UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
1 ANNUAL REPORT PURSUANT TO SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File No: 0-16882
A. Full title of the plan and the address of the plan,
if different from that of the issuer named
below:
THE COMMERCE GROUP, INC. 401(k) PLAN
B. Name of issuer of the securities held pursuant to the plan and
the address of its principal executive office:
THE COMMERCE GROUP, INC.
211 Main Street
Webster, MA 01570
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
Report of Independent Auditors.......................................................................... 1
Financial Statements:
Statement of Net Assets Available for Benefits as of December 31, 1998 ............. 2
Statement of Changes in Net Assets Available for Benefits for the Period from
September 1, 1998 (Date of Inception) through December 31, 1998.................. 3
Notes to Financial Statements.......................................................................... 4
Supplemental Schedules as of and for the Period Ended December 31, 1998:
Line 27a - Schedule of Assets Held for Investment Purposes.............................. 8
Line 27d - Schedule of Reportable Transactions............................................... 9
Consent of Independent Auditors........................................................................ 10
Signatures ...................................................................................................... 11
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Benefits Committee
The Commerce Group, Inc.
We have audited the accompanying statement of net assets available
for benefits of The Commerce Group, Inc. 401(k) Plan (the Plan) as of
December 31, 1998, and the related statement of changes in net
assets available for benefits for the period from September 1, 1998
(date of inception) through December 31, 1998. These financial
statements are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets available for benefits of the Plan
at December 31, 1998, and the changes in net assets available for
benefits for the period from September 1, 1998 through December 31,
1998, in conformity with generally accepted accounting principles.
Our audit was performed for the purpose of forming an opinion on the
financial statements taken as a whole. The accompanying
supplemental schedules of assets held for investment purposes as of
December 31, 1998, and reportable transactions for the period from
September 1, 1998 through December 31, 1998, are presented for
the purpose of additional analysis and are not a required part of the
financial statements, but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and
Disclosure under the Employee Retirement Income Security Act of
1974. These supplemental schedules are the responsibility of the
Plan's management. The fund information in the statement of net
assets available for benefits and the statement of changes in net
assets available for benefits is presented for purposes of additional
analysis rather than to present the net assets available for benefits and
changes in net assets available for benefits of each fund. The
supplemental schedules and fund information have been subjected to
auditing procedures applied in our audit of the financial statements
and, in our opinion, are fairly stated in all material respects in relation
to the financial statements taken as a whole.
Ernst & Young LLP
Boston, Massachusetts
May 21, 1999
1
<PAGE>
<TABLE>
<CAPTION>
The Commerce Group, Inc. 401 (k) Plan
Statement of Net Assets Available for Benefits
December 31, 1998
<S> <C> <C> <C> <C>
Common Common
Stock of Mutual Collective Contribution
Employer Funds Trust Receivable
Assets:
Investments, at fair value
Merrill Lynch Funds:
Commerce Group, Inc.
Common Stock Fund
(cost: $72,765).............. $ 84,556 $ 2,911
Retirement Preservation
Trust (cost: $59,901)..... $ 59,901 5,119
Corporate Bond Fund
(cost: $124,232).............. $123,885 8,855
Capital Fund
(cost: $43,220)................ 44,767 2,420
Basic Value Fund
(cost: $112,262).............. 117,424 8,190
Global Allocation
Fund (cost: $24,421)......... 23,873 1,947
S & P 500 Index Fund
(cost: $76,032).................... 82,701 5,128
MFS Massachusetts Investors
Growth Stock Fund
(cost: $167,276)................... 182,462 10,939
GAM International
Fund (cost: $119,359)........... 124,842 8,644
Lord Abbett Developing
Growth Fund
(cost: $170,744)................... 205,467 11,914
Cash..............................................
Accrued investment income..........
Net assets
available for benefits.......... $ 84,556 $905,421 $ 59,901 $ 66,067
The accompanying notes are an integral part of these financial statements.
2A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Commerce Group, Inc. 401 (k) Plan
Statement of Net Assets Available for Benefits
December 31, 1998
(continued)
<S> <C> <C>
Cash and Accured
Investment
Incomer Total
Assets:
Investments, at fair value
Merrill Lynch Funds:
Commerce Group, Inc.
Common Stock Fund
(cost: $72,765).............. $ 87,467
Retirement Preservation
Trust (cost: $59,901)..... 659,020
Corporate Bond Fund
(cost: $124,232).............. 132,740
Capital Fund
(cost: $43,220)................ 47,187
Basic Value Fund
(cost: $112,262).............. 125,614
Global Allocation
Fund (cost: $24,421)......... 25,820
S & P 500 Index Fund
(cost: $76,032).................... 87,829
MFS Massachusetts Investors
Growth Stock Fund
(cost: $167,276)................... 193,401
GAM International
Fund (cost: $119,359)........... 133,486
Lord Abbett Developing
Growth Fund
(cost: $170,744)................... 217,381
Cash.............................................. $ 3,692 3,692
Accrued investment income.......... 204 204
Net assets
available for benefits.......... $ 3,896 $1,119,841
The accompanying notes are an integral part of these financial statements.
2B
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Commerce Group, Inc. 401 (k) Plan
Statement of Changes in Net Assets Available for Benefits
For the Period from September 1, 1998 through December 31, 1998
<S> <C> <C> <C> <C>
Merrill Lynch Funds
Commerce
Group, Inc. Retirement Corporate
Common Stock Preservation Bond Capital
Fund Trust Fund Fund
Additions to net assets
attributed to:
Dividends........................ $ 581 $ 677 $ 994 $ 736
Net realized investment
gains (losses)................. 15 (1)
Net appreciation
(depreciation) in fair
value of investments....... 11,791 (347) 1,547
12,387 677 646 2,283
Participant contributions... 44,360 155,275 81,847 27,295
Total additions.................. 56,747 155,952 82,493 29,578
Deductions to net assets
attributed to:
Benefits paid to
participants..................... 94 45 131
Net increase before
transfers...................... 56,653 155,907 82,362 29,578
Transfers between funds at
participants' election, net... 5,440 (95,590) 27,600
Transfers from other plans..... 25,374 4,703 22,778 17,609
Net increase..................... 87,467 65,020 132,740 47,187
Net assets available for
benefits at beginning of
period................................ 0 0 0 0
Net assets available for
benefits at end of period.... $ 87,467 $ 65,020 $ 132,740 $ 47,187
The accompanying notes are an integral part of these financial statements.
3A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Commerce Group, Inc. 401 (k) Plan
Statement of Changes in Net Assets Available for Benefits
For the Period from September 1, 1998 through December 31, 1998
(continued)
<S> <C> <C> <C> <C>
Merrill Lynch Funds
MFS
Massachusetts
Global S & P 500 Investors
Basic Value Allocation Index Growth Stock
Fund Fund Fund Fund
Additions to net assets
attributed to:
Dividends......................... $ 1,587 $ 1,944 $ 3,060 $ 12,855
Net realized investment
gains (losses)............... 24 (2) 24 43
Net appreciation
(deprecia tion) in fair
value of investments....... 5,162 (548) 6,669 15,186
6,773 1,394 9,753 28,084
Participant contributions.. 85,145 23,677 63,288 98,847
Total additions................. 91,918 25,071 73,041 126,931
Deductions to net assets
attributed to:
Benefits paid to
participants.................. 238 269 168
Net increase before
transfers.................... 91,680 25,071 72,772 126,763
Transfers between funds at
participants' election, net. 15,128 (40) 288 15,721
Transfers from other plans... 18,806 789 14,769 50,917
Net increase................... 125,614 25,820 87,829 193,401
Net assets available for
benefits at beginning of
period............................ 0 0 0 0
Net assets available for
benefits at end of
period............................ $125,614 $ 25,820 $ 87,829 $ 193,401
The accompanying notes are an integral part of these financial statements.
3B
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Commerce Group, Inc. 401 (k) Plan
Statement of Changes in Net Assets Available for Benefits
For the Period from September 1, 1998 through December 31, 1998
<S> <C> <C> <C> <C>
Lord Abbett Cash
GAM Developing and Accrued
International Growth Investment
Fund Fund Income Total
Additions to net assets
attributed to:
Dividends....................... $ $ $ 204 $ 22,638
Net realized investment
gains (losses)................ 3 534 640
Net appreciation
(depreciation) in fair
value of investments...... 5,483 34,723 79,666
5,486 35,257 204 102,944
Participant contributions.. 92,362 146,679 818,775
Total additions................. 97,848 181,936 204 921,719
Deductions to net assets
attributed to:
Benefits paid to
participants.................... 141 278 (292) 1,072
Net increase before
transfers..................... 97,707 181,658 496 920,647
Transfers between funds at
participants' election, net.. 15,389 16,064 0
Transfers from other plans.... 20,390 19,659 3,400 199,194
Net increase.................... 133,486 217,381 3,896 1,119,841
Net assets available for
benefits at beginning of
period............................... 0 0 0 0
Net assets available for
benefits at end of period.. $133,486 $ 217,381 $ 3,896 $ 1,119,841
The accompanying notes are an integral part of these financial statements.
3C
</TABLE>
<PAGE>
THE COMMERCE GROUP, INC. 401 (k) PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
NOTE A - Description of Plan
1. General
The Commerce Group, Inc. 401(k) Plan (the "Plan") was adopted by The
Commerce Group, Inc. (the "Company") effective September 1, 1998. It is
subject to many of the reporting and disclosure, minimum coverage, vesting,
fiduciary responsibility and civil enforcement provisions of the Employee
Retirement Income Security Act of 1974. The Plan is a voluntary retirement
savings account which allows each participant to direct the investment of their
account balances among options which include money market funds and mutual
funds, one of which consists entirely of the common stock of the Company.
The Plan may be amended and/or terminated by the Company at any time;
however, no such event may adversely affect the rights of Participants in the
Plan with respect to contributions made prior to the date of such event. All
administrative expenses of the Plan are paid for by the Company.
2. Investment Options Available to Plan Participants
The Company has a Trust Agreement with Merrill Lynch Trust Co., FSB
("Merrill Lynch") as Trustee, providing for the management, investment and
reinvestment of Plan assets. The investment options available to Plan
Participants are as follows:
<TABLE>
<CAPTION>
<S><C>
a. Commerce Group, Inc. Common Stock Fund - The fund invests in the common stock of the Company.
b. Merrill Lynch Retirement Preservation Trust - Seeks to provide preservation of capital, liquidity and current
income levels that are typically higher than those by money market funds.
c. Merrill Lynch Corporate Bond Fund - Seeks a high level of current income and as a secondary objective,
the fund seeks capital appreciation.
d. Merrill Lynch Capital Fund - Seeks the highest total investment return consistent with prudent risk through
a fully managed investment policy in equity, fixed income and convertible securities.
e. Merrill Lynch Basic Value Fund - Seeks capital appreciation and secondary income by investing primarily in
large cap equities that appear to be undervalued.
f. Merrill Lynch Global Allocation Fund - Seeks high total investment return utilizing U.S. and foreign equity,
fixed income and money market securities. The investment approach provides the fund with the
opportunity to benefit from anticipated shifts in the relative performance of different types of securities
and different markets.
g. Merrill Lynch S&P 500 Index Fund - The fund is a passive mutual fund which invests in the largest 500 U.S.
publicly traded companies.
h. MFS Massachusetts Investors Growth Stock Fund - Seeks long-term growth of capital through companies
believed to have better than average long-term growth potential. Emphasis is placed on high-quality
companies with characteristics such as: strong management, history of consistent long-term earnings
growth and market leadership.
i. GAM International Fund - Seeks long-term capital appreciation primarily in equity securities in foreign
countries, focusing on Canada, the United Kingdom, continental Europe and the Pacific Basin.
j. Lord Abbett Developing Growth Fund - Seeks to provide long-term capital appreciation by primarily investing
in the stocks of small companies with above average long-term rates, strong management, undervalued
assets and companies with exciting prospects.
</TABLE>
4
<PAGE>
THE COMMERCE GROUP, INC. 401 (k) PLAN
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
3. Eligibility
Employees of the Company become eligible to participate in the Plan
after (1) three months of service with the Company, and, (2) upon
attaining 21 years of age (changed to 18 years of aged effective
December 31, 1998). Employees cease to be eligible to participate in the
Plan upon termination of their employment with the Company.
4. Contributions
Eligible employees may contribute a portion of their pay to the Plan on
a tax deferred basis, so that the eligible employee is not taxed on the
money they contribute until funds are distributed. Eligible employees are
allowed to contribute from 1% up to a maximum of 15% of their covered
compensation, subject to annual maximum limits imposed by the Internal
Revenue Service. Eligible employees may also contribute up to 100% of
their pretax cash bonus which they may be eligible to receive twice yearly
or the same percentage as is applied to their regular pay, also subject to a
maximum dollar amount on all contributions allowable by the Internal
Revenue Code (the "IRC"). Eligible employees may also make rollover
contributions under the Plan from another qualified plan or an individual
retirement account.
5. Vesting
Because participants' account balances consist solely of amounts they
have deferred from their own compensation (and the investment income
derived therefrom) participating participants are 100% vested in their
accounts at all times.
6. Distributions
Participating employees may withdraw funds from the Plan prior to
retirement only in the circumstance of a demonstrated financial hardship.
Upon termination of employment for reasons other than death, disability or
retirement, former participants may also request an eligible rollover
distribution.
7. Federal Income Tax Status
The Plan has applied for but has not received a determination letter
from the Internal Revenue Service stating that the Plan is qualified under
Section 410(a) of the IRC. However, the Plan Administrator believes that
the Plan is qualified and, therefore, the related trust is exempt from
taxation.
8. Risks and Uncertainties
The Plan provides for various investment options in registered
investment companies. Investment securities are exposed to various risks,
such as interest rate, market and credit risks. Due to the level of risks
associated with investment securities, it is reasonably possible that
changes in their values will occur in the near term and that such changes
could materially affect Participants' account balances and the amounts
reported in the statement of net assets available for benefits.
5
<PAGE>
THE COMMERCE GROUP, INC. 401 (k) PLAN
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
Note B - Significant Accounting Policies
1. Basis of Accounting
The financial statements of the Plan have been prepared on the accrual
basis. All expenses associated with the administration of the Plan, with the
exception of the charge for partial or total distribution from a participating
employee's account, are paid directly by the Company and accordingly, are
not reflected in the accompanying statements.
2. Valuation of Investments
The Plan's investments, including the common stock of the Company,
are stated at fair value, based on quoted market prices. The shares of the
registered investment companies are valued at quoted market prices which
represent the net asset values of the shares held by the Plan at December
31, 1998. The Merrill Lynch Retirement Preservation Trust is valued at
cost which approximates fair value.
3. Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
Note C - Investments
Accumulated unrealized gains at September 1, 1998 and at December
31, 1998 and the net increase in unrealized gains were as follows:
<TABLE>
<CAPTION>
<S> <S>
Unrealized gains at September 1, 1998....................................... $ 0
Unrealized gains at December 31, 1998........................................ 79,666
Net increase in unrealized gains............................................ $ 79,666
</TABLE>
The proceeds from sales of investments, the cost of investments sold and net
realized investment gains determined on an average cost basis were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cost Net
Proceeds of Realized
From Investments Investment
Sales Sold Gains
Common stock of employer......... $ 94 $ 79 $ 15
Common/Collective trust.............. 106,876 106,876 0
Mutual funds ............................... 7,478 6,853 625
Total.................................... $114,448 $ 113,808 $ 640
</TABLE>
6
<PAGE>
THE COMMERCE GROUP, INC. 401 (k) PLAN
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
Note D - Year 2000 Compliance (unaudited)
The year 2000 issue exists primarily because most computer programs
were originally coded to recognize only the last two digits in the date field.
If not addressed and corrected, many systems could fail and produce
erroneous results. The impact of this could lead to a material adverse
impact upon the Plan. As a result, considerable effort has taken place to
assess the impact and determine whether to replace and/or reprogram the
systems in order for the systems to distinguish the intended year. The
Company subsequently initiated the Century Change project to address all
internal/external systems, software, third parties and vendors, including
those that impact the Plan, in dealing with year 2000 compliance.
The Century Change project, enlisting both a redeployment of internal
resources and additional external consultant resources, involved the
development of a formal plan to address the Year 2000 problem and has
progressed in accordance with that plan. The Company's plan, which was
designed to, and is proceeding so as to, avoid any material adverse
business production issues, organized corporate systems into four sub-
categories: Data Exchange, AS400 Systems/Programs, PC Applications
and PC Based Vendor Purchased Application Software. Different sub-plans
were established for each category with the same Year 2000 objective in
mind. Internal changes are expected to be completed in accordance with
specified delivery dates as outlined in the plan. Looking forward, the
project has and will continue to move into the testing phases of the plan
which will primarily conclude at the end of third quarter 1999.
The Company has reviewed the Century Change status of vendors who
perform outside processing, those whose software the Company uses for
internal processing and those third parties with whom the Company does
significant business. Accordingly, the Company has recognized that year
2000 non-compliance could materially adversely affect the Company and
the Plan. As a result, the Company has contacted all significant related
third parties in an effort to determine year 2000 compliance. This
program includes sending out questionnaires to our major business
partners, regarding their year 2000 readiness. Based on the responses
received to date, the Company does not anticipate any material impact on
its operations or financial condition. Merrill Lynch has indicated to the
Plan, that as of March 5, 1999, the system that supports the Plan has
been fully renovated, has completed production testing and is undergoing
certification testing which is expected to be completed during June, 1999.
While the Company is taking what it believes are the appropriate
safeguards, there can be no assurances that the failure of third parties to
be year 2000 compliant will not have a material adverse impact on the
Plan. The Company expects that the implementation of the contingency
plans, if necessary, will not have a material adverse effect on the Plan's
ability to conduct its business.
The Company's Executive Committee, as well as the Plan, are currently
reviewing issues dealing with identifying possible year 2000 worst case
scenarios and the development of contingency plans to respond to the
likelihood of these scenarios. Contingency plans have been discussed and
developed, where deemed appropriate, for all material systems and
relationships of the Plan.
7
<PAGE>
<TABLE>
<CAPTION>
THE COMMERCE GROUP, INC. 401(k) PLAN
EIN NO.: 04-2599931 Plan No: 002
Line 27a - Schedule of Assets Held for Investment Purposes
December 31, 1998
<S> <C> <C> <C>
Units/ Current
Investments Shares Cost Value
Merrill Lynch Funds:
Commerce Group, Inc. Common
Stock Fund................................................ 2,386 $ 72,765 $ 84,556
Retirement Preservation Trust........................ 59,901 59,901 59,901
Corporate Bond Fund.................................... 10,616 124,232 123,885
Capital Fund................................................. 1,303 43,220 44,767
Basic Value Fund.......................................... 3,096 112,262 117,424
Global Allocation Fund................................... 1,895 24,421 23,873
S & P 500 Index Fund.................................... 5,405 76,032 82,701
MFS Massachusetts Investors Growth
Stock Fund ................................................ 11,468 167,276 182,462
GAM International Fund.................................... 4,164 119,359 124,842
Lord Abbett Developing Growth Fund................. 13,290 170,744 205,467
Total Investments .............................. 113,524 $ 970,212 $ 1,049,878
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
THE COMMERCE GROUP, INC. 401(k) PLAN
EIN NO.: 04-2599931 Plan No: 002
Line 27d - Schedule of Reportable Transactions
For the Period from September 1, 1998 through December 31, 1998
<S> <C> <C> <C> <C> <C>
Purchases Dispositions
Number of Number of Gain
Units/Shares Cost Units/Shares Proceeds (Loss)
Individual security transactions
in excess of 5% of plan assets:
Retirement Preservation Trust.... 80,686 $ 80,686 100,179 $100,179 $ 0
Series of security transactions in
excess of 5% of plan assets:
Commerce Group, Inc.
Common Stock Fund.............. 2,389 72,844 3 94 15
Retirement Preservation Trust... 166,778 166,778 106,877 106,877 0
Corporate Bond Fund................ 10,687 125,065 71 832 (1)
Basic Value Fund..................... 3,117 113,010 21 772 24
S & P 500 Index Fund............... 5,427 76,334 22 326 24
MFS Massachusetts Investors
Growth Stock Fund................... 11,529 168,143 61 910 43
GAM International Fund.................. 4,184 119,932 20 576 3
Lord Abbett Developing
Growth Fund................................ 13,576 174,233 286 4,021 532
</TABLE>
9
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-62367) pertaining to The Commerce
Group, Inc. 401(k) Plan of our report dated May 21, 1999, with
respect to the financial statements and schedules of The Commerce
Group, Inc. 401(k) Plan included in this Annual Report (Form 11-K) for
the period from September 1, 1998 through December 31, 1998.
Ernst & Young LLP
Boston, Massachusetts
June 18, 1999
10
<PAGE>
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange
Act of 1934, the trustees (or other persons who administer the employee
benefit plan) have duly caused this annual report to be signed on its behalf
by the undersigned hereunto duly authorized.
Dated: June 18, 1999
THE COMMERCE GROUP, INC. 401(k) PLAN
By Randall V. Becker
(Randall V. Becker)
Treasurer and Chief Accounting Officer
11
<PAGE>
