UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ To __________
Commission file number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1942961
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6001 North 91st Street
Milwaukee, Wisconsin 53225-1795
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 462-5310
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 21,992,379 common
shares of the Company's common stock, $0.10 par value, were issued and
outstanding as of December 31, 2003.
1
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE THIRD QUARTER ENDED DECEMBER 31, 2003
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements have been prepared by
Commerce Group Corp. ("the Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed omitted pursuant to such SEC rules and
regulations.
These consolidated financial statements should be read in conjunction
with the financial statements and accompanying notes included in the
Company's Form 10-K for the year ended March 31, 2003.
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities 33
Item 3. Default Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Exhibit Index 33
Registrant's Signature Page 38
Ex-31.1 Certification of CEO/CFO pursuant to Section 302 39
Ex-31.2 Certification of Exec. V.P./Secretary pursuant to Section 302 40
Ex-32.1 Certification of CEO/CFO pursuant to Section 906 41
Ex-32.2 Certification of Exec. V.P./Secretary pursuant to Section 906 42
2
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Dec. 31, 2003 March 31, 2003
------------- --------------
ASSETS
------
Current assets
Cash $ 45,695 $ 28,004
Investments 215,698 194,578
Accounts receivable 608,497 608,212
Inventories 39,562 39,562
Prepaid items and deposits 96,198 41,901
----------- -----------
Total current assets 1,005,650 912,257
Real estate (Note 7) 0 23,336
Property, plant and equipment, net (Note 5) 4,286,772 4,280,912
Mining resources investment 29,512,743 28,035,169
----------- -----------
Total assets $34,805,165 $33,251,674
=========== ===========
LIABILITIES
-----------
Current liabilities
Accounts payable $ 486,939 $ 454,719
Notes and accrued interest payable to
related parties (Notes 8 & 9) 9,015,265 8,027,380
Notes and accrued interest payable to
others (Note 8) 242,194 225,922
Accrued salaries 2,808,915 2,672,415
Accrued legal fees 327,015 326,941
Other accrued expenses 646,747 621,719
----------- -----------
Total liabilities 13,527,075 12,329,096
Commitments and contingencies (Notes 4, 6, 7, 8, 9, 10, 12, 13 & 14)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
2003-none; 2002-none (Note 12) 0 0
Common stock, $0.10 par value:
Authorized 50,000,000 shares; (Note 12)
Issued and outstanding:
12/31/2003-21,992,379 (Note 12) 2,199,238
03/31/2003-20,407,429 (Note 12) 2,040,743
Capital in excess of par value 19,204,830 18,997,412
Retained earnings (deficit) (125,978) (115,577)
----------- -----------
Total shareholders' equity 21,278,090 20,922,578
----------- -----------
Total liabilities and shareholders'
equity $34,805,165 $33,251,674
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE-MONTH PERIODS ENDED DECEMBER 31 (UNAUDITED)
Three Months Ended Nine Months Ended
12/31/03 12/31/02 12/31/03 12/31/02
-------- -------- -------- --------
Revenues $ 0 $ 0 $ 0 $ 0
Expenses:
General and
administrative
expense 3,639 9,546 10,401 29,386
---------- ---------- ---------- ---------
Total expenses 3,639 9,546 10,401 29,386
Net profit (loss) (3,639) (9,546) (10,401) (29,386)
Credit (charges)
for income taxes 0 0 0 0
---------- ---------- ---------- ---------
Net income (loss)
after income tax
credit (charge) $ (3,639) $ (9,546) $ (10,401) $ (29,386)
========== ========== ========== ==========
Net income (loss)
per share (Note 2)
basic $ (.0002) $ (.0005) $ (.0005) $ (.0016)
========== ========== ========== ==========
Net income (loss)
per share (Note 2)
diluted $ (.0002) $ (.0005) $ (.0005) $ (.0015)
========== ========== ========== ==========
Weighted av. common
basic shares (Note 2) 20,790,950 18,612,959 20,790,950 18,612,959
========== ========== ========== ==========
Weighted av. diluted
common shares (Note 2) 21,230,950 19,572,959 21,230,950 19,572,959
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
4
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THROUGH THE PERIOD ENDED DECEMBER 31, 2003 (UNAUDITED)
Common Stock
-----------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
---------- ---------- ----------- ----------
Balances March 31, 2001 15,794,008 $1,579,401 $18,760,849 $ (36,520)
Net income (loss) for
FY March 31, 2002 (43,171)
Common shares issued:
Dir./off./employee/
services comp. 1,154,000 115,400 5,260
Payment of debt 250,000 25,000 12,500
Cash 270,000 27,000 13,500
---------- ---------- ----------- ----------
Balances March 31, 2002 17,468,008 $1,746,801 $18,792,109 $ (79,691)
Net income (loss) for
FY March 31, 2003 (35,886)
Common shares issued:
Dir./off./employee/
services comp. 693,221 69,322 85,848
Payment of debt 1,435,200 143,520 85,805
Cash 811,000 81,100 33,650
---------- ---------- ----------- ----------
Balances March 31, 2003 20,407,429 $2,040,743 $18,997,412 $(115,577)
Net income (loss) for
third quarter ended
December 31, 2003 (10,401)
Common shares issued:
Payment of debt/
option exercise 913,600 91,360 137,040
Cash 420,000 42,000 56,600
Share loans 14,700 1,470 1,617
Employee benefit
account 200,000 20,000 30,000
Services 36,650 3,665 5,497
Reduce asset account 0 0 (23,336)
---------- ---------- ----------- ----------
Balances December 31, 2003 21,992,379 $2,199,238 $19,204,830 $(125,978)
========== ========== =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
5
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED (UNAUDITED)
12/31/03 12/31/02
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (10,401) $ (29,386)
------------ -------------
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH USED IN OPERATING
ACTIVITIES:
Changes in assets and liabilities
Decrease (increase) in account receivables (285) (300)
Decrease (increase) in investments (21,120) 22,851
Decrease (increase) in prepaid items and
deposits (54,297) (16,781)
Increase (decrease) in accounts payable and
accrued liabilities 57,248 74,580
Increase (decrease) in accrued salaries 136,500 135,000
Increase (decrease) in accrued legal fees 74 19,079
------------ -------------
Total adjustments 118,120 234,429
------------ -------------
Net cash provided by (used in)
operating activity 107,719 205,043
INVESTING ACTIVITIES:
Investment in mining resources (1,460,098) (1,314,488)
FINANCING ACTIVITIES:
Net borrowings 1,004,157 904,733
Common stock issued 365,913 204,000
------------ -------------
Net cash provided by (used in) financing
activities 1,370,070 1,108,733
Net increase (decrease) in cash and cash
equivalents 17,691 (712)
Cash - beg. of year 28,004 39,081
------------ -------------
Cash - end of fiscal period $ 45,695 $ 38,369
============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
6
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Cash Flows, continued (Unaudited)
Supplemental disclosures of cash information:
Nine Months Ended
A. Cash information December 2003 December 2002
------------- -------------
1. Accrued interest capitalized $1,062,801 $896,089
2. Interest expense paid in cash None None
3. Income taxes paid None None
B. Non cash inventory and financing
1. Common stock issued for services $9,162 None
2. Accruals: salaries, legal and
director fees $177,974 $186,879
3. Equipment lease or purchases None None
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.
7
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(1) BASIS OF PRESENTATION
- --------------------------
During interim periods, Commerce Group Corp. and its subsidiaries
(collectively "Commerce," the "Company" and/or "Registrant") follow the
accounting policies set forth in Commerce's Annual Report to Shareholders
and in Commerce's Report on Form 10-K filed with the U.S. Securities and
Exchange Commission, except as modified for appropriate interim financial
statement presentation. These financial statements should be read in
conjunction with the financial statements and notes thereto which are
included in Commerce's Annual Report filed with the U.S. Securities and
Exchange Commission on Form 10-K for its fiscal year ended March 31,
2003. These interim results are not necessarily indicative of the
results that may be achieved in the future.
(2) 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.
(3) NEW ACCOUNTING STANDARDS
- -----------------------------
The Company became subject to the accounting and reporting requirements
of Statement of Financial Accounting Standards No. 143, Accounting for
Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 establishes
accounting and reporting standards for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 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. Fair value is determined by estimating the retirement obligations
in the period an asset is first placed in service and then adjusting the
amount for estimated inflation and market risk contingencies to the
projected settlement date of the liability. The result is then
discounted to a present value from the projected settlement date to the
date the asset was first placed in service. The present value of the
asset retirement obligation is recorded as an additional property cost
and as an asset retirement liability. The amortization of the additional
property cost (using the units of production method) will be included in
depreciation, depletion and amortization expense and the accretion of the
discounted liability will be recorded as a separate operating expense,
when applicable, in the Company's Statement of Operations.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS
No. 149") to provide, 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 has been adopted by the Company and
will be applied prospectively for contracts, if any, entered into or
modified after June 30, 2003. The adoption of this statement, as of this
date, has not had a material effect on Commerce's consolidated financial
position or results of operations as the Company has not entered into any
transactions of this type.
8
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150") which clarifies the classification as
liabilities for certain financial instruments including equity shares
that are mandatorily redeemable, or a financial instrument other than
equity shares that has an obligation to repurchase the instrument with
equity shares, including a conditional obligation to settle the financial
instrument with equity shares. SFAS No. 150 is effective for financial
instruments entered into after May 31, 2003. The adoption of this
statement has not had a material effect on the Company's consolidated
financial position or results of operations.
The Emerging Issues Task Force is in the process of forming a committee
to evaluate certain mining industry accounting issues, including issues
arising from the implementation of Statement of Financial Accounting
Standards No. 141 and Statement of Financial Accounting Standards No. 142
to business combinations within the mining industry and accounting for
goodwill and other intangibles. Although such committee has not yet been
formed, and no formal agenda has been set, the issues related to the
business combinations within the mining industry and accounting for
goodwill and other intangibles may be addressed along with the related
question of whether mineral interests conveyed by leases and/or
concessions represent tangible or intangible assets and the amortization
of such assets. While the Company believes that its accounting for its
mineral interests conveyed by leases and/or concessions is in accordance
with generally accepted accounting principles, the Company cannot predict
whether the deliberations of this committee will ultimately modify or
otherwise result in new accounting standards or interpretations thereof
that differ from its current practices.
(4) SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------
CONSOLIDATED STATEMENTS
The Joint Venture and the following subsidiaries are all majority-owned
by the Company and are included in the consolidated financial statements
of the Company. All significant intercompany balances and transactions
have been eliminated.
%
Owner- Charter/Joint Venture
ship Place Date
----- ----------- ----------
Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0 El Salvador 05/08/1960
Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974
San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968
Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0 Wisconsin & 09/22/1987
El Salvador
INVESTMENTS
The investments consist of securities held for the Commerce Group Corp.
Employee Benefit Account, and are stated at cost. The precious stones
included in the investment account are stated at cost.
ACCOUNTS RECEIVABLE
The accounts receivable consist of advances to Misanse, a 52%-owned
subsidiary, which will be offset for the Misanse rental and other charges
that are included in the accounts payable due to Misanse.
9
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
INVENTORY
Inventory consists of consumable supplies used in the processing of gold
ore and is stated at the average cost.
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.
REVENUE RECOGNITION
Revenue from the sale of gold and industrial minerals is recognized when
title passes to the buyer.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment is stated at the lower of cost or
estimated net realizable value. Mining properties, development costs and
plant and equipment will be depreciated when full production takes place
using the units of production method based upon proven and probable
reserves. Until the Company suspended its mining operations, the assets
were depreciated using the straight-line method over estimated useful
lives ranging from three to ten years. Depreciation and amortization
expenses include the amortization of assets acquired, if any, under
capital leases. Replacements and major improvements are capitalized.
When in operation, maintenance and repairs will be charged to expense
based on average estimated equipment usage. Interest costs incurred in
the construction or acquisition of property, plant, and equipment are
capitalized and amortized over the useful lives of the related assets.
Since the Company officially 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.
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.
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
10
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
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 11). The Joint Venture files a U.S. partnership
return.
COMPREHENSIVE INCOME
Effective April 1, 1999, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income.
SFAS 130 is designed to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period. Besides net income, other comprehensive income
includes foreign currency items, minimum pension liability adjustments,
and unrealized gains and losses on certain investments in debt and equity
securities. The Company believes that it has no material items or other
comprehensive income in any period presented in the accompanying
financial statements.
EARNINGS (LOSS) PER COMMON SHARE
The Company has in the past years reported its "Earnings per Share" which
presently complies with SFAS No. 128. As required by this standard, the
Company reports two earnings per share amounts, basic net income and
diluted net income per share. Basic net income per share is computed by
dividing income or loss reportable to common shareholders (the numerator)
by the weighted average number of common shares outstanding (the
denominator). The computation of diluted net income or loss per share is
similar to the computation of basic net income per share except that the
denominator is increased to include the dilutive effect of the additional
common shares that would have been outstanding if all convertible
securities, stock options, rights, share loans, etc. had been converted
to common shares at the last day of each fiscal period.
If on December 31, 2003, 440,000 option shares were added to the weighted
number of shares which amount to 20,790,950 common shares issued and
outstanding, then the total number of fully diluted shares amount to
21,230,950. The basic and the diluted loss per share for this period
ended December 31, 2003 is $.0005 cents per share. The same assumptions
were used for the same period ended December 31, 2002.
11
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
FOREIGN CURRENCY
The Company is not involved in foreign currency transactions because as
of January 1, 2001, the Republic of El Salvador, Central America adopted
the U.S. dollar system and pegged the exchange rate at 8.75 colones to
one U.S. dollar. Almost all of the money transactions in El Salvador are
now conducted in U.S. dollars.
MAJOR CUSTOMER
In the past, the Joint Venture produced gold and silver. It sold its gold
at the world market price to a refinery located in the United States.
Given the nature of the precious metals that are sold, and because many
potential purchasers of gold and silver exist, it is not believed that
the loss of any customer would adversely affect either the Company or the
Joint Venture.
(5) 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:
December 31, 2003 December 31, 2002
--------------------------- ---------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Mineral
Proper-
ties
and
Deferred
Develop-
ment $29,512,743 $29,512,743 $28,491,486 $28,491,486
Property,
Plant
and
Equip-
ment 6,538,915 2,252,143 4,286,772 6,387,699 2,252,143 4,135,556
----------- ----------- ----------- ----------- ---------- -----------
$36,051,658 $ 2,252,143 $33,799,515 $34,879,185 $2,252,143 $32,627,042
=========== =========== =========== =========== ========== ===========
Vehicles, office, mining and laboratory equipment, buildings, etc. are
stated at cost and are depreciated using the straight-line method over
estimated useful lives of three to ten years. Maintenance and repairs
are charged to expense as incurred. Since the Joint Venture suspended
operations effective March 31, 2000 in view of the weak price of gold and
the need to expand and rehabilitate these facilities, no depreciation has
been recorded.
IMPAIRMENTS
The Company evaluates the carrying value of its properties and equipment
by applying the provisions of Statement of Financial Accounting Standards
No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. Estimated future net cash
flows, on an undiscounted basis, from each property are calculated using
estimated recoverable ounces of gold considering current proven and
probable reserves and mineral resources expected to be converted into
mineral reserves. The inclusion of mineral resources is based on various
circumstances, including but not limited to, the existence and nature of
known mineralization, location of the property, results of drilling; and
analysis to demonstrate the ore is commercially recoverable, estimated
future gold price realization (considering historical and current prices,
price trends and related factors); and operating, capital and site
restoration costs. Reduction in the carrying value of property, plant
and equipment, with a corresponding charge to income, are recorded to the
extent that the estimated future net cash flows are less than the
carrying value.
12
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(6) 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.
Any 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 December 31, 2003, the Company's investments, including charges for
interest expense to the Joint Venture, were $43,200,908 and three of the
Company's subsidiaries' advances were $590,265 for a total of
$43,791,173.
INVESTMENT IN EL SALVADOR MINING PROJECTS
During this fiscal period, the Company has advanced funds, performed
services, and allocated its general and administrative costs to the Joint
Venture.
As of December 31, 2003 and 2002, the Company, Sanseb and three of the
Company's subsidiaries have invested (including carrying costs) the
following in its Joint Venture:
2003 2002
---- ----
The Company's advances
(net of gold sale proceeds)
since 09/22/87 $43,200,908 $39,662,986
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 35,802,664 33,638,949
----------- -----------
Total: 86,019,932 80,318,295
Advances by the Company's three
subsidiaries 590,265 590,265
----------- -----------
Combined total investment $86,610,197 $80,908,560
=========== ===========
13
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
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 completing the erection of 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 San
Sebastian Gold Mine Exploration Concession/License (New SSGM) and on
August 29, 2003, it received the Renewed San Sebastian Gold Mine
Exploitation Concession/License (Renewed SSGM) from the Ministry of
Economy's Director of El Salvador Department of Hydrocarbons and Mines
(DHM). It is performing an exploration program and it is attempting to
raise funds for the production of gold.
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
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
9).
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,
14
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
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 an additional two two-year periods, or for a combined 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.
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, in compliance with the new law, has, or it plans
to file applications for all of the mining concessions in which it has an
interest.
SCMP LAND AND BUILDING LEASE
On November 12, 1993, the Joint Venture entered into an agreement with
Corporacion Salvadorena de Inversiones ("Corsain"), an El Salvadoran
governmental agency, to lease for a period of ten years, approximately
166 acres of land and buildings on which its gold processing mill, plant
and related equipment (the SCMP) are located, and which is approximately
15 miles west of the SSGM site. The basic annual lease payment is U.S.
$11,500 (payable in El Salvador colones at the then current rate of
exchange), payable annually in advance, unless otherwise amended, and
subject to an annual increase based on the annual United States'
inflation rate. As agreed, a security deposit of U.S. $11,500 was paid
on the same date and this deposit is subject to increases based on any
United States' inflationary rate adjustments. The Company has met with
the Corsain officials and submitted a written request to extend the lease
for a period of three to five years as the existing lease expired on
November 11, 2003. Corsain is in the process of extending the lease.
15
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
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 9.
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; it has 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.
(7) 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, which lease was renewed on January 2003 for a period
of time to coincide with the terms included in the Renewed SSGM. Other
real estate ownership or leases in El Salvador are as follows: the
Company owns approximately 63 acres at the Modesto Mine; and the Joint
Venture leases the SCMP land and buildings on which its mill, plant and
equipment are located. In addition, the Joint Venture has entered into a
lease agreement to lease approximately 675 acres based on the production
of gold payable in the form of royalties with a mining prospect in the
Department of San Miguel and it leases approximately 175 acres in the
Department of Morazan in the Republic of El Salvador. The Company also
leases on a month-to-month basis approximately 4,032 square feet of
office space in Milwaukee, Wisconsin.
16
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(8) NOTES PAYABLE AND ACCRUED INTEREST
- --------------------------------------- 12/31/03 12/31/02
-------- --------
Related Parties
Mortgage and promissory notes to
related parties, interest ranging from
one percent to four percent over prime
rate, but not less than 16%, payable
monthly, due on demand, using the
undeveloped land, Misanse lease, the
Renewed SSGM issued on August 18,
2003, the New SSGM issued on February
24, 2003, gold ore reserves, real
estate and all other assets owned by
the Company, its subsidiaries and the
Joint Venture as collateral. (Note 9) $9,015,265 $7,807,502
Other
Short-term notes and accrued interest
(December 31, 2003, $107,194 and
December 31, 2002, $437,410) 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. 242,194 775,356
---------- ----------
Total: $9,257,459 $8,582,858
========== ==========
(9) RELATED PARTY TRANSACTIONS
- -------------------------------
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 22 and three-quarter years,
including vacation pay, for a total of $2,760,265.
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 December 31,
2003:
The amount of cash funds which the Company has borrowed from its
President from time to time, together with accrued interest, amounts to
$6,302,909. 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 $879,514, 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 then 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
17
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
compensate its President for selling or pledging his shares on behalf of
the Company, the Company has made a practice of issuing him the number of
restricted shares of common stock equivalent to the number of shares sold
or pledged, plus an additional number of shares equivalent to the amount
of accrued interest calculated at the prime rate plus three percent per
annum and payable monthly. The Company receives all of the net cash
proceeds from the sale or from the pledge of these shares. The Company
did not borrow any common shares during this fiscal period. The share
loans, if any, are all in accordance with the terms and conditions of
Director-approved, open-ended loan agreements dated June 20, 1988,
October 14, 1988, May 17, 1989, and April 1, 1990.
On February 16, 1987, the Company granted its President, by unanimous
consent of the Board of Directors, compensation in the form of a bonus in
the amount of two percent of the pre-tax profits realized by the Company
from its gold mining operations in El Salvador, payable annually over a
period of twenty years commencing on the first day of the month following
the month in which gold production commences.
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 December 31, 2003:
The Company leased approximately 4,032 square feet on a month-to-month
basis for its corporate headquarters' office; the monthly rental charge
was $2,789. The same related company provides administrative services,
use of its vehicles, and other property, as required by the Company.
In lieu of cash payments for the office space rental and for the
consulting, administrative services, etc., these amounts due are added
each month to this related company's open-ended, secured, on-demand
promissory note issued by the Company.
In addition, this related company does from time to time use its credit
facilities to purchase items needed for itself or for the Joint Venture's
mining needs.
This related company has been issued an open-ended, secured, on-demand
promissory note which amounts to $1,200,974; the annual interest rate is
four percent plus the prime rate, but not less than 16%, and it is
payable monthly.
On June 30, 2001, GLSCO purchased 250,000 restricted common shares at a
price of $.15 per share and it received options to purchase 250,000
common shares on or before July 2, 2003, at a price of $.25 per share.
The terms of this transaction are no less favorable than those obtained
from unrelated third parties. On June 24, 2003, GLSCO exercised its
option right to purchase 250,000 restricted common shares at a price of
$.25 per share.
On December 17, 2003, in order to reduce its debt to GLSCO, a total of
436,600 of the Company's restricted common shares were sold to GLSCO at a
price of $.25 each for a total of $115,900. The sale price of the common
shares was no less favorable than the sale price negotiated with
unrelated third parties.
The Company's Directors have consented and approved the following
transactions of which the status of each are reflected as of December 31,
2003:
18
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
The President's wife's Rollover Individual Retirement Account (SM RIRA)
has the Company's open-ended, secured, on-demand promissory note in the
sum of $484,016 which bears interest at an annual rate of prime plus
three percent, but not less than 16% and the interest is payable monthly.
The Directors also have acknowledged that Mrs. Sylvia Machulak (wife of
the President) is to be compensated for her consulting fees due to her
from October, 1, 1994 through September 30, 2000 or 72 months at $2,800 a
month, and thereafter at $3,000 per month. The Company owes her as an
individual and as a consultant, the sum of $318,600 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 September 30, 2003. By
agreement, these fees are to be adjusted to commensurate with the hourly
fees charged by the Law Firm on the date of payment.
The son of the President and his son's wife have the Company's
open-ended, on-demand promissory note in the sum of $147,852 which bears
interest at an annual rate of 16% payable monthly.
The Directors, by their agreement, have deferred cash payment of their
Director fees beginning on January 1, 1981, until such time as the
Company's operations are profitable. Effective from October 1, 1996,
the Director fees are $1,200 for each quarterly meeting and $400 for
attendance at any other Directors' meeting. The Executive Committee
Director fees are $400 for each meeting. The Directors and Officers have
an option to receive cash at such time as the Company has profits and an
adequate cash flow, or to exchange the amount due to them for the
Company's common shares.
The Company advances funds, allocates and charges its expenses to the
Joint Venture. The Joint Venture in turn capitalizes all of these
advances, costs and expenses. When full production commences, these
capitalized costs will be charged as an expense based on a per ton
production basis. The Company also charges interest for its advances to
the Joint Venture which interest rate is established to be the prime rate
quoted on the first day of each month plus four percent and said interest
is payable monthly. This interest is eliminated from the consolidated
statement of operations. However, a separate accounting is maintained
for the purpose of recording the amount that is due to the Company from
the Joint Venture.
COMPANY NET ADVANCES TO THE JOINT VENTURE
- -----------------------------------------
2003 2002
---- ----
Total Interest Total Interest
Advances Charges Advances Charges
----------- ----------- ----------- -----------
Beginning balance
April 1 $40,181,015 $23,751,735 $36,729,924 $20,448,289
December 31 nine months 3,019,893 2,579,950 2,933,062 2,489,609
----------- ----------- ----------- -----------
Total Company advances 43,200,908 26,331,685 39,662,986 22,937,898
Advances by three of
the Company's
subsidiaries 590,265 0 590,265 0
----------- ----------- ----------- -----------
December 31 total net
advances $43,791,173 $26,331,685 $40,253,251 $22,937,898
=========== =========== =========== ===========
(10) COMMITMENTS
- -----------------
Reference is made to Notes 4, 6, 7, 8, 9, 12, 13 and 14.
19
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(11) 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.
(12) 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 21,992,379 shares were issued
and outstanding as of December 31, 2003. Holders of shares of common
stock are entitled to one vote for each share on all matters to be voted
on by the shareholders. Holders of common stock have no cumulative
voting rights. Holders of shares of common stock are entitled to share
ratably in dividends, if any, as may be declared, from time to time by
the Board of Directors in its discretion, from funds legally available
therefore. In the event of a liquidation, dissolution or winding up of
the Company, the holders of shares of common stock are entitled to share
pro rata all assets remaining after payment in full of all liabilities.
Holders of common stock have no preemptive rights to purchase the
Company's common stock. There are no conversion rights or redemption or
sinking fund provisions with respect to the common stock. All of the
issued and outstanding shares of common stock are validly issued, fully
paid and non-assessable.
b. PREFERRED STOCK
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.
There were no preferred shares issued and outstanding for the periods
ending December 31, 2003 or 2002.
c. STOCK OPTION ACTIVITY:
12/31/03 03/31/03
------------------ ----------------
Weighted Weighted
Option Average Option Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beg. yr. 960,000 $0.22 670,000 $0.22
Granted 0 N/A 290,000 $0.19
Exercised (270,000) $0.25* 0 N/A
Forfeited (60,000) $0.25* 0 N/A
Expired (190,000) $0.25* 0 N/A
--------- ----- ---------- -----
Outstanding, end of period 440,000 $0.17 960,000 $0.21
========= ===== ========== =====
*Exercised, forfeited or expired price.
20
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
A summary of the outstanding stock options as of December 31, 2003,
follows:
Weighted Average Weighted
Range of Amount Remaining Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- --------------
Up to $2.99 440,000 .4477 years $0.17
During this fiscal year, 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
December 31, 2003, there were no shares due to other parties for shares
borrowed or for interest payment.
f. S.E.C. FORM S-8 REGISTRATION
On June 10, 2002, the Company filed its fifth Securities and Exchange
Commission Form S-8 Registration Statement No. 333-90122 under the
Securities Act of 1933, and it registered 1,500,000 of the Company's
$0.10 par value common shares for the purpose of distributing shares
pursuant to the plan contained in such registration. From the 1,500,000
shares registered 288,247 shares were issued, and 1,211,753 shares
remain to be issued as of December 31, 2003.
g. COMMERCE GROUP CORP. EMPLOYEE BENEFIT ACCOUNT (CGCEBA)
This account was established for the purpose of compensating the
Company's employees for benefits such as retirement, severance pay, and
all other related compensation that is mandatory under El Salvadoran
labor regulations, and/or as determined by the Officers of the
Corporation. The Directors provide the Officers of the Company with the
authority to issue its common shares to the CGCEBA on an as needed basis.
Under this plan, payment can be made to any employee of the Company or
the Company's subsidiaries. The CGCEBA has sold some of the shares
issued to this account from time to time to meet its obligations to its
El Salvadoran employees. As of December 31, 2003, 375,000 shares
remained in the account.
21
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003
(13) 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.
(14) CONTINGENCIES
- ------------------
Based upon current knowledge, the Company believes that it is in
compliance with the U.S. and El Salvadoran environmental laws and
regulations as currently promulgated. However, the exact nature of
environmental control problems, if any, which the Company may encounter
in the future cannot be predicted, primarily because of the increasing
number, complexity and changing character of environmental requirements
that may be enacted or of the standards being promulgated by governmental
authorities.
(15) UNAUDITED FINANCIAL STATEMENTS
- ------------------------------------
The consolidated financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The financial information included herein is
unaudited; however, the Company believes that the information reflects
all adjustments (consisting solely of normal recurring adjustments) that
are, in the opinion of management, necessary to be a fair presentation of
the financial position, results of operations, and cash flows for the
interim periods. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements
be read in connection with the financial statements and the notes thereto
included in the Company's latest annual report and the filing of the
required Securities and Exchange Commission annual Form 10-K.
22
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - DECEMBER 31, 2003
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters discussed in this report on Form 10-Q, when not historical
matters, are forward-looking statements that involve a number of risks
and uncertainties that could cause actual results to differ materially
from projected results. Such factors include, among others, the
speculative nature of mineral exploration, gold and silver prices,
production and reserve estimates, litigation, environmental and
government regulations, availability of financing, general economic
conditions, conditions in the financial markets, political and
competitive developments in domestic and foreign areas in which the
Company operates, 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 annual audited consolidated financial statements and the notes
thereto. The Company prepares and files its consolidated financial
statements and MD&A in United States ("U.S.") dollars and in accordance
with U.S. generally accepted accounting principles ("GAAP").
The following discussion provides information on the results of
operations, the financial condition, liquidity and capital resources for
the third quarterly period ended December 31, 2003 and 2002. The
financial statements of the Company and the notes thereto contain
detailed information that should be referred to in conjunction with this
discussion.
The Company has no source of securing revenue; it only anticipates that
any future recurring revenue would only occur after it commences gold
production at its San Sebastian Gold Mine located in the Republic of El
Salvador.
ACCOUNTING POLICIES AND ESTIMATES
- ---------------------------------
The ensuing discussion and analysis of financial condition and results of
operations are based on the Company's consolidated financial statements,
prepared in accordance with accounting principles generally accepted in
the United States of America and contained within this report on S.E.C.
Form 10-Q. Certain amounts included in or affecting the Company's
financial statements and related disclosures must be estimated, requiring
that certain assumptions be made with respect to values or conditions
which cannot be made with certainty at the time the financial statements
are prepared. Therefore, the reported amounts of the Company's assets
and liabilities, revenues and expenses, and associated disclosures with
respect to contingent assets and obligations are necessarily affected by
these estimates. The more significant areas requiring the use of
management estimates and assumptions relate to mineral reserves that are
the basis for future cash flow estimates and units-of-production
amortization determination; recoverability and timing of gold production
from the heap-leaching process; environmental, reclamation
23
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.
The Company believes the following significant assumptions and estimates
affect its more critical practices and accounting policies used in the
preparation of its consolidated financial statements.
From time to time, the Company estimates its ore reserves when it is in
production. There are a number of uncertainties inherent in estimating
quantities of reserves, including many factors beyond the control of the
Company. Ore reserve estimates are based upon engineering evaluations of
assay values derived from samplings of drill holes and other openings.
Additionally, declines in the market price of gold may render certain
reserves containing relatively lower grades of mineralization uneconomic
to mine. Further, availability of permits, changes in operating and
capital costs, and other factors could materially and adversely affect
ore reserves. The Company uses its ore reserve estimates in determining
the unit basis for mine depreciation and closure rates, as well as in
evaluating mine asset impairments. Changes in ore reserve estimates
could significantly affect these items.
The Company will assess its producing properties and undeveloped mineral
claims and leases for impairment when events or changes in circumstances
warrant and at least annually. For producing properties and equipment,
an impairment is recognized when the estimated future cash flows
(undiscounted and without interest) expected to result in the use of the
asset are less than the carrying amount of that asset. Measurement of
the impairment loss is based on discounted cash flows. Undeveloped
mineral claims and leases are measured on a fair value basis. Fair value
with respect to such mineral interest, pursuant to Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, effective January 1, 2002, would generally be
assessed with reference to comparable property sales transactions in the
market place.
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS128), Earnings per Share in prior years. SFAS128's objective is to
simplify the computation of earnings per share (EPS) and to make the U.S.
standard more compatible with that of other countries and the
International Accounting Standards Committee. SFAS128 supersedes APB
Opinion 15, replacing the presentation of "primary" and "fully diluted"
EPS with "basic" and "diluted" EPS. Basic EPS is computed by dividing
income available to common shareholders (net income less any dividends
declared on preferred stock and any dividends accumulated on cumulative
preferred stock) by the weighted average number of common shares
outstanding. Diluted EPS requires an adjustment to the denominator to
include the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. The
numerator is adjusted to add back any convertible preferred dividends and
the after-tax amount of interest recognized with any convertible debt.
The financial statements for the quarterly periods ended December 31,
2003 and 2002 and prior years reflect and include Commerce Group Corp.'s
subsidiaries and the Commerce Group Corp./Sanseb Joint Venture (Joint
Venture) on a consolidated basis. Prior to the fiscal year ended March
31, 1997, the Company reported the investment in the Joint Venture as
advances to the Joint Venture and the Company's advances included the
interest earned on these advances in anticipation of the interest being
reimbursed. Now these advances are restated and combined with the
Company's Consolidated Financial Statements. Although the elimination of
interest income reduces the retained earnings, it does not eliminate the
interest charged by and earned by the Company which is due and payable to
it and which is
24
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.
THE COMPANY'S CURRENT STATUS
- ----------------------------
CURRENT EVENTS
In the S.E.C. Form 10-Q filing for the nine-month period ended December
31, 2002, the Company reported the status of the concession/license
filings with the El Salvador Department of Hydrocarbons and Mines (DHM).
Since that time, the following events have taken place:
RENEWED SAN SEBASTIAN GOLD MINE EXPLOITATION CONCESSION/LICENSE (RENEWED
SSGM) - APPROXIMATELY 1.2306 SQUARE KILOMETERS, DEPARTMENT OF LA UNION,
EL SALVADOR, CENTRAL AMERICA
On February 28, 2003 (received March 3, 2003) the DHM admitted to the
receipt of the application and the Company proceeded to file public
notices as required by Article 40 of the El Salvadoran Mining Law and its
Reform (MLIR). On April 16, 2003, the Company's El Salvadoran legal
counsel filed with the DHM notice that it believed that it complied with
the requirements of Article 40, and that there were no objections; and
requested that the DHM make its inspection as required by MLIR Article
42. The DHM inspection was made, a bond was furnished, and the land
surface fees were paid. On August 29, 2003, the Office of the El
Salvadoran Minister of Economy formally presented the Company with a
twenty-year Renewed SSGM dated August 18, 2003.
NEW SSGM EXPLORATION CONCESSION/LICENSE (NEW SSGM) - APPROXIMATELY
40.7694 SQUARE KILOMETERS
On February 24, 2003, the DHM issued the New SSGM for a period of four
years starting from the date following the notification of this
resolution which was received on March 3, 2003. The Company has made
contact with some of the property owners and it has commenced exploration
in the following three formerly-operated mines: La Lola Mine, Santa
Lucia Mine and the Tabanco Mine.
NUEVA ESPARTA EXPLORATION CONCESSION/LICENSE (NUEVA ESPARTA) - 45 SQUARE
KILOMETERS
On or about October 20, 2002, the Company filed an application with the
DHM for the Nueva Esparta, which consists of 45 square kilometers north
and adjacent to the New SSGM. This application was denied and presently
is being appealed by the Company.
GOLD ORE RESERVES (12/31/03)
The Company's geologists have defined the following San Sebastian Gold
Mine gold ore reserves:
Tons Average Grade Ounces
---- ------------- ------
Virgin ore 14,404,096 0.081 1,166,732
Stope fill estimated 1,000,000 0.340 340,000
---------- ---------
Totals 15,404,096 1,506,732
The estimated recoverable ounces by processing through the San Cristobal
Mill and Plant ranges from 85% to 95%; the recovery of gold from the
heap-leaching operations should range from 60% to 70%.
25
PRECIOUS METAL MINING
The Joint Venture has produced gold from March 31, 1995 through December
31, 1999. Its San Cristobal Mill and Plant (SCMP) consisted primarily of
used equipment that had been installed at its leased site by a previous
mining company. The used processing equipment was acquired by the Joint
Venture on February 23, 1993, and gold and silver were produced from
April 1, 1995 until the SCMP operations were officially suspended as of
March 31, 2000. During this period, the price of gold suffered a severe
decline. The price of gold has substantially increased since January
2002.
Although while in operation the Company has on a continuous basis
retrofitted, modified, and restored the equipment, it presently lacks
sufficient funds to perform a major overhaul and to expand the SCMP
facilities.
The Company's management has temporarily suspended its gold processing
until such time as it has adequate funds for the retrofitting,
rehabilitation, restoration, overhauling, and most importantly for the
expansion of the SCMP facilities. The price of gold has increased to a
level to place the SCMP into a profitable, viable position.
The Company has a number of non-exclusive independent consulting
agreements for the purpose of raising the sum of up to U.S. $20 million.
The funds are to be used to purchase and install equipment, perform site
development, working capital for the SSGM open-pit, heap-leaching
operation, and for the expansion of the Joint Venture's SCMP.
From April 1, 1995 through December 1999 (operations were officially
suspended as of March 31, 2000), the Joint Venture produced gold on a
curbed basis primarily from processing the tailings and from the virgin
ore it was excavating from its SSGM open pit. The gold was processed at
its SCMP facility which is located approximately 15 miles from the SSGM
site. It is contemplating the installation of a pilot open-pit,
heap-leaching gold-processing system on the SSGM site. The cone crushing
system is being erected at this site. It also is continuing its SSGM
site preparation, the expansion of its exploration and exploitation
targets, and the enlargement and development of its gold ore reserves.
The exploration of the Montemayor Mine and the Modesto Mine has been
placed on a standby basis pending the advice from its legal counsel
relative to the filing of applications for concessions (licenses) on the
properties it owns or on which it holds leases. All of the mining
properties are located in the Republic of El Salvador, Central America.
The Joint Venture will continue its attempts to commence its production
of gold. Its objectives are to have an expanded complementary operation
while continuing its endeavor to obtain sufficient funds for the SSGM
open-pit, heap-leach operation. The Company's main objective and plan,
through the Joint Venture, is to operate at the SSGM site, a moderate
tonnage, low-grade, open-pit, heap-leaching, gold-producing mine. It
intends to commence this gold-mining operation as soon as adequate
funding is in place and the gold price stabilizes at the current level.
Dependent on the grade of gold ore processed and the funds it is able to
obtain, it then anticipates producing annually approximately 10,000
ounces of gold from the SCMP operation and eventually up to 113,000
ounces of gold from its SSGM open-pit, heap-leaching operation. The
Joint Venture continues on a limited basis to conduct an exploration
program to develop additional gold ore reserves at the SSGM. Since it
has the New SSGM, it is exploring selected areas and the Company plans to
commence production of gold and silver after adequate 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
26
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 THIRD QUARTER ENDED DECEMBER 31, 2003
COMPARED TO DECEMBER 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 $10,401 or $.0005 cents per share. This
compares to a net loss of $29,386 or $.0016 cents per share during the
fiscal period ended December 31, 2002.
There was no current or deferred provision for income taxes during this
fiscal period ended December 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 as there were no operations.
The Company does not anticipate that inflation will have a material
impact on future operations during this fiscal year.
Interest expense in the sum of $1,062,801 was recorded by the Joint
Venture during this fiscal period compared to $896,089 for the same
period in 2002, and it was eliminated by reducing the interest income
earned from the Joint Venture.
Almost all of the costs and expenses incurred by the Company are
allocated and charged to the Joint Venture. The Joint Venture capitalizes
or expenses these costs and will continue to do so until such time when
it is in full production. At the time production commences, these
capitalized costs will be charged as an expense based on a per unit
basis. If the prospect of gold production becomes unlikely, all of these
costs will be written off in the year that this occurs.
FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------------------
As of December 31, 1999, the Joint Venture halted its SCMP operations
(official suspension took place as of March 31, 2000) until such time as
it has adequate funding to repair, retrofit, overhaul and expand the mill
to process its gold ore, and at such time that the price of gold will
stabilize at a higher price. After almost five years of 24-hour-per-day
operation with used equipment, the facilities require a major overhaul.
The low price of gold did not provide an adequate cash reserve for these
needs. Additional equipment to expand the production capacity has to be
purchased, delivered and installed.
The Company plans 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
27
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, which includes the
completion of the erection of the crushing system. Eventually the
production capacity would be increased in stages to 6,000 tons per day so
that annual production could reach 113,000 ounces of gold at the SSGM.
The use of the $17,000,000 proceeds is as follows: $8,000,000 for mining
equipment and the completion of erecting a crushing system; $4,033,548
for the processing equipment and site and infrastructure costs; and a sum
of $4,966,452 is to be used for working capital. The once depressed
price of gold has increased substantially since January 2002. However,
it is believed that the price of gold has increased because of
geopolitical tensions, recession fears, corporate malfeasance and reports
of deflation. The Company's incredibly low common share market price is
a major deterrent in raising cash for the Company's programs.
The Company continues to be cognizant of its cash liquidity until it is
able to produce adequate profits from its SSGM gold production. It will
attempt to obtain sufficient funds to assist the Joint Venture in placing
the SSGM into production as the anticipated profits from the existing
SCMP operation (unless accumulated over a period of time) appear
insufficient to meet the SSGM capital and the other mining exploration
requirements. In order to continue obtaining funds to conduct the Joint
Venture's exploration, exploitation, development, expansion programs, and
the production of gold from the SSGM open-pit, heap-leaching operation,
it is necessary for the Company to obtain funds from other sources. The
Company may have to borrow funds by issuing open-ended, secured,
on-demand or unsecured promissory notes, by selling its shares to its
directors, officers or other interested investors, or by entering into a
joint venture, merging, or developing an acceptable form of a business
combination with other companies.
During the past, the Joint Venture was engaged in exploration,
exploitation and development programs designed to increase its gold ore
reserves. The prospects of expanding the SSGM gold reserves are
positive. The Company believes that the invested funds significantly
contributed to the value of the SSGM and to the value of its other
mining prospects as the results of the exploratory efforts evidence the
potential for a substantial increase of gold ore reserves. Thus far, the
Company was unable to obtain sufficient funds at a reasonable cost to
complete the modification and expansion of the SCMP or for its open-pit,
heap-leach operation.
The Company continues to rely on its directors, officers, related parties
and others for its funding needs. The Company believes that it may be
able to obtain such short-term and/or equity funds as are required from
similar sources as it has in the past. It further believes that the
funding needed to proceed with the continued exploration of the other
exploration targets for the purpose of increasing its gold ore reserves
will be greatly enhanced if the price of gold continues to increase.
These exploration programs will involve airborne geophysics, stream
chemistry, geological mapping, trenching, drilling, etc. The Joint
Venture believes that it may be able to joint venture or enter into other
business arrangements to share these exploration costs with other
entities. On March 5, 2003, the Company reported on the status of the
Renewed SSGM and on the status of the New SSGM which will expand the
potential of its gold and silver ore reserves. Elsewhere in this report
are detailed explanations of the issuance of the New SSGM.
From September 1987 through December 31, 2003, the Company has advanced
the sum of $43,200,908 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 $43,791,173. This
investment includes the charge of $26,331,685 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,
28
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 a community telephone
building, for community facilities, for a community place of worship, for
the purchase of the real estate on the Modesto Mine, for leasing the
Montemayor real estate, for the purchase and erection of a cone crushing
system, for diamond drilling at the SSGM, for the purchase of a rod mill
and a carbon regeneration system, all other related needs, and most
recently, the exploration of the New SSGM.
EMPLOYEES
- ---------
As of December 31, 2003, the Joint Venture employed between 34 and 44
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 December 31, 2003, the Company, and three of
its subsidiaries, have advanced to the Joint Venture $43,791,173.
Included in the total advances is the interest charged to the Joint
Venture by the Company which amounts to $26,331,685 through December 31,
2003. The Company furnishes all of the funds required by the Joint
Venture. This interest charge has been eliminated from these financial
statements.
EFFORTS TO OBTAIN CAPITAL
- -------------------------
Since the concession was granted, and through the present time,
substantial effort is exercised in attempting to secure funding through
various sources, all with the purpose to expand the operations of the
SCMP, to construct an open-pit heap-leach operation at the SSGM site, and
to continue the exploration of its other mining prospects.
The Company, Sanseb, and the Joint Venture consider the past political
situation in the Republic of El Salvador to have been unstable, and
believe that the final peace declaration on December 16, 1992, has
29
put an end to the conflict. Even though many years have passed, the
stigma of the past unfavorable political status in the Republic of El
Salvador continues to exist and therefore certain investors continue to
be apprehensive to invest the funds required. However, as explained in
this report, the Company was able to obtain a sum of funds to invest in
the expansion and retrofitting of its SCMP and for the exploration of its
other mining prospects. The decline in the price of gold to a 20-year
low depressed the public interest, which affected the market price of the
Company's shares as well as the shares of most of the world-wide mining
companies. This has all changed as the price of gold is at its highest
20-year level. 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 as many investors use the thinly traded
market price as the purchase price notwithstanding the Company's
investment and the value in its gold ore reserves. 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
continues to increase since January 2002, and has reached its twenty-year
high. At this time forecasters are predicting the price of gold to
exceed $450 an ounce because gold's positive long-term fundamentals
remain intact.
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, production, handling,
storage, use and disposal of hazardous materials to prevent material
environmental or other damage, and to limit the financial liability which
could result from such events. However, some risk of environmental or
other damage is inherent in the business of the Company, as it is with
other companies engaged in similar businesses.
The DHM requires environmental permits to be issued in connection with
the application of the Renewed SSGM. The issuance of these permits are
under the jurisdiction of the El Salvador Ministry of Environment and
Natural Resources Office (MARN). On October 15, 2002, MARN issued an
environmental permit under Resolution 474-2002 for the SCMP. On October
20, 2002, MARN issued an environmental permit under Resolution 493-2002
for the Renewed SSGM Exploitation area. With these permits in hand, the
Company, on November 5, 2002, filed an application to receive an
exploitation concession, which was received on August 29, 2003 (dated
August 18, 2003), for the Renewed SSGM for a period of 20 years.
DIVIDENDS
- ---------
For the foreseeable future, it is anticipated that the Company will use
all of its earnings to finance its growth and expansion, therefore,
dividends will not be paid to shareholders.
IMPACT OF INFLATION
- -------------------
The impact of inflation on the Company has not been significant in recent
years because of the relatively low rates of inflation and deflation
experienced in the United States.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions for the reporting period and as of the financial statement
date. These estimates and assumptions affect the reported amounts of
assets and liabilities, the
30
disclosure of contingent liabilities and the reported amounts of revenues
and expenses. Actual results could differ from those amounts. A
critical accounting policy is one that is important to the portrayal of
the Company's financial condition and results, and requires the Company
to make difficult subjective and/or complex judgments. Critical
accounting policies cover accounting matters that are inherently
uncertain because the future resolution of such matters is unknown and
undeterminable. The Company believes the following accounting policies
are critical policies: accounting for its gold ore reserves,
environmental liabilities, income taxes, asset retirement obligations and
operations in a foreign country.
Gold ore reserves include proved reserves that represent estimated
quantities of gold in which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reserves under existing economic and operating conditions. The gold ore
reserves are based on estimates prepared by internal or independent
geology consultants. They are used to calculate depreciation, depletion
and amortization (DD&A) and to determine if any potential impairment
exists related to the recorded value of the Company's gold ore reserves.
The Company reviews, on an as needed basis, its estimates of costs of
compliance with environmental laws and the cleanup of various sites,
including sites in which governmental agencies have designated the
Company as a potentially responsible party. When it is probable that
obligations have been incurred and where a minimum cost or a reasonable
estimate of the actual costs of compliance or remediation can be
determined, the applicable amount is accrued.
The Company makes certain estimates, which may include various tax
planning strategies, in determining taxable income, the timing of
deductions and the utilization of tax attributes, which can differ from
estimates due to changes in laws and regulations, discovery and analysis
of site conditions and changes in technology.
Management is required to make judgments based on historical experience
and future expectations on the future abandonment cost, net of salvage
value, of its mining properties and equipment. The Company reviews its
estimate of the future obligation periodically and will accrue the
estimated obligation based on the adoption of SFAS No. 143 as described
in the section, "Recently Issued Accounting Developments." The
implementation of this standard had no material impact on the financial
statements.
RECENTLY ISSUED ACCOUNTING DEVELOPMENTS
- ---------------------------------------
Reference is made to Note 3 in the financial statements included with
this report and the section "Recently Issued Accounting Developments,"
included in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" reported in the Company's first
quarter S.E.C. Form 10-Q filing for the period ended June 30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
COMMODITY PRICES
- ----------------
As of December 31, 2003, there have been no material changes in market
risks as were disclosed in the S.E.C. Form 10-K for the Company's fiscal
year ended March 31, 2003, and in the S.E.C. Form 10-Q for the first
quarter ended June 30, 2003.
31
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of
the Securities and Exchange Commission ("SEC"), means controls and other
procedures that are designed to ensure that information required to be
disclosed in the reports that the Company files or submits to the SEC
under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by the Company in the
reports that it files or submits to the SEC under the Act is accumulated
and communicated to the Company's management, including its principal
executive officer and its principal financial officer, as appropriate to
allow timely decisions to be made regarding required disclosure. The
Company's President, Treasurer, Chief Executive Officer and Chief
Financial Officer and Executive Vice President and Secretary have
evaluated the Company's disclosure controls and procedures as of a date
within 90 days of the filing date of this Form 10-Q and have concluded
that the Company's disclosure controls and procedures are effective as of
the date of such evaluation.
Changes in Internal Controls
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified
Public Accountants' Codification of Statement on Auditing Standards, AU
Section 319, means controls and other procedures designed to provide
reasonable assurance regarding the achievement of objectives in the
reliability of the Company's financial reporting, the effectiveness and
efficiency of the Company's operations and the Company's compliance with
applicable laws and regulations. There have been no significant changes
in the Company's internal controls or in other factors that could
significantly affect such controls subsequent to the date the Company
carried out its evaluation.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- ------------------------------------------------------------------------
Some of the statements contained in this report are forward-looking
statements, such as estimates and statements that describe the Company's
future plans, objectives or goals, including words to the effect that the
Company or management expects a stated condition or result to occur.
Since forward-looking statements address future events and conditions, by
their very nature, they involve inherent risks and uncertainties. Actual
results in each case could differ materially from those currently
anticipated in such statements by reason of factors such as production at
the Company's mines, changes in operating costs, changes in general
economic conditions and conditions in the financial markets, changes in
demand and prices for the products the Company produces, litigation,
legislative, environmental and other judicial, regulatory, political and
competitive developments in areas in which the Company operates and
technological and operational difficulties encountered in connection with
mining. Many of these factors are beyond the Company's ability to
control or predict. The Company disclaims any intent or obligation to
update its forward-looking statements, whether as a result of receiving
new information, the occurrence of future events, or otherwise.
32
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
S.E.C. FORM 10-Q - DECEMBER 31, 2003
PART II - FINANCIAL INFORMATION
Item 1. Legal Proceedings
None pending.
Item 2. Changes in Securities
Reference is made to the financial statements which explain
the number of common shares issued and stock options issued
or exercised.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6(a). Exhibits and Reports on Form 8-K
Exhibits, as required by Item 601 of Regulation S-K are
listed on pages 33 to 38. The exhibit numbers correspond to
the numbers assigned in Item 601 of Regulation S-K.
Item 6(b). Form 8-K
None.
Exhibit Index
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibits in Item 601 of Regulation S-K. The exhibit
numbers noted by an asterisk (*) indicate exhibits actually filed with
this quarterly report on Form 10-Q. All other exhibits are incorporated
by reference into this quarterly report on Form 10-Q.
Exhibit No. Description of Exhibit
- ----------- -----------------------
3 Articles of Incorporation and By-laws
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.)
33
Exhibit No. Description of Exhibit
- ----------- ----------------------
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.)
4 Instruments defining the rights of security holders,
including indentures.
4.1 Three-Year Stock Option Agreement dated March 13, 2001,
and expiring on March 13, 2004, to purchase 100,000
common shares at $.10 per share. This stock option
agreement was exercised on January 23, 2004.
(Incorporated by reference to Exhibit 4.9 of the
Company's Form 10-K for the year ended March 31, 2001.)
4.2 Three-Year Stock Option Agreement dated March 13, 2001,
and expiring on March 13, 2004, to purchase 50,000 common
shares at $.15 per share. This stock option agreement
was exercised on January 23, 2004. (Incorporated by
reference to Exhibit 4.10 of the Company's Form 10-K for
the year ended March 31, 2001.)
4.3 Two-Year Stock Option Agreement dated July 2, 2001, and
expiring on July 2, 2003, to purchase 80,000 common
shares at $.25 per share. Stock options were exercised
for the purchase of 20,000 shares on June 28, 2003; stock
options for the balance of 60,000 shares were forfeited.
(Incorporated by reference to Exhibit 4.3 of the
Company's Form 10-K for the year ended March 31, 2002.)
4.4 Two-Year Stock Option Agreement dated July 2, 2001, and
expiring on July 2, 2003, to purchase 100,000 common
shares at $.25 per share. These stock options expired
and the right to purchase the common shares were
automatically forfeited. (Incorporated by reference to
Exhibit 4.4 of the Company's Form 10-K for the year ended
March 31, 2002.)
4.5 Two-Year Stock Option Agreement dated July 2, 2001, and
expiring on July 2, 2003, to purchase 250,000 common
shares at $.25 per share. These stock options were
exercised on June 24, 2003. (Incorporated by reference
to Exhibit 4.5 of the Company's Form 10-K for the year
ended March 31, 2002.)
34
Exhibit No. Description of Exhibit
- ----------- ----------------------
4.6 Two-Year Stock Option Agreement dated July 2, 2001, and
expiring on July 2, 2003, to purchase 70,000 common
shares at $.25 per share. These stock options expired
and the right to purchase the common shares were
automatically forfeited. (Incorporated by reference to
Exhibit 4.6 of the Company's Form 10-K for the year ended
March 31, 2002.)
4.7 Two-Year Stock Option Agreement dated July 2, 2001, and
expiring on July 2, 2003, to purchase 20,000 common
shares at $.25 per share. These stock options expired
and the right to purchase the common shares were
automatically forfeited. (Incorporated by reference to
Exhibit 4.7 of the Company's Form 10-K for the year ended
March 31, 2002.)
4.8 Two-Year Stock Option Agreement dated April 19, 2002, and
expiring on April 19, 2004, to purchase 80,000 common
shares at $.15 per share. (Incorporated by reference to
Exhibit 4.8 of the Company's Form 10-K for the year ended
March 31, 2002.)
4.9 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.)
4.10 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.)
4.11 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.)
4.12 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.)
35
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.2 Loan Agreement and Promissory Note, Edward L. Machulak,
June 20, 1988. (Incorporated by reference to Exhibit 10.2
of the Company's Form 10-K for the year ended March 31,
1993.)
10.3 Loan Agreement and Promissory Note, Edward L. Machulak,
October 14, 1988. (Incorporated by reference to Exhibit
10.3 of the Company's Form 10-K for the year ended March
31, 1993.)
10.4 Loan Agreement and Promissory Note, Edward L. Machulak,
May 17, 1989. (Incorporated by reference to Exhibit 10.4
of the Company's Form 10-K for the year ended March 31,
1993.)
10.5 Loan Agreement and Promissory Note, Edward L. Machulak,
April 1, 1990. (Incorporated by reference to Exhibit 10.5
of the Company's Form 10-K for the year ended March 31,
1993.)
10.6 Letter Agreement, Edward L. Machulak, October 10, 1989.
(Incorporated by reference to Exhibit 10.6 of the
Company's Form 10-K for the year ended March 31, 1993.)
10.7 Loan Agreement and Promissory Note dated January 19,
1994. (Incorporated by reference to Exhibit 10.10 of the
Company's Form 10-K for the year ended March 31, 1995.)
10.8 John E. Machulak and Susan R. Robertson, Loan Agreement
and Promissory Note dated June 3, 1994. (Incorporated by
reference to Exhibit 10.14 of the Company's Form 10-K for
the year ended March 31, 1995.)
10.9 Lillian M. Skeen, Loan Agreement and Open Ended On Demand
Promissory Note dated June 26, 1997. (Incorporated by
reference to Exhibit 10.9 of the Company's Form 10-K for
the year ended March 31, 1998.)
10.10 Robert C. Skeen, Loan Agreement and Open Ended On Demand
Promissory Note dated June 26, 1997. (Incorporated by
reference to Exhibit 10.10 of the Company's Form 10-K for
the year ended March 31, 1998.)
10.11 Robert C. Skeen, Loan Agreement and Open Ended On Demand
Promissory Note dated January 20, 1998. (Incorporated by
reference to Exhibit 10.11 of the Company's Form 10-K for
the year ended March 31, 1998.)
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.)
36
Exhibit No. Description of Exhibit
- ----------- ----------------------
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 Lease Agreement executed on January 14, 2003 by and
between the Company and Mineral San Sebastian S.A. de
C.V. This Lease Agreement is extendible for one or more
equal periods. (Incorporated by reference to Exhibit 10.1
of the Company's Form 10-Q/A for the quarterly period
ended December 31, 2002.)
10.16 New San Sebastian Gold Mine Exploration
Concession/License (New SSGM) consisting of 40.77 square
kilometers officially received on March 3, 2003.
(Spanish and English translation) (Reference is made to
the Company's Form 8-K filed on March 5, 2003.)
(Incorporated by reference to Exhibit 10.16 of the
Company's Form 10-Q for the quarterly period ended
September 30, 2003.)
10.17 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.) This
Concession Agreement Assignment was cancelled and
replaced with the Renewed San Sebastian Gold Mine
Exploitation Concession/License (Renewed SSGM) on August
18, 2003. (Spanish and English translation) (Reference
is made to the Company's Form 8-K filed on September 3,
2003.) (Incorporated by reference to Exhibit 10.17 of the
Company's Form 10-Q for the quarterly period ended
September 30, 2003.)
11 Schedule of Computation of Net Income Per Share
(Incorporated by reference to Exhibit 11 of the Company's
Form 10-K for the year ended March 31, 2003.)
23.1 Consent of Independent Certified Public Accountant
(Incorporated by reference to Exhibit 23.1 of the
Company's Form 10-K for the year ended March 31, 2003.)
31 Rule 13(a)-14(a)/15d-14(a) Certifications
31.1* Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of Executive Vice President and Secretary
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Section 1350 Certifications
32.1* Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
37
Exhibit No. Description of Exhibit
- ----------- ----------------------
32.2* Certification of Executive Vice President and Secretary
pursuant to 18 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 12, 2003. (Incorporated by reference to Exhibit
99.1 of the Company's Form 10-K for the year ended March
31, 2003.)
99.2 Confirmation Agreement, Edward L. Machulak, May 12, 2003.
(Incorporated by reference to Exhibit 99.2 of the
Company's Form 10-K for the year ended March 31, 2003.)
99.3 Confirmation Agreement, Edward L. Machulak Rollover
Individual Retirement Account, May 12, 2003.
(Incorporated by reference to Exhibit 99.3 of the
Company's Form 10-K for the year ended March 31, 2003.)
99.4 Confirmation Agreement, Sylvia Machulak as an individual
and for her Rollover Individual Retirement Account, May
12, 2003. Incorporated by reference to Exhibit 99.4 of
the Company's Form 10-K for the year ended March 31,
2003.)
99.5 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.) 1,211,753 shares remain to be issued as of
December 31, 2003.
99.6 Individual financial statements of majority-owned
companies have been omitted because these companies do
not constitute a significant or material contribution to
the Company.
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant/Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMERCE GROUP CORP.
Registrant/Company
/s/ Edward L. Machulak
Date: January 26, 2004 ______________________________________
Edward L. Machulak
President, Chief Executive Officer,
Chief Financial Officer and Treasurer
38