Item 1. Business
Glossary of Selected Mining Terms
Cut-off Grade
The minimum grade of ore used to establish reserves.
Doré
Unrefined gold and silver bullion consisting of approximately 90% precious metals that will be further refined to almost pure metal.
Development Stage
A “development stage” project is one which is undergoing preparation of an established commercially mineable deposit for its extraction but which is not yet in production. This stage occurs after completion of a feasibility study.
Exploration Stage
An “exploration stage” prospect is one which is not in either the development or production stage.
Fault
A surface or zone of rock fracture along which there has been displacement.
Feasibility Study
An engineering study designed to define the technical, economic, and legal viability of a mining project with a high degree of reliability.
Formation
A distinct layer of sedimentary rock of similar composition.
Grade
The metal content of ore, usually expressed in troy ounces per ton (2,000 pounds) or in grams per ton or metric tons which contain 2,204.6 pounds or 1,000 kilograms. This report refers to ounces per ton.
Heap Leaching
A method of recovering gold or other precious metals from a heap of ore placed on an impervious pad, whereby a dilute leaching solution is allowed to percolate through the heap, dissolving the precious metal, which is subsequently captured and recovered.
Mineralized Material
The term “mineralized material” refers to material that is not included in the reserve as it does not meet all of the criteria for adequate demonstration for economic or legal extraction.
Mining
Mining is the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product. Exploration continues during the mining process and, in many cases, mineral reserves are expanded during the life of the mine operations as the exploration potential of the deposit is realized.
Net Smelter Return Royalty
A defined percentage of the gross revenue from a resource extraction operation, less a proportionate share or transportation, insurance, and processing costs.
Outcrop
That part of a geologic formation or structure that appears at the surface of the earth.
Probable Reserves
Reserves for which quantity and grade and/or quality are computed from information similar to that used for Proven Reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for Proven Reserves, is high enough to assume continuity between points of observation.
Production Stage
A “production stage” project is actively engaged in the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product.
Proven Reserves
Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling, and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well-defined that size, shape, depth and mineral content of reserves are well established.
Reclamation
The process of returning land to another use after mining is completed.
Recoverable
That portion of metal contained in ore that can be extracted by processing.
Reserves
That part of a mineral deposit which could be economically and legally extracted or produced at the time of reserve determination.
Run-of-Mine
Mined ore of a size that can be processed without further crushing.
Strip Ratio
The ratio between tonnage of waste and ore in an open pit mine.
Waste
Barren rock or mineralized material that is too low in grade to be economically processed.
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.
The matters discussed in this annual report on Form 10-K, when not historical matters, are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially from projections or estimates contained herein. Such forward-looking statements include, among others, scoping and feasibility studies for the San Sebastian Gold Mine, mineralized material estimates, potential residual production levels, future expenditures, cash requirement predictions and the ability to finance continuing operations. Factors that could cause actual results to differ materially from these forward-looking statements include, among others, the factors described in this annual report on Form 10-K. Many of these factors are beyond our ability to control or predict. We disclaim any intent or obligation to update our forward-looking statements, whether as a result of receiving new information, the occurrence of future events, or otherwise.
General
Commerce Group Corp. (“Commerce,” the “Company,” and/or the “Registrant” and reference to these identifications such as “we,” “our,” and “us” may be used herein to refer to Commerce or to any or all of wholly-owned subsidiaries of Commerce) is one of the only precious metals company that has produced gold and silver in the past twenty or more years in the Republic of El Salvador, Central America. Starting in 1968, for periods during the 1970's and 1980's Commerce was operative in the exploration, exploitation, development, and production of precious metals in El Salvador. It continues to be operative in the exploration of precious metals in El Salvador while it seeks funding for exploitation, development, and production. Commerce’s objectives have been to obtain the permission of the Government of El Salvador to continue the exploitation of mineralized material at SSGM and to obtain a sufficient amount of funds to operate and expand its San Cristobal Mill and Plant and to commence an open-pit, heap-leach operation at its SSGM to produce gold at a profit. It has also planned to broaden its exploration targets as the opportunity to discover more gold and silver is evident.
Simultaneously, Commerce has been seeking a compatible acquisition, merger, or other business arrangement. Since the death of Commerce’s long-time Chairman Edward L. Machulak on October 21, 2007, the Company has been directing most of its efforts toward finding a compatible acquisition, merger, or other business arrangement. On March 7, 2008, Commerce and Manti Holdings, LLC (Manti) entered into an agreement in which Manti was given an exclusive thirty-day option to conduct a review of Commerce’s San Sebastian property, with a view toward a pre-defined transaction. The general terms of the understanding reached between Commerce and Manti were stated in Exhibit 99.1 of Commerce’s Form 8-K filed on March 11, 2008. Since then, Manti’s personnel have met with environmental groups and representatives of the El Salvadoran government and have visited Commerce’s mining properties to collect data and make an evaluation. Their investigation is ongoing. A determination to proceed has not yet been made.
Commerce has been a Wisconsin-chartered corporation since its merger from a State of Delaware corporation on April 1, 1999, and its corporate headquarters since its inception have been based in Milwaukee, Wisconsin. Commerce was organized in 1962 and its common shares have been publicly traded since 1968. The Company’s shares have been trading on the Over the Counter Bulletin Board (OTCBB) under the trade symbol CGCO.OB, on the Pink Sheets under the trade symbol of CGCO.PK, and on the Berlin-Bremen Stock Exchange under the trade symbol of C9G since October 2006. The organizational chart on the following page reflects the mining organization and the mining activities in El Salvador as of March 31, 2008.
Company’s Website
Commerce has a website located at http://www.commercegroupcorp.com. This website can be used to access recent new releases, U.S. Securities and Exchange Commission filings, the Company’s Annual Report, Proxy Statement, Board Committee Charter, and other items of interest. The contents of the Company’s website are not incorporated into this document. The U.S. Securities and Exchange Commission filings, including supplemental schedules and exhibits can also be accessed free of charge through the U.S. Securities and Exchange Commission’s website at: http://www.sec.gov.
Precious Metal Mining
Commerce continues to be involved in the exploration of gold and silver mines in the Republic of El Salvador, Central America, through its Commerce/Sanseb Joint Venture (“Joint Venture”). Commerce holds a nearly 100% interest in the Joint Venture which is the operator of the San Sebastian Gold Mine (“SSGM”).
Commerce’s objective is to enhance the value of its shares by realizing profits from the production and sale of gold and silver, cash flow, and by locating, developing and exploiting gold/silver ore reserves.
In 1987 Commerce, through Misanse, was granted the 304-acre SSGM exploitation concession by the El Salvadoran Department of Hydrocarbons and Mines. This concession was renewed on May 20, 2004. On March 3, 2003, Commerce received the New San Sebastian Exploration License. It commenced exploring targeted areas in this 41-square kilometer area (10,374 acres), which includes three formerly-operated mines and encompasses the 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 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.
The Government of El Salvador on May 25, 2004 granted the Nueva Esparta Exploration License which consists of 45 square kilometers of area (11,115 acres) and includes eight formerly-operated gold and silver mines. This exploration area which abuts the New San Sebastian Exploration License area further enhances the potential to locate and evaluate gold and silver ore reserves through the exploration of the eleven formerly-operated gold and silver mines located in both exploration areas. The concession and exploration map is included in this report.
Commerce’s current goal is to find an investor to assume control of mining operations with sufficient capital to in time produce 100,000 ounces of gold per year and to simultaneously develop gold/silver ore reserves. The Company expects that production will occur by developing an open-pit, heap-leach operation on the SSGM site and by acquiring additional mill and related equipment which will increase the capacity of the processing of its higher grade virgin mineralized material at the San Cristobal Mill and Plant (“SCMP”). The SSGM heap-leach operation should have the capability of producing (through processing a higher volume of gold mineralized material beginning with 2,000 tons and in time increasing to 6,000 tons per day) significantly more gold than what can be produced at the SCMP, which has a present capacity of processing 200 tons of gold mineralized material per day. Commerce will also continue to explore areas contiguous to the SSGM site and in its vast exploration license areas.
Operations
On December 31, 1999, there was significant concern about the price of gold declining to $250 an ounce with a strong indication that the price per ounce would continue to decrease. With this in mind, the Joint Venture decided to temporarily suspend its processing of gold at its SCMP. In order to preserve the integrity of the SCMP equipment, it was necessary for the Company to have adequate funds to retrofit, restore, rehabilitate, and expand its mill and plant. The initial resumption of producing gold was accomplished with the SCMP used equipment that the Joint Venture purchased on February 23, 1993. Even though the Joint Venture has maintained this mill and plant on a continuous basis, certain basic structural components are worn out and need to be replaced, retrofitted or overhauled. Concurrent with the decision to suspend processing gold mineralized material was the awareness to increase efficiency by expanding the SCMP facilities from the existing 200-ton-per-day capacity to a 500-ton-per-day operation. From March 31, 1995 through December 31, 1999 when production was suspended, 22,710 ounces of bullion containing 13,305 ounces of gold and 4,667 ounces of silver were mined at the SSGM and then sold at the respective current world market price.
Although the financial statements presented herein reflect that the SSGM is the only one of the Company’s mining properties which has generated revenues, there are strong indications of commercial gold/silver mineralized material present at some of the other gold mine sites.
In the past, the Company’s geologists have estimated that the SSGM has the following mineralized material:
SSGM Mineralized Material
GOLD Mineralized Material (03/31/07)
Tons
Estimated Gold Grade (OPT)
Estimated
Gold Ounces(1)
Virgin material (includes 960,000 tons of dump material)
14,404,096
0.081
1,166,732
Stope fill (estimated)
1,000,000
0.340
340,000
Estimated other mineralized material and open pit
122,815,134
0.016
1,948,748
Total estimated mineralized material
138,219,230
0.025
3,455,480
(1)
The estimated recoverable ounces of gold by processing are: SCMP, 85% to 95%; heap leach, 65% to 70%. 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.
SSGM Joint Venture Arrangements
Commerce acquired 82 1/2% of the authorized and issued common shares of San Sebastian Gold Mines, Inc. (“Sanseb”), a Nevada corporation formed on September 4, 1968. Approximately 200 unrelated shareholders hold the balance of Sanseb’s shares. From 1969 forward, Commerce has provided substantially all of the capital required to develop a mining operation at the SSGM, to fund exploration, and to acquire, refurbish and operate the SCMP.
On September 22, 1987, Commerce and Sanseb entered into a joint venture agreement (named the “Commerce/Sanseb Joint Venture” and sometimes referred to herein as the “Joint Venture”) to formalize the relationship between Commerce and Sanseb with respect to the mining venture and to divide profits. The terms of this agreement authorize Commerce to supervise and control all of the business affairs of the Joint Venture. Under this agreement 90% of the net pre-tax profits of the Joint Venture will be distributed to Commerce and ten percent to Sanseb, and because Commerce owns 82 1/2% of the authorized and issued shares of Sanseb, Commerce in effect has an over 98% interest in the activities of the Joint Venture. In order to maintain current accounting between Commerce and Sanseb, the interest charges to Sanseb on advances made by Commerce are kept separately. Therefore, when profits are earned, the recorded interest due to Commerce will be paid from the cash distributions due and payable to Sanseb.
The Joint Venture leases the SSGM from the Company’s 52%-owned subsidiary, Mineral San Sebastian, S.A. de C.V. (“Misanse”), an El Salvadoran corporation. On January 14, 2003, the Company entered into an amended and renewed 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 time commencing and coinciding with the date that the Company received its Renewed San Sebastian Gold Mine Exploitation Concession, hereinafter identified as the “Renewed SSGM,” from the Ministry of Economy’s Director of El Salvador Department of Hydrocarbons and Mines (DHM). The lease is automatically extendible for one or more equal periods. The Company will pay to Misanse for the rental of this real estate the sum of five percent of the sales of the gold and silver produced from this real estate, however, the payment will not be less than $343.00 per month. The Company has the right to assign this lease without prior notice or permission from Misanse. This lease is pledged as collateral for loans made to related parties (Item 8. Financial Statements and Supplementary Data, Note 7). The Misanse shareholders and directors have acknowledged, approved and confirmed at this shareholders’ meeting the total amount owed to Commerce for funds provided to obtain and maintain this lease agreement and concession.
The Joint Venture is registered as an operating entity to do business in the State of Wisconsin, U.S.A. and in the Republic of El Salvador, Central America. The Joint Venture Agreement authorizes Commerce to execute agreements on behalf of the Joint Venture.
Organizational Structure and Mining Projects
The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries, and its Commerce/Sanseb Joint Venture, but it excludes its 52% ownership of Mineral San Sebastian S.A. de C.V. Upon consolidation, all intercompany balances and transactions are eliminated.
Commerce was originally formed as a Wisconsin corporation (September 14, 1962). It then merged into a Delaware corporation on July 26, 1971 and on April 1, 1999 it merged back into a Wisconsin corporation. It owns 52% of Misanse, an El Salvadoran corporation that was formed on May 8, 1960, reinstated on January 25, 1975 and reincorporated on October 22, 1993. Misanse previously had a mining concession with the government of El Salvador and is the owner of the SSGM real estate. At that time, Misanse had assigned the mining concession to Commerce Group Corp. and San Sebastian Gold Mines, Inc., the mining operator formed on September 22, 1987 and known as the Commerce/Sanseb Joint Venture (Joint Venture). The Joint Venture has the right to operate the SCMP (the gold processing plant acquired on February 23, 1993). It conducted exploration and operations at the SSGM starting in October 1968; it mined and sold gold from 1972 through March 1978 and from April 1, 1995 through December 1999. Commerce also owns 82 1/2% of the San Sebastian Gold Mines, Inc. (SSGM) which was chartered as a Nevada corporation on September 4, 1968.
Starting in 2003 the Joint Venture has performed exploration at the La Lola Mine, the Santa Lucia Mine, the Tabanco Mine, and the Montemayor Mine, and from 2005 the La Joya Mine, which are included in the New San Sebastian Exploration and the Nueva Esparta Exploration License areas.
The Company’s current exploration program is being conducted under the guidance of Luis Alfonso Limay, with direction from the Chairman and the Board of Directors. Mr. Limay has been with the Company since 1986. He is a geologist and mining engineer. He was appointed to the position of Project and Mine Manager in October 1986, and became the Manager of El Salvador operations in March 1995. As such, Mr. Limay is responsible for managing the daily operations of the Joint Venture. As of March 2008 he supervised a staff of approximately forty persons in El Salvador.
From 2003 to the present the Joint Venture has been performing limited exploration at the La Lola Mine, the Santa Lucia Mine, the Tabanco Mine, and the Montemayor Mine, and since 2005 also at the La Joya Mine. Exploration has been minimized because, as previously disclosed, the Company’s environmental permits have been revoked and the Company is not able to do drilling. The Company is doing some trenching and initial exploration at the five listed sites, and is doing limited exploration of its other properties. The Company anticipates that in the near future the Country of El Salvador will complete its revision of its environmental laws and permit more extensive exploration.
The Government of El Salvador has issued the Modesto mining concession to others. Commerce’s attorneys have challenged the legality of the issuance of this concession. Commerce, through its Chairman, owns certain properties believed to be crucial to the Modesto Mine. It plans to apply for concessions on the Modesto property that it owns. Although the sub surface rights belong to the Government of El Salvador, access to the surface rights must be obtained from the landowner.
All of the mines mentioned, including the eleven mines in the two exploration license areas, were formerly mined and did produce gold and/or silver. In addition to the channel trenching, test pit holes, and underground adit openings, the Joint Venture had its own diamond drilling rig and had contracted with others to explore the above-described SSGM potential targets in depth. All of the mining properties appear to have promising geologic prospects, alterations, and historical records that bear evidence that all have been mined and at one time in the past produced gold/silver.
World Gold Market Price, Customers and Competition
Since the Joint Venture was in operation and mined gold on a curbed start-up basis, its revenues, profitability and cash flow were greatly influenced by the world market price of gold. The gold world market price is generally influenced by basic supply and demand fundamentals. The price of gold/silver is unpredictable, volatile, can fluctuate widely and is affected by numerous factors beyond the Company’s control, including, but not limited to, expectations for inflation, the relative strength of the United States’ dollar in relation to other major worldwide currencies, political and economic conditions, central bank sales or purchases, inflation, production costs in major gold-producing regions, and other factors. The supply and demand for gold can also greatly affect the price of gold. The Company has not and does not expect in the foreseeable future to engage in hedging or other similar transactions to minimize the risk of fluctuations in gold prices or currencies. The Company’s past practice has been to sell its gold and silver at the world market spot prices. Gold and silver can be sold on numerous markets throughout the world, and the market price is readily ascertainable for such precious metals. There are many worldwide refiners and smelters available to refine these precious metals. Refined gold and silver can also be sold to a large number of precious metal dealers on a competitive basis. When it was producing doré, the Joint Venture’s SCMP sold the doré to a refinery located in the United States. During the past five years the average annual spot market price of gold has fluctuated between $276 and $725 an ounce.
At this time the Joint Venture believes that, due to its current financial capacity, it may not be a major gold producer based on the size of larger existing gold mining companies. At this time the Company believes no single gold-producing company could have a large impact to offset either the price or supply of gold in the world market. There are many mining entities in the world producing gold. Many of these companies have substantially greater technical and financial resources and larger gold ore reserves than the Company. The Company believes that the expertise of the Joint Venture’s experienced key personnel, its ability to train its employees, its low overhead, its gold mineralized material, its accessibility to the mine, its infrastructure, and its projected low cost of production may allow it to compete effectively and to produce reasonable profits.
The profitability and viability of the Joint Venture is dependent upon, not only the price of gold in the world market (which can be unstable), but also upon the political stability of El Salvador, the cooperation of the Government of El Salvador in issuing needed environmental and other permits, and the availability of adequate funding for either the SCMP operation or the SSGM open-pit, heap-leaching operation and for the exploration projects.
As of this date, inflation, currency, interest rate fluctuations, and political instability have not had a material impact on the Company or its results of operations.
Seasonality
Seasonality does not have a material impact on the Company’s operations, but the rainy season in El Salvador (May through November) can subdue production.
Environmental Matters
The Company’s operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which the Company operates. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, product safety, occupational health and the production, handling, storage, use and disposal of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. However, some risk of environmental or other damage is inherent in the business of the Company, as it is with other companies engaged in similar businesses.
Since the Company has been granted the Renewed SSGM exploitation concession from the DHM, it is required to maintain environmental permits. 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 concession. Financial security bond(s) were submitted as required.
Since the Government of El Salvador (GOES) has established a new Mining Law effective February 1996, its exploration, exploitation, development, and production programs are subject to environmental protection. The GOES has established the Office of the El Salvador Ministry of Environment and Natural Resources (MARN). In order to comply with mining law, the Company was required to obtain environmental permits. On October 15, 2002, an environmental permit under MARN Resolution 474-2002 was issued for the SCMP. On October 21, 2002, an environmental permit under MARN Resolution 493-2002 was issued pertaining to the SSGM exploitation concession. This permit was renewed for a three-year period with the issuance of Resolution No. 3026-003-2006 dated January 4, 2006.
On or about September 13, 2006, without any prior notice, the El Salvador Ministry of Environment’s office delivered to Commerce’s El Salvadoran legal counsel, its revocation of the MARN Resolution dated July 6, 2006 which included its San Sebastian Gold Mine Exploitation and San Cristobal Mill and Plant environmental permits. These were the only permits of their kind issued in the Republic of El Salvador. The Company’s El Salvadoran legal counsel, after reviewing the two letters (one for the SSGM exploitation concession 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 Ministry of Environment’s office; a second letter was submitted by our legal counsel as the Ministry of Environment’s office requested a response to the first letter.
On or about December 6, 2006, the Company’s legal counsel filed with the El Salvadoran Court of Administrative Litigation of the Supreme Court of Justice two complaints against the revocation of the environmental permits: one for the San Sebastian Gold Mine and the other for the San Cristobal Mill and Plant. In these complaints the attorney filed the Company’s following defense:
1.
Violation of the Right to a Hearing and Due Process - pursuant to Articles 88 and 93 of the Environmental Law. On January 4, 2006 under MARN Resolution No. 3026-003-2006, the environmental permit was extended.
2.
Lack of legal foundation for the sanction - the Company was not in production, therefore, it could not be in violation. This fact was verified by a written MARN report after a site inspection on June 23, 2006.
3.
Excess of Authority - besides revoking the environmental permit, MARN ordered the closing of operations which said determination and authority are under the jurisdiction of the El Salvador Ministry of Economy’s office.
Environmental regulations add to the cost and time needed to bring new mines into production and add to operating and closure costs for mines already in operation. As the Company places more mines into production, the costs associated with regulatory compliance can be expected to increase. Such costs are a normal cost of doing business in the mining industry, and may require significant capital and operating expenditures in the future. The Company’s policy is to adhere to the El Salvador environmental standards. The Company cannot accurately predict or estimate the impact of any future laws or regulations developed in El Salvador that would affect the Company’s operations.
All operations by the Company involving the exploration or the production of minerals are subject to existing laws and regulations relating to exploration procedures, safety precautions, employee health and safety, air quality standards, pollution of water sources, waste materials, odor, noise, dust and other environmental protection requirements adopted by the El Salvador governmental authorities. The Company was required to prepare and present to such authorities data pertaining to the effect or impact that any proposed exploration or production of minerals may have upon the environment. The requirements imposed by any such authorities may be costly, time consuming and may delay operations. Future legislation and regulations designed to protect the environment, as well as future interpretations of existing laws and regulations, may require substantial increases in equipment and operating costs to the Company and delays, interruptions, or a termination of operations. The Company cannot accurately predict or estimate the impact of any such future laws or regulations, or future interpretations of existing laws and regulations, on its operations.
Republic of El Salvador, Central America Information Sources
The most current information about El Salvador can be obtained from the following sources:
1.
General information can be obtained through the Internet from the following websites: http://www.usinfo.org.sv/eng/irc/svlinks.html and http://www.dirla.com/elsalvador2.html.
2.
The U.S. Embassy in El Salvador can also be contacted at Final Boulevard Santa Elena Sur, Urbanización Santa Elena, Antiguo Cuscatlán, La Libertad, El Salvador, telephone (011) 503-278-4444 and fax (011) 503-278-6011 or at its website: http://www.elsalvador.org/home.nsf/consularinfo.
Operations, Other Than Mining
Commerce independently and through its partially and wholly-owned subsidiaries conducted other business activities, which at present are suspended. Previous operations consisted of the following: (1) land acquisition and real estate development through its wholly-owned subsidiaries, San Luis Estates, Inc. (“SLE”) and Universal Developers, Inc. (“UDI”); (2) real estate sales, through its wholly-owned subsidiary, Homespan Realty Co., Inc. (“Homespan”); and (3) advertising and various businesses, including Internet-related businesses, through its subsidiary, Ecomm Group Inc. (“Ecomm”).
Land Acquisition, Development, Ownership and Real Estate Sales
During the past years, the Company has substantially diminished its activities in the business of real estate development conducted principally through its subsidiaries San Luis Estates, Inc. (“SLE”), a Colorado corporation, and Universal Developers, Inc. (“UDI”), a Wisconsin corporation. At present, all activities are suspended.
Misanse, the Company’s majority-owned subsidiary (52%) owns the SSGM real estate consisting of approximately 1,470 acres. This real estate is located approximately two and one-half miles northwest of the city of Santa Rosa de Lima, off of the Pan American Highway (a four-lane, first-class highway), about 108 miles southeast of the capital city of San Salvador, El Salvador, and is about 11 miles west from the border of the Country of Honduras. It is also about 26 miles from the city of La Union which has railroad and port facilities. The Company, on January 14, 2003, renewed its lease into a long-term lease arrangement with Misanse.
The Company also leases approximately 166 acres of real estate on which it has its SCMP and plans to process mineralized material on this site. These facilities are located on the Pan American Highway, near the City of El Divisadero.
The Company, through its Chairman, owns approximately 63 acres of land on the Modesto Mine site which is located due north of the city of Paisnal and approximately 19 miles north of San Salvador, the capital city of El Salvador. This real estate is pledged as collateral for funds advanced to the Company. The Company also has permission from a number of property owners to explore, exploit and develop the Montemayor Mine in the Department of Morazan.
Reference is made to “Item 2.
Item 2. Properties: Mining Properties
The significant mining properties in which Commerce Group Corp. or the Joint Venture has an interest are summarized below. All of the properties are located in the Republic of El Salvador, Central America.
1.
San Sebastian Gold Mine
Property Description
San Sebastian Gold Mine located two and one-half miles northwest of the city of Santa Rosa de Lima and the Pan American Highway
Nature of Interest
Mineral concession consisting of 100% ownership of the precious metals extracted from this mine. Environmental permit has been revoked but legal challenge is pending.
Date Interest was Acquired
Cost of Interest
5% of the gross precious metal proceeds or $343 a month whichever is higher.
Amount of Funds to
Make Property Operational
This is dependent on the scale of production that management decides to perform. The amount of investment could be from $5 million to $100 million.
Date Mine will be Operational
It was in operation on a curbed production basis from March 31, 1995 until December 31, 1999 when operations were suspended due to the need to overhaul, repair, restore and expand the SCMP facilities and due to the low price of gold.
2.
Modesto Mine
Property Description
Modesto Mine located near the city of Paisnal and about 19 miles north of San Salvador, the capital city.
Nature of Interest
Land ownership only through the Company’s Chairman.
Date Interest was Acquired
September 1993
Cost of Interest
No cost for interest.
Amount of Funds to
Make Property Operational
Not applicable.
Date Mine will be Operational
Not applicable.
3.
San Cristobal Mill and Plant
Property Description
San Cristobal Mill and Plant located on the Pan American Highway west of the city of El Divisadero.
Nature of Interest
Mill and Plant owned by Joint Venture. The real estate is owned by an agency of the Government of El Salvador. Environmental permit has been revoked but legal challenge is pending.
Date Interest was Acquired
Equipment was acquired on February 23, 1993; lease was acquired on November 12, 1993.
Cost of Interest
Equipment purchased and extensive retrofitting was and continues to be performed. The cost of the investment through March 31, 2008, including the crushing system located at the San Sebastian Gold Mine, is $6,956,540.
Amount of Funds to
Make Property Operational
To expand the plant, including a crushing system to a capacity of 500 tons per day; an estimated sum of up to $4 million may be required, all dependent on whether new or used equipment will be purchased.
Date Mine will be Operational
Curbed production commenced March 1995; operations suspended on December 31, 1999 until the existing equipment is overhauled, repaired, restored and expansion of the SCMP facilities are completed, and dependent on the price of gold and restoration of the environmental permit.
4.
New San Sebastian Exploration License
Property Description
New San Sebastian Exploration License consisting of 41 square kilometers.
Nature of Interest
Exploration license issued by the Government of El Salvador for the precious metals.
Date Interest was Acquired
February 2003
Cost of Interest
Undetermined until negotiated with the surface rights’ owners.
Amount of Funds to
Make Property Operational
Undetermined until preliminary exploration at an estimated cost of $2 million is completed.
Date Mine will be Operational
Undetermined until exploration is completed.
5.
Nueva Esparta Exploration License
Property Description
Nueva Esparta Exploration License consisting of 45 square kilometers.
Nature of Interest
Exploration license issued by the Government of El Salvador for the precious metals.
Date Interest was Acquired
May 2004
Cost of Interest
Undetermined until negotiated with the surface rights’ owners.
Amount of Funds to
Make Property Operational
Undetermined until preliminary exploration at an estimated cost of $2 million is completed.
Date Mine will be Operational
Undetermined until exploration is completed.
The San Sebastian Gold Mine
General Location and Accessibility
The SSGM is situated on a mountainous tract of land owned by Misanse consisting of approximately 1,470 acres of explored and unexplored mining prospects. The SSGM is located approximately three miles off of the Pan American Highway, northwest of the city of Santa Rosa de Lima in the Department of La Union, El Salvador. The tract is typical of the numerous volcanic mountains of the coastal range of southeastern El Salvador. The topography is mountainous with elevations ranging from 300 to 1,500 feet above sea level. The mountain slopes are steep, the gulches are well defined, and the drainage is excellent.
There is good roadway access to the SSGM site. The reconstruction of the Pan American Highway from two lanes to four lanes (from the city of San Salvador to the Honduran border) has been completed. The city of Santa Rosa de Lima (approximately three miles from the SSGM) is one of the larger cities in the Eastern Zone. The SSGM is approximately 30 miles from the city of San Miguel, which is El Salvador’s third largest city, and approximately 108 miles southeast of El Salvador’s capital city, San Salvador. SSGM is also approximately 26 miles from the city of La Union which has port and railroad facilities. Major United States’ commercial airlines provide daily scheduled flights to the Comalapa Airport which is located on the outskirts of the city of San Salvador.
SSGM Mineralized Material
GOLD Mineralized Material (03/31/07)
Tons
Estimated Gold Grade (OPT)
Estimated
Gold Ounces(1)
Virgin material (includes 960,000 tons of dump material)
14,404,096
0.081
1,166,732
Stope fill (estimated)
1,000,000
0.340
340,000
Estimated other mineralized material and open pit
122,815,134
0.016
1,948,748
Total estimated mineralized material
138,219,230
0.025
3,455,480
(1)
The estimated recoverable ounces of gold by processing are: SCMP, 85% to 95%; heap leach, 65% to 70%. 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.
The dump material and stope fill at the SSGM are the by-products of past mining operations. The dump material was mined in the past in the search for higher grades of gold ore and piled to the side of past excavations as it was considered at that time to be too low of a grade of ore to process economically; however, it was reserved for future processing when the price of gold is at a level to process it profitably. The stope fill that was available was in the past (1900 era) considered to be too low of a grade of mineralized material to process economically, therefore it was primarily used to fill the voids in the underground workings to accommodate the extraction of the higher grade of gold mineralized material in the past SSGM mining activities. Virgin material, as the term is used in this report, is mineralized material which is on the surface and readily available for processing; it also includes the undeveloped underground mineralized material.
At the turn of the twentieth century, the SSGM was rated as one of the richest gold mines in the world. The United Nations’ 1969 Mineral Survey Report states that “unquestionably the San Sebastian deposit was the jewel of the El Salvador mining industry and one of the most prolific gold mines in Central America.”
The Company estimates that at the SSGM it has 14.4 million tons of virgin mineralized material, including the dump waste material. The Company plans to use an open-pit mining method and will truck the lower grade mineralized material to one or more heap-leaching pads developed at the SSGM site. The use of open-pit mining and heap-leaching techniques will enable the Company to process a higher volume of low grade mineralized material than can be processed at the SCMP. The Company plans to continue to operate the SCMP after developing a leach-pad operation at the SSGM, using the facility to process the higher grade mineralized material it encounters in the course of mining at the SSGM. The milling operation at the SCMP is expected to return a higher rate of gold recovery than can be expected from heap-leaching techniques.
Approximately 960,000 tons of dump material present at the SSGM site, with grades estimated from 0.082 to 0.178 ounces of gold per ton, have been combined with the virgin ore mineralized material. The Company’s consulting geologist who has confirmed that about seven percent of the stope fill had been removed and processed during the 1973-1978 period made an analysis of the underground stope fill material. It is estimated that the grade of the stope fill averages 0.34 ounces of gold per ton. It is estimated that there are about one million tons available for SCMP treatment from the underground operations. It is necessary to remove the material which has caved in the adits to reach the stope fill areas, or it eventually will be encountered in the open-pit operations.
The Company’s geologists estimated the gold content of the mineralized material by calculating the gold content in an area consisting of 3,300 lineal feet in length, 825 lineal feet in width, and 660 feet in depth, to determine the volume. To support these additional reserves, this Company, since July 1987, has completed the following in the SSGM site: 116,121 lineal feet of 22 miles of surface trenching; 2,162 lineal feet of test pit hole excavation; 42,372 lineal feet of underground adit workings; and more than 19,775 feet of diamond core and reverse circulation drilling. A total of 78,441 fire assays were completed at the Company’s laboratory through 2004. Also, there were more than 30 miles of former adit excavations. These samples, extending the diamond core and reverse circulation drilling, reflected a grade of 0.025. Samples from the 30 miles of former underground workings were assayed through 2004.
All residue from the contemplated operations will be stockpiled for potential future processing dependent upon the price of gold, improvements in technology, and the depletion of higher grade material.
Misanse Mining Lease
The Company (previously through the Joint Venture) leases the SSGM from Mineral San Sebastian, S.A. de C.V. (“Misanse”), an El Salvadoran corporation. The Company owns 52% of the total of Misanse’s issued and outstanding shares. About 100 El Salvador, Central American and United States’ citizens own the balance of the shares. (Reference is made to Item 8. Financial Statements and Supplementary Data, Note 7, for related party interests.)
SSGM Mining Lease
On January 14, 2003, the Company entered into an amended and renewed lease agreement with Mineral San Sebastian Sociedad Anomina de Capital Variable (Misanse) pursuant to the approval of the Misanse shareholders and directors at a shareholders’ meeting and thereafter at a directors’ meeting both held on January 12, 2003. The renewed lease is for a period to coincide with the term of its Renewed SSGM concession, which it received on August 29, 2003 from the DHM. It was automatically amended on May 20, 2004 to coincide with the extension of the term of the Renewed SSGM Exploitation Concession from 20 to 30 years. 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 to related parties (Item 8. Financial Statements and Supplementary Data, Note 7).
Misanse Mineral Concession-Government of El Salvador
In El Salvador, the rights to minerals below the sub-surface are vested with the government. The government through concessions grants mineral rights. Reference is made to the San Sebastian Gold Mine map and the exploration and exploitation maps included in this report.
On January 27, 1987, the Government of El Salvador granted a right to the SSGM mining concession (“concession”) to Misanse which was subject to the performance of the El Salvador Mining Law requirements. These rights were simultaneously assigned to the Joint Venture.
On July 23, 1987, the Government of El Salvador delivered and granted to Misanse, possession of the mining concession. At that time this provided the right to extract minerals and export gold and silver for a term of 25 years (plus a 25-year renewal option) beginning on the first day of production from the real estate which encompasses the SSGM owned by Misanse. Misanse assigned this concession to the Joint Venture.
Effective February 1996, the Government of El Salvador passed a law which required mining companies to pay to it three percent of its gross gold sale receipts and an additional one percent is to be paid to the El Salvador municipality which has jurisdiction of the mine site. As of July 2001, a series of revisions to the El Salvador Mining Law were made. A principal change is that the fee payable to the GOES has been reduced to two percent of the gross gold and silver receipts.
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 Department of Hydrocarbons and Mines (DHM), it was agreed to submit an application for the Renewed SSGM concession for a 30-year term and to simultaneously cancel the concession obtained on July 23, 1987. On September 26, 2002, the Company filed this application. On February 28, 2003 (received March 3, 2003) the DHM admitted to the receipt of the application and the Company proceeded to file public notices as required by Article 40 of the El Salvadoran Mining Law and its Reform (MLIR). On April 16, 2003, the Company’s El Salvadoran legal counsel filed with the DHM notice that it believed that it complied with the requirements of Article 40, and that there were no objections; and requested that the DHM make its inspection as required by MLIR Article 42. An inspection by the DHM was made. The Company then provided a bond which was required by the DHM to protect third parties against any damage caused from the mining operations, and it simultaneously paid the annual surface tax. On August 29, 2003 the Office of the Ministry of Economy formally presented the Company with a twenty-year Renewed SSGM concession 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 concession replaces the collateral that the same parties 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 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.
New San Sebastian Exploration License under El Salvador Resolution Number 27 - 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 concession. The New San Sebastian Exploration License area is in the jurisdiction of the City of Santa Rosa de Lima in the Department of La Union, Republic of El Salvador, Central America. On February 24, 2003, the DHM issued the New San Sebastian Exploration License for a period of four years starting from the date of December 27, 2003, following the notification of this resolution which was received on March 3, 2003. The New San Sebastian Exploration License may be extended for two two-year periods, or for a total of eight years. This license is in the process of being renewed for a period of four years. Besides the San Sebastian Gold Mine, the following three other formerly operative gold and silver mines are included in the New San Sebastian Exploration License area: the La Lola Mine, the Tabanco Mine, and the Santa Lucia Mine. Historical data reflects the following:
A French company operated the La Lola Mine in 1920; they developed two quartz veins, which were named La Lola and Buena Vista. From 1950 through 1953, Mr. Amadeo Tinetti produced 1,850 ounces of gold and 66,000 ounces of silver.
The Tabanco Mine is south of the La Lola Mine. Records evidence and local citizens confirm that several levels of mining occurred. Isolated rich ore shoots reported to contain sulfides and silver chloride were encountered. The oxidized sulfide ore was mined from a width of three to six feet with a grade of 0.50 ounces per ton of gold and five ounces of silver. Records reflect that the Herrera family produced gold and silver beginning in the year 1780.
In the Tepeyac vein very high-grade ore in one to two foot widths was encountered. A United Nation’s team performed sampling and reported that in a sulfide bearing zone they found 0.31 ounces of gold and 4.52 ounces of silver in a 4.9 foot wide vein. The footwall host rock assayed at 0.22 ounces of gold and 41.29 ounces of silver. This footwall rock area location was not specifically identified, but the result lends strength to the recommendation that in any further sampling or mapping of veins in the epithermal environment, close attention will be directed to the wall rock.
The third mine in this exploration area is the Santa Lucia Mine in which Mr. Humberto Perla developed a 100 meter wide underground vein. This vein is the west continuation of the Granadilla and the Año Nuevo veins located about two miles west of the SSGM property.
Nueva Esparta Exploration License (Nueva Esparta) Resolution Number 271 - 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 San Sebastian Exploration License area. 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 Piñas Mine, the Oro Mine, the Montemayor Mine, the Bañadero Mine, the Carrizal Mine, the La Joya Mine and the Copetillo Mine. Historical data reflects the following:
The Montemayor Mine has records that show that an English company commenced production of precious metals sometime about 1860. A report prepared by Mr. Fleury in 1878 stated that the area assayed approximately 48 ounces of silver and 0.85 ounces of gold per ton. Six underground workings were developed, but no records are available. A United Nation’s report reflects a possible grade of twelve ounces of silver and 0.29 ounces of gold from a section of the Montemayor vein stope. The Montañita, Tempique, Guarumo, Santa Gertrudis and El Indio vein findings support expanded exploration. The Company performed preliminary exploration in the Montemayor Mine area from 1995 through 1997. Its findings from the ore samples were very positive and encouraged additional exploration. Exploration will consist of locating workable ore within the known structures through mapping and sampling of vein outcrops and reopening, mapping and sampling of underground work.
The El Bañadero Mine is located near the Montemayor Mine. When in production, most of the mineralized material processed at the Montemayor mill came from this area and the quality of the precious metals appeared to have the highest values. The veins identified in the area are the Saravia, Borbollon, Caraguito 1 to 3, Eulalio and the Miserocordia.
At the La Joya Mine the Company, during previous exploration, discovered three parallel wide quartz veins averaging in width from six feet to twenty-seven feet running northwest by southeast dipping at 42 degrees southwest. More exploration will be concentrated in this tract.
El Jimenito and Santa Teresa are two wide veins that the Company found at the Carrizal Mine. They are 1,920 to 2,560 feet apart. The local residents recollect that free gold was found in the Santa Teresa Vein Adit. This mine is located between the La Joya and Copetillo Mines.
One vein was discovered at the Copetillo Mine in an underground adit. It was developed into two sublevels connected to the south with one 100-foot shaft. Residents recall seeing free gold in the Canton Copetillo.
The Las Piñas Mine is located in the Canton Las Cañas and was in operation in 1935. It was developed for a five-year, 100-ton-per-day mill and plant. Records show that the average grade of silver was 5.10 ounces per ton and that the grade of gold averaged 0.06 ounces per ton.
The La Joya Mine is located in the Canton La Joya. Records relating to activities were not preserved. While exploring the region, Commerce found three parallel wide quartz veins ranging from six to 25 feet running northwest to southeast for a distance of over one mile. The grass roots exploration suggests that this is an area with great ore potential.
At this time there is no available information about the Oro Mine. It is a short distance south of the Montemayor Mine. This should be a good exploration target.
SSGM Current Status
The Company, through its Joint Venture is in the exploration stage. The Company has been seeking funding to purchase equipment, to purchase inventory, and to use for working capital for its on-site proposed open-pit, heap-leaching operation. As an alternate, the Company has been considering a joint venture, merger, acquisition, or any other mutually agreed upon business arrangement.
The Company’s main objective and plan through the Joint Venture has been to operate a moderate tonnage, low-grade, open-pit, heap-leaching operation to mine gold on its SSGM site. Dependent on the funding, the grade of mineralized material, and the tonnage processed, it anticipated producing more than 56,000 ounces of gold from its open-pit, heap-leaching operation during the first twelve full operating months and then gradually increasing the average annual production of gold to 113,000 ounces.
The Company’s plans have included placing its SCMP into production. Although it would be a low tonnage operation, the Company believes that it would be profitable since the present price of gold is over $600 an ounce.
Since the death of Commerce’s long-time Chairman Edward L. Machulak on October 21, 2007, the Company has been directing most of its efforts toward finding a compatible acquisition, merger, or other business arrangement.
Proposed SSGM Open-Pit, Heap-Leaching Operation
The Joint Venture has placed the SCMP into a maintenance position until it receives the funds that it requires or enters into a business arrangement, and receives permission from MARN to resume operations. It expects that $19 million or more is needed to commence an open-pit, heap-leaching operation at the SSGM site. These funds are required to install the crushing system and plant, to purchase mining equipment, and for working capital. The Joint Venture may be able to lease this equipment. When these funds are available, the Joint Venture intends to start processing gold mineralized material from its open pit at a production level of 2,000 tons per day (expected 50,000 ounces annually). During the second year, the production level plans are to expand production to 3,000 tons per day (the funds for this expansion could be generated from profits, with an expectation of 56,000 ounces annually). An increase to process 4,000 tons of gold mineralized material per day would take place during the third year with an expectation of producing 75,000 ounces annually and another expansion to process 6,000 tons per day would take place at the beginning of the fifth year (with an expectation of producing 113,000 ounces annually); all funds for this expansion should be available through a combination of earned profits, borrowings, equity sales, or other creative sources. With the anticipated production volume, there is more than a nine-year supply of gold mineralized material and it is believed that a substantial amount of gold ore can be proven during the production period to continue operating at the same levels for a much longer period.
The Company’s geologists have defined a body of mineralized material estimated to consist of 138 million tons of gold mineralized material at an estimated grade of 0.025 ounces of gold per ton. This reflects a potential of 3.4 million ounces of gold and about 400,000 ounces of silver from this planned open-pit, heap-leaching operation. It would take about 64 years to process this body of gold mineralized material at a production capacity of 6,000 tons per day.
SSGM Ownership of the Property
Misanse, a Salvadoran corporation, owns the San Sebastian Gold Mine real estate consisting of approximately 1,470 acres. The Company owns 52% of Misanse common shares that are issued and outstanding.
Modesto Mine
Modesto Mine Location
The Modesto Mine is located due north of the town of El Paisnal, approximately 19 miles north of the capital city, San Salvador, in the Republic of El Salvador, Central America.
Modesto Mine Present Status
The Joint Venture suspended exploration activities at this site in July 1997 as the Government of El Salvador awarded the concession of the property to another mining company. The Company believes that, through its Chairman, it owns the title to key property; therefore permission from the Company will be required before entry can be made by others.
Montemayor Mine (“Montemayor”)
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. The Company believes that this real estate contains the “heart” of the mine. Montemayor is located about 14 miles northeast of the SCMP, six miles northwest of the SSGM and about two and one-half miles east of the city of San Francisco Gotera in the Department of Morazan, Republic of El Salvador. Historical records evidence that the potential for the Montemayor to become an exploration and development silver-gold producing prospect is excellent.
San Cristobal Mill and Plant (“SCMP”) Recovery and Processing System
SCMP Location
SCMP is located near the city of El Divisadero (bordering the Pan American Highway), and is approximately 13 miles east of the city of San Miguel, the third largest city in the Republic of El Salvador, Central America.
SCMP Lease Agreement
Although the Joint Venture owns the mill, plant and related equipment, it does not own the land and certain buildings.
On November 12, 1993, the Joint Venture entered into an agreement with Corporacion Salvadorena de Inversiones (“Corsain”), an El Salvadoran governmental agency, to lease for a period of ten years (expiring November 12, 2003), approximately 166 acres of land and buildings on which its gold processing mill, plant and related equipment (the SCMP) are located, and which is approximately 15 miles west of the SSGM site. The basic annual lease payment was U.S. $11,500, payable annually in advance, unless otherwise amended, and subject to an annual increase based on the annual United States’ inflation rate. As agreed, a security deposit of U.S. $11,500 was paid on the same date and this deposit was subject to increases based on any United States’ inflationary rate adjustments.
On April 26, 2004, a three-year lease, which includes an automatic additional three-year extension subject to Corsain’s review, was executed by and between Corsain and the Company. This lease is retroactive to November 12, 2003 and the monthly lease payments are $1,418.51 plus the El Salvadoran added value tax. The lease is subject to an annual increase based on the U.S. annual inflationary rate adjustments. The SCMP is strategically located to process mineralized material from other 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 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.
SCMP Mill and Plant Process Description
Current Status
The SCMP (a precious metal cyanidation carbon-in-leach system) has a capacity of processing up to 200 tons of virgin mineralized material per day. The following units of operation are required: crushing, grinding, thickening, agitated leaching and recovery of precious metals via a carbon-in-leach (CIL) system.
The SCMP has been designed to process up to 500 tons of virgin mineralized material per day. The SCMP operations were suspended as of December 31, 1999, as the plant, equipment, and facilities have been placed on a care and maintenance status until such time as the Company has sufficient funds to complete a major overhaul in order to place it into operating condition to increase the SCMP’s processing capacity from 200 to 500 tons per day and at a time the price of gold is stabilized to assure a profit.
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.
SCMP Project Operating Plan
Current and Anticipated Schedule
Development, consisting primarily of expansive road and site improvements to the mine and mill sites, mill equipment modifications and the development and hauling of virgin mineralized material has taken place in the past. Initial processing from April 1, 1995 was from the SSGM tailings. After the SSGM tailings’ resource was exhausted, virgin gold mineralized material was excavated from the SSGM surface (Coseguina area) and hauled to the SCMP site for processing.
The other sources of gold mineralized material from the SSGM to be used at the SCMP operation will be obtained from the stope fill or higher grade gold mineralized material after obtaining access via the underground workings or from the surface. This gold mineralized material will have to be crushed and pulverized, which increases the cost, but is expected to yield a 90% or higher recovery. The income, dependent on the market price of gold, from the higher grade and recovery of gold, is expected to be substantially more than the cost involved, providing that the world gold market price does not decline to a level of unprofitability.
In the past, the gold mineralized material from the SSGM open-pit was loaded onto 20-25 ton dump trucks for transport to the SCMP. Trucks then hauled the gold mineralized material on the Pan American Highway approximately 15 miles from the SSGM. Mine employees were responsible for the mining activities including the determination of areas to be excavated, trucking and loading operations, head sampling and sample analysis.
The gold mineralized material was received at the SCMP where it was weighed, logged, and sampled. Weighing was performed utilizing a conveyor belt scale and/or a truck scale located on the SCMP site. The excess gold mineralized material was then unloaded at the SCMP site and stockpiled in an area which was developed to allow storage of more than 50,000 tons.
Environmental Matters
Reference is made to San Sebastian Gold Mine “Environmental Matters.” The same information applies. On March 15, 2006, the Office of the El Salvadoran Ministry of Environment and Natural Resources (MARN) issued an environmental permit (Resolution 3026-003-2006) relative to the Renewed SSGM Exploitation Concession and the San Cristobal Mill and Plant. On or about September 13, 2006, MARN revoked both permits. For more details, reference is made to page 12, “Environmental Matters” and to Item 3.
Item 3. 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 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were brought to a vote of security holders in the fourth quarter ended March 31, 2008.
Item 4(a). Executive Officers and Managers of the Company
Listed below are the names, ages and positions of the executive officers and managers of the Company and their business experience during the past five or more years. All officers are elected at the annual meeting of the directors, which is usually held after the annual shareholders’ meeting.
Name
Age as of
March 31, 2008
Executive Offices Held
With Company (1)
Period Served
In Office (2)
Edward A. Machulak
President and
Chief Executive Officer
Temporary Chairman
Executive Vice President
Secretary
Assistant Secretary
10/26/07 to present
10/21/07 to 10/26/07
10/16/92 to 10/26/07
1/12/87 to 10/26/07
4/15/86 to 1/12/87
Sidney Sodos
Vice President and Treasurer
10/26/07 to present
John H. Curry
Executive Vice President
10/26/07 to present
Luis A. Limay
Project and Mine Manager
Manager of El Salvador
Operations
10/86 to 1995
03/95 to present
(1)
There have never been any undisclosed arrangements or understandings between any Executive Officer and any other person pursuant to which any Executive Officer was elected as an Executive Officer.
(2)
Executive Officers are elected by the Directors for a term expiring at the Directors’ Annual Meeting and/or hold such positions until their successors have been elected and have qualified.
Family Relationships
Edward A. Machulak, presently a Director, Member of the Directors’ Executive Committee, Director-Emeritus, President and Chief Executive Officer is the brother of the legal counsel for the Company, Attorney John E. Machulak of the law firm of Machulak, Robertson & Sodos, S.C.
Officers’ and Key Management’s Experience
The business experience of each of the Directors, Officers, and Key Management is as follows:
Edward A. Machulak is a Director and holds the following Company positions: Director as of October 28, 1985; a member of the Directors’ Executive Committee as of March 11, 1991; Director-Emeritus since October 28, 2000; Temporary Chairman as of October 21, 2007 and President and Chief Executive Officer as of October 26, 2007. He was the Executive Vice President from October 16, 1992 through October 26, 2007; the Secretary from January 12, 1987 through October 26, 2007; and the Assistant Secretary from April 15, 1986 through January 12, 1987.
He is also a Director, President and Treasurer of Homespan Realty Co., Inc. and San Luis Estates, Inc.; and is a Director and President of San Sebastian Gold Mines, Inc. He has been a Director and Secretary of Ecomm Group Inc. and was elected President on May 17, 2000.
His business experience is as follows: Director and Corporate Secretary of General Lumber & Supply Co., Inc., a building material wholesale and retail distribution center from April 1, 1970 to November 1983; Director and President of Gamco, Inc., a marketing and advertising company, from November 1983 to present; Director and President of Circular Marketing, Inc., an advertising and marketing business, from March 1986 to present; Director and President of MacPak, an Internet developer from September 26, 1996 to present; Director and President of Edjo, Ltd., a company involved in the development, subdividing and sale of land and real estate from June 7, 1973 to present; Director and President of Landpak, Inc., a corporation which owns, operates, manages and sells real estate from September 1985 to present; and he was involved in other corporate real estate ventures and business activities.
Sidney Sodos is a Director and holds the following Company positions: Director as of February 9, 1998; and Vice President and Treasurer as of October 26, 2007.
His business experience is as follows: He was the senior member of the law firm of Sodos & Kafkas, S.C. and on July 1, 2003 he became a member of the law firm of Machulak, Robertson & Sodos, S.C. He is licensed and has practiced law in the federal and state courts in the State of Wisconsin for a period of more than 39 years. He specializes in corporate litigation and media law. He was the Executive Director of the American Federation of Television and Radio Artists in the States of Wisconsin and Illinois (1974-1981). He served as a member of the North Shore East Water Trust, a division of a local municipality. He also was a moderator of a radio program (WTMJ Milwaukee, Wisconsin) "The Law and Sometimes Justice."
John H. Curry is a Director and holds the following Company positions: Director as of October 18, 2002 and Executive Vice President as of October 26, 2007.
His business experience is as follows: He is an economist and was an economic advisor to the U.S. Government during more than 23 years in the Foreign Service working in U.S. Embassies abroad. He has broad financial and management executive skills in the public and private sector with knowledge and experience in dealing with international financial organizations. He has extensive experience with foreign governments, including international economic policy and trade relations, as well as familiarity with energy and mining markets, and has the ability to operate effectively in foreign cultures. He qualifies as an audit committee financial expert.
From 1993 to February 2003, he was the Assistant Director of Marketing and Chief Economist for Watanabe and Associates, Inc. and related firms CKC and KSK. On a part-time basis, he worked from December 2000 to December 2003 as an analyst and writer on international trade and economics for the website of the Summit of the Americas Center at Florida International University. From 1989 to 1993 he was employed by AmeriSecurities Corp., Continental Sales Company and Latine-Europe Corporation performing securities sales and marketing in Latin America and the Caribbean. From 1966 to 1989 he was employed by the U.S. Department of State - Foreign Service in various capacities, but primarily as an Economic Counselor for the U.S. Embassies in Mexico, Tunisia, Bolivia, Nicaragua, Costa Rica, El Salvador and Portugal. He then retired from the service.
He earned a Master of Arts in Applied Economics from the University of Michigan and a Bachelor of Arts in International Studies from Ohio State University. He also completed graduate courses in economics at the University of Detroit and accounting courses at Wayne State University, as well as many short courses with the Foreign Service Institute, Department of State, Washington, D.C. He is fluent in Spanish and has a working knowledge of Portuguese.
Luis Alfonso Limay was appointed to the position of Project and Mine Manager in October 1986 and is responsible for managing the daily affairs of the Joint Venture. During March 1995, Mr. Limay was appointed to the position of Manager of El Salvador operations which supersedes his position as Project and Mine Manager. Mr. Limay also was employed by Sanseb from 1977 through March 1978 as its chief geologist. He obtained degrees in geology and engineering from the National University of San Marlos, Lima, Peru, and the University of Toronto. He was employed as chief geologist by Rosario Resources in a Honduran underground mining operation and he held the same position with Canadian Javelin, a silver mining company that formerly operated in El Salvador.
PART II
Item 5.
Item 5. Market for the Company’s Common Stock and Related Stockholders’ Matters
(a) Principal Market and Common Stock Price
The Company continues to be listed on the Over the Counter Bulletin Board (OTCBB) under the trade symbol CGCO.OB and on the Pink Sheets under the trade symbol CGCO.PK. Since October 21, 2005 its shares were traded on the Berlin-Bremen Stock Exchange under the trade symbol C9G. Prior to this time, the common shares were traded since 1968 on the Over the Counter, American Stock Exchange, Boston Stock Exchange and on the Nasdaq Smallcap.
The following table reflects the range of high and low trade prices of the common shares as reported by the OTCBB for the period ended March 31, 2008 and 2007, as well as the highest and lowest trade price during each quarter through the period ended March 31, 2008. The closing price on May 30, 2008 was $.30 a share.
(b) Approximate Number of Holders of Common Shares
As of March 31, 2008, the Company believes that the common shares were held by approximately 3,600 shareholders; it is estimated that over 95% are United States’ residents.
As of March 31, 2008, the Company’s transfer agent and registrar certified that there were 1,594 shareholders of record. The number of shareholders of the Company who beneficially own shares in nominee or “street name” or through similar arrangements are estimated by the Company to be approximately 1,300.
As of March 31, 2008, there were issued and outstanding: (a) 30,715,869 shares of common stock; (b) no stock options were issued or outstanding to purchase common stock; and (c) no preferred shares or stock options are issued and outstanding.
(c) Equity Compensation Plans
None.
(d) Dividend History
Subject to the rights of holders of any outstanding series of preferred shares to receive preferential dividends, and to other applicable restrictions and limitations, holders of shares of common shares are entitled to receive dividends if and when declared by the Board of Directors out of funds legally available. No dividends were payable during the last fiscal year ended March 31, 2008. The declaration of future dividends will be determined by the Board of Directors in light of the Company’s earnings, cash requirements and other relevant considerations.
(e) Performance Graph
The following Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this annual report into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
Research Data Group, Inc. of San Francisco, California prepared the Company's Performance Graph. With the premise that $100 had been invested on March 31, 2003, by the purchase of the Company's shares, it then compares the Company's performance through March 31, 2008, against two measurements: the NASDAQ Composite and the Company’s selected Peer Group. The graph also assumes the reinvestment of dividends, if any, for each measurement period. The information shown on the chart below is an historical record of the Company’s stock market price, does not reflect the value of the mineralized material, and it is not indicative of the Company’s future performance. The ten companies that comprise the Peer Group are as follows: Atlas Minerals Inc.; Breakwater Resources Ltd.; Caledonia Mining Corp.; Campbell Resources Inc.; Cassidy Gold Corp.; Central Minera Corporation; Earth Sciences Inc.; Golden Eagle International Inc.; Namibian Minerals Corp.; and Nord Resources Corp. The Company’s securities were not eligible for continued quotation on the Over the Counter Bulletin Board (OTCBB) effective January 21, 2005 until the eligibility was reinstated on September 30, 2005.
The Broad Market Index chosen was the NASDAQ Composite Index.
Source: Research Data Group, Inc. San Francisco, CA.
(f) Issue of Securities to Directors and Officers
During the fourth quarter ended March 31, 2008, the Company issued 78,182 of its Form S-8 common shares to its Directors in payment for fees, 31,818 common shares in payment for its annual Officer’s compensation; 29,773 common shares to a Director for services rendered, and 762,500 common shares in payment of accrued salaries.
Item 6.
Item 6. Selected Financial Data
The following table presents certain selected financial information regarding the Company’s financial condition and results over the past five years:
*1
Although the majority of the short-term obligations are due on demand, some of these obligations have the attributes of being long-term as most of the debt is due to most of the related parties who have not called for a payment except for nominal amounts of their short-term loans during the past five or more years.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides information on the results of operations for each of the three years ended March 31, 2008, 2007 and 2006 and the financial condition, liquidity and capital resources for March 31, 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.
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 (03/31/07)
Tons
Estimated Gold Grade (OPT)
Estimated
Gold Ounces(1)
Virgin material (includes 960,000 tons of dump material)
14,404,096
0.081
1,166,732
Stope fill (estimated)
1,000,000
0.340
340,000
Estimated other mineralized material and open pit
122,815,134
0.016
1,948,748
Total estimated mineralized material
138,219,230
0.025
3,455,480
(1)
The estimated recoverable ounces of gold by processing are: SCMP, 85% to 95%; heap leach, 65% to 70%. 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.
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 doré bars.
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 (average expected annual production 12,000 ounces of gold)
U.S. $4 million net
To set up an open-pit, heap-leach operation at the San Sebastian Gold Mine site (average expected annual production for the first seven years and thereafter, 100,000 ounces of gold)
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
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. The Company’s geologists have estimated that there are approximately 1.2 million ounces of gold/silver in the 14.4 million tons of mineralized material and they have estimated that there are an additional 340,000 ounces of gold/silver contained in the one million tons of stope fill. 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 Piñas Mine, the Oro Mine, the Montemayor Mine, the Bañadero 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.
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 as there is a substantial amount of gold mineralized material that grades less than 0.04 ounces per ton. The Company’s engineers had estimated that a 2,000 ton-per-day open-pit, heap-leach, start-up operation should produce approximately 1,280 ounces of gold per month. It is necessary to raise adequate funds from outside sources for this operation; the amount required is dependent on the targeted daily volume of production.
The Company estimates that it will need up to U.S. $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.
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, which were used to progress the erection of the cone crushing system, to maintain the SCMP, and to continue exploration.
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
$ 131,348
$ 2,406
$ 133,754
Accounts payable - Comseb
246,439
246,439
Notes payable and accrued interest
19,433,730
334,038
19,767,768
Accruals - salaries
3,514,131
3,514,131
Accruals - legal fees
454,444
454,444
Accruals - other - Commerce
671,600
218,176
889,776
Total
$554,620
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.
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 Year Ended March 31, 2008 Compared to March 31, 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 $3,052,198 or $.11 cents per share for its fiscal year ended March 31, 2008. This compares to a net loss of $2,616,821 or $.10 cents per share for the fiscal year ended March 31, 2007.
There was no current or deferred provision for income taxes during the fiscal period ended March 31, 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 years ended March 31, 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 $2,915,959 was recorded by the Company during this fiscal period compared to $2,443,624 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.
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 the 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 Year Ended March 31, 2007 Compared to March 31, 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 $2,616,821 or $.10 cents per share for its fiscal year ended March 31, 2007. This compares to a net loss of $2,209,424 or $.09 cents per share for the fiscal year ended March 31, 2006.
There was no current or deferred provision for income taxes during the fiscal period ended March 31, 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 years ended March 31, 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 $2,443,624 was recorded by the Company during this fiscal period compared to $2,047,339 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 the 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.
Critical Accounting Policies and Estimates
The ensuing discussion and analysis of financial condition and results of operations are based on the Company’s consolidated financial statements, prepared in accordance with accounting principles generally accepted in the United States of America and contained within this report on S.E.C. Form 10-K. Certain amounts included in or affecting the Company’s financial statements and related disclosures must be estimated, requiring that certain assumptions be made with respect to values or conditions which cannot be made with certainty at the time the financial statements are prepared. Therefore, the reported amounts of the Company’s assets and liabilities, revenues and expenses, and associated disclosures with respect to contingent assets and obligations are necessarily affected by these estimates. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates and units-of-production amortization determination; recoverability and timing of gold production from the heap-leaching process; environmental, reclamation and closure obligations; asset impairments (including estimates of future cash flows); useful lives and residual values of intangible assets; fair value of financial instruments; valuation allowances for deferred tax assets; 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.
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 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 fiscal years ended March 31, 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.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
And Supplementary Financial Data
Page
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets, Years Ended March 31, 2008 and 2007
Consolidated Statements of Operations, Years Ended March 31, 2008, 2007 and 2006
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended March 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows, Years Ended March 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data (Unaudited)
Supplementary Financial Data:
Schedules of financial statements other than those listed herein have been omitted since they are either not required, are not applicable, or the required information is included in the financial statements and related notes.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Commerce Group Corp.
Milwaukee, Wisconsin
We have audited the accompanying consolidated balance sheets of Commerce Group Corp. (the Company) as of March 31, 2008, and the related statements of operations, stockholders’ deficit and cash flows for the years ended March 31, 2008, 2007 and 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the PCAOB (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Commerce Group Corp. as of March 31, 2008, and the consolidated results of their operations and their cash flows for the years ended March 31, 2008, 2007 and 2006 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 17 to the consolidated financial statements, the Company has a working capital deficit and has suffered recurring operating losses, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 17. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Chisholm, Bierwolf & Nilson, LLC
Bountiful, Utah
July 9, 2008
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Balance Sheets--March 31
The accompanying notes are an integral part of these consolidated financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Operations
For the Years Ended March 31
The accompanying notes are an integral part of these consolidated financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended March 31, 2008, 2007 and 2006
The accompanying notes are an integral part of these consolidated financial statements.
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Cash Flows
For the Years Ended March 31
(Restated)
(Restated)
Operating activities:
Net loss
$(3,052,198)
$(2,616,821)
$(2,209,424)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Common stock issued for Directors’ fees and
for services rendered
93,227
110,758
99,714
Changes in assets and liabilities:
Decrease (increase) in accounts receivable and
other current assets
39,854
(34,025)
(22,457)
Decrease (increase) in prepaid items and deposits
17,542
1,323
50,469
Increase (decrease) in accounts payable and
other accrued expenses
12,268
50,573
(15,911)
Increase in accrued interest expense
2,915,959
2,443,624
2,047,339
Increase (decrease) in accrued legal fees
39,409
3,476
78,577
Net cash provided by (used in) operating activities
66,061
(41,092)
28,037
Investing activities:
Investment in mining resources and property,
plant and equipment
(700,201)
(444,762)
(483,696)
Net cash used by investing activities
(700,201)
(444,762)
(483,696)
Financing activities:
Cash received, related party notes payable
429,917
314,502
460,523
Common stock issued for cash
200,500
145,080
12,500
Net cash provided by financing activities
630,417
459,582
473,023
Net increase (decrease) in cash and cash equivalents
(3,723)
(26,272)
17,634
Cash - beg. of year
5,031
31,303
13,669
Cash - end of year
$ 1,308
$ 5,031
$ 31,303
The accompanying notes are an integral part of these consolidated financial statements.
Supplemental disclosures of cash information:
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Notes to the Consolidated Financial Statements
March 31, 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.
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.
The Company’s directors and officers, with the aid of investment bankers and finders, are aggressively seeking a compatible financial or business arrangement. The verbal and written proposals or arrangements received up to this time were not acceptable by the Company primarily due to the terms and conditions.
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 funding 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 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.
Minority Interest
During the twelve-months ended March 31, 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 March 31, 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 March 31, 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.
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
$584,925
$ 0
$584,925
Accounts payable
$246,439
$133,754
$380,192
On January 14, 2003, 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 $584,925 and that the Company owes Misanse $242,350 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.
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 the 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 the 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 further mineralization at and adjacent to existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on the units of production basis over proven and probable reserves.
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.
Recently Issued Financial Accounting Standards
The FASB has issued FSP EITF 00-19-2. This FSP states that the contingent obligation to make future payments or other transfers of consideration under a registration payment arrangement, issued as a separate agreement or included as a part of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. Also, a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable GAAP without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. This FSP will be applied for when the occasion occurs.
In March 2005, the FASB issued FASB Interpretation No. 47 Accounting for Conditional Asset Retirement Obligations -- an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies the term conditional asset retirement obligation as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” and requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. Any uncertainty about the amount and/or timing of future settlement of a conditional asset retirement obligation should be factored into the measurement of the liability where sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15, 2005. The adoption of these standards will have no material impact on the Company’s financial reporting and disclosures at this time.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. This statement replaces APB Opinion No. 20 Accounting Changes and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” This statement is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. At this time, the adoption of SFAS No. 154 will have no material impact on the Company’s financial reporting and disclosures.
In February 2006, the FASB issued SFAS No. 155, ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS, AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140. This Statement amends FASB Statements No. 133, accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement resolves issues addressed in Statement 133 Implementation Issued No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." The adoption of SFAS No. 155 did not have an impact on the Company's consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS, AN AMENDMENT OF FASB STATEMENT No. 140. This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The adoption of SFAS No. 156 did not have an impact on the Company's consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The requirement is that recognition of the impact of a tax position is made in the financial statements, if the position is more likely than not of being sustained upon examination based on the technical merits of the position. This interpretation also includes guidance on derecognition, classification, interest and penalties, accounting interim periods, disclosure, and transition. The cumulative effect should be reported as an adjustment to the opening balance of retained earnings for the fiscal year. Adoption must take place for fiscal years beginning after December 15, 2006, although early adoption is allowed. The Company is currently determining the effect of this interpretation on its financial reporting.
In August 2006, the SEC published amendments to the disclosure requirements for executive and director compensation, related party transactions, director independence and other corporate governance matters, and security ownership of officers and directors. The rules affect disclosure in proxy statements, annual reports and registration statements. These amendments are effective for filings for fiscal years ending on or after December 15, 2006. The Company is currently determining the effect these amendments will have on its financial reporting.
In September 2006, the FASB issued FASB No. 157, Fair Value Measurements. This standard provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. The standard clarifies that for items that are not actively traded, fair value should reflect the price in a transaction with a market participant, including an adjustment for risk. Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market which the reporting entity transacts. The Company is currently determining the effect of this Statement on its financial reporting.
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R" ("SFAS 158"). SFAS 158 requires employers that sponsor defined benefit pension and post retirement plans to recognize previously unrecognized actuarial losses and prior service costs in the statement of financial position and to recognize future changes in these amounts in the year in which changes occur through comprehensive income. As a result, the statement of financial position will reflect funded status of those plans as an asset or liability. Additionally, employers are required to measure the funded status of a plan as of the date of their year-end statements of financial position and provide additional disclosures. SFAS 158 is effective for financial statements issued for fiscal years ending after December 15, 2006 for companies whose securities are publicly traded. The Company does not expect the adoption of SFAS 158 to have a significant effect on its financial position or results of operation.
In October 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 123(R)-5, Amendment of FASB Staff Position (“FSP”) FAS 123(R)-1, which addresses whether a modification of an instrument in connection with an equity restructuring should be considered a modification for purposes of applying FSP FAS 123(R)-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R). This FSP is effective for the first reporting period beginning after October 10, 2006. This FSP should have no effect on the financial reporting.
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.
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 March 31, 2006, 2007 and 2008.
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 year ended March 31, 2008:
Basic EPS
Net loss to common Shareholders
$(3,052,198)
28,401,086
$
(0.11)
For the year ended March 31, 2007:
Basic EPS
Net loss to common Shareholders
$(2,616,821)
25,457,052
$
(0.10)
For the year ended March 31, 2006:
Basic EPS
Net loss to common Shareholders
$(2,209,424)
23,834,988
$
(0.09)
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.
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:
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.
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 March 31, 2008 and 2007, the Company, Sanseb and three of the Company’s subsidiaries have invested (including carrying costs) the following in its Joint Venture:
The Company’s advances (net of gold sale proceeds) since 09/22/87
$71,399,367
$62,975,723
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
51,526,354
46,802,101
Total:
116,794,184
Advances by the Company’s three subsidiaries
590,265
590,265
Combined total investment
$130,532,346
$117,384,449
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.
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 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 Piñas Mine, the Oro Mine, the Montemayor Mine, the Bañadero Mine, the Carrizal Mine, the La Joya 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.
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 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.
(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 Chairman, 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
03/31/08
03/31/07
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)
$19,433,730
$16,410,397
Other
Short-term notes and accrued interest (March 31, 2008, $199,038 and March 31, 2007, $177,379) 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.
334,038
312,379
Total:
$19,767,768
$16,722,776
(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 $3,351,515 at March 31, 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 March 31, 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 $13,354,281 and $11,372,962 at March 31, 2008 and 2007, respectively; the 2008 interest was $1,992,171 and the 2007 interest was $1,695,286. 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.
The Company had borrowed an aggregate of $1,429,871 and $1,216,540 at March 31, 2008 and 2007, respectively, including accrued interest, from the Company’s late President’s Rollover Individual Retirement Account (ELM RIRA). The 2008 interest was $213,331 and the 2007 interest was $192,210. 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 March 31, 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 $3,242,264 and $2,673,457 at March 31, 2008 and 2007, respectively; the 2008 interest was $478,493 and the 2007 interest was $370,996. 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 March 31, 2008 and 2007:
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 $994,866 and $846,436 at March 31, 2008 and 2007, respectively; the 2008 interest was $148,430 and the 2007 interest was $124,939. 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 $471,600 and $435,600 at March 31, 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 $293,308 and $249,548 at March 31, 2008 and 2007, respectively; the 2008 interest was $43,760 and the 2007 interest was $37,138. 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 $454,443.75 for 2,019.75 hours of legal services rendered from July 1980 through February 29, 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 $51,454 and $102,181 at March 31, 2008 and 2007, respectively; the 2008 interest was $10,728 and the 2007 interest was $1,454. 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 $16,958 as of March 31, 2008, which bears interest at an annual rate of 16% payable monthly. The 2008 interest was $1,958.
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 this fiscal year were exchanged for common stock in March of 2008. The other salary accruals as of March 31, 2008 are $52,616 compared to $126,053 for March 31, 2007.
(8) Commitments
Reference is made to Notes 2, 4, 5, 6, 7, 10, 11, 12, 13 and 16.
(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.
The components of current income tax expense as of March 31, 2008, 2007 and 2006 respectively are as follows:
*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 27,778,596 shares were issued and outstanding as of March 31, 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.
b. Preferred Stock
There were no preferred shares issued and outstanding for the periods ending March 31, 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:
There were no stock options issued or outstanding as of March 31, 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 March 31, 2008, there were no shares due to other parties for shares borrowed or for interest payment on the borrowed shares.
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. A total of 1,107,580 of these shares were issued during the fiscal year ending March 31, 2007 and 932,273 shares were issued during this fiscal year, 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, 2007, 986,655 common shares remained in the account. During this fiscal period no shares were added and 186,655 shares were sold, leaving a balance of 800,000 common shares as of March 31, 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 March 31, 2008 or March 31, 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.
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.
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.
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 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 year ended March 31, 2008
Total Advances
Interest Charges
Beginning balance
$62,975,723
$43,853,373
Advances during fiscal year ended March 31, 2008
8,423,644
7,780,057
Total Company’s net advances
71,399,367
51,633,430
Advances by three of the Company’s subsidiaries
590,265
Total net advances as of March 31, 2008
$71,989,632
$51,633,430
(14) Business Segments
The Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Information became effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes standards for the way that public business enterprises determine operating segments and report information about those segments in annual financial statements. SFAS 131 also requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 further establishes standards for related disclosure about products and services, geographic areas, and major customers.
The Company presently has 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 *1 El Salvador,
Central America
Corporate Headquarters
Year ended March 31, 2008
Sales and revenues
$ 0
$ 0
Depreciation & amortization
Operating income (loss)
(3,052,198)
Total assets
26,247,593
237,409
Capital expenditures
534,817
Year ended March 31, 2007
Sales and revenues
$ 0
$ 0
Depreciation & amortization
Operating income (loss)
(2,616,821)
Total assets
25,610,222
278,843
Capital expenditures
645,830
Year ended March 31, 2006
Sales and revenues
$ 0
$ 0
Depreciation & amortization
Operating income (loss)
(2,209,424)
Total assets
24,969,022
267,784
Capital expenditures
688,060
*1
Its major customer for the refining and purchase of gold is a refinery located in the United States. The price of gold is dependent on the world market price over which the Company, the refinery or any other single competitor do not have control.
(15) Quarterly Financial Data
The following is a tabulation of the quarterly operating results for the years ended March 31, 2008 and 2007:
Fiscal year ended 3/31/08
Operating Revenues
Net (Loss)
Per Share
Basic/Diluted Net Income/(Loss)
First quarter 06/30/07
$0
$ (725,670)
$0
Second quarter 09/30/07
$0
$ (790,564)
$0
Third quarter 12/31/07
$0
$ (766,188)
$0
Fourth quarter 03/31/08
$0
$ (769,776)
$0
$0
$(3,052,198)
$0
Fiscal year ended 3/31/07
Operating Revenues
Net (Loss)
Per Share
Basic/Diluted Net Income/(Loss)
First quarter 06/30/06
$0
$ (609,362)
$0
Second quarter 09/30/06
$0
$ (644,562)
$0
Third quarter 12/31/06
$0
$ (671,954)
$0
Fourth quarter 03/31/07
$0
$ (690,943)
$0
$0
$(2,616,821)
$0
(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.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9(a). 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.
Item 9(b). Other Information
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this item appears under the captions “Officers and Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics” and will be included in the Company’s definitive proxy statement for the 2008 Annual Meeting of the Shareholders to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year and is incorporated by reference in this Annual Report on Form 10-K.
Item 11.
Item 11. Executive Compensation
The information called for by Item 11 is incorporated by reference from information under the caption “Executive Compensation” in the Company’s definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year and is incorporated by reference in the Annual Report on Form 10-K.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by Item 12 is incorporated by reference from information under the captions “Security Ownership of Directors and Management” and “Principal Shareholders” in the Company’s definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information called for by Item 13 is incorporated by reference from information under the caption “Certain Relationships and Related Transactions” in the Company’s definitive proxy statement to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year and is incorporated by reference in the Annual Report on Form 10-K.
Item 14.
Item 14. Principal Accounting Fees and Services
The information called for by Item 14 is incorporated by reference from the information under the caption “Relationship with Independent Accountants and Audit Fees” and is to be included in the Company’s definitive proxy statement for the 2007 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A no later than 120 days after the close of its fiscal year and is incorporated by reference in the Annual Report on Form 10-K.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)
The following is a list of documents filed as part of this Report and are included herewith (*) or have been filed previously:
(1)
Financial Statements (included in Item 8 of this Report)
·
Report of Independent Registered Public Accounting Firm
·
Consolidated Balance Sheets - March 31, 2008 and 2007
·
Consolidated Statements of Operations - Years Ended March 31, 2008, 2007 and 2006
·
Consolidated Statements of Changes in Stockholders’ Equity - Years Ended March 31, 2008, 2007 and 2006
·
Consolidated Statements of Cash Flows - Years Ended March 31, 2008, 2007 and 2006
·
Notes to Consolidated Financial Statements
(1)
Financial Statement Schedules: All Schedules are omitted because the information called for is not applicable, is not required, or because the financial information is set forth in the financial statements or notes thereto.
(2)
Schedule IV (1) Indebtedness of Related Parties
(3)
Schedule IV (2) Indebtedness to Related Parties
(4)
Reports on Form 8-K:
a.
On March 7, 2008, the Company filed a Securities and Exchange Commission Form 8-K disclosing that a news release was issued on the same date announcing that the Company entered into an agreement with Manti Holdings LLC to fund the San Sebastian Gold Mines.
b.
On March 11, 2008 the Company filed a Securities and Exchange Commission Form 8-K disclosing the general terms and conditions of the thirty-day option agreement by and between the Company and Manti Holdings LLC dated March 7, 2008.
c.
On April 10, 2008 the Company filed a Securities and Exchange Commission Form 8-K/A reporting the status of Manti Holdings LLC and stating that the March 7, 2008 agreement may be amended to reflect any new terms and conditions.
(1)
Exhibits:
The exhibit numbers noted by an asterisk (*) indicate exhibits actually filed with this Annual Report on Form 10-K. All other exhibits are incorporated by reference into this Annual Report on Form 10-K.
Exhibit Number
Description of Exhibit
3.1
Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.(i) of the Company’s S.E.C. Form 8-K filed on April 13, 1999.)
3.2
Amended By-laws of the Wisconsin Chartered Company dated May 10, 2004. (Incorporated by reference to Exhibit 3.2 of the Company’s S.E.C. Form 10-K for the year ended March 31, 2006.)
3.3
The Articles of Amendment of the Wisconsin corporation increasing the authorized shares to 50,000,000 common shares. (Incorporated by reference to Exhibit 3.(iii) of the Company’s S.E.C. Form 8-K filed on April 13, 1999.)
3.4
The Articles of Merger from a Delaware corporation to a Wisconsin corporation effective April 1, 1999 at 12:01 a.m. (Central Time). (Incorporated by reference to Exhibit 2.(i) of the Company’s S.E.C. Form 8-K filed on April 13, 1999.)
3.5
A Certificate of Merger filed with the Office of the Secretary of State of Delaware merging into a Wisconsin corporation. (Incorporated by reference to Exhibit 2.(ii) of the Company’s S.E.C. Form 8-K filed on April 13, 1999.)
Instruments defining the rights of security holders, including indentures.
Voting Trust Agreement--not applicable.
Material contracts.
10.1
Bonus compensation, Edward L. Machulak, February 16, 1987. (Incorporated by reference to Exhibit 7 of the Company’s Form 10-K for the year ended March 31, 1987.)
10.2
Loan Agreement and Promissory Note, Edward L. Machulak, June 20, 1988. (Incorporated by reference to Exhibit 10.2 of the Company’s Form 10-K for the year ended March 31, 1993.)
Exhibit Number
Description of Exhibit
10.3
Loan Agreement and Promissory Note, Edward L. Machulak, October 14, 1988. (Incorporated by reference to Exhibit 10.3 of the Company’s Form 10-K for the year ended March 31, 1993.)
10.4
Loan Agreement and Promissory Note, Edward L. Machulak, May 17, 1989. (Incorporated by reference to Exhibit 10.4 of the Company’s Form 10-K for the year ended March 31, 1993.)
10.5
Loan Agreement and Promissory Note, Edward L. Machulak, April 1, 1990. (Incorporated by reference to Exhibit 10.5 of the Company’s Form 10-K for the year ended March 31, 1993.)
10.6
Letter Agreement, Edward L. Machulak, October 10, 1989. (Incorporated by reference to Exhibit 10.6 of the Company’s Form 10-K for the year ended March 31, 1993.)
10.7
Loan Agreement and Promissory Note dated January 19, 1994. (Incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K for the year ended March 31, 1995.)
10.8
John E. Machulak and Susan R. Robertson, Loan Agreement and Promissory Note dated June 3, 1994. (Incorporated by reference to Exhibit 10.14 of the Company’s Form 10-K for the year ended March 31, 1995.)
10.9
Lillian M. Skeen, Loan Agreement and Open Ended On Demand Promissory Note dated June 26, 1997. (Incorporated by reference to Exhibit 10.9 of the Company’s Form 10-K for the year ended March 31, 1998.)
10.10
Robert C. Skeen, Loan Agreement and Open Ended On Demand Promissory Note dated June 26, 1997. (Incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K for the year ended March 31, 1998.)
10.11
Robert C. Skeen, Loan Agreement and Open Ended On Demand Promissory Note dated January 20, 1998. (Incorporated by reference to Exhibit 10.11 of the Company’s Form 10-K for the year ended March 31, 1998.)
Exhibit Number
Description of Exhibit
10.12
John E. Machulak and Susan R. Robertson, Loan Agreement and Open Ended On Demand Promissory Note dated March 6, 1998. (Incorporated by reference to Exhibit 10.12 of the Company’s Form 10-K for the year ended March 31, 1998.)
10.13
Lillian M. Skeen, Loan Agreement and Open Ended On Demand Promissory Note dated May 21, 1998. (Incorporated by reference to Exhibit 10.13 of the Company’s Form 10-K for the year ended March 31, 1998.)
10.14
Edward A. Machulak, Loan Agreement and Open Ended On Demand Promissory Note dated March 6, 1998. (Incorporated by reference to Exhibit 10.14 of the Company’s Form 10-K for the year ended March 31, 1999.)
10.15
Three-year lease agreement by and between the Company and Corporacion Salvadorena de Inversiones (“Corsain”), an El Salvadoran governmental agency, covering the real estate known as the San Cristobal Mill and Plant (SCMP) executed on April 26, 2004, retroactive to November 13, 2003. (Incorporated by reference to Exhibit 10.15 of the Company’s Form 10-K for the year ended March 31, 2004.)
10.16*
Nineteen-month lease agreement by and between the Company and Corporacion Salvadorena de Inversiones (“Corsain”), an El Salvadoran governmental agency, covering the real estate known as the San Cristobal Mill and Plant (SCMP) executed on March 25, 2008, retroactive to November 12, 2006. Lease renewed on June 12, 2008 for a six-month period to expire on December 11, 2008.
10.17
Renewed January 14, 2003 thirty (30) year lease agreement by and between the Company and Mineral San Sebastian S.A. de C.V. (Misanse) covering the 1,470-acre San Sebastian Gold Mine real estate. (Incorporated by reference to Exhibit 3 of Exhibit B of Exhibit 99.3 of the Company’s Form 10-K for the year ended March 31, 2003.)
Exhibit Number
Description of Exhibit
10.18
Exploitation concession/license issued by the Government of El Salvador to the Company for a period of 30 years under Agreement Number 591 dated May 20, 2004. This concession/license permits the Company to develop, extract and sell precious metals from a 304-acre site and is identified as the Renewed San Sebastian Gold Mine (Renewed SSGM). (Incorporated by reference to Exhibit 10.17 of the Company’s Form 10-K for the year ended March 31, 2006.)
10.19
Exploration concession/license issued by the Government of El Salvador to the Company for a period of four years with a four-year renewable extension under Resolution Number 27 dated February 24, 2003. This concession/license permits the Company to explore an area of 10,070 acres for precious metals and is identified as the New San Sebastian Gold Mine Exploration Concession/License (New SSGM). (Incorporated by reference to Exhibit 10.16 of the Company’s Form 10-Q for the period ended September 30, 2003.
10.20
Exploration concession/license issued by the Government of El Salvador to the Company for a period of four years with a four-year renewable extension under Resolution Number 271 dated May 25, 2004. This concession/license permits the Company to explore an area of 11,115 acres for precious metals and is identified as the Nueva Esparta Exploration Concession/License (Nueva Esparta). (Incorporated by reference to Exhibit 10.19 of the Company’s Form 10-K for the year ended March 31, 2006.)
10.21
Lawsuit Company filed with the El Salvadoran Court of Administrative Litigation of the Supreme Court of Justice. (Incorporated by reference to Exhibit 10.20 of the Company’s Form 10-K for the year ended March 31, 2007.)
Exhibit Number
Description of Exhibit
11*
Schedule of Computation of Net Income Per Share
21*
Subsidiaries and Joint Venture of the Company
31.1*
Certification of Chief Executive Officer pursuant to Rule 13(a)-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13(a)-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Chief Executive Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.0
Additional Exhibits
99.1*
Confirmation agreement, General Lumber & Supply Co., Inc., May 30, 2008, incorporated herein by reference.
99.2*
Confirmation Agreement, Sylvia Machulak, Widow, on behalf of Edward L. Machulak, deceased, May 30, 2008, incorporated herein by reference.
99.3*
Confirmation Agreement, Sylvia Machulak, Widow, on behalf of Edward L. Machulak, deceased, for the Edward L. Machulak Rollover Individual Retirement Account, May 30, 2008, incorporated herein by reference.
99.4*
Confirmation Agreement, Sylvia Machulak as an individual and for her Rollover Individual Retirement Account, May 30, 2008, incorporated herein by reference.
99.5*
Confirmation Agreement, Edward A. Machulak as an individual and as President of Circular Marketing, Inc., May 30, 2008, incorporated herein by reference.
99.6*
Confirmation Agreement, John E. Machulak and Susan R. Robertson as individuals, May 30, 2008, incorporated herein by reference.
Exhibit Number
Description of Exhibit
99.7*
Confirmation Agreement, the Law Firm of Machulak, Robertson & Sodos, S.C., May 30, 2008, incorporated herein by reference.
99.8
Concession Agreement Assignment to the Company by Misanse (Incorporated by reference to Exhibit 1 of the Company’s Form 10-K for the year ended March 31, 1988.)
99.9
Individual financial statements of majority-owned companies have been omitted because most of these companies are inactive and do not constitute a significant or material contribution to the Company.
99.10
S.E.C. Form S-8 Registration Statement No. 333-134805 filed under the Securities Act of 1933, as amended and declared effective June 7, 2006, registering three million of its common shares, ten cents par value. (Incorporated by reference as this S.E.C. Form S-8 Registration Statement had been filed on June 7, 2006.)
99.11
Consent of Independent Registered Public Accounting Firm to incorporate by reference in the S.E.C. Form S-8 Registration Statement No. 333-134805 filed under the Securities Act of 1933 as amended and declared effective June 7, 2006, the Independent Registered Public Accounting Firm’s report dated May 24, 2006 relating to the financial statements of the Company for the years ended March 31, 2006 and 2005. (Incorporated by reference to Exhibit 99.7(a) of the Company’s Form 10-K for the year ended March 31, 2006.)
COMMERCE GROUP CORP.
FORM 10-K - MARCH 31, 2008
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on July 14, 2008.
COMMERCE GROUP CORP.
(Company)
By:
/s/ Edward A. Machulak
Edward A. Machulak
Chairman of the Board of Directors,
Member of Executive Committee,
Member of Audit Committee
Director-Emeritus, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons, on behalf of the Company and in the capacities and on the dates indicated:
Name
Office
Date
/s/ Edward A. Machulak
Edward A. Machulak
Chairman of the Board of Directors, Member of Executive Committee, Member of Audit Committee, Director-Emeritus, President and Chief Executive Officer
July 14, 2008
/s/ Sidney Sodos
Sidney Sodos
Director, Vice President and Treasurer
July 14, 2008
/s/ John H. Curry
John H. Curry
Director and Member of Audit Committee, Executive Vice President
July 14, 2008