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, 2000
Commission File Number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1942961
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
OVER THE COUNTER BULLETIN BOARD (OTC BB)
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 closing price of the OTC BB on March 31,
2000, was approximately $5,216,121.
Common shares outstanding as of March 31, 2000, were 13,888,929.
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.
2000 FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
TABLE OF CONTENTS
Page
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 and Managers of the Company
PART II
Item 5. Market for the Company's Common Stock 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
and the Boston Stock Exchange, Inc.
<PAGE>
PART I
ITEM 1. BUSINESS
-----------------
GENERAL
-------
Commerce Group Corp. ("Commerce," the "Company," and/or the "Registrant")
has been a Wisconsin-chartered corporation since its merger from a State
of Delaware corporation on April 1, 1999, and its corporate headquarters
are 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 listed on the Boston
Stock Exchange from February 1975 to the present date and on the Nasdaq
Small-Cap Market from March 1987 to March 31, 1999, the date it was
delisted. On May 5, 1999, the Company's shares began trading on the Over
the Counter Bulletin Board (OTCBB) under the Symbol CGCO. The Company
is in the precious metals mining and the Internet business.
INTERNET BUSINESS
-----------------
ORIGINATION
On January 27, 1999, Commerce entered into an agreement with Interactive
Business Channel, Inc. (IBC) of Irvine, California to develop an Internet
business with Commerce's wholly-owned subsidiary, Piccadilly Advertising
Agency, Inc. (PAA), a Wisconsin corporation formed on July 9, 1974. On
January 27, 1999, PAA's Articles of Incorporation were amended to change
the name of the corporation to Ecomm Group Inc. (Ecomm). Effective
January 29, 1999, Ecomm's domain name was registered as ecommgroup.com.
Ecomm was formed with the belief that a significant opportunity exists to
develop and consolidate certain fragmented niches of the Internet
community into a web portal. Ecomm's principal business is to evaluate,
structure and complete Internet-related business combinations in the form
of investments in or a merger or acquisition of prospects consisting of
private companies, partnerships or sole proprietorships. To achieve
these goals, IBC was retained, and the agreement to develop an Internet
business was put in force.
DEVELOPMENT OF A WEBSITE AND THE ACQUISITION OF INTERNET COMPANIES
Ecomm has been developing its new MyInternet.to web portal since January
1999. To date, Ecomm has completed the beta site located at
http://www.homestead.com/myinternetbeta. The beta site currently
features data from CBSMarketwatch.com, Multex.com, Dow Jones, Red
Herring, HotBot, Goto.com, ProFlowers, Accuweather.com and much more.
Ecomm retained Webzter Corporation to complete the beta site.
IBC, as the consultant of the Company and Ecomm, informed the Company
that it has owned and operated the ibchannel.com website since June of
1997, and that its website has grown to over 500,000 hits in January
1999. IBC's plans were to develop Ecomm primarily by outsourcing
production work to web design and development companies. Ecomm's
business strategy is to build its web portal through the acquisition and
consolidation of selected Internet companies. Ecomm, through its
consultant IBC, will review, evaluate, structure and acquire or merge
Internet businesses; then it plans to combine them into its web portal.
In addition, the Company and IBC have agreed to use their respective
expertise to develop and incorporate a website related to the mining
industry.
<PAGE>
In addition to the development of a website and the acquisition of
Internet companies, on January 27, 1999, IBC agreed to provide the
Company with public relations and other related services primarily
directed at providing information regarding the Company on the Internet.
IBC agreed to perform a program called "The IBC Marketing Campaign" at no
additional cost to the Company or to its subsidiary, Ecomm. As part of
the program, IBC was to develop, host, and maintain an IBC Feature Public
Company Website at http://www.ibchannel.com which would include: (1) a
hyperlink from IBC to the Company's website with the Company's stock
quote and chart; (2) a summary of the Company, press releases,
financials, and contact information; and (3) an investor package e-mail
request form. In addition, IBC agreed to update the MyInternet.to
website as needed, forward e-mail leads to the Company, and develop and
maintain a lead database. Moreover, IBC agreed to feature the Company in
"The IBC Newsletter" at http://www.ibchannel.com/stockline.shtml on a
bi-monthly basis and to link a "Company Discussion Group" to
http://www.thestocktalk.com. IBC agreed to keep the Company informed of
its activities and the results thereof, on a weekly or more frequent
basis.
On May 25, 1999, an amendment to the agreement signed on January 27,
1999, stated that the Company agreed to transfer 500,000 Rule 144
restricted common shares of the Company's stock, ten cents ($.10) par
value as compensation for the services of IBC and Matthew Marcus, after
certain dates in accordance with a timetable more fully described in the
amendment to the agreement.
PLANS TO SET UP THE WEB PORTAL
The new websites that Ecomm acquires will function autonomously, but will
be linked together and share the same brand name. Ecomm launched its own
site on July 26, 1999. The web portal will be maintained by IBC and the
companies it acquires, and it believes that it will not require
substantial additional personnel. Technical support, marketing,
advertising, website maintenance and acquisitions, will be handled by
IBC, as consultants. IBC has been retained to assist the Company in the
aforementioned areas.
It is expected that the web portal will derive revenue from e-commerce,
joint venturers, strategic alliances and from other revenue streams.
During its fiscal year, no income or material expenses were incurred.
The web portal serves Internet customers seeking services including:
free e-mail, chat, free web pages, auctions, and instant messaging. Its
potential customers will be the customers that the acquired Internet
companies have and it will build on that base through marketing and
advertising.
Pursuant to the agreement, the Company issued 500,000 of its restricted
common shares at no cost to IBC, and the ownership of 49% of Ecomm's
common shares. On January 31, 1999, Mr. Matthew Marcus was elected as
the President and Director of Ecomm. Mr. Edward A. Machulak (son of
Edward L. Machulak) is a Director and Secretary of Ecomm. One of his
companies, MacPak, Inc. has developed an on-line city guide portal named
miy.com and his company has been developing websites for others.
There can be no assurance that Ecomm's current strategy will be
successful. Ecomm has not yet entered into any agreements for the
acquisition of any websites, web services or other technology in
connection with the web portal. There is no assurance that it will be
able to enter into contracts for the acquisition of such sites, services
and technology on terms acceptable to Commerce and Ecomm. The Internet
business is highly competitive and there is no assurance that Ecomm's web
portal will attract traffic and generate a profit, even if Ecomm acquires
the websites, web services and technology on acceptable terms. Also,
Ecomm depends on IBC to perform its contractual obligations in achieving
its goals.
<PAGE>
PRECIOUS METAL MINING
---------------------
In addition to the Internet business, 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,
cash flow, and by increasing its gold ore reserves. This can be achieved
by its continuing to be a low-cost gold producer, by increasing
production and by expanding its gold ore reserves.
Commerce's current goal is to secure sufficient capital to increase its
production of gold to 113,000 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 increase the processing
of its 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 gold 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
explore areas contiguous to the SSGM site, and it also is planning drill
programs at its other potential mining prospects.
OPERATIONS
Currently the Joint Venture has decided to temporarily suspend its
processing of gold ore at its SCMP until such time as it has adequate
funds to retrofit, restore and rehabilitate its mill and plant. A major
overhauling is needed to preserve the integrity of the equipment. The
initial resumption of producing gold was with the used equipment the
Joint Venture purchased on February 23, 1993. Even though the Joint
Venture has maintained this mill and plant on a continuous basis, certain
basic structural components are worn out and need to be replaced or
overhauled. Another concern this fiscal year is the world market price
of gold which peaked in October 1999 and thereafter declined. Concurrent
with the decision to suspend is the need to expand the SCMP facilities
from the existing 200-ton-per-day capacity to a 500-ton-per-day
operation. From March 31, 1995, and through the fiscal year ending March
31, 2000, 22,609 ounces of bullion containing 13,478 ounces of gold and
4,634 ounces of silver were produced at the SSGM and then sold. In the
fiscal year ended March 31, 2000, 2,142 ounces of bullion containing
1,499 ounces of gold and 463 ounces of silver were produced and sold.
There are approximately 1.5 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 mining properties which has
generated revenues, although there are strong initial indications of
commercial gold ore present at the other sites.
<PAGE>
At the current stage of the exploration and development, the Company's
geologists have defined the following gold reserves:
Ounces
-------------------
Average
Tons Grade Contained Probable
---- ------- --------- --------
1. San Sebastian Gold Mine
(a) Virgin ore, dump waste
material and tailings 14,404,096 0.081 1,166,732
(b) Stope fill (estimated) 1,000,000 0.340 340,000
---------- --------- -------
15,404,096 1,166,732 340,000
2. San Felipe-El Potosi Mine
(a) Tailings 168,828 0.060 10,130
3. Hormiguero Mine
(a) Tailings 100,000 0.064 6,400
---------- --------- -------
Totals 15,672,924 1,183,262 340,000
========== ========= =======
The anticipated recovery for processing via the SCMP will range from 85%
to 95% and for heap leaching from 65% to 70%.
As of March 31, 2000, the total investment in the El Salvador mining
projects by Commerce, three of Commerce's subsidiaries, Sanseb, and the
Joint Venture amounted to $61,321,814.
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.
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.
<PAGE>
ORGANIZATIONAL STRUCTURE
------------------------
The percentage of ownership of the Joint Venture and the Company's
subsidiaries are shown below 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
Ecomm Group Inc. ("Ecomm") 51.0
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 and
on April 1, 1999 it merged back into a Wisconsin corporation. 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 owner of the SSGM real estate. Misanse 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 acquired on February 23, 1993) and has
conducted exploration and exploitation at the following El Salvador gold
mines: SSGM (since October 1968), San Felipe-El Potosi (since September
1993) and its extension Capulin (since May 1995); Modesto (from August
1993 through July 1997); Hormiguero (from September 1993 through 1998)
and Montemayor (from March 1995 through July 1997).
The Government of El Salvador has issued the Modesto, Montemayor and San
Felipe-El Potosi 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). It also has a lease
agreement with the owner of the San Felipe-El Potosi Mine.
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 and has contracted with others 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 was in operation and produced gold on a curbed
start-up basis, its revenues, profitability and cash flow were greatly
influenced by the world market 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, central bank sales, purchases, inflation, and
production costs in major gold-producing regions. The supply and demand
for gold can also greatly affect the price of gold. 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 a refinery located in the United States.
<PAGE>
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 and financial resources and larger gold ore reserves than the
Company. The Company believes that the expertise of the Joint Venture's
experienced key personnel, its ability to train its employees, its low
overhead, its gold ore resources, its accountability to the mine, and its
projected low cost of production may 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 the world market 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, but the rainy season (May
through November) can curtail production.
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 Government of El
Salvador has established its own Department of Environment.
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 the El Salvador
environmental standards. 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.
<PAGE>
The Company is in the process of updating its environmental impact study
which is being prepared by an independent El Salvadoran consultant.
INFORMATION FROM U.S. EMBASSY IN EL SALVADOR, COUNTRY COMMERCIAL GUIDE
----------------------------------------------------------------------
1999/2000
---------
The following are excerpts from the "Economic and Commercial Section,
Embassy of the United States of America in El Salvador, Country
Commercial Guide 1999/2000," dated June 1999:
"Chapter I - EXECUTIVE SUMMARY
"This Country Commercial Guide (CCG) presents a comprehensive look at El
Salvador's commercial environment, using economic, political and market
analysis. The CCGs were established by recommendation of the Trade
Promotion Coordinating Committee (TPCC), a multi-agency task force, to
consolidate various reporting documents prepared for the U.S. business
community. Country Commercial Guides are prepared annually at U.S.
Embassies through the combined efforts of several U.S. Government
Agencies. . . .
"Chapter III - POLITICAL ENVIRONMENT
"El Salvador has an excellent relationship with the United States,
solidified by years of close cooperation during and after the civil
conflict, and U.S support for reconstruction and reconciliation after the
1992 Peace Accords. Leaders of the FMLN, the one-time guerrilla
organization which has become a political party, have established close
relationships with the U.S. Government, seeing it as an honest broker
during the peace process. Most Salvadoran people view the U.S. in a
favorable light, augmented by the fact that over one million Salvadorans
live in the U.S. and send over USD $1 billion in remittances to family
members in El Salvador every year. The political environment is expected
to remain stable over the next ten or more years.
"In March 1999, El Salvador held its second presidential election since
the end of the war. This election was won by the right-wing Arena party,
which has held the Presidency for the past ten years. The FMLN increased
its strength in the 1997 legislative elections, becoming the second
largest political party with 28 legislative seats, just one seat less
than the governing center-right ARENA party. The FMLN also won important
municipal contests in 1997. A good sign of a vibrant democracy is that
both privatizations of the telecommunications and electrical distribution
systems went forward after the 1997 elections.
"Since its inception as an anti-Communist nationalistic party in the
early 1980s, ARENA has moderated its policies. During the administration
of President Alfredo Cristiani (1989-1994), the government ended a
12-year civil war, greatly liberalized the economy and reduced
corruption. His successors, ex-president Calderon Sol, and Francisco
Flores, who took power in June 1, 1999, have continued these
market-oriented economic policies, and have strengthened the rule of law.
"The FMLN has strongly supported the democratic process, and pursued a
pragmatic center left policy. The FMLN's economic policy leaders have
described the party's goal as a mixed economy, with private enterprise
and investment and with government regulation to ensure that social
interests are taken into account.
<PAGE>
"The right-wing National Conciliation Party (PCN), which was the
governing party before the civil conflict, currently comprises the third
largest parliamentary group.
"The centrist Christian Democratic Party (PDC) has seen its support erode
since controlling the Presidency and Assembly in the mid-1980s. There
are several other small parties. The Social Christian Union Party (USC)
includes elements which left the PDC. Other small leftist parties which
were sympathetic to the FMLN during the conflict, but which operated
legally, coalesced to form the Democratic Convergence Party. . . .
"Chapter VII - INVESTMENT CLIMATE
"Openness to Foreign Investment
"The Salvadoran Government is committed to attracting foreign investment
in most sectors. The climate for foreign investment has improved
significantly over the last few years, as the Government has enacted a
number of complementary laws to facilitate and regulate investment in key
sectors of the economy, and to encourage portfolio investment in state
enterprises under privatization. Companies from many countries including
the United States, Canada, Germany, Korea, Taiwan, and Mexico and lately
France, Spain, Venezuela and Chile have made investments here with
favorable results. Non-official sources estimated that foreign
investment inflows totaled some $250 million in 1995, $60 million in
1997, and over $1.0 billion in 1998. The primary legislation governing
foreign investment in El Salvador is the 1990 Export Reactivation Law;
and the 1988 Foreign Investment Promotion and Guarantee Law and an
updated Free Zones Law enacted in 1998. Other laws complementing the
basic investment legal frame are the Banking Law, Insurance Firms Law,
the Mining Law, the IPR Law, the Stock Exchange Law, special legislation
governing the privatization of the Telecommunications Company, the
electricity generation and distribution laws, and the Pension Funds Law.
The law governing seaport management is being studied for a possible
revision to allow private sector participation in port management.
"* The 1988 Foreign Investment and Promotion Law (and its reforms)
encourages legal and natural persons to freely establish businesses in El
Salvador, with the exception of two activities reserved for Salvadorans:
small business (less than USD 25,000.00 initial investment), and fishing
within 12 miles of territorial sea. The law accepts intangible
technological contributions as foreign direct investment. Thus,
copyrights, patents, trade marks and inventions receive the same
protection under the law. For enhanced protection, the law encourages
the investor to register his investment with the Ministry of Economy.
For investors who register with the Ministry of Economy, this law
provides:
"-- Unrestricted remittance of net profits for investors in industrial
activities. Unrestricted reinvestment of profits.
"-- 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. . . .
<PAGE>
"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.
A 1997 amendment to this law exempts this rebate from income tax.
"In 1994 the government announced that it was setting up a one-stop
office for foreign investment in the Ministry of Economy, where investors
now register their investments, but the project apparently did not
progress. The new administration, in office since June 1, 1999, has
announced its intention to open this office (Oficina Nacional de
Inversiones, ONI) in September 1999.
"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.
"* The Banking Law is the main instrument regulating the operation of
national and foreign banks in El Salvador. This law was modified in 1995
to encourage foreign banks to enter the country, and removed restrictions
on ownership of newly-privatized banks. As of the early 90s, only two
American banks operated in El Salvador. Today, several branches and
offices of new foreign banks operate in El Salvador, among these: Banco
Santander (Spain), Popular bank of Florida, Dresdner Bank A.G., Dresdner
Bank Lateinamerika, and Barclays Bank. In 1997, Scotia Bank (Canada)
bought 53 percent of the shares of a local bank, and a Peruvian bank
bought 99 percent of the shares of another local bank.
"* An Insurance Law was enacted in 1995 to regulate the operation of
insurance firms. The law provides national treatment for foreign
insurance firms. Recently, the American firm AIG entered into a
strategic alliance with a Salvadoran insurance company. Also a Spanish
insurance firm entered in association with a Salvadoran insurance
company.
"* In January 1996, the GOES enacted a modern Mining Law, in substitution
of the previous law dating from 1992. Under this law, two foreign
companies, -- American and Canadian -- have received concessions to
exploit gold and silver mines in El Salvador.
"* Since 1993 El Salvador has had in place a modern IPR law whose gradual
implementation has become a valuable instrument for protecting
intellectual property of foreign investors. Under this law intangible
property rights are recognized.
"* A Stock Exchange law enacted in 1993 led to the creation of the
Salvadoran Stock Exchange. The privatization process and the
establishment of private pension fund administrators are expected to
stimulate the incipient stock exchange. As of May 1999, the stock
exchange transaction averaged some $140 million per week. . . .
"Conversion and Transfer Policies
"El Salvador has a freely convertible currency that since 1994 has traded
at approximately 8.75 colones per dollar. The new government has
declared the possibility of fixing by law the rate. This currency is
buoyed by family remittances of more than one billion dollars per year
(USD 1.3 billion in 1998) from Salvadorans who reside outside the
country. The nation'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. As of the
end of May 1999, the Central Reserve Bank reported more than USD 1.7
billion in net international reserves. . . .
<PAGE>
"Political Violence
"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. . . .
"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 addresses issues such
as national treatment for foreign investors, transfers, expropriation,
investment disputes, tax policies, was signed in March 1999, and is
pending legislative ratification in both countries. The United States
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
investment. El Salvador is a member of the World Trade Organization.
"OPIC
"The Overseas Private 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).
"Labor
"Of El Salvador's labor force of approximately 2.2 million workers, 27
percent work in the agricultural sector. This is followed by
trade/commerce (25 percent), services (18 percent), and manufacturing (16
percent). The minimum wage in the industrial and commerce sectors is
1,260 colons or 144 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.
"Official unemployment was 7.7 percent in 1998, and is projected to fall
to 7.1 percent in 1999. Underemployment is much higher, most common
estimates placing it at 31 percent. However, some construction
contractors cannot find sufficient skilled workers, due to the number of
projects now underway in El Salvador.
"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. The current administration
has made education its first priority sector. There is a lack of middle
management-level talent, which sometimes results in foreigners being
brought in to perform such tasks. In an attempt to raise the level of
maquila production, the Salvadoran Institute of Professional Formation
(INSAFORP) sent 119 students to India to receive 9 months of training in
computer software production. Some of these students have graduated and
are returning to El Salvador to help in the development of this industry.
<PAGE>
"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.
Salvadoran investors have interests in hotels, banks, real estate and
industry in Mexico, Guatemala, Honduras, Costa Rica, Panama and the U.S.
Accurate statistics on the size of these investments are not available.
"Major Foreign Investors
"Coastal Technologies - owner/operator of the Nejapa power-generating
plant. Estimated value over USD 140 million dollars, with plans to
expand it for 1997/98.
"Kimberly 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, expanded in 1997. Also owns 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.
"France Telcom, owns 51 percent of the wired telecommunications company
and has interests in cellular phones service.
"Telefonica Espanola, owns 51 percent of the wireless telephone company.
"AES corporation, US/El Salvador, electricity distribution.
"Emel, Chile/Pennsylvania, power and distribution.
"Electricidad de Caracas, US/Houston and Venezuelan electricity
distribution.
"Sara Lee Knit Products - owns a clothing assembly plant in the El
Pedregal free trade zone.
"Fruit of the Loom - owns several clothing assembling plants and opened
its regional Central America & Caribbean Office in El Salvador in 1998.
"Xerox de El Salvador - sells and services office equipment and
computers.
<PAGE>
"AIG - insurance
"British American Tobacco - distributes cigarettes.
"Citibank - present in El Salvador since the early seventies.
"IBM - present since the sixties.
"Microsoft - opened an office in early 1999."
Excerpts from a website about El Salvador, Central America, located at
http://www.dirla.com/elsalvador2.html provide the following information:
"About the size of Massachusetts, El Salvador is the smallest country in
Central America and most densely populated of the Central American
countries. Now, only four years after a U.N. sponsored peace treaty
ended the country's eleven year bloody war, El Salvador is considered to
have the most dynamic economy in the region.
"Thought to be the most industrialized nation in Central America, the
country's hard working people, and improving economic indicators provide
the investor with some of the building blocks for a successful venture."
OPERATIONS, OTHER THAN MINING
-----------------------------
Aside from its mining operations and recent entry into the Internet
business, 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, and the Internet business through its
51%-owned subsidiary, Ecomm Group Inc. ("Ecomm").
On January 27, 1999, Commerce announced that its wholly-owned subsidiary
(at that time), Ecomm, entered into an agreement with Interactive
Business Channel, Inc. (IBC) in which IBC agreed to develop an "Internet
web portal roll up strategy," and to provide public relations and
consulting services. In addition, IBC agreed to include, at no
additional cost to the Company, its "IBC Marketing Campaign." The public
relations were regarded as an integral part of the agreement with the
intention of exposing the Company to a wide range of potential investors.
IBC received 49% share ownership in Ecomm and 500,000 of the Company's
restricted common shares. On May 25, 1999, both parties agreed that IBC
would continue to design, develop, market, and manage Ecomm's web portal
site. The parties incorporated by reference the "MyInternet.to" Ecomm
Group Inc. Business Plan and the projections prepared by Matthew Marcus,
and acknowledged that it would be the basic plan for the web portal
beginning on May 25, 1999. Mr. Matthew Marcus, as President of Ecomm,
agreed to manage the development of Ecomm's web portal site.
LAND ACQUISITION, DEVELOPMENT AND OWNERSHIP
-------------------------------------------
During the past years, the Company has substantially reduced its
activities in the business of real estate development which was conducted
principally through its 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, 2000, 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 3,000 lineal
feet 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 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. This real estate is
located approximately two and one-half miles northwest of the city of
Santa Rosa de Lima, off of the Pan American Highway (a four-lane newly
constructed 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.
The Company owns approximately 63 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 approximately 175 acres of land considered to be the main part of
the Montemayor Mine 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>
INTERNET BUSINESS AND ADVERTISING
---------------------------------
The Company owns 51% of the outstanding common stock of Ecomm Group Inc.
("Ecomm"), a Wisconsin corporation. The Company, in order to diversify
its business activities, on January 29, 1999, announced its plans to have
its majority-owned subsidiary, Ecomm, enter into the web portal business.
Ecomm's current strategy is to attempt to acquire or to "roll up"
Internet websites and businesses and consolidate them into a web portal.
Interactive Business Channel Inc. (IBC) has agreed to assist Ecomm in
developing an "Internet web portal roll up strategy" by acquiring
Internet businesses. Thus far, IBC has not been successful in achieving
any acquisitions.
There can be no assurance that Ecomm's current strategy will be
successful. Since IBC's involvement, Ecomm has not entered into any
agreements for the acquisition of any websites, web services or other
technology in connection with the web portal. There is no assurance that
it will be able to enter into contracts for the acquisition of such
sites, services and technology on terms acceptable to Commerce and Ecomm.
The Internet business is highly competitive and Ecomm's web portal has
not attracted the traffic it needs to generate revenues or a profit.
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 is in the process of
applying for concessions for the real estate it owns on the Modesto Mine,
and the real estate it leases at the Montemayor Mine and the Hormiguero
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 at this time 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.
<PAGE>
At this time, 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.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS LINES OF BUSINESS
---------------------------------------------------------------
OPERATION
---------
Campground: For the years ended March 31, 2000, 1999 and 1998, 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 preferably to
a single buyer.
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
curbed production 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 Joint Venture recently announced the
suspension of its SCMP facilities in order to overhaul, repair, retrofit
and expand the SCMP.
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. With the substantial decline in
the price of gold and low public market value of its shares, it may be
more difficult to obtain financing under reasonable terms and conditions.
INTERNET BUSINESS
-----------------
As of March 31, 2000, the Company's subsidiary, Ecomm, has not earned any
revenue and has not incurred any significant expenses or capital
investment other than that disclosed in this report. IBC, the
consultant, has not been able to achieve its contractual obligations.
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. The competition is more intense in the Internet
business.
<PAGE>
EMPLOYEES
---------
As of December 31, 1999, 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 was 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. Since the Joint
Venture has laid off most of its employees, the Joint Venture had to pay
the severance pay to its employees and therefore it had to sell the
Company's common shares which were issued to the Commerce Group Corp.
Employee Benefit Account. El Salvador employees are entitled to receive
severance pay which is based on one month pay for each year of
employment.
INSURANCE
---------
The Joint Venture has the availability of 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.
<PAGE>
Industry Segments
-----------------
1. Unaffiliated Sales Year Ended March 31,
------------------ --------------------
Industry Location 2000 1999 1998
-------- -------- ---- ---- ----
Mining (*a) El Salvador $ 413,713 $ 785,526 $ 1,234,443
Campground Missouri, USA 66,902 62,176 61,465
2. There Were No Intersegment Sales
--------------------------------
3. Total Revenues Year Ended March 31,
-------------- --------------------
Industry Location 2000 1999 1998
-------- -------- ---- ---- ----
Mining (*b) El Salvador $ 500,124 $ 999,017 $ 1,347,391
Campground Missouri, USA 66,902 62,176 61,465
Other Delaware/Wis.,
USA 134 246 3,025
----------- ----------- -----------
Total: $ 567,160 $ 1,061,439 $ 1,411,881
4. Operating Profit (Loss) Year Ended March 31,
----------------------- --------------------
Industry Location 2000 1999 1998
-------- -------- ---- ---- ----
Mining (*a) El Salvador $ (384,759) $ (44,688) $ 117,699
Campground Missouri, USA (8,175) (4,267) (2,121)
Interest Income
& Corporate
Headquarters El Salvador/
Delaware
Wisconsin, USA (3,298) (41,311) 3,025
------------ ------------ -----------
Total: $ (396,232) $ (90,266) $ 118,603
5. Identifiable Assets Year Ended March 31,
------------------- --------------------
Industry Location 2000 1999 1998
-------- -------- ---- ---- ----
Mining (*a) El Salvador $27,831,734 $26,031,841 $24,386,843
Campground Missouri, USA 1,135,500 1,135,500 1,135,500
Real Estate Colorado, USA 21,000 21,000 21,000
Corporate Assets 867,967 398,460 256,308
----------- ----------- -----------
Total: $29,856,201 $27,586,801 $25,799,651
(*a) The proceeds from the sale of gold and the gold inventory received
from the Joint Venture were used to reduce the advances due to the
Company.
(*b) Includes an added tax value refund from the Government of El
Salvador of $86,411 for 2000, $213,491 for 1999 and $112,948 for
1998.
<PAGE>
ITEM 2. PROPERTIES
-------------------
MINING PROPERTIES
-----------------
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
Date of Funds
Interest Cost to Make Date
Property Nature of was of Property Mine will be
Description Interest Acquired Interest Operational Operational
----------- -------- -------- -------- ----------- -----------
1. San Sebastian Mineral 1968 5% of the This is It was in
Gold Mine concession gross dependent operation
located two consisting precious on the on a curbed
and one-half of 100% metal scale of production
miles north- ownership proceeds production basis until
west of the of the or $206 that the last
city of Santa precious a month management quarter of
Rosa de Lima metals whichever decides to 2000 when
and the Pan extracted is higher. perform. operations
American from this mine. The amount were sus-
Highway. of invest- pended due
ment could to the need
be from $5 to overhaul,
million to repair and
$100 million. restore
the SCMP
facilities.
2. San Felipe- Application 07/06/93 5% of the Undeter- Undeter-
El Potosi/ pending for gross mined until mined.
Capulin Mine mineral precious a preliminary
located near concession metal drilling
the city of for 100% proceeds. program is
Potosi, 18 ownership completed;
miles north- of the precious estimated
west of the metals extracted cost of
city of San from this mine. drilling is
Miguel. $2 million.
3. Hormiguero Ownership of 09/93 The sur- Undeter- Undeter-
Mine located the tailings. face use mined until mined.
five miles of land a preliminary
southeast (rent) is drilling program
of the San to be is completed;
Cristobal negotia- estimated cost
Mill and ted. of drilling is
Plant near $2 million.
the city Mine surface
of Comacaron. channel trench-
ing and adit
cleaning should
be completed
to determine
drilling cost.
4. Modesto Mine Application 09/93 It appears Undeter- Undeter-
located near is to be as if this mined until mined.
the city of submitted will be an a prelimi-
Paisnal and for a mineral under- nary drilling
about 19 miles concession on ground program is
north of San the real estate operation completed;
Salvador, the owned by the except in estimated cost
capital city. Company to own the of drilling is
100% of the Company- $2 million.
precious metals owned land.
extracted from Therefore,
the real estate no cost for
owned by the interest.
Company.
5. Montemayor Application 07/95 It appears Undeter- Undeter-
Mine located is to be that this mined until mined.
about 14 submitted will be an a prelimi-
miles north- for a mineral under- nary drilling
east of SCMP concession on ground program is
and about six the land mine, completed;
miles north- leased by therefore estimated
west of SSGM. the Company current cost of
to own 100% leases drilling is
of the precious will have $2 million.
metals extracted to be re-
from the areas negotiated
the Company leases. and extended.
6. San Cristobal Mill and Equip- Equipment To expand Curbed
Mill and Plant ment purchased the plant, production
Plant located owned by 02/23/93 and including commenced
off the Pan Joint and extensive a crush- March 1995;
American Venture. there- retro- ing system expansion
Highway west The real after fitting to a capa- program
of the city estate is Lease was and city of 400 in
of El owned by 11/12/93 continues tons per progress.
Divisadero. an agency to be day; an Operations
of the performed. estimated suspended
Government Through sum of up in the last
of El Salvador. 03/31/00, to $3 quarter of
a total of million 2000 until
$5,353,046 may be the
has been required, existing
invested all equipment
in this dependent is over-
plant and whether hauled,
equipment. new or repaired,
Depreciated used equip- restored
value is ment will and
$3,039,127. be purchased. expansion
of the
SCMP
facilities
are
completed.
<PAGE>
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. Reconstruction in 1999 of
the Pan American Highway from two lanes to four lanes (from the city of
San Salvador to the Honduran border) has been recently completed. The
city of Santa Rosa de Lima (approximately three miles from the SSGM) is
one of the largest cities in the Eastern Zone. The SSGM is
approximately 30 miles from the city of 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 air 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
03/31/00 03/31/99 03/31/98
-------- -------- --------
PRODUCTION
Dry tons ore mined and processed 28,970 51,618 59,596
Gold grade of ore (oz./ton) .08 .08 0.087
Strip ratio (tons waste/tons ore) N/A N/A N/A
Gold production (oz.) 1,499 2,684 3,927
Silver production (oz.) 463 836 1,416
Recoverable gold inventory (oz.) 100 259 259
FINANCIAL
Ounces of gold sold 1,499 2,684 3,927
Average gold price realized $ 276 $ 293 $ 315
Revenue from mine operations $ 413,713 $ 785,526 $1,234,443
Cash operating cost per ore ton mined $ 11.06 $ 10.27 $ 14.72
Cash operating cost per ounce $ 163.35 $ 197.62 $ 198.24
Total production cost per ounce (1) $ 357.14 $ 350.19 $ 276.43
Operating earnings (loss) (2) $ (384,759) $ (44,688) $ 117,699
Capital expenditures
in mining projects (2) $2,695,107 $2,269,928 $3,402,089
MINABLE RESERVES (03/31/00)
Contained
Average Gold
Tons Grade Ounces(3)
---------- ----- ----------
Ore - virgin, dump waste and tailings 14,404,096 0.081 1,166,732
Stope fill (estimated) 1,000,000 0.340 340,000
---------- ---------
Totals 15,404,096 1,506,732
(1) As calculated under The Gold Institute's Production Cost Standard,
includes the depreciation expense of $320,491 or $163.35 an ounce for
2000, $338,797 or $126.23 an ounce for 1999 and $208,254 or $53.04 an
ounce for 1998.
(2) Excludes exploration and development drilling.
(3) The estimated recoverable ounces of gold by processing: SCMP, 90%+;
heap leach, 60%/70%.
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, except the lower grade, 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; however, it was reserved for future processing. The stope
fill that is available was in the past 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 to accommodate the extraction
of gold ore in the past SSGM mining activities. Virgin gold ore, as the
term is used in this report, is gold ore which is on the surface and
readily available for processing; it also includes the undeveloped
underground gold ore.
<PAGE>
Virgin gold ore at the SSGM represents the majority of the material (14.4
million tons, including the dump waste material) 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 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 and it now is combined
with the virgin ore. An analysis of the underground stope fill 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. de C.V. ("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
days' notice to Misanse and thereafter all legal obligations thereunder
shall cease.
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.
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.
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.
<PAGE>
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. As an example, Article 138 prohibits confiscation of property.
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 resume 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 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 operation during the
first twelve full operating months and then increasing the annual
production of gold to 113,000 ounces.
PROPOSED SSGM OPEN-PIT, HEAP-LEACHING OPERATION
The Joint Venture has placed the SCMP into a curbed production operation.
It now intends to obtain a sum of $8 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. 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.
<PAGE>
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.
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
Ministry of Environment has jurisdiction over environmental control.
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 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 to the Minister of Environment. It
is in the process of updating its environmental impact study.
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.
<PAGE>
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 curbed 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 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 of 0.06. The remaining 168,825 tons available
multiplied by the average grade of 0.06 should contain 10,130 ounces of
gold. The 10,130 ounces of gold multiplied by a 70% recovery should
yield about 7,091 ounces of gold.
POTOSI AND EL CAPULIN EXPLORATION UNDERTAKINGS
A total of 2,574 meters (8,494 feet) of channel trenching was excavated
with a grade ranging from 0.01 to 0.05 ounces of gold per ton. A total
of 806 meters (2,658 feet) of adits has been restored for entry into the
old workings. A total of 3,500 fire assay samples were completed with
the results encouraging a drilling program.
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. Since the question of the Joint Venture
receiving a concession (license) is questionable, its exploration has
been temporarily ceased until such time as this issue is resolved.
<PAGE>
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.
ENVIRONMENTAL MATTERS
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies except that at this time no environmental
impact study is being conducted at San Felipe-El Potosi or the El Capulin
mines.
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 Joint Venture
has temporarily suspended all of its activities until such time as the
question of a concession/license will be resolved.
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 PRESENT STATUS
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.
<PAGE>
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.
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 permit 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.
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
Energy, 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.
<PAGE>
SCMP LEASE AGREEMENT
Although the Joint Venture owns the mill, plant and related equipment, it
does not own the land and certain buildings. 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 which increased the annual rental to $13,402 beginning
November 1, 1999. 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
Instead of utilizing the existing recovery system on the site on the
acquisition date, 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 up to 500 tons of virgin ore per day.
The SSGM average grade was about 0.080 ounces of gold per ton.
During this fiscal year the Joint Venture did process at the SCMP
approximately 29,000 dry tons (approximately 33,000 wet tons) of
tailings and virgin ore which yielded 2,141 ounces of dore and accounted
for 1,499 ounces of gold and 463 ounces of silver. The cash gross
receipts amounted to $413,713.
SCMP PROJECT OPERATING PLAN
CURRENT AND ANTICIPATED PRODUCTION SCHEDULE
Preproduction development, consisting primarily of expansive road and
site improvements to the mine and mill sites, mill equipment
modifications and the development and hauling of virgin ore has taken
place during the past years. Initial production was from the SSGM
tailings. Since the SSGM's tailings' resource is nearly exhausted,
virgin gold ore is excavated from the SSGM surface and hauled to the SCMP
site.
<PAGE>
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, is expected to be substantially
more than the cost involved, providing that the world gold market price
does not continue to decline to a level of unprofitability.
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 on the Pan American
Highway 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.
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.
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 was operated 24 hours per day, seven days per week and 52 weeks
per year. During the fourth quarter of this fiscal year, the Joint
Venture has suspended the SCMP's operations and placed the facilities on
a care and maintenance status until such time as the Company has
sufficient funds to overhaul the equipment and expand this mill and
plant.
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. A total of 78,441 samples of fire assays have been completed
through March 31, 2000.
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.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
--------------------------
The Company is not a party to any material legal proceedings.
ITEM 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, 2000.
ITEM 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, 2000.
Executive
Age as Offices
of Held With Period Served
Name March 31, 2000 Company (1) In Office (2)
---- -------------- ----------- -------------
Edward L. Machulak 73 President,
Chief Executive,
Operating and
Financial Officer 9/14/62 to present
Treasurer 06/78 to present
Edward A. Machulak Executive Vice
(Son of the President) 48 President 10/16/92 to present
Secretary 1/12/87 to present
Assistant Secretary 4/15/86 to 1/12/87
Luis A. Limay 58 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.
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, 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. He has been a member of the Audit Committee since February 9,
1998, the date that the Audit Committee was formed.
<PAGE>
He is a Director and the President or Officer of: Homespan Realty Co.,
Inc.; San Luis Estates, Inc.; San Sebastian Gold Mines, Inc.; and
Universal Developers, Inc. He is the Secretary and Treasurer of Ecomm
Group 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.
He is also a Director, Vice President and Secretary of: Homespan Realty
Co., Inc. and San Luis Estates, Inc.; and is a Director and Secretary of
San Sebastian Gold Mines, Inc. He has been a Director and Secretary of
Ecomm Group Inc. from January 31, 1999 to the present.
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 MacPak, a developer of an Internet City Guide,
since September 26, 1996 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 in 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 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
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 were fully listed on the Boston Stock
Exchange under the symbol "CMG" or "CMG.BN," from February 10, 1976 to
January 29, 1999. Trading was halted on January 29, 1999, pending the
decision of the Company's appeal of Nasdaq's delisting of the trading of
the Company's common shares. Currently the shares remain listed.
<PAGE>
The Company's common shares traded on the National Association of
Securities Dealers Automated Quotation Systems Small-Cap Issue (Nasdaq)
under the symbol "CGCO" from March 23, 1987 to January 29, 1999. Nasdaq
halted the trading on January 29, 1999.
On Wednesday, March 31, 1999, the Company was notified by Nasdaq/Amex
that the Nasdaq Listing Qualifications Panel had decided to delist the
Company's securities based on public interest concerns and the
noncompliance with the Nasdaq's minimum bid rule.
Since May 5, 1999, the Company's common shares are being traded on the
Over the Counter Bulletin Board (OTCBB) under the symbol CGCO. The last
quote on Nasdaq during the fiscal year ended March 31, 1999 was on
January 29, 1999.
The following table reflects the range of high and low prices of the
common shares as reported by Nasdaq or the OTCBB for the period ended
March 31, 2000 and the highest and lowest trade price during each quarter
through the period ended March 31, 1999.
For the period ended March 31, 2000 March 31, 1999
High Low High Low
---- --- ---- ---
First quarter ending June 30 $1.25000* $0.25000* $1.125 $0.6250
Second quarter ending
September 30 $1.40625 $0.40625 $0.938 $0.3130
Third quarter ending
December 31 $0.67000 $0.28125 $1.000 $0.2810
Fourth quarter ending March 31 $1.46875 $0.28125 $2.000 $0.3125
* The data used for the first quarter ended June 30, 1999 reflects the
information that the Company could assemble, as the Company's shares
began trading on the OTCBB from May 5, 1999. From April 1, 1999
through May 4, 1999 an application for eligibility to trade on the
OTCBB was pending.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES
---------------------------------------------------
As of March 31, 2000, the common shares were held by approximately 4,171
shareholders; it is estimated that over 95% are United States'
residents.
As of March 31, 2000, there were approximately 1,881 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
2,290.
As of March 31, 2000, there were issued and outstanding: (a) 13,888,929
shares of common stock; (b) 1,254,900 stock options to purchase common
stock; and (c) 625,235 common shares due on share loans and share 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, 2000. 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.
<PAGE>
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
----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Total revenue $ 480,615 $ 847,702 $ 1,295,908 $ 59,009 $ 55,692
============ ============ =========== ============ ============
Income (loss)
from continuing
operations $ (396,232) $ (90,266) $ 118,603 $ (5,141) $ (28,387)
============ ============ =========== ============ ============
Income (loss)
from continuing
operations per
share:
Basic $ (.0326) $ (.0081) $ .0115 $ (.0006) $ (.0039)
============ ============ =========== ============ ============
Diluted $ (.0282) $ (.0070) $ .0100 $ (.0005) $ (.0038)
============ ============ =========== ============ ============
Weighted average
shares -
basic 12,172,867 11,165,127 10,358,132 8,136,286 7,368,058
============ ============ =========== ============ ============
Weighted average
shares -
diluted 14,053,002 12,813,368 11,783,532 9,727,646 7,465,898
============ =========== =========== ============ ============
Cash dividends
per common
share $ 0 $ 0 $ 0 $ 0 $ 0
============ =========== =========== ============ ============
BALANCE SHEET DATA
Working
capital*1 $ 420,963 $ 430,833 $ 614,554 $ 660,596 $ (92,398)
============ ============ =========== ============ ============
Total assets $29,856,201 $27,586,801 $25,799,651 $23,169,121 $19,640,191
============ ============ =========== ============ ============
Short-term
obliga-
tions*1 $10,231,272 $ 8,911,087 $ 7,270,772 $ 6,029,195 $ 5,660,979
============ ============ =========== ============ ============
Long-term
obligations $ 0 $ 0 $ 135,000 $ 145,000 $ 20,259
============ ============ =========== ============ ============
Shareholders'
equity $19,624,929 $18,675,714 $18,393,879 $16,994,926 $13,958,953
=========== ============ =========== ============ ============
*1 Although the majority of 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 of their short-term loans 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, gold and silver commodity
prices, production and reserve estimates, litigation, environmental and
government regulations, general economic conditions, conditions in the
financial markets, political and competitive developments in domestic and
foreign areas in which the Company operates, availability of financing,
force majeure events, technological and operational difficulties
encountered in connection with the Company's mining activities, labor
relations, other risk factors as described from time to time in the
Company's filings with the Securities and Exchange Commission and other
matters discussed under this reporting category. 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. Should one or more of those
risks or uncertainties materialize, or should any underlying assumption
prove incorrect, actual results or outcomes may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended.
Management's discussion and analysis ("MD&A") of the financial condition
and results of operations of the Company should be read in conjunction
with the audited consolidated financial statements and the notes thereto.
The Company prepares and files its consolidated financial statements and
MD&A in United States ("U.S.") dollars and in accordance with U.S.
generally accepted accounting principles ("GAAP").
The following discussion provides information on the results of
operations for the three years ended March 31, 2000, 1999, and 1998 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
------------------------------------------------
ACCOUNTING OVERVIEW
-------------------
A redefined structure of the financial statements for the fiscal years
ended March 31, 2000, 1999 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 to it 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 prior to any
profit distribution and pursuant to an agreement entered into by the
joint venture parties.
<PAGE>
For the fiscal year ended March 31, 2000, 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 COMPANY'S CURRENT STATUS
----------------------------
PRECIOUS METAL MINING
The Joint Venture has produced gold from April 1, 1995 through its fiscal
period ended December 31, 1999. Its San Cristobal Mill and Plant (SCMP)
consisted primarily of used equipment that had been installed at its
leased site by a previous mining company. The used processing equipment
was acquired by the Joint Venture on February 23, 1993.
Although the Company has on a continuous basis retrofitted, modified, and
restored the equipment, it lacked sufficient funds to expand the SCMP
facilities. There is also much uncertainty at this time relative to the
price of gold which in the past months reflected a wide range of price
fluctuations.
The Company's management is in the process of temporarily suspending its
gold processing until such time as it has adequate funds for the
retrofitting, rehabilitation, restoration, and most importantly for the
expansion of the SCMP facilities.
The Company had retained IBK Capital Corp. (IBK) of Toronto, Canada, an
independent privately-owned investment banking firm, for the purpose of
raising the sum of U.S. $18 million on a non-exclusive basis. The funds
are to be used to purchase equipment, perform site development, working
capital for the SSGM open-pit, heap-leaching operation, and for the
expansion of the Joint Venture's SCMP.
IBK specializes in providing a full range of services to the mining
industry. It has completed mining transactions with a combined value of
over $950 million (in Canadian dollars) since its inception in 1989. IBK
is also seeking a merger or acquisition partner for the Company.
Through December 1999, the Joint Venture produced gold on a curbed basis
primarily from the gold ore it is excavating from its SSGM open pit. The
gold is processed at its SCMP facility which is located approximately 15
miles from the SSGM site. It is contemplating the installation of a
pilot open-pit, heap-leaching gold-processing system on the SSGM site.
The cone crushing system is being erected 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 on which it holds leases. All of the mining properties are
located in the Republic of El Salvador, Central America.
The Joint Venture will continue its attempts to increase its production
of gold. Its objectives are to have 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 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 10,000 ounces of gold from the SCMP operation and
eventually up to 113,000 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.
<PAGE>
Since the Joint Venture in 1995 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. During 1999, gold
prices declined to their lowest level in over two decades.
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.
THE INTERNET BUSINESS
---------------------
HISTORICAL SYNOPSIS
The Company on January 29, 1999, announced its plans to have its
51%-owned subsidiary, Ecomm Group Inc. (Ecomm), enter into the web portal
business. Ecomm's objective is to become a recognized web portal on the
world wide web by acquiring or "rolling-up" Internet websites.
Interactive Business Channel, Inc. (IBC) has agreed to assist Ecomm in
developing an "Internet web portal roll-up strategy" by acquiring
Internet businesses. In this connection, the President of IBC, Matthew
Marcus, was elected as the President of Ecomm.
Ecomm has been developing its new MyInternet.to web portal since January
1999. On July 26, 1999, the Company announced that Ecomm launched the
site at http://www.myinternet.to.
Since July 1999, Ecomm's MyInternet.to web portal has been tested,
marketed, and updated to maximize its market share on the Internet. The
website has a static link to the highly trafficked
http://www.ibchannel.com website.
MyInternet.to has implemented a broad reaching affiliate program through
Linkshare.com which should enable it to derive revenues from affiliate
agreements with small and large Internet websites. In addition, these
affiliations should draw more traffic and interest to this site. Such
websites include Yahoo Travel, Audio Book Club, JC Penney, Dell, and
many, many more.
MyInternet.to has been designed as a platform to take advantage of new
opportunities to derive financial benefit for Ecomm from the
implementation and integration of new Internet technologies, mergers, and
acquisitions.
<PAGE>
CURRENT INTERNET ACTIVITIES
---------------------------
WIRELESS WEB INITIATIVE
Ecomm's management is of the opinion that MyInternet.to is a sound
platform for implementing a strategic wireless web content initiative.
Ecomm's management, with the assistance of IBC, is now focused on
converting its MyInternet.to web portal to being wireless compatible.
There is an unprecedented niche opportunity to serve wireless web surfers
with content converted from MyInternet.to or its affiliate partners. Such
content may include wireless e-mail, news, stock quotes, maps, and more.
WIRELESS WEB REVENUES
Revenues are expected to be generated from its wireless affiliates such
as Datalink.net, a leader in providing wireless content and services.
Future revenues will be derived from the cash flows of the wireless
companies Ecomm acquires as well as wireless e-commerce and advertising.
WIRELESS INDUSTRY BACKGROUND
It is Ecomm's belief that are more persons in the world currently using
wireless devices than personal computers. Ecomm plans to model the
success of emerging wireless technology companies such as Datalink.net
and Net2wireless.com. Many experts are of the belief that m-Commerce
"mobile commerce" will have a larger impact than the Internet on the way
individuals receive information and conduct transactions.
WIRELESS WEB RESOURCES
The personnel of Ecomm's consultant IBC has "hands on" experience with
developing and implementing Internet and wireless web technology. IBC is
a licensed Palm VII Wireless PDA developer with 3Com and has agreements
in place with Avantgo.com, a premier wireless web content company. IBC's
staff has assisted organizations such as a large, major transportation
company with designing and implementing its technology initiatives and
wireless ISP. It has also consulted with Usurf America in its strategic
advertising and marketing program. Ecomm depends on assistance from
IBC's staff consistent with its consulting agreement with IBC.
WIRELESS WEB MERGERS AND ACQUISITIONS
There appears to be a tremendous opportunity to merge and/or acquire
wireless related companies which have increased in numbers significantly
due to the rise in the popularity of wireless devices such as PDAs
(personal digital assistance), cell phones, and interactive pagers. Like
the computer, a whole new industry is emerging to supply wireless devices
with updated software, hardware, and other technological innovations.
Ecomm believes that by providing management, financial, and marketing
support, it would be a desirable match for potential acquisition targets.
Its consultant, IBC, has agreed to play a major role in such mergers and
acquisitions.
<PAGE>
MYINTERNET.TO WEB PORTAL
------------------------
A significant opportunity exists today to develop and consolidate certain
fragmented niches of the Internet community into a web portal. Ecomm's
principal business is to evaluate, structure and complete
Internet-related business combinations, mergers, and acquisitions.
Because the Internet is growing so rapidly, specialized or niche portals
are being developed as the hubs or gateways to the Internet for groups of
individuals with specific interests. MyInternet.to is "a one stop
gateway to the Internet" and provides a full range of the web's most
popular portals similar to competitive Internet leaders.
Ecomm continues to focus on acquiring websites and services that will
enable the new web portal to provide a full range of the Internet's most
popular services. These services include free web-based e-mail, chat
communities, and auctions similar to other existing programs.
IBC's network of Internet experts will help Ecomm take maximum advantage
of Internet opportunities by providing turnkey e-commerce solutions.
IBC's network of experts will assist in all phases of developing a
profitable e-commerce solution, including project management, website
design, development, management, marketing and media placement.
Ecomm's objective is to be an aggressive provider of content on the world
wide web, with emphasis in the areas of business and finance. Ecomm's
goal is to provide interactive content in all of its content areas, and
to seek advertisers and sponsors who wish to access the demographic
groups using Ecomm's Internet site. The inability of Ecomm to achieve
any portion of its strategic goals may have a material adverse effect on
its business, financial condition and operating results. There can be no
assurances that Ecomm will be able to achieve any of such goals, and if
not so achieved, that it will be able to develop and implement
alternative strategic goals, or be successful with its consulting
endeavors. Ecomm intends to create content that is original,
entertaining, informative and compelling. Ecomm's website content
focuses on what Ecomm believes are currently the most popular areas of
interest on the Internet: business and finance. Ecomm seeks to offer
information in these areas which is written by content contributors with
demonstrated expertise, experience and notoriety in their fields.
Ecomm's management believes that establishing and maintaining the
Company's brand is a critical element of its operating strategy. It also
believes that IBC, its consultant, will further these efforts. Ecomm
plans to create a brand identity that is built around authoritative
commentary and innovative delivery of information. In this regard, Ecomm
has placed significant emphasis on establishing brand identity for its
product offerings. The Company's brand and corporate identity seeks to
reflect an Internet site that provides a well-balanced array of
programming with varying perspectives. Ecomm intends to build and
reinforce its brand through advertising on the Internet, in trade
magazines and in other traditional forms of media, editorial coverage,
and a public relation's strategy that provides meaningful information.
Ecomm also believes that its brand will be reinforced as a result of the
consistent design and imagery associated with each department of its
website. Ecomm believes that by successfully building its brand, there
will be opportunities to expand into new content offerings.
<PAGE>
LEVERAGE STRATEGIC RELATIONSHIPS
--------------------------------
Ecomm intends to leverage its current resources and infrastructure by
aligning into strategic relationships with third-party developers of
content and Internet-related technologies. Ecomm, along with IBC, its
consultant, believes that these relationships will enhance the Company's
product offerings while leveraging the Company's development, sales and
marketing resources. IBC has established relationships with a number of
leading information providers with respect to a significant portion of
the commodity information to be included in Ecomm's Internet site. These
relationships should enable Ecomm to complement its proprietary content
offerings with information developed or compiled by third parties.
There can be no assurance that Ecomm's current strategy will be
successful as the current depressed market price of the Company's shares
presently compels it from using its shares in an exchange for an
acquisition of an Internet company. Ecomm has not yet entered into any
agreements for the acquisition of any websites, web services or other
technology in connection with the web portal. There is no assurance that
it will be able to enter into contracts for the acquisition of such
sites, services and technology on terms acceptable to the Company and
Ecomm. The Internet business is highly competitive and there is no
assurance that Ecomm's web portal will attract traffic and generate a
profit, even if Ecomm acquires the websites, web services and technology
on acceptable terms, or if IBC will be successful with its consulting
endeavors.
RESULTS OF OPERATION FOR THE FISCAL YEAR ENDED MARCH 31, 2000 COMPARED
----------------------------------------------------------------------
TO MARCH 31, 1999 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 loss
of ($396,232) or ($.0326) per basic share for its fiscal year ended March
31, 2000 compared to a loss of ($90,266) or ($.0081) per share for the
same previous fiscal year. This 2000 increased loss results primarily
from the depressed sale price of gold and the fact that less gold was
produced and sold. Depreciation expense, for the fiscal year ended March
31, 2000, was $320,491 compared to $338,797 for the period ended March
31, 1999. The other income and the income derived from the El Salvadoran
added tax value refund of $86,411 for 2000 and $213,491 for 1999 reduced
the losses.
During the nine-month period of gold processing, the Company sold 1,499
ounces of gold and 463 ounces of silver at an average realized price of
$276 an ounce, for a gross total of $413,712. This compares with
producing 2,684 ounces of gold and 836 ounces of silver produced during
its twelve-month period ended March 31, 1999, for a total of $785,526.
In addition, the Joint Venture held approximately 100 ounces of gold in
its inventory valued at $28,000 compared to a value of $75,324 for the
same period in 1999. The Joint Venture suspended its gold mining and
processing due to its need to rehabilitate and expand the SCMP and the
continuous decline and instability in the price of gold.
<PAGE>
The following Gold Institute Production Cost Standard schedule reflects a
comparison of costs to produce gold:
Fiscal Year Ended March 31,
2000 1999
---- ----
Total Per Ounce Total Per Ounce
----- --------- ----- ---------
Direct mining expense(1) $338,772 $172.67 $482,595 $179.80
Third party smelting,
refining and trans-
portation cost 41,443 21.12 47,819 17.82
-------- ------- -------- -------
Cash operating cost 380,215 193.79 530,414 197.62
Royalties:
Misanse (52% belongs to
the Company) 20,686 10.55 39,276 14.63
Government of El Salvador 16,548 8.43 31,421 11.71
-------- ------- -------- -------
Total cash cost 417,449 212.77 601,111 223.96
Depreciation 320,491 163.35 338,797 126.23
-------- ------- -------- -------
Total production costs,
including royalties $737,940 $376.12 $939,908 $350.19
======== ======= ======== =======
(1) 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.
There was no current or deferred provision for income taxes during 2000
or 1999. Additionally, although the Company has operating tax loss
carryforwards, the Company has not previously recorded a net deferred tax
asset 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.
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 weighted 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.
Inflation did not have a material impact on operations in 2000 or 1999.
Management of the Company anticipates that inflation would have an impact
on continuing operations.
Interest expense in the sum of $923,726 was capitalized by the Joint
Venture during this fiscal period compared with $767,459 for the same
period in 1999.
<PAGE>
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, 1999 COMPARED TO MARCH 31,
----------------------------------------------------------------------
1998 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 loss
of ($90,266) or ($.0081) per basic share for its fiscal year ended March
31, 1999 compared to a profit of $118,603 or $.0115 per share for the
previous fiscal year. This 1999 loss results primarily from the
depressed sale price of gold and the costs incurred in extraordinary
corporate administrative expenses. The additional income derived from an
added tax value refund of $213,491 for 1999 and $112,948 for 1998 reduced
the operation losses.
During the fiscal year ended March 31, 1999, the Company sold 2,684
ounces of gold and 836 ounces of silver at an average realized price of
$293 an ounce and for a gross total of $785,526. In addition, the Joint
Venture held 259 ounces of gold in its inventory valued at $72,478. This
compares with producing 3,926 ounces of gold and 1,416 ounces of silver
during its fiscal year ended March 31, 1998.
FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES
-----------------------------------------------------
During this fiscal period ended March 31, 2000, the Company borrowed a
sum of $1,017,739; $982,955 was from related parties which included cash
and accrued interest; the balance of $34,784 was from unrelated parties
which included cash and accrued interest.
A total of 2,311,402 common shares were issued for a sum of $1,345,447
during this fiscal period. These shares were issued for the following:
173,395 shares ($58,990) for Director, Officer, and employee
compensation; 41,050 shares ($18,140) for services; 796,957 shares
($484,179) for payment of debt; 500,000 shares ($288,450) for advances to
a subsidiary; and 800,000 shares ($495,688) for the Commerce Group Corp.
Employee Benefit Account, primarily for the El Salvadoran employees.
This year proved to be a difficult one for the gold market until
September 26, 1999 (referred to as "Gold Sunday"), when a drastic change
took place. A statement was issued by the European Central Bank as well
as the Central Banks of 15 other countries clarifying their intentions to
limit their sale of gold to 400 tons per year for the next five years.
This group also announced that they would limit the amount of gold
lending in the future which would considerably reduce the speculative
activity. The Central Banks of England and Switzerland joined this group
of Central Banks. Since September 1999, the price of gold has fluctuated
dramatically.
The Joint Venture has suspended its SCMP operations until such time as it
has adequate funding to repair, retrofit and expand the mill to process
its gold ore. After almost five years of operation with used equipment,
the facilities require a major overhaul. The price of gold did not
provide an adequate cash reserve for these needs. Additional equipment
has to be purchased, delivered and installed. The Company entered into a
non-exclusive agreement with IBK Capital Corp., an investment banking
firm located in Toronto, Canada, to raise a sum of up to U.S. $18
million. The funds, when provided, will be used to rehabilitate and
expand the SCMP and to construct an open-pit, heap-leaching operation at
the SSGM site.
<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, start-up
operation could produce an additional 540 ounces of gold per month. It is
necessary to raise adequate funds from outside sources for this
operation; the amount required is dependent on the targeted daily volume.
A sum of U.S. $18 million would start the open-pit, heap-leach at a rate
of 2,000 tons per day and the anticipated profits and cash flow then
could be used to expand the 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 insufficient 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 or merging 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 Company believes that the past 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 the
potential for a 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,
retrofit, and maintain the SCMP, to purchase consumable inventory, to
purchase certain hauling and loading equipment, to purchase mining
equipment, 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 and through its SCMP cash flow.
The Company estimates that it will need up to U.S. $18 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 so that annual
production would be 113,000 ounces of gold at the SSGM. The use of the
$18,000,000 proceeds is as follows: $7,000,000 for mining equipment and a
crushing system; $3,689,776 for the processing equipment and site and
infrastructure costs; and $7,310,224 for the working capital. The
existing depressed price of gold and the Company's low common share
market price are deterrents in raising cash for the Company's expansion
program.
Therefore, the Company continues to rely on its directors, officers,
related parties and others for its funding needs. The Company believes
that it may 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 cash flow from the SCMP gold
production may 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 placed on a standby basis
until the price of gold is at a level to warrant the investment. These
programs will involve airborne geophysics, stream chemistry, geological
mapping, trenching, drilling, etc. The Joint Venture believes that it
may be able to joint venture these exploration costs with other entities.
<PAGE>
From September 1987 through March 31, 2000, the Company has invested in
the Joint Venture, including interest charges payable to the Company, the
sum of $27,346,238 and three of the Company's subsidiaries have advanced
the sum of $590,265, for a total of $27,936,503. 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, 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
o f 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, for the purchase of a rod mill and a carbon regeneration system and
many other related needs.
EMPLOYEES
---------
The Joint Venture employed through January 31, 2000 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 now employs less
than 40 persons of which there are 20 employees retained to secure the
SCMP premises. It has developed a continuous harmonious relationship
with its employees. It believes that the Joint Venture was 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.
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, 2000, the Company, and three of
its subsidiaries, have advanced to the Joint Venture $27,936,503.
Included in the total advances is the interest charged to the Joint
Venture by the Company which amounts to $13,049,585 through March 31,
2000. The Company furnishes all of the funds required by the Joint
Venture. This interest charge is eliminated in these 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 expand the operations of the SCMP, to
construct an open-pit heap-leach operation at the SSGM site, to continue
the exploration of its other mining prospects and to obtain funding for
its subsidiary's Internet business.
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, the stigma of the past unfavorable political
status in the Republic of El Salvador exists and therefore certain
investors continue to be apprehensive 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 to a 20-year low depressed the public market price of the
Company's shares as well as the shares of most of the world-wide mining
companies. This decline in the Company's stock market price places the
Company in a situation of substantially diluting its common shares in
order to raise capital. The Company believes that it will be able to
obtain ad equate financing to conduct its operations from the same
sources as in the past.
YEAR 2000 (Y2K) 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 did make an assessment of the impact of the year 2000 issue. The
Company had initiated preliminary communications with certain 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 made inquiries 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.
All of the written responses from these entities were positive. As of
this date, the Company did not experience any problems and it does not
anticipate any future problems relating to the Y2K concerns that would
materially affect the Company's operations.
ENVIRONMENTAL REGULATIONS
-------------------------
The Company's operations are subject to environmental laws and
regulations adopted by various governmental authorities in the
jurisdictions in which the Company operates. Accordingly, the Company
has adopted policies, practices and procedures in the areas of pollution
control, product safety, occupational health and the production,
handling, storage, use and disposal of hazardous materials to prevent
material environmental or other damage, and to limit the financial
liability which could result from such events. However, some risk of
environmental or other damage is inherent in the business of the Company,
as it is with other companies engaged in similar businesses.
<PAGE>
FINANCIAL ACCOUNTING STANDARDS
------------------------------
The provisions of Statement of Financial Accounting Standards No. 131
(SFAS 131), Disclosures about Segments of an Enterprise and Related
Information, became effective for fiscal years beginning after December
15, 1997. 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. Reference is made to
Note 13 of the Financial Statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999 and
establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that the Company recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. At this time, the
Company is not involved with any derivation or hedging activities.
DIVIDENDS
---------
For the foreseeable future, it is anticipated that the Company will use
any earnings to finance its growth, therefore dividends will not be paid
to shareholders.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
------------------------------------------------------------------------
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
------------------------------------------------
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 or Internet activities. 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY FINANCIAL DATA
Page
----
Report of Independent Public Accountant
Financial Statements:
Consolidated Balance Sheets, Years Ended March 31, 2000 and 1999
Consolidated Statements of Operations, Years Ended March 31, 2000, 1999
and 1998
Consolidated Statements of Changes in Shareholders' Equity
Years Ended March 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows, Years Ended March 31, 2000, 1999
and 1998
Notes to Consolidated Financial Statements
Supplementary Financial Data:
Report of Independent Accountant 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 accompanying consolidated balance sheets of Commerce
Group Corp. ("Company"), a Wisconsin Corporation, and its subsidiaries,
as of March 31, 2000 and 1999, 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, 2000, 1999 and
1998. 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 auditing standards generally
accepted in the United States. 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,
2000 and 1999, and the consolidated results of their operations and their
cash flows for each of the three fiscal years in the periods ended March
31, 2000, 1999 and 1998 in conformity with accounting principles
generally accepted in the United States.
Bruce Michael Redlin
Certified Public Accountant
Milwaukee, Wisconsin
May 10, 2000
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED BALANCE SHEETS--MARCH 31
2000 1999
------------- --------------
ASSETS
------
Current assets
Cash $ 313,940 $ 61,821
Investments 232,068 186,182
Accounts receivable 275,162 358,769
Inventories 67,562 156,422
Prepaid items and deposits 58,680 49,677
----------- -----------
Total current assets 947,412 812,871
Real estate (Note 5) 1,179,836 1,179,836
Property, plant and equipment, net 3,039,127 3,567,334
Mining resources investment 24,401,376 22,026,760
Other investments 288,450 0
----------- -----------
Total assets $29,856,201 $27,586,801
=========== ===========
LIABILITIES
-----------
Current liabilities
Accounts payable $ 526,449 $ 382,038
Notes and accrued interest
payable to related parties
(Notes 6 & 7) 5,992,633 5,009,679
Notes and accrued interest
payable to others (Note 6) 1,204,239 1,169,454
Accrued salaries 1,839,015 1,674,015
Accrued legal fees 260,926 197,139
Other accrued expenses 408,010 478,762
----------- -----------
Total liabilities 10,231,272 8,911,087
Commitments and contingencies (Notes 2, 4, 5, 6, 7, 8, 10 & 12)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
2000-none; 1999-none (Note 10) $ 0 $ 0
Common stock, $0.10 par value:
Authorized 50,000,000 shares;
(Notes 1(b) and 10)
Issued and outstanding:
2000-13,888,929 (Note 10) 1,388,893
1999-11,577,527 (Note 10) 1,157,753
Capital in excess of par value 18,402,346 17,288,039
Retained earnings (deficit) (166,310) 229,922
----------- ----------
Total shareholders' equity 19,624,929 18,675,714
----------- -----------
Total liabilities and
shareholders' equity $29,856,201 $27,586,801
=========== ===========
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
2000 1999 1998
----------- ----------- -----------
Revenues:
Gold sales $ 413,713 $ 785,526 $ 1,234,443
Campground income 66,902 62,176 61,465
------------ ------------ -----------
Total revenues 480,615 847,702 1,295,908
Expenses:
Cost of gold sales 376,007 601,111 877,109
Depreciation 320,491 338,797 208,254
General and administrative 266,894 211,797 207,915
----------- ------------ -----------
Total expenses 963,392 1,151,705 1,293,278
Other income:
Interest income 134 246 3,025
El Salvador added value
tax refund 86,411 213,491 112,948
------------ ------------ -----------
Other income 86,545 213,737 115,973
------------ ------------ -----------
Net profit (loss) $ (396,232) $ (90,266) $ 118,603
Credit (charges) for
income taxes 0 0 0
------------ ------------ -----------
Net income (loss) after
income tax credit (charge) $ (396,232) $ (90,266) $ 118,603
============ ============ ===========
Net income (loss) per
share (Note 2) basic $ (.0326) $ (.0081) $ .0115
============ ============ ===========
Net income (loss) per
share (Note 2) diluted $ (.0282) $ (.0070) $ .0100
============ ============ ===========
Weighted av. common shares
outstanding (Note 2) 12,172,867 11,165,127 10,358,132
============ ============ ===========
Weighted av. diluted
common shares (Note 2) 14,053,002 12,813,368 11,783,532
=========== =========== ===========
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, 2000, 1999 AND 1998
Common Stock
----------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
---------- ---------- ----------- ----------
Balances 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
---------- ---------- ----------- ----------
Balances March 31, 1998 11,039,670 $1,103,967 $16,969,724 $ 320,188
Net income (loss) for
FY March 31, 1999 $ (90,266)
Dir./off./employee/
services comp. 214,234 21,423 89,962
Payment of debt 238,123 23,812 190,779
Cash 85,500 8,551 37,574
---------- ---------- ----------- ----------
Balances March 31, 1999 11,577,527 $1,157,753 $17,288,039 $ 229,922
Net income (loss) for
FY March 31, 2000 $(396,232)
Dir./off./employee/
services comp. 1,014,445 101,445 471,373
Payment of debt 796,957 79,695 404,484
Investments 500,000 50,000 238,450
---------- ---------- ----------- ----------
Balances March 31, 2000 13,888,929 1,388,893 18,402,346 $(166,310)
========== ========== =========== ==========
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
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ (396,232) $ (90,266) $ 118,603
------------ ------------ ------------
ADJUSTMENTS TO RECONCILE
NET INCOME (LOSS) TO
NET CASH USED IN
OPERATING ACTIVITIES:
Depreciation 320,491 338,797 208,254
Changes in assets and liabilities
Decrease (increase) in account
receivables 83,607 93,765 (152,788)
Decrease (increase) in inventories 88,860 48,877 (14,050)
Decrease (increase) in prepaid
items and deposits (9,003) 1,871 (4,676)
Increase (decrease) in accounts
payable and accrued liabilities 73,659 57,316 198,265
Increase (decrease) in other
liabilities 0 0 20,446
Increase (decrease) in accrued
salaries 165,000 165,000 165,000
Increase (decrease) in accrued
legal fees 63,787 22,058 38,013
------------ ------------ ------------
Total adjustments 786,401 727,684 458,464
------------- ------------ ------------
Net cash provided by (used in)
operating activity 390,169 637,418 577,067
INVESTING ACTIVITIES:
Investment in mining resources (2,166,900) (2,269,928) (3,402,089)
Investments - other (334,336) 0 0
------------ ------------ ------------
Total (2,501,236) (2,269,928) (3,402,089)
FINANCING ACTIVITIES:
Net borrowings 1,017,739 1,260,943 809,853
Common stock issued 1,345,447 372,101 1,280,350
------------ ------------ ------------
Net cash provided by (used in)
financing activities 2,363,186 1,633,044 2,090,203
Net increase (decrease) in cash
and cash equivalents 252,119 534 (734,819)
Cash - beg. of year 61,821 61,287 796,106
------------ ------------ ------------
Cash - end of year $ 313,940 $ 61,821 $ 61,287
============ ============ ============
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: $923,726 (2000), $767,459 (1999), and $667,836 (1998).
2. There was no interest expense paid in cash for the period ended
March 31, 2000. The interest expense paid in cash for 1999 was
$8,838 and for 1998 was $1,350.
3. The Company paid no income taxes during its fiscal periods ended
March 31, 2000, 1999, and 1998.
4. The investment consists of securities held for the Employee Benefit
Account stated at cost and precious stones, which are stated at the
lower of cost or market value.
5. Accounts receivable consist of an amount due from Misanse which will
be used as an offset for rental charges due to it.
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 employee severance pay and benefits, for director fees, officer
compensation and for other services rendered:
Shares Value
------ -----
2000 1,014,445 $572,818
1999 214,234 $111,385
1998 169,250 $230,661
2. Other non-cash items were for the unpaid salary and director,
officer and legal fees; this amounted to $165,000 for 2000, $187,057
for 1999 and $203,013 for 1998.
3. There were no non-cash equipment financing activities in 2000, 1999
and 1998.
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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") both corporations based in the United States, 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, currently 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 continuous at the San Sebastian
Gold Mine ("SSGM") which is located near the city of Santa Rosa de
Lima. Exploration is being curtailed at other mining projects until
adequate funding and license permits are obtained. All of the
mining projects are located in the Republic of El Salvador, Central
America.
Recently the Joint Venture has decided to temporarily suspend the
San Cristobal Mill and Plant ("SCMP") operations until such time as
it has adequate funds to retrofit, rehabilitate, restore and expand
these facilities and until the price of gold is more stable.
The Joint Venture is in the pre-production and development 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, and recently it has temporarily ceased operations
at its 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, upon receipt of adequate funds; 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.
The Company on January 29, 1999, announced its plans to diversify by
having (at that time) its wholly-owned subsidiary, Ecomm Group Inc.
("Ecomm"), enter into the web portal business. Ecomm's objective is
to become a recognized web portal on the world wide web by acquiring
or "rolling-up" Internet websites. Interactive Business Channel,
Inc. (IBC) has agreed to assist Ecomm in developing an "Internet
web portal roll-up strategy" by acquiring Internet businesses.
Recently Ecomm's management announced that it was expanding into
wireless services and web content by starting a link with a
provider.
Ecomm's principal business will be to evaluate, structure and
complete Internet-related business combinations, mergers, and
acquisitions. It plans to concentrate in specialized or niche
portals which are being developed as hubs or gateways to the
Internet for groups of individuals with specific interests.
Ecomm plans to focus on acquiring websites and services that will
enable the new web portal to provide a full range of the Internet's
most popular services. These services include free web-based
e-mail, chat communities, and auctions similar to existing programs.
<PAGE>
There can be no assurance that Ecomm's current strategy will be
successful. Ecomm has not yet entered into any agreements for the
acquisition of any websites, web services or other technology in
connection with the web portal. There is no assurance that it will
be able to enter into contracts for the acquisition of such sites,
services and technology on terms acceptable to Commerce and Ecomm.
The Internet business is highly competitive and there is no
assurance that Ecomm's web portal will attract traffic and generate
a profit, even if Ecomm acquires the websites, web services and
technology on acceptable terms.
(b) Merger into a Wisconsin corporation effective April 1, 1999
The Company, a United States' corporation, was incorporated as a
Wisconsin corporation in 1962, consolidated with a Delaware
corporation in 1971, and merged from a Delaware corporation into a
Wisconsin corporation on April 1, 1999. The Company simultaneously
with the merger into a Wisconsin corporation increased the number of
its authorized common shares to fifty million (50,000,000), ten
cents ($0.10) par value.
(c) Use of estimates
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 as of April 1, 1998
retroactive to September 1987, 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, 2000, 1999 and 1998, 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,
2000, 1999, 1998, and prior years, were also restated to reflect this
change.
The balance sheet effect of the change in policy was to reduce the Joint
Venture advances by a total of $7,518,335 which consisted of the
following amounts: $2,121,189 for 2000; $1,822,686 for 1999; $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 the
same period. 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,
2000, 1999, 1998, 1997 and 1996 were restated to eliminate the net
interest income of $7,518,335 from the Joint Venture. The amounts were
$2,121,189, $1,822,686, $1,511,895, $1,012,739, and $816,029 for 2000,
1999, 1998, 1997 and 1996 respectively, and $233,797 for prior years.
The consolidated statements of cash flows were also restated to reflect
the changes in operating profits (losses) that are outlined in the above
paragraphs.
<PAGE>
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
Ecomm Group Inc. (Ecomm) 51.0
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 securities held for the Employee Benefit
Account stated at cost and of precious stones which are stated at the
lower of cost or market value.
ACCOUNTS RECEIVABLE
The accounts receivable account consists of the amount advanced to
Mineral San Sebastian, S.A. de C.V. (Misanse) which will be offset for
the rental charges to the Joint Venture.
INTERCOMPANY BALANCES
All intercompany balances and transactions have been eliminated.
INVENTORY
Inventories consist of the following as of March 31:
2000 1999
---- ----
Gold in process (1) (Stated at market value) $28,000 $ 72,447
Materials and supplies (Stated at cost) 39,562 83,975
------- --------
$67,562 $156,422
(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.
<PAGE>
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 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.
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. 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.
<PAGE>
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).
COMPREHENSIVE INCOME
Effective April 1, 1999, the Company adopted 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
includes foreign currency items, minimum pension liability adjustments,
and unrealized gains and losses on certain investments in debt and equity
securities. The Company believes that it has no items of other
comprehensive income in any period presented in the accompanying
financial statements.
EARNINGS (LOSS) PER COMMON SHARE
The Company has in the past 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 or loss reportable to common shareholders (the numerator)
by the weighted average number of common shares outstanding (the
denominator). The computation of diluted net income or loss 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, share loans, etc. had been converted
to common shares at the last day of the fiscal year.
If on March 31, 2000, 1,254,900 option shares, and the 625,235 stock
rights would be added to the weighted average calculated number of shares
which amount to 12,172,867, the total number of the weighted average
fully diluted shares would be 14,053,002, then the loss per share for the
fiscal year ended March 31, 2000, would be $.0282 cents per share. The
same assumptions were used for the same 1999 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 traded
in this past fiscal year about 8.745 colones per U.S. dollar. The
exchange rate was fairly stable. 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 hindrance in exchanging dollars for
colones or vice versa.
<PAGE>
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 plant, equipment, and of the mining
resources investment and development costs:
March 31, 2000 March 31, 1999
----------------------------------- ----------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Mineral
Proper-
ties
and
Deferred
Develop-
ment $24,401,376 $24,401,376 $22,026,760 $22,026,760
Mine
Plant
and
Equip-
ment 5,353,046 2,313,919 3,039,127 5,332,998 1,765,664 3,567,334
----------- ----------- ----------- ----------- ---------- -----------
$29,754,422 $ 2,313,919 $27,440,503 $27,359,758 $1,765,664 $25,594,094
=========== =========== =========== =========== ========== ===========
Production facilities and equipment are stated at cost and are amortized
based on the lease arrangement and salvage value. Vehicles, office
equipment, laboratory equipment, and buildings are stated at cost and are
depreciated using the straight-line method over estimated useful lives of
four to seven years. Maintenance and repairs are charged to expense as
incurred.
IMPAIRMENTS
The Company evaluates the carrying value of its 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. With respect to properties
with proven reserves, an impairment loss is recognized when the estimated
future cash flows (undiscounted and without interest) expected to result
from the use of the asset are less than the carrying amount of the asset.
Measurement of the impairment loss is based on discounted cash flows.
Properties with unproven reserves are assessed for impairment when
changes in market conditions or other events occur and are measured based
on fair value.
(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 the 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 March 31, 2000, the Company's investments, including charges for
interest expense to the Joint Venture, were $27,346,238 and three of the
Company's subsidiaries' advances were $590,265 for a total of
$27,936,503.
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 March 31, 2000 and 1999, the Company, Sanseb and three of the
Company's subsidiaries have invested (including carrying costs) the
following in its Joint Venture:
2000 1999
---- ----
The Company's advances
(net of gold sale proceeds)
since 09/22/87 $27,346,238 $23,153,989
The Company's initial
investment in the Joint Venture 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 26,368,951 23,823,518
----------- -----------
Total: $60,731,549 $53,993,867
Advances by the Company's
three subsidiaries 590,265 590,265
----------- -----------
Combined total investment $61,321,814 $54,584,132
=========== ===========
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, have 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
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.
<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 100 El Salvador, Central American, and United States'
citizens.
(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 also
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 1,800 "colo
nes" per month (approximately $206 per month at the current rate of
exchange). The lease also 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 and subsequently was pledged as collateral for loans made by
related parties. (Note 7)
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 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. The
concession was pledged as collateral for loans made by related parties.
(Note 7)
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.
<PAGE>
SCMP LAND AND BUILDING LEASE
On November 12, 1993, the Joint Venture entered into an agreement with
Corporacion Salvadorena de Inversiones ("Corsain"), an El Salvadoran
governmental agency, 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, unless otherwise amended, 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. The rental charge for the period ending
November 12, 2000 is $13,401.
MODESTO MINE
(a) REAL ESTATE
The Company owns 63 acres of land which are a key part of the Modesto
Mine that is located near the city of El Paisnal, El Salvador. Part of
this real estate is subject to a mortgage and promissory note.
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 not more
than 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.
<PAGE>
MONTEMAYOR MINE
The Joint Venture has leased approximately 175 acres of land that it
considers to be the key mining 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 approximately 63 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.
(6) NOTES PAYABLE AND ACCRUED INTEREST
---------------------------------------
March 31
--------
Notes payable consist of the following: 2000 1999
---- ----
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) $5,992,633 $5,009,679
Other - consists primarily of short-term notes
and accrued interest (2000, $342,229 and 1999,
$307,491) issued to creditors and others,
interest rates of varying amounts, in lieu of
actual cash payments and includes a mortgage on
a certain parcel of land pledged as collateral
located in El Salvador. 1,204,239 1,169,454
---------- ----------
Total: $7,196,872 $6,179,133
========== ==========
<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 19 years, for a total of
$1,839,015.
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, 2000:
<PAGE>
The amount of funds which the Company has borrowed from its President
from time to time, together with accrued interest, amounts to $3,072,268.
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, 2000, an aggregate of $646,141,
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 (375,566) borrowed from him during this fiscal
period and it issued 35,738 of its restricted 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.
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, 2000.
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: 2000, $33,468; 1999, $33,468; and 1998, $33,468.
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: 2000,
$7,320; 1999, $7,680; and 1998, $8,040.
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 from time to time use its credit
facilities to purchase items needed for the Joint Venture's mining needs.
<PAGE>
This related company has been issued an open-ended, secured, on-demand
promissory note which amounts to $1,808,514; the annual interest rate is
four percent plus the prime rate, but not less than 16%, and it is
payable monthly.
On January 10, 1997, four-year stock options were issued to the related
company to purchase 68,000 of the Company's restricted common shares at a
price of $3.00 per share, and on July 12, 1999, two-year stock options
were issued to purchase 500,000 of the Company's restricted common shares
at a price of $.50 per share.
The Company's Directors have consented and approved the following
transactions which status are reflected as of March 31, 2000:
The President's wife's Rollover Individual Retirement Account (RIRA) has
the Company's open-ended, secured, on-demand promissory note in the sum
of $384,290 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 $260,926 for 1,738.75 hours of legal
services rendered since July 1980. By agreement, these fees are to be
adjusted to commensurate with the hourly fees charged by the Law Firm on
the date of payment.
The son of the President and his son's wife have the Company's
open-ended, on-demand promissory note in the sum of $81,420 which bears
interest at an annual rate of 16% payable monthly. The Company borrowed
from them 41,460 common shares. These shares were sold and the Company
received all of the proceeds. Pursuant to the terms of a
Director-approved loan agreement, these shares, plus the 4,146 common
shares earned for the payment of interest, amount to a total of 45,606
restricted common shares which were paid to them during May 1999 by
issuing the Company's restricted common shares.
The Company borrowed 72,770 of the Company's common shares from a
Director pursuant to a Director-approved, open-ended share loan agreement
dated March 6, 1998. The sale of these shares took place during this
fiscal period and all of the proceeds were received by the Company. The
shares borrowed, together with the 7,277 earned for interest, were paid
in October 1999 by issuing the Company's restricted common shares.
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
an option to receive cash or to exchange the amount due to them for the
Company's common shares.
As of March 31, 2000, pursuant to the S.E.C. Form S-8 Registration
Statement File No. 333-59209 effective as of July 16, 1998, and the
S.E.C. Form S-8 Registration Statement File No. 333-95397 effective
January 26, 2000, the Directors/Officers exercised their rights to
purchase 98,236 shares at a price of $.34 per share in payment of all
compensation due to them as of March 31, 2000.
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 on a full production basis. 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. This interest is
eliminated from the consolidated statement of operations.
<PAGE>
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
Year Ended March 31, 1999 3,653,481 2,590,144
Year Ended March 31, 2000 4,192,339 3,044,915
----------- -----------
$27,346,328 $13,049,585
Advances by three of the
Company's subsidiaries 590,265 0
----------- -----------
Total Net Advances March 31, 2000 $27,936,503 $13,049,585
=========== ===========
(8) COMMITMENTS
----------------
Reference is made to Notes 2, 4, 5, 6, 7, 10 and 12.
(9) INCOME TAXES
-----------------
At March 31, 1999, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of
approximately $3,644,857 which may be carried forward to offset future
taxable income; the net operating losses expire at various times to the
year of 2014.
(10) DESCRIPTION OF SECURITIES
-------------------------------
a. COMMON STOCK
The Company's Wisconsin Certificate of Incorporation effective as of
April 1, 1999 authorizes the issuance of 50,000,000 shares of common
stock, $0.10 par value per share of which 13,888,929 shares were issued
and outstanding as of March 31, 2000. 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 issued and
outstanding shares of common stock are validly issued, fully paid and
non-assessable.
<PAGE>
b. PREFERRED STOCK
There were no preferred shares issued and outstanding for the periods
ending March 31, 2000 or 1999.
The Company's Wisconsin Certificate of Incorporation authorizes the
issuance of 250,000 shares of preferred stock, $0.10 par value.
The preferred shares are issuable in one or more series. The Board of
Directors is authorized to fix or alter the dividend rate, conversion
rights (if any), voting rights, rights and terms of redemption (including
any sinking fund provisions), redemption price or prices, liquidation
preferences and number of shares constituting any wholly unissued series
of preferred shares.
c. STOCK OPTION ACTIVITY DURING 2000, 1999, AND 1998 WAS AS FOLLOWS:
03/31/00 03/31/99 03/31/98
-------------------- ------------------ ------------------
Weighted Weighted Weighted
Option Average Option Average Option Average
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding,
beg. yr. 977,400 $3.28 1,327,400 $3.42 1,591,360 $3.22
Granted 660,000 $0.50 70,000 $0.75 0 $0.00
Exercised (160,000) N/A 0 N/A (60,000) $2.00
Forfeited 0 N/A 0 N/A (710) $4.25
Expired (222,500) N/A (420,000) N/A (203,250) $2.25
---------- ----- ---------- ----- ---------- -----
Outstanding,
end of yr. 1,254,900 $2.19 977,400 $3.28 1,327,400 $3.42
========== ===== ========== ===== ========== =====
A summary of the outstanding stock options as of March 31, 2000, follows:
Weighted Average
Range of Amount Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- ----------------
Up to $2.99 600,000 1.37 years $0.63
$3.00 to $5.00 654,900 0.87 years $3.61
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 restricted common shares.
The interest payable to the President 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.
<PAGE>
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 one year. As of March 31,
2000, there were no shares due to other parties for shares borrowed or
for interest payment.
On June 1, 1998 correspondence, together with a loan agreement, had been
submitted to a lender for execution in connection with the Company's
understanding of a stock loan arrangement. The lender verbally
acknowledges the loan agreement and the terms and conditions. The
Company borrowed from the lender 125,300 common shares of a non-related,
publicly-held corporation and sold them for approximately $529,425. The
lender had, until January 15, 2000, 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 borrowed from the
non-related, publicly-held corporation, may accept payment in the form of
a total of 625,235 of the Company's restricted common shares. On January
15, 2000, via written correspondence, the lender exercised his option to
accept the 560,750 Commerce Group Corp. restricted common shares in full
payment for the Company's outstanding obligation. In order to issue the
Company's restricted common shares, the Company and its transfer agent
require an investment letter agreement which was delivered to the lender
on January 24, 2000. The Company has not received the investment letter
agreement.
f. S.E.C. FORM S-8 REGISTRATION
On July 16, 1998, the Company filed its Securities and Exchange
Commission Form S-8 Registration Statement No. 333-59209 under the
Securities Act of 1933, to register 1,000,000 of the Company's $0.10 par
value common stock for the purpose of distributing shares pursuant to the
guidelines of the Company's Services and Consulting Compensation Plan.
As of March 31, 2000, all of the 1,000,000 shares registered were issued.
On January 26, 2000, the Company filed its Securities and Exchange
Commission Form S-8 Registration Statement No. 333-95397 under the
Securities Act of 1933, to register 1,000,000 of the Company's $0.10 par
value common stock for the purpose of distribution of the shares by the
selling qualified shareholders pursuant to the prospectus submitted to
the Securities and Exchange Commission. As of March 31, 2000 from the
1,000,000 shares registered 181,876 were issued and there remain 818,124
that can be issued.
g. COMMERCE GROUP CORP. EMPLOYEE BENEFIT ACCOUNT (CGCEBA)
During this fiscal year, the CGCEBA was established for the purpose of
compensating the employees for benefits such as retirement, severance
pay, and all other related compensation that is mandatory under El
Salvadoran labor regulations, and/or as determined by the Officers of the
Corporation. Under this plan, payment can be made to any employee of the
Company or the Company's subsidiaries. The Company on December 10, 1999,
issued 400,000 of its common shares registered in its Securities and
Exchange Commission Form S-8 Registration Statement. Subsequently, on
January 26, 2000, it issued an additional 400,000 common shares
registered in its Securities and Exchange Commission Form S-8
Registration Statement. The CGCEBA has sold some of these shares from
time to time to meet its obligations to its employees.
<PAGE>
(11) LITIGATION
----------------
There is no material litigation except that on July 16, 1999, the
Company's special legal counsel filed an appeal of Nasdaq's delisting
decision with the Nasdaq-Amex Market Group. On October 13, 1999, the
Company was informed that the appeal was denied and that the decision
made by Nasdaq was affirmed.
(12) COMMITMENTS AND CONTINGENCIES
----------------------------------
Based upon current knowledge, the Company believes that it is in
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.
The Company has transferred at no cost to IBC, forty-nine percent of the
common shares of Ecomm Group Inc. for the successful development of an
Internet business and for certain public relation efforts to enhance the
exposure of the Company pursuant to the agreement it entered into with
IBC on January 27, 1999. Ecomm's business strategy is to build and
expand its web portal through the acquisition and consolidation of
selected Internet companies.
In respect to the public relation services made as part of the January
27, 1999 agreement, IBC has agreed to disseminate information regarding
the Company on the Internet with a view towards developing a more
widespread public interest in the Company. The Company agreed to pay IBC
minimum compensation for its public relations and consulting work in the
form of 10,000 shares of the Company's common stock. On May 25, 1999,
the Company and IBC amended the January 27, 1999 agreement, and a change
was made to issue to IBC a total of 500,000 of the Company's restricted
common shares at no cost in five monthly installments of 100,000 common
shares each. The entire 500,000 common restricted shares were issued.
(13) BUSINESS SEGMENTS
----------------------
The Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related Information
became effective for fiscal years beginning after December 15, 1997.
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 disclosure about products and services,
geographic areas, and major customers.
The Company has presently three reportable segments: mining, campground
operation, and other. The mining segment is engaged in the processing of
gold. The campground operation is to lease space on an annual, monthly
or daily basis. The other segments are those activities that are
combined for reporting purposes. There were no reportable activities in
the Internet business; no income and no expenses were recorded.
<PAGE>
Mining *1
El Salvador, Campground Corporate
Central America Missouri, U.S.A. Headquarters
--------------- ---------------- ------------
Year ended March 31, 2000
Sales and revenues $ 413,713 $ 66,902 $
Depreciation & amortization 320,491 0
Operating income (loss) (384,759) (11,473)
Total assets 27,831,734 1,135,500 888,967
Capital expenditures 2,166,900
Year ended March 31, 1999
Sales and revenues $ 785,526 $ 62,176 $
Depreciation & amortization 338,797
Operating income (loss) (258,179)
Other mining income 213,491
Operating income (loss) (44,688) (4,268) (41,310)
Total assets 26,031,841 1,135,500 419,460
Capital expenditures 2,269,928
Year ended March 31, 1998
Sales and revenues $ 1,234,443 $ 61,465 $
Depreciation & amortization 208,254 0
Operating income (loss) 4,752 903
Other mining income 112,948
Total assets 24,386,843 1,135,500 277,308
Capital expenditures 3,402,089
*1 Its major customer for the refining and purchase of gold is a
refinery located in the United States. The price of gold is
dependent on the world market price over which the Company, the
refinery or any other single competitor do not have control.
<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 a Director" 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 MANAGEMENT
------------------------------------------------------------------------
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 of the Company's shares
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 Accountant 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
------------------------
A Form 8-K was filed on February 29, 2000, to report that the Company's
51%-owned subsidiary, Ecomm Group Inc. issued a news release on February
24, 2000 to announce its strategic wireless content initiative and links
with "web to wireless" company Datalink.net. Inc.
(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
Exhibit 3.(i) of the Company's S.E.C.
Form 8-K filed on April 13, 1999.)
3.2 By-laws of the Company. (Incorporated
by reference to Exhibit 3.(ii) of the
Company's S.E.C. Form 8-K filed on
April 13, 1999.)
3.3 The Articles of Amendment of the
Wisconsin corporation increasing the
authorized shares to 50,000,000 common
shares. (Incorporated by reference to
Exhibit 3.(iii) of the Company's S.E.C.
Form 8-K filed on April 13, 1999.)
3.4 The Articles of Merger from a Delaware
corporation to a Wisconsin corporation
effective April 1, 1999 at 12:01 a.m.
(Central Time). (Incorporated by
reference to Exhibit 2.(i) of the
Company's S.E.C. Form 8-K filed on April
13, 1999.)
3.5 A Certificate of Merger filed with the
Office of the Secretary of State of
Delaware merging into a Wisconsin
corporation. (Incorporated by reference
to Exhibit 2.(ii) of the Company's
S.E.C. Form 8-K filed on April 13,
1999.)
<PAGE>
Exhibit No. Description of Exhibit Page
----------- ---------------------- ----
4 Instruments defining the rights of
security holders, including indentures.
4.1 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.)
4.2 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.)
4.3 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.)
4.4 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.)
4.5 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.)
4.6 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.)
4.7 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.)
4.8 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 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.)
4.9 Three-Year Stock Option Agreement dated
October 10, 1998 to purchase 10,000
common shares at $.75 per share.
(Incorporated by reference to Exhibit
4.10 of the Company's Form 10-K for the
year ended March 31, 1999.)
4.10 Three-Year Stock Option Agreement dated
October 20, 1998 to purchase 10,000
common shares at $.75 per share.
(Incorporated by reference to Exhibit
4.11 of the Company's Form 10-K for the
year ended March 31, 1999.)
<PAGE>
Exhibit No. Description of Exhibit Page
----------- ---------------------- ----
4.11 Three-Year Stock Option Agreement dated
October 22, 1998 to purchase 20,000
common shares at $.75 per share.
(Incorporated by reference to Exhibit
4.12 of the Company's Form 10-K for the
year ended March 31, 1999.)
4.12 Three-Year Stock Option Agreement dated
October 22, 1998 to purchase 30,000
common shares at $.75 per share.
(Incorporated by reference to Exhibit
4.13 of the Company's Form 10-K for the
year ended March 31, 1999.)
4.13* Two-Year Stock Option Agreement dated
July 12, 1999 to purchase 500,000 common
shares at $0.50 per share.
9 Voting Trust Agreement--not applicable.
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.)
<PAGE>
Exhibit No. Description of Exhibit Page
----------- ---------------------- ----
10.9 Lillian M. Skeen, Loan Agreement and
Open Ended On Demand Promissory Note
dated June 26, 1997. (Incorporated by
reference to Exhibit 10.9 of the
Company's Form 10-K for the year ended
March 31, 1998.)
10.10 Robert C. Skeen, Loan Agreement and Open
Ended On Demand Promissory Note dated
June 26, 1997. (Incorporated by
reference to Exhibit 10.10 of the
Company's Form 10-K for the year ended
March 31, 1998.)
10.11 Robert C. Skeen, Loan Agreement and Open
Ended On Demand Promissory Note dated
January 20, 1998. (Incorporated by
reference to Exhibit 10.11 of the
Company's Form 10-K for the year ended
March 31, 1998.)
10.12 John E. Machulak and Susan R. Robertson,
Loan Agreement and Open Ended On Demand
Promissory Note dated March 6, 1998.
(Incorporated by reference to Exhibit
10.12 of the Company's Form 10-K for the
year ended March 31, 1998.)
10.13 Lillian M. Skeen, Loan Agreement and
Open Ended On Demand Promissory Note
dated May 21, 1998. (Incorporated by
reference to Exhibit 10.13 of the
Company's Form 10-K for the year ended
March 31, 1998.)
10.14 Edward A. Machulak, Loan Agreement and
Open Ended On Demand Promissory Note
dated March 6, 1998. (Incorporated by
reference to Exhibit 10.14 of the
Company's Form 10-K for the year ended
March 31, 1999.)
10.15 Agreement by and between the Company and
Interactive Business Channel, Inc. dated
January 27, 1999. (Incorporated by
reference to Exhibit A of the Company's
Form 8-K dated February 8, 1999.)
10.16 May 25, 1999 Amendment to Exhibit 10.15
of the Company's Form 10-K for the year
ended March 31, 1999. (Incorporated by
reference to Exhibit 10.16 of the
Company's Form 10-K for the year ended
March 31, 1999.)
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, 2000, will include the Form 10-K and
will be submitted within 120 days after
the fiscal year end.
21* Subsidiaries and Joint Venture of the
Company
23.1* Consent of Independent Certified Public
Accountant
<PAGE>
Exhibit No. Description of Exhibit Page
----------- ---------------------- ----
99.0 Additional Exhibits
99.1* Confirmation agreement, General Lumber &
Supply Co., Inc., May 8, 2000.
99.2* Confirmation Agreement, Edward L.
Machulak, May 8, 2000.
99.3* Confirmation Agreement, Edward L.
Machulak Rollover Individual Retirement
Account, May 8, 2000.
99.4* Confirmation Agreement, Sylvia Machulak
Rollover Individual Retirement Account,
May 8, 2000.
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 Form S-8 Registration Statement
effective date April 4, 1994, File No.
33-77226. (Incorporated by reference as
this S-8 Registration Statement had been
filed.)
99.8 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. (Incorporated by reference as
this S.E.C. Form S-3 Registration
Statement had been filed on March 26,
1997.)
99.9 S.E.C. Form S-8 Registration Statement
No. 333-59209 filed under the
Securities Act of 1933, as amended, and
declared effective July 16, 1998,
registering one million of its common
shares, ten cents par value.
(Incorporated by reference as this
S.E.C. Form S-8 Registration Statement
had been filed on July 16, 1998.)
99.10 S.E.C. Form S-8 Registration Statement
No. 333-95397 filed under the
Securities Act of 1933 as amended and
declared effective January 26, 2000,
registering one million of its common
shares, ten cents par value.
(Incorporated by reference as this
S.E.C. Form S-8 Registration Statement
had been filed on January 26, 2000.)
99.11 Individual financial statements of
majority-owned companies have been
omitted because these companies do not
constitute a significant or material
contribution to the Company.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-K - MARCH 31, 2000
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 16, 2000.
COMMERCE GROUP CORP.
(Company)
By: /s/ Edward L. Machulak
----------------------
Edward L. Machulak
Chairman of the Board of Directors,
Member of Executive Committee,
Member of Audit 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 Directors, May 16, 2000
---------------------- Member of Executive Committee, ------------
Edward L. Machulak Member of Audit Committee,
Director-Emeritus, President,
Treasurer, Chief Executive,
Operating and Financial Officer
/s/ Edward A. Machulak Director, Member of Executive May 16, 2000
---------------------- Committee, Executive Vice President ------------
Edward A. Machulak and Secretary
/s/ Sidney Sodos Director and Member of Audit May 16, 2000
---------------------- Committee ------------
Sidney Sodos
/s/ Clayton H. Tebo Director and Member of Audit May 16, 2000
---------------------- Committee ------------
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, 2000, 1999, 1998, 1997 and
1996, 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 10, 2000
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
--------------------------------------------------
SCHEDULE IV (1)
INDEBTEDNESS OF RELATED PARTIES - NOT CURRENT
YEARS ENDED MARCH 31, 2000, 1999, AND 1998
Additions Deletions
Balance at to to Balance
Beginning Indebtedness Indebtedness at End
Name of Person (1) of Period (2) (3) of Period
------------------ ---------- ------------ ------------ ---------
Year ended
March 31, 2000
Joint Venture $23,744,254 $4,192,249 $0 $27,936,503
Year ended
March 31, 1999
Joint Venture $20,090,773 $3,653,481 $0 $23,744,254
Year ended
March 31, 1998
Joint Venture $15,693,766 $4,397,007 $0 $20,090,773
(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 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 subsidiaries.
Additions Deletions
Balance at to to Balance
Beginning Indebtedness Indebtedness at End
Name of Person (1) of Period (2) (3) of Period
------------------ --------- ------------ ------------ ---------
Year ended
March 31, 2000
SSGM $23,823,518 $2,545,433 $0 $26,368,951
Year ended
March 31, 1999
SSGM $21,524,975 $2,298,543 $0 $23,823,518
Year ended
March 31, 1998
SSGM $19,388,321 $2,136,654 $0 $21,524,975
(1) San Sebastian Gold Mines, Inc. (SSGM) in which Commerce Group Corp.
owns 82 1/2% of its issued and outstanding common shares.
(2) The advances to SSGM consist of the interest due to the Company on
the outstanding indebtedness.
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------
SCHEDULE IV(2)
INDEBTEDNESS TO RELATED PARTIES
CURRENT YEARS ENDED MARCH 31, 2000, 1999, AND 1998
Balance
at Additions to Deletions to Balance
Beginning Indebtedness Indebtedness at End
Identity of Debtor of Period (1) (2) of Period
------------------ --------- ------------- ------------ ---------
Year ended March 31, 2000
-------------------------
President of the Company $2,568,600 $503,668(a) $ 0 $3,072,268
President's IRA 550,951 95,190(b) 0 646,141
President's Affiliated
Company 1,493,026 315,488(c) 0 1,808,514
Others 397,102 68,608(d) 0 465,710
---------- ----------- --------- ----------
Total, notes payable $5,009,679 $982,954 $ 0 $5,992,633
========== =========== ========= ==========
President's Accrued Salary $1,674,015 $165,000(e) $ 0 $1,839,015
========== =========== ========= ==========
Legal fees (President's
son is a principal) $ 197,139 $ 63,787(f) $ 0 $ 260,926
========== =========== ========= ==========
Year ended March 31, 1999
-------------------------
President of the Company $2,219,984 $348,616(a) $ 0 $2,568,600
President's IRA 469,987 80,964(b) 0 550,951
President's Affiliated
Company 1,182,709 310,317(c) 0 1,493,026
Others 302,440 94,662(d) 0 397,102
---------- ----------- -------- ----------
Total, notes payable $4,175,120 $834,559 $ 0 $5,009,679
========== =========== ======== ==========
President's Accrued Salary $1,509,015 $165,000(e) $ 0 $1,674,015
========== =========== ======== ==========
Legal fees (President's
son is a principal) $ 175,082 $ 22,057 $ 0 $ 197,139
========== =========== ======== ==========
Year ended March 31, 1998
-------------------------
President of the Company $1,839,465 $380,519(a) $ 0 $2,219,984
President's IRA 400,919 69,068(b) 0 469,987
President's Affiliated
Company 963,152 219,557(c) 0 1,182,709
Others 257,993 44,447(d) 0 302,440
---------- ----------- -------- ----------
Total, notes payable $3,461,529 $713,591 $ 0 $4,175,120
========== =========== ========= ==========
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
========== =========== ========= ==========
(1)(a)(b) The net additions to the open-ended, secured, on-demand
promissory notes issued to the President of the Company, as an
individual, and not as a Director or Officer of the Company,
and his IRA result from net cash advances and/or for accrued
interest.
<PAGE>
(1)(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 incurred on behalf of
the Company.
During the fiscal period ended March 31, 2000, the President's
Affiliated Company had been issued the following stock options:
On January 10, 1997, four-year stock options to purchase 68,000
of the Company's restricted common shares at a price of $3.00 a
share; and
On July 12, 1999, two-year stock options to purchase 500,000 of
the Company's restricted common shares at a price of $0.50 a
share.
(1)(d) The additions by others resulted from net cash advances and/or
accrued interest.
(1)(e) The President's salary was accrued for the entire fiscal year.
(1)(f) The addition of the amounts due to the Law Firm results from
legal services rendered.
(2) Deletions to Indebtedness are reflected as a net to the
additions.
