EXHIBIT 99.1
COMMERCE GROUP CORP.
6001 NORTH 91ST ST.
MILWAUKEE, WI 53225-1795
414-462-5310 . FAX 414-462-5312
E-MAIL info@commercegroupcorp.com
WEBSITE www.commercegroupcorp.com
AND/OR COMMERCE/SANSEB JOINT VENTURE (Joint Venture)
AND/OR HOMESPAN REALTY CO., INC. (Homespan)
AND/OR 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, 2004
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, disclosure and status letter you requested
from Commerce and its affiliates to establish and confirm the amount due and the
collateral pledged along with any other Commerce obligations or agreements made
to General Lumber & Supply Co., Inc. (GLSCO and/or Lender) as of Commerce's
fiscal year ended March 31, 2004. Today, Commerce's Directors, by unanimous
consent, approved, ratified and confirmed the contents of this letter and
authorized me to submit its understanding of your status, which is 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, (now Bank One), 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, 2004 is $1,262,389.80.
(Schedule of Principal and Interest as of March 31, 2004,
Exhibit A)
Mrs. Sylvia Machulak
President
General Lumber & Supply Co., Inc.
May 10, 2004
Page 2 of 10 Pages
Commerce is no longer issuing monthly promissory notes for the payment
of interest, purchases, rent, etc., but pursuant to our mutual
understanding, Commerce is augmenting all additions and advances made
by GLSCO, and it will deduct any payments or credits made by Commerce
to the current open-ended, secured, on-demand, outstanding promissory
note(s) issued or obligations owed to GLSCO.
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, 2004,
nothing is due on this open account.
d. GLSCO from time to time has canceled part of its debt by the purchase
of restricted Commerce common shares based on a price determined by the
Directors or at a price sold to third party purchasers at an
arms-length transaction. The transactions consummated during this
fiscal year are as follows:
On June 24, 2003, GLSCO exercised its three-year option dated June 30,
2001 to purchase from Commerce 250,000 of Commerce's restricted common
shares, $.10 par value, at a unit price of $.25 per share, for a total
of $37,500.00. The payment for these shares was made by reducing the
outstanding promissory note balance due to GLSCO from Commerce.
Mrs. Sylvia Machulak
President
General Lumber & Supply Co., Inc.
May 10, 2004
Page 3 of 10 Pages
On December 17, 2003, GLSCO purchased from Commerce, 463,600 of
Commerce's restricted common shares, $.10 par value, at a unit price of
$.25 a share, for a total of $115,900. The share price was established
by using the negotiated price established with arms-length unrelated
third parties who made purchases at that time. The payment for these
shares was made by reducing the outstanding promissory note balance due
to GLSCO from Commerce.
In order to provide continuity and to make an orderly transition of the
Standing Rock Campground (SRC) operations, the parties agreed that
Commerce would operate the SRC until such time that GLSCO would
terminate this agreement.
Commerce retained the profits earned from the SRC operations and the
following describes the amount due to GLSCO:
03/31/02 03/31/03 03/31/04
-------- -------- --------
Revenues $73,364.97 $68,304.07 $58,548.87
Expenses 40,202.17 41,009.24 37,956.32
---------- ---------- ----------
Profit $33,162.80 $27,294.83 $20,592.55
Therefore, as of March 31, 2003, Commerce acknowledged that it owed
GLSCO the sum of $60,457.63 plus accumulated interest in the sum of
$11,918.31, for a total of $72,375.94. This accounts payable was
converted to notes payable due to GLSCO on April 1, 2003.
e. On April 1, 2004, the accounts payable amount due ($20,592.55) by
Commerce to GLSCO was transferred to the notes payable due to GLSCO.
2. Collateral Pledged
The collateral specifically pledged to GLSCO or as otherwise noted 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.
Mrs. Sylvia Machulak
President
General Lumber & Supply Co., Inc.
May 10, 2004
Page 4 of 10 Pages
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. See item 1(d) contained herein.
Reference is made to Exhibit 4 included in the April 9, 1990
confirmation letter. On August 14, 2000, with Directors'
approval, SRC, via an agreement, was conveyed to GLSCO in
consideration of a partial debt cancellation of $1,249,050 debt
owed to GLSCO and for other consideration contained in said
agreement.
c. Uniform Commercial Code Filing - all other specific assets
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 Wisconsin Department of Financial
Institutions Uniform Commercial Code filing, Exhibit 6, included in the
April 9, 1990 confirmation letter, the renewed UCC-1 filing on December
23, 1996, Exhibit B, included in the April 14, 1997 confirmation
letter, and the
Mrs. Sylvia Machulak
President
General Lumber & Supply Co., Inc.
May 10, 2004
Page 5 of 10 Pages
UCC-4 continuation filing on June 27, 2001 at 8:55 a.m., Filing
#02078155, Exhibit B, included in the May 13, 2002 confirmation letter.
d. Acknowledgement of previously recorded collateral provided to
the Lenders
Historical information - San Sebastian Gold Mine Concession
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
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. This collateral
specifically includes all of the San Sebastian Gold Mine (SSGM)
precious metal ore reserves. 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.
The following collateral has been previously assigned to the Lenders
pursuant to resolutions adopted by the Directors:
(1) Commerce/Sanseb Joint Venture (Joint Venture)
Both Commerce and San Sebastian Gold Mines, Inc. have
assigned all of the rights, title, claims, remedies and
interest that each has in the Joint Venture to the Lenders.
Reference is made to Historical information - San Sebastian
Gold Mine Concession.
(2) New SSGM Exploration Concession/License (New SSGM) approximately
40.7694 square kilometers (10,070 acres)
On October 20, 2002, the Company applied for the New SSGM, which
covers an area of 42 square kilometers and includes approximately
1.2306 square kilometers of the Renewed SSGM. The New SSGM is in
the jurisdiction of the City of Santa Rosa de Lima in the
Department of La Union and in the Nueva Esparta in the Department
of Morazan, Republic of El Salvador, Central America. On February
24, 2003, the El Salvador
Mrs. Sylvia Machulak
President
General Lumber & Supply Co., Inc.
May 10, 2004
Page 6 of 10 Pages
Department of Hydrocarbons and Mines (DHM) issued the New SSGM for
a period of four years starting from the date following the
notification of this resolution which was received on March 3,
2003. The New SSGM may be extended for two two-year periods, or for
a total of eight years. Besides the San Sebastian Gold Mine, three
other formerly operative gold and silver mines known as the La Lola
Mine, the Santa Lucia Mine, and the Tabanco Mine are included in
the New SSGM and are being explored. The Company has complied as
required by filing its annual activity report and it paid the
annual surface tax. This concession had been assigned collectively
to all of the Lenders named herein on May 12, 2003 and the
assignment was included in the May 12, 2003 confirmation agreement
as Exhibit B.
(3) Lease agreement by and between Mineral San Sebastian
Sociedad Anomina de Capital Variable (Misanse) and Commerce
dated January 14, 2003
The term of this lease agreement coincides with the term of the
Renewed San Sebastian Gold Mine Exploitation Concession and
consists of 1,470 acres owned by Misanse. This lease agreement has
been assigned to all of the Lenders named herein on May 12, 2003
and the assignment was included in the May 12, 2003 confirmation
agreement as Exhibit B.
e. Acknowledgment of collateral provided during the current fiscal
year March 31, 2004
Commerce's Directors have on May 10, 2004 authorized and directed
Commerce's Officers to assign all of the rights, titles, claims,
remedies and interest it has to GLSCO, ELM, the ELM RIRA, the SM RIRA
and SM, collectively and individually referred to as Lenders, as
collateral for all of the outstanding loans and obligations as of March
31, 2004, including all future advances of any kind as follows:
(1) Renewed San Sebastian Gold Mine Exploitation Concession/License
(Renewed SSGM) - approximately 1.2306 square kilometers (304
acres), Department of La Union, El Salvador, Central America
(pledged and assigned as collateral on May 10, 2004)
On September 6, 2002, at a meeting held with the El Salvadoran
Minister of Economy and the DHM, it was agreed to submit an
application for the Renewed SSGM for a 30-year term and to
simultaneously cancel the
Mrs. Sylvia Machulak
President
General Lumber & Supply Co., Inc.
May 10, 2004
Page 7 of 10 Pages
concession obtained on July 23, 1987. On September 26, 2002, the
Company filed this application. On February 28, 2003 (received
March 3, 2003) the DHM admitted to the receipt of the application
and the Company proceeded to file public notices as required by
Article 40 of the El Salvadoran Mining Law and its Reform (MLIR).
On April 16, 2003, the Company's El Salvadoran legal counsel filed
with the DHM notice that it believed that it complied with the
requirements of Article 40, and that there were no objections; and
requested that the DHM make its inspection as required by MLIR
Article 42. The Company then provided a bond which was required by
the DHM to protect third parties against any damage caused from the
mining operations, and it simultaneously paid the annual surface t
ax. On August 29, 2003 the Office of the Ministry of Economy
formally presented the Company with the twenty-year Renewed SSGM
which was dated August 18, 2003. This Renewed SSGM replaces the
collateral that the same parties held with the previous concession.
A copy of the assignment dated May 10, 2004, is attached to this
document (Exhibit B) and the Renewed SSGM agreement is attached to
it and referred to as Exhibit 1.
(2) San Cristobal Mill and Plant (SCMP) three-year lease by and between
Commerce and Corporacion Salvadorena de Inversiones (Corsain), an
El Salvadoran governmental agency, executed on Monday, April 26,
2004, retroactive to November 13, 2003. Pledged and assigned as
collateral on May 10, 2004.
The renewed three-year SCMP lease for the property located near the
City of El Divisadero was finalized and executed on Monday, April
26, 2004, and is retroactive to November 13, 2003. This May 10,
2004 assignment is included in Exhibit B and the lease agreement is
attached to it and referred to as Exhibit 2.
3. Cross Pledge Collateral Agreement
GLSCO, ELM, the ELM RIRA and the SM RIRA and SM 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, then GLSCO, ELM,
the ELM RIRA, the SM RIRA and SM 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
Mrs. Sylvia Machulak
President
General Lumber & Supply Co., Inc.
May 10, 2004
Page 8 of 10 Pages
the following: GLSCO, ELM, the ELM RIRA, the SM RIRA and SM. The purpose
and the intent of the cross pledge of collateral is to assure GLSCO, ELM,
the ELM RIRA, the SM RIRA and SM, 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,
the SM RIRA, and SM, 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.
4. Cancellation of Inter-Company Debts Upon Default
Since certain of the collateral specifically or collectively pledged to
GLSCO, ELM, the ELM RIRA, the SM RIRA and SM consists of 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 obligations due to GLSCO and 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, the SM RIRA, and SM. Reference
is made to Exhibit 7 included in the April 9, 1990 confirmation letter.
6. Re-Execution Agreement(s)
In the event GLSCO deems that it is necessary or advisable for GLSCO to
have Commerce re-execute any document(s) entered into, including, but not
limited to the
Mrs. Sylvia Machulak
President
General Lumber & Supply Co., Inc.
May 10, 2004
Page 9 of 10 Pages
promissory note(s) or collateral agreement(s), Commerce will re-execute
such document(s) reasonably required by GLSCO. Commerce also acknowledges
that Commerce may be liable to pay certain costs related to any of the
transactions entered into with GLSCO. If at a later date GLSCO determines
that an error has been made in the payment of such costs to GLSCO, then
GLSCO may demand payment and Commerce does hereby agree to make such
payment forthwith. All requests for corrections of any errors and/or
payment of costs shall be complied with by Commerce within seven (7) days
of GLSCO's written request. The failure of Commerce to comply with
Commerce's obligation(s) hereunder shall constitute a default and shall
entitle GLSCO to the remedies available for default under any provisions of
the agreements including, but not limited t o the promissory note(s) and/or
the collateral pledge agreement(s) and/or any other Commerce obligation(s).
7. 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 under this confirmation 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
Mrs. Sylvia Machulak
President
General Lumber & Supply Co., Inc.
May 10, 2004
Page 10 of 10 Pages
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, By: Edward L. Machulak,
Auth. Designee 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, By: Edward L. Machulak,
President 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, By: Edward L. Machulak,
President President
Accepted by:
GENERAL LUMBER & SUPPLY CO., INC.
/s/ Sylvia Machulak
- ---------------------------------
By: Sylvia Machulak, President
Date: May 10, 2004
EXHIBIT A TO EXHIBIT 99.1
(Schedule of Principal and Interest as of March 31, 2004
has been purposely omitted as it only reflects
the calculations of the principal and interest.)
EXHIBIT B
Assignment
For and in consideration of the sum of One Dollar ($1.00) and other good
and valuable consideration such as, but not limited to, the continuance of
extending the open-ended, secured, on-demand promissory note(s) issued by
Commerce Group Corp. (Commerce), a Wisconsin corporation located at 6001 North
91st Street, Milwaukee, Wisconsin 53225, in hand paid, the receipt of which is
hereby acknowledged, Commerce does hereby sell, assign and transfer to General
Lumber & Supply Co., Inc., a Wisconsin corporation, Edward L. Machulak, as an
individual and not as a Director or Officer of Commerce, the Edward L. Machulak
Rollover Individual Retirement Account, the Sylvia Machulak Rollover Individual
Retirement Account, and Sylvia Machulak, as an individual, and their heirs,
successors and assigns, all who reside in the County of Milwaukee, State of
Wisconsin, United States of America, individually and collectively referred to
as "Lenders," all of Commerce's rights, titles, claims, remedies, a nd interests
whatsoever in and to the Renewed San Sebastian Gold Mine Exploitation Concession
consisting of 1.2306 kilometers located on the Hacienda San Sebastian and San
Sebastian El Coyolar under the jurisdiction of Santa Rosa de Lima, Department of
La Union, Republic of El Salvador, Central America, identified on the
cartographic sheet number 2656-IV pursuant to Agreement No. 741 dated August 18,
2003 (delivered on August 29, 2003) granted by the El Salvador Minister of
Economy of the Republic of El Salvador, Central America for a period of twenty
years commencing from the date of publication in the El Salvador Federal
Register (Diario Oficial) and more fully described in the attached
Spanish/English document made an integral part of this Assignment (Exhibit 1).
In addition, this Assignment includes all of Commerce's rights, title,
claims, remedies and interests whatsoever of a three-year lease agreement
entered into on the 26th day of April, 2004, retroactive to November 13, 2003,
by and between Corporacion Salvadorena de Inversiones (Corsain) and Commerce
Group Corp., more fully described in the attached copy of the lease made an
integral part of this Assignment (Exhibit 2).
Said claims, rights, title and interest are pledged, sold, assigned and
transferred to the Lenders as collateral security for loans made and for loans
to be made by the Lenders to Commerce and also as collateral security for any
and all liabilities, direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising from Commerce to the Lenders.
Commerce further acknowledged that Commerce's Directors unanimously adopted
this Assignment by a resolution on May 10, 2004, and that the purpose of this
Assignment is to provide collateral to the above-described Lenders.
This Assignment shall extend to the full term remaining on the above
concession and license or lease and in any amendments, renewals, changes or
extensions thereof.
In Witness Whereof, Commerce has caused this instrument to be signed,
sealed and delivered by its proper officers thereunto duly authorized this 10th
day of May 2004.
ATTEST:
COMMERCE GROUP CORP. COMMERCE GROUP CORP.
/s/ Edward L. Machulak /s/ Edward A. Machulak
- ----------------------------- -------------------------------
Edward L. Machulak, President Edward A. Machulak, Secretary
State of Wisconsin )
) ss.
County of Milwaukee )
On this 10th day of May, 2004, before me, personally appeared Edward L.
Machulak, President and Edward A. Machulak, Secretary of Commerce Group Corp.,
to me known to be the persons described in, and who executed the foregoing
instrument, and acknowledged that they executed the same as their free act and
deed.
/s/ Sylvia Machulak
-----------------------------------
Sylvia Machulak
Notary Public, Milwaukee County, WI
My commission expires June 11, 2006
[Note: Exhibit 1 of Exhibit B is incorporated by reference to Exhibit
10.17 of the Company's S.E.C. Form 10-Q for the quarterly period ended
September 30, 2003 and Exhibit 2 of Exhibit B is incorporated by
reference to Exhibit 10.15 of the Company's S.E.C. Form 10-K for the
fiscal year ended March 31, 2004.]