 (1998), $554,636 (1997) and $470,710
(1996).
2. The interest expense paid in cash was $17,550 (1998), $1,350 (1997)
and none in 1996.
3. The Company paid no income taxes during 1998, 1997, and 1996.
4. The investment consists of precious stones which are stated at the
lower cost or market value.
5. Accounts receivable consist of gold bullion shipped to the
refinery pending the settlement date.
6. Inventory consists of processed ores and 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 fiscal years ended March 31:
1. The Company issued the following common shares for the values
shown for services rendered:
Shares Value
------- --------
1998 169,250 $213,736
1997 66,653 $122,875
1996 45,384 $110,069
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 sale of gold for 1997 which amounted to $969,721 and for 1996
which amounted to $1,180,279 was applied as a reduction to the
mining resources account.
4. Other non-cash items were for the unpaid salary and fees which
amounted to $203,013 for 1998 and $139,875 for 1997.
5. Non-cash equipment financing activities were none for 1998, none
for 1997 and $35,775 for 1996.
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
(1) The Company and Basis of Presentation of Financial Statements
(a) Commerce Group Corp. ("Commerce," the "Company" and/or
"Registrant") and its 82 1/2% owned subsidiary, San Sebastian Gold
Mines, Inc. ("Sanseb") have formed the Commerce/Sanseb Joint
Venture ("Joint Venture") for the purpose of performing gold mining
and related activities, including, but not limited to, exploration,
exploitation, development, extraction and processing of precious
metals in the Republic of El Salvador, Central America. Gold
bullion, the Joint Venture's principal product, is produced (but not
on a full production basis) in El Salvador and refined and sold
in the United States. Expansion of exploration is taking place
at the San Sebastian Gold Mine ("SSGM") which is located near the
city of Santa Rosa de Lima. Exploration is also taking place
at 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
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
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 income
and expenses and the assets, liabilities and equity of its Joint Venture
rather than show 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 1996 were also restated to
reflect this change.
<PAGE>
The balance sheet effect of the change in policy 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.
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 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 cost or market value.
Accounts Receivable
The accounts receivable account consists of gold bullion produced and
shipped to the refinery and pending payment.
<PAGE>
Inventory
Inventories consist of the following as of March 31, 1998:
1998 1997
---- ----
Gold in process (1) (Stated at market value) $ 79,523 $ 88,250
Materials and supplies (Stated at cost) 125,777 103,000
-------- --------
$205,300 $191,250
(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. The Joint Venture capitalizes its
costs and expenses and 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.
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 cost or
estimated net realizable value. Mining properties and
development costs and certain plant and equipment are depreciated 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.
<PAGE>
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.
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>
Net income per share is calculated based on the weighted average number
of common shares issued and outstanding during this fiscal year. The
Company does not include in this calculation any common stock
equivalent, rights or contingent issuances of common stock.
In computing the shares on a fully diluted basis, the net income per
share is based on the assumption that all rights and options were
exercised on the last day of the period that is being reported. No
allowance was made for the common shares that will be issued upon the
conversion of the Series A Convertible Preferred Stock as the exact
number of shares to be issued are indeterminable.
If on March 31, 1998, 1,352,400 option shares and the 73,000 loan shares
would be added to the weighted average calculated number of shares
which amounts to 10,358,132, the total number of the weighted average
fully diluted shares would be 11,783,532, and the profit per share for
the fiscal year ended March 31, 1998, would be $.01 per share. The
same assumptions were used for the same 1997 fiscal period.
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 in exchanging dollars for colones 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:
Plant Mining
and Resource Total Total
Equipment Investment 1998 1997
--------- ----------- ----------- -----------
San Sebastian Gold
Mine $ 115,197 $20,330,660 $20,445,857 $18,750,311
Other Mining
Properties
San Cristobal Mill
and Plant 3,217,106 0 3,217,106 1,718,817
---------- ----------- ----------- -----------
Total Investment $3,332,303 $20,330,660 $23,662,963 $20,469,128
========== =========== =========== ===========
<NOTES>
(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.
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 March 31, 1998, the Company's investments including charges for
interest expense were $19,500,508, and three of the Company's
wholly-owned subsidiaries' advances were $590,265 for a total of
$20,090,773.
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.
<PAGE>
As of March 31, 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 advances since 09/22/87 $ 22,884,951 $ 17,253,501
Less amounts received from gold sales (3,384,443) (2,150,000)
------------ ------------
The Company's net of gold sale proceeds
advances since 09/22/87 19,500,508 15,103,501
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 21,524,975 19,388,321
----------- ------------
Total: 48,041,843 41,508,182
Advances by the Company's three
subsidiaries 590,265 590,265
------------ ------------
Combined total investment $ 48,632,108 $ 42,098,447
============ ============
SSGM Activity
The Company had no significant activity at the SSGM site from
February 1978 through January 1987. The present status is that, the
Company, since January 1987, and thereafter, the Joint Venture,
since September 1987, has completed certain of the required mining
pre-production preliminary stages in the minable 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 for processing at the SCMP.
Mineral San Sebastian S.A. de C.V. ("Misanse")
(a) Misanse Corporate Structure
The SSGM real estate is owned by and leased to the Joint Venture by
Misanse, a Salvadoran chartered corporation. The Company owns 52% of
the total of Misanse's issued and outstanding shares. The balance
is owned by approximately one hundred El Salvador, Central American,
and United States' citizens. The Company has the right to select six of
Misanse's ten directors. (Note 4)
(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.
<PAGE>
The lease is freely assignable by the Joint Venture without notice
to Misanse. The lease may also be canceled by the Joint Venture on
thirty 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.
Effective February 1996, the Government of El Salvador passed a law
which requires 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. 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.
<PAGE>
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.
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 seventy acres of land that
it considers to be key property. 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 175 acres in the Department of Morazan in the
Republic of El Salvador.
<PAGE>
(6) Notes Payable and Accrued Interest
March 31
Notes payable consist of the following: 1998 1997
---- ----
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) $4,175,120 $3,461,529
Other (consists primarily of short-term
notes and accrued 1998 interest of
$305,578 (1997, $285,166) 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. 743,071 646,809
---------- ----------
Total: $4,918,191 $4,108,338
========== ==========
(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, for a total of
$1,509,015.
In addition, with the consent and approval of the Directors, the
President of the Company, as an individual and not as a Director or
Officer of the Company, entered into the following financial
transactions with the Company, the status of which is reflected as of
March 31, 1998:
The amount of funds which the Company has borrowed from its
President from time to time, together with accrued interest, amounts
to $2,219,984. To evidence this debt, the Company has issued to its
President a series of open-ended, secured, on-demand promissory
notes, with interest payable monthly at the prime rate plus two percent,
but not less than 16% per annum.
The Company had borrowed, as of March 31, 1997, an aggregate of
$469,987, 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 returned all of the shares (222,950)
borrowed from him during this fiscal period and it issued 40,036 of its
common shares for the payment of interest for the shares loaned or
pledged as collateral for the benefit of the Company. It may owe
additional common shares for such shares loaned or pledged by him for
collateral purposes to others for the benefit of the Company, all in
accordance with the terms and conditions of Director- approved
open-ended loan agreements dated June 20, 1988, October 14, 1988, May
17, 1989, and April 1, 1990.
<PAGE>
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 March 31, 1998.
The Company leased approximately 4,032 square feet on a
month-to-month basis for its corporate headquarters office; the monthly
rental charge was $2,789. The annual amount charged for the past three
fiscal years is as follows: 1998, $33,468; 1997, $33,468 and 1996,
$28,316.
The same related company provides administrative services, use of data
processing equipment, use of its vehicles and other property as required
by the Company. Total charges for these services were as follows:
1998, $8,040; 1997, $7,950 and 1996, $7,920.
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 amounts to $1,182,709; the annual
interest rate is four percent plus the prime rate, but not less than 16%,
and it is payable monthly.
The Company's Directors have consented and approved the following
transactions which status are reflected as of March 31, 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 $243,218 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 $175,082 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 $59,222 which bears interest at an
annual rate of 16% payable monthly.
The Directors, by their agreement, have deferred cash payment of their
Director fees beginning on January 1, 1981, until such time as the
Company's operations are profitable. Effective from October 1,
1996, the Director fees were increased from $750 to $1,200 for each
quarterly meeting and $400 for attendance at any other Directors'
meeting. The Executive Committee Director fees were increased from
$250 to $400 for each meeting. The Directors and Officers have a
right to exchange the amount due to them for the Company's common shares.
<PAGE>
As of March 31, 1998, pursuant to the S.E.C. Form 8 Registration
Statement effective as of April 4, 1994, the Directors/Officers
exercised their rights to purchase 29,800 shares at a price of $1.00
per share in payment of all compensation due to them as of March 31,
1998.
The Company advances funds, allocates and charges its expenses to the
Joint Venture. The Joint Venture in turn capitalizes all of these
advances, costs and expenses until such time as it resumes its gold mine
operation. When full production commences, these capitalized costs will
be charged as an expense based on a per ton production basis. The
Company also charges interest for its advances to the Joint Venture
which interest rate is established to be the prime rate quoted on the
first day of each month plus four percent and said interest is payable
monthly.
Company Net Advances to the Joint Venture
Total Interest
Advances Charges
----------- -----------
Balance April 1, 1990 $ 1,625,163 $ 252,060
Year Ended March 31, 1991 718,843 266,107
Year Ended March 31, 1992 698,793 312,004
Year Ended March 31, 1993 1,003,617 347,941
Year Ended March 31, 1994 1,155,549 451,180
Year Ended March 31, 1995 2,884,078 751,389
Year Ended March 31, 1996 3,122,766 1,286,739
Year Ended March 31, 1997 3,894,692 1,567,375
Year Ended March 31, 1998 4,397,007 2,179,731
----------- ----------
$19,500,508 $7,414,526
Advances by three of the Company's
wholly-owned subsidiaries 590,265 0
----------- ----------
Total Net Advances March 31, 1998 $20,090,773 $7,414,526
(8) Commitments
Reference is made to Notes 2, 4, 6, 7, and 10.
(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 $3,339,645 which may be carried forward to offset future
taxable income; the net operating losses expire at various times to the
year of 2013.
<PAGE>
(10) Description of Securities
a. Common Stock
The Company's Certificate of Incorporation authorizes the
issuance of 15,000,000 shares of common stock, $0.10 par value per
share of which 9,193,042 shares were outstanding as of March 31, 1997.
Holders of shares of common stock are entitled to one vote for each
share on all 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 March 31, 1997, there
remained 1,515 preferred shares issued and outstanding, and none were
issued and outstanding as of March 31, 1998.
The number of shares of common stock issuable upon conversion of each
of the 2,500 shares of preferred stock, and the consequent number of
shares of common stock available for resale under this prospectus, is
based upon a conversion ratio which is $1,000 divided by the lower of
(a) $2.90 or (b) 65% of the closing bid price of the common stock on
NASDAQ averaged over the five trading days immediately prior to the
date of conversion. The holders that converted these Series A
Convertible Preferred Shares received 655,227 common shares (1997) and
989,965 common shares (1998).
The remaining preferred shares are issuable in one or more series.
The Board of Directors is authorized to fix or alter the dividend rate,
conversion rights (if any), voting rights, rights and terms of
redemption (including any sinking fund provisions), redemption price or
prices, liquidation preferences and number of shares constituting any
wholly unissued series of preferred shares.
c. Stock option activity during 1998, 1997, and 1996 was as follows:
03/31/98 03/31/97 03/31/96
-------- -------- --------
Weighted Weighted Weighted
Average Average Average
Amount Price Amount Price Amount Price
------ ----- ------ ----- ------ -----
Outstanding,
beg. yr. 1,591,360 $3.22 97,840 $2.66 154,850 $2.66
Granted 0 $0.00 1,507,400 $3.38 3,250 $5.00
Exercised (60,000) $2.00 0 $0.00 (60,260) $2.42
Forfeited (710) $4.25 (13,880) $3.00 0 $0.00
Expired (203,250) $2.25 0 $0.00 $0.00
---------- ----- --------- ----- -------- -----
Outstanding,
end of yr. 1,327,400 $3.42 1,591,360 $3.22 97,840 $2.66
========= ===== ========= ===== ====== =====
<PAGE>
A summary of the outstanding stock options as of March 31, 1998, follows:
Weighted Average
Range of Amount Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- --------------
$2.00 to $2.99 230,000 1.78 years $2.72
$3.00 to $5.00 1,097,400 2.19 years $3.56
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.
Said interest payable is for shares loaned to the Company and/or for
such shares loaned or pledged for collateral purposes, or for unpaid
interest, all in accordance with the terms and conditions of
Director-approved open-ended loan agreements dated June 20, 1988,
October 14, 1988, May 17, 1989 and April 1, 1990.
e. Stock Rights - Others
The Company has agreed to issue up to 25,000 of its restricted common
shares in connection with a certain funding agreement entered into on
December 19, 1996.
f. Share Loans - Others
A series of borrowings of the Company's common shares were made under
the provision that the owners would sell said shares as the Company's
designee, with the proceeds payable to the Company. In exchange, the
Company agreed to pay these shares loaned within 31 days or less by
issuing its restricted common shares, together with interest payable in
restricted common shares payable at a negotiated rate of interest
normally payable in advance for a period of two years; as of March
31, 1998; 55,000 shares were borrowed and were paid after the fiscal
year ended. In addition, there were 18,000 common shares due; 15,500
shares were for the purchase of equipment and 2,500 shares were
for services rendered.
g. 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, 478,197
were issued and 21,803 shares are authorized to be issued.
(11) Litigation
There is no material litigation.
<PAGE>
(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.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by
reference from information under the caption "Election of
Directors" in the Company's definitive proxy statement to be filed
pursuant to Regulation 14A no later than 120 days after the close of its
fiscal year. The information on Executive Officers is contained in Part
I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by
reference from information under the caption "Executive
Compensation" in the Company's definitive proxy statement to be filed
pursuant to Regulation 14A no later than 120 days after the close of its
fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMEMT
The information called for by Item 12 is incorporated by
reference from information under the caption "Voting Securities" and
"Principal Shareholders and Ownership by Management" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A
no later than 120 days after the close of its fiscal year.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors and persons
beneficially owning greater than ten percent of the outstanding shares,
to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Based solely on a review of the
copies of such forms furnished to the Company or representations that
no Form 5 was required, the Company believes that all Section 16(a)
filing requirements were complied with as required.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by
reference from information under the caption "Certain
Relationships and Related Transactions" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A no
later than 120 days after the close of its fiscal year.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedules
See index to Consolidated Financial Statements and Supplementary Data in
Item 8 of this report.
Report of Independent Accountants on the Financial Statement
Schedules
Schedule IV (1) Indebtedness of Related Parties
Schedule IV (2) Indebtedness to Related Parties
(b) Reports on Form 8-K
Form 8-K dated January 21, 1998 regarding the Company's employing
Fortress Financial Group, Limited to advise and counsel it on
procedures and techniques to increase the Company's shareholder value.
(Incorporated by reference as this Form 8-K was filed electronically
through the EDGARLink Electronic Filing System on January 21, 1998.)
(c) Exhibits
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibits in Item 601 of Regulation S-K. The exhibit
numbers noted by an asterisk (*) indicate exhibits actually filed with
this Annual Report on Form 10-K. All other exhibits are incorporated by
reference into this Annual Report on Form 10-K.
Exhibit No. Description of Exhibit Page
- ----------- ---------------------- ----
3.1 Articles of Incorporation of the Company.
(Incorporated by reference to the Company's
Registration Statement No. 2-66932 on Form S-I
filed on April 22, 1980.)
3.2 By-laws of the Company. (Incorporated by
reference to Exhibit 3.2 to the Company's Form
10-K for the year ended March 31, 1993.)
4 Instruments defining the rights of security
holders, including indentures.
4.1* Stock Option Agreement dated March 22, 1995 was
modified in a letter agreement dated June 26,
1997 by reducing the number of shares from 20,710
to 20,000, increasing the price per share from
$4.00 to $4.25, and extending the expiration
dated from September 22, 1997 to September 22,
1998. (Incorporated by reference to Exhibit 4.14
of the Company's Form 10-K for the year ended
March 31, 1995 and Exhibit 4.3 of the Company's
Form 10-K for the year ended March 31, 1997)
4.2 Three-Year Stock Option Agreement dated October
1, 1996 to purchase 22,500 common shares at $3.00
per share. (Incorporated by reference to Exhibit
4.6 of the Company's Form 10-K for the year ended
March 31, 1997.)
<PAGE>
4.3 Four-Year Stock Option Agreement dated December
9, 1996 to purchase 3,000 common shares at $3.00
per share. (Incorporated by reference to Exhibit
4.7 of the Company's Form 10-K for the year ended
March 31, 1997.)
4.4 Four-Year Stock Option Agreement dated December
11, 1996 to purchase 15,000 common shares at
$3.00 per share. (Incorporated by reference to
Exhibit 4.8 of the Company's Form 10-K for the
year ended March 31, 1997.)
4.5 Four-Year Stock Option Agreement dated December
11, 1996 to purchase 60,000 common shares at
$3.00 per share. (Incorporated by reference to
Exhibit 4.9 of the Company's Form 10-K for the
year ended March 31, 1997.)
4.6 Four-Year Stock Option Agreement dated December
14, 1996 to purchase 83,900 common shares at
$3.00 per share. (Incorporated by reference to
Exhibit 4.10 of the Company's Form 10-K for the
year ended March 31, 1997.)
4.7 Four-Year Stock Option Agreement dated December
27, 1996 to purchase 30,000 common shares at
$2.50 per share. (Incorporated by reference to
Exhibit 4.11 of the Company's Form 10-K for the
year ended March 31, 1997.)
4.8 Four-Year Stock Option Agreement dated December
31, 1996 to purchase 25,000 common shares at
$3.00 per share. (Incorporated by reference to
Exhibit 4.12 of the Company's Form 10-K for the
year ended March 31, 1997.)
4.9 Four-Year Stock Option Agreement dated January
10, 1997 to purchase 68,000 common shares at
$3.00 per share. (Incorporated by reference to
Exhibit 4.13 of the Company's Form 10-K for the
year ended March 31, 1997.)
4.10 Two-Year Stock Option Agreement is to be issued
effective as of January 30, 1997 to purchase
100,000 common shares at $3.22 per share and an
additional 100,000 common shares at $4.22 per
share. (Incorporated by reference to Exhibit 4.14
of the Company's Form 10-K for the year ended
March 31, 1997.)
4.11 One, Two, Three, Four and Five-Year Stock Option
Agreements are to be issued effective as of
January 23, 1997, to purchase 200,000 shares each
of the years during a five-year period as
follows: year one, $2.25; year two $2.75; year
three, $3.25; year four $3.75; and year five
$4.25. (Incorporated by reference to Exhibit 4.15
of the Company's Form 10-K for the year ended
March 31, 1997.)
9 Voting Trust Agreement--not applicable.
<PAGE>
10 Material contracts regarding sale of assets and
deferred compensation.
10.1 Bonus compensation, Edward L. Machulak, February
16, 1987. (Incorporated by reference to Exhibit
7 of the Company's Form 10-K for the year ended
March 31, 1987.)
10.2 Loan Agreement and Promissory Note, Edward L.
Machulak, June 20, 1988. (Incorporated by
reference to Exhibit 10.2 of the Company's Form
10-K for the year ended March 31, 1993.)
10.3 Loan Agreement and Promissory Note, Edward L.
Machulak, October 14, 1988. (Incorporated by
reference to Exhibit 10.3 of the Company's Form
10-K for the year ended March 31, 1993.)
10.4 Loan Agreement and Promissory Note, Edward L.
Machulak, May 17, 1989. (Incorporated by
reference to Exhibit 10.4 of the Company's Form
10-K for the year ended March 31, 1993.)
10.5 Loan Agreement and Promissory Note, Edward L.
Machulak, April 1, 1990. (Incorporated by
reference to Exhibit 10.5 of the Company's Form
10-K for the year ended March 31, 1993.)
10.6 Letter Agreement, Edward L. Machulak, October 10,
1989. (Incorporated by reference to Exhibit
10.6 of the Company's Form 10-K for the year
ended March 31, 1993.)
10.7 Loan Agreement and Promissory Note dated January
19, 1994. (Incorporated by reference to Exhibit
10.10 of the Company's Form 10-K for the year
ended March 31, 1995.)
10.8 John E. Machulak and Susan R. Robertson, Loan
Agreement and Promissory Note dated June 3, 1994.
(Incorporated by reference to Exhibit 10.14 of
the Company's Form 10-K for the year ended March
31, 1995.)
10.9* Lillian M. Skeen, Loan Agreement and Open Ended
On Demand Promissory Note dated June 26, 1997.
10.10* Robert C. Skeen, Loan Agreement and Open Ended On
Demand Promissory Note dated June 26, 1997.
10.11* Robert C. Skeen, Loan Agreement and Open Ended On
Demand Promissory Note dated January 20, 1998.
10.12* John E. Machulak and Susan R. Robertson, Loan
Agreement and Open Ended On Demand Promissory
Note dated March 6, 1998.
<PAGE>
10.13* Lillian M. Skeen, Loan Agreement and Open Ended
On Demand Promissory Note dated May 21, 1998.
11* Schedule of Computation of Net Income Per Share
13 Annual Report to security holders, Form 10-Q or
Quarterly Report to security holders:
Annual Report for the period ended March 31,
1997, will include the Form 10-K and will be
submitted within 120 days after the fiscal year
end.
21* Subsidiaries of the Company.
23.1* Consent of the independent auditors of the
Company.
99.0 Additional Exhibits
99.1* Confirmation agreement, General Lumber & Supply
Co., Inc., April 13, 1998.
99.2* Confirmation Agreement, Edward L. Machulak, April
13, 1998.
99.3* Confirmation Agreement, Edward L. Machulak
Rollover Individual Retirement Account, April 13,
1998.
99.4* Confirmation Agreement, Sylvia Machulak Rollover
Individual Retirement Account, April 13, 1998.
99.5 Concession Agreement Assignment to the Company by
Misanse (Incorporated by reference to Exhibit 1
of the Company's Form 10-K for the year ended
March 31, 1988.)
99.6 Other Material Information: Restatement of prior
period financial statements. (Incorporated by
reference to Item 8 of the Company's Form 10-K
for the year ended March 31, 1998.)
99.7 The El Salvador Constitutional Supreme Court of
Justice order issued on May 12, 1994, suspending
immediately any charges to the Joint Venture for
import duty taxes of any kind and dated May 18,
1994 (English and Spanish). (Incorporated by
reference to Exhibit 28.6 of the Company's Form
10-K for the year ended March 31, 1994.)
99.8 Form S-8 Registration Statement effective date
April 4, 1994, File No. 33-77226. (Incorporated
by reference as this S-8 Registration has been
filed.)
99.10 Individual financial statements of majority-owned
(d)(2) companies have been omitted because these
companies do not constitute a significant or
material contribution to the Company.
<PAGE>
99.11 S.E.C. Form S-3 Registration Statement No. 333-
23203 filed under the Securities Act of 1933 as
amended and declared effective at 10:00 a.m. on
March 26, 1997.
99.12 Pending preliminary S.E.C. Form S-3 Registration
Statement No. 333-25797 filed April 24, 1997, and
which includes the stock options to purchase one
million two hundred thousand of the Company's
common shares during a five-year period ending
November 29, 2001 at an issuance price ranging
from $2.25 to $4.25 for each restricted share.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-K - MARCH 31, 1998
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly
authorized on May 19, 1998.
COMMERCE GROUP CORP.
(Company)
By: /s/ Edward L. Machulak
----------------------
Edward L. Machulak
Chairman of the Board of
Directors,
Member of Executive Committee,
Director-Emeritus, President,
Treasurer,
Chief Executive, Operating and
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons, on behalf
of the Company and in the capacities and on the dates indicated:
Name Office Date
/s/ Edward L. Machulak Chairman of the Board of May 19, 1998
- ---------------------- Directors, Member of Executive
Edward L. Machulak Committee, Director-Emeritus,
President, Treasurer, Chief
Executive, Operating and
Financial Officer
/s/ Edward A. Machulak Director, Member of Executive May 19, 1998
- ---------------------- Committee, Executive Vice
Edward A. Machulak President and Secretary
/s/ Sidney Sodos Director May 19, 1998
- ----------------------
Sidney Sodos
/s/ Clayton H. Tebo Director May 19, 1998
- ----------------------
Clayton H. Tebo
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANT ON THE FINANCIAL STATEMENT
SCHEDULES
My report on the consolidated financial statements of Commerce Group
Corp. for its fiscal years ended March 31, 1998, 1997, 1996, 1995
and 1994, is included in this Form 10-K. In connection with my
audits of such financial statements, I have also audited the
following: supplementary income statement information, selected
financial data report, and the related financial statement schedules
listed in Item 14(a) of this Form 10-K.
In my opinion, the consolidated financial statement information and
schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein, all in
accordance with accounting principles generally accepted in the United
States.
Bruce Michael Redlin
Certified Public Accountant
Milwaukee, Wisconsin
May 19, 1998
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV (1)
INDEBTEDNESS OF RELATED PARTIES - NOT CURRENT
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
Balance at Balance
Beginning Additions to Deletions to at
of Indebtedness Indebtedness End of
Name of Person (1) Period (2) (3) Period
- ------------------ ------ ------------ ------------ ------
Year ended
March 31, 1998
Joint Venture $15,693,766 $3,806,742 $0 $19,500,508
Year ended
March 31, 1997
Joint Venture $11,799,074 $3,894,692 $0 $15,693,766
Year ended
March 31, 1996
Joint Venture $ 8,676,308 $3,122,766 $0 $11,799,074
(1) Commerce Group Corp. and San Sebastian Gold Mines, Inc.,
Joint Venture ("Joint Venture").
(2) The purpose of the advances is to continue the exploration,
exploitation and development of the SSGM and the other
mining prospects managed by the Joint Venture and which are
located in the Republic of El Salvador, Central America.
Also, funds were used to retrofit, rehabilitate, repair and
to renovate the San Cristobal Mill and Plant acquired by the
Joint Venture for the purpose of producing gold.
(3) Beginning with September 30, 1987, the total indebtedness
includes the advances of $590,265 from three of the
Company's wholly-owned subsidiaries.
Balance at Balance
Beginning Additions to Deletions to at
of Indebtedness Indebtedness End of
Name of Person (1) Period (2) (3) Period
- ------------------ ------ ------------ ------------ ------
Year ended
March 31, 1998
SSGM $19,388,321 $2,136,654 $0 $21,524,975
Year ended
March 31, 1997
SSGM $17,503,414 $1,884,907 $0 $19,388,321
Year ended
March 31, 1996
SSGM $15,725,444 $1,777,970 $0 $17,503,414
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV(2)
INDEBTEDNESS TO RELATED PARTIES
CURRENT YEARS ENDED MARCH 31, 1998, 1997, AND 1996
Balance at
Beginning Additions to Deletions to Balance
Identity of of Indebtedness Indebtedness at End of
Debtor(1) Period (2) (3) Period
- --------- ---------- ------------ ------------ ---------
Year ended
March 31, 1998
President of the
Company $1,839,465 $350,546(a) $ 0 $2,190,011
President's IRA 400,919 62,766(b) 0 463,685
President's
Affiliated Company 963,152 199,690(c) 0(a) 1,162,842
Others 257,993 25,200(d) 0 283,193
---------- ----------- ------------ ----------
Total, notes
payable $3,461,529 $638,202 $ 0 $4,099,731
========== =========== =========== ==========
President's
Accrued Salary $1,344,015 $165,000(e) $ 0 $1,509,015
========== =========== =========== ==========
Legal fees
(President's son
is a principal) $ 137,069 $ 38,013(f) $ 0 $ 175,082
========== =========== =========== ==========
Year ended
March 31, 1997
President of the
Company $1,346,304 $493,161 $ 0 $1,839,465
President's IRA 342,002 58,917 0 400,919
President's
Affiliated Company 1,175,984 215,668 428,500 963,152
Others 220,080 37,913 0 257,993
---------- ----------- ------------ ----------
Total, notes
payable $3,084,370 $805,659 $428,500 $3,461,529
========== =========== =========== ==========
President's Accrued
Salary $1,204,140 $139,875 $ 0 $1,344,015
========== =========== =========== ==========
Legal fees
(President's son is
a principal) $ 76,883 $ 60,186 $ 0 $ 137,069
========== =========== =========== ==========
Year ended
March 31, 1996
President of the
Company $ 841,168 $651,386 $146,250 $1,346,304
President's IRA 291,617 50,385 0 342,002
President's
Affiliated Company 961,012 214,972 0 1,175,984
Others 163,037 70,668 13,625 220,080
---------- ----------- ------------ ----------
Total, notes
payable $2,256,834 $987,411 $159,875 $3,084,370
========== =========== =========== ==========
President's
Accrued Salary $1,089,390 $114,750 $ 0 $1,204,140
========== =========== =========== ==========
Legal fees
(President's son is
a principal $ 166,355 $ 36,178 $125,650 $ 76,883
========== =========== =========== ==========
Additions to Indebtedness
(2)(a)(b) The additions to the open-ended, secured, on-demand
promissory notes issued to the President of the Company and
his IRA result from net cash advances and/or for accrued
interest.
(2)(c) The President owns 55% of an Affiliated Company's common
shares. The additions to the open-ended, secured, on-demand
promissory note issued to an Affiliated Company result from
cash advances, accrued interest, accrued office rent,
vehicle rental, computer use and other expenses paid on
behalf of the Company.
(2)(d) The additions by others resulted from net cash advances
and/or accrued interest.
(2)(e) The President's salary was accrued for the entire fiscal
year.
(2)(f) The addition of the amounts due to the Law Firm results
from legal services rendered.
(3) Deletions to Indebtedness are reflected as a net to the
additions:
(3)(a) During the fiscal period ended March 31, 1997, the
President's Affiliated Company purchased the following
common shares from the Company: 130,000 common shares on
June 10, 1996 at a cost of $292,500; and 68,000 common
shares on January 10, 1997 at a cost of $136,000. The
payment for the purchase of common shares was made by the
cancellation of $428,500 debt owed to the President's
Affiliated Company.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997 MAR-31-1996
<PERIOD-END> MAR-31-1998 MAR-31-1997 MAR-31-1996
<CASH> 61,287 796,106 0<F1>
<SECURITIES> 0 0 0<F1>
<RECEIVABLES> 690,265<F2> 532,801<F2> 0<F1>
<ALLOWANCES> 0 0 0<F1>
<INVENTORY> 1,385,136<F3> 1,371,086<F3> 0<F1>
<CURRENT-ASSETS> 0 0 0<F1>
<PP&E> 23,662,963<F4> 20,469,128<F4> 0<F1>
<DEPRECIATION> 0 0 0<F1>
<TOTAL-ASSETS> 25,799,651 23,169,121 0<F1>
<CURRENT-LIABILITIES> 7,405,772<F5> 6,174,195<F5> 0<F1>
<BONDS> 0 0 0<F1>
0 0 0<F1>
0 1,515,000 0<F1>
<COMMON> 1,103,967 919,304 0<F1>
<OTHER-SE> 17,289,912 14,560,622 0<F1>
<TOTAL-LIABILITY-AND-EQUITY> 25,799,651 23,169,121 0<F1>
<SALES> 0 0 0<F1>
<TOTAL-REVENUES> 1,411,881 62,841 58,361
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 1,293,278 67,982 86,748
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 118,603 (5,141) (28,387)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 118,603 (5,141) (28,387)
<EPS-PRIMARY> .01<F6> .00<F6> .00<F6>
<EPS-DILUTED> .01 .00 .00
<FN>
<F1>Balance sheet is not required.
<F2>Investments, accounts receivable and prepaid items.
<F3>Gold held in inventory and real estate held for sale.
<F4>PPE is net after depreciation.
<F5>Most of the liabilities are owed to related parties and
since nominal payments were made, this debt could be
construed to be long term.
<F6>EPS - Basic
</FN>
</TABLE>
