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, 2002
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 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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the closing price of the OTC BB on
May 13, 2002, was approximately $1,908,035.
Common shares outstanding as of March 31, 2002, were 17,468,008.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporated by reference from the registrant's definitive Proxy
Statement for its 2002 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.
COMMERCE GROUP CORP.
2002 FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended March 31, 2002
TABLE OF CONTENTS
Page
PART I
Item 1. Business..................................................... 3
Item 2. Properties.....................................................13
Item 3. Legal Proceedings..............................................21
Item 4. Submission of Matters to a Vote of Security Holders............21
Item 4(a). Executive Officers and Managers of the Company.................22
PART II
Item 5. Market for the Company's Common Stock and Related Stockholders'
Matters..............................24
Item 6. Selected Financial Data........................................25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................26
Item 8. Financial Statements and Supplementary Data.....................37
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure..................................60
PART III
Item 10. Directors and Executive Officers of the Registrant.............60
Item 11. Executive Compensation.........................................60
Item 12. Security Ownership of Certain Beneficial Owners and Management.60
Item 13. Certain Relationships and Related Transactions.................60
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
.......................................61
Safe Harbor Statement
This annual report contains forward-looking statements within the meaning of
Section 21E of the United States Securities Exchange Act of 1934, as amended,
which are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. One can generally identify these forward-looking
statements because they contain "expect," "believe," and other words that convey
a similar meaning. One can also identify these statements, as they do not relate
strictly to historical or current facts. Examples of factors affecting both
Commerce Group Corp.'s wholly-owned operations and its joint venture that could
cause actual results to differ materially from current expectations are the
following: supply and demand conditions affecting prices and volumes in the
markets, world economic conditions; competition; seasonality; energy supplies
and pricing; the predictability of joint venture operating results; and the
environmental report. One should understand that it is not possible to predict
or identify all factors that could cause actual results to differ from the
Company's forward-looking statements. Consequently, the reader should not
consider any such list to be a complete statement of all potential risks or
uncertainties.
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 twenty years in
the Republic of El Salvador, Central America. Furthermore, since 1968, Commerce
has been operative in the exploration, exploitation and development of precious
metals in El Salvador. Its gold ore reserves exceed 1.5 million ounces. Combined
with its objectives, Commerce is determined to acquire a business combination to
assist it in achieving its goals. It continues to seek compatible acquisition or
merger candidates, preferably in the precious metals field and/or an endeavor in
which synergism will prevail. The Company's goal is to make certain that it can
increase shareholder value by converting its gold ore reserves into a profitable
position and maintain a categorical 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 presently is in the business of precious metals
mining.
Precious Metal Mining
Commerce continues to be 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 simultaneously 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, retrofitted or overhauled. Another concern
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 increase efficiency by expanding 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
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
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, 2002, 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 $76,325,606.
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 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 (from September 1993 through November 1999) and its
extension Capulin (from May 1995 through November 1999); 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, Montemayor, and San
Felipe-El Potosi 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 owners of the San Felipe-El
Potosi Mine.
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
worldwide 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 accessibility to
the mine, its infrastructure, 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 has submitted its environmental impact study with the appropriate El
Salvador agency. The study was prepared by an independent El Salvadoran
consultant.
El Salvador, Central America Information Sources
The most current information about El Salvador can be obtained from the
following sources:
1. The latest Economic and Commercial Section, Embassy of the United
States of America in El Salvador, Country Commercial Guide
can be obtained through the Internet from the following website:
http://www.usinfo.org.sv/econcommguide.htm
2. General information can also be obtained through
the Internet from the following website:
http://www.dirla.com/elsalvador2.html.
3. The U.S. Embassy can also be contacted at Boulevard Santa Elena
Final, Antiguo Cuscatlan, La Libertad, El Salvador,
telephone (011) 503-278-4444 and fax (011) 503-278-6011.
4. Background Notes on El Salvador can also be obtained from the U.S.
Department of State's database at the following website:
http://www.state.gov.
Excerpts from the website mentioned in number 2 above, provide the following
information about El Salvador, Central America:
"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. . . .
"A high volcanic mountain range serves as El Salvador's rugged backbone, along
which many of the most important urban centers are located. The slopes of the
country's many volcanoes became the first agricultural centers due to the rich,
volcanic soils. These agricultural centers, Santa Ana, San Salvador, San
Vicente, etc. have become the country's major cities and towns today, which
share the names of their corresponding volcanoes.
"While the country coastal areas and lowlands are typically hot, San Salvador
enjoys an average, almost unvarying, temperature of 82 degrees ferenheit
[Fahrenheit], 28 degrees Celsius. The rainy season last[s] from May to October.
The best months for traveling are usually November through January.
"El Salvador, the smallest Central American nation, is bordered to the west
by Guatemala, to the north and east by Honduras and to
the south by the Pacific ocean. Its Pacific coastline is 320 km long. Aside
from Belize, El Salvador is the only Central American
nation that does not have both Pacific and Caribbean ports. . . .
"The government of El Salvador is divided into Executive, Legislative branches
and the Supreme Court. The president is freely elected to a five year term. The
Legislative branch, called the `National Assembly', is comprised of 60 members
who serve three year terms, and the 13 member Supreme Court is appointed by the
National Assembly.
"The country is divided into 14 districts, called `departments'. Major political
parties include the right-wing ARENA party, the left-wing Farabundo Marti
National Liberation Front (FMLN), the Christian Democratic Convergence Party and
the National Conciliation Party."
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 mining exploration and development 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"); and (3) advertising and various businesses, including
Internet-related businesses, 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.
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.
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.
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.
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
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 is effective from the
time it was issued in 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 or will apply for applications with
the El Salvador Department of Energy, Mines and Hydrocarbons for the exploration
rights under the February 1996 Mining Law on the real estate it owns at the
Modesto Mine, and the real estate it leases at the Montemayor Mine, the
Hormiguero Mine, and the San Felipe-El Potosi 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 when the Joint Venture is in production.
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 in the Republic of El Salvador, Central
America.
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 and 2000, revenues have been
generated from the campground business. Although Homespan owned the campground
real estate, the Company was the operator of the Standing Rock Campground (SRC)
until March 31, 2001.
The SRC was sold during the fiscal period ended March 31, 2001.
Land Sales
The Company and its subsidiaries have sold their remaining lots in Colorado
during the fiscal year ended March 31, 2001.
Mining
The Company's primary strategy, through its Joint Venture, is to use its SCMP
facilities to process gold ore transported from SSGM and from 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. In addition to producing gold at the SCMP, when 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. However, the Company recognizes that it may be more
difficult to obtain financing under reasonable terms and conditions when
considering the overall lack of interest in gold, the substantial decline in its
price, and the low public market value of the Company's common shares. These
circumstances may change as the price of gold has begun to increase in January
2002, and worldwide investors have been significantly more interested in the
ownership of gold.
Internet Business
As of March 31, 2002, 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, 2002, the Joint Venture employed between 34 and 40 full-time
persons in El Salvador to perform its limited exploration, exploitation, and
development programs; to erect the cone crushing system, to provide 24-hour
seven-day-a-week security at three different sites; to provide engineering,
geology, drafting, and computer-related services; and to handle the
administration of its activities. None of these employees are covered by any
collective bargaining agreements. It has developed a harmonious relationship
with its employees, and it believes that it was the largest single
non-agricultural employer in the El Salvador Eastern Zone. Also, the Company
employs up to four persons, including part-time help, in the United States.
Since the Joint Venture has laid off most of its employees, the Joint Venture
had to pay the severance pay to its employees and therefore it had to sell and
continues to sell the Company's common shares which were issued to the Commerce
Group Corp. Employee Benefit Account. El Salvador employees are entitled to
receive severance pay, which is based on one month's pay for each year of
employment.
Industry Segments
1. Unaffiliated Sales Year Ended March 31,
Industry Location 2002 2001 2000
- ----------------------------------------------------------------------------------------------------- ----
Mining El Salvador $ 0 $ 0 $ 413,713(*a)
Campground Missouri, USA $ 0 $ 238,520 $ 66,902
2. There Were No Intersegment Sales
3. Total Revenues Year Ended March 31,
Industry Location 2002 2001 2000
- ----------------------------------------------------------------------------------------------------- ----
Mining El Salvador $ 0 $ 0 $ 500,124(*b)
Campground Missouri, USA 0 238,520 66,902
Other Delaware/Wis., USA 38 3,662 134
---------------------------------------------------------
Total: $ 38 $ 242,182 $ 567,160
4. Operating Profit (Loss) Year Ended March 31,
Industry Location 2002 2001 2000
- ----------------------------------------------------------------------------------------------------- ----
Mining El Salvador $ 0 $ 0 $ (384,759)(*a)
Campground Missouri, USA 0 185,391 (8,175)
Other Income Wisconsin, USA 38 3,662 0
Corp. Hdqtrs. Wisconsin, USA (43,209) (59,263) (3,298)
-------------------------------------------------------
Total: $ (43,171) $ 129,790 $ (396,232)
5. Identifiable Assets Year Ended March 31,
Industry Location 2002 2001 2000
- ----------------------------------------------------------------------------------------------------- ----
Mining El Salvador $31,677,285 $30,046,855 $27,831,734(*a)
Campground Missouri, USA 0 0 1,135,500
Real Estate Colorado, USA 0 0 21,000
Corporate Assets 268,149 255,830 867,967
-----------------------------------------------------
Total: $31,945,434 $30,302,685 $29,856,201
(*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.
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
Property Description Nature of Interest Date Interest was Acquired Cost
of Interest Amount of Funds to Make Property Operational Date Mine will be
Operational 1. San Sebastian Gold Mine located two and one-half miles northwest
of the city of Santa Rosa de Lima and the Pan American Highway. Mineral
concession consisting of 100% ownership of the precious metals extracted from
this mine. 1968 5% of the gross precious metal proceeds or $206 a month
whichever is higher. This is dependent on the scale of production that
management decides to perform. The amount of investment could be from $5 million
to $100 million. It was in operation on a curbed production basis until December
31, 1999 when operations were suspended due to the need to overhaul, repair,
restore and expand the SCMP facilities.
2. San Felipe-El Potosi/Capulin Mine located near the city of Potosi, 18
miles northwest of the city of San Miguel.
El Salvador legal counsel is in the process of reviewing alternatives to obtain
the mineral concession. 07/06/93
5% of the gross precious metal proceeds.
Undetermined until a preliminary drilling program is
completed; estimated cost of drilling is $2 million.
Undetermined.
3. Hormiguero Mine located five miles southeast of the San Cristobal Mill
and Plant near the city of Comacaron.
Ownership of the tailings. 09/93 The
surface use of land (rent) is to be negotiated.
Undetermined until a preliminary drilling program is completed; estimated cost
of drilling is $2 million. Mine surface channel
trenching and adit cleaning should be completed to determine drilling cost.
Undetermined.
4. Modesto Mine located near the city of Paisnal and about 19 miles north of
San Salvador, the capital city. Application is to be
submitted for a mineral concession on the real estate owned by the Company to
own 100% of the precious metals extracted from the
real estate owned by the Company. 09/93 It
appears as if this will be an underground operation except
in the Company-owned land. Therefore, no cost for interest.
Undetermined until a preliminary drilling program is
completed; estimated cost of drilling is $2 million.
Undetermined.
5. Montemayor Mine located about 14 miles northeast of SCMP and about six
miles northwest of SSGM. Application is to be
submitted for a mineral concession on the land leased by the Company to own
100% of the precious metals extracted from the areas the
Company leases. 07/95 It
appears that this will be an underground mine, therefore
current leases will have to be renegotiated and extended.
Undetermined until a preliminary drilling program is
completed; estimated cost of drilling is $2 million. Undetermined.
6. San Cristobal Mill and Plant located off the Pan American Highway west of the
city of El Divisadero. Mill and Plant owned by Joint Venture. The real estate is
owned by an agency of the Government of El Salvador. Equipment 02/23/93 and
thereafter Lease 11/12/93 Equipment purchased and extensive retrofitting was and
continues to be performed. Through 03/31/02, a total of $6,377,868 has been
invested in this plant and equipment. Depreciated value is $4,125,726. To expand
the plant, including a crushing system to a capacity of 500 tons per day; an
estimated sum of up to $3 million may be required, all dependent whether new or
used equipment will be purchased. Curbed production commenced March 1995;
expansion program in progress. Operations suspended in the last quarter of 1999
until the existing equipment is overhauled, repaired, restored and expansion of
the SCMP facilities are completed.
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 of the
Pan American Highway from two lanes to four lanes (from the city of San Salvador
to the Honduran border) has been completed. The city of Santa Rosa de Lima
(approximately three miles from the SSGM) is one of the larger 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
GOLD ORE RESERVES (03/31/02)
Tons Average Grade Contained Gold Ounces(1)
Ore - virgin 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) 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 the higher grade 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.
Approximately 960,000 tons of dump material present at the SSGM site, with
grades ranging from 0.082 to 0.178 ounces of gold per ton, have been 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.
Effective February 1996, the Government of El Salvador passed a law which
requires mining companies to pay to it three percent of its gross gold sale
receipts and an additional one percent is to be paid to the El Salvador
municipality which has jurisdiction of the mine site. As of July 2001, a series
of revisions to the El Salvador Mining Law offer to make exploration more
economical. The principal change is that the charge has been reduced to two
percent of the gross gold receipts. The Company, in compliance with the new law,
has, or will file its applications for all of the mining concessions in which it
has an interest.
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 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 $8 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 a
nine-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.
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 and the exploration work
performed by the Company indicate that the potential of developing a gold mine
is above average.
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, with an option to renew the
lease for an additional 25 years, for the purpose of mining and extracting
minerals. Although the Company did not receive a concession/license from the El
Salvador Department of Energy, Mines and Hydrocarbons, it is preserving its
rights under the lease agreement.
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.
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.
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 near the SCMP.
SCMP Mill and Plant Process Description
Current Status
The SCMP (a precious metal cyanidation carbon-in-leach system) has a capacity of
processing up to 200 tons of virgin ore per day. The following units of
operations are required: crushing, grinding, thickening, agitated leaching and
recovery of precious metals via a carbon-in-leach (CIL) system.
The SCMP has been 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, equipment,
and facilities have been place on a care and maintenance status until such time
as the Company has sufficient funds to complete a major overhaul in order to
place it into 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 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.
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 exploration fire assays have been completed through March 31,
2002. 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
None.
Item 4(a). Executive Officers and Managers of the Company
Listed below are the names, ages and positions of the executive officers and
managers of the Company and their business experience during the past five or
more years. All officers are elected at the annual meeting of the directors,
which is normally held after the annual shareholders' meeting.
Name Age as of March 31, 2002 Executive Offices Held With Company (1)
Period Served In Office (2)
Edward L. Machulak 75 President, Chief Executive, Operating and
Financial Officer Treasurer 9/14/62
to present 06/78 to present
Edward A. Machulak (Son of the President) 50 Executive Vice President
Secretary Assistant
Secretary 10/16/92 to present 1/12/87 to present 4/15/86 to 1/12/87
Luis A. Limay 60 Project and Mine Manager Manager of El Salvador Operations
10/86 to 1995 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, Director-Emeritus, 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, and has been a Director-Emeritus since December 5,
1979.
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; Director-Emeritus since October 28, 2000; 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, a silver
mining company that formerly operated 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,
2002 and the highest and lowest trade price during each quarter through the
period ended March 31, 2001.
For the period ended March 31, 2002 March 31, 2001
High Low High Low
First quarter ending June 30 $0.16 $0.06 $0.4375 $0.1562
Second quarter ending September 30 $0.20 $0.08 $0.2969 $0.1250
Third quarter ending December 31 $0.11 $0.07 $0.1719 $0.0469
Fourth quarter ending March 31 $0.10 $0.06 $0.1250 $0.0625
(b) Approximate Number of Holders of Common Shares
As of March 31, 2002, the common shares were held by approximately 4,002
shareholders; it is estimated that over 95% are United
States' residents.
As of March 31, 2002, there were approximately 1,660 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 2,342.
As of March 31, 2002, there were issued and outstanding: (a) 17,468,008
shares of common stock; and (b) 670,000 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,
2002. 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 financial information with respect to the
Company and is qualified in its entirety by reference to the historical
financial statements and notes thereto of the Company included in "Item 8.
Financial Statements and Supplementary Data." The statement of operations and
balance sheet data included in this table for each of the five years in the
fiscal period ended March 31, 2002 were derived from the audited financial
statements and the accompanying notes to those financial statements.
Year Ended March 31 -------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
Income statement data
Total revenue $ 38 $ 242,182 $ 480,615 $ 847,702 $ 1,295,908
=========================================================================================
Income (loss) from continuing operations $ (43,171) $ 129,790 $ (396,232) $ (90,266) $ 118,603
===========================================================================
Income (loss) from continuing operations per share:
Basic $ (.0026) $ .0092 $ (.0326) $ (.0081) $ .0115
============================================================================
Diluted $ (.0025) $ .0086 $ (.0282) $ ( .0070) $ .0100
============================================================================
Weighted average shares - basic 16,349,170 14,174,662 12,172,867 11,165,127 10,358,132
==========================================================================
Weighted average shares - diluted 17,019,170 15,094,662 14,053,002 12,813,368 11,783,532
==========================================================================
Cash dividends per common share $ 0 $ 0 $ 0
===============================================================================
$ 0 $ 0
===========================================================
Balance sheet data
Working capital*1 $ 199,573 $ 152,906 $ 420,963 $ 430,833 $ 614,554
===========================================================================
Total assets $31,945,434 $30,302,685 $29,856,201 $27,586,801 $25,799,651
=========================================================================
Short-term obligations*1 $11,486,216 $ 9,998,955 $10,231,272 $ 8,911,087 $ 7,270,772
==========================================================================
Long-term obligations $ 0 $ 0 $ 0
================================================================================
$ 0 $ 135,000
======================================================
Shareholders' equity $20,459,218 $20,303,730 $19,624,929 $18,675,714 $18,393,879
=========================================================================
*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 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, 2002, 2001 and 2000 and the financial condition,
liquidity and capital resources for March 31, 2002 and 2001. 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, 2002, 2001 and prior years reflects and includes the Commerce Group
Corp./Sanseb Joint Venture (Joint Venture) on a consolidated basis. Prior to
this change, the Company reported the investment in the Joint Venture as
advances to the Joint Venture and the Company's advances included the interest
earned on these advances in anticipation of the interest being reimbursed. These
advances are restated and combined with the Company's Consolidated Financial
Statements. Although the elimination of interest income reduces the retained
earnings, it does not eliminate the interest charged by and earned by the
Company which is due and payable to it and which is maintained additionally with
a separate accounting. In effect, this restructuring modifies only the financial
reporting 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, 2002, 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 a number of non-exclusive independent consulting agreements for
the purpose of raising the sum of up to U.S. $20 million. The funds are to be
used to purchase and install equipment, perform site development, working
capital for the SSGM open-pit, heap-leaching operation, and for the expansion of
the Joint Venture's SCMP.
Through December 1999, the Joint Venture produced gold on a curbed basis
primarily from the gold ore it is excavating from its SSGM open pit. The gold
was processed at its SCMP facility which is located approximately 15 miles from
the SSGM site. It is contemplating the installation of a pilot open-pit,
heap-leaching gold-processing system on the SSGM site. The cone crushing system
is being erected at this site. It also is continuing its SSGM site preparation,
the expansion of its exploration and exploitation targets, and the enlargement
and development of its gold ore reserves. It has suspended exploring the
potential of one of the other gold mine prospects identified as the San
Felipe-El Potosi Mine and its extension the El Capulin Mine. The Company's El
Salvadoran legal counsel is in the process of researching legal alternatives.
The Montemayor Mine and the Modesto Mine have been placed on a standby basis
pending the advice from its legal counsel relative to the filing of applications
for concessions (licenses) on the properties it owns or on which it holds
leases. All of the mining properties are located in the Republic of El Salvador,
Central America.
The Joint Venture will continue its attempts to commence its production of gold.
Its objectives are to have an expanded complementary operation while continuing
its endeavor to obtain sufficient funds for the SSGM open-pit, heap-leach
operation. The Company's main objective and plan, through the Joint Venture, is
to operate at the SSGM site, a moderate tonnage, low-grade, open-pit,
heap-leaching, gold-producing mine. It intends to commence this gold-mining
operation as soon as adequate funding is in place and the gold price stabilizes
at a higher level. Dependent on the grade of gold ore processed and the funds it
is able to obtain, it then anticipates producing annually approximately 10,000
ounces of gold from the SCMP operation and eventually up to 113,000 ounces of
gold from its SSGM open-pit, heap-leaching operation. The Joint Venture
continues on a limited basis to conduct an exploration program to develop
additional gold ore reserves at the SSGM.
The Joint Venture produced gold from March 1995 through December 1999 at the
SCMP through a start-up or preliminary operation, which was a forerunner of its
greater goals. The Company's revenues, profitability and cash flow are greatly
influenced by the price of gold. Gold prices fluctuate widely and are affected
by numerous factors which will be beyond the Company's control, such as,
expectations for inflation, the strength of the U.S. dollar, overproduction of
gold, global and regional demand, acts of terrorism, or political and economic
conditions, or for that matter, many other reasons. The combined effect of these
and other factors is difficult; perhaps impossible to predict. Should the market
price of gold fall below the Company's production costs and remain at such level
for any sustained period, the Company could experience losses.
The Company believes that neither it, nor any other competitor, has a material
effect on the precious metal markets and that the price it will receive for its
production is dependent upon world market conditions over which it has no
control.
The Internet and Related Businesses
Historical Synopsis
The Company on January 29, 1999, announced its plans to have its 51%-owned
subsidiary, Ecomm Group Inc. (Ecomm), enter into the web portal business.
Ecomm's objective was and still is to become a recognized web portal on the
world wide web by acquiring or "rolling-up" Internet websites.
The Company intends to remain in the Internet and related businesses and is in
the process of formulating its future plans. The Company believes that a
significant opportunity exists to develop and consolidate the many niches of the
Internet community into a web portal. With experienced management it will
evaluate, structure and attempt to combine Internet-related business
combinations, mergers and acquisitions. This is an ideal time for the Company to
pursue its objectives as the Internet industry has gone through a "shake-down"
process which could mean more realistic valuations and more favorable
negotiations.
There can be no assurance that Ecomm's current strategy will be successful as
the current depressed market price of the Company's common shares presently
compels it from using its shares in an exchange for an acquisition of an
Internet company because of the substantial dilutive effect it would have. Ecomm
has not yet entered into any agreements for the acquisition of any websites, web
services or other technological services. There is no assurance that it will be
able to enter into contracts for the acquisition of such sites, services and
technology on terms acceptable to the Company and Ecomm. The Internet business
is highly competitive and there is no assurance that Ecomm will generate a
profit, even if Ecomm acquires the websites, web services and technology on
acceptable terms.
Results of Operation for the Fiscal Year Ended March 31, 2002 Compared to
March 31, 2001 on a Restated Basis
- ------------------------------------------------------------------------------
The Company recorded a net loss of ($43,171) or ($.0026) per share on no
revenues in 2002. This compares to a net income of $129,790 or $.0092 per share
on revenues of $238,520 in 2001. There were no revenues in 2002 as the Joint
Venture suspended its gold mining and processing due to its need to
rehabilitate, overhaul and expand its SCMP. Also, the unusually low price of
gold contributed to the decision of "moth balling" the operations. The price of
gold has increased since January 2002 because of more worldwide interest in the
ownership of gold.
The Joint Venture on December 31, 1999 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, 2002 or 2001. Additionally, even though the Company has
an operating tax loss carryforward, the Company has previously recorded a net
deferred tax asset due to an assessment of the "more likely than not"
realization criteria required by the Statement of Financial Accounting Standards
No. 109, Accounting for Taxes.
Inflation did not have a material impact on operations in the fiscal years ended
March 31, 2002 or 2001. The Company anticipates that inflation will have an
impact on continuing operations.
Interest expense in the sum of $1,026,940 was capitalized by the Joint
Venture during this fiscal period compared to $1,063,469 for
the same period in 2001.
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. 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, 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 on December 31, 1999 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.
Financing Activities, Liquidity and Capital Resources
As of December 31, 1999, the Joint Venture suspended its SCMP operations until
such time as it has adequate funding to repair, retrofit and expand the mill to
process its gold ore. After almost five years of operation with used equipment,
the facilities require a major overhaul. The low price of gold did not provide
an adequate cash reserve for these needs. Additional equipment has to be
purchased, delivered and installed.
The Company will endeavor to commence an open-pit, heap-leaching operation at
the SSGM as there is a substantial amount of gold ore that grades less than 0.04
ounces per ton. The Company's engineers had determined that a 2,000 ton-per-day
open-pit, heap-leach, start-up operation may produce 1,280 ounces of gold per
month. It is necessary to raise adequate funds from outside sources for this
operation; the amount required is dependent on the targeted daily volume of
production. A sum of U.S. $16 million would start the open-pit, heap-leach at a
rate of 2,000 tons per day and the anticipated profits and cash flow then could
be used to expand the operation to 6,000 tons per day.
The Company continues to be cognizant of its cash liquidity until it is able to
produce adequate profits from its SSGM gold production. It will attempt to
obtain sufficient funds to assist the Joint Venture in placing the SSGM into
production as the anticipated profits from the existing SCMP operation (unless
accumulated over a period of time) appear insufficient to meet the SSGM capital
and the other mining exploration requirements. In order to continue obtaining
funds to conduct the Joint Venture's exploration, exploitation, development,
expansion programs, and the production of gold from the SSGM open-pit,
heap-leaching operation, it is necessary for the Company to obtain funds from
other sources. The Company may be required to borrow funds by issuing
open-ended, secured, on-demand or unsecured promissory notes or by selling its
shares to its directors, officers and other interested investors or by entering
into a joint venture, merging, or developing an acceptable form of a combination
with other companies.
During the past, the Joint Venture was engaged in exploration, exploitation and
development programs designed to increase its gold ore reserves. The prospects
of expanding the gold reserves are positive. The Company believes that the past
invested funds significantly contributed to the value of the SSGM and to the
value of its other mining prospects as the results of the exploratory efforts
evidence the potential for a substantial increase of gold ore reserves. The
Company was unable to obtain sufficient funds during this fiscal year to
complete the modification and expansion of the SCMP or for its open-pit,
heap-leach operation. However, the Company did invest a sum of $531,541 during
this fiscal period, which was used to partially erect the cone crushing system.
The Company estimates that it will need up to U.S. $16 million to start a 2,000
ton-per-day open-pit, heap-leaching operation. Eventually the production
capacity would be increased in stages to 6,000 tons per day so that annual
production could be 113,000 ounces of gold at the SSGM. The use of the
$16,000,000 proceeds is as follows: $8,000,000 for mining equipment and the
completion of erecting a crushing system; $3,033,548 for the processing
equipment and site and infrastructure costs; and a sum of $4,966,452 is to be
used for working capital. The depressed price of gold over the past years and
the Company's incredibly low common share market price are major deterrents in
raising cash for the Company's programs. During the last quarter of this period
there was more interest in gold, as the price of gold continued to move upward.
Therefore, the Company continues to rely on its directors, officers, related
parties and others for its funding needs. The Company believes that it may be
able to obtain such short-term and/or equity funds as are required from similar
sources as it has in the past. It further believes that the funding needed to
proceed with the continued exploration of the other exploration targets for the
purpose of increasing its gold ore reserves will be greatly enhanced if the
price of gold continues to increase. These programs will involve airborne
geophysics, stream chemistry, geological mapping, trenching, drilling, etc. The
Joint Venture believes that it may be able to joint venture or enter into other
business arrangements to share these exploration costs with other entities.
From September 1987 through March 31, 2002, the Company has advanced the sum of
$36,729,923 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 $37,320,189. The investment includes the charge of
$20,448,289 for interest expense during this period of time. The funds invested
in the Joint Venture were used primarily for the exploration, exploitation, and
development of the SSGM, for the construction of the Joint Venture laboratory
facilities on real estate owned by the Company near the SSGM site, for the
operation of the laboratory, for the purchase of a 200-ton per day used SCMP
precious metals' cyanide leaching mill and plant, for the initial retrofitting,
repair, modernization and expansion of its SCMP facilities, for consumable
inventory, for working capital, for exploration and holding costs of the San
Felipe-El Potosi Mine, the Modesto Mine, the Hormiguero Mine, and the Montemayor
Mine, for SSGM infrastructure, including rewiring, repairing and installation of
about two miles of the Company's electric power lines to provide electrical
service, for the purchase of equipment, laboratory chemicals, and supplies, for
parts and supply inventory, for the maintenance of the Company-owned dam and
reservoir, for extensive road extension and preservation, for its participation
in the construction of a community bridge, for community telephone building and
facilities, for a community place of worship, for the purchase of the real
estate on the Modesto Mine, for leasing the Montemayor real estate, for the
purchase and erection of a cone crushing system, for diamond drilling at the
SSGM, for the purchase of a rod mill and a carbon regeneration system and many
other related needs.
Employees
As of March 31, 2002, the Joint Venture employed between 34 and 40 full-time
persons in El Salvador to perform its limited exploration, exploitation, and
development programs; to erect the cone crushing system, to provide 24-hour
seven-day-a-week security at three different sites; to provide engineering,
geology, drafting, and computer-related services; and to handle the
administration of its activities. None of these employees are covered by any
collective bargaining agreements. It has developed a harmonious relationship
with its employees, and it believes that in the past, it was one of the largest
single non-agricultural employers in the El Salvador Eastern Zone. Also, the
Company employs up to four persons, including part-time help, in the United
States. Since the Joint Venture has laid off most of its employees, the Joint
Venture had to pay the severance pay and other benefits to its employees and
therefore it had to sell and continues to sell the Company's common shares which
were issued to the Commerce Group Corp. Employee Benefit Account. El Salvador
employees are entitled to receive severance pay, which is based on one month's
pay for each year of employment.
Related Party Loans, Obligations and Transactions
The related party transactions are included in detail in the Notes to the
Consolidated Financial Statements.
Company Advances to the Joint Venture
Since September 1987 through March 31, 2002, the Company, and three of its
subsidiaries, have advanced to the Joint Venture $36,729,923. Included in the
total advances is the interest charged to the Joint Venture by the Company which
amounts to $20,448,289 through March 31, 2002. The Company furnishes all of the
funds required by the Joint Venture. This interest charge has been eliminated
from these financial statements.
Efforts to Obtain Capital
Since the concession was granted, and through the present time, substantial
effort is exercised in attempting to secure funding through various sources, all
with the purpose to expand the operations of the SCMP, to construct an open-pit
heap-leach operation at the SSGM site, and to continue the exploration of its
other mining prospects.
The Company, Sanseb, and the Joint Venture consider the past political situation
in the Republic of El Salvador to have been unstable, and believe that the final
peace declaration on December 16, 1992, has put an end to war. Presently, the
stigma of the past unfavorable political status in the Republic of El Salvador
exists and therefore certain investors continue to be apprehensive to invest the
funds required. However, as explained in this report, the Company was able to
obtain a sum of funds to invest in the expansion and retrofitting of its SCMP
and for the exploration of its other mining prospects. The decline in the price
of gold to a 20-year low depressed the public interest, which affected the
market price of the Company's shares as well as the shares of most of the
world-wide mining companies. This decline in the Company's stock market price
places the Company in a situation of substantially diluting its common shares in
order to raise capital. The Company believes that it will be able to obtain
adequate financing to conduct its operations from the same sources as in the
past. There are no assurances that funds will be available, except at this time,
there is a world-wide interest in owning gold. The price of gold has increased
substantially in the past few months.
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 all of
its earnings to finance its growth and expansion, therefore, dividends will not
be paid to shareholders.
Impact of Inflation
The impact of inflation on the Company has not been significant in recent years
because of the relatively low rates of inflation experienced in the United
States.
Recent Accounting Developments
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations," which supersedes Accounting Principles Board
Opinion (APB) No. 16, "Business Combinations." This Statement requires that all
business combinations be accounted for by the purchase method, establishes
specific criteria for the recognition of intangible assets separately from
goodwill and requires unallocated negative goodwill to be written off
immediately as an extraordinary gain. The provisions of the Statement apply to
business combinations initiated after June 30, 2001. For business combinations
accounted for using the purchase method before July 1, 2001, the provisions of
this Statement will be effective in the first quarter of 2002. The Company
anticipates that the impact of this new standard will have an immaterial impact
on the financial statements taken as a whole.
In July 2001, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets," which supersedes the Accounting Principles Board (APB) Opinion No. 17,
"Intangible Assets." This Statement addresses the accounting and reporting of
goodwill and other intangible assets subsequent to their acquisition. The
Statement also provides specific guidance on testing goodwill and intangible
assets for impairment. SFAS No. 142 provides that (i) goodwill and
indefinite-lived intangible assets will no longer be amortized, (ii) impairment
will be measured using various valuation techniques based on discounted cash
flows, (iii) goodwill will be tested for impairment at least annually at the
reporting unit level, (iv) intangible assets deemed to have an indefinite life
will be tested for impairment at least annually and (v) intangible assets with
finite lives will be amortized over their useful lives. All provisions of this
Statement will be effective in the first quarter of 2003. The Company
anticipates that the impact of this new standard will have no material impact on
the financial statements taken as a whole.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. All provisions of this Statement will be effective at
the beginning of fiscal 2004. The Company is in the process of determining the
impact of this standard on the Company's financial results when effective.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and amends APB No. 30, "Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." This Statement requires that long-lived assets that
are to be disposed of by sale be measured at the lower of book value or fair
value less costs to sell. SFAS No. 144 retains the fundamental provision of SFAS
121 for (a) recognition and measurement of the impairment of long-lived assets
to be held and used and (b) measurement of long-lived assets to be disposed of
by sale. This statement also retains APB No. 30's requirement that companies
report discontinued operations separately from continuing operations. All
provisions of this Statement will be effective in the first quarter of 2003. The
Company anticipates that the impact of this new standard will have no material
impact on the financial statements taken as a whole.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions for
the reporting period and as of the financial statement date. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities and the reported amounts of revenues and
expenses. Actual results could differ from those amounts.
A critical accounting policy is one that is important to the portrayal of the
Company's financial condition and results, and requires the Company to make
difficult subjective and/or complex judgments. Critical accounting policies
cover accounting matters that are inherently uncertain because the future
resolution of such matters is unknown. The Company believes the following
accounting policies are critical policies; accounting for its gold ore reserves,
environmental liabilities, income taxes and asset retirement obligations.
Gold ore reserves include proved reserves that represent estimated quantities of
gold in which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reserves under existing
economic and operating conditions. The gold ore reserves are based on estimates
prepared by geology consultants and are used to calculate depreciation,
depletion and amortization (DD&A) and determine if any potential impairment
exists related to the recorded value of the Company's gold ore reserves.
The Company reviews, on an as needed basis, its estimates of costs of compliance
with environmental laws and the cleanup of various sites, including sites in
which governmental agencies have designated the Company as a potentially
responsible party. When it is probable that obligations have been incurred and
where a minimum cost or a reasonable estimate of the cost of compliance or
remediation can be determined, the applicable amount is accrued.
The Company makes certain estimates, which may include various tax planning
strategies, in determining taxable income, the timing of deductions and the
utilization of tax attributes.
Management is required to make judgments based on historical experience and
future expectations on the future abandonment cost, net of salvage value, of its
mining properties and equipment. The Company reviews its estimate of the future
obligation periodically and accrues the estimated obligation based on the units
of production method.
Business and Market Risks
The Company continuously reviews the mining risks it encounters in its
day-to-day operations. It mitigates the likelihood and potential severity of
these risks through the application of high operating standards. In addition,
there is great emphasis on safety, training and loss control programs at the
various sites.
The Company's operations have been and in the future may be, affected to various
degrees by changes in environmental regulations, including those for future site
restoration and reclamation costs. The overall effect of these changes upon the
Company varies by jurisdiction, and are not predictable but, given the Company's
environmental policies and programs, the effect of any such changes are not
expected to be material.
Gold Price
The Company's revenues, when it is in production, are derived primarily from the
sale of gold. The Company's net income can vary significantly with fluctuations
in the market price of gold.
Foreign Currency Exchange Risk
The Company conducts the majority of its operations in the Republic of El
Salvador, Central America. Currently, El Salvador is on the U.S. dollar system,
and therefore there is no foreign currency exchange rate.
Cautionary Statement For Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Some of the statements contained in this report are forward-looking statements,
such as estimates and statements that describe the Company's future plans,
objectives or goals, including words to the effect that the Company or
management expects a stated condition or result to occur. Since forward-looking
statements address future events and conditions, by their very nature, they
involve inherent risks and uncertainties. Actual results in each case could
differ materially from those currently anticipated in such statements by reason
of factors such as production at the Company's mines, changes in operating
costs, changes in general economic conditions and conditions in the financial
markets, changes in demand and prices for the products the Company produces,
litigation, legislative, environmental and other judicial, regulatory, political
and competitive developments in areas in which the Company operates and
technological and operational difficulties encountered in connection with mining
or Internet activities. Many of these factors are beyond the Company's ability
to control or predict. The Company disclaims any intent or obligation to update
its forward-looking statements, whether as a result of receiving new
information, the occurrence of future events, or otherwise.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
And Supplementary Financial Data
Page
Report of Independent Public Accountant.......................................38
Financial Statements:
Consolidated Balance Sheets, Years Ended March 31, 2002 and 2001..............39
Consolidated Statements of Operations, Years Ended March 31, 2002, 2001 and
2000...............................40
Consolidated Statements of Changes in Shareholders' Equity
Years Ended March 31, 2002, 2001 and 2000...................................41
Consolidated Statements of Cash Flows, Years Ended March 31, 2002, 2001 and
2000...............................42
Notes to Consolidated Financial Statements....................................44
Supplementary Financial Data:
Report of Independent Accountant on the Financial Statement Schedules.........67
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, 2002 and 2001, 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, 2002, 2001 and 2000. 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., its subsidiaries, and the Joint Venture, as of March 31,
2002 and 2001, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the periods ended March 31, 2002,
2001 and 2000 in conformity with accounting principles generally accepted in the
United States.
Bruce Michael Redlin, CPA, LLC
Certified Public Accountant
Milwaukee, Wisconsin
May 10, 2002
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Balance Sheets--March 31
2002 2001
-----------------------------------
ASSETS
Current assets
Cash $ 39,081 $ 24,401
Investments 230,068 232,068
Accounts receivable 275,785 275,465
Inventories 39,562 39,562
Prepaid items and deposits 25,047 33,981
----------------------------------
Total current assets 609,543 605,477
Real estate (Note 5) 23,336 23,336
Property, plant and equipment, net 4,125,726 3,376,422
Mining resources investment 27,186,829 26,297,450
------------------------------
Total assets $31,945,434 $30,302,685
=============================
LIABILITIES
Current liabilities
Accounts payable $ 409,970 $ 452,571
Notes and accrued interest payable to related parties (Notes 6 & 7) 6,923,874 5,610,380
Notes and accrued interest payable to others (Note 6) 754,251 720,572
Accrued salaries 2,475,765 2,288,015
Accrued legal fees 314,804 308,286
Other accrued expenses 607,552 619,131
--------------------------------
Total liabilities 11,486,216 9,998,955
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
2002-none; 2001-none (Note 10) 0 0
Common stock, $0.10 par value:
Authorized 50,000,000 shares; (Note 10)
Issued and outstanding:
2002-17,468,008 (Note 10) 1,746,801 1,579,401
2001-15,794,008 (Note 10)
Capital in excess of par value 18,792,109 18,760,849
Retained earnings (deficit) (79,692) (36,520)
---------------------------------
Total shareholders' equity 20,459,218 20,303,730
-----------------------------
Total liabilities and shareholders' equity $31,945,434 $30,302,685
============================
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
2002 2001 2000
---------------------------------------
Revenues:
Gold sales $ 0 $ 0 $ 413,713
Campground income 0 75,470 66,902
Real estate sales - net profit 0 163,050 0
----------------------------------------------------------------------
Total revenues 0 238,520 480,615
Expenses:
Cost of gold sales 0 0 376,007
Depreciation 0 0 320,491
General and administrative 43,209 112,392 266,894
------------------------------------------------------------------
Total expenses 43,209 112,392 963,392
Other income:
Interest income 0 3,662 134
El Salvador added value tax refund 38 0 86,411
-------------------------------------------------------------------------
Other income 38 3,662 86,545
------------------------------------------------
Net profit (loss) $ (43,171) $ 129,790 $ (396,232)
Credit (charges) for income taxes 0 0 0
----------------------------------------------------
Net income (loss) after income tax credit (charge) $ (43,171) $ 129,790 $ (396,232)
==============================================
Net income (loss) per share (Note 2) basic $ (.0026) $ .0092 $ (.0326)
================================================
Net income (loss) per share (Note 2) diluted $ (.0025) $ .0086 $ (.0282)
================================================
Weighted av. common shares outstanding (Note 2) 16,349,170 14,174,662 12,172,867
=============================================
Weighted av. diluted common shares (Note 2) 17,019,170 15,094,662 14,053,002
=============================================
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, 2002, 2001 and 2000
Common Stock -----------------------------------------------------
Number of Shares Par Value Capital in Excess
of Par Value Retained Earnings (Deficit)
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)
Net income (loss) for FY March 31, 2002 (43,171)
Dir./off./employee/services comp. 1,154,000 115,400 5,260
Payment of debt 250,000 25,000 12,500
Cash 270,000 27,000 13,500
-------------------------------------------------
Balances March 31, 2002 17,468,008 $1,746,801 $18,792,109 $ (79,691)
============================================================
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
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income (loss) $ (43,171) $ 129,790 $ (396,232)
------------------------------------------
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation 0 0 320,491
Changes in assets and liabilities
Decrease (increase) in account receivables and investments 1,680 (303) 83,607
Decrease (increase) in inventories 0 28,000 88,860
Decrease (increase) in prepaid items and deposits 8,934 24,698 (9,003)
Decrease (increase) in real estate 0 1,156,500 0
Increase (decrease) in accounts payable and accrued liabilities (54,183) 137,243 73,659
Increase (decrease) in accrued salaries 187,750 449,000 165,000
Increase (decrease) in accrued legal fees 6,518 47,359 63,787
--------------------------------------------
Total adjustments 150,699 1,842,497 786,401
-------------------------------------------
Net cash provided by (used in) operating activity 107,528 1,972,287 390,169
Investing activities:
Investment in mining resources (1,638,682) (2,233,369) (2,166,900)
Investments - other 0 288,450 (334,336)
--------------------------------------------------------
Total (1,638,682) (1,944,919) (2,501,236)
Financing activities:
Net borrowings 1,347,174 (865,919) 1,017,739
Common stock issued 198,660 549,011 1,345,447
----------------------------------------
Net cash provided by (used in) financing activities 1,545,834 (316,908) 2,363,186
Net increase (decrease) in cash and cash equivalents 14,680 (289,540) 252,119
Cash - beg. of year 24,401 313,940 61,821
--------------------------------------------
Cash - end of year $ 39,081 $ 24,400 $ 313,940
==========================================
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: $1,026,940 (2002), $1,063,468 (2001) and
$923,726 (2000).
2. There was no interest expense paid in cash for the periods ended March
31, 2002, 2001 or 2000.
3. The Company paid no income taxes during its fiscal periods ended March
31, 2002, 2001, and 2000.
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 mining 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
2002 1,154,000 $120,660
2001 618,500 $ 69,850
2000 1,014,445 $572,818
2. Other non-cash items were for the unpaid salary and director,
officer and legal fees; this amounted to $194,268 for 2002,
$449,360 for 2001, and $228,787 for 2000.
3. There were no non-cash equipment financing activities in 2002, 2001,
or 2000.
The accompanying notes are an integral part of these
consolidated financial statements.
(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 a goal at
the San Sebastian Gold Mine ("SSGM") which is located near
the city of Santa Rosa de Lima. Exploration is being curtailed at
other mining projects until adequate funding and license
permits are obtained. All of the mining projects are located in the
Republic of El Salvador, Central America.
As of April 1, 2000 the Joint Venture decided to temporarily suspend the
San Cristobal Mill and Plant ("SCMP") operations (operations ceased on
December 31, 1999) until such time as it has adequate funds to retrofit,
rehabilitate, restore and expand these facilities and until there is
certainty that the price of gold will be stabilized at a higher selling
price.
Currently the Joint Venture is in the pre-production phase at the SSGM.
Simultaneously, it is performing diverse programs relative to its mining
projects. Prior to December 31, 1999, gold was produced on a start-up (not
full production) basis. Operations were temporarily ceased when the price
of gold fell out of favor with worldwide investors who were reluctant to
invest in gold or gold mining projects.
The Joint Venture plans to begin its open-pit, heap-leaching process on
the SSGM site when adequate funding becomes available. It also plans to
continue its SSGM site preparation, the expansion of its exploration and
exploitation targets, and the enlargement and development of its gold ore
reserves. Furthermore, it plans to explore the potential of other gold
mine exploration prospects in El Salvador. Concurrently, it is in the
process of obtaining necessary funding for each of these separate programs
while its Joint Venture is erecting its crushing system at the SSGM site
and performing minor retrofit and rehabilitation work at the SCMP.
The Company on January 29, 1999, announced its plans to diversify by
having (at that time) its wholly-owned subsidiary, Ecomm Group Inc.
("Ecomm"), enter into the web portal business. Ecomm's objective was and
still is to become a recognized web portal on the world wide web by
acquiring or "rolling-up" Internet websites. Ecomm's principal business is
to evaluate, structure and complete Internet-related business
combinations, mergers, and acquisitions. It plans to concentrate in
specialized or niche portals which are being developed as hubs or gateways
to the Internet for groups of individuals with specific interests.
(b) Use of estimates
The preparation of the financial statements, in accordance with accounting
principles generally accepted in the United States, requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant areas requesting the use
of management estimates relate to the determination of mineral reserves,
reclamation and environmental obligations, impairment of assets and useful
lives to compute depreciation, inflation and amortization. Actual results
could differ from those estimates.
(2) Significant Accounting Policies
Restatement of Prior Period Financial Statements
The Company changed its consolidation policy as of April 1, 1998 retroactive to
September 1987, to include the income and expenses and the assets, liabilities
and equity of its Joint Venture rather than show it as an investment on the
balance sheet. As of March 31, 2002, the consolidated balance sheets, the
consolidated statements of operations, the consolidated statements of changes in
shareholders' equity, and the consolidated statements of cash flows were also
restated to reflect these changes.
The balance sheet effect of the change in policy was to reduce the Joint Venture
advances by the amount of interest charged to the Joint Venture. Retained
earnings were reduced by the same offsetting amount for the same period. The
consolidated statements of changes in shareholders' equity were also restated to
reflect these changes.
The consolidated statements of operations through March 31, 2002 were restated
to eliminate the net interest income earned by the Company from the Joint
Venture.
The consolidated statements of cash flows were also restated to reflect the
changes in operating profits or losses.
Principles of Consolidation
The Joint Venture and the following subsidiaries are all majority-owned by the
Company and are included in the consolidated financial statements of the
Company. All significant intercompany balances and transactions have been
eliminated.
% Ownership
Homespan Realty Co., Inc. ("Homespan") 100.0
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0
Ecomm Group Inc. ("Ecomm") 100.0
San Luis Estates, Inc. ("SLE") 100.0
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5
Universal Developers, Inc. ("UDI") 100.0
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0
Investments
The investments consist of securities held for the 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 advances to Misanse, a
52%-owned subsidiary, which will be offset for the Misanse rental charges
included in the accounts payable.
Intercompany Balances
All intercompany balances and transactions have been eliminated.
Inventory
Inventory consists of consumable supplies.
Deferred Mining Costs
The Company, in order to avoid expense and revenue unbalance, capitalizes all
costs directly associated with acquisition, exploration and development of
specific properties, until these properties are put into operation, sold or are
abandoned. Gains or losses resulting from the sale or abandonment of mining
properties will be included in operations. The Joint Venture capitalizes its
costs and expenses and will write off these cumulative costs on a units of
production method at such time as it begins producing gold derived from the
virgin gold ore on a full production basis. If the prospect of gold production,
due to different conditions and circumstances becomes unlikely, all of these
costs may be written off in the year that this occurs.
The Company regularly evaluates its carrying value of exploration properties in
light of their potential for economic mineralization and the likelihood of
continued work by either the Company or a joint venture partner. The Company
may, from time to time, reduce its carrying value to an amount that approximates
fair market value based upon an assessment of such criteria.
Revenue Recognition
Revenue from the sale of gold and industrial minerals is recognized when title
passes to the buyer.
Property, Plant and Equipment
Property, plant, and equipment is stated at the lower of cost or estimated net
realizable value. Mining properties, development costs and plant and equipment
will be depreciated when full production takes place using the units of
production method based upon proven and probable reserves. Until the Company
suspended its mining operations, the assets were depreciated using the
straight-line method over estimated useful lives ranging from three to ten
years. Depreciation and amortization expenses include the amortization of assets
acquired, if any, under capital leases. Replacements and major improvements are
capitalized. Maintenance and repairs are charged to expense based on average
estimated equipment usage. Interest costs incurred in the construction or
acquisition of property, plant, and equipment are capitalized and amortized over
the useful lives of the related assets. Since the Company suspended its gold
processing operations it also ceased to depreciate its fixed assets.
Mineral Exploration and Development Costs
Significant property acquisition payments for active exploration properties are
capitalized. If no minable ore body is discovered, previously capitalized costs
are expensed in the period the property is abandoned. Expenditures for the
development of new mines, to define further mineralization at and adjacent to
existing ore bodies, and to expand the capacity of operating mines, are
capitalized and amortized on the units of production basis over proven and
probable reserves.
Statement of Financial Accounting Standards
The Company evaluates the carrying value of producing properties and equipment
by applying the provisions of Statement of Financial Accounting Standards No.
121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed. SFAS 121 requires that an impairment loss be
recognized when the estimated future cash flows (undiscounted and without
interest) expected to result from the use of an asset are less than the carrying
amount of the asset. Measurement of an impairment loss is based on fair value of
the asset if the asset is expected to be held and used, which would be computed
using discounted cash flows. Measurement of an impairment loss for an asset held
for sale would be based on fair market value less estimated costs to sell.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and amends APB No. 30, "Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." This Statement requires that long-lived assets that
are to be disposed of by sale be measured at the lower of book value or fair
value less costs to sell. SFAS No. 144 retains the fundamental provision of SFAS
121 for (a) recognition and measurement of the impairment of long-lived assets
to be held and used and (b) measurement of long-lived assets to be disposed of
by sale. This statement also retains APB No. 30's requirement that companies
report discontinued operations separately from continuing operations. All
provisions of this Statement will be effective in the first quarter of 2003. The
Company anticipates that the impact of this new standard will have no material
impact on the financial statements taken as a whole.
Management's estimates of gold and other metal prices, recoverable proven and
probable reserves, operating, capital, and reclamation costs are subject to
certain risks and uncertainties which may affect the recoverability of the
Company's investment in property, plant, and equipment. Although management has
made its best estimate of these factors based on current conditions, it is
reasonably possible that changes could occur in the near-term which could
adversely affect management's estimate of the net cash flows expected to be
generated from its mining properties.
Estimates of future cash flows are subject to risks and uncertainties. It is
possible that changes could occur which may affect the recoverability of
property, plant and equipment.
Deferred Financing Costs
Costs incurred to obtain debt financing are capitalized and amortized over the
life of the debt facilities using the effective interest method.
Interest Capitalization
Interest costs are capitalized as part of the historical cost of facilities and
equipment, if material.
Income Taxes
The Company files a consolidated federal income tax return with its subsidiaries
(See Note 9). The Joint Venture files a U.S. partnership return.
Comprehensive Income
Effective April 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 is
designed to report a measure of all changes in equity of an enterprise that
result from recognized transactions and other economic events of the period.
Besides net income, other comprehensive income includes foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses on
certain investments in debt and equity securities. The Company believes that it
has no material items or other comprehensive income in any period presented in
the accompanying financial statements.
Earnings (Loss) Per Common Share
The Company has in the past years reported its "Earnings per Share" which
presently complies with SFAS No. 128. As required by this standard, the Company
reports two earnings per share amounts, basic net income and diluted net income
per share. Basic net income per share is computed by dividing income or loss
reportable to common shareholders (the numerator) by the weighted average number
of common shares outstanding (the denominator). The computation of diluted net
income or loss per share is similar to the computation of basic net income per
share except that the denominator is increased to include the dilutive effect of
the additional common shares that would have been outstanding if all convertible
securities, stock options, rights, share loans, etc. had been converted to
common shares at the last day of the fiscal year.
If on March 31, 2002, 670,000 option shares were added to the weighted number of
shares which amount to 16,349,170 common shares issued and outstanding, the
total number of fully diluted shares would amount to 17,019,170. The loss per
share for this period ended March 31, 2002 is $.0025 cents per share. The same
assumptions were used for the same 2001 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. Almost all of the business in El Salvador is now conducted
in U.S. dollars.
Major Customer
In the past, the Joint Venture produced gold and silver. It sold its gold at the
world market price to a refinery located in the United States. Given the nature
of the precious metals that are sold, and because many potential purchasers of
gold and silver exist, it is not believed that the loss of any customer would
adversely affect either the Company or the Joint Venture.
(3) Investment in Property, Plant, Equipment and Mining Resources
The following is a summary of the investment in property, plant, equipment,
mining resources and development costs:
March 31, 2002 --------------------------------------------------------- March
----------------------------
31, 2001 ----------------------------------------------------------
Cost Accumulated Amortization Net Cost Accumulated
Amortization Net
Mineral Properties and Deferred Development $27,186,826 $27,186,826 $26,297,450
$26,297,450
Property, Plant and Equipment 6,377,869 2,252,143 4,125,726 5,822,021 2,445,599
--------------------------------------------------------------------------------
3,376,422
$33,564,695 $2,252,143 $31,312,552 $32,119,471 $2,445,599 $29,673,872
==========================================================================================================================
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. Estimated future net cash flows, on an
undiscounted basis, from each property are calculated using estimated
recoverable ounces of gold (considering current proven and probable reserves and
mineral resources expected to be converted into mineral reserves. The inclusion
of mineral resources is based on various circumstances, including but not
limited to, the existence and nature of known mineralization, location of the
property, results of recent drilling; and analysis to demonstrate the ore is
commercially recoverable), estimated future gold price realization (considering
historical and current prices, price trends and related factors); and operating,
capital and site restoration costs. Reduction in the carrying value of property,
plant and equipment, with a corresponding charge to income, are recorded to the
extent that the estimated future net cash flows are less than the carrying
value.
(4) Commerce/Sanseb Joint Venture ("Joint Venture")
The Company is in a joint venture with and owns 82 1/2% of the total common
stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada chartered (1968)
corporation. The balance of Sanseb's stock is held by approximately 180
non-related shareholders, including the President of the Company who owns 2,073
common shares. Sanseb was formed to explore, exploit, research, and develop
adequate gold reserves. Sanseb produced gold from the SSGM from 1972 through
February 1978.
On September 22, 1987, the Company and Sanseb entered into a joint venture
agreement to formalize their relationship with respect to the mining venture and
to account for the Company's substantial investment in Sanseb. Under the terms
of the agreement, the Company is authorized to supervise and control all of the
business affairs of the Joint Venture and has the authority to do all that is
necessary to resume mining operations at the SSGM on behalf of the Joint
Venture. The net pre-tax profits of the Joint Venture will be distributed as
follows: Company 90%; and Sanseb 10%. Since the Company owns 82 1/2% of the
authorized and issued shares of Sanseb, the Company in effect has over a 98%
interest in the Joint Venture activities.
The joint venture agreement further provides that the Company has the right to
be compensated for its general and administrative expenses in connection with
managing the Joint Venture.
Under the joint venture agreement, agreements signed by the Company for the
benefit of the Joint Venture create obligations binding upon the Joint Venture.
The Joint Venture is registered to do business in the State of Wisconsin and in
the Republic of El Salvador, Central America.
Investments in Joint Venture
As of March 31, 2002, the Company's investments, including charges for interest
expense to the Joint Venture, were $36,729,923 and three of the Company's
subsidiaries' advances were $590,265 for a total of $37,320,188.
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, 2002 and 2001, the Company, Sanseb and three of the Company's
subsidiaries have invested (including carrying costs) the following in its Joint
Venture:
2002 2001
------------- ----
The Company's advances (net of gold sale proceeds) since 09/22/87 $36,729,923 $32,519,136
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 31,989,058 29,505,884
--------------------------------------
Total: 75,735,341 69,041,380
Advances by the Company's three subsidiaries 590,265 590,265
--------------------------------------------------- --------------
Combined total investment $76,325,606 $69,631,645
===================================================================================
SSGM Activity
The Company had no significant activity at the SSGM site from February 1978
through January 1987. The present status is that, the Company, since January
1987, and thereafter, the Joint Venture, since September 1987, have completed
certain of the required mining pre-production preliminary stages in the minable
and proven gold ore reserve area, and the Company is active in attempting to
obtain adequate financing for the proposed open-pit, heap-leaching operations on
this site. The Joint Venture plans to resume its exploration and expansion
program to develop additional gold ore reserves in the area surrounding the
minable gold ore reserves. Presently, it is erecting its cone crushing system
and performing minor rehabilitation repairs to its San Cristobal Mill and Plant.
Mineral San Sebastian S.A. de C.V. ("Misanse")
(a) Misanse Corporate Structure
The SSGM real estate is owned by and leased to the Joint Venture by Misanse, a
Salvadoran-chartered corporation. The Company owns 52% of the total of Misanse's
issued and outstanding shares. The balance is owned by approximately 100 El
Salvador, Central American, and United States' citizens.
(b) SSGM Mining Lease
On July 28, 1975, an amended lease agreement between Misanse as lessor and
Sanseb as tenant was signed by the parties giving the tenant all the possessions
and mining rights that pertain to the SSGM as well as other claims to mineral
rights that may already have or could be claimed in the future within the 595
hectares (1,470 acres) plat of land encompassing the SSGM. The 25-year lease,
which begins on the date gold production begins, was further amended to run
concurrently with the concession described herein and may be extended for an
additional 25 years by the tenant as long as the tenant has paid the rent and
has complied with other obligations under the lease and the concession. The
lease also provides that the tenant will pay rent equivalent to five percent of
the gross gold production revenue obtained from the leased SSGM and further
commits itself to 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 cancelled by the Joint Venture on thirty days' notice to
Misanse, and thereafter, all legal responsibilities thereunder shall cease.
(c) Mineral Concession
On July 23, 1987, the Government of El Salvador granted and delivered to the
Company's 52%-owned subsidiary, Misanse, possession of the mining concession.
This is the right to extract and export minerals for a term of 25 years (plus a
25-year renewal option) beginning on the first day of production from the real
estate which encompasses the SSGM owned by Misanse. Misanse assigned this
concession to the Joint Venture. The concession was pledged as collateral for
loans made by related parties. (Note 7)
Effective February 1996, the Government of El Salvador passed a law which
requires mining companies to pay to it three percent of its gross gold sale
receipts and an additional one percent is to be paid to the El Salvador
municipality which has jurisdiction of the mine site. As of July 2001, a series
of revisions to the El Salvador Mining Law offer to make exploration more
economical. The principal change is that the charge has been reduced to two
percent of the gross gold receipts. The Company, in compliance with the new law,
has, or will file its applications for all of the mining concessions in which it
has an interest.
SCMP Land and Building Lease
On November 12, 1993, the Joint Venture entered into an agreement with
Corporacion Salvadorena de Inversiones ("Corsain"), an El Salvadoran
governmental agency, to lease for a period of ten years, approximately 166 acres
of land and buildings on which its gold processing mill, plant and related
equipment (the SCMP) are located, and which is approximately 15 miles east of
the SSGM site. The basic annual lease payment is U.S. $11,500 (payable in El
Salvador colones at the then current rate of exchange), payable annually in
advance, unless otherwise amended, and subject to an annual increase based on
the annual United States' inflation rate. As agreed, a security deposit of U.S.
$11,500 was paid on the same date and this deposit is subject to increases based
on any United States' inflationary rate adjustments.
Modesto Mine
Real Estate
The Company owns 63 acres of land which are a key part of the Modesto Mine that
is located near the city of El Paisnal, El Salvador. This real estate is subject
to a mortgage and promissory note and is pledged as collateral to certain
parties described in Note 7.
San Felipe-El Potosi Mine ("Potosi")
Real Estate Lease Agreement
The Joint Venture entered into a lease agreement with the San Felipe-El Potosi
Cooperative ("Cooperative") of the city of Potosi, El Salvador on July 6, 1993,
to lease the real estate encompassing the San Felipe-El Potosi Mine for a period
of 30 years and with an option to renew the lease for an additional 25 years,
for the purpose of mining and extracting minerals.
Montemayor Mine
The Joint Venture has leased approximately 175 acres of land that it considers
to be the key mining property. The terms of the various leases are one year with
automatic renewal rights. This property is located 14 miles northwest of the
SCMP, six miles northwest of the SSGM, and about two miles east of the city of
San Francisco Gotera in the Department of Morazan, El Salvador.
(5) Synopsis of Real Estate Ownership and Leases
The Company's 52%-owned subsidiary, Misanse, owns the 1,470 acre SSGM site
located near the city of Santa Rosa de Lima in the Department of La Union, El
Salvador. Other real estate ownership or leases in El Salvador are as follows:
the Company owns approximately 63 acres at the Modesto Mine; and the Joint
Venture leases the SCMP land and buildings on which its mill, plant and
equipment are located. In addition, the Joint Venture has entered into a lease
agreement to lease approximately 675 acres based on the production of gold
payable in the form of royalties with a mining prospect in the Department of San
Miguel and it leases approximately 175 acres in the Department of Morazan in the
Republic of El Salvador. The Company also leases approximately 4,032 square feet
of office space in Milwaukee, Wisconsin. (6) Notes Payable and Accrued Interest
03/31/02 03/31/01
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) $6,923,874 $5,610,380 Other Short-term notes and accrued
interest (March 31, 2002, $416,305 and March 31, 2001, $382,625) 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. 754,252 720,572
Total: $7,678,126 $6,330,952
=================================
(7) Related Party Transactions
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 21 years, including
vacation pay, for a total of $2,457,765.
In addition, with the consent and approval of the Directors, the President of
the Company, as an individual and not as a Director or Officer of the Company,
entered into the following financial transactions with the Company, the status
of which is reflected as of March 31, 2002:
The amount of cash funds which the Company has borrowed from its President from
time to time, together with accrued interest, amounts to $4,643,856. 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, 2002, an aggregate of $703,647,
including accrued interest, from the Company's President's Rollover Individual
Retirement Account (ELM RIRA). These loans are evidenced by the Company's
open-ended, secured, on-demand promissory note, with interest payable monthly at
the prime rate plus four percent per annum, but not less than 16% per annum.
In order to satisfy the Company's cash requirements from time to time, the
Company's President has sold or pledged as collateral for loans, shares of the
Company's common stock owned by him. In order to compensate its President for
selling or pledging his shares on behalf of the Company, the Company has made a
practice of issuing him the number of restricted shares of common stock
equivalent to the number of shares sold or pledged, plus an additional number of
shares equivalent to the amount of accrued interest calculated at the prime rate
plus three percent per annum and payable monthly. The Company receives all of
the net cash proceeds from the sale or from the pledge of these shares. The
Company did not borrow any common shares during this fiscal year. The share
loans, if any, are all in accordance with the terms and conditions of
Director-approved, open-ended loan agreements dated June 20, 1988, October 14,
1988, May 17, 1989, and April 1, 1990.
On February 16, 1987, the Company granted its President, by unanimous consent of
the Board of Directors, compensation in the form of a bonus in the amount of two
percent of the pre-tax profits realized by the Company from its gold mining
operations in El Salvador, payable annually over a period of twenty years
commencing on the first day of the month following the month in which gold
production commences.
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, 2002:
The Company leased approximately 4,032 square feet on a month-to-month basis for
its corporate headquarters' office; the monthly rental charge was $2,789. The
same related company provides administrative services, use of its vehicles, and
other property, as required by the Company.
In lieu of cash payments for the office space rental and for the consulting,
administrative services, etc., these amounts due are added each month to this
related company's open-ended, secured, on-demand promissory note issued by the
Company.
In addition, this related company does from time to time use its credit
facilities to purchase items needed for itself or for the Joint Venture's mining
needs.
This related company has been issued an open-ended, secured, on-demand
promissory note which amounts to $1,098,193; the annual interest rate is four
percent plus the prime rate, but not less than 16%, and it is payable monthly.
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. These stock options were not exercised. On June 30, 2001, GLSCO
purchased 250,000 restricted common shares at a price of $.15 per share and it
received two-year options to purchase 250,000 common shares at a price of $.25
per share. The terms of this transaction are no less favorable than those
obtained from unrelated third parties.
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 during the fiscal year ended March 31, 2001.
The Company's Directors have consented and approved the following transactions
of which the status of each are reflected as of March 31, 2002:
The President's wife's Rollover Individual Retirement Account (SM RIRA) has the
Company's open-ended, secured, on-demand promissory note in the sum of $366,289
which bears interest at an annual rate of prime plus three percent, but not less
than 16% and the interest is payable monthly.
The Directors also have acknowledged that Mrs. Sylvia Machulak (wife of the
President) is to be compensated for her consulting fees due to her from October,
1, 1994 through September 30, 2000 or 72 months at $2,800 a month, and
thereafter at $3,000 per month. The Company owes her as an individual and as a
consultant, the sum of $255,600 for services rendered from October 1994.
The Law Firm which represents the Company in which a son of the President is a
principal is owed the sum of $314,804 for 1,907.9 hours of legal services
rendered from July 1980 through March 31, 2002. By agreement, these fees are to
be adjusted to commensurate with the hourly fees charged by the Law Firm on the
date of payment.
The son of the President and his son's wife have the Company's open-ended,
on-demand promissory note in the sum of $111,889 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 278,000 common shares in lieu of any cash
compensation for all amounts due to them as of March 31, 2002. The
Chairman/President does not participate in the payment of Director fees.
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 recording the amount that
is due to the Company from the Joint Venture.
Company Net Advances to the Joint Venture
2002 2001
- ---------------------------------------------------------------------------------------
Total Advances Interest Charges Total Advances Interest Charges
Beginning $32,519,136 $16,973,241 $27,346,328 $13,049,585
March 31 fourth quarter 4,210,787 3,475,048 5,172,808 3,923,656
------------------------------------------------------------------------
Total Company advances 36,729,923 20,448,289 32,519,136 16,973,241
Advances by three of the Company's subsidiaries 590,265 0 590,265
-----------------------------------------------------
0
March 31 total net advances $37,320,188 $20,448,286 $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, 2001, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of approximately
$3,872,513 which may be carried forward to offset future taxable income; the net
operating losses expire at various times to the year of 2016.
(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 17,468,008 shares were issued and outstanding as of
March 31, 2002. Holders of shares of common stock are entitled to one vote for
each share on all matters to be voted on by the shareholders. Holders of common
stock have no cumulative voting rights. Holders of shares of common stock are
entitled to share ratably in dividends, if any, as may be declared, from time to
time by the Board of Directors in its discretion, from funds legally available
therefore. In the event of a liquidation, dissolution or winding up of the
Company, the holders of shares of common stock are entitled to share pro rata
all assets remaining after payment in full of all liabilities. Holders of common
stock have no preemptive rights to purchase the Company's common stock. There
are no conversion rights or redemption or sinking fund provisions with respect
to the common stock. All of the issued and outstanding shares of common stock
are validly issued, fully paid and non-assessable.
b. Preferred Stock
There were no preferred shares issued and outstanding for the periods ending
March 31, 2002 or 2001.
The Company's Wisconsin Certificate of Incorporation authorizes the issuance of
250,000 shares of preferred stock, $0.10 par value.
The preferred shares are issuable in one or more series. If issued, the Board of
Directors is authorized to fix or alter the dividend rate, conversion rights (if
any), voting rights, rights and terms of redemption (including any sinking fund
provisions), redemption price or prices, liquidation preferences and number of
shares constituting any wholly unissued series of preferred shares.
c. Stock option activity during 2002, 2001 and 2000 was as follows:
03/31/02 ---------------------------- 03/31/01 ---------------------------- 03/31/00
- -----------------------------
Option SharesWeighted Average Price Option Shares Weighted Average Price Option
Shares Weighted Average Price
Outstanding, beg. yr. 920,000 $1.27 1,254,900 $2.19 977,400 $3.28
Granted 520,000 $0.25 150,000 $0.12 660,000 $0.50
Exercised 0 N/A 0 N/A (160,000) N/A
Forfeited (500,000) N/A 0 N/A 0 N/A
Expired (270,000) N/A (484,900) N/A (222,500) N/A
-------------------------------------------------------------------------
Outstanding, end of yr. 670,000 $0.22 920,000 $1.27 1,254,900 $2.19
===========================================================================
A summary of the outstanding stock options as of March 31, 2002, follows:
Range of Exercise Prices Amount Outstanding Weighted Average Remaining Contractual Life Weighted Average
--------------- ----------- ----------------
Exercise Price
Up to $2.99 670,000 1.454 years $0.22
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, 2002, there were no shares due to other parties for shares
borrowed or for interest payment.
f. S.E.C. Form S-8 Registration
On 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. All of the 1,000,000 shares were issued
as of March 31, 2002.
On May 25, 2001, the Company filed its fourth Securities and Exchange Commission
Form S-8 Registration Statement No. 333-61650 under the Securities Act of 1933,
and it registered 1,500,000 of the Company's $0.10 par value common shares for
the purpose of distributing shares pursuant to the plan contained in such
registration. From the 1,500,000 shares registered 858,376 were issued, and
641,624 shares remain to be issued as of March 31, 2002.
g. Commerce Group Corp. Employee Benefit Account (CGCEBA)
This account was established for the purpose of compensating the employees for
benefits such as retirement, severance pay, and all other related compensation
that is mandatory under El Salvadoran labor regulations, and/or as determined by
the Officers of the Corporation. The Directors provide the Officers of the
Company with the authority to issue its common shares to the CGCEBA on an as
needed basis. Under this plan, payment can be made to any employee of the
Company or the Company's subsidiaries. The CGCEBA has sold some of the shares
issued to this account from time to time to meet its obligations to its El
Salvadoran employees. As of March 31, 2001, 150,000 shares remained in the
account. On January 24, 2002, an additional 500,000 common shares were issued to
the CGCEBA. During this fiscal period, 130,000 common shares were sold on behalf
of the CGCEBA, leaving a balance of 520,000 shares in the CGCEBA account as of
March 31, 2002.
(11) Litigation
There is no known pending litigation.
(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 presently has three reportable segments: mining, campground
operation, and other. The mining segment was engaged in the processing of gold.
The mining operations are temporarily suspended. The campground operation is to
lease space on an annual, monthly, or daily basis. The campground has been sold.
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, Central America Campground Missouri, U.S.A. Corporate
Headquarters
Year ended March 31, 2002
Sales and revenues $ 0 $ 0
$ 38
Depreciation & amortization 0 0 0
Operating income (loss) 0 0 (43,171)
Total assets 31,676,285 0 269,149
Capital expenditures 1,638,682 0 0
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
*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.
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........67
Schedule IV (1) Indebtedness of Related Parties..............................69
Schedule IV (2) Indebtedness to Related Parties..............................71
(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 Exhibit
4 Instruments defining the rights of security holders,
including indentures.
4.1 Three-Year Stock Option Agreement dated March 13, 2001 to purchase 100,000
common shares at $.10 per share. (Incorporated by reference to Exhibit 4.9 of
the Company's Form 10-K for the year ended March 31, 2001.) 4.2 Three-Year Stock
Option Agreement dated March 13, 2001 to purchase 50,000 common shares at $.15
per share. (Incorporated by reference to Exhibit 4.10 of the Company's Form 10-K
for the year ended March 31, 2001.) 4.3* Two-Year Stock Option Agreement dated
July 2, 2001 to purchase 80,000 common shares at $.25 per share. 4.4* Two-Year
Stock Option Agreement dated July 2, 2001 to purchase 100,000 common shares at
$.25 per share. 4.5* Two-Year Stock Option Agreement dated July 2, 2001 to
purchase 250,000 common shares at $.25 per share. 4.6* Two-Year Stock Option
Agreement dated July 2, 2001 to purchase 70,000 common shares at $.25 per share.
4.7* Two-Year Stock Option Agreement dated July 2, 2001 to purchase 20,000
common shares at $.25 per share.
Subsequent Options Issued:
4.8* Two-Year Stock Option Agreement dated April 19, 2002 to
purchase 80,000 common shares at $.15 per share.
4.9* Two-Year Stock Option Agreement dated April 30, 2002 to
purchase 40,000 common shares at $.25 per share.
9 Voting Trust Agreement--not applicable.
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.)
Exhibit No. Description of Exhibit
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.)
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.)
Exhibit No. Description of Exhibit
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 Contract for Sale
of Real Estate dated August 14, 2000 by and between the Company, its subsidiary,
and a related company. (Incorporated by reference to Exhibit 10.17 of the
Company's Form 10-K for the year ended March 31, 2001.) 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, 2002, 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 13, 2002.
99.2* Confirmation Agreement, Edward L. Machulak, May 13, 2002.
99.3* Confirmation Agreement, Edward L. Machulak Rollover
Individual Retirement Account, May 13, 2002.
99.4* Confirmation Agreement, Sylvia Machulak as an individual and
for her Rollover Individual Retirement Account, May 13,
2002.
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. 333-95397 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.)
All of these shares have been issued as of March 31,
2002.
Exhibit No. Description of Exhibit
99.8 S.E.C. Form S-8 Registration Statement No. 333-61650 filed under the
Securities Act of 1933 as amended and declared effective May 25, 2001,
registering one and one-half 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 May 25, 2001.) 641,624 shares remain to be issued as of March 31,
2002. 99.8(a)* Consent of Independent Certified Public Accountant to incorporate
by reference in the S.E.C. Form S-8 Registration Statement No. 333-61650 filed
under the Securities Act of 1933 as amended and declared effective May 25, 2001
the Certified Public Accountant's report dated May 10, 2002 relating to the
financial statements of the Company for the years ended March 31, 2002 and 2001.
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, 2002
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 13, 2002.
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 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 May 13, 2002
/s/ Edward A. Machulak Edward A. Machulak Director, Member of Executive
Committee,
Director-Emeritus, Executive Vice President and Secretary May 13, 2002
/s/ Sidney Sodos Sidney Sodos Director and Member of Audit Committee
May 13, 2002
------ ------------
/s/ Clayton H. Tebo Clayton H. Tebo Director and Member of Audit Committee
May 13, 2002
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, 2002, 2001, 2000, 1999 and 1998, 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 10, 2002
This Page Left Blank Intentionally.
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV (1)
INDEBTEDNESS OF RELATED PARTIES - NON CURRENT
YEARS ENDED MARCH 31, 2002, 2001, AND 2000
Name of Person (1) Balance at Beginning of Period (3) Additions to Indebtedness (2) Deletions to
- -------------------- ---------- ----------------
Indebtedness Balance at End of Period (3)
- ------------ -------------
Year ended March 31, 2002 Joint Venture $33,109,401 $4,210,787 $0 $37,320,188
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
(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.
Name of Person (1) Balance at Beginning of Period Additions to Indebtedness (2) Deletions to
- -------------------- ------ ----------------
Indebtedness Balance at End of Period
Year ended March 31, 2002 SSGM $29,505,884 $2,483,174 $0 $31,989,058
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
(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 SSGM's 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, 2002, 2001, AND 2000
Identity of Debtor Balance at Beginning of Period Additions to Indebtedness (1) Deletions to
- --------------------- ------ ---
Indebtedness (2) Balance at End of Period
--- -------------
Year ended March 31, 2002
President of the Company $3,676,503 $967,353(a) $ 0 $4,643,856
President's RIRA 599,768 103,879(b) 0 703,647
President's Affiliated Company 926,205 171,988(c) 0 1,098,193
President's Wife's RIRA 312,459 53,830(d) 0 366,289
Others 95,445 16,444(d) 0 111,889
------------------------------ ----------------------- ------------
Total, notes payable $5,610,380 $1,313,494 $ 0 $6,923,874
================= ================================================
President's Accrued Salary $2,279,015 $ 178,750(e) $ 0 $2,451,765
============================= ===============================
President's Wife's Consulting Fees $ 219,600 $ 36,000(f) $ 0 $ 255,606
================= =================================================
Legal fees (President's son is a principal) $ 308,286 $ 6,518(g) $ 0 $ 314,804
================= ============ ================= ===========
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 14,025(d) 0 95,445
----------------------------- --------------------------------
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 $ 0 $ 219,600(f) $ 0 $ 219,600
============================= ================================
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) 0 646,141
----------------------------
President's Affiliated Company 1,493,026 315,488(c) 0 1,808,514
Others 397,102 68,608(d) 0 465,710
--------------------------- -----------------------------------------
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
-============================= =======================================
(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 July 2, 2001, two-year stock options to purchase 250,000 of the
Company's restricted common shares at a price of $0.25 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, 2001 through March 31,
2002 (one year at $13,750).
(1)(f) Twelve months of consulting fees at $3,000 per month for a total of
$36,000.
(1)(g) The addition of the amounts due to the Law Firm results for legal
services rendered.
(2) Deletions to Indebtedness are reflected as a net to the additions.