Back to GetFilings.com
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 June 30, 2002
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: 18,757,708 common
shares of the Company's common stock, $0.10 par value, were issued and
outstanding as of July 15, 2002.
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE FIRST QUARTER ENDED JUNE 30, 2002
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, 2002.
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
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED BALANCE SHEETS
June 30, 2002 March 31, 2002
(Unaudited) (Audited)
------------- --------------
ASSETS
------
Current assets
Cash $ 49,834 $ 39,081
Investments 219,568 230,068
Accounts receivable 275,785 275,785
Inventories 39,562 39,562
Prepaid items and deposits 27,042 25,047
----------- -----------
Total current assets 611,791 609,543
Real estate (Note 5) 23,336 23,336
Property, plant and equipment, net 4,128,725 4,125,726
Mining resources investment 27,602,545 27,186,829
------------ ------------
Total assets $32,366,397 $31,945,434
============ ============
LIABILITIES
-----------
Current liabilities
Accounts payable $ 422,685 $ 409,970
Notes and accrued interest payable to
related parties (Notes 6 & 7) 7,121,250 6,923,874
Notes and accrued interest payable to
others (Note 6) 762,039 754,251
Accrued salaries 2,520,765 2,475,765
Accrued legal fees 333,883 314,804
Other accrued expenses 613,883 607,552
------------ ------------
Total liabilities 11,774,505 11,486,216
Commitments and contingencies (Notes 2, 4, 5, 6, 7, 8, 10 & 11)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
2002-none; 2001-none (Note 10) $ 0 $ 0
Common stock, $0.10 par value:
Authorized 50,000,000 shares;
(Note 10)
Issued and outstanding:
06/30/2002-18,650,708 (Note 10) 1,865,071
03/31/2002-17,468,008 (Note 10) 1,746,801
Capital in excess of par value 18,817,090 18,792,109
Retained earnings (deficit) (90,269) (79,692)
------------ ------------
Total shareholders' equity 20,591,892 20,459,218
Total liabilities and shareholders' ------------ ------------
equity $32,366,397 $31,945,434
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED)
2002 2001
---- ----
Revenues: $ 0 $ 0
------------ ------------
Expenses:
General and administrative 10,577 8,413
------------ ------------
Total expenses (10,577) (8,413)
Net profit (loss) $ (10,577) $ (8,413)
Credit (charges) for income taxes 0 0
----------- -----------
Net income (loss) after income tax
credit (charge) $ (10,577) $ (8,413)
============ ============
Net income (loss) per share
(Note 2) basic $ (.0006) $ (.0006)
============ ============
Net income (loss) per share
(Note 2) diluted $ (.0006) $ (.0005)
============ ============
Weighted av. common shares
outstanding (Note 2) 17,939,707 13,888,929
============ ============
Weighted av. diluted common
shares (Note 2) 18,729,707 15,769,064
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THROUGH THE PERIOD ENDED JUNE 30, 2002 (UNAUDITED)
Common Stock
-----------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
----------- ---------- ----------- ----------
Balances March 31, 2000 13,888,929 $1,388,893 $18,402,346 $(166,310)
Net income (loss) for
FY March 31, 2001 129,790
Dir./off./employee/
services comp. 618,500 61,850 8,000
Payment of debt 1,586,579 158,658 588,953
Cash 200,000 20,000 0
Common shares cancelled (500,000) (50,000) (238,450)
----------- ----------- ------------ -----------
Balances March 31, 2001 15,794,008 1,579,401 18,760,849 (36,520)
Net income (loss) for
FY March 31, 2002 (43,172)
Dir./off./employee/
services comp. 1,154,000 115,400 5,260
Payment of debt 250,000 25,000 12,500
Cash 270,000 27,000 13,500
---------- ---------- ----------- ---------
Balances March 31, 2002 17,468,008 $1,746,801 $18,792,109 $(79,692)
Net income (loss)
June 30, 2002 (10,577)
Shares issued:
Cash 300,000 30,000
Payment of debt 632,700 63,270 2,481
Dir./off./employee
benefit account 250,000 25,000 22,500
---------- ---------- ----------- ---------
Balances June 30, 2002 18,650,708 $1,865,071 $18,817,090 $(90,269)
========== ========== =========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED)
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (10,577) $ (8,413)
Decrease (increase) in investments 10,500 0
Decrease (increase) in prepaid items
and deposits (1,996) 4,380
Increase (decrease) in accounts
payable and accrued liabilities 19,046 (26,360)
Increase (decrease) in accrued salaries 45,000 45,000
Increase (decrease) in accrued legal fees 19,079 0
----------- ------------
Net cash provided by (used in)
operating activity 81,052 14,607
INVESTING ACTIVITIES:
Investment in mining resources (418,715) (371,857)
----------- ------------
Net cash used in investing activities (418,715) (371,857)
FINANCING ACTIVITIES:
Net borrowings 205,165 312,340
Common stock issued 143,251 78,000
Net cash provided by (used in) ----------- ------------
financing activities 348,416 390,340
Net increase (decrease) in cash
and cash equivalents 10,753 33,090
Cash - beg. of year 39,081 24,401
----------- ------------
Cash - end of this period $ 49,834 $ 57,491
=========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (UNAUDITED)
Supplemental disclosures of cash information for the first quarterly
periods ended June 30, 2002 and 2001:
1. The following amounts of accrued interest expense were capitalized:
$286,297 (2002) and $238,833 (2001).
2. There was no interest expense paid in cash for these quarterly
periods in 2002 and 2001.
3. The Company paid no income taxes during the quarterly 2002 or 2001
periods.
4. The investments consist of securities held for the Commerce Group
Corp. Employee Benefit Account stated at cost and precious stones
which are stated at the lower of cost or market value.
5. Accounts receivable consist of advances to Mineral San Sebastian,
S.A. (Misanse), a 52%-owned Corporation, which will be an offset for
Misanse's rental charges included in the accounts payable.
6. Inventory consists of consumable items used in processing gold ore,
which are stated at the lower of average cost or market.
Supplemental schedule of non-cash investing and financing activities
during the first quarterly periods ended June 30:
1. The Company issued the following common shares for the values shown
for services rendered:
Shares Value
------ -----
2002 0 $0
2001 0 $0
2. Other non-cash items that remain as accruals are accrued salary,
legal, and director fees which amounted to $77,479 in 2002 and
$49,400 in 2001.
3. Non-cash equipment financing activities were none for 2002 and none
for 2001.
The accompanying notes are an integral part of these consolidated
financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(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 to increase the gold ore reserves
is the primary objective 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 (operations
ceased on December 31, 1999) until such time as it has adequate
funds to retrofit, rehabilitate, restore and expand these facilities
and until there is certainty that the price of gold will be
stabilized at a higher selling price.
Currently the Joint Venture is in the pre-production phase at the
SSGM. Simultaneously, it is performing diverse programs relative to
its mining projects. Prior to December 31, 1999, gold was produced
on a start-up (not full production) basis. Operations were
temporarily ceased when the price of gold fell out of favor with
worldwide investors who were reluctant to invest in gold or gold
mining projects.
The Joint Venture plans to begin its open-pit, heap-leaching process
on the SSGM site when adequate funding becomes available. It also
plans to continue its SSGM site preparation, the expansion of its
exploration and exploitation targets, and the enlargement and
development of its gold ore reserves. Furthermore, it plans to
explore the potential of other gold mine exploration prospects in El
Salvador. Concurrently, it is in the process of obtaining necessary
funding for each of these separate programs while its Joint Venture
is erecting its crushing system at the SSGM site and performing
minor retrofit and rehabilitation work at the SCMP.
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. Ecomm's
principal business is to evaluate, structure and complete
Internet-related business combinations, mergers, and acquisitions.
It plans to concentrate in specialized or niche portals which are
being developed as hubs or gateways to the Internet for groups of
individuals with specific interests.
(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. Significant areas requesting the use of
management estimates relate to the determination of mineral
reserves, reclamation and environmental obligations, impairment of
assets and useful lives to compute depreciation, inflation and
amortization. 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 June 30, 2002, 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.
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 June 30, 2002 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 Commerce Group Corp.
Employee Benefit Account stated at cost and precious stones which are
stated at the lower of cost or market value.
ACCOUNTS RECEIVABLE
The accounts receivable primarily consists of the advances to Misanse, a
52%-owned subsidiary, which will be offset for the Misanse rental charges
included in the accounts payable.
INTERCOMPANY BALANCES
All intercompany balances and transactions have been eliminated.
INVENTORY
Inventory consists of consumable supplies.
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 units 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 ranging from three to ten years. Depreciation and amortization
expenses include the amortization of assets acquired, if any, 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 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.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and amends APB No. 30, "Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." This
Statement requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less costs to
sell. SFAS No. 144 retains the fundamental provision of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of
by sale. This statement also retains APB No. 30's requirement that
companies report discontinued operations separately from continuing
operations. All provisions of this Statement will be effective in the
firs t quarter of 2003. The Company anticipates that the impact of this
new standard will have no material impact on the financial statements
taken as a whole.
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.
Estimates of future cash flows are subject to risks and uncertainties.
It is possible that changes could occur which may affect the
recoverability of property, plant and equipment.
DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are capitalized and amortized
over the life of the debt facilities using the effective interest method.
INTEREST CAPITALIZATION
Interest costs are capitalized as part of the historical cost of
facilities and equipment, if material.
INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries (See Note 9). The Joint Venture files a U.S. partnership
return.
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 or 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 June 30, 2002, 790,000 option shares were added to the weighted
number of shares which amount to 17,939,707 common shares issued and
outstanding, the total number of fully diluted shares would amount to
18,729,707. The loss per share for this period ended June 30, 2002 is
$.0006 cents per share. The same methods were used for the same 2001
fiscal period.
FOREIGN CURRENCY
As of January 1, 2001, El Salvador has adopted the U.S. dollar system and
pegged the exchange rate at 8.75 colones to one U.S. dollar. Almost all
of the business in El Salvador is now conducted in U.S. dollars.
MAJOR CUSTOMER
In the past, 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) INVESTMENT IN PROPERTY, PLANT, EQUIPMENT AND MINING RESOURCES
- -----------------------------------------------------------------
The following is a summary of the investment in property, plant,
equipment, mining resources and development costs:
June 30, 2002 June 30, 2001
--------------------------- ---------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Mineral
Proper-
ties
and
Deferred
Develop-
ment $27,602,545 $27,602,545 $26,664,189 $26,664,189
Property,
Plant
and
Equip-
ment 6,380,868 2,252,143 4,128,725 5,827,140 2,445,599 3,381,541
----------- ----------- ----------- ----------- ---------- -----------
$33,983,413 $ 2,252,143 $31,731,270 $32,491,329 $2,445,599 $30,045,730
=========== =========== =========== =========== ========== ===========
Production facilities and equipment are stated at cost and are amortized
based on the lease arrangement, if any, 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 three to ten years. Maintenance and repairs are charged to
expense as incurred. Since the Joint Venture suspended operations in
view of the weak price of gold and the need to expand these facilities,
no depreciation has been recorded during this fiscal period.
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. Estimated future net cash
flows, on an undiscounted basis, from each property are calculated using
estimated recoverable ounces of gold (considering current proven and
probable reserves and mineral resources expected to be converted into
mineral reserves. The inclusion of mineral resources is based on various
circumstances, including but not limited to, the existence and nature of
known mineralization, location of the property, results of recent
drilling; and analysis to demonstrate the ore is commercially
recoverable), estimated future gold price realization (considering
historical and current prices, price trends and related factors); and
operating, capital and site restoration costs. Reduction in the carrying
value of property, plant and equipment, with a corresponding charge to
income, are recorded to the extent that the estimated future net cash
flows are less than the carrying value.
(4) COMMERCE/SANSEB JOINT VENTURE ("JOINT VENTURE")
- ---------------------------------------------------
The Company is in a joint venture with and owns 82 1/2% of the total
common stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada
chartered (1968) corporation. The balance of Sanseb's stock is held by
approximately 180 non-related shareholders, including the President of
the Company who owns 2,073 common shares. Sanseb was formed to explore,
exploit, research, and develop adequate gold reserves. 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 June 30, 2002, the Company's investments, including charges for
interest expense to the Joint Venture, were $37,678,244 and three of the
Company's subsidiaries' advances were $590,265 for a total of
$38,268,509.
INVESTMENT IN EL SALVADOR MINING PROJECTS
During this fiscal period, the Company has advanced funds, performed
services, and allocated its general and administrative costs to the Joint
Venture.
As of June 30, 2002 and 2001, the Company, Sanseb and three of the
Company's subsidiaries have invested (including carrying costs) the
following in its Joint Venture:
2002 2001
---- ----
The Company's advances
(net of gold sale proceeds)
since 09/22/87 $37,678,244 $33,645,607
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 32,530,420 30,210,256
----------- -----------
Total: 77,225,024 70,872,223
Advances by the Company's three
subsidiaries 590,265 590,265
----------- -----------
Combined total investment $77,815,289 $71,462,488
=========== ===========
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 plans to resume its exploration and expansion program to develop
additional gold ore reserves in the area surrounding the minable gold ore
reserves. Presently, it is erecting its cone crushing system and
performing minor rehabilitation repairs to its San Cristobal Mill and
Plant.
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 maintaining production taking into consideration market
and other conditions. In no case will the rent be less than 1,800
"colones" per month (approximately $206 per month at the current rate of
exchange). The lease 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 cancelled 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)
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. As of
July 2001, a series of revisions to the El Salvador Mining Law offer to
make exploration more economical. The principal change is that the
charge has been reduced to two percent of the gross gold receipts. 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.
As a subsequent event, reference is made to "Part II - Financial
Information, Item 6. Reports on Form 8-K."
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.
MODESTO MINE
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")
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.
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's 52%-owned subsidiary, 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: the Company owns approximately 63 acres at the Modesto
Mine; and 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. The Company also leases approximately 4,032 square feet of
office space in Milwaukee, Wisconsin.
(6) NOTES PAYABLE AND ACCRUED INTEREST
- ---------------------------------------
06/30/02 03/31/02
-------- --------
Related Parties
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) $7,121,251 $6,923,874
Other
Short-term notes and accrued interest (June 30,
2002, $424,093 and March 31, 2002, $416,305)
issued to creditors and other non related
parties, 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.
762,039 754,252
---------- ----------
Total: $7,883,290 $7,678,126
========== ==========
(7) RELATED PARTY TRANSACTIONS
- -------------------------------
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 21 1/4 years, including
vacation pay, for a total of $2,499,015.
In addition, with the consent and approval of the Directors, the
President of the Company, as an individual and not as a Director or
Officer of the Company, entered into the following financial transactions
with the Company, the status of which is reflected as of June 30, 2002:
The amount of cash funds which the Company has borrowed from its
President from time to time, together with accrued interest, amounts to
$4,799,274. To evidence this debt, the Company has issued to its
President a series of open-ended, secured, on-demand promissory notes,
with interest payable monthly at the prime rate plus two percent, but not
less than 16% per annum.
The Company had borrowed, an aggregate of $732,091, including accrued
interest, from the Company's President's Rollover Individual Retirement
Account (ELM RIRA). These loans are evidenced by the Company's
open-ended, secured, on-demand promissory note, with interest payable
monthly at the prime rate plus four percent per annum, but not less than
16% per annum.
In order to satisfy the Company's cash requirements from time to time,
the Company's President has sold or pledged as collateral for loans,
shares of the Company's common stock owned by him. In order to
compensate its President for selling or pledging his shares on behalf of
the Company, the Company has made a practice of issuing him the number of
restricted shares of common stock equivalent to the number of shares sold
or pledged, plus an additional number of shares equivalent to the amount
of accrued interest calculated at the prime rate plus three percent per
annum and payable monthly. The Company receives all of the net cash
proceeds from the sale or from the pledge of these shares. The Company
did not borrow any common shares during this fiscal period. The share
loans, if any, are all in accordance with the terms and conditions of
Director-approved, open-ended loan agreements dated June 20, 1988,
October 14, 1988, May 17, 1989, and April 1, 1990.
On February 16, 1987, the Company granted its President, by unanimous
consent of the Board of Directors, compensation in the form of a bonus in
the amount of two percent of the pre-tax profits realized by the Company
from its gold mining operations in El Salvador, payable annually over a
period of twenty years commencing on the first day of the month following
the month in which gold production commences on a full production basis.
The President, as an individual, and not as a Director or Officer of the
Company, 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 June 30, 2002:
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 its vehicles, and other property, as required by the Company.
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 itself or for the Joint Venture's
mining needs.
This related company has been issued an open-ended, secured, on-demand
promissory note which amounts to $1,092,378; the annual interest rate is
four percent plus the prime rate, but not less than 16%, and it is
payable monthly.
On June 30, 2001, GLSCO purchased 250,000 restricted common shares at a
price of $.15 per share and it received two-year options to purchase
250,000 common shares at a price of $.25 per share. The terms of this
arms-length transaction are no less favorable than those obtained from
unrelated third parties.
The Company's Directors have consented and approved the following
transactions of which the status of each are reflected as of June 30,
2002:
The President's wife's Rollover Individual Retirement Account (SM RIRA)
has the Company's open-ended, secured, on-demand promissory note in the
sum of $381,095 which bears interest at an annual rate of prime plus
three percent, but not less than 16% and the interest is payable monthly.
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, and thereafter at $3,000 per month. The Company owes her as an
individual and as a consultant, the sum of $264,600 for services rendered
from October 1994.
The Law Firm which represents the Company in which a son of the President
is a principal is owed the sum of $333,882 for 1,907.9 hours of legal
services rendered from July 1980 through June 30, 2002. By agreement,
these fees are to be adjusted to commensurate with the hourly fees
charged by the Law Firm on the date of payment.
The son of the President and his son's wife have the Company's
open-ended, on-demand promissory note in the sum of $116,412 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 at such time as the Company has profits and an
adequate cash flow, 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 until it is in 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.
However, a separate accounting is maintained for the purpose of recording
the amount that is due to the Company from the Joint Venture.
COMPANY NET ADVANCES TO THE JOINT VENTURE
- -----------------------------------------
2002 2001
---- ----
Total Interest Total Interest
Advances Charges Advances Charges
----------- ----------- ----------- -----------
Beginning balance
April 1 $36,729,924 $20,448,289 $32,519,136 $16,973,241
June 30 first
fiscal quarter 948,320 808,097 1,126,471 943,001
----------- ----------- ----------- -----------
Total Company advances 37,678,244 21,256,386 33,645,607 17,916,242
Advances by three of
the Company's
subsidiaries 590,265 0 590,265 0
----------- ----------- ----------- -----------
June 30 total net
advances $38,268,509 $21,256,386 $34,235,872 $17,916,242
=========== =========== =========== ===========
(8) COMMITMENTS
- ----------------
Reference is made to Notes 2, 4, 5, 6, 7, 10 and 11.
(9) INCOME TAXES
- -----------------
At March 31, 2002, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of
approximately $4,253,098 which may be carried forward to offset future
taxable income; the net operating losses expire at various times to the
year of 2017.
(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 18,650,708 shares were issued
and outstanding as of June 30, 2002. Holders of shares of common stock
are entitled to one vote for each share on all matters to be voted on by
the shareholders. Holders of common stock have no cumulative voting
rights. Holders of shares of common stock are entitled to share ratably
in dividends, if any, as may be declared, from time to time by the Board
of Directors in its discretion, from funds legally available therefore.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of shares of common stock are entitled to share pro rata all
assets remaining after payment in full of all liabilities. Holders of
common stock have no preemptive rights to purchase the Company's common
stock. There are no conversion rights or redemption or sinking fund
provisions with respect to the common stock. All of the issued and
outstanding shares of common stock are validly issued, fully paid and
non-assessable.
b. PREFERRED STOCK
There were no preferred shares issued and outstanding for the periods
ending June 30, 2002 or 2001.
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. If issued, the
Board of Directors is authorized to fix or alter the dividend rate,
conversion rights (if any), voting rights, rights and terms of redemption
(including any sinking fund provisions), redemption price or prices,
liquidation preferences and number of shares constituting any wholly
unissued series of preferred shares.
c. STOCK OPTION ACTIVITY DURING THIS FIRST QUARTER PERIOD:
06/30/02 03/31/02
------------------ ----------------
Weighted Weighted
Option Average Option Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beg. yr. 670,000 $0.22 920,000 $1.27
Granted 120,000 $0.15 520,000 $0.25
Exercised 0 N/A 0 N/A
Forfeited 0 N/A (500,000) N/A
Expired 0 N/A (270,000) N/A
--------- ----- ---------- -----
Outstanding, end of period 790,000 $0.21 670,000 $0.22
========= ===== ========== =====
A summary of the outstanding stock options as of June 30, 2002,
follows:
Weighted Average Weighted
Range of Amount Remaining Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- --------------
Up to $2.99 790,000 1.342 years $0.21
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.
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 30 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 June 30,
2002, there were no shares due to other parties for shares borrowed or
for interest payment.
f. S.E.C. FORM S-8 REGISTRATION
On May 25, 2001, the Company filed its fourth Securities and Exchange
Commission Form S-8 Registration Statement No. 333-61650 under the
Securities Act of 1933, and it registered 1,500,000 of the Company's
$0.10 par value common shares for the purpose of distributing shares
pursuant to the plan contained in such registration. From the 1,500,000
shares registered 1,108,376 were issued, and 391,624 shares remain to be
issued as of June 30, 2002.
On June 10, 2002, the Company filed its fifth Securities and Exchange
Commission Form S-8 Registration Statement No. 333-90122 under the
Securities Act of 1933, and it registered 1,500,000 of the Company's
$0.10 par value common shares for the purpose of distributing shares
pursuant to the plan contained in such registration. None of the
1,500,000 shares registered were issued as of June 30, 2002.
g. COMMERCE GROUP CORP. EMPLOYEE BENEFIT ACCOUNT (CGCEBA)
This account was established for the purpose of compensating the
employees for benefits such as retirement, severance pay, and any other
related compensation that is mandatory under El Salvadoran labor
regulations, and/or as determined by the Officers of the Corporation.
The Directors provide the Officers of the Company with the authority to
issue its common shares to the CGCEBA on an as needed basis. Under this
plan, payment can be made to any employee of the Company or the Company's
subsidiaries. The CGCEBA has sold some of the shares issued to this
account from time to time to meet its obligations to its El Salvadoran
employees. A balance of 250,000 shares remain in the CGCEBA account as
of June 30, 2002.
(11) 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.
(12) BUSINESS SEGMENTS
- ----------------------
The Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related Information
became effective for fiscal years beginning after December 15, 1997.
SFAS 131 establishes standards for the way that public business
enterprises determine operating segments and report information about
those segments in annual financial statements. SFAS 131 also requires
those enterprises to report selected information about operating segments
in interim financial reports issued to shareholders. SFAS 131 further
establishes standards for related disclosure about products and services,
geographic areas, and major customers.
The Company presently has two reportable segments: mining and other.
The mining segment was engaged in the processing of gold. The mining
operations are temporarily suspended. The other segments are those
activities that are combined for reporting purposes.
(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.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - JUNE 30, 2002
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
----------------------------------------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters discussed in this report on Form 10-Q, when not historical
matters, are forward-looking statements that involve a number of risks
and uncertainties that could cause actual results to differ materially
from projected results. Such factors include, among others, the
speculative nature of mineral exploration, gold and silver commodity
prices, production and reserve estimates, litigation, environmental and
government regulations, general economic conditions, conditions in the
financial markets, political and competitive developments in domestic and
foreign areas in which the Company operates, availability of financing,
force majeure events, technological and operational difficulties
encountered in connection with the Company's mining activities, labor
relations, other risk factors as described from time to time in the
Company's filings with the Securities and Exchange Commission and other
matters discussed under this reporting category. Many of these factors
are beyond the Company's ability to control or predict. The Company
disclaims any intent or obligation to update its forward-looking
statements, whether as a result of receiving new information, the
occurrence of future events, or otherwise. Should one or more of those
risks or uncertainties materialize, or should any underlying assumption
prove incorrect, actual results or outcomes may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended.
Management's discussion and analysis ("MD&A") of the financial condition
and results of operations of the Company should be read in conjunction
with the audited consolidated financial statements and the notes thereto.
The Company prepares and files its consolidated financial statements and
MD&A in United States ("U.S.") dollars and in accordance with U.S.
generally accepted accounting principles ("GAAP").
The following discussion provides information on the results of
operations for the first quarterly periods ended June 30, 2002 and 2001
and the financial condition, liquidity and capital resources for the same
two-year period. The financial statements of the Company and the notes
thereto contain detailed information that should be referred to in
conjunction with this discussion.
RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
- ------------------------------------------------
ACCOUNTING OVERVIEW
- -------------------
A redefined structure of the financial statements for the first quarterly
periods ended 2002, 2001, 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. These advances are
restated and combined with the Company's Consolidated Financial
Statements. Although the elimination of interest income reduces the
retained earnings, it does not eliminate the interest charged by and
earned by the Company which is due and payable to it and which is
maintained additionally with a separate accounting. In effect, this
restructuring modifies only the financial reporting as at the time that
the profits for the gold mining operation are distributed, the interest
earned on these advances will be pa id first to the Company prior to any
profit distribution and pursuant to an agreement entered into by the
joint venture parties.
THE COMPANY'S CURRENT STATUS
- ----------------------------
PRECIOUS METAL MINING
The Joint Venture has produced gold from March 31, 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 presently lacks sufficient funds to perform a
major overhaul and to expand the SCMP facilities. There is also much
uncertainty at this time relative to the price of gold which in the past
months reflected a wide range of price fluctuations.
The Company's management has temporarily suspended its gold processing
until such time as it has adequate funds for the retrofitting,
rehabilitation, restoration, overhauling, and most importantly for the
expansion of the SCMP facilities.
The Company has a number of non-exclusive independent consulting
agreements for the purpose of raising the sum of up to U.S. $20 million.
The funds are to be used to purchase and install equipment, perform site
development, working capital for the SSGM open-pit, heap-leaching
operation, and for the expansion of the Joint Venture's SCMP.
Through December 1999, the Joint Venture produced gold on a curbed basis
primarily from the gold ore it is excavating from its SSGM open pit. The
gold 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 has suspended exploring the potential of one of the
other gold mine prospects identified as the San Felipe-El Potosi Mine and
its extension the El Capulin Mine. The Company's El Salvadoran legal
counsel is in the process of researching legal alternatives. The
Montemayor Mine and the Modesto Mine have been placed on a standby basis
pending the advice from its legal counsel relative to the filing of
applications for concessions (licenses) on the properties it owns or on
which it holds leases. All of the mining properties are located in the
Republic of El Salvador, Central America.
The Joint Venture will continue its attempts to commence its production
of gold. Its objectives are to have an expanded complementary operation
while continuing its endeavor to obtain sufficient funds for the SSGM
open-pit, heap-leach operation. The Company's main objective and plan,
through the Joint Venture, is to operate at the SSGM site, a moderate
tonnage, low-grade, open-pit, heap-leaching, gold-producing mine. It
intends to commence this gold-mining operation as soon as adequate
funding is in place and the gold price stabilizes at a higher level.
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 on a limited basis to conduct an exploration
program to develop additional gold ore reserves at the SSGM.
The Joint Venture produced gold from March 1995 through December 1999 at
the SCMP through a start-up or preliminary operation, which was a
forerunner of its greater goals. The Company's revenues, profitability
and cash flow are 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, acts of terrorism, or political and economic conditions, or for
that matter, many other reasons. The combined effect of these and other
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.
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 AND RELATED BUSINESSES
- -----------------------------------
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.
The Company intends to remain in the Internet and related businesses 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 experienced
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 has gone through a "shake-down" process which could mean more
realistic valuations and more favorable negotiations.
There can be no assurance that Ecomm's current strategy will be
successful as the current depressed market price of the Company's common
shares presently compels it from using its shares in an exchange for an
acquisition of an Internet company because of the substantial dilutive
effect it would have. Ecomm has not yet entered into any agreements for
the acquisition of any websites, web services or other technological
services. 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 FIRST QUARTER ENDED JUNE 30, 2002 COMPARED
TO JUNE 30, 2001 ON A RESTATED BASIS
- -----------------------------------------------------------------------
The Company, on a consolidated basis, including the Joint Venture and
excluding the interest income due from the Joint Venture, had a net loss
of ($10,577) or ($.0006) per share for this fiscal period compared to a
net loss of ($8,413) or $.0006 per basic share for its first quarter
ended June 30, 2001. This loss is primarily from the allocated portion
of its administrative expenses.
The Joint Venture suspended its gold mining and processing due to its
need to rehabilitate, overhaul, and expand the SCMP, and due to the
continuous decline and instability in the price of gold.
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
- -----------------------------------------------------
As of December 31, 1999, the Joint Venture 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, and the
capacity must be increased. The low price of gold did not provide an
adequate cash reserve for these needs. Additional equipment has to be
purchased, delivered and installed.
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 may produce 1,280 ounces of gold per month. It is necessary to
raise adequate funds from outside sources for this operation; the amount
required is dependent on the targeted daily volume of production. A sum
of U.S. $16 million would start the open-pit, heap-leach at a rate of
2,000 tons per day and the anticipated profits and cash flow then could
be used to expand the operation to 6,000 tons per day.
The Company continues to be cognizant of its cash liquidity until it is
able to produce adequate profits from its SSGM gold production. It will
attempt to obtain sufficient funds to assist the Joint Venture in placing
the SSGM into production as the anticipated profits from the existing
SCMP operation (unless accumulated over a period of time) appear
insufficient to meet the SSGM capital and the other mining exploration
requirements. In order to continue obtaining funds to conduct the Joint
Venture's exploration, exploitation, development, expansion programs, and
the production of gold from the SSGM open-pit, heap-leaching operation,
it is 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, merging, or developing an acceptable form of a combination
with other companies.
During the past, the Joint Venture was engaged in exploration,
exploitation and development programs designed to increase its gold ore
reserves. The prospects of expanding the gold reserves are positive.
The Company believes that the past invested funds significantly
contributed to the value of the SSGM and to the value of its other
mining prospects as the results of the exploratory efforts evidence the
potential for a substantial increase of gold ore reserves. The Company
was unable to obtain sufficient funds during this first quarter to
complete the modification and expansion of the SCMP or for its open-pit,
heap-leach operation.
The Company estimates that it will need up to U.S. $16 million to start
a 2,000 ton-per-day open-pit, heap-leaching operation. Eventually the
production capacity would be increased in stages to 6,000 tons per day so
that annual production could be 113,000 ounces of gold at the SSGM. The
use of the $16,000,000 proceeds is as follows: $8,000,000 for mining
equipment and the completion of erecting a crushing system; $3,033,548
for the processing equipment and site and infrastructure costs; and a sum
of $4,966,452 is to be used for working capital. The depressed price of
gold over the past years and the Company's incredibly low common share
market price are major deterrents in raising cash for the Company's
programs. During this first quarter there was more interest in gold, as
the price of gold continued to move upward and reached its highest price
in many years. There is much speculation and uncertainty as to the
future price of gold.
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. 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 will be greatly enhanced if the price of
gold continues to increase. 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 or
enter into other business arrangements to share these exploration costs
with other entities.
From September 1987 through June 30, 2002, the Company has advanced the
sum of $37,678,244 to the Joint Venture (which includes interest charges
payable to the Company), and three of the Company's subsidiaries have
advanced the sum of $590,265, for a total of $38,268,509. The investment
includes the charge of $21,256,386 for interest expense during this
period of time. 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 initial retrofitting,
repair, modernization and expansion of its SCMP facilities, for
consumable inventory, for working capital, for exploration and holding
costs of the San Felipe-El Potosi Mine, the Modesto Mine, the Hormiguero
Mine, and the Montemayor Mine, for SSGM infrastructure, including
rewiring, repairing and installation of about two miles of the Company's
electric power 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
- ---------
As of June 30, 2002, the Joint Venture employed between 30 and 40
full-time persons in El Salvador to perform its limited exploration,
exploitation, and development programs; to erect the cone crushing
system, to provide 24-hour seven-day-a-week security at three different
sites; to provide engineering, geology, drafting, and computer-related
services; and to handle the administration of its activities. None of
these employees are covered by any collective bargaining agreements. It
has developed a harmonious relationship with its employees, and it
believes that in the past, it was one of the largest single
non-agricultural employers in the El Salvador Eastern Zone. Also, the
Company employs up to four persons, including part-time help, in the
United States. Since the Joint Venture has laid off most of its
employees, the Joint Venture had to pay the severance pay and other
benefits to its employees and therefore it had to sell and continues to
sell the Company's common shares which were issued to the Commerce Group
Corp. Employee Benefit Account. El Salvador employees are entitled to
receive severance pay, which is based on one month's pay for each year of
employment.
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
- -------------------------------------
From September 1987 through June 30, 2002, the Company, and three of its
subsidiaries, have advanced to the Joint Venture $38,268,509. Included
in the total advances is the interest charged to the Joint Venture by the
Company which amounts to $21,256,386 through June 30, 2002. The Company
furnishes all of the funds required by the Joint Venture. This interest
charge has been eliminated from these financial statements.
EFFORTS TO OBTAIN CAPITAL
- -------------------------
Since the concession was granted, and through the present time,
substantial effort is exercised in attempting to secure 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, and
to continue the exploration of its other mining prospects.
The Company, Sanseb, and the Joint Venture consider the past political
situation in the Republic of El Salvador to have been unstable, and
believe that the final peace declaration on December 16, 1992, has put an
end to war. Presently, 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 interest, which
affected the market price of the Company's shares as well as the shares
of most of the world-wide mining companies. This decline in the
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 adequate financing to
conduct its operations from the same previous sources. There are no
assurances that funds will be available, except at this time, there is a
world-wide interest in owning gold. The price of gold has increased to
its highest level in many years; however, the price fluctuations create
an atmosphere of uncertainty.
ENVIRONMENTAL REGULATIONS
- -------------------------
The Company's operations are subject to environmental laws and
regulations adopted by various governmental authorities in the
jurisdictions in which the Company operates. Accordingly, the Company
has adopted policies, practices and procedures in the areas of pollution
control, product safety, occupational health and the production,
handling, storage, use and disposal of hazardous materials to prevent
material environmental or other damage, and to limit the financial
liability which could result from such events. However, some risk of
environmental or other damage is inherent in the business of the Company,
as it is with other companies engaged in similar businesses.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions for the reporting period and as of the financial statement
date. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent liabilities and the
reported amounts of revenues and expenses. Actual results could differ
from those amounts.
A critical accounting policy is one that is important to the portrayal of
the Company's financial condition and results, and requires the Company
to make difficult subjective and/or complex judgments. Critical
accounting policies cover accounting matters that are inherently
uncertain because the future resolution of such matters is unknown. The
Company believes the following accounting policies are critical policies:
accounting for its gold ore reserves, environmental liabilities, income
taxes and asset retirement obligations.
Gold ore reserves include proved reserves that represent estimated
quantities of gold in which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reserves under existing economic and operating conditions. The gold ore
reserves are based on estimates prepared by geology consultants and are
used to calculate depreciation, depletion and amortization (DD&A) and
determine if any potential impairment exists related to the recorded
value of the Company's gold ore reserves.
The Company reviews, on an as needed basis, its estimates of costs of
compliance with environmental laws and the cleanup of various sites,
including sites in which governmental agencies have designated the
Company as a potentially responsible party. When it is probable that
obligations have been incurred and where a minimum cost or a reasonable
estimate of the cost of compliance or remediation can be determined, the
applicable amount is accrued.
The Company makes certain estimates, which may include various tax
planning strategies, in determining taxable income, the timing of
deductions and the utilization of tax attributes.
Management is required to make judgments based on historical experience
and future expectations on the future abandonment cost, net of salvage
value, of its mining properties and equipment. The Company reviews its
estimate of the future obligation periodically and accrues the estimated
obligation based on the units of production method.
BUSINESS AND MARKET RISKS
- -------------------------
The Company continuously reviews the mining risks it encounters in its
day-to-day operations. It mitigates the likelihood and potential
severity of these risks through the application of high operating
standards. In addition, there is great emphasis on safety, training and
loss control programs at the various sites.
The Company's operations have been and in the future may be, affected to
various degrees by changes in environmental regulations, including those
for future site restoration and reclamation costs. The overall effect of
these changes upon the Company varies by jurisdiction, and are not
predictable but, given the Company's environmental policies and programs,
the effect of any such changes are not expected to be material.
(Subsequent event - reference is made to "Part II - Financial
Information, Item 6. Reports on Form 8-K.")
GOLD PRICE
- ----------
The Company's revenues, when it is in production, will be derived
primarily from the sale of gold. The Company's net income can vary
significantly with fluctuations in the market price of gold.
FOREIGN CURRENCY EXCHANGE RISK
- ------------------------------
The Company conducts the majority of its operations in the Republic of El
Salvador, Central America. Currently, El Salvador is on the U.S. dollar
system, and therefore there is no foreign currency exchange rate.
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.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - JUNE 30, 2002
PART II - FINANCIAL INFORMATION
Item 1. Legal Proceedings
None pending. Reference is made to "Item 6. Reports on Form
8-K."
Item 2. Changes in Securities
Reference is made to the financial statements which explain the
common shares and stock options issued and to be issued.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None, except the routine business matters included in the proxy
statement to be submitted to the shareholders of record as of
August 20, 2002 relating to an annual meeting of shareholders
to be held on October 18, 2002. Reference is made to the proxy
statement filed with the Securities and Exchange Commission on
July 23, 2002 for disclosure of the details.
Item 5. Other Information
None.
Item 6. Reports on Form 8-K
A Form 8-K was filed on August 6, 2002 to report that the El
Salvador Director of Hydrocarbons and Mines, a Department of
the El Salvador Ministry of Economy's Office, notified the
Company that it plans to cancel the Joint Venture's concession
(license), which is a right to extract precious metals from its
San Sebastian Gold Mine (SSGM) located in the Republic of El
Salvador, Central America. (Incorporated by reference as this
Form 8-K had been filed on August 8, 2002.)
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: August 13, 2002 ______________________________________
Edward L. Machulak
President, Chief Executive, Operating and
Financial Officer and Treasurer