Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 2010
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ To __________
Commission file number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-6050862
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
6001 NORTH 91ST STREET
MILWAUKEE, WISCONSIN 53225-1795
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 462-5310
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [x]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [x]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No []
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (Sec. 229.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [x]
Indicate by check mark whether the issuer is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 30,750,869 common
shares of the Company's common stock, $0.10 par value, were issued and
outstanding as of February 11, 2011.
1
COMMERCE GROUP CORP.
FORM 10-Q
FOR THE THIRD QUARTER ENDED DECEMBER 31, 2010
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements have been prepared by
Commerce Group Corp. ("the Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed and omitted pursuant to such SEC rules and
regulations.
These consolidated financial statements should be read in conjunction
with the financial statements and accompanying notes included in the
Company's Form 10-K for the year ended March 31, 2010.
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to the Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Default Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 18
SIGNATURES:
Registrant's Signature Page 18
Certification of Chief Executive Officer (Section 302) 19
Certification of Chief Financial Officer (Section 302) 20
Certification of Chief Executive Officer (Section 906) 21
Certification of Chief Financial Officer (Section 906) 22
CAUTIONARY STATEMENT FOR PURPOSED OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The matters discussed in this quarterly report on Form 10-Q, when not
historical matters, are forward-looking statements that involve a number
of risks and uncertainties that could cause actual results to differ
materially from projections or estimates contained herein. Such factors
include, among others, the speculative nature of mineral exploration,
commodity prices, production and reserve estimates, environmental and
governmental regulations, availability of financing, force majeure
events, and other risk factors as described from time to time in the
Company's filings with the Securities and Exchange Commission. Many of
these factors are beyond the Company's ability to control or predict.
The Company disclaims any intent or obligation to update its
forward-looking statements, whether as a result of receiving new
information, the occurrence of future events, or otherwise.
2
COMMERCE GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
12/31/10
(Unaudited) 03/31/10
----------- --------
ASSETS
------
Current assets
Cash $ 3,539 $ 5,965
------------ ------------
Total current assets 3,539 5,965
Property, plant and equipment, net 76,323 76,323
Other assets
Supplies held for sale 6,928 6,928
Prepaid items and deposits 11,236 11,236
Accounts receivable - related,
net of allowances 253,967 250,582
Other assets 40,000 40,000
------------ ------------
Total other assets 312,131 308,746
------------ ------------
Total assets $ 391,993 $ 391,034
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities
Accounts payable $ 2,948 $ 2,947
Accounts payable - related 376,516 322,631
Notes and accrued interest
payable to related parties 31,465,115 27,661,381
Notes and accrued interest
payable to others 393,512 377,238
Accrued salaries 4,028,380 3,895,631
Accrued legal fees 627,604 546,233
Other accrued expenses - related
parties 608,200 576,400
Other accrued expenses - other 421,130 421,125
------------ ------------
Total current liabilities 37,923,405 33,803,586
------------ ------------
Total liabilities 37,923,405 33,803,586
------------ ------------
Commitments and contingencies
Shareholders' Deficit
Preferred Stock
Preferred stock, $0.10 par value:
Authorized 250,000 shares;
Issued and outstanding - none $ - $ -
Common stock, $0.10 par value:
Authorized 50,000,000 shares;
30,750,869 issued and outstanding: 3,075,087 3,075,087
Capital in excess of par value 19,579,827 19,579,827
Accumulated deficit (60,186,326) (56,067,466)
------------ ------------
Total shareholders' deficit (37,531,412) (33,412,552)
------------ ------------
Total liabilities and
shareholders' equity $ 391,993 $ 391,034
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
COMMERCE GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31 (UNAUDITED)
Three Months Ended Nine Months Ended
12/31/10 12/31/09 12/31/10 12/31/09
----------- ----------- ----------- ------------
Revenues: $ - $ - $ - $ -
Expenses:
General and
administrative 194,360 148,171 520,337 540,946
----------- ------------ ------------ ------------
Total expenses 194,360 148,171 520,337 540,946
Net loss from operations (194,360) (148,171) (520,337) (540,946)
Other income (expense)
Interest expense (1,255,989) (1,065,284) (3,598,523) (3,050,064)
----------- ------------ ------------ ------------
Total other income
(expense) (1,255,989) (1,065,284) (3,598,523) (3,050,064)
----------- ------------ ------------ ------------
Net loss (1,450,349) (1,213,445) (4,118,860) (3,591,010)
Income tax expense - - - -
----------- ------------ ------------ ------------
Net loss $(1,450,349) $(1,213,445) $(4,118,860) $(3,591,010)
============ ============ ============ ============
Net loss per share
basic/diluted $ (.05) $ (.04) $ (.13) $ (.12)
=========== ============ ============ ============
Weighted av. basic/
diluted common
shares outstanding 30,750,869 30,750,869 30,750,869 30,750,869
=========== ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
4
COMMERCE GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31 (UNAUDITED)
2010 2009
------- -------
OPERATING ACTIVITIES:
Net loss $(4,118,860) $(3,591,010)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Changes in assets and liabilities:
Decrease in mining supplies 31,968
Increase in accounts receivable
and other assets (3,385) (3,087)
Decrease in prepaid items and
deposits - 3,203
Increase in accounts payable
and other accrued expenses 53,885 15,038
Increase in accrued interest
to related parties 3,582,249 3,050,065
Increase in accrued interest to others 16,274 16,274
Increase in accrued legal fees 81,371 37,406
Increase in accrued salaries 132,750 132,750
Decrease in other accruals
to related parties 31,800 36,600
Decrease in other accruals 5 (33,783)
Net cash used in ----------- ------------
operating activities (223,911) (304,576)
INVESTING ACTIVITIES:
Cash received, scrap metal - 40,667
---------- -----------
Net cash provided by
investing activities - 40,667
FINANCING ACTIVITIES:
Cash received, related party
notes payable 221,485 236,324
---------- ----------
Net cash provided by financing
activities 221,485 236,324
Net decrease in cash and
cash equivalents (2,426) (27,585)
Cash - beginning of the period 5,965 38,827
---------- -----------
Cash - end of the period $ 3,539 $ 11,242
========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
5
COMMERCE GROUP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
GENERAL
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. The
Company is currently unable to conduct exploration and exploitation
activities. The Company continues to staff its office in San Miguel and
performs and conducts non-mining activities in the Country of El
Salvador.
CONSOLIDATED STATEMENTS
The Joint Venture and the following subsidiaries are all majority-owned
by the Company and are included in the consolidated financial statements
of the Company. All significant intercompany balances and transactions
have been eliminated. Not included in the consolidated statements is
Mineral San Sebastian, S.A. de C.V. (Misanse) as the Company does not
have corporate control of Misanse because the majority of Misanse's
elected directors must be El Salvadoran shareholders.
Charter/Joint Venture
---------------------
Included in the Consolidated Statements % Ownership Place Date
--------------------------------------- ----------- ----- ----
Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959
Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974
San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968
Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964
Commerce/Sanseb Joint Venture
("Joint Venture") 90.0 Wisconsin
& El Salvador 09/22/1987
Not included in the Consolidated Statements
-------------------------------------------
Mineral San Sebastian, S.A. de C.V.
("Misanse") 52.0 El Salvador 05/08/1960
NOTE 2 - 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.
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 the 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 its employees 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.
6
COMMERCE GROUP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2010
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly
the financial position as of December 31, 2010 and March 31, 2010, the
results of operations and cash flows at December 31, 2010 and 2009 and
for the periods then ended have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. It is suggested that these interim financial statements be read
in conjunction with the financial statements and notes thereto included
in the Company's March 31, 2010 audited financial statements. The results
of operations for the periods ended December 31, 2010 and 2009 are not
necessarily indicative of the operating results for the full year.
ACCOUNTING METHOD
The Company recognizes income and expenses on the accrual basis of
accounting. The Company has elected a March 31 year end.
OTHER ASSETS
Other assets consist primarily of stock of the Company held for
reimbursement of medical and other expenses incurred by employees of the
Company in El Salvador. The Company is required by the El Salvadoran
government to set aside assets for the payment of medical and other
expenses of El Salvadoran employees. During the year ended March 31,
2010, the Company revalued those assets held aside for reimbursement of
expenses at current market values. As such, the Company recognized a
loss on valuation of assets of $61,529. Other assets as of
the periods ended December 31, 2010 and March 31, 2010 were $40,000 and
$40,000, respectively.
ACCOUNTS RECEIVABLE - RELATED
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 $253,967 $ 0 $253,967
Accounts payable - related parties $253,967 $122,549 $376,516
The Company is of the opinion that it is appropriate to record the fact
that Misanse owes the Company $600,224 and that the Company owes Misanse
$253,967 as Misanse is not consolidated with the Company's financial
records. If 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.
Due to the fact that the country of El Salvador where the Company is
planning to mine revoked its mining permits and the Company is in the
process of challenging that decision, management determined that the
collectability of the Misanse-related receivable is uncertain. Therefore,
it set up an allowance of $346,257 for bad debts during its fiscal year
ended March 31, 2009 and as of December 31, 2010 left a balance of
$253,967 in accounts receivable.
7
COMMERCE GROUP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2010
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLIES HELD FOR SALE
Supplies held for sale consist of consumable items used in processing
mineralized material. The Company is in the process of liquidating its
consumables and has reduced the value to the amount it anticipates to
recover.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
MINING RESOURCES INVESTMENT
The Company expenses all costs directly associated with acquisition,
exploration and development of specific properties. Gains or losses
resulting from the sale or abandonment of mining properties will be
included in operations. The Joint Venture expenses its costs.
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 are 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. Maintenance and repairs will be charged to expense based on
average estimated equipment usage. Interest costs incurred in the
construction or acquisition of property, plant, and equipment are
expensed when incurred. The Company did not impair the plant
and equipment for the amount of $76,323 which represents the cost of land
and improvements that management believes are fully recoverable.
LOSS PER COMMON SHARE
The computation of loss per share of common stock is based on the
weighted average number of shares outstanding during the period.
SUBSQUENT EVENTS
The Company has evaluated subsequent events from the balance sheet date
through the date the financial statements were issued and has determined
that there are no events that would have a material impact on the
financial statements.
NOTE 4 - NOTES PAYABLE AND ACCRUED INTEREST
12/31/10 03/31/10
-------- --------
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 5) $31,465,115 $27,661,381
Other
Short-term notes and accrued
interest (December 31, 2010,
$258,512 and March 31, 2010,
$242,238) 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. 393,512 377,238
----------- -----------
Total: $31,858,627 $28,038,619
8
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company, in an attempt to preserve cash, has accrued the late
President's salary for the past 26.58 years, including
vacation pay, for a total of $3,455,786 and $3,455,786 at December 31,
2010 and March 31, 2010, respectively. The current President has also
agreed to accrue his salary and vacation pay beginning April 1, 2008,
which totals $486,979 and $363,229 as of December 31, 2010 and March 31,
2010, 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 December 31,
2010 and March 31, 2010:
The amount of cash funds which the Company has borrowed from its late
President from time to time, together with accrued interest, amounts to
$20,790,513 and $18,413,742 at December 31, 2010 and March 31, 2010,
respectively; the interest for the three months ended December 31, 2010
and December 31, 2009 was $827,442 and $704,300 respectively. To
evidence this debt, the Company has issued to its late President a series
of open-ended, secured, on-demand promissory notes, with interest payable
monthly at the prime rate plus two percent, but not less than 16% per
annum.
The Company had borrowed an aggregate of $2,228,332 and $1,973,589 at
December 31, 2010 and March 31, 2010, respectively, including accrued
interest, from the Company's late President's Rollover Individual
Retirement Account (ELM RIRA). The interest for the three months ended
December 31, 2010 and December 31, 2009 was $88,685 and $75,487
respectively. These loans are evidenced by the Company's open-ended,
secured, on-demand promissory note, with interest payable monthly at the
prime rate plus four percent per annum, but not less than 16% per annum.
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 December 31, 2010 and March 31, 2010:
The Company leased approximately 4,032 square feet on a month-to-month
basis for its corporate headquarters' office; the monthly rental charge
is $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.
9
COMMERCE GROUP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2010
NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)
This related company has been issued an open-ended, secured, on-demand
promissory note, which amounts to $5,840,333 and $5,136,655 at December
31, 2010 and March 31, 2010, respectively; the interest for the three
months ended December 31, 2010 and December 31, 2009 was $232,101 and
$193,574 respectively. The annual interest rate is four percent plus the
prime rate, but not less than 16%, and it is payable monthly.
The Company's Directors have consented and approved the following
transactions of which the status of each are reflected as of December
31, 2010 and March 31, 2010:
The late President's wife's Rollover Individual Retirement Account (SM
RIRA) has the Company's open-ended, secured, on-demand promissory note in
the sum of $1,400,670 and $1,240,546 at December 31, 2010 and March 31,
2010, respectively; the interest for the three months ended December 31,
2010 and December 31, 2009 was $55,745 and $52,522 respectively. The
annual interest rate is three percent plus the prime rate, but not less
than 16%, and it is payable monthly.
The Directors also have acknowledged that the wife of the late President
is to be compensated for her consulting fees due to her from October 1,
1994 through December 31, 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 $570,600 and $543,600 at December 31,
2010 and March 31, 2010, 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 $457,096
and $404,841 at December 31, 2010 and March 31, 2010, respectively; the
interest for the three months ended December 31, 2010 and December 31,
2009 was $18,192 and $15,485 respectively. The annual interest rate is
three percent plus the prime rate, but not less than 16%, and it is
payable monthly.
The Law Firm which represents the Company in which the second oldest son
of the late President is a principal is owed the sum of $627,604 for
2789.35 hours of legal services rendered from July 1980 through November
30, 2010. 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 $721,743 and $468,601 at
December 31, 2010 and March 31, 2010, respectively; the interest for the
three months ended December 31, 2010 and December 31, 2009 was $27,326
and $17,577 respectively. The annual interest rate is four percent plus
the prime rate, but not less than 16%, and it is payable monthly.
10
COMMERCE GROUP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2010
NOTE 5 - RELATED PARTY TRANSACTIONS (CONTINUED)
The late President's half brother has a promissory note in the sum of
$26,428 and $23,407 as of December 31, 2010 and March 31, 2010,
respectively; the interest for the three months ended December 31, 2010
and December 31, 2009 was $1,052 and $895 respectively. The annual
interest rate is four percent plus the prime rate, but not less than 16%,
and it is payable monthly.
The Directors, by their agreement, have deferred cash payment of their
Director fees beginning on January 1, 1981, until such time as the
Company's operations are profitable. Effective from October 1, 1996 to
March 31, 2009, the Director fees were $1,200 for each quarterly meeting
and $400 for attendance at any other Directors' meeting. The Executive
Committee Director fees were $400 for each meeting. At a Board of
Directors' meeting held in June of 2009, the Directors agreed to amend
the Director fees to be $600 for attendance at any meeting retroactive to
April 1, 2009.
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. The accrued
amount due for Director fees for the periods ended December 31, 2010 and
March 31, 2010 was $37,600 and $32,800 respectively. The other salary
accruals as of December 31, 2010 and March 31, 2010 are $85,616 and
$76,616 respectively.
On January 14, 2003, the Company entered into an amended and renewed
thirty-year lease agreement with Misanse, an entity in which the Company
has a majority interest. 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.
NOTE 6 - LITIGATION
There is no pending litigation in the United States with the exception of
the CAFTA proceedings described below. On December 6, 2006, the
Company's El Salvadoran legal counsel 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) revoked two of its El Salvadoran environmental permits for mining
exploitation contrary to El Salvadoran law. 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. On April
29, 2010 the El Salvadoran Supreme Court issued a notice to counsel
rejecting the Company's complaint. In October 2008 the Directorate of
Mines notified the Company that it was not honoring the Company's
previous request for an extension of the exploration permits at the San
Sebastian and Nueva Esparta areas. The Company also challenged this
action but has not succeeded in obtaining the requested extensions and
is presently unable to conduct exploration activities.
The Company has initiated arbitration proceedings where it contends that
the Government of El Salvador frustrated its effort to develop its mining
interests in the Country of El Salvador in violation of the Central
America Free Trade Agreement-Dominican Republic (CAFTA-DR) and the
Foreign Investment Law of El Salvador. On March 17, 2009, the Company
served a written notice of its intent to submit a claim to arbitration on
the Republic of El Salvador under CAFTA-DR. The parties had 90 days to
resolve their dispute amicably, after which the Company had the right to
commence arbitration proceedings against the Republic of El Salvador to
claim significant monetary damages. When the Company received no
response to the Notice of Intent, on July 2, 2009 it submitted to the
International Centre for Settlement of Investment Disputes (ICSID) a
notice of arbitration to commence international arbitration proceedings
against the Republic of El Salvador under CAFTA-DR and the Foreign
Investment Law of El Salvador. The request for arbitration was
registered with the ICSID on August 21, 2009.
11
COMMERCE GROUP CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2010
NOTE 6 - LITIGATION (CONTINUED)
On July 1, 2010 the Company received notice from the ICSID that the three
nominations for arbitrators in the Company's action under CAFTA-DR had
all accepted their appointments. As a result, the Arbitral Tribunal was
therefore deemed to have been constituted under ICSID Arbitration Rule 6.
On July 29, 2010, the tribunal conducted an initial scheduling
conference. On August 16, 2010 El Salvador filed its preliminary
objection to the claims of the Company and its affiliate seeking
dismissal of the arbitration proceedings. The Company filed its response
to El Salvador's preliminary objection on September 15, 2010. El
Salvador then filed its reply on September 30, 2010 and the Company filed
its rejoinder on October 15, 2010. On November 1, 2010, the countries of
Nicaragua and Costa Rica filed amicus submissions. A hearing was held on
November 15, 2010 and pursuant to CAFTA-DR rules, the Tribunal is to rule
on the objections on an expedited schedule. The Company has not yet
received the Tribunal's decision. Copies of all of the mentioned
filings, including a link to the November 15, 2010 hearing, are available
on the Company's website at www.commercegroupcorp.com.
If the Company succeeds in its legal challenges or the Government of El
Salvador changes its policy, and the Company obtains the funds to do so,
the Company intends to resume its activities in the Republic of El
Salvador which are now suspended.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
The Company has reviewed the recent accounting pronouncements and does
not believe the provisions of any will have a material effect on the
financial position, results of operations or cash flows of the Company.
12
COMMERCE GROUP CORP. AND SUBSIDIARIES
SEC FORM 10-Q - DECEMBER 31, 2010
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in Item 2 contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results may materially differ from those projected in the
forward-looking statements as a result of certain risks and uncertainties
set forth in this report. Although management believes that the
assumptions made and expectations reflected in the forward-looking
statements are reasonable, there is no assurance that the underlying
assumptions will, in fact, prove to be correct or that actual results
will not be different from expectations expressed in this report.
The following discussion provides information on the results of
operations and the financial condition, liquidity and capital resources
for the third quarter periods ended December 31, 2010 and 2009. The
financial statements of the Company and the notes thereto contain
detailed information that should be referred to in conjunction with this
discussion.
OVERVIEW
All of the Company's mining interests are located in the Republic of El
Salvador, Central America. The Government of El Salvador (GOES) via the
Ministry of Economy's office issued three concessions/licenses which
have now been revoked or suspended.
At the present time, the Government of El Salvador has for all intents
and purposes, prohibited precious metal mining in the Republic of El
Salvador. The Company is unable to predict if and when this policy will
change. This has hampered not only mining activities, but also, the
Company's ability to find a suitable investment partner. The Company has
invoked the legal process to challenge the actions taken by the
Government of El Salvador against the Company.
If the Company succeeds in its legal challenges or the Government of El
Salvador changes its policy, and the Company obtains the funds to do so,
the Company intends to resume its activities in the Republic of El
Salvador which are now suspended. Primarily, 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 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.
The Company did not have a final feasibility study completed within the
past five years, therefore, a determination that the property contains
valid reserve estimates is not possible at this time.
13
COMMERCE GROUP CORP. AND ITS SUBSIDIARIES
SEC FORM 10-Q - DECEMBER 31, 2010
PART I - FINANCIAL INFORMATION (CONTINUED)
FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES
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 mineralized material.
If the Company's permits to conduct mining activity are restored, the
Company will need to raise adequate funds from outside sources for this
operation; the amount required is dependent on the targeted daily volume
of production. However, the Company estimates 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 continues to rely on its directors, officers, related parties
and others for its funding needs. It believes that the funding needed to
proceed with the 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 $ 122,549 $ 20 $ 122,569
Accounts payable - Comseb 253,967 2,928 256,895
Notes payable and accrued interest 31,465,115 393,512 31,858,627
Accruals - salaries 4,028,380 4,028,380
Accruals - legal fees 627,604 627,604
Accruals - other - Commerce 608,200 194,074 802,274
Accruals - other - Comseb 227,056 227,056
----------- -------- -----------
Total $37,105,815 $817,590 $37,923,405
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.
14
COMMERCE GROUP CORP. AND ITS SUBSIDIARIES
SEC FORM 10-Q - DECEMBER 31, 2010
PART I - FINANCIAL INFORMATION (CONTINUED)
RESULTS OF OPERATION FOR THE THREE MONTHS AND NINE MONTHS ENDED
DECEMBER 31, 2010 COMPARED TO DECEMBER 31, 2009
There are no revenues as the Company has suspended its gold production
until it is able to enter into a business arrangement. The price of gold
has stabilized at a price level that could assure a profitable operation.
The Company recorded a net loss of $1,450,349 or $.05 cents per share for
the three months ended December 31, 2010 and $4,118,860 or $.13 cents per
share for the nine months ended December 31, 2010. This compares to a
net loss of $1,213,455 or $.04 cents per share for the three months ended
December 31, 2009 and $3,591,010 or $.12 cents per share for the nine
months ended December 31, 2009.
The Company recorded interest expense in the sum of $1,255,989 during
this three-month period ended December 31, 2010 compared to $1,065,284
for the same period in 2009, and $3,598,523 during the nine-month period
ended December 31, 2010 compared to $3,050,064 for the same period in
2009. In the past the interest expense was eliminated with the interest
income earned from the Joint Venture. As stated above, the interest
expense is now included in the net loss.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial condition and results of operations are based on
the Company's consolidated financial statements, prepared in accordance
with accounting principles generally accepted in the United States of
America and contained within this report on S.E.C. Form 10-Q. There
have been no significant changes to these policies during the period
discussed in this report on Form 10-Q.
RISK FACTORS
The Company's right to explore for gold and silver and to conduct mining
at its properties in El Salvador is dependent upon permission from the
Government of El Salvador. At the present time, the Government of El
Salvador has for all intents and purposes, prohibited precious metal
mining in the Republic of El Salvador. The Company is unable to predict
if and when this policy will change. This has hampered not only mining
activities, but also, the Company's ability to find a suitable investment
partner.
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. In
October 2008 the Directorate of Mines notified the Company that it was
not honoring the Company's previous request for an extension of the
exploration permits at the San Sebastian and Nueva Esparta areas. The
Company has challenged the Government of El Salvador's actions. Reference
is made to note 6.
The Company's main objective and plan has been to operate a moderate
tonnage, low-grade, open-pit, heap-leaching operation to mine gold on its
SSGM site. 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. At the present time, the Company cannot proceed
with its plans because the Government of El Salvador has revoked the
necessary permits.
If the Company's permits to conduct mining activity are restored, the
Company will need to raise adequate funds from outside sources for its
proposed operations. There have been and will be no revenues for so long
as the Company is not in production.
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.
15
COMMERCE GROUP CORP. AND ITS SUBSIDIARIES
SEC FORM 10-Q - DECEMBER 31, 2010
PART I - FINANCIAL INFORMATION (CONTINUED)
ITEM 3. CONTROLS AND PROCEDURES
REPORT ON CONTROLS AND PROCEDURES
In connection with the preparation of this quarterly report on Form 10-Q,
an evaluation was carried out by our management of the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act") as
of December 31, 2010. Based on that evaluation management has concluded
that as of the end of the period covered by this report, the Company's
disclosure controls and procedures were not effective for the reasons
stated below.
Our management does not expect that our disclosure controls and
procedures or our internal controls will prevent all error or fraud. A
control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints and the benefits of
controls must be considered relative to their costs. Due to the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if
any, have been detected. To address the material weaknesses, we performed
additional analysis and other post-closing procedures in an effort to
ensure our consolidated financial statements included in this report have
been prepared in accordance with generally accepted accounting
principles. Accordingly, management believes that the financial
statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows
for the periods presented.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the third quarter of this fiscal year
that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
16
COMMERCE GROUP CORP. AND ITS SUBSIDIARIES
SEC FORM 10-Q - DECEMBER 31, 2010
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There is no pending litigation in the United States with the
exception of the CAFTA proceedings described below. On
December 6, 2006, the Company's El Salvadoran legal counsel
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)
revoked two of its El Salvadoran environmental permits for
mining exploitation contrary to El Salvadoran law. 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. On April 29, 2010 the El Salvadoran Supreme
Court issued a notice to counsel rejecting the Company's
complaint. In October 2008 the Directorate of Mines notified
the Company that it was not honoring the Company's previous
request for an extension of the exploration permits at the San
Sebastian and Nueva Esparta areas. The Company also challenged
this action but has not succeeded in obtaining the requested
extensions and is presently unable to conduct exploration
activities.
The Company has initiated arbitration proceedings where it
contends that the Government of El Salvador frustrated its
effort to develop its mining interests in the Country of El
Salvador in violation of the Central America Free Trade
Agreement-Dominican Republic (CAFTA-DR) and the Foreign
Investment Law of El Salvador. On March 17, 2009, the Company
served a written notice of its intent to submit a claim to
arbitration on the Republic of El Salvador under CAFTA-DR. The
parties had 90 days to resolve their dispute amicably, after
which the Company had the right to commence arbitration
proceedings against the Republic of El Salvador to claim
significant monetary damages. When the Company received no
response to the Notice of Intent, on July 2, 2009 it submitted
to the International Centre for Settlement of Investment
Disputes (ICSID) a notice of arbitration to commence
international arbitration proceedings against the Republic of
El Salvador under CAFTA-DR and the Foreign Investment Law of El
Salvador. The request for arbitration was registered with the
ICSID on August 21, 2009.
On July 1, 2010 the Company received notice from the ICSID that
the three nominations for arbitrators in the Company's action
under CAFTA-DR had all accepted their appointments. As a
result, the Arbitral Tribunal was therefore deemed to have been
constituted under ICSID Arbitration Rule 6. On July 29, 2010,
the tribunal conducted an initial scheduling conference. On
August 16, 2010 El Salvador filed its preliminary objection to
the claims of the Company and its affiliate seeking dismissal
of the arbitration proceedings. The Company filed its response
to El Salvador's preliminary objection on September 15, 2010.
El Salvador then filed its reply on September 30, 2010 and the
Company filed its rejoinder on October 15, 2010. On November
1, 2010, the countries of Nicaragua and Costa Rica filed
amicus submissions. A hearing was held on November 15, 2010
and pursuant to CAFTA-DR rules, the Tribunal is to rule on the
objections on an expedited schedule. The Company has not yet
received the Tribunal's decision. Copies of all of the
mentioned filings, including a link to the November 15, 2010
hearing, are available on the Company's website at
www.commercegroupcorp.com.
If the Company succeeds in its legal challenges or the
Government of El Salvador changes its policy, and the Company
obtains the funds to do so, the Company intends to resume its
activities in the Republic of El Salvador which are now
suspended.
Item 2. Changes in Securities
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None during this period.
Item 5. Other Information
None.
17
COMMERCE GROUP CORP. AND ITS SUBSIDIARIES
SEC FORM 10-Q - DECEMBER 31, 2010
PART II - OTHER INFORMATION (CONTINUED)
Item 6(a). Exhibits
(a) Exhibits
Exhibit No. Description of Exhibit
---------- ----------------------
31.1* Certification of President and Chief
Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2* Certification of Vice President,
Treasurer and Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1* Certification of President and Chief
Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2* Certification of Vice President,
Treasurer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
*Filed herewith
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant/Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMERCE GROUP CORP.
Registrant/Company
Date: February 11, 2011 /s/ Edward A. Machulak
-------------------------------------
President and Chief Executive Officer
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