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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2001
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 incorporation or organization) (I.R.S. Employer
Identification No.)
6001 North 91st Street
Milwaukee, Wisconsin 53225-1795
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 462-5310
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Shares $0.10 par value Boston Stock Exchange
Over The Counter Bulletin Board (OTC BB)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the closing price of the OTC BB on April 25, 2001, was
approximately $1,524,296.
Common shares outstanding as of March 31, 2001, were 15,794,008.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporated by reference from the registrant's definitive Proxy
Statement for its 2001 Annual Meeting of Shareholders to be filed, pursuant to
Regulation 14A, no later than 120 days after the close of the registrant's
fiscal year.
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COMMERCE GROUP CORP.
2001 FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended March 31, 2001
TABLE OF CONTENTS
Page
PART I
Item 1.
Business................................................................... 3
Item 2.
Properties..................................................................18
Item 3.
Proceedings................................................................29
Item 4. Submission of Matters to a Vote of Security
Holders.....................................................................30
Item 4(a). Executive Officers and Managers of the
Company.....................................................................30
PART II
Item 5. Market for the Company's Common Stock and Related Stockholders'
Matters.....................................................................32
Item 6. Selected Financial
Data........................................................................33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations..................................................................34
Item 8. Financial Statements and Supplementary
Data........................................................................43
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure...................................................................67
PART III
Item 10. Directors and Executive Officers of the
Registrant...................................................................67
Item 11. Executive
Compensation.................................................................67
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................................67
Item 13. Certain Relationships and Related
Transactions.................................................................67
..
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.........................................................................68
Safe Harbor Statement
This document includes certain "forward-looking statements" within the meaning
of Section 21E of the United States Securities Exchange Act of 1934, as amended.
All statements, other than statements of historical fact, included herein,
including without limitation, statements regarding potential mineralization and
reserves, exploration results, and future plans and objectives of Commerce Group
Corp. ("Commerce"), are forward-looking statements that involve various risks
and uncertainties. There can be no assurance that such statements will prove to
be accurate, and actual results and future events could differ materially from
those anticipated in such statements. Important factors that could cause actual
results to differ materially from Commerce's expectations are disclosed under
various sections of this and other documents filed from time to time with the
United States Securities and Exchange Commission and the Boston Stock Exchange,
Inc.
PART I
Item 1. Business
General
Commerce Group Corp. ("Commerce," the "Company," and/or the "Registrant") is the
only precious metals company that has produced gold in the past ten years in the
Republic of El Salvador, Central America. Commerce also is involved in the
exploration, exploitation and development of precious metals in El Salvador. It
has been active in El Salvador since 1968. Its gold ore reserve exceed 1.5
million ounces. In conjunction with its strategy, Commerce is determined to
acquire a business combination to assist it in achieving its goals. It continues
to seek compatible acquisition or merger candidates in the precious metals field
and/or in the Internet business. The Company's ambition is to make certain that
it can increase shareholder value by converting its gold ore reserves into a
profitable mode and cash flow.
Commerce has been a Wisconsin-chartered corporation since its merger from a
State of Delaware corporation on April 1, 1999, and its corporate headquarters
are based in Milwaukee, Wisconsin. It was organized in 1962 and its common
shares have been publicly traded since 1968. The Company's shares have been
trading on the Over the Counter Bulletin Board (OTCBB) under the Symbol CGCO
since May 5, 1999. The Company is in the business of precious metals mining and
is reactivating its interest in the Internet business.
Precious Metal Mining
Commerce presently is engaged in the exploration, exploitation, and development
of gold and silver mines in the Republic of El Salvador, Central America,
through its Commerce/Sanseb Joint Venture ("Joint Venture"). Commerce holds a
nearly 100% interest in the Joint Venture which owns the concession rights to
extract gold from the San Sebastian Gold Mine ("SSGM").
Commerce's objective is to enhance the value of its shares by profits, cash
flow, and by increasing its gold ore reserves. This also can be achieved by its
continuing to be a low-cost gold producer, by increasing production and by
expanding its gold ore reserves.
Commerce's current goal is to secure sufficient capital to increase its
production of gold to 113,000 ounces per year and to develop additional gold ore
reserves. The Company expects to increase production by developing an open-pit,
heap-leach operation on site at the SSGM and by acquiring additional mining
equipment which will increase the processing of its higher grade virgin ore at
the San Cristobal Mill and Plant ("SCMP"). The heap-leach operation will have
the capability of producing (through processing a higher volume of gold ore)
significantly more gold than could be produced at the SCMP which has a present
capacity of processing 200 tons of gold ore per day. Commerce will also continue
to explore areas contiguous to the SSGM site, and it also is planning drill
programs at its other potential mining prospects.
Operations
On December 31, 1999, the Joint Venture decided to temporarily suspend its
processing of gold ore at its SCMP until such time as it has adequate funds to
retrofit, restore, rehabilitate, and expand its mill and plant. A major
overhauling is needed to preserve the integrity of the equipment. The initial
resumption of producing gold was with the SCMP used equipment the Joint Venture
purchased on February 23, 1993. Even though the Joint Venture has maintained
this mill and plant on a continuous basis, certain basic structural components
are worn out and need to be replaced or overhauled. Another concern this fiscal
year is the substantial decline in the world market price of gold after it
peaked in October 1999. Concurrent with the decision to suspend processing gold
ore is the need to expand the SCMP facilities from the existing 200-ton-per-day
capacity to a 500-ton-per-day operation. From March 31, 1995 through December
31, 1999 when production was suspended, 22,710 ounces of bullion containing
13,305 ounces of gold and 4,667 ounces of silver were produced at the SSGM and
then sold at the respective current world market price.
There are approximately 1.5 million ounces of proven and estimated gold ore
reserves at the SSGM. Currently, and for all financial statement periods
presented herein, the SSGM is the only one of the Company's mining properties
which has generated revenues, although there are strong initial indications of
commercial gold ore present at the other gold mine sites.
At the current stage of the exploration and development, the Company's
geologists have defined the following gold reserves:
Ounces
----------------------------
Tons Average Grade Contained Probable
1. San Sebastian Gold Mine
(a) Virgin ore, dump waste material and
tailings 14,404,096 0.081 1,166,732
(b) Stope fill (estimated) 1,000,000 0.340 ________ 340,000
-- --------- -------
15,404,096 1,166,732 340,000
2. San Felipe-El Potosi Mine
(a) Tailings 168,828 0.060 10,130
3. Hormiguero Mine
(a) Tailings 100,000 0.064 6,400 ________
------ ------- ------- -----
Totals 15,672,924 1,183,262 340,000
========== ========= === =======
The anticipated recovery for processing via the SCMP will range from 85% to
95% and for heap leaching from 65% to
70%.
As of March 31, 2001, the total investment, including interest and holding
costs, in the El Salvador mining projects by Commerce, three of Commerce's
subsidiaries, Sanseb, and the Joint Venture amounted to $69,631,645.
SSGM Joint Venture Arrangements
Commerce acquired 82 1/2% of the authorized and issued common shares of San
Sebastian Gold Mines, Inc. ("Sanseb"), a Nevada corporation formed on September
4, 1968. The balance of Sanseb's shares are held by approximately 200 unrelated
shareholders. From 1969 forward, Commerce has provided substantially all of the
capital required to develop a mining operation at the SSGM, to fund exploration,
and to acquire and refurbish the SCMP.
On September 22, 1987, Commerce and Sanseb entered into a joint venture
agreement (named the "Commerce/Sanseb Joint Venture" and sometimes referred to
herein as the "Joint Venture" or "Comseb") to formalize the relationship between
Commerce and Sanseb with respect to the mining venture and to divide profits.
The terms of this agreement authorize Commerce to supervise and control all of
the business affairs of the Joint Venture. Under this agreement 90% of the net
pre-tax profits of the Joint Venture will be distributed to Commerce and ten
percent to Sanseb, and because Commerce owns 82 1/2% of the authorized and
issued shares of Sanseb, Commerce in effect has an over 98% interest in the
activities of the Joint Venture. In order to maintain current accounting between
Commerce and Sanseb, the interest charges to Sanseb on advances made by Commerce
are kept separately. Therefore, when profits are earned, the interest recorded
will be paid from the cash distributions made to Sanseb.
The Joint Venture leases the SSGM from the Company's 52%-owned subsidiary,
Mineral San Sebastian, S.A. de C.V. ("Misanse"), an El Salvadoran corporation.
Although Misanse owns the real estate comprising the site of the SSGM, the lease
agreement grants Comseb the right to all gold produced in exchange for a five
percent royalty over a term of 25 years beginning on the first day gold is
produced, which Comseb may, at its option, extend for an additional 25 years.
Because Commerce owns 52% of Misanse, Comseb in effect pays to its shareholders,
excluding Commerce, a net royalty amounting to less than two and one-half
percent of the SSGM gold production.
The Joint Venture is registered as an operating entity to do business in the
State of Wisconsin, U.S.A. and in
the Republic of El Salvador, Central America. The Joint Venture Agreement
authorizes Commerce to sign agreements
on behalf of the Joint Venture.
Organizational Structure
The percentage of ownership of the Joint Venture and the Company's subsidiaries
are shown below and are included in the consolidated financial statements of the
Company. All significant intercompany balances and transactions have been
eliminated.
% Ownership
Homespan Realty Co., Inc. ("Homespan") 100.0
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0
Ecomm Group Inc. ("Ecomm") 100.0
San Luis Estates, Inc. ("SLE") 100.0
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5
Universal Developers, Inc. ("UDI") 100.0
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0
Commerce was originally formed as a Wisconsin corporation (September 14, 1962).
It then merged into a Delaware corporation on July 26, 1971 and on April 1, 1999
it merged back into a Wisconsin corporation. It owns 52% of Misanse, an El
Salvadoran corporation that was formed on May 8, 1960, reinstated on January 25,
1975 and reincorporated on October 22, 1993. Commerce also owns 82 1/2% of the
San Sebastian Gold Mines, Inc. (SSGM) which was chartered as a Nevada
corporation on September 4, 1968. Misanse has a mining concession with the
government of El Salvador and is the owner of the SSGM real estate. Misanse has
assigned the mining concession to Commerce Group Corp. and San Sebastian Gold
Mines, Inc., the mining operator formed on September 22, 1987, and is known as
the Commerce/Sanseb Joint Venture (Comseb). Comseb operates the SCMP (the gold
processing plant acquired on February 23, 1993) and has conducted exploration
and exploitation at the following El Salvador gold mines: SSGM (since October
1968), San Felipe-El Potosi (since September 1993) and its extension Capulin
(since May 1995); Modesto (from August 1993 through July 1997); Hormiguero (from
September 1993 through 1998) and Montemayor (from March 1995 through July 1997).
The Government of El Salvador has issued the Modesto and Montemayor mining
concessions to others. Commerce's attorneys have challenged the legality of the
issuance of these concessions. Commerce owns properties believed to be crucial
to the Modesto Mine and it holds leases to the key property of the Montemayor
Mine. It is in the process of applying for concessions on the property it owns
(Modesto) and on the property that it leases (Montemayor). It also has a lease
agreement with the owner of the San Felipe-El Potosi Mine and an application for
the concession is pending.
All of the mines mentioned were formerly in production and did produce gold
and/or silver. In addition to the channel trenching, test pit holes, and
underground adit openings, the Joint Venture has acquired its own diamond
drilling rig and has contracted with others to explore in depth, the
above-described potential targets. All of the mining properties have promising
geologic prospects, alternations, and historical records that bear evidence that
all have been mined and produced gold on a commercial basis in the past.
World Gold Market Price, Customers and Competition
Since the Joint Venture was in operation and produced gold on a curbed start-up
basis, its revenues, profitability and cash flow were greatly influenced by the
world market price of gold. The gold world market price is generally influenced
by basic supply and demand fundamentals. It is unpredictable, volatile, can
fluctuate widely and is affected by numerous factors beyond the Company's
control, including, but not limited to, expectations for inflation, the relative
strength of the United States' dollar in relation to other major currencies,
political and economic conditions, central bank sales or purchases, inflation,
production costs in major gold-producing regions, and other factors. The supply
and demand for gold can also greatly affect the price of gold. The Company has
not and does not expect in the foreseeable future to engage in hedging or other
transactions to minimize the risk of fluctuations in gold prices or currencies.
Gold and silver can be sold on numerous markets throughout the world, and the
market price is readily ascertainable for such precious metals. There are many
refiners and smelters available to refine these precious metals. Refined gold
and silver can also be sold to a large number of precious metal dealers on a
competitive basis. The Joint Venture's SCMP operation which produces dore is
refined by and sold to a refinery located in the United States.
At this time the Joint Venture believes that, due to its current financial
capacity, it may not be a major gold producer based on the size of larger
existing gold mining companies. The Company believes no single gold-producing
company has a large impact to offset either the price or supply of gold in the
world market. There are many mining entities in the world producing gold. Many
of these companies have substantially greater technical and financial resources
and larger gold ore reserves than the Company. The Company believes that the
expertise of the Joint Venture's experienced key personnel, its ability to train
its employees, its low overhead, its gold ore resources, its accountability to
the mine, and its projected low cost of production may allow it to compete
effectively and to produce reasonable profits. The Company's present and past
practice has been to sell its gold and silver at the world market prices.
The profitability and viability of the Joint Venture is dependent upon, not only
the price of gold in the world market (which can be unstable), but also upon the
political stability of El Salvador and the availability of adequate funding for
either the SCMP operation or the SSGM open-pit, heap-leaching operation or for
the other exploration projects.
As of this date, inflation, currency and interest rate fluctuations have not had
a material impact on the Company or its results of operations.
Seasonality
Seasonality does not have a material impact, but the rainy season (May through
November) can curtail production.
Environmental Matters
Since the Government of El Salvador has established a new Mining Law effective
February 1996, its exploration, development, and production programs are subject
to environmental protection. The Government of El Salvador has established its
own Department of Environment.
Environmental regulations add to the cost and time needed to bring new mines
into production and add to operating and closure costs for mines already in
operation. As the Company places more mines into production, the costs
associated with regulatory compliance can be expected to increase. Such costs
are a normal cost of doing business in the mining industry, and may require
significant capital and operating expenditures in the future. The Company's
policy is to adhere to the El Salvador environmental standards. The Company
cannot accurately predict or estimate the impact of any future laws or
regulations developed in El Salvador that would affect the Company's operations.
All operations by the Company involving the exploration or the production of
minerals are subject to existing laws and regulations relating to exploration
procedures, safety precautions, employee health and safety, air quality
standards, pollution of water sources, waste materials, odor, noise, dust and
other environmental protection requirements adopted by the El Salvador
governmental authorities. The Company may be required to prepare and present to
such authorities data pertaining to the effect or impact that any proposed
exploration or production of minerals may have upon the environment. The
requirements imposed by any such authorities may be costly, time consuming and
may delay operations. Future legislation and regulations designed to protect the
environment, as well as future interpretations of existing laws and regulations,
may require substantial increases in equipment and operating costs to the
Company and delays, interruptions, or a termination of operations. The Company
cannot accurately predict or estimate the impact of any such future laws or
regulations, or future interpretations of existing laws and regulations, on its
operations.
The Company is in the process of updating its environmental impact study which
is being prepared by an independent El Salvadoran consultant.
Information from U.S. Embassy in El Salvador, Country Commercial Guide 2000/2001
The following are excerpts from the "Economic and Commercial Section,
Embassy of the United States of America in
El Salvador, Country Commercial Guide 2000/2001,"
dated June 2000 obtained from
http://www.usinfo.org.sv/econcommguide.htm:
"Chapter I - EXECUTIVE SUMMARY
"This Country Commercial Guide (CCG) presents a comprehensive look at El
Salvador's commercial environment, using economic, political and market
analysis. The CCGs were established by recommendation of the Trade Promotion
Coordinating Committee (TPCC), a multi-agency task force, to consolidate various
reporting documents prepared for the U.S. business community. Country Commercial
Guides are prepared annually at U.S. Embassies through the combined efforts of
several U.S. Government Agencies.
"In 1999, El Salvador's economy grew an anemic 2.6 percent, down from 3.5
percent in 1998. The economic outlook, based on the first semester of 2000
performance, suggests that the Government's growth target of 3 to 4 percent for
2000 can be attained. The inflation rate in 1999 was -1.0 percent. Other
positive business climate features include a stable currency, rising
international reserves, a low debt burden, the conclusion of the tariff
reduction program, streamlined customs procedures, and further progress in the
Government's program to privatize basic infrastructure such as
telecommunications, energy distribution/generation, and the pension funds
administration. The economy should improve greatly due to the recent passage of
the U.S. Caribbean Basin Initiative that enhances trade benefits in the textile
sector, the recently concluded Free Trade Agreement with Mexico and an increase
in GOES revenues as a result of the income and VAT tax reforms introduced in
October 1999.
. . .
"With continued political stability (there was a peaceful transition to a new
administration on June 1, 1999) and deepening market-oriented structural
reforms, El Salvador offers a positive environment for U.S. exporters and
investors.
"Country Commercial Guides are available on the National Trade Data
Bank on CD-ROM or through the Internet.
Please contact STAT-USA at 1-800-STAT-USA for more information. To
locate Country Commercial Guides via the
Internet, please use the following World Wide Web address:
WWW.STAT-USA.GOV. CCGs can also be ordered in hard
copy or on diskette from the National Technical Information Service
(NTIS) at 1-800-553-NTIS. . . .
"Chapter III - POLITICAL ENVIRONMENT
"El Salvador has an excellent relationship with the United States, solidified by
years of close cooperation during and after the civil conflict, and U.S support
for reconstruction and reconciliation after the 1992 Peace Accords. Leaders of
the FMLN, the one-time guerrilla organization which has become a political
party, have established close relationships with the U.S. Government, seeing it
as an honest broker during the peace process. Most Salvadoran people view the
U.S. in a favorable light, augmented by the fact that over one million
Salvadorans live in the U.S. and send over USD $1.4 billion in remittances to
family members in El Salvador every year. The political environment is expected
to remain stable over the next ten or more years.
"In March 1999, El Salvador held its second presidential election since the end
of the war. This election was won by the right-wing Arena party, which has held
the Presidency for the past eleven years. The FMLN, the second largest political
party, further increased its strength in the March 2000 municipal and
legislative elections, by winning 32 seats, one more than ARENA, and most of the
largest municipal centers in the country. A good sign of a vibrant democracy is
that the privatizations of both the telecommunication and electrical
distribution systems have not experienced any major delays before or after the
various elections held since 1997.
"Since its inception as an anti-Communist nationalistic party in the early
1980s, ARENA has moderated its policies. During the administration of President
Alfredo Cristiani (1989-1994), the government ended a 12-year civil war, greatly
liberalized the economy and reduced corruption. His successors, ex-president
Calderon Sol, and Francisco Flores, who took power in June 1, 1999, have
continued these market-oriented economic policies, and have strengthened the
rule of law.
"The FMLN has strongly supported the democratic process, and pursued a pragmatic
center left policy. The FMLN's economic policy leaders have described the
party's goal as a mixed economy, with private enterprise and investment and with
government regulation to ensure that social interests are taken into account.
"The right-wing National Conciliation Party (PCN), which was the governing party
before the civil conflict, currently comprises the third largest parliamentary
group, with 15 seats at the Legislative Assembly won during the March 2000
elections.
"The centrist Christian Democratic Party (PDC) has seen its support erode
since controlling the Presidency and
Assembly in the mid-1980s. There are several other small parties. The
Social Christian Union Party (USC) includes
elements which left the PDC. Other small leftist parties which were
sympathetic to the FMLN during the conflict,
but which operated legally, coalesced to form the Democratic Convergence
Party. . . .
"Chapter VII - INVESTMENT CLIMATE
"Openness to Foreign Investment
"The Salvadoran Government is committed to attracting foreign investment in most
sectors. The climate for foreign investment has improved significantly over the
last few years, as the Government has enacted new laws, or amended directly
related investment legislation, to facilitate and regulate direct and portfolio
investment in key sectors of the economy, as well as to encourage investment in
state enterprises under privatization. Companies from many countries including
the United States, Canada, Germany, Korea, Taiwan, and Mexico and lately France,
Spain, Venezuela and Chile have made investments here with favorable results.
The Central Bank and the Ministry of Economy estimate that foreign investment
inflows totaled some $250 million in 1995, $60 million in 1997, over $1.03
billion in 1998 (almost 90 percent related to the privatization of the energy
distribution and telecommunications sectors), and $231 million in 1999. The
primary legislation governing foreign investment in El Salvador is the 1999
Investment Law, the 1990 Export Reactivation Law; and an updated Free Zones Law
from 1998. Other laws complementing the basic investment legal framework are the
Banking Law, Insurance Firms Law, the Mining Law, the IPR Law, the Stock
Exchange Law, special legislation governing the privatization of the
Telecommunications Company, the electricity generation and distribution laws,
and the Pension Funds Law. The law governing seaport management is being studied
for a possible revision to allow private sector participation in port
management.
"*The 1999 Investment Law is a comprehensive, clearer and modern piece of
legislation that encourages natural and legal persons, including foreign
investors, to freely establish business in El Salvador, with the exception of
two activities: small business (less than $25,000.00 initial investment), and
fishing within the twelve miles of territorial sea. The law accepts intangible
technological contributions as foreign direct investment. Thus, copyrights,
patents, trade marks and inventions receive protection under the law. For
enhanced protection, the law encourages, but does not require, the investor to
register his investment with the Ministry of Economy. The law grants equal
treatment to domestic and foreign investors, and it creates a new, unified
office (the National Investment Office, ONI, at the Ministry of Economy), to
reduce and facilitate the process of registering new investments in the country.
It also set forth clear procedures to resolve disputes between the government
- -or national partners- and foreign investors, and facilitates residence
requirements for duly registered foreign investors. For investors, registered
with the Ministry of Economy, the law provides:
"--Unrestricted remittance of net profits for investors in any economic
activity. Unrestricted reinvestment of
profits.
"-- Unrestricted remittance of funds obtained from the liquidation of a business
in proportion to the foreign funds invested.
"--Unrestricted remittance of royalties and fees for use of foreign patents,
trademarks, technical assistance and other similar services.
"-- Foreign investors may hold dollar accounts in El Salvador and may use these
accounts to obtain local financing.
"-- Although underground resources (i.e minerals) belong to the state, the state
may grant concessions for their exploitation to local and foreign investors.
"--Investment in banks and financial institutions is subject to
provisions included in the Banking Law.
"In March 2000, in accordance with dispositions of the new investment law, the
Goes announced the formation of a high level committee to promote foreign
investment in El Salvador. The committee, baptized as PROESA, (The Promotion of
El Salvador) is chaired by Vice-President Quintanilla, and is comprised by the
Ministers of Economy, and Foreign Relations, and prominent private sector
representatives. The committee will work closely with the recently established
National Investment Office (ONI). Currently, PROESA is carrying out an
international campaign to attract investors. . . .
"Under the Export Reactivation Law of 1990, firms not located in free zones
and exporting less than one hundred
percent of their production may apply for tax rebates of six percent of the
FOB value of these exports. A 1997
amendment to this law exempts this rebate from income tax. . . .
"It is not necessary to have a local partner in El Salvador. Some
maquila operations are completely
foreign-owned. Three multinational oil companies operate in El Salvador, and
two of these companies share a small
refinery. . . .
"*In January 1996, the GOES enacted a modern Mining Law, in substitution of the
previous law dating from 1922. Under this law, two foreign companies, --
American and Canadian -- have received concessions to exploit gold and silver
mines in El Salvador.
"*Since 1993 El Salvador has had in place a modern IPR law whose gradual
implementation has become a valuable
instrument for protecting intellectual property of foreign investors. Under
this law intangible property rights
are recognized. . . .
"Another milestone in the privatization process and the opening of the
Salvadoran market to foreign investment
was the approval of the Pension Funds legal framework in 1996. Under the
Pension Reform, five private pension
funds administrators (four of them backed with foreign capital) were
authorized to operate in April 1998. . . .
"Conversion and Transfer Policies
"El Salvador has a freely convertible currency that since 1994 has traded at
approximately 8.75 colones per dollar. The new government has declared the
possibility of fixing the rate by law. This currency is buoyed by family
remittances of more than one billion dollars per year (USD 1.38 billion in 1999)
from Salvadorans who reside outside the country. The nation's banks and many
foreign exchange houses actively trade dollars and colones. Foreign businesses
freely remit profits, repatriate capital, and bring in capital for additional
investments. Banks publish their exchange rates daily in local newspapers. As of
the end of May 2000, the Central Reserve Bank reported more than USD 1.9 billion
in net international reserves.
"Expropriation and Compensation
"According to El Salvador's Constitution, expropriation can proceed for causes
of public need or social interest, and indemnization can take place either
before or after the fact.
"The last case of expropriation began in 1986, when the government nationalized
the assets of CAESS, one of four recently privatized electric distribution
companies. Actually, this was not an expropriation in the classic sense, but
involved the expiration of a government concession to build and operate a
distribution system that would automatically revert to the government after 50
years of exploitation. The dispute centered around the market value of the
company's stocks at the time of reversion. Six years later, shareholders
received the first payment of ten million dollars. In March 1993, the government
concluded payments of cash and bonds and the case was settled to the
satisfaction of all parties.
"In 1960 the United States and Salvadoran governments signed an investment
guarantee treaty, which protects U.S. investors against losses that could arise
from currency inconvertibility or expropriation. In March 1999, the U.S. and El
Salvador signed a bilateral investment treaty (BIT), pending legislative
ratification in both El Salvador and the U.S., that would encompass all aspects
of investment.
"Dispute Settlement
"Article 15 of the new investment law establishes the procedures to resolve
disputes that may arise between the foreign investor and the State or local
investor or partner.
"El Salvador is a member of the International Center for Settlement of
Investment Disputes (ICSID), and disputes may be submitted for arbitration to
this center. Resolving business disputes through the slow-moving domestic legal
system can be costly and unproductive. The Salvadoran courts rely on written
briefs rather than hearings and oral arguments. Some disputants allege that
legal decisions can be bought, and final rulings are often not enforced. Where
possible, arbitration clauses, preferably with a foreign venue, should be
included in contracts as a means to resolve business disputes. The local Chamber
of Commerce and Industry is working to establish an arbitration dispute office,
as a service to its members.
"Political Violence
"El Salvador continues its transition to a peacetime society after 12 years of
civil conflict. There have been few confirmed acts of political violence since
the elections in mid-1994. Although general crime levels are high and are of
concern to the business community, there has not been political violence
specifically aimed at foreign investors, their businesses or their property.
"Performance Requirements
"El Salvador's investment legislation does not require investors to export
specific amounts, transfer technology,
incorporate set levels of local content, or fulfill other
performance criteria. . . .
"Bilateral Investment Treaties
"The United States and El Salvador signed an investment guarantee treaty in 1960
designed to protect U.S. investors against expropriation or currency
inconvertibility. The United States and El Salvador also have a framework
agreement for a Trade and Investment Council (TIC). An all-encompassing
bilateral investment treaty which addresses issues such as national treatment
for foreign investors, transfers, expropriation, investment disputes, tax
policies, was signed in March 1999, and is pending legislative ratification in
both countries. The United States and Salvadoran governments are working
towards, but have not yet reached agreement on, a Tax Information Exchange
Agreement.
"El Salvador is a member of the Central American Common Market, and has
approximately 50 commercial and technical cooperation treaties in effect. Three
of these treaties (Mexico, Spain, and Venezuela) look to promote investment. El
Salvador is a member of the World Trade Organization.
"OPIC
"The Overseas Private Investment Corporation (OPIC) has a bilateral agreement
with El Salvador. OPIC has approved insurance coverage for five projects in El
Salvador, including the expansion of a U.S. bank in El Salvador, and is
considering several other projects. OPIC insures currency inconvertibility,
expropriation and civil strife, as well as corporate financing. El Salvador also
participates in the Multilateral Investment Guarantee Agency (MIGA).
"Labor
"El Salvador's labor force consists of approximately 2.2 million workers, of
which 36 percent work in the agricultural sector. This is followed by services
(21 percent), commerce (18 percent), and manufacturing (16 percent). The minimum
wage in the industrial and commerce sectors is 1,260 colones or USD 144 a month.
Urban employees with minimal skills generally earn at least twenty percent more
than the minimum wage. Although the minimum wage is less for agricultural
workers, coffee plantation owners report that they pay above the minimum wage to
attract workers during the harvest.
"Official unemployment was 7.7 percent in 1999. Underemployment is much higher,
most common estimates placing it at 31 percent. However, some construction
contractors cannot find sufficient skilled workers, due to the number of
projects now underway in El Salvador.
"Salvadoran labor is perceived as hard working and trainable. The general
educational level is low, which may inhibit the development of industries
needing skilled, educated labor. The current administration has made education
its first priority. There is a lack of mid-level management talent, which
sometimes results in foreigners being brought in to perform such tasks. In an
attempt to raise the level of maquila production, the Salvadoran Institute of
Professional Formation (INSAFORP) sent 119 students to India to receive 9 months
of training in computer software production. These students have since then
graduated and returned to El Salvador to help in the development of this
industry.
"The Constitution of December 1983 guarantees the right of employees to
organize into associations and unions.
Employers are free to hire union or non-union labor. Closed shops are illegal.
"Capital Outflow Policy
"There are no restrictions on capital outflows for Salvadorans, nor are there
any specific incentives to invest capital outside El Salvador. Salvadoran
investors have interests in hotels, banks, real estate and industry in Mexico,
Guatemala, Honduras, Costa Rica, Panama and the U.S. Accurate statistics on the
size of these investments are not available."
Excerpts from a website about El Salvador, Central America, located at
http://www.dirla.com/elsalvador2.html provide the following information:
"About the size of Massachusetts, El Salvador is the smallest country in Central
America and most densely populated of the Central American countries. Now, only
four years after a U.N. sponsored peace treaty ended the country's eleven year
bloody war, El Salvador is considered to have the most dynamic economy in the
region.
"Thought to be the most industrialized nation in Central America, the country's
hard working people, and improving economic indicators provide the investor with
some of the building blocks for a successful venture."
Operations, Other Than Mining
Commerce independently and through its partially and wholly-owned subsidiaries
conducts other business activities, which at present are substantially less
significant than its gold production and exploration in El Salvador: (1) land
acquisition and real estate development through its wholly-owned subsidiaries,
San Luis Estates, Inc. ("SLE") and Universal Developers, Inc. ("UDI"); (2) real
estate sales, through its wholly-owned subsidiary, Homespan Realty Co., Inc.
("Homespan"); (3) the operation of a 331-acre campground known as Standing Rock
Campground, which is owned by Homespan and operated by the Company through March
31, 2001; and (4) advertising, and the Internet business through its subsidiary,
Ecomm Group Inc. ("Ecomm").
Land Acquisition, Development, Ownership and Real Estate Sales
During the past years, the Company has substantially reduced its activities in
the business of real estate development which was conducted principally through
its subsidiaries San Luis Estates, Inc. ("SLE"), a Colorado corporation, and
Universal Developers, Inc. ("UDI"), a Wisconsin corporation.
SLE had been the developer of a large tract of land for recreation, retirement
and for other individual purposes. This land consists of approximately 7,000
acres. It was subdivided in the San Luis North Estates Subdivision located in
Costilla County, Colorado, abuts the Town of San Luis, Colorado, and lies
between the San Juan and Sangre de Cristo mountain ranges in southern Colorado.
This tract of land had been subdivided into 1,205 five-acre or larger parcels,
unimproved except for gravel roads now maintained by Costilla County, however,
drainage, survey, staking, and water rights adjudication have been completed.
As of April 1, 2000, there remained an inventory of 40 five-acre parcels of real
estate developed in the San Luis North Estates subdivision. SLE also owns twelve
improved lots located in the city of Fort Garland, Costilla County, Colorado.
On August 14, 2000, the Directors, in order to reduce corporate debt, authorized
the Officers of the Company to negotiate the sale of its non-income producing
assets to the Sylvia Machulak Rollover Retirement Account (SM RIRA) in exchange
for the reduction of debt owed to the SM RIRA. It was agreed to sell to the SM
RIRA, 43 parcels of land located in the San Luis North Estates Subdivision for a
sum of $64,500, and 12 lots consisting of approximately one acre located in Fort
Garland, Colorado for the sum of $6,000. Subsequently, the SM RIRA consummated
the purchase of all of these Costilla County, Colorado parcels of land.
The Company's wholly-owned subsidiary, Homespan, as nominee for the Company,
owned a 331-acre campground known as Standing Rock Campground located in Camden
County, Missouri. This recreational resort includes approximately 3,000 lineal
feet of lake frontage on the Lake of the Ozarks, and it has campsites for
recreational vehicle parking. A clubhouse and several ancillary buildings are on
the premises. The Company was the operator of the campground and was leasing
space to campers and others on a daily, weekly, or monthly basis until March 31,
2001.
On August 14, 2000, the Directors, in order to reduce corporate debt, authorized
the Officers of the Company to negotiate the sale of its low-income producing
asset, the Standing Rock Campground (SRC), to General Lumber & Supply Co., Inc.
(GLSCO) in exchange for a reduction of $1,249,050 of the debt owed to GLSCO. The
agreement contains a condition that if SRC were sold by GLSCO to an unrelated
third party during a period of one year for a sum exceeding GLSCO's purchase
price, the difference, after taking into account all selling expenses would be
applied to reduce the balance of GLSCO's promissory note. In the event the
selling price to a third party would be less than GLSCO's purchase price, then
an addition would be made to the existing balance of GLSCO's promissory note.
Also, adjustments would be made for the interest due to GLSCO during this period
of time. Reference is made to Exhibit 10.17.
Misanse, the Company's majority-owned subsidiary (52%) owns the SSGM real estate
consisting of approximately 1,470 acres. This real estate is located
approximately two and one-half miles northwest of the city of Santa Rosa de
Lima, off of the Pan American Highway (a four-lane newly constructed highway),
and about 108 miles southeast of the capital city of San Salvador, El Salvador,
and it is about 11 miles west from the border of the Country of Honduras. It is
also about 26 miles from the city of La Union which has railroad and port
facilities.
The Company owns approximately 63 acres of land on the Modesto Mine site which
is located due north of the city of Paisnal and approximately 19 miles north of
San Salvador, the capital city of El Salvador. This real estate is pledged as
collateral for funds advanced to the Company. It also leases approximately 175
acres of land considered to be the main part of the Montemayor Mine in the
Department of Morazan.
Reference is made to "Item 2. Properties," for additional information.
Homespan, the local real estate marketing subsidiary of the Company is presently
inactive. It has no significant activity and is not material to the Company's
operation. Formerly, Homespan held the title to the real estate located in
Colorado and the Standing Rock Campground ("SRC"), located in the Lake of the
Ozarks. SRC was operated by the Company. Assets of Homespan have also served as
a source of collateral for funds loaned to the Company and its majority-owned
subsidiaries.
Internet Business and Advertising
The Company owns 100% of the outstanding common stock of Ecomm Group Inc.
("Ecomm"), a Wisconsin corporation. The Company, in order to diversify its
business activities, on January 29, 1999, announced its plans to have its
wholly-owned subsidiary, Ecomm, enter into the web portal business. Ecomm's
current strategy is to attempt to acquire or to "roll up" Internet websites and
businesses and consolidate them into a web portal.
There can be no assurance that Ecomm's current strategy will be successful.
Ecomm has not entered into any agreements for the acquisition of any websites,
web services or other technology in connection with the web portal. There is no
assurance that it will be able to enter into contracts for the acquisition of
such sites, services and technology on terms acceptable to Commerce and Ecomm.
The Internet business is highly speculative and competitive.
Patents and License Agreements
On July 23, 1987, the Government of El Salvador delivered and granted to
Misanse, possession of a mining concession (license). On September 25, 1996, the
SSGM concession was reconfirmed to comply with the 1996 El Salvadoran Mining
Law. The Joint Venture believes that its SSGM concession begins on the date it
was issued--July 1987. The concession provides the right to extract and export
minerals for a term of 25 years (plus a 25-year renewal option) beginning on the
first day of production from the real estate owned by Misanse and encompassing
the SSGM. Misanse assigned this concession to the Joint Venture. (Reference is
made to "Item 2." for additional information.)
The Joint Venture has applications pending with the El Salvador Department of
Energy, Mines and Hydrocarbons for the exploration rights under the February
1996 Mining Law for the San Felipe-El Potosi Mine, and its extension, the El
Capulin Mine. Applications for concessions are pending for the real estate it
owns on the Modesto Mine, and the real estate it leases at the Montemayor Mine
and the Hormiguero Mine. The Company and its subsidiaries hold no patents or
trademarks.
Significant Customers
The Company presently has no individual significant customers in which the loss
of one or more would have an adverse effect on any segment of its operations or
from whom the Company has received more than ten percent of its consolidated
revenues, except for the sale of gold which the Joint Venture is producing. The
gold in dore form is refined and then sold at the world market price to a
refinery located in the United States.
Miscellaneous
Backlog orders at this time are not significant to either the Company's or its
majority-owned subsidiaries' areas of operations, or at this time is any portion
of their operations subject to renegotiation of profits or termination of
contracts at the election of the United States' Government.
At this time, neither the Company nor its majority-owned subsidiaries conduct
any material research and development activities, except as indicated in this
report with respect to the Joint Venture and its mining exploration,
exploitation, and development programs.
The Company believes that the federal, state and local provisions regulating the
discharge of materials into the environment should not have a substantial effect
on the capital expenditures, earnings or competitive position of the Company or
any of its majority-owned subsidiaries as the Company does not have any mining
activity in the United States.
Financial Information About Industry Segments Lines of Business
Operation
Campground: For the years ended March 31, 2001, 2000 and 1999, revenues have
been generated from the campground business. Although Homespan owns the
campground real estate, the Company was the campground operator until March 31,
2001. Reference is made to "Land Acquisition, Development, Ownership and Real
Estate Sales."
Land Sales
The Company and its subsidiaries have sold their remaining lots in Colorado
during this fiscal year.
Mining
The Company's primary strategy, through its Joint Venture, is to use its SCMP
facilities to process gold ore transported from SSGM and other exploration
opportunities located in the Republic of El Salvador. The Joint Venture has
produced gold at its SCMP operations from March 31, 1995 through December 31,
1999. At such time as funds are available, the Company intends to process its
SSGM gold ore via an open-pit, heap-leaching system. The Joint Venture announced
the suspension of its SCMP facilities as of December 31, 1999, in order to
overhaul, repair, retrofit and expand the SCMP.
The Company anticipates that the capital required for the purchase of equipment
and working capital can be obtained from the sale of its common or preferred
shares, bonds, equity offerings, loans, leases, partial sale of its gold
reserves, sale of gold, or from a combination of these and other creative
funding possibilities. With the substantial decline in the price of gold and low
public market value of its common shares, it may be more difficult to obtain
financing under reasonable terms and conditions.
Internet Business
As of March 31, 2001, the Company's subsidiary, Ecomm, has not earned any
revenue and has not incurred any significant expenses or capital investment
other than that disclosed in this report.
Competition
The Company believes that neither it, nor any other competitor, have a material
effect on the precious metal markets, and that the price that the Joint Venture
will receive for its sale of gold is dependent upon world market conditions over
which neither it nor any other single competitor have control. The competition
is more intense in the Internet business.
Employees
As of March 31, 2001, the Joint Venture employed approximately 45 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 it was the largest single
non-agricultural employer in the El Salvador Eastern Zone. Also, the Company
employs approximately four persons (plus part-time help) in the United States.
Since the Joint Venture has laid off most of its employees, the Joint Venture
had to pay the severance pay to its employees and therefore it had to sell the
Company's common shares which were issued to the Commerce Group Corp. Employee
Benefit Account. El Salvador employees are entitled to receive severance pay
which is based on one month's pay for each year of employment.
Industry Segments
1. Unaffiliated Sales Year Ended March 31,
Industry Location 2001 2000 1999
-------- -------- ---- ---- ----
Mining (*a) El Salvador $ $ 413,713 $
0 785,526
Campground Missouri, USA 238,520 66,902 62,176
2. There Were No Intersegment Sales
3. Total Revenues Year Ended March 31,
Industry Location 2001 2000 1999
-------- -------- ---- ---- ----
Mining (*b) El Salvador $ $ 500,124 $
0 999,017
Campground Missouri, USA 238,520 66,902 62,176
Other Delaware/Wis., USA 3,662 134 246
---------------- ----------------- ------------ ---
Total: $ 242,182 $ 567,160 $ 1,061,439
4. Operating Profit (Loss) Year Ended March 31,
Industry Location 2001 2000 1999
-------- -------- ---- ---- ----
Mining (*a) El Salvador $ $ (384,759) $ (44,688)
0
Campground Missouri, USA 185,391 (8,175) (4,267)
Other Income Wisconsin, USA 3,662 0 0
Corp. Hdqtrs. Wisconsin, USA (59,263) (3,298) (41,311)
------ -------- -------- ------- ----- --------
Total: $ 129,790 $ (396,232) $ (90,266)
5. Identifiable Assets Year Ended March 31,
Industry Location 2001 2000 1999
-------- -------- ---- ---- ----
Mining (*a) El Salvador $30,046,855 $27,831,734 $26,031,841
Campground Missouri, USA 0 1,135,500 1,135,500
Real Estate Colorado, USA 0 21,000 21,000
Corporate Assets 255,830 867,967 398,460
------- ------- ------- ------- ------- -------
Total: $30,302,685 $29,856,201 $27,586,801
(*a) The proceeds from the sale of gold and the gold inventory received from
the Joint Venture were used to reduce the advances due to the Company.
(*b) Includes an added tax value refund from the Government of El
Salvador of $86,411 for 2000, and $213,491
for 1999.
Item 2. Properties
Mining Properties
The table below provides a summary of the most significant mining properties in
which the Company has an interest. More detailed information regarding each of
these properties is provided in the text that follows:
Commerce Group Corp./San Sebastian Gold Mines, Inc. Joint Venture Properties all located in the Republic of El
Salvador, Central America
Date Amount of Date Mine will be Operational
Property Nature of Interest Cost of Funds to
Description Interest was Interest Make
Acquired Property
Operational
1. San Sebastian Mineral 1968 5% of the This is It was in operation on a
Gold Mine concession gross dependent curbed production basis until
located two and consisting precious on the December 31, 1999 when
one-half miles of 100% metal scale of operations were suspended due
northwest of ownership of proceeds or production to the need to overhaul,
the city of the precious $206 a that repair, restore and expand the
Santa Rosa de metals month management SCMP facilities.
Lima and the extracted whichever decides to
Pan American from this is higher. perform.
Highway. mine. The amount
of
investment
could be
from $5
million to
$100
million.
2. San Felipe-El Application 07/06/93 5% of the Undetermined Undetermined.
Potosi/Capulin pending for gross until a
Mine located mineral precious preliminary
near the city concession metal drilling
of Potosi, 18 for 100% proceeds. program is
miles northwest ownership of completed;
of the city of the precious estimated
San Miguel. metals cost of
extracted drilling
from this is $2
mine. million.
3. Hormiguero Mine Ownership of 09/93 The surface Undetermined Undetermined.
located five the tailings. use of land until a
miles southeast (rent) is preliminary
of the San to be drilling
Cristobal Mill negotiated. program is
and Plant near completed;
the city of estimated
Comacaron. cost of
drilling
is $2
million.
Mine
surface
channel
trenching
and adit
cleaning
should be
completed
to
determine
drilling
cost.
4. Modesto Mine Application 09/93 It appears Undetermined Undetermined.
located near is to be as if this until a
the city of submitted will be an preliminary
Paisnal and for a underground drilling
about 19 miles mineral operation program is
north of San concession except in completed;
Salvador, the on the real the estimated
capital city. estate owned Company-owned cost of
by the land. drilling
Company to Therefore, is $2
own 100% of no cost for million.
the precious interest.
metals
extracted
from the
real estate
owned by the
Company.
5. Montemayor Mine Application 07/95 It appears Undetermined Undetermined.
located about is to be that this until a
14 miles submitted will be an preliminary
northeast of for a underground drilling
SCMP and about mineral mine, program is
six miles concession therefore completed;
northwest of on the land current estimated
SSGM. leased by leases will cost of
the Company have to be drilling
to own 100% renegotiated is $2
of the and million.
precious extended.
metals
extracted
from the
areas the
Company
leases.
6. San Cristobal Mill and Equipment Equipment To expand Curbed production commenced
Mill and Plant Plant owned 02/23/93 purchased the plant, March 1995; expansion program
located off the by Joint and and including in progress. Operations
Pan American Venture. thereafter extensive a crushing suspended in the last quarter
Highway west of The real Lease retrofitting system to of 1999 until the existing
the city of El estate is 11/12/93 was and a capacity equipment is overhauled,
Divisadero. owned by an continues of 500 repaired, restored and
agency of to be tons per expansion of the SCMP
the performed. day; an facilities are completed.
Government Through estimated
of El 03/31/01, a sum of up
Salvador. total of to $3
$5,822,021 million
has been may be
invested in required,
this plant all
and dependent
equipment. whether
Depreciated new or
value is used
$3,376,422. equipment
will be
purchased.
32
42
The San Sebastian Gold Mine
General Location and Accessibility
The SSGM is situated on a mountainous tract of land consisting of approximately
1,470 acres of explored and unexplored mining prospects. The SSGM is located
approximately two and one-half miles off of the Pan American Highway, northwest
of the city of Santa Rosa de Lima in the Department of La Union, El Salvador.
The tract is typical of the numerous volcanic mountains of the coast range of
southeastern El Salvador. The topography is mountainous with elevations ranging
from 300 to 1,500 feet above sea level. The mountain slopes are steep, the
gulches are well defined, and the drainage is excellent.
There is good roadway access to the SSGM site. Most of the reconstruction in
1999 of the Pan American Highway from two lanes to four lanes (from the city of
San Salvador to the Honduran border) has been recently completed. The city of
Santa Rosa de Lima (approximately three miles from the SSGM) is one of the
largest cities in the Eastern Zone. The SSGM is approximately 30 miles from the
city of San Miguel, which is El Salvador's second largest city, and
approximately 108 miles southeast of El Salvador's capital city, San Salvador.
SSGM is also approximately 26 miles from the city of La Union which has port and
railroad facilities. Major United States' commercial airlines provide daily
scheduled flights to the Comalapa Airport which is located on the outskirts of
the city of San Salvador.
SSGM Reserves and Operation
Statistical production and financial data for the San Sebastian Gold Mine (SSGM)
are shown on the following table:
San Sebastian Gold Mine (SSGM) Operation
03/31/01 03/31/00(3) 03/31/99
PRODUCTION
Dry tons ore mined and processed 0 28,970 51,618
Gold grade of ore (oz./ton) 0 .08 .08
Strip ratio (tons waste/tons ore) N/A N/A N/A
Gold production (oz.) 0 1,555 2,684
Silver production (oz.) 0 495 836
Recoverable gold inventory (oz.) 0 100 259
FINANCIAL
Ounces of gold sold 0 1,499 2,684
Average gold price realized $ $ 276 $
0 293
Revenue from mine operations $ $ 413,713 $ 785,526
0
Cash operating cost per ore ton mined $ $ 11.69 $ 10.27
0
Cash operating cost per ounce $ $ 172.67 $ 197.62
0
Total production cost per ounce (1) $ $ 357.14 $ 350.19
0
Operating earnings (loss) (2) $ $ (384,759) $ (44,688)
0
Capital expenditures in mining projects (2) $2,233,369 $2,166,900 $2,269,928
MINABLE RESERVES (03/31/01)
Contained
Tons Average Grade Gold Ounces(4)
Ore - virgin, dump waste and tailings 14,404,096 0.081 1,166,732
Stope fill (estimated) 1,000,000 0.340 340,000
-- --------- --- -------
Totals 15,404,096 1,506,732
(1) As calculated under The Gold Institute's Production Cost Standard,
includes the depreciation expense of $320,491 or $163.35 an ounce for
2000 and $338,797 or $126.23 an ounce for 1999.
(2) Excludes exploration and development drilling.
(3) Based on nine months of production.
(4) The estimated recoverable ounces of gold by processing: SCMP, 85% to
95%; heap leach, 65% to 70%.
The tailings, dump material, and stope fill at the SSGM are the by-products of
past mining operations. The tailings are the residue of higher grade ore once
milled and processed to recover the then economically feasible fraction of gold
present in the material. Most of the tailings, except the lower grade, have been
processed. The dump material is actually gold ore which has been mined in the
search for higher grades of gold ore and piled to the side of past excavations
as it was considered at that time to be too low of a grade of ore to process
economically; however, it was reserved for future processing. The stope fill
that is available was in the past considered to be too low of a grade of ore to
process economically, therefore it was primarily used to fill the voids in the
underground workings to accommodate the extraction of gold ore in the past SSGM
mining activities. Virgin gold ore, as the term is used in this report, is gold
ore which is on the surface and readily available for processing; it also
includes the undeveloped underground gold ore.
Virgin gold ore at the SSGM represents the majority of the material (14.4
million tons, including the dump waste material) in the Company's reserves. The
Company plans to use an open-pit mining method and will truck the lower grade
gold ore to one or more heap-leaching pads developed at the SSGM site. The use
of open-pit mining and heap-leaching techniques will enable the Company to
process a higher volume of gold ore than can be processed at the SCMP or through
underground operations used by the Company and others in the past. The Company
plans to continue to operate the SCMP after developing a leach-pad operation at
the SSGM, using the facility to process the higher grade ore it encounters in
the course of mining at the SSGM. The milling operation at the SCMP is expected
to return a higher rate of gold recovery than can be expected from heap-leaching
techniques.
The 960,000 tons of dump material present at the SSGM site has grades ranging
from 0.082 to 0.178 ounces of gold per ton and it now is combined with the
virgin ore. An analysis of the underground stope fill material was made by the
Company's consulting geologist who has confirmed that about seven percent of the
stope fill had been removed and processed during the 1973-1978 period. The grade
of the stope fill averages 0.34 ounces of gold per ton. It is estimated that
there are about one million tons available for SCMP treatment from the
underground operations. It is necessary to remove the material which has caved
in the adits to reach the stope fill areas, or it will be encountered in the
open-pit operations.
All residue from the contemplated operations will be stockpiled for potential
future processing dependent upon the price of gold, improvements in technology,
and the depletion of higher grade material.
Misanse Mining Lease
The Company (through the Comseb Joint Venture) leases the SSGM from Mineral San
Sebastian, S.A. de C.V. ("Misanse"), an El Salvadoran corporation. The Company
owns 52% of the total of Misanse's issued and outstanding shares. The balance of
the shares are owned by about 100 El Salvador, Central American and United
States' citizens. (Reference is made to Note 7 of the financial statements for
related party interests.)
On July 28, 1975, an amended lease agreement between Misanse as lessor and
Sanseb as tenant was executed by the parties giving the tenant all the
possessions and mining rights that pertain to the SSGM as well as other claims
that may already have or could be claimed in the future within the 1,470 acre
plat of land encompassing the SSGM. The lease was further amended to run
concurrently with the concession described herein and may be extended for one or
more equal periods by the tenant as long as the tenant has paid the rent and has
complied with other obligations under the lease and the concession. The lease
further provides that the tenant will pay rent to equal five percent of the
gross gold production revenues obtained from the leased SSGM and further commits
itself to maintain production taking into consideration market, political, and
other conditions. In no case will the rent be less than 1,800 colones per month
(approximately $206 per month at the current rate of exchange). The lease
further provides that, in the event the lessor wishes to sell the property, it
must first give preference to the Company; the lease further provides that the
tenant must give preference to employ its former mining employees and Misanse
shareholders.
The lease is freely assignable by the Joint Venture without notice to Misanse.
The lease may also be cancelled by the Joint Venture on thirty days' notice to
Misanse and thereafter all legal obligations thereunder shall cease.
Misanse Mineral Concession-Government of El Salvador
In El Salvador, the rights to minerals are vested with the government. Mineral
rights are granted by the government through concessions or licenses.
On January 27, 1987, the Government granted a right to the SSGM mining
concession ("concession") to Misanse which was subject to the performance of the
El Salvador Mining Law requirements. These rights were simultaneously assigned
to the Joint Venture.
On July 23, 1987, the Government of El Salvador delivered and granted to
Misanse, possession of the mining concession. This is the right to extract and
export minerals for a term of 25 years (plus a 25-year renewal option) beginning
on the first day of production from the real estate which encompasses the SSGM
owned by Misanse. Misanse assigned this concession to the Joint Venture.
During February 1996, and effective 120 days thereafter, the Government of El
Salvador adopted a revised Mining Law. This law grants longer exploration and
exploitation terms. It also contains a provision that three percent of the gold
receipts will be paid to the Government of El Salvador and an additional one
percent is to be paid to the municipality where the mine is located.
The concession, or the right to mine gold, is subject to cancellation by the
Government of El Salvador if there is an abandonment of the property such as if
there is no demonstration that the concession holder intends to carry out
exploration, exploitation, or development of the property in good faith during a
six-month period after the concession is granted or if the work of exploration,
exploitation or development is suspended for six months or if the exploration,
exploitation or development is reduced to an extent that the effort used cannot
be regarded as being reasonable in relation to the importance and resources of
the mining property.
In the event of public disaster or disturbance of the public order, all mines in
the given locality shall be regarded as being in exploration, exploitation or
development without the necessity of any special formality. Such event did occur
when, on November 11, 1989, the guerrillas attempted to seize the Country of El
Salvador. On January 16, 1992, a peace accord and cease-fire agreement was
entered into by the Government of El Salvador and its opposition. The transition
from war to peace was effected without any serious occurrences and final peace
was declared on December 15, 1992, with a three-year period to comply with the
terms of the peace pact.
The work of a concession may be suspended by permission of a competent authority
for a reasonable period not to exceed one year. An exception would be in case of
acts of God or force majeure in which case the period may be extended
successively as long as such reasons exist.
A concession may be fortified for lack of security measure, or if its condition
would endanger the lives of workers, or for failure to comply with provisions of
the Mining Code or other provisions enacted with respect to any aspect of
exploitation in the mining industry, unless corrected within a reasonable
period.
The Complimentary Mining Law states that, in addition to the cases mentioned in
the El Salvador Mining Code, abandonment of the mine will be presumed if after a
significant reduction or exhaustion of the veins, beds, or other formation in
exploitation, three months is allowed to pass without adequate efforts either to
exploit other deposits existing in the concession or to discover new deposits
suitable for exploitation.
A concession may be granted for an unlimited time, as long as the concession
holder complies with the conditions imposed by law. The Joint Venture's
concession is for a period of twenty-five years, beginning on the first day of
production, and with a right to extend it for an additional twenty-five years.
In addition, the El Salvador Constitution contains certain provisions which,
although not referring specifically to mining, are applicable thereto. As an
example, Article 138 prohibits confiscation of property.
SSGM Current Status
The Company, through its Joint Venture is conducting the following activities:
It is in the exploration, development and pre-production mining stage which
consists of completing its survey, mapping, site preparation, infrastructure,
construction, planning, and in the performance of the auxiliary work needed to
resume gold production at the SSGM site. Presently, the Company is seeking
funding to purchase equipment, to purchase inventory, and to use for working
capital for its on-site proposed open-pit, heap-leaching operation. In addition,
the Company was engaged in the exploration and development of the peripheral
area (including diamond core drilling) surrounding the main body of gold ore in
order to increase its gold ore reserves.
The Company's main objective and plan, through the Joint Venture, is to operate
a moderate tonnage, low-grade, open-pit, heap-leaching operation to produce gold
on its SSGM site. Dependent on the funding, the grade of ore, and the tonnage
processed, it anticipates producing more than 40,000 ounces of gold from its
open-pit, heap-leaching operation during the first twelve full operating months
and then gradually increasing the annual production of gold to 113,000 ounces.
Proposed SSGM Open-Pit, Heap-Leaching Operation
The Joint Venture has placed the SCMP into a curbed production operation. It now
intends to obtain a sum of $8 million or more to commence an open-pit,
heap-leaching operation at the SSGM site. An additional $7 million or more is
estimated to be required for the crushing system, plant, and mining equipment if
the Joint Venture were unable to lease this equipment. After these funds are
obtained, the Joint Venture intends to start processing gold ore from its open
pit at a production level of 2,000 tons per day. During the second year, the
production level plans are to expand production to 3,000 tons per day (the funds
for this expansion could be generated from profits). An increase to process
4,000 tons of gold ore per day would take place during the third year and
another expansion to process 6,000 tons per day would take place at the
beginning of the fifth year; all funds for this expansion should be available
through a combination of earned profits, borrowings, equity sales, or other
creative sources. With the anticipated production volume, there is more than an
eight-year supply of gold ore as it is believed that a substantial amount of
gold ore can be proven. The Company's geologists have defined a body of ore
consisting of 138 million tons of gold ore at a grade of 0.025 ounces of gold
per ton. This reflects a potential of 3.4 million ounces of gold and about
400,000 ounces of silver from this planned open-pit, heap-leaching operation. It
would take about 64 years to process this body of gold ore at a production
capacity of 6,000 tons per day.
SSGM Ownership of the Property
The San Sebastian Gold Mine real estate consisting of approximately 1,470 acres,
is owned by Misanse, a Salvadoran corporation. The Company owns 52% of Misanse
common shares that are issued and outstanding.
Environmental Matters
Since the Government of El Salvador has established a new Mining Law effective
February 1996, its exploration, development, and production programs are subject
to environmental protection. The El Salvador Ministry of Environment has
jurisdiction over environmental control.
Environmental regulations add to the cost and time needed to bring new mines or
mills into production and add to operating and closure costs for mines already
in operation. As the Company places more mines into production, the costs
associated with regulatory compliance can be expected to increase. Such costs
are a normal cost of doing business in the mining industry, and may require
significant capital and operating expenditures in the future. The Company cannot
accurately predict or estimate the impact of any future laws or regulations
developed in El Salvador that would affect the Company's operations.
All operations by the Company involving the exploration or the production of
minerals are subject to existing laws and regulations relating to exploration
procedures, safety precautions, employee health and safety, air quality
standards, pollution of water sources, waste materials, odor, noise, dust and
other environmental protection requirements adopted by the El Salvador
governmental authorities. The Company is required to prepare and present to such
authorities data pertaining to the effect or impact that any proposed
exploration or production of minerals may have upon the environment. The
requirements imposed by any such authorities may be costly, time consuming and
may delay operations. Future legislation and regulations designed to protect the
environment, as well as future interpretations of existing laws and regulations,
may require substantial increases in equipment and operating costs to the
Company and delays, interruptions, or a termination of operations. The Company
cannot accurately predict or estimate the impact of any such future laws or
regulations, or future interpretations of existing laws and regulations, on its
operations.
The Company has submitted an environmental impact study prepared by an
independent El Salvadoran consultant to the El Salvador Minister of Environment.
It is in the process of updating its environmental impact study.
San Felipe-El Potosi Mine ("Potosi") and its extension the El Capulin Mine
("El Capulin")
Potosi Location
The Joint Venture has commenced an exploration program on the Potosi property
which is located approximately 18 miles northwest of the city of San Miguel, the
second largest city in the Republic of El Salvador, Central America, on a paved
road 15 miles to the city of Chapalteque and then west three miles on a gravel
road to the city of Potosi. The historical records indicate that the potential
of developing a gold mine is above average.
Potosi Historical Information
Historical records evidence that exploration and production of gold took place
in 1899 and that Potosi was worked intermittently from 1906 through 1952. The
main production period in six levels was from 1938 through 1952 at a rate of 35
to 50 tons per day. Production data avouch that 30,000 ounces of gold were
produced from 1945 through 1952 after which the mine became dormant. During this
time a curbed underground exploration program confirmed that the gold ore
reserves were of commercial value. The gold assays from some of the former drill
hole samples on the southern extension of the north-south portion of this
property showed a grade of 0.10 to 0.35 ounces of gold per ton of ore.
Potosi Tailings' Reserve
Twenty-four test pit hole excavations have been plotted and drilled on this
four-acre site of tailings. The depth to the bottom of the tailings' pile varied
from 7.00 to 10.2 meters (23 to 34 vertical feet) and a total of 137.6 meters
(454 feet) of test pit hole excavations were completed. The 573 fire assay
samples (tailings) indicated an average grade of gold per ounce of 0.06. The
remaining 168,825 tons available multiplied by the average grade of 0.06 should
contain 10,130 ounces of gold. The 10,130 ounces of gold multiplied by a 70%
recovery should yield about 7,091 ounces of gold.
Potosi and El Capulin Exploration Undertakings
Since October 25, 1993, and until it suspended its program during 1999, Comseb
had a full-time crew, ranging from 25 to 30 employees, conducting an exploration
program consisting of surveys, channel trenching, adit openings, test pit holes,
excavation and drilling of the tailings to determine its gold content.
A total of 2,574 meters (8,494 feet) of channel trenching was excavated with a
grade ranging from 0.01 to 0.05 ounces of gold per ton. A total of 806 meters
(2,658 feet) of adits has been restored for entry into the old workings. A total
of 3,500 fire assay samples were completed with the results encouraging a
drilling program.
Potosi Exploration Concession
The exploration concession application was filed on September 6, 1993, with the
Department of Energy, Mines and Hydrocarbons, a division of the El Salvador's
Minister of Economy's office, by the owners of the real estate, the Cooperative
San Felipe-El Potosi. An application for an exploration concession was filed on
May 8, 1997 in order to comply with the current mining regulations adopted by
the Government of El Salvador in February 1996. The concession consists of
approximately 6,100 acres. While this concession application is pending, it
precludes others from performing exploration on this site. Until this issue is
resolved, Comseb's exploration of the El Potosi site has been temporarily
suspended.
Potosi Lease Agreement
The Joint Venture entered into a lease agreement with the San Felipe Potosi
Cooperative ("Cooperative") of the city of Potosi, El Salvador on July 6, 1993,
to lease the real estate for a period of 30 years and with an option to renew
the lease for an additional 25 years, for the purpose of mining and extracting
minerals.
Environmental Matters
Reference is made to San Sebastian Gold Mine "Environmental Matters." The same
information applies except that at this time no environmental impact study has
been conducted at San Felipe-El Potosi or the El Capulin mines.
Hormiguero Mine ("Hormiguero")
Hormiguero Location
The Hormiguero is located approximately five miles southeast from the SCMP off
of the Pan American Highway in the Departments of San Miguel and Morazan,
Comacaran Jurisdiction, in the Republic of El Salvador, Central America. The
Joint Venture plans to survey, map, plat, plan and develop an exploration
program.
Hormiguero Current Status
The Joint Venture is planning to develop an exploration program on the 5,000
acre site. An application for exploration has been filed on September 6, 1993
with the Department of Energy, Mines and Hydrocarbons, a division of the El
Salvador Minister of Economy's office. In order to comply with the El Salvadoran
Mining Law adopted during February 1996, an exploration application was filed on
April 21, 1997. The Joint Venture has temporarily suspended all of its
activities until such time as the question of a concession/license will be
resolved.
Modesto Mine
Modesto Mine Location
The Modesto Mine is located due north of the town of El Paisnal, approximately
19 miles north of the capital city, San Salvador, in the Republic of
El Salvador, Central America.
Modesto Mine Present Status
On or about September 2, 1993, the Joint Venture through one of its employees,
filed an application with the El Salvador Minister of Economy, Department of
Energy, Mines and Hydrocarbons to explore the 4,000 hectares (9,800 acres) of
property known as the Modesto Mine. The application, together with the consent
to explore this area from the property owners owning more than 25% of total
area, has been submitted to the El Salvador Director of Energy, Mines and
Hydrocarbons. Also, the Joint Venture had submitted its original plan to this
governmental agency on January 24, 1994, outlining its exploration program. In
order to comply with the current mining regulations adopted by the Government of
El Salvador during February 1996, the Joint Venture filed an exploration
concession application on April 21, 1997.
After completing the necessary surveying, mapping and planning, the Joint
Venture proceeded to clean and trench the surface and adit vein exposure. Since
August 1993, 3,084 metric feet of surface channel trenching (10,177 feet) and
866 meters (2,858 feet) of adit cleaning were completed. In addition, four
inclines have been excavated for entry. A total of 4,027 fire assay samples were
performed revealing an average grade of 0.035 ounces per ton. The Joint Venture
suspended its exploration during July 1997 as the Government of El Salvador
awarded the concession of the property to another mining company. The Company
believes that it owns the key property, therefore permission from the Company
will be required before entry can be made by others. The Joint Venture, upon
advice of legal counsel, intends to file an application for a concession
(license) on the property it owns.
Environmental Matters
Reference is made to San Sebastian Gold Mine "Environmental Matters." The same
information applies except that no environmental impact study is being conducted
at Modesto at this time.
Montemayor Mine ("Montemayor")
Montemayor Location/Ownership
The Joint Venture has obtained leases for more than 175 acres of the surface
rights from a number of property owners which permit the Joint Venture to enter
their property for the purpose of exploring, exploiting and developing the
property and then, if feasible, to mine and extract minerals from this property.
The term of this permission is for an infinite period. The Company believes that
this real estate contains the "heart" of the mine. Montemayor is located about
14 miles northeast of the SCMP, six miles northwest of the SSGM and about two
and one-half miles east of the city of San Francisco Gotera in the Department of
Morazan, Republic of El Salvador. Historical records evidence that the potential
for the Montemayor to become an exploration and development gold-producing
prospect is good.
On April 22, 1997, a current exploration concession was filed with the El
Salvador Minister of Economy's office in order to comply with the El Salvadoran
Mining Law adopted in February 1996. During July 1997, the Minister of Economy
awarded the concession to others. Since the Joint Venture has leases on the
surface of key real estate, it cannot be forced to allow others to operate a
mine on this key part of the property. The Joint Venture, upon advice of its
legal counsel, intends to file an application for a concession (license) on the
property it leases.
Environmental Matters
Reference is made to San Sebastian Gold Mine "Environmental Matters." The same
information applies except that no environmental impact study is being conducted
at Montemayor at this time.
San Cristobal Mill and Plant ("SCMP") Recovery and Processing System
SCMP Location
SCMP is located near the city of El Divisadero (bordering the Pan American
Highway), and is approximately 13 miles east of the city of San Miguel, the
second largest city in the Republic of El Salvador, Central America.
SCMP Lease Agreement
Although the Joint Venture owns the mill, plant and related equipment, it does
not own the land and certain buildings. On November 12, 1993, the Joint Venture
entered into an agreement with Corsain to lease approximately 166 acres of land
and the buildings for a period of ten years. The annual rental charge was U.S.
$11,500, payable in advance, and was subject to annual increases based on the
United States' percentage rate of inflation. The annual rental, including
inflation charges, increased to $16,331 beginning on November 1, 2000. Also as
agreed, an $11,500 security deposit was required and this deposit is subject to
an annual increase based on the U.S. inflation rate. The premises are
strategically located to process gold ore from the other mining prospects that
are in the exploration stage.
SCMP Mill and Plant Process Description
Instead of utilizing the existing recovery system on the site on the acquisition
date, the Joint Venture's engineers have designed a carbon-in-leach (CIL)
process.
On February 23, 1993, the Company, on behalf of the Joint Venture acquired SCMP,
a precious metals' cyanide leaching mill and plant rated with a capacity of
processing 200 tons per day which utilized the following unit operations:
crushing, grinding, thickening, agitated leaching, counter current decantation
of leach solution, recovery of precious metals by zinc precipitation
(Merrill-Crowe), and direct smelting of precipitates to produce precious metals
as dore and tailings' disposal.
The Company's engineers recommended that this processing system be retrofitted
and converted to process the SSGM tailings by a cyanidation carbon-in-leach
(CIL) system to recover the residual cyanide soluble precious metals. The first
pouring of gold on a test basis took place on March 31, 1995. The SCMP was
operated on a "start-up and build-up" to a gradual full capacity system during
this trial and modification period.
Current Status
The start-up, testing and adjustment stage of processing the remaining SSGM
tailings via trucking this ore to the SCMP has continued and the Joint Venture
is still in its preliminary stage of producing gold. The SCMP is being designed
to process up to 500 tons of virgin ore per day. The SCMP operations were
suspended as of December 31, 1999, as the plant and equipment required a major
overhaul in order to place it in operating condition.
SCMP Project Operating Plan
Current and Anticipated Production Schedule
Preproduction development, consisting primarily of expansive road and site
improvements to the mine and mill sites, mill equipment modifications and the
development and hauling of virgin ore has taken place during the past years.
Initial production was from the SSGM tailings. Since the SSGM's tailings'
resource is nearly exhausted, virgin gold ore is excavated from the SSGM surface
and hauled to the SCMP site.
The other sources of gold ore from the SSGM to be used at the SCMP operation
will be obtained from the stope fill or higher grade gold ore after obtaining
access via the underground workings or from the surface of the main ore body.
This gold ore will have to be crushed and pulverized, which increases the cost,
but is expected to yield a 90% or higher recovery. The income, dependent on the
market price of gold from the higher grade and recovery of gold ore, is expected
to be substantially more than the cost involved, providing that the world gold
market price does not continue to decline to a level of unprofitability.
The virgin ore and/or tailings are referred to herein as "gold ore." The gold
ore from the SSGM open-pit is loaded onto 20-25 ton dump trucks for transport to
the SCMP. Trucks then haul the gold ore on the Pan American Highway
approximately 15 miles from the SSGM. Mine employees are responsible for the
mining activities including the determination of areas to be excavated, trucking
and loading operations, head sampling and sample analysis.
The gold ore is received at the SCMP where it is weighed, logged, and sampled.
Weighing is performed utilizing a conveyor belt scale and/or a truck scale
located on the SCMP site. The excess gold ore is then unloaded at the SCMP site
and stockpiled in an area which was developed to allow storage of more than
50,000 tons.
SCMP Personnel
The SCMP employees, during this past year's start-up testing period (including
its own trained security personnel) total about 144 persons. The SCMP was
operated 24 hours per day, seven days per week and 52 weeks per year. During the
fourth quarter of this fiscal year, the Joint Venture has suspended the SCMP's
operations and placed the facilities on a care and maintenance status until such
time as the Company has sufficient funds to overhaul and expand this mill and
plant.
Environmental Matters
Reference is made to San Sebastian Gold Mine "Environmental Matters." The same
information applies.
Comseb Laboratories (Lab)
The Joint Venture has two laboratories: one located at the SCMP facilities and
the other on real estate owned by the Company near the SSGM site. A total of
78,441 samples of fire assays have been completed through March 31, 2001. This
total does not include the assays that were performed for production purposes.
Corporate Headquarters
The Company leases approximately 4,032 square feet of office space for its
corporate headquarters on the second floor of the building known as the General
Building located at 6001 North 91st Street, Milwaukee, Wisconsin, at a monthly
rental charge of $2,789 on a month-to-month basis. The lessor is General Lumber
& Supply Co., Inc. ("General Lumber"), a Wisconsin corporation. The Company's
President, Edward L. Machulak owns 55% of the common stock of General Lumber.
Edward L. Machulak disclaims any interest in the balance of General Lumber
common stock which is owned by two of Mr. Machulak's brothers, his wife, and a
trust for the benefit of his children. In addition, the Company shares
proportionately any increase in real property taxes and any increase in general
fire and extended coverage insurance on the property. In lieu of cash payment,
the Lessor has agreed to apply the monthly rental payments owed to the secured
open-ended, on-demand promissory note(s) due to it.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were brought to a vote of security holders in the fourth quarter
ended March 31, 2001.
Item 4(a). Executive Officers and Managers of the Company
Listed below are the names and ages of each of the present executive officers
and managers of the Company together with the principal positions and offices
held by each as of the end of the Company's fiscal year ended March 31, 2001.
Age as of Executive Offices Held Period Served
Name March 31, 2001 With Company (1) In Office (2)
----- -------------- ---------------- -------------
Edward L. Machulak 74 President, Chief Executive,
Operating and Financial Officer
Treasurer 9/14/62 to present
06/78 to present
Edward A. Machulak 49 Executive Vice President 10/16/92 to present
(Son of the President) Secretary 1/12/87 to present
Assistant Secretary 4/15/86 to 1/12/87
Luis A. Limay 59 Project and Mine Manager 10/86 to 1995
Manager of El Salvador
Operations 03/95 to present
(1) Neither have there been nor are there any arrangements nor understandings
between any Executive Officer and any other person pursuant to which any
Executive Officer was elected as an Executive Officer.
(2) Executive Officers are elected by the Directors for a term expiring at
the Directors' Annual Meeting and/or hold such positions until their
successors have been elected and have qualified.
Family Relationships
Edward A. Machulak, presently a Director, Member of the Directors' Executive
Committee, Executive Vice President, and Secretary, is the son of Edward L.
Machulak, the Company's Chairman of the Board of Directors who is also a Member
of the Directors' Executive Committee, and is the President and Treasurer of the
Company. Attorney John E. Machulak (son of Edward L. Machulak) of the law firm
of Machulak, Robertson & O'Dess, S.C. is the legal counsel for the Company.
Officers' and Key Management's Experience
The business experience of each of the Directors, Officers, and Key Management
is as follows:
Edward L. Machulak has been employed by the Company since September 1962. Mr.
Machulak has served as the President, Director, and Chairman of the Board of
Directors of the Company since 1962, Treasurer since 1978, and on March 11,
1991, he was elected as a Member of the Directors' Executive Committee. He has
been a member of the Audit Committee since February 9, 1998, the date that the
Audit Committee was formed.
He is a Director and the President or Officer of: Homespan Realty Co., Inc.;
San Luis Estates, Inc.; San Sebastian Gold Mines, Inc.; and Universal
Developers, Inc. He is the Secretary and Treasurer of Ecomm Group Inc. He
is the authorized representative of the Commerce/Sanseb Joint Venture.
He is a Director and Treasurer of Mineral San Sebastian S.A. de C.V.
Also he is involved in various capacities with the following companies:
General Lumber & Supply Co., Inc., Director; Edjo, Ltd., Director and
Secretary; and Landpak, Inc., Director and Secretary.
Edward A. Machulak is a Director and holds the following Company positions:
Director as of October 28, 1985; a member of the Directors' Executive Committee
as of March 11, 1991; Executive Vice President as of October 16, 1992; Secretary
as of January 12, 1987; and he was the Assistant Secretary from April 15, 1986
through January 12, 1987.
He is also a Director, Vice President and Secretary of: Homespan Realty
Co., Inc. and San Luis Estates, Inc.; and is a Director and Secretary of
San Sebastian Gold Mines, Inc. He has been a Director and Secretary of Ecomm
Group Inc. and was elected President on May 17, 2000.
His business experience is as follows: Director and Corporate Secretary of
General Lumber & Supply Co., Inc., a building material wholesale and retail
distribution center from April 1, 1970 to November 1983; Director and President
of Gamco, Inc., a marketing and advertising company, from November 1983 to
present; Director and President of Circular Marketing, Inc., an advertising and
marketing business, from March 1986 to present; Director and President of
MacPak, a developer of an Internet City Guide, since September 26, 1996 to
present; Director and President of Edjo, Ltd., a company involved in the
development, subdividing and sale of land and real estate from June 7, 1973 to
present; Director and President of Landpak, Inc., a corporation which owns,
operates, manages and sells real estate from September 1985 to present; and he
was involved in other corporate real estate ventures and business activities.
Luis Alfonso Limay was appointed to the position of Project and Mine Manager in
October 1986 and is responsible for managing the daily affairs of the Joint
Venture. During March 1995, Mr. Limay was appointed to the position of Manager
of El Salvador operations which supersedes his position as Project and Mine
Manager. Mr. Limay was employed by Sanseb from 1977 through March 1978 as its
chief geologist. He obtained degrees in geology and engineering from the
National University of San Marlos, Lima, Peru, and the University of Toronto. He
was employed as chief geologist by Rosario Resources in a Honduran underground
mining operation and he held the same position with Canadian Javelin in El
Salvador.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholders' Matters
(a) Principal Market and Common Stock Price
The Company's common shares were fully listed on the Boston Stock Exchange under
the symbol "CMG" or "CMG.BN," from February 10, 1976 to January 29, 1999.
Trading was halted on January 29, 1999, pending the decision of the Company's
appeal of Nasdaq's delisting of the trading of the Company's common shares.
Currently the shares remain listed.
Since May 5, 1999, the Company's common shares are being traded on the Over the
Counter Bulletin Board (OTCBB) under the symbol CGCO.
The following table reflects the range of high and low trade prices of the
common shares as reported by Nasdaq or the OTCBB for the period ended March 31,
2001 and the highest and lowest trade price during each quarter through the
period ended March 31, 2000.
For the period ended March 31, 2001 March 31, 2000
High Low High Low
First quarter ending June 30 $0.4375 $0.1562 $1.25000 $0.25000
Second quarter ending September 30 $0.2969 $0.1250 $1.40625 $0.40625
Third quarter ending December 31 $0.1719 $0.0469 $0.67000 $0.28125
Fourth quarter ending March 31 $0.1250 $0.0625 $1.46875 $0.28125
(b) Approximate Number of Holders of Common Shares
As of March 31, 2001, the common shares were held by approximately 4,085
shareholders; it is estimated that over 95% are United States' residents.
As of March 31, 2001, there were approximately 1,726 holders of record of the
Company's common shares. The number of shareholders of the Company who
beneficially own shares in nominee or "street name" or through similar
arrangements are estimated by the Company to be approximately 2,359.
As of March 31, 2001, there were issued and outstanding: (a) 15,794,008
shares of common stock; and (b) 920,000 stock options to purchase common
stock.
(c) Dividend History
Subject to the rights of holders of any outstanding series of preferred shares
to receive preferential dividends, and to other applicable restrictions and
limitations, holders of shares of common shares are entitled to receive
dividends if and when declared by the Board of Directors out of funds legally
available. No dividends were payable during the last fiscal year ended March 31,
2001. The declaration of future dividends will be determined by the Board of
Directors in light of the Company's earnings, cash requirements and other
relevant considerations.
Item 6. Selected Financial Data
The following table sets forth certain consolidated financial data for the
respective periods presented and should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations:
Year Ended March 31
-------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Income statement data
Total revenue $ 242,182 $ 480,615 $ 847,702 $ 1,295,908 $ 59,009
============= ============= ============ =========== ==============
Income (loss) from continuing
operations $ 129,790 $ (396,232) $ (90,266) $ 118,603 $ (5,141)
============= ============ ============= ============ ==============
Income (loss) from continuing operations per share:
Basic $ $ (.0326) $ $ $ (.0006)
========= ============= ======= ========= ==============
.0092 (.0081) .0115
===== ======= =====
Diluted $ $ (.0282) $ ( $ $ (.0005)
========= ============= ======== ========= ==============
.0086 .0070) .0100
===== ====== =====
Weighted average shares - basic 14,174,662 12,172,867 11,165,127 10,358,132 8,136,286
= ========== = ========== == ========== == ========== ==== =========
Weighted average shares - diluted 15,094,662 14,053,002 12,813,368 11,783,532 9,727,646
= ========== = ========== == ========== == ========== ==== =========
Cash dividends per common share $ $ $ $ $
==============================================================
0 0 0 0 0
= = = = =
Balance sheet data
Working capital*1 $ 152,906 $ 420,963 $ 430,833 $ 614,554 $ 660,596
============= ============= ============= ============= =============
Total assets $30,302,685 $29,856,201 $27,586,801 $25,799,651 $23,169,121
=========== =========== =========== =========== ===========
Short-term obligations*1 $ 9,998,955 $10,231,272 $ 8,911,087 $ 7,270,772 $ 6,029,195
============ =========== ============ ============ ============
Long-term obligations $ $ $ $ 135,000 $ 145,000
=========================================================== =============
0 0 0
= = =
Shareholders' equity $20,303,730 $19,624,929 $18,675,714 $18,393,879 $16,994,926
=========== =========== =========== =========== ===========
*1 Although the majority of the short-term obligations are due on demand,
these obligations have the affect of being long-term as most of the debt is
due to related parties who have not called for the payment except for
nominal amounts of their short-term loans during the past five or more
years.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The matters discussed in this report on Form 10-K, when not historical matters,
are forward-looking statements that involve a number of risks and uncertainties
that could cause actual results to differ materially from projected results.
Such factors include, among others, the speculative nature of mineral
exploration, gold and silver commodity prices, production and reserve estimates,
litigation, environmental and government regulations, general economic
conditions, conditions in the financial markets, political and competitive
developments in domestic and foreign areas in which the Company operates,
availability of financing, force majeure events, technological and operational
difficulties encountered in connection with the Company's mining activities,
labor relations, other risk factors as described from time to time in the
Company's filings with the Securities and Exchange Commission and other matters
discussed under this reporting category. Many of these factors are beyond the
Company's ability to control or predict. The Company disclaims any intent or
obligation to update its forward-looking statements, whether as a result of
receiving new information, the occurrence of future events, or otherwise. Should
one or more of those risks or uncertainties materialize, or should any
underlying assumption prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
Management's discussion and analysis ("MD&A") of the financial condition and
results of operations of the Company should be read in conjunction with the
audited consolidated financial statements and the notes thereto. The Company
prepares and files its consolidated financial statements and MD&A in United
States ("U.S.") dollars and in accordance with U.S. generally accepted
accounting principles ("GAAP").
The following discussion provides information on the results of operations for
the three years ended March 31, 2001, 2000 and 1999 and the financial condition,
liquidity and capital resources for the same three-year period. The financial
statements of the Company and the notes thereto contain detailed information
that should be referred to in conjunction with this discussion.
Restatement of Prior Period Financial Statements
Accounting Overview
A redefined structure of the financial statements for the fiscal years ended
March 31, 2001, 2000 and prior years reflects and includes the Commerce Group
Corp./Sanseb Joint Venture (Joint Venture) on a consolidated basis. Prior to
this change, the Company reported the investment in the Joint Venture as
advances to the Joint Venture and the Company's advances included the interest
earned on these advances in anticipation of the interest being reimbursed. These
advances are restated and combined with the Company's Consolidated Financial
Statements. Although the elimination of interest income reduces the retained
earnings, it does not eliminate the interest charged by and earned by the
Company which is due and payable to it and which is maintained additionally with
a separate accounting. In effect, this restructuring modifies only the financial
reporting and at the time that the profits for the gold mining operation are
distributed, the interest earned on these advances will be paid first to the
Company prior to any profit distribution and pursuant to an agreement entered
into by the joint venture parties.
For the fiscal year ended March 31, 2001, the Company was able to segregate the
disbursements to the Joint Venture to identify the category to be charged.
Reference is made to Note 2 in the financial statements for additional details.
The Company's Current Status
Precious Metal Mining
The Joint Venture has produced gold from March 31, 1995 through its fiscal
period ended December 31, 1999. Its San Cristobal Mill and Plant (SCMP)
consisted primarily of used equipment that had been installed at its leased site
by a previous mining company. The used processing equipment was acquired by the
Joint Venture on February 23, 1993.
Although the Company has on a continuous basis retrofitted, modified, and
restored the equipment, it presently lacks sufficient funds to perform a major
overhaul and to expand the SCMP facilities. There is also much uncertainty at
this time relative to the price of gold which in the past months reflected a
wide range of price fluctuations.
The Company's management has temporarily suspended its gold processing until
such time as it has adequate funds for the retrofitting, rehabilitation,
restoration, overhauling, and most importantly for the expansion of the SCMP
facilities.
The Company has entered into a non-exclusive independent consulting arrangement
for the purpose of raising the sum of up to U.S. $20 million. The funds are to
be used to purchase and install equipment, perform site development, working
capital for the SSGM open-pit, heap-leaching operation, and for the expansion of
the Joint Venture's SCMP.
Through December 1999, the Joint Venture produced gold on a curbed basis
primarily from the gold ore it is excavating from its SSGM open pit. The gold
was processed at its SCMP facility which is located approximately 15 miles from
the SSGM site. It is contemplating the installation of a pilot open-pit,
heap-leaching gold-processing system on the SSGM site. The cone crushing system
is being erected at this site. It also is continuing its SSGM site preparation,
the expansion of its exploration and exploitation targets, and the enlargement
and development of its gold ore reserves. It has suspended exploring the
potential of the other gold mine prospects identified as the San Felipe-El
Potosi Mine and its extension the El Capulin Mine. An application for a
concession is pending. The Montemayor Mine and the Modesto Mine have been placed
on a standby basis pending the Government of El Salvador's decision on the
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 and it intends to commence this gold-mining
operation as soon as adequate funding is in place. Dependent on the grade of
gold ore processed and the funds it is able to obtain, it then anticipates
producing annually approximately 10,000 ounces of gold from the SCMP operation
and eventually up to 113,000 ounces of gold from its SSGM open-pit,
heap-leaching operation. The Joint Venture continues to conduct an exploration
program to develop additional gold ore reserves at the SSGM.
Since the Joint Venture in 1995 commenced producing gold at the SCMP, albeit a
very exiguous operation, and a forerunner of its greater goals, the Company's
revenues, profitability and cash flow will be greatly influenced by the price of
gold. Gold prices fluctuate widely and are affected by numerous factors which
will be beyond the Company's control, such as, expectations for inflation, the
strength of the U.S. dollar, overproduction of gold, global and regional demand,
or political and economic conditions. The combined effect of these and other
factors is difficult; perhaps impossible to predict. Should the market price of
gold fall below the Company's production costs and remain at such level for any
sustained period, the Company could experience losses.
The Company believes that neither it, nor any other competitor, has a material
effect on the precious metal markets and that the price it will receive for its
production is dependent upon world market conditions over which it has no
control.
The Internet Business
Historical Synopsis
The Company on January 29, 1999, announced its plans to have its 51%-owned
subsidiary, Ecomm Group Inc. (Ecomm), enter into the web portal business.
Ecomm's objective was and still is to become a recognized web portal on the
world wide web by acquiring or "rolling-up" Internet websites. Interactive
Business Channel, Inc. (IBC) had agreed to assist Ecomm in developing an
"Internet web portal roll-up strategy" by acquiring Internet businesses. In this
connection, the President of IBC, Matthew Marcus, was elected as the President
of Ecomm.
Ecomm had been developing its new MyInternet.to web portal since January 1999.
On July 26, 1999, the Company announced that Ecomm launched the site at
http://www.myinternet.to.
Since July 1999, Ecomm's MyInternet.to web portal had been tested, marketed, and
updated to maximize its market share on the Internet. The website had a static
link to the highly trafficked http://www.ibchannel.com website.
MyInternet.to had implemented a broad reaching affiliate program through
Linkshare.com which should have enabled it to derive revenues from affiliate
agreements with small and large Internet websites. In addition, these
affiliations should have drawn more traffic and interest to this site. Such
websites included Yahoo Travel, Audio Book Club, JC Penney, Dell, and many, many
more.
MyInternet.to had been designed as a platform to take advantage of new
opportunities to derive financial benefit for Ecomm from the implementation and
integration of new Internet technologies, mergers, and acquisitions.
Current Internet Activities
The Company believes that IBC and/or Mr. Matthew Marcus were not meeting their
contractual obligations. Therefore the Company and Ecomm decided that they
should discontinue their relationship. On June 14, 2000 the Company's legal
counsel filed a complaint in the State of Wisconsin, Circuit Court, Milwaukee
County, as plaintiffs, against IBC and Matthew Marcus (the President of IBC and
Ecomm). The details of this lawsuit were explained in the Securities and
Exchange Commission Form 8-K dated June 14, 2000 and filed on June 29, 2000.
On July 31, 2000, the Company and Ecomm entered into a Settlement, Rescission,
and Mutual Release Agreement with Interactive Business Channel, Inc. (IBC) and
Mr. Matthew Marcus, as an individual. Reference is made to "Part II - Financial
Information, Item 1. Legal Proceedings" of the Company's September 30, 2000 Form
10-Q filing for details.
The Company intends to remain in the Internet business and is in the process of
formulating its future plans. The Company believes that a significant
opportunity exists to develop and consolidate the many niches of the Internet
community into a web portal. With new management it will evaluate, structure and
attempt to combine Internet-related business combinations, mergers and
acquisitions. This is an ideal time for the Company to pursue its objectives as
the Internet industry is going through a "shake-down" process which could mean
more realistic valuations and more favorable negotiations.
There can be no assurance that Ecomm's current strategy will be successful as
the current depressed market price of the Company's common shares presently
compels it from using its shares in an exchange for an acquisition of an
Internet company because of substantial dilutive effect it would have. Ecomm has
not yet entered into any agreements for the acquisition of any websites, web
services or other technology in connection with the web portal. There is no
assurance that it will be able to enter into contracts for the acquisition of
such sites, services and technology on terms acceptable to the Company and
Ecomm. The Internet business is highly competitive and there is no assurance
that Ecomm will generate a profit, even if Ecomm acquires the websites, web
services and technology on acceptable terms.
Results of Operation for the Fiscal Year Ended March 31, 2001 Compared to
March 31, 2000 on a Restated Basis
- ------------------------------------------------------------------------------
The Company, on a consolidated basis, including the Joint Venture and excluding
the interest income due from the Joint Venture, had a net profit of $129,790 or
$.0092 per share for this fiscal year compared to a net loss of ($396,232) or
($.0326) per basic share for its fiscal year ended March 31, 2000. This profit
for the fiscal year was primarily from the sale of real estate. The Directors
decided that it would be in the best interest of the Company to reduce debt by
selling the encumbered non-income producing assets. Without this net profit of
$163,050, there would have been a loss of ($33,260). Depreciation of $320,491
contributed substantially to the 2000 year loss. In fiscal 2001 there was no El
Salvador added value tax refund recorded as income whereas in 2000, $86,411 was
refunded.
The Joint Venture suspended its gold mining and processing due to its need to
rehabilitate, overhaul, and expand the SCMP, and due to the continuous decline
and instability in the price of gold.
There was no current or deferred provision for income taxes during the fiscal
period ended March 31, 2001 or 2000. Additionally, although the Company has
operating tax loss carryforwards, the Company has not previously recorded a net
deferred tax asset due to an assessment of the "more likely than not"
realization criteria required by Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes.
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS128), Earnings per Share in prior years. SFAS128's objective is to simplify
the computation of earnings per share (EPS) and to make the U.S. standard more
compatible with that of other countries and the International Accounting
Standards Committee. SFAS128 supersedes APB Opinion 15, replacing the
presentation of "primary" and "fully diluted" EPS with "basic" and "diluted"
EPS. Basic EPS is computed by dividing income available to common shareholders
(net income less any dividends declared on preferred stock and any dividends
accumulated on cumulative preferred stock) by the weighted average number of
common shares outstanding. Diluted EPS requires an adjustment to the denominator
to include the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. The numerator
is adjusted to add back any convertible preferred dividends and the after-tax
amount of interest recognized with any convertible debt.
Inflation did not have a material impact on operations in the fiscal years
ended March 31, 2001 or 2000. Management of the Company anticipates that
inflation will have an impact on continuing operations.
Interest expense in the sum of $1,063,468 was capitalized by the Joint
Venture during this fiscal period compared to $923,726 for the same period in
2000.
Almost all of the costs and expenses incurred by the Company are allocated and
charged to the Joint Venture. The Joint Venture capitalizes or expenses these
costs and expenses and will continue to do so until such time when it is in full
production on each of its mining projects. At the time production commences,
these capitalized costs will be charged as an expense based on a per unit basis.
If the prospect of gold production becomes unlikely, all of these costs will be
written off in the year that this occurs.
Results of Operation for the Fiscal Year Ended March 31, 2000 Compared to
March 31, 1999 on a Restated Basis
- -------------------------------------------------------------------------------
The Company, on a consolidated basis, including the Joint Venture and excluding
the interest income due from the Joint Venture, had a net loss of ($396,232) or
($.0326) per basic share for its fiscal year ended March 31, 2000 compared to a
loss of ($90,266) or ($.0081) per share for the same previous fiscal year. This
2000 increased loss results primarily from the depressed sale price of gold and
the fact that less gold was produced and sold. Depreciation expense, for the
fiscal year ended March 31, 2000, was $320,491 compared to $338,797 for the
period ended March 31, 1999. The other income and the income derived from the El
Salvadoran added tax value refund of $86,411 for 2000 and $213,491 for 1999,
reduced the losses.
During the nine-month period of gold processing, the Company sold 1,499 ounces
of gold and 463 ounces of silver at an average realized price of $276 an ounce,
for a gross total of $413,712. This compares with producing 2,684 ounces of gold
and 836 ounces of silver produced during its twelve-month period ended March 31,
1999, for a total of $785,526. In addition, the Joint Venture held approximately
100 ounces of gold in its inventory valued at $28,000 compared to a value of
$75,324 for the same period in 1999. The Joint Venture suspended its gold mining
and processing due to its need to rehabilitate, overhaul, and expand the SCMP
and the continuous decline and instability in the price of gold.
Financing Activities, Liquidity and Capital Resources
During this fiscal period ended March 31, 2001, the Company reduced the notes
payable by a sum of $2,056,063 as follows: the sale of the Company's restricted
common shares and land to related parties reduced the notes payable by
$1,532,050; and the fulfillment of the Company's obligation to issue restricted
common shares to an unrelated party reduced the debt by $524,013.
A total of 2,405,079 common shares were issued for a sum of $837,461 during this
fiscal period. These shares were issued for the following: 618,500 shares
($69,850) for Director, Officer, and employee compensation; 1,586,579 shares
($747,611) for payment of debt; and 200,000 shares ($20,000) for cash.
The Joint Venture has suspended its SCMP operations until such time as it has
adequate funding to repair, retrofit and expand the mill to process its gold
ore. After almost five years of operation with used equipment, the facilities
require a major overhaul. The price of gold did not provide an adequate cash
reserve for these needs. Additional equipment has to be purchased, delivered and
installed.
The Company will endeavor to commence an open-pit, heap-leaching operation at
the SSGM as there is a substantial amount of gold ore that grades less than 0.04
ounces per ton. The Company's engineers had determined that a 2,000 ton-per-day
open-pit, heap-leach, start-up operation may produce 1,280 ounces of gold per
month. It is necessary to raise adequate funds from outside sources for this
operation; the amount required is dependent on the targeted daily volume of
production. A sum of U.S. $16 million would start the open-pit, heap-leach at a
rate of 2,000 tons per day and the anticipated profits and cash flow then could
be used to expand the operation to 6,000 tons per day.
The Company continues to be cognizant of its cash liquidity until it is able to
produce adequate profits from its SSGM gold production. It will attempt to
obtain sufficient funds to assist the Joint Venture in placing the SSGM into
production as the anticipated profits from the existing SCMP operation (unless
accumulated over a period of time) appear insufficient to meet the SSGM capital
and the other mining exploration requirements. In order to continue obtaining
funds to conduct the Joint Venture's exploration, exploitation, development,
expansion programs, and the production of gold from the SSGM open-pit,
heap-leaching operation, it is necessary for the Company to obtain funds from
other sources. The Company may be required to borrow funds by issuing
open-ended, secured, on-demand or unsecured promissory notes or by selling its
shares to its directors, officers and other interested investors or by entering
into a joint venture or merging with other companies.
During the past, the Joint Venture was engaged in exploration, exploitation and
development programs designed to increase its gold ore reserves. The prospects
of expanding the gold reserves are positive. The Company believes that the past
invested funds significantly contributed to the value of the SSGM and to the
value of its other mining prospects as the results of the exploratory efforts
evidence the potential for a substantial increase of gold ore reserves. The
Company was unable to obtain sufficient funds during this fiscal year to
continue to modify, overhaul, retrofit, and expand the SCMP or for its open-pit,
heap-leach operation.
The Company estimates that it will need up to U.S. $16 million to start a 2,000
ton-per-day open-pit, heap-leaching operation. Eventually the production
capacity would be increased in stages to 6,000 tons per day so that annual
production would be 113,000 ounces of gold at the SSGM. The use of the
$16,000,000 proceeds is as follows: $8,000,000 for mining equipment and a
crushing system; $3,033,548 for the processing equipment and site and
infrastructure costs; and $4,966,452 for the working capital. The existing
depressed price of gold and the Company's unbelievably low common share market
price are major deterrents in raising cash for the Company's programs.
Therefore, the Company continues to rely on its directors, officers, related
parties and others for its funding needs. The Company believes that it may be
able to obtain such short-term and/or equity funds as are required from similar
sources as it has in the past. It further believes that the funding needed to
proceed with the continued exploration of the other exploration targets for the
purpose of increasing its gold ore reserves should be placed on a standby basis
until the price of gold is at a level to warrant the investment. These programs
will involve airborne geophysics, stream chemistry, geological mapping,
trenching, drilling, etc. The Joint Venture believes that it may be able to
joint venture these exploration costs with other entities.
From September 1987 through March 31, 2001, the Company has advanced the sum of
$32,519,136 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 $33,109,401. 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 Modesto Mine, the
Hormiguero Mine, and the Montemayor Mine, for SSGM infrastructure, including
rewiring and repairing about two miles of the Company's electric lines to
provide electrical service, for the purchase of equipment, laboratory chemicals,
and supplies, for parts and supply inventory, for the maintenance of the
Company-owned dam and reservoir, for extensive road extension and preservation,
for its participation in the construction of a community bridge, for community
telephone building and facilities, for a community place of worship, for the
purchase of the real estate on the Modesto Mine, for leasing the Montemayor real
estate, for the purchase and erection of a cone crushing system, for diamond
drilling at the SSGM, for the purchase of a rod mill and a carbon regeneration
system and many other related needs.
Employees
As of March 31, 2001, the Joint Venture employed approximately 45 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 it was the largest single
non-agricultural employer in the El Salvador Eastern Zone. Also, the Company
employs approximately four persons (plus part-time help) in the United States.
Since the Joint Venture has laid off most of its employees, the Joint Venture
had to pay the severance pay to its employees and therefore it had to sell the
Company's common shares which were issued to the Commerce Group Corp. Employee
Benefit Account. El Salvador employees are entitled to receive severance pay
which is based on one month'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 March 31, 2001, the Company, and three of its
subsidiaries, have advanced to the Joint Venture $33,109,401. Included in the
total advances is the interest charged to the Joint Venture by the Company which
amounts to $16,973,241 through March 31, 2001. The Company furnishes all of the
funds required by the Joint Venture. This interest charge is eliminated in these
financial statements.
Efforts to Obtain Capital
Since the concession was granted, and through the present time, substantial
effort is exercised in securing funding through various sources, all with the
purpose to expand the operations of the SCMP, to construct an open-pit
heap-leach operation at the SSGM site, and to continue the exploration of its
other mining prospects.
The Company, Sanseb, and the Joint Venture consider the past political situation
in the Republic of El Salvador to have been unstable, and believe that the final
peace declaration on December 16, 1992, has put an end to war. Presently, the
stigma of the past unfavorable political status in the Republic of El Salvador
exists and therefore certain investors continue to be apprehensive to invest the
funds required. However, as explained in this report, the Company was able to
obtain a sum of funds to invest in the expansion and retrofitting of its SCMP
and for the exploration of its other mining prospects. The decline in the price
of gold to a 20-year low depressed the public market price of the Company's
shares as well as the shares of most of the world-wide mining companies. This
decline in the Company's stock market price places the Company in a situation of
substantially diluting its common shares in order to raise capital. The Company
believes that it will be able to obtain adequate financing to conduct its
operations from the same sources as in the past. There are no assurances that
funds will be available.
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.
Dividends
For the foreseeable future, it is anticipated that the Company will use any
earnings to finance its growth and expansion, therefore, dividends will not be
paid to shareholders.
Cautionary Statement For Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Some of the statements contained in this report are forward-looking statements,
such as estimates and statements that describe the Company's future plans,
objectives or goals, including words to the effect that the Company or
management expects a stated condition or result to occur. Since forward-looking
statements address future events and conditions, by their very nature, they
involve inherent risks and uncertainties. Actual results in each case could
differ materially from those currently anticipated in such statements by reason
of factors such as production at the Company's mines, changes in operating
costs, changes in general economic conditions and conditions in the financial
markets, changes in demand and prices for the products the Company produces,
litigation, legislative, environmental and other judicial, regulatory, political
and competitive developments in areas in which the Company operates and
technological and operational difficulties encountered in connection with mining
or Internet activities. Many of these factors are beyond the Company's ability
to control or predict. The Company disclaims any intent or obligation to update
its forward-looking statements, whether as a result of receiving new
information, the occurrence of future events, or otherwise.
55
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
And Supplementary Financial Data
Page
Report of Independent Public Accountant........................................................................44
Financial Statements:
Consolidated Balance Sheets, Years Ended March 31, 2001 and 2000...............................................45
Consolidated Statements of Operations, Years Ended March 31, 2001, 2000 and 1999...............................46
Consolidated Statements of Changes in Shareholders' Equity
Years Ended March 31, 2001, 2000 and 1999....................................................................47
Consolidated Statements of Cash Flows, Years Ended March 31, 2001, 2000 and 1999...............................48
Notes to Consolidated Financial Statements.....................................................................50
Supplementary Financial Data:
Report of Independent Accountant on the Financial Statements Schedules.........................................74
Schedules of financial statements other than those listed herein have been
omitted since they are either not required, are not applicable, or the required
information is included in the financial statements and related notes.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To the Shareholders and Board of Directors of Commerce Group Corp.:
I have audited the accompanying consolidated balance sheets of Commerce Group
Corp. ("Company"), a Wisconsin Corporation, and its subsidiaries, as of March
31, 2001 and 2000, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows, for each of the three fiscal
years in the periods ended March 31, 2001, 2000 and 1999. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my audits.
I conducted my audits in accordance with auditing standards generally accepted
in the United States. Those standards require that I plan and perform the audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audits provide a reasonable basis for my
opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commerce Group Corp. and its subsidiaries as of March 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the periods ended March 31, 2001, 2000 and 1999 in
conformity with accounting principles generally accepted in the United States.
Bruce Michael Redlin, CPA, LLC
Certified Public Accountant
Milwaukee, Wisconsin
May 9, 2001
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Balance Sheets--March 31
2001
----------------
2000
----
ASSETS
Current assets
Cash $ 24,401 $ 313,940
Investments 232,068 232,068
Accounts receivable 275,465 275,162
Inventories 39,562 67,562
Prepaid items and deposits 33,981 58,680
---------------- ---------------
Total current assets 605,477 947,412
Real estate (Note 5) 23,336 1,179,836
Property, plant and equipment, net 3,376,422 3,039,127
Mining resources investment 26,297,450 24,401,376
Other investments 288,450
------------------------- -------
0
Total assets $30,302,685 $29,856,201
=========== ===========
LIABILITIES
Current liabilities
Accounts payable $ 452,571 $ 526,449
Notes and accrued interest payable to related parties (Notes 6 & 7) 5,610,380 5,992,633
Notes and accrued interest payable to others (Note 6) 720,572 1,204,239
Accrued salaries 2,288,015 1,839,015
Accrued legal fees 308,286 260,926
Other accrued expenses 619,131 408,010
------- ------- --------------
Total liabilities 9,998,955 10,231,272
Commitments and contingencies (Notes 2, 4, 5, 6, 7, 8, 10 & 12)
SHAREHOLDERS' EQUITY
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
2001-none; 2000-none (Note 10) $ $
0 0
Common stock, $0.10 par value:
Authorized 50,000,000 shares; (Note 10)
Issued and outstanding:
2001-15,794,008 (Note 10) 1,579,401 1,388,893
2000-13,888,929 (Note 10)
Capital in excess of par value 18,760,849 18,402,346
Retained earnings (deficit) (36,520) (166,310)
------- -------- --------------
Total shareholders' equity 20,303,730 19,624,929
-- ---------- -- ----------
Total liabilities and shareholders' equity $30,302,685 $29,856,201
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Operations
For the Year Ended March 31
2001 2000 1999
---- ---- ----
Revenues:
Gold sales $ $ 413,713 $ 785,526
0
Campground income 75,470 66,902
62,176
Real estate sales - net profit 163,050
------ -------
0 0
- -
Total revenues 238,520 480,615 847,702
Expenses:
Cost of gold sales 0 376,007 601,111
Depreciation 0 320,491 338,797
General and administrative 112,392 266,894 211,797
------ ------- ------- ------- --------------
Total expenses 112,392 963,392 1,151,705
Other income:
Interest income 3,662 134 246
El Salvador added value tax refund 86,411 213,491
---------------- ------- ------ --------------
0
Other income 3,662 86,545 213,737
--------- ----- ------- ------ --------------
Net profit (loss) $ 129,790 $ (396,232) $ (90,266)
Credit (charges) for income taxes
0 0 0
- - -
Net income (loss) after income tax credit (charge) $ 129,790 $ (396,232) $ (90,266)
=========== =========== ============
Net income (loss) per share (Note 2) basic $ .0092 $ (.0326) $ (.0081)
============= ============= =============
Net income (loss) per share (Note 2) diluted $ .0086 $ (.0282) $ (.0070)
============= ============= =============
Weighted av. common shares outstanding (Note 2) 14,174,662 12,172,867 11,165,127
========== ========== ==========
Weighted av. diluted common shares (Note 2) 15,094,662 14,053,002 12,813,368
========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended March 31, 2001, 2000 and 1999
Common Stock
-----------------------------------------------------
Capital in Retained
Number of Excess of Earnings
Par Par Value (Deficit)
Shares Value
Balances March 31, 1998 11,039,670 $1,103,967 $16,969,724 $ 320,188
Net income (loss) for FY March 31, 1999 $ (90,266)
Dir./off./employee/services comp. 214,234 21,423 89,962
Payment of debt 238,123 23,812 190,779
Cash 85,500 8,551 37,574 _________
------- ------ --------- ----- ---------------
Balances March 31, 1999 11,577,527 $1,157,753 $17,288,039 $ 229,922
Net income (loss) for FY March 31, 2000 $(396,232)
Dir./off./employee/services comp. 1,014,445 101,445 471,373
Payment of debt 796,957 79,695 404,484
Investments 500,000 50,000 238,450 ________
----- ------- ----- ------ ----- -------
Balances March 31, 2000 13,888,929 1,388,893 18,402,346 $(166,310)
Net income (loss) for FY March 31, 2001 $ 129,790
Dir./off./employee/services comp. 618,500 61,850 8,000
Payment of debt 1,586,579 158,658 588,953
Cash 200,000 20,000 0
Common shares cancelled (500,000) (50,000) (238,450) ________
-- --------- -- -------- -- ---------
Balances March 31, 2001 15,794,008 1,579,401 18,760,849 $ (36,520)
========== ========= ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Cash Flows
For the Years Ended March 31
2001 2000 1999
------------- --------- ---- -------- ----
Operating activities:
Net income (loss) $ 129,790 $ (396,232) $ (90,266)
--------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation 0 320,491 338,797
Changes in assets and liabilities
Decrease (increase) in account receivables (303) 83,607 93,765
Decrease (increase) in inventories 28,000 88,860 48,877
Decrease (increase) in prepaid items and deposits 24,698 (9,003) 1,871
Decrease (increase) in real estate 1,156,500 0 0
Increase (decrease) in accounts payable and accrued liabilities 137,243 73,659 57,316
Increase (decrease) in accrued salaries 449,000 165,000 165,000
Increase (decrease) in accrued legal fees 47,359 63,787 22,058
------------- ------- ------ ------- ------
Total adjustments 1,842,497 786,401 727,684
-- --------- ----- ------- ----- -------
Net cash provided by (used in) operating activity 1,972,287 390,169 637,418
Investing activities:
Investment in mining resources (2,233,369) (2,166,900) (2,269,928)
Investments - other 288,450 (334,336)
----- ------- --- ---------
0
Total (1,944,919) (2,501,236) (2,269,928)
Financing activities:
Net borrowings (865,919) 1,017,739 1,260,943
Common stock issued 549,011 1,345,447 372,101
---- ------- --------- ---- -------
Net cash provided by (used in) financing activities (316,908) 2,363,186 1,633,044
Net increase (decrease) in cash and cash equivalents (289,540) 252,119 534
Cash - beg. of year 313,940 61,821 61,287
----- ------- ------- ------ ------ ------
Cash - end of year $ 24,400 $ 313,940 $ 61,821
============ =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Cash Flows, continued
Supplemental disclosures of cash information:
1. The following amounts of interest expense paid or accrued were
capitalized: $1,063,468 (2001), $923,726 (2000), and $767,459 (1999).
2. There was no interest expense paid in cash for the periods ended
March 31, 2001 or 2000; $8,838 was paid in 1999.
3. The Company paid no income taxes during its fiscal periods ended
March 31, 2001, 2000, and 1999.
4. The investment consists of securities held for the Employee
Benefit Account stated at cost and precious stones, which are stated at the
lower of
cost or market value.
5. Accounts receivable consist of an amount advanced to Misanse, a
52%-owned Corporation, which will be an offset for rental charges
included in the accounts payable due to the Joint Venture.
6. Inventory consists of consumable items which are stated at the lower of
average cost or market.
Supplemental schedule of non-cash investing and financing activities during the
fiscal years ended March 31:
1. The Company issued the following common shares for the values shown for
employee severance pay and benefits, for director fees, officer
compensation and for other services rendered:
Shares Value
2001 618,500 $ 69,850
2000 1,014,445 $572,818
1999 214,234 $111,385
2. Other non-cash items were for the unpaid salary and director,
officer and legal fees; this amounted to $449,360 for 2001, $228,787
for 2000, and $187,057 for 1999.
3. There were no non-cash equipment financing activities in 2001, 2000,
or 1999.
The accompanying notes are an integral part
of these consolidated financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Notes to the Consolidated Financial Statements
March 31, 2001
(1) The Company and Basis of Presentation of Financial Statements
(a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant") and
its 82 1/2%-owned subsidiary, San Sebastian Gold Mines, Inc. ("Sanseb")
both corporations based in the United States, have formed the
Commerce/Sanseb Joint Venture ("Joint Venture") for the purpose of
performing gold mining and related activities, including, but not limited
to, exploration, exploitation, development, extraction and processing of
precious metals in the Republic of El Salvador, Central America. Gold
bullion, currently the Joint Venture's principal product, was produced
(but not on a full production basis) in El Salvador and refined and sold
in the United States. Expansion of exploration is continuous at the San
Sebastian Gold Mine ("SSGM") which is located near the city of Santa Rosa
de Lima. Exploration is being curtailed at other mining projects until
adequate funding and license permits are obtained.
All of the mining projects are located in the Republic of El Salvador,
Central America.
As of April 1, 2000 the Joint Venture decided to temporarily suspend the
San Cristobal Mill and Plant ("SCMP") operations until such time as it has
adequate funds to retrofit, rehabilitate, restore and expand these
facilities and until there is certainty that the price of gold will be
stabilized at a higher level.
The Joint Venture is in the pre-production and development stage at the
SSGM and it simultaneously is performing separate programs. It did produce
gold on a start-up (not full production) basis, and as of December 31,
1999, it temporarily ceased operations at its SCMP which is located
approximately 15 miles from the SSGM site. It plans to begin its open-pit,
heap-leaching process on the SSGM site upon receipt of adequate funds. 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. In addition, it plans to explore the potential
of other gold mine exploration prospects in El Salvador. Concurrently, it
also is in the process of obtaining the necessary funding for each of
these separate programs while its Joint Venture is erecting its crushing
system at the SSGM site.
The Company on January 29, 1999, announced its plans to diversify by
having (at that time) its wholly-owned subsidiary, Ecomm Group Inc.
("Ecomm"), enter into the web portal business. Ecomm's objective was and
still is to become a recognized web portal on the world wide web by
acquiring or "rolling-up" Internet websites. Interactive Business Channel,
Inc. (IBC) had agreed to assist Ecomm in developing an "Internet web
portal roll-up strategy" by acquiring Internet businesses.
Ecomm's principal business was to evaluate, structure and complete
Internet-related business combinations, mergers, and acquisitions. It
planned to concentrate in specialized or niche portals which are being
developed as hubs or gateways to the Internet for groups of individuals
with specific interests.
Due to the lack of progress in meeting its goals, the Company, after many
attempts to prompt IBC and its President Matthew Marcus to perform
according to the agreements dated January 29, 1999 and May 25, 1999, had
its legal counsel file a complaint on behalf of the Company and its
51%-owned subsidiary, Ecomm Group Inc., as plaintiffs, against IBC and
Matthew Marcus as defendants.
Included in this complaint were the following three causes of action: the
first cause of action was the breach of contract; the second cause of
action was the breach of fiduciary duty; and the third cause of action was
the rescission of the contract and return of compensation.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Notes to the Consolidated Financial Statements (Continued)
March 31, 2001
The plaintiffs demanded judgment against the defendants as follows: for
actual damages in an amount to be determined at trial; for punitive
damages in an amount to be determined at trial; for rescission of the
transaction and return to the plaintiffs of 49% of the common stock of
Ecomm Group Inc. represented by 96 common shares and for the return of
500,000 Commerce Group Corp. common shares, par value ten cents per share,
issued as compensation for the services of IBC and Mr. Matthew Marcus; and
for actual attorney's fees, the costs and disbursements of this action,
and any further relief the Court deems equitable and just.
A copy of the said complaint was filed as Exhibit A to the Company's
Securities and Exchange Commission Form 8-K on June 29, 2000.
On July 31, 2000, the Company and Ecomm entered into a Settlement,
Rescission, and Mutual Release Agreement with Interactive Business
Channel, Inc. and Mr. Matthew Marcus, as an individual. Reference is made
to the Company's Securities and Exchange Commission Form 10-Q filing for
the quarterly period ended September 30, 2000, in "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation"
and in "Part II Financial Information, Item 1. Legal Proceedings" for a
complete description of a lawsuit that has been settled in favor of the
Company.
There can be no assurance that Ecomm's current strategy will be
successful. Ecomm has not yet entered into any agreements for the
acquisition of any websites, web services or other technology businesses.
There is no assurance that it will be able to enter into contracts for the
acquisition of such sites, services and technology on terms acceptable to
Commerce and Ecomm. The Internet business is highly competitive and there
is no assurance that Ecomm will be able to attract traffic and generate a
profit, even if Ecomm acquires the websites, web services and technology
on acceptable terms.
(b) Use of estimates
The preparation of the financial statements, in accordance with accounting
principles generally accepted in the United States, requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(2) Significant Accounting Policies
Restatement of Prior Period Financial Statements
The Company changed its consolidation policy as of April 1, 1998 retroactive to
September 1987, to include the income and expenses and the assets, liabilities
and equity of its Joint Venture rather than show it as an investment on the
balance sheet. As of March 31, 2001, the consolidated balance sheets, the
consolidated statements of operations, the consolidated statements of changes in
shareholders' equity, and the consolidated statements of cash flows were also
restated to reflect these changes.
The balance sheet effect of the change in policy was to reduce the Joint Venture
advances by the amount of interest charged to the Joint Venture. Retained
earnings were reduced by the same offsetting amount for the same period. The
consolidated statements of changes in shareholders' equity were also restated to
reflect these changes.
The consolidated statements of operations through March 31, 2001 were
restated to eliminate the net interest income earned by the Company from
the Joint Venture.
The consolidated statements of cash flows were also restated to reflect the
changes in operating profits or losses.
Principles of Consolidation
The Joint Venture and the following subsidiaries are all majority-owned by the
Company and are included in the consolidated financial statements of the
Company. All significant intercompany balances and transactions have been
eliminated.
% Ownership
Homespan Realty Co., Inc. ("Homespan") 100.0
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0
Ecomm Group Inc. ("Ecomm") 100.0
San Luis Estates, Inc. ("SLE") 100.0
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5
Universal Developers, Inc. ("UDI") 100.0
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0
Investments
The investments consist of securities held for the Employee Benefit
Account stated at cost and of precious stones which are stated at the lower of
cost or market value.
Accounts Receivable
The accounts receivable primarily consists of the amount advanced to Mineral San
Sebastian, S.A. de C.V. (Misanse) which will be offset for the rental charges
included in the accounts payable due to the Joint Venture.
Intercompany Balances
All intercompany balances and transactions have been eliminated.
Inventory
Inventory consists of consumable supplies.
Deferred Mining Costs
The Company, in order to avoid expense and revenue unbalance, capitalizes all
costs directly associated with acquisition, exploration and development of
specific properties, until these properties are put into operation, sold or are
abandoned. Gains or losses resulting from the sale or abandonment of mining
properties will be included in operations. The Joint Venture capitalizes its
costs and expenses and will write off these cumulative costs on a units of
production method at such time as it begins producing gold derived from the
virgin gold ore on a full production basis. If the prospect of gold production,
due to different conditions and circumstances becomes unlikely, all of these
costs may be written off in the year that this occurs.
The Company regularly evaluates its carrying value of exploration properties in
light of their potential for economic mineralization and the likelihood of
continued work by either the Company or a joint venture partner. The Company
may, from time to time, reduce its carrying value to an amount that approximates
fair market value based upon an assessment of such criteria.
Revenue Recognition
Revenue from the sale of gold and industrial minerals is recognized when title
passes to the buyer.
Property, Plant and Equipment
Property, plant, and equipment is stated at the lower of cost or estimated net
realizable value. Mining properties, development costs and plant and equipment
will be depreciated when full production takes place using the units of
production method based upon proven and probable reserves. Until the Company
suspended its mining operations, the assets were depreciated using the
straight-line method over estimated useful lives ranging from three to ten
years. Depreciation and amortization expense include the amortization of assets
acquired under capital leases. Replacements and major improvements are
capitalized. Maintenance and repairs are charged to expense based on average
estimated equipment usage. Interest costs incurred in the construction or
acquisition of property, plant, and equipment are capitalized and amortized over
the useful lives of the related assets. Since the Company suspended its gold
processing operations it also ceased to depreciate most of its fixed assets.
Mineral Exploration and Development Costs
Significant property acquisition payments for active exploration properties are
capitalized. If no minable ore body is discovered, previously capitalized costs
are expensed in the period the property is abandoned. Expenditures for the
development of new mines, to define further mineralization at and adjacent to
existing ore bodies, and to expand the capacity of operating mines, are
capitalized and amortized on the units of production basis over proven and
probable reserves.
Statement of Financial Accounting Standards
The Company evaluates the carrying value of producing properties and equipment
by applying the provisions of Statement of Financial Accounting Standards No.
121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed. SFAS 121 requires that an impairment loss be
recognized when the estimated future cash flows (undiscounted and without
interest) expected to result from the use of an asset are less than the carrying
amount of the asset. Measurement of an impairment loss is based on fair value of
the asset if the asset is expected to be held and used, which would be computed
using discounted cash flows. Measurement of an impairment loss for an asset held
for sale would be based on fair market value less estimated costs to sell.
Management's estimates of gold and other metal prices, recoverable proven and
probable reserves, operating, capital, and reclamation costs are subject to
certain risks and uncertainties which may affect the recoverability of the
Company's investment in property, plant, and equipment. Although management has
made its best estimate of these factors based on current conditions, it is
reasonably possible that changes could occur in the near-term which could
adversely affect management's estimate of the net cash flows expected to be
generated from its mining properties.
Deferred Financing Costs
Costs incurred to obtain debt financing are capitalized and amortized over the
life of the debt facilities using the effective interest method.
Interest Capitalization
Interest costs are capitalized as part of the historical cost of facilities and
equipment, if material.
Income Taxes
The Company files a consolidated federal income tax return with its subsidiaries
(See Note 9). The Joint Venture files a U.S. partnership return.
Comprehensive Income
Effective April 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 is
designed to report a measure of all changes in equity of an enterprise that
result from recognized transactions and other economic events of the period.
Besides net income, other comprehensive income includes foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses on
certain investments in debt and equity securities. The Company believes that it
has no material items or other comprehensive income in any period presented in
the accompanying financial statements.
Earnings (Loss) Per Common Share
The Company has in the past years reported its "Earnings per Share" which
presently complies with SFAS No. 128. As required by this standard, the Company
reports two earnings per share amounts, basic net income and diluted net income
per share. Basic net income per share is computed by dividing income or loss
reportable to common shareholders (the numerator) by the weighted average number
of common shares outstanding (the denominator). The computation of diluted net
income or loss per share is similar to the computation of basic net income per
share except that the denominator is increased to include the dilutive effect of
the additional common shares that would have been outstanding if all convertible
securities, stock options, rights, share loans, etc. had been converted to
common shares at the last day of the fiscal year.
If on March 31, 2001, 920,000 option shares were added to the weighted number of
shares which amount to 14,174,662 common shares issued and outstanding, the
total number of fully diluted shares would amount to 15,094,662. The income per
share for this period ended March 31, 2001, would then be $.0086 cents per
share. The same assumptions were used for the same 2000 fiscal period.
Foreign Currency
The Company is involved in foreign currency transactions as it deposits U.S.
funds primarily through bank wire transfer of funds from its U.S. bank account
into the Joint Venture's El Salvador bank accounts. The Joint Venture is
obligated to repay the Company for funds advanced in U.S. dollars. El Salvador
has a freely convertible currency that traded in this past fiscal year about
8.75 colones per U.S. dollar. This exchange rate has been fairly stable since
1994. In this environment, based on the free convertibility of colones, foreign
businesses have no problem making remittances of profits, repatriating capital
or bringing in capital for additional investments. There is no hindrance in
exchanging dollars for colones or vice versa. As of January 1, 2001, El Salvador
has adopted the U.S. dollar system and pegged the exchange rate at 8.75 colones
to one U.S. dollar.
Major Customer
The Joint Venture produced gold and silver. It sold its gold at the world market
price to a refinery located in the United States. Given the nature of the
precious metals that are sold, and because many potential purchasers of gold and
silver exist, it is not believed that the loss of any customer would adversely
affect either the Company or the Joint Venture.
(3) 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:
March 31, 2001 March 31, 2000
---------------------------------------------------------------------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
Mineral Properties and
Deferred Development $26,297,450 $26,297,450 $24,401,376 $24,401,376
Property, Plant and
Equipment 5,822,021 2,445,599 3,376,422 5,353,046 2,313,919 3,039,127
------------- -- --------- ------------- ------------- -- --------- -------------
$32,119,471 $2,445,599 $29,673,872 $29,754,422 $2,313,919 $27,440,503
=========== ========== =========== =========== ========== ===========
Production facilities and equipment are stated at cost and are amortized based
on the lease arrangement, if any, and salvage value. Vehicles, office equipment,
laboratory equipment, and buildings are stated at cost and are depreciated using
the straight-line method over estimated useful lives of three to ten years.
Maintenance and repairs are charged to expense as incurred. Since the Joint
Venture suspended operations in view of the weak price of gold and the need to
expand these facilities, no depreciation has been recorded during this fiscal
year.
Impairments
The Company evaluates the carrying value of its properties and equipment by
applying the provisions of Statement of Financial Accounting Standards No. 121
(SFAS 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. With respect to properties with proven
reserves, an impairment loss is recognized when the estimated future cash flows
(undiscounted and without interest) expected to result from the use of the asset
are less than the carrying amount of the asset. Measurement of the impairment
loss is based on discounted cash flows. Properties with unproven reserves are
assessed for impairment when changes in market conditions or other events occur
and are measured based on fair value.
(4) Commerce/Sanseb Joint Venture ("Joint Venture")
The Company is in a joint venture with and owns 82 1/2% of the total common
stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada chartered (1968)
corporation. The balance of Sanseb's stock is held by approximately 180
non-related shareholders, including the President of the Company who owns 2,073
common shares. Sanseb was formed to explore, exploit, research, and develop
adequate gold reserves. Sanseb produced gold from the SSGM from 1972 through
February 1978.
On September 22, 1987, the Company and Sanseb entered into a joint venture
agreement to formalize their relationship with respect to the mining venture and
to account for the Company's substantial investment in Sanseb. Under the terms
of the agreement, the Company is authorized to supervise and control all of the
business affairs of the Joint Venture and has the authority to do all that is
necessary to resume mining operations at the SSGM on behalf of the Joint
Venture. The net pre-tax profits of the Joint Venture will be distributed as
follows: Company 90%; and Sanseb 10%. Since the Company owns 82 1/2% of the
authorized and issued shares of Sanseb, the Company in effect has over a 98%
interest in the Joint Venture activities.
The joint venture agreement further provides that the Company has the right to
be compensated for its general and administrative expenses in connection with
managing the Joint Venture.
Under the joint venture agreement, agreements signed by the Company for the
benefit of the Joint Venture create obligations binding upon the Joint Venture.
The Joint Venture is registered to do business in the State of Wisconsin and in
the Republic of El Salvador, Central America.
Investments in Joint Venture
As of March 31, 2001, the Company's investments, including charges for interest
expense to the Joint Venture, were $32,519,136 and three of the Company's
subsidiaries' advances were $590,265 for a total of $33,109,401.
Investment in El Salvador Mining Projects
During the fiscal year, the Company has advanced funds, performed services, and
allocated its general and administrative costs to the Joint Venture.
As of March 31, 2001 and 2000, the Company, Sanseb and three of the
Company's subsidiaries have invested (including carrying costs) the
following in its Joint Venture:
2001 2000
---- ----
The Company's advances (net of gold sale proceeds) since 09/22/87 $32,519,136 $27,346,238
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
29,505,884 26,368,951
Total: 69,041,380 60,731,549
Advances by the Company's three subsidiaries 590,265 590,265
------- ------- --------------
Combined total investment $69,631,645 $61,321,814
=========== ===========
SSGM Activity
The Company had no significant activity at the SSGM site from February 1978
through January 1987. The present status is that, the Company, since January
1987, and thereafter, the Joint Venture, since September 1987, have completed
certain of the required mining pre-production preliminary stages in the minable
and proven gold ore reserve area, and the Company is active in attempting to
obtain adequate financing for the proposed open-pit, heap-leaching operations on
this site. The Joint Venture is also engaged in the exploration and the
expansion program to develop additional gold ore reserves in the area
surrounding the minable gold ore reserves and it is erecting its cone crushing
system.
Mineral San Sebastian S.A. de C.V. ("Misanse")
(a) Misanse Corporate Structure
The SSGM real estate is owned by and leased to the Joint Venture by Misanse, a
Salvadoran-chartered corporation. The Company owns 52% of the total of Misanse's
issued and outstanding shares. The balance is owned by approximately 100 El
Salvador, Central American, and United States' citizens.
(b) SSGM Mining Lease
On July 28, 1975, an amended lease agreement between Misanse as lessor and
Sanseb as tenant was signed by the parties giving the tenant all the possessions
and mining rights that pertain to the SSGM as well as other claims to mineral
rights that may already have or could be claimed in the future within the 595
hectares (1,470 acres) plat of land encompassing the SSGM. The 25-year lease,
which begins on the date gold production begins, was further amended to run
concurrently with the concession described herein and may be extended for an
additional 25 years by the tenant as long as the tenant has paid the rent and
has complied with other obligations under the lease and the concession. The
lease also provides that the tenant will pay rent equivalent to five percent of
the gross gold production revenue obtained from the leased SSGM and further
commits itself to maintain production taking into consideration market and other
conditions. In no case will the rent be less than 1,800 "colones" per month
(approximately $206 per month at the current rate of exchange). The lease also
provides that, in the event the lessor wishes to sell the property, it must
first give preference to the tenant; the lease further provides that the tenant
must give preference to employ former mining employees and Misanse shareholders,
providing they qualify for the available position. The lease agreement was
assigned on January 29, 1987 to the Company and Sanseb together with the mining
concession application and subsequently was pledged as collateral for loans made
by related parties. (Note 7)
The lease is freely assignable by the Joint Venture without notice to Misanse.
The lease may also be canceled by the Joint Venture on thirty days' notice to
Misanse, and thereafter, all legal responsibilities thereunder shall cease.
(c) Mineral Concession
On July 23, 1987, the Government of El Salvador granted and delivered to the
Company's 52%-owned subsidiary, Misanse, possession of the mining concession.
This is the right to extract and export minerals for a term of 25 years (plus a
25-year renewal option) beginning on the first day of production from the real
estate which encompasses the SSGM owned by Misanse. Misanse assigned this
concession to the Joint Venture. The concession was pledged as collateral for
loans made by related parties. (Note 7)
Effective February 1996, the Government of El Salvador passed a law which
requires mining companies to pay to it three percent of its gross gold sale
receipts and an additional one percent is to be paid to the El Salvador
municipality which has jurisdiction of the mine site. The Company, in compliance
with the new law, has, or will file its applications for all of the mining
concessions in which it has an interest.
SCMP Land and Building Lease
On November 12, 1993, the Joint Venture entered into an agreement with
Corporacion Salvadorena de Inversiones ("Corsain"), an El Salvadoran
governmental agency, to lease for a period of ten years, approximately 166 acres
of land and buildings on which its gold processing mill, plant and related
equipment (the SCMP) are located, and which is approximately 15 miles east of
the SSGM site. The basic annual lease payment is U.S. $11,500 (payable in El
Salvador colones at the then current rate of exchange), payable annually in
advance, unless otherwise amended, and subject to an annual increase based on
the annual United States' inflation rate. As agreed, a security deposit of U.S.
$11,500 was paid on the same date and this deposit is subject to increases based
on any United States' inflationary rate adjustments.
Modesto Mine
(a) Real Estate
The Company owns 63 acres of land which are a key part of the Modesto Mine that
is located near the city of El Paisnal, El Salvador. This real estate is subject
to a mortgage and promissory note and is pledged as collateral to certain
parties described in Note 7.
San Felipe-El Potosi Mine ("Potosi")
(a) Real Estate Lease Agreement
The Joint Venture entered into a lease agreement with the San Felipe-El Potosi
Cooperative ("Cooperative") of the city of Potosi, El Salvador on July 6, 1993,
to lease the real estate encompassing the San Felipe-El Potosi Mine for a period
of 30 years and with an option to renew the lease for an additional 25 years,
for the purpose of mining and extracting minerals and under the following basic
terms and conditions:
1. The lease payment will be five percent of the gross receipts
derived from the production of precious metals from this site which wil
l be payable
monthly.
2. The Joint Venture will advance to the Cooperative the funds required to
obtain the mining concession from the El Salvador Department of Energy,
Mines and Hydrocarbons and all related costs which will be reimbursed or
will become a deduction from future rental payments.
3. The Joint Venture will, when it is in production, employ not more than
45 qualified members of the Cooperative providing that there is a need for
their
particular skill or service.
4. The Joint Venture will furnish medicine and first aid medical assistance to
all of its employees to the extent that such benefits are not provided by
the Salvadoran Social Security System.
5. An employee life insurance program is to be seriously considered by the
Joint Venture when production commences, providing that the cost of such
insurance is not excessive.
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.
(6) Notes Payable and Accrued Interest
03/31/01 03/31/00
Related Parties
Mortgage and promissory notes to related parties, interest ranging from one
percent to four percent over prime rate, but not less than 16%, payable monthly,
due on demand, using the undeveloped land, real estate and all other assets
owned by the Company, its subsidiaries and the Joint Venture as collateral (Note
7)
$5,610,380 $5,992,633
Other
Short-term notes and accrued interest (March 31, 2001, $382,625 and March 31,
2000, $342,279) 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.
720,572 1,204,239
----- ------- -- ---------
Total: $6,330,952 $7,196,872
========== ==========
(7) Related Party Transactions
The Company, in an attempt to preserve cash, had prevailed on its President to
accrue his salary for the past 20 years, including vacation pay, for a total
of $2,279,015.
In addition, with the consent and approval of the Directors, the President of
the Company, as an individual and not as a Director or Officer of the Company,
entered into the following financial transactions with the Company, the status
of which is reflected as of March 31, 2001:
The amount of funds which the Company has borrowed from its President from time
to time, together with accrued interest, amounts to $3,676,503. To evidence this
debt, the Company has issued to its President a series of open-ended, secured,
on-demand promissory notes, with interest payable monthly at the prime rate plus
two percent, but not less than 16% per annum.
The Company had borrowed, as of March 31, 2001, an aggregate of $599,768,
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.
On August 14, 2000, the Directors, in order to reduce corporate debt and to
provide liquidity to the ELM RIRA, authorized the Officers of the Company to
sell to it, a total of 600,000 of the Company's restricted common shares at a
price of twenty-five cents a share (the market price during the period of April
1, 2000 through August 14, 2000 ranged from a low of $.16 to a high of $.50 per
share). On December 7, 2000, the payment for these shares was made by a
reduction of $150,000 of the debt owed to the ELM RIRA. In addition, the
Directors authorized the Officers of the Company to negotiate the sale of its
non-income producing asset (all of the precious stones and jewelry) to the ELM
RIRA at the Company's book value of $172,100, which payment would reduce the
amount due to the ELM RIRA. Also, the Directors acknowledged that as of March
31, 2000, 19 months of vacation pay was due to the President, and this
transaction was recorded on the Company's records during the third quarter of
this fiscal year. An additional month of vacation pay was added as of March 31,
2001, for a total of twenty months of vacation pay.
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 returned all of the 110,000 common shares borrowed from him during this
fiscal year and the 984 common shares due to him for accrued interest by issuing
the same number of restricted common shares. It may owe additional common shares
for such shares loaned or pledged by him for collateral purposes to others for
the benefit of the Company, all in accordance with the terms and conditions of
Director-approved, open-ended loan agreements dated June 20, 1988, October 14,
1988, May 17, 1989, and April 1, 1990.
On February 16, 1987, the Company granted its President, by unanimous consent of
the Board of Directors, compensation in the form of a bonus in the amount of two
percent of the pre-tax profits realized by the Company from its gold mining
operations in El Salvador, payable annually over a period of twenty years
commencing on the first day of the month following the month in which gold
production commences.
The President, 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 March
31, 2001:
The Company leased approximately 4,032 square feet on a month-to-month basis for
its corporate headquarters' office; the monthly rental charge was $2,789. The
same related company provides administrative services, use of data processing
equipment, use of its vehicles and other property as required by the Company.
In lieu of cash payments for the office space rental and for the consulting,
administrative services, etc., these amounts due are added each month to this
related company's open-ended, secured, on-demand promissory note issued by the
Company.
In addition, this related company does from time to time use its credit
facilities to purchase items needed for the Joint Venture's mining needs.
This related company has been issued an open-ended, secured, on-demand
promissory note which amounts to $926,205; the annual interest rate is
four percent
plus the prime rate, but not less than 16%, and it is payable monthly.
On January 10, 1997, four-year stock options were issued to the related company
to purchase 68,000 of the Company's restricted common shares at a price of $3.00
per share. These stock options were not exercised and have expired. On July 12,
1999, two-year stock options were issued to the related company to purchase
500,000 of the Company's restricted common shares at a price of $.50 per share.
On August 14, 2000, the Directors, in order to reduce corporate debt, authorized
the Officers of the Company to negotiate the sale of its low-income producing
asset, the Standing Rock Campground (SRC), to GLSCO in exchange for a reduction
of $1,249,050 of the debt owed to GLSCO. The agreement has a condition that if
SRC were sold by GLSCO to an unrelated third party during a period of one year
for a sum exceeding GLSCO's purchase price, the difference, after taking into
account all selling expenses, would be applied to reduce the balance of GLSCO's
promissory note. In the event the selling price to a third party would be less
than GLSCO's purchase price, then an addition would be made to the existing
balance of GLSCO's promissory note. Also, adjustments would be made for the
interest due to GLSCO during this period of time. This transaction was
consummated.
The Company's Directors have consented and approved the following transactions
of which the status of each are reflected as of March 31, 2001:
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 $312,459
which bears interest at an annual rate of prime plus three percent, but not less
than 16% and the interest is payable monthly.
On August 14, 2000, the Directors, in order to reduce corporate debt, authorized
the Officers of the Company to negotiate the sale of its non-income producing
assets to the SM RIRA in exchange for the reduction of debt owed to the SM RIRA.
It was agreed to sell to the SM RIRA, 43 parcels of land located in the San Luis
North Estates Subdivision for a sum of $64,500, 12 lots consisting of
approximately one acre located in Fort Garland, Colorado for the sum of $6,000
and 250,000 of the Company's restricted common shares at a price of $.25 a share
or $62,500. Pursuant to a Directors' resolution adopted on August 14, 2000, the
following transactions were concluded: on December 7, 2000, the SM RIRA
purchased 250,000 of the Company's restricted common shares at a price of $.25 a
share, and during the fiscal period the SM RIRA consummated the purchase of all
of the Costilla County parcels of land as described above.
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. This transaction was recorded on the Company's
records during this fiscal year as an accrual.
The Law Firm which represents the Company in which a son of the President is a
principal is owed the sum of $308,286 for 1,868.4 hours of legal services
rendered from July 1980 through March 31, 2001. 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 $95,445 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 Directors and Officers of the Company exercised
their option to receive a total of 274,000 common shares in lieu of any cash
compensation for all amounts due to them as of March 31, 2001.
The Company advances funds, allocates and charges its expenses to the Joint
Venture. The Joint Venture in turn capitalizes all of these advances, costs and
expenses on a full production basis. When full production commences, these
capitalized costs will be charged as an expense based on a per ton production
basis. The Company also charges interest for its advances to the Joint Venture
which interest rate is established to be the prime rate quoted on the first day
of each month plus four percent and said interest is payable monthly. This
interest is eliminated from the consolidated statement of operations.
However, a separate accounting is maintained for the purpose of demonstrating
what is due to the Company.
Company Net Advances to the Joint Venture
Total Advances Interest Charges
Balance March 31, 2000 $27,346,328 $13,049,585
Advances during fiscal year ended March 31, 2001 5,172,808 3,923,656
---- --------- ---- ---------
Total Company's net advances 32,519,136 16,973,241
Advances by three of the Company's subsidiaries 590,265 0
------- ------- ------------------ -
Total net advances as of March 31, 2001 $33,109,401 $16,973,241
=========== ===========
(8) Commitments
Reference is made to Notes 2, 4, 5, 6, 7, 10 and 12.
(9) Income Taxes
At March 31, 2000, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of approximately
$4,580,120 which may be carried forward to offset future taxable income; the net
operating losses expire at various times to the year of 2015.
(10) Description of Securities
a. Common Stock
The Company's Wisconsin Certificate of Incorporation effective as of April 1,
1999 authorizes the issuance of 50,000,000 shares of common stock, $0.10 par
value per share of which 15,794,008 shares were issued and outstanding as of
March 31, 2001. 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
March 31, 2001 or 2000.
The Company's Wisconsin Certificate of Incorporation authorizes the issuance of
250,000 shares of preferred stock, $0.10 par value.
The preferred shares are issuable in one or more series. The Board of Directors
is authorized to fix or alter the dividend rate, conversion rights (if any),
voting rights, rights and terms of redemption (including any sinking fund
provisions), redemption price or prices, liquidation preferences and number of
shares constituting any wholly unissued series of preferred shares.
c. Stock option activity during 2001, 2000, and 1999 was as follows:
03/31/01 03/31/00 03/31/99
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Option Average Option Average Option Shares Average
Shares Price Shares Price Price
Outstanding, beg. yr. 1,254,900 $2.19 977,400 $3.28 1,327,400 $3.42
Granted 150,000 $0.12 660,000 $0.50 70,000 $0.75
Exercised 0 N/A (160,000) N/A 0 N/A
Forfeited 0 N/A 0 N/A 0 N/A
Expired (484,900) N/A (222,500) N/A (420,000) N/A
--------- --- --------- --- --------- - ---
Outstanding, end of yr. 920,000 $1.27 1,254,900 $2.19 977,400 $3.28
=== ======= ===== ========= ===== === ======= =====
A summary of the outstanding stock options as of March 31, 2001, follows:
Weighted Average
Range of Exercise Amount Remaining Contractual Weighted Average
Prices Outstanding Life Exercise Price
Up to $2.99 720,000 1.20 years $0.44
$3.00 to $5.00 200,000 0.82 years $4.25
d. Stock Rights - To The President
Reference is made to Note 7, Related Party Transactions, of the Company's
financial statements which disclose the terms and conditions of the share loans
to the Company by the President and the interest which is payable to him by the
Company's issuance of its restricted common shares.
Any share interest payable to the President is for shares loaned to the Company
and/or for such shares loaned or pledged for collateral purposes, or for unpaid
interest, all in accordance with the terms and conditions of Director-approved,
open-ended loan agreements dated June 20, 1988, October 14, 1988, May 17, 1989
and April 1, 1990.
e. Share Loans - Others
A series of borrowings of the Company's common shares were made under the
provision that the owners would sell said shares as the Company's designee, with
the proceeds payable to the Company. In exchange, the Company agreed to pay
these shares loaned within 31 days or less by issuing its restricted common
shares, together with interest payable in restricted common shares payable at a
negotiated rate of interest normally payable in advance for a period of one
year. As of March 31, 2001, there were no shares due to other parties for shares
borrowed or for interest payment.
On June 1, 1998 correspondence, together with a loan agreement, had been
submitted to a lender for execution in connection with the Company's
understanding of a stock loan arrangement. The lender verbally acknowledges the
loan agreement and the terms and conditions. The Company borrowed from the
lender 125,300 common shares of a non-related, publicly-held corporation and
sold them for approximately $524,013. The lender had, until January 15, 2000,
the option of demanding payment of the principal amount of the stock loan in
return for the 125,300 shares borrowed plus interest in the form of 64,845 of
the Company's restricted common shares or the lender could accept payment in the
form of a total of 625,595 of the Company's restricted common shares. On January
15, 2000, via written correspondence, the lender exercised his option to accept
the 560,750 Commerce Group Corp. restricted common shares in full payment for
the Company's outstanding obligation. After the Company received the appropriate
agreements, it caused its transfer agent on October 23, 2000 to issue 625,595 of
the Company's restricted common shares in full payment of the amount due to the
lender.
f. S.E.C. Form S-8 Registration
On January 26, 2000, the Company filed its Securities and Exchange Commission
Form S-8 Registration Statement No. 333-95397 under the Securities Act of 1933,
to register 1,000,000 of the Company's $0.10 par value common stock for the
purpose of distribution of the shares pursuant to the prospectus submitted to
the Securities and Exchange Commission. As of March 31, 2001, from the 1,000,000
shares registered 800,376 were issued, and 199,624 shares remain to be issued.
g. Commerce Group Corp. Employee Benefit Account (CGCEBA)
This account was established for the purpose of compensating the employees for
benefits such as retirement, severance pay, and all other related compensation
that is mandatory under El Salvadoran labor regulations, and/or as determined by
the Officers of the Corporation. Under this plan, payment can be made to any
employee of the Company or the Company's subsidiaries. The Company on December
10, 1999, issued 400,000 of its common shares registered in its Securities and
Exchange Commission Form S-8 Registration Statement. Subsequently, on January
26, 2000, it issued an additional 400,000 common shares registered in its
Securities and Exchange Commission Form S-8 Registration Statement. The CGCEBA
has sold some of these shares from time to time to meet its obligations to its
El Salvadoran employees. There remain 150,000 of the Company's common shares in
the account as of March 31, 2001.
(11) Litigation
On June 14, 2000, Commerce Group Corp.'s legal counsel filed a complaint in
the State of Wisconsin, Circuit Court, Milwaukee County, Case No.
00CV004805,
Money Judgment: 30301, on behalf of Ecomm Group Inc. (a 51%-owned
Commerce Group Corp. subsidiary) and Commerce Group Corp., as
plaintiffs, against
Interactive Business Channel (IBC) and Matthew Marcus, as an individual,
both of Irvine California, as defendants.
Included in this complaint were the following three causes of action: the first
cause of action was the breach of contract; the second cause of action was the
breach of fiduciary duty; and the third cause of action was the rescission of
the contract and return of compensation.
The plaintiffs demanded judgment against the defendants as follows: for actual
damages in an amount to be determined at trial; for punitive damages in an
amount to be determined at trial; for rescission of the transaction and return
to the plaintiffs of 49% of the common stock of Ecomm Group Inc. represented by
96 common shares and for the return of 500,000 Commerce Group Corp. common
shares, par value ten cents per share, issued as compensation for the services
of IBC and Mr. Matthew Marcus; and for actual attorney's fees, the costs and
disbursements of the action, and any further relief the Court deemed equitable
and just.
A copy of the said complaint was filed as Exhibit A to the Company's Securities
and Exchange Commission Form 8-K on June 29, 2000.
On July 31, 2000, the Company and Ecomm entered into a Settlement, Rescission,
and Mutual Release Agreement with Interactive Business Channel, Inc. and Mr.
Matthew Marcus, as an individual. A notice of dismissal was subsequently filed
with the Circuit Court of Milwaukee County, State of Wisconsin on August 4,
2000. Reference is made to the Company's Securities and Exchange Commission Form
10-Q filing for the quarterly period ended September 30, 2000, in "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation" and in "Part II - Financial Information, Item 1. Legal Proceedings"
for a complete description of a lawsuit that has been settled in favor of the
Company.
(12) Commitments and Contingencies
Based upon current knowledge, the Company believes that it is in compliance with
environmental laws and regulations as currently promulgated. However, the exact
nature of environmental control problems, if any, which the Company may
encounter in the future cannot be predicted, primarily because of the increasing
number, complexity and changing character of environmental requirements that may
be enacted or of the standards being promulgated by governmental authorities.
(13) Business Segments
The Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures
about Segments of an Enterprise and Related Information became effective for
fiscal years beginning after December 15, 1997. SFAS 131 establishes standards
for the way that public business enterprises determine operating segments and
report information about those segments in annual financial statements. SFAS 131
also requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131 further
establishes standards for related disclosure about products and services,
geographic areas, and major customers.
The Company has presently three reportable segments: mining, campground
operation, and other. The mining segment was engaged in the processing of gold.
The campground operation is to lease space on an annual, monthly, or daily
basis. The other segments are those activities that are combined for reporting
purposes. There were no reportable activities in the Internet business; no
income and no expenses were recorded.
Mining *1
El Salvador, Campground
Central America Missouri, U.S.A. Corporate Headquarters
Year ended March 31, 2001
Sales and revenues $ 0 $ 189,020 $ 53,162
Depreciation & amortization 0 0 0
Operating income (loss) 0 146,349 (16,559)
Total assets 30,046,855 0 255,830
Capital expenditures 2,233,369 0 0
Year ended March 31, 2000
Sales and revenues $ 413,713 $ 66,902 $ 0
Depreciation & amortization 320,491 0 0
Operating income (loss) (384,759) (11,473) 0
Total assets 27,831,734 1,135,500 888,967
Capital expenditures 2,166,900 0 0
Year ended March 31, 1999
Sales and revenues $ 785,526 $ 62,176 $ 0
Depreciation & amortization 338,797 0 0
Operating income (loss) (258,179) 0 0
Other mining income 213,491 0 0
Operating income (loss) (44,688) (4,268) (41,310)
Total assets 26,031,841 1,135,500 419,460
Capital expenditures 2,269,928 0 0
*1 Its major customer for the refining and purchase of gold is a refinery
located in the United States. The price of gold is dependent on the world
market price over which the Company, the refinery or any other single
competitor do not have control.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
None during this fiscal period.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information called for by Item 10 is incorporated by reference from
information under the caption "Election of a Director" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A no later than
120 days after the close of its fiscal year. The information on Executive
Officers is contained in Part I of this Form 10-K.
Item 11. Executive Compensation
The information called for by Item 11 is incorporated by reference from
information under the caption "Executive Compensation" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A no later than
120 days after the close of its fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by Item 12 is incorporated by reference from
information under the caption "Voting Securities" and "Principal Shareholders
and Ownership by Management" in the Company's definitive proxy statement to be
filed pursuant to Regulation 14A no later than 120 days after the close of its
fiscal year.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 and related Securities and
Exchange Commission rules require the Company's executive officers and directors
and persons beneficially owning greater than ten percent of the outstanding
shares to file reports of ownership and changes in ownership of the Company's
shares with the Securities and Exchange Commission and to disclose any late
filings. Based solely on a review of the copies of such forms furnished to the
Company or representations that no Form 5 was required, the Company believes
that all Section 16(a) filing requirements were complied with as required.
Item 13. Certain Relationships and Related Transactions
The information called for by Item 13 is incorporated by reference in Note 7 of
the financial statements and under the caption "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement to be filed
pursuant to Regulation 14A no later than 120 days after the close of its fiscal
year.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules
See index to Consolidated Financial Statements and Supplementary Data in Item 8
of this report.
Report of Independent Accountant on the Financial Statement Schedules..........................................74
Schedule IV (1) Indebtedness of Related Parties................................................................75
Schedule IV (2) Indebtedness to Related Parties................................................................77
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibit numbers in the following list correspond to the numbers assigned to
such exhibits in Item 601 of Regulation S-K. The exhibit numbers noted by an
asterisk (*) indicate exhibits actually filed with this Annual Report on Form
10-K. All other exhibits are incorporated by reference into this Annual Report
on Form 10-K.
Exhibit No. Description of Exhibit
3.1 Articles of Incorporation of the Company. (Incorporated
by reference to Exhibit
3.(i) of the Company's S.E.C. Form 8-K filed on April 13, 1999.)
3.2 By-laws of the Company. (Incorporated by reference
to Exhibit 3.(ii) of the
Company's S.E.C. Form 8-K filed on April 13, 1999.)
3.3 The Articles of Amendment of the Wisconsin corporation
increasing the authorized shares to 50,000,000 common shares.
(Incorporated by reference to Exhibit 3.(iii) of the
Company's S.E.C. Form 8-K filed on April 13, 1999.)
3.4 The Articles of Merger from a Delaware corporation
to a Wisconsin corporation
effective April 1, 1999 at 12:01 a.m. (Central Time).
(Incorporated by reference to
Exhibit 2.(i) of the Company's S.E.C. Form 8-K filed on
April 13, 1999.)
3.5 A Certificate of Merger filed with the Office of the
Secretary of State of Delaware merging into a Wisconsin
corporation. (Incorporated by reference to Exhibit 2.(ii) of
the Company's S.E.C. Form 8-K filed on April 13, 1999.)
Exhibit No. Description of Exhibits
4 Instruments defining the rights of security holders,
including indentures.
4.1 Four-Year Stock Option Agreement dated December 14, 1996 to
purchase 83,900 common shares at $3.00 per share.
(Incorporated by reference to Exhibit 4.10 of the Company's
Form 10-K for the year ended March 31, 1997.)
4.2 Four-Year Stock Option Agreement dated January 10, 1997 to
purchase 68,000 common shares at $3.00 per share.
(Incorporated by reference to Exhibit 4.13 of the Company's
Form 10-K for the year ended March 31, 1997.)
4.3 Five-Year Stock Option Agreement is to be issued effective as
of January 23, 1997, to purchase 200,000 shares at a cost of
$4.25 per share. (Incorporated by reference to Exhibit 4.15
of the Company's Form 10-K for the year ended March 31,
1997.)
4.4 Three-Year Stock Option Agreement dated October 10, 1998 to
purchase 10,000 common shares at $.75 per share.
(Incorporated by reference to Exhibit 4.10 of the Company's
Form 10-K for the year ended March 31, 1999.)
4.5 Three-Year Stock Option Agreement dated October 20, 1998 to
purchase 10,000 common shares at $.75 per share.
(Incorporated by reference to Exhibit 4.11 of the Company's
Form 10-K for the year ended March 31, 1999.)
4.6 Three-Year Stock Option Agreement dated October 22, 1998 to
purchase 20,000 common shares at $.75 per share.
(Incorporated by reference to Exhibit 4.12 of the Company's
Form 10-K for the year ended March 31, 1999.)
4.7 Three-Year Stock Option Agreement dated October 22, 1998 to
purchase 30,000 common shares at $.75 per share.
(Incorporated by reference to Exhibit 4.13 of the Company's
Form 10-K for the year ended March 31, 1999.)
4.8 Two-Year Stock Option Agreement dated July 12, 1999 to
purchase 500,000 common shares at $0.50 per share.
(Incorporated by reference to Exhibit 4.13 of the Company's
Form 10-K for the year ended March 31, 2000.)
4.9* Three-Year Stock Option Agreement dated March 13, 2001
to purchase 100,000 common
shares at $.10 per share.
4.10* Three-Year Stock Option Agreement dated March 13, 2001
to purchase 50,000 common
shares at $.15 per share.
9 Voting Trust Agreement--not applicable.
Exhibit No. Description of Exhibit
10 Material contracts regarding sale of assets and deferred
compensation.
10.1 Bonus compensation, Edward L. Machulak, February 16, 1987.
(Incorporated by reference to Exhibit 7 of the Company's Form
10-K for the year ended March 31, 1987.)
10.2 Loan Agreement and Promissory Note, Edward L. Machulak,
June 20, 1988. (Incorporated
by reference to Exhibit 10.2 of the Company's
Form 10-K for the year ended March 31,
1993.)
10.3 Loan Agreement and Promissory Note, Edward L
. Machulak, October 14, 1988.
(Incorporated by reference to Exhibit 10.3 of the
Company's Form 10-K for the year
ended March 31, 1993.)
10.4 Loan Agreement and Promissory Note, Edward L. Machulak,
May 17, 1989. (Incorporated by
reference to Exhibit 10.4 of the Company's Form 10-K
for the year ended March 31,
1993.)
10.5 Loan Agreement and Promissory Note, Edward L. Machulak,
April 1, 1990. (Incorporated
by reference to Exhibit 10.5 of the Company's Form 10-K
for the year ended March 31,
1993.)
10.6 Letter Agreement, Edward L. Machulak, October 10, 1989.
(Incorporated by reference
to Exhibit 10.6 of the Company's Form 10-K for the year ended
March 31, 1993.)
10.7 Loan Agreement and Promissory Note dated January 19, 1994.
(Incorporated by reference to Exhibit 10.10 of the Company's
Form 10-K for the year ended March 31, 1995.)
10.8 John E. Machulak and Susan R. Robertson, Loan Agreement
and Promissory Note dated June
3, 1994. (Incorporated by reference to Exhibit 10.14 of
the Company's Form 10-K for
the year ended March 31, 1995.)
10.9 Lillian M. Skeen, Loan Agreement and Open Ended On Demand
Promissory Note dated June 26, 1997. (Incorporated by
reference to Exhibit 10.9 of the Company's Form 10-K for the
year ended March 31, 1998.)
10.10 Robert C. Skeen, Loan Agreement and Open Ended On Demand
Promissory Note dated June 26, 1997. (Incorporated by
reference to Exhibit 10.10 of the Company's Form 10-K for the
year ended March 31, 1998.)
10.11 Robert C. Skeen, Loan Agreement and Open Ended On Demand
Promissory Note dated January 20, 1998. (Incorporated by
reference to Exhibit 10.11 of the Company's Form 10-K for the
year ended March 31, 1998.)
Exhibit No. Description of Exhibit
10.12 John E. Machulak and Susan R. Robertson, Loan Agreement
and Open Ended On Demand
Promissory Note dated March 6, 1998. (Incorporated
by reference to Exhibit 10.12 of
the Company's Form 10-K for the year ended March 31, 1998.)
10.13 Lillian M. Skeen, Loan Agreement and Open Ended On Demand
Promissory Note dated May 21, 1998. (Incorporated by
reference to Exhibit 10.13 of the Company's Form 10-K for the
year ended March 31, 1998.)
10.14 Edward A. Machulak, Loan Agreement and Open Ended On Demand
Promissory Note dated March 6, 1998. (Incorporated by
reference to Exhibit 10.14 of the Company's Form 10-K for the
year ended March 31, 1999.)
10.15 Agreement by and between the Company and Interactive
Business Channel, Inc. dated
January 27, 1999. (Incorporated by reference to Exhibit A
of the Company's Form 8-K
dated February 8, 1999.)
10.16 May 25, 1999 Amendment to Exhibit 10.15 of the Company's Form
10-K for the year ended March 31, 1999. (Incorporated by
reference to Exhibit 10.16 of the Company's Form 10-K for the
year ended March 31, 1999.)
10.17* Contract for Sale of Real Estate dated August 14, 2000 by
and between the Company, its
subsdiary, and a related company.
11* Schedule of Computation of Net Income Per Share
13 Annual Report to security holders, Form 10-Q or Quarterly
Report to security holders:
Annual Report for the period ended March 31, 2001, will
include the Form 10-K and will be submitted within 120 days
after the fiscal year end.
21* Subsidiaries and Joint Venture of the Company
23.1* Consent of Independent Certified Public Accountant
99.0 Additional Exhibits
99.1* Confirmation agreement, General Lumber & Supply Co., Inc.,
May 14, 2001.
99.2* Confirmation Agreement, Edward L. Machulak, May 14, 2001.
99.3* Confirmation Agreement, Edward L. Machulak Rollover
Individual Retirement Account, May
14, 2001.
99.4* Confirmation Agreement, Sylvia Machulak Rollover Individual
Retirement Account, May
14, 2001.
Exhibit No. Description of Exhibit
99.5 Concession Agreement Assignment to the Company by Misanse
(Incorporated by reference to Exhibit 1 of the Company's Form
10-K for the year ended March 31, 1988.)
99.6 Other Material Information: Restatement of prior
period financial statements.
(Incorporated by reference to Item 8 of the Company's
Form 10-K for the year ended
March 31, 1998.)
99.7 S.E.C. Form S-8 Registration Statement No. 333-59209 filed
under the Securities Act of 1933, as amended, and declared
effective July 16, 1998, registering one million of its
common shares, ten cents par value. (Incorporated by
reference as this S.E.C. Form S-8 Registration Statement had
been filed on July 16, 1998.) All of these shares have been
issued as of March 31, 2000.
99.8 S.E.C. Form S-8 Registration Statement No. 333-95397 filed
under the Securities Act of
1933 as amended and declared effective January 26, 2000,
registering one million of
its common shares, ten cents par value. (Incorporated
by reference as this S.E.C.
Form S-8 Registration Statement had been filed on January 26
2000.)
99.9 Individual financial statements of majority-owned companies
have been omitted because these companies do not constitute a
significant or material contribution to the Company.
COMMERCE GROUP CORP.
FORM 10-K - MARCH 31, 2001
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized on May 16, 2001.
COMMERCE GROUP CORP.
(Company)
By: /s/ Edward L. Machulak
Edward L. Machulak
Chairman of the Board of Directors,
Member of Executive Committee,
Member of Audit Committee
Director-Emeritus, President, Treasurer,
Chief Executive, Operating and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons, on behalf of the Company and in
the capacities and on the dates indicated:
Name Office Date
/s/ Edward L. Machulak Chairman of the Board of Directors, Member of May 16, 2001
- ---------------------- ------------
Edward L. Machulak Executive Committee, Member of Audit Committee,
Director-Emeritus, President, Treasurer, Chief
Executive, Operating and Financial Officer
/s/ Edward A. Machulak Director, Member of Executive Committee, Executive May 16, 2001
- ---------------------- ------------
Edward A. Machulak Vice President and Secretary
/s/ Sidney Sodos Director and Member of Audit Committee May 16, 2001
- ---------------- ------------
Sidney Sodos
/s/ Clayton H. Tebo Director and Member of Audit Committee May 16, 2001
- ------------------- ------------
Clayton H. Tebo
REPORT OF INDEPENDENT ACCOUNTANT ON THE FINANCIAL STATEMENT SCHEDULES
My report on the consolidated financial statements of Commerce Group Corp. for
its fiscal years ended March 31, 2001, 2000, 1999, 1998 and 1997, is included in
this Form 10-K. In connection with my audits of such financial statements, I
have also audited the following: supplementary income statement information,
selected financial data report, and the related financial statement schedules
listed in Item 14(a) of this Form 10-K.
In my opinion, the consolidated financial statement information and schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein, all in accordance with accounting principles
generally accepted in the United States.
Bruce Michael Redlin, CPA, LLC
Certified Public Accountant
Milwaukee, Wisconsin
May 9, 2001
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV (1)
INDEBTEDNESS OF RELATED PARTIES - NON CURRENT
YEARS ENDED MARCH 31, 2001, 2000, AND 1999
Balance at
Beginning of Additions to Deletions to Balance at End
Name of Person (1) Period (3) Indebtedness (2) Indebtedness of Period (3)
- ------------------ ---------- ---------------- ------------ -------------
Year ended March 31, 2001
Joint Venture $27,936,503 $5,172,898 $0 $33,109,401
Year ended March 31, 2000
Joint Venture $23,744,254 $4,192,249 $0 $27,936,503
Year ended March 31, 1999
Joint Venture $20,090,773 $3,653,481 $0 $23,744,254
(1) Commerce Group Corp. (90% ownership) and San Sebastian Gold Mines, Inc.
(10% ownership), Joint Venture ("Joint Venture"); includes the advances from
three of the Company's subsidiaries.
(2) The purpose of the advances is to continue the exploration, exploitation
and development of the SSGM and the other mining prospects and
activities managed by the Joint Venture which are located in the
Republic of El Salvador, Central America. Also, funds were used to
retrofit, rehabilitate, repair and to renovate the San Cristobal Mill
and Plant acquired by the Joint Venture for the purpose of producing
gold. The construction and erection of the cone crushing system is
taking place. Also included are the holding costs.
(3) Beginning with September 30, 1987, the total indebtedness includes the advances of $590,265 from three of the Company's
subsidiaries.
Balance at
Beginning of Additions to Deletions to Balance at
Name of Person (1) Period Indebtedness (2) Indebtedness End of Period
- ------------------ ------ ---------------- ------------ -------------
Year ended March 31, 2001
SSGM $26,368,951 $3,136,933 $0 $29,505,884
Year ended March 31, 2000
SSGM $23,823,518 $2,545,433 $0 $26,368,951
Year ended March 31, 1999
SSGM $21,524,975 $2,298,543 $0 $23,823,518
(1) San Sebastian Gold Mines, Inc. (SSGM) in which Commerce Group Corp.
owns 82 1/2% of its issued and outstanding common shares.
(2) The advances to SSGM primarily consist of the interest due to the
Company on the outstanding indebtedness.
This Page Left Blank Intentionally.
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV(2)
INDEBTEDNESS TO RELATED PARTIES
CURRENT YEARS ENDED MARCH 31, 2001, 2000, AND 1999
Balance at Additions to Deletions to
Beginning of Indebtedness Indebtedness Balance at
Identity of Debtor Period (1) (2) End of Period
- ------------------- ------ --- --- -------------
Year ended March 31, 2001
President of the Company $3,072,268 $ 604,235(a) $ 0 $3,676,503
President's RIRA 646,141 103,627(b) (150,000)(a) 599,768
President's Affiliated Company 1,808,514 366,741(c) (1,249,050)(b) 926,205
President's Wife's RIRA 384,290 61,169(d) (133,000)(c) 312,459
President's Son/Daughter-in-Law 81,420 95,445
------- ------ ------ ---------------- ------- ------
14,025(d) 0
---------- -
Total, notes payable $5,992,633 $1,149,797 $ (1,532,050) $5,610,380
========== ============ ============= ==========
President's Accrued Salary $1,839,015 $ 440,000(e) $ 0 $2,279,015
========== =========== ================== ==========
President's Wife's Consulting Fees $ $ 219,600(f) $ 0 $ 219,600
=============== ============ ================== ===========
0
Legal fees (President's son is a
principal) $ 260,926 $ 47,360(g) $ 0 $ 308,286
=========== ============ ================== ===========
Year ended March 31, 2000
President of the Company $2,568,600 $503,668(a) $ 0 $3,072,268
President's RIRA 550,951 95,190(b) 646,141
0
President's Affiliated Company 1,493,026 315,488(c) 1,808,514
0
Others 397,102 68,608(d) 465,710
----- ------- ---- ------ ------------------ ----- -------
0
Total, notes payable $5,009,679 $982,954 $ 0 $5,992,633
========== ========= ================== ==========
President's Accrued Salary $1,674,015 $ 165,000(e) $ 0 $1,839,015
========== ========== ================== ==========
Legal fees (President's son is a
principal) $ 197,139 $ 63,787(g) $ 0 $ 260,926
=========== =========== ================== ===========
Year ended March 31, 1999
President of the Company $2,219,984 $348,616(a) $ 0 $2,568,600
President's RIRA 469,987 80,964(b) 0 550,951
President's Affiliated Company 1,182,709 310,317(c) 0 1,493,026
Others 302,440 94,662(d) 0 397,102
----- ------- --- ------ ------------------ ----- -------
Total, notes payable $4,175,120 $ 0 $5,009,679
========== ================= ==========
$834,559
President's Accrued Salary $1,509,015 $ 165,000(e) $ 0 $1,674,015
========== ========= ================= ==========
Legal fees (President's son is a
principal) $ 175,082 $ $ 0 $ 197,139
=========== === ================= ===========
22,057(f)
(1)(a)(b)The additions to the open-ended, secured, on-demand promissory notes
issued to the President of the Company, as an individual, and not as a
Director or Officer of the Company, and his RIRA are from net cash
advances and/or accrued interest.
(1)(c) The President owns 55% of an Affiliated Company's common shares. The
additions to the open-ended, secured, on-demand promissory note issued
to an Affiliated Company result from cash advances, accrued interest,
accrued office rent, vehicle rental, computer use and other expenses
incurred on behalf of the Company.
The President's Affiliated Company had been issued the following stock
options:
On January 10, 1997, four-year stock options to purchase 68,000 of the
Company's restricted common shares at a price of $3.00 a share. These
options expired on January 9, 2001, as the holder of the options did
not execute its rights; and
On July 12, 1999, two-year stock options to purchase 500,000 of the
Company's restricted common shares at a price of $0.50 a share.
(1)(d) The additions resulted from accrued interest earned during the fiscal
year.
(1)(e) The President's salary of $165,000 was accrued for the entire fiscal
year. In addition, the Directors, pursuant to a resolution, compensated
the President for vacation pay from April 1, 1981 through March 31,
2001 (20 years at $13,750 or $278,000), for a total of $440,000.
(1)(f) The Directors, pursuant to a resolution adopted on October 20, 2000,
recognized that there was due to the President's wife, consulting fees
from October 1, 1994, through March 31, 2001, computed as follows: 72
months at $2,800 per month ($201,600), and from October 1, 2000, six
months at $3,000 per month ($18,000), for a combined total of $219,600.
(1)(g) The addition of the amounts due to the Law Firm results from legal
services rendered.
(2) Deletions to Indebtedness are reflected as a net to the additions.
(2)(a) Pursuant to a Directors' resolution adopted on August 14, 2000,
the President's RIRA, for need of liquidity, purchased on 600,000 of the
Company's
restricted common shares at a unit price of $.25 each, for a total of
$150,000.
(2)(b) Pursuant to a Directors' resolution adopted on August 14, 2000, the
Standing Rock Campground (SRC), which was encumbered and held as
collateral by the President's affiliated company, was sold to the
affiliate company for the sum of $1,249,050. The agreement also
contains the following conditions: if SRC were sold by the affiliate
company to an unrelated third party during a period of one year for a
sum exceeding the affiliate company's purchase price, the difference,
after taking into account all selling expenses, would be applied to
reduce the balance of the affiliate company's promissory note. In the
event the selling price to a third party would be less than the
affiliate company's purchase price, then an addition would be made to
the existing balance of the affiliate company's promissory note. Also,
adjustments would be made for the interest due to the affiliate company
during this period of time.
(2)(c) Pursuant to a Directors' resolution adopted on August 14, 2000, in
order to reduce corporate debt, the Directors authorized the Officers
of the Company to sell to the President's wife's RIRA, certain
non-income producing encumbered assets such as 43 parcels of land
located in the San Luis North Estates Subdivision, Costilla County,
Colorado, and 12 lots located in Fort Garland, Colorado, for a total
sum of $70,500. Also, the Directors authorized the Officers of the
Company to sell to the RIRA 250,000 of the Company's restricted common
shares at $.25 each, for a total of $62,500. Combined, both
transactions totalled $133,000.