UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1999
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ To __________
Commission file number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1942961
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6001 NORTH 91ST STREET
MILWAUKEE, WISCONSIN 53225-1795
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 462-5310
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 13,009,980 common
shares of the Company's common stock, $0.10 par value, were issued and
outstanding as of January 31, 2000.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE THIRD QUARTER ENDED DECEMBER 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements have been prepared by
Commerce Group Corp. ("the Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed omitted pursuant to such SEC rules and
regulations.
These consolidated financial statements should be read in conjunction
with the financial statements and accompanying notes included in the
Company's Form 10-K for the year ended March 31, 1999.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Reports on Form 8-K
Registrant's Signature Page
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED BALANCE SHEETS
Dec. 31, 1999 March 31, 1999
(Unaudited) (Audited)
------------- --------------
ASSETS
------
Current assets
Cash $ 1,945 $ 61,821
Investments 322,068 186,182
Accounts receivable 292,169 358,769
Inventories 117,801 156,422
Prepaid items and deposits 52,190 49,677
----------- -----------
Total current assets 786,173 812,871
Real estate (Note 5) 1,179,836 1,179,836
Property, plant and equipment, net 3,169,138 3,567,334
Mining resources investment 23,819,448 22,026,760
Other investments 288,450 0
------------ -----------
Total assets $29,243,045 $27,586,801
============ ===========
LIABILITIES
-----------
Current liabilities
Accounts payable $ 662,800 $ 382,038
Notes and accrued interest
payable to related parties
(Notes 6 & 7) 5,744,847 5,009,679
Notes and accrued interest
payable to others (Note 6) 1,278,090 1,169,454
Accrued salaries 1,809,015 1,674,015
Accrued legal fees 254,633 197,139
Other accrued expenses 543,046 478,762
------------ -----------
Total liabilities 10,292,431 8,911,087
Commitments and contingencies (Notes 2, 4, 5, 6, 7, 8, 12 & 14)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
1999-none; 1998-none (Note 10) $ 0 $ 0
Common stock, $0.10 par value:
Authorized 50,000,000 shares;
(Notes 1(b) and 10)
Issued and outstanding:
03/31/1999-11,577,527 (Note 10) 1,157,753
12/31/1999-12,609,980 (Note 10) 1,260,998
Capital in excess of par value 17,711,036 17,288,039
Retained earnings (deficit) (21,420) 229,922
------------ -----------
Total shareholders' equity 18,950,614 18,675,714
------------ -----------
Total liabilities and
shareholders' equity $29,243,045 $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 NINE MONTHS ENDED DECEMBER 31 (UNAUDITED)
Three Months Ended
Third Quarter Nine Months Ended
12/31/99 12/31/98 12/31/99 12/31/98
----------- ----------- ----------- ------------
Revenues:
Gold sales $ 92,984 $ 163,802 $ 414,280 $ 556,426
Campground income 13,811 14,866 62,912 58,226
------------ ------------ ------------ -------------
Total revenues 106,795 178,668 477,192 614,652
Expenses:
Cost of gold sales $ 124,970 $ 154,825 $ 383,657 $ 402,938
Depreciation 77,184 84,983 243,309 253,758
General, adminis-
trative and camp-
ground expense 37,567 67,146 175,720 229,454
------------ ------------ ------------ -------------
Total Expenses 239,721 306,954 802,686 886,150
Other income:
Miscellaneous
income $ 0 $ (3) $ 191 $ 246
El Salvador added
value tax refund 6,908 28,199 73,961 84,598
------------ ------------ ------------ -------------
Other income 6,908 28,196 74,152 84,844
Net profit (loss) $ (126,018) $ (100,090) $ (251,342) $ (186,654)
Credit (charges)
for income taxes 0 0 0 0
------------ ------------ ------------ -------------
Net income (loss)
after income tax
credit (charge) $ (126,018) $ (100,090) $ (251,342) $ (186,654)
============ ============ ============ =============
Net income (loss)
per share (Note 2)
basic $ (.0106) $ (.0090) $ (.0211) $ (.0168)
============ ============ ============ =============
Net income (loss)
per share (Note 2)
diluted $ (.0088) $ (.0076) $ (.0176) $ (.0141)
============ ============ ============ =============
Weighted av. common
shares outstanding
(Note 2) 11,896,415 11,115,694 11,896,415 11,115,694
============ ============ ============ =============
Weighted av. diluted
common shares
(Note 2) 14,320,152 13,192,385 14,320,152 13,192,385
============ ============ ============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THROUGH THE NINE MONTH PERIOD ENDED DECEMBER 31, 1999 (UNAUDITED)
Common Stock
------------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
---------- ----------- ----------- ----------
Balance March 31, 1997 9,193,042 $ 919,304 $14,359,037 $ 201,585
Net Income (Loss) for
FY March 31, 1998 118,603
Common Shares Issued
Through March 31, 199 1,846,628 184,663 2,610,687
---------- ----------- ----------- ----------
Balance March 31, 1998 11,039,670 1,103,967 16,969,724 320,188
Net Income (Loss)
FY March 31, 1999 (90,266)
Common Shares
Issued Through
March 31, 1999 537,857 53,786 318,315
---------- ---------- ----------- ----------
Balance March 31, 1999 11,577,527 1,157,753 17,288,039 229,922
Net Income (Loss)
Second Quarter
December 31, 1999 (251,342)
Common Shares
Issued Through
the Third Quarter
December 31, 1999 1,032,453 103,245 422,997
---------- ---------- ----------- ----------
Balance December 31,
1999 12,609,980 $1,260,998 $17,711,036 $ (21,420)
========== ========== =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31 (UNAUDITED)
12/31/99 12/31/98
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ (251,342) $ (186,654)
------------ ------------
ADJUSTMENTS TO RECONCILE
NET INCOME (LOSS) TO NET
CASH USED IN OPERATING ACTIVITIES:
Depreciation 243,309 253,758
Changes in assets and liabilities
Decrease (increase) in account
receivables 66,600 121,419
Decrease (increase) in investments (135,886) 1,610
Decrease (increase) in inventories 38,621 37,434
Decrease (increase) in prepaid
items and deposits (2,513) (10,255)
Increase (decrease) in accounts
payable and accrued liabilities 345,046 88,494
Increase (decrease) in accrued
salaries 135,000 135,000
Increase (decrease) in accrued
legal fees 57,494 3,793
------------ ------------
Total adjustments 747,671 631,253
------------ ------------
Net cash provided by (used in)
operating activity 496,329 444,599
INVESTING ACTIVITIES:
Investment in mining resources (1,637,801) (1,697,989)
Investment - other (288,450) 0
------------ ------------
Net cash used in investing
activities (1,926,251) (1,697,989)
FINANCING ACTIVITIES:
Net borrowings 843,804 1,095,062
Common stock issued 526,242 156,275
------------ ------------
Net cash provided by (used in)
financing activities 1,370,046 1,251,337
Net increase (decrease) in cash
and cash equivalents (59,876) (2,053)
Cash - beg. of year 61,821 61,287
------------ ------------
Cash - end of year $ 1,945 $ 59,234
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Supplemental disclosures of cash information for the third quarterly
periods ended December 31, 1999 and 1998:
1. The following amounts of interest expense accrued were capitalized:
$672,410 (1999) and $556,398 (1998).
2. The interest expense paid in cash for this quarterly period was none
for 1999 and $1,082 in 1998.
3. The Company paid no income taxes during this period for 1999 or
1998.
4. The investment consists of precious stones and the Employee Benefit
Account which are stated at the lower of the cost or market value.
5. Accounts receivable consist of gold bullion shipped to the refinery
pending the payment on the settlement date, an amount due from the
Government of El Salvador for an added value tax refund, and for the
amount advanced to Mineral San Sebastian, S.A. de C.V. (Misanse).
6. Inventory consists of processed ores, metal-in-process and consumable
items which are stated at the lower of average cost or market.
Supplemental schedule of non-cash investing and financing activities
during the third quarterly period ended December 31:
1. The Company issued the following common shares for the values shown
for services rendered and for investments:
1999 1998
--------- ------
Shares 906,800 4,100
Value $441,725 $3,350
2. The sale of gold in 1999 was $414,280 and $556,426 for 1998.
3. Other non-cash items were for the unpaid salary, legal and director
fees which amounted to $205,693 in 1999 and $182,613 in 1998.
4. There were no non-cash equipment financing activities.
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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 United States' chartered corporations, 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 curtailed at other mining properties until adequate funding and
licensing permits are obtained. All of the mining projects are
located in the Republic of El Salvador, Central America.
Presently, the Joint Venture is in the pre-production and
development stage at the SSGM and it simultaneously is performing
several separate programs: it has started to produce gold on a
start up (not full production) basis at its San Cristobal Mill and
Plant ("SCMP") which is located approximately 15 miles from the SSGM
site; the second program is to begin its open-pit, heap-leaching
process on the SSGM site; the third program is to continue its SSGM
site preparation, the expansion of its exploration and exploitation
targets, and the enlargement and development of its gold ore
reserves; and the fourth program is to explore the potential of
other gold mine exploration prospects identified as the San
Felipe-El Potosi Mine, and its extension, the El Capulin Mine and
the Hormiguero Mine, all located in El Salvador, Central America.
Concurrently, it also is in the process of obtaining the necessary
funding for each of these separate programs while its Joint Venture
continues its gold production, exploration, exploitation and
development operations.
The Company on January 29, 1999, announced its plans to diversify by
having its wholly-owned subsidiary, 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.
On July 26, 1999, Ecomm announced the launching of its MyInternet.to
web portal. MyInternet.to is "a one stop gateway to the Internet"
and provides a full range of the web's most popular services with a
differentiating twist in order to compete with other portals. Since
the launching, it has made over thirty affiliations with some of
the most well-known United States' corporations.
Ecomm's principal goal will be to evaluate, structure and acquire
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 is focusing 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. 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. Reference is made to the Management's Discussion
and Analysis of Financial Condition and Results of Operation for an
explanation of Ecomm's expansion into the wireless business.
(b) Merger into a Wisconsin corporation effective April 1, 1999
The Company, a United States' corporation (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), presents its consolidated
financial statements in U.S. dollars. 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 and
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, 1999, 1998 and 1997 and the consolidated statements of
changes in shareholders' equity, consolidated statements of cash flows
and consolidated statements of operations for the years ended March 31,
1999, 1998, 1997, and prior years, were also restated to reflect this
change.
The balance sheet effect of the change in policy for each fiscal year
ending on March 31, was to reduce the Joint Venture advances by a total
of $5,397,146 which consisted of the following amounts: $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,
1999, 1998, 1997 and 1996 were restated to eliminate the net interest
income of $5,397,146 from the Joint Venture. The amounts were
$1,822,686, $1,511,895, $1,012,739, and $816,029 for 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
Piccadilly Advertising Agency, Inc. ("Piccadilly")
now known as 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 precious stones and the value of the Company's
shares held in the Employee Benefit Account which values are stated at
the lower cost or market value.
ACCOUNTS RECEIVABLE
The accounts receivable account consists of gold bullion shipped to the
refinery pending the payment on the settlement date, an amount due from
the Government of El Salvador for an added value tax refund, and includes
the amount advanced to Mineral San Sebastian, S.A. de C.V. (Misanse).
INTERCOMPANY BALANCES
All intercompany balances and transactions have been eliminated.
INVENTORY
Inventories consist of the following as of:
Dec. 31, 1999 March 31, 1999
------------- --------------
Gold in process (1) (Stated at market value) $ 75,324 $ 72,447
Materials and supplies (Stated at cost) 42,477 83,975
-------- --------
$117,801 $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 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 are stated at the lower of cost or
estimated net realizable value. Mining properties and development costs
and certain plant and equipment are depreciated using the units of
production method based upon proven and probable reserves or by using the
straight-line depreciation method. Other assets are depreciated using
the straight-line method over estimated useful lives of three 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 as presented in the accompanying financial
statements.
EARNINGS (LOSS) PER COMMON SHARE
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.
If on December 31, 1999, the 1,614,900 option shares, the 183,602 loan
shares, and the 625,235 stock rights were added to the weighted average
calculated number of basic shares which amount to 11,896,415, the total
number of the weighted average fully diluted shares would be 14,320,152.
The loss per share for the fiscal period ended December 31, 1999, then
would be $.0176 cents per diluted share. The same assumptions were used
for the same 1998 fiscal period reflecting a loss of $.0141 cents per
share.
FOREIGN CURRENCY
The Company is involved in foreign currency transactions as it deposits
U.S. funds primarily through bank wire transfer of funds from its U.S.
bank account into the Joint Venture's El Salvador bank accounts. The
Joint Venture is obligated to repay the Company for funds advanced in
U.S. dollars. El Salvador has a freely convertible currency that traded
in this past fiscal year about 8.75 colones per U.S. dollar. The
exchange rate was 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 are no formal procedures in exchanging
dollars for colones or vice versa.
<PAGE>
MAJOR CUSTOMER
The Joint Venture produces gold and silver from its El Salvador mining
operation. 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:
December 31, 1999 March 31, 1999
--------------------------------- ---------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
----------- ------------ ----- ----------- ------------ -----
Mineral
Proper-
ties
and
Deferred
Deve-
lop-
ment $23,819,448 $23,819,448 $22,026,760 $22,026,760
Mine
Plant
and
Equip-
ment 5,353,046 2,183,908 3,169,138 5,332,998 1,765,664 3,567,334
----------- ---------- ----------- ----------- ---------- -----------
$29,172,494 $2,183,908 $26,988,586 $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 December 31, 1999, the Company's investments, including charges for
interest expense to the Joint Venture, were $26,131,651 and three of the
Company's wholly-owned subsidiaries' advances were $590,265 for a total
of $26,721,916.
INVESTMENT IN EL SALVADOR MINING PROJECTS
During the fiscal year, the Company has advanced funds, performed
services, and allocated its general and administrative costs to the Joint
Venture.
As of December 31, 1999 and 1998, the Company, Sanseb and three of the
Company's wholly-owned subsidiaries have invested (including carrying
costs) the following in its Joint Venture:
1999 1998
---- ----
The Company's advances (net of gold
sale proceeds) since 09/22/87 $26,131,651 $22,327,101
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 25,690,540 23,259,838
----------- -----------
Total: $58,838,551 $52,603,299
Advances by the Company's three
subsidiaries 590,265 590,265
----------- -----------
Combined total investment $59,428,816 $53,193,564
=========== ===========
SSGM ACTIVITY
Due to the civil unrest in El Salvador, 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 expansion of its SCMP facilities and
the proposed open-pit, heap-leaching operations on this site. The Joint
Venture is also engaged in the exploration and the expansion program to
develop additional gold ore reserves in the area surrounding the SSGM
gold ore reserves and at its other El Salvador mining prospects. During
this fiscal period gold is being produced by trucking the virgin ore from
the SSGM for processing at the SCMP.
<PAGE>
MINERAL SAN SEBASTIAN S.A. DE C.V. ("MISANSE")
(a) MISANSE CORPORATE STRUCTURE
The SSGM real estate is owned by and leased to the Joint Venture by
Misanse, a Salvadoran-chartered corporation. The Company owns 52% of the
total of Misanse's issued and outstanding shares. The balance is owned
by approximately one hundred El Salvador, Central American, and United
States' citizens. The Company has the right to select six of Misanse's
ten directors.
(b) SSGM MINING LEASE
On July 28, 1975, an amended lease agreement between Misanse as lessor
and Sanseb as tenant was signed by the parties giving the tenant all the
possessions and mining rights that pertain to the SSGM as well as other
claims to mineral rights that may already have or could be claimed in the
future within the 595 hectares (1,470 acres) plat of land encompassing
the SSGM. The 25-year lease, which begins on the date gold production
begins, was further amended to run concurrently with the concession
described herein and may be extended for an additional 25 years by the
tenant as long as the tenant has paid the rent and has complied with
other obligations under the lease and the concession. The lease 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 eighteen
hundred "colones" 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 January 27, 1987, the Government granted a right to the mining
concession ("concession") to Misanse which was subject to the performance
of the El Salvador Mining Law requirements. These rights were
simultaneously assigned to the Company and Sanseb.
On July 23, 1987, the Government of El Salvador delivered and granted to
the Company's 52%-owned subsidiary, Misanse, possession of the mining
concession. This is the right to extract and export minerals for a term
of 25 years (plus a 25-year renewal option) beginning on the first day
of production from the real estate which encompasses the SSGM owned by
Misanse. Misanse assigned this concession to the Joint Venture. The
concession was pledged as collateral for loans made by related parties.
(Note 7)
<PAGE>
Effective February 1996, the Government of El Salvador passed a law which
requires mining companies to pay to it three percent of its gross gold
sale receipts and an additional one percent is to be paid to the El
Salvador municipality which has jurisdiction of the mine site. The
Company, in compliance with the new law, has filed its applications for
all of the mining concessions in which it has an interest.
SCMP LAND AND BUILDING LEASE
On November 12, 1993, the Joint Venture entered into an agreement with
Corporacion Salvadorena de Inversiones ("Corsain"), a governmental agency
of El Salvador, to lease for a period of ten years, approximately 166
acres of land and buildings on which its gold processing mill, plant and
related equipment (the SCMP) are located, and which is approximately 15
miles east of the SSGM site. The annual lease payment is U.S. $11,500
(payable in El Salvador colones at the then current rate of exchange),
payable annually in advance, and subject to an annual increase based on
the annual United States' inflation rate. As agreed, a security deposit
of U.S. $11,500 was paid on the same date and this deposit will be
subject to increases based on any United States' inflationary rate
adjustments.
MODESTO MINE
(a) REAL ESTATE
The Company owns 63 acres of land which are a key part of the Modesto
Mine that is located near the city of El Paisnal, El Salvador. It also
has contracted to purchase additional acreage which transfer will take
place after it receives clear title. Part of this real estate is subject
to a mortgage 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 up to 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 one hundred seventy-five 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 a total of approximately
63 acres at the Modesto Mine; and the Joint Venture leases approximately
166 acres of land at the SCMP site 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
Notes payable consist of the following: 12/31/99 03/31/99
----------- -----------
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) $5,744,847 $5,009,679
Other - consists primarily of short-term
notes and accrued interest (as of December
31, 1999, $336,137 and as of March 31,
1999, $307,495) 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. 1,278,090 1,169,454
---------- ----------
Total: $7,022,937 $6,179,133
========== ==========
(7) RELATED PARTY TRANSACTIONS
- - -------------------------------
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 18 years and nine months, for
a total of $1,797,765.
In addition, with the consent and approval of the Directors, the
President of the Company, as an individual and not as a Director or
Officer of the Company, entered into the following financial transactions
with the Company, the status of which is reflected as of December 31,
1999:
<PAGE>
The amount of funds which the Company has borrowed from its President
from time to time, together with accrued interest, amounts to $2,951,397.
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 December 31, 1999, an aggregate of
$621,037, including accrued interest, from the Company's President's
Rollover Individual Retirement Account (RIRA). These loans are evidenced
by the Company's open-ended, secured, on-demand promissory note, with
interest payable monthly at the prime rate plus four percent per annum,
but not less than 16% per annum.
In order to satisfy the Company's cash requirements from time to time,
the Company's President has sold or pledged as collateral for loans,
shares of the Company's common stock owned by him. In order to
compensate its President for selling or pledging his shares on behalf of
the Company, the Company has made a practice of issuing him the number of
restricted shares of common stock equivalent to the number of shares sold
or pledged, plus an additional number of shares equivalent to the amount
of accrued interest calculated at the prime rate plus three percent per
annum and payable monthly. The Company received all of the net cash
proceeds from the sale or from the pledge of these shares. The Company
borrowed a total of 155,600 shares from him during this fiscal period and
it owes him 28,002 common shares for the interest earned on common shares
he loaned or pledged as collateral for the benefit of the Company. The
Company may owe additional common shares for such shares loaned or
pledged by him for collateral purposes to others for the benefit of the
Company, all in accordance with the terms and conditions of
Director-approved, open-ended loan agreements dated June 20, 1988,
October 14, 1988, May 17, 1989, and April 1, 1990.
On February 16, 1987, the Company granted its President, by unanimous
consent of the Board of Directors, compensation in the form of a bonus in
the amount of two percent of the pre-tax profits realized by the Company
from its gold mining operations in El Salvador, payable annually over a
period of twenty years commencing on the first day of the month following
the month in which gold production commences.
The President presently owns a total of 467 Misanse common shares. There
are a total of 2,600 Misanse shares issued and outstanding.
Also with the consent and approval of the Directors, a company in which
the President has a 55% ownership entered into the following agreements,
and the status is reflected as of December 31, 1999:
The Company leased approximately 4,032 square feet on a month-to-month
basis for its corporate headquarters office and the monthly rental charge
was $2,789. Administrative services, use of data processing equipment,
use of its vehicles and other property as required by the Company were
also provided.
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 $1,724,797; the annual interest rate is
four percent plus the prime rate, but not less than 16%, and it is
payable monthly.
The Company's Directors have consented and approved the following
transactions which status are reflected as of December 31, 1999:
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 $369,360 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 $254,633 for legal services
rendered some of which dates back to July 1980.
The son of the President and his son's wife have the Company's
open-ended, on-demand promissory note in the sum of $78,256 which bears
interest at an annual rate of 16% payable monthly. The Company borrowed
41,460 common shares from them. These shares, plus 4,146 shares earned
for interest were paid during May 1999 by issuing the Company's
restricted common shares. The Company received all of the net proceeds.
The Company borrowed 72,770 of the Company's common shares from a
Director pursuant to a Director-approved, open-ended stock loan agreement
dated March 6, 1998. The sale of these shares took place during this
fiscal period and all of the net proceeds were received by the Company.
These shares, plus 7,277 shares 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 for the amounts due to them, or exchange their
fees for the Company's common shares. Currently, the Audit Committee
Directors do not receive any compensation.
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.
COMPANY NET ADVANCES TO THE JOINT VENTURE
- - -----------------------------------------
Total Advances Interest Charges
-------------- ----------------
Balances March 31, 1999 $23,153,989 $10,004,670
Advances through the third
quarter ended December 31, 1999 2,977,662 2,219,237
----------- -----------
Total Company's net advances 26,131,651 12,223,907
Advances by three of the
Company's subsidiaries 590,265 0
----------- -----------
Total net advances
December 31, 1999 $26,721,916 $12,223,907
=========== ===========
(8) COMMITMENTS
- - ----------------
Reference is made to Notes 2, 4, 5, 6, 7, 12 and 14.
<PAGE>
(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 authorizes the
issuance of 50,000,000 shares of common stock, $0.10 par value per share
of which 12,609,980 shares were issued and outstanding as of December 31,
1999. 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.
b. PREFERRED STOCK
There were no preferred shares issued and outstanding for the periods
ending December 31, 1999 or 1998.
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
12/31/99 03/31/99
------------------ -----------------
Weighted Weighted
Option Average Option Average
Shares Price Shares Price
---------- ----- --------- ------
Outstanding, beg. period 977,400 $3.28 1,327,400 $3.42
Granted 660,000 $0.50 70,000 $0.75
Exercised 0 N/A 0 N/A
Forfeited 0 N/A 0 N/A
Expired (22,500) N/A (420,000) N/A
---------- ----- ---------- -----
Outstanding 1,614,900 $2.15 977,400 $3.28
========== ===== ========== =====
<PAGE>
A summary of the outstanding stock options as of December 31, 1999,
follows:
Weighted Average Weighted
Range of Amount Remaining Average
Exercise Prices Outstanding Contractual Life Exercise Price
- - --------------- ----------- ---------------- ---------------
Up to $2.99 760,000 1.35 years $ .60
$3.00 to $5.00 854,900 1.00 years $3.53
d. STOCK RIGHTS - TO THE PRESIDENT AND/OR DIRECTORS
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. As of
December 31, 1999, there were a total of 183,602 restricted common shares
due to him.
Said interest payable is for shares loaned to the Company and/or for such
shares loaned or pledged for collateral purposes, or for unpaid interest,
all in accordance with the terms and conditions of Director-approved
open-ended loan agreements.
e. SHARE LOANS - OTHERS
A series of borrowings of the Company's common shares were made under the
provision that the owners would sell said shares as the Company's
designee, with the proceeds payable to the Company. In exchange, the
Company agreed to pay these shares loaned within 31 days or less by
issuing its restricted common shares, together with interest payable in
restricted common shares payable at a negotiated rate of interest
normally payable in advance for a period of two years. As of December
31, 1999, there were no common shares borrowed from other parties.
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 of the non-related,
publicly-held corporation borrowed, 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 lieu
of the 125,300 common shares of a non-related public company in return
for the shares borrowed by the Company.
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 December 31, 1999, from the 1,000,000 shares registered, 574,231
shares were issued and 425,769 shares are authorized to be issued. An
additional 400,000 shares were issued to the Commerce Group Corp.
Employee Benefit Account on January 26, 2000.
<PAGE>
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.
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, 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 Statement. Subsequently, on January 26,
2000, it issued an additional 400,000 common shares registered in its
Securities and Exchange Commission Form S-8 Statement. The CGCEBA plans
to sell these shares from time to time to meet its obligations to its
employees.
(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 material
compliance with environmental laws and regulations as currently
promulgated. However, the exact nature of environmental control
problems, if any, which the Company may encounter in the future cannot be
predicted, primarily because of the increasing number, complexity and
changing character of environmental requirements that may be enacted or
of the standards being promulgated by governmental authorities.
The Company has transferred at no cost to IBC, forty-nine percent of the
common shares of Piccadilly Advertising Agency, Inc. (PAA) 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. On the same day,
PAA's Articles of Incorporation were amended to change the name of the
corporation to Ecomm Group Inc. (Ecomm). Ecomm also reserved the domain
name of ecommgroup.com. 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 the only
change was 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.
<PAGE>
On January 29, 1999, Nasdaq halted the trading of the Company's shares
and on March 31, 1999, the Company's securities were delisted from The
Nasdaq Stock Market effective at the close of business.
(13) ENVIRONMENTAL MATTERS
- - --------------------------
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.
(14) YEAR 2000 ISSUE
- - --------------------
Computer programs written decades ago utilized a two digit format to
identify the applicable year. Without modification, any date sensitive
software beyond December 31, 1999 could fail, as the date would be reset
to 1900. This could result in, amongst other things, disruptions to
operations and the inability to process financial transactions. The
Company has made an assessment of the impact of the year 2000 issue. The
Company has initiated preliminary communications with certain of its
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 has contacted 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 received from these entities were positive and the
Company will continue to contact the ones who have not responded. As of
February 1, 2000, the Company has not encountered any Y2K related
problems.
(15) UNAUDITED FINANCIAL STATEMENTS
- - ------------------------------------
The consolidated financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The financial information included herein is
unaudited; however, the Company believes that the information reflects
all adjustments (consisting solely of normal recurring adjustments) that
are, in the opinion of management, necessary to be a fair presentation of
the financial position, results of operations, and cash flows for the
interim periods. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements
be read in connection with the financial statements and the notes thereto
included in the Company's latest annual report and the filing of the
required Securities and Exchange Commission annual Form 10-K.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - DECEMBER 31, 1999
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters discussed in this report on Form 10-Q, when not historical
matters, are forward-looking statements that involve a number of risks
and uncertainties that could cause actual results to differ materially
from projected results. Such factors include, among others, the
speculative nature of mineral exploration, 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.
The following discussion provides information on the results of
operations for the nine-month fiscal periods ended December 31, 1999 and
1998 and the financial condition, liquidity and capital resources for the
same two-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
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ACCOUNTING OVERVIEW
A redefined structure of the financial statements for the nine-month
periods ended December 31, 1999 and 1998 and for prior years reflects and
includes the Commerce Group Corp./Sanseb Joint Venture (Joint Venture) on
a consolidated basis. Prior to this change, the Company reported the
investment in the Joint Venture as advances to the Joint Venture and the
Company's advances included the interest earned on these advances in
anticipation of the interest being reimbursed. In this report, these
advances are restated and combined with the Company's Consolidated
Financial Statements. Although the elimination of interest income
reduces the retained earnings, it does not eliminate the interest charged
by and earned by the Company which is due and payable and which is
maintained additionally with a separate accounting. In effect, this
restructuring modifies only the financial reporting and at the time that
the profits for the gold mining operation are distributed, the interest
earned on these advances will be paid first to the Company prior to any
profit distribution and pursuant to the contract entered into by the
joint venture parties.
For this fiscal quarterly period ended December 31, 1999, the Company was
able to restructure the disbursements to the Joint Venture to identify
the category to be charged. Reference is made to Note 2 in the financial
statements for additional details.
<PAGE>
THE COMPANY'S CURRENT STATUS
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PRECIOUS METAL MINING
The Joint Venture has produced gold from April 1, 1995 through this
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 the 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 has 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. 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 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 proceeding to install a pilot open-pit,
heap-leaching gold processing system on the SSGM site. The cone crushing
system is being reconstructed at this site. It also is continuing its
SSGM site preparation, the expansion of its exploration and exploitation
targets, and the enlargement and development of its gold ore reserves.
It is exploring the potential of the other gold mine prospects identified
as the San Felipe-El Potosi Mine, and its extension, the El Capulin Mine,
and the Hormiguero Mine. The Montemayor Mine and the Modesto Mine have
been placed on a standby basis pending the submission of an application
for a concession (license) on the property it owns or 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 major gold-mining operation as soon as adequate
funding is in place. Dependent on the grade of gold ore processed and
the funds it is able to obtain, it then anticipates producing annually
approximately 8,000 ounces of gold from the SCMP operation and eventually
up to 40,000 ounces of gold from its SSGM open-pit, heap-leaching
operation. The Joint Venture continues to conduct an exploration program
to develop additional gold ore reserves at the SSGM located in the
Republic of El Salvador.
Since the Joint Venture commenced producing gold at the SCMP, albeit a
very exiguous operation, and a forerunner of its greater goals, the
Company's revenues, profitability and cash flow will be greatly
influenced by the price of gold. Gold prices fluctuate widely and are
affected by numerous factors which will be beyond the Company's control,
such as, expectations for inflation, the strength of the U.S. dollar,
overproduction of gold, global and regional demand, or political and
economic conditions. The combined effect of these factors is difficult;
perhaps impossible to predict. Should the market price of gold fall
below the Company's production costs and remain at such level for any
sustained period, the Company could experience losses.
<PAGE>
The Company believes that neither it, nor any other competitor, has a
material effect on the precious metal markets and that the price it will
receive for its production is dependent upon world market conditions over
which it has no control.
THE INTERNET BUSINESS
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HISTORICAL SYNOPSIS
The Company on January 29, 1999, announced its plans to have its
fifty-one percent 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, is also 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 receives 2,500 hits on average daily and 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.
CURRENT INTERNET ACTIVITIES
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The most exciting technology which Ecomm is currently concentrating on is
wireless technology.
WIRELESS WEB INITIATIVE
Ecomm is of the opinion that MyInternet.to is a sound platform for
implementing a strategic wireless web content initiative. Ecomm's
management 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.
<PAGE>
WIRELESS WEB REVENUES
Revenues will be initially 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.
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.
MYINTERNET.TO WEB PORTAL
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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. 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.
<PAGE>
Ecomm believes that establishing and maintaining the Company's brand is a
critical element of its operating strategy. 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 in to new content offerings.
LEVERAGE STRATEGIC RELATIONSHIPS
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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 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 compel 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.
RESULTS OF OPERATION FISCAL QUARTER DECEMBER 31, 1999 COMPARED TO
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DECEMBER 31, 1998 ON A RESTATED BASIS
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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 ($251,342) or ($.0211) per basic share for its nine-month period ended
December 31, 1999 compared to a loss of ($186,654) or ($.0168) per share
for the same previous fiscal year. This 1999 increased loss results
primarily from the depressed sale price of gold and the fact that less
gold was produced and sold. The other income and the income derived from
the El Salvadoran added tax value refund of $74,152 for 1999 and $84,844
for 1998 reduced the losses.
<PAGE>
During this nine-month period ended December 31, 1999, the Company sold
1,499 ounces of gold and 463 ounces of silver at an average realized
price of $272 an ounce, for a gross total of $414,280. This compares with
producing 1,906 ounces of gold and 607 ounces of silver during its
nine-month period ended December 31, 1998, for a total of $556,426. In
addition, the Joint Venture held approximately 260 ounces of gold in its
inventory valued at $75,324 compared to a value of $67,005 for the same
period in 1998.
The following Gold Institute Production Cost Standard schedule reflects a
comparison of costs to produce gold:
Third Quarter Ended December 31,
1999 1998
---- ----
Per Per
Total Ounce Total Ounce
-------- ---- -------- ----
Direct mining expense(1) $307,795 $205 $352,860 $185
Third party smelting,
refining and transportation cost 37,751 25 55,570 29
-------- ---- -------- ----
Cash operating cost 345,546 230 408,430 214
Royalties:
Misanse (52% belongs to the Company) 20,714 14 27,821 14
Government of El Salvador 16,571 11 22,257 12
-------- ---- -------- ----
Total cash cost 382,831 255 458,508 240
Depreciation 243,308 163 253,758 134
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Total production costs $626,139 $418 $712,266 $374
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(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 1999
or 1998. 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.
Inflation did not have a material impact on operations in 1999 or 1998.
Management of the Company anticipates that inflation would have an impact
on continuing operations.
Interest expense in the sum of $672,410 was capitalized by the Joint
Venture for the nine-month fiscal period ended December 31, 1999 and
$556,399 for the same period in 1998.
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.
<PAGE>
FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES
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During this fiscal period ended December 31, 1999, the Company borrowed a
sum of $843,804; $735,171 was from related parties which included cash
and accrued interest; the balance of $108,633 was from unrelated parties
which included cash and accrued interest.
A total of 1,032,453 common shares were issued for a sum of $526,242
during this fiscal period. These shares were issued for the following:
6,800 shares ($3,275) for services; 125,653 shares ($84,517) for payment
of debt; 500,000 shares ($288,450) for advances to a subsidiary; and
400,000 shares ($150,000) 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 Company is in the process of temporarily suspending 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 an 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.
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.
An ideal amount of funds to have would be U.S. $13 million which would
start the open-pit, heap-leach at a rate of 2,000 tons per day and the
anticipated profits and cash flow then could be used to expand to 6,000
tons per day.
The Company continues to be cognizant of its cash liquidity until it is
able to produce adequate profits from its SSGM gold production. It will
attempt to obtain sufficient funds to assist the Joint Venture in placing
the SSGM into production as the anticipated SCMP profits (unless
accumulated over a period of time) appear 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.
<PAGE>
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 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. $13 million to start
a 2,000 ton-per-day open-pit, heap-leaching operation and over time to
increase the production capacity to 6,000 tons per day at the SSGM. The
use of the $13,000,000 proceeds is as follows: $7,000,000 for mining
equipment and a crushing system; $3,689,776 for the processing equipment
and site and infrastructure costs; and $2,310,224 for the working
capital. The depressed price of gold (which now appears to have been
alleviated) 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.
From September 1987 through December 31, 1999, the Company has invested
in the Joint Venture, including interest charges payable to the Company,
the sum of $26,131,651 and three of the Company's wholly-owned
subsidiaries have advanced the sum of $590,265, for a total of
$26,721,916. 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 of equipment, laboratory chemicals,
and supplies, for parts and supply inventory, for the maintenance of the
Company-owned dam and reservoir, for extensive road extension and
preservation, for its participation in the construction of a community
bridge, for community telephone building and facilities, for a community
place of worship, for the purchase of the real estate on the Modesto
Mine, for leasing the Montemayor real estate, for the purchase of a cone
crushing system, for diamond drilling at the SSGM, for the purchase of a
rod mill and a carbon regeneration system and many other related needs.
<PAGE>
RELATED PARTY LOANS, OBLIGATIONS AND TRANSACTIONS
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The related party transactions are included in detail in the Notes to the
Consolidated Financial Statements.
COMPANY ADVANCES TO THE JOINT VENTURE
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Since September 1987 through December 31, 1999, the Company, and three of
its subsidiaries, have advanced to the Joint Venture $26,721,916.
Included in the total advances is the interest charged to the Joint
Venture by the Company and this charge amounts to $12,223,907 through
December 31, 1999. The Company furnishes all of the funds required by
the Joint Venture. This interest charge has been eliminated in these
financial statements.
EFFORTS TO OBTAIN CAPITAL
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Since the concession was granted, and through the present time,
substantial effort is exercised in securing funding through various
sources, all with the purpose to resume and expand the operations of the
SCMP and SSGM, 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 from the same sources as in the past.
EMPLOYEES
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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. As of January 31, 2000, the
Joint Venture has reduced the number of employees to less than 100 since
it suspended the SCMP gold processing for such time and until it does
obtain adequate funds to rehabilitate and expand its SCMP operations.
None of these employees are covered by any collective bargaining
agreements. It has developed a continuous harmonious relationship with
its employees. It believes that the Joint Venture is the largest single
non-agricultural employer in El Salvador's Eastern Zone. Also, the
Company employs approximately four persons (plus part-time help) in the
United States.
<PAGE>
INSURANCE
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The Joint Venture has the availability of insurance through an El
Salvador insurance company with the following insurance coverage:
general liability, vehicle liability and extended coverage, fire,
explosion, hurricane, cyclone, tornado, windstorm, hail, flood, storm,
earthquake, tremor or volcanic eruption, politically-motivated violence,
terrorism, strikes, work stoppages, riots, uprisings, malicious acts,
vandalism, and related acts. As additional equipment and assets are
acquired or improvements are made, the insurance coverage can be
increased accordingly.
CHANGE OF DOMICILE FROM A DELAWARE CORPORATION TO A WISCONSIN CORPORATION
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Effective on April 1, 1999 at 12:01 a.m. (Central Time) Commerce Group
Corp., a Delaware Corporation (CGCO Del) was merged into Commerce Group
Corp., a Wisconsin Corporation (CGCO Wis) pursuant to shareholders'
approval at the Annual Shareholders' Meeting held on October 16, 1998.
Simultaneously with the merger, CGCO Wis increased its authorized common
shares, par value $0.10 per share, to fifty million (50,000,000) shares.
Its two hundred fifty thousand (250,000) preferred shares, par value
$0.10 per share, remain the same. There were no substantial changes to
the Articles of Incorporation or to CGCO Wis's By-Laws.
COMMERCE DELISTED FROM NASDAQ TRADING
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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 of Nasdaq's minimum one dollar bid rule. The Company's
legal counsel filed an appeal of the Nasdaq Listing Qualification Panel's
decision with the Nasdaq Listings and Hearing Review Counsel within the
prescribed time frame. On October 13, 1999, the Nasdaq Review Council
affirmed the March 31, 1999 decision of the Panel to delist the Company
from the Nasdaq Stock Market.
COMMERCE TRADING ON THE OVER THE COUNTER BULLETIN BOARD (OTCBB)
- - ---------------------------------------------------------------
Effective May 5, 1999, the Company's common shares are being traded on
the Over the Counter Bulletin Board (OTCBB) and its symbol is CGCO.
YEAR 2000 ISSUE
- - ---------------
Computer programs written decades ago utilized a two digit format to
identify the applicable year. Without modification, any date sensitive
software beyond December 31, 1999 could fail, as the date would be reset
to 1900. This could result in, amongst other things, disruptions to
operations and the inability to process financial transactions. The
Company has made an assessment of the impact of the year 2000 issue. The
Company has initiated preliminary communications with certain of its
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 has contacted 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 and the Company will
continue to contact the ones who have not responded. As of February 1,
2000, the Company has not encountered or experienced any Y2K
difficulties.
<PAGE>
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.
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 audited March 31, 1999 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 derivative or hedging activities.
DIVIDENDS
- - ---------
In the foreseeable future, it is anticipated that the Company will use
all of its earnings, if any, to finance its growth and expansion, and
that dividends will not be paid to shareholders.
SAFE HARBOR
- - -----------
Some of the statements contained in this report are forward-looking
statements, such as estimates and statements that describe the Company's
future plans, objectives or goals, including words to the effect that the
Company or management expects a stated condition or result to occur.
Since forward-looking statements address future events and conditions, by
their very nature, they involve inherent risks and uncertainties. Actual
results in each case could differ materially from those currently
anticipated in such statements by reason of factors such as production at
the Company's mines, changes in operating costs, changes in general
economic conditions and conditions in the financial markets, changes in
demand and prices for the products the Company produces, litigation,
legislative, environmental and other judicial, regulatory, political and
competitive developments in areas in which the Company operates and
technological and operational difficulties encountered in connection with
mining activities.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - DECEMBER 31, 1999
PART II - FINANCIAL INFORMATION
Item 1. Legal Proceedings
There is no adverse litigation that could materially affect the
Company.
Item 2. Changes in Securities
Reference is made to the financial statements which explain the
common shares issued and to be issued.
Item 3. Default Upon Senior Securities
None during this quarter ended December 31, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
None during this quarter ended December 31, 1999.
Item 5. Other Information
None during this quarter ended December 31, 1999.
Item 6. Reports on Form 8-K
None during this quarter ended December 31, 1999.
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant/Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMERCE GROUP CORP.
Registrant/Company
Date: February 7, 2000 /s/ Edward L. Machulak
____________________________
Edward L. Machulak
President, Chief Executive,
Operating and Financial Officer
and Treasurer
[ARTICLE] 5
[LEGEND]
March 31, 1999 Financial Statement is from an audited financial statement.
December 31, 1999 Financial Statement is unaudited.
[/LEGEND]
<TABLE>
<S> <C> <C> <C> <C>
[PERIOD-TYPE] 9-MOS YEAR 9-MOS YEAR
[FISCAL-YEAR-END] MAR-31-2000 MAR-31-1999 MAR-31-2000 MAR-31-1999
[PERIOD-END] DEC-31-1999 MAR-31-1999 DEC-31-1999 DEC-31-1998
[CASH] 54,135<F1> 111,498<F1> 0
0
[SECURITIES] 0 0 0 0
[RECEIVABLES] 292,169 358,769 0 0
[ALLOWANCES] 0 0 0 0
[INVENTORY] 1,908,155<F2> 1,522,440<F2> 0
0
[CURRENT-ASSETS] 2,254,459 1,992,707 0 0
[PP&E] 26,988,586 25,594,094 0 0
[DEPRECIATION] 0 0 0 0
[TOTAL-ASSETS] 29,243,045 27,586,801 0 0
[CURRENT-LIABILITIES] 10,292,431 8,911,087 0 0
[BONDS] 0 0 0 0
[PREFERRED-MANDATORY] 0 0 0 0
[PREFERRED] 0 0 0 0
[COMMON] 1,260,998 1,157,753 0 0
[OTHER-SE] 17,689,616 17,517,961 0 0
[TOTAL-LIABILITY-AND-EQUITY] 29,243,045 27,586,801 0 0
[SALES] 0 0 0 0
[TOTAL-REVENUES] 0 0 551,344 699,496
[CGS] 0 0 0 0
[TOTAL-COSTS] 0 0 802,686 886,150
[OTHER-EXPENSES] 0 0 0 0
[LOSS-PROVISION] 0 0 0 0
[INTEREST-EXPENSE] 0 0 0 0
[INCOME-PRETAX] 0 0 (251,342) (186,654)
[INCOME-TAX] 0 0 0 0
[INCOME-CONTINUING] 0 0 0 0
[DISCONTINUED] 0 0 0 0
[EXTRAORDINARY] 0 0 0 0
[CHANGES] 0 0 0 0
[NET-INCOME] 0 0 (251,342) (186,654)
[EPS-BASIC] 0 0 (.021) (.017)
[EPS-DILUTED] 0 0 (.018) (.014)
<FN>
<F1>Cash includes deposits and prepaid items.
<F2>Inventory includes inventory, investments and real estate held for sale.
</FN>
</TABLE>
