10-Q 1 sept09.txt 10-Q FOR THE PERIOD ENDED 9-30-09 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 SEPTEMBER 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 September 30, 2009. 1 COMMERCE GROUP CORP. FORM 10-Q FOR THE SECOND QUARTER ENDED SEPTEMBER 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 Cash Flows 6 Notes to the Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk 27 Item 4. Controls and Procedures 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings 29 Item 2. Changes in Securities 29 Item 3. Default Upon Senior Securities 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 5. Other Information 29 Item 6. Exhibits and Reports on Form 8-K 30 2 SIGNATURES: Registrant's Signature Page 30 Certification of Chief Executive Officer (Section 302) 31 Certification of Chief Financial Officer (Section 302) 32 Certification of Chief Executive Officer (Section 906) 33 Certification of Chief Financial Officer (Section 906) 34 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 09/30/09 (Unaudited) 03/31/09 ----------- -------- ASSETS ------ Current assets Cash $ 8,152 $ 38,827 Other current assets 233,977 233,977 Accounts receivable - related 248,524 246,466 Supplies held for sale 39,562 39,562 Prepaid items and deposits 11,265 14,439 ------------ ------------ Total current assets 541,480 573,271 Property, plant and equipment, net 78,324 116,324 ------------ ------------ Total assets $ 619,804 $ 689,595 ============ ============ LIABILITIES AND SHAREHOLDERS' (DEFICIT) --------------------------------------- Current liabilities Accounts payable $ 5,310 $ 16,659 Accounts payable - related 300,586 274,344 Notes and accrued interest payable to related parties 25,529,180 23,390,532 Notes and accrued interest payable to others 366,467 355,638 Accrued salaries 3,793,381 3,704,881 Accrued legal fees 528,401 506,396 Other accrued expenses - other 457,426 447,337 Other accrued expenses - related 551,200 528,400 ------------ ------------ Total current liabilities 31,531,951 29,224,187 ------------ ------------ Total liabilities 31,531,951 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: 9/30/2009 - 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) (53,567,061) (51,189,506) ------------ ------------ Total shareholders' (deficit) (30,912,147) (28,534,592) ------------ ------------ Total liabilities and shareholders' (deficit) $ 619,804 $ 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 SEPTEMBER 30 (UNAUDITED) Three Months Ended Second Quarter Six Months Ended 09/30/09 09/30/08 09/30/09 09/30/08 ----------- ----------- ----------- ------------ Revenues: $ 0 $ 0 $ 0 $ 0 Expenses: General and administrative 204,521 40,080 392,775 79,485 ----------- ----------- ------------ ------------ Total expenses 204,521 40,080 392,755 79,485 Net loss from operations (204,521) (40,080) (392,755) (79,485) Other income 0 0 0 0 Interest expense (1,019,607) (851,297) (1,984,780) (1,657,030) ----------- ----------- ------------ ------------ Net loss before income taxes (1,224,128) (891,377) (2,377,555) (1,736,515) Income tax expense 0 0 0 0 ----------- ----------- ------------ ------------ Net loss $(1,224,128) $ (891,377) $(2,377,555) $(1,736,515) ============ =========== ============ ============ Net loss per share basic/diluted $ (.04) $ (.03) $ (.08) $ (.06) =========== =========== ============ ============ Weighted av. basic/ diluted common shares outstanding 30,750,869 30,719,790 30,750,869 30,723,711 =========== =========== ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 5 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 30 (UNAUDITED) 2009 2008 ------- ------- OPERATING ACTIVITIES: Net (loss) $(2,377,555) $(1,736,515) 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 3,500 Changes in assets and liabilities: Decrease (increase) in accounts receivable and other current assets/ liabilities (2,058) (6,950) Decrease (increase) in prepaid items and deposits 3,174 (738) Increase in accounts payable and other accrued expenses 14,894 (66,017) Increase in accrued interest - related 1,984,778 1,657,030 Increase in accrued interest - others 10,830 0 Increase in accrued legal fees 22,005 21,341 Increase in accrued salaries 88,500 0 Increase in other accruals - related 22,800 0 Increase in other accruals 10,089 0 Net cash provided by (used in) ----------- ------------ operating activities (222,543) (128,349) INVESTING ACTIVITIES: Investment in mining resources and property, plant and equipment 0 (326,789) Cash received, scrap metal 38,000 0 ---------- ----------- Net cash used by investing activities 38,000 (326,789) FINANCING ACTIVITIES: Cash received, related party notes payable 153,868 465,168 ---------- --------- Net cash provided by financing activities 153,868 465,168 Net increase (decrease) in cash and cash equivalents (30,675) 10,030 Cash - beg. of the period 38,827 1,308 ---------- ---------- Cash - end of the period $ 8,152 $ 11,338 ========= ========== Supplemental disclosures of cash information: --------------------------------------------- Year Ended September 30, 2009 September 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. 6 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (1) THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS GENERAL Commerce Group Corp., a Wisconsin-based corporation organized in 1962 ("Commerce," the "Company" and/or "Registrant") and its 82 1/2%-owned subsidiary, San Sebastian Gold Mines, Inc., a Nevada corporation organized in 1968 ("Sanseb"), have formed the Commerce/Sanseb Joint Venture ("Joint Venture") for the purpose of performing gold mining, the sale of gold, and related activities, including, but not limited to, exploration, exploitation, development, extraction and processing of precious metals in the Republic of El Salvador, Central America. (2) GOING CONCERN The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has recurring net losses, negative working capital and negative cash flow from operations, and is dependent upon raising capital to continue operations. The Company's ability to continue as a going concern is subject to its ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of its securities, increasing sales or obtaining loans and grants from various financial institutions where possible. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. During the past five years, the Company and its shareholders and officers have been able to provide the capital necessary to continue the operations of the Company, the maintenance of the mine and related equipment, and perform limited exploration on its exploration license areas. However, there is no guarantee that the Company can continue to provide the required capital and to keep the Company's assets maintained. If the Company was unable to raise sufficient funds, the Company would be unable to pay 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 should increase investors' interest. 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. 7 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTERIM FINANCIAL STATEMENTS The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2009 and 2008 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these interim financial statements be read in conjunction with the financial statements and notes thereto included in the Company's March 31, 2009 audited financial statements. The results of operations for the periods ended September 30, 2009 and 2008 are not necessarily indicative of the operating results for the full year. BASIS OF PRESENTATION: The financial statements have been prepared by the Registrant pursuant to rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position and results of operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with the generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. UNAUDITED INFORMATION 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. 8 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) 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 second quarter periods ended September 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 September 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. Also included in other current assets are certain precious stones and jewelry stated at cost of $132,448 as of September 30, 2009 and 2008. 9 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 $248,524 $ 0 $248,524 Accounts payable - related parties $248,524 $52,062 $300,586 The Company is of the opinion that it is appropriate to record the fact that Misanse owes the Company $248,524 and that the Company owes Misanse $594,781 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 $248,524 in accounts receivable. 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. 10 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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. 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 GAAP, 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. Reference is made to note (2) Going Concern for additional information. 11 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) ASSET RETIREMENT OBLIGATIONS Accounting for Asset Retirement Obligations is in accordance with GAAP 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. NEW ACCOUNTING PRONOUNCEMENTS AND CHANGES IN ACCOUNTING POLICY In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement modifies the Generally Accepted Accounting Principles ("GAAP") hierarchy by establishing only two levels of GAAP, authoritative and non-authoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification ("ASC"), also known collectively as the "Codification," is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Non-authoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement applies beginning in third quarter 2009. All accounting references have been updated, and therefore SFAS references have been replaced with ASC references. LOSS PER COMMON SHARE In accordance with GAAP, the basic net loss per share is computed by dividing net 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 September 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 9, but are not included in fully diluted EPS due to antidilutive effect are as follows: 19,249,131 and and 19,276,289 for the quarters ended September 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 September 30, 2009: Basic/diluted EPS Net loss to common Shareholders $(2,377,555) 30,750,869 $ (0.08) ============ =========== For the period ended September 30, 2008: Basic/diluted EPS Net loss to common Shareholders $(1,736,515) 30,723,711 $ (0.06) ============ =========== 12 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) (4) 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:
September 30, 2009 September 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 $21,029,305 $ 0 $21,029,305 Prop- erty, Plant and Equip- ment 7,165,819 (2,252,143) (4,835,352) 78,324 7,106,134 (2,252,143) 4,853,991 ---------- ------------ ------------ ------- ------------ ----------- ----------- $7,165,819 $(2,252,143) $(4,835,352) $78,324 $28,135,439 $(2,252,143) $25,883,296 ========== ============ ============ ======= ============ ============ ===========
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 (3) Summary of Significant Accounting Policies. Reference is made to note (2) Going Concern for additional information. (5) COMMERCE/SANSEB JOINT VENTURE ("JOINT VENTURE") As of September 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 $ 81,367,214 $ 74,974,571 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 56,396,261 53,372,269 ------------ ------------ Total: $144,779,835 $135,363,200 Advances by the Company's three subsidiaries 590,265 590,265 ------------ ------------ Combined total investment $145,370,100 $135,953,465 ============ ============ 13 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) EXPLORATION ACTIVITY 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 its 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") 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. 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 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. 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 In October 2008 the Directorate of Mines notified the Company that it was not honoring the Company's request for an extension of its 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 In October 2008 the Directorate of Mines notified the Company that it was not honoring the Company's previous request for an extension of its exploration permit at the Nueva Esparta area. The Company is contesting these actions. SCMP LAND AND BUILDING LEASE Because of the length of time that the permit status of the SCMP has gone unresolved and the expenses associated with the lease, 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. 14 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) (6) NOTES PAYABLE AND ACCRUED INTEREST 09/30/09 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) $25,529,180 $23,390,532 Other Short-term notes and accrued interest (September 30, 2009, $231,468 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. 366,468 355,638 ----------- ----------- Total: $25,895,648 $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 September 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 $266,979 and $184,479 as of September 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 September 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 $16,992,116 and $15,673,362 at September 30, 2009 and March 31, 2009, respectively; the interest for the three months ended September 30, 2009 and September 30, 2008 was $676,270 and $576,207 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 $1,821,219 and $1,679,874 at September 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 three months ended September 30, 2009 and September 30, 2008 was $72,483 and $61,696 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. 15 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) 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 September 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. 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 $4,629,443 and $4,112,818 at September 30, 2009 and March 31, 2009, respectively; the interest for the three months ended September 30, 2009 and September 30, 2008 was $182,373 and $141,263 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 September 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 $1,267,155 and $1,168,811 at September 30, 2009 and March 31, 2009, respectively; the interest for the three months ended September 30, 2009 and September 30, 2008 was $50,432 and $42,926 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 $525,600 and $507,600 at September 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 $373,585 and $344,591 at September 30, 2009 and March 31, 2009, respectively; the interest for the three months ended September 30, 2009 and September 30, 2008 was $14,868 and $12,656 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 $528,401.25 for 2,348.45 hours of legal services rendered from July 1980 through August 31, 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 $424,063 and $391,152 at September 30, 2009 and March 31, 2009, respectively; the interest for the three months ended September 30, 2009 and September 30, 2008 was $16,877 and $9,010 respectively. The annual interest rate is four percent plus the prime rate, but not less than 16%, and it is payable monthly. 16 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) The late President's half brother has a promissory note in the sum of $21,599 and $19,923 as of September 30, 2009 and March 31, 2009, respectively; the interest for the three months ended September 30, 2009 and September 30, 2008 was $860 and $732 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 September 30, 2009 and March 31, 2009 was $25,600 and $20,800 respectively. The other salary accruals as of September 30, 2009 and March 31, 2009 are $70,616 and $64,616 respectively. (8) COMMITMENTS AND CONTINGENCIES Reference is made to Notes 3, 5, 6, 7, 9, 10, and 11. ENVIRONMENTAL REGULATIONS AND COMPLIANCE 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. 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. Also, 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. CASH DEPOSITS AND SURETY BONDS 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). The Company was required to provide cash deposits or surety bonds in connection with obtaining these environmental permits and complied with the requirements. Thereafter, 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. In 2007 the bonds acquired by the Company were returned after the September 2006 revocation of the environmental permits under MARN Resolution No. 3249-779-2006 dated July 5, 2006 and MARN Resolution No. 3026-783-2006 dated July 6, 2006. 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. 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. 17 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 (5) Commerce/Sanseb Joint Venture ("Joint Venture") of the Notes to the Consolidated Financial Statements. Reference is also made note (5) Synopsis of Real Estate Ownership and Leases in the Company's Form 10-K for its fiscal year ended March 31, 2009. 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: 18 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) Company Net Advances to the Joint Venture during the fiscal quarter ended September 30, 2009 Total Interest Advances Charges -------- ------- Beginning balance $79,756,706 $59,327,182 Advances during fiscal period ended 9/30/09 1,610,508 1,467,248 ----------- ----------- Total Company's net advances 81,367,214 60,794,430 Advances by three of the Company's subsidiaries 590,265 0 ----------- ----------- Total net advances as of 9/30/09 $81,957,479 $60,794,430 (9) 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. There were no Company common shares issued during the periods ended September 30, 2009 and March 31, 2009. b. PREFERRED STOCK There were no preferred shares issued and outstanding for the periods ending September 30, 2009 or March 31, 2009. c. STOCK OPTION ACTIVITY: There were no stock options issued or outstanding for the periods ending September 30, 2009 or March 31, 2009. d. 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 second quarter, leaving a balance of 925,147 unissued Form S-8 common shares. 19 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) e. 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. 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 September 30, 2009. (10) 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. The request for arbitration was registered with the ICSID on August 21, 2009. 20 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 (CONTINUED) (11) BUSINESS SEGMENTS 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 9/30/09 Sales and revenues $ 0 $ 0 Depreciation & amortization 0 0 Operating income (loss) 0 (2,377,555) Total assets 303,102 238,378 Capital expenditures 0 0 Fiscal period ended 9/30/08 Sales and revenues $ 0 $ 0 Depreciation & amortization 0 0 Operating income (loss) 0 (1,736,515) Total assets 20,787,259 242,047 Capital expenditures 273,722 0 (12) QUARTERLY FINANCIAL DATA The following is a tabulation of the quarterly operating results for the quarters ended September 30, 2009 and September 30, 2008: Per Share Operating Basic/Diluted Net Revenues Net (Loss) Income/(Loss) --------- ---------- ----------------- First quarter 6/30/09 $0 $(1,153,427) $(.04) Second quarter 9/30/09 $0 $(1,224,128) $(.04) Per Share Operating Basic/Diluted Net Revenues Net (Loss) Income/(Loss) -------- ---------- ----------------- First quarter 6/30/08 $0 $(845,138) $(.03) Second quarter 9/30/08 $0 $(891,377) $(.03) 21 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - SEPTEMBER 30, 2009 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report. The following discussion provides information on the results of operations and the financial condition, liquidity and capital resources for the second quarter periods ended September 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 All of the Company's mining interests are located in the Republic of El Salvador, Central America. The Government of El Salvador (GOES) via the Ministry of Economy's office issued three concessions/licenses which have now been revoked or suspended. Reference is made to note (5) Commerce/Sanseb Joint Venture ("Joint Venture"). 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. In view of these uncertainties, 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. 22 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - SEPTEMBER 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 FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES The Company has no revenues because it is not in production and it requires funds to purchase the necessary equipment, inventory and working capital to commence processing mineralized material. If the Company's permits to conduct mining activity are restored, the Company will need to raise adequate funds from outside sources for this operation; the amount required is dependent on the targeted daily volume of production. However, the Company estimates that at least $30 million (net) in funding is needed for the expansion of exploration opportunities and to resume production of gold and silver from its San Sebastian Gold Mine located near the City of Santa Rosa de Lima, Republic of El Salvador, Central America. The Company continues to rely on its directors, officers, related parties and others for its funding needs. It believes that the funding needed to proceed with the exploration of the other exploration targets for the purpose of identifying potential gold ore reserves will be greatly enhanced if the price of gold stays at the current or higher level. These exploration programs will involve airborne geophysics, stream chemistry, geological mapping, trenching, drilling, etc. The Joint Venture believes that it may be able to joint venture or enter into other business arrangements to share these exploration costs with other entities. DEBT Most of the debt is owed to related parties as follows: Related Parties Others Total --------------- ------ ----- Accounts payable - Commerce $ 52,062 $ 2,602 $ 54,664 Accounts payable - Comseb 248,524 2,708 251,232 Notes payable and accrued interest 25,529,180 366,467 25,895,647 Accruals - salaries 3,793,381 3,793,381 Accruals - legal fees 528,401 528,401 Accruals - other - Commerce 551,200 188,639 739,839 Accruals - other - Comseb 268,787 268,787 ----------- -------- ----------- Total $30,702,748 $829,203 $31,531,951 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. 23 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - SEPTEMBER 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) RESULTS OF OPERATION FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO SEPTEMBER 30, 2008 There are no revenues as the Company has suspended its gold production until it is able to enter into a business arrangement. The price of gold has stabilized at a price level that could assure a profitable operation. The Company recorded a net loss of $2,377,555 or $.08 cents per share for the six months ended September 30, 2009. This compares to a net loss of $1,736,515 or $.06 cents per share for the six months ended September 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. It also caused a significant increase in the general and administration expenses which were $392,755 for the six months ended September 30, 2009 compared to $79,485 for the six months ended September 30, 2008. There was no current or deferred provision for income taxes during the six months ended September 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 six months ended September 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 $1,984,780 was recorded by the Company during this six-month period compared to $1,657,030 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. 24 RESULTS OF OPERATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO SEPTEMBER 30, 2008 There are no revenues as the Company has suspended its gold production until it is able to enter into a business arrangement. The price of gold has stabilized at a price level that could assure a profitable operation. The Company recorded a net loss of $1,224,128 or $.04 cents per share for its three months ended September 30, 2009. This compares to a net loss of $891,377 or $.03 cents per share for the three months ended September 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. It also caused a significant increase in the general and administration expenses which were $204,521 for the three months ended September 30, 2009 compared to $40,080 for the three months ended September 30, 2008. There was no current or deferred provision for income taxes during the three months ended September 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 three months ended September 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 $1,019,607 was recorded by the Company during this three-month period compared to $851,297 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. 25 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - SEPTEMBER 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's financial condition and results of operations are based on the Company's consolidated financial statements, prepared in accordance with accounting principles generally accepted in the United States of America and contained within this report on S.E.C. Form 10-Q. The preparation of the Company's financial statements requires that the Company make estimates and assumptions that affect the amounts reported in its financial statements and the accompanying notes. The Company has identified certain policies that it believes are important to the portrayal of its financial condition and results of operations. These policies require the application of significant judgment by the Company's management. The Company bases its estimates on historical experience, industry standards, and various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on the Company's financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions. Further information on these assumptions and on the Company's accounting policies can be found in the notes to the Company's financial statements contained in its Form 10-K for its fiscal year ended March 31, 2009. There have been no significant changes to these policies during the period discussed in this report on Form 10-Q. RISK FACTORS The Company's right to explore for gold and silver and to conduct mining at its properties in El Salvador is dependent upon permission from the Government of El Salvador. At the present time, the Government of El Salvador has for all intents and purposes, prohibited precious metal mining in the Republic of El Salvador. The Company is unable to predict if and when this policy will change. This has hampered not only mining activities, but also, the Company's ability to find a suitable investment partner. On or about September 13, 2006, the El Salvador Ministry of the Environment delivered to Commerce's El Salvadoran legal counsel its revocation of the environmental permits issued for the SSGM and SCMP. The Company is contesting these actions in legal proceedings, but there can be no assurances as to what the outcome will be. 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 is contesting these actions in legal proceedings, but there can be no assurances as to what the outcome will be. The Company's main objective and plan has been to operate a moderate tonnage, low-grade, open-pit, heap-leaching operation to mine gold on its SSGM site. Since the death of Commerce's long-time Chairman Edward L. Machulak on October 21, 2007, the Company has been directing most of its efforts toward finding a compatible acquisition, merger, or other business arrangement. At the present time, the Company cannot proceed with its plans because the government of El Salvador has revoked the necessary permits. If the Company's permits to conduct mining activity are restored, the Company will need to raise adequate funds from outside sources for its proposed operations. There have been and will be no revenues for so long as the Company is not in production. The Company has recurring net losses, negative working capital and negative cash flow from operations, and is dependent upon raising capital to continue operations. The Company's ability to continue as a going concern is subject to its ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of its securities, increasing sales or obtaining loans and grants from various financial institutions where possible. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 26 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - SEPTEMBER 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) 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. The Company expects gold to be its primary product in the future, but the Company cannot currently reasonably estimate its future production and therefore it cannot comment on the impact that changes in gold prices could have on its projected pre-tax earnings and cash flows during 2008. FOREIGN CURRENCY The price of gold is denominated in U.S. dollars, and the Company's current gold production operations and significant properties are located in the Republic of El Salvador. The Republic of El Salvador converted its money into the U.S. dollar system on January 12, 2001 therefore, the Republic of El Salvador's national currency is the U.S. dollar. ITEM 4. CONTROLS AND PROCEDURES 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 September 30, 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 27 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - SEPTEMBER 30, 2009 PART I - FINANCIAL INFORMATION (CONTINUED) Based on our assessment, our chief executive officer and our chief financial officer believe that, as of September 30, 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 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. 28 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE SEC FORM 10-Q - SEPTEMBER 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. The request for arbitration was registered with the ICSID on August 21, 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. 29 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: November 12, 2009 /s/ Edward A. Machulak ------------------------------------- President and Chief Executive Officer 30