UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ To __________
Commission file number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 39-6050862
(State or other jurisdiction of (I.R.S. Employer Identification Number)
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 11,241,670 common
shares of the Company's common stock, $0.10 par value, were issued and
outstanding as of December 31, 1998.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE SECOND QUARTER ENDED DECEMBER 31, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements have been prepared by
Commerce Group Corp. ("the Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed and omitted pursuant to such SEC rules and
regulations.
These consolidated financial statements should be read in conjunction
with the financial statements and accompanying notes included in the
Company's Form 10-K for the year ended March 31, 1998.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Reports on Form 8-K
Registrant's Signature Page
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Balance Sheets
December 31, 1998 March 31, 1998
(Unaudited) (Audited)
------------------ --------------
ASSETS
------
Current assets
Cash $ 59,234 $ 61,287
Investments 186,182 187,792
Accounts and notes receivable 331,115 452,534
Inventories 167,866 205,300
Prepaid items and deposits 60,194 49,939
----------- -----------
Total current assets 804,591 956,852
Real estate (Note 5) 1,179,836 1,179,836
Property, plant and equipment,
net 3,070,994 3,332,303
Mining resources investment 22,036,200 20,330,660
----------- -----------
Total assets $27,091,621 $25,799,651
=========== ===========
LIABILITIES
-----------
Current liabilities
Accounts payable $ 381,608 $ 342,298
Notes and accrued interest
payable to related parties
(Notes 6 & 7) 4,740,817 4,175,120
Notes and accrued interest
payable to others (Note 6) 1,272,436 743,071
Accrued salaries 1,644,015 1,509,015
Accrued legal fees 178,875 175,082
Other accrued expenses 510,370 461,186
----------- -----------
Total liabilities 8,728,121 7,405,772
Commitments and contingencies (Notes 2, 4, 5, 6, 7, 8 & 12)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
1998-none; 1997-none shares
(Note 10) $ 0 $ 0
Common stock, $0.10 par value:
Authorized 15,000,000 shares;
Issued and outstanding:
March 31, 1998-11,039,670
(Note 10) 1,103,967
December 31, 1998-11,241,670
(Note 10) 1,124,167
Capital in excess of par value 17,105,799 16,969,724
Retained earnings (deficit) 133,534 320,188
----------- -----------
Total shareholders' equity 18,363,500 18,393,879
Total liabilities and ----------- -----------
shareholders' equity $27,091,621 $25,799,651
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Operations
For the Nine Months Ended December 31 (Unaudited)
Three Months Ended
Third Quarter Nine Months Ended
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
Revenues:
Gold sales $ 163,802 $ 315,560 $ 556,426 $ 892,440
Campground income 14,866 12,598 58,226 55,925
----------- ----------- ----------- ------------
Total revenues 178,668 328,358 614,652 948,365
Expenses:
Cost of gold sales $ 154,825 $ 160,203 $ 402,938 $ 562,779
Depreciation 84,983 56,071 253,758 161,906
General,
administrative and
campground expense 67,146 51,733 229,454 215,239
----------- ----------- ----------- ------------
Total expenses 306,954 268,007 886,150 939,924
Other income:
Miscellaneous
income $ (3) $ 393 $ 246 $ 3,018
El Salvador added
value tax refund 28,199 28,200 84,598 84,598
------------ ----------- ----------- -----------
Other income 28,196 28,593 84,844 87,616
Net profit (loss) $ (100,090) $ 88,944 $ (186,654) $ 96,057
Credit (charges)
for income taxes 0 0 0 0
Net income (loss) ------------- ------------ ------------ ----------
after income tax
credit (charge) $ (100,090) $ 88,944 $ (186,654) $ 96,057
============ =========== ============ ===========
Net income (loss)
per share (Note 2)
basic $ (.0090) $ .0087 $ (.0168) $ .0094
============ =========== ============ ===========
Net income (loss)
per share (Note 2)
diluted $ (.0076) $ .0074 $ (.0141) $ .0080
============ =========== ============ ===========
Weighted av. common
shares outstanding
(Note 2) 11,115,694 10,249,886 11,115,694 10,249,886
=========== =========== =========== ===========
Weighted av. diluted
common shares
(Note 2) 13,192,385 12,006,670 13,192,385 12,006,670
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Changes in Shareholders' Equity
Through the Period Ended December 31, 1998 (Unaudited)
Common Stock
------------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
---------- ---------- ----------- --------
Balance March 31, 1997 9,193,042 $ 919,304 $14,359,037 $201,585
Net Income (Loss) for
FY March 31, 1998 118,603
Common Shares Issued
Through March 31, 1998 1,846,628 184,663 2,610,687
---------- ---------- ----------- --------
Balance March 31, 1998 11,039,670 $1,103,967 $16,969,724 $320,188
Net Income (Loss)
Third Quarter 12/31/98 (186,654)
Common Shares Issued
Through Third Quarter
12/31/98 202,000 20,200 136,075
Balance as of ---------- ---------- ----------- --------
December 31, 1998 11,241,670 $1,124,167 $17,105,799 $133,534
========== ========== =========== ========
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 Nine Months Ended December 31 (Unaudited)
12/31/98 12/31/97
-------- --------
Operating activities:
Net income (loss) $ (186,654) $ 96,057
------------ -----------
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation 253,758 161,906
Changes in assets and liabilities
Decrease (increase) in account receivables 121,419 (63,454)
Decrease (increase) in investments 1,610 7,096
Decrease (increase) in inventories 37,434 (27,288)
Decrease (increase) in prepaid items and
deposits (10,255) (20,300)
Increase (decrease) in accounts payable
and accrued liabilities 88,494 600,854
Increase (decrease) in accrued salaries 135,000 135,000
Increase (decrease) in accrued legal fees 3,793 38,013
----------- ------------
Total adjustments 631,253 831,827
----------- ------------
Net cash provided by (used in) operating
activity 444,599 927,884
Investing activities:
Investment in mining resources (1,697,989) (2,831,661)
------------ -----------
Net cash used in investing activities (1,697,989) (2,831,661)
Financing activities:
Net borrowings 1,095,062 604,582
Preferred stock redeemed 0 (1,515,000)
Common stock issued 156,275 2,094,355
---------- -----------
Net cash provided by (used in)
financing activities 1,251,337 1,183,937
Net increase (decrease) in cash
and cash equivalents (2,053) (719,840)
Cash - beg. of year 61,287 796,106
------------ ------------
Cash - end of year $ 59,234 $ 76,266
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Cash Flows, continued
Supplemental disclosures of cash information for the nine month period
ended December 31, 1998 and 1997:
1. The following amounts of interest expense accrued were capitalized:
$556,398 (1998), $479,988 (1997).
2. The interest expense paid in cash for the nine month period was
$1,082 (1998) and $16,875 (1997).
3. The Company paid no income taxes during the 1998 or 1997 periods.
4. The investment consists of precious stones which are stated at the
lower of cost or market value.
5. Accounts receivable consist of gold bullion shipped to the refinery
pending the settlement date, an amount due from the Government of El
Salvador for an added value tax refund and miscellaneous
receivables.
6. Inventory consists of processed ores, metal-in-process and
consumable items which are stated at the lower of average cost or
market.
Supplemental schedule of non-cash investing and financing activities
during the nine month periods ended December 31, 1998 and 1997:
1. The Company issued the following common shares for the values shown
for services rendered:
Shares Value
------ ------
1998 4,100 $ 3,350
1997 50,800 $112,180
2. A total of 1,515 Series A Convertible Stock in the principal amount
of $1,515,000 was converted into 989,965 common shares in the year
ended March 31, 1998 and 985 shares of the same issue in the
principal amount of $985,000 were converted into 655,227 common
shares in the year ended March 31, 1997.
3. The gross proceeds from the sale of gold for 1998 amounted to
$556,426 and $892,440 for 1997.
4. Other non-cash items were for unpaid salaries, legal and director
fees which amounted to $182,613 for 1998 and $160,666 for 1997.
5. Non-cash equipment financing activities were none for 1998 and none
for 1997.
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Notes to Consolidated Financial Statements (Unaudited)
December 31, 1998
(1) The Company and Basis of Presentation of Financial Statements
- ------------------------------------------------------------------
(a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant")
and its 82 1/2% owned subsidiary, San Sebastian Gold Mines, Inc.
("Sanseb") have formed the Commerce/Sanseb Joint Venture ("Joint
Venture") for the purpose of precious metal mining and related
activities, including, but not limited to, exploration,
exploitation, development, extraction and processing of precious
metals in the Republic of El Salvador, Central America. Gold
bullion, the Joint Venture's principal product, is produced (but not
on a full production basis) in El Salvador and refined and sold in
the United States. Expansion of exploration is taking place at the
San Sebastian Gold Mine ("SSGM") which is located near the city of
Santa Rosa de Lima. Exploration is also taking place at other
mining properties, all located in the Republic of El Salvador,
Central America.
Presently, the Joint Venture is in the pre-production stage at the
SSGM and it simultaneously is performing several separate programs:
it has started to produce gold on a start up (not full production)
basis at its San Cristobal Mill and Plant ("SCMP") which is located
approximately 15 miles from the SSGM site; the second goal is to
begin its open-pit, heap-leaching process on the SSGM site; the
third goal is to continue its SSGM site preparation, the expansion
of its exploration and exploitation targets, and the enlargement and
development of its gold ore reserves; and the fourth goal is to
explore the potential of other gold mine exploration prospects
identified as the San Felipe-El Potosi Mine, and its extension, the
El Capulin Mine and the Hormiguero Mine, all located in El Salvador,
Central America. Concurrently, it also is in the process of
obtaining the necessary funding for each of these separate programs
while its Joint Venture continues its gold production, exploration,
exploitation and development operations.
(b) The Company, a United States' corporation (incorporated as a
Wisconsin corporation in 1962 and consolidated with a Delaware
corporation in 1971), presents its consolidated financial statements
in U.S. dollars.
(c) The preparation of the financial statements, in accordance with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(2) Significant Accounting Policies
- ------------------------------------
Restatement of Prior Period Financial Statements
The Company changed its consolidation policy to include the assets,
liabilities and equity and the income and expenses of its Joint Venture
rather than represent it as an investment on the balance sheet. The
consolidated balance sheets for March 31, 1998 and 1997 and the
consolidated statements of changes in shareholders' equity, consolidated
statements of cash flows and consolidated statements of operations for
the years ended March 31, 1998, 1997 and also 1996 were restated to
reflect this change.
<PAGE>
The balance sheet effect of the restatement was to reduce the Joint
Venture advances by a total of $3,574,460 which consisted of the
following amounts: $1,511,895 for 1998; $1,012,739 for 1997; $816,029 for
1996; and $233,797 for prior years. Retained earnings were reduced by an
offsetting amount for both 1997 and 1996 and prior years. The
consolidated statements of changes in shareholders' equity was also
restated to reflect these changes.
The consolidated statements of operations for the years ended March 31,
1998, 1997 and 1996 were restated to eliminate interest income from the
Joint Venture. The amounts were $1,511,895, $1,012,739, and $816,029 for
1998, 1997 and 1996 respectively.
The consolidated statements of cash flows for 1998 and 1997 and prior
years were also restated to reflect the changes in operating profits
(losses) that are outlined in the above paragraphs.
Principles of Consolidation
The Joint Venture and the following subsidiaries are all majority-owned
by the Company and are included in the consolidated financial statements
of the Company. All significant intercompany balances and transactions
have been eliminated.
% Ownership
-----------
Homespan Realty Co., Inc. ("Homespan") 100.0
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0
Piccadilly Advertising Agency, Inc. ("Piccadilly") 100.0
San Luis Estates, Inc. ("SLE") 100.0
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5
Universal Developers, Inc. ("UDI") 100.0
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0
Investments
The investments consist of precious stones which are stated at the lower
of cost or market value.
Accounts Receivable
The accounts receivable account consists of gold bullion produced and
shipped to the refinery, pending payment, a refund due for an added value
tax refund, and miscellaneous receivables.
<PAGE>
Inventory
Inventories consist of the following as of December 31:
1998 1997
---- ----
Gold in process (1) (Stated at market value) $ 74,056 $ 75,065
Materials and supplies (Stated at cost) 93,810 143,473
--------- ---------
$ 167,866 $ 218,538
(1) Includes all direct and indirect costs of mining, crushing,
processing and mine site overhead expenses.
Deferred Mining Costs
The Company, in order to avoid expense and revenue unbalance, capitalizes
all costs directly associated with acquisition, exploration and
development of specific properties, until these properties are put into
operation, sold or are abandoned. Gains or losses resulting from the
sale or abandonment of mining properties will be included in operations.
These capitalized costs and expenses will be written off on a unit of
production method at such time as it begins producing gold derived from
the virgin gold ore on a full production basis. If the prospect of gold
production, due to different conditions and circumstances becomes
unlikely, all of these costs may be written off in the year that this
occurs.
The Company regularly evaluates its carrying value of exploration
properties in light of their potential for economic mineralization and
the likelihood of continued work by either the Company or a joint venture
partner. The Company may, from time to time, reduce its carrying value
to an amount that approximates fair market value based upon an assessment
of such criteria.
Revenue Recognition
Revenue from the sale of gold and industrial minerals is recognized when
title passes to the buyer.
Property, Plant and Equipment
Property, plant, and equipment is stated at the lower of depreciated cost
or estimated net realizable value. Mining properties and development
costs and certain plant and equipment are depreciated by using the U.S.
Internal Revenue Service's depreciation guidelines and by using the units
of production method based upon proven and probable reserves. Other
assets are depreciated using the straight-line method over estimated
useful lives of five to ten years. Depreciation and amortization expense
includes the amortization of assets acquired under capital leases.
Replacements and major improvements are capitalized. Maintenance and
repairs are charged to expense based on average estimated equipment
usage. Interest costs incurred in the construction or acquisition of
property, plant, and equipment are capitalized and amortized over the
useful lives of the related assets.
<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>
In computing the shares on a fully diluted basis, the net income per
share is based on the assumption that all rights and options were
exercised on the last day of the period that is being reported. No
allowance was made for the common shares that would be issued upon the
conversion of the Series A Convertible Preferred Stock as the exact
number of shares to be issued at that time were indeterminable.
If on December 31, 1998, 1,377,400 option shares, the 74,056 loan shares,
and the 625,235 stock rights would be added to the weighted average
calculated number of shares which amounts to 11,115,694 the total number
of the weighted average fully diluted shares would be 13,192,385, and the
loss per share for the fiscal period ended December 31, 1998, would be
much less than $.02 per share. The same assumptions were used for the
same 1997 fiscal period and the gain is much less than $.01 per share.
Foreign Currency
The Company is involved in foreign currency transactions as it deposits
U.S. funds primarily through bank wire transfer of funds from its U.S.
bank account into the Joint Venture's El Salvador bank accounts. The
Joint Venture is obligated to repay the Company for funds advanced in
U.S. dollars. El Salvador has a freely convertible currency that at
present trades about 8.74 colones per U.S. dollar and this exchange rate
was stable during this fiscal year. In this environment, based on the
free convertibility of the colon, foreign businesses have no problem
making remittances of profits, repatriating capital or bringing in
capital for additional investments. There is no delay or required
government approvals to exchange dollars for colones (El Salvador
currency) or vice versa.
Major Customer
The Joint Venture produces gold and silver. It sells its gold at the
world market price to a refinery located in the United States. Given the
nature of the precious metals that are sold, and because many potential
purchasers of gold and silver exist, it is not believed that the loss of
any customer would adversely affect either the Company or the Joint
Venture.
(3) Property, Plant, Equipment, Net and Mining Resource Investments
- -------------------------------------------------------------------
The following is a summary of the net book value of plant and equipment,
and of mining properties and development costs by property as of December
31, 1998:
Mining
Plant and Resource Total
Equipment Investment 12/31/98
--------- ----------- -----------
San Sebastian Gold Mine/
Other Mining Properties $ 97,028 $22,036,200 $22,133,228
San Cristobal Mill and Plant 2,973,966 0 2,973,966
---------- ----------- -----------
Total Investment $3,070,994 $22,036,200 $25,107,194
========== =========== ===========
(4) Commerce/Sanseb Joint Venture ("Joint Venture")
- ---------------------------------------------------
The Company is in a joint venture with and owns 82 1/2% of the total
common stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada
chartered (1968) corporation. The balance of Sanseb's stock is held by
approximately 180 non-related shareholders, including the President of
the Company who owns 2,073 common shares. Sanseb was formed to explore,
exploit, research, and develop adequate gold reserves. It produced gold
from SSGM from 1972 through February 1978.
<PAGE>
On September 22, 1987, the Company and Sanseb entered into a joint
venture agreement to formalize their relationship with respect to the
mining venture and to account for the Company's substantial investment in
Sanseb. Under the terms of the agreement, the Company is authorized to
supervise and control all of the business affairs of the Joint Venture
and has the authority to do all that is necessary to resume mining
operations at the SSGM on behalf of the Joint Venture. The net pre-tax
profits of the Joint Venture will be distributed as follows: Company
90%; and Sanseb 10%. Since the Company owns 82 1/2% of the authorized
and issued shares of Sanseb, the Company in effect has over a 98%
interest in the Joint Venture activities.
The joint venture agreement further provides that the Company has the
right to be compensated for its general and administrative expenses in
connection with managing the Joint Venture.
Under the joint venture agreement, agreements signed by the Company for
the benefit of the Joint Venture create obligations binding upon the
Joint Venture.
The Joint Venture is registered to do business in the State of Wisconsin
and in the Republic of El Salvador, Central America.
Investments in Joint Venture
As of December 31, 1998, the Company's investments including charges for
interest expense and deductions for gold sale proceeds were $22,327,100
and three of the Company's wholly-owned subsidiaries' advances were
$590,265 for a total of $22,917,365.
Investment in El Salvador Mining Projects
During the fiscal year, the Company has advanced funds, performed
services, and allocated its general and administrative costs to the Joint
Venture.
As of December 31, 1998 and 1997, the Company, Sanseb and three of the
Company's wholly-owned subsidiaries have invested (including carrying
costs) the following in its Joint Venture:
1998 1997
---- ----
The Company's net of gold sale
proceeds advances since 09/22/87 $22,327,101 $18,615,708
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 23,259,838 20,977,172
----------- -----------
Total: 52,603,299 46,609,240
Advances by the Company's three
subsidiaries 590,265 590,265
----------- -----------
Combined total investment $53,193,564 $47,199,505
=========== ===========
SSGM Activity
The Company had no significant activity at the SSGM site from February
1978 through January 1987 due to the civil unrest in the Republic of El
Salvador. The present status is that, the Company, since January 1987,
and thereafter, the Joint Venture, formed in September 1987, has
completed certain of the required mining pre-production preliminary
stages in the minable and proven gold ore reserve area, and the Company
is active in attempting to obtain adequate financing for the expansion of
its SCMP facilities and the proposed open-pit, heap-leaching operations
on this site. The Joint Venture is also engaged in the exploration and
the expansion program to develop additional gold ore reserves in the area
surrounding the SSGM minable gold ore reserves and at its other El
Salvador mining prospects. During this fiscal period gold is being
produced by trucking the virgin ore from this site for processing at the
SCMP.
<PAGE>
Mineral San Sebastian S.A. de C.V. ("Misanse")
(a) Misanse Corporate Structure
The SSGM real estate is owned by and leased to the Joint Venture by
Misanse, a Salvadoran chartered corporation. The Company owns 52% of the
total of Misanse's issued and outstanding shares. The balance is owned
by approximately one hundred El Salvador, Central American, and United
States' citizens. The Company has the right to select six of Misanse's
ten directors.
(b) SSGM Mining Lease
On July 28, 1975, an amended lease agreement between Misanse as lessor
and Sanseb as tenant was signed by the parties giving the tenant all the
possessions and mining rights that pertain to the SSGM as well as other
claims to mineral rights that may already have or could be claimed in the
future within the 595 hectares (1,470 acres) plat of land encompassing
the SSGM. The 25-year lease, which begins on the date gold production
begins, was further amended to run concurrently with the concession
described herein and may be extended for an additional 25 years by the
tenant as long as the tenant has paid the rent and has complied with
other obligations under the lease and the concession. The lease further
provides that the tenant will pay rent equivalent to five percent of the
gross gold production revenue obtained from the leased SSGM and further
commits itself to maintain production taking into consideration market
and other conditions. In no case will the rent be less than eighteen
hundred "colones" per month (approximately $206 per month at the current
rate of exchange). The lease further provides that, in the event the
lessor wishes to sell the property, it must first give preference to the
tenant; the lease further provides that the tenant must give preference
to employ former mining employees and Misanse shareholders, providing
they qualify for the available position. The lease agreement was
assigned on January 29, 1987 to the Company and Sanseb together with the
mining concession application.
The lease is freely assignable by the Joint Venture without notice to
Misanse. The lease may also be canceled by the Joint Venture on thirty
days' notice to Misanse, and thereafter, all legal responsibilities
thereunder shall cease.
(c) Mineral Concession
On January 27, 1987, the Government granted a right to the mining
concession ("concession") to Misanse which was subject to the performance
of the El Salvador Mining law requirements. These rights were
simultaneously assigned to the Company and Sanseb.
On July 23, 1987, the Government of El Salvador delivered and granted to
the Company's 52%-owned subsidiary, Misanse, possession of the mining
concession. This is the right to extract and export minerals for a term
of 25 years (plus a 25-year renewal option) beginning on the first day
of production from the real estate which encompasses the SSGM owned by
Misanse. Misanse assigned this concession to the Joint Venture.
<PAGE>
Effective February 1996, the Government of El Salvador passed a law which
requires mining companies to pay to it three percent of its gross gold
sale receipts and an additional one percent is to be paid to the El
Salvador municipality which has jurisdiction of the mine site. The
Company, in compliance with the new law, has filed its applications for
all of the mining concessions in which it has an interest.
SCMP Land and Building Lease
On November 12, 1993, the Joint Venture entered into an agreement with
Corporacion Salvadorena de Inversiones ("Corsain"), a governmental agency
of El Salvador, to lease for a period of ten years, approximately 166
acres of land and buildings on which its gold processing mill, plant and
related equipment (the SCMP) are located, and which is approximately 15
miles west of the SSGM site. The annual lease payment is U.S. $11,500
(payable in El Salvador colones at the then current rate of exchange),
payable annually in advance, and subject to an annual increase based on
the annual United States' inflation rate. As agreed, a security deposit
of U.S. $11,500 was paid on the same date and this deposit will be
subject to increases based on any United States' inflationary rate
adjustments.
Modesto Mine
(a) Real Estate
The Company owns 52 acres of land which are a key part of the Modesto
Mine that is located near the city of El Paisnal, El Salvador. It also
has contracted to purchase additional acreage which transfer will take
place after it receives clear title. Part of this real estate is subject
to a mortgage.
San Felipe-El Potosi Mine ("Potosi")
(a) Real Estate Lease Agreement
The Joint Venture entered into a lease agreement with the San Felipe-El
Potosi Cooperative ("Cooperative") of the city of Potosi, El Salvador on
July 6, 1993, to lease the real estate encompassing the San Felipe-El
Potosi Mine for a period of 30 years and with an option to renew the
lease for an additional 25 years, for the purpose of mining and
extracting minerals and under the following basic terms and conditions:
1. The lease payment will be five percent of the gross receipts derived
from the production of precious metals from this site which will be
payable monthly.
2. The Joint Venture will advance to the Cooperative the funds required
to obtain the mining concession from the El Salvador Department of
Energy, Mines and Hydrocarbons and all related costs which will be
reimbursed or will become a deduction from future rental payments.
3. The Joint Venture will, when it is in production, employ all of the
45 qualified members of the Cooperative providing that there is a
need for their particular skill or service.
4. The Joint Venture will furnish medicine and first aid medical
assistance to all of its employees to the extent that such benefits
are not provided by the Salvadoran Social Security System.
<PAGE>
5. An employee life insurance program is to be seriously considered by
the Joint Venture when production commences, providing that the cost
of such insurance is not excessive.
Montemayor Mine
The Joint Venture has leased approximately one hundred sixty prime acres
of land that it considers to be key locations of the mines on these
properties. The terms of the various leases are one year with automatic
renewal rights. This property is located 14 miles northwest of the SCMP,
six miles northwest of the SSGM, and about two miles east of the city of
San Francisco Gotera in the Department of Morazan, El Salvador.
(5) Synopsis of Real Estate Ownership and Leases
- -------------------------------------------------
The Company and its subsidiaries own a 331-acre campground located in the
Lake of the Ozarks, Camden County, Missouri; 40 lots in the San Luis
North Estates Subdivision, Costilla County, Colorado; and 12 lots in the
city of Fort Garland, Costilla County, Colorado. Misanse owns the 1,470
acre SSGM site located near the city of Santa Rosa de Lima in the
Department of La Union, El Salvador. Other real estate ownership or
leases in El Salvador are as follows: it owns a total of approximately
52 acres at the Modesto Mine; the Joint Venture leases the SCMP land and
buildings on which its mill, plant and equipment are located. In
addition, the Joint Venture has entered into a lease agreement to lease
approximately 675 acres based on the production of gold payable in the
form of royalties with a mining prospect in the Department of San Miguel
and it leases approximately 169 acres in the Department of Morazan in the
Republic of El Salvador.
(6) Notes Payable and Accrued Interest
- ---------------------------------------
Notes payable consist of the following: 12/31/98 03/31/98
-------- --------
Mortgage and promissory notes to
related parties, interest ranging
from one percent to four percent
over prime rate, but not less
than 16%, payable monthly, due on
demand, using the undeveloped
land, real estate and all other
assets owned by the Company, its
subsidiaries and the Joint
Venture as collateral (Note 7) $4,740,817 $4,175,120
Other (consists primarily of
short-term notes and accrued
interest of $320,243 as of
December 31, 1998 and $305,578 as
of March 31, 1998 issued to trade
creditors and others, interest of
varying amounts, in lieu of
actual cash payments) and a
mortgage on a certain parcel of
land located in El Salvador. 1,272,436 743,071
---------- ----------
Total: $6,013,253 $4,918,191
========== ==========
<PAGE>
(7) Related Party Transactions
- -------------------------------
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 17 years and six months which
amounts to $1,623,765.
In addition, with the consent and approval of the Directors, the
President of the Company, as an individual and not as a Director or
Officer of the Company, entered into the following financial transactions
with the Company, the status of which is reflected as of December 31,
1998:
The amount of funds which the Company has borrowed from its President
from time to time, together with accrued interest, amounts to $2,447,359.
To evidence this debt, the Company has issued to its President a series
of open-ended, secured, on-demand promissory notes, with interest
payable monthly at the prime rate plus two percent, but not less than 16%
per annum.
The Company had borrowed an aggregate of $529,774 which includes accrued
interest, from the Company's President's Rollover Individual Retirement
Account (RIRA). These loans are evidenced by the Company's open-ended,
secured, on-demand promissory note, with interest payable monthly at the
prime rate plus four percent per annum, but not less than 16% per annum.
In order to satisfy the Company's cash requirements from time to time,
the Company's President has sold or pledged as collateral for loans,
shares of the Company's common stock owned by him. In order to
compensate its President for selling or pledging his shares on behalf of
the Company, the Company has made a practice of issuing him the number of
restricted shares of common stock equivalent to the number of shares sold
plus an additional number of shares equivalent to the amount of accrued
interest calculated at the prime rate plus three percent per annum and
payable monthly. Interest is also accrued on the shares pledged as
collateral. The Company received all of the net cash proceeds from the
sale or from the pledge of these shares. The Company borrowed a total of
12,500 shares from him during this nine month fiscal period and it owes
him 18,925 common shares for the interest earned on common shares he
loaned or pledged as collateral for the benefit of the Company. It may o
we additional common shares for such shares loaned or pledged by him for
collateral purposes to others for the benefit of the Company, all in
accordance with the terms and conditions of Director-approved open-ended
loan agreements dated June 20, 1988, October 14, 1988, May 17, 1989, and
April 1, 1990.
On February 16, 1987, the Company granted its President, by unanimous
consent of the Board of Directors compensation in the form of a bonus in
the amount of two percent of the pre-tax profits realized by the Company
from its gold mining operations in El Salvador, payable annually over a
period of twenty years commencing on the first day of the month following
the month in which gold production commences.
The President presently owns a total of 467 Misanse common shares. There
are a total of 2,600 Misanse shares issued and outstanding.
Also with the consent and approval of the Directors, a company in which
the President has a 55% ownership entered into the following agreements,
and the status is reflected as of December 31, 1998.
The Company leases approximately 4,032 square feet on a month-to-month
basis for its corporate headquarters office; the monthly rental charge is
$2,789 and it also provides administrative services, use of data
processing equipment, use of its vehicles and other property as required
by the Company.
<PAGE>
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 $1,422,768; the annual interest rate is
four percent plus the prime rate, but not less than 16%, and it is
payable monthly.
The Company's Directors have consented and approved the following
transactions which status are reflected as of December 31, 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
$274,159 which bears interest at an annual rate of prime plus three
percent, but not less than 16% and the interest is payable monthly.
The Law Firm which represents the Company in which a son of the President
is a principal is owed the sum of $178,875 through September 30, 1998 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 $66,757 which bears interest at an annual
rate of 16% payable monthly.
The Directors, by their agreement, have deferred cash payment of their
Director fees beginning on January 1, 1981, until such time as the
Company's operations are profitable. Effective from October 1, 1996,
the Director fees are $1,200 for each quarterly meeting and $400 for
attendance at any other Directors' meeting. The Executive Committee
Director fees are $400 for each meeting. The Directors and Officers have
a right to exchange the amount due to them for the Company's common
shares. All of the Directors have exchanged their Director fees for the
Company's common shares 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 on a full production basis, then these capitalized costs will
be charged as an expense based on a per ton production charge. The
Company also charges interest for its advances to the Joint Venture which
interest rate is established to be the prime rate quoted on the first day
of each month plus four percent and said interest is payable monthly.
(The interest charges are eliminated in these financial statements;
reference is made to Note 2 - Restatement of prior period financial
statements.)
<PAGE>
Company Net Advances to the Joint Venture
- ------------------------------------------
Total Advances Interest Charges
-------------- ----------------
Balance April 1, 1990 $ 1,625,163 $ 252,060
Year Ended March 31, 1991 718,843 266,107
Year Ended March 31, 1992 698,793 312,004
Year Ended March 31, 1993 1,003,617 347,941
Year Ended March 31, 1994 1,155,549 451,180
Year Ended March 31, 1995 2,884,078 751,389
Year Ended March 31, 1996 3,122,766 1,286,739
Year Ended March 31, 1997 3,894,692 1,567,375
Year Ended March 31, 1998 4,397,007 2,179,731
Through Third Quarter Ended
December 31, 1998 2,826,592 1,936,358
---------- ----------
Balances 22,327,100 9,350,884
Advances by three of the Company's
wholly-owned subsidiaries 590,265 0
Total Advances After Deducting Gold ----------- ----------
Sale Proceeds as of December 31, 1998 $22,917,365 $9,350,884
=========== ==========
(8) Commitments
- ----------------
Reference is made to Notes 2, 4, 5, 6, 7, and 12.
(9) Income Taxes
- -----------------
As of the fiscal year ended March 31, 1998, the Company and its
subsidiaries, excluding the Joint Venture, have estimated net operating
losses remaining in a sum of approximately $1,859,878 which may be
carried forward to offset future taxable income; the net operating losses
expire at various times to the year of 2013.
(10) Description of Securities
- -------------------------------
a. Common Stock
The Company's Delaware Certificate of Incorporation authorizes the
issuance of 15,000,000 shares of common stock, $0.10 par value per share
of which 11,241,670 shares were outstanding as of December 31, 1998.
Holders of shares of common stock are entitled to one vote for each share
on all matters to be voted on by the shareholders. Holders of common
stock have no cumulative voting rights. Holders of shares of common
stock are entitled to share ratably in dividends, if any, as may be
declared, from time to time by the Board of Directors in its discretion,
from funds legally available therefore. In the event of a liquidation,
dissolution or winding up of the Company, the holders of shares of common
stock are entitled to share pro rata all assets remaining after payment
in full of all liabilities. Holders of common stock have no preemptive
rights to purchase the Company's common stock. There are no conversion
rights or redemption or sinking fund provisions with respect to the comm
on stock. All of the outstanding shares of common stock are validly
issued, fully paid and non-assessable.
b. Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
250,000 shares of preferred stock, $0.10 par value. The preferred shares
are issuable in one or more series. The Board of Directors is authorized
to fix or alter the dividend rate, conversion rights (if any), voting
rights, rights and terms of redemption (including any sinking fund
provisions), redemption price or prices, liquidation preferences and
number of shares constituting any wholly unissued series of preferred
shares.
<PAGE>
c. Stock option activity
Nine Month Period Fiscal Year Ended
December 31, 1998 March 31, 1998
------------------ -----------------
Weighted Weighted
Average Average
Amount Price Amount Price
------ --------- ------ --------
Outstanding, beg. yr. 1,327,400 $3.42 1,591,360 $3.22
Granted 70,000 $0.75 0 $0.00
Exercised 0 $0.00 (60,000) $2.00
Forfeited 0 $0.00 (710) $4.25
Expired (20,000) $0.00 (203,250) $2.25
---------- ----- ---------- -----
Outstanding,
end of period 1,377,400 $3.27 1,327,400 $3.42
========= ===== ========== =====
A summary of the outstanding stock options as of December 31, 1998,
follows:
Weighted Average Weighted
Range of Amount Remaining Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- --------------
$2.00 to $2.99 300,000 2.28 years $2.26
$3.00 to $5.00 1,077,400 1.58 years $3.55
d. Stock Rights - To The President
Reference is made to Note 7, Related Party Transactions, of the Company's
financial statements which disclose the terms and conditions of the share
loans to the Company by the President and the interest which is payable
to him by the Company's issuance of its common shares. As of December
31, 1998, there are a total of 31,425 restricted common shares due to
him.
Said interest payable is for shares loaned to the Company and/or for such
shares loaned or pledged for collateral purposes, or for unpaid interest,
all in accordance with the terms and conditions of Director-approved
open-ended loan agreements dated June 20, 1988, October 14, 1988, May 17,
1989 and April 1, 1990.
e. 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 December 31,
1998; 40,037 shares are due to this party.
On June 1, 1998 correspondence, together with a loan agreement, had been
submitted to a lender in connection with the Company's understanding of a
stock loan arrangement. The Company borrowed 125,300 common shares of a
non-related, publicly-held corporation and sold them for approximately
$529,425. The lender, until January 15, 2000, will have the option of
demanding payment of the principal amount of the stock loan in return for
the 125,300 shares borrowed plus interest in the form of 64,485 of the
Company's restricted common shares or in lieu of the 125,300 shares of
the non-related, publicly-held corporation borrowed, may accept payment
in the form of 560,750 of the Company's restricted common shares.
<PAGE>
f. S.E.C. Form S-8 Registration
On April 4, 1994, the Company filed its Securities and Exchange
Commission Form S-8 Registration Statement No. 33-77226 under the
Securities Act of 1933, to register 500,000 of the Company's $.10 par
value common stock for the purpose of distributing common shares pursuant
to the guidelines of the Company's 1994 Services and Consulting
Compensation Plan. From the 500,000 shares registered, 481,697 were
issued and 17,703 shares are authorized to be issued.
On July 16, 1998, the Company filed its second Securities and Exchange
Commission Form S-8 Registration Statement No. 333-59209 under the
Securities Act of 1933 and registered 1,000,000 of the Company's $0.10
par value common stock for the purpose of distributing its common shares
pursuant to the guidelines in the prospectus. No shares have been issued
as of the filing date of this report.
(11) Litigation
- ----------------
There is no material litigation.
(12) Commitments and Contingencies
- -----------------------------------
Based upon current knowledge, the Company believes that it is in material
compliance with environmental laws and regulations as currently
promulgated. However, the exact nature of environmental control
problems, if any, which the Company may encounter in the future cannot be
predicted, primarily because of the increasing number, complexity and
changing character of environmental requirements that may be enacted or
of the standards being promulgated by governmental authorities.
(13) Recently Issued Financial Accounting Standards
- ----------------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income. SFAS 130 is designed to report a measure
of all changes in equity of an enterprise that result from recognized
transactions and other economic events of the period other than
transactions with owners in their capacity as owners. Besides net
income, other comprehensive income would include foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses on
certain investments in debt and equity securities. The provisions of
SFAS 130 will be effective for fiscal years beginning after March 31,
1998. Upon adoption, the Company does not anticipate a material impact
on its financial statements.
In June 1997 the FASB issued Statement of Financial Accounting Standards
No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and
Related Information. SFAS 131 established standards for the way that
public business enterprises determine operating segments and report
information about those segments in annual financial statements. SFAS
131 also requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
SFAS 131 further establishes standards for related disclosure about
products and services, geographic areas, and major customers. The
provisions of SFAS 131 will be effective for fiscal years beginning after
March 31, 1998. Upon adoption, the Company does not anticipate a
material impact on its reported disclosures.
<PAGE>
(14) Year 2000 Issue
- ---------------------
Computer programs written decades ago utilized a two digit format to
identify the applicable year. Without modification, any date sensitive
software beyond December 31, 1999 could fail, as the date would be reset
to 1900. This could result in, amongst other things, disruptions to
operations and the inability to process financial transactions. The
Company is in the process of making an assessment of the impact of the
year 2000 issue. The Company is initiating communications with its
equipment suppliers in which a computer is utilized and with its computer
manufacturers (hardware and software) for the processing of financial
information to determine the extent to which the issue may impact the
Company. In addition, the Company will inquire of other entities who are
significant suppliers of consumables used in its operations and of others
it currently interacts with electronically (financial institutions, etc.)
to determine the extent to which it may be vulnerable to those third p
arties' failure to remediate their own year 2000 issue.
(15) Unaudited Financial Statements
- ------------------------------------
The consolidated financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The financial information included herein is
unaudited; however, the Company believes that the information reflects
all adjustments (consisting solely of normal recurring adjustments) that
are, in the opinion of management, necessary to be a fair presentation of
the financial position, results of operations, and cash flows for the
interim periods. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements
be read in connection with the financial statements and the notes thereto
incl uded in the Company's latest annual report and the filing of the
most recent required Securities and Exchange Commission annual Form 10-K.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - DECEMBER 31, 1998
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The matters discussed in this report on Form 10-Q, when not historical
matters, are forward-looking statements that involve a number of risks
and uncertainties that could cause actual results to differ materially
from projected results. Such factors include, among others, the
speculative nature of mineral exploration, commodity prices, production
and reserve estimates, environmental and government regulations,
availability of financing, force majeure events, and other risk factors
as described from time to time in the Company's filings with the United
States Securities and Exchange Commission. Many of these factors are
beyond the Company's ability to control or predict. The Company
disclaims any intent or obligation to update its forward-looking
statements, whether as a result of receiving new information, the
occurrence of future events, or otherwise.
Events Relating to Nasdaq's Halting the Trade of the Company's Shares
- ---------------------------------------------------------------------
On November 12, 1998, the Company appeared before the Nasdaq Listing
Qualifications Hearing Panel ("Panel") pursuant to the Procedure on
Grievances concerning Automated Systems contained in Rule 4800 Series of
the NASD Code of Procedure. The Panel had been designated by the Board
of Governors to determine if the quotations of the securities of the
Company should continue to be listed on The Nasdaq SmallCap Market,
notwithstanding its failure to meet the bid price requirement of $1.00
per share as set forth in NASD Marketplace Rule 4310(c)(4).
On December 7, 1998, the Panel determined to continue the Company's
listing on the Nasdaq SmallCap Market pursuant to an exception where on
or before February 10, 1999, the Company had to evidence a closing bid
price equal to or greater than $1.00 per share and thereafter the Company
must demonstrate a closing bid price of $1.00 per share for a minimum of
ten consecutive trading days. The determination also stated that in
order to fully comply with the terms of this exception, the Company must
be able to demonstrate compliance with all requirements for continued
listing on the Nasdaq SmallCap Market. In the event the Company fails to
meet any of the terms of this exception, the Company's securities will be
delisted from the Nasdaq Stock Market.
In accordance with the Panel's decision, the Company issued a press
release announcing its conditional listing on the Nasdaq SmallCap Market
and the change of its trading symbol from CGCO to CGCOC effective
December 9, 1998. Subsequently, on January 19, 1999, the Nasdaq Listing
and Hearing Review Council ("Review Council") called for the review of
the December 7, 1998 decision of the Panel. The matter was called for
review to determine whether it was appropriate for the Panel to grant the
Company an exception to the bid price requirement.
<PAGE>
On January 29, 1999, at 16:28:43 p.m. E.D.T. Nasdaq halted the trading of
the Company's shares pending receipt of information as to the Company's
decision to develop a Web portal. On that day, approximately 2,000,000
shares of the Company's common stock were traded. This followed the
Company's issuance of the press release relating to its plans to have its
subsidiary Ecomm Group Inc. (formerly Piccadilly Advertising Agency,
Inc.) together with The Interactive Business Channel Inc. to consolidate
Web sites into a Web portal. The Company promptly responded to Nasdaq's
request for information and to a subsequent request for additional
information. On February 9, 1999, Nasdaq's staff referred the matter
back to the Panel for determination as to whether or not the Company
qualifies for inclusion in the Nasdaq Stock Market. Nasdaq staff has
recommended that the Company be disqualified for inclusion in the Nasdaq
Stock Market on public interest grounds, based on staff's opinion that
the Company does not have sufficient agreements in place or resources to
justify its announcing a plan to develop a new Web portal. The Company
strongly disagrees with the opinion of the Nasdaq staff, has referred
Nasdaq staff to the arrangements that it has made with The Interactive
Business Channel Inc., and intends to contest the recommendation of
Nasdaq staff before the Panel. (The Form 8-K filed with the U.S.
Securities and Exchange Commission in connection with the halt and the
Company's arrangements with The Interactive Business Channel Inc. is
incorporated by reference. It was filed electronically through the
EDGARLink Electronic Filing System on February 8, 1999.) Reference is
also made to Item 6. Reports on Form 8-K.
Results of Operations, Financial Condition, Liquidity and Capital
Resources
- -----------------------------------------------------------------
The following discussion provides information on the results of
operations, financial condition, liquidity and capital resources for the
nine-month period of its fiscal years ended December 31, 1998 and
December 31, 1997. The financial statements of the Company and the notes
thereto contain detailed information that should be referred to in
conjunction with this discussion.
Overview and Restatement of Prior Period Financial Statements
- -------------------------------------------------------------
A redefined structure of the financial statements for the fiscal years
ended March 31, 1998 and March 31, 1997, for the nine month periods ended
December 31, 1998 and December 31, 1997, and for prior years reflects and
includes the Commerce Group Corp./Sanseb Joint Venture (Joint Venture) on
a consolidated basis. Prior to this change, the Company reported the
investment in the Joint Venture as advances to the Joint Venture and the
Company's advances included the interest earned on these advances in
anticipation of the interest being reimbursed. The payment of interest
and principal is a priority to the distribution of the anticipated future
profits earned by the Joint Venture. In this report, these advances are
restated and combined with the Company's Consolidated Financial
Statements. Although the elimination of interest income reduces the
retained earnings, it does not eliminate the interest charged and earned
by the Company which is due, payable and maintained as a separate ac
counting. In effect, this restructuring modifies only the financial
reporting and at the time that the cash or profits from the gold mining
operation are distributed, the interest earned on these advances will be
paid first to the Company pursuant to the contractual agreement entered
into by both joint venture parties.
For this fiscal quarterly period, the Company was able to segregate the
disbursements to the Joint Venture to identify the category to be
charged. Reference is made to Notes 3 and 7 in the financial statements
for additional details.
<PAGE>
The Joint Venture is producing gold on a limited basis from the gold ore
it is excavating from its SSGM open pit and which it is processing at its
SCMP facility which is located approximately 15 miles from the SSGM site.
It is proceeding to install a pilot open-pit, heap-leaching gold process
on the SSGM site. The cone crushing system is being reconstructed at
this site. It also is continuing its SSGM site preparation, the
expansion of its exploration and exploitation targets, and the
enlargement and development of its gold ore reserves. It is exploring
the potential of the other gold mine prospects identified as the San
Felipe-El Potosi Mine, and its extension, the El Capulin Mine and the
Hormiguero Mine. The Montemayor Mine and the Modesto Mine have been
placed on a standby basis pending the submission of an application for a
concession (license) on the property it owns or holds leases. All of the
mining properties are located in the Republic of El Salvador, Central
America. Concurrently, it also is in the process of obtaining the
necessary funding for each of these separate operations while it
continues its limited production of gold.
Current Status
- --------------
The Company during this fiscal year purchased and shipped a rod mill and
a rotary kiln for carbon reactivation. It is the Company's belief that
the rod mill which has been installed should increase the processing of
200 tons of ore to 350 tons of ore per day. With this 75% increase of
processing gold ore per day at the SCMP, and providing the price of gold
maintains near the $300 per ounce level, the operations are expected to
be profitable and the cash flow should be increased to assist the current
operating cash needs. The Joint Venture has not reached its goal of
processing 350 tons of gold ore per day during this third quarter period.
The recent hurricane named "Mitch" did not cause any bodily harm to its
employees or any damage to its equipment, but it did severely curtail
production. Another event that restricted production was the major
repair of one of its two ball mills. The installation of the rod mill
also caused a temporary close down of the operations.
The rotary kiln for carbon reactivation will not only regenerate the
carbon to make the carbon more effective, but this process should
increase the production of gold. The cone crushing system is being
assembled and should also be a cost saving factor. The Company seeks
funds to start a heap-leaching operation at the SSGM. Instead of casting
aside the low grade of ore and handling it twice, it could place it on
heap-leaching pads which should increase both revenue and profits.
This enhancement in gold production and particularly profits, should
broaden the Company's objectives. It could enable the Company to
commence an expanded complementary operation while continuing its
endeavor to obtain sufficient funds for the SSGM open-pit, heap-leach
operation. The Company's main objective and plan, through the Joint
Venture, is to operate at the SSGM site, a moderate tonnage, low-grade,
open-pit, heap-leaching, gold-producing mine and it intends to commence
this major gold-mining operation as soon as adequate funding is in place.
Dependent on the grade of gold ore processed and the funds it is able to
obtain it then anticipates producing annually approximately 8,000 ounces
of gold from the SCMP operation and eventually up to 40,000 ounces of
gold from its SSGM open-pit, heap-leaching operation. The Joint Venture
continues to conduct an exploration program to develop additional gold
ore reserves at the SSGM and at the following other mines: the San
Felipe-El Potosi Mine, and its extension, the El Capulin Mine and the
Hormiguero Mine; all located in El Salvador.
Since the Joint Venture commenced producing gold at the SCMP, albeit a
very exiguous operation, and a forerunner of its greater goals, the
Company's revenues, profitability and cash flow will be greatly
influenced by the price of gold. Gold prices fluctuate widely and are
affected by numerous factors which will be beyond the Company's control,
such as, expectations for inflation, the strength of the U.S. dollar,
overproduction of gold, global and regional demand, or political and
economic conditions. The combined effect of these factors is difficult;
perhaps impossible to predict. Should the market price of gold fall
below the Company's production costs and remain at such level for any
sustained period, the Company could experience losses. Under these
circumstances, the Company could choose to suspend operations in order to
minimize losses.
<PAGE>
The Company believes that neither it, nor any other competitor, has a
material effect on the precious metal markets and that the price it will
receive for its gold is dependent upon world market conditions over which
it has no control.
Results of Operation Fiscal Quarter Ended December 31, 1998 Compared to
December 31, 1997 on a Restated Basis
- ------------------------------------------------------------------------
The Company, on a consolidated restated basis which includes the Joint
Venture and excludes the interest income due from the Joint Venture, had
a net loss of $186,654 or less than $.02 cents per share for the nine
month period ended December 31, 1998 compared to a nominal profit of
$88,944 or less than $.01 cent per share for the same 1997 period. This
loss was primarily attributable to the lower gold world market selling
price and to the lower production of gold.
During the first nine months ended December 31, 1998, the Company sold
1,907 ounces of gold and 607 ounces of silver for a gross total of
$556,426. This compares with $892,440 in gold sales for 2,591 ounces of
gold and 690 ounces of silver produced during the same period in 1997. In
addition, the 259 ounces of gold held in its inventory was valued at
$74,055 which amounts to a nominal valuation reduction in inventory
value. The following schedule reflects the cost to produce gold during
this fiscal period:
San Sebastian Gold Mine
Cost Per Ounce of Gold Sold
Nine months ended December
1998 1997(1)
---- -------
Cash operating (1) $268 $241
Total cash costs (2) $294 $272
Total production costs (3) $427 $334
(1) All direct and indirect costs of the operation, excluding royalties.
Includes inventory value changes.
(2) Cash operating costs, general and administrative, selling expense
($83, 1998; $55, 1997), royalties and amounts due to the Government
of El Salvador ($26, 1998; $31, 1997).
(3) Total cash costs plus depreciation which amount to $133 per ounce in
1998 and $62 per ounce in 1997.
There is 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 1998 or 1997 due to an assessment of the "more likely than not"
realization criteria required by Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes.
<PAGE>
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS128), Earnings per Share in prior years. SFAS128's objective is to
simplify the computation of earnings per share (EPS) and to make the U.S.
standard more compatible with that of other countries and the
International Accounting Standards Committee. SFAS128 supersedes APB
Opinion 15, replacing the presentation of "primary" and "fully diluted"
EPS with "basic" and "diluted" EPS. Basic EPS is computed by dividing
income available to common shareholders (net income less any dividends
declared on preferred stock and any dividends accumulated on cumulative
preferred stock) by the weighed average number of common shares
outstanding. Diluted EPS requires an adjustment to the denominator to
include the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. The
numerator is adjusted to add back any convertible preferred dividends and
the after-tax amount of interest recognized with any convertible debt.
The Company's basic and diluted EPS computations are reflected in the
consolidated statements of operations.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting For Stock-Based Compensation. SFAS 123 defines a "fair value"
based method of accounting for employee options or similar equity
instrument. SFAS 123 encourages, but does not require the method of
accounting prescribed by the Statement, and does allow for an entity to
continue to measure compensation cost as prescribed by APB Opinion No.
25. (APB 25), Accounting for Stock Issued to Employees. Entities
electing to remain with APB 25 must make proforma disclosures of net
income and earnings per share as if the fair value based method had been
applied, effective for fiscal years beginning after December 15, 1995.
The Company has not issued any employee options nor has it made elections
to do so as of this date.
Inflation did not have a material impact on the operations. At this time
management of the Company does not anticipate that inflation will have a
significant impact on continuing operations.
The interest expense in the sum of $556,399 was capitalized by the Joint
Venture for the fiscal quarter ended December 31, 1998 and $479,988 for
the same period in 1997.
Almost all of the costs and expenses incurred by the Company are
allocated and charged to the Joint Venture. The Joint Venture capitalizes
or expenses these costs and expenses and will continue to do so until
such time when it is in full production on each of its mining projects.
At the time production commences, these capitalized costs will be charged
as an expense based on a per unit basis. If the prospect of gold
production becomes unlikely, all of these costs will be written off in
the year that this occurs.
Financing Activities, Liquidity and Capital Resources
- -----------------------------------------------------
During this nine month period the Company borrowed a sum of $1,095,062;
$565,697 was from related parties which included cash and accrued
interest; the balance of $529,365 was from unrelated parties and included
cash and accrued interest.
The Company expects to continue operating its SSGM by expanding its SCMP
production capacity. Additional equipment has been purchased and has
been delivered. It is believed that the recently installed rod mill will
increase the processing level from approximately 200 to 350 tons per day
which is a 75% increase. Additional needed equipment will be purchased
or leased. At this level of processing with a grade of gold ore as has
been processed in the past and at a $300 per ounce gold selling price,
the Company anticipates a sufficient cash flow to operate on a
self-sustaining basis. Funds to explore the expansion of the SSGM gold
ore reserves and to explore the other mining prospects will have to be
sought by raising additional capital or through a joint venture or by
other creative means.
<PAGE>
The Company will endeavor to commence an open-pit, heap-leaching
operation at the SSGM as there is a substantial amount of gold ore that
grades less than 0.04 ounces per ton. The Company's engineers had
determined that a 1,000 ton-per-day open-pit, heap-leach operation could
produce an additional 500 ounces of gold per month It is necessary to
raise adequate funds for this operation; the amount needed is dependent
on the targeted daily volume. An ideal amount of funds to have would be
U.S. $13 million which would start the open-pit, heap-leach at a rate of
2,000 tons per day and the profits and cash flow then could be used to
expand this operation to 6,000 tons per day.
The Company continues to be cognizant of its cash liquidity until it is
able to produce adequate profits from its SSGM gold production. It will
attempt to obtain sufficient funds to assist the Joint Venture in placing
the SSGM into production as the anticipated SCMP profits (unless
accumulated over a period of time) appear not to be sufficient to meet
the SSGM capital and the other mining exploration requirements. In
order to continue obtaining funds to conduct the Joint Venture's
exploration, exploitation, development, expansion programs, and the
production of gold from the SSGM open-pit, heap-leaching operation, it
may be necessary for the Company to obtain funds from other sources.
The Company may be required to borrow funds by issuing open-ended,
secured, on-demand or unsecured promissory notes or by selling its shares
to its directors, officers and other interested investors or by entering
into a joint venture with other companies. The Company is currently
examining sev eral options with respect to project financing however,
there can be no assurances of such arrangements being finalized. Should
this Company not be able to obtain funding, the expansion progress could
be delayed.
During the past, the Joint Venture was engaged in exploration,
exploitation and development programs designed to increase its gold ore
reserves. The prospects of expanding the gold reserves are positive.
The Company believes that these invested funds significantly contributed
to the value of the SSGM and to the value of its other mining prospects
as the results of the exploratory efforts evidence a potential
substantial increase of gold ore reserves, which add value to the Joint
Venture and to the Company. The Company was able to obtain sufficient
funds to continue to modify and retrofit the SCMP, to purchase consumable
inventory, to purchase certain hauling and loading equipment, to purchase
a crushing system, to purchase additional equipment to improve its
grinding circuitry, to perform diamond drilling on the SSGM, to continue
its exploration projects, and for working capital use. The Company has
been able to obtain the funds required for its and the Joint Venture's
underta king via a debt and equity structure of funding.
The Company estimates that it will need up to U.S. $13 million to start
a 2,000 ton-per-day open-pit, heap-leaching operation and over time and
with additional capital to increase the production capacity to 6,000 tons
per day at the SSGM. The use of proceeds is as follows: $7,000,000 for
mining equipment and a crushing system; $3,689,776 for the processing
equipment and site and infrastructure costs; and $2,310,224 for the
working capital.
Therefore, the Company continues to rely on its directors, officers,
related parties and others for its funding needs. The Company believes
that it will be able to obtain such short-term and/or equity funds as are
required from similar sources as it has in the past. In turn, then it
can invest the funds required by the Joint Venture to continue the
exploration, exploitation and development of the SSGM, and the other
exploration prospects, for the operation of SCMP and for other necessary
Company expenditures. It further believes that the funding needed to
proceed with the continued exploration of the other exploration targets
for the purpose of increasing its gold ore reserves should be
approximately $10 million. These programs will involve airborne
geophysics, stream chemistry, geological mapping, trenching and drilling.
The Joint Venture believes that it may be able to joint venture these
exploration costs with other mining companies.
<PAGE>
From September 1987 through December 31, 1998, the Company has invested
in the Joint Venture, including interest charges payable to the Company,
the sum of $22,327,100 and three of the Company's wholly-owned
subsidiaries have advanced the sum of $590,265, for a total of
$22,917,365. 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 SSG M infrastructure, including rewiring and
repairing about two miles of the Company's electric lines to provide
electrical service, for the purchase of equipment, laboratory chemicals,
and supplies, for parts and supply inventory, for the maintenance of the
Company-owned dam and reservoir, for extensive road extension and
preservation, for its participation in the construction of a community
bridge, for community telephone building and facilities, for a community
place of worship, for the purchase of the real estate on the Modesto
Mine, for leasing the Montemayor real estate, for the purchase of a cone
crushing system, for diamond drilling at the SSGM, recently for the
purchase and installation of a rod mill and a rotary kiln for carbon
reactivation, and for many other related needs.
Employees
- ---------
The Joint Venture employs approximately 300 full-time residents of El
Salvador to perform its exploration, exploitation, and development
programs; to produce gold from its SCMP facilities; and to handle the
administration of its activities. None of these employees are covered by
any collective bargaining agreements. It has developed a continuous
harmonious relationship with its employees. It believes that the Joint
Venture is the largest single non-agricultural employer in El Salvador's
Eastern Zone. Also, the Company employs approximately four persons (plus
part-time help) in the United States.
Insurance
- ---------
The Joint Venture has in existence insurance through an El Salvador
insurance company with the following insurance coverage: general
liability, vehicle liability and extended coverage, fire, explosion,
hurricane, cyclone, tornado, windstorm, hail, flood, storm, earthquake,
tremor or volcanic eruption, politically-motivated violence, terrorism,
strikes, work stoppages, riots, uprisings, malicious acts, vandalism, and
related acts. As additional equipment and assets are acquired or
improvements are made, the insurance coverage will be increased
accordingly.
Related Party Loans, Obligations and Transactions
- -------------------------------------------------
The related party transactions are included in detail in the Notes to the
Consolidated Financial Statements.
<PAGE>
Efforts to Obtain Capital
- -------------------------
Since the concession was granted, and through the present time,
substantial effort is exercised in securing funding through various
sources, all with the purpose to resume 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, although much time has lapsed, interested
investors continue to remember the political conflict and therefore
remain apprehensive and skeptical about the political status of the
Republic of El Salvador. Therefore the investors continue to be
hesitant to invest funds. 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 also depressed the market price of the Company's common shares
as well as the common shares of most of the world-wide mining companies.
This decline in the stock market price places the Company in a situation
of diluting it s common shares in order to raise capital. The Company
believes that it will be able to obtain adequate financing from the same
sources as in the past to conduct the present operations during this
fiscal year ended March 31, 1999.
Environmental Regulations
- -------------------------
Based upon current knowledge, the Company believes that it is in material
compliance with all applicable environmental laws and regulations as
currently promulgated. However, the exact nature of environmental
control problems, if any, which the Company may encounter in the future
cannot be predicted, primarily because of the increasing number,
complexity and changing character of environmental requirements that may
be enacted or of the standards being promulgated by federal and state
authorities.
Recently Issued Financial Accounting Standards
- ----------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income and Statement of Financial Accounting
Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise
and Related Information. The provisions of SFAS 130 and SFAS 131 will
be effective for fiscal years beginning after December 15, 1997. SFAS
130 is designed to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their
capacity as owners. Besides net income, other comprehensive income would
include foreign currency items, minimum pension liability adjustments,
and unrealized gains and losses on certain investments in debt and equity
securities. SFAS 131 establishes standards for the way that public
business enterprises determine operating segments and report information
about those s egments in annual financial statements. SFAS 131 also
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131
further establishes standards for related disclosures about products and
services, geographic areas, and major customers. Upon adoption of SFAS
130, the Company does not anticipate a material impact on its financial
statements. Upon adoption of SFAS 131, the Company does anticipate a
material impact on its on its reported disclosures.
Dividends
- ---------
For the foreseeable future, it is anticipated that the Company will use
its earnings to finance its growth and that dividends will not be paid to
shareholders.
<PAGE>
Safe Harbor
- -----------
Some of the statements contained in this report are forward-looking
statements, such as estimates and statements that describe the Company's
future plans, objectives or goals, including words to the effect that the
Company or management expects a stated condition or result to occur.
Since forward-looking statements address future events and conditions, by
their very nature, they involve inherent risks and uncertainties. Actual
results in each case could differ materially from those currently
anticipated in such statements by reason of factors such as production at
the Company's mines, changes in operating costs, changes in general
economic conditions and conditions in the financial markets, changes in
demand and prices for the products the Company produces, litigation,
legislative, environmental and other judicial, regulatory, political and
competitive developments in areas in which the Company operates and
technological and operational difficulties encountered in connection with
mining activities.
<PAGE>
COMMERCE GROUP CORP,. ITS SUBIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - DECEMBER 31, 1998
PART II - FINANCIAL INFORMATION
Item 1. Legal Proceedings
There is no adverse litigation that could materially affect the
Company.
Item 2. Changes in Securities
Reference is made to the financial statements which explain the
common shares issued and to be issued.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Reports on Form 8-K
S.E.C. Form 8-K dated October 22, 1998 regarding the
discussions and actions that took place at the Company's Annual
Shareholders' meeting held on October 16, 1998. (Incorporated
by reference as this Form 8-K was filed electronically through
the EDGARLink Electronic Filing System on October 23, 1998.)
S.E.C. Form 8-K dated December 9, 1998 regarding the
determination of the Nasdaq Listing Qualifications Panel to
continue the Company's listing on The Nasdaq SmallCap Market
with the following exception: on or before February 10, 1999,
the Company must evidence a closing bid price equal to or
greater than $1.00 per share; thereafter the Company must
demonstrate a closing bid price of $1.00 per share for a
minimum of ten consecutive trading days and be in compliance
with all requirements for continued listing on the Nasdaq
SmallCap Market. If the Company fails to meet any of the terms
of the exception, the company securities would be delisted from
The Nasdaq Stock Market SM (Incorporated by reference as this
Form 8-K was filed electronically through the EDGARLink
Electronic Filing System on December 9, 1998.)
<PAGE>
S.E.C. Form 8-K dated February 6, 1999, stating that the Company
entered into an agreement with The Interactive Business Channel,
Inc. to develop an Internet business with the Company's
wholly-owned subsidiary, Piccadilly Advertising Agency, Inc.
(which corporate name was changed to Ecomm Group, Inc.) and to
provide the Company with public relations services designed to
give the Company more exposure on the Internet. The January 27,
1999 Agreement was attached to the Form 8-K as Exhibit A.
Ecomm's business plan was attached to the Form 8-K as Exhibit B.
The press releases about the Company's plans in respect to the
agreement, Nasdaq's subsequent halt of the trade of the
Company's shares pending the receipt of additional information,
and the Boston Stock Exchange's subsequent halt of the trading
of the Company's shares were also attached to the Form 8-K and
identified as Exhibits C, D and E respectively. (Incorporated
by reference as this Form 8-K was filed electronically through
the EDGARLink Electronic Filing System on February 8, 1999.)
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant/Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMERCE GROUP CORP.
Registrant/Company
/s/ Edward L. Machulak
Date: February 12, 1999 ------------------------------------
Edward L. Machulak
President, Chief Executive, Operating and
Financial Officer and Treasurer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
March 31, 1998 Financial Statement is from an audited financial statement.
December 31, 1998 Financial Statement is unaudited.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998 MAR-31-1999 MAR-31-1998
<PERIOD-END> DEC-31-1998 MAR-31-1998 DEC-31-1998 DEC-31-1997
<CASH> 119,428<F1> 111,226<F1> 0
0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 331,115 452,534 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 1,533,884<F2> 1,572,928<F2> 0
0
<CURRENT-ASSETS> 1,984,427 2,136,688 0 0
<PP&E> 25,107,194 23,662,963 0 0
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 27,091,621 25,799,651 0 0
<CURRENT-LIABILITIES> 8,728,121 7,405,772 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 1,124,167 1,103,967 0 0
<OTHER-SE> 17,239,333 17,289,912 0 0
<TOTAL-LIABILITY-AND-EQUITY> 27,091,621 25,799,651 0 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 0 0 699,496 1,035,981
<CGS> 0 0 0 0
<TOTAL-COSTS> 0 0 886,150 939,924
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> 0 0 (186,564) 96,507
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 0 0 (186,564) 96,507
<EPS-PRIMARY> 0 0 (.017) .009
<EPS-DILUTED> 0 0 (.014) .008
<FN>
<F1>Cash includes deposits and prepaid items.
<F2>Inventory includes inventory, investments and real estate held for sale.
</FN>
</TABLE>
