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, 2003
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ To __________
Commission file number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1942961
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 20,716,129 common
shares of the Company's common stock, $0.10 par value, were issued and
outstanding as of July 31, 2003.
1
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE FIRST QUARTER ENDED JUNE 30, 2003
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, 2003.
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities 36
Item 3. Default Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Registrant's Signature Page 37
Sarbanes-Oxley Section 302 Certifications 38
2
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED BALANCE SHEETS
June 30, 2003 March 31, 2003
(Unaudited) (Audited)
------------- --------------
ASSETS
------
Current assets
Cash $ 21,284 $ 28,004
Investments 194,578 194,578
Accounts receivable 608,497 608,212
Inventories 39,562 39,562
Prepaid items and deposits 41,871 41,901
----------- -----------
Total current assets 905,792 912,257
Real estate (Note 5) 0 23,336
Property, plant and equipment, net 4,283,071 4,280,912
Mining resources investment 28,523,590 28,035,169
------------ ------------
Total assets $33,712,453 $33,251,674
============ ============
LIABILITIES
-----------
Current liabilities
Accounts payable $ 407,162 $ 454,719
Notes and accrued interest payable to
related parties (Notes 6 & 7) 8,423,537 8,027,380
Notes and accrued interest payable to
others (Note 6) 231,307 225,922
Accrued salaries 2,717,415 2,672,415
Accrued legal fees 327,015 326,941
Other accrued expenses 634,546 621,719
------------ ------------
Total liabilities 12,740,982 12,329,096
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
2003-none; 2002-none (Note 10) $ 0 $ 0
Common stock, $0.10 par value:
Authorized 50,000,000 shares;
(Note 10)
Issued and outstanding:
06/30/2003-20,716,129 (Note 10) 2,071,613
03/31/2003-20,407,429 (Note 10) 2,040,743
Capital in excess of par value 19,018,833 18,997,412
Retained earnings (deficit) (118,975) (115,577)
------------ ------------
Total shareholders' equity 20,971,471 20,922,578
Total liabilities and shareholders' ------------ ------------
equity $33,712,453 $33,251,674
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED)
2003 2002
---- ----
Revenues: $ 0 $ 0
------------ ------------
Expenses:
General and administrative 3,398 10,577
------------ ------------
Total expenses 3,398 10,577
Net profit (loss) $ (3,398) $ (10,577)
Credit (charges) for income taxes 0 0
------------ ------------
Net income (loss) after income tax credit (charge) $ (3,398) $ (10,577)
============ ============
Net income (loss) per share (Note 2) basic $ (.0002) $ (.0006)
============ ============
Net income (loss) per share (Note 2) diluted $ (.0002) $ (.0006)
============ ============
Weighted av. common shares outstanding (Note 2) 20,447,732 17,939,707
============ ============
Weighted av. diluted common shares (Note 2) 20,887,732 18,729,707
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
4
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THROUGH THE PERIOD ENDED JUNE 30, 2003 (UNAUDITED)
Common Stock
-----------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
---------- ---------- ----------- ----------
Balances March 31, 2001 15,794,008 1,579,401 $18,760,849 $(36,520)
Net income (loss) for
FY March 31, 2002 (43,171)
Common shares issued:
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 $(79,691)
Net income (loss) for
FY March 31, 2003 (35,886)
Common shares issued:
Dir./off./employee/
services comp. 693,221 69,322 85,848
Payment of debt 1,435,200 143,520 85,805
Cash 811,000 81,100 33,650
---------- ----------- ------------ -----------
Balances March 31, 2003 20,407,429 $2,040,743 $18,997,412 $(115,577)
Net income (loss)
for first quarter
ended June 30, 2003 (3,398)
Common shares issued:
Payment of debt/option
exercise 250,000 25,000 37,500
Cash 44,000 4,400 5,640
Share loans 14,700 1,470 1,617
Reduce asset account 0 0 (23,336)
---------- ----------- ------------ -----------
Balances June 30, 2003 20,716,719 $2,071,613 $19,018,833 $(118,975)
========== =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED)
2003 2002
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (3,398) $ (10,577)
Decrease (increase) in investments 0 10,500
Decrease (increase) in accounts receivable (285) 0
Decrease (increase) in prepaid items
and deposits 30 (1,996)
Increase (decrease) in accounts
payable and accrued liabilities (34,730) 19,046
Increase (decrease) in accrued salaries 45,000 45,000
Increase (decrease) in accrued legal fees 74 19,079
----------- ------------
Net cash provided by (used in)
operating activity 6,691 81,052
INVESTING ACTIVITIES:
Investment in mining resources (467,244) (418,715)
----------- ------------
Net cash used in investing activities (467,244) (418,715)
FINANCING ACTIVITIES:
Net borrowings 401,542 205,165
Common stock issued 52,291 143,251
Net cash provided by (used in) ----------- ------------
financing activities 453,833 348,416
Net increase (decrease) in cash
and cash equivalents (6,720) 10,753
Cash - beg. of year 28,004 39,081
----------- ------------
Cash - end of this period $ 21,284 $ 49,834
=========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
6
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, 2003 and 2002:
1. The following amounts of accrued interest expense were capitalized:
$344,379 (2003) and $286,297 (2002).
2. There was no interest expense paid in cash for these quarterly
periods in 2003 and 2002.
3. The Company paid no income taxes during the quarterly 2003 or 2002
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
------ -----
2003 0 $0
2002 0 $0
2. Other non-cash items:
2003 2002
---- ----
Accrued salaries $45,000 $45,000
Accrued legal fees 74 19,079
Accrued director fees 4,400 4,400
Consulting fees 9,000 9,000
------- -------
$58,474 $77,479
3. Non-cash equipment financing activities were none for 2003 and none
for 2002.
The accompanying notes are an integral part of these consolidated
financial statements.
7
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(1) THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
- ------------------------------------------------------------------
(a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant")
and its 82 1/2%-owned subsidiary, San Sebastian Gold Mines, Inc.
("Sanseb") both United States' corporations, have formed the
Commerce/Sanseb Joint Venture ("Joint Venture") for the purpose of
performing gold mining and related activities, including, but not
limited to, exploration, exploitation, development, extraction and
processing of precious metals in the Republic of El Salvador,
Central America. Gold bullion, currently the Joint Venture's
principal product, was produced (but not on a full production basis)
in El Salvador and refined and sold in the United States. Expansion
of exploration is a goal 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 concession/license permits are obtained. All of the mining
projects are located in the Republic of El Salvador, Central
America.
On March 3, 2003, the Company received an exploration license dated
February 24, 2003, for the exploration of minerals in an area
encompassing the SSGM, consisting of 42 square kilometers, which is
hereafter referred to as the "New SSGM Exploration
Concession/License" or the "New SSGM." This expanded area provides
the Company with an opportunity to increase its gold and silver ore
reserves. Included in this area are three formerly-operated gold
and silver mines: the La Lola Mine, the Santa Lucia Mine and the
Tabanco Mine.
As of March 31, 2000 the Joint Venture had temporarily suspended 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.
The Joint Venture plans to begin its open-pit, heap-leaching process
on the SSGM site when adequate funding becomes available, and if the
price of gold maintains the current price level. 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. It plans to commence
an exploration program on the New SSGM.
(b) Basis of presentation:
Management estimates and assumptions:
Certain amounts included in or affecting the Company's financial
statements and related disclosures must be estimated, requiring that
certain assumptions be made with respect to values or conditions
which cannot be made with certainty at the time the financial
statements are prepared. Therefore, the reported amounts of the
Company's assets and liabilities, revenues and expenses, and
associated disclosures with respect to contingent assets and
obligations are necessarily affected by these estimates. The
Company evaluates these estimates on an ongoing basis, utilizing
historical experience, consultation with experts, and other methods
considered reasonable in the particular circumstances.
Nevertheless, actual results may differ significantly from the
Company's estimates.
8
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(2) SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------
CONSOLIDATED STATEMENTS
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.
%
Owner- Charter/Joint Venture
ship Place Date
----- ----------- ----------
Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0 El Salvador 05/08/1960
Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974
San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968
Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0 Wisconsin & 09/22/1987
El Salvador
INVESTMENTS
The investments consist of securities held for the Commerce Group Corp.
Employee Benefit Account, and are stated at cost. The precious stones
included in the investment account are stated at cost.
ACCOUNTS RECEIVABLE
The accounts receivable primarily consists of the advances to Misanse, a
52%-owned subsidiary, which will be offset for the Misanse rental and
other charges included in the accounts payable due to Misanse.
INTERCOMPANY BALANCES
All intercompany balances and transactions have been eliminated.
INVENTORY
Inventory consists of consumable supplies and are stated at cost, which
is lower than the market value.
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.
9
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.
When in operation, maintenance and repairs will be 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 as of March
31, 2000, 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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This
Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. All provisions of this Statement will be effective
when the occurrence arises. The Company is in the process of determining
the impact of this standard on the Company's financial results when
effective. The Company's adoption of SFAS No. 143 should not have a
material impact on the Company's results of operations or financial
position.
10
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 are effective in the first
quarter of 2003. The Company anticipates that the impact of this new
standard should have no material impact on the financial statements taken
as a whole.
In December 2002, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS No. 148). SFAS No. 148,
amends SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No.
123), to provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirement of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used
on reported results. The amendment to SFAS no. 123 are effective for
financial statements for fiscal years ending after December 15, 2002. As
the Company accounts for stock-based employee compensation using the
intrinsic value method in accordance with APB No. 25, Accounting for
Stock Issued to Employees, the Company has adopted the disclosure
requirements of SFAS No. 148, effective April 1, 2003.
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.
11
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 each fiscal period.
If on June 30, 2003, 440,000 option shares were added to the weighted
number of shares which amount to 20,447,732 common shares issued and
outstanding, then the total number of fully diluted shares amount to
20,887,732. The loss per share for this period ended June 30, 2003 is
$.0002 cents per share. The same assumptions were used for the same 2003
fiscal period.
FOREIGN CURRENCY
The Company is not involved in foreign currency transactions because as
of January 1, 2001, the Republic of El Salvador, Central America adopted
the U.S. dollar system and pegged the exchange rate at 8.75 colones to
one U.S. dollar. Almost all of the money transactions in El Salvador are
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.
12
(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, 2003 June 30, 2002
--------------------------- ---------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Mineral
Proper-
ties
and
Deferred
Develop-
ment $28,523,590 $28,523,590 $27,602,545 $27,602,545
Property,
Plant
and
Equip-
ment 6,535,214 2,252,143 4,283,071 6,380,868 2,252,143 4,128,725
----------- ----------- ----------- ----------- ---------- -----------
$35,058,804 $ 2,252,143 $32,806,661 $33,983,413 $2,252,143 $31,731,270
=========== =========== =========== =========== ========== ===========
Vehicles, office, mining and laboratory equipment, buildings, etc. 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 effective March 31, 2000 in view of the weak price of gold and
the need to expand and rehabilitate these facilities, no depreciation has
been recorded.
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 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 in 1968 to
explore, exploit, research, and develop adequate gold reserves. Sanseb
produced gold from the SSGM from 1972 through February 1978.
13
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, 2003, the Company's investments, including charges for
interest expense to the Joint Venture, were $41,161,345 and three of the
Company's subsidiaries' advances were $590,265 for a total of
$41,751,610.
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, 2003 and 2002, the Company, Sanseb and three of the
Company's subsidiaries have invested (including carrying costs) the
following in its Joint Venture:
2003 2002
---- ----
The Company's advances (net of gold
sale proceeds) since 09/22/87 $41,161,345 $37,678,244
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 34,695,080 32,530,420
----------- ------------
Total: 82,872,785 77,225,024
Advances by the Company's three
subsidiaries 590,265 590,265
----------- -----------
Combined total investment $83,463,050 $77,815,289
=========== ===========
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 at the SSGM. The Joint
Venture plans to resume its exploration and expansion program to develop
additional gold ore reserves in the area
14
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. On March 3, 2003, the Company received the
New SSGM from the Ministry of Economy's Director of El Salvador
Department of Hydrocarbons and Mines (DHM) which includes and extensively
encompasses the existing SSGM. It is in the process of planning its
exploration program.
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 January 14, 2003, the Company entered into an amended and renewed
30-year lease agreement with Mineral San Sebastian Sociedad Anomina de
Capital Variable (Misanse) pursuant to the approval of the Misanse
shareholders and Misanse directors at a meeting held on January 12, 2003.
The renewed lease is for a period of thirty (30) years commencing on the
date that the Company receives its Renewed San Sebastian Gold Mine
Exploitation Concession/License, hereinafter identified as the "Renewed
SSGM," from the DHM. The lease is automatically extendible for one or
more equal periods. The Company will pay to Misanse for the rental of
this real estate the sum of five percent of the net sales of the gold and
silver produced from this real estate, however, the payment will not be
less than $343.00 per month. The Company has the right to assign this
lease without prior notice or permission from Misanse. This lease is
pledged as collateral for loans made to related parties (Note 7).
MINERAL CONCESSIONS/LICENSES
Renewed San Sebastian Gold Mine Exploitation Concession/License (Renewed
SSGM) - approximately 1.2306 square kilometers, Department of La Union,
El Salvador, Central America
On September 6, 2002, at a meeting held with the El Salvadoran Minister
of Economy and the DHM, it was agreed to submit an application for the
Renewed SSGM for a 30-year term and to simultaneously cancel the
concession obtained on July 23, 1987. On September 26, 2002, the Company
filed this application. On February 28, 2003 (received March 3, 2003)
the DHM admitted to the receipt of the application and the Company
proceeded to file public notices as required by Article 40 of the El
Salvadoran Mining Law and its Reform (MLIR). On April 16, 2003, the
Company's El Salvadoran legal counsel filed with the DHM notice that it
believed that it complied with the requirements of Article 40, and that
there were no objections; and requested that the DHM make its inspection
as required by MLIR Article 42. An inspection by the DHM was made. The
Company then provided a bond which was required by the DHM to protect
third parties against any damage caused from the mining operations, and
it paid the annual surface tax. Once issued, this Renewed SSGM will be
pledged as collateral to the same parties that held the previous
concession as collateral.
15
New SSGM Exploration Concession/License (New SSGM) - approximately
40.7694 square kilometers
On October 20, 2002, the Company applied for the New SSGM, which covers
an area of 42 square kilometers and includes approximately 1.2306 square
kilometers of the Renewed SSGM. The New SSGM is in the jurisdiction of
the City of Santa Rosa de Lima in the Department of La Union and in the
Nueva Esparta in the Department of Morazan, Republic of El Salvador,
Central America. On February 24, 2003, the DHM issued the New SSGM for a
period of four years starting from the date following the notification of
this resolution which was received on March 3, 2003. The New SSGM may be
extended for two two-year periods, or for a total of eight years.
Besides the San Sebastian Gold Mine, three other formerly operative gold
and silver mines known as the La Lola Mine, the Santa Lucia Mine, and the
Tabanco Mine are included in the New SSGM.
Nueva Esparta Exploration Concession/License (Nueva Esparta) - 45 square
kilometers
On or about October 20, 2002, the Company filed an application with the
DHM for the Nueva Esparta, which consists of 45 square kilometers north
and adjacent to the New SSGM. This rectangular area is in the
Departments of La Union (east) and Morazan (west) and in the jurisdiction
of the City of Santa Rosa de Lima, El Salvador, Central America.
Included in the Nueva Esparta are eight other formerly operated gold and
silver mines known as: the Grande Mine, the Las Pinas Mine, the Oro
Mine, the Montemayor Mine, the Banadero Mine, the Carrizal Mine, the La
Joya Mine and the Copetillo Mine. The application is pending.
El Salvador Mineral Production Fees
Effective February 1996, the Government of El Salvador passed a law which
required mining companies to pay to it three percent of its gross
gold/silver 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
fee has been reduced to two percent of the gross gold receipts. The
Company, in compliance with the new law, has, or it plans to file
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 west 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.
16
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 on a month-to-month basis
approximately 4,032 square feet of office space in Milwaukee, Wisconsin.
17
(6) NOTES PAYABLE AND ACCRUED INTEREST
- ---------------------------------------
06/30/03 06/30/02
-------- --------
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, Misanse lease, real
estate and all other assets owned by
the Company, its subsidiaries and the
Joint Venture as collateral. (Note 7) $8,423,537 $7,121,251
Other
Short-term notes and accrued interest
(June 30, 2003, $96,307 and June 30,
2002, $424,093) 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. 231,307 762,039
---------- ----------
Total: $8,654,844 $7,883,290
========== ==========
(7) RELATED PARTY TRANSACTIONS
- -------------------------------
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 22 and one-quarter years,
including vacation pay, for a total of $2,677,765.
In addition, with the consent and approval of the Directors, the
President of the Company, as an individual and not as a Director or
Officer of the Company, entered into the following financial transactions
with the Company, the status of which is reflected as of June 30, 2003:
The amount of cash funds which the Company has borrowed from its
President from time to time, together with accrued interest, amounts to
$5,790,875. 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 June 30, 2003, an aggregate of $858,210,
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
18
with the terms and conditions of Director-approved, open-ended loan
agreements dated June 20, 1988, October 14, 1988, May 17, 1989, and April
1, 1990.
On February 16, 1987, the Company granted its President, by unanimous
consent of the Board of Directors, compensation in the form of a bonus in
the amount of two percent of the pre-tax profits realized by the Company
from its gold mining operations in El Salvador, payable annually over a
period of twenty years commencing on the first day of the month following
the month in which gold production commences.
The President, 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, 2003:
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 $1,191,235; 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 options to purchase 250,000
common shares on or before July 2, 2003, at a price of $.25 per share.
The terms of this transaction are no less favorable than those obtained
from unrelated third parties. On June 24, 2003, GLSCO exercised its
option right to purchase 250,000 restricted common shares at a price of
$.25 per share.
The Company's Directors have consented and approved the following
transactions of which the status of each are reflected as of June 30,
2003:
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 $446,749 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 $300,600 for services rendered
from October 1994.
19
The Law Firm which represents the Company in which a son of the President
is a principal is owed the sum of $327,015 for 1,767.3 hours of legal
services rendered from July 1980 through June 30, 2003. 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 $136,468 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. 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
- -----------------------------------------
2003 2002
---- ----
Total Interest Total Interest
Advances Charges Advances Charges
----------- ----------- ----------- -----------
Beginning balance April 1 $40,181,015 $23,751,735 $36,729,924 $20,448,289
June 30 first quarter 980,330 833,146 948,320 808,097
----------- ----------- ----------- -----------
Total Company advances 41,161,345 24,584,881 37,678,244 21,256,386
Advances by three of the
Company's subsidiaries 590,265 0 590,265 0
----------- ----------- ----------- -----------
June 30 total net advances $41,751,610 $24,584,881 $38,268,509 $21,256,386
=========== =========== =========== ===========
(8) COMMITMENTS
- ----------------
Reference is made to Notes 2, 4, 5, 6, 7, 10 and 12.
(9) INCOME TAXES
- -----------------
At March 31, 2003, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of
approximately $5,063,150 which may be carried forward to offset future
taxable income; the net operating losses expire at various times to the
year of 2018.
(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 20,716,129 shares
20
were issued and outstanding as of June 30, 2003. 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, 2003 or 2002.
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:
06/30/03 03/31/03
------------------ ----------------
Weighted Weighted
Option Average Option Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beg. yr. 960,000 $0.22 670,000 $0.22
Granted 0 N/A 290,000 $0.19
Exercised (270,000) $0.25* 0 N/A
Forfeited (60,000) $0.25* 0 N/A
Expired (190,000) $0.25* 0 N/A
--------- ----- ---------- -----
Outstanding, end of period 440,000 $0.17 960,000 $0.21
========= ===== ========== =====
*Exercised, forfeited or expired price.
A summary of the outstanding stock options as of June 30, 2003,
follows:
Weighted Average Weighted
Range of Amount Remaining Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- --------------
Up to $2.99 440,000 .9519 years $0.17
There were no options issued to any Director, Officer, or employee.
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, from time to time, 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 from time
to time 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
June 30, 2003, there were no shares due to other parties for shares
borrowed or for interest payment.
f. S.E.C. FORM S-8 REGISTRATION
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. From the 1,500,000
shares registered 51,597 shares were issued, and 1,448,403 shares remain
to be issued as of June 30, 2003.
g. COMMERCE GROUP CORP. EMPLOYEE BENEFIT ACCOUNT (CGCEBA)
This account was established for the purpose of compensating the
Company's 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. 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. As of June 30, 2003, 321,000 shares remained in
the account.
(11) CERTAIN CONCENTRATIONS AND CONCENTRATIONS OF CREDIT RISK
- --------------------------------------------------------------
The Company is subject to concentrations of credit risk in connection
with maintaining its cash primarily in two financial institutions for the
amounts in excess of levels. One is insured by the Federal Deposit
Insurance Corporation. The other is an El Salvadoran banking institution
which the Company uses to pay its El Salvadoran expenses and obligations.
The Company considers the U.S. institution to be financially strong and
does not consider the underlying risk at this time with its El Salvadoran
bank to be significant. To date, these concentrations of credit risk
have not had a significant effect on the Company's financial position or
results of operations.
22
The Company, when it produced gold and silver, sold its gold and silver
production predominantly to one customer. Given the nature of the
commodities being sold, and because many other potential purchasers of
gold and silver exist, it is not believed that the loss of such customer
would adversely affect the Company.
The Company is not subject to credit risk in connection with any hedging
activities as it has not hedged any of its gold production. If the
Company changes its policies, then it will only use highly-rated credit
worthy counterparties, therefore it should not anticipate
non-performance.
(12) CONTINGENCIES
- ------------------
Based upon current knowledge, the Company believes that it is in
compliance with the U.S. and El Salvadoran 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) 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.
(14) 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.
23
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - JUNE 30, 2003
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 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, the financial condition, liquidity and capital resources for
the first quarterly period ended June 30, 2003 and 2002. The financial
statements of the Company and the notes thereto contain detailed
information that should be referred to in conjunction with this
discussion.
ACCOUNTING POLICIES AND ESTIMATES
- ---------------------------------
The ensuing discussion and analysis of financial condition and results of
operations are based on the Company's consolidated financial statements,
prepared in accordance with accounting principles generally accepted in
the United States of America and contained within this report on S.E.C.
Form 10-Q. Certain amounts included in or affecting the Company's
financial statements and related disclosures must be estimated, requiring
that certain assumptions be made with respect to values or conditions
which cannot be made with certainty at the time the financial statements
are prepared. Therefore, the reported amounts of the Company's assets
and liabilities, revenues and expenses, and associated disclosures with
respect to contingent assets and obligations are necessarily affected by
these estimates. The more significant areas requiring the use of
management estimates and assumptions relate to mineral reserves that are
the basis for future cash flow estimates and units-of-production
amortization determination; recoverability and timing of gold production
from the heap-leaching process; environmental, reclamation and closure
obligations; asset impairments (including estimates of future cash
flows); useful lives and residual values of intangible assets; fair value
of financial instruments; valuation allowances for deferred tax assets;
and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions.
24
The Company believes the following significant assumptions and estimates
affect its more critical practices and accounting policies used in the
preparation of its consolidated financial statements.
From time to time, the Company estimates its ore reserves when it is in
production. There are a number of uncertainties inherent in estimating
quantities of reserves, including many factors beyond the control of the
Company. Ore reserve estimates are based upon engineering evaluations of
assay values derived from samplings of drill holes and other openings.
Additionally, declines in the market price of gold may render certain
reserves containing relatively lower grades of mineralization uneconomic
to mine. Further, availability of permits, changes in operating and
capital costs, and other factors could materially and adversely affect
ore reserves. The Company uses its ore reserve estimates in determining
the unit basis for mine depreciation and closure rates, as well as in
evaluating mine asset impairments. Changes in ore reserve estimates
could significantly affect these items.
The Company will assess its producing properties and undeveloped mineral
claims and leases for impairment when events or changes in circumstances
warrant and at least annually. For producing properties and equipment,
an impairment is recognized when the estimated future cash flows
(undiscounted and without interest) expected to result in the use of the
asset are less than the carrying amount of that asset. Measurement of
the impairment loss is based on discounted cash flows. Undeveloped
mineral claims and leases are measured on a fair value basis. Fair value
with respect to such mineral interest, pursuant to Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, effective January 1, 2002, would generally be
assessed with reference to comparable property sales transactions in the
market place.
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS128), Earnings per Share in prior years. SFAS128's objective is to
simplify the computation of earnings per share (EPS) and to make the U.S.
standard more compatible with that of other countries and the
International Accounting Standards Committee. SFAS128 supersedes APB
Opinion 15, replacing the presentation of "primary" and "fully diluted"
EPS with "basic" and "diluted" EPS. Basic EPS is computed by dividing
income available to common shareholders (net income less any dividends
declared on preferred stock and any dividends accumulated on cumulative
preferred stock) by the weighted average number of common shares
outstanding. Diluted EPS requires an adjustment to the denominator to
include the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. The
numerator is adjusted to add back any convertible preferred dividends and
the after-tax amount of interest recognized with any convertible debt.
The financial statements for the quarterly periods ended June 30, 2003
and 2002 and prior years reflect and include Commerce Group Corp.'s
subsidiaries and the Commerce Group Corp./Sanseb Joint Venture (Joint
Venture) on a consolidated basis. Prior to the fiscal year ended March
31, 1997, 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. Now 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. At
such time when the profits from the gold mining operation are
distributed, the interest earned on these advances will be paid first to
the Company pursuant to an agreement entered into by the joint venture
parties.
25
THE COMPANY'S CURRENT STATUS
- ----------------------------
CURRENT EVENTS
In the S.E.C. Form 10-Q filing for the nine-month period ended December
31, 2002, the Company reported the status of the concession/license
filings with the El Salvador Department of Hydrocarbons and Mines (DHM).
Since that time, the following events have taken place:
RENEWED SAN SEBASTIAN GOLD MINE EXPLOITATION CONCESSION/LICENSE (RENEWED
SSGM) - APPROXIMATELY 1.2306 SQUARE KILOMETERS, DEPARTMENT OF LA UNION,
EL SALVADOR, CENTRAL AMERICA
On February 28, 2003 (received March 3, 2003) the DHM admitted to the
receipt of the application and the Company proceeded to file public
notices as required by Article 40 of the El Salvadoran Mining Law and its
Reform (MLIR). On April 16, 2003, the Company's El Salvadoran legal
counsel filed with the DHM notice that it believed that it complied with
the requirements of Article 40, and that there were no objections; and
requested that the DHM make its inspection as required by MLIR Article
42. The DHM inspection was made, a bond was furnished, and the land
surface fees were paid. The Company expects a 30-year exploitation
concession/license to be issued.
NEW SSGM EXPLORATION CONCESSION/LICENSE (NEW SSGM) - APPROXIMATELY
40.7694 SQUARE KILOMETERS
On February 24, 2003, the DHM issued the New SSGM for a period of four
years starting from the date following the notification of this
resolution which was received on March 3, 2003. The Company has made
contact with some of the property owners and it expects to commence
exploration in the following three formerly-operated mines: La Lola Mine,
Santa Lucia Mine and the Tabanco Mine.
NUEVA ESPARTA EXPLORATION CONCESSION/LICENSE (NUEVA ESPARTA) - 45 SQUARE
KILOMETERS
On or about October 20, 2002, the Company filed an application with the
DHM for the Nueva Esparta, which consists of 45 square kilometers north
and adjacent to the New SSGM. This application is pending.
GOLD ORE RESERVES (06/30/03)
The Company's geologists have defined the following San Sebastian Gold
Mine gold ore reserves:
Tons Average Grade Ounces
---- ------------- ------
Virgin ore 14,404,096 0.081 1,166,732
Stope fill estimated 1,000,000 0.340 340,000
---------- ---------
Totals 15,404,096 1,506,732
The estimated recoverable ounces by processing through the San Cristobal
Mill and Plant ranges from 85% to 95%; the recovery of gold from the
heap-leaching operations should range from 60% to 70%.
PRECIOUS METAL MINING
The Joint Venture has produced gold from March 31, 1995 through 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
26
February 23, 1993, and the SCMP operations were suspended as of March 31,
2000. During this period, the price of gold suffered a severe decline.
The price of gold has gradually increased since January 2002.
Although while in operation 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.
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. During the past 18 months, the price
of gold has increased to a level to place the SCMP into a viable
position.
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.
From April 1, 1995 through December 1999, the Joint Venture produced
gold on a curbed basis primarily from processing the tailings and from
the virgin 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. The exploration of the Montemayor Mine and the Modesto
Mine has 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 the current 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. Since it
has the New SSGM, it is planning to explore selected areas, and when it
receives the Renewed SSGM, it plans to commence production of gold and
silver after funds are available.
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.
27
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.
RESULTS OF OPERATION FOR THE FIRST QUARTER ENDED JUNE 30, 2003 COMPARED
TO JUNE 30, 2002
- -----------------------------------------------------------------------
There are no revenues as the Company has suspended its gold production
until it is able to procure the funds it requires to rehabilitate,
retrofit, overhaul, and expand its SCMP, when it has funds to commence an
open-pit, heap-leach operation at the SSGM site, and when the price of
gold stabilizes at a price level to assure a profitable operation. The
Company recorded a net loss of ($3,398) or $.0002 cents per share. This
compares to a net loss of $10,577 or $.0006 cents per share for the first
quarterly period ended June 30, 2002.
There was no current or deferred provision for income taxes during this
fiscal period ended June 30, 2003 or 2002. Additionally, even though the
Company has an operating tax loss carryforward, the Company has
previously recorded a net deferred tax asset due to an assessment of the
"more likely than not" realization criteria required by the Statement of
Financial Accounting Standards No. 109, Accounting for Taxes.
Inflation did not have a material impact as there were no operations.
The Company does not anticipate that inflation will have a material
impact on future operations during this fiscal year.
Interest expense in the sum of $334,584 was recorded by the Joint Venture
during this fiscal period compared to $286,297 for the same period in
2002, and it was eliminated by reducing the interest income earned from
the Joint Venture.
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 will continue to do so until such time when
it is in full production. 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 halted its SCMP operations
(official suspension took place as of March 31, 2000) until such time as
it has adequate funding to repair, retrofit, overhaul and expand the mill
to process its gold ore, and at such time that the price of gold will
stabilize at a higher price. After almost five years of 24-hour-per-day
operation with used equipment, the facilities require a major overhaul.
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.
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 reach 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
28
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 once depressed price of gold has gradually increased since
January 2002. However, the price of gold has been darkened by
geopolitical tensions, recession fears, corporate malfeasance and reports
of deflation. The Company's incredibly low common share market price is
a major deterrent in raising cash for the Company's programs.
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 have to borrow funds by issuing open-ended, secured,
on-demand or unsecured promissory notes, by selling its shares to its
directors, officers or other interested investors, or by entering into a
joint venture, merging, or developing an acceptable form of a business
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 SSGM 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.
Thus far, the Company was unable to obtain sufficient funds to complete
the modification and expansion of the SCMP or for its open-pit,
heap-leach operation.
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 exploration 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. On March 5, 2003, the Company reported on the status of the
Renewed SSGM and on the status of the New SSGM which may increase the
potential and add gold and silver ore reserves. Elsewhere in this report
are detailed explanations of the issuance of the New SSGM.
From September 1987 through June 30, 2003, the Company has advanced the
sum of $41,161,345 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 $41,751,610. This
investment includes the charge of $24,584,881 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
29
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, all other
related needs, and most recently, the exploration of the New SSGM.
EMPLOYEES
- ---------
As of June 30, 2003, the Joint Venture employed between 34 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
- -------------------------------------
Since September 1987 through June 30, 2003, the Company, and three of its
subsidiaries, have advanced to the Joint Venture $41,751,610. Included
in the total advances is the interest charged to the Joint Venture by the
Company which amounts to $24,584,881 through June 30, 2003. 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 the conflict. Even though many years have passed, the stigma of
the past unfavorable political status in the Republic of El Salvador
continues to exist 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 equity capital. The Company believes that it will be able
to obtain adequate financing to conduct its operations from the same
30
sources as in the past. There are no assurances that funds will be
available, except at this time, there is a greater world-wide interest in
the ownership of gold. The price of gold continues to increase since
January 2002.
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.
The DHM requires environmental permits to be issued in connection with
the application of the Renewed SSGM. The issuance of these permits are
under the jurisdiction of the El Salvador Ministry of Environment and
Natural Resources Office (MARN). On October 15, 2002, MARN issued an
environmental permit under Resolution 474-2002 for the SCMP. On October
20, 2002, MARN issued an environmental permit under Resolution 493-2002
for the Renewed SSGM Exploitation area. With these permits in hand, the
Company, on November 5, 2002, filed an application for the Renewed SSGM
for a period of 30 years.
DIVIDENDS
- ---------
For the foreseeable future, it is anticipated that the Company will use
all of its earnings to finance its growth and expansion, therefore,
dividends will not be paid to shareholders.
IMPACT OF INFLATION
- -------------------
The impact of inflation on the Company has not been significant in recent
years because of the relatively low rates of inflation and deflation
experienced in the United States.
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 and
undeterminable. 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 internal or independent
geology consultants. They are used to calculate depreciation,
31
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 actual costs 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, which can differ from
estimates due to changes in laws and regulations, discovery and analysis
of site conditions and changes in technology.
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 will accrue the
estimated obligation based on the adoption of SFAS No. 143 as described
in the following section, "Recently Issued Accounting Developments." The
implementation of this standard had no material impact on the financial
statements.
RECENTLY ISSUED ACCOUNTING DEVELOPMENTS
- ---------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which supersedes Accounting Principles
Board Opinion (APB) No. 16, "Business Combinations." This Statement
requires that all business combinations be accounted for by the purchase
method, establishes specific criteria for the recognition of intangible
assets separately from goodwill and requires unallocated negative
goodwill to be written off immediately as an extraordinary gain. The
provisions of the Statement apply to business combinations initiated
after June 30, 2001. For business combinations accounted for using the
purchase method before July 1, 2001, the provisions of this Statement are
effective in the first quarter of 2002. The Company anticipates that the
impact of this new standard should not have a material impact on the
financial statements taken as a whole.
In July 2001, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," which supersedes the Accounting Principles
Board (APB) Opinion No. 17, "Intangible Assets." This Statement
addresses the accounting and reporting of goodwill and other intangible
assets subsequent to their acquisition. The Statement also provides
specific guidance on testing goodwill and intangible assets for
impairment. SFAS No. 142 provides that (i) goodwill and indefinite-lived
intangible assets will no longer be amortized, (ii) impairment will be
measured using various valuation techniques based on discounted cash
flows, (iii) goodwill will be tested for impairment at least annually at
the reporting unit level, (iv) intangible assets deemed to have an
indefinite life will be tested for impairment at least annually and (v)
intangible assets with finite lives will be amortized over their useful
lives. All provisions of this Statement are effective in the first
quarter of 2003. The Company anticipates that the impact of this new
standard should not have any material impact on the financial statements
taken as a whole.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This
Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. All provisions of this Statement will be effective
32
when the occurrence arises. The Company is in the process of determining
the impact of this standard on the Company's financial results when
effective. The Company's adoption of SFAS No. 143 should not have a
material impact on the Company's results of operations or financial
position.
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 are effective in the first
quarter of 2003. The Company anticipates that the impact of this new
standard should have no material impact on the financial statements taken
as a whole.
In April 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS No. 145) which is generally effective for transactions
occurring after May 15, 2002. Through the rescission of FASB Statements
4 and 64, SFAS No. 145 eliminates the requirement that gains and losses
from extinguishment of debt be aggregated and, if material, be classified
as an extraordinary item net of any income tax effect. SFAS No. 145 made
several other technical corrections to existing pronouncements that may
change accounting practice. The Company does not believe SFAS No. 145
should have any material impact on its results of operations or financial
position.
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 146, Accounting for Costs Associated with Exit
or Disposal Activities (SFAS No. 146). SFAS No. 146 is effective for
exit or disposal activities that are initiated after March 31, 2003.
This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The Company does
not believe that SFAS No. 146 should have a material impact on its
results of operations or financial position.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(FIN No. 45). FIN No. 45 elaborates on the disclosures to be made by the
guarantor about is obligations under certain guarantees. FIN No. 45 also
clarifies that a guarantor is required to recognize, at the inception of
a guarantee, a liability for the fair value of the obligation undertaken
in issuing the guarantee. As required by FIN No. 45, the Company has
adopted the disclosure requirements effective March 31, 2003. The
Company believes that the initial recognition and measurement provisions
of FIN No. 45 on a prospective basis for guarantees issued or modified
after March 31, 2003 should not have any material impact on its results
of operations or financial position.
In December 2002, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS No. 148). SFAS No. 148,
amends SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS No.
123) to provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of
33
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. The amendments to SFAS No. 123 are effective for financial
statements for fiscal years ending after December 15, 2002. As the
Company accounts for stock-based employee compensation using the
intrinsic value method in accordance with APB No. 25, Accounting for
Stock Issued to Employees, the Company has adopted the disclosure
requirements of SFAS No. 148, effective April 1, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
COMMODITY PRICES
- ----------------
When in production, the Company's earnings and cash flow will be
significantly impacted by changes in the market price of gold. Gold
prices can fluctuate widely and are affected by numerous factors, such as
demand, production levels, economic policies of central banks, producer
hedging, and the strength of the U.S. dollar relative to other
currencies. During the last five years, the average annual market price
of gold has fluctuated between $271 per ounce and $365 per ounce. The
Company has not been engaged in any hedging contracts whatsoever.
FOREIGN CURRENCY
- ----------------
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 all receipts and expenditures are in U.S. dollars.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of
the Securities and Exchange Commission ("SEC"), means controls and other
procedures that are designed to ensure that information required to be
disclosed in the reports that the Company files or submits to the SEC
under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by the Company in the
reports that it files or submits to the SEC under the Act is accumulated
and communicated to the Company's management, including its principal
executive officer and its principal financial officer, as appropriate to
allow timely decisions to be made regarding required disclosure. The
Company's President, Treasurer, Chief Executive, Operating and Financial
Officer and Executive Vice President and Secretary have evaluated the
Company's disclosure controls and procedures as of a date within 90 days
of the filing date of this Form 10-Q and have concluded that the
Company's disclosure controls and procedures are effective as of the date
of such evaluation.
Changes in Internal Controls
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified
Public Accountants' Codification of Statement on Auditing Standards, AU
Section 319, means controls and other procedures designed to provide
reasonable assurance regarding the achievement of objectives in the
reliability of the Company's financial reporting, the effectiveness and
efficiency of the Company's operations and the Company's compliance with
applicable laws and
34
regulations. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect
such controls subsequent to the date the Company carried out its
evaluation.
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. 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.
35
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - JUNE 30, 2003
PART II - FINANCIAL INFORMATION
Item 1. Legal Proceedings
None pending.
Item 2. Changes in Securities
Reference is made to the financial statements which explain
the number of common shares and stock options issued during
this three-month period ended June 30, 2003.
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 19, 2003 relating to an annual meeting of
shareholders to be held on October 17, 2003. Reference is
made to the proxy statement filed with the Securities and
Exchange Commission on July 14, 2003 for disclosure of the
details.
Item 5. Other Information
None.
Item 6(a). Exhibits and Reports on Form 8-K
Exhibit No. Description of Exhibit
----------- ----------------------
99.0 Additional Exhibits
99.1* Certification of President,
Treasurer, Chief Executive,
Operating and Financial Officer
99.2* Certification of Executive Vice
President and Secretary
*Filed herewith
Item 6(b). Form 8-K
None.
36
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 7, 2003 ______________________________________
Edward L. Machulak
President, Chief Executive, Operating and
Financial Officer and Treasurer
37
CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Edward L. Machulak, President, Treasurer, Chief Executive, Operating
and Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commerce Group
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Edward L. Machulak
Date: August 7, 2003 _________________________________
Edward L. Machulak
President, Treasurer,
Chief Executive, Operating and
Financial Officer
38
CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Edward A. Machulak, Executive Vice President and Secretary, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Commerce Group
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Edward A. Machulak
Date: August 7, 2003 _________________________________
Edward A. Machulak
Executive Vice President,
and Secretary
39