Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [x]
Filed by the Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-
12
COMMERCE GROUP CORP.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement) COMMERCE GROUP CORP.
Payment of Filing Fee (Check the appropriate box):
[x] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2). [ ]
$500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3). [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
COMMERCE GROUP CORP
6001 North 91st Street
Milwaukee, Wisconsin 53225-1795
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On Friday, October 16, 1998
To the Shareholders of Commerce Group Corp.:
The Annual Meeting of Shareholders of Commerce Group Corp. (the "Company") will
be held at the Tripoli Country Club, 7401 N. 43rd Street, Milwaukee, Wisconsin
53209, on Friday, October 16, 1998, at 3:00 p.m. (local time) for the following
purposes:
1. To elect two directors to serve for the period specified herein and
until their successors are elected and qualified;
2. To vote upon and approve the Company's proposed reincorporation from
Delaware to Wisconsin by merger into its newly-formed, wholly-owned
Wisconsin subsidiary.
3. To ratify the selection of Bruce Michael Redlin, C.P.A. as the
Company's independent accountant for the fiscal year ended March 31,
1999; and
4. To transact such other business as may be properly brought before the meeting
or any adjournment thereof.
The Board of Directors has fixed the close of business on Wednesday, August 19,
1998, as the record date for determination of shareholders entitled to notice of
and to vote at the Annual Meeting or any adjournment thereof.
YOU ARE INVITED TO ATTEND THIS MEETING IN PERSON. WHETHER OR NOT YOU PLAN TO
ATTEND, IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING.
THEREFORE, YOU ARE URGED TO PROMPTLY SIGN AND RETURN THE ACCOMPANYING PROXY CARD
IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED WITHIN THE UNITED
STATES. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO ITS EXERCISE BY GIVING
WRITTEN NOTICE TO THE SECRETARY OF THE COMPANY. IF YOU RETURN AN EXECUTED PROXY
AND THEN ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON.
ATTENDANCE AT THE MEETING WILL NOT BY ITSELF REVOKE A PROXY.
By Order of the Board of Directors
Edward A. Machulak
Executive Vice President
and Corporate Secretary
August 20, 1998
Milwaukee, Wisconsin
<PAGE>
COMMERCE GROUP CORP.
6001 North 91st Street
Milwaukee, Wisconsin 53225-1795
PROXY STATEMENT
August 20, 1998
--------------
This Proxy Statement is furnished by the Board of Directors of Commerce Group
Corp. (respectively the "Board" and the "Company" or "Commerce") in connection
with the solicitation of proxies for use at the Annual Meeting of Shareholders
to be held at 3:00 p.m. C.D.T. on Friday, October 16, 1998, or at any
adjournment thereof (the "Annual Meeting" or "Meeting") pursuant to the Notice
of said Meeting. This Proxy Statement and the proxies solicited hereby are being
first mailed to shareholders of the Company on or about August 20, 1998.
SHAREHOLDERS ARE URGED, WHETHER OR NOT THEY EXPECT TO ATTEND THE ANNUAL
MEETING, TO COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE. You may revoke your proxy at any time prior
to its exercise by giving written notice to the Secretary of the Company. If you
return an executed proxy and then attend the Annual Meeting, you may revoke your
proxy and vote in person. Attendance at the Annual Meeting will not by itself
revoke a proxy.
Unless otherwise directed in the accompanying proxy, persons named therein will
vote FOR the election of the two director nominees listed herein, FOR the
reincorporation proposal and FOR the ratification of the selection of Bruce
Michael Redlin, C.P.A. as the Company's independent accountant for the fiscal
year ended March 31, 1999. As to any other business that may properly come
before the Meeting, the proxy holders will vote in accordance with the
recommendations of the Board of Directors.
VOTING SECURITIES
The close of business on August 19, 1998 has been fixed as the record date for
determination of shareholders entitled to notice of and to vote at the Annual
Meeting or any adjournment thereof. As of August 19, 1998, there were issued,
outstanding and entitled to vote 11,112,670 shares of Commerce's common stock,
$0.10 par value (common stock). Each share of common stock entitles the
shareholder to one vote on all matters presented at the meeting.
1
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL SHAREHOLDERS AND OWNERSHIP BY MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Commerce's common stock as of August 19, 1998, by each of its
directors who own Commerce common stock, all directors and officers as a group,
and each shareholder who beneficially owns more than 5% of Commerce's
outstanding common stock.
Amount and Nature of
Beneficial Ownership (1)(2)
Name and Address of Beneficial Owner* Position Shares Percent
<S> <C> <C>
Edward L. Machulak Chairman of the Board, Director, 1,625,558(3) 14.63%
President, Treasurer, Director Emeritus,
Member of the Audit and Executive
Committee
Edward A. Machulak Director, Executive Vice President, 102,458(4) .92%
Secretary and Member of the Executive
Committee
Sidney Sodos Director and Member of the Audit 31,200 .28%
Committee
Clayton H. Tebo Director and Member of the Audit 24,951 .22%
Committee
General Lumber & Supply Co., Inc. (General Lumber) 868,000(3) 7.81%
------------
All Directors, Officers and Affiliates as a Group (4) 2,652,167 23.86%
</TABLE>
*All directors and beneficial owners listed above can be contacted through
Commerce's offices located at 6001 N. 91st Street, Milwaukee, Wisconsin
53225-1795.
(1) Unless otherwise indicated, shares shown as beneficially owned are
those as to which the named person possesses sole voting and investment
power.
(2) All shares indicated are based on common stock, after the exercise of
rights.
(3) The 1,625,558 common shares owned directly by him as of July 14, 1998
include the 97,161 shares held jointly with his wife, but do not
include the 7,500 shares borrowed by the Company, the 5,750 shares due
for interest on the shares borrowed or pledged on behalf of the
Company, and the 868,000 shares owned by General Lumber, a
privately-held company in which he owns 55% of the common shares. If
these 881,250 shares were added to the 1,625,558 common shares owned by
him directly, then the total shares under his control amount to
2,506,808 and would represent a 22.56% ownership of shares based on
11,112,670 common shares issued and outstanding. This total number of
shares does not assume the exercise of the 1,327,400 existing stock
options into common shares of which 83,900 option shares are owned by
his wife, 68,000 shares are owned by General Lumber, and the balance
are owned by unrelated parties.
The number of common shares owned by Sylvia Machulak, wife of Edward L.
Machulak, the President of the Company, personally as of July 14, 1998,
is 115,967. The number of shares owned by the Sylvia Machulak Rollover
Individual Retirement Account as of July 14, 1998, is 250,000. If the
shares owned by Sylvia Machulak and her Rollover Individual Retirement
Account were added to the 2,506,808 above described shares owned by
him, then the total shares would amount to 2,872,775, or a 25.85%
ownership. Mr. Machulak disclaims any beneficial interest in these
shares owned by Sylvia Machulak, except the 97,161 shares held jointly.
(4) Does not include 1,000 shares owned by Carol A. Machulak, Edward A.
Machulak's wife, in which he disclaims any beneficial interest.
2
<PAGE>
PROPOSAL NO. 1--ELECTION OF A DIRECTOR
Nominees for Election
The Company's Directors, for continuity, are divided into three Classes: I, II
and III, to permit staggered terms for each class of Directors. They are elected
by class at each annual meeting. At this annual meeting, two directors will be
elected to serve until the next election of the Class III Directors, for which
such Directors shall have been chosen and until their successors shall be
elected and qualified. The Directors are elected for a three-year term. The
nominees receiving the greatest number of votes at this annual meeting for the
two Director vacancy positions will be elected. Four Directors constitute the
total number of Directors.
The nominees for election as Class III Directors at this Annual Meeting are set
forth in the table below. One is an incumbent Director who was elected at the
1995 Annual Meeting of Shareholders for a three-year term and the other nominee
was elected on February 9, 1998. The nominees have consented to serve as
Directors if elected. Unless authority to vote for any Director is withheld in a
proxy, it is intended that each proxy will be voted FOR such nominee. In the
event that the nominees for Directors should before the Meeting become unable to
serve, it is intended that shares represented by proxies which are executed and
returned will be voted for such substitute nominees as may be recommended by the
Company's existing Board of Directors, unless other directions are given in the
proxies. To the best of the Company's knowledge, the nominees will be available
to serve.
<TABLE>
<CAPTION>
The Board of Directors recommend a vote FOR the nominees listed below.
Class Expiration of
Nominee Age Position Director Since Term of Office
------- --------------
<S> <C> <C> <C> <C>
Edward L. Machulak 72 Director September 14, 1962 Class III, 2001
Sidney Sodos 60 Director February 9, 1998 Class III, 2001
</TABLE>
Edward L. Machulak, age 72, has been employed by the Company since September
1962. Mr. Machulak has served as the President, Director, and Chairman of the
Board of Directors of the Company since 1962, Treasurer since 1978, and on March
11, 1991, he was elected as a Member of the Directors' Executive Committee. On
February 9, 1998, he was elected as a member of the Audit Committee.
He is a Director and the President for each of the Company's subsidiaries:
Homespan Realty Co., Inc.; Piccadilly Advertising Agency, Inc.; San Luis
Estates, Inc.; San Sebastian Gold Mines, Inc.; and Universal Developers, Inc. He
is the authorized representative of the Commerce/Sanseb Joint Venture. He is a
Director and Treasurer of Mineral San Sebastian S.A. de C.V. Also, he is
involved in various capacities with the following companies: General Lumber &
Supply Co., Inc., Director; Edjo, Ltd., Director and Secretary; and Landpak,
Inc., Director and Secretary.
Sidney Sodos, age 60, has been elected as a Class III Director and as a Member
of the Audit Committee on February 9, 1998. Mr. Sodos is the senior member of
the law firm of Sodos, Kafkas & VanEss, S.C. He is licensed and has practiced
law in the federal and state courts in the State of Wisconsin for a period of
more than 35 years. He specializes in corporate litigation and media law. He was
the Executive Director of the American Federation of Television and Radio
Artists in the States of Wisconsin and Illinois (1974-1981). He served as a
member of the North Shore East Water Trust, a division of a local municipality.
He also was a moderator of a radio program (WTMJ Milwaukee, Wisconsin) "The Law
and Sometimes Justice."
3
<PAGE>
Other Directors Whose Terms of Office Have Not Expired
Class I Director - term expires in 1999
Clayton H. Tebo, age 85, has been a Director of the Company since March 11,
1991. He was elected as a member of the Audit Committee on February 9, 1998. Mr.
Tebo had been a Director of the Company from the Company's inception, September
1962 through March 1, 1969. Mr. Tebo has been retired since March 6, 1969,
however, he has been retained from time to time by the Company as a consultant
for special projects. He also was the special assistant to the President prior
to and after his 1969 retirement.
Class II Director - term expires in 2000
Edward A. Machulak , age 46, (son of the Chairman and President) has been a
Director since October 28, 1985, and he was elected as a member of the
Directors' Executive Committee on March 11, 1991; Executive Vice President as of
October 16, 1992; Secretary as of January 12, 1987; and he was the Assistant
Secretary from April 15, 1986 through January 12, 1987. His business experience
is as follows: Director and Corporate Secretary of General Lumber & Supply Co.,
Inc., a building material wholesale and retail distribution center from April 1,
1970 to November 1983; Director and President of Gamco, Inc., a marketing and
advertising company, from November 1983 to present; Director and President of
Circular Marketing, Inc., an advertising and marketing business, from March 1986
to present; Director and President of Edjo, Ltd., a company involved in the
development, subdividing and sale of land and real estate from June 7, 1973 to
present; Director and President of Landpak, Inc., a corporation which owns,
operates, manages and sells real estate from September 1985 to present; and he
was involved in other corporate real estate ventures and business activities
since 1976.
Committees and Meetings
The Board of Directors has an Audit Committee and an Executive Committee. It
does not have a Compensation or Investment Committee as the Board of Directors
in its entirety or the Executive Committee act on those matters.
The Audit Committee of the Board of Directors which was formed on February 9,
1998, currently consists of three members: Messrs. Edward L. Machulak, Sidney
Sodos and Clayton H. Tebo. The Audit Committee reviews, acts on, and reports to
the Board of Directors with respect to auditing performance and practices, risk
management, credit risks, financial accounting and tax matters. The Committee
reviews the selection of the Company's independent accountant, the scope of the
annual audit, the nature of non-audit services, the fees to be paid to the
independent accountant, the performance of the Company's independent accountant,
the accounting practices of the Company, and all matters related. It meets every
quarter after the regular quarterly Directors' meeting. There is no
compensation.
The Executive Committee of the Board of Directors currently consists of Messrs.
Edward L. Machulak and Edward A. Machulak (son of the President). The Executive
Committee was formulated to provide the authority to act on behalf of the
Directors during such time when the Directors are not in session; two members of
the Directors are elected to this committee. The Executive Committee provides
additional resources to assist management in making strategic decisions,
consults with management on technical, tactical, organizational and
administrative matters, acquisitions and dispositions, exploration targets,
mergers and policies regarding the long-term growth of the Company. The fee paid
to the Directors, except the President, is $400 for each meeting attended.
During the Company's fiscal year ended March 31, 1998, the Board of Directors
met four times at the regularly scheduled meeting and once at the Annual
Directors' meeting. The Audit Committee was newly formed on February 9, 1998 and
did not have any meetings during this fiscal year. The Executive Committee had
eight
4
<PAGE>
meetings. All of the Directors holding office attended 100% of the Director and
Executive Committee meetings, except Mr. Sidney Sodos who was elected as a
Director and as a member of the Audit Committee on February 9, 1998. The
Director's fees (excluding the President) are based on a minimum of four
quarterly scheduled meetings held in February, May, August and November of each
year at $1,200 for each meeting held. These fees, together with travel and
out-of-pocket expenses, if any, are payable quarterly on the date of each
quarterly scheduled meeting or if no quarterly meeting is held then such fees
are payable on the second Monday of said month that the meeting was to be held.
On January 1, 1981, the Directors unanimously agreed by resolution that cash
payment of Directors' fees will be deferred until such time as the Company has
adequate annual operating profits and a cash flow to make such payments. This
resolution was reconfirmed on October 16, 1992. On September 16, 1994, at the
Annual Directors' Meeting, the Directors unanimously adopted a resolution that
in lieu of cash payment of Directors' fees, the Directors have a right to obtain
the Company's common shares on or before the close of each fiscal year based on
the lowest bid price during the twelve-month period preceding the issuance of
the common shares. The Directors are encouraged to own the Company's common
shares. During March 1998, three Directors exercised their rights to convert the
sum due to them for Director fees and Officer compensation which combined
amounted to $20,800 for 20,800 of the Company's common shares. The conversion
price on March 20, 1998, for these shares was based on the low bid price of
$1.00 per share.
<TABLE>
<CAPTION>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table discloses compensation for the three fiscal years ended
March 31, earned, but not received (accrued) by the Company's Chief Executive
Officer; there was no other Company Executive Officer who was paid in excess of
$100,000 in compensation in this fiscal year:
Annual Compensation (1)
Name and Principal Position Year Salary($) Bonus($) All Other Compensation ($)(2)(3)
- ---------------------------
<S> <C> <C> <C> <C>
Edward L. Machulak 1998 $165,000 (None Paid-Accrued) (1) & (1)(a) None
(Chairman, Chief Executive 1997 $139,875 (None Paid-Accrued) (1) & (1)(a) None
Officer and Treasurer) 1996 $114,750 (None Paid-Accrued) (1) & (1)(a) None
</TABLE>
(1) The salaries payable to Edward L. Machulak amount to $1,509,015 and
were accrued since April 1, 1981, or for a period of 17 years: 11 years
at $67,740, four and one-half years at $114,750, and one and one-half
years at $13,750. The accrual of salaries is at the request of the
Company to assist the Company with its cash preservation. The salaries
do not include the value of perquisites and other personal benefits
because the aggregate amount of such compensation, if any, does not
exceed the lesser of $50,000 or ten percent of the total amount of
accrued annual salary and bonus owed to him.
(1)(a) On February 16, 1987, by a Consent Resolution of all of the Directors,
Edward L. Machulak, the President, was awarded as a bonus compensation
the following: For a period of twenty (20) years, commencing the first
day of the month following the month in which the Company begins to
produce gold from its El Salvadoran gold mining operations, the Company
will pay annually to the President two percent (2%) of the pre-tax
profits earned from these operations. The pre-tax profits for the
fiscal year ended March 31, 1998 amounted to $117,699, therefore, the
sum of $2,353.98 is due and payable to him.
(2) On March 11, 1991, the Directors decided that it would be in the best
interest of the Company to reactivate its Executive Committee with
authority to act on behalf of the Directors during such time when the
Directors are not in session; two members were elected to this
committee. The Executive Committee meets
5
<PAGE>
each month or more often when a regular Directors' meeting is not held.
The members of the Executive Committee (excluding the President of the
Company, who is a Director and a member of the committee) received a
$400 compensation fee for each meeting attended. On February 9, 1998,
the Directors formed an Audit Committee which will meet after each
quarterly meeting providing there is business to be conducted. During
the fiscal period ended March, 31, 1998, no meetings were held and
there is no additional compensation.
6
<PAGE>
(3) Members of the Board of Directors who were Directors as of December 5,
1979, and Directors thereafter who have been a Director for a period of
15 years or more and do not stand for re-election shall become
Directors Emeriti. Such Directors are entitled to receive notice of all
Board meetings, to attend such meetings, and to receive Directors' fees
regardless of attendance at any meeting, at a fee of not less than that
provided prior to becoming a Director Emeritus. An individual serving
solely as a Director Emeritus is not entitled to vote on any matter
before the Board nor to be counted as a member of the Board for the
purpose of determining a quorum. At present, there is no person who is
not a Director that qualifies as a Director Emeritus.
(4) There have never been any arrangements or understandings between any
Director and any other person pursuant to which any Director was
selected as a Director.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
There were no Options/SAR benefits provided to any Officers for compensation
during this fiscal period.
Board Compensation Committee Report on Executive Compensation
The Company's executive compensation program is administered by all of the
Directors; presently Edward L. Machulak, Edward A. Machulak, Sidney Sodos and
Clayton H. Tebo. During the fiscal year ended March 31, 1998, the Directors have
considered many factors such as business performance, cash preservation, Company
goals, and whatever other component that was necessary to arrive at a just
compensation for the Company's Officers. They also considered the needs of
attracting, developing, rewarding and retaining highly qualified and productive
individuals by providing them with attractive compensation awards. The Directors
want to ensure compensation levels that are externally competitive and
internally equitable, therefore, the Directors agreed to provide an encouraging
executive stock ownership program to enhance a mutuality of interest with other
shareholders. The Directors are committed to a strong, positive link between the
Company's achievement of its goals, taking into consideration its financial
condition and compensation and benefits plans.
Base Salary
The Directors review each executive officer's salary annually. In determining
appropriate salary levels, they consider the level and scope of responsibility,
experience, Company and individual performance, internal equity, as well as pay
practices of other companies relating to executives of similar responsibility.
By design, they strive to set executives' salaries at competitive market levels.
They believe maximum performance can be encouraged through the use of
appropriate incentive programs. Incentive programs for executives are as
follows:
Annual Incentives
Annual incentive awards are made to executives and managers to recognize and
reward corporate and individual performance. The Directors' plan provides an
incentive fund. A portion of the available bonus is reserved for discretionary
performance awards by the Company's President for other employees whose efforts
and performance are judged to be exceptional. Due to the Company's preservation
of cash and because the Company has limited revenues and it is not in full gold
production, the incentives have been deferred, but are expected to be payable at
some future date.
7
<PAGE>
The amount individual executives may earn is directly dependent upon the
individual's position, responsibility, and ability to impact the Company's
financial success. External market data is reviewed periodically to determine
competitive incentive opportunities for individual executives.
Equity-Based Compensation
Non-Statutory Stock Option ("NSO") and Stock Appreciation Rights ("SAR") Plans
The purpose of these plans is to provide additional incentives to employees to
work to maximize shareholder value. The NSO and SAR plans generally utilize a
vesting period to encourage key employees to continue in the employ of the
Company. The Directors are charged with responsibility for administering and
granting non-statutory stock options and stock appreciation rights. Due to the
Company not being in full gold production, thus indeterminable profits, no NSOs
or SARs have ever been granted, but it is intended to provide these benefits at
such time in the future as determined by the Directors.
Commerce Group Corp.'s 1994 Services and Consulting Compensation Plan
A Securities and Exchange Commission Form S-8 Registration Statement under the
Securities Act of 1933 had been filed and was effective as of April 4, 1994,
Registration No. 33-77226, registering a total of 500,000 of the Company's
common shares, $0.10 par value. The purpose of this filing is to provide
employees, consultants and others that perform services for the Company, its
common shares in lieu of cash for services rendered. The Plan also provides that
the Directors may provide stock and/or option grants under the terms and
conditions of this agreement. Since April 4, 1994, the Company has issued under
this Plan its common shares in payment for compensation as follows: Director
fees, including accumulated fees from prior years, 40,952; due to Officers,
32,148; employee bonuses, 165,736; consulting fees, 39,700; and for services
rendered, 199,661; for a total of 478,197 shares.
Five hundred common shares were issued to the President.
Chief Executive Officer
In order to induce the President of the Company, Mr. Edward L. Machulak, to
continue using his best efforts to place the gold mines into full production,
the Directors have assured him that he will be adequately compensated for his
achievements. This additional recompense is to make certain that the Company's
goal to produce gold is realized. The Directors believe that the maximum
performance will be achieved due to the assurance of this promise.
The fact that the President of the Company has not received any cash payment for
salaries for more than 17 years and that the value of the amount due to him has
deteriorated due to inflation and other factors, the Directors have agreed to
justly take these conditions into consideration at such time when the Company
will be in a position to make a cash or any other mutually satisfactory payment
arrangement.
The Directors believe that the Company's President is achieving the Company's
objective considering that the funding arrangements continue to be problematic.
Employment Agreements
With the exception of the disclosure made herein relative to Mr. Edward L.
Machulak's (President) bonus compensation, and because the Directors have agreed
that he will be adequately compensated at such time as the Company's Joint
Venture will be producing gold, he has no separate employment agreements, but he
has a general understanding of the incentive compensation to be provided to him.
There are no termination or severance arrangements.
8
<PAGE>
PERFORMANCE GRAPH
The following Performance Graph shall not be deemed incorporated by reference by
any general statement incorporating by reference this proxy statement into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent that the Company specifically incorporates this information
by reference, and shall not otherwise be deemed filed under such Acts.
Media General Financial Services of Richmond, Virginia prepared the Company's
Performance Graph assuming that $100 was invested on April 1, 1993, by the
purchase of the Company's shares and it then compares the Company's performance
over a five-year period against two measurements: the NASDAQ Market Index (used
as the Broad Market Index) and the Peer Group Index (Industry SIC Code Index
1041--Gold Ores). Comparisons are made using two peer groups. Last year's peer
group is known as the "Old Peer Group" and this year's peer group is known as
the "New Peer Group. The New Peer Group was expanded to include additional
mining companies. The graph also assumes the reinvestment of dividends, if any,
for each measurement period.
The information shown on the chart below is historical and does not reflect the
value of the gold ore reserves.
[The chart/graph could not be converted into ASCII. The data used to make the
chart/graph is listed below.]
<TABLE>
<CAPTION>
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
OF COMPANY, PEER GROUP AND BROAD MARKET
FISCAL YEAR ENDING MARCH 31
<S> <C> <C> <C> <C> <C> <C>
COMPANY 1993 1994 1995 1996 1997 1998
-------
COMMERCE GROUP CORP. 100 64.71 211.76 129.41 100.00 44.12
NASDAQ MARKET INDEX 100 115.57 122.61 164.91 184.50 278.82
9
<PAGE>
OLD PEER GROUP 100 202.46 153.06 315.32 233.12 106.87
NEW PEER GROUP 100 139.61 100.70 135.86 115.32 67.44
The Broad Market Index chosen was the NASDAQ Market Index.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
The Company's past revenues have been insufficient to meet its financial
obligations when they became due. Various transactions with management on an
individual basis and with the affiliates were entered into by the Company in
order to utilize assets whenever possible, other than cash to meet its or its
affiliates' obligations when due and thereby preserve the Company's cash
resources for use in meeting its other liabilities. These disclosures are
updated herein as follows:
(1) Edward L. Machulak Transactions (President of the Company)
With the consent and approval of the Directors, the President of the Company, as
an individual and not as a Director or Officer of the Company, entered into the
following financial transactions with the Company, the status of which is
reflected as of March 31, 1998:
The Company, in an attempt to preserve cash, had prevailed on its President to
accrue his salary for the past 17 years: 11 years at $67,740 annually
($745,140); four and one-half years at $114,750 annually ($516,375); and one and
one-half years at $13,750 ($247,500) for a total of $1,509,015.
The amount of funds which the Company has borrowed from its President from time
to time, together with accrued interest, amounts to $2,219,984. To evidence this
debt, the Company had issued its President a series of open-ended, secured,
on-demand promissory notes, with interest payable monthly at the prime rate plus
2%, but not less than 16% per annum.
In order to satisfy the Company's cash requirements from time to time, the
Company's President has sold or pledged as collateral for loans, shares of the
Company's common stock owned by him. In order to compensate its President for
selling or pledging his shares on behalf of the Company, the Company has made a
practice of issuing him the number of restricted shares of common stock
equivalent to the number of shares sold or pledged, plus an additional number of
shares equivalent to the amount of accrued interest calculated at the prime rate
plus 3% per annum and payable monthly. The Company received all of the net cash
proceeds from the sale or from the pledge of these shares. The Company returned
all of the shares (222,950) borrowed from him and issued 40,036 restricted
common shares in full payment for the interest during this fiscal period. It may
owe additional common shares for such shares loaned or pledged by him for
collateral purposes to others for the benefit of the Company, all in accordance
with the terms and conditions of Director approved open-ended loan agreements
dated June 20, 1988, October 14, 1988, May 17, 1989, and April 1, 1990.
On February 16, 1987, the Company granted its President, by unanimous consent of
the Board of Directors, compensation in the form of a bonus in the amount of 2%
of the pre-tax profits realized by the Company from its gold mining operations
in El Salvador, payable annually over a period of 20 years commencing on the
first day of the month following the month in which gold production commences. A
sum of $2,354 is due to him as of the end of the fiscal year.
President's Ownership of Mineral San Sebastian S.A. de C.V. (Misanse) Common
Shares
10
<PAGE>
Prior proxy statements have detailed the circumstances in which the President
has acquired on December 10, 1993, the ownership of 203 Misanse common shares.
In addition, as of June 1995, he personally, for his own account, purchased an
additional 264 Misanse common shares from a Misanse shareholder in an
arms-length transaction. There are a total of 2,600 Misanse shares issued and
outstanding. The Company has agreed in connection with the issuance of the
mining concession from the Government of El Salvador not to exceed its 52%
Misanse stock ownership.
Collateral Pledged to Secure the Promissory Notes
The following collateral is held by him: (1) 2,002,037 shares of the Sanseb
$0.10 par value common stock; (2) 1,346 Mineral San Sebastian, S.A. de C.V.
common shares, 100 colones par value; (3) 300 Homespan Realty Co., Inc. no par
value common shares; (4) 1,800 Universal Developers, Inc. no par value common
shares; (5) 419,000 International Property Exchange, Inc. $0.05 par value common
shares; (6) one voting membership certificate of San Luis Valley Irrigation Well
Owners, Inc.; (7) certificate no. 312 consisting of .001447 units of
Augmentation Plan Number One of San Luis Valley Irrigation Well Owners, Inc.;
(8) 100 Piccadilly Advertising Agency, Inc. $0.10 par value common shares; (9)
two Deeds of Trust to Colorado Public Trustee granted by San Luis Estates, Inc.
to Edward L. Machulak are described as follows: one Deed of Trust is dated March
20, 1984, and includes four parcels of land; and the other Deed of Trust is
dated October 4, 1982, and consists of six parcels of land located in the San
Luis North Estates Subdivision, Costilla County, Colorado; (10) a deed of trust
(jointly held with a related company in which he is involved) which contains
approximately 331 acres of real estate known as the "Standing Rock Campground"
located in the Lake of the Ozarks, Camden County, Missouri; (11) assignment with
others, the concession granted to Misanse which was assigned by Misanse to the
Joint Venture; (12) all of its current investment holdings; (13) all other
miscellaneous assets owned by the Company filed under the Uniform Commercial
Code requirements, and all other assets owned by the Joint Venture and/or its
subsidiaries; (14) the assignment and pledge of all the rights, titles, claims,
remedies, and interest held by the Commerce/Sanseb Joint Venture which was
formed on September 22, 1987; and (15) the cross-pledge collateral rights.
(2) Edward L. Machulak Rollover Individual Retirement Account (ELM RIRA)
The Company had borrowed an aggregate of $469,987, including accrued interest,
from the Company's President's ELM RIRA. These loans are evidenced by the
Company's open-ended, secured, on-demand promissory note, with interest payable
monthly at the prime rate plus 4% per annum, but not less than 16% per annum.
The following collateral is held by the ELM RIRA: (1) assignment with others,
the concession granted to Misanse which was assigned by Misanse to the Joint
Venture; (2) the assignment and pledge of all the rights, titles, claims,
remedies, and interest held by the Commerce/Sanseb Joint Venture which was
formed on September 22, 1987; and (3) the cross-pledge collateral rights.
(3) General Lumber & Supply Co., Inc. ("General Lumber")
Also with the consent and approval of the Directors, a company (General Lumber)
in which the President has a 55% ownership entered into the following
agreements, and the status is reflected as of March 31, 1998.
This related company has been issued an open-ended, secured, on-demand
promissory note which at March 31, 1998 amounts to $1,182,709; the annual
interest rate is 4% plus the prime rate, but not less than 16%, and it is
payable monthly.
The Company leases approximately 4,032 square feet on a month-to-month basis for
its corporate headquarters office; the monthly rental charge is $2,789, and the
annual amount charged for the past three fiscal years is as follows: 1998,
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<PAGE>
$33,468; 1997, $33,468; and 1996, $28,316.
The same related company provides consulting, administrative services, use of
data processing equipment, use of its vehicles and other property as required by
the Company. Total charges for these services were as follows: 1998, $8,040;
1997, $7,950; and 1996, $7,920.
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 use its credit facilities to purchase
items needed for the Joint Venture's mining needs.
The collateral specifically pledged to General Lumber securing the Promissory
Note is as follows: (1) 48,645 San Luis Estates, Inc. common shares, $0.50 par
value; (2) a deed of trust issued jointly with the President of the Company
dated November 3, 1983, by and between Homespan Realty Co., Inc., as party of
the first part, which is a lien on the 331-acre Standing Rock Campground located
in Camdenton, Missouri; (3) an interest with the President of the Company in an
assignment and pledge of all of the corporate assets and on all of its
subsidiaries' assets which has been filed under the Uniform Commercial Code
requirements; (4) assignment with others, the concession granted to Misanse
which was assigned by Misanse to the Joint Venture; (5) the assignment and
pledge of all the rights, titles, claims, remedies, and interest held by the
Commerce/Sanseb Joint Venture which was formed on September 22, 1987; and (6)
the cross-pledge collateral rights.
The Company purchased during its fiscal year ended March 31, 1998, on behalf of
its Joint Venture, various items that it required from time to time. These
purchases are believed to have been at a price and at terms equal to or better
than generally offered to others.
(4) Sylvia Machulak Rollover Individual Retirement Account
The President's wife's Individual Retirement Account ("IRA") has the Company's
open-ended, secured, on-demand promissory note in the sum of $243,218 which
bears interest at an annual rate of prime plus three percent, but not less than
16% and the interest is payable monthly. On December 14, 1996, she acquired a
four-year stock option to purchase 83,900 of the Company's restricted common
shares at a price of $3.00 each which expires December 13, 2001. This stock
option transaction had the same terms as were entered into with other third
party arms-length transactions.
This IRA has as collateral the following: (1) 48,645 San Luis Estates, Inc.
common shares, $0.50 par value; (2) 12 lots located in Fort Garland, Costilla
County, Colorado; (3) 30 lots located in the San Luis North Estates Subdivision,
Costilla County; (4) assignment with others, the concession granted to Misanse
which was assigned by Misanse to the Joint Venture; (5) assignment and pledge of
all the rights, titles, claims, remedies, and interest held by the
Commerce/Sanseb Joint Venture which was formed on September 22, 1987; and (6)
the cross-pledge collateral rights.
(5) Cross-Pledge Collateral Agreement
The President, Edward L. Machulak, as an individual and not as a Director or
Officer of the Company, the Edward L. Machulak Rollover Individual Retirement
Account, General Lumber, and the Sylvia Machulak Rollover Individual Retirement
Account, individually are entitled to specific collateral that has been pledged
to them by the Company, its subsidiaries, affiliates, and the Joint Venture.
Upon default by the Company, or its subsidiaries, affiliates, or the Joint
Venture, Edward L. Machulak, the Edward L. Machulak Rollover Individual
Retirement Account, General
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<PAGE>
Lumber, and the Sylvia Machulak Rollover Individual Retirement Account have the
first right to the proceeds from the specific collateral pledged to each of
them. The Company, its subsidiaries, its affiliates, and the Joint Venture also
have cross-pledged the collateral without diminishing the rights of the specific
collateral pledged to each of the following: Edward L. Machulak, the Edward L.
Machulak Rollover Individual Retirement Account, General Lumber, and the Sylvia
Machulak Rollover Individual Retirement Account. The purpose and the intent of
the cross-pledge of collateral is to assure Edward L. Machulak, the Edward L.
Machulak Rollover Individual Retirement Account, General Lumber, and the Sylvia
Machulak Rollover Individual Retirement Account, that each of them would be paid
in full; and, any excess collateral that would be available is for the purpose
of satisfying any debts and obligations due to each of the named parties. The
formula to be used (after deducting the payments made from the specific
collateral) is to total all of the debts due to Edward L. Machulak, the Edward
L. Machulak Rollover Individual Retirement Account, General Lumber, and the
Sylvia Machulak Rollover Individual Retirement Account, and then to divide the
total debt into each individual debt to establish each individual percentage of
the outstanding debt due. This percentage then will be multiplied by the total
of the excess collateral to determine the amount of proceeds derived from the
excess collateral due to each of them.
(6) Cancellation of the Inter-Company Debts Upon Default
Since part of the collateral pledged to Edward L. Machulak, the Edward L.
Machulak Rollover Individual Retirement Account, General Lumber, and the Sylvia
Machulak Rollover Individual Retirement Account is the common stock of Homespan
Realty Co., Inc., Piccadilly Advertising Agency, Inc., San Sebastian Gold Mines,
Inc., San Luis Estates, Inc.; Mineral San Sebastian, S.A. de C.V., Universal
Developers, Inc., and one hundred percent of the Company's interest in the
Commerce/Sanseb Joint Venture, the Company agreed, upon default of the payment
of principal or interest to any of the lenders mentioned herein, that it will
cancel any inter-company debts owed to the Company by any of its wholly-owned
subsidiaries or affiliates at such time as any of the stock or Joint Venture
ownership is transferred as a result of default of any promissory note.
(7) Guarantors
The agreement among the lenders further confirms that the Company and all of the
following are guarantors of loans made to each of the lenders mentioned above:
Commerce/Sanseb Joint Venture; Homespan Realty Co., Inc.; Piccadilly Advertising
Agency, Inc.; San Luis Estates, Inc.; San Sebastian Gold Mines, Inc.; and
Universal Developers, Inc. They jointly and severally guaranteed payment of the
note(s) that the Company and they caused to be issued and also agreed that these
note(s) may be accelerated in accordance with the provisions contained in the
agreement and/or any collateral or mortgage/deeds of trust securing these notes.
Also, the Company and all of its subsidiaries and affiliates, including the
Commerce/Sanseb Joint Venture, agreed to the cross-pledge of the collateral for
the benefit of Edward L. Machulak, the Edward L. Machulak Rollover Individual
Retirement Account, General Lumber, and the Sylvia Machulak Rollover Individual
Retirement Account.
(8) Directors' Transactions
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. In the past, Directors were allowed to cancel the payment for
fees earned by them by accepting the Company's restricted common shares. Said
pricing of shares varied and were dependent partially on the market value of the
tradable common shares. Beginning with October 1, 1996, the Director fees are
$1,200 for each quarterly meeting and $400 for the attendance of any other
Directors' meeting. The Executive Director fees beginning on October 1, 1996,
were fixed at $400 a meeting. The Directors and Officers have a right to
exchange the amount due to them for the Company's common shares. The
Director/President of the Company does not receive any Director fees.
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<PAGE>
On September 16, 1994, the Directors adopted a resolution offering the Directors
and Officers of the Company (President not included) a right to exchange the
compensation due to them for the Company's common shares valued at the lowest
bid quote reflected in the NASD Monthly Statistical Report during a twelve-month
period preceding the exercise of this right during March of each fiscal year.
During March 1998, the Directors/Officers exercised their rights to purchase
20,800 shares at a price of $1.00 per share which was the low bid price on March
26, 1998, in payment of all compensation due to them as of March 31, 1998.
14
<PAGE>
(9) Machulak, Hutchinson, Robertson, Dwyer & O'Dess, S.C. ("Law Firm")
The Law Firm which represents the Company in which a son of the President is a
principal is owed the sum of $175,082 for legal services rendered some of which
dates back to the amount due from July 1984. The amount due is based on the
present current hourly rate charged to the Company. By agreement, these fees are
to be adjusted to commensurate with the hourly fees charged by the Law Firm on
the date of payment. Also, the son of the President and his son's wife have the
Company's open-ended, on-demand promissory note in the sum of $59,222 which
bears interest at an annual rate of 16% payable monthly.
(10) Intercompany Transactions and Other Transactions
(a) 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 had transactions with its majority-owned
subsidiaries, San Luis Estates, Inc., Universal Developers, Inc.,
Homespan Realty Co., Inc., Piccadilly Advertising Agency, Inc., San
Sebastian Gold Mines, Inc., Mineral San Sebastian S.A. de C.V., and
substantial transactions with the Commerce/Sanseb Joint Venture.
(b) The Company formerly advanced funds, allocated and charged its expenses
to the Joint Venture. The Joint Venture in turn capitalized all of
these advances, allocations and expenses. During this fiscal year the
Company restated its prior period financial statements.
The Company changed its consolidation policy to include the income and
expenses and the assets, liabilities and equity of its Joint Venture
rather than show it as an investment on the balance sheet. The
consolidated balance sheets for March 31, 1998 and 1997 and the
consolidated statements of changes in shareholders' equity,
consolidated statements of cash flows and consolidated statements of
operations for the years ended March 31, 1998, 1997 and 1996 were also
restated to reflect this change.
The balance sheet effect of the change in policy was to reduce the
Joint Venture advances by a total of $3,574,460 which consisted of the
following amounts: $1,511,895 for 1998; $1,012,739 for 1997; $816,029
for 1996 and $233,797 for prior years. Retained earnings were reduced
by an offsetting amount for both 1998 and 1997. The consolidated
statements of changes in shareholders' equity were also restated to
reflect these changes.
The consolidated statements of operations for the years ended March 31,
1998, 1997 and 1996 were restated to eliminate interest income earned
from the Joint Venture. The amounts were $1,511,895, $1,012,739 and
$816,029 for 1998, 1997 and 1996 respectively.
The consolidated statements of cash flows for 1998 and 1997 were also
restated to reflect the changes in operating profits (losses) that are
outlined in the above paragraphs.
This change is reflected in the Company's financial statements, but
they do not alter the fact that for distribution of the Joint Venture
profits, the former accounting methods will be separately preserved to
distinguish and determine the future division of funds.
(c) The Company maintains a separate accounting for the funds advanced to
the Joint Venture and for the interest charged which is 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 profits.
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Company Advances to the Joint Venture Total Advances Interest Charges
Balance April 1, 1990 $ 1,625,163 $ 252,060
Year ended March 31, 1991 718,843 266,107
Year ended March 31, 1992 698,793 312,004
Year ended March 31, 1993 1,003,617 347,941
Year ended March 31, 1994 1,155,549 451,180
Year ended March 31, 1995 2,884,078 751,389
Year ended March 31, 1996 4,303,045 1,286,739
Year ended March 31, 1997 4,864,413 1,567,375
Year ended March 31, 1998 5,631,450 2,179,731
-------------
Gross advances $22,884,951 $7,414,526
Less proceeds received from gold sales:
Year ended March 31, 1996 $1,180,279
Year ended March 31, 1997 969,721
Year ended March 31, 1998 1,234,443 3,384,443
-----------
Balance $19,500,508
Advances by three of the Company's
wholly-owned subsidiaries 590,265 0
-------------
Total advances through March 31, 1998 $20,090,773 $7,414,526
===========
</TABLE>
(d) Transaction with Pension or Similar Plans
During December 1983, the Company's Board of Directors authorized the Company to
establish a Cash or Deferred Profit Sharing Plan and Trust to meet the
requirements for a qualified employee benefit plan as set forth in Section 401
et seq of the 1954 Internal Revenue Code, Section 401(k) and further authorized
that, in lieu of cash, certain assets could be placed in this plan for those who
qualify. Since all of the Company's assets are pledged as collateral, in
connection with outstanding loans, and because of the Company's limited cash
position, this plan was not effected, however it is intended to effectuate the
plan as soon as it is able to fund it.
(e) Transactions with Promoters
The Company has entered into several consulting agreements with finders of
funds. These finders may be deemed to be promoters.
(f) Termination of Employment--None
(g) Compliance with Section 16(a) of the 1934 Act
The Company believes that each Director and/or Officer has not intentionally
been remiss in filing Securities and Exchange Commission Forms 3, 4, or 5 and
amendments thereto on a timely basis during the fiscal year ended March 31,
1998. The Company is not responsible for incorrect information supplied to it by
its Directors or Officers in regard to compliance with Section 16(a) of the 1934
Act.
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<PAGE>
PROPOSAL NUMBER 3 - REINCORPORATION IN WISCONSIN
At its meeting on May 11, 1998, the Board of Directors of the Company
unanimously approved and adopted, subject to stockholder approval, an Agreement
and Plan of Merger (the "Merger Agreement"), a copy of which is included as
Exhibit A to this Proxy Statement, pursuant to which the Company is to be merged
with and into CGC Wisconsin, Inc. ("CGC Wisconsin"), a Wisconsin corporation
recently organized by the Company as a wholly-owned subsidiary solely for the
purpose of effecting the change in the state of incorporation of the Company
(sometimes referred to below as "CGC Delaware") from Delaware to Wisconsin (the
"Reincorporation"). On the effective date of the Reincorporation (the "Effective
Date"), CGC Delaware will be merged into CGC Wisconsin (the "Merger") and CGC
Wisconsin will be the surviving corporation of the Merger and automatically
change its name to "Commerce Group Corp."
As a result of the Reincorporation, each outstanding share of Common Stock will
be converted automatically into one share of common stock of CGC Wisconsin, $.10
par value per share, and should continue to be listed without interruption on
the Boston Stock Exchange and on The Nasdaq Stock MarketSM. Each certificate
currently representing issued and outstanding shares of Common Stock will
continue after the Reincorporation to represent the same number of shares of
common stock of CGC Wisconsin. Outstanding options to purchase shares of Common
Stock outstanding will be automatically converted into identical options to
purchase the same number of shares of CGC Wisconsin. IT WILL NOT BE NECESSARY
FOR STOCKHOLDERS TO EXCHANGE THEIR EXISTING STOCK CERTIFICATES FOR STOCK
CERTIFICATES OF CGC WISCONSIN AS A RESULT OF THE REINCORPORATION.
In addition, in connection with the reincorporation, the number of authorized
shares of common stock will be increased from 15,000,000 to 50,000,000 shares.
The purpose of the increase in authorized common stock is to provide for future
issuances of common stock. The Company has no current plans to issue any
additional shares of common stock.
The Reincorporation will not result in any change in the name, business,
management, benefit plans, location, assets, liabilities or net worth of the
Company. The corporate headquarters of the Company will remain in Wisconsin. All
of the assets, liabilities, subsidiaries and other properties of CGC Delaware
will, pursuant to the Merger Agreement, become the assets, liabilities,
subsidiaries and other properties of CGC Wisconsin to the full extent provided
by law.
At present, CGC Wisconsin has only nominal assets.
Assuming the requisite stockholder authorization and approval of the
Reincorporation is obtained at the Meeting, it is presently anticipated that the
Reincorporation will be consummated on October 20, 1998, or as soon thereafter
as is practicable in the discretion of the Board of Directors. The Board of
Directors of the Company has, however, reserved the right to abandon the
Reincorporation prior to the Effective Date of the Merger. See "Amendment of the
Merger Agreement or Abandonment of the Reincorporation."
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
THE REINCORPORATION PROPOSAL.
Principal Reasons for Changing the State of Incorporation
The proposed Reincorporation will provide the Company with state tax and other
savings. As a Delaware business corporation, the Company is required to file
annual returns with the Secretary of State of Delaware, and pay an annual
franchise tax based on "assumed par value capital." The Company's 1997 Delaware
franchise tax liability paid in 1998 was approximately $820.00. It is
anticipated that the Delaware franchise tax liability for 1998, will be
substantially the same if the Company does not change its state of incorporation
from Delaware or if it does not
17
<PAGE>
increase the number of authorized shares. Wisconsin has no similar annual tax on
domestic corporations; however, it would impose a one-time fee of up to $10,000
for the establishments of CGC Wisconsin. See "Comparison of Delaware and
Wisconsin Law - Differences." Thus, the present value of the savings resulting
to the Company from the reincorporation over a period of years could be a
substantial sum of money particularly in view that the Directors want to
increase substantially its authorized shares.
An additional reason for the Reincorporation is to conform the Company's legal
residence to its principal place of business. The Company believes that having
its legal residence in Wisconsin will enable the Company to have a more
significant voice in the legislative process with respect to the corporate laws
directly affecting it. This opportunity can be an important one, as corporations
are substantially affected by changes in the legal and financial environment in
which they operate, and by the variety of legislative and other governmental
actions that may be taken in response to such changes.
In addition, the Board of Directors believes that, because the Wisconsin
Business Corporation Law ("WBCL") offers corporate law advantages comparable to
those that the Delaware General Corporation Law ("DGCL") offers, the extra tax
burden that results from maintaining a Delaware domicile is unwarranted. The
WBCL includes the grant of authority to permit directors broader discretion in
performing their duties and mandatory corporate indemnification of directors and
officers. See "Comparison of Delaware and Wisconsin Law-Similarities; Comparison
of Delaware and Wisconsin Law-Differences." These provisions make it more
difficult for shareholders to challenge directors' actions or successfully sue
them for breach of fiduciary duty. The Board of Directors believes that these
provisions are of value in that they permit the Company to continue to attract
and retain qualified persons to serve as directors and to encourage the
effective exercise of directors' business judgment by providing a greater degree
of assurance to the directors that they can act within a wide range of
discretion without the threat of litigation. At present, there is no pending
litigation or proceeding involving the directors of the Company in their
capacity as directors, and to the knowledge of the Company, no such litigation
or proceeding is threatened.
The Delaware Certificate and By-Laws and Wisconsin Articles and By-Laws
Although the Reincorporation is not expected to change the business and
operations of the Company, the Reincorporation will change the legal domicile of
the Company and will change the law applicable to the Company's corporate
affairs from Delaware to Wisconsin and result in the Company's corporate affairs
being governed by the Restated Articles of Incorporation of CGC Wisconsin
("Wisconsin Articles") and the By-Laws of CGC Wisconsin ("Wisconsin By-Laws").
The Wisconsin Articles and the Wisconsin By-Laws of CGC Delaware will be
substantially the same as the current Restate Certificate of Incorporation and
By-Laws of CGC Delaware ("Delaware Certificate" and "Delaware By-Laws"). Certain
differences, which generally relate to the differences between the WBCL and the
DGCL, are summarized in the comparison of Wisconsin and Delaware law sections
below. Copies of the Wisconsin Articles and the Wisconsin By-Laws, and the
Delaware Certificate and the Delaware By-Laws, may be obtained from the Company,
without charge, by written request addressed to Commerce Group Corp., 6001 North
91st street, Milwaukee, Wisconsin 53225-1795.
Comparison of Delaware and Wisconsin Law - Similarities
Modern corporation laws have evolved to the point where the laws of most states
contain substantially similar provisions regarding major features of corporate
existence. Certain relevant similarities between the DGCL as it currently
applies to the Company and the WBCL as it will apply to the Company after the
Reincorporation are described below:
Classified Board of Directors; Removal of Directors. Both the DGCL and the WBCL
allow the Board of Directors to be divided into two or three classes. The
Delaware Certificate provides and the Wisconsin Articles will provide
18
<PAGE>
that the Board of Directors is to be classified into three classes of
approximately equal size and tenure. Under the DGCL, absent a provision to the
contrary in a corporation's certificate of incorporation, directors on a
classified board can be removed only for cause. The DGCL allows for the removal
of directors on a classified board with or without cause unless the articles of
incorporation or by-laws provide that the directors may be removed only for
cause. The Wisconsin Articles will provide that Directors may be removed only
for cause. As a result, the current prohibition on the removal of Directors
without cause will be carried over to the Wisconsin Articles. In addition, the
Delaware Certificate provides and the Wisconsin Articles will provide that
vacancies on the Board of Directors may be filled, subject to the rights of
holders of Preferred Stock or outstanding stock other than Common Stock, only by
the majority vote of Directors remaining on the Board of Directors, and that any
new Director elected to fill a vacancy on the Board will serve the remainder of
the full term of the class in which the vacancy occurred.
Preferred Stock. The Delaware Certificate authorizes and the Wisconsin Articles
will authorize the issuance of 250,000 shares of preferred stock (the "Preferred
Stock") by the Board of Directors without any further action by the
stockholders. The Delaware Certificate provides and the Wisconsin articles will
provide that the relative rights and preferences of any Preferred Stock issued
in the future may be established by the Board of Directors without shareholder
action. The DGCL permits the Board of Directors to decrease the number of
authorized shares of any series of preferred stock (but not below the number of
shares then outstanding). The WBCL, however, does not permit a Board of
Directors to decrease the number of shares in a series of preferred stock.
Required Vote for Authorization of Certain Action. Both the DGCL and the WBCL
permit the authorization of a merger, dissolution or disposition of
substantially all the assets of corporations by the holders of a majority of the
outstanding shares of capital stock entitled to vote. Under the WBCL, this
majority shareholder vote also applies to a share exchange.
Shareholder Action by Consent. Under the DGCL, unless the certificate of
incorporation provides otherwise, any action which may be taken by the
stockholders at a meeting may also be taken without a meeting by written consent
by the holders of such number of shares which, if present at a meeting, could
have so acted by vote. The Delaware Certificate prohibits stockholder action
without a meeting. Under the WBCL, shareholders may take action without a
meeting by unanimous written consent, or, if a Wisconsin corporation so elects
in its articles of incorporation, by less than unanimous written consent. The
Wisconsin Articles will not provide that shareholder action without a meeting
may be taken by less than unanimous consent, and therefore, any shareholder
action taken after the Reincorporation will, from a practical perspective,
require a shareholder's meeting, as is currently the case with the Company.
Interested Director Transactions. Under both the DGCL and the WBCL, contracts or
transactions in which one or more of the corporation's directors has an interest
are not void or voidable solely because of such interest or because such
director was present at the directors' or shareholders' meeting where such
contract or transaction was approved, if certain conditions are met. Under the
laws of both Wisconsin and Delaware, if the director's interest is fully
disclosed and a vote is taken in good faith, such contracts or transactions may
be approved by a majority vote of the shareholders (excluding under the WBCL
shares held by the interested director or entities controlled by the interested
director) or of the disinterested directors. If the contracts or transactions
are shown to be fair and reasonable as to the corporation at the time that they
are authorized, approved or ratified by the board of directors, then separate
shareholder or disinterested director approval is not required.
Indemnification of Directors and Officers. Under the DGCL, indemnification
provisions are strictly elective. The Delaware By-Laws obligate the Company to
indemnify its directors and officers to the fullest extent allowed by Delaware
law. In summary, the Delaware By-Laws require the Company to indemnify a
director or officer against any and all liabilities and reasonable expenses
incurred in connection with the investigation, defense, settlement or appeal of
any type of action, whether instituted by a third party or a stockholder
(excluding derivative claims);
19
<PAGE>
provided the director or officer acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that such conduct was unlawful. With regard to derivative actions or
suits by the corporation, directors and officers are entitled to indemnification
for expenses incurred in the defense of any such action or suit; provided,
however, that indemnification may not be made if the person is adjudged liable
for negligence or misconduct in the performance of his or her duty to the
corporation absent approval by a court. The director or officer is entitled to
an advance of expenses in connection with any investigation, defense, settlement
or appeal of any type of action if the director or officer provides to the
Company a written undertaking to repay such expense advance if it is ultimately
determined that the director or officer is not entitled to indemnification.
The WBCL and the Wisconsin By-Laws provide for mandatory indemnification of a
director or officer against certain liabilities and expenses (i) to the extent
such officers or directors are successful in the defense of a proceeding
(whether brought derivatively or by a third party) and (ii) in proceedings in
which the director or officer is not successful in the defense thereof, unless
(in the latter case only) it is determined that the director or officer breached
or failed to perform his or her duties to the corporation and such breach or
failure constituted (a) a willful failure by the director or officer to deal
fairly with the corporation or its shareholders in connection with a matter in
which the director or officer had a material conflict of interest; (b) a
violation of the criminal law, unless the director or officer had reasonable
cause to believe his or her conduct was lawful or had no reasonable cause to
believe his or her conduct was unlawful; (c) a transaction from which the
director or officer derived an improper personal profit; or (d) willful
misconduct. The WBCL specifically states that it is the public policy of
Wisconsin to require or permit indemnification in connection with a proceeding
involving securities regulation, as described therein, to the extent otherwise
required or permitted under the WBCL as described above. The Company is aware of
the positions of the Securities and Exchange Commission that indemnification
against liabilities under the federal securities laws is contrary to public
policy and that federal law will be controlling with respect to the availability
of indemnification for actions based on the federal securities laws. The WBCL
also does not limit indemnification to expenses in connection with a claim by or
on behalf of the corporation and is mandated by the DGCL. The Wisconsin By-Laws
also require the advance payment of directors' and officers' litigation
expenses, subject to certain conditions.
The DGCL permits a corporation to adopt a provision in its certificate of
incorporation that limits the monetary liability of the corporation's directors
to the corporation or its stockholders for a breach of the director's fiduciary
duty of care. The Delaware Certificate contains such a provision. Under the
DGCL, a corporation may not limit a director's monetary liability for (i) any
breach of the director's duty of loyalty to the corporation or its stockholders;
(ii) an act or omission not in good faith or involving intentional misconduct or
knowing violation of law; (iii) the payment of unlawful dividends or unlawful
stock repurchases or redemptions; or (iv) any transaction in which the director
received an improper personal benefit.
Unlike the DGCL, the WBCL automatically limits the liability of directors of
Wisconsin corporations statutorily, without requiring a provision in a
corporation's articles of incorporation. Under the WBCL, the personal liability
of a director to the corporation and its shareholders is eliminated, except
where (a) the liability is based on a breach of the director's duty (whether
duty of care or duty of loyalty) to the corporation and its shareholders and (b)
such breach constitutes (i) the director's willful failure to deal fairly with
the corporation or its shareholders in connection with a matter in which the
director had a material conflict of interest; (ii) a violation of criminal law,
unless the director had reasonable cause to believe that his or her conduct was
lawful or no reasonable cause to believe his or her conduct was unlawful; (iii)
a transaction from which the director derived an improper personal profit; or
(iv) willful misconduct. The DGCL does not specifically define the type of
conduct that constitutes a breach of director's "duty of loyalty," while clauses
(i) and (iii) above define the specific types of behavior under the WBCL that
constitutes a breach of a director's duty of loyalty that would preclude
elimination of personal liability. Because of the vagaries of the DGCL in this
regard, it is possible that a broad interpretation of a breach of a director's
duty of loyalty under the DGCL could result in the imposition of personal
liability on a director under the DGCL when such
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conduct would be shielded from liability under the WBCL. A director may also be
found personally liable to a corporation for the amount of a distribution made
in violation of the WBCL if the director's vote constitutes conduct described in
the preceding sentence.
Amendment of By-Laws. The DGCL provides that the board of directors may adopt,
amend or repeal by-laws of a Delaware corporation if such power is conferred in
the certificate of incorporation. The Delaware Certificate contains a provision
conferring this power on the Directors. Under the WBCL, such power is granted to
the board of directors unless otherwise stated in the articles or by-laws. After
the Reincorporation, the Wisconsin Articles and By-Laws will not prohibit the
Board of Directors from taking such action regarding the Wisconsin By-Laws and,
therefore, the Board of Directors' current ability to amend the By-Laws will
continue unchanged after the Reincorporation.
Comparison of Delaware and Wisconsin Law - Differences
Although it is impractical to note all of the differences between the
corporation laws of Delaware and Wisconsin, the following is a summary of the
significant differences between the DGCL and the WBCL as applicable to the
Company:
Corporation Franchise Taxes. Under Delaware law, corporations are assessed a
franchise tax based upon the "assumed par value" of their outstanding shares or
total shares issued, whichever is less. The Company paid approximately $820.00
in corporate franchise tax to the State of Delaware in 1998. Wisconsin has no
comparable tax for domestic corporations. Since the Company is headquartered in
Wisconsin and operates chiefly out of this state, changing the state of
incorporation is expected to have no effect upon its income and other corporate
taxes, other than relieving the Company of any liability for Delaware franchise
taxes.
Special Meetings of Shareholders. Under Delaware law, the Delaware Certificate
and the Delaware By-Laws, a special meeting of stockholders may be called only
by the Board of Directors. Under Wisconsin law, a special meeting of
shareholders must also be called by the Board of Directors pursuant to a written
demand of the holders of not less than one-tenth of the votes entitled to be
cast at such meeting or by such other person as may be designated in the
articles or by-laws. The Wisconsin Articles and By-Laws will not designate any
such other person. The Wisconsin By-Laws will set forth in detail the procedures
required to call a special meeting of shareholders. Neither the Wisconsin
Articles nor the Wisconsin By-Laws will give shareholders the right to propose
business at a special meeting of shareholders called by the Board of Directors
or pursuant to the demand of other shareholders.
Inspection of Corporate Records. The DGCL permits any stockholder of record to
inspect the corporate records of a corporation upon a good faith showing of a
proper purpose, and the stockholder list must be made available for inspection
at least 10 days before a stockholders' meeting and may be inspected by any
stockholder. By contrast, under the WBCL, in order to inspect and copy the
corporate records of a corporation, including the shareholder list, a
shareholder must be a shareholder of record and either has been a shareholder of
record of the corporation for at least 6 months before making a demand or holds
at least 5% of the outstanding shares of the corporation. Under the WBCL, a
shareholder's demand must also be made for a proper purpose. In addition, under
the WBCL, all shareholders may inspect the shareholder list for a meeting
beginning two business days after the notice of a meeting of shareholders is
given and ending at the conclusion of the meeting.
Dividends. Under the DGCL, a corporation may pay dividends and repurchase stock
out of surplus and any net profits for the fiscal year in which the dividend was
declared or for the preceding fiscal year provided that no payment may reduce
capital below the amount of capital represented by all classes of shares having
a preference upon the distribution of assets. Under the WBCL, the board of
directors may authorize and the corporation may make distributions to its
shareholders unless after such distribution the corporation would not be able to
pay its debts
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as they become due or its total assets after the distribution would be less than
the sum of its total liabilities, plus, unless the articles of incorporation
provide otherwise, the amount that would be needed, if the corporation were to
be dissolved at the time of the distribution. The Company has never paid any
dividends on its Common Stock for the past 15 years. However, the Company
believes that any difference in the standards for the payment of dividends will
have no practical effect on the ability of the Company to pay dividends in the
future.
Dissenters' Rights. Under both Delaware and Wisconsin law, a shareholder is
entitled to receive payment of the fair value of the shareholder's common stock
if the shareholder dissents from a proposed merger or consolidation. Under the
DGCL, dissenters' rights are not available in the case of a sale of all or
substantially all of the assets of a corporation. Dissenters' rights also are
not available for stockholders of the surviving corporation if the merger did
not require the approval of the stockholders of the surviving corporation or if
the shares of the Delaware corporation that is party to a merger or
consolidation are listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or are held of record by not
less than 2,000 persons and in the merger or consolidation Stockholders receive
shares of stock of the corporation surviving or resulting from the merger or
consolidation and/or shares of stock of any other corporation that are either
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 persons and/or
cash in lieu of fractional shares of the foregoing or any combination of the
foregoing. Since the Common Stock is currently listed, and the shares of CGC
Wisconsin will continue to be listed on the Boston Stock Exchange and on The
Nasdaq Stock MarketSM, dissenters' rights will not be available to shareholders
in connection with the Reincorporation.
In addition to being applicable in the case of a merger, under the WBCL,
dissenters' right are available in the case of a share exchange or sale of all
or substantially all of the assets of a Wisconsin corporation. Dissenters'
rights may also be made applicable by affirmative provision in the articles of
incorporation, by-laws or a board of directors' resolution in the case of
certain amendments to the articles of incorporation or other actions requiring a
shareholder vote. However, under the WBCL, except with respect to business
combinations with a 10% or greater shareholder, or unless the articles of
incorporation provide otherwise, dissenters' rights are not available to holders
of shares registered on a national securities exchange or quoted on the National
Association of Securities Dealers, Inc. automated quotations system on the
record date for a meeting of shareholders at which action on the proposed
transaction otherwise subject to dissenters' rights is to be taken. As a result,
assuming the continued listing of the Common Stock on the Boston Stock Exchange
and on The Nasdaq Stock MarketSM, under the WBCL, shareholders may not be
entitled to dissenters' rights with respect to any future merger or sale of all
or substantially all of the assets of the Company that might occur following the
Reincorporation. The Company has no current plans for any such transaction.
Director and Officer Discretion. Under the provisions of the WBCL (the
"Wisconsin Stakeholder Provisions"), in discharging his or her duties to the
corporation and in determining what he or she believes to be in the best
interests of the corporation, a director or officer may, in addition to
considering the effects of any action on shareholders, consider the effect of
the action on employees, suppliers, customers, the communities in which the
corporation operates and any other factors that the director or officer
considers pertinent. The DGCL does not contain a comparable provision, but the
Delaware Certificate includes a provision substantially similar to the WBCL.
Under Delaware law, the consideration that a board may give to nonstockholder
constituencies is less clear. Under Delaware judicial doctrine, a director may
consider the effect of a proposed action on nonstockholder constituencies when
these interests are not adverse to the interests of stockholders.
Anti-Takeover Statutes. DGCL Section 203 (the "Delaware Business Combination
Statute") applies to certain business combination involving a corporation and
certain of its stockholders. Unless the corporation's certificate of
incorporation expressly provides that Section 203 of the DGCL shall not apply,
the Delaware Business Combination
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Statute prevents an "Interested Stockholder" (defined generally as a person with
15% or more of the corporation's outstanding voting stock) from engaging in a
"Business Combination" (defined to include a variety of transactions, including
the sale of assets, mergers and almost any related party transaction) with a
Delaware corporation for three years following the date such person became an
Interested Stockholder, unless (i) before such person became an Interested
Stockholder, the board of directors of the corporation approved the transaction
in which the Interested Stockholder became an Interested Stockholder or approved
the Business Combination; (ii) upon consummation of the transaction which
resulted in the Interested Stockholder becoming an Interested Stockholder, the
Interested Stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by certain employee stock
ownership plans); or (iii) following the transaction in which such person became
an Interested Stockholder, the Business Combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of two-thirds of the outstanding voting stock of
the corporation not owned by the Interested Stockholder. The Delaware Business
Combination Statute currently applies to the Company. Sections 180.1140 to
180.1145 of the WBCL (the "Wisconsin Business Combination Statute") regulate a
broad range of "business combinations" between a Wisconsin corporation and an
"interested stockholder." The Wisconsin Business Combination Statute defines a
"business combination" to include a merger or share exchange, sale, lease,
exchange, mortgage, pledge, transfer or other disposition of assets equal to at
least 5% of the market value of the stock or assets of the company or 10% of its
earning power, or issuance of stock or rights to purchase stock with a market
value equal to at least 5% of the outstanding stock, adoption of a plan of
liquidation and certain other transactions involving an "interested
stockholder." An "interested stockholder" is defined as a person who
beneficially owns, directly or indirectly, 10% of the voting power of the
outstanding voting stock of a corporation or who is an affiliate or associate of
the corporation and beneficially owned 10% of the voting power of the then
outstanding voting stock within the last three years. The Wisconsin Business
Combination Statute prohibits a corporation from engaging in a business
combination (other than a business combination of a type specifically excluded
from the coverage of the statute) with an interested stockholder for a period of
three years following the date such person becomes an interested stockholder,
unless the board of directors approved the business combination or the
acquisition of the stock that resulted in a person becoming an interested
stockholder before such acquisition. Business combination after the three-year
period following the stock acquisition date are permitted only if (i) the board
of directors approved the acquisition of the stock prior to the acquisition
date; (ii) the business combination is approved by a majority of the outstanding
voting stock not beneficially owned by the interested stockholder; or (iii) the
consideration to be received by shareholders meets certain requirements of the
statute with respect to form an amount. Unlike the prohibition on business
combinations in the Delaware Business Combination Statute, which is inapplicable
if the interested stockholder acquires at least 85% of the outstanding voting
stock at the time of becoming an interested stockholder or if during the
three-year period of the prohibition the board of directors and holders of
two-thirds of the unaffiliated shares approve the business combination, the
Wisconsin Business Combination Statute's prohibition on business combinations
applies for three years after the acquisition of at least 10% of the outstanding
shares without regard to the percentage of shares owned by the interested
stockholder and cannot be avoided by subsequent action of the board of directors
or shareholders. The Wisconsin Business Combination Statute is also triggered by
the acquisition of 10% of the outstanding shares rather than 15% under the
Delaware Business Combination Statute.
The WBCL provides that certain mergers share exchanges or sales, leases,
exchanges or other dispositions of assets in a transaction involving a
"significant shareholder" are subject to a supermajority vote of shareholders
(the "Wisconsin Fair Price Statute"), in addition to any approval otherwise
required. A "significant shareholder" is defined as a person who beneficially
owns, directly or indirectly, 10% or more of the voting stock of a corporation
or an affiliate of the corporation which beneficially owned, directly or
indirectly, 10% or more of the voting stock of the corporation within the last
two years. Such business combination must be approved by 80% of the voting power
of the corporation's stock and at least two-thirds of the voting power of the
corporation's stock not
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beneficially held by the significant shareholder who is party to the relevant
transaction or any of its affiliates or associates, in each case voting together
as a single group, unless the following fair price standards have been met: (i)
the aggregate value of the per share consideration is equal to the higher of (a)
the highest price paid for any common shares of the corporation by the
significant shareholder in the transaction in which it became a significant
shareholder or within two years before the date of the business combination; (b)
the market value of the corporation's shares on the date of commencement of any
tender offer by the significant shareholder, the date on which the person became
a significant shareholder or the date of the first public announcement of the
proposed business combination, whichever is higher; or (c) the highest
liquidation or dissolution distribution to which holders of the shares would be
entitled; and (ii) either cash, or the form of consideration used by the
significant shareholder to acquire the largest number of shares, is offered.
However, the impact of the Wisconsin Fair Price Statute is limited because the
statute does not prohibit an acquirer from effecting a second step transaction
as a "reverse stock split" without complying with the statute.
Under Section 180.1150 (the "Wisconsin Control Share Statute") of the WBCL, the
voting power of shares, including shares issuable upon conversion of convertible
securities or exercise of options or warrants, of an "issuing public
corporation" (which the Company would be after the effectiveness of the
Reincorporation) held by any person or persons acting as a group in excess of
20% of the voting power in the election of directors is limited to 10% of the
full voting power of those shares, unless the articles of incorporation
otherwise provide. This restriction does not apply to shares acquired directly
from the issuing public corporation, in certain specified transactions, or in a
transaction in which the corporation's shareholders have approved restoration of
the full voting power of the otherwise restricted shares. The impact of the
Wisconsin Control Share Statute is limited because it will have a limited impact
on a person who acquires 75% or more of the Common Stock. The DGCL does not have
a similar provision.
Section 180.1134 (the "Wisconsin Defensive Action Restrictions") of the WBCL
provides that in addition to the vote otherwise required by law or the articles
of incorporation of an issuing public corporation (which would apply to the
Company after the Reincorporation) the approval of the holders of a majority of
the shares entitled to vote is required before such a corporation can take
certain action while a takeover offer is being made or after the takeover offer
has been publicly announced and before it is concluded. Under the Wisconsin
Defensive Action Restrictions, shareholder approval is required for the
corporation to (i) acquire more than 5% of the outstanding voting shares at a
price above the market price from any individual or organization that owns more
than 3% of the outstanding voting shares and has held such shares for less than
two years, unless an equal offer is made to acquire all voting shares; or (ii)
sell or option assets of the corporation which amount to at least 10% of the
market value of the corporation, unless in the case of this clause (ii) the
corporation has at least three independent directors and a majority of the
independent directors vote to not have this provision apply to the corporation.
The Company currently has two independent directors; thus, the restrictions
described in clause (i) above will currently have the effect of deterring a
shareholder from acquiring the Company's shares with the goal of seeking to have
the Company repurchase such shares at a premium over the market price. The DGCL
does not have a similar provision.
Statutory Shareholder Liability. Wisconsin law provides that shareholders of
Wisconsin domestic corporations and foreign corporations registered to do
business in Wisconsin are personally liable, up to the value of the
consideration paid to the corporation for their shares, for certain debts owed
to employees for services performed. While the WBCL specifies that such
liability is limited to the par value of the shares ($.10 in the case of CGC
Wisconsin). This decision was affirmed by a split decision of the Wisconsin
Supreme Court with one justice abstaining. As a result, it is without
precedential effect. Although Delaware has no comparable provision, Wisconsin
courts have held that this provision of the WBCL applies to foreign corporations
registered to do business in Wisconsin and therefore such provisions may already
be applicable to the Company. The impact of this shareholder liability
provision, however, is mitigated because the Company (as opposed to its
subsidiaries) employs relatively few employees.
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Certain Federal Income Tax Consequences of the Reincorporation
The Reincorporation will constitute a reorganization within the meaning of
Section 368(a) of the Code. Accordingly, for federal income tax purposes, no
gain or loss will be recognized by stockholders upon the conversion of Common
Stock into CGC Wisconsin common stock resulting from the Reincorporation. Each
stockholder whose shares are converted from Common Stock into CGC Wisconsin
common stock will have the same basis in the common stock of CGC Wisconsin as
such stockholder had in the Common Stock immediately prior to the Effective Date
of the Reincorporation, and each stockholder's holding period of CGC Wisconsin
common stock will include the period during which such stockholder held the
corresponding shares of Common Stock, provided such corresponding shares of
Common Stock were held by the stockholder as a capital asset on the Effective
Date. No gain or loss will be recognized by the Company or by CGC Wisconsin as a
result of the Reincorporation.
NO INFORMATION IS PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES, IF ANY,
UNDER APPLICABLE STATE, LOCAL OR FOREIGN LAWS, AND EACH STOCKHOLDER IS ADVISED
TO CONSULT HIS OR HER PERSONAL ATTORNEY OR TAX ADVISOR AS TO THE FEDERAL, STATE,
LOCAL OR FOREIGN TAX CONSEQUENCES OF THE PROPOSED REINCORPORATION IN VIEW OF THE
STOCKHOLDER'S INDIVIDUAL CIRCUMSTANCES.
Amendment of the Merger Agreement or Abandonment of the Reincorporation
The Board of Directors of the Company may amend, modify and supplement the
Merger Agreement, before or after stockholder approval. However, no such
amendment, modification or supplement may be made or become effective after
stockholder approval which, in the judgment of the Board, would have a
materially adverse effect upon the rights, powers, privileges or preferences of
the Company's stockholders. The Merger Agreement may be terminated and the
Reincorporation may be abandoned, notwithstanding stockholder approval, by the
Board of Directors of the Company at any time before consummation of the
Reincorporation if the Board should determine that in its judgment the
Reincorporation does not appear to be in the best interests of the Company or
its stockholders.
Vote Required to Approve the Reincorporation; Dissenter's Rights
Under Delaware law, the affirmative vote of holders of a majority of the shares
eligible to vote is required for approval of the Reincorporation proposal.
Consequently, any shares not voted at the Meeting, whether due to broker
non-votes, abstentions or otherwise, will have the same effect as vote against
the Reincorporation. The votes represented by the proxies received will be voted
FOR approval of the Reincorporation, unless a vote against such approval is
specifically indicated on the proxy.
Dissenters' rights will not be available to stockholders in connection with the
proposed Reincorporation.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
THE REINCORPORATION PROPOSAL.
PROPOSAL NO. 3--RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANT
The Board of Directors has selected Bruce Michael Redlin, certified public
accountant as the Company's independent accountant for the fiscal year ended
March 31, 1999. Shareholders will be asked to ratify the selection of Bruce
Michael Redlin at the Annual Meeting. Ratification will require the favorable
vote of the holders of a majority of the common stock represented and voting at
the Meeting. Although ratification of the accountant by the shareholders is not
legally required, the Company's Board of Directors believes such ratification to
be in the best interest of the Company. If the shareholders do not ratify this
appointment, other firms of certified public accountants will be
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considered by the Board of Directors. Bruce Michael Redlin was the Company's
independent accountant for the fiscal year ended March 31, 1998. Mr. Bruce
Michael Redlin has been conducting audits for the Company beginning with the
March 31, 1982 audit. He is expected to attend the Annual Meeting with the
opportunity to make a statement if he desires to do so and he will be available
at that time to respond to appropriate questions.
SHAREHOLDERS' PROPOSAL FOR NEXT ANNUAL MEETING
Any proposal of a shareholder intended to be presented at the next annual
meeting of shareholders, expected to be held on October 1, 1999, must be
received at the office of the Secretary of the Company by January 11, 1999, if
such proposal is to be considered for inclusion in the Company's proxy statement
and form of proxy relating to that meeting.
ANNUAL REPORT
The Company's fiscal year ended March 31, 1998 Annual Report to Shareholders has
been mailed to shareholders concurrently herewith, but such report is not
incorporated in this Proxy Statement and is not deemed to be a part of this
proxy solicitation material.
On or about June 29, 1998, the Company filed with the Securities and Exchange
Commission its Annual Report on Form 10-K. This Report contains detailed
information concerning the Company and its operations, supplementary financial
information and certain schedules which, except for exhibits, are included in
the Annual Report to Shareholders. A copy of the Annual Report will be furnished
without charge upon written request to: Investor Relations, Commerce Group
Corp., 6001 North 91st Street, Milwaukee, Wisconsin 53225.
EXPENSES OF SOLICITATION
The total cost of this solicitation will be borne by the Company. In addition to
use of the mails, certain officers, directors and regular employees of the
Company, without receiving additional compensation, may solicit proxies
personally by telephone or facsimile. The Company may reimburse persons holding
shares in their own names or in the names of their nominees for expenses they
incur in obtaining instructions from beneficial owners of such shares.
OTHER MATTERS
Management knows of no other business to be presented at the Meeting, but if
other matters do properly come before the Meeting, it is intended that the
persons named in the proxy will vote on said matters in accordance with their
best judgment. The above Notice, Proxy Statement and Form of Proxy are sent by
Order of the Board of Directors. The Directors urge you to attend this meeting
and if you are not able to attend, please submit your proxy. Your interest and
cooperation is greatly appreciated.
Edward A. Machulak
Executive Vice President
and Corporate Secretary
August 20, 1998
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PROXY COMMERCE GROUP CORP.
PROXY
6001 North 91st Street
Milwaukee, Wisconsin 53225-1795
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Edward L. Machulak and Edward A. Machulak as
Proxies each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all the shares of common
stock of Commerce Group Corp. held of record by the undersigned on August 19,
1998, at the annual meeting of shareholders to be held on October 16, 1998, or
any adjournment or adjournments thereof.
1. ELECTION OF TWO DIRECTORS to vote FOR the nominees listed below
Edward L. Machulak, Class III Director, term expiring at the 2001
Annual Shareholders' Meeting
________ FOR________ WITHHOLD AUTHORITY
Sidney Sodos, Class III Director, term expiring at the 2001 Annual
Shareholders' Meeting
________ FOR________ WITHHOLD AUTHORITY
2. Proposal to reincorporate Wisconsin by merger into the Company's wholly owned
subsidiary, CGC
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Wisconsin, Inc.
_____ FOR_____ AGAINST_____ ABSTAIN
3. Proposal to approve the appointment of BRUCE MICHAEL REDLIN as
independent public accountant of the corporation.
_____ FOR_____ AGAINST_____ ABSTAIN
4. In their discretion on any other matter which may properly come before
the meeting or any adjournment or adjournments thereof.
(Continued and to be signed on reverse side)
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(Continued from other side)
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this proxy will be
voted for the election of the listed directors, and for the appointment of Bruce
Michael Redlin as independent public accountant of Commerce Group Corp.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, as executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign as full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated __________________________________1998
-------------------------------------------
Signature
-------------------------------------------
Signature if held jointly
(Please mark, sign, date and return the proxy card promptly, using
the enclosed envelope.)
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EXHIBIT A
AGREEMENT AND PLAN OF MERGER
THIS PLAN OF MERGER ("Plan of Merger"), dated as of __________, 1998, by
and between COMMERCE GROUP CORP., a Delaware corporation ("CMG Delaware"), and
CGC, CORP., a Wisconsin corporation ("CGC Wisconsin").
WITNESSETH:
WHEREAS, the authorized capital stock of CMG Delaware consists of
15,000,000 shares of common stock, $.10 par value ("CMG Delaware Common Stock"),
of which 11,112,670 shares are issued and outstanding as of the date hereof, and
250,000 shares of preferred stock, no par value ("CMG Delaware Preferred
Stock"), none of which are issued and outstanding;
WHEREAS, the authorized capital stock of CGC Wisconsin will consist of
50,000,000 shares of common stock, $.10 par value ("CGC Wisconsin Common
Stock"), and 250,000 shares of preferred stock, no par value ("CGC Wisconsin
Preferred Stock");
WHEREAS, 100 shares of CGC Wisconsin Common Stock are issued and
outstanding and are owned of record by CMG Delaware, and no shares of CGC
Wisconsin Preferred Stock are issued and outstanding;
WHEREAS, CMG Delaware and CGC Wisconsin are entering into this Plan of
Merger ("Plan of Merger"), which contemplates the merger ("Merger") of CMG
Delaware with and into CGC Wisconsin upon the terms and conditions provided
herein and pursuant to the applicable provisions of the Wisconsin Business
Corporation Law ("WBCL"), the applicable provisions of the Delaware General
Corporation Law ("DGCL") and Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"); and,
WHEREAS, the respective Boards of Directors of CMG Delaware and CGC
Wisconsin deem it in the best interests of their respective corporations and
shareholders that CMG Delaware be merged with and into CGC Wisconsin with CGC
Wisconsin being the surviving corporation of the Merger, and each such Board of
Directors has approved this Plan of Merger, has authorized its execution and
delivery, has directed that this Plan of Merger be submitted to its respective
shareholders for approval and has recommended its approval;
NOW, THEREFORE, in consideration of the premises and the agreements herein
contained and in accordance with the DGCL and WBCL, the parties hereto adopt and
agree to the following agreements, terms and conditions relating to the Merger
and the mode of carrying the same into effect:
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ARTICLE I
The Merger
1.1 The Merger. Subject to the terms and conditions of this Plan of Merger, at
the Effective Time (as defined below), CMG Delaware will be merged with and into
CGC Wisconsin, in accordance with the applicable provisions of the WBCL and the
applicable provisions of the DGCL.
1.02 Effective Time of the Merger. Subject to the provisions of this Plan of
Merger, articles of merger ("Articles of Merger") shall be duly prepared and
executed by CMG Delaware and CGC Wisconsin and thereafter delivered to the
Secretary of State of Wisconsin for filing as provided in the WBCL as soon as
practicable after approval of the Plan of Merger and the Merger by the
shareholders of CMG Delaware and CGC Wisconsin, and a certificate of merger
("Certificate of Merger") shall be duly prepared and executed by CMG Delaware
and CGC Wisconsin and thereafter delivered to the Secretary of State of Delaware
for filing as provided in the DGCL as soon as practicable after approval of the
Plan of Merger and the Merger by the shareholders of CMG Delaware and CGC
Wisconsin. The Merger shall become effective as of 5:00 p.m. (Central Time) on
the day of filing of the Articles of Merger with the Secretary of State of
Wisconsin and a Certificate of Merger with the Secretary of State of Delaware
(the "Effective Time"). 99999999999999999999999999999
1.03 Effects of the Merger.
(a) At the Effective Time, (i) the separate existence of CMG Delaware shall
cease, and CMG Delaware shall be merged with and into CGC Wisconsin as provided
in Section 180.1106 of the WBCL and Section 259 of the DGCL (CMG Delaware and
CGC Wisconsin are sometimes referred to herein as the "Constituent
Corporations," and CGC Wisconsin, after consummation of the Merger, is sometimes
referred to herein as the "Surviving Corporation"); (ii) the Restated Articles
of Incorporation of CGC Wisconsin in effect immediately prior to the Effective
Time shall continue without change (until further amended in accordance with
applicable law) as the Restated Articles of Incorporation of the Surviving
Corporation except that the name of the Surviving Corporation shall be
automatically amended, effective as of the Effective Time, from "CGC Wisconsin,
Inc." to "Commerce Group Corp."; (iii) the By-Laws of CGC Wisconsin in effect
immediately prior to the Effective Time shall continue without change as the
By-Laws of the Surviving Corporation; and (iv) the members of the Board of
Directors and the officers of CGC Wisconsin immediately prior to the Effective
Time shall continue without change as the directors and officers of the
Surviving Corporation (in each case until such time as their respective
successors are duly elected or their earlier resignation, death, retirement or
removal).
(b) In accordance with Section 180.1106 of the WBCL and Section 259 of the
DGCL, at and after the Effective Time, the Surviving Corporation shall possess
all the rights, privileges, powers and franchises of a public as well as of a
private nature, and be subject to all the restrictions, disabilities and duties,
of each of the Constituent Corporations; and all and singular rights,
privileges, powers and franchises of each of the Constituent Corporations, and
all property, real, personal and mixed, and all debts due to either of the
Constituent Corporations on
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whatever account, as well as for stock subscriptions and all other things in
action or belonging to each of the Constituent Corporations, shall be vested in
the Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest, shall be thereafter as effectually
the property of the Surviving Corporation as they were of the Constituent
Corporations, and the title to any real estate vested, by deed or otherwise, in
either of the Constituent Corporations shall not revert or be in any way
impaired; but all rights of creditors and all liens upon any property of either
of the Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities and duties of the Constituent Corporations shall thereafter attach
to the Surviving Corporation, and may be enforced against it to the same extent
as if said debts and liabilities had been incurred or contracted by it. Any
action or proceeding, whether civil, criminal, administrative or investigatory,
pending by or against either Constituent Corporation shall be prosecuted as if
the Merger had not taken place, or the Surviving Corporation may be substituted
as a party in such action or proceeding in place of any Constituent Corporation.
ARTICLE 2
Effect of the Merger on the Capital Stock
Of the Constituent Corporations
2.01(a) Effect on CMG Delaware Common Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the Constituent
Corporations or the stockholders of CMG Delaware, all shares of CMG Delaware
Common Stock issued and outstanding or held in treasury, if any, immediately
prior to the Effective Time shall automatically be converted into an equal
number of fully paid and non-assessable shares (except as provided in Section
180.0622(2)(b) of the WBCL) of CGC Wisconsin Common Stock, and certificates
representing such shares of CMG Delaware Common Stock issued and outstanding or
held in treasury, if any, immediately prior to the Effective Time shall from and
after the Effective Time represent the number of shares of CGC Wisconsin Common
Stock into which such shares shall have been converted.
(b) Effect on CMG Delaware Options and Other Rights. At the Effective Time,
each option or other right granted by CMG Delaware to purchase or, by contract,
to receive CMG Delaware Common Stock (under or subject to any stock option plan
or any other agreement of CMG Delaware) and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into and become a stock option or right to
purchase or receive, upon the same terms and conditions, the number and kind of
shares of the Surviving Corporation's capital stock equal to the number and kind
of shares of CMG Delaware capital stock that the holder thereof would have
received had such holder exercised the option or right in full immediately prior
to the Effective Time (whether or not such option or right was then
exercisable).
2.02 Effect on CMG Delaware Plans.
(a) At the Effective Time, each employee or director benefit plan or incentive
compensation plan to which CMG Delaware is a party shall be assumed by, and
continue to be the plan of, the Surviving Corporation.
(b) To the extent any of the aforementioned plans of CMG Delaware or any of
its
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subsidiaries provides for the issuance or purchase of, or otherwise relates to,
CMG Delaware Common Stock or other capital stock of CMG Delaware, after the
Effective Time such plans shall be deemed to provide for the issuance or
purchase of, or otherwise relate to, CGC Wisconsin Common Stock or other capital
stock of CGC Wisconsin upon the same terms and conditions.
2.03 Effect on CGC Wisconsin Common Stock. As of the Effective Time, by virtue
of the Merger and without any action on the part of the Constituent Corporations
or the shareholder of CGC Wisconsin, all shares of CGC Wisconsin Common Stock
issued and outstanding or held in treasury, if any, immediately prior to the
Effective Time shall no longer be issued or outstanding and shall automatically
be cancelled and retired and shall cease to exist, and each holder of a
certificate representing any such shares shall cease to have any rights with
respect thereto.
ARTICLE 3
Shareholder Approval
3.01 Shareholder Approval. This Plan of Merger and the Merger herein
contemplated shall be submitted to the shareholders of each of the parties
hereto in accordance with the applicable provisions of law, and the consummation
of this Plan of Merger and the Merger herein provided for are conditioned upon
the approval hereof by the shareholders of the respective parties as provided by
law.
ARTICLE 4
Termination; Amendment
4.01Termination. This Plan of Merger may be terminated and the Merger
abandoned by the Boards of Directors of CMG Delaware and CGC Wisconsin at any
time until the first to occur of the filing of Articles of Merger with the
Secretary of State of Wisconsin or the filing of a Certificate of Merger with
the Secretary of State of Delaware.
4.02 Amendment. Subject to the following sentence, this Plan of Merger may be
amended, modified or supplemented by the Constituent Corporations at any time
until the first to occur of the filing of Articles of Merger with the Secretary
of State of Wisconsin or the filing of a Certificate of Merger with the
Secretary of State of Delaware. Notwithstanding the foregoing, amendments,
modifications or supplements of this Plan of Merger that are required by the
Secretary of State of Wisconsin or the Secretary of State of Delaware and that
do not materially and adversely affect the rights, benefits and obligations of
any Constituent Corporation may be made unilaterally by the Constituent
Corporation filing this Plan of Merger with such office.
IN WITNESS WHEREOF, the Constituent Corporations have executed this Plan of
Merger as of the date and year first above written.
COMMERCE GROUP CORP.
a Delaware corporation
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-----------------------------------
By:
/s/ Edward L. Machulak
Edward L. Machulak
Chairman of the Board, President,
and Chief Executive Officer
CGC Wisconsin, Inc.,
a Wisconsin corporation
-----------------------------------
By:
/s/Edward L. Machulak
Edward L. Machulak
Chairman of the Board, President,
and Chief Executive Officer
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