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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2004
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 Over The Counter Bulletin Board (OTC BB)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated file (as defined
in Rule 12b-2 of the Exchange Act). Yes __ No __X__
The aggregate market value of the 15,662,802 shares held by nonaffiliates of the
registrant based on the closing price of the OTC BB on September 30, 2003 was
approximately $4,072,329.
At March 31, 2004, there were 22,681,591 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K is incorporated herein by
reference to the registrant's definitive Proxy Statement relating to its 2004
Annual Meeting of Stockholders, which will be filed with the Commission within
120 days after the end of the registrant's fiscal year.
COMMERCE GROUP CORP.
2004 FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended March 31, 2004
TABLE OF CONTENTS
Page
PART I
Item 1.
Business.................................................................... 3
Item 2.
Properties...................................................................10
Item 3. Legal
Proceedings..................................................................19
Item 4. Submission of Matters to a Vote of Security
Holders..................................................19
Item 4(a). Executive Officers and Managers of the
Company.......................................................20
PART II
Item 5. Market for the Company's Common Stock and Related Stockholders'
Matters..............................21
Item 6. Selected Financial
Data........................................................................23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations...................................................................24
Item 7(a). Quantitative and Qualitative Disclosures About Market
Risk...........................................35
Item 8. Financial Statements and Supplementary
Data..........................................................36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................60
Item 9(a). Controls and
Procedures...................................................................60
PART III
Item 10. Directors and Executive Officers of the
Registrant...................................................60
Item 11. Executive
Compensation.................................................................61
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................61
Item 13. Certain Relationships and Related
Transactions.......................................................61
Item 14. Principal Accounting Fees and
Services...............................................................61
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................62
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, commodity prices, production and reserve estimates, environmental
and governmental regulations, availability of financing, force majeure events,
and other risk factors as described from time to time in the Company's filings
with the Securities and Exchange Commission. 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.
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, development, and production
of precious metals in El Salvador. Its gold ore reserves exceed 1.5 million
ounces, which, in turn, translate to .066 ounces of gold for each common share
issued and outstanding as of March 31, 2004. Commerce's objectives are to obtain
a sufficient amount of funds to expand its San Cristobal Mill and Plant and to
commence an open-pit, heap-leach operation to produce gold at a profit. Commerce
simultaneously continues to seek a compatible acquisition or merger, preferably
a business in the precious metals field, or an endeavor in which synergism will
prevail. This combination should enhance the value of Commerce's common shares.
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.OB
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 is the operator of the
San Sebastian Gold Mine ("SSGM").
Commerce's objective is to enhance the value of its shares by realizing profits,
cash flow, and by increasing its gold ore reserves. This may be achieved by its
continuing to be a low-cost gold producer, by increasing production and by
expanding its gold ore reserves. Commerce has an opportunity to increase its
gold ore reserves since on March 3, 2003, it received the New San Sebastian Gold
Mine Exploration Concession/License hereinafter identified as the "New SSGM." It
is currently exploring this 42-square kilometer area, which includes three
formerly-operated mines and encompasses the SSGM.
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 mill and related equipment which will increase the capacity
of the processing of its higher grade virgin ore at the San Cristobal Mill and
Plant ("SCMP"). The heap-leach operation should 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
at that time was the substantial decline in the world market price of gold.
Concurrent with the decision to suspend processing gold ore was the awareness 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. Although the financial statement periods presented herein
reflect that the SSGM is the only one of the Company's mining properties which
has generated revenues, there are strong 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 Total
San Sebastian Gold Mine
(a) Virgin ore, dump waste
material and tailings 14,404,096 0.081 1,166,732 1,166,732
(b) Stope fill (estimated) 1,000,000 0.340 ________ 340,000 340,000
-- --------- ------- --- -------
15,404,096 1,166,732 340,000 1,506,732
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, 2004, 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 $88,242,656.
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") 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.
On January 14, 2003, the Company entered into an amended and renewed 20-year
lease agreement with Mineral San Sebastian Sociedad Anomina de Capital Variable
(Misanse) pursuant to the approval of the Misanse shareholders and Misanse
directors at a meeting held on January 12, 2003. The renewed lease is for a
period of time commencing and coinciding with the date that the Company received
its Renewed San Sebastian Gold Mine Exploitation Concession/License, hereinafter
identified as the "Renewed SSGM," from the Ministry of Economy's Director of El
Salvador Department of Hydrocarbons and Mines (DHM). The lease is automatically
extendible for one or more equal periods. The Company will pay to Misanse for
the rental of this real estate the sum of five percent of the net sales of the
gold and silver produced from this real estate, however, the payment will not be
less than $343.00 per month. The Company has the right to assign this lease
without prior notice or permission from Misanse. This lease is pledged as
collateral for loans made to related parties (Note 7).
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 execute
agreements on behalf of the Joint Venture.
Organizational Structure and Mining Projects
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.
Charter/Joint Venture
% Ownership Place Date
Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0 El Salvador 05/08/1960
Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974
San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968
Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0 Wisconsin & El 09/22/1987
Salvador
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 previously had a mining concession
with the government of El Salvador and was the owner of the SSGM real estate. At
that time, Misanse had 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 (Joint Venture). The Joint
Venture 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).
Currently the Joint Venture is performing exploration on the La Lola Mine, the
Santa Lucia Mine and the Tabanco Mine, which are included in the New SSGM.
The Government of El Salvador has issued the Modesto 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 plans to apply 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. Although the sub
surface rights belong to the Government of El Salvador, access to the surface
rights must be obtained from the owner.
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, alterations, 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
similar transactions to minimize the risk of fluctuations in gold prices or
currencies. The Company's present and past practice has been to sell its gold
and silver at the world market spot prices. 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 was 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 could have 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 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, interest rate fluctuations, and political
instability have not had a material impact on the Company or its results of
operations.
Seasonality
Seasonality does not have a material impact on the Company's operations, but the
rainy season in El Salvador (May through November) can curtail production.
Environmental Matters
Since the Government of El Salvador (GOES) has established a new Mining Law
effective February 1996, its exploration, development, and production programs
are subject to environmental protection. The GOES has established the Office of
the El Salvador Ministry of Environment and Natural Resources (MARN). In order
to comply with mining law, the Company was required to obtain environmental
permits. On October 15, 2002, an environmental permit under MARN Resolution
474-2002 was issued for the SCMP. On October 21, 2002, an environmental permit
under MARN Resolution 493-2002 was issued pertaining to the SSGM.
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 was 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.
El Salvador, Central America Information Sources
The most current information about El Salvador can be obtained from the
following sources:
1. General information can be obtained through the Internet
from the following websites:
http://www.usinfo.org.sv/newsite/eng/irc/svlinks.html and
http://www.dirla.com/elsalvador2.html.
2. The U.S. Embassy in El Salvador can also be contacted at Final Boulevard
Santa Elena Sur, Urbanizacion Santa
Elena, Antiguo Cuscatlan, La Libertad, El Salvador, telephone
(011) 503-278-4444 and fax (011) 503-278-6011
or at its website: http://elsalvador.usembassy.gov/consular2.
Operations, Other Than Mining
Commerce independently and through its partially and wholly-owned
subsidiaries conducted other business
activities, which at present, most are dormant. Previous operations
consisted of the following: (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 diminished its activities
in the business of real estate development conducted principally through its
subsidiaries San Luis Estates, Inc. ("SLE"), a Colorado corporation, and
Universal Developers, Inc. ("UDI"), a Wisconsin corporation. At present, all
activities have ceased.
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),
about 108 miles southeast of the capital city of San Salvador, El Salvador, and
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, on January 14, 2003, entered into a long term lease arrangement.
The Company also leases approximately 166 acres of real estate on which it has
its SCMP and plans to process ore on this site. These facilities are located on
the Pan American Highway, near the City of El Divisadero.
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 was to attempt to acquire or to "roll up" Internet websites and
businesses and consolidate them into a web portal. The Company's attempts to
acquire Internet-related businesses have not been successful, therefore, there
are no activities.
Employees
As of March 31, 2004, the Company and its wholly-owned subsidiaries employed
between 35 and 45 persons, which number may adjust seasonally. The Company also
employs up to four persons, including part-time help, in the United States. None
of the Company's employees are covered by collective bargaining agreements.
Patents, Trademarks, Licenses, Franchises, Concessions & Government Contracts
Other than concessions, licenses and interests in mining properties granted by
governmental authorities and private landowners, the Company does not own any
material patents, trademarks, licenses, franchises or concessions.
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 spot 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.
Item 2. Properties
Mining Properties
The table below provides a summary of the most significant mining properties in
which Commerce Group Corp. or the Joint Venture has an interest. All of the
properties are located in the Republic of El Salvador, Central America. More
detailed information regarding each of these properties is provided in the text
that follows.
Date Amount of Funds to Make Date Mine will be Operational
Property Description Nature of Interest Interest Cost of Interest Property Operational
- -------------------- ------------------ ---------------- --------------------
was Acquired
------------
1. San Sebastian Gold Mine
Mineral concession consisting 1968 5% of the gross precious This is dependent on the It was in operation on a
located two and one-half
of 100% ownership of the metal proceeds or $343 a scale of production curbed production basis from
miles northwest of the city
precious metals extracted from month whichever is that management decides 03/31/95 until December 31,
of Santa Rosa de Lima and the
this mine. higher. to perform. The amount 1999 when operations were
Pan American Highway. of investment could be suspended due to the need to
from $5 million to $100 overhaul, repair, restore and
million. expand the SCMP facilities.
2. San Felipe-El Potosi/Capulin
El Salvador legal counsel is in 07/06/93 5% of the gross precious Undetermined until a Undetermined.
Mine located near the city of
the process of reviewing metal proceeds. preliminary drilling
Potosi, 18 miles northwest of
alternatives to obtain the program is completed;
the city of San Miguel. mineral concession. estimated cost of
drilling is $2 million.
3. Hormiguero Mine located five
Ownership of the tailings. 09/93 The surface use of land Undetermined until a Undetermined.
miles southeast of the San (rent) is to be preliminary drilling
Cristobal Mill and Plant near negotiated. program is completed;
the city of Comacaron. estimated cost of
drilling is $2 million.
Mine surface channel
trenching and adit
cleaning should be
completed to determine
drilling cost.
4. Modesto Mine located near the Application is to be submitted 09/93 On the Company-owned Undetermined until a Undetermined.
city of Paisnal and about 19 for a mineral concession on land it appears as if preliminary drilling
miles north of San Salvador, the real estate owned by the this will be an program is completed;
the capital city. Company to own 100% of the underground operation. estimated cost of
precious metals extracted from Therefore, no cost for drilling is $2 million.
the real estate owned by the interest.
Company.
5. Montemayor Mine located about Application is to be submitted 07/95 It appears that this Undetermined until a Undetermined.
14 miles northeast of SCMP for a mineral concession on the will be an underground preliminary drilling
and about six miles northwest land leased by the Company to mine, therefore current program is completed;
of SSGM. own 100% of the precious metals leases will have to be estimated cost of
extracted from the areas the renegotiated and drilling is $2 million.
Company leases. extended.
6. San Cristobal Mill and Plant
Mill and Plant owned by Joint Equipment Equipment purchased and To expand the plant, Curbed production commenced
located off the Pan American
Venture. The real estate is 02/23/93 extensive retrofitting including a crushing March 1995; expansion program
Highway west of the city of
owned by an agency of the and was and continues to be system to a capacity of in progress. Operations
El Divisadero.
Government of El Salvador. thereafter performed. The 500 tons per day; an suspended on 12/31/99 until
Lease depreciated investment estimated sum of up to the existing equipment is
11/12/93 through 03/31/04 is $3 million may be overhauled, repaired, restored
$4,288,953. required, all dependent and expansion of the SCMP
whether new or used facilities are completed, and,
equipment will be dependent on the price of gold.
purchased.
7. New San Sebastian Gold Mine Exploration concession issued 02/03 Undetermined as Undetermined until Undetermined.
Exploration by the Government of El negotiations will be exploration at an
Concession/License Salvador for 100% ownership of made with the surface estimated cost of $2
consisting of 42 square the precious metals. rights' owners. million is completed.
kilometers.
35
35
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 coastal 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 third 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 (03/31/03)
Contained
Tons Average Grade 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 until the price of
gold is at a level to process it profitably. 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 low grade gold ore than can be processed at the SCMP.
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 reserves. 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
eventually 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 (previously through the 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.)
SSGM Mining Lease
On January 14, 2003, the Company entered into an amended and renewed lease
agreement with Mineral San Sebastian Sociedad Anomina de Capital Variable
(Misanse) pursuant to the approval of the Misanse shareholders and directors at
a shareholders' meeting and thereafter at a directors' meeting both held on
January 12, 2003. The renewed lease is for a period to coincide with the term of
its Renewed SSGM, which it received on August 29, 2003 from the DHM. The lease
is automatically extendible for one or more equal periods. The Company will pay
to Misanse for the rental of this real estate the sum of five percent of the net
sales of the gold and silver produced from this real estate, however, the
payment will not be less than $343.00 per month. The Company has the right to
assign this lease without prior notice or permission from Misanse. This lease is
pledged as collateral for loans made to related parties (Note 7).
Misanse Mineral Concession/License-Government of El Salvador
In El Salvador, the rights to minerals below the sub-surface are vested with the
government. Mineral rights are granted by the government through concessions or
licenses.
On January 27, 1987, the Government of El Salvador 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
required 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 fee has been reduced to two percent
of the gross gold receipts.
Renewed San Sebastian Gold Mine Exploitation Concession/License (Renewed SSGM)
- approximately 1.2306 square kilometers, Department of La Union, El
Salvador, Central America
On September 6, 2002, at a meeting held with the El Salvadoran Minister of
Economy and the DHM, it was agreed to submit an application for the Renewed SSGM
for a 30-year term and to simultaneously cancel the concession obtained on July
23, 1987. On September 26, 2002, the Company filed this application. On February
28, 2003 (received March 3, 2003) the DHM admitted to the receipt of the
application and the Company proceeded to file public notices as required by
Article 40 of the El Salvadoran Mining Law and its Reform (MLIR). On April 16,
2003, the Company's El Salvadoran legal counsel filed with the DHM notice that
it believed that it complied with the requirements of Article 40, and that there
were no objections; and requested that the DHM make its inspection as required
by MLIR Article 42. An inspection by the DHM was made. The Company then provided
a bond which was required by the DHM to protect third parties against any damage
caused from the mining operations, and it simultaneously paid the annual surface
tax. On August 29, 2003 the Office of the Ministry of Economy formally presented
the Company with a twenty-year Renewed SSGM which was dated August 18, 2003.
This Renewed SSGM replaces the collateral that the same parties held with the
previous concession.
New SSGM Exploration Concession/License (New SSGM) - approximately 40.7694
square kilometers
On October 20, 2002, the Company applied for the New SSGM, which covers an area
of 42 square kilometers and includes approximately 1.2306 square kilometers of
the Renewed SSGM. The New SSGM is in the jurisdiction of the City of Santa Rosa
de Lima in the Department of La Union and in the Nueva Esparta in the Department
of Morazan, Republic of El Salvador, Central America. On February 24, 2003, the
DHM issued the New SSGM for a period of four years starting from the date
following the notification of this resolution which was received on March 3,
2003. The New SSGM may be extended for two two-year periods, or for a total of
eight years. Besides the San Sebastian Gold Mine, the following three other
formerly operative gold and silver mines included in the New SSGM are being
explored: the La Lola Mine, the Santa Lucia Mine, and the Tabanco Mine.
Nueva Esparta Exploration Concession/License (Nueva Esparta) - 45 square
kilometers
On or about October 20, 2002, the Company filed an application with the DHM for
the Nueva Esparta, which consists of 45 square kilometers north and adjacent to
the New SSGM. This rectangular area is in the Departments of La Union (east) and
Morazan (west) and in the jurisdiction of the City of Santa Rosa de Lima, El
Salvador, Central America. Included in the Nueva Esparta are eight other
formerly operated gold and silver mines known as: the Grande Mine, the Las Pinas
Mine, the Oro Mine, the Montemayor Mine, the Banadero Mine, the Carrizal Mine,
the La Joya Mine and the Copetillo Mine. The application was denied and
presently is being appealed by the Company.
SSGM Current Status
The Company, through its Joint Venture is conducting the following activities:
It is in the exploration, exploitation, 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 is planning its strategies for the New SSGM in
anticipation of increasing 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 $9 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 (including the existing 1.5 million
ounces) 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
The Company's operations are subject to environmental laws and regulations
adopted by various governmental authorities in the jurisdictions in which the
Company operates. Accordingly, the Company has adopted policies, practices and
procedures in the areas of pollution control, product safety, occupational
health and the production, handling, storage, use and disposal of hazardous
materials to prevent material environmental or other damage, and to limit the
financial liability which could result from such events. However, some risk of
environmental or other damage is inherent in the business of the Company, as it
is with other companies engaged in similar businesses.
The DHM requires environmental permits to be issued in connection with the
application of the Renewed SSGM. The issuance of these permits is under the
jurisdiction of the El Salvador Ministry of Environment and Natural Resources
Office (MARN). On October 15, 2002, MARN issued an environmental permit under
Resolution 474-2002 for the SCMP. On October 20, 2002, MARN issued an
environmental permit under Resolution 493-2002 for the Renewed SSGM Exploitation
area.
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.
San Felipe-El Potosi Mine ("Potosi") and its extension the El Capulin Mine
("El Capulin")
Potosi Location
The Joint Venture had commenced an exploration program on the Potosi property
which is located approximately 18 miles northwest of the city of San Miguel, the
third 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
DHM, 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 this 5,000
acre site. An application for exploration had been filed on September 6, 1993
with the DHM. 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 it decides to resume them.
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 DHM 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 DHM. 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 concession/license for the Montemayor
Mine is included in the Nueva Esparta application filed on October 20, 2002.
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
third 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
Corporacion Salvadorena de Inversiones ("Corsain"), an El Salvadoran
governmental agency, to lease for a period of ten years, approximately 166 acres
of land and buildings on which its gold processing mill, plant and related
equipment (the SCMP) are located, and which is approximately 15 miles west of
the SSGM site. The basic annual lease payment was U.S. $11,500, 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 was subject to increases
based on any United States' inflationary rate adjustments.
On April 26, 2004, a three-year lease, which includes an automatic additional
three-year extension subject to Corsain's review, was executed by and between
Corsain and the Company. This lease is retroactive to November 12, 2003 and the
monthly lease payments are $1,418.51 plus the El Salvadoran added value tax. The
lease is subject to an annual increase based on the U.S. annual inflationary
rate adjustments. The SCMP is strategically located to process ore from other
mining projects.
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 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. On October 15, 2002, an environmental permit (Resolution
474-2002) was issued to the Company by the Office of the El Salvadoran Ministry
of Environment and Natural Resources.
The Joint Venture 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 logged through March 31,
2004. This total does not include the assays that were performed for production
purposes.
Corporate Headquarters
The Company leases approximately 4,032 square feet of office space for its
corporate headquarters on the second floor of the building known as the General
Building located at 6001 North 91st Street, Milwaukee, Wisconsin, at a monthly
rental charge of $2,789 on a month-to-month basis. The lessor is General Lumber
& Supply Co., Inc. ("General Lumber"), a Wisconsin corporation. The Company's
President, Edward L. Machulak, owns 55% of the common stock of General Lumber.
Edward L. Machulak disclaims any interest in the balance of General Lumber
common stock which is owned by two of Mr. Machulak's brothers, his wife, and a
trust for the benefit of his children. In addition, the Company shares
proportionately any increase in real property taxes and any increase in general
fire and extended coverage insurance on the property. In lieu of cash payment,
the Lessor has agreed to apply the monthly rental payments owed to the secured
open-ended, on-demand promissory note(s) due to it.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were brought to a vote of security holders in the last quarter ended
March 31, 2004.
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.
Age as of Executive Offices Held Period Served
Name March 31, 2004 With Company (1) In Office (2)
----- -------------- ---------------- -------------
Edward L. Machulak 77 President, Chief Executive,
Operating and Financial Officer
Treasurer 9/14/62 to present
06/78 to present
Edward A. Machulak 52 Executive Vice President 10/16/92 to present
(Son of the President) Secretary 1/12/87 to present
Assistant Secretary 4/15/86 to 1/12/87
Luis A. Limay 62 Project and Mine Manager 10/86 to 1995
Manager of El Salvador
Operations 03/95 to present
(1) Neither have there been nor are there any arrangements nor understandings
between any Executive Officer and any other person pursuant to which any
Executive Officer was elected as an Executive Officer.
(2) Executive Officers are elected by the Directors for a term expiring at
the Directors' Annual Meeting and/or hold such positions until their
successors have been elected and have qualified.
Family Relationships
Edward A. Machulak, presently a Director, Member of the Directors' Executive
Committee, 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 & Sodos, 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, was the
Treasurer, and as of January 12, 2003, was elected President 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 (son of Edward L. 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, an Internet developer from 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
Since May 5, 1999, the Company's common shares are being traded on the Over the
Counter Bulletin Board (OTCBB) under the symbol CGCO.OB. Prior to this time, the
common shares were traded since 1968 on the Over the Counter, American Stock
Exchange, Boston Stock Exchange and on the Nasdaq Smallcap.
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,
2004 and the highest and lowest trade price during each quarter through the
period ended March 31, 2003.
For the period ended March 31, 2004 March 31, 2003
High Low High Low
First quarter ending June 30 $0.30 $0.15 $0.45 $0.08
Second quarter ending September 30 $0.37 $0.21 $0.29 $0.07
Third quarter ending December 31 $0.31 $0.22 $0.31 $0.10
Fourth quarter ending March 31 $0.30 $0.20 $0.42 $0.14
(b) Approximate Number of Holders of Common Shares
As of March 31, 2004, the common shares were held by approximately 4,000
shareholders; it is estimated that over 95% are United States' residents.
As of March 31, 2004, there were approximately 1,631 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 2,369.
As of March 31, 2004, there were issued and outstanding: (a) 22,681,591
shares of common stock; and (b) 210,000 stock options to purchase common
stock.
(c) Equity Compensation Plans
None.
(d) 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,
2004. 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.
(e) Issue of Securities
During the fourth quarter ended March 31, 2004, the Company issued 69,629 shares
to its Directors in payment for Directors' fees, 31,481 shares for Officer's
compensation; and 13,102 to a Director for services rendered. These shares were
issued pursuant to a Securities and Exchange Commission Form S-8 Registration.
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 31st, were derived from the audited financial
statements and the accompanying notes to those financial statements.
Year Ended March 31
-------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Income statement data
Total revenue $ $ $ $ 242,182 $ 480,615
=========================================================== =============
0 0 38
= = ==
Income (loss) from continuing
operations $ (14,381) $ (35,886) $ (43,171) $ 129,790 $ (396,232)
============= ============= ============= ============= ============
Income (loss) from continuing operations per share:
Basic $ (.0007) $ (.0019) $ (.0026) $ $ (.0326)
============= ============= ============= ========= =============
.0092
Diluted $ (.0007) $ (.0018) $ (.0025) $ $ (.0282)
============= ============= ============= ========= =============
.0086
Weighted average shares - basic 21,089,812 18,907,958 16,349,170 14,174,662 12,172,867
= ========== = ========== = ========== = ========== = ==========
Weighted average shares - diluted 21,299,812 19,867,958 17,019,170 15,094,662 14,053,002
= ========== = ========== = ========== = ========== = ==========
Cash dividends per common share $ $ $ $ $
==============================================================
0 0 0 0 0
= = = = =
Balance sheet data
Working capital*1 $ 504,882 $ 457,538 $ 199,573 $ 152,906 $ 420,963
============= ============= ============= ============= =============
Total assets $35,384,314 $33,251,674 $31,945,434 $30,302,685 $29,856,201
=========== =========== =========== =========== ===========
Short-term obligations*1 $13,981,516 $12,329,096 $11,486,216 $ 9,998,955 $10,231,272
=========== =========== =========== ============ ===========
Long-term obligations $ $ $ $ $
==============================================================
0 0 0 0 0
= = = = =
Shareholders' equity $21,412,798 $20,922,577 $20,459,218 $20,303,730 $19,624,929
=========== =========== =========== =========== ===========
*1 Although the majority of the short-term obligations are due on demand, some
of these obligations have the attributes 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
each of the three years ended March 31, 2004, 2003 and 2002 and the financial
condition, liquidity and capital resources for March 31, 2004 and 2003. The
financial statements of the Company and the notes thereto contain detailed
information that should be referred to in conjunction with this discussion.
Critical Accounting Policies and Estimates
The ensuing discussion and analysis of financial condition and results of
operations are based on the Company's consolidated financial statements,
prepared in accordance with accounting principles generally accepted in the
United States of America and contained within this report on S.E.C. Form 10-K.
Certain amounts included in or affecting the Company's financial statements and
related disclosures must be estimated, requiring that certain assumptions be
made with respect to values or conditions which cannot be made with certainty at
the time the financial statements are prepared. Therefore, the reported amounts
of the Company's assets and liabilities, revenues and expenses, and associated
disclosures with respect to contingent assets and obligations are necessarily
affected by these estimates. The more significant areas requiring the use of
management estimates and assumptions relate to mineral reserves that are the
basis for future cash flow estimates and units-of-production amortization
determination; recoverability and timing of gold production from the
heap-leaching process; environmental, reclamation and closure obligations; asset
impairments (including estimates of future cash flows); useful lives and
residual values of intangible assets; fair value of financial instruments;
valuation allowances for deferred tax assets; and contingencies and litigation.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions.
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.
The Company believes the following significant assumptions and estimates affect
its more critical practices and accounting policies used in the preparation of
its consolidated financial statements.
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.
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 actual costs of compliance
or remediation can be determined, the applicable amount is accrued. Actual costs
can differ from estimates due to changes in laws and regulations, discovery and
analysis of site conditions and changes in technology.
The Company makes certain estimates, which may include various tax planning
strategies, in determining taxable income, the timing of deductions and the
utilization of tax attributes, which can differ from estimates due to changes in
laws and regulations, discovery and analysis of site conditions and changes in
technology.
Management is required to make judgments based on historical experience and
future expectations on the future abandonment cost, net of salvage value, of its
mining properties and equipment. The Company reviews its estimate of the future
obligation periodically and will accrue the estimated obligation based on the
SFAS No. 143 "Account for Asset Retirement Obligations."
From time to time, the Company estimates its ore reserves when it is in
production. There are a number of uncertainties inherent in estimating
quantities of reserves, including many factors beyond the control of the
Company. Ore reserve estimates are based upon engineering evaluations of assay
values derived from samplings of drill holes and other openings. Additionally,
declines in the market price of gold may render certain reserves containing
relatively lower grades of mineralization uneconomic to mine. Further,
availability of permits, changes in operating and capital costs, and other
factors could materially and adversely affect ore reserves. The Company uses its
ore reserve estimates in determining the unit basis for mine depreciation and
closure rates, as well as in evaluating mine asset impairments. Changes in ore
reserve estimates could significantly affect these items.
The Company will assess its producing properties and undeveloped mineral claims
and leases for impairment when events or changes in circumstances warrant and at
least annually. For producing properties and equipment, an impairment is
recognized when the estimated future cash flows (undiscounted and without
interest) expected to result in the use of the asset are less than the carrying
amount of that asset. Measurement of the impairment loss is based on discounted
cash flows. Undeveloped mineral claims and leases are measured on a fair value
basis. Fair value with respect to such mineral interest, pursuant to Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective January 1, 2002, would generally be
assessed with reference to comparable property sales transactions in the market
place.
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS128), Earnings per Share in prior years. SFAS128's objective is to simplify
the computation of earnings per share (EPS) and to make the U.S. standard more
compatible with that of other countries and the International Accounting
Standards Committee. SFAS128 supersedes APB Opinion 15, replacing the
presentation of "primary" and "fully diluted" EPS with "basic" and "diluted"
EPS. Basic EPS is computed by dividing income available to common shareholders
(net income less any dividends declared on preferred stock and any dividends
accumulated on cumulative preferred stock) by the weighted average number of
common shares outstanding. Diluted EPS requires an adjustment to the denominator
to include the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. The numerator
is adjusted to add back any convertible preferred dividends and the after-tax
amount of interest recognized with any convertible debt.
The financial statements for the fiscal years ended March 31, 2004, 2003 and
prior years reflect and include Commerce Group Corp.'s subsidiaries and the
Commerce Group Corp./Sanseb Joint Venture (Joint Venture) on a consolidated
basis. Previously, the Company reported the investment in the Joint Venture as
advances to the Joint Venture and the Company's advances included the interest
earned on these advances in anticipation of the interest being reimbursed. Now
these advances are restated and combined with the Company's Consolidated
Financial Statements. Although the elimination of interest income reduces the
retained earnings, it does not eliminate the interest charged by and earned by
the Company which is due and payable to it and which is maintained additionally
with a separate accounting. At such time when the profits from the gold mining
operation are distributed, the interest earned on these advances will be paid
first to the Company pursuant to an agreement entered into by the joint venture
parties.
For the fiscal year ended March 31, 2004, 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.
Gold Ore Reserves (03/31/04)
The Company's geologists have defined the following San Sebastian Gold Mine gold
ore reserves:
Tons Average Grade Ounces
Virgin ore 14,404,096 0.081 1,166,732
Stope fill estimated 1,000,000 0.340 340,000
-- --------- -- -------
Totals 15,404,096 1,506,732
The estimated recoverable ounces by processing through the San Cristobal
Mill and Plant ranges from 85% to 95%; the recovery of gold from the
heap-leaching operations should range from 60% to 70%.
Precious Metal Mining Strategy
The Joint Venture has produced gold from March 31, 1995 through December 31,
1999. Its San Cristobal Mill and Plant (SCMP) consisted primarily of used
equipment that had been installed at its leased site by a previous mining
company. The used processing equipment was acquired by the Joint Venture on
February 23, 1993, and the SCMP operations were officially suspended as of March
31, 2000. During this period, the price of gold suffered a severe decline.
Although while in operation the Company has on a continuous basis retrofitted,
modified, and restored the equipment, it presently lacks sufficient funds to
perform a major overhaul and to expand the SCMP facilities.
The Company's management has temporarily suspended its gold processing until
such time as it has adequate funds for the retrofitting, rehabilitation,
restoration, overhauling, and most importantly for the expansion of the SCMP
facilities. During the last two fiscal periods, the price of gold has increased
to a level to place the SCMP into a viable position.
The Company has a number of non-exclusive independent consulting agreements for
the purpose of raising the sum of up to U.S. $20 million. The funds are to be
used to purchase and install equipment, perform site development, working
capital for the SSGM open-pit, heap-leaching operation, and for the expansion of
the Joint Venture's SCMP.
Through December 1999, the Joint Venture produced gold on a curbed basis
primarily from processing the tailings and from the virgin ore it was excavating
from its SSGM open pit. The gold was processed at its SCMP facility which is
located approximately 15 miles from the SSGM site. It is contemplating the
installation of a pilot open-pit, heap-leaching gold-processing system on the
SSGM site. The cone crushing system is being erected at this site. It also is
continuing its SSGM site preparation, the expansion of its exploration and
exploitation targets, and the enlargement and development of its gold ore
reserves. The 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 the current level. Dependent on the grade of gold ore processed and the funds
it is able to obtain, it then anticipates producing annually approximately
10,000 ounces of gold from the SCMP operation and eventually up to 113,000
ounces of gold from its SSGM open-pit, heap-leaching operation. The Joint
Venture continues on a limited basis to conduct an exploration program to
develop additional gold ore reserves at the SSGM. Since it has the New SSGM, it
is exploring the Tabanco Mine and the Santa Lucia Mine, and plans to commence
production of gold and silver after funds are available.
The Joint Venture produced gold from March 1995 through December 1999 at the
SCMP through a start-up or preliminary operation, which was a forerunner of its
greater goals. The Company's revenues, profitability and cash flow are greatly
influenced by the price of gold. Gold prices fluctuate widely and are affected
by numerous factors which will be beyond the Company's control, such as,
expectations for inflation, the strength of the U.S. dollar, overproduction of
gold, global and regional demand, acts of terrorism, or political and economic
conditions, or for that matter, many other reasons. The combined effect of these
and other factors is difficult; perhaps impossible to predict. Should the market
price of gold fall below the Company's production costs and remain at such level
for any sustained period, the Company could experience losses.
The Company believes that neither it, nor any other competitor, has a material
effect on the precious metal markets and that the price it will receive for its
production is dependent upon world market conditions over which it has no
control.
Results of Operation for the Fiscal Year Ended March 31, 2004 Compared to
March 31, 2003
- -------------------------------------------------------------------------------
There are no revenues as the Company has suspended its gold production until it
is able to procure the funds it requires to rehabilitate, retrofit, overhaul,
and expand its SCMP and/or when it has funds to commence an open-pit, heap-leach
operation at the SSGM site. The price of gold has stabilized at a price level
that could assure a profitable operation. The Company recorded a net loss of
$14,381 or $.0007 cents per share. This compares to a net loss of $35,886 or
$.0019 cents per share for the fiscal year ended March 31, 2003.
There was no current or deferred provision for income taxes during the fiscal
period ended March 31, 2004 or 2003. 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, 2004 or 2003. The Company does not anticipate that inflation will have
a material impact on continuing operations during the next fiscal year.
Interest expense in the sum of $1,433,298 was recorded by the Joint Venture
during this fiscal period compared to $1,212,976 for the same period in 2003,
and it was eliminated with the interest income earned from the Joint Venture.
Almost all of the costs and expenses incurred by the Company are allocated and
charged to the Joint Venture. The Joint Venture capitalizes 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, 2003 Compared to
March 31, 2002
- -------------------------------------------------------------------------------
There are no revenues as the Company has suspended its gold production until it
is able to procure the funds it requires to rehabilitate, retrofit, overhaul,
and expand its SCMP, when it has funds to commence an open-pit, heap-leach
operation at the SSGM site, and when the price of gold stabilizes at a price
level to assure a profitable operation. The Company recorded a net loss of
$35,886 or $.0019 cents per share. This compares to a net loss of $43,171 or
$.0026 cents per share for the fiscal year ended March 31, 2002.
There was no current or deferred provision for income taxes during the fiscal
period ended March 31, 2003 or 2002. Additionally, even though the Company has
an operating tax loss carryforward, the Company has previously recorded a net
deferred tax asset due to an assessment of the "more likely than not"
realization criteria required by the Statement of Financial Accounting Standards
No. 109, Accounting for Taxes.
Inflation did not have a material impact on operations in the fiscal years ended
March 31, 2003 or 2002. The Company does not anticipate that inflation will have
a material impact on continuing operations during the next fiscal year.
Interest expense in the sum of $1,212,976 was recorded by the Joint Venture
during this fiscal period compared to $1,026,940 for the same period in 2002,
and it was eliminated with the interest income earned from the Joint Venture.
Almost all of the costs and expenses incurred by the Company are allocated and
charged to the Joint Venture. The Joint Venture capitalizes 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.
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, overhaul and expand
the mill to process its gold ore, and at such time that the price of gold will
stabilize at a higher price. After almost five years of 24-hour-per-day
operation with used equipment, the plant requires a major overhaul. At that time
the low price of gold did not provide an adequate cash reserve for these needs.
Additional equipment has to be purchased, delivered and installed.
The Company will endeavor to commence an open-pit, heap-leaching operation at
the SSGM as there is a substantial amount of gold ore that grades less than 0.04
ounces per ton. The Company's engineers had determined that a 2,000 ton-per-day
open-pit, heap-leach, start-up operation may produce 1,280 ounces of gold per
month. It is necessary to raise adequate funds from outside sources for this
operation; the amount required is dependent on the targeted daily volume of
production.
The Company estimates that it will need up to U.S. $17 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
$17,000,000 proceeds is as follows: $8,250,000 for mining equipment and the
completion of erecting a crushing system; $3,783,548 for the processing
equipment and site and infrastructure costs; and a sum of $4,966,452 is to be
used for working capital. The once depressed price of gold has substantially
increased during the last two years. The Company's incredibly low common share
market price is a major deterrent in raising cash for the Company's programs.
The Company continues to be cognizant of its cash liquidity until it is able to
produce adequate profits from its SSGM gold production. It will attempt to
obtain sufficient funds to assist the Joint Venture in placing the SSGM into
production as the anticipated profits from the existing SCMP operation (unless
accumulated over a period of time) appear insufficient to meet the SSGM capital
and the other mining exploration requirements. In order to continue obtaining
funds to conduct the Joint Venture's exploration, exploitation, development,
expansion programs, and the production of gold from the SSGM open-pit,
heap-leaching operation, it is necessary for the Company to obtain funds from
other sources. The Company may have to borrow funds by issuing open-ended,
secured, on-demand or unsecured promissory notes, by selling its shares to its
directors, officers and other interested accredited investors, or by entering
into a joint venture, merging, or developing an acceptable form of a business
combination with other companies.
During the past, the Joint Venture was engaged in exploration, exploitation and
development programs designed to increase its gold ore reserves. The prospects
of expanding the 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 funds during this fiscal
period, which were used to progress the erection of the cone crushing system and
to maintain the SCMP.
The Company continues to rely on its directors, officers, related parties and
others for its funding needs. The Company believes that it may be able to obtain
such short-term and/or equity funds as are required from similar sources as it
has in the past. It further believes that the funding needed to proceed with the
continued exploration of the other exploration targets for the purpose of
increasing its gold ore reserves will be greatly enhanced if the price of gold
continues to increase. These exploration programs will involve airborne
geophysics, stream chemistry, geological mapping, trenching, drilling, etc. The
Joint Venture believes that it may be able to joint venture or enter into other
business arrangements to share these exploration costs with other entities.
From September 1987 through March 31, 2004, the Company has advanced the sum of
$44,295,125 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 $44,885,390. This investment includes the charge of
$27,200,167 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, for
holding costs, and all other related needs.
Recently Issued Accounting Standards
The Company adopted Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN No. 45). FIN No. 45 broadens the
disclosures to be made by the guarantor about its obligations under
certain
guarantees. FIN No. 45 also requires a guarantor to recognize a liability for
the fair value of the obligation undertaken in issuing the guarantee
at the inception of a guarantee. Adoption of FIN No. 45 did not have an impact
on the Company's financial position, results of operations, or cash
flows as of March 31, 2004.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN No. 46)
which provides guidance on the identification and reporting for entities over
which control is achieved through means other than voting rights. FIN No. 46
defines such entities as variable interest entities (VIEs). A FASB Staff
Position issued in October 2003 deferred the effective date of FIN No. 46 to the
first interim or annual period ending after December 15, 2003 for entities
created before February 1, 2003 if certain criteria are met. Subsequently,
during December 2003, the FASB issued a revision to FIN No. 46 (FIN No. 46R)
which replaces the original interpretation. Application of this revised
interpretation is required in financial statements for companies that have
interests in VIEs or potential VIEs commonly referred to as special-purpose
entities created after December 15, 2003. Application for entities created
before January 1, 2004 is required in financial statements for periods ending
after March 15, 2004. The Company believes it has no such variable interest
entities and as a result FIN No. 46 did not have an impact on the Company's
financial position, results of operations, or cash flows for the year then ended
March 31, 2004.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities to amend and clarify financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
The changes in this statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly to achieve
more consistent reporting of contracts as either derivative or hybrid
instruments. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. SFAS No. 149 did not have any impact on the Company's
financial position, results of operations, or cash flows for the year then ended
March 31, 2004.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity providing
guidance regarding classification of freestanding financial instruments as
liabilities (or assets in some circumstances). SFAS No. 150 was originally
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise at the beginning of the first interim period beginning after June
15, 2003, and was to be applied prospectively. However, on October 29, 2003, the
FASB decided to defer the provisions of paragraphs nine and ten of SFAS No. 150
as they apply to mandatorily redeemable non-controlling interests. These
provisions required that mandatorily redeemable minority interests within the
scope of SFAS No. 150 be classified as a liability on the parent company's
financial statements in certain situations, including when a finite-lived entity
is consolidated. The deferral of those provisions is expected to remain in
effect while these interests are addressed in either Phase II of the FASB's
Liabilities and Equity Project or Phase II of the FASB's Business Combinations
Project. The FASB also decided to (i) preclude any "early" adoption of the
provisions of paragraphs nine and ten for these non-controlling interests during
the deferral period; and (ii) require the restatement of any financial
statements that have been issued where those provisions were applied to
mandatorily redeemable non-controlling interests. SFAS No. 150 did not have any
impact on the Company' financial position, results of operations or cash flows,
for the year then ended March 31, 2004.
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. At this time the Company
believes that the impact of this standard should not have any material impact on
the financial statements taken as a whole.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. All provisions of this Statement will be effective when
the occurrence arises. At this time, the Company believes that the adoption of
SFAS No. 143 should not have a material impact on the Company's results of
operations or financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and amends APB No. 30, "Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." This Statement requires that long-lived assets that
are to be disposed of by sale be measured at the lower of book value or fair
value less costs to sell. SFAS No. 144 retains the fundamental provision of SFAS
121 for (a) recognition and measurement of the impairment of long-lived assets
to be held and used and (b) measurement of long-lived assets to be disposed of
by sale. This statement also retains APB No. 30's requirement that companies
report discontinued operations separately from continuing operations. All
provisions of this Statement are effective in the first quarter of 2003. At this
time, the Company believes that the impact of this standard should have no
material impact on the financial statements taken as a whole.
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (SFAS No. 146). SFAS No. 146 is effective for exit or
disposal activities that are initiated after March 31, 2003. This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." At this time, the Company believes that SFAS No. 146 should not
have a material impact on its results of operations or financial position.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN No. 45). FIN No. 45
elaborates on the disclosures to be made by the guarantor about is obligations
under certain guarantees. FIN No. 45 also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. As required by FIN No. 45,
the Company has adopted the disclosure requirements effective March 31, 2003.
The Company believes that the initial recognition and measurement provisions of
FIN No. 45 on a prospective basis for guarantees issued or modified after March
31, 2003 should not have any material impact on its results of operations or
financial position.
Employees
As of March 31, 2004, the Joint Venture employed between 35 and 45 full-time
persons in El Salvador to perform its limited exploration, exploitation, and
development programs; to erect the cone crushing system, to provide 24-hour
seven-day-a-week security at three different sites; to provide engineering,
geology, drafting, and computer-related services; and to handle the
administration of its activities. None of these employees are covered by any
collective bargaining agreements. It has developed a harmonious relationship
with its employees, and it believes that 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, 2004, the Company, and three of its
subsidiaries, have advanced to the Joint Venture $44,885,390. Included in the
total advances is the interest charged to the Joint Venture by the Company which
amounts to $27,200,167 through March 31, 2004. 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 by the Directors and Officers in attempting to secure
funding through various sources, all with the purpose to expand the operations
of the SCMP, to construct an open-pit heap-leach operation at the SSGM site, and
to continue the exploration of its other mining prospects.
The Company, Sanseb, and the Joint Venture consider the past political situation
in the Republic of El Salvador to have been unstable, and believe that the final
peace declaration on December 16, 1992, has put an end to the conflict. Even
though many years have passed, the stigma of the past unfavorable political
status in the Republic of El Salvador 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 Company's stock market price places the
Company in a situation of substantially diluting its common shares in order to
raise equity capital. The Company believes that it will be able to obtain
adequate financing to conduct its operations from the same sources as in the
past. There are no assurances that funds will be available, except at this time,
there is a greater world-wide interest in the ownership of gold. The price of
gold has increased substantially during this past fiscal year which encourages
investors to invest in gold mining companies.
Environmental Regulations
The Company's operations are subject to environmental laws and regulations
adopted by various governmental authorities in the jurisdictions in which the
Company operates. Accordingly, the Company has adopted policies, practices and
procedures in the areas of pollution control, product safety, occupational
health and the production, handling, storage, use and disposal of hazardous
materials to prevent material environmental or other damage, and to limit the
financial liability which could result from such events. However, some risk of
environmental or other damage is inherent in the business of the Company, as it
is with other companies engaged in similar businesses.
The DHM requires environmental permits to be issued in connection with the
application of the Renewed SSGM. The issuance of these permits are under the
jurisdiction of the El Salvador Ministry of Environment and Natural Resources
Office (MARN). On October 15, 2002, MARN issued an environmental permit under
Resolution 474-2002 for the SCMP. On October 20, 2002, MARN issued an
environmental permit under Resolution 493-2002 for the Renewed SSGM Exploitation
area.
Dividends
For the foreseeable future, it is anticipated that the Company will use all of
its earnings to finance its growth and expansion, therefore, dividends will not
be paid to shareholders.
Impact of Inflation
The impact of inflation on the Company has not been significant in recent years
because of the relatively low rates of inflation and deflation experienced in
the United States.
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk
Commodity Prices
When in production, the Company's earnings and cash flow will be significantly
impacted by changes in the market price of gold. Gold prices can fluctuate
widely and are affected by numerous factors, such as demand, production levels,
economic policies of central banks, producer hedging, and the strength of the
U.S. dollar relative to other currencies. During the last five years, the
average annual market price of gold has fluctuated between $270 per ounce and
$375 per ounce. The Company has not been engaged in any hedging contracts
whatsoever.
Foreign Currency
The Company conducts the majority of its operations in the Republic of El
Salvador, Central America. Currently, El Salvador is on the U.S. dollar
system, and therefore all receipts and expenditures since January 1, 2001 are
in U.S. dollars.
Cautionary Statement For Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Some of the statements contained in this report are forward-looking statements,
such as estimates and statements that describe the Company's future plans,
objectives or goals, including words to the effect that the Company or
management expects a stated condition or result to occur. Since forward-looking
statements address future events and conditions, by their very nature, they
involve inherent risks and uncertainties. Actual results in each case could
differ materially from those currently anticipated in such statements by reason
of factors such as production at the Company's mines, changes in operating
costs, changes in general economic conditions and conditions in the financial
markets, changes in demand and prices for the products the Company produces,
litigation, legislative, environmental and other judicial, regulatory, political
and competitive developments in areas in which the Company operates and
technological and operational difficulties encountered in connection with
mining. Many of these factors are beyond the Company's ability to control or
predict. The Company disclaims any intent or obligation to update its
forward-looking statements, whether as a result of receiving new information,
the occurrence of future events, or otherwise.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
And Supplementary Financial Data
Page
Report of Independent Public Accountant........................................................................37
Financial Statements:
Consolidated Balance Sheets, Years Ended March 31, 2004 and 2003...............................................38
Consolidated Statements of Operations, Years Ended March 31, 2004, 2003 and 2002...............................39
Consolidated Statements of Changes in Shareholders' Equity
Years Ended March 31, 2004, 2003 and 2002....................................................................40
Consolidated Statements of Cash Flows, Years Ended March 31, 2004, 2003 and 2002...............................41
Notes to Consolidated Financial Statements.....................................................................43
Supplementary Financial Data:
Report of Independent Accountant on the Financial Statement Schedules..........................................68
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.
In my opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholders' equity
and
cash flows present fairly, in all material respects, the financial position of
Commerce Group Corp., its subsidiaries, and the Commerce/Sanseb Joint Venture
at March 31, 2004 and 2003, and the results of all operations and cash flows for
each of the three years in the period ended March 31, 2004 in conformity
with accounting principles generally accepted in the United States of
America. 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 of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that I plan and perform the audit to obtain reasonable
assurance about 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, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. I believe that my audits provide
a reasonable basis for my opinion.
Bruce Michael Redlin, CPA, LLC
Certified Public Accountant
West Allis, Wisconsin
May 10, 2004
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Balance Sheets--March 31
2004
----------------
2003
----
ASSETS
Current assets
Cash $ 30,348 $ 28,004
Investments 219,098 194,578
Accounts receivable 608,669 608,212
Inventories 39,562 39,562
Prepaid items and deposits 95,794 41,901
--------- ------ ---------------
Total current assets 993,471 912,257
Real estate 0 23,336
Property, plant and equipment, net 4,288,953 4,280,912
Mining resources investment 30,111,890 28,035,169
-- ---------- -- ----------
Total assets $35,394,314 $33,251,674
=========== ===========
LIABILITIES
Current liabilities
Accounts payable $ 488,589 $ 454,719
Notes and accrued interest payable to related parties 9,400,682 8,027,380
Notes and accrued interest payable to others 247,579 225,922
Accrued salaries 2,871,128 2,672,415
Accrued legal fees 327,015 326,941
Other accrued expenses 646,523 621,719
------- ------- --------------
Total liabilities 13,981,516 12,329,096
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
2004-none; 2003-none 0 0
Common stock, $0.10 par value: Authorized 50,000,000 shares; Issued and
outstanding:
2004-22,681,591 2,268,159
2003-20,407,429 2,040,743
Capital in excess of par value 19,274,597 18,997,412
Retained earnings (deficit) (129,958) (115,577)
----- --------- --------------
Total shareholders' equity 21,412,798 20,922,578
-- ---------- -- ----------
Total liabilities and shareholders' equity $35,394,314 $33,251,674
=========== ===========
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
2004 2003 2002
---- ---- ----
Revenues: 0 0 0
Expenses:
General and administrative 14,381 35,886
--------------- ----- ------
43,209
Total expenses 14,381 35,886 43,209
Other income:
El Salvador added value tax refund 0
--------------- ----------------
0 38
- --
Other income 0
--------------- ----------------
0 38
- --
Net profit (loss) $ (14,381) $ (35,886) $ (43,171)
Credit (charges) for income taxes 0
--------------- ----------------
0 0
- -
Net income (loss) after income tax credit (charge) $ (14,381) $ (35,886) $ (43,171)
=========== =========== ===========
Net income (loss) per share basic $ (.0007) $ (.0019) $ (.0026)
============ ============ ============
Net income (loss) per share diluted $ (.0007) $ (.0018) $ (.0025)
============ ============ ============
Weighted av. common shares outstanding 21,089,812 18,907,958 16,349,170
========== ========== ==========
Weighted av. diluted common shares 21,299,812 19,867,958 17,019,170
========== ========== ==========
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, 2004, 2003 and 2002
Common Stock
-----------------------------------------------------
Capital in Retained
Number of Excess of Earnings
Par Par Value (Deficit)
Shares Value
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)
Net income (loss) for FY March 31, 2003 (35,886)
Dir./off./employee/services comp. 693,221 69,322 85,848
Payment of debt 1,435,200 143,520 85,805
Cash 811,000 81,100 33,650 ________
----- ------- ------- ------ ---------------
Balances March 31, 2003 20,407,429 $2,040,743 $18,997,412 $(115,577)
Net income (loss) for FY March 31, 2004 (14,381)
Dir./off./employee/services comp. 630,862 63,086 92,014
Payment of debt 928,300 92,830 138,657
Stock options exercised 230,000 23,000 6,500
Cash 485,000 48,500 63,350
Reduce asset account _________ _________ (23,336) ________
------ --------
Balances March 31, 2004 22,681,591 $2,268,159 $19,274,597 $(129,958)
========== ========== =========== ==========
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
2004 2003 2002
------------- --------- ---- -------- ----
Operating activities:
Net income (loss) $ (14,381) $ (35,886) $ (43,171)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation 0 0 0
Changes in assets and liabilities
Decrease (increase) in account receivables and investments (24,977) (296,936) 1,680
Decrease (increase) in prepaid items and deposits (53,893) (16,854) 8,934
Increase (decrease) in accounts payable and accrued liabilities 58,750 58,915 (54,183)
Increase (decrease) in accrued salaries 198,713 196,650 187,750
Increase (decrease) in accrued legal fees 12,138 6,518
--------------------- ------ -------- -----
0
Total adjustments 178,593 (46,087) 150,699
----- ------- --- -------- ---- -------
Net cash provided by (used in) operating activity 164,212 (81,973) 107,528
Investing activities:
Investment in mining resources (2,061,426) (1,003,527) (1,638,682)
----------- ----------- -----------
Total (2,061,426) (1,003,527) (1,638,682)
Financing activities:
Net borrowings 1,394,958 575,177 1,347,174
Common stock issued 504,600 499,246 198,660
---- ------- ---- ------- ---- -------
Net cash provided by (used in) financing activities 1,899,558 1,074,423 1,545,834
Net increase (decrease) in cash and cash equivalents 2,344 (11,077) 14,680
Cash - beg. of year 28,004 39,081 24,401
------ ------ ------ ------ ------ ------
Cash - end of year $ 30,348 $ 28,004 $ 39,081
=========== =========== ===========
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:
Year Ended
March 31, 2004 March 31, 2003
-------------- --------------
A. Cash information Shares $ Amount Shares $ Amount
1. Accrued interest capitalized 0 $1,433,298 0 $1,212,976
2. Interest expense paid in cash 0 0 0 0
3. Income taxes paid 0 0 0 0
B. Non cash investing and financing
Common stock issued for:
1. Director fees, officer compensation,
employee benefits and services 630,862 $155,100 693,221 $155,170
2. Accruals: salaries, legal and
consulting fees 0 234,789 0 244,788
3. Equipment lease or purchases 0 0 0 0
C. Other supplemental disclosures
1. Investments consist of securities held by Commerce for the Commerce
Group Corp. Employee Benefit Account, which are stated at cost. Also
included
are the precious stones and jewelry inventory stated at cost.
2. The accounts receivable consist of advances to Mineral San Sebastian
S.A. (Misanse), which is 52% owned by the Company. These advances will be an
offset for the Misanse rental charges that are included in the
accounts payable.
3. Inventory consists of consumable items used in processing gold ore,
which are stated at the average cost.
The accompanying notes are an integral part of these consolidated financial
statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Notes to the Consolidated Financial Statements
March 31, 2004
(1) The Company and Basis of Presentation of Financial Statements
(a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant")
and its 82 1/2%-owned subsidiary, San Sebastian Gold Mines, Inc. ("Sanseb")
both
United States' corporations, have formed the Commerce/Sanseb Joint Venture
("Joint Venture") for the purpose of performing gold mining and
related
activities, including, but not limited to, exploration, exploitation,
development, extraction and processing of precious metals in the Republic of El
Salvador, Central America. Gold bullion, currently the Joint
Venture's principal product, was produced (but not on a full production
basis) in El
Salvador and refined and sold in the United States. Expansion of
exploration is a goal at the San Sebastian Gold Mine ("SSGM") which is
located near
the city of Santa Rosa de Lima. Expanded exploration is being
curtailed at other mining projects until adequate funding is obtained under
satisfactory
terms and conditions. All of the mining projects are located in the
Republic of El Salvador, Central America.
On March 3, 2003, the Company received an exploration license dated
February 24, 2003, for the exploration of minerals in an area encompassing
the
SSGM, consisting of 42 square kilometers, which is hereafter referred to
as the "New SSGM Exploration Concession/License" or the "New SSGM." This
expanded area provides the Company with an opportunity to increase its
gold and silver ore reserves. Included in this area are three formerly-operated
gold and silver mines: the La Lola Mine, the Santa Lucia Mine and the
Tabanco Mine.
As of March 31, 2000 the Joint Venture had temporarily suspended the San
Cristobal Mill and Plant ("SCMP") operations (operations ceased on December
31, 1999) until such time as it has adequate funds to retrofit,
rehabilitate, restore and expand these facilities and until there is
certainty that the
price of gold will be stabilized at the current or a higher selling price.
The Joint Venture plans to begin its open-pit, heap-leaching process on
the SSGM site when adequate funding becomes available, and if the price of gold
maintains the current price level. It also plans to continue its SSGM
site preparation, the expansion of its exploration and exploitation targets,
and
the enlargement and development of its gold ore reserves. Furthermore,
it plans to explore the potential of other gold mine exploration prospects in
El Salvador. Concurrently, it is in the process of obtaining
necessary funding for each of these separate programs while its Joint
Venture is
performing minor retrofit and rehabilitation work at the SCMP. It
commenced an exploration program on the New SSGM.
(b) Basis of presentation:
Management estimates and assumptions:
Certain amounts included in or affecting the Company's financial
statements and related disclosures must be estimated, requiring that certain
assumptions be made with respect to values or conditions which cannot be
made with certainty at the time the financial statements are prepared.
Therefore, the reported amounts of the Company's assets and liabilities,
revenues and expenses, and associated disclosures with respect to contingent
assets and obligations are necessarily affected by these estimates.
The Company evaluates these estimates on an ongoing basis, utilizing
historical
experience, consultation with experts, and other methods considered
reasonable in the particular circumstances. Nevertheless, actual results may
differ significantly from the Company's estimates.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Notes to the Consolidated Financial Statements (Continued)
March 31, 2004
(2) Significant Accounting Policies
Consolidated Statements
The Joint Venture and the following subsidiaries are all majority-owned by
the Company and are included in the consolidated financial statements of the
Company. All significant intercompany balances and transactions have been
eliminated.
Charter/Joint Venture
% Ownership Place Date
Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0 El Salvador 05/08/1960
Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974
San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968
Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0 Wisconsin & 09/22/1987
El Salvador
Investments
The investments consist of recently acquired securities held for the Commerce
Group Corp. Employee Benefit Account, and are stated at cost.
The precious
stones included in the investment account are stated at cost.
Accounts Receivable
The accounts receivable primarily consists of the advances to Misanse, a
52%-owned subsidiary, which will be offset for the Misanse rental charges
included
in the accounts payable.
Intercompany Balances
All significant intercompany balances and transactions have been eliminated.
Inventory
Inventory consists of consumable supplies and are stated at cost, which is lower
than the market value.
Deferred Mining Costs
The Company, in order to avoid expense and revenue unbalance, capitalizes all
costs directly associated with acquisition, exploration and development of
specific properties, until these properties are put into operation, sold or are
abandoned. Gains or losses resulting from the sale or abandonment of mining
properties will be included in operations. The Joint Venture capitalizes
its costs and expenses and will write off these cumulative costs on a units
of
production method at such time as it begins producing gold derived from the
virgin gold ore on a full production basis. If the prospect of gold production,
due to different conditions and circumstances becomes unlikely, all of these
costs may be written off in the year that this occurs.
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 is recognized when delivery has occurred, title
and risk of loss passes to the buyer, and collectability is reasonably assured.
Gold sales are made in accordance with sales contracts where the price
is fixed or determinable.
Property, Plant and Equipment
Property, plant, and equipment is stated at the lower of cost or estimated
net realizable value. Mining properties, development costs and plant and
equipment will be depreciated when full production takes place using the
units of production method based upon proven and probable reserves. Until
the
Company suspended its mining operations, the assets were depreciated using the
straight-line method over estimated useful lives ranging from three to ten
years. Depreciation and amortization expenses include the amortization
of assets acquired, if any, under capital leases. Replacements and major
improvements are capitalized. When in operation, maintenance and repairs
will be charged to expense based on average estimated equipment usage. Interest
costs incurred in the construction or acquisition of property, plant, and
equipment are capitalized and amortized over the useful lives of the related
assets. Since the Company suspended its gold processing operations as of March
31, 2000, it also ceased to depreciate its fixed assets.
Mineral Exploration and Development Costs
Significant property acquisition payments for active exploration properties are
capitalized. If no minable ore body is discovered, previously capitalized costs
are expensed in the period the property is abandoned. Expenditures for the
development of new mines, to define further mineralization at and adjacent to
existing ore bodies, and to expand the capacity of operating mines, are
capitalized and amortized on the units of production basis over proven and
probable reserves.
Recently Issued Accounting Standards
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and
reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. All provisions of this Statement will be effective when
the occurrence arises. At this time, the Company
believes that the adoption of SFAS No. 143 should not have a material
impact on the
Company's results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and amends APB No. 30, "Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." This Statement requires that long-lived assets that
are to be disposed of by sale be measured at the lower of book value or fair
value less costs to sell. SFAS No. 144 retains the fundamental provision of SFAS
121 for (a) recognition and measurement of the impairment of long-lived assets
to be held and used and (b) measurement of long-lived assets to be disposed of
by sale. This statement also retains APB No. 30's requirement that companies
report discontinued operations separately from continuing operations. All
provisions of this statement are effective in the first quarter of 2003. At this
time, the Company believes that the impact of this standard should have no
material impact on the financial statements taken as a whole.
In December 2002, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation -
Transition and Disclosure (SFAS No. 148). SFAS No. 148, amends SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), to provide alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, SFAS
No. 148
amends the disclosure requirement of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The amendments to SFAS No. 123 are
effective for
financial statements for fiscal years ending after December 15, 2002. As the
Company accounts for stock-based employee compensation using the intrinsic
value method in accordance with APB No. 25, Accounting for Stock Issued to
Employees, the Company has adopted the disclosure requirements of SFAS No.
148,
effective April 1, 2003.
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 the provisions of Statement of Financial Accounting
Standards No. 128 (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. Reference is made to the
computations included in the Consolidated Statements of Operations.
If on March 31, 2004, the 210,000 option shares were added to the weighted
number of shares which amount to 21,089,812 common shares issued and
outstanding, then the total number of fully diluted shares amount to 21,299,812.
The loss per share for this period ended March 31, 2004 is $.0007 cents per
share. The same assumptions were used for the same 2003 fiscal period.
Foreign Currency
The Company conducts the majority of its operations in the Republic of El
Salvador, Central America. Currently, El Salvador is on the U.S. dollar
system and
therefore all receipts and expenditures since January 1, 2001 are 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, 2004 March 31, 2003
--------------------------------------------------------------------------------------------------------
Accumulated Accumulated
Cost Depreciation Net Cost Depreciation Net
Mineral Properties and
Deferred Development $30,111,891 $30,111,891 $28,035,169 $28,035,169
Property, Plant and
Equipment 6,541,095 2,252,143 4,288,952 6,533,055 2,252,143 4,280,912
------------- -- --------- ------------- ------------- -- --------- -------------
$36,652,986 $2,252,143 $34,400,843 $34,568,224 $2,252,143 $32,316,081
=========== ========== =========== =========== ========== ===========
Vehicles, office, mining and laboratory equipment, buildings, etc. are stated at
cost and are depreciated using the straight-line method over estimated useful
lives of three to ten years. Maintenance and repairs are charged to expense as
incurred. Since the Joint Venture suspended operations 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 drilling; and analysis to demonstrate the ore is
commercially recoverable), estimated future gold price realization (considering
historical and current prices, price trends and related factors); and operating,
capital and site restoration costs. Reduction in the carrying value of property,
plant and equipment, with a corresponding charge to income, are recorded to the
extent that the estimated future net cash flows are less than the carrying
value.
(4) Commerce/Sanseb Joint Venture ("Joint Venture")
The Company is in a joint venture with and owns 82 1/2% of the total common
stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada chartered (1968)
corporation. The balance of Sanseb's stock is held by approximately 180
non-related shareholders, including the President of the Company who owns 2,073
common shares. Sanseb was formed in 1968 to explore, exploit, research, and
develop adequate gold reserves. Sanseb produced gold from the SSGM from 1972
through February 1978.
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, 2004, the Company's investments, including charges for interest
expense to the Joint Venture, were $44,295,125 and three of the Company's
subsidiaries' advances were $590,265 for a total of $44,885,390.
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, 2004 and 2003, the Company, Sanseb and three of the Company's
subsidiaries have invested (including carrying costs) the following in its
Joint Venture:
2004 2003
---- ----
The Company's advances (net of gold sale proceeds) since 09/22/87 $44,295,125 $40,181,015
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
36,340,906 34,160,023
Total: 87,652,391 81,357,398
Advances by the Company's three subsidiaries 590,265 590,265
------- ------- --------------
Combined total investment $88,242,656 $81,947,663
=========== ===========
SSGM Activity
The Company had no significant activity at the SSGM site from February 1978
through January 1987. The present status is that, the Company, since January
1987, and thereafter, the Joint Venture, since September 1987, have completed
certain of the required mining pre-production preliminary stages in the minable
and proven gold ore reserve area, and the Company is active in attempting to
obtain adequate financing for the proposed open-pit, heap-leaching operations at
the SSGM. The Joint Venture plans to resume its exploration and expansion
program to develop additional gold ore reserves in the area surrounding the
minable gold ore reserves. Presently, it is erecting its cone crushing system
and performing minor rehabilitation repairs to its San Cristobal Mill and Plant.
On March 3, 2003, the Company received the New SSGM from the Ministry of
Economy's Director of El Salvador Department of Hydrocarbons and Mines (DHM)
which includes and encompasses the existing SSGM, and is in the process of
exploring three of the formerly operated gold mines.
Mineral San Sebastian S.A. de C.V. ("Misanse")
(a) Misanse Corporate Structure
The SSGM real estate is owned by and leased to the Joint Venture by Misanse, a
Salvadoran-chartered corporation. The Company owns 52% of the total of Misanse's
issued and outstanding shares. The balance is owned by approximately 100 El
Salvador, Central American, and United States' citizens.
(b) SSGM Mining Lease
On January 14, 2003, the Company entered into an amended and renewed 30-year
lease agreement with Mineral San Sebastian Sociedad Anomina de Capital Variable
(Misanse) pursuant to the approval of the Misanse shareholders and Misanse
directors at a meeting held on January 12, 2003. The renewed lease is for a
period of thirty (30) years commencing on the date that the Company received its
Renewed San Sebastian Gold Mine Exploitation Concession/License, hereinafter
identified as the "Renewed SSGM," from the DHM. The lease is automatically
extendible for one or more equal periods. The Company will pay to Misanse for
the rental of this real estate the sum of five percent of the net sales of the
gold and silver produced from this real estate, however, the payment will not be
less than $343.00 per month. The Company has the right to assign this lease
without prior notice or permission from Misanse. This lease is pledged as
collateral for loans made to related parties (Note 7).
(c) Mineral Concessions/Licenses
Renewed San Sebastian Gold Mine Exploitation Concession/License (Renewed SSGM)
- approximately 1.2306 square kilometers, Department of La Union, El Salvador,
Central America
On September 6, 2002, at a meeting held with the El Salvadoran Minister of
Economy and the DHM, it was agreed to submit an application for the Renewed SSGM
for a 30-year term and to simultaneously cancel the concession obtained on July
23, 1987. On September 26, 2002, the Company filed this application. On February
28, 2003 (received March 3, 2003) the DHM admitted to the receipt of the
application and the Company proceeded to file public notices as required by
Article 40 of the El Salvadoran Mining Law and its Reform (MLIR). On April 16,
2003, the Company's El Salvadoran legal counsel filed with the DHM notice that
it believed that it complied with the requirements of Article 40, and that there
were no objections; and requested that the DHM make its inspection as required
by MLIR Article 42. The Company then provided a bond which was required by the
DHM to protect third parties against any damage caused from the mining
operations, and it simultaneously paid the annual surface tax. On August 29,
2003 the Office of the Ministry of Economy formally presented the Company with a
twenty-year Renewed SSGM which was dated August 18, 2003. This Renewed SSGM
replaces the collateral that the same parties held with the previous concession.
New SSGM Exploration Concession/License (New SSGM) - approximately 40.7694
square kilometers
On October 20, 2002, the Company applied for the New SSGM, which covers an area
of 42 square kilometers and includes approximately 1.2306 square kilometers of
the Renewed SSGM. The New SSGM is in the jurisdiction of the City of Santa Rosa
de Lima in the Department of La Union and in the Nueva Esparta in the Department
of Morazan, Republic of El Salvador, Central America. On February 24, 2003, the
DHM issued the New SSGM for a period of four years starting from the date
following the notification of this resolution which was received on March 3,
2003. The New SSGM may be extended for two two-year periods, or for a total of
eight years. Besides the San Sebastian Gold Mine, three other formerly operative
gold and silver mines known as the La Lola Mine, the Santa Lucia Mine, and the
Tabanco Mine are included in the New SSGM and are being explored. The Company
has complied as required by filing its annual activity report and it paid the
annual surface tax.
Nueva Esparta Exploration Concession/License (Nueva Esparta) - 45 square
kilometers
On or about October 20, 2002, the Company filed an application with the DHM for
the Nueva Esparta, which consists of 45 square kilometers north and adjacent to
the New SSGM. This rectangular area is in the Departments of La Union (east) and
Morazan (west) and in the jurisdiction of the City of Santa Rosa de Lima, El
Salvador, Central America. Included in the Nueva Esparta are eight other
formerly operated gold and silver mines known as: the Grande Mine, the Las Pinas
Mine, the Oro Mine, the Montemayor Mine, the Banadero Mine, the Carrizal Mine,
the La Joya Mine and the Copetillo Mine. The application was denied and
presently is being appealed by the Company.
El Salvador Mineral Production Fees
As of July 2001, a series of revisions to the El Salvador Mining Law offer to
make exploration more economical. The principal change is that the fee has been
reduced to two percent of the gross gold and silver receipts. The Company
believes that it is in compliance with the new law, and plans to file
applications for all of the mining concessions in which it has an interest.
SCMP Land and Building Lease
On November 12, 1993, the Joint Venture entered into an agreement with
Corporacion Salvadorena de Inversiones ("Corsain"), an El Salvadoran
governmental agency, to lease for a period of ten years, approximately 166 acres
of land and buildings on which its gold processing mill, plant and related
equipment (the SCMP) are located, and which is approximately 15 miles west of
the SSGM site. The basic annual lease payment was U.S. $11,500, 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 was subject to increases
based on any United States' inflationary rate adjustments.
On April 26, 2004, a three-year lease, which includes an automatic additional
three-year extension subject to Corsain's review, was executed by and between
Corsain and the Company. This lease is retroactive to November 12, 2003 and the
monthly lease payments are $1,418.51 plus the El Salvadoran added value tax. The
lease is subject to an annual increase based on the U.S. annual inflationary
rate adjustments. The SCMP is strategically located to process ore from other
mining projects.
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 previously leased approximately 175 acres in the Department of
Morazan in the Republic of El Salvador. The Company also leases on a
month-to-month basis approximately 4,032 square feet of office space in
Milwaukee, Wisconsin.
(6) Notes Payable and Accrued Interest
03/31/04 03/31/03
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 Misanse lease, real estate and all other assets owned
by the Company, its subsidiaries and the Joint Venture as collateral. (Note 7)
$9,400,682 $8,027,380
Other
Short-term notes and accrued interest (March 31, 2004, $112,578 and March 31,
2003, $90,922) 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.
247,579 225,922
----- ------- ----- -------
Total: $9,648,261 $8,253,302
(7) Related Party Transactions
The Company, in an attempt to preserve cash, had prevailed on its President
to accrue his salary for the past 23 years, including vacation pay, for a total
of $2,815,265.
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, 2004:
The amount of cash funds which the Company has borrowed from its President from
time to time, together with accrued interest, amounts to $6,565,817. To evidence
this debt, the Company has issued to its President a series of open-ended,
secured, on-demand promissory notes, with interest payable monthly at the prime
rate plus two percent, but not less than 16% per annum.
The Company had borrowed an aggregate of $915,066, including accrued interest,
from the Company's President's Rollover Individual Retirement Account (ELM
RIRA). These loans are evidenced by the Company's open-ended, secured, on-demand
promissory note, with interest payable monthly at the prime rate plus four
percent per annum, but not less than 16% per annum.
On December 17, 2003, in order to reduce the Company's debt and to provide
liquidity to the ELM RIRA, the Company sold to the ELM RIRA, 200,000 of its
restricted common shares at a price of $.25 each for a total of $50,000. The
sale price of the common shares was no less favorable than the sales price
negotiated with unrelated third parties.
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, 2004:
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 $1,262,390; the annual interest rate is
four percent
plus the prime rate, but not less than 16%, and it is payable monthly.
On June 30, 2001, GLSCO purchased 250,000 restricted common shares at a price of
$.15 per share and it received options to purchase 250,000 common shares on or
before July 2, 2003, at a price of $.25 per share. On June 24, 2003, GLSCO
exercised its option right to purchase these shares. The terms of this
transaction are no less favorable than those obtained from unrelated third
parties.
On December 17, 2003, in order to reduce debt, and in consideration for
cancellation of $115,900 of debt owed to GLSCO, the Company sold to GLSCO
436,600 of
its restricted common shares, $.10 par value, at a price of $.25 a share.
The Company's Directors have consented and approved the following transactions
of which the status of each are reflected as of March 31, 2004:
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 $503,581
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 the 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
$327,600 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 $327,015 for 1,767.65 hours of legal services
rendered from July 1980 through March 31, 2004. By agreement on the date of
payment, these fees are to be adjusted to commensurate with the hourly fees
charged by the Law Firm.
The son of the President and his son's wife have the Company's open-ended,
on-demand promissory note in the sum of $153,828 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 101,110 common shares valued at $.27 a share
in lieu of any cash compensation for all amounts due to them as of March 31,
2004. In addition, during this period one Director received 39,752 of the
Company's common shares for consulting services valued at $10,200. The
Chairman/President does not receive any 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. When full production commences, these capitalized costs will be
charged as an expense based on a per unit 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
2004 2003
---- ----
Interest Charges Interest Charges
Total Advances Total Advances
Beginning balances $40,181,015 $23,751,735 $36,729,923 $20,448,289
March 31, 2004 advances 4,114,110 3,448,432 3,451,092 3,303,446
--- --------- ---- --------- ---- --------- ---- ---------
Total Company advances 44,295,125 27,200,167 40,181,015 23,751,735
Advances by three of the Company's
subsidiaries 590,265 590,265
------- ------- ------------------------- -------
0 0
- -
Total net advances March 31, 2004 $44,885,390 $27,200,167 $40,771,280 $23,751,735
=========== =========== =========== ===========
(8) Commitments
Reference is made to Notes 2, 4, 5, 6, 7, 10 and 12.
(9) Income Taxes
At March 31, 2003, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of approximately
$5,063,150 which may be carried forward to offset future taxable income; the net
operating losses expire at various times to the year of 2018.
(10) Description of Securities
a. Common Stock
The Company's Wisconsin Certificate of Incorporation effective as of April 1,
1999 authorizes the issuance of 50,000,000 shares of common stock, $0.10 par
value per share of which 22,681,591 shares were issued and outstanding as of
March 31, 2004. 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, 2004 or 2003.
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:
03/31/04 03/31/03 03/31/02
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Option Average Option Average Option Shares Average
Shares Price Shares Price Price
Outstanding, beg. yr. 960,000 $0.21 670,000 $0.22 920,000 $1.27
Granted 290,000 $0.19 520,000 $0.25
Exercised (500,000) N/A 0 N/A 0 N/A
Forfeited (60,000) N/A 0 N/A (500,000) N/A
Expired (190,000) N/A 0 N/A (270,000) N/A
--------- --- ------------ --- --------- ---
Outstanding, end of yr. 210,000 $0.23 960,000 $0.21 670,000 $0.22
=== ======= ===== ======= ===== === ======= =====
A summary of the outstanding stock options as of March 31, 2004, follows:
Weighted Average
Range of Exercise Amount Remaining Contractual Weighted Average
Prices Outstanding Life Exercise Price
Up to $2.99 210,000 .3589 years $0.23
There were no options issued to any Director, Officer, or employee.
d. Stock Rights - To The President
Reference is made to Note 7, Related Party Transactions, of the Company's
financial statements which disclose the terms and conditions of the share loans
to the Company by the President and the interest which is payable to him by the
Company's issuance of its restricted common shares.
Any share interest payable to the President is for shares loaned to the Company
and/or for such shares loaned or pledged for collateral purposes, or for unpaid
interest, from time to time, all in accordance with the terms and conditions of
Director-approved, open-ended loan agreements dated June 20, 1988, October 14,
1988, May 17, 1989 and April 1, 1990.
e. Share Loans - Others
A series of borrowings of the Company's common shares were made from time to
time under the provision that the owners would sell said shares as the Company's
designee, with the proceeds payable to the Company. In exchange, the Company
agreed to pay these shares loaned within 31 days or less by issuing its
restricted common shares, together with interest payable in restricted common
shares payable at a negotiated rate of interest normally payable in advance for
a period of one year. As of March 31, 2004, there were no shares due to other
parties for shares borrowed or for interest payment.
f. S.E.C. Form S-8 Registration
On May 25, 2001, the Company filed its fourth Securities and Exchange Commission
Form S-8 Registration Statement No. 333-61650 under the Securities Act of 1933,
and it registered 1,500,000 of the Company's $0.10 par value common shares for
the purpose of distributing shares pursuant to the plan contained in such
registration. All of the 1,500,000 shares were issued as of March 31, 2003.
On June 10, 2002, the Company filed its fifth Securities and Exchange Commission
Form S-8 Registration Statement No. 333-90122 under the Securities Act of 1933,
and it registered 1,500,000 of the Company's $0.10 par value common shares for
the purpose of distributing shares pursuant to the plan contained in such
registration. From the 1,500,000 shares registered 682,459 shares were issued,
and 817,541 shares remain to be issued as of March 31, 2004.
g. Commerce Group Corp. Employee Benefit Account (CGCEBA)
This account was established for the purpose of compensating the Company's
employees for benefits such as retirement, severance pay, and all other related
compensation that is mandatory under El Salvadoran labor regulations, and/or as
determined by the Officers of the Corporation. The Directors provide the
Officers of the Company with the authority to issue its common shares to the
CGCEBA on an as needed basis. Under this plan, payment can be made to any
employee of the Company or the Company's subsidiaries. The CGCEBA has sold some
of the shares issued to this account from time to time to meet its obligations
to its El Salvadoran employees. As of April 1, 2003, 321,000 shares remained in
the account. An additional 350,000 shares were issued and 286,000 shares were
sold, leaving a balance of 385,000 shares as of March 31, 2004.
(11) Litigation
There is no known pending litigation.
(12) Certain Concentrations and Concentrations of Credit Risk
The Company is subject to concentrations of credit risk in connection with
maintaining its cash primarily in two financial institutions for the amounts in
excess of levels. One is insured by the Federal Deposit Insurance Corporation.
The other is an El Salvadoran banking institution which the Company uses to pay
its El Salvadoran expenses and obligations. The Company considers the U.S.
institution to be financially strong and does not consider the underlying risk
at this time with its El Salvadoran bank to be significant. To date, these
concentrations of credit risk have not had a significant effect on the Company's
financial position or results of operations.
The Company, when it produced gold and silver, sold its gold and silver
production predominantly to one customer. Given the nature of the commodities
being sold, and because many other potential purchasers of gold and silver
exist, it is not believed that the loss of such customer would adversely affect
the Company.
The Company is not subject to credit risk in connection with any hedging
activities as it has not hedged any of its gold production. If the Company
changes its policies, then it will only use highly-rated credit worthy
counterparties, therefore it should not anticipate non-performance.
(13) Commitments and Contingencies
Environmental Compliance
Based upon current knowledge, the Company believes that it is in compliance with
the U.S. and El Salvadoran environmental laws and regulations as currently
promulgated. However, the exact nature of environmental control problems, if
any, which the Company may encounter in the future cannot be predicted,
primarily because of the increasing number, complexity and changing character of
environmental requirements that may be enacted or of the standards being
promulgated by governmental authorities.
Guarantees
The Company has provided the Government of El Salvador with the following
guarantees on September 27, 2002: three-year guarantees were issued by the
Banco
Agricola, S.C. on behalf of the Company to the Ministry of Environment and
Natural Resources; Guarantee No. 1901-0000059-8 was issued for the San
Cristobal
Mill and Plant in the sum of $771.49; and Guarantee no. 1901-0000058-7 was
issued for the Renewed SSGM in the sum of $14,428.68.
On July 10, 2003 a third party liability guarantee in the sum of $42,857.14 was
issued by Compania Anglo Salvadorena de Seguros, S.A. on behalf of the Company
to the Ministry of Economy's Office of the Department of Hydrocarbons and Mines.
Lease Commitments
The month-to-month lease of its offices is described in note (7) Related Party
Transactions of the Notes to the Consolidated Financial Statements. The lease of
the SCMP and other mining leases are described in note (4) Commerce/Sanseb Joint
Venture ("Joint Venture") and in note (5) Synopsis of Real Estate Ownership and
Leases of the Notes to the Consolidated Financial Statements.
(14) 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 Corporate Headquarters
Year ended March 31, 2004
Sales and revenues $ 0 $ 0
Depreciation & amortization 0 0
Operating income (loss) 0 (14,381)
Total assets 35,369,314 244,946
Capital expenditures 2,084,762 0
Year ended March 31, 2003
Sales and revenues $ 0 $ 0
Depreciation & amortization 0 0
Operating income (loss) 0 (35,886)
Total assets 33,029,998 221,676
Capital expenditures 1,003,526 0
Year ended March 31, 2002
Sales and revenues $ 0 $ 38
Depreciation & amortization 0 0
Operating income (loss) 0 (43,171)
Total assets 31,676,285 269,149
Capital expenditures 1,638,682 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 with Accountants on Accounting and
Financial Disclosure
There has been no change in the Company's certified public accountants during
the past two years. There has been no report on Form 8-K of a disagreement
between the Company and its accountants on any matter of accounting principles
or practices or financial statement disclosure.
Item 9(a). Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures. The term
"disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, as appropriate
to allow timely decisions to be made regarding required disclosure. The
Company's Chief Executive Officer and Chief Financial Officer have evaluated the
Company's disclosure controls and procedures as of the end of the period covered
by this Annual Report on Form 10-K and have concluded that the Company's
disclosure controls and procedures are effective as of the date of such
evaluation.
Changes in Internal Control Over Financial Reporting
The Company also maintains a system of internal controls. The term "internal
controls," as defined by the American Institute of Certified Public Accountants'
Codification of Statement on Auditing Standards, AU Section 319, means controls
and other procedures designed to provide reasonable assurance regarding the
achievement of objectives in the reliability of the Company's financial
reporting, the effectiveness and efficiency of the Company's operations and the
Company's compliance with applicable laws and regulations. There have been no
changes in the Company's internal controls or in other factors during the fourth
fiscal quarter that could significantly affect the Company's internal control
over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item appears under the captions "Officers and
Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Code
of Ethics" included in the Company's definitive proxy statement for the 2004
Annual Meeting to be filed pursuant to Regulation 14A within 120 days after the
end of the fiscal year and is incorporated by reference in this Annual Report on
Form 10-K. Information regarding executive officers and managers is contained in
Part I of this report under "Item 4(a). Executive Officers and Managers of the
Company."
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 captions "Security Ownership of Directors and Management"
and "Principal Shareholders" 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 13. Certain Relationships and Related Transactions
The information called for by Item 13 is incorporated by reference from
information 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.
Item 14. Principal Accounting Fees and Services
The information called for by Item 14 is incorporated by reference from the
information under the caption "Fees to Independent Accountants" to be included
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 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules
See Index to Consolidated Financial Statements and Supplementary Financial Data
in Item 8 of this report.
Report of Independent Accountant on the Financial Statement Schedules.........68
Schedule IV (1) Indebtedness of Related Parties...............................69
Schedule IV (2) Indebtedness to Related Parties...............................71
(b) Reports on Form 8-K
There were no Form 8-K reports filed during the three months ended March 31,
2004.
(c) Exhibits
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 Two-Year Stock Option Agreement dated April 30, 2002, and
expiring on April 30, 2004, to purchase 40,000 common shares
at $.25 per share. (Incorporated by reference to Exhibit 4.9
of the Company's Form 10-K for the year ended March 31,
2002.)
4.2 Two-Year Stock Option Agreement dated August 21, 2002, and
expiring on August 21, 2004, to purchase 40,000 common shares
at $.22 per share. (Incorporated by reference to Exhibit 4.10
of the Company's Form 10-K for the year ended March 31,
2003.)
4.3 Two-Year Stock Option Agreement dated September 20, 2002, and
expiring on September 20, 2004, to purchase 65,000 common
shares at $.22 per share. (Incorporated by reference to
Exhibit 4.11 of the Company's Form 10-K for the year ended
March 31, 2003.)
4.4 Two-Year Stock Option Agreement dated September 25, 2002, and
expiring on September 25, 2004, to purchase 65,000 common
shares at $.22 per share. (Incorporated by reference to
Exhibit 4.12 of the Company's Form 10-K for the year ended
March 31, 2003.)
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.)
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.)
Exhibit No. Description of Exhibit
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.)
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* Three-year lease agreement by and between the Company and
Corporacion Salvadorena de Inversiones ("Corsain"), an El
Salvadoran governmental agency, covering the real estate
known as the San Cristobal Mill and Plant (SCMP) executed on
April 26, 2004, retroactive to November 13, 2003.
11* Schedule of Computation of Net Income Per Share
21* Subsidiaries and Joint Venture of the Company
Exhibit No. Description of Exhibit
23.1* Consent of Independent Certified Public Accountant
31.1* Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13(a)-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Executive Vice President and Secretary
pursuant to Rule 13(a)-14(a)/15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer and Chief
Financial Officer pursuant to
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
32.2* Certification of Executive Vice President and Secretary
pursuant to U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.0 Additional Exhibits
99.1* Confirmation agreement, General Lumber & Supply Co., Inc.,
May 10, 2004.
99.2* Confirmation Agreement, Edward L. Machulak, May 10, 2004.
99.3* Confirmation Agreement, Edward L. Machulak Rollover
Individual Retirement Account, May
10, 2004.
99.4* Confirmation Agreement, Sylvia Machulak as an individual and
for her Rollover Individual Retirement Account, May 10, 2004.
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 S.E.C. Form S-8 Registration Statement No. 333-90122 filed
under the Securities Act of
1933, as amended and declared effective June 10, 2002,
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 June 10, 2002.) 817,541
shares remain to be issued as of March 31, 2004.
99.6(a)* Consent of Independent Certified Public Accountant to
incorporate by reference in the S.E.C. Form S-8 Registration
Statement No. 333-90122 filed under the Securities Act of
1933 as amended and declared effective June 10, 2002 the
Certified Public Accountant's report dated May 10, 2004
relating to the financial statements of the Company for the
years ended March 31, 2004 and 2003.
Exhibit No. Description of Exhibit
99.7 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, 2004
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 Report to be signed on its behalf
by the undersigned, thereunto duly authorized on May 10, 2004.
COMMERCE GROUP CORP.
(Company)
By: /s/ Edward L. Machulak
Edward L. Machulak
Chairman of the Board of Directors,
Member of Executive Committee,
Member of Audit Committee
Director-Emeritus, President, Treasurer,
Chief Executive, Operating and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons, on behalf of the Company and in
the capacities and on the dates indicated:
Name Office Date
/s/ Edward L. Machulak Chairman of the Board of Directors, Member of May 10, 2004
- ---------------------- ------------
Edward L. Machulak Executive Committee, Member of Audit Committee,
Director-Emeritus, President, Treasurer, Chief
Executive, Operating and Financial Officer
/s/ Edward A. Machulak Director, Member of Executive Committee, May 10, 2004
- ---------------------- ------------
Edward A. Machulak Director-Emeritus, Executive Vice President and
Secretary
/s/ Sidney Sodos Director May 10, 2004
Sidney Sodos
/s/ John H. Curry Director and Member of Audit Committee May 10, 2004
- ----------------- ------------
John H. Curry
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, 2004, 2003, 2002, 2001 and 2000, 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 15(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 of America.
Bruce Michael Redlin, CPA, LLC
Certified Public Accountant
West Allis, Wisconsin
May 10, 2004
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV (1)
INDEBTEDNESS OF RELATED PARTIES - NON CURRENT
YEARS ENDED MARCH 31, 2004, 2003, AND 2002
Commerce/Sanseb Joint Venture (Joint Venture)
Balance at
Beginning of Additions to Deletions to Balance at End
Name of Person (1) Period (3) Indebtedness (2) Indebtedness of Period (3)
- ------------------ ---------- ---------------- ------------ -------------
Year ended March 31, 2004
Joint Venture $40,771,280 $4,114,110 $0 $44,885,390
Year ended March 31, 2003
Joint Venture $37,320,188 $3,451,092 $0 $40,771,280
Year ended March 31, 2002
Joint Venture $33,109,401 $4,210,787 $0 $37,320,188
(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 standby maintenance and holding costs are also included. The
addition to indebtedness is netted to include any adjustments for
payments or credits.
(3) Beginning with September 30, 1987, the total indebtedness includes the
advances of $590,265 from three of the Company's subsidiaries.
San Sebastian Gold Mines, Inc. (SSGM)
Balance at
Beginning of Additions to Deletions to Balance at
Name of Person (1) Period Indebtedness (2) Indebtedness End of Period
- ------------------ ------ ---------------- ------------ -------------
Year ended March 31, 2004
SSGM $34,160,023 $2,180,883 $0 $36,340,906
Year ended March 31, 2003
SSGM $31,989,058 $2,170,965 $0 $34,160,023
Year ended March 31, 2002
SSGM $29,505,884 $2,483,174 $0 $31,989,058
(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, 2004, 2003, AND 2002
Balance at Net Additions
Beginning of (Deletions) to Balance at
Identity of Debtor Period Indebtedness (1) End of Period
- ------------------- ------ ---------------- -------------
Year ended March 31, 2004
President of the Company $5,521,516 $1,044,301(a) $6,565,817
President's RIRA 824,866 90,200(b) 915,066
President's Affiliated Company 1,120,442 141,948(c) 1,262,390
President's Wife's RIRA 429,391 74,190(d) 503,581
President's Son/Daughter-in-Law 131,165 22,663(d) 153,828
----- ------- ------ ------ ----- -------
Total, notes payable $8,027,380 $1,373,302 $9,400,682
========== ============ ==========
President's Accrued Salary $2,636,515 $ 178,750(e) $2,815,265
========== =========== ==========
President's Wife's Consulting Fees $ $ 36,000(f) $ 327,600
==== ============ ===========
291,600
Legal fees (President's son is a
principal) $ 326,941 $ 74(g) $ 327,015
=========== ============== ===========
Year ended March 31, 2003
President of the Company $4,643,856 $ 877,660(a) $5,521,516
President's RIRA 703,647 121,219(b) 824,866
President's Affiliated Company 1,098,193 22,249(c) 1,120,442
President's Wife's RIRA 366,289 63,102(d) 429,391
Others 111,889 19,276(d) 131,165
----- ------- ------- ------ ----- -------
Total, notes payable $6,923,874 $1,103,506 $8,027,380
========== ============= ==========
President's Accrued Salary $2,457,765 $ 178,750(e) $2,636,515
========== =========== ==========
President's Wife's Consulting Fees $ 255,600 $ $ 291,600
=========== ====== ===========
36,000(f)
Legal fees (President's son is a
principal) $ 314,804 $ 12,137(g) $ 326,941
=========== =========== ===========
Year ended March 31, 2002
President of the Company $3,676,503 $ 967,353(a) $4,643,856
President's RIRA 599,768 103,879(b) 703,647
President's Affiliated Company 926,205 171,988(c) 1,098,193
President's Wife's RIRA 312,459 53,830(d) 366,289
Others 95,445 16,444(d) 111,889
------- ------ ------- ------ ----- -------
Total, notes payable $5,610,380 $1,313,494 $6,923,874
========== ============= ==========
President's Accrued Salary $2,279,015 $ 178,750(e) $2,457,765
========== = =========== ==========
President's Wife's Consulting Fees $ 219,600 $ $ 255,600
=========== ====== ===========
36,000(f)
Legal fees (President's son is a
principal) $ 308,286 $ $ 314,804
=========== ======= ===========
6,518(g)
(1)(a)(b)The net 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:
The President's Affiliated Company has purchased the following shares
which payment was offset by the reduction of the notes payable to the
Affiliated Company: on January 3, 2003, 575,000 of the Company's
restricted common shares, $.10 par value, were sold at a price of $.175
per share for a total of $100,625; and on March 26, 2003, 175,000 of
the Company's restricted common shares, $.10 par value, were sold at a
price of $.27 per share, for a total of $47,250.
During the fiscal year ended March 31, 2004, the Affiliated Company on
June 24, 2003, purchased 250,000 of the Company's restricted common
shares at a price of $.25 each for a total of $37,500 and on December
17, 2003, it purchased 463,600 restricted common shares at a price of
$.25 each for a total of $115,900. The total purchase price of the
shares of $153,400 was paid by reducing the amount owed to the
Affiliated Company.
(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 in the sum of $13,750 for one month's vacation pay.
(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.