UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 (I.R.S. Employer Identification Number)
of incorporation or
organization)
6001 North 91st Street
Milwaukee, Wisconsin 53225-1795
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 462-5310
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: 13,488,929 common
shares of the Company's common stock, $0.10 par value, were issued and
outstanding as of September 30, 2000.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE SECOND QUARTER ENDED SEPTEMBER 30, 2000
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, 2000.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Reports on Form 8-K
Registrant's Signature Page
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED BALANCE SHEETS
September 30, 2000 March 31, 2000
(Unaudited) (Audited)
------------- --------------
ASSETS
------
Current assets
Cash $ 102,525 $ 313,940
Investments 232,068 232,068
Accounts receivable 275,218 275,162
Inventories 67,562 67,562
Prepaid items and deposits 40,261 58,680
----------- -----------
Total current assets 717,634 947,412
Real estate (Note 5) 1,179,836 1,179,836
Property, plant and equipment, net 3,101,587 3,039,127
Mining resources investment 25,180,056 24,401,376
Other investments 0 288,450
------------ ------------
Total assets $30,179,113 $29,856,201
============ ============
LIABILITIES
-----------
Current liabilities
Accounts payable $ 492,407 $ 526,449
Notes and accrued interest payable to
related parties (Notes 6 & 7) 6,501,074 5,992,633
Notes and accrued interest payable to
others (Note 6) 1,224,605 1,204,239
Accrued salaries 1,929,015 1,839,015
Accrued legal fees 276,555 260,926
Other accrued expenses 417,769 408,010
------------ ------------
Total liabilities 10,841,425 10,231,272
Commitments and contingencies (Notes 2, 4, 5, 6, 7, 8, 10 & 12)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
2000-none; 1999-none (Note 10) $ 0 $ 0
Common stock, $0.10 par value:
Authorized 50,000,000 shares;
(Notes 1 and 10)
Issued and outstanding:
03/31/00-13,888,929 1,388,893
09/30/00-13,488,929 (Note 10) 1,348,893
Capital in excess of par value 18,168,896 18,402,346
Retained earnings (deficit) (180,101) (166,310)
------------ ------------
Total shareholders' equity 19,337,688 19,624,929
Total liabilities and shareholders' ------------ ------------
equity $30,179,113 $29,856,201
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30 (UNAUDITED)
Three Months Ended
Second Quarter Six Months Ended
09/30/00 09/30/99 09/30/00 09/30/99
Revenues: ------------ ------------ ------------ -------------
Gold sales $ 0 $ 156,213 $ 0 $ 321,296
Campground income 23,358 26,259 50,709 49,101
------------ ------------ ------------ -------------
Total revenues 23,358 182,472 50,709 370,397
Expenses:
Cost of gold sales 0 124,174 0 258,687
Depreciation 0 77,131 0 166,125
General and adminis-
trative 38,792 66,312 67,760 138,153
------------ ------------ ------------ -------------
Total expenses 38,792 267,617 67,760 562,965
Other income:
Interest income 1,180 163 3,260 191
El Salvador added
value tax refund 0 38,816 0 67,053
------------ ------------ ------------ ------------
Other income 1,180 38,979 3,260 67,244
Net profit (loss) (14,254) (46,166) (13,791) (125,324)
Credit (charges)
for income taxes 0 0 0 0
------------ ------------ ------------- ------------
Net income (loss)
after income tax
credit (charge) $ (14,254) $ (46,166) $ (13,791) $ (125,324)
============ ============ ============= ============
Net income (loss)
per share
(Note 2) basic $ (.0010) $ (.0039) $ (.0010) $ (.0107)
============ ============ ============= ============
Net income (loss)
per share
(Note 2) diluted $ (.0009) $ (.0032) $ (.0009) $ (.0088)
============ ============ ============= ============
Weighted av.
common shares
outstanding (Note 2) 13,725,541 11,731,072 13,725,541 11,731,072
============ ============ ============= ============
Weighted av.
diluted common
shares (Note 2) 15,605,676 14,268,266 15,605,676 14,268,266
============ =========== ============= ============
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THROUGH THE PERIOD ENDED SEPTEMBER 30, 2000 (UNAUDITED)
Common Stock
-----------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
----------- ---------- ----------- ----------
Balances March 31, 1998 11,039,670 $1,103,967 $16,969,724 $ 320,188
Net income (loss) for
FY March 31, 1999 (90,266)
Dir./off./employee/
services comp. 214,234 21,423 89,962
Payment of debt 238,123 23,812 190,779
Cash 85,500 8,551 37,574
----------- ----------- ------------ -----------
Balances March 31, 1999 11,577,527 1,157,753 17,288,039 229,922
Net income (loss) for
FY March 31, 2000 (396,232)
Dir./off./employee/
services comp. 1,014,445 101,445 471,373
Payment of debt 796,957 79,695 404,484
Investments 500,000 50,000 238,450
----------- ----------- ------------ -----------
Balances March 31, 2000 13,888,929 1,388,893 18,402,346 (166,310)
Net income (loss) through
the second quarter ended
September 30, 2000 (13,791)
Common shares issued through
the second quarter ended
September 30, 2000 100,000 10,000 5,000 0
Common shares cancelled,
second quarter ended
September 30, 2000 (500,000) $ (50,000) $ (238,450) 0
----------- ----------- ------------ -----------
Balance September 30, 13,488,929 $1,348,893 $18,168,896 $ 180,101
2000 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30 (UNAUDITED)
09/30/00 09/30/99
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (13,791) $ (125,324)
ADJUSTMENTS TO RECONCILE ----------- ------------
NET INCOME (LOSS) TO
NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation 0 166,125
Changes in assets and liabilities
Decrease (increase) in account
receivables (56) 8,160
Decrease (increase) in investments 288,450 (220,486)
Decrease (increase) in inventories 0 16,322
Decrease (increase) in prepaid items
and deposits 18,419 6,789
Increase (decrease) in accounts
payable and accrued liabilities (33,083) 255,530
Increase (decrease) in director fees 8,800 8,800
Increase (decrease) in accrued salaries 90,000 90,000
Increase (decrease) in accrued legal fees 15,629 44,435
----------- ------------
Total adjustments 388,159 375,675
Net cash provided by (used in) ----------- ------------
operating activity 374,368 250,351
INVESTING ACTIVITIES:
Investment in mining resources (841,140) (1,130,512)
----------- ------------
Net cash used in investing activities (841,140) (1,130,512)
FINANCING ACTIVITIES:
Net borrowings 528,807 556,291
Common stock issued (273,450) 271,910
Net cash provided by (used in) ----------- ------------
financing activities 255,357 828,201
Net increase (decrease) in cash
and cash equivalents (211,415) (51,960)
Cash - beg. of year 313,940 61,821
----------- ------------
Cash - end of fiscal period $ 102,525 $ 9,861
=========== ============
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 (Unaudited)
Supplemental disclosures of cash information for the second quarterly
periods ended September 30, 2000 and 1999:
1. The following amounts of accrued interest expense were capitalized:
$516,529 (2000) and $436,192 (1999).
2. There was no interest expense paid in cash for the quarterly periods
in 2000 and 1999.
3. The Company paid no income taxes during the quarterly 2000 or 1999
periods.
4. The investment consists of precious stones which are stated at the
lower of cost or market value.
5. Accounts receivable include $250,560 due from an affiliate which
will be offset by $220,106 due to an affiliate and the balance of
$24,658 is due from others.
6. Inventory consists of gold bullion valued at market value and
consumable items used to process precious metals which are stated at
the lower of average cost or market.
Supplemental schedule of non-cash investing and financing activities
during the second quarterly periods ended September 30:
1. The Company issued the following common shares for the values shown
for services rendered:
Shares Value
------- --------
2000 100,000 $ 15,000
1999 405,800 $235,100
2. Other non-cash items were for the unpaid salary, legal and director
fees which amounted to $114,429 in 2000 and $143,235 in 1999.
3. Non-cash equipment financing activities were none for 2000 and none
for 1999.
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Notes to the Unaudited Consolidated Financial Statements
September 30, 2000
(1) THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
------------------------------------------------------------------
(a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant")
and its 82 1/2%-owned subsidiary, San Sebastian Gold Mines, Inc.
("Sanseb") both corporations based in the United States, have
formed the Commerce/Sanseb Joint Venture ("Joint Venture") for the
purpose of performing gold mining and related activities, including,
but not limited to, exploration, exploitation, development,
extraction and processing of precious metals in the Republic of El
Salvador, Central America. Gold bullion, currently the Joint
Venture's principal product, was produced (but not on a full
production basis) in El Salvador and refined and sold in the United
States. Expansion of exploration is continuous at the San Sebastian
Gold Mine ("SSGM") which is located near the city of Santa Rosa de
Lima. Exploration is being curtailed at other mining projects until
adequate funding and license permits are obtained. All of the
mining projects are located in the Republic of El Salvador, Central
America.
As of April 1, 2000 the Joint Venture decided to temporarily suspend
the San Cristobal Mill and Plant ("SCMP") operations until such
time as it has adequate funds to retrofit, rehabilitate, restore and
expand these facilities and until the price of gold is more stable.
The Joint Venture is in the pre-production and development stage at
the SSGM and it simultaneously is performing several separate
programs: it did produce gold on a start-up (not full production)
basis, and recently it has temporarily ceased operations at its SCMP
which is located approximately 15 miles from the SSGM site; the
second program is to begin its open-pit, heap-leaching process on
the SSGM site, upon receipt of adequate funds; the third program is
to continue its SSGM site preparation, the expansion of its
exploration and exploitation targets, and the enlargement and
development of its gold ore reserves; and the fourth program is to
explore the potential of other gold mine exploration prospects
identified as the San Felipe-El Potosi Mine, and its extension the
El Capulin Mine, and the Hormiguero Mine, all located in El
Salvador, Central America. Concurrently, it also is in the process
of obtaining the necessary funding for each of these separate
programs while its Joint Venture continues its exploration,
exploitation and development operations.
The Company on January 29, 1999, announced its plans to diversify by
having (at that time) its wholly-owned subsidiary, Ecomm Group Inc.
("Ecomm"), enter into the web portal business. Ecomm's objective
was and still is to become a recognized web portal on the world wide
web by acquiring or "rolling-up" Internet websites. Interactive
Business Channel, Inc. (IBC) had agreed to assist Ecomm in
developing an "Internet web portal roll-up strategy" by acquiring
Internet businesses.
Ecomm's principal business was to evaluate, structure and complete
Internet-related business combinations, mergers, and acquisitions.
It planned 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.
Due to the lack of progress in meeting its goals, the Company, after
many attempts to prompt IBC and its President Matthew Marcus to
perform according to the agreements dated January 29, 1999 and May
25, 1999, had its legal counsel file a complaint on behalf of the
Company and its 51%-owned subsidiary, Ecomm Group Inc., as
plaintiffs, against IBC and Matthew Marcus as defendants.
<PAGE>
Included in this complaint were the following three causes of
action: the first cause of action was the breach of contract; the
second cause of action was the breach of fiduciary duty; and the
third cause of action was the rescission of the contract and return
of compensation.
The plaintiffs demanded judgment against the defendants as follows:
for actual damages in an amount to be determined at trial; for
punitive damages in an amount to be determined at trial; for
rescission of the transaction and return to the plaintiffs of 49% of
the common stock of Ecomm Group Inc. represented by 96 common shares
and for the return of 500,000 Commerce Group Corp. common shares,
par value ten cents per share, issued as compensation for the
services of IBC and Mr. Matthew Marcus; and for actual attorney's
fees, the costs and disbursements of this action, and any further
relief the Court deems equitable and just.
A copy of the said complaint was filed as Exhibit A to the Company's
Securities and Exchange Commission Form 8-K on June 29, 2000.
On July 31, 2000, the Company and Ecomm entered into a Settlement,
Rescission, and Mutual Release Agreement with Interactive Business
Channel, Inc. and Mr. Matthew Marcus, as an individual. Reference
is made to "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and to "Part II -
Financial Information, Item 1. Legal Proceedings" for additional
details.
There can be no assurance that Ecomm's current strategy will be
successful. Ecomm has not yet entered into any agreements for the
acquisition of any websites, web services or other technology
businesses. 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
will be able to attract traffic and generate a profit, even if Ecomm
acquires the websites, web services and technology on acceptable
terms.
(b) Use of estimates
The preparation of the financial statements, in accordance with
accounting principles generally accepted in the United States,
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
------------------------------------
RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
The Company changed its consolidation policy as of April 1, 1998
retroactive to September 1987, to include the income and expenses and the
assets, liabilities and equity of its Joint Venture rather than show it
as an investment on the balance sheet. As of September 30, 2000, the
consolidated balance sheets, the consolidated statements of operations,
the consolidated statements of changes in shareholders' equity, and the
consolidated statements of cash flows were also restated to reflect these
changes.
<PAGE>
The balance sheet effect of the change in policy was to reduce the Joint
Venture advances by the amount of interest charged to the Joint Venture.
Retained earnings were reduced by the same offsetting amount for the same
period. The consolidated statements of changes in shareholders' equity
were also restated to reflect these changes.
The consolidated statements of operations through September 30, 2000 were
restated to eliminate the net interest income earned by the Company from
the Joint Venture.
The consolidated statements of cash flows were also restated to reflect
the changes in operating profits or losses.
PRINCIPLES OF CONSOLIDATION
The Joint Venture and the following subsidiaries are all majority-owned
by the Company and are included in the consolidated financial statements
of the Company. All significant intercompany balances and transactions
have been eliminated.
% Ownership
-----------
Homespan Realty Co., Inc. ("Homespan") 100.0
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0
Ecomm Group Inc. (Ecomm) 100.0
San Luis Estates, Inc. ("SLE") 100.0
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5
Universal Developers, Inc. ("UDI") 100.0
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0
INVESTMENTS
The investments consist of securities held for the Employee Benefit
Account stated at cost and of precious stones which are stated at the
lower of cost or market value.
ACCOUNTS RECEIVABLE
The accounts receivable account primarily consists of the amount
advanced to Mineral San Sebastian, S.A. de C.V. (Misanse) which will be
offset for the rental charges to the Joint Venture.
INTERCOMPANY BALANCES
All intercompany balances and transactions have been eliminated.
INVENTORY
Inventories consist of the following as of September 30:
2000 1999
---- ----
Gold in process (1) (Stated at market value) $28,000 $ 77,608
Materials and supplies (Stated at cost) 39,562 62,492
------- --------
$67,562 $140,100
======= ========
(1) Includes all direct and indirect costs of mining, crushing,
processing and mine site overhead expenses.
<PAGE>
DEFERRED MINING COSTS
The Company, in order to avoid expense and revenue unbalance, capitalizes
all costs directly associated with acquisition, exploration and
development of specific properties, until these properties are put into
operation, sold or are abandoned. Gains or losses resulting from the
sale or abandonment of mining properties will be included in operations.
The Joint Venture capitalizes its costs and expenses and will write off
these cumulative costs on a unit of production method at such time as it
begins producing gold derived from the virgin gold ore on a full
production basis. If the prospect of gold production, due to different
conditions and circumstances becomes unlikely, all of these costs may be
written off in the year that this occurs.
The Company regularly evaluates its carrying value of exploration
properties in light of their potential for economic mineralization and
the likelihood of continued work by either the Company or a joint venture
partner. The Company may, from time to time, reduce its carrying value
to an amount that approximates fair market value based upon an assessment
of such criteria.
REVENUE RECOGNITION
Revenue from the sale of gold and industrial minerals is recognized when
title passes to the buyer.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment is stated at the lower of cost or
estimated net realizable value. Mining properties, development costs and
plant and equipment will be depreciated when full production takes place
using the units of production method based upon proven and probable
reserves. Until the Company suspended its mining operations, the assets
were depreciated using the straight-line method over estimated useful
lives of five to ten years. Depreciation and amortization expense
includes the amortization of assets acquired under capital leases.
Replacements and major improvements are capitalized. Maintenance and
repairs are charged to expense based on average estimated equipment
usage. Interest costs incurred in the construction or acquisition of
property, plant, and equipment are capitalized and amortized over the
useful lives of the related assets. Since the Company suspended its gold
processing operations it also ceased to depreciate most of its fixed
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.
<PAGE>
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 mining properties.
DEFERRED FINANCIAL 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. 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 material items of other
comprehensive income in any period presented in the accompanying
financial statements.
EARNINGS (LOSS) PER COMMON SHARE
The Company has in the past years reported its "Earnings per Share" which
presently complies with SFAS No. 128. As required by this standard, the
Company reports two earnings per share amounts, basic net income and
diluted net income per share. Basic net income per share is computed by
dividing income or loss reportable to common shareholders (the numerator)
by the weighted average number of common shares outstanding (the
denominator). The computation of diluted net income or loss per share is
similar to the computation of basic net income per share except that the
denominator is increased to include the dilutive effect of the additional
common shares that would have been outstanding if all convertible
securities, stock options, rights, share loans, etc. had been converted
to common shares at the last day of the fiscal year.
If on September 30, 2000, 1,254,900 option shares, and the 625,235 stock
rights are added to the weighted number of shares which amount to
13,725,541 common shares issued and outstanding, the total number of
fully diluted shares would amount to 15,605,676. The income or loss per
share for this period ended September 30, 2000 would then be $(.0009)
cents per share. The same assumptions were used for the same 1999 fiscal
period.
<PAGE>
FOREIGN CURRENCY
The Company is involved in foreign currency transactions as it deposits
U.S. funds primarily through bank wire transfer of funds from its U.S.
bank account into the Joint Venture's El Salvador bank accounts. The
Joint Venture is obligated to repay the Company for funds advanced in
U.S. dollars. El Salvador has a freely convertible currency that traded
in this past fiscal year about 8.745 colones per U.S. dollar. The
exchange rate was fairly stable. In this environment, based on the free
convertibility of colones, foreign businesses have no problem making
remittances of profits, repatriating capital or bringing in capital for
additional investments. There is no hindrance in exchanging dollars for
colones or vice versa.
MAJOR CUSTOMER
The Joint Venture produced gold and silver. It sold 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:
September 30, 2000 March 31, 2000
--------------------------- ---------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Mineral
Proper-
ties
and
Deferred
Develop-
ment $25,180,056 $25,180,056 $24,401,376 $24,401,376
Mine
Plant
and
Equip-
ment 5,545,697 2,444,110 3,101,587 5,353,046 2,313,919 3,039,127
----------- ----------- ----------- ----------- ---------- -----------
$30,725,753 $ 2,444,110 $28,281,643 $29,754,422 $2,313,919 $27,440,503
=========== =========== =========== =========== ========== ===========
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.
<PAGE>
(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. Sanseb produced
gold from the SSGM from 1972 through February 1978.
On September 22, 1987, the Company and Sanseb entered into a joint
venture agreement to formalize their relationship with respect to the
mining venture and to account for the Company's substantial investment in
Sanseb. Under the terms of the agreement, the Company is authorized to
supervise and control all of the business affairs of the Joint Venture
and has the authority to do all that is necessary to resume mining
operations at the SSGM on behalf of the Joint Venture. The net pre-tax
profits of the Joint Venture will be distributed as follows: Company
90%; and Sanseb 10%. Since the Company owns 82 1/2% of the authorized
and issued shares of Sanseb, the Company in effect has over a 98%
interest in the Joint Venture activities.
The joint venture agreement further provides that the Company has the
right to be compensated for its general and administrative expenses in
connection with managing the Joint Venture.
Under the joint venture agreement, agreements signed by the Company for
the benefit of the Joint Venture create obligations binding upon the
Joint Venture.
The Joint Venture is registered to do business in the State of Wisconsin
and in the Republic of El Salvador, Central America.
INVESTMENTS IN JOINT VENTURE
As of September 30, 2000, the Company's investments, including charges
for interest expense to the Joint Venture, were $29,579,248 and three of
the Company's subsidiaries' advances were $590,265 for a total of
$30,169,513.
INVESTMENT IN EL SALVADOR MINING PROJECTS
During the fiscal year, the Company has advanced funds, performed
services, and allocated its general and administrative costs to the Joint
Venture.
As of September 30, 2000 and 1999, the Company, Sanseb and three of the
Company's subsidiaries have invested (including carrying costs) the
following in its Joint Venture:
2000 1999
---- ----
The Company's advances
(net of gold sale proceeds)
since 09/22/87 $29,579,247 $24,996,078
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 27,903,206 25,032,811
----------- -----------
Total: 64,498,813 57,045,249
Advances by the Company's three
subsidiaries 590,265 590,265
----------- -----------
Combined total investment $65,089,078 $57,635,514
=========== ===========
<PAGE>
SSGM ACTIVITY
The Company had no significant activity at the SSGM site from February
1978 through January 1987. The present status is that, the Company,
since January 1987, and thereafter, the Joint Venture, since September
1987, have completed certain of the required mining pre-production
preliminary stages in the minable and proven gold ore reserve area, and
the Company is active in attempting to obtain adequate financing for the
proposed open-pit, heap-leaching operations on this site. The Joint
Venture is also engaged in the exploration and the expansion program to
develop additional gold ore reserves in the area surrounding the minable
gold ore reserves and it is erecting its cone crushing system.
MINERAL SAN SEBASTIAN S.A. DE C.V. ("MISANSE")
(a) MISANSE CORPORATE STRUCTURE
The SSGM real estate is owned by and leased to the Joint Venture by
Misanse, a Salvadoran-chartered corporation. The Company owns 52% of the
total of Misanse's issued and outstanding shares. The balance is owned
by approximately 100 El Salvador, Central American, and United States'
citizens.
(b) SSGM MINING LEASE
On July 28, 1975, an amended lease agreement between Misanse as lessor
and Sanseb as tenant was signed by the parties giving the tenant all the
possessions and mining rights that pertain to the SSGM as well as other
claims to mineral rights that may already have or could be claimed in the
future within the 595 hectares (1,470 acres) plat of land encompassing
the SSGM. The 25-year lease, which begins on the date gold production
begins, was further amended to run concurrently with the concession
described herein and may be extended for an additional 25 years by the
tenant as long as the tenant has paid the rent and has complied with
other obligations under the lease and the concession. The lease also
provides that the tenant will pay rent equivalent to five percent of the
gross gold production revenue obtained from the leased SSGM and further
commits itself to maintain production taking into consideration market
and other conditions. In no case will the rent be less than 1,800 "colo-
nes" per month (approximately $206 per month at the current rate of
exchange). The lease also provides that, in the event the lessor wishes
to sell the property, it must first give preference to the tenant; the
lease further provides that the tenant must give preference to employ
former mining employees and Misanse shareholders, providing they qualify
for the available position. The lease agreement was assigned on January
29, 1987 to the Company and Sanseb together with the mining concession
application and subsequently was pledged as collateral for loans made by
related parties. (Note 7)
The lease is freely assignable by the Joint Venture without notice to
Misanse. The lease may also be canceled by the Joint Venture on thirty
days' notice to Misanse, and thereafter, all legal responsibilities
thereunder shall cease.
(c) MINERAL CONCESSION
On July 23, 1987, the Government of El Salvador granted and delivered 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, or will file 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"), an El Salvadoran
governmental agency, to lease for a period of ten years, approximately
166 acres of land and buildings on which its gold processing mill, plant
and related equipment (the SCMP) are located, and which is approximately
15 miles east of the SSGM site. The basic annual lease payment is U.S.
$11,500 (payable in El Salvador colones at the then current rate of
exchange), payable annually in advance, unless otherwise amended, and
subject to an annual increase based on the annual United States'
inflation rate. As agreed, a security deposit of U.S. $11,500 was paid
on the same date and this deposit is subject to increases based on any
United States' inflationary rate adjustments. The rental charge for the
period ending November 12, 2000 is $13,401.
MODESTO MINE
(a) REAL ESTATE
The Company owns 63 acres of land which are a key part of the Modesto
Mine that is located near the city of El Paisnal, El Salvador. This real
estate is subject to a mortgage and promissory note and is pledged as
collateral to certain parties described in Note 7.
SAN FELIPE-EL POTOSI MINE ("POTOSI")
(a) REAL ESTATE LEASE AGREEMENT
The Joint Venture entered into a lease agreement with the San Felipe-El
Potosi Cooperative ("Cooperative") of the city of Potosi, El Salvador on
July 6, 1993, to lease the real estate encompassing the San Felipe-El
Potosi Mine for a period of 30 years and with an option to renew the
lease for an additional 25 years, for the purpose of mining and
extracting minerals and under the following basic terms and conditions:
1. The lease payment will be five percent of the gross receipts derived
from the production of precious metals from this site which will be
payable monthly.
2. The Joint Venture will advance to the Cooperative the funds required
to obtain the mining concession from the El Salvador Department of
Energy, Mines and Hydrocarbons and all related costs which will be
reimbursed or will become a deduction from future rental payments.
3. The Joint Venture will, when it is in production, employ not more
than 45 qualified members of the Cooperative providing that there is
a need for their particular skill or service.
4. The Joint Venture will furnish medicine and first aid medical
assistance to all of its employees to the extent that such benefits
are not provided by the Salvadoran Social Security System.
5. An employee life insurance program is to be seriously considered by
the Joint Venture when production commences, providing that the cost
of such insurance is not excessive.
<PAGE>
MONTEMAYOR MINE
The Joint Venture has leased approximately 175 acres of land that it
considers to be the key mining property. The terms of the various leases
are one year with automatic renewal rights. This property is located 14
miles northwest of the SCMP, six miles northwest of the SSGM, and about
two miles east of the city of San Francisco Gotera in the Department of
Morazan, El Salvador.
(5) SYNOPSIS OF REAL ESTATE OWNERSHIP AND LEASES
-------------------------------------------------
The Company and its subsidiaries own a 331-acre campground located in the
Lake of the Ozarks, Camden County, Missouri; 40 lots in the San Luis
North Estates Subdivision, Costilla County, Colorado; and 12 lots in the
city of Fort Garland, Costilla County, Colorado. Misanse owns the 1,470
acre SSGM site located near the city of Santa Rosa de Lima in the
Department of La Union, El Salvador. Other real estate ownership or
leases in El Salvador are as follows: it owns approximately 63 acres at
the Modesto Mine; the Joint Venture leases the SCMP land and buildings
on which its mill, plant and equipment are located. In addition, the
Joint Venture has entered into a lease agreement to lease approximately
675 acres based on the production of gold payable in the form of
royalties with a mining prospect in the Department of San Miguel and it
leases approximately 175 acres in the Department of Morazan in the
Republic of El Salvador.
(6) NOTES PAYABLE AND ACCRUED INTEREST
---------------------------------------
Notes payable consist of the following: 09/30/00 03/31/00
-------- --------
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) $6,501,074 $5,992,633
Other - consists primarily of
short-term notes and accrued interest
(September 30, 2000, $362,646 and
September 30, 1999, $325,757)
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. 1,224,605 1,204,239
---------- ----------
Total: $7,725,679 $7,196,872
========== ==========
(7) RELATED PARTY TRANSACTIONS
-------------------------------
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 19 years and six months, for
a total of $1,921,515.
In addition, with the consent and approval of the Directors, the
President of the Company, as an individual and not as a Director or
Officer of the Company, entered into the following financial transactions
with the Company, the status of which is reflected as of September 30,
2000:
<PAGE>
The amount of funds which the Company has borrowed from its President
from time to time, together with accrued interest, amounts to $3,311,207.
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 September 30, 2000, an aggregate of
$699,736, 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.
On August 14, 2000, the Directors, in order to reduce corporate debt and
to provide liquidity, authorized the Officers of the Company to sell to
the President's RIRA, a total of 600,000 of the Company's restricted
common shares at a price of twenty-five cents a share (the market price
during the period of April 1, 2000 through August 14, 2000 ranged from a
low of $.16 to a high of $.50 per share). The payment for these shares
will be made by a reduction of $150,000 of the debt owed to the RIRA. In
addition, the Directors authorized the Officers of the Company to
negotiate the sale of its non-income producing asset (all of the precious
stones and jewelry) to the ELM RIRA at the Company's book value of
$172,100, which payment will reduce the amount due to the ELM RIRA.
Also, the Directors acknowledged that as of March 31, 2000, 19 months of
vacation pay was due to the President.
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
has not borrowed any of his shares during this first six-month period.
It may owe additional common shares for such shares loaned or pledged by
him for collateral purposes to others for the benefit of the Company, all
in accordance with the terms and conditions of Director-approved, o
pen-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, General Lumber & Supply Co., Inc.
(GLSCO), entered into the following agreements, and the status is
reflected as of September 30, 2000.
The Company leased approximately 4,032 square feet on a month-to-month
basis for its corporate headquarters' office; the monthly rental charge
was $2,789. The same related company provides administrative services,
use of data processing equipment, use of its vehicles and other property
as required by the Company.
<PAGE>
In lieu of cash payments for the office space rental and for the
consulting, administrative services, etc., these amounts due are added
each month to this related company's open-ended, secured, on-demand
promissory note issued by the Company.
In addition, this related company does from time to time use its credit
facilities to purchase items needed for the Joint Venture's mining needs.
This related company has been issued an open-ended, secured, on-demand
promissory note which amounts to $1,985,793; the annual interest rate is
four percent plus the prime rate, but not less than 16%, and it is
payable monthly.
On January 10, 1997, four-year stock options were issued to the related
company to purchase 68,000 of the Company's restricted common shares at a
price of $3.00 per share, and on July 12, 1999, two-year stock options
were issued to purchase 500,000 of the Company's restricted common shares
at a price of $.50 per share.
On August 14, 2000, the Directors, in order to reduce corporate debt,
authorized the Officers of the Company to negotiate the sale of its
low-income producing asset, the Standing Rock Campground (SRC), to GLSCO
in exchange for a reduction of $1,249,050 of the debt owed to GLSCO. The
agreement has a condition that if SRC were sold by GLSCO to an unrelated
third party during a period of one year for a sum exceeding GLSCO's
purchase price, the difference, after taking into account all selling
expenses, would be applied to reduce the balance of GLSCO's promissory
note. In the event the selling price to a third party were less than
GLSCO's purchase price, then an addition would be made to the existing
balance of GLSCO's promissory note. Also, adjustments would be made for
the interest due to GLSCO during this period of time.
The Company's Directors have consented and approved the following
transactions of which the status of each are reflected as of September
30, 2000:
The President's wife's Rollover Individual Retirement Account (RIRA) has
the Company's open-ended, secured, on-demand promissory note in the sum
of $416,166 which bears interest at an annual rate of prime plus three
percent, but not less than 16% and the interest is payable monthly.
On August 14, 2000, the Directors, in order to reduce corporate debt,
authorized the Officers of the Company to negotiate the sale of its
non-income producing assets to the Sylvia Machulak Rollover Retirement
Account (SM RIRA) in exchange for the reduction of debt owed to the SM
RIRA. It was agreed to sell to the SM RIRA, 43 parcels of land located
in the San Luis North Estates Subdivision for a sum of $64,500, 12 lots
consisting of approximately one acre located in Fort Garland, Colorado
for the sum of $6,000 and 250,000 of the Company's restricted common
shares at a price of $.25 a share or $62,500.
The Directors also have acknowledged that Mrs. Sylvia Machulak (wife of
the President) is to be compensated for her consulting fees due to her
from October, 1, 1994 through September 30, 2000 or 72 months at $2,800 a
month.
The Law Firm which represents the Company in which a son of the President
is a principal is owed the sum of $276,555 for 1,844 hours of legal
services rendered from July 1980 through August 31, 2000. By agreement,
these fees are to be adjusted to commensurate with the hourly fees
charged by the Law Firm on the date of payment.
<PAGE>
The son of the President and his son's wife have the Company's
open-ended, on-demand promissory note in the sum of $88,172 which bears
interest at an annual rate of 16% payable monthly.
The Directors, by their agreement, have deferred cash payment of their
Director fees beginning on January 1, 1981, until such time as the
Company's operations are profitable. Effective from October 1, 1996,
the Director fees are $1,200 for each quarterly meeting and $400 for
attendance at any other Directors' meeting. The Executive Committee
Director fees are $400 for each meeting. The Directors and Officers have
an option to receive cash or to exchange the amount due to them for the
Company's common shares.
The Company advances funds, allocates and charges its expenses to the
Joint Venture. The Joint Venture in turn capitalizes all of these
advances, costs and expenses 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 Interest
Advances Charges
-------- --------
Balance March 31, 2000 $27,346,328 $13,049,585
Fiscal second quarter
ended September 30, 2000 2,232,920 1,889,742
----------- -----------
Total Company's net advances 29,579,248 14,939,327
Advances by three of the Company's
subsidiaries 590,265 0
----------- -----------
Total net advances as of
September 30, 2000 $30,169,513 $14,939,327
=========== ===========
(8) COMMITMENTS
----------------
Reference is made to Notes 2, 4, 5, 6, 7, 10 and 12.
(9) INCOME TAXES
-----------------
At March 31, 2000, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of
approximately $4,580,120 which may be carried forward to offset future
taxable income; the net operating losses expire at various times to the
year of 2015.
(10) DESCRIPTION OF SECURITIES
-------------------------------
a. COMMON STOCK
The Company's Wisconsin Certificate of Incorporation effective as of
April 1, 1999 authorizes the issuance of 50,000,000 shares of common
stock, $0.10 par value per share of which 13,488,929 shares were issued
and outstanding as of September 30, 2000. Holders of shares of common
stock are entitled to one vote for each share on all matters to be voted
on by the shareholders. Holders of common stock have no cumulative
voting rights. Holders of shares of common stock are entitled to share
ratably in dividends, if any, as may be declared, from time to time by
the Board of Directors in its discretion, from funds legally available
therefore. In the event of a liquidation, dissolution or winding up of
the Company, the holders of shares of common stock are entitled to share
pro rata all assets remaining after payment in full of all liabilities.
Holders of common stock have no preemptive rights to purchase the
Company's common stock. There are no conversion rights or redemption or
sinking fund provisions with respect to the common stock. All of the
issued and outstanding shares of common stock are validly issued, fully
paid and non-assessable.
<PAGE>
b. PREFERRED STOCK
There were no preferred shares issued and outstanding for the periods
ending September 30, 2000 or 1999.
The Company's Wisconsin Certificate of Incorporation authorizes the
issuance of 250,000 shares of preferred stock, $0.10 par value.
The preferred shares are issuable in one or more series. The Board of
Directors is authorized to fix or alter the dividend rate, conversion
rights (if any), voting rights, rights and terms of redemption (including
any sinking fund provisions), redemption price or prices, liquidation
preferences and number of shares constituting any wholly unissued series
of preferred shares.
c. STOCK OPTION ACTIVITY
09/30/00 03/31/00
------------------ ----------------
Weighted Weighted
Option Average Option Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beg. yr. 1,254,900 $2.19 977,400 $3.28
Granted 0 $0.00 660,000 $0.50
Exercised 0 $0.00 (160,000) N/A
Forfeited 0 $0.00 0 N/A
Expired 0 $0.00 (222,500) N/A
--------- ----- ---------- -----
Outstanding, end of yr. 1,254,900 $2.19 1,254,900 $2.19
========= ===== ========== =====
A summary of the outstanding stock options as of September 30, 2000,
follows:
Weighted Average Weighted
Range of Amount Remaining Average
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- --------------
Up to $2.99 600,000 .8708 years $0.63
$3.00 to $5.00 654,900 .3675 years $3.61
d. STOCK RIGHTS - TO THE PRESIDENT
Reference is made to Note 7, Related Party Transactions, of the Company's
financial statements which disclose the terms and conditions of the share
loans to the Company by the President and the interest which is payable
to him by the Company's issuance of its restricted common shares.
Any share interest payable to the President is for shares loaned to the
Company and/or for such shares loaned or pledged for collateral purposes,
or for unpaid interest, all in accordance with the terms and conditions
of Director-approved, open-ended loan agreements dated June 20, 1988,
October 14, 1988, May 17, 1989 and April 1, 1990.
<PAGE>
e. SHARE LOANS - OTHERS
A series of borrowings of the Company's common shares were made under the
provision that the owners would sell said shares as the Company's
designee, with the proceeds payable to the Company. In exchange, the
Company agreed to pay these shares loaned within 31 days or less by
issuing its restricted common shares, together with interest payable in
restricted common shares payable at a negotiated rate of interest
normally payable in advance for a period of one year. As of September
30, 2000, there were no shares due to other parties for shares borrowed
or for interest payment.
On June 1, 1998 correspondence, together with a loan agreement, had been
submitted to a lender for execution in connection with the Company's
understanding of a stock loan arrangement. The lender verbally
acknowledges the loan agreement and the terms and conditions. The
Company borrowed from the lender 125,300 common shares of a non-related,
publicly-held corporation and sold them for approximately $524,013. 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 64,845 of the Company's restricted
common shares or in lieu of the 125,300 shares borrowed from the
non-related, publicly-held corporation, may accept payment in the form of
a total of 625,595 of the Company's restricted common shares. On January
15, 2000, via written correspondence, the lender exercised his option to
accept the 560,750 Commerce Group Corp. restricted common shares in full
payment for the Company's outstanding obligation. In order to issue the
Company's restricted common shares, the Company and its transfer agent
require investment letter agreements which were delivered to the lender
on January 24, 2000. After the Company received the executed investment
letter agreements, it caused its transfer agent on October 23, 2000 to
issue the 625,595 restricted common shares due to the lender.
f. S.E.C. FORM S-8 REGISTRATION
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 pursuant
to the prospectus submitted to the Securities and Exchange Commission.
As of September 30, 2000 from the 1,000,000 shares registered 281,876
were issued and there remain 718,124 unissued shares.
g. COMMERCE GROUP CORP. EMPLOYEE BENEFIT ACCOUNT (CGCEBA)
During this fiscal year, the CGCEBA was established for the purpose of
compensating the employees for benefits such as retirement, severance
pay, and all other related compensation that is mandatory under El
Salvadoran labor regulations, and/or as determined by the Officers of the
Corporation. Under this plan, payment can be made to any employee of the
Company or the Company's subsidiaries. The Company on December 10, 1999,
issued 400,000 of its common shares registered in its Securities and
Exchange Commission Form S-8 Registration Statement. Subsequently, on
January 26, 2000, it issued an additional 400,000 common shares
registered in its Securities and Exchange Commission Form S-8
Registration Statement. The CGCEBA has sold some of these shares from
time to time to meet its obligations to its El Salvadoran employees.
(11) LITIGATION
----------------
On June 14, 2000, Commerce Group Corp.'s legal counsel filed a complaint
in the State of Wisconsin, Circuit Court, Milwaukee County, Case No.
00CV004805, Money Judgment: 30301, on behalf of Ecomm Group Inc. (a
51%-owned Commerce Group Corp. subsidiary) and Commerce Group Corp., as
plaintiffs, against Interactive Business Channel (IBC) and Matthew
Marcus, as an individual, both of Irvine California, as defendants.
<PAGE>
Included in this complaint were the following three causes of action:
the first cause of action was the breach of contract; the second cause of
action was the breach of fiduciary duty; and the third cause of action
was the rescission of the contract and return of compensation.
The plaintiffs demanded judgment against the defendants as follows: for
actual damages in an amount to be determined at trial; for punitive
damages in an amount to be determined at trial; for rescission of the
transaction and return to the plaintiffs of 49% of the common stock of
Ecomm Group Inc. represented by 96 common shares and for the return of
500,000 Commerce Group Corp. common shares, par value ten cents per
share, issued as compensation for the services of IBC and Mr. Matthew
Marcus; and for actual attorney's fees, the costs and disbursements of
this action, and any further relief the Court deems equitable and just.
A copy of the said complaint was filed as Exhibit A to the Company's
Securities and Exchange Commission Form 8-K on June 29, 2000.
On July 31, 2000, the Company and Ecomm entered into a Settlement,
Rescission, and Mutual Release Agreement with Interactive Business
Channel, Inc. and Mr. Matthew Marcus, as an individual. A notice of
dismissal was subsequently filed with the Circuit Court of Milwaukee
County, State of Wisconsin on August 4, 2000. Reference is made to "Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and to "Part II - Financial Information, Item 1.
Legal Proceedings" for additional details.
(12) COMMITMENTS AND CONTINGENCIES
----------------------------------
Based upon current knowledge, the Company believes that it is in
compliance with environmental laws and regulations as currently
promulgated. However, the exact nature of environmental control
problems, if any, which the Company may encounter in the future cannot be
predicted, primarily because of the increasing number, complexity and
changing character of environmental requirements that may be enacted or
of the standards being promulgated by governmental authorities.
(13) 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>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
------------------------------------------------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE
HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The matters discussed in this report on Form 10-Q, when not historical
matters, are forward-looking statements that involve a number of risks
and uncertainties that could cause actual results to differ materially
from projected results. Such factors include, among others, the
speculative nature of mineral exploration, 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 and Internet
activities, labor relations, other risk factors as described from time to
time in the Company's filings with the Securities and Exchange Commission
and other matters discussed under this reporting category. Many of these
factors are beyond the Company's ability to control or predict. The
Company disclaims any intent or obligation to update its forward-looking
statements, whether as a result of receiving new information, the
occurrence of future events, or otherwise. Should one or more of those
risks or uncertainties materialize, or should any underlying assumption
prove incorrect, actual results or outcomes may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended.
Management's discussion and analysis ("MD&A") of the financial condition
and results of operations of the Company should be read in conjunction
with the March 31, 2000 audited consolidated financial statements and the
notes thereto. The Company prepares and files its consolidated financial
statements and MD&A in United States ("U.S.") dollars and in accordance
with U.S. generally accepted accounting principles ("GAAP").
The following discussion provides information on the results of
operations for the second quarterly periods ended September 30, 2000 and
1999 and the financial condition, liquidity and capital resources for the
same period. The financial statements of the Company and the notes
thereto contain detailed information that should be referred to in
conjunction with this discussion.
RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
------------------------------------------------
ACCOUNTING OVERVIEW
-------------------
A redefined structure of the financial statements for the second
quarterly period ended September 30, 2000, 1999 and prior years reflects
and includes the Commerce Group Corp./Sanseb Joint Venture (Joint
Venture) on a consolidated basis. Prior to this change, the Company
reported the investment in the Joint Venture as advances to the Joint
Venture and the Company's advances included the interest earned on these
advances in anticipation of the interest being reimbursed. In this
report, these advances are restated and combined with the Company's
Consolidated Financial Statements. Although the elimination of interest
income reduces the earnings and the retained earnings, it does not
eliminate the interest charged by and earned by the Company which is due
and payable to it and which is maintained additionally with a separate
accounting. In effect, this restructuring modifies only the financial
reporting and at the time that the profits for the gold mining operation
are distributed, the interest earned on these advances will be paid
first to the Company prior to any profit distribution and pursuant to an
agreement entered into by the joint venture parties.
<PAGE>
THE COMPANY'S CURRENT STATUS
----------------------------
PRECIOUS METAL MINING
The Joint Venture has produced gold from April 1, 1995 through its fiscal
period ended December 31, 1999. Its San Cristobal Mill and Plant (SCMP)
consisted primarily of used equipment that had been installed at its
leased site by a previous mining company. The used processing equipment
was acquired by the Joint Venture on February 23, 1993.
Although the Company has on a continuous basis retrofitted, modified, and
restored the equipment, it lacked sufficient funds to perform a major
overhaul of the mill and plant and to expand the SCMP facilities. There
is also much uncertainty at this time relative to the stability of the
price of gold which in the past months reflected a wide range of price
fluctuations.
The Company's management has temporarily suspended its gold processing
until such time as it has adequate funds for the retrofitting,
rehabilitation, restoration, and expansion of the SCMP facilities.
Through December 1999, the Joint Venture produced gold on a curbed basis
primarily from the gold ore it was excavating from its SSGM open pit.
The gold was processed at its SCMP facility which is located
approximately 15 miles from the SSGM site. It is contemplating the
installation of a pilot open-pit, heap-leaching gold-processing system
on the SSGM site. The cone crushing system is being erected at this
site. It also is continuing its SSGM site preparation, the expansion of
its exploration and exploitation targets, and the enlargement and
development of its gold ore reserves. It is exploring the potential of
the other gold mine prospects identified as the San Felipe-El Potosi
Mine, and its extension, the El Capulin Mine, and the Hormiguero Mine.
The Montemayor Mine and the Modesto Mine have been placed on a standby
basis pending the submission of an application for a concession (license)
on the property it owns or on which it holds leases. All of the mining
properties are located in the Republic of El Salvador, Central America.
The Joint Venture's objectives are to have an expanded SCMP complementary
operation while continuing its endeavor to obtain sufficient funds for
the SSGM open-pit, heap-leach operation. The Company's main objective and
plan, through the Joint Venture, is to operate at the SSGM site, a
moderate tonnage, low-grade, open-pit, heap-leaching, gold-producing mine
and it intends to commence this gold-mining operation as soon as adequate
funding is in place. Dependent on the grade of gold ore processed and
the funds it is able to obtain, it then anticipates producing annually
approximately 10,000 ounces of gold from the SCMP operation and
eventually up to 113,000 ounces of gold from its SSGM open-pit,
heap-leaching operation. The Joint Venture continues to conduct an
exploration program to develop additional gold ore reserves at the SSGM.
Since the Joint Venture in 1995 commenced producing gold at the SCMP,
albeit a very exiguous operation, and a forerunner of its greater goals,
the Company's revenues, profitability and cash flow will be greatly
influenced by the price of gold. Gold prices fluctuate widely and are
affected by numerous factors which will be beyond the Company's control,
such as, expectations for inflation, the strength of the U.S. dollar,
overproduction of gold, global and regional demand, or political and
economic conditions and many other factors. The combined effect of these
factors is difficult; perhaps impossible to predict. Should the market
price of gold fall below the Company's production costs and remain at
such level for any sustained period, the Company could experience losses.
During 1999, gold prices declined to their lowest level in over two
decades.
<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
---------------------
HISTORICAL SYNOPSIS
The Company on January 29, 1999, announced its plans to have its
51%-owned subsidiary, Ecomm Group Inc. (Ecomm), enter into the web portal
business. Ecomm's objective was and still is to become a recognized web
portal on the world wide web by acquiring or "rolling-up" Internet
websites. Interactive Business Channel, Inc. (IBC) had agreed to assist
Ecomm in developing an "Internet web portal roll-up strategy" by
acquiring Internet businesses. In this connection, the President of IBC,
Matthew Marcus, was elected as the President of Ecomm.
Ecomm had 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 had been tested,
marketed, and updated to maximize its market share on the Internet. The
website had a static link to the highly trafficked
http://www.ibchannel.com website.
MyInternet.to had implemented a broad reaching affiliate program through
Linkshare.com which should have enabled it to derive revenues from
affiliate agreements with small and large Internet websites. In
addition, these affiliations should have drawn more traffic and interest
to this site. Such websites included Yahoo Travel, Audio Book Club, JC
Penney, Dell, and many, many more.
MyInternet.to had 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 ACTIVITIES
------------------
The Company believes that IBC and/or Mr. Matthew Marcus were not meeting
their contractual obligations. Therefore the Company and Ecomm decided
that they should discontinue their relationship. On June 14, 2000 the
Company's legal counsel filed a complaint in the State of Wisconsin,
Circuit Court, Milwaukee County, as plaintiffs, against IBC and Matthew
Marcus (the President of IBC and Ecomm). The details of this lawsuit
were explained in the Securities and Exchange Commission Form 8-K dated
June 14, 2000 and filed on June 29, 2000.
On July 31, 2000, the Company and Ecomm entered into a Settlement,
Rescission, and Mutual Release Agreement with Interactive Business
Channel, Inc. (IBC) and Mr. Matthew Marcus, as an individual. Reference
is made to "Part II - Financial Information, Item 1. Legal Proceedings"
for details.
The Company intends to remain in the Internet business and is in the
process of formulating its future plans. The Company believes that a
significant opportunity exists to develop and consolidate the many niches
of the Internet community into a web portal. With new management it will
evaluate, structure and attempt to combine Internet-related business
combinations, mergers and acquisitions. This is an ideal time for the
Company to pursue its objectives as the Internet industry is going
through a "shake-down" process which could mean more realistic valuations
and more favorable negotiations.
<PAGE>
There can be no assurance that Ecomm's current strategy will be
successful as the current depressed market price of the Company's shares
presently compels it from using its shares in an exchange for an
acquisition of an Internet company. Ecomm has not yet entered into any
agreements for the acquisition of any websites, web services or other
technology in connection with the web portal. There is no assurance that
it will be able to enter into contracts for the acquisition of such
sites, services and technology on terms acceptable to the Company and
Ecomm. The Internet business is highly competitive and there is no
assurance that Ecomm will generate a profit, even if Ecomm acquires the
websites, web services and technology on acceptable terms.
RESULTS OF OPERATION FOR THE SECOND QUARTER ENDED SEPTEMBER 30, 2000
COMPARED TO SEPTEMBER 30, 1999 ON A RESTATED BASIS
--------------------------------------------------------------------
The Company, on a consolidated basis, including the Joint Venture and
excluding the interest income due from the Joint Venture, had a very
nominal loss of ($13,791) or ($.0010) per basic share during its second
quarter period ended September 30, 2000 compared to a loss of ($125,324)
or ($.0107) per basic share for the same six-month period in the previous
fiscal year.
The almost break-even status results from suspending the gold production.
Gold production was suspended due to the Company's need to rehabilitate
and expand the SCMP and because of the continuous decline and instability
in the price of gold.
Interest expense in the sum of $516,529 was capitalized by the Joint
Venture during this fiscal period compared with $436,192 for the same
period in 1999.
Almost all of the costs and expenses incurred by the Company are
allocated and charged to the Joint Venture. The Joint Venture capitalizes
or expenses these costs and expenses and will continue to do so until
such time when it is in full production on each of its mining projects.
At the time production commences, these capitalized costs will be charged
as an expense based on a per unit basis. If the prospect of gold
production becomes unlikely, all of these costs will be written off in
the year that this occurs.
FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES
-----------------------------------------------------
During this six-month period ended September 30, 2000, the Company
borrowed a sum of $528,808; $508,441 was from related parties; the
balance of $20,367 was from unrelated parties which included cash and
accrued interest.
During this period, the 500,000 common shares, ten cents par value, that
were issued to Interactive Business Channel, Inc. were returned to the
transfer agent for cancellation. In addition, 100,000 common shares,
ten cents par value, were issued for consulting services.
The Joint Venture has suspended its SCMP operations until such time as it
has adequate funding to repair, retrofit and expand the mill to process
its gold ore. After almost five years of operation with used equipment,
the facilities require a major overhaul. The price of gold did not
provide an adequate cash reserve for these needs. Additional equipment
has to be purchased, delivered and installed.
During the past, the Joint Venture was engaged in exploration,
exploitation and development programs designed to increase its gold ore
reserves. The prospects of expanding the gold reserves are positive.
The Company believes that the past invested funds significantly
contributed to the value of the SSGM and to the value of its other
mining prospects as the results of the exploratory efforts evidence the
potential for a substantial increase of gold ore reserves, which add
value to the Joint Venture and to the Company. The Company was able to
obtain sufficient funds during this fiscal year to continue to modify,
retrofit, and maintain the SCMP, to purchase consumable inventory, to
purchase certain hauling and loading equipment, to purchase mining
equipment, to continue its exploration projects, and for working capital
use. The Company has been able to obtain the funds required for its and
the Joint Venture's undertaking via a debt and equity structure of
funding and through its SCMP cash flow.
<PAGE>
The Company continues to be cognizant of its cash liquidity until it is
able to produce adequate profits and cash flow 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 to be
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.
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 2,000 ton-per-day open-pit, heap-leach, start-up
operation could produce an additional 1,440 ounces of gold per month. It
is necessary to raise adequate funds for this operation; the amount
required is dependent on the targeted daily volume. It is estimated that
a sum of U.S. $15 million would start the open-pit, heap-leach at a
rate of 2,000 tons per day and the anticipated profits and cash flow then
could be used to expand the operation to 6,000 tons per day, which should
produce 113,000 ounces of gold annually. The use of the $15,000,000
proceeds is as follows: $7,000,000 for mining equipment and a crushing
system; $3,033,548 for the processing equipment and site and
infrastructure costs; and $4,966,452 for the working capital.
In addition to the funds required for the open-pit, heap-leaching
operation, the Company requires a sum of $3,000,000 to expand its
existing SCMP from the present capacity of processing 200 tons per day to
500 tons per day. The use of proceeds are $2,388,000 for equipment and
$612,000 for working capital. A 500-ton-per-day operation could yield up
to 15,000 ounces of gold annually dependent on the grade of the gold ore.
The existing depressed price of gold along with the lack of investor
interest in mining stocks and the Company's low common share market price
are deterrents in raising cash for these operations.
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
exploitation and development of the SSGM, to commence and operate an
open-pit, heap-leaching operation at the SSGM, 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 others.
<PAGE>
From September 1987 through September 30, 2000, the Company has invested
in the Joint Venture, including interest charges payable to the Company,
the sum of $29,579,248 and three of the Company's subsidiaries have
advanced the sum of $590,265, for a total of $30,169,513. 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, for
exploration of the Modesto, Hormiguero and Montemayor mines, 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 and erection of a cone crushing system, for diamond
drilling at the SSGM, for the purchase of a rod mill and a carbon
regeneration system and many other related needs.
EMPLOYEES
---------
The Joint Venture employed through January 31, 2000 approximately 300
full-time persons from El Salvador (up to 325 persons, including
part-time employees) to perform its exploration, exploitation, and
development programs; to produce gold from its SCMP facilities; and to
handle the administration of its activities. None of these employees are
covered by any collective bargaining agreements. It now employs less
than 40 persons of which there are 20 employees retained to provide
around-the-clock security at the SCMP premises. It has developed a
continuous harmonious relationship with its employees. It believes that
the Joint Venture was the largest single non-agricultural employer in El
Salvador's Eastern Zone. Also, the Company employs approximately four
persons (plus part-time help) in the United States.
RELATED PARTY LOANS, OBLIGATIONS AND TRANSACTIONS
-------------------------------------------------
The related party transactions are included in detail in the Notes to the
Consolidated Financial Statements.
COMPANY ADVANCES TO THE JOINT VENTURE
-------------------------------------
Since September 1987 through September 30, 2000, the Company, and three
of its subsidiaries, have advanced to the Joint Venture $30,169,513.
Included in the total advances is the interest charged to the Joint
Venture by the Company which amounts to $14,939,327 through September 30,
2000. The Company furnishes all of the funds required by the Joint
Venture. This interest charge is eliminated in the consolidated
financial statements.
EFFORTS TO OBTAIN CAPITAL
-------------------------
Since the concession was granted, and through the present time,
substantial effort is exercised in securing funding through various
sources, all with the purpose to expand the operations of the SCMP, to
construct an open-pit heap-leach operation at the SSGM site, to continue
the exploration of its other mining prospects and to obtain funding for
its subsidiary's Internet business.
The Company, Sanseb, and the Joint Venture consider the past political
situation in the Republic of El Salvador to have been unstable, and
believe that the final peace declaration on December 16, 1992, has put an
end to war. Presently, the stigma of the past unfavorable political
status in the Republic of El Salvador exists and therefore certain
investors continue to be apprehensive to invest the funds required.
However, as explained in this report, the Company was able to obtain a
sum of funds to invest in the expansion and retrofitting of its SCMP and
for the exploration of its other mining prospects. The decline in the
price of gold to a 20-year low depressed the public market price of the
Company's shares as well as the shares of most of the world-wide mining
companies. This decline in the Company's stock market price places the
Company in a situation of substantially diluting its common shares in
order to raise capital. The Company believes that it will be able to
obtain ad equate financing to maintain a status quo position from the
same sources as in the past. It also will pursue a business combination,
acquisition and merger program.
<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 mining business as it is
with other companies engaged in similar businesses.
DIVIDENDS
---------
For the foreseeable future, it is anticipated that the Company will use
any earnings to finance its growth, therefore it is expected that
dividends will not be paid to shareholders.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
------------------------------------------------------------------------
Some of the statements contained in this report are forward-looking
statements, such as estimates and statements that describe the Company's
future plans, objectives or goals, including words to the effect that the
Company or management expects a stated condition or result to occur.
Since forward-looking statements address future events and conditions, by
their very nature, they involve inherent risks and uncertainties. Actual
results in each case could differ materially from those currently
anticipated in such statements by reason of factors such as production at
the Company's mines, changes in operating costs, changes in general
economic conditions and conditions in the financial markets, changes in
demand and prices for the products the Company produces, litigation,
legislative, environmental and other judicial, regulatory, political and
competitive developments in areas in which the Company operates and
technological and operational difficulties encountered in connection with
mining or Internet activities. Many of these factors are beyond the
Company's ability to control or predict. The Company disclaims any
intent or obligation to update its forward-looking statements, whether as
a result of receiving new information, the occurrence of future events,
or otherwise.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - SEPTEMBER 30, 2000
PART II - FINANCIAL INFORMATION
Item 1. Legal Proceedings
On June 14, 2000, Commerce Group Corp.'s legal counsel filed a
complaint in the State of Wisconsin, Circuit Court, Milwaukee
County, Case No. 00CV004805, Money Judgment: 30301, on behalf
of Ecomm Group Inc. (a 51%-owned Commerce Group Corp.
subsidiary) and Commerce Group Corp., as plaintiffs, against
Interactive Business Channel (IBC) and Matthew Marcus, as an
individual, both of Irvine California, as defendants.
Included in this complaint were the following three causes of
action: the first cause of action was the breach of contract;
the second cause of action was the breach of fiduciary duty;
and the third cause of action was the rescission of the
contract and return of compensation.
The plaintiffs demanded judgment against the defendants as
follows: for actual damages in an amount to be determined at
trial; for punitive damages in an amount to be determined at
trial; for rescission of the transaction and return to the
plaintiffs of 49% of the common stock of Ecomm Group Inc.
represented by 96 common shares and for the return of 500,000
Commerce Group Corp. common shares, par value ten cents per
share, issued as compensation for the services of IBC and Mr.
Matthew Marcus; and for actual attorney's fees, the costs and
disbursements of this action, and any further relief the Court
deems equitable and just.
A copy of the said complaint was filed as Exhibit A to the
Company's Securities and Exchange Commission Form 8-K on June
29, 2000.
On July 31, 2000, the Company and Ecomm entered into a
Settlement, Rescission, and Mutual Release Agreement
(Agreement) with Interactive Business Channel, Inc. (IBC) and
Mr. Matthew Marcus, as an individual to settle the disputes and
differences that have arisen between IBC and Matthew Marcus, as
an individual, and Commerce and Ecomm with respect to those
certain agreements in writing entered into between various of
the parties, the first dated January 27, 1999 ("January
Agreement"), by and between Commerce and IBC, the second dated
May 25, 1999 ("May Agreement"), by and among Commerce, Ecomm
and IBC, which agreements were made a part of the Agreement and
were incorporated by reference. The parties executed the
Agreement to definitively and finally resolve such disputes and
differences, and agreed to the following:
1. IBC agreed to endorse over and deliver to Commerce share
certificates for 500,000 shares of common stock of Commerce
(the "Commerce shares"), restricted under Rule 144 of the
Securities Act of 1933, which it has received from
Commerce, pursuant to the terms and conditions of the May
Agreement.
2. IBC agreed to endorse over and deliver to Commerce share
certificates for 96 shares of common stock of Ecomm (the
"Ecomm shares").
3. Commerce and Ecomm agreed to transfer 100% of their rights,
title and interest in the "MyInternet.to" Web portal
("MyInternet.to") to IBC. In connection therewith:
<PAGE>
a. Commerce and Ecomm agreed to transfer to IBC any
documents or other materials proprietary or otherwise
relating to MyInternet.to in their possession and
identified by IBC within five (5) business days
following execution of this Agreement;
b. Commerce and Ecomm agreed to waive any claim now or in
the future to any rights, title or interest or monetary
proceeds or any other benefits tangible or intangible
in MyInternet.to arising from their rights, title and
interest in MyInternet.to prior to the execution date
of the Agreement; and
c. IBC and Matthew Marcus agreed to assume any liabilities
which have been incurred in connection with the
development of MyInternet.to, to indemnify and hold
Commerce and/or Ecomm harmless, and to defend Commerce
and/or Ecomm against claims of third parties, together
with all court costs imposed on and all attorneys' fees
expended by Commerce and/or Ecomm in connection with
the defense thereof.
4. Commerce and Ecomm did file in the Circuit Court of
Milwaukee County, State of Wisconsin, a notice of dismissal
of their Complaint in the action entitled ECOMM GROUP, INC.
and COMMERCE GROUP CORP. vs. INTERACTIVE BUSINESS CHANNEL
and MATTHEW MARCUS, Case No. 00CV004805, Money Judgment:
30301 on August 4, 2000, and the Parties mutually agreed
that, subject to the settlement provisions as set forth
above, the above-mentioned January Agreement and May
Agreement entered into by some or all of the parties shall
be and were rescinded, terminated and cancelled as of the
date of execution of the Agreement.
Item 2. Changes in Securities
Reference is made to the financial statements which explain the
common shares issued and to be issued.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On October 20, 2000, the Company held its annual meeting of
shareholders. The shareholders voted affirmatively on the
following three items at the meeting:
Proposal I was the election of one Class II Director of the
Company: Edward A. Machulak was elected as a Class II Director
for a term of three years expiring at the annual meeting of
shareholders to be held in the year of 2003. The proposal
electing Edward A. Machulak passed with votes of 12,083,163 in
favor of the proposal; 203,677 votes withheld authority.
<PAGE>
Proposal II was to ratify the appointment of Bruce Michael
Redlin, C.P.A., LLC as the Company's independent public
accountant for its fiscal year ended March 31, 2001. The
proposal passed with 12,098,369 votes in favor of the proposal;
132,633 votes were against the proposal and 55,838 votes
abstained.
There was a proposal from the floor to ratify the acts of the
Directors and Officers, including all related party
transactions. The proposal passed with 12,286,840 votes in
favor of the proposal and none against it.
Item 5. Other Information
None.
Item 6. Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant/Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMERCE GROUP CORP.
Registrant/Company
/s/ Edward L. Machulak
Date: October 31, 2000 ______________________________________
Edward L. Machulak
President, Chief Executive, Operating and
Financial Officer and Treasurer
