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, 2008
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 39-6050862
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
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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 by check mark whether the registrant is a shell company (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: 30,715,869 common shares of
the Company's common stock, $0.10 par value, were issued and outstanding as of
June 30, 2008.
1
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE FIRST QUARTER ENDED JUNE 30, 2008
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 and 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, 2008.
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Changes in Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to the Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 33
Item 3. Quantitative and Qualitative Disclosures about Market Risk 46
Item 4. Controls and Procedures 47
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings 49
Item 2. Changes in Securities 49
Item 3. Default Upon Senior Securities 49
Item 4. Submission of Matters to a Vote of Security Holders 49
Item 5. Other Information 49
Item 6. Exhibits and Reports on Form 8-K 50
2
SIGNATURES:
Registrant's Signature Page 51
Certification of Chief Executive Officer (Section 302) 52
Certification of Chief Financial Officer (Section 302) 53
Certification of Chief Executive Officer (Section 906) 54
Certification of Chief Financial Officer (Section 906) 55
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CAUTIONARY STATEMENT FOR PURPOSED OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The matters discussed in this quarterly 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 projections or estimates contained herein. Such factors
include, among others, the speculative nature of mineral exploration,
commodity prices, production and reserve estimates, environmental and
governmental regulations, availability of financing, force majeure
events, and other risk factors as described from time to time in the
Company's filings with the Securities and Exchange Commission. Many of
these factors are beyond the Company's ability to control or predict.
The Company disclaims any intent or obligation to update its
forward-looking statements, whether as a result of receiving new
information, the occurrence of future events, or otherwise.
3
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED BALANCE SHEETS
06/30/08
(Unaudited) 03/31/08
----------- --------
ASSETS
------
Current assets
Cash $ 5,414 $ 1,308
Other current assets 233,977 233,977
Accounts receivable - related 591,867 585,647
Mining supplies 39,562 39,562
Prepaid items and deposits 16,478 14,932
------------ ------------
Total current assets 887,298 875,426
Property, plant and equipment, net 4,850,548 4,846,257
Mining resources investment 20,904,053 20,763,318
------------ ------------
Total assets $26,641,899 $26,485,002
============ ============
LIABILITIES
-----------
Current liabilities
Accounts payable $ 6,713 $ 2,406
Accounts payable - related 384,866 377,786
Notes and accrued interest
payable to related parties 20,334,499 19,433,730
Notes and accrued interest
payable to others 339,423 334,038
Accrued salaries 3,558,381 3,514,131
Accrued legal fees 466,582 454,444
Other accrued expenses - related 484,600 471,600
Other accrued expenses - other 433,281 418,176
------------ ------------
Total current liabilities 26,008,345 25,006,311
------------ ------------
Total liabilities $26,008,345 $25,006,311
------------ ------------
Commitments and contingencies
(Notes 2, 4, 5, 6, 7, 8, 10, 11, 12, 13 & 16)
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SHAREHOLDERS' EQUITY
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
2008-none; 2007-none $ 0 $ 0
Common stock, $0.10 par value:
Authorized 50,000,000 shares;
Issued and outstanding:
6/30/2008 - 30,715,869 3,071,587
3/31/2008 - 30,715,869 3,071,587
Capital in excess of par value 19,579,827 19,579,827
Accumulated deficit (22,017,860) (21,172,723)
------------ ------------
Total shareholders' equity 633,554 1,478,691
------------ ------------
Total liabilities and
shareholders' equity $26,641,899 $26,485,002
============ ============
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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 OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED)
2008 2007
------------ ------------
Revenues: $ 0 $ 0
------------ ------------
Expenses:
General and administrative $ 39,405 46,209
------------ ------------
Total expenses 39,405 46,209
Net loss from operations $ (39,405) $ (46,209)
Other income 0 0
Interest expense (805,733) (679,461)
------------ ------------
Net loss before income taxes (845,138) (725,670)
Income tax expense 0 0
------------ ------------
Net loss (845,138) $ (725,670)
============ ============
Net loss per share basic/diluted $ (.03) $ (.03)
============ ============
Weighted average basic/diluted
common shares outstanding 30,715,869 28,227,717
============ ============
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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 CHANGES IN SHAREHOLDERS' EQUITY
FOR THE FIRST QUARTER JUNE 30, 2008
Common Stock
-----------------------------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
---------- ---------- ----------- ------------
Balances March 31, 2006 25,116,016 $2,511,602 $19,376,974 $(15,503,704)
Net loss for fiscal year
ended March 31, 2007 $ (2,616,821)
Common stock issued for:
Dir./off./employee/services
comp. 1,107,580 110,758 0
Payment of debt 750,000 75,000 0
Cash 805,000 80,500 64,580
---------- ---------- ----------- ------------
Balances March 31, 2007 27,778,596 $2,777,860 $19,441,554 $(18,120,525)
Net loss for fiscal year
ended March 31, 2008 $ (3,052,198)
Common stock issued for:
Dir./off./employee/services
comp. 932,273 93,227 108,273
Payment of debt 0 0 0
Cash 2,005,000 200,500 30,000
---------- ---------- ----------- ------------
Balances March 31, 2008 30,715,869 $3,071,587 $19,579,827 $(21,172,723)
Net loss for three months
ended June 30, 2008 (845,138)
Common stock issued for:
Dir./off./employee/services
comp. 0 0 0
Payment of debt 0 0 0
Cash 0 0 0
---------- ---------- ----------- ------------
Balances June 30, 2008 30,715,869 $3,071,587 $19,579,827 $(22,017,861)
========== ========== =========== =============
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The accompanying notes are an integral part of these consolidated financial
statements.
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COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED)
2008 2007
---------- ---------
OPERATING ACTIVITIES:
Net loss $ (845,137) $(725,670)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable and other current assets (6,220) 16,225
Decrease (increase) in prepaid
items and deposits (1,546) (558)
Increase (decrease) in accounts
payable and other accrued expenses 11,387 47,644
Increase in accrued interest expense 805,733 679,461
Increase (decrease) in accrued legal fees 12,139 225
Net cash provided by (used in) ----------- ----------
operating activities (23,644) 17,327
INVESTING ACTIVITIES:
Investment in mining resources and
property, plant and equipment (173,447) (115,597)
---------- ---------
Net cash used by investing activities (173,447) (115,597)
FINANCING ACTIVITIES:
Cash received, related party
notes payable 201,197 67,500
Common stock issued for cash 0 29,241
--------- ---------
Net cash provided by financing activities 201,197 96,741
Net increase (decrease) in cash and
cash equivalents 4,106 (1,529)
Cash - beg. of year 1,308 5,031
---------- ---------
Cash - end of this period
6/30/08 and 6/30/07 $ 5,414 $ 3,502
========= =========
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The accompanying notes are an integral part of these consolidated financial
statements.
Supplemental disclosures of cash information:
Year Ended
June 30, 2008 June 30, 2007
------------- -------------
Cash information Shares Amount Shares Amount
------ ------ ------ ------
1. Interest expense paid in cash - - - -
2. Income taxes paid - - - -
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7
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(1) THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
(a) Commerce Group Corp., a Wisconsin-based corporation organized in
1962 ("Commerce," the "Company" and/or "Registrant") and its 82
1/2%-owned subsidiary, San Sebastian Gold Mines, Inc., a Nevada
corporation organized in 1968 ("Sanseb"), have formed the
Commerce/Sanseb Joint Venture ("Joint Venture") for the purpose of
performing gold mining, the sale of gold, 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. Reference to Commerce, the
Company and/or Registrant, includes all of the Company's
wholly-owned or partially-owned subsidiaries and the Commerce/Sanseb
Joint Venture or any one or more of them as the context requires.
In the past, gold bullion 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, El
Salvador, Central America, and at the other licensed mining
exploration areas neighboring the SSGM site. Currently expanded
exploration is being limited at other mining projects until adequate
funding is obtained under acceptable terms and conditions. All of
the mining projects are located in the Republic of El Salvador,
Central America. Commerce is a reporting company and its common
shares are traded on the Over-the-Counter Bulletin Board (CGCO.OB),
the Pink Sheets (CGCO.PK), and on the Berlin-Bremen Stock Exchange
(C9G).
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 its
environmental permit is reinstated.
On March 3, 2003, the Company received an exploration license from
the Government of El Salvador (GOES) dated February 24, 2003, for
the exploration of minerals in an area encompassing the SSGM,
consisting of 40.77 square kilometers (10,070 acres). This expanded
area provides the Company with an opportunity to locate and evaluate
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. Thus far, from the
exploration performed, the results and findings are very encouraging
to continue forward with the expansion of the exploration.
On May 20, 2004 (delivered June 4, 2004) the Company was granted an
exploitation concession from the GOES consisting of 1.23 square
kilometers (304 acres) for the exploitation of the precious metals
(the "Renewed San Sebastian Gold Mine Exploitation Concession" or
"Renewed SSGM").
On or about September 13, 2006, the El Salvador Ministry of the
Environment delivered to Commerce's El Salvadoran legal counsel its
revocation of the environmental permits issued for the SSGM and
SCMP. This Company's legal counsel on December 6, 2006, filed with
the El Salvadoran Court of Administrative Litigation of the Supreme
Court of Justice two complaints relating to this matter. (See the
Company's discussion in the section entitled "Environmental
Matters.") These legal proceedings are pending.
On May 25, 2004 (received June 4, 2004) the GOES issued a second
exploration license consisting of 45 square kilometers (11,115
acres) hereinafter referred to as the Nueva Esparta Exploration
License.
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COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
The Company continues to be cognizant of its cash needs until such
time as it is able to produce adequate profits from its SSGM gold
production. It will continue its attempt to obtain sufficient funds
to assist the Joint Venture in placing the SSGM into an open-pit,
heap-leach production. In order to continue to follow its goal 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 outside sources. The Company may have to
borrow funds by issuing open-ended, secured, on-demand or unsecured
promissory notes, by selling its shares to its directors, officers
and other interested accredited investors, or by entering into a
joint venture, merger, or by developing an acceptable, creative form
of a business combination.
On July 18, 2008 the Company entered into a non-binding letter of
intent for a proposed acquisition/merger with Voter Communications,
Inc. The letter of intent which discloses the general terms and
conditions was attached as Exhibit 99.1 of the Form 8-K that the
Company filed with the SEC on July 23, 2008.
Earlier in the year Commerce entered into a tentative arrangement
with another company to perform exploration in El Salvador. However,
that company has decided not to continue its efforts to enter
into a transaction relating to Commerce's San Sebastian Gold Mine
in the Country of El Salvador. Therefore, Commerce's directors and
officers continue to seek a compatible financial or business
arrangement.
The Joint Venture plans to begin its open-pit, heap-leaching process
on the SSGM site when adequate funding becomes available under fair
and reasonable terms and conditions, and providing that the price of
gold maintains at the current price level. It also plans to
continue its SSGM site preparation, the expansion of its exploration
and exploitation targets, and the identification and development of
gold ore reserves. Furthermore, it plans to explore the potential
of other gold and silver mine exploration prospects in El Salvador.
Concurrently, it is in the process of obtaining necessary funding
for each of these separate programs while its Joint Venture is
performing minor retrofit and rehabilitation work at the SCMP. It
commenced an exploration program in the New SSGM and in the Nueva
Esparta. Its finding of additional precious metals encourages it to
expand the exploration activities.
(b) Basis of presentation:
Management estimates and assumptions:
Certain amounts included in or affecting the Company's consolidated
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.
The more significant areas requiring the use of management estimates
and assumptions relate to mineralized material that are the basis
for future cash flow estimates and units-of-production amortization
determination; updating feasibility studies, 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 stock based
compensation; fair value of financial instruments and non-monetary
transactions; valuation allowances for deferred tax assets; and
contingencies and
9
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
litigation. The Company's estimates are based on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances.
(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. Not included in the consolidated statements is
Mineral San Sebastian, S.A. de C.V. (Misanse) as the Company does not
have corporate control of Misanse because the majority of Misanse's
elected directors must be El Salvadoran shareholders.
Charter/Joint Venture
---------------------
Included in the Consolidated Statements % Ownership Place Date
--------------------------------------- ----------- ----- ----
Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959
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
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& El Salvador 09/22/1987
Not included in the Consolidated Statements
Mineral San Sebastian, S.A. de C.V.
("Misanse") 52.0 El Salvador 05/08/1960
MINORITY INTEREST
During the first quarter periods ended June 30, 2008 and 2007, there were
no expenses in the entities wherein minority interests existed. Minority
interest as a whole is immaterial in these financial statements and
therefore has not been presented.
OTHER CURRENT ASSETS
1. Other current assets consist primarily of assets held in an employee
benefit account stated at cost of $101,529 as of June 30, 2008. The
funds are to be used primarily to pay the El Salvadoran employee
medical benefits and pension benefits as required by the El
Salvadoran Government and for other employee purposes.
The El Salvadoran vacation and Christmas bonus payments are due when
earned while the severance pay is due and payable at such time when
the employee has been discharged, retired, permanently laid off,
death or when incapable of working due to permanent health/work
related conditions. The Company has sole control and jurisdiction
over this account and to the best of the Company's knowledge, there
is absolutely no condition, right, or requirement by the El
Salvadoran authorities to have such funds in any form of a reserve.
Also included in other current assets are certain precious stones
and jewelry stated at cost of $132,448 as of June 30, 2008. The
Directors approved the sale of these assets to the Rollover
Individual Retirement Account of the late President of the Company
at the Company's cost.
10
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
2. The accounts receivable - related balance consists of advances to
Mineral San Sebastian S.A. (Misanse), which is 52% owned by the
Company. These advances are an offset for the past and future
Misanse rental charges that are included in the accounts payable.
An accounting is as follows:
Misanse Others Total
-------- -------- --------
Accounts receivable $591,867 $ 0 $591,867
Accounts payable - related parties $243,379 $148,201 $391,580
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On March 26, 2008, at a Misanse shareholders' meeting held at the
Company's City of San Miguel, El Salvador office, the Misanse
shareholders and the Misanse Directors approved, confirmed and
ratified the amount that Misanse owed the Company for advances and
other obligations the Company incurred on behalf of Misanse. The
amount due to Misanse at that time was also approved, ratified and
confirmed.
The Company is of the opinion that it is appropriate to record the
fact that Misanse owes the Company $591,867 and that the Company owes
Misanse $243,379 as Misanse is not consolidated with the Company's
financial records. When gold production commences, the 5% royalty
payable to Misanse for rent of the San Sebastian Gold Mine property
based on the gross proceeds from the sale of gold and the accounts
payable offset will reduce this receivable until it is paid in full.
3. Mining supplies consist of consumable items used in processing
mineralized material, which are stated at the average cost.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The accounts receivable consist of advances to Misanse, a 52%-owned
subsidiary, which will be offset for the Misanse rental charges included
in the Joint Venture's accounts payable.
INTERCOMPANY BALANCES
All intercompany balances and transactions have been eliminated in the
consolidated financial statements.
MINING SUPPLIES
Mining supplies consist of consumable supplies used in connection with
processing mineralized material, and are stated at the average cost,
which is lower than the market value.
11
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
DEFERRED MINING COST
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 (excluding certain interest expense.).
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 (excluding certain interest expense) and will
write off these cumulative costs on a units of production method at such
time as it begins producing gold derived from the gold ore on a full
production basis. If the prospect of gold production, due to different
conditions and circumstances becomes unlikely, all of these costs may be
written off in the year that this occurs.
The Company regularly evaluates its carrying value of exploration
properties in light of their potential for economic mineralization and
the likelihood of continued work by either the Company or a joint venture
partner. The Company may, from time to time, reduce its carrying value
to an amount that approximates fair market value based upon an assessment
of such criteria.
REVENUE RECOGNITION
Revenue from the sale of gold will be recognized when delivery has
occurred, title and risk of loss passes to the buyer, and collectability
is reasonably assured. Gold sales will be made in accordance with sales
contracts where the price is fixed or determinable. No revenue has been
recognized for the years presented.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are 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. Certain 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 effective 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
additional mineralization, and to expand the capacity of operating mines
will be capitalized and amortized on the units of production basis over
proven and probable reserves.
12
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
IMPAIRMENTS OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its mine development, mineral
interest and mining properties when events or changes in circumstances
indicate that the properties may be impaired. For these assets, an
impairment loss is recognized when the estimated future cash flows
(undiscounted and without interest) expected to result from the use of
the asset are less than the carrying amount of the asset. Measurement of
the impairment loss is based on discounted cash flows.
Intangible assets subject to impairment are assessed for impairment at
least annually or more frequently when changes in market conditions or
other events occur. Impairments are measured based on estimated fair
value. Fair value with respect to such mineral interests, pursuant to a
Statement of Financial Accounting Standards ("SFAS") 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. No impairment has been recorded
as of the periods presented.
ASSET RETIREMENT OBLIGATIONS
Accounting for Asset Retirement Obligations is based on the guidance of
SFAS No. 143 which requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. Fair value
is determined by estimating the retirement obligations in the period an
asset is first placed in service and then adjusting the amount for
estimated inflation and market risk contingencies to the projected
settlement date of the liability. The result is then discounted to a
present value from the projected settlement date to the date the asset
was first placed in service or to the change in estimate/timing. The
present value of the asset retirement obligation is recorded as an
additional property cost and as an asset retirement liability. The
amortization of the additional property cost (using the units of
production method) is included in depreciation, depletion and
amortization expense and the accretion of the discounted liability is
recorded as a separate operating expense in the Company's statement of
operations. No impairment has been recorded as of the periods presented.
13
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits companies to
choose to measure many financial instruments and certain other items at
fair value that are not currently required to be measured at fair value,
and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. SFAS
159 is effective for the Company on January 1, 2008, and is not expected
to have a material effect on its consolidated financial statements.
In December 2007, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141(R), "Business Combinations" ("SFAS 141R"). SFAS 141R
establishes the principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in
the acquiree, and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141R is effective
for the Company on January 1, 2009, and is not expected to have a
material effect on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51 ("SFAS
160"). SFAS 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity. This new consolidation method will
significantly change the accounting for transactions with minority
interest holders. SFAS 160 is effective for the Company on
January 1, 2009, and is not expected to have a material effect on
its consolidated financial statements.
14
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
During March 2008 the FASB issued Financial Accounting Standards No. 161,
"Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133" ("FAS No. 161"). FAS No. 161
enhances the disclosure requirements under FAS No. 133 pertaining to how
and why an entity uses derivative instruments, how derivative instruments
and related hedge items are accounted for under FAS No. 133, and how
derivative instruments and related hedge items affect an entity's
financial position, financial performance, and cash flows. FAS No. 161 is
effective for fiscal years, and interim periods within those fiscal
years, beginning after November 15, 2008 (fiscal year 2009 for the
Company). This disclosure is not expected to have a material effect on
the Company's consolidated financial statements.
MANAGEMENT'S ASSUMPTIONS
Management's estimates of gold and other metal prices, recoverable gold,
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.
INTEREST CAPITALIZATION
Certain interest costs were 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.
LOSS PER COMMON SHARE
The Company has in the past years reported its "Earnings per Share" (EPS)
which presently complies with the provisions of Statement of Financial
Accounting Standards No. 128 (SFAS No. 128). As required by this
standard, the Company, if applicable, could report two earnings per share
amounts, basic net loss and diluted net loss per share. Basic net loss
per share is computed by dividing loss reportable to common shareholders
(the numerator) by the weighted average number of common shares
outstanding (the denominator). The computation of diluted net loss per
share is similar to the computation of basic net loss 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, however, there were no such dilutive items as
of June 30, 2008.
15
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
The computation of diluted EPS shall not assume conversion, exercise, or
contingent issuance of securities that would have an antidilutive effect
on earnings per share. Shares issued on actual conversion, exercise, or
satisfaction of certain conditions for which the underlying potential
common shares were antidilutive shall be included in the computation as
outstanding common shares from the date of conversion, exercise, or
satisfaction of those conditions, respectively. Therefore, there is no
difference in the loss or the number of basic or diluted shares.
The computation of loss per share of common stock is based on the
weighted average number of shares outstanding at the date of the
financial statements.
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
For the period ended June 30, 2008:
Basic EPS
Net loss to common Shareholders $(845,138) 30,715,869 $ (0.03)
========== ===========
For the period ended June 30, 2007:
Basic EPS
Net loss to common Shareholders $(725,670) 28,227,717 $ (0.03)
========== ===========
|
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 transactions since January 1, 2001 are reported
in U.S. dollars.
STOCK OPTIONS
Prior to January 1, 2006, the Company accounted for stock compensation
plans under the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations ("APB 25"), as permitted by FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). No stock-based employee compensation cost was recognized for
stock option awards in the consolidated statements of operations for the
periods prior to January 1, 2006, as all options granted under those
plans had an exercise price equal to the market value of the Common Stock
on the date of the grant in accordance with APB 25.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of FASB Statement No. 123(R), "Share-Based Payment" ("SFAS
123R"), using the modified-prospective-transition method. Under this
transition method, total compensation cost includes compensation costs
for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123, and compensation
costs for all share-based payments granted subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with the
provisions of SFAS 123R. The Company estimated the fair value of its
option awards granted prior to January 1, 2006 using the Black-Scholes
option-pricing formula, and the Company continues to use this model. The
Company records compensation expense for stock options ratably over the
options vesting period. Results for prior periods have not been
restated.
16
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Unless otherwise indicated, the fair values of all reported assets and
liabilities which represent financial instruments (none of which are held
for trading purposes) approximate the carrying values of such amounts.
(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, 2008 June 30, 2007
----------------------------- -----------------------------
Accumulated Accumulated
Depre- Depre-
Cost ciation Net Cost ciation Net
---- ----------- --- ---- ----------- ---
Min-
eral
Prop-
erties
and
De-
ferred
De-
velop-
ment $20,904,053 $ 0 $20,904,053 $20,262,335 $ 0 $20,262,335
Prop-
erty,
Plant
and
Equip-
ment 7,102,691 (2,252,143) 4,850,548 7,105,176 (2,252,143) 4,853,033
----------- ------------ ----------- ----------- ------------ -----------
|
$28,006,744 $(2,252,143) $25,754,601 $27,367,511 $(2,252,143) $25,115,368
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. Gains or losses on dispositions are
included in operations. Since the Joint Venture suspended operations
effective on March 31, 2000 in view of the weak price of gold and the
need to expand the SCMP facilities, no depreciation has been recorded
during the following fiscal years. The Company is maintaining the
property and equipment and will begin to depreciate them once operations
commence again. Reference is made to Property, Plant and Equipment in
note (2) Significant Accounting Policies.
(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. Approximately 180 non-related
shareholders, including the late President of the Company who owns 2,073
common shares, hold the balance of Sanseb's stock. Sanseb was formed in
1968 to explore, exploit, research, and develop adequate gold reserves
and to produce gold. Sanseb produced gold from the SSGM from 1972
through February 1978.
On September 22, 1987, the Company and Sanseb entered into a joint
venture agreement to formalize their relationship with respect to the
mining venture and to account for the Company's substantial investment in
Sanseb. Under the terms of the agreement, the Company is authorized to
supervise and control all of the business affairs of the Joint Venture
and has the authority to do all that is necessary to resume mining
operations at the SSGM on behalf of the Joint Venture. The net pre-tax
profits of the Joint Venture will be distributed as follows: Company
90%; and Sanseb 10%. Since the Company owns 82 1/2% of the authorized
and issued common shares of Sanseb, the Company in effect has over a 98%
interest in the Joint Venture activities.
17
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
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.
INVESTMENT IN EL SALVADOR MINING PROJECTS
During the fiscal year, the Company has advanced funds, performed
services, and allocated its general and administrative costs to the Joint
Venture.
As of June 30, 2008 and 2007, the Company, Sanseb and three of the
Company's subsidiaries have invested (including carrying costs) the
following in its Joint Venture:
2008 2007
---- ----
The Company's advances
(net of gold sale proceeds) since 09/22/87 $73,169,823 $65,072,185
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 52,441,547 48,008,335
------------ ------------
Total: $132,627,730 $120,096,880
Advances by the Company's three subsidiaries 590,265 590,265
------------ ------------
Combined total investment $133,217,995 $120,687,145
============ ============
|
EXPLORATION ACTIVITY
The Company had no significant activity at the SSGM site from February
1978 through January 1987 due to the civil unrest in El Salvador. 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 effort to locate
and evaluate minable and proven gold ore reserve area, and the Company is
active in attempting to obtain adequate financing at acceptable terms and
conditions for the proposed open-pit, heap-leaching operations at the
SSGM and to commence the production of gold and silver at its SCMP. The
Joint Venture plans to resume its exploration and expansion program to
identify and develop gold ore reserves in the area surrounding the SSGM.
Presently, it is completing the erection of its cone crushing system,
performing minor rehabilitation repairs to its San Cristobal Mill and
Plant, and performing exploration in targeted areas. On February 24,
2003, the Ministry of Economy's Director of El Salvador Department of
Hydrocarbons and Mines (DHM) granted an exploration license referred to
as the "New San Sebastian Exploration License" which area includes and
encompasses the existing SSGM. Also the Company is currently in the
process of exploring two of the formerly operated gold mines in this
exploration area. On May 25, 2004, the Government of El Salvador (GOES)
granted another exploration license which is referred to as the "Nueva
Esparta" and includes eight formerly operated gold/silver mines.
Exploration has commenced on the Montemayor Mine, the La Joya Mine, the
Tabanco Mine, the La Lola Mine, and other formerly operated mines
included in this license.
18
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
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 common shares. Approximately
100 El Salvador, Central American, and United States' citizens own the
balance.
(b) SSGM MINING LEASE
On January 14, 2003, the Company entered into an amended and renewed
30-year lease agreement with Mineral San Sebastian Sociedad Anomina de
Capital Variable (Misanse) pursuant to the approval of the Misanse
shareholders and Misanse directors at a meeting held on January 12, 2003.
The renewed lease is for a period of thirty (30) years commencing on the
date that the Company received its Renewed San Sebastian Gold Mine
Exploitation Concession, 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 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 by related parties (Notes 6 and 7).
(c) ONE EXPLOITATION AND TWO EXPLORATION MINERAL CONCESSIONS/LICENSES
ISSUED BY THE GOVERNMENT OF EL SALVADOR
RENEWED SAN SEBASTIAN GOLD MINE EXPLOITATION CONCESSION UNDER EL SALVADOR
AGREEMENT NUMBER 591 DATED MAY 20, 2004 AND DELIVERED ON JUNE 4, 2004
(RENEWED SSGM) - APPROXIMATELY 1.2306 SQUARE KILOMETERS (304 ACRES)
LOCATED IN THE 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 subsequently renewed for a period
of three years beginning on February 17, 2006; it was required by the DHM
to protect third parties against any damage caused from the mining
operations; it simultaneously paid the annual surface tax. On August 29,
2003 the Office of the Ministry of Economy formally presented the Company
with a twenty-year Renewed SSGM which was dated August 18, 2003. On May
20, 2004 (delivered June 4, 2004) the Government of El Salvador under
this Agreement Number 591 extended the exploitation concession for a
period of thirty (30) years. This Renewed SSGM replaces the collateral
that the same lenders held with the previous concession. On or about
September 13, 2006, the El Salvador Ministry of the Environment delivered
to Commerce's El Salvadoran legal counsel its revocation of the
environmental permits issued for the SSGM exploitation concession and the
SCMP. This Company's legal counsel on December 6, 2006, filed with the
El Salvadoran Court of
19
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
Administrative Litigation of the Supreme Court of Justice two complaints
relating to this matter. (See the Company's discussion in the section
entitled "Environmental Matters.") These legal proceedings are pending.
NEW SSGM EXPLORATION LICENSE UNDER EL SALVADOR RESOLUTION NUMBER 27 (NEW
SSGM) - APPROXIMATELY 40.7694 SQUARE KILOMETERS (10,070 ACRES) LOCATED IN
THE DEPARTMENTS OF LA UNION AND MORAZAN, EL SALVADOR, CENTRAL AMERICA
On October 20, 2002, the Company applied to the Government of El Salvador
through the DHM for the New San Sebastian Exploration License, which
covers an area of 41 square kilometers and includes approximately 1.2306
square kilometers of the Renewed SSGM Exploitation Concession. The New
San Sebastian Exploration License 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. It is
presently in the process of receiving an extension of time from the GOES.
Besides the San Sebastian Gold Mine, the following three other formerly
operative gold and silver mines included in the New SSGM are being
explored: the La Lola Mine, the Santa Lucia Mine, and the Tabanco Mine.
NUEVA ESPARTA EXPLORATION LICENSE (NUEVA ESPARTA) UNDER EL SALVADOR
RESOLUTION NO. 271 - APPROXIMATELY 45 SQUARE KILOMETERS (11,115 ACRES)
LOCATED IN THE DEPARTMENTS OF LA UNION AND MORAZAN, EL SALVADOR, CENTRAL
AMERICA
On or about October 20, 2002, the Company filed an application with the
Government of El Salvador through 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. On May 25, 2004 (received June 4, 2004)
the Government of El Salvador under Resolution Number 271 issued the
exploration license for a period of four years with a right to request an
additional four year extension. An important observation is that these
mines form a belt of mineralization following a fault line from the SSGM
to the Montemayor Mine for a distance of approximately five miles.
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
Joy a Mine and the Copetillo Mine.
EL SALVADOR MINERAL PRODUCTION FEES
As of July 2001, a series of revisions to the El Salvador Mining Law
offer to make exploitation more attractive. The principal change is that
the fee payable to the GOES has been reduced to two percent of the gross
gold and silver receipts.
20
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
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 certain buildings on which its gold processing
mill, plant and related equipment (the SCMP) are located, and which is
approximately 15 miles west of the SSGM site. The basic annual lease
payment was U.S. $11,500, payable annually in advance, unless otherwise
amended, and subject to an annual increase based on the annual United
States' inflation rate. As agreed, a security deposit of U.S. $11,500
was paid on the same date and this deposit was subject to increases based
on any United States' inflationary rate adjustments.
On April 26, 2004, a three-year lease, which includes an automatic
additional three-year extension subject to Corsain's review, was executed
by and between Corsain and the Company. This lease is retroactive to
November 12, 2003 and the monthly lease payments are $1,418.51 plus the
El Salvadoran added value tax. The lease is subject to an annual
increase based on the U.S. annual inflationary rate adjustments, and is
in the process of being renewed. The SCMP is strategically located to
process ore from other nearby mining projects.
On March 25, 2008 a nineteen-month lease retroactive to November 12, 2006
was executed by and between Corsain and the Company. The total lease
payment for this nineteen-month period is $18,608.21. Reference is made
to Exhibit 10.16 of the Company's Form 10-K for its fiscal year ended
March 31, 2008, for a copy of this lease. The lease was renewed on June
12, 2008 for a six-month period to expire on December 11, 2008.
MODESTO MINE
REAL ESTATE
The Company, through its Chairman, 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 Notes 6 and
7.
MONTEMAYOR MINE
The Joint Venture has obtained permission from a number of property
owners to enter their property for the purpose of exploring, exploiting
and developing the property and then if feasible to mine and extract
minerals from this property. 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.
21
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
(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, through its late President, 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 from time to time has entered
into term agreements with others to have access to other properties.
Payment for these agreements is based on the production of gold payable
in the form of royalties. The Company also leases on a month-to-month
basis approximately 4,032 square feet of office space in Milwaukee,
Wisconsin.
(6) NOTES PAYABLE AND ACCRUED INTEREST
06/30/08 06/30/07
-------- --------
Related Parties
Mortgage and promissory notes to
related parties, interest ranging
from one percent to four percent
over prime rate, but not less
than 16%, payable monthly, due on
demand, using the Misanse lease,
real estate and all other assets
owned by the Company, its
subsidiaries and the Joint
Venture as collateral. (Note 7) $20,334,499 $17,098,714
Other
Short-term notes and accrued
interest (June 30, 2008, $204,423
and June 30, 2007, $182,764)
issued to 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. 339,423 332,764
----------- -----------
Total: $20,673,922 $17,431,478
|
(7) RELATED PARTY TRANSACTIONS
The Company, in an attempt to preserve cash, had prevailed on its late
President to accrue his salary for the past 26.58 years, including
vacation pay, for a total of $3,455,786 and $3,392,765 at June 30, 2008
and 2007, respectively.
In addition, with the consent and approval of the Directors, the late
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, 2008
and 2007:
The amount of cash funds which the Company has borrowed from its late
President from time to time, together with accrued interest, amounts to
$13,901,701 and $11,816,132 at June 30, 2008 and 2007, respectively; the
interest for the quarter ended June 30, 2008 and 2007 was $547,420 and
$465,556 respectively. To evidence this debt, the Company has issued to
its late 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.
22
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
The Company had borrowed an aggregate of $1,488,485 and $1,266,409 at
June 30, 2008 and 2007, respectively, including accrued interest, from
the Company's late President's Rollover Individual Retirement Account
(ELM RIRA). The interest for the quarter ended June 30, 2008 and 2007
was $58,613 and $49,869 respectively. 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 late President has sold or pledged as collateral for loans,
shares of the Company's common stock owned by him. In order to
compensate its late President for selling or pledging his shares on
behalf of the Company, the Company has made a practice of issuing him the
number of restricted shares of common stock equivalent to the number of
shares sold or pledged, plus an additional number of shares equivalent to
the amount of accrued interest calculated at the prime rate plus three
percent per annum and payable monthly. The Company receives all of the
net cash proceeds from the sale or from the pledge of these shares. The
Company did not borrow any common shares during this fiscal year. The
share loans, if any, are all in accordance with the terms and conditions
of Director-approved, open-ended loan agreements dated June 20, 1988,
October 14, 1988, May 17, 1989, and April 1, 1990.
On February 16, 1987, the Company granted its late 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 late 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 common shares issued and outstanding.
Also with the consent and approval of the Directors, a company in which
the late 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, 2008:
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 the Company 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 $3,401,649 and $2,821,701 at June 30,
2008 and 2007, respectively; the interest for the quarter ended June 30,
2008 and 2007 was $133,615 and $110,415 respectively. The annual
interest rate is four percent plus the prime rate, but not less than 16%,
and it is payable monthly.
The Company's Directors have consented and approved the following
transactions of which the status of each are reflected as of June 30,
2008 and 2007:
23
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
The late 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 $1,035,647 and $881,133 at June 30, 2008 and 2007,
respectively; the interest for the quarter ended June 30, 2008 and 2007
was $40,782 and $34,697 respectively. The annual interest rate is three
percent plus the prime rate, but not less than 16%, and it is payable
monthly.
The Directors also have acknowledged that the wife of the late 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 $480,600 and $444,600 at June 30, 2008
and 2007, respectively, for services rendered from October 1994.
The second oldest son of the late President and his son's wife have the
Company's open-ended, on-demand promissory note in the sum of $305,332
and $259,777 at June 30, 2008 and 2007, respectively; the interest for
the quarter ended June 30, 2008 and 2007 was $12,023 and $10,229
respectively. The annual interest rate is three percent plus the
prime rate, but not less than 16%, and it is payable monthly.
The Law Firm which represents the Company in which the second oldest son
of the late President is a principal is owed the sum of $466,582.50 for
2,073.70 hours of legal services rendered from July 1980 through June 30,
2008. By agreement on the date of payment, these fees are to be adjusted
to commensurate with the current hourly fees charged by the Law Firm.
The current President, who has controlling ownership of a company called
Circular Marketing, Inc., has the Company's open-ended, secured,
on-demand promissory note in the sum of $184,031 and $53,563 at June 30,
2008 and 2007, respectively; the interest for the quarter ended June 30,
2008 and 2007 was $5,850 and $2,109 respectively. The annual
interest rate is four percent plus the prime rate, but not less than 16%,
and it is payable monthly.
The late President's half brother has a promissory note in the sum of
$17,653 as of June 30, 2008, which bears interest at an annual rate of
16% payable monthly. The interest for the quarter ended June 30, 2008
was $695; the promissory note was issued in July of 2007, so there was no
interest for the quarter ended June 30, 2007.
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 at any time exchange the amount due to them for
the Company's common shares. The Chairman/President does not receive any
Director fees. All of the accrued amount due for Director fees during
the fiscal year ended March 31, 2008 were exchanged for common stock in
March of 2008. The accrued amount due for Director fees for the quarters
ended June 30, 2008 and 2007 was $4,000 and $4,400 respectively. The
other salary accruals as of June 30, 2008 are $102,595 compared to
$132,053 for June 30, 2007.
(8) COMMITMENTS
Reference is made to Notes 2, 4, 5, 6, 7, 10, 11, 12, 13 and 16.
24
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
(9) INCOME TAXES
At March 31, 2008, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of
approximately $13,123,892, which may be carried forward to offset future
taxable income; the net operating losses expire at various times up until
the year 2022.
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences
and operating loss, tax credit carry-forwards, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax will not be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
March 31
--------
Deferred Tax Assets: 2008 Rate 2007 Rate
---- ---- ---- ----
Net Operating Loss Carry-forwards $ 4,462,123 34% $ 3,619,772 34%
Valuation Allowance for Deferred
Tax Assets (4,462,123) (34%) (3,619,772) (34%)
------------ ----- ------------ -----
Net Deferred Tax Assets: $ 0 0 $ 0 0
|
The components of current income tax expense as of March 31, 2008, 2007
and 2006 respectively are as follows:
As of March 31
2008 2007 2006
---- ---- ----
Current federal tax expense $ 0 $ 0 $ 0
Current state tax expense $ 0 $ 0 $ 0
Change in NOL benefits $(842,351) $(58,887) $(646,200)*
Change in valuation allowance $ 842,351 $ 58,887 $ 646,200
Income tax expense $ 0 $ 0 $ 0
|
*The March 31, 2006 net operating tax loss includes $591,200 restatement
from prior years.
(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 30,715,869 and 28,433,596
shares were issued and outstanding as of June 30, 2008 and 2007. 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.
25
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
b. PREFERRED STOCK
There were no preferred shares issued and outstanding for the periods
ending June 30, 2008 or 2007.
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:
06/30/08 06/30/07
----------------- ----------------
Weighted Weighted
Option Average Option Average
Shares Price Shares Price
------ ----- ------ -----
Outstanding, beg. yr. 0 N/A 0 N/A
Granted 0 N/A 0 N/A
Exercised 0 N/A 0 N/A
Forfeited 0 N/A 0 N/A
Expired 0 N/A 0 N/A
------ --- ------ ---
Outstanding, end of yr. 0 N/A 0 N/A
====== === ====== ===
|
There were no stock options issued or outstanding as of June 30, 2008 or
2007.
d. STOCK RIGHTS - TO THE LATE 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 late 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 late 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, 2008, there were no shares due to other parties for shares
borrowed or for interest payment on the borrowed shares.
26
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
f. S.E.C. FORM S-8 REGISTRATION
On June 7, 2006, the Company declared effective its sixth Securities and
Exchange Commission Form S-8 Registration Statement No. 333-134805 under
the Securities Act of 1933, as amended, and registered 3,000,000 of the
Company's $0.10 par value common shares for the purpose of distributing
shares pursuant to the plan contained in such registration. No shares
were issued during this first quarter, leaving a balance of 960,147
unissued Form S-8 common shares.
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 the CGCEBA from time to time during this fiscal year to meet
its obligations primarily to its El Salvadoran employees. As of April 1,
2008, 800,000 common shares remained in the account. During this fiscal
period no shares were added and no shares were sold, leaving a balance of
800,000 common shares as of June 30, 2008.
(11) LITIGATION
There is no pending litigation in the United States. However, in the
Republic of El Salvador, Central America, the Company's El Salvadoran
legal counsel on December 6, 2006, filed a complaint with the El
Salvadoran Supreme Court Administrative Division claiming that the El
Salvadoran Office of the Ministry of Environment and Natural Resources
(MARN) has revoked two of its El Salvadoran environmental permits for
mining exploitation, without any prior notice, without a right to a
hearing and the right of due process, based on misguided assertions, and
contrary to El Salvadoran law. In addition, the Company's legal counsel
stated that there is a lack of legal foundation for the sanctions and
excess authority exercised by MARN. Reference is made to Exhibit 10.20
of the Company's Form 10-K/A for its fiscal year ended March 31, 2007,
for an English translation of that complaint. There has been no amount
accrued for litigation as of June 30, 2008 or June 30, 2007.
(12) CERTAIN CONCENTRATIONS AND CONCENTRATIONS OF CREDIT RISK
The Company is subject to concentrations of credit risk in connection
with maintaining its cash primarily in two financial institutions for the
amounts in excess of levels. One is insured by the U.S. Federal Deposit
Insurance Corporation. The other is an El Salvadoran banking institution
which the Company uses to pay its El Salvadoran obligations. The Company
considers the U.S. institution to be financially strong and does not
consider the underlying risk at this time with its El Salvadoran bank to
be significant. To date, these concentrations of credit risk have not
had a significant effect on the Company's financial position or results
of operations.
The Company is not subject to credit risk in connection with any hedging
activities as it has never 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.
27
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
When in production the Company sold its gold and silver to one customer.
Given the marketability and liquidity of the precious metals being sold
and because of the large pool of qualified buyers for gold and silver the
Company believes that the loss of its customer could be quickly replaced
without any adverse affect.
(13) COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL COMPLIANCE
Based upon current knowledge, the Company believes that it is in
compliance with the U.S. and El Salvadoran environmental laws and
regulations as currently promulgated. However, the exact nature of
environmental control problems, if any, which the Company may encounter
in the future cannot be predicted, primarily because of the increasing
number, complexity and changing character of environmental requirements
that may be enacted or of the standards being promulgated by governmental
authorities. The Company has filed a lawsuit with the El Salvadoran
Court of Administrative Litigation of the Supreme Court of Justice.
Reference is made to Exhibit 10.20 of the Company's Form 10-K/A for its
fiscal year ended March 31, 2007, for a copy of such filing.
ENVIRONMENTAL GUARANTEES
In connection with the issuance of environmental permits, the Company has
provided the Government of El Salvador with the following guarantees on
March 15, 2006: three-year guarantees expiring on March 15, 2009 were
issued by Seguros del Pacifico, S.A., an El Salvadoran insurance company,
on behalf of the Company to the Ministry of Environment and Natural
Resources for the Renewed SSGM Exploitation Concession.
In connection with the Renewed SSGM Exploitation Concession, on February
17, 2006, a three-year, third-party liability guarantee (bond) expiring
on February 17, 2009 in the sum of $42,857.14 was issued by Seguros del
Pacifico, S.A. on behalf of the Company as required to the Ministry of
Economy's Office of the Department of Hydrocarbons and Mines.
The El Salvadoran Environmental Law, Decree No. 233, 1998 and the General
Regulation of the Environmental Law specify the following:
* An environmental permit from the Ministry of Environment and Natural
Resources (MARN) based on the approval of an Environmental Impact
Assessment, is required for exploitation and industrial processing of
minerals and fossil fuels;
* The environmental permit requires the Company to implement prevention,
minimization or compensation measures established in the environmental
management program, which is a component of the Environmental Impact
Assessment;
* A financial security (bond) is required that covers the total cost of
the facilities or investment required to comply with the environmental
management plans included in the Environmental Impact Assessment.
28
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
Numeric standards for ambient air quality; emissions from fixed sources;
maximum environmental noise levels; water quality and effluent limits are
specified in various norms and regulation, including the Special
Regulation of Technical Norms for Environmental Quality Decree No. 40,
and the Special Regulations of Wastewater Decree No. 39.
The El Salvadoran Department of Hydrocarbons and Mines (DHM) requires
environmental permits to be issued in connection with the application of
the Renewed SSGM. The issuance of these permits is under the
jurisdiction of the El Salvador Ministry of Environment and Natural
Resources Office (MARN). On October 15, 2002, MARN issued an
environmental permit under Resolution 474-2002 for the SCMP. On October
20, 2002, MARN issued an environmental permit under Resolution 493-2002
for the Renewed SSGM Exploitation area, which on March 15, 2006, was
renewed for a three-year period expiring March 15, 2009.
On or about September 18, 2006, without any prior notice, the El Salvador
Minister of Environment's office delivered to Commerce's El Salvadoran
legal counsel, its revocation of its San Sebastian Gold Mine Exploitation
environmental permit which was the only permit of its kind issued in the
Republic of El Salvador. The Company's El Salvadoran legal counsel after
reviewing the two letters (one for the SSGM and the other for the SCMP)
concluded that the revocation of these permits was arbitrary, illegal and
unconstitutional and he so stated in his September 20, 2006 letter to the
Minister of Environment's office; a second letter was submitted by our
legal counsel as the Minister of Environment's office requested a
response to the first letter. As of October 28, 2006, no responses were
received. The Company has filed a lawsuit with the El Salvadoran Court
of Administrative Litigation of the Supreme Court of Justice stating that
the Ministry of Environment has not provided any prior notice, has not
provided a right to a hearing and the right of due process, based its
opinion on misguided assertions, and contrary to El Salvadoran law. In
addition, the Company's legal counsel stated that there is a lack of
legal foundation for the sanctions and excess authority exercised by
MARN. Reference is made to Exhibit 10.20 of the Company's Form 10-K/A
for its fiscal year ended March 31, 2007, for a copy of such filing.
LEASE COMMITMENTS
The month-to-month lease of its offices is described in note (7) Related
Party Transactions of the Notes to the Consolidated Financial Statements.
The lease of the SCMP and other mining leases are described in note (4)
Commerce/Sanseb Joint Venture ("Joint Venture") and in note (5) Synopsis
of Real Estate Ownership and Leases of the Notes to the Consolidated
Financial Statements.
CONFIRMATION AGREEMENTS WITH RELATED PARTIES
The Company, with Directors' approval, as of the end of each fiscal year,
enters into confirmation agreements with Edward L. Machulak, as an
individual, and not as a Director or Officer of the Company, the Edward
L. Machulak Rollover Individual Retirement Account, (Edward L. Machulak's
Widow Sylvia Machulak will now act on his behalf), General Lumber &
Supply Co., Inc., and Sylvia Machulak as an individual and for the Sylvia
Machulak Rollover Individual Retirement Account, John E. and Susan R.
Machulak, Edward A. Machulak and Circular Marketing, Inc. to acknowledge
the amount due, the collateral pledged, and other pertinent facts and
understandings between the parties as of the fiscal year end. These
agreements are filed annually as exhibits to the SEC Form 10-K.
29
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
INTERCOMPANY TRANSACTIONS AND OTHER TRANSACTIONS
In addition to the transactions between the Company and General Lumber,
and certain individuals who also are Directors and Officers of the
Company and between the Company and its Officers, Directors and
affiliates, the Company has and continues to have transactions with its
subsidiaries, San Luis Estates, Inc., Universal Developers, Inc.,
Homespan Realty Co., Inc., Ecomm Group Inc., San Sebastian Gold Mines,
Inc., Mineral San Sebastian S.A. de C.V., and substantial transactions
with the Commerce/Sanseb Joint Venture.
The Company advances funds, allocates expenses, and charges for
disbursements made to the Joint Venture. The Joint Venture in turn
capitalizes all of these advances, allocations, expenses, and
disbursements (excluding certain interest expense).
The Company has adopted a policy to maintain a separate accounting of the
amount due to it from Sanseb and the Joint Venture. This independent
accounting will be maintained by the Company to reflect its investment
and the amount due to it. This record will become the official document
for future Joint Venture cash distributions. All of the advances and
interest earned will be paid to the Company before the distribution to
others of any of the Joint Venture's profits or cash flow.
The Company maintains a separate accounting for the funds or credits
advanced to the Joint Venture and for the interest charged which is at
the prime rate quoted on the first business day of each month plus four
percent and said interest is payable monthly. These advances, together
with interest, are to be paid to the Company prior to the distribution of
any of the Joint Venture profits, and are reflected as follows:
Company Net Advances to the Joint Venture during the fiscal quarter ended
June 30, 2008
Total Interest
Advances Charges
-------- -------
Beginning balance $71,989,632 $51,633,430
Advances during fiscal period ended June 30, 2008 1,180,191 1,630,054
----------- -----------
Total Company's net advances 73,169,823 53,263,484
Advances by three of the Company's subsidiaries 590,265 0
----------- -----------
Total net advances as of June 30, 2008 $73,760,088 $53,263,484
|
(14) BUSINESS SEGMENTS
The Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related Information
became effective for fiscal years beginning after December 15, 1997.
SFAS 131 establishes standards for the way that public business
enterprises determine operating segments and report information about
those segments in annual financial statements. SFAS 131 also requires
those enterprises to report selected information about operating segments
in interim financial reports issued to shareholders. SFAS 131 further
establishes standards for related disclosure about products and services,
geographic areas, and major customers.
30
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
The Company presently has two reportable segments: mining and other.
The mining segment was engaged in the exploitation and exploration of
precious metals. The production processing is temporarily suspended
while the exploration continues. The other segments are those activities
that are combined for reporting purposes.
Mining El Salvador, Corporate
Central America Headquarters
---------------------- ------------
Fiscal period ended 6/30/08
Sales and revenues $ 0 $ 0
Depreciation & amortization 0 0
Operating income (loss) 0 (845,138)
Total assets 20,662,867 241,186
Capital expenditures 145,026 0
Fiscal period ended 6/30/07
Sales and revenues $ 0 $ 0
Depreciation & amortization 0 0
Operating income (loss) 0 (725,670)
Total assets 19,993,534 268,800
Capital expenditures 138,518 0
|
(15) QUARTERLY FINANCIAL DATA
The following is a tabulation of the quarterly operating results for the
quarters ended June 30, 2008 and 2007:
Per Share
Operating Basic/Diluted Net
Fiscal year ended 3/31/09 Revenues Net (Loss) Income/(Loss)
------------------------- -------- ---------- -----------------
First quarter 6/30/08 $0 $(845,138) $.03
Per Share
Operating Basic/Diluted Net
Fiscal year ended 3/31/08 Revenues Net (Loss) Income/(Loss)
------------------------- --------- ---------- -----------------
First quarter 6/30/07 $0 $(725,670) $.03
|
31
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 (CONTINUED)
(16) UNCERTAINTIES
The Company has experienced recurring losses since the gold mining
operations have been placed on a hold status. The Company has had no
revenues during this phase and is therefore dependent upon raising
capital to continue operations. During the past five years, the Company
and its shareholders and officers have been able to provide the capital
necessary to continue the operations of the Company, the maintenance of
the mine and related equipment, and perform limited exploration on its
exploration license areas. However, there is no guarantee that the
Company can continue to provide required capital and to keep the
Company's assets maintained. If the Company was unable to raise
sufficient funds, the Company would be unable to pay the employees
maintaining its mining equipment in El Salvador, which could result in
loss of assets or impairment thereof. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Management believes it has sufficient availability of funds through loans
and other business arrangements from its principal officer, its
directors, through accredited investors, and other sources to continue
its operations for the coming year. Management is also entertaining
joint venture opportunities, and other financing in order to generate
sufficient capital to begin the open-pit, heap-leaching operation at the
San Sebastian Gold Mine and to resume its production facilities at its
San Cristobal Mill and Plant. The substantial increase in the price of
gold--the highest in 25 years--has expanded investors' interest.
(17) GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
has recurring net losses, negative working capital and negative cash flow
from operations, and is dependent upon raising capital to continue
operations. The Company's ability to continue as a going concern is
subject to its ability to generate a profit and/or obtain necessary
funding from outside sources, including obtaining additional funding from
the sale of its securities, increasing sales or obtaining loans and
grants from various financial institutions where possible. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
(18) 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.
32
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides information on the results of
operations and the financial condition, liquidity and capital resources
for the first quarter periods ended June 30, 2008 and 2007. The
financial statements of the Company and the notes thereto contain
detailed information that should be referred to in conjunction with this
discussion.
OVERVIEW
Today Commerce is a company with substantial gold and silver mineralized
material and a great potential for locating and exploiting gold and
silver ore reserves. The Company is in the precious metals exploration
business with all of its mines presently located in the Republic of El
Salvador, Central America. The Company's objective and goals are to
increase shareholder value by finding a compatible acquisition, merger or
other business arrangement by which gold and silver ore reserves within
the concession/license areas granted to the Company by the Government of
El Salvador (GOES) will be identified, developed and processed.
Substantial capital expenditures are required to find, develop and
process gold ore. The Company's geologists and engineers believe that it
has potentially significant precious metal reserves which can be
identified and developed by continuous and expanded exploration. The
Company will strive to have its properties operated in an efficient
manner to maximize the cash flow and earnings. The strategies to
accomplish these goals include, whether by Commerce or through an
arrangement with another respected company, commencement of production of
gold and silver when adequate funding is available, locating and
identifying gold and silver ore reserves by a more aggressive exploration
program, continuing the good relationship established over the past 38
years with its employees, continuing its relationship with the El
Salvadoran Government, earning profits and respecting the citizens
surrounding its mining properties.
On July 18, 2008 the Company entered into a non-binding letter of intent
for a proposed acquisition/merger with Voter Communications, Inc. The
letter of intent which discloses the general terms and conditions was
attached as Exhibit 99.1 of the Form 8-K that the Company filed with the
SEC on July 23, 2008.
Earlier in the year Commerce entered into a tentative arrangement with
another company to perform exploration in El Salvador. However, that
company has decided not to continue its efforts to enter into a
transaction relating to Commerce's San Sebastian Gold Mine in the Country
of El Salvador. Therefore, Commerce's directors and officers continue to
seek a compatible financial or business arrangement.
The Company is determined to obtain the permissions needed from El
Salvador and to enter into a business arrangement through which gold will
be produced at its San Cristobal Mill and Plant facilities and an
open-pit, heap-leach operation constructed on its San Sebastian Gold Mine
site which is located approximately two and one half miles off of the Pan
American highway northwest of the City of Santa Rosa de Lima in the
Department of La Union, El Salvador.
All of the Company's mining interests are located in the Republic of El
Salvador, Central America, in the Departments of La Union and Morazan.
Our geologists have made the following estimates of mineralized material:
SSGM MINERALIZED MATERIAL
Gold Mineralized Material (06/30/08) Tons
----
Mineralized virgin material
(includes 960,000 tons of dump material) 14,404,096
Stope fill (estimated) 1,000,000
Estimated other mineralized material and open pit 122,815,134
-----------
Total estimated mineralized material 138,219,230
|
Because the Company does not have a final feasibility study completed
within the past five years, a determination that the property contains
valid reserve estimates is not possible at this time.
33
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
Acres
-----
Exploitation/Exploration Department or Exploi- Explor-
Concessions/Licenses Location tation ation Total
------------------------ ------------- ------ ------- -----
Renewed San Sebastian Gold Mine La Union 304 1,394 1,698
New San Sebastian Gold Mine La Union/Morazan 8,372 8,372
Nueva Esparta La Union/Morazan 11,115 11,115
--- ------ ------
Total Acreage 304 20,881 21,185
|
The San Sebastian Gold Mine has four contiguous target areas in the
10,070 acre area (1,573 square miles): the San Sebastian Gold Mine; the
Coseguina Hill; the San Juan Hill; and the El Salazar area. Most of the
exploration has been conducted on the San Sebastian Gold Mine, the
Coseguina Hill and the El Salazar area. Very little exploration has been
performed on the San Juan Hill. The prospects of finding commercial
grades of ore potentially at the recent gold price is above average. A
large part of the San Sebastian Exploration License area remains
unexplored. Also included in the New San Sebastian Exploration License
area are four formerly-operated mines. They are: the San Sebastian Gold
Mine; the La Lola Mine; the Tabanco Mine; and the Santa Lucia Mine.
The Nueva Esparta Exploration License area consists of 11,115 acres
(17.36 square miles) of land to explore. Included in the exploration
area are eight formerly-operated gold and silver mines: 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. At the La
Joya - Montemayor Mine, the Company discovered a surface vein that as of
this writing is over one and one half miles in length and about five to
over thirty feet in width. This area is targeted to be one of the first
areas to be drilled.
POTENTIAL RESERVES AND MINERALIZED MATERIAL
In the past, the Company has reported possible mineral reserves of up to
3.4 million ounces of gold as part of its San Sebastian Gold Mine and has
reported mineralized material on a number of its properties. Because the
Company does not have a final feasibility study completed within the past
five years, a determination that the property contains valid reserve
estimates is not possible at this time.
There are a number of uncertainties inherent in estimating quantities of
mineralized material, including many factors beyond the Company's
control. Mineralized material estimates and estimates of gold content 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 mineralized materials containing
relatively lower grades of mineralization uneconomic to mine at this
time. Further, availability of permits, changes in operating and capital
costs, and other factors could materially and adversely affect estimates
of commercially useful mineralized material . The Company uses its
mineralized material estimates and estimates of gold content in
determining the unit basis for mine depreciation and amortization of
closure costs. Changes in estimates could significantly affect these
items.
It is expected that the carbon-in-leach process will be used to produce
gold at the SSGM. As the solution percolates through the heap, gold is
dissolved from the mineralized material into solution. This solution is
collected and processed with activated carbon, which precipitates the
gold out of solution and onto the carbon. Through the subsequent
processes of acid washing and pressure stripping, the gold is returned to
a solution in a more highly concentrated state. This concentrated
solution of gold is then processed in an electrowinning circuit, which
re-precipitates the gold onto cathodes for melting into gold dore bars.
34
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
When the Company was in production certain estimates regarding this
overall process were required for inventory accounting and reporting of
gold estimates, the most significant of which are the amount and timing
of gold to be recovered. Although the Company can calculate with
reasonable certainty the tonnage and grades of gold mineralized material
placed under the mill process system and laboratory analysis, the
recovery and timing factors are influenced by the grade of the
mineralized material under leach and the particular mineralogy of a
deposit being mined. The Company's estimates are based on laboratory
leaching models which approximate the recovery from gold mineralized
material under leach. From this data the Company has estimated the
amount of gold that can be recovered and the time it will take for
recovery. When the Company is in production, the Company will
continually monitor the actual monthly and cumulative recovery from the
carbon-in-leach process as a check against the laboratory models.
The Company has no revenues because it is not in production and it
requires funds to purchase the necessary equipment, inventory and working
capital to commence processing the mineralized material The Company is
determined to find a business arrangement that will enable production to
commence. It plans to joint venture, merge, be acquired or enter into a
business combination that will benefit all parties concerned.
The Company believes that at least $30 million (net) in funding is needed
for the expansion of exploration opportunities and to resume production
of gold and silver from its San Sebastian Gold Mine located near the City
of Santa Rosa de Lima, Republic of El Salvador, Central America. The
Company expects that the $30 million would be used as follows:
To resume the production of gold and silver
at its San Cristobal Mill and Plant using
its higher grade mineralized material, its
funding needs amount to U.S. $4 million net
To set up an open-pit, heap-leach operation
at the San Sebastian Gold Mine site U.S. $19 million net
For preliminary exploration for a part or
for all of the 10,000 acres of the New San
Sebastian Exploration License area
consisting of three former mine operations
up to U.S. $ 2 million net
For preliminary exploration for a part or
for all of the 11,000 acres of the Nueva
Esparta Exploration License area consisting
of eight former mine operations up to U.S. $ 2 million net
Contingent fund availability, inflation
costs and for accelerating the above
projects U.S. $ 3 million net
----------------------
Total U.S. $30 million net
|
35
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
All of the Company's mines are located in the Republic of El Salvador,
Central America. The Government of El Salvador (GOES) via the Ministry
of Economy's office has issued the following three concessions/licenses:
1. On or about May 20, 2004, the Renewed San Sebastian Gold Mine
Exploitation Concession (Renewed SSGM) was issued by the GOES for a
period of 30 years. This gives the Company the right to extract and
process mineralized material to produce gold and silver from the San
Sebastian Gold Mine site. Because the Company does not have a final
feasibility study completed within the past five years, a
determination that the property contains valid reserve estimates is
not possible at this time. On or about September 13, 2006, the El
Salvador Ministry of the Environment delivered to Commerce's El
Salvadoran legal counsel its revocation of the environmental permits
issued for the SSGM exploitation concession and the SCMP. This
Company's legal counsel on December 6, 2006, filed with the El
Salvadoran Court of Administrative Litigation of the Supreme Court
of Justice two complaints relating to this matter. (See the
Company's discussion in the section entitled "Environmental
Matters.") These legal proceedings are pending.
2. On or about February 27, 2003, the GOES granted to the Company the
New San Sebastian Exploration License (New San Sebastian Exploration
License) consisting of approximately 10,070 acres which encompass
the Renewed SSGM Exploitation Concession. This exploration license
is in the process of being renewed. This license gives the right to
exploration of the subsurface in this area. In this area there are
three formerly operated mines: La Lola Mine, Santa Lucia Mine and
Tabanco Mine. Presently the Company is performing exploration work
at the Tabanco and La Lola Mine area.
3. On May 25, 2004 the GOES granted to the Company the Nueva Esparta
Exploration License consisting of 11,115 acres of area to explore.
This exploration license area abuts the New San Sebastian
Exploration License area and it has eight formerly operated
gold/silver mines: 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 Company did exploration
work on the Montemayor Mine from 1995 - 1997 and it has resumed its
exploration work in these mines. The Company is a U.S. Wisconsin
chartered corporation engaged in exploration for gold and silver,
with its primary asset being the San Sebastian Gold Mine (SSGM).
The SSGM is located in the Republic of El Salvador, Central America
and produced over one million ounces of gold during the 1900-1917
period. The Company became involved as an investor and then as a
majority owner. Gold and silver was mined from mid-1972 through the
first quarter of 1978. Mining ceased due to the civil unrest in El
Salvador. A peace pact was entered into in December 1992
conditioned upon meeting the terms and conditions of this peace
agreement during a three-year period. Mining of gold and silver
commenced on April 1, 1995 and the operations were suspended during
the first quarter of 2000 due to the low selling price of gold
(lowest price about $252) at that time and the need to retrofit,
restore and expand the San Cristobal Mill and Plant (SCMP). The
Company presently is seeking permission from MARN and funding to
restore the SCMP and to set up an open-pit, heap-leach operation at
the SSGM site. Its alternative is to joint venture or to enter into
a merger or other business combination.
36
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES
The Company wants to proceed with its plan to re-start its San Cristobal
Mill and Plant operations, but it will require financing for the
expansion of its production capacity from 200 to 500 tons per day and to
retrofit this plant. In order to obtain funding there are multiple
sources which could include private equity investment, public equity
offering, debt, and other forms of creative funding approaches.
Additional equipment has to be purchased, delivered and installed and the
SCMP has to be retrofitted, overhauled and its production capacity should
be expanded.
The Company will endeavor to commence an open-pit, heap-leaching
operation at the SSGM. 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. $19 million to start a
2,000 ton-per-day open-pit, heap-leaching operation. Eventually the
production capacity would be increased in stages to 6,000 tons per day so
that annual production could be 113,000 ounces of gold at the SSGM. The
use of the $19,000,000 proceeds is as follows: $8,745,000 for mining
equipment and the completion of erecting a crushing system; $4,010,560
for the processing equipment and site and infrastructure costs; and a sum
of $6,244,440 is to be used for working capital. The once depressed
price of gold has substantially increased during the last two years. The
Company's incredibly low common share market price is a major deterrent
in raising cash for the Company's programs.
The Company continues to be cognizant of its cash liquidity problem 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. In order to continue obtaining funds
to conduct the Joint Venture's exploration and proposed exploitation,
development, and 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 outside sources. The Company may have to borrow
funds by issuing open-ended, secured, on-demand or unsecured promissory
notes, by selling its shares to its directors, officers and other
interested accredited investors, or by entering into a joint venture,
merging, or developing an acceptable form of a business combination with
others.
On July 18, 2008 the Company entered into a non-binding letter of intent
for a proposed acquisition/merger with Voter Communications, Inc. The
letter of intent which discloses the general terms and conditions was
attached as Exhibit 99.1 of the Form 8-K that the Company filed with the
SEC on July 23, 2008.
Earlier in the year Commerce entered into a tentative arrangement with
another company to perform exploration in El Salvador. However, that
company has decided not to continue its efforts to enter into a
transaction relating to Commerce's San Sebastian Gold Mine in the Country
of El Salvador. Therefore, Commerce's directors and officers continue to
seek a compatible financial or business arrangement.
During the past, the Joint Venture was engaged in exploration programs
designed to locate and evaluate gold ore reserves. The prospects of
locating and evaluating 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 substantial gold ore
reserves. The Company was unable to obtain sufficient funds during this
fiscal year to complete the modification and expansion of the SCMP or for
its open-pit, heap-leach operation. However, the Company did invest
funds during this fiscal period to maintain the SCMP and to continue
exploration.
37
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
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 identifying potential gold ore
reserves will be greatly enhanced if the price of gold stays at the
current or higher level. 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.
DEBT
Most of the debt is owed to related parties as follows:
Related Parties Others Total
--------------- ------ -----
Accounts payable - Commerce $ 143,447 $ 4,005 $ 147,452
Accounts payable - Comseb 241,420 2,708 244,128
Notes payable and accrued interest 20,334,499 339,423 20,673,922
Accruals - salaries 3,558,381 3,558,381
Accruals - legal fees 466,583 466,583
Accruals - other - Commerce 484,600 433,281 917,881
----------- -------- -----------
Total $25,228,930 $779,417 $26,008,347
|
Although the majority of the short-term obligations are due on demand,
most of the obligations have the attributes of being long-term
obligations as most of the debt is due to related parties who have not
called for payment during the past five or more years.
CASH DEPOSITS AND SURETY BONDS
The Company was required to provide cash deposits or surety bonds in
connection with obtaining its mining concession and environmental
permits.
El Salvador Ministry of Environment Requirements:
The El Salvador Ministry of Economy exploitation concession for the
Renewed San Sebastian Gold Mine Exploitation Concession No. 591 dated May
20, 2004 required a three-year, third-party liability guarantee (bond)
which was renewed commencing on February 17, 2006 through February 17,
2009 in the sum of $42,857.14. It was issued by Seguros del Pacifico,
S.A., an El Salvadoran bonding and insurance company.
a. A bond in an amount of $771.49 is required in connection with the
environmental permit issued on October 15, 2002 under MARN Resolution
No. 474-2002 for the San Cristobal Mill and Plant. This bond was
originally issued on October 15, 2003 for a period of three years.
The environmental permit was revoked without notice, cause, or reason
by MARN Resolution No. 3249-779-2006 dated July 5, 2006. The notice
was first delivered to the Company on or about September 13, 2006.
As a result of the revocation, the bond was returned in 2007.
38
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
b. A bond in an amount of $14,428.68 is required in connection with the
environmental permits issued on October 20, 2002 under MARN
Resolution No. 493-2002 for the Renewed San Sebastian Gold Mine
Exploitation concession. This permit was renewed on March 15, 2006
for a term of three years and an audit by MARN was made. The
environmental permit was revalidated on June 23, 2006. MARN
delivered its revocation of the environmental permit, Resolution No.
3026-783-2006 dated July 6, 2006 on or about September 13, 2006. As
a result of the revocation, the bond was returned in 2007.
On or about December 6, 2006, the Company's El Salvadoran attorney filed
a complaint against the Ministry of Environment with the Honorable Court
of Administrative Litigation of the Supreme Court of Justice stating that
the Ministry of Environment violated the right of a notice, hearing and
due process, that there is a lack of legal foundation for the sanctions,
use of excess authority, and contrary to the El Salvadoran law.
RESULTS OF OPERATION FOR THE FISCAL PERIOD ENDED JUNE 30, 2008 COMPARED
TO JUNE 30, 2007
There are no revenues as the Company has suspended its gold production
until it is able to enter into a business arrangement or is able to
procure the funds it requires to rehabilitate, retrofit, overhaul, and
expand its SCMP to commence an open-pit, heap-leach gold producing
operation at the SSGM site. The price of gold has stabilized at a price
level that could assure a profitable operation. The Company recorded a
net loss of $845,138 or $.03 cents per share for its fiscal quarter ended
June 30, 2008. This compares to a net loss of $725,670 or $.03 cents per
share for the fiscal year ended June 30, 2007.
There was no current or deferred provision for income taxes during the
fiscal quarter ended June 30, 2008 or 2007. Additionally, even though
the Company has an operating tax loss carry forward, 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.
Since the Company was not in production, inflation did not have a
material impact on operations in the fiscal quarters ended June 30, 2008
or 2007. The Company does not anticipate that inflation will have a
material impact on continuing operations during the next fiscal year
unless the Company is producing gold and silver.
The costs for fuel will be a significant operating expense when
production commences. It is expected that continued high fuel costs and
increased costs of hiring and retaining qualified mining personnel with
the required specialized skills to operate and manage a mining operation
will have a potential significant impact on continuing operations in the
future.
Interest expense in the sum of $805,733 was recorded by the Company
during this fiscal quarter compared to $679,461 for the same period in
2007, and in the past it was eliminated with the interest income earned
from the Joint Venture. As stated above, the interest expense is now
included in the net loss.
39
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
Almost all of the costs and expenses incurred by the Company are
allocated and charged to the Joint Venture. The Joint Venture
capitalizes the costs and expenses (excluding certain interest expense)
and will continue to do so until such time when it is in production. At
the time production commences, these capitalized costs will be charged as
an expense based on a per unit basis. If the prospect of gold production
becomes unlikely, all of these costs will be written off in the year that
this occurs.
RESULTS OF OPERATION FOR THE FISCAL PERIOD ENDED JUNE 30, 2007 COMPARED
TO JUNE 30, 2006
There are no revenues as the Company has suspended its gold production
until it is able to enter into a business arrangement or is able to
procure the funds it requires to rehabilitate, retrofit, overhaul, and
expand its SCMP to commence an open-pit, heap-leach gold producing
operation at the SSGM site. The price of gold has stabilized at a price
level that could assure a profitable operation. The Company recorded a
net loss of $725,670 or $.03 cents per share for its fiscal quarter ended
June 30, 2007. This compares to a net loss of $609,362 or $.02 cents per
share for the fiscal year ended June 30, 2006.
There was no current or deferred provision for income taxes during the
fiscal quarter ended June 30, 2008 or 2007. Additionally, even though
the Company has an operating tax loss carry forward, 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.
Since the Company was not in production, inflation did not have a
material impact on operations in the fiscal quarters ended June 30, 2008
or 2007. The Company does not anticipate that inflation will have a
material impact on continuing operations during the next fiscal year
unless the Company is producing gold and silver.
The costs for fuel will be a significant operating expense when
production commences. It is expected that continued high fuel costs and
increased costs of hiring and retaining qualified mining personnel with
the required specialized skills to operate and manage a mining operation
will have a potential significant impact on continuing operations in the
future.
Interest expense in the sum of $679,461 was recorded by the Company
during this fiscal period compared to $568,783 for the same period in
2006, and in the past it was eliminated with the interest income earned
from the Joint Venture. As stated above, the interest expense is now
included in the net loss.
Almost all of the costs and expenses incurred by the Company are
allocated and charged to the Joint Venture. The Joint Venture
capitalizes the costs and expenses (excluding certain interest expense)
and will continue to do so until such time when it is in 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.
40
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The ensuing discussion and analysis of financial condition and results of
operations are based on the Company's consolidated financial statements,
prepared in accordance with accounting principles generally accepted in
the United States of America and contained within this report on S.E.C.
Form 10-K. Certain amounts included in or affecting the Company's
financial statements and related disclosures must be estimated, requiring
that certain assumptions be made with respect to values or conditions
which cannot be made with certainty at the time the financial statements
are prepared. Therefore, the reported amounts of the Company's assets
and liabilities, revenues and expenses, and associated disclosures with
respect to contingent assets and obligations are necessarily affected by
these estimates. The more significant areas requiring the use of
management estimates and assumptions relate to mineral reserves that are
the basis for future cash flow estimates and units-of-production amor-
tization 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;
non monetary transactions; and contingencies and litigation. The Company
bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following significant assumptions and estimates
affect its more critical practices and accounting policies used in the
preparation of its consolidated financial statements.
A critical accounting policy is one that is important to the portrayal of
the Company's financial condition and results, and requires the Company
to make difficult subjective and/or complex judgments. Critical
accounting policies cover accounting matters that are inherently
uncertain because the future resolution of such matters is unknown. The
Company believes the following accounting policies are critical policies;
accounting for its gold ore reserves, environmental liabilities, income
taxes and asset retirement obligations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions for the reporting period and as of the financial statement
date. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent liabilities and the
reported amounts of revenues and expenses. Actual results could differ
from those amounts.
Gold ore reserves include reserves that represent estimated quantities of
gold in which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reserves under
existing economic and operating conditions. The gold ore reserves are
based on estimates prepared by geology and mining consultants and are
used to calculate depreciation, depletion and amortization (DD&A) and
determine if any potential impairment exists related to the recorded
value of the Company's gold ore reserves. Decline in the market price of
gold may render certain reserves containing relatively lower grade of
mineralization uneconomic to mine. Changes in capital and operating
costs including other factors could materially and adversely affect ore
reserves.
41
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
The Company reviews, on an as needed basis, its estimates of costs of
compliance with environmental laws and the cleanup of various sites,
including sites in which governmental agencies have designated the
Company as a potentially responsible party. When it is probable that
obligations have been incurred and where a minimum cost or a reasonable
estimate of the actual costs of compliance or remediation can be
determined, the applicable amount is accrued. Actual costs can differ
from estimates due to changes in laws and regulations, discovery and
analysis of site conditions and changes in technology.
The Company makes certain estimates, which may include various tax
planning strategies, in determining taxable income, the timing of
deductions and the utilization of tax attributes, which can differ from
estimates due to changes in laws and regulations, discovery and analysis
of site conditions and changes in technology.
Management is required to make judgments based on historical experience
and future expectations on the future abandonment cost, net of salvage
value, of its mining properties and equipment. The Company reviews its
estimate of the future obligation periodically and will accrue the
estimated obligation based on the SFAS No. 143 "Account for Asset
Retirement Obligations."
From time to time, the Company will estimate ore reserves, if any, 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 utilizes 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 at least annually plans to assess its properties and
undeveloped mineral claims and leases, if any, for impairment when events
or changes in circumstances indicate that the properties may be impaired.
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 transaction in the market place. The expected
values associated with potential property development are estimated using
the traditional net present value analysis of revenues, costs and
capital investment cash flow projections discounted at a risk-adjusted
rate reflective to the time periods associated with each possible
outcome. Assumptions
42
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
underlying future cash flow estimates are subject to risks and
uncertainties. Also, the occurrence of past market transactions does not
mean that such comparable amounts would be applicable to the Company's
situation. Any differences between significant assumptions and market
conditions could have a material effect on the fair value estimate.
The financial statements for the first fiscal quarters ended June 30,
2008, 2007 and prior years reflect and include Commerce Group Corp.'s
subsidiaries and the Commerce Group Corp./Sanseb Joint Venture (Joint
Venture) on a consolidated basis. Previously, the Company reported the
investment in the Joint Venture as advances to the Joint Venture and the
Company's advances included the interest earned on these advances in
anticipation of the interest being reimbursed. Now these advances are
restated and combined with the Company's Consolidated Financial
Statements. Although the elimination of interest income reduces the
retained earnings, it does not eliminate the interest charged by and
earned by the Company which is due and payable to it and which is
maintained additionally with a separate accounting. At such time when
the profits from the gold mining operation are distributed, the interest
earned on these advances will be paid first to the Company pursuant to an
agreement entered into by the joint venture parties.
For the fiscal year ended March 31, 2008, the Company was able to
segregate the disbursements to the Joint Venture to identify the category
to be charged. Reference is made to Item 8. Financial Statements and
Supplementary Data, Note 2 in the Company's Form 10-K for its fiscal year
ended March 31, 2008, for additional details.
PRECIOUS METAL MINING STRATEGY
The Company processed gold from 1972 through March 1978 at the SSGM site
and from March 31, 1995 through December 31, 1999 at its SCMP. Its SCMP
consisted primarily of used equipment that had been installed at its
leased site by a previous mining company. The used processing equipment
was acquired by the Joint Venture on February 23, 1993, and the SCMP
operations were officially suspended as of March 31, 2000. During this
period, the price of gold suffered a severe decline.
Although while in operation at the SCMP site the Company has on a
continuous basis repaired, maintained, modified, and restored the
equipment, it presently lacks sufficient funds to retrofit and to expand
the SCMP facilities.
43
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
The Company has temporarily suspended its gold processing until such time
as it has obtained the necessary permission from MARN to proceed and has
obtained adequate funds for the retrofitting, rehabilitation,
restoration, overhauling, and most importantly for the expansion of the
SCMP facilities. During the last two fiscal periods, the price of gold
has increased to a level to place the SCMP operation into a profitable
position.
The Company has a number of non-exclusive independent consulting
agreements for the purpose of raising the sum of up to U.S. $30 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, for the retrofit and expansion of the Joint Venture's SCMP,
and for continuing and expanding its exploration programs.
Through December 1999, the Joint Venture produced gold primarily from
processing the SSGM tailings and from the virgin mineralized material 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 maintained at this site. It also is continuing limited activities.
The Modesto Mine is inactive. Most of the mining properties are located
in the Departments of La Union and Morazan in the Republic of El
Salvador, Central America.
The Joint Venture will continue its attempts to commence its processing
of gold from the SSGM site. 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 the necessary permission is obtained
from MARN and adequate funding is in place, providing the gold price
remains at or above the current price level. The Joint Venture continues
on a limited basis to conduct an exploration program to locate and
evaluate gold ore reserves at the SSGM. Since it has the New San
Sebastian Exploration License and the Nueva Esparta Exploration License,
it is exploring the Mina Lola, the Tabanco Mine, the Santa Lucia Mine,
the Montemayor Mine, the La Joya Mine and the Banadero Mine.
The Company processed gold at the SSGM site from 1972-1978 and the Joint
Venture processed gold from March 1995 through December 1999 at the SCMP
through a start-up or preliminary operation, which was a forerunner of
its greater goals. The Company's revenues, profitability and cash flow
are greatly influenced by the price of gold. Gold prices fluctuate
widely and are affected by numerous factors which will be beyond the
Company's control, such as, expectations for inflation, the strength of
the U.S. dollar, overproduction of gold, global and regional demand, acts
of terrorism, or political and economic conditions, or for that matter,
many other reasons. The combined effect of these and other factors is
difficult; perhaps impossible to predict. Should the market price of
gold fall below the Company's production costs and remain at such level
for any sustained period, the Company could experience losses. The
Company believes that neither it, nor any other competitor, has a
material effect on the precious metal markets nor that the price it will
receive for its production is dependent upon world market conditions over
which it has no control.
44
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
EMPLOYEES
As of June 30, 2008, the Joint Venture employed approximately 40
full-time persons in El Salvador to perform its limited exploration
program; to complete the erection of 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 the employees are
covered by any collective bargaining agreements. It has developed a
harmonious relationship with its employees, and it believes that at one
time 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 their severance pay and other benefits, therefore from time to
time it sold 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.
EFFORTS TO OBTAIN CAPITAL
Since the concession/licenses were granted, and through the present time,
substantial effort is exercised by the Directors and Officers in
attempting to secure funding through various sources, all with the
purpose to expand the operations of the SCMP, to construct an open-pit
heap-leach operation at the SSGM site, and to continue the exploration of
its other El Salvadoran mining prospects. In more than one instance, the
Company has encountered difficulty in negotiating reasonable terms and
conditions.
The Company, Sanseb, and the Joint Venture consider the past political
situation in the Republic of El Salvador to have been unstable, and
believe that the final peace declaration on December 16, 1992, has put an
end to the conflict. Even though many years have passed, the stigma of
the past unfavorable political status in the Republic of El Salvador
exists and therefore certain investors continue to be apprehensive to
invest the funds required. However, as explained in this report, the
Company was able to obtain a sum of funds to invest in the expansion and
retrofitting of its SCMP and for the exploration of its other mining
prospects. The decline in the Company's common stock market price places
the Company in a situation of substantially diluting its common shares in
order to raise equity capital. The Company believes that it will be able
to obtain adequate financing to conduct its operations from the same
sources as in the past. There are no assurances that funds will be avail-
able, except at this time, there continues to be a greater world-wide
interest in the ownership of gold. The price of gold is at a favorable
height which should encourage investors to invest in gold mining
companies.
ENVIRONMENTAL REGULATIONS
The Company's mining operations are subject to the El Salvador
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.
45
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
The El Salvador Department of Hydrocarbons and Mines (DHM) requires
environmental permits to be issued in connection with the issuance of
exploitation concessions. 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. Reference is made to "Cash
Deposits and Surety Bonds for an explanation of the lawsuit filed against
the El Salvador Ministry of Environment for the revoking of the Company's
environmental license.
GUARANTEES/BONDS
The Company has provided the Government of El Salvador with the following
guarantees: on March 15, 2006 a three-year guarantee (bond) was issued by
Seguros del Pacifico on behalf of the Company to the Ministry of
Environment and Natural Resources for the Renewed SSGM in the sum of
$14,428.68. As a result of the revocation of the environmental permits,
the bond was returned in 2007.
On February 17, 2006, a three-year third party liability guarantee in the
sum of $42,857.14 was issued by Seguros del Pacifico on behalf of the
Company to the Ministry of Economy's Office of the Department of
Hydrocarbons and Mines.
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 the United States' inflation on the Company has not been
significant in recent years because of the relatively low rates of
inflation and deflation experienced in the United States.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICES
The Company's future revenues, earnings and cash flow may be strongly
influenced by changes in gold prices, which fluctuate widely and over
which the Company has no control. The Company, if market conditions
justify, may enter into gold price protection arrangements in the future,
if necessary, to ensure that it generates enough cash flow to support its
growth and exploration plans and any debt related to the potential
financing.
The risks associated with price protection arrangements include
opportunity risk by limiting unilateral participation in upward prices;
production risk associated with the requirement to deliver physical
ounces against a forward commitment; and credit risk associated with
counterparties to the hedged transaction. At present, the Company's
future earnings and cash flow may be significantly impacted by changes in
the market price of gold and silver. Gold and silver prices can
fluctuate widely and are affected by numerous factors, such as demand,
inflation, interest rates and economic policies to central banks,
producer hedging, and the strength of the U.S. dollar relative to other
currencies. During the last five years, the London PM Fix gold price has
fluctuated between a low of $342 per ounce in June 2003 and a high of
over $1003 per ounce in June 2008. The Company expects gold to be its
primary product in the future,
46
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
but the Company cannot currently reasonably estimate its future
production and therefore it cannot comment on the impact that changes in
gold prices could have on its projected pre-tax earnings and cash flows
during 2008.
FOREIGN CURRENCY
The price of gold is denominated in U.S. dollars, and the Company's
current gold production operations and significant properties are located
primarily in the Republic of El Salvador. The Republic of El Salvador
converted its money into the U.S. dollar system on January 12, 2001
therefore, the Republic of El Salvador's national currency is the U.S.
dollar.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company is not an accelerated filer and therefore is not required to
provide a report of management on its internal controls over financial
reporting. However, the Company maintains a system of disclosure
controls and procedures. The term "disclosure controls and procedures,"
as defined by regulations of the Securities and Exchange Commission
("SEC"), means controls and other procedures that are designed to ensure
that information required to be disclosed in the reports that the Company
files or submits to the SEC under the Securities Exchange Act of 1934, as
amended (the "Act"), is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits to the
SEC under the Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, as appropriate to allow timely decisions to be made
regarding required disclosure. The Company's Chief Executive Officer and
Chief Financial Officer have evaluated the Company's disclosure controls
and procedures as of the end of the period covered by this Annual Report
on Form 10-K and have concluded that the Company's disclosure controls
and procedures are effective as of the date of such evaluation.
Changes in Internal Control Over Financial Reporting
Effective for the reporting year ended March 31, 2008, the Company is not
an accelerated filer and it is not required to provide a report of
management on our internal control over financial reporting.
There have been no changes in our internal control over financial
reporting for the period ended March 31, 2008 that have materially
effected, or are reasonable likely to materially affect the internal
control over financial reporting.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also projections of
any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or
that the degree of compliance with policies and procedures may
deteriorate.
47
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART I - FINANCIAL INFORMATION (CONTINUED)
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 expect 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.
48
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
SEC FORM 10-Q - JUNE 30, 2008
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There is no pending litigation in the United States. However,
in the Republic of El Salvador, Central America, the Company's
El Salvadoran legal counsel on December 6, 2006, filed a
complaint with the El Salvadoran Supreme Court Administrative
Division claiming that the El Salvadoran Office of the Ministry
of Environment and Natural Resources, (MARN) has revoked its El
Salvadoran environmental permits for mining exploitation,
without any prior notice, without a right to a hearing and
without the right of due process, based on misguided
assertions, and contrary to El Salvadoran law. In addition,
the Company's legal counsel stated that there is a lack of
legal foundation for the sanctions and excess authority
exercised by MARN. For more details, reference is made to page
12, "Environmental Matters."
Item 2. Changes in Securities
None, except as disclosed in the Consolidated Statements of
Changes in Shareholders' Equity.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None during this period.
Item 5. Other Information
None.
49
Item 6(a). Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
---------- ----------------------
31.1* Certification of President and Chief
Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2* Certification of Vice President,
Treasurer and Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1* Certification of President and Chief
Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2* Certification of Vice President,
Treasurer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
*Filed herewith
(b) Reports on Form 8-K
On July 23, 2008, the Company filed a Securities and
Exchange Commission Form 8-K disclosing that a
non-binding letter of intent for a proposed
acquisition/merger was entered into by and between the
Company and Voter Communications, Inc. on July 18, 2008.
The general terms and conditions were outlined in
Exhibit 99.1.
On July 24, 2008, the Company filed a Securities and
Exchange Commission Form 8-K disclosing that a news
release was issued on July 23, 2008 announcing that the
Company signed a letter of intent to merge with Voter
Communications, Inc.
On August 5, 2008, the Company filed a Securities and
Exchange Commission Form 8-K disclosing that Manti
Holdings LLC would not continue its efforts to enter
into a transaction relating to the Company's San
Sebastian Gold Mine in the Country of El Salvador and
that the Company would continue to seek a suitable
development partner or purchaser.
50
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
Date: August 15, 2008 /s/ Edward A. Machulak
-------------------------------------
President and Chief Executive Officer
|
51
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