UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
Commission File Number 1-7375
COMMERCE GROUP CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 39-6050862
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6001 North 91st Street
Milwaukee, Wisconsin 53225-1795
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 462-5310
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Shares $0.10 par value Boston Stock Exchange
Over The Counter Bulletin Board (OTC BB)*1
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by nonaffiliates of
the registrant based on the closing price of the OTC BB on May 17, 1999,
was approximately $7,765,628.
Common shares outstanding as of March 31, 1999, were 11,577,527.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporated by reference from the registrant's definitive Proxy
Statement for its Annual Meeting of Shareholders to be filed, pursuant to
Regulation 14A, no later than 120 days after the close of the
registrant's fiscal year.
*1 Effective May 5, 1999.
<PAGE>
COMMERCE GROUP CORP.
1999 FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended March 31, 1999
TABLE OF CONTENTS
Page
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 4(a). Executive Officers and Managers of the Company
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholders' Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K
This document includes certain "forward-looking statements" within the
meaning of Section 21E of the United States Securities Exchange Act of
1934, as amended. All statements, other than statements of historical
fact, included herein, including without limitation, statements regarding
potential mineralization and reserves, exploration results, and future
plans and objectives of Commerce Group Corp. ("Commerce"), are
forward-looking statements that involve various risks and uncertainties.
There can be no assurance that such statements will prove to be accurate,
and actual results and future events could differ materially from those
anticipated in such statements. Important factors that could cause
actual results to differ materially from Commerce's expectations are
disclosed under various sections of this and other documents filed from
time to time with the United States Securities and Exchange Commission,
the Boston Stock Exchange, Inc., and the National Association of Security
Dealers Automated Systems.
<PAGE>
PART I
ITEM 1. BUSINESS
- -----------------
GENERAL
- -------
Commerce Group Corp. ("Commerce," the "Company," and/or the "Registrant")
was a Delaware corporation which merged into a Wisconsin corporation on
April 1, 1999, with its corporate headquarters based in Milwaukee,
Wisconsin. It was organized in 1962 and its common shares have been
publicly traded since 1968 on the over-the-counter market. Its common
shares have been traded on the Boston Stock Exchange from February 1975
to the present date and on the Nasdaq Small-Cap Market from March 1987 to
March 31, 1999, the date it was delisted. On May 5, 1999, the Company's
shares began trading on the Over the Counter Bulletin Board (OTCBB)
under the Symbol CGCO. The Company is in the precious metals mining and
the Internet business.
INTERNET BUSINESS
- -----------------
ORIGINATION
On January 27, 1999, Commerce entered into an agreement with Interactive
Business Channel, Inc. (IBC) of Irvine, California to develop an Internet
business with Commerce's wholly-owned subsidiary, Piccadilly Advertising
Agency, Inc. (PAA), a Wisconsin corporation formed on July 9, 1974. On
January 27, 1999, PAA's Articles of Incorporation were amended to change
the name of the corporation to Ecomm Group Inc. (Ecomm). Effective
January 29, 1999, Ecomm's domain name was registered as ecommgroup.com.
Ecomm was formed with the belief that a significant opportunity exists to
develop and consolidate certain fragmented niches of the Internet
community into a web portal. Ecomm's principal business is to evaluate,
structure and complete Internet-related business combinations in the form
of investments in or a merger or acquisition of prospects consisting of
private companies, partnerships or sole proprietorships.
DEVELOPMENT OF A WEBSITE AND THE ACQUISITION OF INTERNET COMPANIES
Ecomm has been developing its new MyInternet.to web portal since January
1999. To date, Ecomm has completed the beta site located at
http://www.homestead.com/myinternetbeta. The beta site currently
features data from CBSMarketwatch.com, Multex.com, Dow Jones, Red
Herring, HotBot, Goto.com, ProFlowers, Accuweather.com and much more.
Ecomm is considering retaining Webzter Corporation to complete the beta
site. It is expected that the completion of the web portal should be
achieved soon.
IBC has informed the Company that it has owned and operated the
ibchannel.com website since June of 1997, and that its website has grown
to over 500,000 hits in January 1999. IBC plans to develop Ecomm
primarily by outsourcing production work to web design and development
companies. IBC has identified the key aspects of launching Ecomm's
Internet business in the near future. Ecomm's business strategy is to
build its web portal through the acquisition and consolidation of
selected Internet companies. Ecomm will review, evaluate, structure and
acquire or merge Internet businesses; then it plans to combine them into
its web portal. Ecomm presently has a letter of intent to acquire an
Internet company and its president has discussed the acquisition or
merger with several other Internet companies. In addition, the Company
and IBC have agreed to use their respective expertise to develop and
incorporate a website related to the mining industry.
<PAGE>
PLANS TO SET UP THE WEB PORTAL
The new websites that Ecomm acquires will function autonomously, but will
be linked together and share the same brand name. Ecomm has arranged to
have its own site, which will be launched as soon as practicable. The
web portal will be maintained by IBC and the companies it acquires, and
it does not require substantial additional personnel. Technical support,
marketing, advertising and website maintenance will be handled by Ecomm
and the companies it acquires. IBC has been retained to assist the
company in the aforementioned areas. Ecomm is currently evaluating data
vendors and the purchase or lease of a web portal site.
It is expected that the web portal will derive revenue from e-commerce,
joint venturers, strategic alliances and from other revenue streams. The
web portal may serve any Internet customers seeking services including:
free e-mail, chat, free web pages, auctions, and instant messaging. Its
potential customers will be the customers that the acquired Internet
companies have and it will build on that base through marketing and
advertising.
In consideration of the foregoing, the Company agreed to issue at no cost
to IBC the ownership of 49% of Ecomm's common shares. On January 31,
1999, Mr. Matthew Marcus was elected as the President and Director of
Ecomm. Mr. Edward A. Machulak (son of Edward L. Machulak) the Director,
Executive Vice President and Secretary of the Company continues his
position as the Secretary and Director of Ecomm. One of his companies,
MacPak, Inc. has developed an on-line city guide portal named miy.com and
his company has been developing websites for others. Mr. Edward L.
Machulak, the Company's Chairman, Chief Executive Officer and Treasurer
continues his position as the Treasurer and as a Director of Ecomm.
There can be no assurance that Ecomm's current strategy will be
successful. Ecomm has not yet entered into any agreements for the
acquisition of any websites, web services or other technology in
connection with the web portal. There is no assurance that it will be
able to enter into contracts for the acquisition of such sites, services
and technology on terms acceptable to Commerce and Ecomm. The Internet
business is highly competitive and there is no assurance that Ecomm's web
portal will attract traffic and generate a profit, even if Ecomm acquires
the websites, web services and technology on acceptable terms.
PRECIOUS METAL MINING
- ---------------------
Commerce presently is engaged in the exploration and development of gold
and silver mines in the Republic of El Salvador, Central America, through
its Commerce/Sanseb Joint Venture ("Joint Venture"). Commerce holds a
nearly 100% interest in the Joint Venture which owns the concession
rights to extract gold from the San Sebastian Gold Mine ("SSGM").
Commerce's objective is to enhance the value of its shares by profits and
cash flow. This can be achieved by its continuing to be a low cost gold
producer, by increasing production and by expanding its gold ore
reserves.
Commerce's current goal is to secure sufficient capital to increase its
production of gold to 40,000 ounces per year and to develop additional
gold ore reserves. The Company expects to increase production by
developing an open-pit, heap-leach operation on site at the SSGM and by
acquiring additional mining equipment which will permit it to process
higher grade virgin ore at the San Cristobal Mill and Plant ("SCMP").
The heap-leach operation will have the capability of producing (through
processing a higher volume of ore) significantly more gold than could be
produced at the SCMP which has a present capacity of processing 200 tons
of gold ore per day. Commerce will also continue to drill test holes at
previously unexplored areas at the site of the SSGM and it also is
planning drill programs at the other potential mining prospects.
<PAGE>
OPERATIONS
Currently the Joint Venture is processing gold ore on a curbed basis at
its SCMP. All of the gold ore is from the SSGM open pit. The SCMP is
located approximately 13 miles west of the SSGM. Commerce acquired the
SCMP facility on February 23, 1993, and the Joint Venture thereafter made
and continues to make constant substantial renovations and modifications
for the expansion of the plant and equipment before and after placing
this facility into a curbed operation. From March 31, 1995, and through
the fiscal year ending March 31, 1998, 16,086 ounces of bullion
containing 9,066 ounces of gold and 3,336 ounces of silver were produced
at the SSGM and then sold. In the fiscal year ended March 31, 1999,
4,381 ounces of bullion containing 2,684 ounces of gold and 836 ounces of
silver were produced and sold. Revenues from this SSGM production were
used primarily to fund further exploration of ore reserves at the SSGM,
to fund the exploration of the other mining prospects, and to fund
expansion improvements at the SCMP.
There are approximately 1.6 million ounces of proven and estimated gold
ore reserves at the SSGM and the other El Salvador gold mines.
Currently, and for all financial statement periods presented herein, the
SSGM is the only one of the Company's mining properties which has
generated revenues, although there are strong initial indications of
commercial gold ore present at the other sites.
At the current stage of the exploration and development, the Company's
geologists have defined the following gold reserves:
Ounces
--------------------
Average
Tons Grade Contained Probable
---------- ------- --------- --------
1. San Sebastian Gold Mine
(a) Virgin ore, dump waste
material and tailings 14,420,268 0.081 1,168,042
(b) Stope fill (estimated) 1,000,000 0.340 340,000
---------- --------- -------
15,420,268 1,168,042 340,000
2. San Felipe-El Potosi Mine
(a) Tailings 185,000 0.060 11,100
3. Hormiguero Mine
(a) Tailings 150,000 0.064 9,600
---------- --------- -------
Totals 15,755,268 1,188,742 340,000
========== ========= =======
The anticipated recovery for processing via the SCMP will range from 85%
to 90% and for heap leaching from 65% to 70%.
As of March 31, 1999, the total investment in the El Salvador mining
projects by Commerce, three of Commerce's wholly-owned subsidiaries,
Sanseb, and the Joint Venture amounted to $54,584,132.
SSGM JOINT VENTURE ARRANGEMENTS
Commerce acquired 82 1/2% of the authorized and issued shares of San
Sebastian Gold Mines, Inc. ("Sanseb"), a Nevada corporation formed on
September 4, 1968. The balance of Sanseb's shares are held by
approximately 200 unrelated shareholders. From 1969 forward, Commerce
has provided substantially all of the capital required to develop a
mining operation at the SSGM, to fund exploration, and to acquire and
refurbish the SCMP.
<PAGE>
On September 22, 1987, Commerce and Sanseb entered into a joint venture
agreement (named the "Commerce/Sanseb Joint Venture" and sometimes
referred to herein as the "Joint Venture" or "Comseb") to formalize the
relationship between Commerce and Sanseb with respect to the mining
venture and to divide profits. The terms of this agreement authorize
Commerce to supervise and control all of the business affairs of the
Joint Venture. Under this agreement 90% of the net pre-tax profits of
the Joint Venture will be distributed to Commerce and ten percent to
Sanseb, and because Commerce owns 82 1/2% of the authorized and issued
shares of Sanseb, Commerce in effect has an over 98% interest in the
activities of the Joint Venture.
The Joint Venture leases the SSGM from the Company's 52%-owned
subsidiary, Mineral San Sebastian, S.A. de C.V. ("Misanse"), an El
Salvadoran corporation. Although Misanse owns the real estate comprising
the site of the SSGM, the lease agreement grants Comseb the right to all
gold produced in exchange for a five percent royalty over a term of 25
years beginning on the first day gold is produced, which Comseb may, at
its option, extend for an additional 25 years. Because Commerce owns 52%
of Misanse, Comseb in effect pays a royalty amounting to less than two
and one-half percent of the SSGM gold production.
The Joint Venture is registered as an operating entity to do business in
the State of Wisconsin, U.S.A. and in the Republic of El Salvador,
Central America. Under the Joint Venture Agreement, Commerce is
authorized to sign agreements on behalf of the Joint Venture.
ORGANIZATIONAL STRUCTURE
- ------------------------
The Joint Venture and the following subsidiaries are all majority-owned
by the Company and are included in the consolidated financial statements
of the Company. All significant intercompany balances and transactions
have been eliminated.
% Ownership
-----------
Homespan Realty Co., Inc. ("Homespan") 100.0
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0
Piccadilly Advertising Agency, Inc. ("Piccadilly")
Since 01/28/99 the name was changed to
Ecomm Group Inc. ("Ecomm") 100.0
San Luis Estates, Inc. ("SLE") 100.0
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5
Universal Developers, Inc. ("UDI") 100.0
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0
Commerce was originally formed as a Wisconsin corporation (September 14,
1962) which then merged into a Delaware corporation on July 26, 1971 and
on April 1, 1999 it merged back into a Wisconsin corporation. It owns
52% of Misanse, an El Salvadoran corporation that was formed on May 8,
1960, reinstated on January 25, 1975 and reincorporated on October 22,
1993. Commerce owns 82 1/2% of the San Sebastian Gold Mines, Inc.
(SSGM). Misanse has a mining concession with the government of El
Salvador and is the owner of the SSGM real estate. Misanse has assigned
the mining concession to the Commerce/Sanseb Joint Venture (Comseb), the
mining operator formed on September 22, 1987. Comseb operates the SCMP
(the gold processing plant near the city of El Divisadero acquired on
February 23, 1993) and has conducted exploration and exploitation at the
following El Salvador gold mines: SSGM (near the city of Santa Rosa de
Lima since October 1968), San Felipe-El Potosi (near the city of El
Potosi since September 1993) as well as its extension Capulin (near the
city of El Potosi since May 1995); Modesto (near the city of El Paisnal
since August 1993); Hormiguero (near the city of Comacaron since
September 1993) and Montemayor (northwest of SSGM since March 1995).
<PAGE>
The Government of El Salvador has issued the Modesto and Montemayor
mining concessions to others. Commerce's attorneys have challenged the
legality of the issuance of these concessions. Commerce owns properties
believed to be crucial to the Modesto Mine and it holds leases to the
key property of the Montemayor Mine. It is in the process of applying
for concessions on the property it owns (Modesto) and on the property
that it leases (Montemayor).
All of the mines mentioned were formerly in production and did produce
gold and/or silver. In addition to the channel trenching, test pit
holes, and underground adit openings, the Joint Venture has acquired its
own diamond drilling rig and has contracted with others to explore in
depth, the above-described potential targets. All of the properties have
promising geologic prospects, alternations, and historical records that
evidence all have been mined and produced gold on a commercial basis in
the past.
WORLD GOLD MARKET PRICE, CUSTOMERS AND COMPETITION
- --------------------------------------------------
Since the Joint Venture is in operation and producing gold on a curbed
start-up basis, its revenues, profitability and cash flow will be greatly
influenced by the price of gold. The gold world market price is
unpredictable, volatile, can fluctuate widely and is affected by numerous
factors beyond the Company's control, including, but not limited to,
expectations for inflation, the relative strength of the United States'
dollar in relation to other major currencies, political and economic
conditions, central bank sales, purchases, inflation, and production
costs in major gold-producing regions. The supply and demand for gold
can also greatly affect the price of gold. The Company has not and does
not expect in the foreseeable future to engage in hedging or other
transactions to minimize the risk of fluctuations in gold prices or
currencies. Gold and silver can be sold on numerous markets throughout
the world, and the market price is readily ascertainable for such
precious metals. There are many refiners and smelters available to
refine these precious metals. Refined gold and silver can also be sold
to a large number of precious metal dealers on a competitive basis. The
Joint Venture's SCMP operation which produces dore is refined by and sold
to Handy & Harman's refinery located in the United States.
At this time the Joint Venture believes that, due to its financial
capacity, it may not be a major gold producer based on the size of larger
existing gold mining companies. The Company believes no single
gold-producing Company has a large impact to offset either the price or
supply of gold in the world market. There are many entities in the world
producing gold. Many of these companies have substantially greater
technical and financial resources and larger gold ore reserves than the
Company. The Company believes that the expertise of the Joint Venture's
experienced key personnel, its ability to train its employees, its low
overhead, its gold ore resources, and its projected low cost of
production may allow it to compete effectively and to produce reasonable
profits. The Company's present and past practice has been to sell its
gold and silver at the world market prices.
The profitability and viability of the Joint Venture is dependent upon,
not only the price of gold in the world market (which can be unstable),
but also upon the political stability of El Salvador and the availability
of adequate funding for either the SCMP operation or the SSGM open-pit,
heap-leaching operation or for the other exploration projects.
As of this date, inflation, currency and interest rate fluctuations have
not had a material impact on the Company or its results of operations.
<PAGE>
SEASONALITY
- -----------
Seasonality does not have a material impact but the rainy season (May
through November) can curtail production. Hurricane Mitch did
temporarily reduce production.
ENVIRONMENTAL MATTERS
- ---------------------
Since the Government of El Salvador has established a new Mining Law
effective February 1996, its exploration, development, and production
programs are subject to environmental protection. The Government of El
Salvador has established its own Department of Environment.
Environmental regulations add to the cost and time needed to bring new
mines into production and add to operating and closure costs for mines
already in operation. As the Company places more mines into production,
the costs associated with regulatory compliance can be expected to
increase. Such costs are a normal cost of doing business in the mining
industry, and may require significant capital and operating expenditures
in the future. The Company's policy is to adhere to the El Salvador
standards. The Company cannot accurately predict or estimate the impact
of any future laws or regulations developed in El Salvador that would
affect the Company's operations.
All operations by the Company involving the exploration for or the
production of minerals are subject to existing laws and regulations
relating to exploration procedures, safety precautions, employee health
and safety, air quality standards, pollution of water sources, waste
materials, odor, noise, dust and other environmental protection
requirements adopted by the El Salvador governmental authorities. The
Company may be required to prepare and present to such authorities data
pertaining to the effect or impact that any proposed exploration for or
production of minerals may have upon the environment. The requirements
imposed by any such authorities may be costly, time consuming and may
delay operations. Future legislation and regulations designed to protect
the environment, as well as future interpretations of existing laws and
regulations, may require substantial increases in equipment and operating
costs to the Company and delays, interruptions, or a termination of
operations. The Company cannot accurately predict or estimate the impact
of any such future laws or regulations, or future interpretations of
existing laws and regulations, on its operations.
The Company has submitted an environmental impact study prepared by an
independent El Salvadoran consultant which is under review.
POLITICAL ENVIRONMENT IN EL SALVADOR
- ------------------------------------
The following information is an excerpt from the "U.S. Embassy - San
Salvador Country Commercial Guide 1998/1999":
"Chapter III - POLITICAL ENVIRONMENT
"El Salvador has an excellent relationship with the United States,
solidified by years of close cooperation during and after the civil
conflict, and U.S support for reconstruction and reconciliation after the
1992 Peace Accords. Leaders of the FMLN, the one-time guerrilla
organization which has become a political party, have established close
relationships with the U.S. Government, seeing it as an honest broker
during the peace process. Most Salvadoran people view the U.S. in a
favorable light, augmented by the fact that close to one million
Salvadorans live in the U.S. The political environment is expected to
remain stable over the next ten or more years.
<PAGE>
"In March 1997, Salvadorans held their second elections since the end of
the war. The FMLN increased its strength as the second largest political
party in the legislature, falling one seat short of the governing
center-right ARENA party. The FMLN also won important municipal contests.
A good sign of a vibrant democracy is the fact that the privatization
program has continued its march. President Calderon Sol will end his five
year term in June 1999; presidential elections will take place in March
1999.
"Since its inception as an anti-Communist nationalistic party in the
early 1980s, ARENA has moderated its policies. During the administration
of President Alfredo Cristiani (1989-1994), the government ended the
12-year civil war, greatly liberalized the economy and reduced
corruption. President Calderon Sol has continued these market-oriented
economic policies, and has strengthened the rule of law.
"The FMLN has strongly supported the democratic process, and pursued a
pragmatic center left policy. FMLN's economic policy leaders have
described the party's goal as a mixed economy, with private enterprise
and investment and with government regulation to ensure that social
interests are taken into account.
"The right wing National Conciliation Party (PCN), which was the party of
government before the civil war, currently has the third largest
parliamentary group.
"The centrist Christian Democratic Party (PDC) has seen its support
slowly erode since controlling the Presidency and Assembly in the
mid-1980s. There are several other small parties. The Social Christian
Union Party (USC) includes elements which went away from the PDC. Other
small leftist parties which were sympathetic to the FMLN during the
conflict, but which operated legally, coalesced to form the Democratic
Convergence Party."
The following chart is included as "Appendix B - DOMESTIC ECONOMY" in the
"U.S. Embassy - San Salvador Country Commercial Guide 1998/1999":
"MACROECONOMIC DATA
(USD Millions, except where noted)
1996 1997 1998
GDP 10,405.5 11,441.4 12,615.2
GDP growth rate (real) 2.1 4.0 4.0
GDP per capital (USD) 1,902.0 2,050.0 2,217.0
Gov't spending percent GDP 19.9 17.4 18.0
Inflation (percent) 7.4 2.5 4.0
Unemployment (percent) 7.7 7.7 7.6
Foreign Exchange Reserves 1,099.5 1,325.0 1,575.0
Average Exchange Rate /1USD 8.75 8.75 8.75
Foreign Debt 2,540.8 2,700.0 *2,400.0
Debt service Ratio (Principal
+ Interest on Foreign Income) 33.2 35.7 36.0
U.S. Econ Assistance (USD Millions)
Military Assistance Excluded,
includes P-480 110.1 48.0 36.0
*Balance as of May 1998
Source: Banco Central de Reserva, Economic Studies Department - 1990 base
year, 1996 preliminary figures; 1997 projections from BCR's Monetary
Program. Unemployment estimate based on Vice Ministry of Promotion and
International Cooperation surveys."
<PAGE>
The following information is an excerpt from the "U.S. Embassy - San
Salvador Country Commercial Guide 1998/1999":
"Chapter VII - INVESTMENT CLIMATE
"Openness to Foreign Investment
"The Salvadoran Government is committed to attracting foreign investment
in most sectors. The climate for foreign investment has improved
significantly over the last few years, as the Government has enacted a
number of complementary laws to facilitate and regulate investment in key
sectors of the economy, and to encourage portfolio investment in state
enterprises under privatization. Companies from many countries including
the United States, Canada, Germany, Korea, Taiwan, and Mexico have made
investments here with favorable results. The primary legislation
governing foreign investment in El Salvador is the 1990 Export
Reactivation Law; and the 1988 Foreign Investment Promotion and Guarantee
law. Other laws complementing the basic investment legal frame are the
Banking Law, Insurance Firms Law, the Mining Law, the IPR Law, the Stock
Exchange Law, special legislation to facilitate the privatization of the
Telecommunications Company, and the electricity generation and
distribution laws , and the Pension Funds Law.
"* The 1988 Foreign Investment and Promotion Law encourages legal and
natural persons to freely establish businesses in El Salvador, with the
exception of two activities reserved for Salvadorans: small business
(less than USD 25,000.00 initial investment), and fishing within 12 miles
of territorial sea. The law accepts intangible technological
contributions as foreign direct investment. Thus, copyrights, patents,
trade marks and inventions receive the same protection under the law. For
enhanced protection, the law encourages the investor to register his
investment with the Ministry of Economy. For investors who register with
the Ministry of Economy, this law provides:
"-- Unrestricted remittance of net profits for investors in industrial
activities. Unrestricted reinvestment of profits.
"-- Remittance of net profits up to fifty percent of the registered
foreign capital per year for investors in commercial and service
activities. In practice, however, there is free convertibility of
capital.
"-- Unrestricted remittance of funds obtained from the liquidation of a
business in proportion to the foreign funds invested.
"-- Unrestricted remittance of royalties and fees for use of foreign
patents, trademarks, technical assistance and other similar services.
"-- Foreign investors may hold dollar accounts in El Salvador and may use
these accounts to obtain local financing. . . .
"Under the Export Reactivation Law of 1990, firms not located in free
zones and exporting less than one hundred percent of their production may
apply for tax rebates of six percent of the FOB value of these exports. A
1997 amendment to this law exempted from income tax the proceeds obtained
through the rebate.
"In 1994 the government announced that it was setting up a one-stop
office for foreign investment in the Ministry of Economy, where investors
now register their investments. To date, no concrete steps have been
taken towards this end. The registration process is supposed to be
non-discriminatory and is not considered an impediment to investment.
<PAGE>
"It is not necessary to have a local partner in El Salvador. Some maquila
operations are completely foreign-owned. Three multinational oil
companies operate in El Salvador, and two of these companies share a
small refinery. . . .
"*In January 1996, the GOES enacted a modern Mining Law, in substitution
of the previous law dating from 1992. Under this law, two foreign
companies, -- American and Canadian -- have received concessions to
exploit gold and silver mines in El Salvador.
"*Since 1993 El Salvador has had in place a modern IPR Law whose gradual
implementation has become a valuable instrument for protecting
intellectual property of foreign investors. Under this law intangible
property rights are recognized.
"* A Stock Exchange Law enacted in 1993 led to the creation of the
Salvadoran Stock Exchange. The privatization process and the
establishment of private pension fund administrators are expected to
stimulate the incipient stock exchange. . . .
"Conversion and Transfer Policies
"El Salvador has a freely convertible currency that since 1994 has traded
at approximately 8.75 colones per dollar. This currency is buoyed by
family remittances of more than one billion dollars per year (USD 1.2
billion in 1997) from Salvadorans who reside outside the country. The
nation's banks and many foreign exchange houses actively trade dollars
and colons. Foreign businesses freely remit profits, repatriate capital,
and bring in capital for additional investments. Banks publish their
exchange rates daily in local newspapers. As of the end of May 1998, the
Central Reserve Bank reported more than USD 1.8 billion in net
international reserves. . . .
"Political Violence
"El Salvador continues its transition to a peacetime society after 12
years of civil conflict. There have been few confirmed acts of political
violence since the elections in mid-1994. Although general crime levels
are high and are of concern to the business community, there has not been
political violence specifically aimed at foreign investors, their
businesses or their property.
"Performance Requirements
"El Salvador's investment legislation does not require investors to
export specific amounts, transfer technology, incorporate set levels of
local content, or fulfill other performance criteria. . . .
"Regulatory System
"The laws and policies of El Salvador are relatively transparent and
generally foster competition. Bureaucratic procedures have improved in
recent years and are relatively streamlined for foreign investors. The
Superintendent of Banks supervises the banking system, but interest rates
are determined by market forces. Banking law reforms have attracted new
foreign banks to the country in the last year, and several new financial
institutions have been established by Salvadoran investors. Gasoline
prices are 'controlled' by the government, but are actually based on an
average of U.S. Gulf Coast refinery prices.
<PAGE>
"Bilateral Investment Treaties
"The United States and El Salvador signed an investment guarantee treaty
in 1960 designed to protect U.S. investors against expropriation or
currency inconvertibility. The United States and El Salvador also have a
framework agreement for a Trade and Investment Council (TIC). An
all-encompassing bilateral investment treaty which would address issues
such as national treatment for foreign investors, transfers,
expropriation, investment disputes, tax policies, is being negotiated,
but has not been signed. The United States and Salvadoran governments are
working towards but have not yet reached agreement on a Tax Information
Exchange Agreement.
"El Salvador is a member of the Central American Common Market, and has
approximately 50 commercial and technical cooperation treaties in effect.
Three of these treaties (Mexico, Spain, and Venezuela) look to promote
investment. El Salvador is a member of the World Trade Organization.
"OPIC
"The Overseas Investment Corporation (OPIC) has a bilateral agreement
with El Salvador. OPIC has approved insurance coverage for the expansion
of a U.S. bank in El Salvador, and is considering several other projects.
OPIC insures currency inconvertibility, expropriation and civil strife,
as well as corporate financing. El Salvador is also participating in the
Multilateral Investment Guarantee Agency (MIGA).
"Labor
"Of El Salvador's labor force of approximately 1.5 million workers, 34
percent work in the agricultural sector. This is followed by services (21
percent), commerce (18 percent) and manufacturing (15 percent). The
minimum wage in the industrial and commerce sectors is 1,260 colons or
144 dollars a month. Urban employees with minimal skills generally earn
at least twenty percent more than the minimum wage. Although the minimum
wage is less for agricultural workers, coffee plantation owners report
that they pay above the minimum wage to attract workers during the
harvest.
"Official unemployment was 7.7 percent in 1997. Underemployment is much
higher, although there are no reliable estimates. However, some
construction contractors cannot find sufficient skilled workers, due to
the number of projects now underway in El Salvador.
"Salvadoran labor is perceived as hard working and trainable. The general
educational level is low, which may inhibit the development of industries
needing skilled, educated labor. The current administration has made
education its first priority sector. There is a lack of middle
management-level talent, which sometimes results in foreigners being
brought in to perform such tasks.
"The Constitution of December 1983 guarantees the right of employees to
organize into associations and unions. Employers are free to hire union
or non-union labor. Closed shops are illegal. . . .
"Capital Outflow Policy
"There are no restrictions on capital outflow for Salvadorans, nor are
there any specific incentives to invest capital outside El Salvador.
Salvadoran investors have interests in hotels, real estate and industry
in Mexico, Guatemala, Honduras, Costa Rica, Panama and the U.S. Accurate
statistics about the size of these investments are not available.
<PAGE>
"Major Foreign Investors
"Coastal Technologies - owner/operator of the Nejapa power-generating
plant. Estimated value over USD 140 million dollars, with plans to expand
it for 1997/98.
"Kimberly Clark de C.A. - owns a paper products factory.
"Texaco Caribbean - fuel storage and lubricant blending plant in
Acajutla, and service station/grocery markets throughout the country.
"Esso Standard Oil - together with Shell, owns and operates a small oil
refinery in Acajutla, expanded in 1997. Also owns service station/grocery
marts throughout the country.
"Shell El Salvador - shares an oil refinery with Esso, and owns service
station/grocery marts throughout the country.
"Bayer de El Salvador- owns a modern pharmaceutical processing plant.
"Sara Lee Knit Products - owns a clothing assembly plant in the El
Pedregal free trade zone.
"Xerox de El Salvador - sells and services office equipment and
computers.
"AIG - insurance
"British American Tobacco - manufactures cigarettes.
"The following companies purchased controlling shares in the country's
four electricity distribution companies.
i) AES Corporation, U.S.
ii) EMEL, S.A., Chile and Pennsylvania Power and Light, U.S.
iii) Electricidad de Caracas, Venezuela"
OPERATIONS, OTHER THAN MINING
- -----------------------------
Aside from its mining operations and recent entry into the Internet
business, Commerce independently and through its partially and
wholly-owned subsidiaries conducts other business activities, which at
present are substantially less significant than its gold production and
exploration in El Salvador: (1) land acquisition and real estate
development through its wholly-owned subsidiaries, San Luis Estates, Inc.
("SLE") and Universal Developers, Inc. ("UDI"); (2) real estate sales,
through its wholly-owned subsidiary, Homespan Realty Co., Inc.
("Homespan"); (3) the operation of a 331-acre campground known as
Standing Rock Campground, which is owned by Homespan and operated by the
Company; and (4) advertising, and the Internet business through its
wholly-owned subsidiary, Piccadilly Advertising Agency, Inc.
("Piccadilly") whose name was recently changed to Ecomm Group Inc.
("Ecomm").
On January 29, 1999, Commerce announced that its wholly-owned subsidiary,
Ecomm, entered into an agreement with Interactive Business Channel, Inc.
(IBC) in which IBC would assist in developing an "Internet web portal
roll up strategy." IBC's president was elected to the office of the
President of Ecomm. IBC is to receive 49% share ownership in Ecomm.
Ecomm's strategy is to attempt to acquire or "roll up" Internet websites
and businesses and to consolidate them into a web portal.
<PAGE>
LAND ACQUISITION, DEVELOPMENT AND OWNERSHIP
- -------------------------------------------
During the past years, the Company has substantially reduced its
activities in the business of land acquisition and real estate
development which was conducted principally through its two wholly-owned
subsidiaries, San Luis Estates, Inc. ("SLE"), a Colorado corporation, and
Universal Developers, Inc. ("UDI"), a Wisconsin corporation.
SLE had been the developer of a large tract of land for recreation,
retirement and for other individual purposes. This land consists of
approximately 7,000 acres. It was subdivided in the San Luis North
Estates Subdivision located in Costilla County, Colorado, abuts the Town
of San Luis, Colorado, and lies between the San Juan and Sangre de Cristo
mountain ranges in southern Colorado. This tract of land had been
subdivided into 1,205 five-acre or larger parcels, unimproved except for
gravel roads now maintained by Costilla County, however, drainage,
survey, staking, and water rights adjudication have been completed.
As of March 31, 1999, there remained an inventory of 40 five-acre parcels
of real estate which represents less than four percent of the total lots
developed in this subdivision. It is the intent of the Company to sell
the remaining lot inventory as a bulk sale for cash or to exchange it for
other assets or to reduce its debts. This land inventory is not
considered material or significant to the Company's operations.
SLE believes that it is in compliance with the requirements of the
Department of Housing and Urban Development ("HUD") to sell its remaining
lots in the San Luis North Estates Subdivision; if necessary, it intends
to maintain its registration effective with HUD in anticipation of
selling its remaining lots unless it finds that it is exempt from the HUD
rules and regulations.
SLE also owns twelve improved lots located in the city of Fort Garland,
Costilla County, Colorado. The assets of SLE have served as a source of
collateral for funds advanced to the Company and its majority-owned
subsidiaries.
The Company's wholly-owned subsidiary, Homespan, owns a 331-acre
campground known as Standing Rock Campground located in Camden County,
Missouri. This recreational resort includes approximately three quarters
of a mile of lake frontage on the Lake of the Ozarks, 130 campsites of
which 120 campsites include hook ups for electricity, water, sewer, and a
pad for recreational vehicle parking. A clubhouse and several ancillary
buildings are on the premises. The Company is the operator of the
campground and is leasing space to campers and others on a daily, weekly,
or monthly basis.
Misanse, the Company's majority-owned subsidiary (52%) owns the SSGM real
estate consisting of approximately 1,470 acres which is located
approximately two and one-half miles northwest of the city of Santa Rosa
de Lima, off of the Pan American Highway, and about 108 miles southeast
of the capital city of San Salvador, El Salvador, and it is about 11
miles west from the border of the Country of Honduras. It is also about
26 miles from the city of La Union which has railroad and port
facilities. An airline commuter service provides daily scheduled flights
to the city of Santa Rosa de Lima.
The Company owns approximately 57 acres of land on the Modesto Mine site
which is located due north of the city of Paisnal and approximately 19
miles north of San Salvador, the capital city of El Salvador. It also
leases approximately 175 acres of vacant land in the Department of
Morazan known as the Montemayor Mine.
Reference is made to "Item 2. Properties," for additional information.
<PAGE>
REAL ESTATE SALES
- -----------------
Homespan, the local real estate marketing subsidiary of the Company is
presently inactive. It has no significant activity and is not material
to the Company's operation. Homespan holds the title to the real estate
located in Colorado and the Standing Rock Campground ("SRC"), located in
the Lake of the Ozarks. SRC is operated by the Company. Assets of
Homespan have also served as a source of collateral for funds loaned to
the Company and its majority-owned subsidiaries.
INTERNET BUSINESS AND ADVERTISING
- ---------------------------------
The Company owns 100% of the outstanding common stock of Piccadilly
Advertising Agency, Inc. ("Piccadilly"), a Wisconsin corporation. On
January 28, 1999, Piccadilly changed its name to Ecomm Group Inc.
(Ecomm). Ecomm provides, when required, advertising services to the
Company and its other subsidiaries when they are needed.
The Company, in order to diversify its business activities, on January
29, 1999, announced its plans to have its majority-owned subsidiary,
Ecomm, enter into the web portal business. Ecomm's current strategy is
to attempt to acquire or to "roll up" Internet websites and businesses
and consolidate them into a web portal. Interactive Business Channel
Inc. (IBC) has agreed to assist Ecomm in developing an "Internet web
portal roll up strategy" by acquiring Internet businesses. In this
connection, the president of IBC, Matthew Marcus, has begun serving as
the part-time President of Ecomm.
There can be no assurance that Ecomm's current strategy will be
successful. Ecomm has not yet entered into any agreements for the
acquisition of any websites, web services or other technology in
connection with the web portal. There is no assurance that it will be
able to enter into contracts for the acquisition of such sites, services
and technology on terms acceptable to Commerce and Ecomm. The Internet
business is highly competitive and there is no assurance that Ecomm's web
portal will attract traffic and generate a profit even if Ecomm acquires
the websites, web services and technology on acceptable terms.
PATENTS AND LICENSE AGREEMENTS
- ------------------------------
On July 23, 1987, the Government of El Salvador delivered and granted to
Misanse, possession of a mining concession (license). On September 25,
1996, the SSGM concession was reconfirmed to comply with the 1996 El
Salvadoran Mining Law. The Joint Venture believes that its SSGM
concession begins on the date it was issued--July 1987. The concession
provides the right to extract and export minerals for a term of 25 years
(plus a 25-year renewal option) beginning on the first day of production
from the real estate owned by Misanse and encompassing the SSGM. Misanse
assigned this concession to the Joint Venture. (Reference is made to
"Item 2." for additional information)
The Joint Venture has applications pending with the El Salvador
Department of Energy, Mines and Hydrocarbons for the exploration rights
under the February 1996 Mining Law for the following mining properties
located in El Salvador: San Felipe-El Potosi Mine, and its extension,
the El Capulin Mine, and the Hormiguero Mine. It is in the process of
applying for concessions for the real estate it owns on the Modesto Mine,
and the real estate it leases at the Montemayor Mine and the Hormiguero
Mine. The Company and its subsidiaries hold no patents or trademarks.
Presently it has not entered into any Internet licensing agreements.
<PAGE>
SIGNIFICANT CUSTOMERS
- ---------------------
The Company presently has no individual significant customers in which
the loss of one or more would have an adverse effect on any segment of
its operations or from whom the Company has received more than ten
percent of its consolidated revenues except for the sale of gold which
the Joint Venture is producing. The gold in dore form is refined and
then sold at the world market price to a refinery located in the United
States.
MISCELLANEOUS
- -------------
Backlog orders at this time are not significant to either the Company's
or its majority-owned subsidiaries' areas of operations, or at this time
is any portion of their operations subject to renegotiation of profits or
termination of contracts at the election of the United States'
Government.
At this time, neither the Company nor its majority-owned subsidiaries
conduct any material research and development activities, except as
indicated in this report with respect to the Joint Venture and its mining
exploration and exploitation programs.
The Company believes that the federal, state and local provisions
regulating the discharge of materials into the environment should not
have a substantial effect on the capital expenditures, earnings or
competitive position of the Company or any of its majority-owned
subsidiaries as the Company does not have any mining activity in the
United States.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS LINES OF BUSINESS
- ---------------------------------------------------------------
Operation
- ---------
Campground: For the years ended March 31, 1999, 1998 and 1997, revenues
have been generated from the campground business. Although Homespan owns
the campground real estate, the Company is the campground operator.
Land Sales
- ----------
The Company intends to sell its remaining lots in Colorado preferably to
a single buyer.
Mining
- ------
The Company's primary strategy, through its Joint Venture, is to use its
SCMP facilities to process gold ore transported from SSGM and other
exploration opportunities located in the Republic of El Salvador. The
Joint Venture has produced gold from its SCMP operations during this
curbed production period. At such time as funds are available, the
Company intends to process its SSGM gold ore via an open-pit,
heap-leaching system.
The Company anticipates that the capital required for the purchase of
equipment and working capital can be obtained from the sale of its common
or preferred shares, bonds, equity offerings, loans, leases, partial sale
of its gold reserves, sale of gold, or from a combination of these and
other creative funding possibilities. With the substantial decline in
the price of gold, it may be more difficult to obtain financing under
reasonable terms and conditions.
<PAGE>
INTERNET BUSINESS
- -----------------
As of March 31, 1999, the Company's subsidiary, Ecomm, has not earned any
revenue and has not incurred any significant expenses or capital
investment other than disclosed in this report.
COMPETITION
- -----------
The Company believes that neither it, nor any other competitor, have a
material effect on the precious metal markets, and that the price that
the Joint Venture will receive for its sale of gold is dependent upon
world market conditions over which neither it nor any other single
competitor have control. The competition is more intense in the Internet
business.
EMPLOYEES
- ---------
As of March 31, 1999, the Joint Venture employed approximately 300
full-time persons in El Salvador to perform its exploration,
exploitation, and development programs; to produce gold from its SCMP
facilities; and to handle the administration of its activities. None of
these employees are covered by any collective bargaining agreements. It
has developed a harmonious relationship with its employees, and it
believes that it is the largest single non-agricultural employer in the
El Salvador Eastern Zone. Also, the Company employs approximately four
persons (plus part-time help) in the United States.
INSURANCE
- ---------
The Joint Venture has the availability of insurance through an El
Salvador insurance company with the following coverage: general
liability, vehicle liability and extended coverage, fire, explosion,
hurricane, cyclone, tornado, windstorm, hail, flood, storm, earthquake,
tremor or volcanic eruption, politically-motivated violence, terrorism,
strikes, work stoppages, riots, uprisings, malicious acts, vandalism, and
related acts. As additional equipment and assets are acquired or
improvements are made, the insurance coverage can be increased
accordingly.
<PAGE>
INDUSTRY SEGMENTS
-----------------
1. Unaffiliated Sales Year Ended March 31,
------------------ --------------------
Industry Location 1999 1998 1997
-------- -------- ---- ---- ----
Mining (*a) El Salvador $ 785,526 $ 1,234,443 $ 0
Campground Missouri, USA 62,176 61,465 59,009
2. There Were No Intersegment Sales
--------------------------------
3. Total Revenues Year Ended March 31,
-------------- --------------------
Industry Location 1999 1998 1997
-------- -------- ---- ---- ----
Mining (*b) El Salvador $ 999,017 $ 1,347,391 $ 0
Campground Missouri, USA 62,176 61,465 59,009
Other Delaware/Wis., USA 246 3,025 3,832
----------- ----------- -----------
Total: $ 1,061,439 $ 1,411,881 $ 62,841
4. Operating Profit (Loss) Year Ended March 31,
----------------------- --------------------
Industry Location 1999 1998 1997
-------- -------- ---- ---- ----
Mining (*a) El Salvador $ (44,688) $ 117,699 $ 0
Campground Missouri, USA (4,267) (2,121) (8,973)
Interest Income El Salvador/
& Corporate Delaware
Headquarters Wisconsin, USA (41,311) 3,025 3,832
------------ ----------- ------------
Total: $ (90,266) $ 118,603 $ (5,141)
5. Identifiable Assets Year Ended March 31,
------------------- --------------------
Industry Location 1999 1998 1997
-------- -------- ---- ---- ----
Mining (*a) El Salvador $26,031,841 $24,386,843 $21,035,881
Campground Missouri, USA 1,135,500 1,135,500 1,135,500
Real Estate Colorado, USA 21,000 21,000 21,000
Corporate Assets 398,460 256,308 976,740
----------- ----------- -----------
Total: $27,586,801 $25,799,651 $23,169,121
(*a) The proceeds from the sale of gold and the gold inventory received
from the Joint Venture were used to reduce the advances due to the
Company's Joint Venture account and all expenditures increased the
advances.
(*b) Includes an added tax value refund of $213,491 for 1999 and $112,948
for 1998 from the Government of El Salvador.
<PAGE>
ITEM 2. PROPERTIES
- -------------------
MINING PROPERTIES
- -----------------
The table below provides a summary of the most significant mining
properties in which the Company has an interest. More detailed
information regarding each of these properties is provided in the text
that follows:
Commerce Group Corp./San Sebastian Gold Mines, Inc. Joint Venture
Properties all located in the Republic of El Salvador, Central America
Amount
Date of Funds
Interest Cost to Make Date
Property Nature of was of Property Mine will be
Description Interest Acquired Interest Operational Operational
----------- -------- --------- -------- ----------- ------------
1. San Sebastian Mineral 1968 5% of the This is In operation
Gold Mine concession gross dependent on a curbed
located two consisting precious on the production
and one-half of 100% metal scale of basis.
miles north- ownership proceeds production
west of the of the or $206 that
city of Santa precious a month management
Rosa de Lima metals whichever decides to
and the Pan extracted is higher. perform.
American from this mine. The amount
Highway. of invest-
ment could
be from $5
million to
$100 million.
2. San Felipe- Application 07/06/93 5% of the Undeter- Undetermined.
El Potosi/ pending for gross mined until
Capulin Mine mineral precious a preliminary
located near concession metal drilling
the city of for 100% proceeds. program is
Potosi, 18 ownership completed;
miles north- of the precious estimated
west of the metals extracted cost of
city of San from this mine. drilling is
Miguel. $2 million.
3. Hormiguero Ownership of 09/93 The sur- Undeter- Undetermined.
Mine located the tailings. face use mined until
five miles of land a preliminary
southeast (rent) is drilling program
of the San to be is completed;
Cristobal negotiated. estimated cost
Mill and of drilling is
Plant near $2 million.
the city Mine surface
of Comacaron. channel trench-
ing and adit
cleaning should
be completed
to determine
drilling cost.
4. Modesto Mine Application 09/93 It appears Undeter- Undetermined.
located near is to be as if this mined until
the city of submitted will be an a prelimi-
Paisnal and for a mineral underground nary drilling
about 19 miles concession on operation program is
north of San the real estate except in completed;
Salvador, the owned by the the estimated
capital city. Company to own Company- cost of
100% of the owned land. drilling is
precious metals Therefore, $2 million.
extracted from no cost for
the real estate interest.
owned by the
Company.
5. Montemayor Application 07/95 It appears Undeter- Undetermined.
Mine located is to be submitted that this mined until
about 14 miles for a mineral will be an a prelimi-
northeast of concession on underground nary drilling
SCMP and about the land leased mine, program is
six miles by the Company therefore completed;
northwest of to own 100% of current estimated
SSGM. the precious leases will cost of
metals extracted have to be drilling is
from the areas renegotia- $2 million.
the Company ted and ex-
leases. tended.
6. San Cristobal Mill and Equip- Equipment To expand Curbed pro-
Mill and Plant ment purchased the plant, duction
Plant located owned by 02/23/93 and exten- including commenced
off the Pan Joint and sive retro- a crush- March 1995,
American Venture. there- fitting was ing system expansion
Highway west The real after and to a capa- program in
of the city estate is Lease continues city of progress.
of El owned by 11/12/93 to be per- 400 tons
Divisadero. an agency formed. per day; an
of the Through estimated
Govern- 03/31/99, sum of up
ment of a total of to $3
El $5,094,607 million
Salvador. has been may be
invested required,
in this all
plant and dependent
equipment. whether new
Depreciated or used
value is equipment
$3,476,341. will be
purchased.
<PAGE>
THE SAN SEBASTIAN GOLD MINE
- ---------------------------
GENERAL LOCATION AND ACCESSIBILITY
The SSGM is situated on a mountainous tract of land consisting of
approximately 1,470 acres of explored and unexplored mining prospects.
The SSGM is located approximately two and one-half miles off of the Pan
American Highway, northwest of the city of Santa Rosa de Lima in the
Department of La Union, El Salvador. The tract is typical of the numerous
volcanic mountains of the coast range of southeastern El Salvador. The
topography is mountainous with elevations ranging from 300 to 1,500 feet
above sea level. The mountain slopes are steep, the gulches are well
defined, and the drainage is excellent.
There is good roadway access to the SSGM site. Reconstruction of the Pan
American Highway from two lanes to four lanes (from the city of San
Miguel to the Honduran border) has been recently completed. The city of
Santa Rosa de Lima (approximately three miles from the SSGM) is one of
the largest cities in the Eastern Zone. The SSGM is approximately 30
miles from the city of San Miguel, which is El Salvador's second largest
city, and approximately 108 miles southeast of El Salvador's capital
city, San Salvador. SSGM is also approximately 26 miles from the city of
La Union which has port and railroad facilities. Major United States'
commercial airlines provide daily scheduled flights to the Comalapa
Airport which is located on the outskirts of the city of San Salvador.
An airline commuter service provides air flights to the cities of Santa
Rosa de Lima, San Miguel, and La Union as well as other cities throughout
El Salvador.
<PAGE>
SSGM RESERVES AND OPERATION
Statistical production and financial data for the San Sebastian Gold Mine
(SSGM) are shown on the following table:
San Sebastian Gold Mine (SSGM) Operation
03/31/99 03/31/98 03/31/97
-------- -------- --------
PRODUCTION
Tons ore mined and processed 51,618 59,596 74,350
Gold grade of ore (oz./ton) .08 0.087 0.080
Strip ratio (tons waste/tons ore) N/A N/A N/A
Gold production (oz.) 2,684 3,927 2,601(1)
Silver production (oz.) 836 1,416 596
Recoverable gold inventory (oz.) 259 259 259
FINANCIAL
Ounces of gold sold 2,684 3,667 2,601
Average gold price realized $ 293 $ 315 $ 368
Revenue from mine operations $ 785,526 $1,234,443 $ 956,261
Cash operating cost per ore
ton mined $ 10.27 $ 14.72 N/A
Cash operating cost per ounce $ 197.62 $ 198.24 N/A
Total production cost per
ounce (2) $ 350.19 $ 276.43 N/A
Operating earnings (loss) (3) $ (44,688) $ 117,699 N/A
Capital expenditures in mining
projects (3) $2,269,928 $3,402,089 $3,080,901
MINABLE RESERVES (03/31/99) Contained
Average Gold
Tons Grade Ounces(4)
---------- ------- ----------
Ore - virgin, dump waste
and tailings 14,420,268 0.081 1,168,042
Stope fill (estimated) 1,000,000 0.340 340,000
---------- ---------
Totals 15,420,268 1,508,042
(1) Proceeds from 1997 gold sales were credited against equipment
purchases and development costs; no detailed costs were maintained
on the mining operation.
(2) As calculated under The Gold Institute's Production Cost Standard,
includes the depreciation expense of $338,797 or $126.23 an ounce
for 1999 and $208,254 or $53.04 an ounce for 1998.
(3) Excludes exploration and development drilling.
(4) The estimated recoverable ounces of gold by processing: SCMP, 88%;
heap leach, 60%.
The tailings, dump material, and stope fill at the SSGM are the
by-products of past mining operations. The tailings are the residue of
higher grade ore once milled and processed to recover the then
economically feasible fraction of gold present in the material. Most of
the tailings, except the lower grade, have been processed. The dump
material is actually gold ore which has been mined in the search for
higher grades of gold ore and piled to the side of past excavations as it
was considered at that time to be too low of a grade of ore to process
economically; however, it was reserved for future processing. The stope
fill also was considered to be too low of a grade of ore to process
economically, therefore it was primarily used to fill the voids in the
underground workings of the past SSGM mining activities. Virgin gold
ore, as the term is used in this report, is gold ore which is on the
surface and readily available for processing; it also includes the
undeveloped underground gold ore.
<PAGE>
Virgin gold ore at the SSGM represents the majority of the material (14.4
million tons, including the dump waste material) in the Company's
reserves. The Company plans to use an open-pit mining method and will
truck the lower grade gold ore to one or more heap-leaching pads
developed at the SSGM site. The use of open-pit mining and heap-leaching
techniques will enable the Company to process a higher volume of gold ore
than can be processed at the SCMP or through underground operations used
by the Company and others in the past. The Company plans to continue to
operate the SCMP after developing a leach-pad operation at the SSGM,
using the facility to process the higher grade ore it encounters in the
course of mining at the SSGM. The milling operation at the SCMP is
expected to return a higher rate of gold recovery than can be expected
from heap-leaching techniques.
The 960,000 tons of dump material present at the SSGM site has grades
ranging from 0.082 to 0.178 ounces of gold per ton and it now is combined
with the virgin ore. An analysis of the underground stope fill material
was made by the Company's consulting geologist who has confirmed that
about seven percent of the stope fill had been removed and processed
during the 1973-1978 period. The grade of the stope fill averages 0.34
ounces of gold per ton. It is estimated that there are about one million
tons available for SCMP treatment from the underground operations. It is
necessary to remove the material which has caved in the adits to reach
the stope fill areas.
All residue from the contemplated operations will be stockpiled for
potential future processing dependent upon the price of gold,
improvements in technology, and the depletion of better grading material.
MISANSE MINING LEASE
The Company (through the Comseb Joint Venture) leases the SSGM from
Mineral San Sebastian, S.A. de C.V. ("Misanse"), an El Salvadoran
corporation. The Company owns 52% of the total of Misanse's issued and
outstanding shares. The balance of the shares are owned by about 100 El
Salvador, Central American and United States' citizens. (Reference is
made to Note 7 of the financial statements for related party interests.)
On July 28, 1975, an amended lease agreement between Misanse as lessor
and Sanseb as tenant was executed by the parties giving the tenant all
the possessions and mining rights that pertain to the SSGM as well as
other claims that may already have or could be claimed in the future
within the 1,470 acre plat of land encompassing the SSGM. The lease was
further amended to run concurrently with the concession described herein
and may be extended for one or more equal periods by the tenant as long
as the tenant has paid the rent and has complied with other obligations
under the lease and the concession. The lease further provides that the
tenant will pay rent to equal five percent of the gross gold production
revenues obtained from the leased SSGM and further commits itself to
maintain production taking into consideration market, political, and
other conditions. In no case will the rent be less than 1,800 colones
per month (approximately $206 per month at the current rate of exchange).
The lease further provides that, in the event the lessor wishes to sell
the property, it must first give preference to the tenant; the lease
further provides that the tenant must give preference to employ its
former mining employees and Misanse shareholders.
<PAGE>
The lease is freely assignable by the Joint Venture without notice to
Misanse. The lease may also be cancelled by the Joint Venture on thirty
days' notice to Misanse and thereafter all legal obligations thereunder
shall cease.
In the event that new extended bodies of ore are discovered, Misanse may
be required to make proper claim for them through the Ministry of Economy
of El Salvador's Department of Energy, Mines and Hydrocarbons, and
include such claims in the present lease. Such addition to the lease is
required to be made without additional rental payment, except that the
expenses for procuring the concession shall be borne by the Joint
Venture.
MISANSE MINERAL CONCESSION-GOVERNMENT OF EL SALVADOR
In El Salvador, the rights to minerals are vested with the government.
Mineral rights are granted by the government through concessions or
licenses.
On January 27, 1987, the Government granted a right to the SSGM mining
concession ("concession") to Misanse which was subject to the performance
of the El Salvador Mining Law requirements. These rights were
simultaneously assigned to the Joint Venture.
On July 23, 1987, the Government of El Salvador delivered and granted to
Misanse, possession of the mining concession. This is the right to
extract and export minerals for a term of 25 years (plus a 25-year
renewal option) beginning on the first day of production from the real
estate which encompasses the SSGM owned by Misanse. Misanse assigned
this concession to the Joint Venture.
During February 1996, and effective 120 days thereafter, the Government
of El Salvador adopted a revised Mining Law. This law grants longer
exploration and exploitation terms. It also contains a provision that
three percent of the gold receipts will be paid to the Government of El
Salvador and an additional one percent is to be paid to the municipality
where the mine is located.
The concession, or the right to mine gold, is subject to cancellation by
the Government of El Salvador if there is an abandonment of the property
such as if there is no demonstration that the concession holder intends
to carry out exploration, exploitation, or development of the property in
good faith during a six-month period after the concession is granted or
if the work of exploration, exploitation or development is suspended for
six months or if the exploration, exploitation or development is reduced
to an extent that the effort used cannot be regarded as being reasonable
in relation to the importance and resources of the mining property.
In the event of public disaster or disturbance of the public order, all
mines in the given locality shall be regarded as being in exploration,
exploitation or development without the necessity of any special
formality. Such event did occur when, on November 11, 1989, the
guerrillas attempted to seize the Country of El Salvador. On January 16,
1992, a peace accord and cease-fire agreement was entered into by the
Government of El Salvador and its opposition. The transition from war to
peace was effected without any serious occurrences and final peace was
declared on December 15, 1992, with a three-year period to comply with
the terms of the peace pact.
<PAGE>
The work of a concession may be suspended by permission of a competent
authority for a reasonable period not to exceed one year. An exception
would be in case of acts of God or force majeure in which case the period
may be extended successively as long as such reasons exist.
A concession may be fortified for lack of security measure, or if its
condition would endanger the lives of workers, or for failure to comply
with provisions of the Mining Code or other provisions enacted with
respect to any aspect of exploitation in the mining industry, unless
corrected within a reasonable period.
The Complimentary Mining Law states that, in addition to the cases
mentioned in the El Salvador Mining Code, abandonment of the mine will be
presumed if after a significant reduction or exhaustion of the veins,
beds, or other formation in exploitation, three months is allowed to pass
without adequate efforts either to exploit other deposits existing in the
concession or to discover new deposits suitable for exploitation.
A concession may be granted for an unlimited time, as long as the
concession holder complies with the conditions imposed by law. The Joint
Venture's concession is for a period of twenty-five years, beginning on
the first day of production, and with a right to extend it for an
additional twenty-five years.
In addition, the El Salvador Constitution contains certain provisions
which, although not referring specifically to mining, are applicable
thereto. Article 138, for example, prohibits confiscation of property as
a penalty or for any other reasons, but, in the event that any authority
violates this prohibition, the confiscated property is imprescriptible.
SSGM CURRENT STATUS
The Company, through its Joint Venture is conducting the following
activities: It is in the exploration, development and pre-production
mining stage which consists of completing its survey, mapping, site
preparation, infrastructure, construction, planning, and in the
performance of the auxiliary work needed to begin gold production at the
SSGM site. Presently, the Company is seeking funding to purchase
equipment, to purchase inventory, and to use for working capital for its
on-site proposed open-pit, heap-leaching operation. In addition, the
Company is engaged in the exploration and development of the peripheral
area (including diamond core drilling) surrounding the main body of gold
ore in order to increase its gold ore reserves.
The Company's main objective and plan, through the Joint Venture, is to
operate a moderate tonnage, low-grade, open-pit, heap-leaching operation
to produce gold on its SSGM site. Dependent on the funding, the grade of
ore, and the tonnage processed, it anticipates producing more than 40,000
ounces of gold from its open-pit, heap-leaching operation during the
first twelve full operating months and more thereafter.
PROPOSED SSGM OPEN-PIT, HEAP-LEACHING OPERATION
The Joint Venture has placed the SCMP into a curbed production operation.
It now intends to obtain a sum of $6 million or more to commence an
open-pit, heap-leaching operation at the SSGM site. An additional $7
million or more is estimated to be required for the crushing system and
mining equipment if the Joint Venture were unable to lease this
equipment. After these funds are obtained, the Joint Venture intends to
start processing gold ore from its open pit at a production level of
2,000 tons per day. During the second year, the production level plans
are to expand production to 3,000 tons per day (the funds for this
expansion could be generated from profits). An increase to process 4,000
tons of gold ore per day would take place during the third year and
another expansion to process 6,000 tons per day would take place at the
beginning of the fifth year; all funds for this expansion should be
available through a combination of earned profits, borrowings, equity
sales, or other sources. With the anticipated production volume, there is
at least an eight-year supply of gold ore. More gold ore would be
developed during this period of time as it is believed that a substantial
amount of gold ore can be proven.
SSGM LABORATORY AND SURVEYING CREWS
The Joint Venture has its own SSGM on-site laboratory with full-time,
trained personnel working three shifts to fire assay the gold ore
samples. It also has two full-time surveying crews consisting of ten
persons.
SSGM OWNERSHIP OF THE PROPERTY
The San Sebastian Gold Mine real estate consisting of approximately 1,470
acres, is owned by Misanse, a Salvadoran corporation. The Company owns
52% of Misanse common shares that are issued and outstanding. Over
65,576 fire assay samples have been completed through March 31, 1999.
ENVIRONMENTAL MATTERS
Since the Government of El Salvador has established a new Mining Law
effective February 1996, its exploration, development, and production
programs are subject to environmental protection. The El Salvador
Ministry of Environment has jurisdiction over environmental control.
Environmental regulations add to the cost and time needed to bring new
mines or mills into production and add to operating and closure costs for
mines already in operation. As the Company places more mines into
production, the costs associated with regulatory compliance can be
expected to increase. Such costs are a normal cost of doing business in
the mining industry, and may require significant capital and operating
expenditures in the future. The Company cannot accurately predict or
estimate the impact of any future laws or regulations developed in El
Salvador that would affect the Company's operations.
All operations by the Company involving the exploration for or the
production of minerals are subject to existing laws and regulations
relating to exploration procedures, safety precautions, employee health
and safety, air quality standards, pollution of water sources, waste
materials, odor, noise, dust and other environmental protection
requirements adopted by the El Salvador governmental authorities. The
Company may be required to prepare and present to such authorities data
pertaining to the effect or impact that any proposed exploration for or
production of minerals may have upon the environment. The requirements
imposed by any such authorities may be costly, time consuming and may
delay operations. Future legislation and regulations designed to protect
the environment, as well as future interpretations of existing laws and
regulations, may require substantial increases in equipment and operating
costs to the Company and delays, interruptions, or a termination of
operations. The Company cannot accurately predict or estimate the impact
of any such future laws or regulations, or future interpretations of
existing laws and regulations, on its operations.
The Company has submitted an environmental impact study prepared by an
independent El Salvadoran consultant to the Minister of Environment.
<PAGE>
SAN FELIPE-EL POTOSI MINE ("POTOSI") AND ITS EXTENSION THE EL CAPULIN
- ---------------------------------------------------------------------
MINE ("EL CAPULIN")
- -------------------
POTOSI LOCATION
The Joint Venture has commenced an exploration program on the Potosi
property which is located approximately 18 miles northwest of the city of
San Miguel, the second largest city in the Republic of El Salvador,
Central America, on a paved road 15 miles to the city of Chapalteque and
then west three miles on a gravel road to the city of Potosi. The
historical records indicate that the potential of developing a gold mine
is above average.
POTOSI HISTORICAL INFORMATION
Historical records evidence that exploration and production of gold took
place in 1899 and that Potosi was worked intermittently from 1906 through
1952. The main production period in six levels was from 1938 through
1952 at a rate of 35 to 50 tons per day. Production data avouch that
30,000 ounces of gold were produced from 1945 through 1952 after which
the mine became dormant. During this time a curbed underground
exploration program confirmed that the gold ore reserves were of
commercial value. The gold assays from some of the former drill hole
samples on the southern extension of the north-south portion of this
property showed a grade of 0.10 to 0.35 ounces of gold per ton of ore.
POTOSI GEOLOGY
The Potosi vein type occurrences are very strong, persistent, poor
quartz-calcite fissure fillings from two to ten feet wide and up to 3,400
feet in length. On a regional scale, the veins are fairly
straight-forward type structures but in detail they can be complicated.
Dips in the north-south veins are steeper than in the lattice systems
such as the 50 degrees to 90 degrees in the Potosi type. The proportion
of gold-to-silver increases in north-south striking veins or in veins of
any orientation whose dips more closely approach the vertical.
Two relatively narrow north-south veins, 450 feet apart, have been worked
in the past by vertical and an inclined shaft for up to 2,100 feet along
the strike and to depths of between 180 and 440 feet below surface on
four to six levels. The veins are contained in coarse-grained augite
andesites. The larger of the veins is up to ten feet in width, dipping
55 degrees to 75 degrees west. The second vein is weaker in structure
and about three feet in width. Gold values seem to be indiscriminately
associated with quartz and do not seem to diminish at depth. Assay plans
and ore reserve sections completed in 1952 show 30 blocks with an average
grade of 0.6563 ounces of gold per ton. Holes drilled from the projected
extension of the north-south portion of one of the veins returned various
five-foot sludge samples grading 0.10 to 0.35 ounces of gold per ton with
a one foot of core length grading at 0.39 ounces of gold per ton. It
appears that the deposition took place at higher temperatures than
attributed to silver, thus the vertical zoning of gold deposition is
deeper or has a larger vertical dimension than silver; therefore the
possibility of considerable ore below levels is a realistic one. The age
mineralization is past laramide with the host rock being rhyolite. The
previous gold-silver ratio was 0.3:1.
POTOSI TAILINGS' RESERVE
Since October 25, 1993, Comseb has had a full-time crew, ranging from 25
to 30 employees, conducting an exploration program consisting of
surveys, channel trenching, adit openings, test pit holes, excavation and
drilling of the tailings to determine its gold content.
<PAGE>
Twenty-four test pit hole excavations have been plotted and drilled on
this four-acre site of tailings. The depth to the bottom of the
tailings' pile varied from 7.00 to 10.2 meters (23 to 34 vertical feet)
and a total of 137.6 meters (454 feet) of test pit hole excavations were
completed. The 573 fire assay samples (tailings) indicated an average
grade of gold per ounce of 0.06. The 185,000 tons available multiplied
by the average grade of 0.06 should contain 11,100 ounces of gold. The
11,100 ounces of gold multiplied by a 70% recovery should yield about
7,770 ounces of gold.
POTOSI AND EL CAPULIN EXPLORATION UNDERTAKINGS
A total of 2,506 meters (8,270 feet) of channel trenching was excavated
with a grade ranging from 0.01 to 0.05 ounces of gold per ton. A total
of 801 meters (2,643 feet) of adits has been restored for entry into the
old workings. A total of 3,140 fire assay samples were completed with
the results encouraging a drilling program.
POTOSI EXPLORATION CONCESSION
The exploration concession application was filed on September 6, 1993,
with the Department of Energy, Mines and Hydrocarbons, a division of the
El Salvador's Minister of Economy's office, by the owners of the real
estate, the Cooperative San Felipe-El Potosi. An application for an
exploration concession was filed on May 8, 1997 in order to comply with
the current mining regulations adopted by the Government of El Salvador
in February 1996. The concession consists of approximately 6,100 acres.
While the concession application is pending, it precludes any others from
performing exploration on this site. Upon assessing that the property
has potential mining prospects, the Joint Venture has the right and did
apply for the mining concession.
POTOSI LEASE AGREEMENT
The Joint Venture entered into a lease agreement with the San Felipe
Potosi Cooperative ("Cooperative") of the city of Potosi, El Salvador on
July 6, 1993, to lease the real estate for a period of 30 years and with
an option to renew the lease for an additional 25 years, for the purpose
of mining and extracting minerals and under the following basic terms and
conditions:
1. The term of the lease will be for a period of 30 years plus an option
to automatically extend the lease for an additional 25 years.
2. The lease payment will be five percent of the gross receipts derived
from the production of precious metals from this site and will be
payable monthly.
3. The Joint Venture will advance to the Cooperative the funds required
to obtain the mining concession from the El Salvador Department of
Energy, Mines and Hydrocarbons and all related costs will be
reimbursed or will become a deduction from future rental payments.
4. The Joint Venture will, when it is in production, employ all of the 45
qualified members of the Cooperative, providing that there is a need
for their particular skill or service.
5. The Joint Venture will furnish medicine and first aid medical
assistance to all of its employees to the extent that such benefits
are not provided by the El Salvador Social Security System.
<PAGE>
6. An employee life insurance program is to be seriously considered by
the Joint Venture when production commences, providing that the cost
of such insurance is not excessive.
ENVIRONMENTAL MATTERS
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies except that no environmental impact study is
being conducted at Potosi or El Capulin at this time.
HORMIGUERO MINE ("HORMIGUERO")
- ------------------------------
HORMIGUERO LOCATION
The Hormiguero is located approximately five miles southeast from the
SCMP off of the Pan American Highway in the Departments of San Miguel and
Morazan, Comacaran Jurisdiction, in the Republic of El Salvador, Central
America. The Joint Venture plans to survey, map, plat, plan and develop
an exploration program.
HORMIGUERO CURRENT STATUS
The Joint Venture continues to develop an exploration program on the
5,000 acre site. An application for exploration has been filed on
September 6, 1993 with the Department of Energy, Mines and Hydrocarbons,
a division of the El Salvador Minister of Economy's office. In order to
comply with the El Salvadoran Mining Law adopted during February 1996, an
exploration application was filed on April 21, 1997.
The Hormiguero property continues to be in the stages of being mapped
geologically and topographically on a referenced grid in order to provide
a base to plan a drilling program with the objective to prove that a
commercial body of ore may extend below the bottom of the former
workings. This drilling activity would also determine if the faulted
north end of the Gallardo vein continues. Further drilling could
evidence the mineralization of unexplored veins.
1. Tailings: In an area of approximately 15,744 square meters
(approximately four acres) 35 test pit holes at a total depth of 322
meters (1,063 feet) were excavated and the 705 samples that were fire
assayed showed an average of 0.064 ounces of gold per ton; (0.064
ounces per ton multiplied by 150,000 tons reflected that there are
9,600 ounces of gold).
2. The surface channel trenches consisting of 511 meters (1,686 lineal
feet) were dug perpendicular to the Guadalupe vein and the samples in
this area verified an average grade of 0.0177 ounces of gold per ton.
3. Taladron Adit: The purpose is to clean this adit for entry, in an
attempt to intercept the Guadalupe vein at 61 meters (201 feet) below
surface. A total of 156 meters (515 lineal feet) have been cleaned.
4. The more than 6,000 tons of broken ore (dump material) averaged a
grade of 0.055 ounces of gold per ton. The same grade average was
encountered in the Las Hormigas vein system in the Guadelupe dump
material.
<PAGE>
HORMIGUERO OWNERSHIP
This real estate is owned by various individuals and families and the
Joint Venture has entered into a lease arrangement with the land owners
to explore approximately 175 acres of the core of the mining property.
ENVIRONMENTAL MATTERS
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies except that no environmental impact study is
being conducted at Hormiguero at this time.
MODESTO MINE
- ------------
MODESTO MINE LOCATION
The Modesto Mine is located due north of the town of El Paisnal,
approximately 19 miles north of the capital city, San Salvador, in the
Republic of El Salvador, Central America.
MODESTO MINE PRESENT STATUS
After completing the necessary surveying, mapping and planning, the Joint
Venture proceeded to clean and trench the surface and adit vein exposure.
Since August 1993, 3,084 metric feet of surface channel trenching (10,177
feet) and 866 meters (2,858 feet) of adit cleaning were completed. In
addition, four inclines have been excavated for entry. A total of 4,027
fire assay samples were performed revealing an average grade of 0.035
ounces per ton. The Joint Venture suspended its exploration during July
1997 as the Government of El Salvador awarded the concession of the
property to another mining company. The Company believes that it owns
the key property, therefore permission from the Company will be required
before entry can be made by others. The Joint Venture, upon advice of
legal counsel, intends to file an application for a concession (license)
on the property it owns.
On or about September 2, 1993, the Joint Venture through one of its
employees, filed an application with the El Salvador Department of
Energy, Mines and Hydrocarbons to explore the 4,000 hectares (9,800
acres) of property known as the Modesto Mine. The application, together
with the consent to explore this area from the property owners owning
more than 25% of total area, has been submitted to the El Salvador
Director of Energy, Mines and Hydrocarbons. Also, the Joint Venture had
submitted its original plan to this governmental agency on January 24,
1994, outlining its exploration program. In order to comply with the
current mining regulations adopted by the Government of El Salvador
during February 1996, the Joint Venture filed an exploration concession
application on April 21, 1997.
ENVIRONMENTAL MATTERS
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies except that no environmental impact study is
being conducted at Modesto at this time.
<PAGE>
MONTEMAYOR MINE ("MONTEMAYOR")
- ------------------------------
MONTEMAYOR LOCATION/OWNERSHIP
The Joint Venture has obtained leases for more than 175 acres of the
surface rights from a number of property owners which permits the Joint
Venture to enter their property for the purpose of exploring, exploiting
and developing the property and then, if feasible, to mine and extract
minerals from this property. The term of this permission is for an
infinite period. The Company believes that this real estate contains the
"heart" of the mine. Montemayor is located about 14 miles northeast of
the SCMP, six miles northwest of the SSGM and about two and one-half
miles east of the city of San Francisco Gotera in the Department of
Morazan, Republic of El Salvador. Historical records evidence that the
potential for the Montemayor to become an exploration and development
gold-producing prospect is good.
On April 22, 1997, a current exploration concession was filed with the
Minister of Economy's office in order to comply with the El Salvadoran
Mining Law adopted on February 1996. During July 1997, the Department of
Mines and Hydrocarbons has awarded the concession to others. Since the
Joint Venture has leases on the surface of key real estate, it cannot be
forced to allow others on this key part of the property. The Joint
Venture, upon advice of its legal counsel, intends to file an application
for a concession (license) on the property it leases.
ENVIRONMENTAL MATTERS
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies except that no environmental impact study is
being conducted at Montemayor at this time.
SAN CRISTOBAL MILL AND PLANT ("SCMP") RECOVERY AND PROCESSING SYSTEM
- --------------------------------------------------------------------
SCMP LOCATION
SCMP is located near the city of El Divisadero (off of the Pan American
Highway), and is approximately 13 miles east of the city of San Miguel,
the second largest city in the Republic of El Salvador, Central America.
SCMP LEASE AGREEMENT
Although the Joint Venture owns the mill, plant and related equipment, it
does not own the land and certain buildings. Since February 23, 1993,
the Joint Venture attempted to either lease or purchase this real estate
from an Agency of the El Salvador Government, Corporacion Salvadorena de
Inversiones ("Corsain"). On November 12, 1993, the Joint Venture entered
into an agreement with Corsain to lease approximately 166 acres of land
and the buildings for a period of ten years. The annual rental charge is
U.S. $11,500 payable in advance and subject to annual increases based on
the United States' percentage rate of inflation. Also as agreed, an
$11,500 security deposit was required and this deposit is subject to an
annual increase based on the U.S. inflation rate. The premises are
strategically located to process gold ore from the other mining prospects
that are in the exploration stage.
SCMP MILL AND PLANT PROCESS DESCRIPTION
Instead of utilizing the existing recovery system, the Joint Venture's
engineers have designed a carbon-in-leach (CIL) process.
<PAGE>
On February 23, 1993, the Company, on behalf of the Joint Venture
acquired SCMP, a precious metals' cyanide leaching mill and plant rated
with a capacity of processing 200 tons per day which utilized the
following unit operations: crushing, grinding, thickening, agitated
leaching, counter current decantation of leach solution, recovery of
precious metals by zinc precipitation (Merrill-Crowe), and direct
smelting of precipitates to produce precious metals as dore and tailings'
disposal.
The Company's engineers recommended that this processing system be
retrofitted and converted to process the SSGM tailings by a cyanidation
carbon-in-leach (CIL) system to recover the residual cyanide soluble
precious metals. The first pouring of gold on a test basis took place on
March 31, 1995. The SCMP is being operated on a "start-up and build-up"
to a gradual full capacity system during this trial and modification
period.
CURRENT STATUS
The start-up, testing and adjustment stage of processing the remaining
SSGM tailings via trucking this ore to the SCMP has continued and the
Joint Venture is still in its preliminary stage of producing gold. The
SCMP is being designed to process 300/400 tons of virgin ore per day.
The SSGM average grade was about 0.080 ounces of gold per ton.
During this fiscal year the Joint Venture did process at the SCMP
approximately 52,000 dry tons (approximately 70,000 wet tons) of
tailings which yielded 4,381 ounces of dore and accounted for 2,684
ounces of gold and 836 ounces of silver. The cash gross receipts
amounted to $785,526.
SCMP PROJECT OPERATING PLAN
PRODUCTION SCHEDULE
Preproduction development, consisting primarily of expansive road and
site improvements to the mine and mill sites, mill equipment
modifications and the development and hauling of virgin ore has taken
place during the past years. Initial production was from the SSGM
tailings. Since SSGM's tailings' resource is exhausted, virgin gold ore
is excavated from the SSGM surface and hauled to the SCMP site.
The other sources of gold ore from the SSGM to be used at the SCMP
operation will be obtained from the stope fill or higher grade gold ore
after obtaining access through the underground workings from the main ore
body. This gold ore will have to be crushed and pulverized which
increases the cost, but then the yield is expected to be about a 92%
recovery. The income, dependent on the market price of gold from the
higher grade and recovery of gold ore, will be substantially more than
the cost involved, providing that the world gold market price does not
continue to decline to a level of unprofitability.
The virgin ore and/or tailings are referred to herein as "gold ore." The
gold ore from the SSGM open-pit is loaded onto 20-25 ton dump trucks for
transport to the SCMP. Trucks then haul the gold ore on the Pan American
Highway approximately 15 miles from the SSGM. Mine employees are
responsible for the mining activities including the determination of
areas to be excavated, trucking and loading operations, head sampling and
sample analysis.
<PAGE>
The gold ore is received at the SCMP where it is weighed, logged, and
sampled. Weighing is performed utilizing a conveyor belt scale and/or a
truck scale located on the SCMP site. The excess gold ore is then
unloaded at the SCMP site and stockpiled in an area which was developed
to allow storage of more than 15,000 tons.
SCMP PERSONNEL
The SCMP employees, during this past year's start-up testing period
(including its own trained security personnel) total about 144 persons.
The SCMP is operated 24 hours per day, seven days per week and 52 weeks
per year.
ENVIRONMENTAL MATTERS
Reference is made to San Sebastian Gold Mine "Environmental Matters."
The same information applies.
COMSEB LABORATORIES (LAB)
- -------------------------
The Joint Venture has two laboratories: one located at the SCMP
facilities and the other on real estate owned by the Company near the
SSGM site. At the SSGM Lab, the Joint Venture employs four employees for
each of the twelve-hour shifts where a total of 74,507 samples of fire
assays have been completed through March 31, 1999. Approximately four
employees are working during the two eight-hour shifts at the SCMP
laboratory.
CORPORATE HEADQUARTERS
- ----------------------
The Company leases approximately 4,032 square feet of office space for
its corporate headquarters on the second floor of the building known as
the General Building located at 6001 North 91st Street, Milwaukee,
Wisconsin, at a monthly rental charge of $2,789 on a month-to-month
basis. The lessor is General Lumber & Supply Co., Inc. ("General
Lumber"), a Wisconsin corporation. The Company's President, Edward L.
Machulak owns 55% of the common stock of General Lumber. Edward L.
Machulak disclaims any interest in the balance of General Lumber common
stock which is owned by two of Mr. Machulak's brothers, his wife, and a
trust for the benefit of his children. In addition, the Company shares
proportionately any increase in real property taxes and any increase in
general fire and extended coverage insurance on the property. In lieu of
cash payment, the Lessor has agreed to apply the monthly rental payments
owed to the secured open-ended, on-demand promissory note(s) due to it.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Other than the pending appeal of Nasdaq's delisting of the trading of the
Company's common shares on March 31, 1999, the Company is not a party to
any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were brought to a vote of security holders in the fourth
quarter ended March 31, 1999.
<PAGE>
ITEM 4(a). EXECUTIVE OFFICERS AND MANAGERS OF THE COMPANY
- ----------------------------------------------------------
Listed below are the names and ages of each of the present executive
officers and managers of the Company together with the principal
positions and offices held by each as of the end of the Company's fiscal
year ended March 31, 1999.
Executive
Age as of Offices Held Period Served
Name March 31, 1999 With Company (1) In Office (2)
---- -------------- ---------------- -------------
Edward L. Machulak 72 President, Chief
Executive Officer,
and Operating and 9/14/62 to
Financial Officer present
Treasurer 6/78 to present
Edward A. Machulak 47 Executive Vice
(Son of the President) President 10/16/92 to present
Secretary 1/12/87 to present
Assistant Secretary 4/15/86 to 1/12/87
Luis A. Limay 57 Project and Mine
Manager 10/86 to 1995
Manager of El
Salvador Operations 03/95 to present
(1) Neither have there been nor are there any arrangements nor
understandings between any Executive Officer and any other person
pursuant to which any Executive Officer was elected as an Executive
Officer.
(2) Executive Officers are elected by the Directors for a term expiring
at the Directors' Annual Meeting and/or hold such positions until
their successors have been elected and have qualified.
FAMILY RELATIONSHIPS
- --------------------
Edward A. Machulak, presently a Director, Member of the Directors'
Executive Committee, Executive Vice President, and Secretary, is the son
of Edward L. Machulak, the Company's Chairman of the Board of Directors
who is also a Member of the Directors' Executive Committee, and is the
President and Treasurer of the Company. Attorney John E. Machulak (son
of Edward L. Machulak) of the law firm of Machulak, Hutchinson, Robertson
& O'Dess, S.C. is the legal counsel for the Company.
OFFICERS' AND KEY MANAGEMENT'S EXPERIENCE
- ------------------------------------------
The business experience of each of the Directors, Officers, and Key
Management is as follows:
Edward L. Machulak 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 appointed as a member of the
Audit Committee.
He is a Director and the President or Officer for each of the Company's
subsidiaries: Homespan Realty Co., Inc.; Ecomm Group Inc. (Treasurer).;
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.
<PAGE>
Edward A. Machulak is a Director and holds the following Company
positions: Director as of October 28, 1985; a member of the Directors'
Executive Committee as of 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 yard 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 MacPak, a developer of an Internet City Guide,
since September 26, 1996 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.
Luis Alfonso Limay was appointed to the position of Project and Mine
Manager since October 1986 and is responsible for managing the daily
affairs of the Joint Venture. During March 1995, Mr. Limay was appointed
to the position of Manager of El Salvador operations which now supersedes
his position as Project and Mine Manager. Mr. Limay was employed by
Sanseb from 1977 through March 1978 as its chief geologist. He obtained
degrees in geology and engineering from the National University of San
Marlos, Lima, Peru, and the University of Toronto. He was employed as
chief geologist by Rosario Resources in a Honduran underground mining
operation and he held the same position with Canadian Javelin in El
Salvador.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDERS'
- ------------------------------------------------------------------------
MATTERS
- -------
(a) PRINCIPAL MARKET AND COMMON STOCK PRICE
- --------------------------------------------
The Company's common shares were traded on the Boston Stock Exchange
under the symbol "CMG" or "CMG.BN," on a fully listed basis from February
10, 1976 to January 29, 1999. Trading was halted on January 29, 1999,
pending the decision of the Company's appeal of Nasdaq's delisting of the
trading of the Company's common shares. The Company's common shares
traded on the National Association of Securities Dealers Automated
Quotation Systems Small-Cap Issue (Nasdaq) under the symbol "CGCO" from
March 23, 1987 to January 29, 1999. Nasdaq halted the trading on January
29, 1999.
On Wednesday, March 31, 1999, the Company was notified by Nasdaq/Amex
that the Nasdaq Listing Qualifications Panel had decided to delist the
Company's securities based on public interest concerns and the
noncompliance with the Nasdaq's minimum bid rule. In its decision, the
Panel stated that it was of the opinion that the Company had failed to
adequately disclose the preliminary nature of its plans to develop the
web portal announced in its press release on January 29, 1999. The Panel
was further of the opinion that the Company lacked an adequate basis in
fact for the statements that were contained in the press release. The
Panel agreed with the staff's conclusion that the press release was
motivated in large part by the Company's desire to satisfy the listing
exception by capitalizing on the market's enthusiasm for the Internet.
In its decision, the Panel stated that it was particularly troubled by
the warrant agreement with the IBC and by the "promotional nature" of the
press release. The Company disagrees with Nasdaq's opinion.
<PAGE>
The Company intends to appeal the Nasdaq Listing Qualification Panel's
decision by filing such appeal for review with the Nasdaq Listings and
Hearing Review Counsel within the prescribed time frame. There is no
assurance that this appeal will be successful.
Since May 5, 1999, the Company's common shares are being traded on the
Over the Counter Bulletin Board (OTCBB) under the symbol CGCO. Its share
price also is currently being quoted in the National Quotation Service
"Pink Sheets," under the same symbol. Therefore, the last quote during
this fiscal year was on January 29, 1999.
The following table reflects the range of high and low prices of the
common shares as reported by Nasdaq for the period ended March 31, 1999
and the highest and lowest trade price during each quarter through the
period ended March 31, 1998. The quotations reflect inter-dealer prices
without retail mark-up, mark-down or commission, and do not necessarily
represent actual transactions.
For the period ended March 31, 1999 March 31, 1998
High Low High Low
------ ------ ------ ------
First quarter ending June 30 $1.125 $.6250 $3.625 $2.125
Second quarter ending September 30 $ .938 $.3130 $2.625 $1.625
Third quarter ending December 31 $1.000 $.2810 $2.000 $ .875
Fourth quarter ending March 31* $2.000 $.3125 $1.281 $ .844
* The last quote for the fiscal year was on January 29, 1999, the date
that the shares were halted from trading by Nasdaq.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES
- ---------------------------------------------------
As of March 31, 1999, the common shares were held by approximately 4,472
shareholders; it is estimated that over 95% are United States'
residents.
As of March 31, 1999, there were approximately 1,935 holders of record of
the Company's common shares. The number of shareholders of the Company
who beneficially own shares in nominee or "street name" or through
similar arrangements are estimated by the Company to be approximately
2,537.
As of March 31, 1999, there were issued and outstanding: (a) 11,577,527
shares of common stock; (b) 977,400 stock options to purchase common
stock; and (c) 670,841 common shares due on share loans and share rights.
(c) DIVIDEND HISTORY
- ---------------------
Subject to the rights of holders of any outstanding series of preferred
shares to receive preferential dividends, and to other applicable
restrictions and limitations, holders of shares of common shares are
entitled to receive dividends if and when declared by the Board of
Directors out of funds legally available. No dividends were payable
during the last fiscal year ended March 31, 1999. The declaration of
future dividends will be determined by the Board of Directors in light of
the Company's earnings, cash requirements and other relevant
considerations.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following table sets forth certain consolidated financial data for
the respective periods presented and should be read in conjunction with
the Consolidated Financial Statements and the related notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Year Ended March 31
---------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Total revenue $ 847,702 $ 1,295,908 $ 59,009 $ 55,692 $ 71,792
============ =========== ============ =========== ============
Income from
continuing
operations $ (90,266) $ 118,603 $ (5,141) $ (28,387) $ (10,038)
============ =========== ============ ============ ============
Income (loss)
from continuing
operations per
share:
Basic $ (.0081) $ .0115 $ (.0006) $ (.0039) $ (.0016)
============ =========== ============ ============ ============
Diluted $ (.0070) $ .0100 $ (.0005) $ (.0038) $ (.0016)
============ =========== ============ ============ ============
Weighted
average
shares -
basic 11,165,127 10,358,132 8,136,286 7,368,058 5,941,950
============ =========== ============ ============ ============
Weighted
average
shares -
diluted 12,813,368 11,783,532 9,727,646 7,465,898 6,101,006
============ =========== ============ ============ ============
Cash
dividends
per common
share $ 0 $ 0 $ 0 $ 0 $ 0
============ =========== ============ ============ ============
BALANCE SHEET DATA
Working
capital*1 $ 430,833 $ 614,554 $ 660,596 $ (92,398) $ 322,944
============ =========== ============ ============ ============
Total assets $27,586,801 $25,799,651 $23,196,121 $19,640,191 $17,573,464
============ =========== ============ ============ ============
Short-term
obliga-
tions*1 $ 8,911,087 $ 7,270,772 $ 6,029,195 $ 5,660,979 $ 4,812,918
============ =========== ============ ============ ============
Long-term
obliga-
tions $ 0 $ 135,000 $ 145,000 $ 20,259 $ 120,000
============ =========== ============ ============ ============
Share-
holders'
equity $18,675,714 $18,393,879 $16,994,926 $13,958,953 $12,640,546
============ =========== ============ ============ ============
*1 Although the majority of the short-term obligations are due on demand,
these obligations have the affect of being long-term as most of the debt is
due to related parties who have not called for the payment except for
nominal amounts of their short-term loans during the past five or more
years.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters discussed in this report on Form 10-K, when not historical
matters, are forward-looking statements that involve a number of risks
and uncertainties that could cause actual results to differ materially
from projected results. Such factors include, among others, the
speculative nature of mineral exploration, gold and silver commodity
prices, production and reserve estimates, litigation, environmental and
government regulations, general economic conditions, conditions in the
financial markets, political and competitive developments in domestic and
foreign areas in which the Company operates, availability of financing,
force majeure events, technological and operational difficulties
encountered in connection with the Company's mining activities, labor
relations, other risk factors as described from time to time in the
Company's filings with the Securities and Exchange Commission and other
matters discussed under this reporting category. Many of these factors
are beyond the Company's ability to control or predict. The Company
disclaims any intent or obligation to update its forward-looking
statements, whether as a result of receiving new information, the
occurrence of future events, or otherwise. Should one or more of those
risks or uncertainties materialize, or should any underlying assumption
prove incorrect, actual results or outcomes may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended.
The following discussion provides information on the results of
operations for the three years ended March 31, 1999, 1998 and 1997 and
the financial condition, liquidity and capital resources for the same
three-year period. The financial statements of the Company and the notes
thereto contain detailed information that should be referred to in
conjunction with this discussion.
RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
- -------------------------------------------------
OVERVIEW
- --------
A redefined structure of the financial statements for the fiscal years
ended March 31, 1999, 1998 and prior years reflects and includes the
Commerce Group Corp./Sanseb Joint Venture (Joint Venture) on a
consolidated basis. Prior to this change, the Company reported the
investment in the Joint Venture as advances to the Joint Venture and the
Company's advances included the interest earned on these advances in
anticipation of the interest being reimbursed. In this report, these
advances are restated and combined with the Company's Consolidated
Financial Statements. Although the elimination of interest income
reduces the retained earnings, it does not eliminate the interest charged
by and earned by the Company which is due and payable and which is
maintained additionally with a separate accounting. In effect, this
restructuring modifies only the financial reporting and at the time that
the profits for the gold mining operation are distributed, the interest
earned on these advances will be paid first to the Company prior to any
profit distribution and pursuant to the contract entered into by the
joint venture parties.
For the fiscal year ended March 31, 1999, the Company was able to
segregate the disbursements to the Joint Venture to identify the category
to be charged. Reference is made to Note 2 in the financial statements
for additional details.
<PAGE>
The Joint Venture is producing gold on a curbed basis from the gold ore
it is excavating from its SSGM open pit. The gold is processed at its
SCMP facility which is located approximately 15 miles from the SSGM site.
It is proceeding to install a pilot open-pit, heap-leaching gold process
on the SSGM site. The cone crushing system is being reconstructed at
this site. It also is continuing its SSGM site preparation, the
expansion of its exploration and exploitation targets, and the
enlargement and development of its gold ore reserves. It is exploring
the potential of the other gold mine prospects identified as the San
Felipe-El Potosi Mine, and its extension, the El Capulin Mine and the
Hormiguero Mine. The Montemayor Mine and the Modesto Mine have been
placed on a standby basis pending the submission of an application for a
concession (license) on the property it owns or holds leases. All of the
mining properties are located in El Salvador, Central America.
Concurrently, it also is in the process of obtaining the necessary
funding for each of these separate mining potentials while it continues
its production of gold.
CURRENT STATUS
- --------------
DIVERSITY TO INTERNET BUSINESS
- ------------------------------
The Company on January 29, 1999, announced its plans to have its one
hundred percent-owned subsidiary, Ecomm Group Inc. (Ecomm), enter into
the web portal business. Ecomm's objective is to become a recognized web
portal on the world wide web by acquiring or "rolling-up" Internet
websites. Interactive Business Channel, Inc. (IBC) has agreed to assist
Ecomm in developing an "Internet web portal roll-up strategy" by
acquiring Internet businesses. In this connection, the President of IBC,
Matthew Marcus, has begun serving as the part-time President of Ecomm.
Ecomm has been developing its new MyInternet.to web portal since January
1999. To date, Ecomm has completed the beta site located at
http://www.homestead.com/myinternetbeta. The beta site currently
features data from CBSMarketwatch.com, Multex.com, Dow Jones, Red
Herring, HotBot, Goto.com, ProFlowers, Accuweather.com and much more.
Ecomm is considering retaining Webzter Corporation to complete the beta
site. It is expected that the completion of the web portal should be
achieved soon.
A significant opportunity exists today to develop and consolidate certain
fragmented niches of the Internet community into a web portal. Ecomm's
principal business is to evaluate, structure and complete Internet
related business combinations, mergers, and acquisitions. Because the
Internet is growing so rapidly, specialized or niche portals are being
developed as the hubs or gateways to the Internet for groups of
individuals with specific interests.
Ecomm will focus on acquiring websites and services that will enable the
new web portal to provide a full range of the Internet's most popular
services. These services include free web-based e-mail, chat
communities, and auctions similar to existing programs.
IBC's network of Internet experts will help Ecomm take maximum advantage
of Internet opportunities by providing turnkey E-commerce solutions.
IBC's network of experts will assist in all phases of developing a
profitable E-commerce solution including project management, website
design, development, management, marketing and media placement.
Ecomm's objective is to be an aggressive provider of content on the world
wide web, specifically in the areas of business and finance. Ecomm's
goal is to provide interactive content in all of its content areas, and
to seek advertisers and sponsors who wish to access the demographic
groups using Ecomm's Internet site. The inability of Ecomm to achieve
any portion of its strategic goals may have a material adverse effect on
its business, financial condition and operating results. There can be no
assurances that Ecomm will be able to achieve any of such goals, and if
not so achieved, that it will be able to develop and implement
alternative strategic goals. Ecomm seeks to create content that is
original, entertaining, informative and compelling. Ecomm's website
content focuses on what Ecomm believes are currently the most popular
areas of interest on the Internet: business and finance. Ecomm seeks to
offer information in these areas which is written by content contributors
with demonstrated expertise, experience and notoriety in their fields.
<PAGE>
Ecomm believes that establishing and maintaining the Company's brand is a
critical element of its operating strategy. Ecomm plans to create a
brand identity that is built around authoritative commentary and
innovative delivery of information. In this regard, Ecomm has placed
significant emphasis on establishing brand identity for its product
offerings. The Company's brand and corporate identity seeks to reflect
an Internet site that provides a well-balanced array of programming with
varying perspectives. Ecomm will seek to build and reinforce its brand
through advertising on the Internet; in trade magazines and in other
traditional forms of media; editorial coverage; and a public relations
strategy that provides meaningful information. Ecomm also believes that
its brand will be reinforced as a result of the consistent design and
imagery associated with each department of its website. Ecomm believes
that by successfully building its brand, there will be opportunities to
expand into new content offerings.
LEVERAGE STRATEGIC RELATIONSHIPS
- --------------------------------
Ecomm seeks to leverage its current resources and infrastructure by
entering into strategic relationships with third-party developers of
content and Internet-related technologies. Ecomm believes that these
relationships will enhance the Company's product offerings while
leveraging the Company's development, sales and marketing resources. IBC
has established relationships with a number of leading information
providers with respect to a significant portion of the commodity
information to be included in Ecomm's Internet site. These relationships
should enable Ecomm to complement its proprietary content offerings with
information developed or compiled by third parties.
There can be no assurance that Ecomm's current strategy will be
successful. Due to the uncertainty of where the Company's shares would
be trading, Ecomm has not yet entered into any agreements for the
acquisition of any websites, web services or other technology in
connection with the web portal. There is no assurance that it will be
able to enter into contracts for the acquisition of such sites, services
and technology on terms acceptable to the Company and Ecomm. The
Internet business is highly competitive and there is no assurance that
Ecomm's web portal will attract traffic and generate a profit, even if
Ecomm acquires the websites, web services and technology on acceptable
terms.
CHANGE OF DOMICILE FROM A DELAWARE CORPORATION TO A WISCONSIN CORPORATION
- -------------------------------------------------------------------------
Effective on April 1, 1999 at 12:01 a.m. (Central Time) Commerce Group
Corp., a Delaware Corporation (CGCO Del) was merged into Commerce Group
Corp., a Wisconsin Corporation (CGCO Wis) pursuant to shareholders'
approval at the Annual Shareholders' Meeting held on October 16, 1998.
Simultaneously with the merger, CGCO Wis increased its authorized common
shares, par value $0.10 per share, to fifty million (50,000,000) shares.
Its two hundred fifty thousand (250,000) preferred shares, par value
$0.10 per share, remain the same. There were no substantial changes to
the Articles of Incorporation or to CGCO Wis's By-Laws.
<PAGE>
COMMERCE DELISTED FROM NASDAQ TRADING
- -------------------------------------
On Wednesday, March 31, 1999, the Company was notified by Nasdaq/Amex
that the Nasdaq Listing Qualifications Panel had decided to delist the
Company's securities based on public interest concerns and the
noncompliance with the Nasdaq's minimum bid rule. The Company intends to
appeal the Nasdaq Listing Qualification Panel's decision by filing such
appeal for review with the Nasdaq Listings and Hearing Review Counsel
within the prescribed time frame. There is no assurance that this appeal
will be successful. (Reference is made to the S.E.C. Form 8-K filed on
April 13, 1999.)
COMMERCE TRADING ON THE OVER THE COUNTER BULLETIN BOARD (OTCBB)
- ---------------------------------------------------------------
Effective May 5, 1999, the Company's common shares are being traded on
the Over the Counter Bulletin Board (OTCBB) and its symbol is CGCO. It
is also currently quoted in the National Quotation Service "Pink Sheets,"
under the symbol CGCO.
MINING ACTIVITIES
- -----------------
The Company continues its attempts to increase its production of gold.
Its objectives are to have an expanded complementary operation while
continuing its endeavor to obtain sufficient funds for the SSGM open-pit,
heap-leach operation. The Company's main objective and plan, through the
Joint Venture, is to operate at the SSGM site, a moderate tonnage,
low-grade, open-pit, heap-leaching, gold-producing mine and it intends to
commence this major gold-mining operation as soon as adequate funding is
in place. Dependent on the grade of gold ore processed and the funds it
is able to obtain, it then anticipates producing annually approximately
8,000 ounces of gold from the SCMP operation and eventually up to 40,000
ounces of gold from its SSGM open-pit, heap-leaching operation. The
Joint Venture continues to conduct an exploration program to develop
additional gold ore reserves at the SSGM and at the following other
mines: the San Felipe-El Potosi Mine, and its extension, the El Capulin
Mine and the Hormiguero Mine; all located in El Salvador.
Since the Joint Venture commenced producing gold at the SCMP, albeit a
very exiguous operation, and a forerunner of its greater goals, the
Company's revenues, profitability and cash flow will be greatly
influenced by the price of gold. Gold prices fluctuate widely and are
affected by numerous factors which will be beyond the Company's control,
such as, expectations for inflation, the strength of the U.S. dollar,
overproduction of gold, global and regional demand, or political and
economic conditions. The combined effect of these factors is difficult;
perhaps impossible to predict. Should the market price of gold fall
below the Company's production costs and remain at such level for any
sustained period, the Company could experience losses. Under these
circumstances, the Company could choose to suspend operations in order to
minimize losses.
The Company believes that neither it, nor any other competitor, has a
material effect on the precious metal markets and that the price it will
receive for its production is dependent upon world market conditions over
which it has no control.
<PAGE>
RESULTS OF OPERATION FISCAL YEARS MARCH 31, 1999 COMPARED TO MARCH 31,
- ----------------------------------------------------------------------
1998 ON A RESTATED BASIS
- ------------------------
The Company, on a consolidated basis, including the Joint Venture and
excluding the interest income due from the Joint Venture, had a net loss
of ($90,266) or ($.0081) per basic share for its fiscal year ended March
31, 1999 compared to a profit of $118,603 or $.0115 per share for the
previous fiscal year. This 1999 loss results primarily from the
depressed sale price of gold and the loss incurred in extraordinary
corporate administrative expenses. The additional income derived from an
added tax value refund of $213,491 for 1999 and $112,948 for 1998 reduced
the operation losses.
The gold production expenses for March 31, 1997 were not separated to
reflect the cost, but it is believed that an inconsequential profit was
earned. All of the gold proceeds for that year ($969,721) were applied
to the reduction of the advances to the Joint Venture.
During the fiscal year ended March 31, 1999, the Company sold 2,684
ounces of gold and 836 ounces of silver at an average realized price of
$293 an ounce and for a gross total of $785,526. In addition, the Joint
Venture held 259 ounces of gold in its inventory valued at $72,478. This
compares with producing 3,926 ounces of gold and 1,416 ounces of silver
during its fiscal year ended March 31, 1998. The following Gold
Institute Production Cost Standard schedule reflects a comparison of
costs to produce gold:
1999 1998
---- ----
Total Per Ounce Total Per Ounce
----- --------- ----- ---------
Direct mining expense $482,595 $179.80 $ 736,743 $187.64
Third party smelting,
refining and transpor-
tation cost 47,819 17.82 41,611 10.60
-------- ------- ---------- -------
Cash operating cost 530,414 197.62 778,354 198.24
Misanse Royalties
(52% belongs
to the Company) 39,276 14.63 61,722 15.72
Government of El
Salvador 31,421 11.71 37,033 9.43
-------- ------- -------- -------
Total cash cost 601,111 223.96 877,109 223.39
Depreciation 338,797 126.23 208,254 53.04
-------- ------- ---------- -------
Total production
costs $939,908 $350.19 $1,085,363 $276.43
======== ======= ========== =======
Direct mining expense includes all expenditures incurred at the SCMP
site, including inventory changes and specific corporate charges.
Exploration expenditures are not included in the direct mining expense.
There was no current or deferred provision for income taxes during 1999
or 1998. Additionally, although the Company has operating loss
carryforwards, the Company has not recorded a net deferred tax asset in
either 1997 or 1996 due to an assessment of the "more likely than not"
realization criteria required by Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes.
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS128), Earnings per Share in prior years. SFAS128's objective is to
simplify the computation of earnings per share (EPS) and to make the U.S.
standard more compatible with that of other countries and the
International Accounting Standards Committee. SFAS128 supersedes APB
Opinion 15, replacing the presentation of "primary" and "fully diluted"
EPS with "basic" and "diluted" EPS. Basic EPS is computed by dividing
income available to common shareholders (net income less any dividends
declared on preferred stock and any dividends accumulated on cumulative
preferred stock) by the weighed average number of common shares
outstanding. Diluted EPS requires an adjustment to the denominator to
include the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. The
numerator is adjusted to add back any convertible preferred dividends and
the after-tax amount of interest recognized with any convertible debt.
<PAGE>
Inflation did not have a material impact on operations in 1998 or 1997.
Management of the Company does not anticipate that inflation will have a
significant impact on continuing operations.
Interest expense in the sum of $767,459 was capitalized by the Joint
Venture for the fiscal year ended March 31, 1999 and $667,836 for the
same period in 1998.
Almost all of the costs and expenses incurred by the Company are
allocated and charged to the Joint Venture. The Joint Venture capitalizes
or expenses these costs and expenses and will continue to do so until
such time when it is in full production on each of its mining projects.
At the time production commences, these capitalized costs will be charged
as an expense based on a per unit basis. If the prospect of gold
production becomes unlikely, all of these costs will be written off in
the year that this occurs.
RESULTS OF OPERATION FISCAL YEARS MARCH 31, 1998 COMPARED TO MARCH 31,
- ----------------------------------------------------------------------
1997 ON A RESTATED BASIS
- -------------------------
The Company, on a consolidated basis, including the Joint Venture and
excluding the interest income due from the Joint Venture, had a net gain
of $118,603 or $.0115 per share for its fiscal year ended March 31, 1998
compared to a nominal loss of $5,141 or $-0- per share for the previous
fiscal year. This gain results primarily from the gold mining
operations, including an added tax value refund of $112,948.
FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------------------
During this fiscal year the Company borrowed a sum of $1,260,943;
$834,559 was from related parties which included cash and accrued
interest; the balance of $426,384 was from unrelated parties which
included cash and accrued interest.
A total of 537,857 common shares were issued for a sum of $372,101 during
this fiscal year. These shares were issued for the following: cash,
85,500 shares ($46,125); directors, officers employees, and for services,
214,234 shares ($111,385); and payment of debt, 238,123 shares
($214,591).
This last fiscal year proved to be a difficult year for the gold market.
The price of gold has reached its lowest point during the past 18 years
although the current demand for, and supply of, affects the gold price.
Gold demand for jewelry and industrial use accounts for approximately 80%
of gold production. However, the greatest impact on the price of gold
may come from the sale of gold by the world's central banks.
The Company expects to continue operating its SSGM by expanding its mill
production capacity. Additional equipment has been purchased and has
been delivered and has been or will be installed. Funds to explore the
expansion of the SSGM gold ore reserves and to explore the other mining
prospects will have to be sought by raising additional capital or by a
joint venture or by other means.
<PAGE>
The Company will endeavor to commence an open-pit, heap-leaching
operation at the SSGM as there is a substantial amount of gold ore that
grades less than 0.04 ounces per ton. The Company's engineers had
determined that a 1,000 ton-per-day open-pit, heap-leach operation could
produce an additional 540 ounces of gold per month. It is necessary to
raise adequate funds for this operation; the amount needed is dependent
on the targeted daily volume. An ideal amount of funds to have would be
U.S. $13 million which would start the open-pit, heap-leach at a rate of
2,000 tons per day and the profits and cash flow then could be used to
expand to 6,000 tons per day.
The Company continues to be cognizant of its cash liquidity until it is
able to produce adequate profits from its SSGM gold production. It will
attempt to obtain sufficient funds to assist the Joint Venture in placing
the SSGM into production as the anticipated SCMP profits (unless
accumulated over a period of time) appear insufficient to meet the SSGM
capital and the other mining exploration requirements. In order to
continue obtaining funds to conduct the Joint Venture's exploration,
exploitation, development, expansion programs, and the production of gold
from the SSGM open-pit, heap-leaching operation, it may be necessary
for the Company to obtain funds from other sources. The Company may be
required to borrow funds by issuing open-ended, secured, on-demand or
unsecured promissory notes or by selling its shares to its directors,
officers and other interested investors or by entering into a joint
venture with other companies.
During the past, the Joint Venture was engaged in exploration,
exploitation and development programs designed to increase its gold ore
reserves. The prospects of expanding the gold reserves are positive.
The Company believes that the past invested funds significantly
contributed to the value of the SSGM and to the value of its other
mining prospects as the results of the exploratory efforts evidence the
potential for a substantial increase of gold ore reserves, which add
value to the Joint Venture and to the Company. The Company was able to
obtain sufficient funds during this fiscal year to continue to modify and
retrofit the SCMP, to purchase consumable inventory, to purchase certain
hauling and loading equipment, to continue its exploration projects, and
for working capital use. The Company has been able to obtain the funds
required for its and the Joint Venture's undertaking via a debt and
equity structure of funding and through its SCMP cash flow.
The Company estimates that it will need up to U.S. $13 million to start a
2,000 ton-per-day open-pit, heap-leaching operation and over time to
increase the production capacity to 6,000 tons per day at the SSGM. The
use of proceeds is as follows: $7,000,000 for mining equipment and a
crushing system; $3,689,776 for the processing equipment and site and
infrastructure costs; and $2,310,224 for the working capital. The
depressed price of gold and the low share market price are deterrents in
raising cash for the Company's expansion program.
Therefore, the Company continues to rely on its directors, officers,
related parties and others for its funding needs. The Company believes
that it may be able to obtain such short-term and/or equity funds as are
required from similar sources as it has in the past. In turn, then it
can invest the funds required by the Joint Venture to continue the
exploration, exploitation and development of the SSGM, and the other
exploration prospects, for the operation of SCMP and for other necessary
Company expenditures. Anticipated profits from the SCMP gold production
provide a limited amount of cash for corporate purposes. It further
believes that the funding needed to proceed with the continued
exploration of the other exploration targets for the purpose of
increasing its gold ore reserves should be approximately $10 million.
These programs will involve airborne geophysics, stream chemistry,
geological mapping, trenching, drilling, etc. The Joint Venture believes
that it may be able to joint venture these exploration costs with other
mining companies.
<PAGE>
From September 1987 through March 31, 1999, the Company has invested in
the Joint Venture, including interest charges payable to the Company, the
sum of $23,153,989 and three of the Company's wholly-owned subsidiaries
have advanced the sum of $590,265, for a total of $23,744,254. The funds
invested in the Joint Venture were used primarily for the exploration,
exploitation, and development of the SSGM, for the construction of the
Joint Venture laboratory facilities on real estate owned by the Company
near the SSGM site, for the operation of the laboratory, for the purchase
of a 200-ton per day used SCMP precious metals' cyanide leaching mill and
plant, for the retrofitting, repair, modernization and expansion of its
SCMP facilities, for consumable inventory, for working capital to
commence the production of gold, for exploration costs for the San
Felipe-El Potosi Mine, and its extension, the El Capulin Mine, the
Modesto Mine, the Hormiguero Mine, and the Montemayor Mine, for SSGM
infrastructure, including rewiring and repairing about two miles of the
Company's electric lines to provide electrical service, for the purchase
of equipment, laboratory chemicals, and supplies, for parts and supply
inventory, for the maintenance of the Company-owned dam and reservoir,
for extensive road extension and preservation, for its participation in
the construction of a community bridge, for community telephone building
and facilities, for a community place of worship, for the purchase of the
real estate on the Modesto Mine, for leasing the Montemayor real estate,
for the purchase of a cone crushing system, for diamond drilling at the
SSGM, and most recently for the purchase of a rod mill and a carbon
regeneration system and many other related needs.
EMPLOYEES
- ---------
The Joint Venture employs approximately 300 full-time persons from El
Salvador (up to 325 persons, including part-time employees) to perform
its exploration, exploitation, and development programs; to produce gold
from its SCMP facilities; and to handle the administration of its
activities. None of these employees are covered by any collective
bargaining agreements. It has developed a continuous harmonious
relationship with its employees. It believes that the Joint Venture is
the largest single non-agricultural employer in El Salvador's Eastern
Zone. Also, the Company employs approximately four persons (plus
part-time help) in the United States.
INSURANCE
- ---------
The Joint Venture has the availability of insurance through an El
Salvador insurance company with the following insurance coverage:
general liability, vehicle liability and extended coverage, fire,
explosion, hurricane, cyclone, tornado, windstorm, hail, flood, storm,
earthquake, tremor or volcanic eruption, politically-motivated violence,
terrorism, strikes, work stoppages, riots, uprisings, malicious acts,
vandalism, and related acts. As additional equipment and assets are
acquired or improvements are made, the insurance coverage will be
increased accordingly.
RELATED PARTY LOANS, OBLIGATIONS AND TRANSACTIONS
- -------------------------------------------------
The related party transactions are included in detail in the Notes to the
Consolidated Financial Statements.
<PAGE>
COMPANY ADVANCES TO THE JOINT VENTURE
- -------------------------------------
Since September 1987 through March 31, 1999, the Company, and three of
its subsidiaries, have advanced to the Joint Venture $23,744,254.
Included in the total advances is the interest charged to the Joint
Venture by the Company and this charge amounts to $10,004,670 through
March 31, 1999. The Company furnishes all of the funds required by the
Joint Venture. The interest charge is eliminated in these financial
statements.
EFFORTS TO OBTAIN CAPITAL
- -------------------------
Since the concession was granted, and through the present time,
substantial effort is exercised in securing funding through various
sources, all with the purpose to resume and expand the operations of the
SCMP and SSGM and to continue the exploration of its other mining
prospects.
The Company, Sanseb, and the Joint Venture consider the past political
situation in the Republic of El Salvador to have been unstable, and
believe that the final peace declaration on December 16, 1992, has put an
end to war. Presently, the stigma of the past unfavorable political
status in the Republic of El Salvador exists and therefore investors
continue to be hesitant to invest the funds required. However, as
explained in this report, the Company was able to obtain a sum of funds
to invest in the expansion and retrofitting of its SCMP and for the
exploration of its other mining prospects. The decline in the price of
gold hit its lowest price in 18 years and therefore depressed the market
price of the Company's shares as well as the shares of most of the
world-wide mining companies. This decline in the stock market price
places the Company in a situation of substantially diluting its shares in
order to raise capital. The Company believes that it will be able to
obtain adequate financing from the same sources as in the past to conduct
the present operations during the fiscal year ended March 31, 2000.
YEAR 2000 ISSUE
- ---------------
Computer programs written decades ago utilized a two digit format to
identify the applicable year. Without modification, any date sensitive
software beyond December 31, 1999 could fail, as the date would be reset
to 1900. This could result in, amongst other things, disruptions to
operations and the inability to process financial transactions. The
Company has not yet made an assessment of the impact of the year 2000
issue. The Company has initiated preliminary communications with certain
of its equipment suppliers in which a computer is utilized and with its
computer manufacturers (hardware and software) for the processing of
financial information to determine the extent to which the issue may
impact the Company. In addition, the Company may inquire of other
entities who are significant suppliers of consumables used in its
operations and of others it currently interacts with electronically
(financial institutions, etc.) to determine the extent to which it may be
vulnerable to those third parties' failure to remediate their own year
2000 issue.
ENVIRONMENTAL REGULATIONS
- -------------------------
The Company's operations are subject to environmental laws and
regulations adopted by various governmental authorities in the
jurisdictions in which the Company operates. Accordingly, the Company
has adopted policies, practices and procedures in the areas of pollution
control, product safety, occupational health and the production,
handling, storage, use and disposal of hazardous materials to prevent
material environmental or other damage, and to limit the financial
liability which could result from such events. However, some risk of
environmental or other damage is inherent in the business of the Company,
as it is with other companies engaged in similar businesses.
FINANCIAL ACCOUNTING STANDARDS
- ------------------------------
The provisions of Statement of Financial Accounting Standards No. 131
(SFAS 131), Disclosures about Segments of an Enterprise and Related
Information, became effective for fiscal years beginning after December
15, 1997. SFAS 131 establishes standards for the way that public
business enterprises determine operating segments and report information
about those segments in annual financial statements. SFAS 131 also
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131
further establishes standards for related disclosures about products and
services, geographic areas, and major customers. Reference is made to
Note 13 of the Financial Statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999 and
establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that the Company recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. At this time, the
Company is not involved with any derivation or hedging activities.
DIVIDENDS
- ---------
For the foreseeable future, it is anticipated that the Company will use
any earnings to finance its growth and that dividends will not be paid to
shareholders.
SAFE HARBOR
- -----------
Some of the statements contained in this report are forward-looking
statements, such as estimates and statements that describe the Company's
future plans, objectives or goals, including words to the effect that the
Company or management expects a stated condition or result to occur.
Since forward-looking statements address future events and conditions, by
their very nature, they involve inherent risks and uncertainties. Actual
results in each case could differ materially from those currently
anticipated in such statements by reason of factors such as production at
the Company's mines, changes in operating costs, changes in general
economic conditions and conditions in the financial markets, changes in
demand and prices for the products the Company produces, litigation,
legislative, environmental and other judicial, regulatory, political and
competitive developments in areas in which the Company operates and
technological and operational difficulties encountered in connection with
mining activities.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY FINANCIAL DATA
Page
----
Report of Independent Public Accountant
Financial Statements:
Consolidated Balance Sheets, Years Ended March 31, 1999 and 1998
Consolidated Statements of Operations, Years Ended March 31, 1999, 1998
and 1997
Consolidated Statements of Changes in Shareholders'
Equity Years Ended March 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows, Years Ended March 31, 1999, 1998
and 1997
Notes to Consolidated Financial Statements
Supplementary Financial Data:
Report of Independent Accountant on the Financial Statements Schedules
Financial statements schedules other than those listed herein have been
omitted since they are either not required, are not applicable, or the
required information is included in the financial statements and related
notes.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To the Shareholders and Board of Directors of Commerce Group Corp.:
I have audited the consolidated balance sheets of Commerce Group Corp.
("Company"), a Wisconsin Corporation, and its subsidiaries, as of March
31, 1999 and 1998, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows, for each of the three
fiscal years in the periods ended March 31, 1999, 1998 and 1997. These
financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements
based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. I believe that my audits
provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Commerce Group Corp. and its subsidiaries as of March 31,
1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three fiscal years in the periods ended March
31, 1999, 1998 and 1997 in accordance with accounting principles
generally accepted in the United States.
Bruce Michael Redlin
Certified Public Accountant
/s/ Bruce Michael Redlin
Milwaukee, Wisconsin
May 10, 1999
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Balance Sheets--March 31
1999 1998
----------- -----------
ASSETS
------
Current assets
Cash $ 61,821 $ 61,287
Investments 186,182 187,792
Accounts receivable 358,769 452,534
Inventories 156,422 205,300
Prepaid items and deposits 49,677 49,939
----------- -----------
Total current assets 812,871 956,852
Real estate (Note 5) 1,179,836 1,179,836
Property, plant and
equipment, net 3,567,334 3,332,303
Mining resources investment 22,026,760 20,330,660
----------- -----------
Total assets $27,586,801 $25,799,651
=========== ===========
LIABILITIES
-----------
Current liabilities
Accounts payable $ 382,038 $ 342,298
Notes and accrued interest
payable to related parties
(Notes 6 & 7) 5,009,679 4,175,120
Notes and accrued interest
payable to others (Note 6) 1,169,454 743,071
Accrued salaries 1,674,015 1,509,015
Accrued legal fees 197,139 175,082
Other accrued expenses 478,762 461,186
----------- -----------
Total liabilities 8,911,087 7,405,772
Commitments and contingencies
(Notes 2, 4, 5, 6, 7, 8, 12 & 14)
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock
Preferred stock,
$0.10 par value:
Authorized 250,000 shares;
Issued and outstanding
1999-none; 1998-none (Note 10) $ 0 $ 0
Common stock,
$0.10 par value:
Authorized 15,000,000
shares; (Notes 1(b) and 10)
Issued and outstanding:
1999-11,577,527 (Note 10) 1,157,753
1998-11,039,670 (Note 10) 1,103,967
Capital in excess
of par value 17,288,039 16,969,724
Retained earnings
(deficit) 229,922 320,188
----------- -----------
Total shareholders'
equity 18,675,714 18,393,879
----------- -----------
Total liabilities
and shareholders'
equity $27,586,801 $25,799,651
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Operations
For the Year Ended March 31
1999 1998 1997
---- ---- ----
Revenues:
Gold sales $ 785,526 $ 1,234,443 $ 0
Campground income 62,176 61,465 59,009
----------- ----------- -----------
Total revenues 847,702 1,295,908 59,009
Expenses:
Cost of gold sales 601,111 877,109 0
Depreciation 338,797 208,254 0
General and
administrative 211,797 207,915 67,982
----------- ----------- -----------
Total expenses 1,151,705 1,293,278 67,982
Other income:
Interest income 246 3,025 3,832
El Salvador added
value tax refund 213,491 112,948 0
----------- ----------- -----------
Other income 213,737 115,973 3,832
----------- ----------- -----------
Net profit (loss) $ (90,266) $ 118,603 $ (5,141)
Credit (charges)
for income taxes 0 0 0
----------- ----------- -----------
Net income (loss)
after income tax
credit (charge) $ (90,266) $ 118,603 $ (5,141)
============ =========== ============
Net income (loss)
per share (Note 2)
basic $ (.0081) $ .0115 $ (.0006)
============ =========== ============
Net income (loss)
per share (Note 2)
diluted $ (.0070) $ .0100 $ (.0005)
============ =========== ============
Weighted av. common
shares outstanding
(Note 2) 11,165,127 10,358,132 8,136,286
=========== =========== ===========
Weighted av. diluted
common shares (Note 2) 12,813,368 11,783,532 9,727,646
=========== =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended March 31, 1999, 1998 and 1997
Common Stock
--------------------------------------
Capital in Retained
Number of Excess of Earnings
Shares Par Value Par Value (Deficit)
---------- ---------- ----------- ----------
Balance March 31, 1996 7,792,209 $ 779,221 $12,973,006 $206,726
Net income (loss) for
FY March 31, 1997 (5,141)
Dir./off./employee/
services comp. 66,563 6,656 122,875
Payment of debt 381,043 38,104 762,792
Cash 953,227 95,323 1,526,927
Preferred conv.
stock issuance costs:
Current (404,466)
Deferred (622,097)
---------- ---------- ----------- --------
Balance March 31, 1997 9,193,042 $ 919,304 $14,359,037 $201,585
Net income (loss) for
FY March 31, 1998 118,603
Dir./off./employee
/services comp. 169,250 16,925 213,736
Payment of debt 592,936 59,293 796,370
Cash 34,477 3,448 70,577
Preferred stock
converted 989,965 98,997 1,416,004
Stock options 60,000 6,000 114,000
---------- ---------- ----------- --------
Balance March 31, 1998 11,039,670 $1,103,967 $16,969,724 $320,188
Net income (loss)
for FY March 31, 1999 $(90,266)
Dir./off./employee
/services comp. 214,234 21,423 89,962
Payment of debt 238,123 23,812 190,779
Cash 85,500 8,551 37,574
---------- ---------- ----------- --------
Balance March 31, 1999 11,577,527 $1,157,753 $17,288,039 $229,922
========== ========== =========== ========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Cash Flows
For the Years Ended March 31
1999 1998 1997
------------ ----------- ------------
Operating activities:
Net income (loss) $ (90,266) $ 118,603 $ (5,141)
------------ ----------- ------------
Adjustments to reconcile
net income (loss) to
net cash used in
operating activities:
Depreciation 338,797 208,254 203,341
Changes in assets and
liabilities
Decrease (increase) in
account receivables 93,765 (152,788) 37,998
Decrease (increase) in
inventories 48,877 (14,050) 13,011
Decrease (increase) in
prepaid items and
deposits 1,871 (4,676) 21,012
Increase (decrease) in
accounts payable and
accrued liabilities 57,316 198,265 (11,201)
Increase (decrease) in
other liabilities 0 20,446 (220,761)
Increase (decrease) in
accrued salaries 165,000 165,000 139,875
Increase (decrease) in
accrued legal fees 22,058 38,013 60,186
----------- ----------- -----------
Total adjustments 727,684 458,464 243,461
----------- ----------- -----------
Net cash provided by
(used in) operating
activity 637,418 577,067 238,320
Investing activities:
Investment in mining
resources (2,269,928) (3,402,089) (3,080,901)
------------ ------------ ------------
Total (2,269,928) (3,402,089) (3,080,901)
Financing activities:
Net borrowings 1,260,943 809,853 524,858
Common stock issued 372,101 1,280,350 3,041,114
----------- ----------- ------------
Net cash provided by
(used in) financing
activities 1,633,044 2,090,203 3,565,972
Net increase (decrease)
in cash and cash
equivalents 534 (734,819) 723,391
Cash - beg. of year 61,287 796,106 72,715
----------- ----------- -----------
Cash - end of year $ 61,821 $ 61,287 $ 796,106
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
Consolidated Statements of Cash Flows, continued
Supplemental disclosures of cash information:
1. The following amounts of interest expense paid or accrued were
capitalized: $767,459 (1999), $667,836 (1998) and $554,636 (1997).
2. The interest expense paid in cash for 1999 was $8,838 and for 1998 was
$1,350.
3. The Company paid no income taxes during its fiscal periods ended March
31, 1999, 1998 and 1997.
4. The investment consists of precious stones which are stated at cost or
market value whichever is lower.
5. Accounts receivable consist of gold bullion shipped to the refinery
pending the settlement date and the amount due from Misanse.
6. Inventory consists of processed ores and metal-in-process and
consumable items which are stated at the lower of average cost or
market.
Supplemental schedule of non-cash investing and financing activities
during the fiscal years ended March 31:
1. The Company issued the following common shares for the values shown
for employee and other services rendered:
Shares Value
------ -----
1999 214,234 $111,385
1998 169,250 $230,661
1997 66,653 $129,531
2. Other non-cash items were for the unpaid salary and director, officer
and legal fees; this amounted to $187,057 for 1999 and $203,013 for
1998.
3. There were no non-cash equipment financing activities in 1999 and
1998.
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(1) THE COMPANY AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
- ------------------------------------------------------------------
(a) Commerce Group Corp. ("Commerce," the "Company" and/or "Registrant")
and its 82 1/2% owned subsidiary, San Sebastian Gold Mines, Inc.
("Sanseb") both corporations based in the United States, have
formed the Commerce/Sanseb Joint Venture ("Joint Venture") for the
purpose of performing gold mining and related activities, including,
but not limited to, exploration, exploitation, development,
extraction and processing of precious metals in the Republic of El
Salvador, Central America. Gold bullion, currently the Joint
Venture's principal product, is produced (but not on a full
production basis) in El Salvador and refined and sold in the United
States. Expansion of exploration is continuous at the San Sebastian
Gold Mine ("SSGM") which is located near the city of Santa Rosa de
Lima. Exploration is also taking place at other mining properties,
all located in the Republic of El Salvador, Central America.
Presently, the Joint Venture is in the pre-production and
development stage at the SSGM and it simultaneously is performing
several separate programs: it has started to produce gold on a
start up (not full production) basis at its San Cristobal Mill and
Plant ("SCMP") which is located approximately 15 miles from the SSGM
site; the second program is to begin its open-pit, heap-leaching
process on the SSGM site; the third program is to continue its SSGM
site preparation, the expansion of its exploration and exploitation
targets, and the enlargement and development of its gold ore
reserves; and the fourth program is to explore the potential of
other gold mine exploration prospects identified as the San
Felipe-El Potosi Mine, and its extension, the El Capulin Mine and
the Hormiguero Mine, all located in El Salvador, Central America.
Concurrently, it also is in the process of obtaining the necessary
funding for each of these separate programs while its Joint Venture
continues its gold production, exploration, exploitation and
development operations.
The Company on January 29, 1999, announced its plans to diversify by
having its wholly-owned subsidiary, Ecomm, enter into the web portal
business. Ecomm's objective is to become a recognized web portal on
the world wide web by acquiring or "rolling-up" Internet websites.
Interactive Business Channel, Inc. (IBC) has agreed to assist Ecomm
in developing an "Internet web portal roll-up strategy" by acquiring
Internet businesses.
Ecomm's principal business will be to evaluate, structure and
complete Internet related business combinations, mergers, and
acquisitions. It plans to concentrate in specialized or niche
portals which are being developed as hubs or gateways to the
Internet for groups of individuals with specific interests.
Ecomm plans to focus on acquiring websites and services that will
enable the new web portal to provide a full range of the Internet's
most popular services. These services include free web-based
e-mail, chat communities, and auctions similar to existing programs.
There can be no assurance that Ecomm's current strategy will be
successful. Ecomm has not yet entered into any agreements for the
acquisition of any websites, web services or other technology in
connection with the web portal. There is no assurance that it will
be able to enter into contracts for the acquisition of such sites,
services and technology on terms acceptable to Commerce and Ecomm.
The Internet business is highly competitive and there is no
assurance that Ecomm's web portal will attract traffic and generate
a profit, even if Ecomm acquires the websites, web services and
technology on acceptable terms.
<PAGE>
(b) Merger into a Wisconsin corporation effective April 1, 1999
The Company, a United States' corporation (incorporated as a
Wisconsin corporation in 1962, consolidated with a Delaware
corporation in 1971, and merged from a Delaware corporation into a
Wisconsin corporation on April 1, 1999), presents its consolidated
financial statements in U.S. dollars. The Company simultaneously
with the merger into a Wisconsin corporation increased the number of
its authorized common shares to fifty million (50,000,000), ten
cents ($0.10) par value.
(c) Use of estimates
The preparation of the financial statements, in accordance with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(2) SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------
RESTATEMEMT OF PRIOR PERIOD FINANCIAL STATEMENTS
The Company changed its consolidation policy as of April 1, 1998 and
retroactive to September 1987, 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, 1999, 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,
1999, 1998, 1997, and prior years, 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 $5,397,146 which consisted of the
following amounts: $1,822,686 for 1999; $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 the same period. The
consolidated statements of changes in shareholders' equity was also
restated to reflect these changes.
The consolidated statements of operations for the years ended March 31,
1999, 1998, 1997 and 1996 were restated to eliminate the net interest
income from the Joint Venture. The amounts were $1,822,686, $1,511,895,
$1,012,739, and $816,029 for 1999, 1998, 1997 and 1996 respectively, and
$233,797 for prior years.
The consolidated statements of cash flows were also restated to reflect
the changes in operating profits (losses) that are outlined in the above
paragraphs.
<PAGE>
PRINCIPLES OF CONSOLIDATION
The Joint Venture and the following subsidiaries are all majority-owned
by the Company and are included in the consolidated financial statements
of the Company. All significant intercompany balances and transactions
have been eliminated.
% Ownership
-----------
Homespan Realty Co., Inc. ("Homespan") 100.0
Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0
Piccadilly Advertising Agency, Inc. ("Piccadilly")
now known as Ecomm Group Inc. (Ecomm) 100.0
San Luis Estates, Inc. ("SLE") 100.0
San Sebastian Gold Mines, Inc. ("Sanseb") 82.5
Universal Developers, Inc. ("UDI") 100.0
Commerce/Sanseb Joint Venture ("Joint Venture") 90.0
INVESTMENTS
The investments consist of precious stones which are stated at the lower
cost or market value.
ACCOUNTS RECEIVABLE
The accounts receivable account consists of gold bullion produced and
shipped to the refinery and pending payment and includes the amount
advanced to Mineral San Sebastian, S.A. de C.V. (Misanse).
INTERCOMPANY BALANCES
All intercompany balances and transactions have been eliminated.
INVENTORY
Inventories consist of the following as of March 31, 1999:
1999 1998
-------- --------
Gold in process (1) (Stated at market value) $ 72,447 $ 79,523
Materials and supplies (Stated at cost) 83,975 125,777
-------- --------
$156,422 $205,300
(1) Includes all direct and indirect costs of mining, crushing,
processing and mine site overhead expenses.
DEFERRED MINING COSTS
The Company, in order to avoid expense and revenue unbalance, capitalizes
all costs directly associated with acquisition, exploration and
development of specific properties, until these properties are put into
operation, sold or are abandoned. Gains or losses resulting from the
sale or abandonment of mining properties will be included in operations.
The Joint Venture capitalizes its costs and expenses and will write off
these cumulative costs on a unit of production method at such time as it
begins producing gold derived from the virgin gold ore on a full
production basis. If the prospect of gold production, due to different
conditions and circumstances becomes unlikely, all of these costs may be
written off in the year that this occurs.
<PAGE>
The Company regularly evaluates its carrying value of exploration
properties in light of their potential for economic mineralization and
the likelihood of continued work by either the Company or a joint venture
partner. The Company may, from time to time, reduce its carrying value
to an amount that approximates fair market value based upon an assessment
of such criteria.
REVENUE RECOGNITION
Revenue from the sale of gold and industrial minerals is recognized when
title passes to the buyer.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment is stated at the lower of cost or
estimated net realizable value. Mining properties and development costs
and certain plant and equipment are depreciated using the units of
production method based upon proven and probable reserves. Other assets
are depreciated using the straight-line method over estimated useful
lives of five to ten years. Depreciation and amortization expense
includes the amortization of assets acquired under capital leases.
Replacements and major improvements are capitalized. Maintenance and
repairs are charged to expense based on average estimated equipment
usage. Interest costs incurred in the construction or acquisition of
property, plant, and equipment are capitalized and amortized over the
useful lives of the related assets.
MINERAL EXPLORATION AND DEVELOPMENT COSTS
Significant property acquisition payments for active exploration
properties are capitalized. If no minable ore body is discovered,
previously capitalized costs are expensed in the period the property is
abandoned. Expenditures for the development of new mines, to define
further mineralization at and adjacent to existing ore bodies, and to
expand the capacity of operating mines, are capitalized and amortized on
the units of production basis over proven and probable reserves.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
The Company evaluates the carrying value of producing properties and
equipment by applying the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed. SFAS 121 requires that
an impairment loss be recognized when the estimated future cash flows
(undiscounted and without interest) expected to result from the use of an
asset are less than the carrying amount of the asset. Measurement of an
impairment loss is based on fair value of the asset if the asset is
expected to be held and used, which would be computed using discounted
cash flows. Measurement of an impairment loss for an asset held for sale
would be based on fair market value less estimated costs to sell.
Management's estimates of gold and other metal prices, recoverable proven
and probable reserves, operating, capital, and reclamation costs are
subject to certain risks and uncertainties which may affect the
recoverability of the Company's investment in property, plant, and
equipment. Although management has made its best estimate of these
factors based on current conditions, it is reasonably possible that
changes could occur in the near-term which could adversely affect
management's estimate of the net cash flows expected to be generated from
its operating properties.
<PAGE>
DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are capitalized and amortized
over the life of the debt facilities using the effective interest method.
INTEREST CAPITALIZATION
Interest costs are capitalized as part of the historical cost of
facilities and equipment, if material.
INCOME TAXES
The Company files a consolidated Federal Income Tax return with its
subsidiaries (See Note 9).
COMPREHENSIVE INCOME
Effective April 1, 1999, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income.
SFAS 130 is designed to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their
capacity as owners. Besides net income, other comprehensive income
includes foreign currency items, minimum pension liability adjustments,
and unrealized gains and losses on certain investments in debt and equity
securities. The Company believes that it has no items of other
comprehensive income in any period presented in the accompanying
financial statements.
EARNINGS (LOSS) PER COMMON SHARE
The Company has in the past years reported its "Earnings per Share" which
presently complies with SFAS No. 128. As required by this new standard,
the Company reports two earnings per share amounts, basic net income and
diluted net income per share. Basic net income per share is computed by
dividing income or loss reportable to common shareholders (the numerator)
by the weighted average number of common shares outstanding (the
denominator). The computation of diluted net income or loss per share is
similar to the computation of basic net income per share except that the
denominator is increased to include the dilutive effect of the additional
common shares that would have been outstanding if all convertible
securities, stock options, rights, share loans, etc. had been converted
to common shares at the last day of the fiscal year.
If on March 31, 1999, 977,400 option shares, the 45,606 loan shares, and
the 625,235 stock rights would be added to the weighted average
calculated number of shares which amount to 11,165,127, the total number
of the weighted average fully diluted shares would be 12,813,368, then
the loss per share for the fiscal year ended March 31, 1999, would be
$.0070 cents per share. The same assumptions were used for the same 1998
fiscal period.
FOREIGN CURRENCY
The Company is involved in foreign currency transactions as it deposits
U.S. funds primarily through bank wire transfer of funds from its U.S.
bank account into the Joint Venture's El Salvador bank accounts. The
Joint Venture is obligated to repay the Company for funds advanced in
U.S. dollars. El Salvador has a freely convertible currency that traded
in this past fiscal year about 8.74 colones per U.S. dollar. The
exchange rate was stable. In this environment, based on the free
convertibility of the colon, foreign businesses have no problem making
remittances of profits, repatriating capital or bringing in capital for
additional investments. There is no hindrance in exchanging dollars for
colones or vice versa.
<PAGE>
MAJOR CUSTOMER
The Joint Venture produces gold and silver. It sells its gold at the
world market price to a refinery located in the United States. Given the
nature of the precious metals that are sold, and because many potential
purchasers of gold and silver exist, it is not believed that the loss of
any customer would adversely affect either the Company or the Joint
Venture.
(3) PROPERTY, PLANT, EQUIPMENT, NET AND MINING RESOURCE INVESTMENTS
- -------------------------------------------------------------------
The following is a summary of the plant, equipment, and of the mining
resources investment and development costs:
March 31, 1999 March 31, 1998
----------------------------------- ----------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
----------- ------------ ---------- ----------- ------------ ---------
Mineral
Proper-
ties
and
Deferred
Develop-
ment $22,026,760 $22,026,760 $20,330,660 $20,330,660
Mine
Plant
and
Equip-
ment 5,332,998 1,765,664 3,567,334 4,509,101 1,176,798 3,332,303
----------- ----------- ----------- ----------- ---------- -----------
$27,359,758 $ 1,765,664 $25,594,094 $24,839,761 $1,176,798 $23,662,963
=========== =========== =========== =========== ========== ===========
Production facilities and equipment are stated at cost and are amortized
based on the lease arrangement and salvage value. Vehicles, office
equipment, laboratory equipment, and buildings are stated at cost and are
depreciated using the straight line method over estimated useful lives of
four to seven years. Maintenance and repairs are charged to expense as
incurred.
IMPAIRMENTS
The Company evaluates the carrying value of its properties and equipment
by applying the provisions of Statement of Financial Accounting Standards
No. 121 (SFAS 121), Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. With respect to properties
with proven reserves, an impairment loss is recognized when the estimated
future cash flows (undiscounted and without interest) expected to result
from the use of the asset are less than the carrying amount of the asset.
Measurement of the impairment loss is based on discounted cash flows.
Properties with unproven reserves are assessed for impairment when
changes in market conditions or other events occur and are measured based
on fair value.
(4) COMMERCE/SANSEB JOINT VENTURE ("JOINT VENTURE")
- ---------------------------------------------------
The Company is in a joint venture with and owns 82 1/2% of the total
common stock (2,002,037 shares) of Sanseb, a U.S. State of Nevada
chartered (1968) corporation. The balance of Sanseb's stock is held by
approximately 180 non-related shareholders, including the President of
the Company who owns 2,073 common shares. Sanseb was formed to explore,
exploit, research, and develop adequate gold reserves. It produced gold
from the SSGM from 1972 through February 1978.
On September 22, 1987, the Company and Sanseb entered into a joint
venture agreement to formalize their relationship with respect to the
mining venture and to account for the Company's substantial investment in
Sanseb. Under the terms of the agreement, the Company is authorized to
supervise and control all of the business affairs of the Joint Venture
and has the authority to do all that is necessary to resume mining
operations at the SSGM on behalf of the Joint Venture. The net pre-tax
profits of the Joint Venture will be distributed as follows: Company
90%; and Sanseb 10%. Since the Company owns 82 1/2% of the authorized
and issued shares of Sanseb, the Company in effect has over a 98%
interest in the Joint Venture activities.
<PAGE>
The joint venture agreement further provides that the Company has the
right to be compensated for its general and administrative expenses in
connection with managing the Joint Venture.
Under the joint venture agreement, agreements signed by the Company for
the benefit of the Joint Venture create obligations binding upon the
Joint Venture.
The Joint Venture is registered to do business in the State of Wisconsin
and in the Republic of El Salvador, Central America.
INVESTMENTS IN JOINT VENTURE
As of March 31, 1999, the Company's investments, including charges for
interest expense to the Joint Venture, were $23,153,989 and three of the
Company's wholly-owned subsidiaries' advances were $590,265 for a total
of $23,744,254.
INVESTMENT IN EL SALVADOR MINING PROJECTS
During the fiscal year, the Company has advanced funds, performed
services, and allocated its general and administrative costs to the Joint
Venture.
As of March 31, 1999 and 1998, the Company, Sanseb and three of the
Company's wholly-owned subsidiaries have invested (including carrying
costs) the following in its Joint Venture:
1999 1998
----------- -----------
The Company's advances
(net of gold sale proceeds)
since 09/22/87 $23,153,989 $19,500,508
The Company's initial
investment in the Joint Venture 3,508,180 3,508,180
Sanseb's investment in the Joint
Venture 3,508,180 3,508,180
Sanseb's investment in the mining
projects and amount due to the
Company 23,823,518 21,524,975
----------- -----------
Total: $53,993,867 $48,041,843
Advances by the Company's three
subsidiaries 590,265 590,265
----------- -----------
Combined total investment $54,584,132 $48,632,108
=========== ===========
SSGM ACTIVITY
The Company had no significant activity at the SSGM site from February
1978 through January 1987. The present status is that, the Company,
since January 1987, and thereafter, the Joint Venture, since September
1987, have completed certain of the required mining pre-production
preliminary stages in the minable and proven gold ore reserve area, and
the Company is active in attempting to obtain adequate financing for the
expansion of its SCMP facilities and the proposed open-pit, heap-leaching
operations on this site. The Joint Venture is also engaged in the
exploration and the expansion program to develop additional gold ore
reserves in the area surrounding the minable gold ore reserves and at its
other El Salvador mining prospects. During this fiscal period gold is
being produced by trucking the virgin ore for processing at the SCMP.
<PAGE>
MINERAL SAN SEBASTIAN S.A. DE C.V. ("MISANSE")
(a) MISANSE CORPORATE STRUCTURE
The SSGM real estate is owned by and leased to the Joint Venture by
Misanse, a Salvadoran chartered corporation. The Company owns 52% of the
total of Misanse's issued and outstanding shares. The balance is owned
by approximately one hundred El Salvador, Central American, and United
States' citizens. The Company has the right to select six of Misanse's
ten directors. (Note 4)
(b) SSGM MINING LEASE
On July 28, 1975, an amended lease agreement between Misanse as lessor
and Sanseb as tenant was signed by the parties giving the tenant all the
possessions and mining rights that pertain to the SSGM as well as other
claims to mineral rights that may already have or could be claimed in the
future within the 595 hectares (1,470 acres) plat of land encompassing
the SSGM. The 25-year lease, which begins on the date gold production
begins, was further amended to run concurrently with the concession
described herein and may be extended for an additional 25 years by the
tenant as long as the tenant has paid the rent and has complied with
other obligations under the lease and the concession. The lease also
provides that the tenant will pay rent equivalent to five percent of the
gross gold production revenue obtained from the leased SSGM and further
commits itself to maintain production taking into consideration market
and other conditions. In no case will the rent be less than eighteen
hundred "colones" per month (approximately $206 per month at the current
rate of exchange). The lease also provides that, in the event the lessor
wishes to sell the property, it must first give preference to the tenant;
the lease further provides that the tenant must give preference to employ
former mining employees and Misanse shareholders, providing they qualify
for the available position. The lease agreement was assigned on January
29, 1987 to the Company and Sanseb together with the mining concession
application and subsequently was pledged as collateral for loans made by
related parties. (Note 7)
The lease is freely assignable by the Joint Venture without notice to
Misanse. The lease may also be canceled by the Joint Venture on thirty
days' notice to Misanse, and thereafter, all legal responsibilities
thereunder shall cease.
(c) MINERAL CONCESSION
On January 27, 1987, the Government granted a right to the mining
concession ("concession") to Misanse which was subject to the performance
of the El Salvador Mining Law requirements. These rights were
simultaneously assigned to the Company and Sanseb.
On July 23, 1987, the Government of El Salvador delivered and granted to
the Company's 52%-owned subsidiary, Misanse, possession of the mining
concession. This is the right to extract and export minerals for a term
of 25 years (plus a 25-year renewal option) beginning on the first day
of production from the real estate which encompasses the SSGM owned by
Misanse. Misanse assigned this concession to the Joint Venture. The
concession was pledged as collateral for loans made by related parties.
(Note 7)
Effective February 1996, the Government of El Salvador passed a law which
requires mining companies to pay to it three percent of its gross gold
sale receipts and an additional one percent is to be paid to the El
Salvador municipality which has jurisdiction of the mine site. The
Company, in compliance with the new law, has filed its applications for
all of the mining concessions in which it has an interest.
<PAGE>
SCMP LAND AND BUILDING LEASE
On November 12, 1993, the Joint Venture entered into an agreement with
Corporacion Salvadorena de Inversiones ("Corsain"), a governmental agency
of El Salvador, to lease for a period of ten years, approximately 166
acres of land and buildings on which its gold processing mill, plant and
related equipment (the SCMP) are located, and which is approximately 15
miles east of the SSGM site. The annual lease payment is U.S. $11,500
(payable in El Salvador colones at the then current rate of exchange),
payable annually in advance, and subject to an annual increase based on
the annual United States' inflation rate. As agreed, a security deposit
of U.S. $11,500 was paid on the same date and this deposit will be
subject to increases based on any United States' inflationary rate
adjustments.
MODESTO MINE
(a) REAL ESTATE
The Company owns 52 acres of land which are a key part of the Modesto
Mine that is located near the city of El Paisnal, El Salvador. It also
has contracted to purchase additional acreage which transfer will take
place after it receives clear title. Part of this real estate is subject
to a mortgage and promissory note.
SAN FELIPE-EL POTOSI MINE ("POTOSI")
(a) REAL ESTATE LEASE AGREEMENT
The Joint Venture entered into a lease agreement with the San Felipe-El
Potosi Cooperative ("Cooperative") of the city of Potosi, El Salvador on
July 6, 1993, to lease the real estate encompassing the San Felipe-El
Potosi Mine for a period of 30 years and with an option to renew the
lease for an additional 25 years, for the purpose of mining and
extracting minerals and under the following basic terms and conditions:
1. The lease payment will be five percent of the gross receipts derived
from the production of precious metals from this site which will be
payable monthly.
2. The Joint Venture will advance to the Cooperative the funds required
to obtain the mining concession from the El Salvador Department of
Energy, Mines and Hydrocarbons and all related costs which will be
reimbursed or will become a deduction from future rental payments.
3. The Joint Venture will, when it is in production, employ not more than
45 qualified members of the Cooperative providing that there is a need
for their particular skill or service.
4. The Joint Venture will furnish medicine and first aid medical
assistance to all of its employees to the extent that such benefits
are not provided by the Salvadoran Social Security System.
5. An employee life insurance program is to be seriously considered by
the Joint Venture when production commences, providing that the cost
of such insurance is not excessive.
MONTEMAYOR MINE
The Joint Venture has leased approximately one hundred seventy-five acres
of land that it considers to be the key mining property. The terms of
the various leases are one year with automatic renewal rights. This
property is located 14 miles northwest of the SCMP, six miles northwest
of the SSGM, and about two miles east of the city of San Francisco Gotera
in the Department of Morazan, El Salvador.
<PAGE>
(5) SYNOPSIS OF REAL ESTATE OWNERSHIP AND LEASES
- -------------------------------------------------
The Company and its subsidiaries own a 331-acre campground located in the
Lake of the Ozarks, Camden County, Missouri; 40 lots in the San Luis
North Estates Subdivision, Costilla County, Colorado; and 12 lots in the
city of Fort Garland, Costilla County, Colorado. Misanse owns the 1,470
acre SSGM site located near the city of Santa Rosa de Lima in the
Department of La Union, El Salvador. Other real estate ownership or
leases in El Salvador are as follows: it owns a total of approximately
52 acres at the Modesto Mine; the Joint Venture leases the SCMP land and
buildings on which its mill, plant and equipment are located. In
addition, the Joint Venture has entered into a lease agreement to lease
approximately 675 acres based on the production of gold payable in the
form of royalties with a mining prospect in the Department of San Miguel
and it leases approximately 175 acres in the Department of Morazan in the
Republic of El Salvador.
(6) NOTES PAYABLE AND ACCRUED INTEREST
- ---------------------------------------
March 31
--------
Notes payable consist of the following: 1999 1998
---- ----
Mortgage and promissory notes to
related parties, interest ranging from
one percent to four percent over prime
rate, but not less than 16%, payable
monthly, due on demand, using the
undeveloped land, real estate and all
other assets owned by the Company,
its subsidiaries and the Joint Venture
as collateral (Note 7) $5,009,679 $4,175,120
Other - consists primarily of
short-term notes and accrued interest
(1999, $307,491 and 1998, $305,578)
issued to creditors and others,
interest rates of varying amounts, in
lieu of actual cash payments and
includes a mortgage on a certain
parcel of land pledged as collateral
located in El Salvador. 1,169,454 743,071
----------- ----------
Total: $6,179,133 $4,918,191
========== ==========
(7) RELATED PARTY TRANSACTIONS
- -------------------------------
The Company, in an attempt to preserve cash, had prevailed on its
President to accrue his salary for the past 18 years, for a total of
$1,674,015.
In addition, 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, 1999:
The amount of funds which the Company has borrowed from its President
from time to time, together with accrued interest, amounts to $2,568,600.
To evidence this debt, the Company has issued to its President a series
of open-ended, secured, on-demand promissory notes, with interest
payable monthly at the prime rate plus two percent, but not less than 16%
per annum.
<PAGE>
The Company had borrowed, as of March 31, 1999, an aggregate of $550,951,
including accrued interest, from the Company's President's Rollover
Individual Retirement Account (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 four percent per annum, 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 three percent 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 (20,200) borrowed from him during this fiscal
period and it issued 26,523 of its common shares for the payment of
interest for the shares loaned or pledged as collateral for the benefit
of the Company. 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 two percent of the pre-tax profits realized by the Company
from its gold mining operations in El Salvador, payable annually over a
period of twenty years commencing on the first day of the month following
the month in which gold production commences.
The President presently owns a total of 467 Misanse common shares. There
are a total of 2,600 Misanse shares issued and outstanding.
Also with the consent and approval of the Directors, a company in which
the President has a 55% ownership entered into the following agreements,
and the status is reflected as of March 31, 1999.
The Company leased approximately 4,032 square feet on a month-to-month
basis for its corporate headquarters office; the monthly rental charge
was $2,789. The annual amount charged for the past three fiscal years is
as follows: 1999, $33,468; 1998, $33,468; and 1997, $33,468.
The same related company provides 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: 1999,
$7,680; 1998, $8,040; and 1997, $7,950.
In lieu of cash payments for the office space rental and for the
consulting, administrative services, etc., these amounts due are added
each month to this related company's open-ended, secured, on-demand
promissory note issued by the Company.
In addition, this related company does from time to time use its credit
facilities to purchase items needed for the Joint Venture's mining needs.
This related company has been issued an open-ended, secured, on-demand
promissory note which amounts to $1,493,026; the annual interest rate is
four percent plus the prime rate, but not less than 16%, and it is
payable monthly.
<PAGE>
The Company's Directors have consented and approved the following
transactions which status are reflected as of March 31, 1999:
The President's wife's Rollover Individual Retirement Account (RIRA) has
the Company's open-ended, secured, on-demand promissory note in the sum
of $327,676 which bears interest at an annual rate of prime plus three
percent, but not less than 16% and the interest is payable monthly.
The Law Firm which represents the Company in which a son of the President
is a principal is owed the sum of $197,139 for legal services rendered
throughout the past years.
The son of the President and his son's wife have the Company's
open-ended, on-demand promissory note in the sum of $69,426 which bears
interest at an annual rate of 16% payable monthly. In addition, the
Company borrowed 26,460 common shares from them on May 28, 1999, and
15,000 common shares on October 8, 1998, for a total of 41,460 common
shares. There are also 4,146 shares due to them for the payment of
interest.
The Directors, by their agreement, have deferred cash payment of their
Director fees beginning on January 1, 1981, until such time as the
Company's operations are profitable. Effective from October 1, 1996,
the Director fees are $1,200 for each quarterly meeting and $400 for
attendance at any other Directors' meeting. The Executive Committee
Director fees are $400 for each meeting. The Directors and Officers have
a right to exchange the amount due to them for the Company's common
shares.
As of March 31, 1999, pursuant to the S.E.C. Form S-8 Registration
Statement effective as of April 4, 1994, the Directors/Officers exercised
their rights to purchase 66,134 shares at a price of thirty-seven and
one-half cents per share in payment of all compensation due to them as of
March 31, 1999.
The Company advances funds, allocates and charges its expenses to the
Joint Venture. The Joint Venture in turn capitalizes all of these
advances, costs and expenses on a full production basis. When full
production commences, these capitalized costs will be charged as an
expense based on a per ton production basis. The Company also charges
interest for its advances to the Joint Venture which interest rate is
established to be the prime rate quoted on the first day of each month
plus four percent and said interest is payable monthly. This interest is
eliminated from the consolidated statement of operations.
COMPANY NET 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 3,122,766 1,286,739
Year Ended March 31, 1997 3,894,692 1,567,375
Year Ended March 31, 1998 4,397,007 2,179,731
Year Ended March 31, 1999 3,653,481 2,590,144
----------- -----------
$23,153,989 $10,004,670
Advances by three of the
Company's wholly-owned
subsidiaries 590,265 0
----------- -----------
Total Net Advances March 31, 1999 $23,744,254 $10,004,670
=========== ===========
<PAGE>
(8) COMMITMENTS
- ----------------
Reference is made to Notes 2, 4, 5, 6, 7, 12 and 14.
(9) INCOME TAXES
- -----------------
At March 31, 1998, the Company and its subsidiaries, excluding the Joint
Venture, have estimated net operating losses remaining in a sum of
approximately $1,859,878 which may be carried forward to offset future
taxable income; the net operating losses expire at various times to the
year of 2014.
(10) DESCRIPTION OF SECURITIES
- -------------------------------
a. COMMON STOCK
The Company's Delaware Certificate of Incorporation authorizes the
issuance of 15,000,000 shares of common stock, $0.10 par value per share
of which 11,577,527 shares were issued and outstanding as of March 31,
1999. Holders of shares of common stock are entitled to one vote for
each share on all matters to be voted on by the shareholders. Holders of
common stock have no cumulative voting rights. Holders of shares of
common stock are entitled to share ratably in dividends, if any, as may
be declared, from time to time by the Board of Directors in its
discretion, from funds legally available therefore. In the event of a
liquidation, dissolution or winding up of the Company, the holders of
shares of common stock are entitled to share pro rata all assets
remaining after payment in full of all liabilities. Holders of common
stock have no preemptive rights to purchase the Company's common stock.
There are no conversion rights or redemption or sinking fund provisions
with respect to the common stock. All of the issued and outstanding
shares of common stock are validly issued, fully paid and non-assessable.
On April 1, 1999, the Company merged into a Wisconsin chartered
corporation which has 50,000,000 authorized common shares, par value
$0.10 a share. The rights of the shareholders remain almost the same as
described herein.
b. PREFERRED STOCK
There were no preferred shares issued and outstanding for the periods
ending March 31, 1999 or 1998.
The Company's Delaware and Wisconsin Certificates of Incorporation
authorize the issuance of 250,000 shares of preferred stock, $0.10 par
value.
The preferred shares are issuable in one or more series. The Board of
Directors is authorized to fix or alter the dividend rate, conversion
rights (if any), voting rights, rights and terms of redemption (including
any sinking fund provisions), redemption price or prices, liquidation
preferences and number of shares constituting any wholly unissued series
of preferred shares.
<PAGE>
c. STOCK OPTION ACTIVITY DURING 1999, 1998, AND 1997 WAS AS FOLLOWS:
03/31/99 03/31/98 03/31/97
------------------- ------------------- -------------------
Weighted Weighted Weighted
Option Average Option Average Option Average
Shares Price Shares Price Shares Price
--------- ----- --------- ----- --------- -----
Outstanding,
beg. yr. 1,327,400 $3.42 1,591,360 $3.22 97,840 $2.66
Granted 70,000 $0.75 0 $0.00 1,507,400 $3.38
Exercised 0 N/A (60,000) $2.00 0 $0.00
Forfeited 0 N/A (710) $4.25 (13,880) $3.00
Expired (420,000) N/A (203,250) $2.25 0 $0.00
---------- ----- ---------- ----- ---------- -----
Outstanding,
end of yr. 977,400 $3.28 1,327,400 $3.42 1,591,360 $3.22
========== ===== ========= ===== ========= =====
A summary of the outstanding stock options as of March 31, 1999, follows:
Weighted Average
Range of Amount Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- ----------------
$2.00 to $2.99 100,000 2.39 years $1.28
$3.00 to $5.00 877,400 1.63 years $3.51
d. STOCK RIGHTS - TO THE PRESIDENT
Reference is made to Note 7, Related Party Transactions, of the Company's
financial statements which disclose the terms and conditions of the share
loans to the Company by the President and the interest which is payable
to him by the Company's issuance of its common shares.
Said interest payable is for shares loaned to the Company and/or for such
shares loaned or pledged for collateral purposes, or for unpaid interest,
all in accordance with the terms and conditions of Director-approved
open-ended loan agreements dated June 20, 1988, October 14, 1988, May 17,
1989 and April 1, 1990.
e. SHARE LOANS - OTHERS
A series of borrowings of the Company's common shares were made under the
provision that the owners would sell said shares as the Company's
designee, with the proceeds payable to the Company. In exchange, the
Company agreed to pay these shares loaned within 31 days or less by
issuing its restricted common shares, together with interest payable in
restricted common shares payable at a negotiated rate of interest
normally payable in advance for a period of two years. As of March 31,
1999, there were 41,460 common shares borrowed and 4,146 common shares
were due for the interest on these share loans.
On June 1, 1998 correspondence, together with a loan agreement, had been
submitted to a lender for execution in connection with the Company's
understanding of a stock loan arrangement. The lender verbally
acknowledges the loan agreement and the terms and conditions. The
Company borrowed 125,300 common shares of a non-related, publicly-held
corporation and sold them for approximately $529,425. The lender, until
January 15, 2000, will have the option of demanding payment of the
principal amount of the stock loan in return for the 125,300 shares
borrowed plus interest in the form of 64,485 of the Company's restricted
common shares or in lieu of the 125,300 shares of the non-related,
publicly-held corporation borrowed, may accept payment in the form of up
to 625,235 of the Company's restricted common shares.
<PAGE>
f. S.E.C. FORM S-8 REGISTRATION
On July 16, 1998, the Company filed its Securities and Exchange
Commission Form S-8 Registration Statement No. 333-59209 under the
Securities Act of 1933, to register 1,000,000 of the Company's $0.10 par
value common stock for the purpose of distributing shares pursuant to the
guidelines of the Company's Services and Consulting Compensation Plan.
From the 1,000,000 shares registered, 167,431 shares were issued and
832,569 shares are authorized to be issued.
(11) LITIGATION
- ----------------
There is no material litigation except the Company's legal counsel is
appealing Nasdaq's delisting decision. (Reference is made to Part II,
Item 5, Item 7, etc.)
(12) COMMITMENTS AND CONTINGENCIES
- ----------------------------------
Based upon current knowledge, the Company believes that it is in material
compliance with environmental laws and regulations as currently
promulgated. However, the exact nature of environmental control
problems, if any, which the Company may encounter in the future cannot be
predicted, primarily because of the increasing number, complexity and
changing character of environmental requirements that may be enacted or
of the standards being promulgated by governmental authorities.
The Company has agreed to transfer at no cost to IBC, forty-nine percent
of the common shares of Piccadilly Advertising Agency, Inc. (PAA) for the
successful development of an Internet business pursuant to the agreement
it entered into with IBC on January 27, 1999. On the same day, PAA's
Articles of Incorporation were amended to change the name of the
corporation to Ecomm Group Inc. (Ecomm). Ecomm also reserved the domain
name of ecommgroup.com. Ecomm's business strategy is to build a web
portal through the acquisition and consolidation of selected Internet
companies.
In respect to the public relation services made as part of the January
27, 1999 agreement, IBC has agreed to disseminate information regarding
the Company on the Internet with a view towards developing a more
widespread public interest in the Company. The Company agreed to pay IBC
minimum compensation for its public relations and consulting work in the
form of 10,000 shares of the Company's common stock, and also agreed to
issue warrants to purchase 500,000 shares of the Company's common stock
at the price of $0.10 per share if the conditions imposed by Nasdaq to
maintain a stock bid price of $1.00 or more and for the Company's
continued listing are met. On January 29, 1999, Nasdaq halted the
trading of the Company's shares and on March 31, 1999, the Company's
securities were delisted from The Nasdaq Stock Market effective at the
close of business. The Company is appealing Nasdaq's decision.
(13) BUSINESS SEGMENTS
- ----------------------
The Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related Information
became effective for fiscal years beginning after December 15, 1997.
SFAS 131 establishes standards for the way that public business
enterprises determine operating segments and report information about
those segments in annual financial statements. SFAS 131 also requires
those enterprises to report selected information about operating segments
in interim financial reports issued to shareholders. SFAS 131 further
establishes standards for related disclosure about products and services,
geographic areas, and major customers.
<PAGE>
The Company has presently three reportable segments: mining, campground
operation, and other. The mining segment is engaged in the processing of
gold. The campground operation is to lease space on an annual, monthly
or daily basis. The other segments are those activities that are
combined for reporting purposes. There were very limited activities in
the Internet business, thus no disclosure is made. Another start-up
segment, the Internet business, was in the process of being developed and
its expansion was temporarily ceased pending the outcome of the Nasdaq
January 29, 1999 decision to halt the trading of the Company's common
shares.
Mining *1
El Salvador,
Central Campground Corporate
America Missouri, U.S.A. Headquarters
------- ---------------- ------------
Year ended March 31, 1999
Sales and revenues $ 785,526 $ 62,176 $
Depreciation & amortization 338,797
Operating income (loss) (258,179)
Other mining income 213,491
Operating income (loss) (44,688) (4,268) (41,310)
Total assets 26,031,841 1,135,500 419,460
Capital expenditures 2,269,928
Year ended March 31, 1998
Sales and revenues $ 1,234,443 $ 61,465 $
Depreciation & amortization 208,254 0
Operating income (loss) 4,752 903
Other mining income 112,948
Total assets 24,386,843 1,135,500 277,308
Capital expenditures 3,402,089
Year ended March 31, 1997
Sales and revenues $ 0 $ 59,009 $
Depreciation & amortization 0 0
Operating income (loss) 3,832 (8,973)
Total assets 21,035,881 1,135,500 997,740
Capital expenditures 3,080,901
*1 Its major customer for the refining and purchase of gold is a refinery
located in the United States. The price of gold is dependent on the
world market price over which the Company, the refinery or any other
single competitor have control.
<PAGE>
(14) ENVIRONMENTAL MATTERS
- --------------------------
The Company's operations are subject to environmental laws and
regulations adopted by various governmental authorities in the
jurisdictions in which the Company operates. Accordingly, the Company
has adopted policies, practices and procedures in the areas of pollution
control, product safety, occupational health and the production,
handling, storage, use and disposal of hazardous materials to prevent
material environmental or other damage, and to limit the financial
liability which could result from such events. However, some risk of
environmental or other damage is inherent in the business of the Company,
as it is with other companies engaged in similar businesses.
(15) YEAR 2000 ISSUE
- --------------------
Computer programs written decades ago utilized a two digit format to
identify the applicable year. Without modification, any date sensitive
software beyond December 31, 1999 could fail, as the date would be reset
to 1900. This could result in, amongst other things, disruptions to
operations and the inability to process financial transactions. The
Company has not yet made a complete assessment of the impact of the year
2000 issue. The Company has initiated preliminary communications with
certain of its equipment suppliers in which a computer is utilized and
with its computer manufacturers (hardware and software) for the
processing of financial information to determine the extent to which the
issue may impact the Company. In addition, the Company may inquire of
other entities who are significant suppliers of consumables used in its
operations and of others it currently interacts with electronically
(financial institutions, etc.) to determine the extent to which it may be
vulnerable to those third parties' failure to remediate their own year
2000 issue.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
- ----------------------------------------------------------------
DISCLOSURE
- ----------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information called for by Item 10 is incorporated by reference from
information under the caption "Election of a Director" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A no
later than 120 days after the close of its fiscal year. The information
on Executive Officers is contained in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information called for by Item 11 is incorporated by reference from
information under the caption "Executive Compensation" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A no
later than 120 days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information called for by Item 12 is incorporated by reference from
information under the caption "Voting Securities" and "Principal
Shareholders and Ownership by Management" in the Company's definitive
proxy statement to be filed pursuant to Regulation 14A no later than 120
days after the close of its fiscal year.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors and persons beneficially
owning greater than ten percent of the outstanding shares, to file
reports of ownership and changes in ownership with the Securities and
Exchange Commission. Based solely on a review of the copies of such
forms furnished to the Company or representations that no Form 5 was
required, the Company believes that all Section 16(a) filing requirements
were complied with as required.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information called for by Item 13 is incorporated by reference from
information under the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement to be filed
pursuant to Regulation 14A no later than 120 days after the close of its
fiscal year.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) FINANCIAL STATEMENTS AND SCHEDULES
- ---------------------------------------
See index to Consolidated Financial Statements and Supplementary Data in
Item 8 of this report.
Report of Independent Accountant on the Financial Statement Schedules
Schedule IV (1) Indebtedness of Related Parties
Schedule IV (2) Indebtedness to Related Parties
(b) REPORTS ON FORM 8-K
(1) A Form 8-K was filed on February 8, 1999, to report that the Company
entered into an agreement with Interactive Business Channel, Inc.
(IBC) on January 27, 1999 for the purpose of developing an Internet
business with the Company's wholly-owned subsidiary, Piccadilly
Advertising Agency, Inc. whose name subsequently was changed to
Ecomm Group Inc. This agreement also retained IBC to provide public
relations and consulting work to enhance the value of the Company's
shares to meet the $1.00 bid price required by The Nasdaq SmallCap
Market.
(2) A Form 8-K was filed on April 13, 1999 to report that its shares
were delisted by Nasdaq effective March 31, 1999, based on public
interest concerns and the non-compliance to retain a one dollar bid
price. Also, the Company announced that it changed its domicile
from a Delaware corporation to a Wisconsin corporation. This merger
was effective as of April 1, 1999 at 12:01 a.m. (Central Time).
(3) A Form 8-K was filed on May 19, 1999 reporting that the Company's
common shares were trading on the Over the Counter Bulletin Board
(OTC BB) effective May 5, 1999.
(c) EXHIBITS
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibits in Item 601 of Regulation S-K. The exhibit
numbers noted by an asterisk (*) indicate exhibits actually filed with
this Annual Report on Form 10-K. All other exhibits are incorporated by
reference into this Annual Report on Form 10-K.
Exhibit No. Description of Exhibit Page
___________ ______________________ ____
3.1 Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.(i) of
the Company's S.E.C. Form 8-K filed on
April 13, 1999.)
3.2 By-laws of the Company. (Incorporated by reference
to Exhibit 3.(ii) of the Company's S.E.C. Form 8-K
filed on April 13, 1999.)
3.3 The Articles of Amendment of the Wisconsin
corporation increasing the authorized shares to
50,000,000 common shares. (Incorporated by
reference to Exhibit 3.(iii) of the Company's S.E.C.
Form 8-K filed on April 13, 1999.)
<PAGE>
Exhibit No. Description of Exhibit Page
___________ ______________________ ____
3.4 The Articles of Merger from a Delaware corporation
to a Wisconsin corporation effective April 1, 1999
at 12:01 a.m. (Central Time). (Incorporated by
reference to Exhibit 2.(i) of the Company's S.E.C.
Form 8-K filed on April 13, 1999.)
3.5 A Certificate of Merger filed with the Office of
the Secretary of State of Delaware merging into a
Wisconsin corporation. (Incorporated by reference
to Exhibit 2.(ii) of the Company's S.E.C. Form 8-K
filed on April 13, 1999.)
4 Instruments defining the rights of security holders,
including indentures.
4.1 Three-Year Stock Option Agreement dated
October 1, 1996 to purchase 22,500 common shares at
$3.00 per share. (Incorporated by reference to
Exhibit 4.6 of the Company's Form 10-K for the year
ended March 31, 1997.)
4.2 Four-Year Stock Option Agreement dated December 9,
1996 to purchase 3,000 common shares at $3.00 per
share. (Incorporated by reference to Exhibit 4.7
of the Company's Form 10-K for the year ended
March 31, 1997.)
4.3 Four-Year Stock Option Agreement dated December 11,
1996 to purchase 15,000 common shares at $3.00 per
share. (Incorporated by reference to Exhibit 4.8
of the Company's Form 10-K for the year ended March 31, 1997.)
4.4 Four-Year Stock Option Agreement dated December 11,
1996 to purchase 60,000 common shares at $3.00 per
share. (Incorporated by reference to Exhibit 4.9
of the Company's Form 10-K for the year ended
March 31, 1997.)
4.5 Four-Year Stock Option Agreement dated December 14,
1996 to purchase 83,900 common shares at $3.00 per
share. (Incorporated by reference to Exhibit 4.10
of the Company's Form 10-K for the year ended
March 31, 1997.)
4.6 Four-Year Stock Option Agreement dated December 27,
1996 to purchase 30,000 common shares at $2.50 per
share. (Incorporated by reference to Exhibit 4.11
of the Company's Form 10-K for the year ended
March 31, 1997.)
4.7 Four-Year Stock Option Agreement dated December 31,
1996 to purchase 25,000 common shares at $3.00 per
share. (Incorporated by reference to Exhibit 4.12
of the Company's Form 10-K for the year ended
March 31, 1997.)
4.8 Four-Year Stock Option Agreement dated January 10,
1997 to purchase 68,000 common shares at $3.00 per
share. (Incorporated by reference to Exhibit 4.13
of the Company's Form 10-K for the year ended
March 31, 1997.)
4.9 Three, Four and Five-Year Stock Option Agreements
are to be issued effective as of January 23, 1997,
to purchase 200,000 shares each of the years during
a five-year period as follows: year three, $3.25;
year four $3.75; and year five $4.25. (Incorporated
by reference to Exhibit 4.15 of the Company's Form
10-K for the year ended March 31, 1997.)
<PAGE>
Exhibit No. Description of Exhibit Page
___________ ______________________ ____
4.10* Three-Year Stock Option Agreement dated October 10,
1998 to purchase 10,000 common shares at $.75 per
share.
4.11* Three-Year Stock Option Agreement dated October 20,
1998 to purchase 10,000 common shares at $.75 per
share.
4.12* Three-Year Stock Option Agreement dated October 22,
1998 to purchase 20,000 common shares at $.75 per
share.
4.13* Three-Year Stock Option Agreement dated October 22,
1998 to purchase 30,000 common shares at $.75 per
share.
9 Voting Trust Agreement--not applicable.
10 Material contracts regarding sale of assets and
deferred compensation.
10.1 Bonus compensation, Edward L. Machulak, February 16,
1987. (Incorporated by reference to Exhibit 7 of
the Company's Form 10-K for the year ended
March 31, 1987.)
10.2 Loan Agreement and Promissory Note, Edward L.
Machulak, June 20, 1988. (Incorporated by reference
to Exhibit 10.2 of the Company's Form 10-K for the
year ended March 31, 1993.)
10.3 Loan Agreement and Promissory Note, Edward L.
Machulak, October 14, 1988. (Incorporated by
reference to Exhibit 10.3 of the Company's Form
10-K for the year ended March 31, 1993.)
10.4 Loan Agreement and Promissory Note, Edward L.
Machulak, May 17, 1989. (Incorporated by reference
to Exhibit 10.4 of the Company's Form 10-K for
the year ended March 31, 1993.)
10.5 Loan Agreement and Promissory Note, Edward L.
Machulak, April 1, 1990. (Incorporated by reference
to Exhibit 10.5 of the Company's Form 10-K for
the year ended March 31, 1993.)
10.6 Letter Agreement, Edward L. Machulak, October 10,
1989. (Incorporated by reference to Exhibit 10.6
of the Company's Form 10-K for the year ended
March 31, 1993.)
10.7 Loan Agreement and Promissory Note dated January 19,
1994. (Incorporated by reference to Exhibit 10.10
of the Company's Form 10-K for the year ended
March 31, 1995.)
10.8 John E. Machulak and Susan R. Robertson, Loan
Agreement and Promissory Note dated June 3, 1994.
(Incorporated by reference to Exhibit 10.14 of the
Company's Form 10-K for the year ended March 31, 1995.)
<PAGE>
Exhibit No. Description of Exhibit Page
___________ ______________________ ____
10.9 Lillian M. Skeen, Loan Agreement and Open Ended On
Demand Promissory Note dated June 26, 1997.
(Incorporated by reference to Exhibit 10.9 of the
Company's Form 10-K for the year ended March 31, 1998.)
10.10 Robert C. Skeen, Loan Agreement and Open Ended On
Demand Promissory Note dated June 26, 1997.
(Incorporated by reference to Exhibit 10.10 of the
Company's Form 10-K for the year ended March 31, 1998.)
10.11 Robert C. Skeen, Loan Agreement and Open Ended On
Demand Promissory Note dated January 20, 1998.
(Incorporated by reference to Exhibit 10.11 of the
Company's Form 10-K for the year ended March 31, 1998.)
10.12 John E. Machulak and Susan R. Robertson, Loan
Agreement and Open Ended On Demand Promissory Note
dated March 6, 1998. (Incorporated by reference to
Exhibit 10.12 of the Company's Form 10-K for the year
ended March 31, 1998.)
10.13 Lillian M. Skeen, Loan Agreement and Open Ended On
Demand Promissory Note dated May 21, 1998.
(Incorporated by reference to Exhibit 10.13 of the
Company's Form 10-K for the year ended March 31, 1998.)
10.14* Edward A. Machulak, Loan Agreement and Open Ended On
Demand Promissory Note dated March 6, 1998.
10.15 Agreement by and between the Company and Interactive
Business Channel, Inc. dated January 27, 1999.
(Incorporated by reference to Exhibit A of the
Company's Form 8-K dated February 8, 1999.)
10.16* May 25, 1999 Amendment to Exhibit 10.15 of the Company's
Form 10-K for the year ended March 31, 1999.
11* Schedule of Computation of Net Income Per Share
13 Annual Report to security holders, Form 10-Q or
Quarterly Report to security holders:
Annual Report for the period ended March 31, 1999,
will include the Form 10-K and will be submitted
within 120 days after the fiscal year end.
21* Subsidiaries of the Company and its Joint Venture.
23.1* Consent of Independent Certified Public Accountant
99.0 Additional Exhibits
99.1* Confirmation agreement, General Lumber & Supply
Co., Inc., May 10, 1999.
99.2* Confirmation Agreement, Edward L. Machulak,
May 10, 1999.
<PAGE>
Exhibit No. Description of Exhibit Page
___________ ______________________ ____
99.3* Confirmation Agreement, Edward L. Machulak Rollover
Individual Retirement Account, May 10, 1999.
99.4* Confirmation Agreement, Sylvia Machulak Rollover
Individual Retirement Account, May 10, 1999.
99.5 Concession Agreement Assignment to the Company by
Misanse (Incorporated by reference to Exhibit 1 of
the Company's Form 10-K for the year ended
March 31, 1988.)
99.6 Other Material Information: Restatement of prior
period financial statements. (Incorporated by
reference to Item 8 of the Company's Form 10-K
for the year ended March 31, 1998.)
99.7 Form S-8 Registration Statement effective date
April 4, 1994, File No. 33-77226. (Incorporated
by reference as this S-8 Registration Statement had
been filed.)
99.8 S.E.C. Form S-3 Registration Statement No. 333-23203
filed under the Securities Act of 1933 as amended and
declared effective at 10:00 a.m. on March 26, 1997.
(Incorporated by reference as this S.E.C. Form S-3
Registration Statement had been filed on
March 26, 1997.)
99.9 S.E.C. Form S-8 Registration Statement No. 333-59209
filed under the Securities Act of 1933, as amended,
and declared effective July 16, 1998, registering
one million of its common shares, ten cents par
value. (Incorporated by reference as this S.E.C.
Form S-8 Registration Statement had been filed on
July 16, 1998.)
99.10 Individual financial statements of majority-owned
companies have been omitted because these companies
do not constitute a significant or material
contribution to the Company.
<PAGE>
COMMERCE GROUP CORP.
FORM 10-K - MARCH 31, 1999
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized on
May 19, 1999.
COMMERCE GROUP CORP.
(Company)
By: /s/ Edward L. Machulak
----------------------------------
Edward L. Machulak
Chairman of the Board of Directors,
Member of Executive Committee,
Member of Audit Committee
Director-Emeritus, President,
Treasurer, Chief Executive,
Operating and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons, on behalf of the
Company and in the capacities and on the dates indicated:
Name Office Date
____ ______ ____
/s/Edward L. Machulak Chairman of the Board of Directors, May 19, 1999
- --------------------- Member of Executive Committee, Member ------------
Edward L. Machulak of Audit Committee, Director-Emeritus,
President, Treasurer, Chief Executive,
Operating and Financial Officer
/s/Edward A. Machulak Director, Member of Executive May 19, 1999
- --------------------- Committee, Executive Vice President ------------
Edward A. Machulak and Secretary
/s/Sidney Sodos Director and Member of Audit May 19, 1999
- --------------- Committee ------------
Sidney Sodos
/s/Clayton H. Tebo Director and Member of Audit May 19, 1999
- ------------------ Committee ------------
Clayton H. Tebo
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANT ON THE FINANCIAL STATEMENT SCHEDULES
---------------------------------------------------------------------
My report on the consolidated financial statements of Commerce Group
Corp. for its fiscal years ended March 31, 1999, 1998, 1997, 1996 and
1995, is included in this Form 10-K. In connection with my audits of
such financial statements, I have also audited the following:
supplementary income statement information, selected financial data
report, and the related financial statement schedules listed in Item
14(a) of this Form 10-K.
In my opinion, the consolidated financial statement information and
schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein, all in
accordance with accounting principles generally accepted in the United
States.
Bruce Michael Redlin
Certified Public Accountant
/s/ Bruce Michael Redlin
Milwaukee, Wisconsin
May 10, 1999
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV (1)
INDEBTEDNESS OF RELATED PARTIES - NOT CURRENT
YEARS ENDED MARCH 31, 1999, 1998, AND 1997
Balance
at Additions to Deletions to Balance
Beginning Indebtedness Indebtedness at End
Name of Person (1) of Period (2) (3) of Period
- ------------------ --------- ------------ ------------ ---------
Year ended March 31, 1999
Joint Venture $20,090,773 $3,653,481 $0 $23,744,254
Year ended March 31, 1998
Joint Venture $15,693,766 $4,397,007 $0 $20,090,773
Year ended March 31, 1997
Joint Venture $11,799,074 $3,894,692 $0 $15,693,766
(1) Commerce Group Corp. and San Sebastian Gold Mines, Inc., Joint
Venture ("Joint Venture").
(2) The purpose of the advances is to continue the exploration,
exploitation and development of the SSGM and the other mining
prospects managed by the Joint Venture and which are located in the
Republic of El Salvador, Central America. Also, funds were used to
retrofit, rehabilitate, repair and to renovate the San Cristobal
Mill and Plant acquired by the Joint Venture for the purpose of
producing gold.
(3) Beginning with September 30, 1987, the total indebtedness includes
the advances of $590,265 from three of the Company's wholly-owned
subsidiaries.
Balance
at Additions to Deletions to Balance
Beginning Indebtedness Indebtedness at End
Name of Person (1) of Period (2) (3) of Period
- ------------------ --------- ------------ ------------ ---------
Year ended March 31, 1999
SSGM $21,524,975 $2,298,543 $0 $23,823,518
Year ended March 31, 1998
SSGM $19,388,321 $2,136,654 $0 $21,524,975
Year ended March 31, 1997
SSGM $17,503,414 $1,884,907 $0 $19,388,321
<PAGE>
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE IV(2)
INDEBTEDNESS TO RELATED PARTIES
CURRENT YEARS ENDED MARCH 31, 1999, 1998, AND 1997
Balance
at Additions to Deletions to Balance
Beginning Indebtedness Indebtedness at End
Identity of Debtor (1) of Period (2) (3) of Period
- ---------------------- --------- ------------ ------------ ---------
Year ended March 31, 1999
- -------------------------
President of the Company $2,219,984 $348,616(a) $ 0 $2,568,600
President's IRA 469,987 80,964(b) 0 550,951
President's Affiliated
Company 1,182,709 310,317(c) 0 1,493,026
Others 302,440 94,662(d) 0 397,102
---------- -------- --------- ----------
Total, notes payable $4,175,120 $834,559 $ 0 $5,009,679
========== ======== ========= ==========
President's Accrued
Salary $1,509,015 $165,000(e) $ 0 $1,674,015
========== ======== ========= ==========
Legal fees (President's
son is a principal) $ 175,082 $ 22,057 $ 0 $ 197,139
========== ======== ========= ==========
Year ended March 31, 1998
- -------------------------
President of the Company $1,839,465 $380,519(a) $ 0 $2,219,984
President's IRA 400,919 69,068(b) 0 469,987
President's Affiliated
Company 963,152 219,557(c) 0 1,182,709
Others 257,993 44,447(d) 0 302,440
---------- -------- --------- ----------
Total, notes payable $3,461,529 $713,591 $ 0 $4,175,120
========== ======== ========= ==========
President's Accrued
Salary $1,344,015 $165,000(e) $ 0 $1,509,015
========== ======== ========= ==========
Legal fees (President's
son is a principal) $ 137,069 $ 38,013(f) $ 0 $ 175,082
========== ======== ========= ==========
Year ended March 31, 1997
- -------------------------
President of the Company $1,346,304 $493,161(a) $ 0 $1,839,465
President's IRA 342,002 58,917(b) 0 400,919
President's Affiliated
Company 1,175,984 215,668(c) 428,500(a) 963,152
Others 220,080 37,913(d) 0 257,993
---------- -------- -------- ----------
Total, notes payable $3,084,370 $805,659 $428,500 $3,461,529
========== ======== ======== ==========
President's Accrued
Salary $1,204,140 $139,875(e) $ 0 $1,344,015
========== ======== ========= ==========
Legal fees (President's
son is a principal) $ 76,883 $ 60,186(f) $ 0 $ 137,069
========== ======== ========= ==========
Additions to Indebtedness
(2)(a)(b) The additions to the open-ended, secured, on-demand promissory
notes issued to the President of the Company, and as
individual, and not as a Director or Officer of the Company,
and his IRA result from net cash advances and/or for accrued
interest.
<PAGE>
(2)(c) The President owns 55% of an Affiliated Company's common
shares. The additions to the open-ended, secured, on-demand
promissory note issued to an Affiliated Company result from
cash advances, accrued interest, accrued office rent, vehicle
rental, computer use and other expenses paid on behalf of the
Company.
(2)(d) The additions by others resulted from net cash advances and/or
accrued interest.
(2)(e) The President's salary was accrued for the entire fiscal year.
(2)(f) The addition of the amounts due to the Law Firm results from
legal services rendered.
(3) Deletions to Indebtedness are reflected as a net to the
additions:
(3)(a) During the fiscal period ended March 31, 1997, the President's
Affiliated Company purchased the following common shares from
the Company: 130,000 common shares on June 10, 1996 at a cost
of $292,500; and 68,000 common shares on January 10, 1997 at a
cost of $136,000. The payment for the purchase of common
shares was made by the cancellation of $428,500 debt owed to
the President's Affiliated Company.
EXHIBIT 4.10
------------
COMMERCE GROUP CORP.
A Delaware Corporation
Three-Year Stock Option to Purchase
10,000 Shares of Commerce Group Corp.
Common Stock at a Price of $.75 Per Share
For value and consideration received on this 10th day of October,
1998, Commerce Group Corp. (Commerce), a Delaware Corporation, whose
business address is 6001 North 91st Street, Milwaukee, Wisconsin 53225,
grants a stock option (stock option agreement) to Lawrence E. Kau
(Option Holder), whose address is N2316 Mehring Road, Jefferson,
Wisconsin 53549, under the following terms and conditions:
1. Issue. Option Holder will have the right to purchase up to ten
thousand (10,000) Commerce common shares, ten cents ($0.10) par value,
hereinafter referred to as "option shares," at a price (option price) of
seventy-five cents ($.75) per share, payable in cash.
Upon tender of the sum of U.S. seven thousand five hundred dollars
($7,500.00), Commerce agrees to issue to Option Holder, a total of ten
thousand (10,000) Commerce validly issued nonassessable and fully paid
common shares, ten cents ($0.10) par value.
2. Exercise Date. Option Holder will have the right to purchase
the common shares at any time during a three (3) year period of time,
commencing from the date of this agreement and expiring on October 10,
2001.
3. Tender. At any time the Option Holder of this stock option
agreement, pursuant to the foregoing terms and conditions, shall exercise
the right to purchase these option shares, the Option Holder of said
stock option agreement shall surrender this stock option agreement for
said shares of option shares, accompanied by proper instruments of
surrender, to Commerce, at its principal office, accompanied by a written
notice to the effect that the Option Holder elects to exercise its stock
option agreement, and stating the name or names in which the certificate
or certificates for shares of option shares shall be issued. As promptly
as practicable, after the receipt of such notice and the surrender of
this stock option agreement, Commerce shall issue and deliver to Option
Holder or such other holder of the stock option agreement, or to the
written order of such holder, a new certificate or certificates for the
number of shares of option shares issuable upon surrendering of this s
tock option agreement. Such issuance of option shares shall be deemed to
have been effected on the date on which such notice shall have been
received by Commerce and such stock option agreement shall have been
surrendered as hereinabove provided. All shares of option shares which
may be issued upon exercise of the stock option agreement, shall, upon
issuance, be validly issued, fully paid, and nonassessable by Commerce.
4. Partial Purchases. Option Holder will not have the right to
purchase the option shares in blocks of not less than the total amount of
option shares provided under the stock option agreement.
5. Notice of Change of Rights. Commerce agrees to notify Option
Holder as follows:
a. When Commerce shall declare a dividend (or make any other
distribution) on its option shares, payable otherwise than in cash
out of the consolidated earnings surplus of Commerce, its
subsidiaries, and the Commerce/Sanseb Joint Venture (Joint Venture);
or
b. When Commerce shall authorize the granting to the holders
of its common shares of rights to subscribe for or purchase any
shares of capital stock of any class or any other rights; or
c. Of any reclassification of the common shares of Commerce
other than a subdivision or a combination of its outstanding shares
of such stock, of any consolidation or merger to which Commerce is a
party and for which approval of any stockholders of Commerce is
required or of the sale or transfer of all or substantially all the
assets of Commerce, its subsidiaries, and the Joint Venture; or
<PAGE>
d. Of the voluntary or involuntary dissolution, liquidation
or winding up of Commerce; then Commerce shall cause to be filed at
the office of Commerce, and shall cause to be mailed to the option
holders of this stock option agreement, at their addresses as they
shall then appear on the records of Commerce, at least ten days
prior to the record date specified below, a notice stating:
(1) the record date for such dividend, distribution or
rights or, if a record is not to be taken, the date as of which
the holders of the option shares of record to be entitled to
such dividend, distribution or rights are to be determined; or
(2) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation
or winding up is expected to become effective, and the date as
of which it is expected that holders of the option shares of
record shall be entitled to exchange their option shares for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up.
6. Procedures. The Board of Directors of Commerce, or a committee
established by it, shall have the right, from time to time, to adopt
other specific rules of procedure to carry out the full intent of this
stock option agreement, and to do all reasonable acts necessary
therefore; provided that such rules and acts shall not violate the
specific terms of this stock option agreement.
7. Dividends. Until such time as the Option Holder purchases the
option shares under this stock option agreement, the Option Holder shall
not be entitled to receive such dividends and distributions as from time
to time may be declared by the Board of Directors of Commerce.
8. Voting. The Option Holders of this stock option agreement
shall have no voting rights.
9. Notice. The Option Holders of the stock option agreement shall
be entitled to any notice of shareholders' meetings.
10. Reservation of Common Stock. Commerce shall at all times
reserve and keep available out of its authorized but unissued common
shares, or shall authorize from time to time, an increase in such shares
if required, of such number of its duly authorized shares of common
stock, as shall be sufficient to effect the exercise of this stock option
agreement.
11. Registration. Option Holder, as owner of this stock option
agreement, by acceptance thereof, shall agree for itself and for all
subsequent owners, that before any disposition is made of this stock
option agreement or of the option shares, Option Holder shall give
written notice to Commerce describing briefly the manner of any such
proposed disposition. No such disposition shall be made unless and until
(1) Commerce has advised such owners that it has received an opinion from
its legal counsel satisfactory to it that no post-effective amendment to
Commerce's registration statement, if any, filed with the Securities and
Exchange Commission (Commission) under the Securities Act of 1933 (Act)
and no other registration under said Act is required to such disposition,
or (2) such post-effective amendment or such other registration has been
filed by Commerce and made effective by the Commission, provided,
however, that Commerce shall have no obligation to so file.
12. Restriction on Certificates. Each certificate for the option
shares to be issued hereunder, until the Option Holder has held this
stock option agreement for a period of two years, without the intent of
selling, transferring, or disposing them, shall bear a legend reading
substantially as follows:
<PAGE>
"Neither this stock option agreement nor the shares of common stock
issuable upon the exercise of the stock option agreement have been
registered under the United States Securities Act of 1933; and the
common stock to be issued under the stock option agreement has been
acquired for investment and has not been registered under the
Securities Act of 1933 or the securities law of any state. Except
upon such registration, such securities may not be sold, pledged,
hypothecated or otherwise transferred unless the transferor delivers
to Commerce Group Corp., an opinion of counsel satisfactory to
Commerce Group Corp., its counsel, its transfer agent and its
counsel that registration is not required and such transfer will not
be in violation of the Securities Act of 1933 or any applicable
state securities laws or any rule of regulation thereunder."
13. Entire Agreement. This agreement is the entire, final and
complete agreement pertaining to the subject matter hereof, and it
supersedes and replaces all written and oral agreements heretofore made
or existing by and between the parties or their representatives insofar
as this subject matter is concerned. Neither party shall be bound by any
promises, representations or agreements except as are herein expressly
set forth.
14. Applicable Law. This agreement is being delivered in and shall
be governed by and construed and enforced in accordance with the laws of
the State of Wisconsin, United States.
15. Binding Effect. This agreement shall be binding upon and inure
to the benefit of all parties and all parties and their respective
successors, heirs, assigns, and legal representatives are subject to its
terms.
In Witness Whereof, Commerce has executed this stock option
agreement on the day and date first written above.
COMMERCE GROUP CORP.
/s/ Edward L. Machulak
__________________________________________
By: Edward L. Machulak, President
This stock option agreement is accepted by Lawrence E. Kau on the 10th
day of October, 1998.
/s/ Lawrence E. Kau
________________________________
Lawrence E. Kau
EXHIBIT 4.11
------------
COMMERCE GROUP CORP.
A Delaware Corporation
Three-Year Stock Option to Purchase
10,000 Shares of Commerce Group Corp.
Common Stock at a Price of $.75 Per Share
For value and consideration received on this 20th day of October,
1998, Commerce Group Corp. (Commerce), a Delaware Corporation, whose
business address is 6001 North 91st Street, Milwaukee, Wisconsin 53225,
grants a stock option (stock option agreement) to Edward C. Seebach
(Option Holder), whose address is 14220 Hyland Drive, Brookfield,
Wisconsin 53005, under the following terms and conditions:
1. Issue. Option Holder will have the right to purchase up to ten
thousand (10,000) Commerce common shares, ten cents ($0.10) par value,
hereinafter referred to as "option shares," at a price (option price) of
seventy-five cents ($.75) per share, payable in cash.
Upon tender of the sum of U.S. seven thousand five hundred dollars
($7,500.00), Commerce agrees to issue to Option Holder, a total of ten
thousand (10,000) Commerce validly issued nonassessable and fully paid
common shares, ten cents ($0.10) par value.
2. Exercise Date. Option Holder will have the right to purchase
the common shares at any time during a three (3) year period of time,
commencing from the date of this agreement and expiring on October 20,
2001.
3. Tender. At any time the Option Holder of this stock option
agreement, pursuant to the foregoing terms and conditions, shall exercise
the right to purchase these option shares, the Option Holder of said
stock option agreement shall surrender this stock option agreement for
said shares of option shares, accompanied by proper instruments of
surrender, to Commerce, at its principal office, accompanied by a written
notice to the effect that the Option Holder elects to exercise its stock
option agreement, and stating the name or names in which the certificate
or certificates for shares of option shares shall be issued. As promptly
as practicable, after the receipt of such notice and the surrender of
this stock option agreement, Commerce shall issue and deliver to Option
Holder or such other holder of the stock option agreement, or to the
written order of such holder, a new certificate or certificates for the
number of shares of option shares issuable upon surrendering of this
stock option agreement. Such issuance of option shares shall be deemed
to have been effected on the date on which such notice shall have been
received by Commerce and such stock option agreement shall have been
surrendered as hereinabove provided. All shares of option shares which
may be issued upon exercise of the stock option agreement, shall, upon
issuance, be validly issued, fully paid, and nonassessable by Commerce.
4. Partial Purchases. Option Holder will not have the right to
purchase the option shares in blocks of not less than the total amount of
option shares provided under the stock option agreement.
5. Notice of Change of Rights. Commerce agrees to notify Option
Holder as follows:
a. When Commerce shall declare a dividend (or make any other
distribution) on its option shares, payable otherwise than in cash
out of the consolidated earnings surplus of Commerce, its
subsidiaries, and the Commerce/Sanseb Joint Venture (Joint Venture);
or
b. When Commerce shall authorize the granting to the holders
of its common shares of rights to subscribe for or purchase any
shares of capital stock of any class or any other rights; or
c. Of any reclassification of the common shares of Commerce
other than a subdivision or a combination of its outstanding shares
of such stock, of any consolidation or merger to which Commerce is a
party and for which approval of any stockholders of Commerce is
required or of the sale or transfer of all or substantially all the
assets of Commerce, its subsidiaries, and the Joint Venture; or
<PAGE>
d. Of the voluntary or involuntary dissolution, liquidation
or winding up of Commerce; then Commerce shall cause to be filed at
the office of Commerce, and shall cause to be mailed to the option
holders of this stock option agreement, at their addresses as they
shall then appear on the records of Commerce, at least ten days
prior to the record date specified below, a notice stating:
(1) the record date for such dividend, distribution or
rights or, if a record is not to be taken, the date as of which
the holders of the option shares of record to be entitled to
such dividend, distribution or rights are to be determined; or
(2) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation
or winding up is expected to become effective, and the date as
of which it is expected that holders of the option shares of
record shall be entitled to exchange their option shares for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up.
6. Procedures. The Board of Directors of Commerce, or a committee
established by it, shall have the right, from time to time, to adopt
other specific rules of procedure to carry out the full intent of this
stock option agreement, and to do all reasonable acts necessary
therefore; provided that such rules and acts shall not violate the
specific terms of this stock option agreement.
7. Dividends. Until such time as the Option Holder purchases the
option shares under this stock option agreement, the Option Holder shall
not be entitled to receive such dividends and distributions as from time
to time may be declared by the Board of Directors of Commerce.
8. Voting. The Option Holders of this stock option agreement
shall have no voting rights.
9. Notice. The Option Holders of the stock option agreement shall
be entitled to any notice of shareholders' meetings.
10. Reservation of Common Stock. Commerce shall at all times
reserve and keep available out of its authorized but unissued common
shares, or shall authorize from time to time, an increase in such shares
if required, of such number of its duly authorized shares of common
stock, as shall be sufficient to effect the exercise of this stock option
agreement.
11. Registration. Option Holder, as owner of this stock option
agreement, by acceptance thereof, shall agree for itself and for all
subsequent owners, that before any disposition is made of this stock
option agreement or of the option shares, Option Holder shall give
written notice to Commerce describing briefly the manner of any such
proposed disposition. No such disposition shall be made unless and until
(1) Commerce has advised such owners that it has received an opinion from
its legal counsel satisfactory to it that no post-effective amendment to
Commerce's registration statement, if any, filed with the Securities and
Exchange Commission (Commission) under the Securities Act of 1933 (Act)
and no other registration under said Act is required to such disposition,
or (2) such post-effective amendment or such other registration has been
filed by Commerce and made effective by the Commission, provided,
however, that Commerce shall have no obligation to so file.
12. Restriction on Certificates. Each certificate for the option
shares to be issued hereunder, until the Option Holder has held this
stock option agreement for a period of two years, without the intent of
selling, transferring, or disposing them, shall bear a legend reading
substantially as follows:
<PAGE>
"Neither this stock option agreement nor the shares of common stock
issuable upon the exercise of the stock option agreement have been
registered under the United States Securities Act of 1933; and the
common stock to be issued under the stock option agreement has been
acquired for investment and has not been registered under the
Securities Act of 1933 or the securities law of any state. Except
upon such registration, such securities may not be sold, pledged,
hypothecated or otherwise transferred unless the transferor delivers
to Commerce Group Corp., an opinion of counsel satisfactory to
Commerce Group Corp., its counsel, its transfer agent and its
counsel that registration is not required and such transfer will not
be in violation of the Securities Act of 1933 or any applicable
state securities laws or any rule of regulation thereunder."
13. Entire Agreement. This agreement is the entire, final and
complete agreement pertaining to the subject matter hereof, and it
supersedes and replaces all written and oral agreements heretofore made
or existing by and between the parties or their representatives insofar
as this subject matter is concerned. Neither party shall be bound by any
promises, representations or agreements except as are herein expressly
set forth.
14. Applicable Law. This agreement is being delivered in and shall
be governed by and construed and enforced in accordance with the laws of
the State of Wisconsin, United States.
15. Binding Effect. This agreement shall be binding upon and inure
to the benefit of all parties and all parties and their respective
successors, heirs, assigns, and legal representatives are subject to its
terms.
In Witness Whereof, Commerce has executed this stock option
agreement on the day and date first written above.
COMMERCE GROUP CORP.
/s/ Edward L. Machulak
__________________________________________
By: Edward L. Machulak, President
This stock option agreement is accepted by Edward C. Seebach on the 20th
day of October, 1998.
/s/ Edward C. Seebach
________________________________
Edward C. Seebach
EXHIBIT 4.12
------------
COMMERCE GROUP CORP.
A Delaware Corporation
Three-Year Stock Option to Purchase
20,000 Shares of Commerce Group Corp.
Common Stock at a Price of $.75 Per Share
For value and consideration received on this 22nd day of October,
1998, Commerce Group Corp. (Commerce), a Delaware Corporation, whose
business address is 6001 North 91st Street, Milwaukee, Wisconsin 53225,
grants a stock option (stock option agreement) to the Henry and Marian
Stark Living Trust (Option Holder), whose address is 2114 West Merrimac
Court, Mequon, Wisconsin 53092, under the following terms and
conditions:
1. Issue. Option Holder will have the right to purchase up to
twenty thousand (20,000) Commerce common shares, ten cents ($0.10) par
value, hereinafter referred to as "option shares," at a price (option
price) of seventy-five cents ($.75) per share, payable in cash.
Upon tender of the sum of U.S. fifteen thousand dollars
($15,000.00), Commerce agrees to issue to Option Holder, a total of
thirty thousand (20,000) Commerce validly issued nonassessable and fully
paid common shares, ten cents ($0.10) par value.
2. Exercise Date. Option Holder will have the right to purchase
the common shares at any time during a three (3) year period of time,
commencing from the date of this agreement and expiring on October 22,
2001.
3. Tender. At any time the Option Holder of this stock option
agreement, pursuant to the foregoing terms and conditions, shall exercise
the right to purchase these option shares, the Option Holder of said
stock option agreement shall surrender this stock option agreement for
said shares of option shares, accompanied by proper instruments of
surrender, to Commerce, at its principal office, accompanied by a written
notice to the effect that the Option Holder elects to exercise its stock
option agreement, and stating the name or names in which the certificate
or certificates for shares of option shares shall be issued. As promptly
as practicable, after the receipt of such notice and the surrender of
this stock option agreement, Commerce shall issue and deliver to Option
Holder or such other holder of the stock option agreement, or to the
written order of such holder, a new certificate or certificates for the
number of shares of option shares issuable upon surrendering of this
stock option agreement. Such issuance of option shares shall be deemed
to have been effected on the date on which such notice shall have been
received by Commerce and such stock option agreement shall have been
surrendered as hereinabove provided. All shares of option shares which
may be issued upon exercise of the stock option agreement, shall, upon
issuance, be validly issued, fully paid, and nonassessable by Commerce.
4. Partial Purchases. Option Holder will not have the right to
purchase the option shares in blocks of not less than the total amount of
option shares provided under the stock option agreement.
5. Notice of Change of Rights. Commerce agrees to notify Option
Holder as follows:
a. When Commerce shall declare a dividend (or make any other
distribution) on its option shares, payable otherwise than in cash
out of the consolidated earnings surplus of Commerce, its
subsidiaries, and the Commerce/Sanseb Joint Venture (Joint Venture);
or
b. When Commerce shall authorize the granting to the holders
of its common shares of rights to subscribe for or purchase any
shares of capital stock of any class or any other rights; or
c. Of any reclassification of the common shares of Commerce
other than a subdivision or a combination of its outstanding shares
of such stock, of any consolidation or merger to which Commerce is a
party and for which approval of any stockholders of Commerce is
required or of the sale or transfer of all or substantially all the
assets of Commerce, its subsidiaries, and the Joint Venture; or
<PAGE>
d. Of the voluntary or involuntary dissolution, liquidation
or winding up of Commerce; then Commerce shall cause to be filed at
the office of Commerce, and shall cause to be mailed to the option
holders of this stock option agreement, at their addresses as they
shall then appear on the records of Commerce, at least ten days
prior to the record date specified below, a notice stating:
(1) the record date for such dividend, distribution or
rights or, if a record is not to be taken, the date as of which
the holders of the option shares of record to be entitled to
such dividend, distribution or rights are to be determined; or
(2) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation
or winding up is expected to become effective, and the date as
of which it is expected that holders of the option shares of
record shall be entitled to exchange their option shares for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up.
6. Procedures. The Board of Directors of Commerce, or a committee
established by it, shall have the right, from time to time, to adopt
other specific rules of procedure to carry out the full intent of this
stock option agreement, and to do all reasonable acts necessary
therefore; provided that such rules and acts shall not violate the
specific terms of this stock option agreement.
7. Dividends. Until such time as the Option Holder purchases the
option shares under this stock option agreement, the Option Holder shall
not be entitled to receive such dividends and distributions as from time
to time may be declared by the Board of Directors of Commerce.
8. Voting. The Option Holders of this stock option agreement
shall have no voting rights.
9. Notice. The Option Holders of the stock option agreement shall
be entitled to any notice of shareholders' meetings.
10. Reservation of Common Stock. Commerce shall at all times
reserve and keep available out of its authorized but unissued common
shares, or shall authorize from time to time, an increase in such shares
if required, of such number of its duly authorized shares of common
stock, as shall be sufficient to effect the exercise of this stock option
agreement.
11. Registration. Option Holder, as owner of this stock option
agreement, by acceptance thereof, shall agree for itself and for all
subsequent owners, that before any disposition is made of this stock
option agreement or of the option shares, Option Holder shall give
written notice to Commerce describing briefly the manner of any such
proposed disposition. No such disposition shall be made unless and until
(1) Commerce has advised such owners that it has received an opinion from
its legal counsel satisfactory to it that no post-effective amendment to
Commerce's registration statement, if any, filed with the Securities and
Exchange Commission (Commission) under the Securities Act of 1933 (Act)
and no other registration under said Act is required to such disposition,
or (2) such post-effective amendment or such other registration has been
filed by Commerce and made effective by the Commission, provided,
however, that Commerce shall have no obligation to so file.
12. Restriction on Certificates. Each certificate for the option
shares to be issued hereunder, until the Option Holder has held this
stock option agreement for a period of two years, without the intent of
selling, transferring, or disposing them, shall bear a legend reading
substantially as follows:
<PAGE>
"Neither this stock option agreement nor the shares of common stock
issuable upon the exercise of the stock option agreement have been
registered under the United States Securities Act of 1933; and the
common stock to be issued under the stock option agreement has been
acquired for investment and has not been registered under the
Securities Act of 1933 or the securities law of any state. Except
upon such registration, such securities may not be sold, pledged,
hypothecated or otherwise transferred unless the transferor delivers
to Commerce Group Corp., an opinion of counsel satisfactory to
Commerce Group Corp., its counsel, its transfer agent and its
counsel that registration is not required and such transfer will not
be in violation of the Securities Act of 1933 or any applicable
state securities laws or any rule of regulation thereunder."
13. Entire Agreement. This agreement is the entire, final and
complete agreement pertaining to the subject matter hereof, and it
supersedes and replaces all written and oral agreements heretofore made
or existing by and between the parties or their representatives insofar
as this subject matter is concerned. Neither party shall be bound by any
promises, representations or agreements except as are herein expressly
set forth.
14. Applicable Law. This agreement is being delivered in and shall
be governed by and construed and enforced in accordance with the laws of
the State of Wisconsin, United States.
15. Binding Effect. This agreement shall be binding upon and inure
to the benefit of all parties and all parties and their respective
successors, heirs, assigns, and legal representatives are subject to its
terms.
In Witness Whereof, Commerce has executed this stock option
agreement on the day and date first written above.
COMMERCE GROUP CORP.
/s/ Edward L. Machulak
__________________________________________
By: Edward L. Machulak, President
This stock option agreement is accepted by Henry Stark and Marian Stark
on behalf of the Henry and Marian Stark Living Trust on the 22nd day of
October, 1998.
/s/ Henry Stark /s/ Marian Stark
________________________________ _________________________________
Henry Stark Marian Stark
EXHIBIT 4.13
------------
COMMERCE GROUP CORP.
A Delaware Corporation
Three-Year Stock Option to Purchase
30,000 Shares of Commerce Group Corp.
Common Stock at a Price of $.75 Per Share
For value and consideration received on this 22nd day of October,
1998, Commerce Group Corp. (Commerce), a Delaware Corporation, whose
business address is 6001 North 91st Street, Milwaukee, Wisconsin 53225,
grants a stock option (stock option agreement) to Lawrence E. Kau
(Option Holder), whose address is N2316 Mehring Road, Jefferson,
Wisconsin 53549, under the following terms and conditions:
1. Issue. Option Holder will have the right to purchase up to
thirty thousand (30,000) Commerce common shares, ten cents ($0.10) par
value, hereinafter referred to as "option shares," at a price (option
price) of seventy-five cents ($.75) per share, payable in cash.
Upon tender of the sum of U.S. twenty-two thousand five hundred
dollars ($22,500.00), Commerce agrees to issue to Option Holder, a total
of thirty thousand (30,000) Commerce validly issued nonassessable and
fully paid common shares, ten cents ($0.10) par value.
2. Exercise Date. Option Holder will have the right to purchase
the common shares at any time during a three (3) year period of time,
commencing from the date of this agreement and expiring on October 22,
2001.
3. Tender. At any time the Option Holder of this stock option
agreement, pursuant to the foregoing terms and conditions, shall exercise
the right to purchase these option shares, the Option Holder of said
stock option agreement shall surrender this stock option agreement for
said shares of option shares, accompanied by proper instruments of
surrender, to Commerce, at its principal office, accompanied by a written
notice to the effect that the Option Holder elects to exercise its stock
option agreement, and stating the name or names in which the certificate
or certificates for shares of option shares shall be issued. As promptly
as practicable, after the receipt of such notice and the surrender of
this stock option agreement, Commerce shall issue and deliver to Option
Holder or such other holder of the stock option agreement, or to the
written order of such holder, a new certificate or certificates for the
number of shares of option shares issuable upon surrendering of this s
tock option agreement. Such issuance of option shares shall be deemed to
have been effected on the date on which such notice shall have been
received by Commerce and such stock option agreement shall have been
surrendered as hereinabove provided. All shares of option shares which
may be issued upon exercise of the stock option agreement, shall, upon
issuance, be validly issued, fully paid, and nonassessable by Commerce.
4. Partial Purchases. Option Holder will not have the right to
purchase the option shares in blocks of not less than the total amount of
option shares provided under the stock option agreement.
5. Notice of Change of Rights. Commerce agrees to notify Option
Holder as follows:
a. When Commerce shall declare a dividend (or make any other
distribution) on its option shares, payable otherwise than in cash
out of the consolidated earnings surplus of Commerce, its
subsidiaries, and the Commerce/Sanseb Joint Venture (Joint Venture);
or
b. When Commerce shall authorize the granting to the holders
of its common shares of rights to subscribe for or purchase any
shares of capital stock of any class or any other rights; or
c. Of any reclassification of the common shares of Commerce
other than a subdivision or a combination of its outstanding shares
of such stock, of any consolidation or merger to which Commerce is a
party and for which approval of any stockholders of Commerce is
required or of the sale or transfer of all or substantially all the
assets of Commerce, its subsidiaries, and the Joint Venture; or
<PAGE>
d. Of the voluntary or involuntary dissolution, liquidation
or winding up of Commerce; then Commerce shall cause to be filed at
the office of Commerce, and shall cause to be mailed to the option
holders of this stock option agreement, at their addresses as they
shall then appear on the records of Commerce, at least ten days
prior to the record date specified below, a notice stating:
(1) the record date for such dividend, distribution or
rights or, if a record is not to be taken, the date as of which
the holders of the option shares of record to be entitled to
such dividend, distribution or rights are to be determined; or
(2) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation
or winding up is expected to become effective, and the date as
of which it is expected that holders of the option shares of
record shall be entitled to exchange their option shares for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up.
6. Procedures. The Board of Directors of Commerce, or a committee
established by it, shall have the right, from time to time, to adopt
other specific rules of procedure to carry out the full intent of this
stock option agreement, and to do all reasonable acts necessary
therefore; provided that such rules and acts shall not violate the
specific terms of this stock option agreement.
7. Dividends. Until such time as the Option Holder purchases the
option shares under this stock option agreement, the Option Holder shall
not be entitled to receive such dividends and distributions as from time
to time may be declared by the Board of Directors of Commerce.
8. Voting. The Option Holders of this stock option agreement
shall have no voting rights.
9. Notice. The Option Holders of the stock option agreement shall
be entitled to any notice of shareholders' meetings.
10. Reservation of Common Stock. Commerce shall at all times
reserve and keep available out of its authorized but unissued common
shares, or shall authorize from time to time, an increase in such shares
if required, of such number of its duly authorized shares of common
stock, as shall be sufficient to effect the exercise of this stock option
agreement.
11. Registration. Option Holder, as owner of this stock option
agreement, by acceptance thereof, shall agree for itself and for all
subsequent owners, that before any disposition is made of this stock
option agreement or of the option shares, Option Holder shall give
written notice to Commerce describing briefly the manner of any such
proposed disposition. No such disposition shall be made unless and until
(1) Commerce has advised such owners that it has received an opinion from
its legal counsel satisfactory to it that no post-effective amendment to
Commerce's registration statement, if any, filed with the Securities and
Exchange Commission (Commission) under the Securities Act of 1933 (Act)
and no other registration under said Act is required to such disposition,
or (2) such post-effective amendment or such other registration has been
filed by Commerce and made effective by the Commission, provided,
however, that Commerce shall have no obligation to so file.
12. Restriction on Certificates. Each certificate for the option
shares to be issued hereunder, until the Option Holder has held this
stock option agreement for a period of two years, without the intent of
selling, transferring, or disposing them, shall bear a legend reading
substantially as follows:
<PAGE>
"Neither this stock option agreement nor the shares of common stock
issuable upon the exercise of the stock option agreement have been
registered under the United States Securities Act of 1933; and the
common stock to be issued under the stock option agreement has been
acquired for investment and has not been registered under the
Securities Act of 1933 or the securities law of any state. Except
upon such registration, such securities may not be sold, pledged,
hypothecated or otherwise transferred unless the transferor delivers
to Commerce Group Corp., an opinion of counsel satisfactory to
Commerce Group Corp., its counsel, its transfer agent and its
counsel that registration is not required and such transfer will not
be in violation of the Securities Act of 1933 or any applicable
state securities laws or any rule of regulation thereunder."
13. Entire Agreement. This agreement is the entire, final and
complete agreement pertaining to the subject matter hereof, and it
supersedes and replaces all written and oral agreements heretofore made
or existing by and between the parties or their representatives insofar
as this subject matter is concerned. Neither party shall be bound by any
promises, representations or agreements except as are herein expressly
set forth.
14. Applicable Law. This agreement is being delivered in and shall
be governed by and construed and enforced in accordance with the laws of
the State of Wisconsin, United States.
15. Binding Effect. This agreement shall be binding upon and inure
to the benefit of all parties and all parties and their respective
successors, heirs, assigns, and legal representatives are subject to its
terms.
In Witness Whereof, Commerce has executed this stock option
agreement on the day and date first written above.
COMMERCE GROUP CORP.
/s/ Edward L. Machulak
__________________________________________
By: Edward L. Machulak, President
This stock option agreement is accepted by Lawrence E. Kau on the 22nd
day of October, 1998.
/s/ Lawrence E. Kau
________________________________
Lawrence E. Kau
EXHIBIT 10.14
-------------
SHARE LOAN AGREEMENT AND OPEN ENDED ON DEMAND PROMISSORY NOTE
This loan agreement (agreement) and open-ended, on-demand promissory
note (note) is entered into this 6th day of March, 1998, by and between
Commerce Group Corp., a Delaware corporation, of 6001 North 91st Street,
Milwaukee, Wisconsin 53225-1795, hereinafter referred to as "Commerce"
and Edward A. Machulak who resides at 2636 North 90th Street, Wauwatosa,
Wisconsin 53226, hereinafter referred to as "EAM."
WITNESSETH:
Whereas, Commerce is in the process of raising funds whereby its
Commerce/Sanseb Joint Venture, hereinafter referred to as "Joint
Venture," maintains its gold mining operations located in the Republic of
El Salvador, Central America, and Commerce recognizes that the success of
doing so can be performed by obtaining the required funding; and
Whereas, Commerce requires from EAM free and tradeable Commerce
common shares, par value $0.10, for the purpose of having EAM sell said
shares as Commerce's designee to obtain funds for Commerce; and
Whereas, Commerce desires to borrow from EAM, a minimum of 25,000
shares of Commerce common shares, par value $0.10 that EAM personally
owns so that EAM, on behalf of Commerce, can cause the sale of these
shares to provide the cash to Commerce; and
Whereas, EAM is willing to accommodate Commerce by lending the EAM
Commerce common shares to Commerce, providing that such shares are
replaced to EAM with restricted Commerce common shares on an on demand
basis within 30 days from the date the shares are sold or as mutually
agreed; and
Whereas, EAM recognizes that Commerce at this time does not have any
collateral to pledge to assure the return of said borrowed shares,
however, Commerce acknowledges that its Directors have authorized the
Officers of Commerce to replace such shares to EAM by issuing restricted
Commerce common shares from Commerce's authorized shares; and
Whereas, Commerce does recognize that the shares issued by Commerce
to replace the borrowed shares will be restrictive shares which EAM will
not be able to sell in the public market for a period of at least one
year, and these shares will be subject to the Securities and Exchange
Commission Rule 144 until two years have lapsed from the issue date of
such shares; and
Whereas, Commerce agrees to return the Commerce common shares loaned
to Commerce and to pay interest in advance to EAM by paying a sum
equivalent to ten percent (10%) per annum payable with Commerce's
restricted common shares. For example, for each 1,000 shares loaned to
Commerce, EAM will receive in return, one hundred (100) shares as payment
for interest plus the return of the one thousand (1,000) shares borrowed,
for a total of 1,100 Commerce restricted common shares; and
Whereas, EAM is accommodating Commerce, and EAM may continue to do
so in the future, providing that all of the Commerce common shares EAM
will transfer, sell, or pledge on behalf of Commerce will be replaced and
returned to EAM on demand, as agreed, together with the Commerce common
shares due for interest earned; and
Now, Therefore, in consideration of the mutual promises and
undertakings set forth herein, together with other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the
parties agree as follows:
<PAGE>
1. Commerce agrees to borrow and EAM agrees to loan, from time to
time, such number of free and tradeable Commerce common shares, $0.10 par
value, owned by EAM at such time and in such amounts that Commerce
determines, but in any event, not less than 25,000 common shares.
2. Commerce promises to pay to the order of EAM, no later than
thirty (30) days after the date that the funds have been collected from
the sale of the EAM shares to others the number of the Commerce common
shares borrowed from EAM from time to time or at such time as mutually
agreed. It is agreed by both parties that this is an open-ended,
on-demand promissory note and it may include any future loans of Commerce
common shares made by EAM to or on behalf of Commerce.
3. Commerce promises to pay to EAM, interest at the rate of ten
percent (10%) per annum for a minimum period of one year. The interest
for the first year will be prepaid as mutually agreed or within thirty
(30) days from the date that the funds will have been collected for the
sale of the EAM shares by Commerce issuing to EAM, its restricted common
shares; and thereafter, if all of the loaned shares are not returned,
then interest will be computed and paid monthly on the basis of a 360-day
year of twelve 30-day months. Interest due after the one-year prepayment
will be computed at a rate of fifteen percent (15%) per annum and paid
monthly on the basis of a 360-day year of twelve 30-day months. In lieu
of cash for the payment of interest, Commerce will issue to EAM shares of
Commerce's restricted common shares which shall be computed pursuant to
the following example:
Total number of shares borrowed by Commerce and sold to others 1,000
Interest rate ten percent (10%) per annum x one (1)year 10%
-----
Number of Commerce common restricted common shares payable as
the interest charge 100
-----
Total shares to be issued for each 1,000 shares borrowed by
Commerce 1,100
Any fractional difference, if any, shall be rounded off to a whole share.
If Commerce fails to make any payment due under this note within ten
(10) days after it becomes due, or upon any default (other than
non-payment) which is not cured within fifteen (15) days following the
date of mailing or hand delivery of a written notice to Commerce, EAM may
accelerate the entire principal balance of this note and declare the same
immediately due and payable upon written notice or demand. It is
understood and agreed that ten (10) day's written notice is required
prior to any acceleration due to a default in payments.
In the event any payment (including, without limitation, the entire
principal balance due upon maturity) becomes more than fifteen (15) days
past due and upon ten (10) day's written notice from EAM, Commerce shall
pay a late payment charge to EAM equal to five percent (5%) of the entire
unpaid amount (including principal and interest) and the interest rate
will be accelerated to a rate of five percent (5%) over the prime
interest rate charged by the First National Bank of Chicago, on a per
annum basis, payable monthly with Commerce restricted common shares,
until paid.
Presentment, protest, demand, and notice of dishonor are waived.
Commerce agrees to pay all costs and expenses of collection or
foreclosure, including (without limitation) reasonable attorney's fees,
not to exceed one percent (1%) of the value of the loan, except to the
extent limited or prohibited by applicable law.
Without affecting the liability of Commerce, EAM may, with written
notice, accept partial payments, release or impair any collateral
security for the payment of this note or agree not to sue any party
liable on it, without affecting the liability of any endorser, surety or
guarantor, EAM may, with notice, renew or extend the time for payment.
<PAGE>
EAM agrees to execute the attached Investment Letter Agreement in
such form as is attached to this agreement which may be modified from
time to time to conform with the U.S. Securities and Exchange
Commission's modifications, changes, etc., until such time as Commerce
will direct its Transfer Agent to issue its restricted common shares to
EAM.
Commerce agrees to return to EAM the identical number of Commerce
common shares it has borrowed.
Commerce agrees that all payments shall be made to EAM of amounts
equivalent to dividends, and distribution which EAM as owner of the
Commerce common shares are entitled to receive during the period
beginning with the transfer of said common shares by EAM and ending with
the transfer of the identical Commerce common shares returned to EAM.
Commerce agrees not to purposely reduce the risk of loss or
opportunity for gain of EAM of the Commerce common shares in the Commerce
common shares transferred.
Commerce agrees to preserve EAM's voting rights in the Commerce
common shares loaned.
Both parties agree that this is a loan of EAM's shares and not to be
construed as a sale of said shares for EAM's benefit. EAM agrees that
Commerce has the sole right in deciding the selling price of the shares
borrowed from EAM.
This agreement and note is the entire, final and complete agreement
of the parties pertaining to the subject matter hereof, and it supersedes
and replaces all written and oral agreements heretofore made or existing
by and between the parties or their representatives insofar as this
subject matter is concerned. Neither party shall be bound by any
promises, representations or agreements except as are herein expressly
set forth.
This agreement shall not be modified, revoked, released or sooner
terminated unless the parties agree to do so in writing.
This agreement and note is being delivered in and shall be governed
by and construed and enforced in accordance with the laws of the State of
Wisconsin, United States.
This agreement and note shall be binding upon and inure to the
benefit of such parties and subject to its terms, their respective
successors, heirs, assigns and legal representatives.
In Witness Whereof, the parties have executed this agreement and
Commerce has executed the promissory note contained herein on the day and
date first written above.
COMMERCE GROUP CORP.
/s/ Edward A. Machulak /s/ Edward L. Machulak
___________________________________ ____________________________________
Edward A. Machulak By: Edward L. Machulak, President
EXHIBIT 10.16
-------------
AGREEMENT
This is an Agreement made May 25, 1999, by and among Commerce Group
Corp. ("Commerce"), a Wisconsin corporation with its principal place of
business at 6001 North 91st Street, Milwaukee, Wisconsin, 53225, and The
Interactive Business Channel ("IBC"), a Delaware corporation, with its
principal place of business located at 19800 MacArthur Boulevard, #880,
Irvine, California, 92612, and Ecomm Group Inc. ("Ecomm"), a Wisconsin
corporation with its principal place of business at 6001 North 91st
Street, Milwaukee, Wisconsin, 53225.
WHEREAS, on the 27th day of January, 1999, Commerce and IBC entered
into an Agreement, to, among other things, develop Ecomm's Web Portal
site;
WHEREAS, the parties wish to modify certain provisions of that
agreement;
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Web Site Development. The IBC will continue to design, develop,
market and manage Ecomm's Web Portal site. The parties incorporate by
reference the "MyInternet.to" Ecomm Group Inc. Business Plan and
projections prepared by Matthew Marcus, and acknowledge that will be the
basic plan for the web portal going forward from this date, which plan
can be from time to time modified by the mutual agreement of the parties.
As President of Ecomm, Matthew Marcus will manage the development of
Ecomm's Web Portal site.
2. Compensation. As compensation for the services of IBC and
Matthew Marcus, Commerce agrees to transfer to IBC 500,000 Rule 144
Restricted shares of Commerce's ten cent ($0.10) par value common stock
after certain dates in accordance with the following timetable:
1 month after this agreement is signed 100,000 shares
2 months after this agreement is signed 100,000 shares
3 months after this agreement is signed 100,000 shares
4 months after this agreement is signed 100,000 shares
5 months after this agreement is signed 100,000 shares
3. January 27, 1999 Agreement. In all other respects, the January
27, 1999 Agreement will remain in effect.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed in triplicate on the day and year first above written.
COMMERCE GROUP CORP. INTERACTIVE BUSINESS CHANNEL, INC.
/s/ Edward L. Machulak /s/ Matthew Marcus
- ------------------------------ -----------------------------------
By: Edward L. Machulak By: Matthew Marcus, President
President
ECOMM GROUP INC.
/s/ Matthew Marcus
- ------------------------------
By: Matthew Marcus, President
EXHIBIT 11
----------
COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
Years Ended March 31
1999 1998 1997
____________ ___________ ___________
BASIC
- -----
Net income for primary income per
common share $ (90,266) $ 118,603 $ (5,141)
=========== =========== ==========
Weighted average number of common
shares outstanding during the
year - basic 11,165,127 10,358,132 8,136,286
=========== =========== ==========
Income (loss) per common
share - basic $ (.0081) $ .0115 $ (.0006)
=========== =========== ==========
DILUTED
_______
Net income for basic and diluted
income per common share $ (90,266) $ 118,603 $ (5,141)
=========== =========== ==========
Weighted average number of common
shares used in calculating
income per common share 11,165,127 10,358,132 8,136,286
Add incremental shares representing:
Shares issuable upon exercise of
stock options 977,400 1,327,400 1,591,360
Shares issuable upon payment of
stock loans interest and other 45,606 98,000 0
Stock rights 625,235 0 0
___________ ___________ __________
Weighted average number of shares
used in calculation of fully
diluted income per share 12,813,368 11,783,532 9,727,646
=========== =========== ==========
Fully diluted income (loss) per
common share $ (.0070) $ .0100 $ (.0005)
=========== =========== ==========
EXHIBIT 21
----------
SUBSIDIARIES AND JOINT VENTURE OF THE COMPANY
As of March 31, 1999, the Company owned a majority to one hundred percent
of the following securities of the following subsidiaries and Joint
Venture:
State (Country) Percentage of Voting
Subsidiary of Incorporation Securities Owned
- ---------- ---------------- --------------------
San Luis Estates, Inc. Colorado 100.00%
Universal Developers, Inc. Wisconsin 100.00%
Homespan Realty Co., Inc. Wisconsin 100.00%
Piccadilly Advertising Agency, Wisconsin 100.00%
Inc. now known as Ecomm
Group Inc.
San Sebastian Gold Mines, Nevada 82.50%
Inc.
Mineral San Sebastian, S.A. (El Salvador, Central 52.00%
de C.V. America)
Commerce/Sanseb Joint Venture Wisconsin (and El Salvador, 90.00%
Central America)
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
--------------------------------------------------
I hereby consent to the incorporation by reference in the March 31, 1999,
Form 10-K of Commerce Group Corp., its Joint Venture, and its
subsidiaries of my report dated May 10, 1999, which appears in
the annual report on Form 10-K for the year ended March 31, 1999.
Bruce Michael Redlin
Certified Public Accountant
/s/ Bruce Michael Redlin
Milwaukee, Wisconsin
May 10, 1999
EXHIBIT 99.1
------------
COMMERCE GROUP CORP.
6001 NORTH 91ST STREET
MILWAUKEE, WI 53225-1795
414/462-5310 . FAX 414/462/5312
Stock Symbols: CGCO (OTC BB) CMG OR CMG.BN (Boston Stock Exchange)
AND/OR COMMERCE/SANSEB JOINT VENTURE (Joint Venture)
AND/OR HOMESPAN REALTY CO., INC. (Homespan)
AND/OR PICCADILLY ADVERTISING CO., INC. (Piccadilly)
Whose name was changed as of January 27, 1999 to ECOMM GROUP INC. (Ecomm)
AND/OR SAN LUIS ESTATES, INC. (SLE)
AND/OR SAN SEBASTIAN GOLD MINES, INC. (Sanseb)
AND/OR UNIVERSAL DEVELOPERS, INC. (UDI)
ALL LOCATED AT THE SAME ADDRESS
May 10, 1999
Mrs. Sylvia Machulak
President
General Lumber & Supply Co., Inc.
6001 North 91st Street
Milwaukee, Wisconsin 53225
Dear Mrs. Machulak:
At today's Commerce Group Corp. (Commerce) Directors' meeting, the
Directors were informed about the confirmation and status letter you
requested from Commerce and its affiliates to establish and confirm the
amount due and the collateral pledged to General Lumber & Supply Co.,
Inc. (GLSCO) as of Commerce's fiscal year ended March 31, 1999. Today,
Commerce's Directors approved, ratified and confirmed the contents of
this letter and authorized me to authenticate and confirm the outstanding
obligations due to GLSCO, and to describe the collateral pledged to GLSCO
as of Commerce's fiscal year ended March 31, 1999, which are as follows:
1. Promissory Notes and Other Obligations
a. An open-ended, secured, on-demand promissory note no. 3 which
was originally issued to GLSCO on December 31, 1981 in the sum
of $16,836.37 and has been open-ended since that date and is to
include all future advances, services, charges and interest on a
monthly basis. Pursuant to Commerce's Directors' approval on
October 1, 1990, the interest rate on this note was increased to
a rate of 4% over the prime rate base established by the First
National Bank of Chicago, Chicago, Illinois. Beginning with
April 1, 1994, the interest rate is 4% over the prime rate base
established by the First National Bank of Chicago, Chicago,
Illinois, but not less than 16% per annum. The interest is
payable monthly and the total amount due to GLSCO on this
promissory note as of March 31, 1999 is $1,493,026.31.
(Schedule of Principal and Interest as of March 31, 1999,
Exhibit A) Commerce is no longer issuing monthly notes for the
payment of interest, purchases, rent, etc., but pursuant to our
understanding, Commerce is adding these liabilities or deducting
any payments to the current open-ended outstanding promissory
note(s).
<PAGE>
b. Commerce leased approximately 3,100 square feet on a
month-to-month basis for its corporate headquarter's office; the
monthly rental charge was $2,145 since October 1, 1992. As of
December 1, 1995, Commerce increased the space it rents to 4,032
square feet, and the monthly rental charge was increased to
$2,789. All other terms and conditions of the Amended October
1, 1992 Lease Agreement remain the same. (Reference is made to
Exhibit B, December 1, 1995 Amended Lease Agreement, included in
April 13, 1998 confirmation letter.) (Reference is made to
Exhibit B, Lease Agreement, included in April 12, 1993
confirmation letter.)
c. Commerce also acknowledges that it purchases on an open account
from GLSCO from time to time materials, supplies etc. that it
needs for itself or for the Joint Venture. Some of the
purchases are made through GLSCO because Commerce does not have
the credit availability from the various sellers of goods,
merchandise, etc. that is required by it or the Joint Venture.
The amount due from time to time varies. As of March 31, 1999,
the amount due on this open account is $15,590.38.
d. GLSCO from time to time has canceled part of its debt to
purchase restricted Commerce common shares at a price as sold to
third party purchasers on an arms-length transaction. There
were no such transactions consummated during this fiscal year.
e. On January 22, 1997, four-year stock options to purchase 68,000
of restricted Commerce common shares, $0.10 par value, at a
price of $3.00 per share, were issued to GLSCO based on
arms-length transactions that had taken place at that time.
2. Collateral Pledged to GLSCO
The collateral specifically pledged to GLSCO is as follows:
a. San Luis Estates, Inc. (SLE) Certificate No. 24 which is dated
December 31, 1981, consisting of 48,645 common shares, $0.50 par
value, being 50% of the total issued and outstanding shares.
SLE and Commerce agree that no additional shares of any kind
whatsoever of SLE will be issued as long as any monies are due
to GLSCO. Reference is made to Exhibit 3 included in the April
9, 1990 confirmation letter.
<PAGE>
b. A Deed of Trust dated November 3, 1983 by and between Homespan,
as party of the first part, and Ronald K. Carpenter, Esq.
(Trustee), as party of the second part, for the benefit of
Edward L. Machulak (ELM), as an individual, and not as a
Director or Officer of Commerce and GLSCO, as party of the third
part. The Deed of Trust is in favor of ELM and GLSCO and is
open-ended to secure the promissory note(s) due to ELM and GLSCO
and to further secure any future obligations that Commerce or
Homespan may incur from them. This Deed of Trust is issued to
Ronald K. Carpenter, Esq., Trustee for the benefit of ELM and
GLSCO and is a lien on the 331-acre Standing Rock Campground
located in Camdenton, Missouri. The Deed of Trust was filed for
record on November 5, 1984 in Camden County, Missouri at 1:24
p.m. in Book 122, Page 200. Reference is made to Exhibit 4
included in the April 9, 1990 confirmation letter.
c. GLSCO, ELM, the Edward L. Machulak Rollover Individual
Retirement Account (ELM RIRA) and the Sylvia Machulak Rollover
Individual Retirement Account (SM RIRA) collectively and
individually identified as the lender(s), have been assigned
on October 19, 1987, all of the rights, titles, claims, remedies
and interest in and to the mine concession granted by the
Government of El Salvador to Mineral San Sebastian, S.A. de C.V.
(Misanse) on July 23, 1987, and thereafter from time to time
amended, and which Misanse then assigned to the Joint Venture on
September 22, 1987. Commerce and the Joint Venture have the
right to assign this and any subsequent concession agreement.
Reference is made to Exhibit 5 included in the April 9, 1990
confirmation letter. Effective February 1996, the Government of
El Salvador approved an updated version of the mining law.
Therefore, Commerce applied for a mining concession applicable
to this mining law at the San Sebastian Gold Mine. The
concession is subject to compliance which has been presented to
the El Salvador Director of Mines and Hydrocarbons. Therefore,
it is clearly understood that this new concession is to become
collateral effective simultaneously upon receiving the
concession to all of the parties herein mentioned.
<PAGE>
d. An interest with ELM in filing financing statements under the
Uniform Commercial Code by an assignment and pledge of all
corporate assets, such as but not limited to the property of
Commerce, Joint Venture, SLE, and Homespan, wherever located,
now owned or hereafter acquired is as follows: all accounts,
all land contract receivables, contract rights, instruments and
chattel paper; all inventory, all jewelry and precious stones,
and all documents relating to inventory, including all goods
held for sale, lease or demonstration, to be furnished under
contracts of service, and raw materials, work in process and
materials and supplies used or consumed in the business of
Commerce, Joint Venture, SLE, and Homespan; all office
furniture, fixtures and all other equipment; all general
intangibles, all stock and securities of any kind, and all
rights, titles, and interest in the Commerce Group Corp./San
Sebastian Gold Mines, Inc. Joint Venture, and all additions and
accessions to, all spare and repair parts, special tools,
equipment and replacements for all returned or repossessed goods
the sale or lease of which gave rise to, and all proceeds and
products of the foregoing. Reference is made to the Uniform
Commercial Code filing, Exhibit 6, included in the April 9, 1990
confirmation letter and the renewed UCC-1 filing on December 17,
1996, Exhibit B, included in the April 14, 1997 confirmation
letter.
3. Cross Pledge Collateral Agreement
GLSCO, ELM, the ELM RIRA and the SM RIRA individually are entitled
to specific collateral that has been pledged to them by Commerce,
its subsidiaries, affiliates and the Joint Venture. Upon default by
Commerce, or its subsidiaries or affiliates or the Joint Venture,
GLSCO, ELM, the ELM RIRA and the SM RIRA have the first right to the
proceeds from the specific collateral pledged to each of them.
Commerce, its subsidiaries, affiliates and Joint Venture also have
cross-pledged the collateral without diminishing the rights of the
specific collateral pledged to each of the following: GLSCO, ELM,
the ELM RIRA and the SM RIRA. The purpose and the intent of the
cross pledge of collateral is to assure GLSCO, ELM, the ELM RIRA and
the SM RIRA, that each of them would be paid in full; thus, 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
GLSCO, ELM, the ELM RIRA and the SM RIRA, and then to divide this
total debt into each individual debt to establish each individual's
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 and then the
amount due to each of them would be distributed.
<PAGE>
4. Cancellation of Inter-Company Debts Upon Default
Since part of the collateral pledged to GLSCO, ELM, the ELM RIRA and
the SM RIRA is the common stock of Homespan, Ecomm, Sanseb, SLE,
Misanse, UDI and the interest in the ownership of the Joint Venture,
Commerce agreed, upon default of the payment of principal or
interest to any of the individual lender(s) mentioned herein, that
it will automatically cancel any inter-company debts owed to
Commerce by any of its wholly-owned subsidiaries or affiliates or
the Joint Venture at such time as any of the stock or Joint Venture
ownership is transferred to the collateral holders as a result of
default of any promissory note.
5. Guarantors
This agreement further confirms that Commerce and all of the
following are guarantors to the loans made by GLSCO to Commerce:
Joint Venture, Homespan, Ecomm, SLE, Sanseb and UDI. They jointly
and severally guarantee payment of the note(s) that they caused to
be issued and also agree that these note(s) may be accelerated in
accordance with the provisions contained in the agreement and/or any
collateral or mortgages securing these notes. Also, Commerce, all
of its subsidiaries and the Joint Venture agree to the cross pledge
of collateral for the benefit of GLSCO, ELM, the ELM RIRA and the SM
RIRA. Reference is made to Exhibit 7 included in the April 9, 1990
confirmation letter.
6. Omissions
Commerce believes that it has included all of its obligations,
monies due and has listed all of the collateral due to GLSCO,
however, since these transactions have taken place over a long
period of time in which changes could have taken place, it is
possible that inadvertently some item(s), particularly collateral,
could have been omitted. If that should prove to be a fact, then
Commerce, the Joint Venture, Homespan, Ecomm, SLE, Sanseb, and UDI
agree that those omissions of collateral, if any, are meant to be
included as collateral with this confirmation and agreement.
If you are in agreement with the contents of this letter, please sign
below and return one copy to Commerce.
Very truly yours,
COMMERCE GROUP CORP.
/s/ Edward A. Machulak
- ------------------------
Edward A. Machulak
Secretary
<PAGE>
The contents of this letter are agreed by the following:
COMMERCE/SANSEB JOINT VENTURE HOMESPAN REALTY COMPANY, INC.
as Guarantor (Joint Venture) as Guarantor (Homespan)
/s/ Edward L. Machulak /s/ Edward L. Machulak
_______________________________________ __________________________________
By: Edward L. Machulak, Auth. Designee By: Edward L. Machulak, President
ECOMM GROUP INC. SAN LUIS ESTATES, INC.
as Guarantor (Ecomm) as Guarantor (SLE)
/s/ Edward A. Machulak /s/ Edward L. Machulak
____________________________________ __________________________________
By: Edward A. Machulak, Secretary By: Edward L. Machulak, President
SAN SEBASTIAN GOLD MINES, INC. UNIVERSAL DEVELOPERS, INC.
as Guarantor (Sanseb) as Guarantor (UDI)
/s/ Edward L. Machulak /s/ Edward L. Machulak
____________________________________ __________________________________
By: Edward L. Machulak, President By: Edward L. Machulak, President
Accepted by:
GENERAL LUMBER & SUPPLY CO., INC.
/s/ Sylvia Machulak
____________________________________
By: Sylvia Machulak, President
Date: May 10, 1999
<PAGE>
Exhibit A to Exhibit 99.1
(Schedule of Principal and Interest as of March 31, 1999
has been purposely omitted as it only reflects
the calculations of the principal and interest.)
EXHIBIT 99.2
------------
COMMERCE GROUP CORP.
6001 NORTH 91ST STREET
MILWAUKEE, WI 53225-1795
414/462-5310 . FAX 414/462-5312
Stock Symbols: CGCO (OTC BB) . CMG OR CMG.BN (Boston Stock Exchange)
AND/OR COMMERCE/SANSEB JOINT VENTURE (Joint Venture)
AND/OR HOMESPAN REALTY CO., INC. (Homespan)
AND/OR PICCADILLY ADVERTISING CO., INC. (Piccadilly)
Whose name was changed as of January 27, 1999 to ECOMM GROUP INC. (Ecomm)
AND/OR SAN LUIS ESTATES, INC. (SLE)
AND/OR SAN SEBASTIAN GOLD MINES, INC. (Sanseb)
AND/OR UNIVERSAL DEVELOPERS, INC. (UDI)
ALL LOCATED AT THE SAME ADDRESS
May 10, 1999
Mr. Edward L. Machulak
903 West Green Tree Road
River Hills, Wisconsin 53217
Dear Mr. Machulak:
At today's Commerce Group Corp. (Commerce) Directors' meeting, the
Directors were informed about the confirmation and status letter you
requested from Commerce and its affiliates to establish and confirm the
amount due and the collateral pledged to Edward L. Machulak (ELM) as an
individual and not as a Director or Officer of Commerce or its
subsidiaries or as the authorized designee of the Joint Venture as of
Commerce's fiscal year ended March 31, 1999. Today, Commerce's Directors
approved, ratified and confirmed the contents of this letter and
authorized me to authenticate and confirm the outstanding obligations due
to ELM and the collateral pledged to ELM as of Commerce's fiscal year
ended March 31, 1999, which are as follows:
1. Promissory Notes and Other Obligations
a. An open-ended, secured, on-demand promissory note (Note) dated
October 1, 1989 in which all of the prior promissory notes were
consolidated into this single Note amounted to $490,217.19 as of
that date. All future advances and interest, not paid, are to
be added to this Note. This Note, together with cash and other
advances and interest as of March 31, 1999, amounts to
$2,568,600.38. This Note bears interest, payable monthly, at
the rate of 2% over the prime rate established from time to time
by the First National Bank of Chicago, Chicago, Illinois, but
not less than 16% per annum (Schedule of Principal and Interest
as of March 31, 1999, Exhibit A). Commerce is no longer issuing
monthly promissory notes for the payment of interest, etc., but
pursuant to our understanding, Commerce is adding these
liabilities or deducting any payments to the current open-ended
outstanding promissory note(s).
<PAGE>
b. In addition, Commerce owes ELM the sum of $1,674,015 which is
due for unpaid and accrued salaries for a period of eighteen
(18) years beginning on April 1, 1981 through March 31, 1999.
Commerce further acknowledges that ELM's monthly salary for
eighteen (18) years and nine months is as follows: eleven years
at $67,740 annually ($745,140); four years and six months at
$114,750 annually ($516,375); thirty months at $13,750
($412,500).
c. As a result of Commerce borrowing ELM's Commerce shares and
ELM's selling these shares as designee and for Commerce's
benefit, and with Commerce receiving all of the proceeds,
Commerce has agreed to pay ELM interest at the rate of prime
plus 3%, payable monthly with Commerce's restricted common
shares and based on the Commerce shares due to ELM. Interest is
also due and payable monthly with Commerce's restricted common
shares for the shares pledged by ELM as collateral to others,
all for the Company's interest and benefit. An accounting of
the Commerce common shares due and/or paid to ELM as of March
31, 1999, pursuant to a series of open-ended, on-demand loan and
promissory note agreements by and between Commerce and ELM dated
April 1, 1990, May 17, 1989, October 14, 1988 and June 20, 1988,
and for certain continuos loans and/or pledges of ELM's
securities that have taken place and continue to occur during
the fiscal year ended March 31, 1999 is as follows:
1. Share loans 20,200
2. Interest shares due on shares pledged to
two banks for an open line of credit 25,491
3. Interest shares due on shares sold for
the benefit of Commerce 1,032
------
Total Commerce common shares paid and
issued as of March 31, 1999 to ELM 46,723
======
Therefore, there were no shares due to ELM as of March 31, 1999.
d. Reference is made to four Director-approved, open-ended loan
agreements dated June 20, 1988, October 14, 1988, May 17, 1989
(Exhibits B, C and D of the April 12, 1993, confirmation letter)
and April 1, 1990 (Exhibit 2 of the April 9, 1990 confirmation
letter).
e. On October 23, 1993, in order to comply with the El Salvador
Government's minimum capital requirements, the shareholders of
Mineral San Sebastian S.A. de C.V. (Misanse) voted to increase
Misanse's capitalization from 119,500 colones to 260,000
colones. This was accomplished via a shareholders' rights
offering on the basis of purchasing one share for each share
owned with the rights expiring on December 10, 1993. According
to Misanse's by-laws, the rights not exercised would be offered
proportionately to the shareholders who did exercise their
rights.
<PAGE>
In addition to the rights offering, the shareholders authorized
the sale of 210 additional common shares to the following: ten
shares to each of the four officers/directors (40 shares), five
shares to each of the remaining six directors (30 shares), three
shares to each of the ten supplemental directors (30 shares),
(the President and the Secretary of the Company, who are
directors of Misanse, had the right and they purchased ten and
three shares respectively), and 110 shares were sold to the
Company over and above the amount of shares it was entitled to
by the rights offering so that it would retain its 52%
ownership. When the Company obtained the concession in 1987, it
agreed with the El Salvador Minister of Economy's office not to
increase its 52% ownership of Misanse. Therefore, after the
rights offering, the Company owned approximately 52%.
On the closing date of December 10, 1993 of this rights
offering, there were 264 shares that were not subscribed and
purchased. The Company would have been entitled to purchase 137
shares (264 x 52%). However, the Company had been prohibited to
purchase these shares as it would have exceeded its 52%
ownership of Misanse shares. The 137 shares were acquired by
ELM with prior approval of Commerce's directors. He acquired an
additional four shares by virtue of his proportionate ownership.
A Misanse Director-approved drawing was held to sell the
unsubscribed shares. In order to close the sales, 52 shares
were purchased by ELM which he agreed in writing to hold these
shares in escrow for a period of one year for the purpose of
providing certain El Salvador Misanse shareholders time to
obtain funds to purchase these shares at his cost. None were
purchased by the Misanse shareholders.
During June 1995, ELM personally purchased an additional 264
Misanse common shares from a Misanse shareholder in an
arms-length transaction. Therefore ELM presently owns a total
of 467 Misanse common shares or approximately 17.96% of the
total 2,600 Misanse common shares issued and outstanding.
2. Collateral Pledged to ELM
The collateral specifically pledged to ELM is as follows:
a. A Collateral Pledge Agreement dated October 14, 1981 granted to
ELM by Commerce pledging the following collateral: 2,002,037
shares of Sanseb common stock, par value $0.10 per share and
1,346 shares of Mineral San Sebastian, S.A. de C.V. common
stock, par value one hundred colones per share. The shares
pledged are as follows: the 618 shares originally owned by
Commerce, and the 618 shares plus 110 shares purchased from the
October 23, 1993 Misanse rights offering. Reference is made to
Exhibit 4 included in the April 9, 1990 confirmation letter.
<PAGE>
b. A Collateral Pledge Agreement dated February 24, 1983, by
Commerce, SLE and UDI collectively and individually, pledging
the following collateral:
300 shares of no par value common shares of Homespan (formerly
known as Trade Realty Co., Inc.), Certificate No. 7 dated
January 21, 1974, being 100% of its issued and outstanding
shares. Homespan and Commerce agree that no additional shares
of Homespan will be issued as long as there are any obligations
due to ELM; 1,800 shares of no par value (UDI) capital stock
Certificate No. 17 dated September 15, 1972, representing 100%
of the shares issued and outstanding. UDI and Commerce agree
that no additional shares of UDI will be issued as long as there
are any outstanding obligations due to ELM. Reference is made
to Exhibit 5 included in the April 9, 1990 confirmation letter.
c. Collateral Pledge Agreement dated July 13, 1983 granted to
General Lumber & Supply Co., Inc. (GLSCO) and ELM by Commerce,
SLE, and UDI, individually and collectively, pledging the
following collateral:
419,000 shares of fully paid and nonassessable shares of the par
value of $.05 each of the capital stock of International
Property Exchange, Inc., formerly known as Capital Funding &
Development Corp., Certificate 2885 dated June 30, 1983;
One voting membership certificate of San Luis Valley Irrigation
Well Owners, Inc., Membership Certificate No. 871, dated
November 27, 1979;
Certificate No. 312, Membership No. 871, consisting of .001447
units of Augmentation Plan Number One of San Luis Valley
Irrigation Well Owners, Inc. dated February 8, 1980;
100 common shares of $0.10 par value, Piccadilly (now Ecomm),
Certificate No. 1, dated July 23, 1974. Ecomm and Commerce
agree that no additional shares of Ecomm will be issued as long
as there are any outstanding obligations due to ELM. Reference
is made to Exhibit 6 included in the April 9, 1990 confirmation
letter.
<PAGE>
d. A Deed of Trust dated November 3, 1983 by and between Homespan,
as party of the first part, and Ronald K. Carpenter, Esq.
(Trustee), as party of the second part, for the benefit of ELM
and GLSCO, as party of the third part. The Deed of Trust is in
favor of ELM and GLSCO and is open-ended to secure the
promissory note(s) due to ELM and GLSCO and to further secure
any future obligations that Commerce or Homespan may incur from
them. This Deed of Trust is issued to Ronald K. Carpenter,
Esq., Trustee for the benefit of ELM and GLSCO and is a first
lien on the 331-acre Standing Rock Campground located in
Camdenton, Missouri. The Deed of Trust was recorded on November
5, 1984 in Camden County, Missouri at 1:24 p.m. in Book 122,
Page 200. Reference is made to Exhibit 7 included in the April
9, 1990 confirmation letter.
e. Two Deeds of Trust to a Colorado Public Trustee granted by SLE
to ELM are described as follows:
A Deed of Trust dated March 20, 1984, consisting of four lots in
the San Luis North Estates Subdivision, Costilla, Colorado, and
recorded at 9:01 a.m. on August 2, 1984, in Book 238, Page 600,
Reception No. 157128;
A Deed of Trust dated October 4, 1982, consisting of six parcels
of land in the San Luis North Estates Subdivision, Costilla,
Colorado, and recorded at 8:40 a.m. on October 6, 1982, in Book
228, Pages 300-301, Reception No. 148981. Reference is made to
Exhibit 8 included in the April 9, 1990 confirmation letter.
f. GLSCO, ELM, the Edward L. Machulak Rollover Individual
Retirement Account (ELM RIRA) and the Sylvia Machulak Rollover
Individual Retirement Account (SM RIRA) collectively and
individually identified as the lender(s), have been assigned on
October 19, 1987, all of the rights, titles, claims, remedies
and interest in the Joint Venture, and to the mine concession
granted by the Government of El Salvador to Misanse on July 23,
1987, and thereafter from time to time amended, and which
Misanse then assigned to the Joint Venture on September 22,
1987. Commerce and the Joint Venture have the right to assign
this and any subsequent concession agreement. Reference is made
to Exhibit 9 included in the April 9, 1990 confirmation letter.
Effective February 1996, the Government of El Salvador approved
an updated version of the mining law. Therefore, Commerce
applied for a mining concession applicable to this mining law at
the San Sebastian Gold Mine. The concession is subject to
compliance which has been presented to the El Salvador Director
of Mines and Hydrocarbons. Therefore, it is clearly understood
that this concession is to become collateral effective
simultaneously upon receiving the concession to all of the
parties herein mentioned.
<PAGE>
g. An interest with GLSCO in filing financing statements under the
Uniform Commercial Code by an assignment and pledge of all
corporate assets, such as but not limited to the property of
Commerce, Joint Venture, SLE, and Homespan, wherever located,
now owned or hereafter acquired is as follows: all accounts,
all land contract receivables, contract rights, instruments and
chattel paper; all inventory, all jewelry and precious stones,
and all documents relating to inventory, including all goods
held for sale, lease or demonstration, to be furnished under
contracts of service, and raw materials, work in process and
materials and supplies used or consumed in the business of
Commerce, Commerce/Sanseb Joint Venture, SLE, and Homespan; all
office furniture, fixtures and all other equipment; all general
intangibles, all stock and securities of any kind, and all
rights, titles and interest in the Commerce Group Corp./San
Sebastian Gold Mines, Inc. Joint Venture, and all additions and
accessions to, all spare and repair parts, special tools,
equipment and replacements for all returned or repossessed goods
the sale or lease of which gave rise to, and all proceeds and
products of the foregoing. Reference is made to the Uniform
Commercial Code filing, Exhibit 10, included in the April 9,
1990 confirmation letter and the renewed UCC-1 filing on
December 17, 1996, Exhibit B, included in the April 14, 1997
confirmation letter.
h. Commerce and Sanseb agree that ELM has as collateral, the
assignment and pledge of all of their rights, titles, claims,
remedies, and interest whatsoever in the Joint Venture which was
formed on September 22, 1987. In the event of default, whatever
interest Commerce and Sanseb have in the Joint Venture will be
transferred to ELM and it will include whatever assets are owned
by the Joint Venture. Reference is made to Exhibit C included in
the April 8, 1991 confirmation letter.
3. Cross Pledge Collateral Agreement
GLSCO, ELM, the ELM RIRA and the SM RIRA individually are entitled
to specific collateral that has been pledged to them by Commerce,
its subsidiaries, affiliates and the Joint Venture. Upon default by
Commerce, or its subsidiaries or affiliates or the Joint Venture,
GLSCO, ELM, the ELM RIRA and the SM RIRA have the first right to the
proceeds from the specific collateral pledged to each of them.
Commerce, its subsidiaries, 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: GLSCO,
ELM, the ELM RIRA and the SM RIRA. The purpose and the intent of
the cross pledge of collateral is to assure GLSCO, ELM, the ELM RIRA
and the SM RIRA, that each of them would be paid in full; thus, 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
GLSCO, ELM, the ELM RIRA and the SM RIRA, and then to divide this
total debt into each individual debt to establish each individual's
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 and then the
amount due to each of them would be distributed.
<PAGE>
4. Bonus
On February 16, 1987, by a Consent Resolution of all of the
Directors, ELM was awarded as a bonus compensation, the following:
for a period of 20 years, commencing the first day of the month
following the month in which Commerce begins to produce gold from
its El Salvadoran gold mining operations, Commerce will pay annually
to ELM, 2% of the pre-tax profits earned from these operations.
Reference is made to Exhibit 11 included in the April 9, 1990
confirmation letter.
5. Cancellation of Inter-Company Debts Upon Default
Since part of the collateral pledged to GLSCO, ELM, the ELM RIRA and
the SM RIRA is the common stock of Homespan, Ecomm, Sanseb, SLE,
Misanse, UDI and the interest in the ownership of the Joint Venture,
Commerce agreed, upon default of the payment of principal or
interest to any of the individual lender(s) mentioned herein, that
it will automatically cancel any inter-company debts owed to
Commerce by any of its wholly-owned subsidiaries or affiliates or
the Joint Venture at such time as any of the stock or Joint Venture
ownership is transferred to the collateral holders as a result of
default of any promissory note.
6. Guarantors
This agreement further confirms that Commerce and all of the
following are guarantors to the loans made by ELM to Commerce:
Joint Venture, Homespan, Ecomm, SLE, Sanseb and UDI. They jointly
and severally guarantee payment of the note(s) that were issued to
ELM and also agree that these note(s) may be accelerated in
accordance with the provisions contained in the agreement and/or any
collateral or mortgages securing these notes. Also, Commerce, all
of its subsidiaries and the Joint Venture agree to the cross pledge
of collateral for the benefit of GLSCO, ELM, the ELM RIRA and the SM
RIRA. Reference is made to Exhibit 12 included in the April 9, 1990
confirmation letter.
7. Omissions
Commerce believes that it has included all of its obligations,
monies due and has listed all of the collateral due to ELM, however,
since these transactions have taken place over a long period of
time in which changes could have taken place, it is possible that
inadvertently some item(s), particularly collateral, could have been
omitted. If that should prove to be a fact, then Commerce, the
Joint Venture, Homespan, Ecomm, SLE, Sanseb, and UDI agree that
those omissions of collateral, if any, are meant to be included as
collateral with this confirmation and agreement.
<PAGE>
8. Real Estate Ownership Adjacent to San Sebastian Gold Mine, Inc.
(SSGM)
Commerce acknowledges that ELM personally owns the real estate
adjacent to and bordering the north boundary line of the SSGM
located in the Republic of El Salvador, Central America, and that
Comseb is performing certain exploration and exploitation on this
property. These costs are to be payable by an offset to the amounts
due to ELM. (Reference is made to Exhibit B, "Concesion de
Exploracio El Paraiso" - plat map that identifies the ELM (Macay)
"92.13 Hectareas," in the April 13, 1998 confirmation letter).
If you are in agreement with the contents of this letter, please sign
below and return one copy to Commerce.
Very truly yours,
COMMERCE GROUP CORP.
/s/ Edward A. Machulak
- -------------------------
Edward A. Machulak
Secretary
<PAGE>
The contents of this letter are agreed by the following:
COMMERCE/SANSEB JOINT VENTURE HOMESPAN REALTY COMPANY, INC.
as Guarantor (Joint Venture) as Guarantor (Homespan)
/s/ Edward L. Machulak /s/ Edward L. Machulak
_______________________________________ __________________________________
By: Edward L. Machulak, Auth. Designee By: Edward L. Machulak, President
ECOMM GROUP INC. SAN LUIS ESTATES, INC.
as Guarantor (Ecomm) as Guarantor (SLE)
/s/ Edward A. Machulak /s/ Edward L. Machulak
____________________________________ __________________________________
By: Edward A. Machulak, Secretary By: Edward L. Machulak, President
SAN SEBASTIAN GOLD MINES, INC. UNIVERSAL DEVELOPERS, INC.
as Guarantor (Sanseb) as Guarantor (UDI)
/s/ Edward L. Machulak /s/ Edward L. Machulak
____________________________________ __________________________________
By: Edward L. Machulak, President By: Edward L. Machulak, President
Accepted by:
/s/ Edward L. Machulak
____________________________________
Edward L. Machulak, as an Individual and
not as a Director or Officer of any of the
Corporations mentioned in this letter.
Date: May 10, 1999
<PAGE>
Exhibit A to Exhibit 99.2
(Schedule of Principal and Interest as of March 31, 1999
has been purposely omitted as it only reflects
the calculations of the principal and interest.)
EXHIBIT 99.3
------------
COMMERCE GROUP CORP.
6001 NORTH 91ST STREET
MILWAUKEE, WI 53225-1795
414/462-5310 . FAX 414/462-5312
Stock Symbols: CGCO (OTC BB) . CMG OR CMG.BN (Boston Stock Exchange)
AND/OR COMMERCE/SANSEB JOINT VENTURE (Joint Venture)
AND/OR HOMESPAN REALTY CO., INC. (Homespan)
AND/OR PICCADILLY ADVERTISING CO., INC. (Piccadilly)
Whose name was changed as of January 27, 1999 to ECOMM GROUP INC. (Ecomm)
AND/OR SAN LUIS ESTATES, INC. (SLE)
AND/OR SAN SEBASTIAN GOLD MINES, INC. (Sanseb)
AND/OR UNIVERSAL DEVELOPERS, INC. (UDI)
ALL LOCATED AT THE SAME ADDRESS
May 10, 1999
Mr. Edward L. Machulak
Edward L. Machulak Rollover
Individual Retirement Account
903 West Green Tree Road
River Hills, Wisconsin 53217
Dear Mr. Machulak:
At today's Commerce Group Corp. (Commerce) Directors' meeting, the
Directors were informed about the confirmation, disclosure and status
letter you requested from Commerce and its affiliates to establish and
confirm the amount due and the collateral pledged to the Edward L.
Machulak Rollover Individual Retirement Account (ELM RIRA) as of
Commerce's fiscal year ended March 31, 1999. Today, Commerce's Directors
approved, ratified and confirmed the contents of this letter and
authorized me to authenticate and confirm the outstanding obligations due
to the ELM RIRA, and the collateral pledged to the ELM RIRA as of
Commerce's fiscal year ended March 31, 1999, which are as follows:
1. Promissory Notes and Other Obligations
The total amount of all of the open-ended, secured, on-demand
promissory notes, together with interest due to the ELM RIRA,
amounts to $550,950.83 as of March 31, 1999. These promissory
notes, since April 1, 1994, bear interest, payable monthly, at the
rate of 4% over the prime base interest rate established from time
to time by the First National Bank of Chicago, Chicago, Illinois,
but not less than 16% per annum (Schedule of Principal and Interest
as of March 31, 1999, Exhibit A).
<PAGE>
2. Collateral Pledged to the ELM RIRA
General Lumber & Supply Co., Inc. (GLSCO), Edward L. Machulak (ELM)
as an individual and not as a Director or Officer of Commerce, the
ELM RIRA and the Sylvia Machulak Rollover Individual Retirement
Account (SM RIRA) collectively and individually identified as the
lender(s), have been assigned on October 19, 1987, all of the
rights, titles, claims, remedies and interest in and to the mine
concession which was granted by the Government of El Salvador to
Mineral San Sebastian, S.A. de C.V. (Misanse) on July 23, 1987, and
thereafter from time to time amended, and which Misanse then
assigned to the Joint Venture on September 22, 1987. Commerce and
the Joint Venture have the right to assign this and any subsequent
concession agreement. Reference is made to Exhibit 2 included in
the April 9, 1990 confirmation letter. Effective February 1996, the
Government of El Salvador approved an updated version of the mining
law. Therefore, Commerce applied for a mining concession applicable
to this mining law at the San Sebastian Gold Mine. The concession
is subject to compliance which has been presented to the El Salvador
Director of Mines and Hydrocarbons. Therefore, it is clearly
understood that this concession, and all of the rights thereunder,
are to become collateral effective simultaneously upon receiving the
concession to all of the parties herein mentioned.
3. Cross Pledge Collateral Agreement
GLSCO, ELM, the ELM RIRA and the SM RIRA individually are entitled
to specific collateral that has been pledged to them by Commerce,
its subsidiaries, affiliates and the Joint Venture. Upon default by
Commerce, or its subsidiaries or affiliates or the Joint Venture,
GLSCO, ELM, the ELM RIRA and the SM RIRA have the first right to the
proceeds from the specific collateral pledged to each of them.
Commerce, its subsidiaries, 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: GLSCO,
ELM, the ELM RIRA and the SM RIRA. The purpose and the intent of
the cross pledge of collateral is to assure GLSCO, ELM, the ELM RIRA
and the SM RIRA, that each of them would be paid in full; thus, 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
GLSCO, ELM, the ELM RIRA and the SM RIRA, and then to divide this
total debt into each individual debt to establish each individual's
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 and then the
amount due to each of them would be distributed accordingly.
<PAGE>
4. Cancellation of Inter-Company Debts Upon Default
Since part of the collateral pledged to GLSCO, ELM, the ELM RIRA and
the SM RIRA is the common stock of Homespan, Ecomm, Sanseb, SLE,
Misanse, UDI and the interest in the ownership of the Joint Venture,
Commerce agreed, upon default of the payment of principal or
interest to any of the individual lender(s) mentioned herein, that
it will automatically cancel any inter-company debts owed to
Commerce by any of its wholly-owned subsidiaries or affiliates or
the Joint Venture at such time as any of the stock or Joint Venture
ownership is transferred to the collateral holders as a result of
default of any promissory note.
5. Guarantors
This agreement further confirms that Commerce and all of the
following are guarantors to the loans made by the ELM RIRA to
Commerce: Joint Venture, Homespan, Ecomm, SLE, Sanseb and UDI. They
jointly and severally guarantee payment of the note(s) that were
issued and also agree that these note(s) may be accelerated in
accordance with the provisions contained in the agreement and/or any
collateral or mortgages securing these notes. Also, Commerce, all
of its subsidiaries and the Joint Venture agree to the cross pledge
of collateral for the benefit of GLSCO, ELM, the ELM RIRA and the SM
RIRA. Reference is made to Exhibit 3 included in the April 9, 1990
confirmation letter.
6. Omissions
Commerce believes that it has included all of its obligations,
monies due and has listed all of the collateral due to the ELM RIRA,
however, since these transactions have taken place over a long
period of time in which changes could have taken place, it is
possible that inadvertently some item(s), particularly collateral,
could have been omitted. If that should prove to be a fact, then
Commerce, the Joint Venture, Homespan, Ecomm, SLE, Sanseb, and UDI
agree that those omissions of collateral, if any, are meant to be
included as collateral with this confirmation and agreement.
If you are in agreement with the contents of this letter, please sign
below and return one copy to Commerce.
Very truly yours,
COMMERCE GROUP CORP.
/s/ Edward A. Machulak
Edward A. Machulak
Secretary
<PAGE>
The contents of this letter are agreed by the following:
COMMERCE/SANSEB JOINT VENTURE HOMESPAN REALTY COMPANY, INC.
as Guarantor (Joint Venture) as Guarantor (Homespan)
/s/ Edward L. Machulak /s/ Edward L. Machulak
_______________________________________ __________________________________
By: Edward L. Machulak, Auth. Designee By: Edward L. Machulak, President
ECOMM GROUP INC. SAN LUIS ESTATES, INC.
as Guarantor (Ecomm) as Guarantor (SLE)
/s/ Edward A. Machulak /s/ Edward L. Machulak
____________________________________ ____________________________________
By: Edward A. Machulak, Secretary By: Edward L. Machulak, President
SAN SEBASTIAN GOLD MINES, INC. UNIVERSAL DEVELOPERS, INC.
as Guarantor (Sanseb) as Guarantor (UDI)
/s/ Edward L. Machulak /s/ Edward L. Machulak
____________________________________ ____________________________________
By: Edward L. Machulak, President By: Edward L. Machulak, President
Accepted by:
/s/ Edward L. Machulak
____________________________________
Edward L. Machulak Rollover Individual
Retirement Account
Date: May 10, 1999
<PAGE>
Exhibit A to Exhibit 99.3
(Schedule of Principal and Interest as of March 31, 1999
has been purposely omitted as it only reflects
the calculations of the principal and interest.)
EXHIBIT 99.4
------------
COMMERCE GROUP CORP.
6001 NORTH 91ST STREET
MILWAUKEE, WI 53225-1795
414/462-5310 . FAX 414/462-5312
Stock Symbols: CGCO (OTC BB) . CMG OR CMG.BN (Boston Stock Exchange)
AND/OR COMMERCE/SANSEB JOINT VENTURE (Joint Venture)
AND/OR HOMESPAN REALTY CO., INC. (Homespan)
AND/OR PICCADILLY ADVERTISING CO., INC. (Piccadilly)
Whose name was changed as of January 27, 1999 to ECOMM GROUP INC. (Ecomm)
AND/OR SAN LUIS ESTATES, INC. (SLE)
AND/OR SAN SEBASTIAN GOLD MINES, INC. (Sanseb)
AND/OR UNIVERSAL DEVELOPERS, INC. (UDI)
ALL LOCATED AT THE SAME ADDRESS
May 10, 1999
Mrs. Sylvia Machulak as an
Individual and for her Rollover
Individual Retirement Account
903 West Green Tree Road
River Hills, Wisconsin 53217
Dear Mrs. Machulak:
At today's Commerce Group Corp. (Commerce) Directors' meeting, the
Directors were informed about the confirmation and status letter you
requested from Commerce and its affiliates to establish and confirm the
amount due and the collateral pledged to the Sylvia Machulak Rollover
Retirement Account (SM RIRA) as of Commerce's fiscal year ended March 31,
1999. Today, Commerce's Directors approved, ratified and confirmed the
contents of this letter and authorized me to authenticate and confirm the
outstanding obligations due to the SM RIRA as of Commerce's fiscal year
ended March 31, 1999, which are as follows:
1. Promissory Notes and Other Obligations
a. A series of open-ended, secured, on-demand promissory notes
(Notes) are due to the SM RIRA. Their combined amount is
$327,675.96 as of March 31, 1999. These Notes bear interest,
payable monthly, at the rate of 3% over the prime rate
established from time to time by the First National Bank of
Chicago, Chicago, Illinois, but not less than 16% per annum.
(Schedule of Principal and Interest as of March 31, 1999,
Exhibit A)
2. Amounts Due to Sylvia Machulak as an Individual (SM)
As of September 30, 1994, a sum of $167,800 is due to Sylvia
Machulak for consulting services rendered pursuant to a Director
resolution adopted on September 16, 1994. Reference is made to
Exhibit B included in the April 5, 1996 confirmation letter. On
December 14, 1996, Commerce issued a four-year stock option to the
SM RIRA to purchase 83,000 of its restricted common shares at a
price of $3.00 per share. (Reference is made to Exhibit B in the
April 14, 1997 confirmation letter.)
<PAGE>
3. Collateral Pledged to the SM RIRA
The collateral specifically pledged to the SM RIRA is as follows:
a. A Deed of Trust executed by SLE on July 16, 1982, consisting of
12 lots located in the Town of Fort Garland, Costilla County,
Colorado, and recorded at 8:45 a.m. on May 18, 1984, in Book
237, Page 658, Reception No. 156287. Reference is made to
Exhibit 2 in the April 9, 1990 confirmation letter.
b. A Deed of Trust executed by SLE on May 27, 1983, consisting of
32 lots located in the San Luis North Estates Subdivision,
Costilla County, Colorado, and recorded at 9:30 a.m. on May 31,
1983, in Book 709, Reception No. 152520. Reference is made to
Exhibit 3 in the April 9, 1990 confirmation letter.
c. A Collateral Pledge Agreement executed by Commerce on December
31, 1981 granted to the SM RIRA by Commerce pledging 48,645 SLE
common shares, par value $0.50 a share, Certificate No. 25,
dated December 31, 1981, together with a letter agreement dated
December 31, 1981. Reference is made to Exhibit 4 in the April
9, 1990 confirmation letter.
d. General Lumber & Supply Co., Inc. (GLSCO), Edward L. Machulak
(ELM), as an individual and not as a Director or Officer of
Commerce the Edward L. Machulak Rollover Individual Retirement
Account (ELM RIRA) and the SM RIRA collectively and individually
identified as the lender(s), have been assigned on October 19,
1987, all of the rights, titles, claims, remedies and interest
in the mine concession which was granted by the Government of El
Salvador to Mineral San Sebastian, S.A. de C.V. (Misanse) on
July 23, 1987, and thereafter from time to time amended, and
which Misanse then assigned to the Joint Venture on September
22, 1987. Commerce and the Joint Venture have the right to
assign this and any subsequent concession agreement. Reference
is made to Exhibit 4(a) included in the April 9, 1990
confirmation letter. Effective February 1996, the Government of
El Salvador approved an updated version of the mining law.
Therefore, Commerce applied for a mining concession applicable
to this mining law at the San Sebastian Gold Mine. The
concession is subject to compliance which has been presented to
the El Salvador Director of Mines and Hydrocarbons. Therefore,
it is clearly understood that this concession is to become
collateral effective simultaneously upon receiving the
concession to all of the parties herein mentioned.
<PAGE>
4. Cross Pledge Collateral Agreement
GLSCO, ELM, the ELM RIRA and the SM RIRA individually are entitled
to specific collateral that has been pledged to them by Commerce,
its subsidiaries, affiliates and the Joint Venture. Upon default by
Commerce, or its subsidiaries or affiliates or the Joint Venture,
GLSCO, ELM, the ELM RIRA and the SM RIRA have the first right to the
proceeds from the specific collateral pledged to each of them.
Commerce, its subsidiaries, 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: GLSCO,
ELM, the ELM RIRA and the SM RIRA. The purpose and the intent of
the cross pledge of collateral is to assure GLSCO, ELM, the ELM RIRA
and the SM RIRA, that each of them would be paid in full; thus, 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
GLSCO, ELM, the ELM RIRA and the SM RIRA, and then to divide this
total debt into each individual debt to establish each individual's
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 and then the
amount due to each of them would be distributed accordingly.
5. Cancellation of Inter-Company Debts Upon Default
Since part of the collateral pledged to GLSCO, ELM, the ELM RIRA and
the SM RIRA is the common stock of Homespan, Ecomm, Sanseb, SLE,
Misanse, UDI and the interest in the ownership of the Joint Venture,
Commerce agreed, upon default of the payment of principal or
interest to any of the individual lender(s) mentioned herein, that
it will automatically cancel any inter-company debts owed to
Commerce by any of its wholly-owned subsidiaries or affiliates or
the Joint Venture at such time as any of the stock or Joint Venture
ownership is transferred to the collateral holders as a result of
default of any promissory note.
<PAGE>
6. Guarantors
This agreement further confirms that Commerce and all of the
following are guarantors to the loans made by the SM RIRA to
Commerce: Joint Venture, Homespan, Ecomm, SLE, Sanseb and UDI. They
jointly and severally guarantee payment of the note(s) that they
issued and also agree that these note(s) may be accelerated in
accordance with the provisions contained in the agreement and/or any
collateral or mortgages securing these notes. Also, Commerce, all
of its subsidiaries and the Joint Venture agree to the cross pledge
of collateral for the benefit of GLSCO, ELM, the ELM RIRA and the SM
RIRA. Reference is made to Exhibit 5 included in the April 9, 1990
confirmation letter.
7. Omissions
Commerce believes that it has included all of its obligations,
monies due and has listed all of the collateral due to the SM RIRA,
however, since these transactions have taken place over a long
period of time in which changes could have taken place, it is
possible that inadvertently some item(s), particularly collateral,
could have been omitted. If that should prove to be a fact, then
Commerce, the Joint Venture, Homespan, Ecomm, SLE, Sanseb, and UDI
agree that those omissions of collateral, if any, are meant to be
included as collateral with this confirmation and agreement.
If you are in agreement with the contents of this letter, please sign
below and return one copy to Commerce.
Very truly yours,
COMMERCE GROUP CORP.
/s/ Edward A. Machulak
Edward A. Machulak
Secretary
<PAGE>
The contents of this letter are agreed by the following:
COMMERCE/SANSEB JOINT VENTURE HOMESPAN REALTY COMPANY, INC.
as Guarantor (Joint Venture) as Guarantor (Homespan)
/s/ Edward L. Machulak /s/ Edward L. Machulak
_______________________________________ __________________________________
By: Edward L. Machulak, Auth. Designee By: Edward L. Machulak, President
ECOMM GROUP INC. SAN LUIS ESTATES, INC.
as Guarantor (Ecomm) as Guarantor (SLE)
/s/ Edward A. Machulak /s/ Edward L. Machulak
____________________________________ __________________________________
By: Edward A. Machulak, Secretary By: Edward L. Machulak, President
SAN SEBASTIAN GOLD MINES, INC. UNIVERSAL DEVELOPERS, INC.
as Guarantor (Sanseb) as Guarantor (UDI)
/s/ Edward L. Machulak /s/ Edward L. Machulak
____________________________________ __________________________________
By: Edward L. Machulak, President By: Edward L. Machulak, President
Accepted by: Accepted by:
/s/ Sylvia Machulak /s/ Sylvia Machulak
____________________________________ __________________________________
Sylvia Machulak Rollover Individual Sylvia Machulak as an individual
Retirement Account Date: May 10, 1999
Date: May 10, 1999
<PAGE>
Exhibit A to Exhibit 99.4
(Schedule of Principal and Interest as of March 31, 1999
has been purposely omitted as it only reflects
the calculations of the principal and interest.)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998 MAR-31-1997
<PERIOD-END> MAR-31-1999 MAR-31-1998 MAR-31-1997
<CASH> 61,821 61,287 796,106<F1>
<SECURITIES> 0 0 0<F1>
<RECEIVABLES> 594,628<F2> 690,265<F2> 532,801<F1>
<ALLOWANCES> 0 0 0<F1>
<INVENTORY> 1,336,258<F3> 1,385,136<F3> 1,371,086<F1>
<CURRENT-ASSETS> 0 0 0<F1>
<PP&E> 27,359,758 24,839,761 20,469,128<F1>
<DEPRECIATION> (1,765,664) (1,176,798) 0<F1>
<TOTAL-ASSETS> 27,586,801 25,799,651 23,169,121<F1>
<CURRENT-LIABILITIES> 8,911,087<F4> 7,405,772<F4> 6,174,195<F1>
<BONDS> 0 0 0<F1>
0 0 0<F1>
0 0 1,515,000<F1>
<COMMON> 18,675,714<F5> 18,393,879<F5> 15,479,926<F1>
<OTHER-SE> 0 0 0<F1>
<TOTAL-LIABILITY-AND-EQUITY> 27,586,801 25,799,651 23,169,121
<SALES> 0 0 0<F1>
<TOTAL-REVENUES> 1,061,439<F6> 1,411,881<F6> 62,841<F6>
<CGS> 0 0 0
<TOTAL-COSTS> (1,151,705) (1,293,278) (67,982)
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> (90,266) 118,603 (5,141)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (90,266) 118,603 (5,141)
<EPS-BASIC> (.01)<F7> .01<F7> (.00)<F7>
<EPS-DILUTED> (.01)<F7> .01<F7> (.00)<F7>
<FN>
<F1>Balance sheet not required, but included.
<F2>Includes investments, accounts receivable, prepaid assets and deposits.
<F3>Includes gold in process, consumables, including reagents and real estate held
for sale.
<F4>Most liabilities are due to related parties and since only nominal payments
were made, these debts could be construed to be long-term obligations.
<F5>Includes common stock par value, capital in excess of par value, and retained
earnings.
<F6>Includes all income and revenues.
<F7>EPS - used term basic instead of primary.
</FN>
</TABLE>
