-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ORDtqKARPfKmcadhREdq+JKDR41ymgWKnaE/3eTCAttseTatiyaw+dkeVlmkiZEC iR2tztZxZ4EkIOuslHh7Kg== 0000109757-09-000010.txt : 20090814 0000109757-09-000010.hdr.sgml : 20090814 20090814131436 ACCESSION NUMBER: 0000109757-09-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20090814 DATE AS OF CHANGE: 20090814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCE GROUP CORP /WI/ CENTRAL INDEX KEY: 0000109757 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 391942961 STATE OF INCORPORATION: WI FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07375 FILM NUMBER: 091014060 BUSINESS ADDRESS: STREET 1: 6001 N 91ST ST CITY: MILWAUKEE STATE: WI ZIP: 53225-1795 BUSINESS PHONE: 4144625310 MAIL ADDRESS: STREET 1: 6001 N 91ST ST CITY: MILWAUKEE STATE: WI ZIP: 53225 10-Q 1 jun09.txt 10-Q FOR THE PERIOD ENDED 6-30-09 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2009 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 June 30, 2009. 1 COMMERCE GROUP CORP. FORM 10-Q FOR THE FIRST QUARTER ENDED JUNE 30, 2009 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, 2009. Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statements of Changes in Shareholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to the Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 37 Item 3. Quantitative and Qualitative Disclosures about Market Risk 50 Item 4. Controls and Procedures 51 PART II. OTHER INFORMATION Item 1. Legal Proceedings 54 Item 2. Changes in Securities 54 Item 3. Default Upon Senior Securities 54 Item 4. Submission of Matters to a Vote of Security Holders 54 Item 5. Other Information 54 Item 6. Exhibits and Reports on Form 8-K 55 2 SIGNATURES: Registrant's Signature Page 55 Certification of Chief Executive Officer (Section 302) 56 Certification of Chief Financial Officer (Section 302) 57 Certification of Chief Executive Officer (Section 906) 58 Certification of Chief Financial Officer (Section 906) 59 CAUTIONARY STATEMENT FOR PURPOSED OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The matters discussed in this quarterly report on Form 10-Q, when not historical matters, are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially from projections or estimates contained herein. Such factors include, among others, the speculative nature of mineral exploration, commodity prices, production and reserve estimates, environmental and governmental regulations, availability of financing, force majeure events, and other risk factors as described from time to time in the Company's filings with the Securities and Exchange Commission. Many of these factors are beyond the Company's ability to control or predict. The Company disclaims any intent or obligation to update its forward-looking statements, whether as a result of receiving new information, the occurrence of future events, or otherwise. 3 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE CONSOLIDATED BALANCE SHEETS 06/30/09 (Unaudited) 03/31/09 ----------- -------- ASSETS ------ Current assets Cash $ 27,509 $ 38,827 Other current assets 233,977 233,977 Accounts receivable - related 246,466 246,466 Supplies held for sale 39,562 39,562 Prepaid items and deposits 11,587 14,439 ------------ ------------ Total current assets 559,101 573,270 Property, plant and equipment, net 92,325 116,325 ------------ ------------ Total assets $ 651,426 $ 689,595 ============ ============ LIABILITIES AND SHAREHOLDERS' (DEFICIT) --------------------------------------- Current liabilities Accounts payable $ 2,728 $ 16,659 Accounts payable - related 294,955 274,344 Notes and accrued interest payable to related parties 24,426,190 23,390,532 Notes and accrued interest payable to others 361,023 355,638 Accrued salaries 3,749,131 3,704,881 Accrued legal fees 512,168 506,396 Other accrued expenses - other 451,049 447,337 Other accrued expenses - related 542,200 528,400 ------------ ------------ Total current liabilities 30,339,444 29,224,187 ------------ ------------ Total liabilities 30,339,444 29,224,187 ------------ ------------ Commitments and contingencies Shareholders' (Deficit) Preferred Stock Preferred stock, $0.10 par value: Authorized 250,000 shares; Issued and outstanding 2009-none; 2008-none $ 0 $ 0 Common stock, $0.10 par value: Authorized 50,000,000 shares; Issued and outstanding: 6/30/2009 - 30,750,869 3,075,087 3/31/2009 - 30,750,869 3,075,087 Capital in excess of par value 19,579,827 19,579,827 Accumulated (deficit) (52,342,933) (51,189,506) ------------ ------------ Total shareholders' (deficit) (29,688,019) (28,534,592) ------------ ------------ Total liabilities and shareholders' (deficit) $ 651,426 $ 689,595 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 4 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED) 2009 2008 ------------ ------------ Revenues: $ 0 $ 0 ------------ ------------ Expenses: General and administrative $ 188,254 39,405 ------------ ------------ Total expenses 188,254 39,405 ------------ ------------ Net (loss) from operations $ (188,254) $ (39,405) ------------ ------------ Other income (expense) Interest expense (965,173) (805,733) ------------ ------------ Total other income (expense) (965,173) (805,733) ------------ ------------ Net (loss) before income taxes (1,153,427) (845,138) Income tax expense 0 0 ------------ ------------ Net (loss) (1,153,427) $ (845,138) ============ ============ Net (loss) per share basic/diluted $ (.04) $ (.03) ============ ============ Weighted average basic/diluted common shares outstanding 30,750,869 30,715,869 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 5 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) FOR THE FIRST QUARTER JUNE 30, 2009
Preferred Stock Common Stock --------------- --------------------------------- Capital in Accumu- Number of Par Number of Excess of lated Shares Value Shares Par Value Par Value (Deficit) --------- ----- ---------- ---------- ----------- ------------ Balances March 31, 2008 0 $0 30,715,869 $3,071,587 $19,579,827 $(21,172,723) Net (loss) for fiscal year ended March 31, 2009 $(30,016,783) Common stock issued for: Services 35,000 3,500 0 - -- ---------- ---------- ----------- ------------ Balances March 31, 2009 0 $0 30,750,869 $3,075,087 $19,579,827 $(51,189,506) Net (loss) for three months ended June 30, 2009 (1,153,427) Common stock issued: none - -- ---------- ---------- ----------- ------------ Balances June 30, 2009 0 $0 30,750,869 $3,075,587 $19,579,827 $(52,342,933) = == ========== ========== =========== =============
The accompanying notes are an integral part of these consolidated financial statements. 6 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED) 2009 2008 ------- ------- OPERATING ACTIVITIES: Net (loss) $(1,153,427) $(845,137) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Common stock issued for Directors' fees and for services rendered 0 0 Changes in assets and liabilities: Decrease (increase) in accounts receivable and other current assets/ liabilities 0 (6,220) Decrease (increase) in prepaid items and deposits 2,852 (1,546) Increase in accounts payable and other accrued expenses 6,682 11,387 Increase in accrued interest - related 959,788 805,733 Increase in accrued interest - others 5,385 0 Increase in accrued legal fees 5,771 12,139 Increase in accrued salaries 44,250 0 Increase in other accruals - related 13,800 0 Increase in other accruals 3,711 0 Net cash provided by (used in) ----------- ---------- operating activities (111,187) (23,644) INVESTING ACTIVITIES: Investment in mining resources and property, plant and equipment 0 (173,447) Cash received, scrap metal 24,000 0 ---------- --------- Net cash used by investing activities 24,000 (173,447) FINANCING ACTIVITIES: Cash received, related party notes payable 75,869 201,197 Common stock issued for cash 0 0 ---------- --------- Net cash provided by financing activities 75,869 201,197 Net increase (decrease) in cash and cash equivalents (11,318) 4,106 Cash - beg. of the period 38,827 1,308 ---------- --------- Cash - end of the period $ 27,509 $ 5,414 ========= ======== Supplemental disclosures of cash information: - --------------------------------------------- Year Ended June 30, 2009 June 30, 2008 ------------- ------------- Cash information Shares Amount Shares Amount ------ ------ ------ ------ 1. Interest expense paid in cash - - - - 2. Income taxes paid - - - - The accompanying notes are an integral part of these consolidated financial statements. 7 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (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 previously licensed mining exploration areas neighboring the SSGM site. 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 believes this notice is unwarranted and an appeal is pending. 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 suspended the San Cristobal Mill and Plant ("SCMP") operations (operations ceased on December 31, 1999). 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 provided 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 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. 8 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) 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. However, until these legal matters are resolved, the Company is unable to proceed with either exploration for gold or any production of gold. Considering the length of time the permit for the San Cristobal Mill and Plant has been revoked, the Company is considering terminating its lease and liquidating the equipment. 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, if permitted by the Government of El Salvador. In order to continue to follow its goal to conduct the Joint Venture's exploration, exploitation, development expansion programs, and the production of gold from the SSGM open-pit, heap-leaching operation, it is necessary for the Company to obtain funds from outside sources. The Company may have to borrow funds by issuing open-ended, secured, on-demand or unsecured promissory notes, by selling its shares to its directors, officers and other interested accredited investors, or by entering into a joint venture, merger, or by developing an acceptable, creative form of a business combination. On July 18, 2008 the Company entered into a non-binding letter of intent for a proposed acquisition/merger with Voter Communications, Inc. The letter of intent which discloses the general terms and conditions was attached as Exhibit 99.1 of the Form 8-K that the Company filed with the SEC on July 23, 2008. Given the subsequent, unexpected downward trend in the primary and secondary public equity markets, the parties do not believe that it is feasible to pursue the objectives of the proposed merger at this time. Based on this, Voter Communications, Inc. has arranged for alternative private equity financing to accomplish its business objectives in 2009. On March 7, 2008, Commerce entered into a tentative arrangement with another company to perform exploration in El Salvador. However, that company has decided not to continue its efforts to enter into a transaction relating to Commerce's San Sebastian Gold Mine in the Country of El Salvador. Therefore, Commerce's directors and officers continue to seek a compatible financial or business arrangement. For the fiscal year ended March 31, 2009, the Company performed an impairment test over long-lived assets including mining resources and property, plant and equipment. Testing for impairment of long-lived assets requires significant management judgment regarding future cash flows, asset lives, and discount rates. The Company considered a number of factors including the cancellation of its permits by the Government of El Salvador, the fact that there has been no resolution of the Company's legal challenges to this action initiated in El Salvador, the unwillingness of the El Salvadoran Government to engage in any discussions after the Company gave notice of its intent to file for arbitration under CAFTA-DR on March 17, 2009 (and consequently, the need to file for arbitration before the International Centre for Settlement of Investment Disputes (ICSID) on July 2, 2009), and public statements made by members of the Government of El Salvador elected in March 2009. 9 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) Given all of these factors and events, the Company determined that its assets have been impaired and the Company has made significant adjustments to account for impairment. A pre-tax charge of $21,213,950 was recognized in the fourth quarter ending March 31, 2009, fully impairing the mining resource assets. Additionally, a pre-tax charge of $4,835,353 was recognized in the fourth quarter ending March 31, 2009, related to impairment of plant and equipment. The Company has not impaired plant and equipment for the amount of $116,324 which the Company believes to be fully recoverable. (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. 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. 10 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) (2) SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------ CONSOLIDATED STATEMENTS The Joint Venture and the following subsidiaries are all majority-owned by the Company and are included in the consolidated financial statements of the Company. All significant intercompany balances and transactions have been eliminated. Not included in the consolidated statements is Mineral San Sebastian, S.A. de C.V. (Misanse) as the Company does not have corporate control of Misanse because the majority of Misanse's elected directors must be El Salvadoran shareholders. Charter/Joint Venture --------------------- Included in the Consolidated Statements % Ownership Place Date - --------------------------------------- ----------- ----- ---- Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959 Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974 San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970 San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968 Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964 Commerce/Sanseb Joint Venture ("Joint Venture") 90.0 Wisconsin & El Salvador 09/22/1987 Not included in the Consolidated Statements - ------------------------------------------- Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0 El Salvador 05/08/1960 MINORITY INTEREST During the first quarter periods ended June 30, 2009 and 2008, 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 Other current assets consist primarily of assets held in an employee benefit account stated at cost of $101,529 as of June 30, 2009 and 2008. The funds are to be used primarily to pay the El Salvadoran employee medical benefits and pension benefits as required by the El Salvadoran Government and for other employee purposes. The El Salvadoran vacation and Christmas bonus payments are due when earned while the severance pay is due and payable at such time when the employee has been discharged, retired, permanently laid off, death or when incapable of working due to permanent health/work related conditions. The Company has sole control and jurisdiction over this account and to the best of the Company's knowledge, there is absolutely no condition, right, or requirement by the El Salvadoran authorities to have such funds in any form of a reserve. Also included in other current assets are certain precious stones and jewelry stated at cost of $132,448 as of June 30, 2009 and 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. The sale has not yet occurred. 11 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) 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 $246,466 $ 0 $246,466 Accounts payable - related parties $247,494 $47,461 $294,955 On March 26, 2008, at a Misanse shareholders' meeting held at the Company's City of San Miguel, El Salvador office, the Misanse shareholders and the Misanse Directors approved, confirmed and ratified the amount that Misanse owed the Company for advances and other obligations the Company incurred on behalf of Misanse. The amount due to Misanse at that time was also approved, ratified and confirmed. The Company is of the opinion that it is appropriate to record the fact that Misanse owes the Company $247,494 and that the Company owes Misanse $592,723 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 and left a balance of $246,466 in accounts receivable. More disclosure regarding the revocation of the mining permits and related issues can be found in the "Impairment of Long-Lived Assets" note that follows. SUPPLIES HELD FOR SALE Supplies held for sale 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. 12 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) MINING RESOURCES INVESTMENT The Company, in order to avoid expense and revenue unbalance 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. 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 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. IMPAIRMENTS OF LONG-LIVED ASSETS The Company evaluates the carrying value of the unamortized balances of long-lived assets to determine whether any impairment of these assets has occurred or whether any revision to the related amortization periods should be made, in accordance with Statement of Financial Accounting Standards No. 144," Accounting for the Impairment or Disposal of Long-Lived Assets" ('SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Those long-lived assets include the mine development, mineral interest, mining properties, and property, plant and equipment. This evaluation is based on management's projections of the undiscounted future cash flows associated with each asset. If management's evaluation were to indicate that the carrying values of these assets were impaired, such impairment would be recognized by a write down of the applicable asset. 13 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) For the fiscal year ended March 31, 2009, the Company performed an impairment test over long-lived assets including mining resources and property, plant and equipment. Testing for impairment of long-lived assets requires significant management judgment regarding future cash flows, asset lives, and discount rates. The Company considered a number of factors including the cancellation of its permits by the Government of El Salvador, the fact that there has been no resolution of the Company's legal challenges to this action initiated in El Salvador, the unwillingness of the El Salvadoran Government to engage in any discussions after the Company gave notice of its intent to file for arbitration under CAFTA-DR on March 17, 2009 (and consequently, the need to file for arbitration before the International Centre for Settlement of Investment Disputes (ICSID) on July 2, 2009), and public statements made by members of the Government of El Salvador elected in March 2009. Given all of these factors and events, the Company determined that its assets have been impaired and the Company has made significant adjustments to account for impairment. A pre-tax charge of $21,213,950 was recognized in the fourth quarter ending March 31, 2009, fully impairing the mining resource assets. Additionally, a pre-tax charge of $4,835,353 was recognized in the fourth quarter ending March 31, 2009, related to impairment of plant and equipment. The Company has not impaired plant and equipment for the amount of $116,324 which the Company believes to be fully recoverable. 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. 14 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS 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. In May 8, 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, the Hierarchy of Generally Accepted Accounting Principles, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature. The Company is currently assessing the impact of SGAS No. 162 on its financial position and results of operations. The FASB has issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee Insurance Contracts. SFAS No. 163 clarifies how SFAS No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts issued by insurance enterprises, and addresses the recognition and measurement of premium revenue and claim liabilities. It requires expanded disclosures about contracts, and recognition of claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (a) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations, and (b) the insurance enterprise's surveillance or watch list. The Company is currently evaluating the impact of SFAS No. 163. In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments." This staff position requires disclosures about the fair value of financial instruments whenever a public company issues financial information for interim reporting periods. This staff position is effective for interim reporting periods ending after June 15, 2009. The Company is currently evaluating the impact that the adoption of FASB Staff Position No. FAS 107-1 and APB 28-1 will have on its consolidated financial statements. 15 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, "Subsequent Events" ("FAS 165"). FAS 165 establishes the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. FAS 165 is effective for interim and fiscal periods ending after June 15, 2009. In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140" ("SFAS 166"). SFAS 166 revises SFAS No. 140 and will require entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk with respect to the assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of SFAS 166 will have on its consolidated financial statements. In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"). SFAS 167 amends certain requirements of FASB Interpretation No. 46(R) to improve financial reporting by companies involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS 167 is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of SFAS 167 will have on its consolidated financial statements. In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles" ("FAS 168"). FAS 168 replaces FAS 162, "The Hierarchy of Generally Accepted Accounting Principles." FAS 168 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. FAS 168 is effective for interim and fiscal periods ending after September 15, 2009. 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. The Financial Accounting Standards Board (FASB) has issued Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of FIN 48, the Company performed a review of its material tax positions. At the adoption date of January 1, 2007, the Company had no unrecognized tax benefit which would affect the effective tax rate. As of March 31, 2009, the Company had no accrued interest and penalties related to uncertain tax positions. 16 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) LOSS PER COMMON SHARE The Company has in the past years reported its "Earnings per Share" (EPS) which presently complies with the provisions of Statement of Financial Accounting Standards No. 128 (SFAS No. 128). As required by this standard, the Company, if applicable, could report two earnings per share amounts, basic net loss and diluted net loss per share. Basic net loss per share is computed by dividing loss reportable to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator). The computation of diluted net loss per share is similar to the computation of basic net loss per share except that the denominator is increased to include the dilutive effect of the additional common shares that would have been outstanding if all convertible securities, stock options, rights, share loans etc. had been converted to common shares, however, there were no such dilutive items as of June 30, 2009 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. The number of shares that could be issued according to note 10 stock rights, but are not included in fully diluted EPS due to antidilutive effect are as follows: 19,249,131 and and 19,284,131 for the quarters ended June 30, 2009 and 2008 respectively. Shares issued on actual conversion, exercise, or satisfaction of certain conditions for which the underlying potential common shares were antidilutive shall be included in the computation as outstanding common shares from the date of conversion, exercise, or satisfaction of those conditions, respectively. Therefore, there is no difference in the loss or the number of basic or diluted shares. The computation of loss per share of common stock is based on the weighted average number of shares outstanding at the date of the financial statements. Net Loss Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- For the period ended June 30, 2009: Basic/diluted EPS Net loss to common Shareholders $(1,153,427) 30,750,869 $ (0.04) ============ =========== For the period ended June 30, 2008: Basic/diluted EPS Net loss to common Shareholders $ (845,138) 30,715,869 $ (0.03) ============ =========== FOREIGN CURRENCY The Company conducts the majority of its operations in the Republic of El Salvador, Central America. Currently, El Salvador is on the U.S. dollar system and therefore all transactions since January 1, 2001 are reported in U.S. dollars. STOCK OPTIONS Prior to January 1, 2006, the Company accounted for stock compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations ("APB 25"), as permitted by FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). No stock-based employee compensation cost was recognized for stock option awards in the consolidated statements of operations for the periods prior to January 1, 2006, as all options granted under those plans had an exercise price equal to the market value of the Common Stock on the date of the grant in accordance with APB 25. 17 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) 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. On January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements. SFAS No. 157 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows: * Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. * Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. * Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement. The fair value of the Company's cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate carrying value based on their effective interest rates compared to current market prices. The Company's financial instruments consist of cash, receivables, payables, and notes payable. The carrying amount of cash, receivables and payables approximates fair value because of the short-term nature of these items. The carrying amount of the notes payable approximates fair value as the individual borrowings bear interest at market interest rates. 18 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) (3) INVESTMENT IN PROPERTY, PLANT, EQUIPMENT AND MINING RESOURCES - ------------------------------------------------------------------ The following is a summary of the investment in property, plant, equipment, mining resources and development costs:
June 30, 2009 June 30, 2008 ---------------------------------------- -------------------------- Accumulated Accumulated Depre- 3-31-09 Depre- Cost ciation Impairment Net Cost ciation Net ---- ----------- ---------- --- ---- ----------- --- Min- eral Prop- erties and De- ferred De- velop- ment $ 0 $ 0 $ 0 $ 0 $20,904,053 $ 0 $20,904,053 Prop- erty, Plant and Equip- ment 7,179,819 (2,252,143) (4,835,352) 92,324 7,105,176 (2,252,143) 4,853,033 ---------- ------------ ------------ ------- ------------ ----------- ----------- $7,179,819 $(2,252,143) $(4,835,352) $92,324 $27,367,511 $(2,252,143) $25,115,368 ========== ============ ============ ======= ============ ============ ===========
Vehicles, office, mining and laboratory equipment, buildings, etc. are stated at cost and are depreciated using the straight-line method over estimated useful lives of three to ten years. Maintenance and repairs are charged to expense as incurred. Gains or losses on dispositions are included in operations. Reference is made to Property, Plant and Equipment in note (2) Significant Accounting Policies. For the fiscal year ended March 31, 2009, the Company performed an impairment test over long-lived assets including mining resources and property, plant and equipment. Testing for impairment of long-lived assets requires significant management judgment regarding future cash flows, asset lives, and discount rates. The Company considered a number of factors including the cancellation of its permits by the Government of El Salvador, the fact that there has been no resolution of the Company's legal challenges to this action initiated in El Salvador, the unwillingness of the El Salvadoran Government to engage in any discussions after the Company gave notice of its intent to file for arbitration under CAFTA-DR on March 17, 2009 (and consequently, the need to file for arbitration before the International Centre for Settlement of Investment Disputes (ICSID) on July 2, 2009), and public statements made by members of the Government of El Salvador elected in March 2009. Given all of these factors and events, the Company determined that its assets have been impaired and the Company has made significant adjustments to account for impairment. A pre-tax charge of $21,213,950 was recognized in the fourth quarter ending March 31, 2009, fully impairing the mining resource assets. Additionally, a pre-tax charge of $4,835,353 was recognized in the fourth quarter ending March 31, 2009, related to impairment of plant and equipment. The Company has not impaired plant and equipment for the amount of $116,324 which the Company believes to be fully recoverable. 19 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) (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 June 30, 2009 and 2008, the Company, Sanseb and three of the Company's subsidiaries have invested (including carrying costs) the following in its Joint Venture: 2009 2008 ---- ---- The Company's advances (net of gold sale proceeds) since 09/22/87 $ 79,756,706 $ 73,169,823 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 55,656,512 52,441,547 ------------ ------------ Total: $142,429,578 $132,627,730 Advances by the Company's three subsidiaries 590,265 590,265 ------------ ------------ Combined total investment $143,019,843 $133,217,995 ============ ============ 20 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) 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 the 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. The Joint Venture plans to resume its exploration and expansion program and to identify and develop gold ore reserves in the area surrounding the SSGM, if permitted to do so by the Government of El Salvador and if the necessary financing is obtained. 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 believes this notice is unwarranted and an appeal is pending. 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, if any; 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 replaced 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 is contesting these actions. 21 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) 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 covered an area of 41 square kilometers and included 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 provided that it may be extended for two two-year periods, or for a total of eight years. In October 2008 the Directorate of Mines notified the Company that it was not honoring the Company's request for an extension of the exploration permit. The Company is contesting these actions. 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. 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 permit at the Nueva Esparta area. The Company is contesting these actions. EL SALVADOR MINERAL PRODUCTION FEES As of July 2001, a series of revisions to the El Salvador Mining Law offered to make exploitation more attractive. The principal change was that the fee payable to the GOES was 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 was retroactive to November 12, 2003 and the monthly lease payments were $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. 22 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) On March 25, 2008 a nineteen-month lease retroactive to November 12, 2006 was executed by and between Corsain and the Company. The total lease payment for this nineteen-month period is $18,608.21. Reference is made to Exhibit 10.16 of the Company's Form 10-K for its fiscal year ended March 31, 2008, for a copy of this lease. The lease was renewed on June 12, 2008 for a six-month period to expire on December 11, 2008, with an option to subsequently renew it for additional three-month periods. The Company has chosen to exercise this option and has renewed the lease through June of 2009. 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. Because of the length of time that the permit status of the SCMP has gone unresolved, the Company is now in the process of liquidating its equipment and eventually will be terminating its lease of the land on which the SCMP is located. MODESTO MINE REAL ESTATE The Company, through its late 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 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 late President, owns approximately 63 acres at the Modesto Mine; and the Joint Venture leases the SCMP land and buildings on which its mill, plant and equipment are located. In addition, the Joint Venture from time to time has entered into term agreements with others to have access to other properties. Payment for these agreements is based on the production of gold payable in the form of royalties. The Company also leases on a month-to-month basis approximately 4,032 square feet of office space in Milwaukee, Wisconsin. 23 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) (6) NOTES PAYABLE AND ACCRUED INTEREST - --------------------------------------- 06/30/09 03/31/09 -------- -------- 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) $24,426,190 $23,390,532 Other Short-term notes and accrued interest (June 30, 2009, $226,023 and March 31, 2009, $220,638) 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. 361,023 355,638 ----------- ----------- Total: $24,787,213 $23,746,170 (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 $3,455,786 at June 30, 2009 and March 31, 2009, respectively. The current President has also agreed to accrue his salary and vacation pay beginning April 1, 2008, which totals $225,729 and $184,479 as of June 30, 2009 and March 31, 2009, respectively. In addition, with the consent and approval of the Directors, the late President of the Company, as an individual and not as a Director or Officer of the Company, entered into the following financial transactions with the Company, the status of which is reflected as of June 30, 2009 and March 31, 2009: The amount of cash funds which the Company has borrowed from its late President from time to time, together with accrued interest, amounts to $16,315,846 and $15,673,362 at June 30, 2009 and March 31, 2009, respectively; the interest for the periods ended June 30, 2009 and March 31, 2009 was $642,484 and $2,334,081 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 $1,748,736 and $1,679,874 at June 30, 2009 and March 31, 2009, respectively, including accrued interest, from the Company's late President's Rollover Individual Retirement Account (ELM RIRA). The interest for the periods ended June 30, 2009 and March 31, 2009 was $68,862 and $250,003 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. 24 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) 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 had made a practice of issuing him the number of restricted shares of common stock equivalent to the number of shares sold or pledged, plus an additional number of shares equivalent to the amount of accrued interest calculated at the prime rate plus three percent per annum and payable monthly. The Company receives all of the net cash proceeds from the sale or from the pledge of these shares. The Company did not borrow any common shares during this fiscal year. The share loans, if any, are all in accordance with the terms and conditions of Director-approved, open-ended loan agreements dated June 20, 1988, October 14, 1988, May 17, 1989, and April 1, 1990. On February 16, 1987, the Company granted its late President, by unanimous consent of the Board of Directors, compensation in the form of a bonus in the amount of two percent of the pre-tax profits realized by the Company from its gold mining operations in El Salvador, payable annually over a period of twenty years commencing on the first day of the month following the month in which gold production commences. The late President, as an individual, and not as a Director or Officer of the Company, presently owns a total of 467 Misanse common shares. There are a total of 2,600 Misanse common shares issued and outstanding. Also with the consent and approval of the Directors, a company in which the late President has a 55% ownership, General Lumber & Supply Co., Inc. (GLSCO), entered into the following agreements, and the status is reflected as of June 30, 2009 and March 31, 2009: 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. 25 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) 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 $4,358,242 and $4,112,818 at June 30, 2009 and March 31, 2009, respectively; the interest for the periods ended June 30, 2009 and March 31, 2009 was $169,554 and $586,238 respectively. The annual interest rate is four percent plus the prime rate, but not less than 16%, and it is payable monthly. The Company's Directors have consented and approved the following transactions of which the status of each are reflected as of June 30, 2009 and March 31, 2009: 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 $1,216,723 and $1,168,811 at June 30, 2009 and March 31, 2009, respectively; the interest for the periods ended June 30, 2009 and March 31, 2009 was $47,912 and $173,945 respectively. The annual interest rate is three percent plus the prime rate, but not less than 16%, and it is payable monthly. The Directors also have acknowledged that the wife of the late President is to be compensated for her consulting fees due to her from October 1, 1994 through September 30, 2000 or 72 months at $2,800 a month, and thereafter at $3,000 per month. The Company owes her as an individual and as a consultant, the sum of $516,600 and $507,600 at June 30, 2009 and March 31, 2009, 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 $358,716 and $344,591 at June 30, 2009 and March 31, 2009, respectively; the interest for the periods ended June 30, 2009 and March 31, 2009 was $14,126 and $51,283 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 $512,167.50 for 2,276.50 hours of legal services rendered from July 1980 through April 30, 2009. 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 $407,186 and $391,152 at June 30, 2009 and March 31, 2009, respectively; the interest for the periods ended June 30, 2009 and March 31, 2009 was $16,034 and $44,970 respectively. The annual interest rate is four percent plus the prime rate, but not less than 16%, and it is payable monthly. 26 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) The late President's half brother has a promissory note in the sum of $20,740 and $19,923 as of June 30, 2009 and March 31, 2009, respectively; the interest for the periods ended June 30, 2009 and March 31, 2009 was was $817 and $2,965 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 June 30, 2009 and March 31, 2009 was $25,600 and $20,800 respectively. The other salary accruals as of June 30, 2009 and March 31, 2009 are $293,345 and $64,616 respectively. (8) COMMITMENTS AND CONTINGENCIES - ---------------------------------- Reference is made to Notes 2, 4, 5, 6, 7, 10, 11, 12, 13 and 16. 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. These legal proceedings are pending. 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. 27 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) 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. 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. These legal proceedings are pending. 28 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) 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 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: 29 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) Company Net Advances to the Joint Venture during the fiscal quarter ended June 30, 2009 Total Interest Advances Charges -------- ------- Beginning balance $78,235,144 $57,903,982 Advances during fiscal period ended June 30, 2009 1,521,562 1,423,200 ----------- ----------- Total Company's net advances 79,756,706 59,327,182 Advances by three of the Company's subsidiaries 590,265 0 ----------- ----------- Total net advances as of June 30, 2009 $80,346,971 $59,327,182 (9) INCOME TAXES - ----------------- At March 31, 2009, the Company and its subsidiaries, excluding the Joint Venture, have estimated net operating losses remaining in a sum of approximately $16,132,208, which may be carried forward to offset future taxable income; the net operating losses expire at various times up until the year 2023. The Financial Accounting Standards Board (FASB) has issued Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of FIN 48, the Company performed a review of its material tax positions. At the adoption date of January 1, 2007, the Company had no unrecognized tax benefit which would affect the effective tax rate. As of March 31, 2009, the Company had no accrued interest and penalties related to uncertain tax positions. 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. 30 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) March 31 -------- Deferred Tax Assets: 2009 Rate 2008 Rate ---- ---- ---- ---- Net Operating Loss Carry-forwards $ 5,484,951 34% $ 4,462,123 34% Valuation Allowance for Deferred Tax Assets (5,484,951) (34%) (4,462,123) (34%) ------------ ----- ------------ ----- Net Deferred Tax Assets: $ 0 0 $ 0 0 The components of current income tax expense as of March 31, 2009 and 2008 respectively are as follows: As of March 31 2009 2008 ---- ---- Current federal tax expense $ 0 $ 0 Current state tax expense $ 0 $ 0 Change in NOL benefits $(1,022,828) $(842,351) Change in valuation allowance $ 1,022,828 $ 842,351 Income tax expense $ 0 $ 0 (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 30,750,869 and 30,715,869 shares were issued and outstanding as of March 31, 2009 and 2008. 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. There were no Company common shares issued during the periods ended June 30, 2009 and March 31, 2009. 31 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) b. PREFERRED STOCK There were no preferred shares issued and outstanding for the periods ending June 30, 2009 or March 31, 2009. 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 for the periods ending June 30, 2009 or March 31, 2009. 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, 2009, 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. No shares were issued during this first quarter, leaving a balance of 925,147 unissued Form S-8 common shares. 32 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) g. COMMERCE GROUP CORP. EMPLOYEE BENEFIT ACCOUNT (CGCEBA) This account was established for the purpose of compensating the Company's employees for benefits such as retirement, severance pay, and all other related compensation that is mandatory under El Salvadoran labor regulations, and/or as determined by the Officers of the Corporation. The Directors provide the Officers of the Company with the authority to issue its common shares to the CGCEBA on an as needed basis. Under this plan, payment can be made to any employee of the Company or the Company's subsidiaries. The CGCEBA has sold some of the shares issued to the CGCEBA from time to time during this fiscal year to meet its obligations primarily to its El Salvadoran employees. As of April 1, 2008, 800,000 common shares remained in the account. During this fiscal period no shares were added and no shares were sold, leaving a balance of 800,000 common shares as of June 30, 2009. (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. Also, 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 believes this notice is unwarranted and an appeal is pending. On March 18, 2009, the Company filed a Securities and Exchange Commission Form 8-K disclosing that the Company and San Sebastian Gold Mines, Inc. delivered a Notice of Intent to commence international arbitration proceedings against the Government of El Salvador under the Central America Free Trade Agreement-Dominican Republic (CAFTA-DR). The Company contends that the Government of El Salvador frustrated its effort to develop its mining interests in the country of El Salvador in violation of 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 Government of El Salvador to claim significant monetary damages. Since the Company received no response to the Notice of Intent, it submitted to the International Centre for Settlement of Investment Disputes (ICSID) a notice of arbitration to commence international arbitration proceedings against the Government of El Salvador under CAFTA-DR on July 2, 2009. 33 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) (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. It does not consider the underlying risk at this time with its El Salvadoran bank to be significant, although, there is a concentration of credit risk related to all operations taking place in a foreign jurisdiction whose laws are different from those in the U.S. Also, the civil and economic factors of El Salvador are different. 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) 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 other segments are those activities that are combined for reporting purposes. Mining El Salvador, Corporate Central America Headquarters ---------------------- ------------ Fiscal period ended 6/30/09 Sales and revenues $ 0 $ 0 Depreciation & amortization 0 0 Operating income (loss) 0 (1,153,427) Total assets 310,067 249,034 Capital expenditures 0 0 Fiscal period ended 6/30/08 Sales and revenues $ 0 $ 0 Depreciation & amortization 0 0 Operating income (loss) 0 (845,138) Total assets 20,662,867 241,186 Capital expenditures 145,026 0 34 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) (14) QUARTERLY FINANCIAL DATA - ----------------------------- The following is a tabulation of the quarterly operating results for the quarters ended June 30, 2009 and June 30, 2008: Per Share Operating Basic/Diluted Net Revenues Net (Loss) Income/(Loss) --------- ---------- ----------------- First quarter 6/30/09 $0 $(1,153,427) $.04 Per Share Operating Basic/Diluted Net Revenues Net (Loss) Income/(Loss) -------- ---------- ----------------- First quarter 6/30/08 $0 $(845,138) $.03 (15) 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 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 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, if permitted by the Government of El Salvador. The substantial increase in the price of gold--the highest in 25 years--should increase investors' interest. 35 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2009 (CONTINUED) For the fiscal year ended March 31, 2009, the Company performed an impairment test over long-lived assets including mining resources and property, plant and equipment. Testing for impairment of long-lived assets requires significant management judgment regarding future cash flows, asset lives, and discount rates. The Company considered a number of factors including the cancellation of its permits by the Government of El Salvador, the fact that there has been no resolution of the Company's legal challenges to this action initiated in El Salvador, the unwillingness of the El Salvadoran Government to engage in any discussions after the Company gave notice of its intent to file for arbitration under CAFTA-DR on March 17, 2009 (and consequently, the need to file for arbitration before the International Centre for Settlement of Investment Disputes (ICSID) on July 2, 2009), and public statements made by members of the Government of El Salvador elected in March 2009. Given all of these factors and events, the Company determined that its assets have been impaired and the Company has made significant adjustments to account for impairment. A pre-tax charge of $21,213,950 was recognized in the fourth quarter ending March 31, 2009, fully impairing the mining resource assets. Additionally, a pre-tax charge of $4,835,353 was recognized in the fourth quarter ending March 31, 2009, related to impairment of plant and equipment. The Company has not impaired plant and equipment for the amount of $116,324 which the Company believes to be fully recoverable. (16) UNAUDITED FINANCIAL STATEMENTS - ----------------------------------- The consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The financial information included herein is unaudited; however, the Company believes that the information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary to be a fair presentation of the financial position, results of operations, and cash flows for the interim periods. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in connection with the financial statements and the notes thereto included in the Company's latest annual report and the filing of the required Securities and Exchange Commission annual Form 10-K. 36 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------- The following discussion provides information on the results of operations and the financial condition, liquidity and capital resources for the first quarter periods ended June 30, 2009 and 2008. 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 great potential for developing gold and silver ore reserves. The Company is in the precious metals exploration business with all of its mining interests presently located in the Republic of El Salvador, Central America. The Company's objectives 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 strategies to accomplish these goals include, whether by Commerce or through an arrangement with another respected company, resolving its permit issues with the El Salvadoran Government, 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 39 years with its employees, earning profits and respecting the citizens surrounding its mining properties. 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 March 7, 2008. Commerce entered into a tentative arrangement with another company to perform exploration in El Salvador. However, that company has decided not to continue its efforts to enter into a transaction relating to Commerce's San Sebastian Gold Mine in the Republic of El Salvador. The Company has invoked the legal process to challenge the actions taken by the Government of El Salvador against the Company. 37 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) 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. 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. In the past, the Company had the following exploitation/exploration licenses, and is pursuing legal remedies in an effort to reinstate the licenses: Acres ----- Exploitation/Exploration Department or Exploi- Explor- Concessions/Licenses Location tation ation Total ------------------------ ------------- ------ ------- ----- Renewed San Sebastian Gold Mine La Union 304 1,394 1,698 New San Sebastian Gold Mine La Union/Morazan 8,372 8,372 Nueva Esparta La Union/Morazan 11,115 11,115 --- ------ ------ Total Acreage 304 20,881 21,185 The San Sebastian Gold Mine has four contiguous target areas in the 10,070 acre area (1,573 square miles): the San Sebastian Gold Mine; the Cosiguina Hill; the San Juan Hill; and the El Salazar area. Most of the exploration conducted in the past was on the San Sebastian Gold Mine, the Cosiguina Hill and the El Salazar area. Very little exploration has been performed on the San Juan Hill. A large part of the San Sebastian Exploration License area remains unexplored. Also included in the New San Sebastian Exploration License area were 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 consisted of 11,115 acres (17.36 square miles) of land to explore. Included in the exploration area were 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 is over one and one half miles in length and about five to over 30 feet in width. This area is targeted to be one of the first areas to be drilled. 38 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) On July 18, 2008 the Company entered into a non-binding letter of intent for a proposed acquisition/merger with Voter Communications, Inc. The letter of intent which discloses the general terms and conditions was attached as Exhibit 99.1 of the Form 8-K that the Company filed with the SEC on July 23, 2008. Given the subsequent, unexpected downward trend in the primary and secondary public equity markets, the parties do not believe that it is feasible to pursue the objectives of the proposed merger at this time. Based on this, Voter Communications, Inc. has arranged for alternative private equity financing to accomplish its business objectives in 2009. POTENTIAL RESERVES AND MINERALIZED MATERIAL - ------------------------------------------- Because the Company does not have a final feasibility study completed within the past five years, a determination that the property contains reserves is not possible at this time. The Company does believe that the property contains substantial quantities of mineralized material containing gold and silver. There are a number of uncertainties inherent in estimating quantities of mineralized material, however, 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. Further, availability of permits, changes in operating and capital costs, and other factors could materially and adversely affect estimates of commercially useful mineralized material. It is expected that the carbon-in-leach process will be used to produce gold at the SSGM. As the solution percolates through the heap, gold is dissolved from the mineralized material into solution. This solution is collected and processed with activated carbon, which precipitates the gold out of solution and onto the carbon. Through the subsequent processes of acid washing and pressure stripping, the gold is returned to a solution in a more highly concentrated state. This concentrated solution of gold is then processed in an electrowinning circuit, which re-precipitates the gold onto cathodes for melting into gold dore bars. 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 were the amount and timing of gold to be recovered. Although the Company could 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 were based on laboratory leaching models, which approximated the recovery from gold mineralized material under leach. From this data the Company estimated the amount of gold that could be recovered and the time it would take for recovery. If and 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. 39 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) 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. 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 set up an open-pit, heap-leach operation at the San Sebastian Gold Mine site U.S. $19 million net For preliminary exploration for a part or for all of the 10,000 acres of the New San Sebastian Exploration License area consisting of three former mine operations 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 U.S. $ 2 million net Contingent fund availability, inflation costs and for accelerating the above projects U.S. $ 7 million net ---------------------- Total U.S. $30 million net 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 the following three concessions/licenses which have now been revoked or suspended: 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 gave the Company the right to extract and process mineralized material to produce gold and silver from the San Sebastian Gold Mine site. 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. 40 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) 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 license gave 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. 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 believes this notice is unwarranted and an appeal is pending. 3. On May 25, 2004 the GOES granted to the Company the Nueva Esparta Exploration License consisting of 11,115 acres of area to explore. This exploration license area abuts the New San Sebastian Exploration License area and it has eight formerly operated gold/silver mines: the Grande Mine, the Las Pinas Mine, the Oro Mine, the Montemayor Mine, the Banadero Mine, the Carrizal Mine, the La Joya Mine and the Copetillo Mine. The Company did exploration work on the Montemayor Mine from 1995 - 1997. 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 believes this notice is unwarranted and an appeal is pending. The Company is a U.S. Wisconsin chartered corporation. Its primary asset is 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). FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------------------- 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. 41 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) The Company estimates that it will need 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 expected to be 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 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 proposed exploration and 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. 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 $ 47,462 $ 20 $ 47,482 Accounts payable - Comseb 247,494 2,708 250,202 Notes payable and accrued interest 24,426,190 361,023 24,787,213 Accruals - salaries 3,749,131 3,749,131 Accruals - legal fees 512,168 512,168 Accruals - other - Commerce 542,200 185,221 727,421 Accruals - other - Comseb 265,827 265,827 ----------- -------- ----------- Total $29,524,645 $814,799 $30,339,444 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. 42 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) 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 this 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 this 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. 43 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) RESULTS OF OPERATION FOR THE FISCAL PERIOD ENDED JUNE 30, 2009 COMPARED TO JUNE 30, 2008 - ----------------------------------------------------------------------- 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 $1,153,427 or $.04 cents per share for its fiscal quarter ended June 30, 2009. This compares to a net loss of $845,138 or $.03 cents per share for the fiscal year ended June 30, 2008. The Company has chosen to stop capitalizing mining expenses due to the changes in the El Salvadoran political climate and economy. This has caused a significantly greater loss in the most recent period. There was no current or deferred provision for income taxes during the fiscal quarter ended June 30, 2009 or 2008. Additionally, even though the Company has an operating tax loss carry forward, the Company has previously recorded a net deferred tax asset due to an assessment of the "more likely than not" realization criteria required by the Statement of Financial Accounting Standards No. 109, Accounting for Taxes. Since the Company was not in production, inflation did not have a material impact on operations in the fiscal quarters ended June 30, 2009 or 2008. 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 $965,173 was recorded by the Company during this fiscal quarter compared to $805,733 for the same period in 2008, 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. 44 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) CRITICAL ACCOUNTING POLICIES AND ESTIMATES - ------------------------------------------ The ensuing discussion and analysis of financial condition and results of operations are based on the Company's consolidated financial statements, prepared in accordance with accounting principles generally accepted in the United States of America and contained within this report on S.E.C. Form 10-K. Certain amounts included in or affecting the Company's financial statements and related disclosures must be estimated, requiring that certain assumptions be made with respect to values or conditions which cannot be made with certainty at the time the financial statements are prepared. Therefore, the reported amounts of the Company's assets and liabilities, revenues and expenses, and associated disclosures with respect to contingent assets and obligations are necessarily affected by these estimates. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates and units-of-production amorti- zation 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: 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. 45 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2008 PART I - FINANCIAL INFORMATION (CONTINUED) The Company reviews, on an as needed basis, its estimates of costs of compliance with environmental laws and the cleanup of various sites, including sites in which governmental agencies have designated the Company as a potentially responsible party. When it is probable that obligations have been incurred and where a minimum cost or a reasonable estimate of the actual costs of compliance or remediation can be determined, the applicable amount is accrued. Actual costs can differ from estimates due to changes in laws and regulations, discovery and analysis of site conditions and changes in technology. The Company makes certain estimates, which may include various tax planning strategies, in determining taxable income, the timing of deductions and the utilization of tax attributes, which can differ from estimates due to changes in laws and regulations, discovery and analysis of site conditions and changes in technology. Management is required to make judgments based on historical experience and future expectations on the future abandonment cost, net of salvage value, of its mining properties and equipment. The Company reviews its estimate of the future obligation periodically and will accrue the estimated obligation based on the SFAS No. 143 "Account for Asset Retirement Obligations." From time to time, the Company will estimate ore reserves, if any, when it is in production. There are a number of uncertainties inherent in estimating quantities of reserves, including many factors beyond the control of the Company. Ore reserve estimates are based upon engineering evaluations of assay values derived from samplings of drill holes and other openings. Additionally, declines in the market price of gold may render certain reserves containing relatively lower grades of mineralization uneconomic to mine. Further, availability of permits, changes in operating and capital costs, and other factors could materially and adversely affect ore reserves. The Company utilizes its ore reserve estimates in determining the unit basis for mine depreciation and closure rates, as well as in evaluating mine asset impairments. Changes in ore reserve estimates could significantly affect these items. 46 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2008 PART I - FINANCIAL INFORMATION (CONTINUED) 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 first fiscal quarters ended June 30, 2008, 2007 and prior years reflect and include Commerce Group Corp.'s subsidiaries and the Commerce Group Corp./Sanseb Joint Venture (Joint Venture) on a consolidated basis. Previously, the Company reported the investment in the Joint Venture as advances to the Joint Venture and the Company's advances included the interest earned on these advances in anticipation of the interest being reimbursed. Now these advances are restated and combined with the Company's Consolidated Financial Statements. Although the elimination of interest income reduces the retained earnings, it does not eliminate the interest charged by and earned by the Company which is due and payable to it and which is maintained additionally with a separate accounting. At such time, if ever, as 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, 2009, the Company was able to segregate the disbursements to the Joint Venture to identify the category to be charged. Reference is made to Item 8. Financial Statements and Supplementary Data, Note 2 in the Company's Form 10-K for its fiscal year ended March 31, 2009, for additional details. PRECIOUS METAL MINING STRATEGY The Company processed gold from 1972 through March 1978 at the SSGM site and from March 31, 1995 through December 31, 1999 at its SCMP. Its SCMP consisted primarily of used equipment that had been installed at its leased site by a previous mining company. The used processing equipment was acquired by the Joint Venture on February 23, 1993, and the SCMP operations were officially suspended as of March 31, 2000. During this period, the price of gold suffered a severe decline. The Company has suspended its gold processing until such time, if ever, as it has obtained the necessary permission from MARN. 47 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2008 PART I - FINANCIAL INFORMATION (CONTINUED) The Company has a number of non-exclusive independent consulting agreements for the purpose of raising the sum of U.S. $30 million. The funds are to be used to pursue reinstatement of permits, purchase and install equipment, perform site development, working capital for the SSGM open-pit, heap-leaching operation, and for continuing and expanding its exploration programs, if allowed by the Government of El Salvador. Through December 1999, the Joint Venture produced gold primarily from processing the SSGM tailings and from the virgin mineralized material it was excavating from its SSGM open pit. The gold was processed at its SCMP facility, which is located approximately 15 miles from the SSGM site. It has contemplated the installation of a pilot open-pit, heap-leaching gold-processing system on the SSGM site. The cone crushing system is being maintained at this site. The Modesto Mine is inactive. Most of the mining properties are located in the Departments of La Union and Morazan in the Republic of El Salvador, Central America. The Joint Venture will continue its attempts to commence its processing of gold from the SSGM site. Its objectives are to have an expanded complementary operation while continuing its endeavor to obtain sufficient funds for the SSGM open-pit, heap-leach operation. The Company's main objective and plan, through the Joint Venture, is to operate at the SSGM site, a moderate tonnage, low-grade, open-pit, heap-leaching, gold-producing mine. It intends to commence this gold-mining operation as soon, if ever, as the necessary permission is obtained from MARN and adequate funding is in place, providing the gold price remains at or above the current price level. The Company processed gold at the SSGM site from 1972-1978 and the Joint Venture processed gold from March 1995 through December 1999 at the SCMP through a start-up or preliminary operation, which was a forerunner of its greater goals. The Company's revenues, profitability and cash flow are likely to be greatly influenced by the price of gold. Gold prices fluctuate widely and are affected by numerous factors which will be beyond the Company's control, such as, expectations for inflation, the strength of the U.S. dollar, overproduction of gold, global and regional demand, acts of terrorism, or political and economic conditions. The combined effect of these and other factors is difficult, perhaps impossible to predict. Should the market price of gold fall below the Company's production costs and remain at such level for any sustained period, the Company, even if in production, could experience losses. 48 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) EMPLOYEES - --------- As of June 30, 2009, the Joint Venture employed approximately 25 to 30 full-time persons in El Salvador, to provide 24-hour seven-day-a-week security at three different sites; to provide engineering, geology, drafting, and computer-related services; and to handle the administration of its activities. None of the employees are covered by any collective bargaining agreements. It has developed a harmonious relationship with its employees, and it believes that at one time in the past, it was one of the largest single non-agricultural employers in the El Salvador Eastern Zone. Since the Joint Venture has laid off most of its employees, the Joint Venture had to pay their severance pay and other benefits, therefore from time to time it sold the Company's common shares which were issued to the Commerce Group Corp. Employee Benefit Account. El Salvador employees are entitled to receive severance pay, which is based on one month's pay for each year of employment. RELATED PARTY LOANS, OBLIGATIONS AND TRANSACTIONS - ------------------------------------------------- The related party transactions are included in detail in the Notes to the Consolidated Financial Statements. EFFORTS TO OBTAIN CAPITAL - ------------------------- Since the concession/licenses were granted, and through the present time, substantial effort is exercised by the Directors and Officers in attempting to secure funding through various sources, all with the purpose to construct an open-pit heap-leach operation at the SSGM site, and to continue the exploration of its other El Salvadoran mining prospects. In more than one instance, the Company has encountered difficulty in negotiating reasonable terms and conditions. The Company, Sanseb, and the Joint Venture consider the past political situation in the Republic of El Salvador to have been unstable, and believe that the final peace declaration on December 16, 1992, has put an end to the conflict. Even though many years have passed, the stigma of the past unfavorable political status in the Republic of El Salvador exists and therefore certain investors continue to be apprehensive to invest the funds required. The decline in the Company's common stock market price places the Company in a situation of substantially diluting its common shares in order to raise equity capital. There are no assurances that funds will be available, except at this time, there continues to be a great world-wide interest in the ownership of gold. The price of gold is at a favorable height which should encourage investors to invest in gold mining companies. ENVIRONMENTAL REGULATIONS - ------------------------- The Company's mining operations are subject to the El Salvador environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which the Company operates. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, product safety, occupational health and the production, handling, storage, use and disposal of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. However, some risk of environmental or other damage is inherent in the business of the Company, as it is with other companies engaged in similar businesses. The El Salvador Department of Hydrocarbons and Mines (DHM) requires environmental permits to be issued in connection with the issuance of exploitation concessions. The issuances of these permits are under the jurisdiction of the El Salvador Ministry of Environment and Natural Resources Office (MARN). On October 15, 2002, MARN issued an environmental permit under Resolution 474-2002 for the SCMP. On October 20, 2002, MARN issued an environmental permit under Resolution 493-2002 for the Renewed SSGM Exploitation area. Reference is made to "Cash Deposits and Surety Bonds for an explanation of the lawsuit filed against the El Salvador Ministry of Environment for the revoking of the Company's environmental license. These permits have been revoked, and appeals are pending. 49 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) GUARANTEES/BONDS - ---------------- The Company has provided the Government of El Salvador with the following guarantees: on March 15, 2006 a three-year guarantee (bond) was issued by Seguros del Pacifico on behalf of the Company to the Ministry of Environment and Natural Resources for the Renewed SSGM in the sum of $14,428.68. As a result of the revocation of the environmental permits, the bond was returned in 2007. On February 17, 2006, a three-year third party liability guarantee in the sum of $42,857.14 was issued by Seguros del Pacifico on behalf of the Company to the Ministry of Economy's Office of the Department of Hydrocarbons and Mines. DIVIDENDS - --------- For the foreseeable future, it is anticipated that the Company will use any earnings to finance its growth and expansion, therefore, dividends will not be paid to shareholders. IMPACT OF INFLATION - ------------------- The impact of the United States' inflation on the Company has not been significant in recent years because of the relatively low rates of inflation and deflation experienced in the United States. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- COMMODITY PRICES - ---------------- The Company's future revenues, earnings and cash flow may be strongly influenced by changes in gold prices, which fluctuate widely and over which the Company has no control. The Company, if market conditions justify, may enter into gold price protection arrangements in the future, if necessary, to ensure that it generates enough cash flow to support its growth and exploration plans and any debt related to the potential financing. The risks associated with price protection arrangements include opportunity risk by limiting unilateral participation in upward prices; production risk associated with the requirement to deliver physical ounces against a forward commitment; and credit risk associated with counterparties to the hedged transaction. At present, the Company's future earnings and cash flow may be significantly impacted by changes in the market price of gold and silver. Gold and silver prices can fluctuate widely and are affected by numerous factors, such as demand, inflation, interest rates and economic policies to central banks, producer hedging, and the strength of the U.S. dollar relative to other currencies. During the past five years (March 31, 2004 to March 31, 2009) the London PM Fix gold price has fluctuated between a low of about $375 per ounce in May of 2004 and a high of over $1011 per ounce in March 2008. The Company expects gold to be its primary product in the future, but the Company can not currently reasonably estimate its future production and therefore it cannot comment on the impact that changes in gold prices could have on its projected pre-tax earnings and cash flows during 2008. FOREIGN CURRENCY - ---------------- The price of gold is denominated in U.S. dollars, and the Company's current gold production operations and significant properties are located in the Republic of El Salvador. The Republic of El Salvador converted its money into the U.S. dollar system on January 12, 2001 therefore, the Republic of El Salvador's national currency is the U.S. dollar. 50 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) ITEM 4. CONTROLS AND PROCEDURES - -------------------------------- REPORT ON CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our chief executive officer and our chief financial officer are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: * pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; * provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and * provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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 the policies or procedures may deteriorate. Our chief executive officer and our chief financial officer assessed the effectiveness of our internal control over financial reporting as of March 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework 51 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2008 PART I - FINANCIAL INFORMATION (CONTINUED) Based on our assessment, our chief executive officer and our chief financial officer believe that, as of March 31, 2009, our internal control over financial reporting was not effective as of the evaluation date due to the factors stated below. Management assessed the effectiveness of the Company's internal control over financial reporting as of evaluation date and identified the following material weaknesses: INSUFFICIENT RESOURCES: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting. INADEQUATE SEGREGATION OF DUTIES: We have an inadequate number of personnel to properly implement control procedures. Management is committed to improving its internal controls and will (1) continue to use third party specialists to address shortfalls in staffing and to assist the Company with accounting and finance responsibilities and (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel. Management, including our president, has discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of this material weakness, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected. This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this report. 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 fourth quarter of the last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 52 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2008 PART I - FINANCIAL INFORMATION (CONTINUED) CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - ------------------------------------------------------------------------- Some of the statements contained in this report are forward-looking statements, such as estimates and statements that describe the Company's future plans, objectives or goals, including words to the effect that the Company or management expect a stated condition or result to occur. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties. Actual results in each case could differ materially from those currently anticipated in such statements by reason of factors such as production at the Company's mines, changes in operating costs, changes in general economic conditions and conditions in the financial markets, changes in demand and prices for the products the Company produces, litigation, legislative, environmental and other judicial, regulatory, political and competitive developments in areas in which the Company operates and technological and operational difficulties encountered in connection with mining. Many of these factors are beyond the Company's ability to control or predict. The Company disclaims any intent or obligation to update its forward-looking statements, either as a result of receiving new information, the occurrence of future events, or otherwise. 53 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - JUNE 30, 2009 PART II - OTHER INFORMATION Item 1. Legal Proceedings There is no pending litigation in the United States. However, in the Republic of El Salvador, Central America, the Company's El Salvadoran legal counsel on December 6, 2006, filed a complaint with the El Salvadoran Supreme Court Administrative Division claiming that the El Salvadoran Office of the Ministry of Environment and Natural Resources, (MARN) has revoked its El Salvadoran environmental permits for mining exploitation, without any prior notice, without a right to a hearing and without the right of due process, based on misguided assertions, and contrary to El Salvadoran law. In addition, the Company's legal counsel stated that there is a lack of legal foundation for the sanctions and excess authority exercised by MARN. For more details, reference is made to "Environmental Matters." Also, 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 believes this notice is unwarranted and an appeal is pending. On March 17, 2009, the Company's attorneys delivered a Notice of Intent to commence international arbitration proceedings against the Government of El Salvador under the Central America Free Trade Agreement-Dominican Republic (CAFTA-DR). The Company contends that the Government of El Salvador frustrated its effort to develop its mining interests in the country of El Salvador in violation of 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 Government of El Salvador to claim significant monetary damages. Since the Company received no response to the Notice of Intent, it submitted to the International Centre for Settlement of Investment Disputes (ICSID) a notice of arbitration to commence international arbitration proceedings against the Government of El Salvador under CAFTA-DR on July 2, 2009. Item 2. Changes in Securities None, except as disclosed in the Consolidated Statements of Changes in Shareholders' Equity. Item 3. Default Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None during this period. Item 5. Other Information None. 54 Item 6(a). Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description of Exhibit ---------- ---------------------- 31.1* Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Vice President, Treasurer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2* Certification of Vice President, Treasurer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *Filed herewith (b) Reports on Form 8-K None SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant/Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMERCE GROUP CORP. Registrant/Company Date: August 14, 2009 /s/ Edward A. Machulak ------------------------------------- President and Chief Executive Officer 55 EX-31 2 jun09311.txt EXHIBIT 31.1 - CERT. OF CEO (SECTION 302) EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER ---------------------------------------- PURSUANT TO RULE 13(a)-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, - ------------------------------------------------------------------------------ AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 -------------------------------------------------------------------- I, Edward A. Machulak, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Commerce Group Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2009 /s/ Edward A. Machulak ----------------------------------------------- Edward A. Machulak Chairman, President and Chief Executive Officer 56 EX-31 3 jun09312.txt EXHIBIT 31.2 - CERT. OF CFO (SECTION 302) EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER ----------------------------------------- PURSUANT TO RULE 13(a)-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, - ------------------------------------------------------------------------------ AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 -------------------------------------------------------------------- I, Sidney Sodos, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Commerce Group Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2009 /s/ Sidney Sodos -------------------------------------- Sidney Sodos Vice President, Treasurer and Chief Financial Officer 57 EX-32 4 jun09321.txt EXHIBIT 32.1 - CERT. OF CEO (SECTION 906) EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The certification set forth below is being submitted in connection with the Quarterly Report of Commerce Group Corp. (the "Company") on Form 10-Q for the first quarterly period ending June 30, 2009 (the "Report") for the purpose of complying with Rule 13a-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code. I, Edward A. Machulak, Chairman, President and Chief Executive Officer of Commerce Group Corp., (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Form 10-Q of the Company for the first quarterly period ended June 30, 2009, (the "Form 10-Q"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 14, 2009 /s/ Edward A. Machulak ----------------------------------------------- Edward A. Machulak Chairman, President and Chief Executive Officer 58 EX-32 5 jun09322.txt EXHIBIT 32.2 - CERT. OF CFO (SECTION 906) EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The certification set forth below is being submitted in connection with the Quarterly Report of Commerce Group Corp. (the "Company") on Form 10-Q for the first quarterly period ending June 30, 2009 (the "Report") for the purpose of complying with Rule 13a-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code. I, Sidney Sodos, Vice President, Treasurer and Chief Financial Officer of Commerce Group Corp., (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Form 10-Q of the Company for the first quarterly period ended June 30, 2009, (the "Form 10-Q"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 14, 2009 /s/ Sidney Sodos ----------------------------------- Sidney Sodos Vice President, Treasurer and Chief Financial Officer 59 -----END PRIVACY-ENHANCED MESSAGE-----