-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JOvHmHL1seh7CGJsprK547BABKmRoWcWb5WQouB/pD9tGbZW2BFaePv/qSt62jbz gpG4R/16JzJifXkLqgfpMA== 0000109757-03-000006.txt : 20030811 0000109757-03-000006.hdr.sgml : 20030811 20030811142935 ACCESSION NUMBER: 0000109757-03-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCE GROUP CORP /WI/ CENTRAL INDEX KEY: 0000109757 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 391942961 STATE OF INCORPORATION: WI FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07375 FILM NUMBER: 03834181 BUSINESS ADDRESS: STREET 1: 6001 N 91ST ST CITY: MILWAUKEE STATE: WI ZIP: 53225-1795 BUSINESS PHONE: 4144625310 MAIL ADDRESS: STREET 1: 6001 N 91ST ST CITY: MILWAUKEE STATE: WI ZIP: 53225 10-Q 1 tenqjun03.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 06/30/2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2003 or ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From __________ To __________ Commission file number 1-7375 COMMERCE GROUP CORP. (Exact name of registrant as specified in its charter) WISCONSIN 39-1942961 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 6001 NORTH 91ST STREET MILWAUKEE, WISCONSIN 53225-1795 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (414) 462-5310 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 20,716,129 common shares of the Company's common stock, $0.10 par value, were issued and outstanding as of July 31, 2003. 1 COMMERCE GROUP CORP. FORM 10-Q FOR THE FIRST QUARTER ENDED JUNE 30, 2003 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements The following consolidated financial statements have been prepared by Commerce Group Corp. ("the Company") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed omitted pursuant to such SEC rules and regulations. These consolidated financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company's Form 10-K for the year ended March 31, 2003. Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Changes in Shareholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings 36 Item 2. Changes in Securities 36 Item 3. Default Upon Senior Securities 36 Item 4. Submission of Matters to a Vote of Security Holders 36 Item 5. Other Information 36 Item 6. Exhibits and Reports on Form 8-K 36 Registrant's Signature Page 37 Sarbanes-Oxley Section 302 Certifications 38 2 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE CONSOLIDATED BALANCE SHEETS June 30, 2003 March 31, 2003 (Unaudited) (Audited) ------------- -------------- ASSETS ------ Current assets Cash $ 21,284 $ 28,004 Investments 194,578 194,578 Accounts receivable 608,497 608,212 Inventories 39,562 39,562 Prepaid items and deposits 41,871 41,901 ----------- ----------- Total current assets 905,792 912,257 Real estate (Note 5) 0 23,336 Property, plant and equipment, net 4,283,071 4,280,912 Mining resources investment 28,523,590 28,035,169 ------------ ------------ Total assets $33,712,453 $33,251,674 ============ ============ LIABILITIES ----------- Current liabilities Accounts payable $ 407,162 $ 454,719 Notes and accrued interest payable to related parties (Notes 6 & 7) 8,423,537 8,027,380 Notes and accrued interest payable to others (Note 6) 231,307 225,922 Accrued salaries 2,717,415 2,672,415 Accrued legal fees 327,015 326,941 Other accrued expenses 634,546 621,719 ------------ ------------ Total liabilities 12,740,982 12,329,096 Commitments and contingencies (Notes 2, 4, 5, 6, 7, 8, 10 & 11) SHAREHOLDERS' EQUITY -------------------- Preferred Stock Preferred stock, $0.10 par value: Authorized 250,000 shares; Issued and outstanding 2003-none; 2002-none (Note 10) $ 0 $ 0 Common stock, $0.10 par value: Authorized 50,000,000 shares; (Note 10) Issued and outstanding: 06/30/2003-20,716,129 (Note 10) 2,071,613 03/31/2003-20,407,429 (Note 10) 2,040,743 Capital in excess of par value 19,018,833 18,997,412 Retained earnings (deficit) (118,975) (115,577) ------------ ------------ Total shareholders' equity 20,971,471 20,922,578 Total liabilities and shareholders' ------------ ------------ equity $33,712,453 $33,251,674 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 3 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED) 2003 2002 ---- ---- Revenues: $ 0 $ 0 ------------ ------------ Expenses: General and administrative 3,398 10,577 ------------ ------------ Total expenses 3,398 10,577 Net profit (loss) $ (3,398) $ (10,577) Credit (charges) for income taxes 0 0 ------------ ------------ Net income (loss) after income tax credit (charge) $ (3,398) $ (10,577) ============ ============ Net income (loss) per share (Note 2) basic $ (.0002) $ (.0006) ============ ============ Net income (loss) per share (Note 2) diluted $ (.0002) $ (.0006) ============ ============ Weighted av. common shares outstanding (Note 2) 20,447,732 17,939,707 ============ ============ Weighted av. diluted common shares (Note 2) 20,887,732 18,729,707 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 4 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY THROUGH THE PERIOD ENDED JUNE 30, 2003 (UNAUDITED) Common Stock ----------------------------------- Capital in Retained Number of Excess of Earnings Shares Par Value Par Value (Deficit) ---------- ---------- ----------- ---------- Balances March 31, 2001 15,794,008 1,579,401 $18,760,849 $(36,520) Net income (loss) for FY March 31, 2002 (43,171) Common shares issued: Dir./off./employee/ services comp. 1,154,000 115,400 5,260 Payment of debt 250,000 25,000 12,500 Cash 270,000 27,000 13,500 ---------- ----------- ------------ ----------- Balances March 31, 2002 17,468,008 $1,746,801 $18,792,109 $(79,691) Net income (loss) for FY March 31, 2003 (35,886) Common shares issued: Dir./off./employee/ services comp. 693,221 69,322 85,848 Payment of debt 1,435,200 143,520 85,805 Cash 811,000 81,100 33,650 ---------- ----------- ------------ ----------- Balances March 31, 2003 20,407,429 $2,040,743 $18,997,412 $(115,577) Net income (loss) for first quarter ended June 30, 2003 (3,398) Common shares issued: Payment of debt/option exercise 250,000 25,000 37,500 Cash 44,000 4,400 5,640 Share loans 14,700 1,470 1,617 Reduce asset account 0 0 (23,336) ---------- ----------- ------------ ----------- Balances June 30, 2003 20,716,719 $2,071,613 $19,018,833 $(118,975) ========== =========== ============ =========== The accompanying notes are an integral part of these consolidated financial statements. 5 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED) 2003 2002 -------- -------- OPERATING ACTIVITIES: Net income (loss) $ (3,398) $ (10,577) Decrease (increase) in investments 0 10,500 Decrease (increase) in accounts receivable (285) 0 Decrease (increase) in prepaid items and deposits 30 (1,996) Increase (decrease) in accounts payable and accrued liabilities (34,730) 19,046 Increase (decrease) in accrued salaries 45,000 45,000 Increase (decrease) in accrued legal fees 74 19,079 ----------- ------------ Net cash provided by (used in) operating activity 6,691 81,052 INVESTING ACTIVITIES: Investment in mining resources (467,244) (418,715) ----------- ------------ Net cash used in investing activities (467,244) (418,715) FINANCING ACTIVITIES: Net borrowings 401,542 205,165 Common stock issued 52,291 143,251 Net cash provided by (used in) ----------- ------------ financing activities 453,833 348,416 Net increase (decrease) in cash and cash equivalents (6,720) 10,753 Cash - beg. of year 28,004 39,081 ----------- ------------ Cash - end of this period $ 21,284 $ 49,834 =========== ============ The accompanying notes are an integral part of these consolidated financial statements. 6 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (UNAUDITED) Supplemental disclosures of cash information for the first quarterly periods ended June 30, 2003 and 2002: 1. The following amounts of accrued interest expense were capitalized: $344,379 (2003) and $286,297 (2002). 2. There was no interest expense paid in cash for these quarterly periods in 2003 and 2002. 3. The Company paid no income taxes during the quarterly 2003 or 2002 periods. 4. The investments consist of securities held for the Commerce Group Corp. Employee Benefit Account stated at cost and precious stones which are stated at the lower of cost or market value. 5. Accounts receivable consist of advances to Mineral San Sebastian, S.A. (Misanse), a 52%-owned Corporation, which will be an offset for Misanse's rental charges included in the accounts payable. 6. Inventory consists of consumable items used in processing gold ore, which are stated at the lower of average cost or market. Supplemental schedule of non-cash investing and financing activities during the first quarterly periods ended June 30: 1. The Company issued the following common shares for the values shown for services rendered: Shares Value ------ ----- 2003 0 $0 2002 0 $0 2. Other non-cash items: 2003 2002 ---- ---- Accrued salaries $45,000 $45,000 Accrued legal fees 74 19,079 Accrued director fees 4,400 4,400 Consulting fees 9,000 9,000 ------- ------- $58,474 $77,479 3. Non-cash equipment financing activities were none for 2003 and none for 2002. The accompanying notes are an integral part of these consolidated financial statements. 7 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (1) THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS - ------------------------------------------------------------------ (a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant") and its 82 1/2%-owned subsidiary, San Sebastian Gold Mines, Inc. ("Sanseb") both United States' corporations, have formed the Commerce/Sanseb Joint Venture ("Joint Venture") for the purpose of performing gold mining and related activities, including, but not limited to, exploration, exploitation, development, extraction and processing of precious metals in the Republic of El Salvador, Central America. Gold bullion, currently the Joint Venture's principal product, was produced (but not on a full production basis) in El Salvador and refined and sold in the United States. Expansion of exploration is a goal at the San Sebastian Gold Mine ("SSGM") which is located near the city of Santa Rosa de Lima. Exploration is being curtailed at other mining projects until adequate funding and concession/license permits are obtained. All of the mining projects are located in the Republic of El Salvador, Central America. On March 3, 2003, the Company received an exploration license dated February 24, 2003, for the exploration of minerals in an area encompassing the SSGM, consisting of 42 square kilometers, which is hereafter referred to as the "New SSGM Exploration Concession/License" or the "New SSGM." This expanded area provides the Company with an opportunity to increase its gold and silver ore reserves. Included in this area are three formerly-operated gold and silver mines: the La Lola Mine, the Santa Lucia Mine and the Tabanco Mine. As of March 31, 2000 the Joint Venture had temporarily suspended the San Cristobal Mill and Plant ("SCMP") operations (operations ceased on December 31, 1999) until such time as it has adequate funds to retrofit, rehabilitate, restore and expand these facilities and until there is certainty that the price of gold will be stabilized at a higher selling price. The Joint Venture plans to begin its open-pit, heap-leaching process on the SSGM site when adequate funding becomes available, and if the price of gold maintains the current price level. It also plans to continue its SSGM site preparation, the expansion of its exploration and exploitation targets, and the enlargement and development of its gold ore reserves. Furthermore, it plans to explore the potential of other gold mine exploration prospects in El Salvador. Concurrently, it is in the process of obtaining necessary funding for each of these separate programs while its Joint Venture is erecting its crushing system at the SSGM site and performing minor retrofit and rehabilitation work at the SCMP. It plans to commence an exploration program on the New SSGM. (b) Basis of presentation: Management estimates and assumptions: Certain amounts included in or affecting the Company's financial statements and related disclosures must be estimated, requiring that certain assumptions be made with respect to values or conditions which cannot be made with certainty at the time the financial statements are prepared. Therefore, the reported amounts of the Company's assets and liabilities, revenues and expenses, and associated disclosures with respect to contingent assets and obligations are necessarily affected by these estimates. The Company evaluates these estimates on an ongoing basis, utilizing historical experience, consultation with experts, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from the Company's estimates. 8 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2003 (2) SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------ CONSOLIDATED STATEMENTS The Joint Venture and the following subsidiaries are all majority-owned by the Company and are included in the consolidated financial statements of the Company. All significant intercompany balances and transactions have been eliminated. % Owner- Charter/Joint Venture ship Place Date ----- ----------- ---------- Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959 Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0 El Salvador 05/08/1960 Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974 San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970 San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968 Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964 Commerce/Sanseb Joint Venture ("Joint Venture") 90.0 Wisconsin & 09/22/1987 El Salvador INVESTMENTS The investments consist of securities held for the Commerce Group Corp. Employee Benefit Account, and are stated at cost. The precious stones included in the investment account are stated at cost. ACCOUNTS RECEIVABLE The accounts receivable primarily consists of the advances to Misanse, a 52%-owned subsidiary, which will be offset for the Misanse rental and other charges included in the accounts payable due to Misanse. INTERCOMPANY BALANCES All intercompany balances and transactions have been eliminated. INVENTORY Inventory consists of consumable supplies and are stated at cost, which is lower than the market value. DEFERRED MINING COSTS The Company, in order to avoid expense and revenue unbalance, capitalizes all costs directly associated with acquisition, exploration and development of specific properties, until these properties are put into operation, sold or are abandoned. Gains or losses resulting from the sale or abandonment of mining properties will be included in operations. The Joint Venture capitalizes its costs and expenses and will write off these cumulative costs on a units of production method at such time as it begins producing gold derived from the virgin gold ore on a full production basis. If the prospect of gold production, due to different conditions and circumstances becomes unlikely, all of these costs may be written off in the year that this occurs. 9 The Company regularly evaluates its carrying value of exploration properties in light of their potential for economic mineralization and the likelihood of continued work by either the Company or a joint venture partner. The Company may, from time to time, reduce its carrying value to an amount that approximates fair market value based upon an assessment of such criteria. REVENUE RECOGNITION Revenue from the sale of gold and industrial minerals is recognized when title passes to the buyer. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment is stated at the lower of cost or estimated net realizable value. Mining properties, development costs and plant and equipment will be depreciated when full production takes place using the units of production method based upon proven and probable reserves. Until the Company suspended its mining operations, the assets were depreciated using the straight-line method over estimated useful lives ranging from three to ten years. Depreciation and amortization expenses include the amortization of assets acquired, if any, under capital leases. Replacements and major improvements are capitalized. When in operation, maintenance and repairs will be charged to expense based on average estimated equipment usage. Interest costs incurred in the construction or acquisition of property, plant, and equipment are capitalized and amortized over the useful lives of the related assets. Since the Company suspended its gold processing operations as of March 31, 2000, it also ceased to depreciate its fixed assets. MINERAL EXPLORATION AND DEVELOPMENT COSTS Significant property acquisition payments for active exploration properties are capitalized. If no minable ore body is discovered, previously capitalized costs are expensed in the period the property is abandoned. Expenditures for the development of new mines, to define further mineralization at and adjacent to existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on the units of production basis over proven and probable reserves. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. All provisions of this Statement will be effective when the occurrence arises. The Company is in the process of determining the impact of this standard on the Company's financial results when effective. The Company's adoption of SFAS No. 143 should not have a material impact on the Company's results of operations or financial position. 10 In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and amends APB No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This Statement requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. SFAS No. 144 retains the fundamental provision of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This statement also retains APB No. 30's requirement that companies report discontinued operations separately from continuing operations. All provisions of this Statement are effective in the first quarter of 2003. The Company anticipates that the impact of this new standard should have no material impact on the financial statements taken as a whole. In December 2002, the Financial Accounting Standards Board issued Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS No. 148). SFAS No. 148, amends SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendment to SFAS no. 123 are effective for financial statements for fiscal years ending after December 15, 2002. As the Company accounts for stock-based employee compensation using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees, the Company has adopted the disclosure requirements of SFAS No. 148, effective April 1, 2003. Management's estimates of gold and other metal prices, recoverable proven and probable reserves, operating, capital, and reclamation costs are subject to certain risks and uncertainties which may affect the recoverability of the Company's investment in property, plant, and equipment. Although management has made its best estimate of these factors based on current conditions, it is reasonably possible that changes could occur in the near-term which could adversely affect management's estimate of the net cash flows expected to be generated from its mining properties. Estimates of future cash flows are subject to risks and uncertainties. It is possible that changes could occur which may affect the recoverability of property, plant and equipment. DEFERRED FINANCING COSTS Costs incurred to obtain debt financing are capitalized and amortized over the life of the debt facilities using the effective interest method. INTEREST CAPITALIZATION Interest costs are capitalized as part of the historical cost of facilities and equipment, if material. INCOME TAXES The Company files a consolidated federal income tax return with its subsidiaries (See Note 9). The Joint Venture files a U.S. partnership return. 11 COMPREHENSIVE INCOME Effective April 1, 1999, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 is designed to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period. Besides net income, other comprehensive income includes foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. The Company believes that it has no material items or other comprehensive income in any period presented in the accompanying financial statements. EARNINGS (LOSS) PER COMMON SHARE The Company has in the past years reported its "Earnings per Share" which presently complies with SFAS No. 128. As required by this standard, the Company reports two earnings per share amounts, basic net income and diluted net income per share. Basic net income per share is computed by dividing income or loss reportable to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator). The computation of diluted net income or loss per share is similar to the computation of basic net income per share except that the denominator is increased to include the dilutive effect of the additional common shares that would have been outstanding if all convertible securities, stock options, rights, share loans, etc. had been converted to common shares at the last day of each fiscal period. If on June 30, 2003, 440,000 option shares were added to the weighted number of shares which amount to 20,447,732 common shares issued and outstanding, then the total number of fully diluted shares amount to 20,887,732. The loss per share for this period ended June 30, 2003 is $.0002 cents per share. The same assumptions were used for the same 2003 fiscal period. FOREIGN CURRENCY The Company is not involved in foreign currency transactions because as of January 1, 2001, the Republic of El Salvador, Central America adopted the U.S. dollar system and pegged the exchange rate at 8.75 colones to one U.S. dollar. Almost all of the money transactions in El Salvador are now conducted in U.S. dollars. MAJOR CUSTOMER In the past, the Joint Venture produced gold and silver. It sold its gold at the world market price to a refinery located in the United States. Given the nature of the precious metals that are sold, and because many potential purchasers of gold and silver exist, it is not believed that the loss of any customer would adversely affect either the Company or the Joint Venture. 12 (3) INVESTMENT IN PROPERTY, PLANT, EQUIPMENT AND MINING RESOURCES - ----------------------------------------------------------------- The following is a summary of the investment in property, plant, equipment, mining resources and development costs: June 30, 2003 June 30, 2002 --------------------------- --------------------------- Accumulated Accumulated Cost Amortization Net Cost Amortization Net ---- ------------ --- ---- ------------ --- Mineral Proper- ties and Deferred Develop- ment $28,523,590 $28,523,590 $27,602,545 $27,602,545 Property, Plant and Equip- ment 6,535,214 2,252,143 4,283,071 6,380,868 2,252,143 4,128,725 ----------- ----------- ----------- ----------- ---------- ----------- $35,058,804 $ 2,252,143 $32,806,661 $33,983,413 $2,252,143 $31,731,270 =========== =========== =========== =========== ========== =========== Vehicles, office, mining and laboratory equipment, buildings, etc. are stated at cost and are depreciated using the straight-line method over estimated useful lives of three to ten years. Maintenance and repairs are charged to expense as incurred. Since the Joint Venture suspended operations effective March 31, 2000 in view of the weak price of gold and the need to expand and rehabilitate these facilities, no depreciation has been recorded. IMPAIRMENTS The Company evaluates the carrying value of its properties and equipment by applying the provisions of Statement of Financial Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Estimated future net cash flows, on an undiscounted basis, from each property are calculated using estimated recoverable ounces of gold (considering current proven and probable reserves and mineral resources expected to be converted into mineral reserves. The inclusion of mineral resources is based on various circumstances, including but not limited to, the existence and nature of known mineralization, location of the property, results of drilling; and analysis to demonstrate the ore is commercially recoverable), estimated future gold price realization (considering historical and current prices, price trends and related factors); and operating, capital and site restoration costs. Reduction in the carrying value of property, plant and equipment, with a corresponding charge to income, are recorded to the extent that the estimated future net cash flows are less than the carrying value. (4) COMMERCE/SANSEB JOINT VENTURE ("JOINT VENTURE") - --------------------------------------------------- The Company is in a joint venture with and owns 82 1/2% of the total common stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada chartered (1968) corporation. The balance of Sanseb's stock is held by approximately 180 non-related shareholders, including the President of the Company who owns 2,073 common shares. Sanseb was formed in 1968 to explore, exploit, research, and develop adequate gold reserves. Sanseb produced gold from the SSGM from 1972 through February 1978. 13 On September 22, 1987, the Company and Sanseb entered into a joint venture agreement to formalize their relationship with respect to the mining venture and to account for the Company's substantial investment in Sanseb. Under the terms of the agreement, the Company is authorized to supervise and control all of the business affairs of the Joint Venture and has the authority to do all that is necessary to resume mining operations at the SSGM on behalf of the Joint Venture. The net pre-tax profits of the Joint Venture will be distributed as follows: Company 90%; and Sanseb 10%. Since the Company owns 82 1/2% of the authorized and issued shares of Sanseb, the Company in effect has over a 98% interest in the Joint Venture activities. The joint venture agreement further provides that the Company has the right to be compensated for its general and administrative expenses in connection with managing the Joint Venture. Under the joint venture agreement, agreements signed by the Company for the benefit of the Joint Venture create obligations binding upon the Joint Venture. The Joint Venture is registered to do business in the State of Wisconsin and in the Republic of El Salvador, Central America. INVESTMENTS IN JOINT VENTURE As of June 30, 2003, the Company's investments, including charges for interest expense to the Joint Venture, were $41,161,345 and three of the Company's subsidiaries' advances were $590,265 for a total of $41,751,610. INVESTMENT IN EL SALVADOR MINING PROJECTS During this fiscal period, the Company has advanced funds, performed services, and allocated its general and administrative costs to the Joint Venture. As of June 30, 2003 and 2002, the Company, Sanseb and three of the Company's subsidiaries have invested (including carrying costs) the following in its Joint Venture: 2003 2002 ---- ---- The Company's advances (net of gold sale proceeds) since 09/22/87 $41,161,345 $37,678,244 The Company's initial investment in the Joint Venture 3,508,180 3,508,180 Sanseb's investment in the Joint Venture 3,508,180 3,508,180 Sanseb's investment in the mining projects and amount due to the Company 34,695,080 32,530,420 ----------- ------------ Total: 82,872,785 77,225,024 Advances by the Company's three subsidiaries 590,265 590,265 ----------- ----------- Combined total investment $83,463,050 $77,815,289 =========== =========== SSGM ACTIVITY The Company had no significant activity at the SSGM site from February 1978 through January 1987. The present status is that, the Company, since January 1987, and thereafter, the Joint Venture, since September 1987, have completed certain of the required mining pre-production preliminary stages in the minable and proven gold ore reserve area, and the Company is active in attempting to obtain adequate financing for the proposed open-pit, heap-leaching operations at the SSGM. The Joint Venture plans to resume its exploration and expansion program to develop additional gold ore reserves in the area 14 surrounding the minable gold ore reserves. Presently, it is erecting its cone crushing system and performing minor rehabilitation repairs to its San Cristobal Mill and Plant. On March 3, 2003, the Company received the New SSGM from the Ministry of Economy's Director of El Salvador Department of Hydrocarbons and Mines (DHM) which includes and extensively encompasses the existing SSGM. It is in the process of planning its exploration program. MINERAL SAN SEBASTIAN S.A. DE C.V. ("MISANSE") (a) MISANSE CORPORATE STRUCTURE The SSGM real estate is owned by and leased to the Joint Venture by Misanse, a Salvadoran-chartered corporation. The Company owns 52% of the total of Misanse's issued and outstanding shares. The balance is owned by approximately 100 El Salvador, Central American, and United States' citizens. (b) SSGM MINING LEASE On January 14, 2003, the Company entered into an amended and renewed 30-year lease agreement with Mineral San Sebastian Sociedad Anomina de Capital Variable (Misanse) pursuant to the approval of the Misanse shareholders and Misanse directors at a meeting held on January 12, 2003. The renewed lease is for a period of thirty (30) years commencing on the date that the Company receives its Renewed San Sebastian Gold Mine Exploitation Concession/License, hereinafter identified as the "Renewed SSGM," from the DHM. The lease is automatically extendible for one or more equal periods. The Company will pay to Misanse for the rental of this real estate the sum of five percent of the net sales of the gold and silver produced from this real estate, however, the payment will not be less than $343.00 per month. The Company has the right to assign this lease without prior notice or permission from Misanse. This lease is pledged as collateral for loans made to related parties (Note 7). MINERAL CONCESSIONS/LICENSES Renewed San Sebastian Gold Mine Exploitation Concession/License (Renewed SSGM) - approximately 1.2306 square kilometers, Department of La Union, El Salvador, Central America On September 6, 2002, at a meeting held with the El Salvadoran Minister of Economy and the DHM, it was agreed to submit an application for the Renewed SSGM for a 30-year term and to simultaneously cancel the concession obtained on July 23, 1987. On September 26, 2002, the Company filed this application. On February 28, 2003 (received March 3, 2003) the DHM admitted to the receipt of the application and the Company proceeded to file public notices as required by Article 40 of the El Salvadoran Mining Law and its Reform (MLIR). On April 16, 2003, the Company's El Salvadoran legal counsel filed with the DHM notice that it believed that it complied with the requirements of Article 40, and that there were no objections; and requested that the DHM make its inspection as required by MLIR Article 42. An inspection by the DHM was made. The Company then provided a bond which was required by the DHM to protect third parties against any damage caused from the mining operations, and it paid the annual surface tax. Once issued, this Renewed SSGM will be pledged as collateral to the same parties that held the previous concession as collateral. 15 New SSGM Exploration Concession/License (New SSGM) - approximately 40.7694 square kilometers On October 20, 2002, the Company applied for the New SSGM, which covers an area of 42 square kilometers and includes approximately 1.2306 square kilometers of the Renewed SSGM. The New SSGM is in the jurisdiction of the City of Santa Rosa de Lima in the Department of La Union and in the Nueva Esparta in the Department of Morazan, Republic of El Salvador, Central America. On February 24, 2003, the DHM issued the New SSGM for a period of four years starting from the date following the notification of this resolution which was received on March 3, 2003. The New SSGM may be extended for two two-year periods, or for a total of eight years. Besides the San Sebastian Gold Mine, three other formerly operative gold and silver mines known as the La Lola Mine, the Santa Lucia Mine, and the Tabanco Mine are included in the New SSGM. Nueva Esparta Exploration Concession/License (Nueva Esparta) - 45 square kilometers On or about October 20, 2002, the Company filed an application with the DHM for the Nueva Esparta, which consists of 45 square kilometers north and adjacent to the New SSGM. This rectangular area is in the Departments of La Union (east) and Morazan (west) and in the jurisdiction of the City of Santa Rosa de Lima, El Salvador, Central America. Included in the Nueva Esparta are eight other formerly operated gold and silver mines known as: the Grande Mine, the Las Pinas Mine, the Oro Mine, the Montemayor Mine, the Banadero Mine, the Carrizal Mine, the La Joya Mine and the Copetillo Mine. The application is pending. El Salvador Mineral Production Fees Effective February 1996, the Government of El Salvador passed a law which required mining companies to pay to it three percent of its gross gold/silver sale receipts and an additional one percent is to be paid to the El Salvador municipality which has jurisdiction of the mine site. As of July 2001, a series of revisions to the El Salvador Mining Law offer to make exploration more economical. The principal change is that the fee has been reduced to two percent of the gross gold receipts. The Company, in compliance with the new law, has, or it plans to file applications for all of the mining concessions in which it has an interest. SCMP LAND AND BUILDING LEASE On November 12, 1993, the Joint Venture entered into an agreement with Corporacion Salvadorena de Inversiones ("Corsain"), an El Salvadoran governmental agency, to lease for a period of ten years, approximately 166 acres of land and buildings on which its gold processing mill, plant and related equipment (the SCMP) are located, and which is approximately 15 miles west of the SSGM site. The basic annual lease payment is U.S. $11,500 (payable in El Salvador colones at the then current rate of exchange), payable annually in advance, unless otherwise amended, and subject to an annual increase based on the annual United States' inflation rate. As agreed, a security deposit of U.S. $11,500 was paid on the same date and this deposit is subject to increases based on any United States' inflationary rate adjustments. 16 MODESTO MINE REAL ESTATE The Company owns 63 acres of land which are a key part of the Modesto Mine that is located near the city of El Paisnal, El Salvador. This real estate is subject to a mortgage and promissory note and is pledged as collateral to certain parties described in Note 7. SAN FELIPE-EL POTOSI MINE ("POTOSI") REAL ESTATE LEASE AGREEMENT The Joint Venture entered into a lease agreement with the San Felipe-El Potosi Cooperative ("Cooperative") of the city of Potosi, El Salvador on July 6, 1993, to lease the real estate encompassing the San Felipe-El Potosi Mine for a period of 30 years and with an option to renew the lease for an additional 25 years, for the purpose of mining and extracting minerals. MONTEMAYOR MINE The Joint Venture has leased approximately 175 acres of land that it considers to be the key mining property. The terms of the various leases are one year with automatic renewal rights. This property is located 14 miles northwest of the SCMP, six miles northwest of the SSGM, and about two miles east of the city of San Francisco Gotera in the Department of Morazan, El Salvador. (5) SYNOPSIS OF REAL ESTATE OWNERSHIP AND LEASES - ------------------------------------------------- The Company's 52%-owned subsidiary, Misanse, owns the 1,470 acre SSGM site located near the city of Santa Rosa de Lima in the Department of La Union, El Salvador. Other real estate ownership or leases in El Salvador are as follows: the Company owns approximately 63 acres at the Modesto Mine; and the Joint Venture leases the SCMP land and buildings on which its mill, plant and equipment are located. In addition, the Joint Venture has entered into a lease agreement to lease approximately 675 acres based on the production of gold payable in the form of royalties with a mining prospect in the Department of San Miguel and it leases approximately 175 acres in the Department of Morazan in the Republic of El Salvador. The Company also leases on a month-to-month basis approximately 4,032 square feet of office space in Milwaukee, Wisconsin. 17 (6) NOTES PAYABLE AND ACCRUED INTEREST - --------------------------------------- 06/30/03 06/30/02 -------- -------- Related Parties Mortgage and promissory notes to related parties, interest ranging from one percent to four percent over prime rate, but not less than 16%, payable monthly, due on demand, using the undeveloped land, Misanse lease, real estate and all other assets owned by the Company, its subsidiaries and the Joint Venture as collateral. (Note 7) $8,423,537 $7,121,251 Other Short-term notes and accrued interest (June 30, 2003, $96,307 and June 30, 2002, $424,093) issued to creditors and other non related parties, interest rates of varying amounts, in lieu of actual cash payments and includes a mortgage on a certain parcel of land pledged as collateral located in El Salvador. 231,307 762,039 ---------- ---------- Total: $8,654,844 $7,883,290 ========== ========== (7) RELATED PARTY TRANSACTIONS - ------------------------------- The Company, in an attempt to preserve cash, had prevailed on its President to accrue his salary for the past 22 and one-quarter years, including vacation pay, for a total of $2,677,765. In addition, with the consent and approval of the Directors, the President of the Company, as an individual and not as a Director or Officer of the Company, entered into the following financial transactions with the Company, the status of which is reflected as of June 30, 2003: The amount of cash funds which the Company has borrowed from its President from time to time, together with accrued interest, amounts to $5,790,875. To evidence this debt, the Company has issued to its President a series of open-ended, secured, on-demand promissory notes, with interest payable monthly at the prime rate plus two percent, but not less than 16% per annum. The Company had borrowed, as of June 30, 2003, an aggregate of $858,210, including accrued interest, from the Company's President's Rollover Individual Retirement Account (ELM RIRA). These loans are evidenced by the Company's open-ended, secured, on-demand promissory note, with interest payable monthly at the prime rate plus four percent per annum, but not less than 16% per annum. In order to satisfy the Company's cash requirements from time to time, the Company's President has sold or pledged as collateral for loans, shares of the Company's common stock owned by him. In order to compensate its President for selling or pledging his shares on behalf of the Company, the Company has made a practice of issuing him the number of restricted shares of common stock equivalent to the number of shares sold or pledged, plus an additional number of shares equivalent to the amount of accrued interest calculated at the prime rate plus three percent per annum and payable monthly. The Company receives all of the net cash proceeds from the sale or from the pledge of these shares. The Company did not borrow any common shares during this fiscal period. The share loans, if any, are all in accordance 18 with the terms and conditions of Director-approved, open-ended loan agreements dated June 20, 1988, October 14, 1988, May 17, 1989, and April 1, 1990. On February 16, 1987, the Company granted its President, by unanimous consent of the Board of Directors, compensation in the form of a bonus in the amount of two percent of the pre-tax profits realized by the Company from its gold mining operations in El Salvador, payable annually over a period of twenty years commencing on the first day of the month following the month in which gold production commences. The President, as an individual, and not as a Director or Officer of the Company, presently owns a total of 467 Misanse common shares. There are a total of 2,600 Misanse shares issued and outstanding. Also with the consent and approval of the Directors, a company in which the President has a 55% ownership, General Lumber & Supply Co., Inc. (GLSCO), entered into the following agreements, and the status is reflected as of June 30, 2003: The Company leased approximately 4,032 square feet on a month-to-month basis for its corporate headquarters' office; the monthly rental charge was $2,789. The same related company provides administrative services, use of its vehicles, and other property, as required by the Company. In lieu of cash payments for the office space rental and for the consulting, administrative services, etc., these amounts due are added each month to this related company's open-ended, secured, on-demand promissory note issued by the Company. In addition, this related company does from time to time use its credit facilities to purchase items needed for itself or for the Joint Venture's mining needs. This related company has been issued an open-ended, secured, on-demand promissory note which amounts to $1,191,235; the annual interest rate is four percent plus the prime rate, but not less than 16%, and it is payable monthly. On June 30, 2001, GLSCO purchased 250,000 restricted common shares at a price of $.15 per share and it received options to purchase 250,000 common shares on or before July 2, 2003, at a price of $.25 per share. The terms of this transaction are no less favorable than those obtained from unrelated third parties. On June 24, 2003, GLSCO exercised its option right to purchase 250,000 restricted common shares at a price of $.25 per share. The Company's Directors have consented and approved the following transactions of which the status of each are reflected as of June 30, 2003: The President's wife's Rollover Individual Retirement Account (SM RIRA) has the Company's open-ended, secured, on-demand promissory note in the sum of $446,749 which bears interest at an annual rate of prime plus three percent, but not less than 16% and the interest is payable monthly. The Directors also have acknowledged that Mrs. Sylvia Machulak (wife of the President) is to be compensated for her consulting fees due to her from October, 1, 1994 through September 30, 2000 or 72 months at $2,800 a month, and thereafter at $3,000 per month. The Company owes her as an individual and as a consultant, the sum of $300,600 for services rendered from October 1994. 19 The Law Firm which represents the Company in which a son of the President is a principal is owed the sum of $327,015 for 1,767.3 hours of legal services rendered from July 1980 through June 30, 2003. By agreement, these fees are to be adjusted to commensurate with the hourly fees charged by the Law Firm on the date of payment. The son of the President and his son's wife have the Company's open-ended, on-demand promissory note in the sum of $136,468 which bears interest at an annual rate of 16% payable monthly. The Directors, by their agreement, have deferred cash payment of their Director fees beginning on January 1, 1981, until such time as the Company's operations are profitable. Effective from October 1, 1996, the Director fees are $1,200 for each quarterly meeting and $400 for attendance at any other Directors' meeting. The Executive Committee Director fees are $400 for each meeting. The Directors and Officers have an option to receive cash at such time as the Company has profits and an adequate cash flow, or to exchange the amount due to them for the Company's common shares. The Company advances funds, allocates and charges its expenses to the Joint Venture. The Joint Venture in turn capitalizes all of these advances, costs and expenses. When full production commences, these capitalized costs will be charged as an expense based on a per ton production basis. The Company also charges interest for its advances to the Joint Venture which interest rate is established to be the prime rate quoted on the first day of each month plus four percent and said interest is payable monthly. This interest is eliminated from the consolidated statement of operations. However, a separate accounting is maintained for the purpose of recording the amount that is due to the Company from the Joint Venture. COMPANY NET ADVANCES TO THE JOINT VENTURE - ----------------------------------------- 2003 2002 ---- ---- Total Interest Total Interest Advances Charges Advances Charges ----------- ----------- ----------- ----------- Beginning balance April 1 $40,181,015 $23,751,735 $36,729,924 $20,448,289 June 30 first quarter 980,330 833,146 948,320 808,097 ----------- ----------- ----------- ----------- Total Company advances 41,161,345 24,584,881 37,678,244 21,256,386 Advances by three of the Company's subsidiaries 590,265 0 590,265 0 ----------- ----------- ----------- ----------- June 30 total net advances $41,751,610 $24,584,881 $38,268,509 $21,256,386 =========== =========== =========== =========== (8) COMMITMENTS - ---------------- Reference is made to Notes 2, 4, 5, 6, 7, 10 and 12. (9) INCOME TAXES - ----------------- At March 31, 2003, the Company and its subsidiaries, excluding the Joint Venture, have estimated net operating losses remaining in a sum of approximately $5,063,150 which may be carried forward to offset future taxable income; the net operating losses expire at various times to the year of 2018. (10) DESCRIPTION OF SECURITIES - ------------------------------- a. COMMON STOCK The Company's Wisconsin Certificate of Incorporation effective as of April 1, 1999 authorizes the issuance of 50,000,000 shares of common stock, $0.10 par value per share of which 20,716,129 shares 20 were issued and outstanding as of June 30, 2003. Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the shareholders. Holders of common stock have no cumulative voting rights. Holders of shares of common stock are entitled to share ratably in dividends, if any, as may be declared, from time to time by the Board of Directors in its discretion, from funds legally available therefore. In the event of a liquidation, dissolution or winding up of the Company, the holders of shares of common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. Holders of common stock have no preemptive rights to purchase the Company's common stock. There are no conversion rights or redemption or sinking fund provisions with respect to the common stock. All of the issued and outstanding shares of common stock are validly issued, fully paid and non-assessable. b. PREFERRED STOCK There were no preferred shares issued and outstanding for the periods ending June 30, 2003 or 2002. The Company's Wisconsin Certificate of Incorporation authorizes the issuance of 250,000 shares of preferred stock, $0.10 par value. The preferred shares are issuable in one or more series. If issued, the Board of Directors is authorized to fix or alter the dividend rate, conversion rights (if any), voting rights, rights and terms of redemption (including any sinking fund provisions), redemption price or prices, liquidation preferences and number of shares constituting any wholly unissued series of preferred shares. c. STOCK OPTION ACTIVITY: 06/30/03 03/31/03 ------------------ ---------------- Weighted Weighted Option Average Option Average Shares Price Shares Price ------ ----- ------ ----- Outstanding, beg. yr. 960,000 $0.22 670,000 $0.22 Granted 0 N/A 290,000 $0.19 Exercised (270,000) $0.25* 0 N/A Forfeited (60,000) $0.25* 0 N/A Expired (190,000) $0.25* 0 N/A --------- ----- ---------- ----- Outstanding, end of period 440,000 $0.17 960,000 $0.21 ========= ===== ========== ===== *Exercised, forfeited or expired price. A summary of the outstanding stock options as of June 30, 2003, follows: Weighted Average Weighted Range of Amount Remaining Average Exercise Prices Outstanding Contractual Life Exercise Price - --------------- ----------- ---------------- -------------- Up to $2.99 440,000 .9519 years $0.17 There were no options issued to any Director, Officer, or employee. 21 d. STOCK RIGHTS - TO THE PRESIDENT Reference is made to Note 7, Related Party Transactions, of the Company's financial statements which disclose the terms and conditions of the share loans to the Company by the President and the interest which is payable to him by the Company's issuance of its restricted common shares. Any share interest payable to the President is for shares loaned to the Company and/or for such shares loaned or pledged for collateral purposes, or for unpaid interest, from time to time, all in accordance with the terms and conditions of Director-approved, open-ended loan agreements dated June 20, 1988, October 14, 1988, May 17, 1989 and April 1, 1990. e. SHARE LOANS - OTHERS A series of borrowings of the Company's common shares were made from time to time under the provision that the owners would sell said shares as the Company's designee, with the proceeds payable to the Company. In exchange, the Company agreed to pay these shares loaned within 31 days or less by issuing its restricted common shares, together with interest payable in restricted common shares payable at a negotiated rate of interest normally payable in advance for a period of one year. As of June 30, 2003, there were no shares due to other parties for shares borrowed or for interest payment. f. S.E.C. FORM S-8 REGISTRATION On June 10, 2002, the Company filed its fifth Securities and Exchange Commission Form S-8 Registration Statement No. 333-90122 under the Securities Act of 1933, and it registered 1,500,000 of the Company's $0.10 par value common shares for the purpose of distributing shares pursuant to the plan contained in such registration. From the 1,500,000 shares registered 51,597 shares were issued, and 1,448,403 shares remain to be issued as of June 30, 2003. g. COMMERCE GROUP CORP. EMPLOYEE BENEFIT ACCOUNT (CGCEBA) This account was established for the purpose of compensating the Company's employees for benefits such as retirement, severance pay, and all other related compensation that is mandatory under El Salvadoran labor regulations, and/or as determined by the Officers of the Corporation. The Directors provide the Officers of the Company with the authority to issue its common shares to the CGCEBA on an as needed basis. Under this plan, payment can be made to any employee of the Company or the Company's subsidiaries. The CGCEBA has sold some of the shares issued to this account from time to time to meet its obligations to its El Salvadoran employees. As of June 30, 2003, 321,000 shares remained in the account. (11) CERTAIN CONCENTRATIONS AND CONCENTRATIONS OF CREDIT RISK - -------------------------------------------------------------- The Company is subject to concentrations of credit risk in connection with maintaining its cash primarily in two financial institutions for the amounts in excess of levels. One is insured by the Federal Deposit Insurance Corporation. The other is an El Salvadoran banking institution which the Company uses to pay its El Salvadoran expenses and obligations. The Company considers the U.S. institution to be financially strong and does not consider the underlying risk at this time with its El Salvadoran bank to be significant. To date, these concentrations of credit risk have not had a significant effect on the Company's financial position or results of operations. 22 The Company, when it produced gold and silver, sold its gold and silver production predominantly to one customer. Given the nature of the commodities being sold, and because many other potential purchasers of gold and silver exist, it is not believed that the loss of such customer would adversely affect the Company. The Company is not subject to credit risk in connection with any hedging activities as it has not hedged any of its gold production. If the Company changes its policies, then it will only use highly-rated credit worthy counterparties, therefore it should not anticipate non-performance. (12) CONTINGENCIES - ------------------ Based upon current knowledge, the Company believes that it is in compliance with the U.S. and El Salvadoran environmental laws and regulations as currently promulgated. However, the exact nature of environmental control problems, if any, which the Company may encounter in the future cannot be predicted, primarily because of the increasing number, complexity and changing character of environmental requirements that may be enacted or of the standards being promulgated by governmental authorities. (13) BUSINESS SEGMENTS - ---------------------- The Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information became effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes standards for the way that public business enterprises determine operating segments and report information about those segments in annual financial statements. SFAS 131 also requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 further establishes standards for related disclosure about products and services, geographic areas, and major customers. The Company presently has two reportable segments: mining and other. The mining segment was engaged in the processing of gold. The mining operations are temporarily suspended. The other segments are those activities that are combined for reporting purposes. (14) UNAUDITED FINANCIAL STATEMENTS - ----------------------------------- The consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The financial information included herein is unaudited; however, the Company believes that the information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary to be a fair presentation of the financial position, results of operations, and cash flows for the interim periods. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in connection with the financial statements and the notes thereto included in the Company's latest annual report and the filing of the required Securities and Exchange Commission annual Form 10-K. 23 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE S.E.C. FORM 10-Q - JUNE 30, 2003 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------ CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The matters discussed in this report on Form 10-Q, when not historical matters, are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially from projected results. Such factors include, among others, the speculative nature of mineral exploration, gold and silver prices, production and reserve estimates, litigation, environmental and government regulations, general economic conditions, conditions in the financial markets, political and competitive developments in domestic and foreign areas in which the Company operates, availability of financing, force majeure events, technological and operational difficulties encountered in connection with the Company's mining activities, labor relations, other risk factors as described from time to time in the Company's filings with the Securities and Exchange Commission and other matters discussed under this reporting category. Many of these factors are beyond the Company's ability to control or predict. The Company disclaims any intent or obligation to update its forward-looking statements, whether as a result of receiving new information, the occurrence of future events, or otherwise. Should one or more of those risks or uncertainties materialize, or should any underlying assumption prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected or intended. Management's discussion and analysis ("MD&A") of the financial condition and results of operations of the Company should be read in conjunction with the audited consolidated financial statements and the notes thereto. The Company prepares and files its consolidated financial statements and MD&A in United States ("U.S.") dollars and in accordance with U.S. generally accepted accounting principles ("GAAP"). The following discussion provides information on the results of operations, the financial condition, liquidity and capital resources for the first quarterly period ended June 30, 2003 and 2002. The financial statements of the Company and the notes thereto contain detailed information that should be referred to in conjunction with this discussion. ACCOUNTING POLICIES AND ESTIMATES - --------------------------------- The ensuing discussion and analysis of financial condition and results of operations are based on the Company's consolidated financial statements, prepared in accordance with accounting principles generally accepted in the United States of America and contained within this report on S.E.C. Form 10-Q. Certain amounts included in or affecting the Company's financial statements and related disclosures must be estimated, requiring that certain assumptions be made with respect to values or conditions which cannot be made with certainty at the time the financial statements are prepared. Therefore, the reported amounts of the Company's assets and liabilities, revenues and expenses, and associated disclosures with respect to contingent assets and obligations are necessarily affected by these estimates. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates and units-of-production amortization determination; recoverability and timing of gold production from the heap-leaching process; environmental, reclamation and closure obligations; asset impairments (including estimates of future cash flows); useful lives and residual values of intangible assets; fair value of financial instruments; valuation allowances for deferred tax assets; and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. 24 The Company believes the following significant assumptions and estimates affect its more critical practices and accounting policies used in the preparation of its consolidated financial statements. From time to time, the Company estimates its ore reserves when it is in production. There are a number of uncertainties inherent in estimating quantities of reserves, including many factors beyond the control of the Company. Ore reserve estimates are based upon engineering evaluations of assay values derived from samplings of drill holes and other openings. Additionally, declines in the market price of gold may render certain reserves containing relatively lower grades of mineralization uneconomic to mine. Further, availability of permits, changes in operating and capital costs, and other factors could materially and adversely affect ore reserves. The Company uses its ore reserve estimates in determining the unit basis for mine depreciation and closure rates, as well as in evaluating mine asset impairments. Changes in ore reserve estimates could significantly affect these items. The Company will assess its producing properties and undeveloped mineral claims and leases for impairment when events or changes in circumstances warrant and at least annually. For producing properties and equipment, an impairment is recognized when the estimated future cash flows (undiscounted and without interest) expected to result in the use of the asset are less than the carrying amount of that asset. Measurement of the impairment loss is based on discounted cash flows. Undeveloped mineral claims and leases are measured on a fair value basis. Fair value with respect to such mineral interest, pursuant to Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002, would generally be assessed with reference to comparable property sales transactions in the market place. The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS128), Earnings per Share in prior years. SFAS128's objective is to simplify the computation of earnings per share (EPS) and to make the U.S. standard more compatible with that of other countries and the International Accounting Standards Committee. SFAS128 supersedes APB Opinion 15, replacing the presentation of "primary" and "fully diluted" EPS with "basic" and "diluted" EPS. Basic EPS is computed by dividing income available to common shareholders (net income less any dividends declared on preferred stock and any dividends accumulated on cumulative preferred stock) by the weighted average number of common shares outstanding. Diluted EPS requires an adjustment to the denominator to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted to add back any convertible preferred dividends and the after-tax amount of interest recognized with any convertible debt. The financial statements for the quarterly periods ended June 30, 2003 and 2002 and prior years reflect and include Commerce Group Corp.'s subsidiaries and the Commerce Group Corp./Sanseb Joint Venture (Joint Venture) on a consolidated basis. Prior to the fiscal year ended March 31, 1997, the Company reported the investment in the Joint Venture as advances to the Joint Venture and the Company's advances included the interest earned on these advances in anticipation of the interest being reimbursed. Now these advances are restated and combined with the Company's Consolidated Financial Statements. Although the elimination of interest income reduces the retained earnings, it does not eliminate the interest charged by and earned by the Company which is due and payable to it and which is maintained additionally with a separate accounting. At such time when the profits from the gold mining operation are distributed, the interest earned on these advances will be paid first to the Company pursuant to an agreement entered into by the joint venture parties. 25 THE COMPANY'S CURRENT STATUS - ---------------------------- CURRENT EVENTS In the S.E.C. Form 10-Q filing for the nine-month period ended December 31, 2002, the Company reported the status of the concession/license filings with the El Salvador Department of Hydrocarbons and Mines (DHM). Since that time, the following events have taken place: RENEWED SAN SEBASTIAN GOLD MINE EXPLOITATION CONCESSION/LICENSE (RENEWED SSGM) - APPROXIMATELY 1.2306 SQUARE KILOMETERS, DEPARTMENT OF LA UNION, EL SALVADOR, CENTRAL AMERICA On February 28, 2003 (received March 3, 2003) the DHM admitted to the receipt of the application and the Company proceeded to file public notices as required by Article 40 of the El Salvadoran Mining Law and its Reform (MLIR). On April 16, 2003, the Company's El Salvadoran legal counsel filed with the DHM notice that it believed that it complied with the requirements of Article 40, and that there were no objections; and requested that the DHM make its inspection as required by MLIR Article 42. The DHM inspection was made, a bond was furnished, and the land surface fees were paid. The Company expects a 30-year exploitation concession/license to be issued. NEW SSGM EXPLORATION CONCESSION/LICENSE (NEW SSGM) - APPROXIMATELY 40.7694 SQUARE KILOMETERS On February 24, 2003, the DHM issued the New SSGM for a period of four years starting from the date following the notification of this resolution which was received on March 3, 2003. The Company has made contact with some of the property owners and it expects to commence exploration in the following three formerly-operated mines: La Lola Mine, Santa Lucia Mine and the Tabanco Mine. NUEVA ESPARTA EXPLORATION CONCESSION/LICENSE (NUEVA ESPARTA) - 45 SQUARE KILOMETERS On or about October 20, 2002, the Company filed an application with the DHM for the Nueva Esparta, which consists of 45 square kilometers north and adjacent to the New SSGM. This application is pending. GOLD ORE RESERVES (06/30/03) The Company's geologists have defined the following San Sebastian Gold Mine gold ore reserves: Tons Average Grade Ounces ---- ------------- ------ Virgin ore 14,404,096 0.081 1,166,732 Stope fill estimated 1,000,000 0.340 340,000 ---------- --------- Totals 15,404,096 1,506,732 The estimated recoverable ounces by processing through the San Cristobal Mill and Plant ranges from 85% to 95%; the recovery of gold from the heap-leaching operations should range from 60% to 70%. PRECIOUS METAL MINING The Joint Venture has produced gold from March 31, 1995 through December 31, 1999. Its San Cristobal Mill and Plant (SCMP) consisted primarily of used equipment that had been installed at its leased site by a previous mining company. The used processing equipment was acquired by the Joint Venture on 26 February 23, 1993, and the SCMP operations were suspended as of March 31, 2000. During this period, the price of gold suffered a severe decline. The price of gold has gradually increased since January 2002. Although while in operation the Company has on a continuous basis retrofitted, modified, and restored the equipment, it presently lacks sufficient funds to perform a major overhaul and to expand the SCMP facilities. The Company's management has temporarily suspended its gold processing until such time as it has adequate funds for the retrofitting, rehabilitation, restoration, overhauling, and most importantly for the expansion of the SCMP facilities. During the past 18 months, the price of gold has increased to a level to place the SCMP into a viable position. The Company has a number of non-exclusive independent consulting agreements for the purpose of raising the sum of up to U.S. $20 million. The funds are to be used to purchase and install equipment, perform site development, working capital for the SSGM open-pit, heap-leaching operation, and for the expansion of the Joint Venture's SCMP. From April 1, 1995 through December 1999, the Joint Venture produced gold on a curbed basis primarily from processing the tailings and from the virgin ore it was excavating from its SSGM open pit. The gold was processed at its SCMP facility which is located approximately 15 miles from the SSGM site. It is contemplating the installation of a pilot open-pit, heap-leaching gold-processing system on the SSGM site. The cone crushing system is being erected at this site. It also is continuing its SSGM site preparation, the expansion of its exploration and exploitation targets, and the enlargement and development of its gold ore reserves. The exploration of the Montemayor Mine and the Modesto Mine has been placed on a standby basis pending the advice from its legal counsel relative to the filing of applications for concessions (licenses) on the properties it owns or on which it holds leases. All of the mining properties are located in the Republic of El Salvador, Central America. The Joint Venture will continue its attempts to commence its production of gold. Its objectives are to have an expanded complementary operation while continuing its endeavor to obtain sufficient funds for the SSGM open-pit, heap-leach operation. The Company's main objective and plan, through the Joint Venture, is to operate at the SSGM site, a moderate tonnage, low-grade, open-pit, heap-leaching, gold-producing mine. It intends to commence this gold-mining operation as soon as adequate funding is in place and the gold price stabilizes at the current level. Dependent on the grade of gold ore processed and the funds it is able to obtain, it then anticipates producing annually approximately 10,000 ounces of gold from the SCMP operation and eventually up to 113,000 ounces of gold from its SSGM open-pit, heap-leaching operation. The Joint Venture continues on a limited basis to conduct an exploration program to develop additional gold ore reserves at the SSGM. Since it has the New SSGM, it is planning to explore selected areas, and when it receives the Renewed SSGM, it plans to commence production of gold and silver after funds are available. The Joint Venture produced gold from March 1995 through December 1999 at the SCMP through a start-up or preliminary operation, which was a forerunner of its greater goals. The Company's revenues, profitability and cash flow are greatly influenced by the price of gold. Gold prices fluctuate widely and are affected by numerous factors which will be beyond the Company's control, such as, expectations for inflation, the strength of the U.S. dollar, overproduction of gold, global and regional demand, acts of terrorism, or political and economic conditions, or for that matter, many other reasons. The combined effect of these and other factors is difficult; perhaps impossible to predict. Should the market price of gold fall below the Company's production costs and remain at such level for any sustained period, the Company could experience losses. 27 The Company believes that neither it, nor any other competitor, has a material effect on the precious metal markets and that the price it will receive for its production is dependent upon world market conditions over which it has no control. RESULTS OF OPERATION FOR THE FIRST QUARTER ENDED JUNE 30, 2003 COMPARED TO JUNE 30, 2002 - ----------------------------------------------------------------------- There are no revenues as the Company has suspended its gold production until it is able to procure the funds it requires to rehabilitate, retrofit, overhaul, and expand its SCMP, when it has funds to commence an open-pit, heap-leach operation at the SSGM site, and when the price of gold stabilizes at a price level to assure a profitable operation. The Company recorded a net loss of ($3,398) or $.0002 cents per share. This compares to a net loss of $10,577 or $.0006 cents per share for the first quarterly period ended June 30, 2002. There was no current or deferred provision for income taxes during this fiscal period ended June 30, 2003 or 2002. Additionally, even though the Company has an operating tax loss carryforward, the Company has previously recorded a net deferred tax asset due to an assessment of the "more likely than not" realization criteria required by the Statement of Financial Accounting Standards No. 109, Accounting for Taxes. Inflation did not have a material impact as there were no operations. The Company does not anticipate that inflation will have a material impact on future operations during this fiscal year. Interest expense in the sum of $334,584 was recorded by the Joint Venture during this fiscal period compared to $286,297 for the same period in 2002, and it was eliminated by reducing the interest income earned from the Joint Venture. Almost all of the costs and expenses incurred by the Company are allocated and charged to the Joint Venture. The Joint Venture capitalizes or expenses these costs and will continue to do so until such time when it is in full production. At the time production commences, these capitalized costs will be charged as an expense based on a per unit basis. If the prospect of gold production becomes unlikely, all of these costs will be written off in the year that this occurs. FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------------------- As of December 31, 1999, the Joint Venture halted its SCMP operations (official suspension took place as of March 31, 2000) until such time as it has adequate funding to repair, retrofit, overhaul and expand the mill to process its gold ore, and at such time that the price of gold will stabilize at a higher price. After almost five years of 24-hour-per-day operation with used equipment, the facilities require a major overhaul. The low price of gold did not provide an adequate cash reserve for these needs. Additional equipment has to be purchased, delivered and installed. The Company will endeavor to commence an open-pit, heap-leaching operation at the SSGM as there is a substantial amount of gold ore that grades less than 0.04 ounces per ton. The Company's engineers had determined that a 2,000 ton-per-day open-pit, heap-leach, start-up operation may produce 1,280 ounces of gold per month. It is necessary to raise adequate funds from outside sources for this operation; the amount required is dependent on the targeted daily volume of production. The Company estimates that it will need up to U.S. $16 million to start a 2,000 ton-per-day open-pit, heap-leaching operation. Eventually the production capacity would be increased in stages to 6,000 tons per day so that annual production could reach 113,000 ounces of gold at the SSGM. The use of the $16,000,000 proceeds is as follows: $8,000,000 for mining equipment and the completion of erecting a 28 crushing system; $3,033,548 for the processing equipment and site and infrastructure costs; and a sum of $4,966,452 is to be used for working capital. The once depressed price of gold has gradually increased since January 2002. However, the price of gold has been darkened by geopolitical tensions, recession fears, corporate malfeasance and reports of deflation. The Company's incredibly low common share market price is a major deterrent in raising cash for the Company's programs. The Company continues to be cognizant of its cash liquidity until it is able to produce adequate profits from its SSGM gold production. It will attempt to obtain sufficient funds to assist the Joint Venture in placing the SSGM into production as the anticipated profits from the existing SCMP operation (unless accumulated over a period of time) appear insufficient to meet the SSGM capital and the other mining exploration requirements. In order to continue obtaining funds to conduct the Joint Venture's exploration, exploitation, development, expansion programs, and the production of gold from the SSGM open-pit, heap-leaching operation, it is necessary for the Company to obtain funds from other sources. The Company may have to borrow funds by issuing open-ended, secured, on-demand or unsecured promissory notes, by selling its shares to its directors, officers or other interested investors, or by entering into a joint venture, merging, or developing an acceptable form of a business combination with other companies. During the past, the Joint Venture was engaged in exploration, exploitation and development programs designed to increase its gold ore reserves. The prospects of expanding the SSGM gold reserves are positive. The Company believes that the past invested funds significantly contributed to the value of the SSGM and to the value of its other mining prospects as the results of the exploratory efforts evidence the potential for a substantial increase of gold ore reserves. Thus far, the Company was unable to obtain sufficient funds to complete the modification and expansion of the SCMP or for its open-pit, heap-leach operation. The Company continues to rely on its directors, officers, related parties and others for its funding needs. The Company believes that it may be able to obtain such short-term and/or equity funds as are required from similar sources as it has in the past. It further believes that the funding needed to proceed with the continued exploration of the other exploration targets for the purpose of increasing its gold ore reserves will be greatly enhanced if the price of gold continues to increase. These exploration programs will involve airborne geophysics, stream chemistry, geological mapping, trenching, drilling, etc. The Joint Venture believes that it may be able to joint venture or enter into other business arrangements to share these exploration costs with other entities. On March 5, 2003, the Company reported on the status of the Renewed SSGM and on the status of the New SSGM which may increase the potential and add gold and silver ore reserves. Elsewhere in this report are detailed explanations of the issuance of the New SSGM. From September 1987 through June 30, 2003, the Company has advanced the sum of $41,161,345 to the Joint Venture (which includes interest charges payable to the Company), and three of the Company's subsidiaries have advanced the sum of $590,265, for a total of $41,751,610. This investment includes the charge of $24,584,881 for interest expense during this period of time. The funds invested in the Joint Venture were used primarily for the exploration, exploitation, and development of the SSGM, for the construction of the Joint Venture laboratory facilities on real estate owned by the Company near the SSGM site, for the operation of the laboratory, for the purchase of a 200-ton per day used SCMP precious metals' cyanide leaching mill and plant, for the initial retrofitting, repair, modernization and expansion of its SCMP facilities, for consumable inventory, for working capital, for exploration and holding costs of the San Felipe-El Potosi Mine, the Modesto Mine, the Hormiguero Mine, and the Montemayor Mine, for SSGM infrastructure, including rewiring, repairing and installation of about two miles of the Company's electric power lines to provide electrical service, for the purchase of equipment, laboratory chemicals, and supplies, for parts and supply inventory, for the maintenance of the Company-owned dam and reservoir, for extensive road extension and preservation, for its participation in the construction of a community 29 bridge, for community telephone building and facilities, for a community place of worship, for the purchase of the real estate on the Modesto Mine, for leasing the Montemayor real estate, for the purchase and erection of a cone crushing system, for diamond drilling at the SSGM, for the purchase of a rod mill and a carbon regeneration system, all other related needs, and most recently, the exploration of the New SSGM. EMPLOYEES - --------- As of June 30, 2003, the Joint Venture employed between 34 and 40 full-time persons in El Salvador to perform its limited exploration, exploitation, and development programs; to erect the cone crushing system, to provide 24-hour seven-day-a-week security at three different sites; to provide engineering, geology, drafting, and computer-related services; and to handle the administration of its activities. None of these employees are covered by any collective bargaining agreements. It has developed a harmonious relationship with its employees, and it believes that in the past, it was one of the largest single non-agricultural employers in the El Salvador Eastern Zone. Also, the Company employs up to four persons, including part-time help, in the United States. Since the Joint Venture has laid off most of its employees, the Joint Venture had to pay the severance pay and other benefits to its employees and therefore it had to sell and continues to sell the Company's common shares which were issued to the Commerce Group Corp. Employee Benefit Account. El Salvador employees are entitled to receive severance pay, which is based on one month's pay for each year of employment. RELATED PARTY LOANS, OBLIGATIONS AND TRANSACTIONS - ------------------------------------------------- The related party transactions are included in detail in the Notes to the Consolidated Financial Statements. COMPANY ADVANCES TO THE JOINT VENTURE - ------------------------------------- Since September 1987 through June 30, 2003, the Company, and three of its subsidiaries, have advanced to the Joint Venture $41,751,610. Included in the total advances is the interest charged to the Joint Venture by the Company which amounts to $24,584,881 through June 30, 2003. The Company furnishes all of the funds required by the Joint Venture. This interest charge has been eliminated from these financial statements. EFFORTS TO OBTAIN CAPITAL - ------------------------- Since the concession was granted, and through the present time, substantial effort is exercised in attempting to secure funding through various sources, all with the purpose to expand the operations of the SCMP, to construct an open-pit heap-leach operation at the SSGM site, and to continue the exploration of its other mining prospects. The Company, Sanseb, and the Joint Venture consider the past political situation in the Republic of El Salvador to have been unstable, and believe that the final peace declaration on December 16, 1992, has put an end to the conflict. Even though many years have passed, the stigma of the past unfavorable political status in the Republic of El Salvador continues to exist and therefore certain investors continue to be apprehensive to invest the funds required. However, as explained in this report, the Company was able to obtain a sum of funds to invest in the expansion and retrofitting of its SCMP and for the exploration of its other mining prospects. The decline in the price of gold to a 20-year low depressed the public interest, which affected the market price of the Company's shares as well as the shares of most of the world-wide mining companies. This decline in the Company's stock market price places the Company in a situation of substantially diluting its common shares in order to raise equity capital. The Company believes that it will be able to obtain adequate financing to conduct its operations from the same 30 sources as in the past. There are no assurances that funds will be available, except at this time, there is a greater world-wide interest in the ownership of gold. The price of gold continues to increase since January 2002. ENVIRONMENTAL REGULATIONS - ------------------------- The Company's operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which the Company operates. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, product safety, occupational health and the production, handling, storage, use and disposal of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. However, some risk of environmental or other damage is inherent in the business of the Company, as it is with other companies engaged in similar businesses. The DHM requires environmental permits to be issued in connection with the application of the Renewed SSGM. The issuance of these permits are under the jurisdiction of the El Salvador Ministry of Environment and Natural Resources Office (MARN). On October 15, 2002, MARN issued an environmental permit under Resolution 474-2002 for the SCMP. On October 20, 2002, MARN issued an environmental permit under Resolution 493-2002 for the Renewed SSGM Exploitation area. With these permits in hand, the Company, on November 5, 2002, filed an application for the Renewed SSGM for a period of 30 years. DIVIDENDS - --------- For the foreseeable future, it is anticipated that the Company will use all of its earnings to finance its growth and expansion, therefore, dividends will not be paid to shareholders. IMPACT OF INFLATION - ------------------- The impact of inflation on the Company has not been significant in recent years because of the relatively low rates of inflation and deflation experienced in the United States. CRITICAL ACCOUNTING POLICIES - ---------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions for the reporting period and as of the financial statement date. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from those amounts. A critical accounting policy is one that is important to the portrayal of the Company's financial condition and results, and requires the Company to make difficult subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown and undeterminable. The Company believes the following accounting policies are critical policies; accounting for its gold ore reserves, environmental liabilities, income taxes and asset retirement obligations. Gold ore reserves include proved reserves that represent estimated quantities of gold in which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reserves under existing economic and operating conditions. The gold ore reserves are based on estimates prepared by internal or independent geology consultants. They are used to calculate depreciation, 31 depletion and amortization (DD&A) and determine if any potential impairment exists related to the recorded value of the Company's gold ore reserves. The Company reviews, on an as needed basis, its estimates of costs of compliance with environmental laws and the cleanup of various sites, including sites in which governmental agencies have designated the Company as a potentially responsible party. When it is probable that obligations have been incurred and where a minimum cost or a reasonable estimate of the actual costs of compliance or remediation can be determined, the applicable amount is accrued. The Company makes certain estimates, which may include various tax planning strategies, in determining taxable income, the timing of deductions and the utilization of tax attributes, which can differ from estimates due to changes in laws and regulations, discovery and analysis of site conditions and changes in technology. Management is required to make judgments based on historical experience and future expectations on the future abandonment cost, net of salvage value, of its mining properties and equipment. The Company reviews its estimate of the future obligation periodically and will accrue the estimated obligation based on the adoption of SFAS No. 143 as described in the following section, "Recently Issued Accounting Developments." The implementation of this standard had no material impact on the financial statements. RECENTLY ISSUED ACCOUNTING DEVELOPMENTS - --------------------------------------- In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," which supersedes Accounting Principles Board Opinion (APB) No. 16, "Business Combinations." This Statement requires that all business combinations be accounted for by the purchase method, establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain. The provisions of the Statement apply to business combinations initiated after June 30, 2001. For business combinations accounted for using the purchase method before July 1, 2001, the provisions of this Statement are effective in the first quarter of 2002. The Company anticipates that the impact of this new standard should not have a material impact on the financial statements taken as a whole. In July 2001, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which supersedes the Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets." This Statement addresses the accounting and reporting of goodwill and other intangible assets subsequent to their acquisition. The Statement also provides specific guidance on testing goodwill and intangible assets for impairment. SFAS No. 142 provides that (i) goodwill and indefinite-lived intangible assets will no longer be amortized, (ii) impairment will be measured using various valuation techniques based on discounted cash flows, (iii) goodwill will be tested for impairment at least annually at the reporting unit level, (iv) intangible assets deemed to have an indefinite life will be tested for impairment at least annually and (v) intangible assets with finite lives will be amortized over their useful lives. All provisions of this Statement are effective in the first quarter of 2003. The Company anticipates that the impact of this new standard should not have any material impact on the financial statements taken as a whole. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. All provisions of this Statement will be effective 32 when the occurrence arises. The Company is in the process of determining the impact of this standard on the Company's financial results when effective. The Company's adoption of SFAS No. 143 should not have a material impact on the Company's results of operations or financial position. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and amends APB No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This Statement requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. SFAS No. 144 retains the fundamental provision of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This statement also retains APB No. 30's requirement that companies report discontinued operations separately from continuing operations. All provisions of this Statement are effective in the first quarter of 2003. The Company anticipates that the impact of this new standard should have no material impact on the financial statements taken as a whole. In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145) which is generally effective for transactions occurring after May 15, 2002. Through the rescission of FASB Statements 4 and 64, SFAS No. 145 eliminates the requirement that gains and losses from extinguishment of debt be aggregated and, if material, be classified as an extraordinary item net of any income tax effect. SFAS No. 145 made several other technical corrections to existing pronouncements that may change accounting practice. The Company does not believe SFAS No. 145 should have any material impact on its results of operations or financial position. In June 2002, the Financial Accounting Standards Board issued Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 is effective for exit or disposal activities that are initiated after March 31, 2003. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The Company does not believe that SFAS No. 146 should have a material impact on its results of operations or financial position. In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45). FIN No. 45 elaborates on the disclosures to be made by the guarantor about is obligations under certain guarantees. FIN No. 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. As required by FIN No. 45, the Company has adopted the disclosure requirements effective March 31, 2003. The Company believes that the initial recognition and measurement provisions of FIN No. 45 on a prospective basis for guarantees issued or modified after March 31, 2003 should not have any material impact on its results of operations or financial position. In December 2002, the Financial Accounting Standards Board issued Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS No. 148). SFAS No. 148, amends SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of 33 SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendments to SFAS No. 123 are effective for financial statements for fiscal years ending after December 15, 2002. As the Company accounts for stock-based employee compensation using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees, the Company has adopted the disclosure requirements of SFAS No. 148, effective April 1, 2003. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- COMMODITY PRICES - ---------------- When in production, the Company's earnings and cash flow will be significantly impacted by changes in the market price of gold. Gold prices can fluctuate widely and are affected by numerous factors, such as demand, production levels, economic policies of central banks, producer hedging, and the strength of the U.S. dollar relative to other currencies. During the last five years, the average annual market price of gold has fluctuated between $271 per ounce and $365 per ounce. The Company has not been engaged in any hedging contracts whatsoever. FOREIGN CURRENCY - ---------------- The Company conducts the majority of its operations in the Republic of El Salvador, Central America. Currently, El Salvador is on the U.S. dollar system, and therefore all receipts and expenditures are in U.S. dollars. ITEM 4. CONTROLS AND PROCEDURES - -------------------------------- Evaluation of Disclosure Controls and Procedures The Company maintains a system of disclosure controls and procedures. The term "disclosure controls and procedures," as defined by regulations of the Securities and Exchange Commission ("SEC"), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC under the Act is accumulated and communicated to the Company's management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions to be made regarding required disclosure. The Company's President, Treasurer, Chief Executive, Operating and Financial Officer and Executive Vice President and Secretary have evaluated the Company's disclosure controls and procedures as of a date within 90 days of the filing date of this Form 10-Q and have concluded that the Company's disclosure controls and procedures are effective as of the date of such evaluation. Changes in Internal Controls The Company also maintains a system of internal controls. The term "internal controls," as defined by the American Institute of Certified Public Accountants' Codification of Statement on Auditing Standards, AU Section 319, means controls and other procedures designed to provide reasonable assurance regarding the achievement of objectives in the reliability of the Company's financial reporting, the effectiveness and efficiency of the Company's operations and the Company's compliance with applicable laws and 34 regulations. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect such controls subsequent to the date the Company carried out its evaluation. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - ------------------------------------------------------------------------ Some of the statements contained in this report are forward-looking statements, such as estimates and statements that describe the Company's future plans, objectives or goals, including words to the effect that the Company or management expects a stated condition or result to occur. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties. Actual results in each case could differ materially from those currently anticipated in such statements by reason of factors such as production at the Company's mines, changes in operating costs, changes in general economic conditions and conditions in the financial markets, changes in demand and prices for the products the Company produces, litigation, legislative, environmental and other judicial, regulatory, political and competitive developments in areas in which the Company operates and technological and operational difficulties encountered in connection with mining. Many of these factors are beyond the Company's ability to control or predict. The Company disclaims any intent or obligation to update its forward-looking statements, whether as a result of receiving new information, the occurrence of future events, or otherwise. 35 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE S.E.C. FORM 10-Q - JUNE 30, 2003 PART II - FINANCIAL INFORMATION Item 1. Legal Proceedings None pending. Item 2. Changes in Securities Reference is made to the financial statements which explain the number of common shares and stock options issued during this three-month period ended June 30, 2003. Item 3. Default Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None, except the routine business matters included in the proxy statement to be submitted to the shareholders of record as of August 19, 2003 relating to an annual meeting of shareholders to be held on October 17, 2003. Reference is made to the proxy statement filed with the Securities and Exchange Commission on July 14, 2003 for disclosure of the details. Item 5. Other Information None. Item 6(a). Exhibits and Reports on Form 8-K Exhibit No. Description of Exhibit ----------- ---------------------- 99.0 Additional Exhibits 99.1* Certification of President, Treasurer, Chief Executive, Operating and Financial Officer 99.2* Certification of Executive Vice President and Secretary *Filed herewith Item 6(b). Form 8-K None. 36 SIGNATURE --------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant/Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMERCE GROUP CORP. Registrant/Company /s/ Edward L. Machulak Date: August 7, 2003 ______________________________________ Edward L. Machulak President, Chief Executive, Operating and Financial Officer and Treasurer 37 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Edward L. Machulak, President, Treasurer, Chief Executive, Operating and Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Commerce Group Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Edward L. Machulak Date: August 7, 2003 _________________________________ Edward L. Machulak President, Treasurer, Chief Executive, Operating and Financial Officer 38 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Edward A. Machulak, Executive Vice President and Secretary, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Commerce Group Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Edward A. Machulak Date: August 7, 2003 _________________________________ Edward A. Machulak Executive Vice President, and Secretary 39 EX-99.1 3 exh991jun.txt EXHIBIT 99.1 - CERTIFICATION OF CEO EXHIBIT 99.1 CERTIFICATION OF PRESIDENT, TREASURER, CHIEF EXECUTIVE, OPERATING AND FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Commerce Group Corp. (the "Company") on Form 10-Q for the period ending June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward L. Machulak, President, Treasurer, Chief Executive, Operating and Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Edward L. Machulak Date: August 7, 2003 ____________________________________ Edward L. Machulak President, Treasurer, Chief Executive, Operating and Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 4 exh992jun.txt EXHIBIT 99.2 - CERTIFICATION OF EXEC. V.P./SECRETARY EXHIBIT 99.2 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 In connection with the Quarterly Report of Commerce Group Corp. (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward A. Machulak, Executive Vice President and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Edward A. Machulak Date: August 7, 2003 __________________________________ Edward A. Machulak Executive Vice President and Secretary A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----