EXHIBIT 99.2
COMMERCE GROUP CORP.
6001 NORTH 91ST ST.
MILWAUKEE, WI 53225-1795
414-462-5310 . fax 414-462-5310
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 8, 2006
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 annual confirmation, disclosure and status letter that
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 Edward L. Machulak (ELM and/or Lender) 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, 2006. 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 with Commerce, which is 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 added to this Note, and
payments to ELM reduce the amount owed. This Note, together with cash
and other advances and interest as of March 31, 2006, amounts to
$9,698,412.44. Commerce has renewed this promissory note as of March
31, 2006 and a copy is attached (Exhibit A). A schedule including all
of the transactions pertaining to the activities relating to this Note
during the fiscal year ended March 31, 2006 is also attached (Exhibit
A-1). 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, (then Bank One; now the
prime rate published in the Wall Street Journal), but not less than
16% per annum. Commerce is no longer issuing monthly notes for the
payment of interest, etc., but pursuant to our understanding, Commerce
is augmenting all additions and advances made by
Mr.Edward L. Machulak
May 8, 2006
Page 2 of 15 Pages
ELM, 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 ELM.
On May 9, 2005, Commerce's Directors authorized its Officers to issue
renewed annual note(s) (Exhibit B of the May 9, 2005 confirmation
letter) so that the Lender will have a current substituted dated debt
instrument. The Directors acknowledged that the issuance of note(s)
for each transaction are too cumbersome and are not practicable to
manage. Also, the length of time involved and the number of
transactions make it impractical to devote the time and effort to
issue a note for each transaction. Therefore, the Directors have
unanimously agreed to continue to embrace this resolution, which was
adopted on May 9, 2005:
WHEREAS, in the past 20 years or more the following
parties: General Lumber & Supply Co., Inc. (GLSCO); Edward L.
Machulak as an individual and not as a Director or Officer of
Commerce (ELM); the Edward L. Machulak Rollover Individual Retirement
Account (ELM RIRA), the Sylvia Machulak Rollover Individual Retirement
Account (SM RIRA), and Sylvia Machulak, as a consultant and as an
individual (SM), hereafter collectively and individually identified as
the Lender(s), have accounted for advancing cash funds, earning
accrued interest, and for appropriate credit which was reconciled to
the open-ended, secured, on-demand notes(s); and
WHEREAS, the Directors desire to minimize the record keeping in
these transactions without jeopardizing, diminishing, altering,
changing or losing any rights that the Lenders have by changing the
procedures in handling the recording of any notes(s) issued or to be
issued; and
WHEREAS, in order to provide an easier accounting facility by
renewing the notes(s) on an annual basis to coincide with the
Company's fiscal year (which presently ends on March 31) and to
incorporate said renewed note(s) with the annual confirmation
agreement(s); and
WHEREAS, prior to the change to issue substituted renewed
note(s), the initial promissory note(s) were considered to be
open-ended, secured, on-demand and the additions and deductions were
recognized by separate accounting records; therefore, be it
RESOLVED, That the Directors authorize and empower the
Officers to substitute and issue renewed consolidated
promissory note(s) at the end of each fiscal year beginning
with the Company's fiscal year
Mr. Edward L. Machulak
May 8, 2006
Page 3 of 15 Pages
ended March 31, 2005 to the following: General Lumber & Supply
Co., Inc. (GLSCO); Edward L. Machulak as an individual and
not as a Director or Officer of Commerce (ELM); the Edward L.
Machulak Rollover Individual Retirement Account (ELM RIRA), the
Sylvia Machulak Rollover Individual Retirement Account (SM
RIRA), and Sylvia Machulak, as a consultant and as an
individual (SM), hereafter collectively and individually
identified as the Lender(s); and
BE IT FURTHER RESOLVED, That the Officers of the Company
are authorized and empowered to assure the Lender(s) that by
substituting and consolidating the existing note(s) and issuing
the renewed note(s) on the last day of the Company's fiscal
year beginning with March 31, 2005 with the understanding that
the intention is that the Lender(s) will not jeopardize, lose,
diminish, risk, alter or change any rights, including the
pledge of collateral, that are inherent with the initial
note(s) by the issuance of annual renewed open-ended, secured,
on-demand promissory note(s); and
BE IT FURTHER RESOLVED, That the Directors acknowledge
that the only purpose of the change and substitution to issue
annual renewed notes(s) is for the convenience, reduced
accounting and reducing the paperwork involved; and
BE IT FURTHER RESOVED, That the Officers are authorized
and empowered to perform any act that they deem necessary to
accommodate the purpose of issuing annual renewed note(s).
b. Salaries, vacation pay
In addition to the promissory note, Commerce owes ELM the following
for accrued salaries and vacation:
Period Years Annual Salary Total
------ ----- ------------- -----
April 1, 1981 - March 31, 1992 11.00 $ 67,740 $ 745,140
April 1, 1992 - Sept. 30, 1996 4.50 $114,750 516,375
Oct. 1, 1996 - March 31, 2006 9.50 $165,000 1,567,500
----- ----------
Balance 25.00 $2,829,015
Vacation Pay Months Payment
------------ ------ -------
April 1981 - March 31, 2006 25 $13,750 343,750
----------
Total Due $3,172,765
Mr. Edward L. Machulak
May 8, 2006
Page 4 of 15 Pages
At Commerce's Annual Board of Directors' Meeting held on October 19,
2001, the Directors adopted a resolution to compensate ELM for
vacation pay based on one month for each year of service beginning
on April 1, 1981, and also the following resolution, which in part
states:
"BE IT FURTHER RESOLVED, That the Directors agreed that on the
day the compensation will be paid to Edward L. Machulak, an
adjustment will be made to compensate him for the loss of the dollar
purchasing value caused by inflation and other economic factors;"
c. ELM Bonus agreement
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.
d. Share loans
To infuse funds into Commerce, Commerce from time to time borrowed
ELM's free trading common shares of Commerce and ELM sold these
shares as designee for Commerce's benefit with Commerce receiving
all of the proceeds. For these share loans, Commerce has agreed to
pay ELM interest at the rate of prime plus 3%, payable monthly with
payment by issuing Commerce's restricted common shares based on
these borrowed shares. 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 best interest and benefit. All share loans and
interest are to be paid annually on or before March 31 of each of
Commerce's fiscal years. An accounting of the Commerce common
shares due and/or paid to ELM as of March 31, 2006, pursuant to a
series of Director-approved, 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 continuous loans and/or pledges of ELM's securities
that have taken place and continued to occur during the fiscal year
ended March 31, 2006 is as follows:
Mr. Edward L. Machulak
May 8, 2006
Page 5 of 15 Pages
1. Share loans None
2. Interest shares due on shares pledged to banks
for an open line of credit None
3. Interest shares due on shares sold for the
benefit of Commerce None
Total Commerce restricted common shares paid
and issued for the fiscal period ended March
31, 2006 to ELM None
e. Open ended loan agreements
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).
f. Misanse share ownership disclosure
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.
In addition to the rights offering, the Misanse 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 after the
issuance of the shares under the rights offering. When the Company
obtained the concession in 1987, it agreed with the El Salvador
Ministry of Economy's office not to increase its 52% ownership of
Misanse. Therefore, after the rights offering, the Company owned
approximately 52%.
Mr. Edward L. Machulak
May 8, 2006
Page 6 of 15 Pages
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 in the remaining unsold shares. 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 named 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
The collateral specifically pledged to ELM or as otherwise noted 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 ($11.43) 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.
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
Mr. Edward L. Machulak
May 8, 2006
Page 7 of 15 Pages
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
Ecomm, individually and collectively, pledging the following
collateral:
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.
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. On August 14, 2000, with the
Directors' approval, this property, via an agreement, was conveyed
to GLSCO in consideration of the cancellation of $1,249,050 of debt
owed to GLSCO and for other consideration contained in the said
agreement.
Mr. Edward L. Machulak
May 8, 2006
Page 8 of 15 Pages
e. Commerce/Sanseb Joint Venture (Joint Venture)
Commerce and Sanseb agree that ELM (the other Lenders were included
later) 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, including, but not limited to
the precious metal ore reserves. Reference is made to Exhibit C
included in the April 8, 1991 confirmation letter.
f. Uniform Commercial Code Filing - all other specific assets
ELM's 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, the 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 10,
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 UCC-4 continuation filing on June
27, 2001 at 8:55 a.m., Filing #02078155 (Exhibit B of the May 13,
2002 confirmation letter).
Mr. Edward L. Machulak
May 8, 2006
Page 9 of 15 Pages
g. 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, but is not limited to, 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 9
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)
Government of El Salvador Resolution No. 27.
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 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
Mr. Edward L. Machulak
May 8, 2006
Page 10 of 15 Pages
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.
(4) 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) Government
of El Salvador Agreement No. 591.
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 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. On May
Mr. Edward L. Machulak
May 8, 2006
Page 11 of 15 Pages
20, 2004 (delivered June 4, 2004) the Government of El Salvador,
under their Agreement Number 591, extended the exploitation
concession for a period of 30 years. A copy of the assignment
dated May 10, 2004, is attached to the May 10, 2004 confirmation
letter as Exhibit B and the Renewed SSGM agreement is attached
to Exhibit B and referred to as Exhibit 1.
(5) 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 the May 10, 2004
confirmation letter as Exhibit B and the lease agreement is
attached to Exhibit B and referred to as Exhibit 2.
(6) Nueva Esparta Exploration Concession/License (Nueva Esparta) -
45 square kilometers (11,115 acres) Resolution No. 271; Pledged
and assigned as collateral on May 9, 2005
On or about October 20, 2002, the Company filed an application
with the DHM for the Nueva Esparta Exploration
Concession/License which consists of 45 square kilometers and is
located north and adjacent to the New SSGM. On May 25, 2004 the
Government of El Salvador, under their Resolution No. 271,
issued the Nueva Esparta Exploration Concession/License for a
period of four years starting from the date following the
notification of this resolution which was received on June 4,
2004. This concession/license may be extended for two two-year
periods or for a total of eight years. This rectangular area is
in the Departments of La Union (east) and Morazan (west) and in
the jurisdiction of the City of Santa Rosa de Lima, El Salvador,
Central America. Included in the Nueva Esparta are eight other
formerly operated gold and silver mines known as: the Banadero
Mine, the Carrizal Mine, the Copetillo Mine, the Grande Mine,
the La Joya Mine, the Las Pinas Mine, the Montemayor Mine, and
the Or o Mine. A copy of the assignment dated May 9, 2005 was
attached to the May 9, 2005 confirmation letter as Exhibit C and
the Nueva Esparta Exploration Concession was attached to Exhibit
C and referred to as Exhibit 1.
Mr. Edward L. Machulak
May 8, 2006
Page 12 of 15 Pages
(7) Acknowledgment of collateral provided through May 8, 2006
Commerce's Directors have on May 8, 2006 authorized and directed
Commerce's Officers to assign all of the rights, titles, claims,
remedies and interest in all of its assets that it has to GLSCO,
ELM, the ELM RIRA, the SM RIRA and SM, collectively and
individually referred to as Lenders, as additional collateral
for all of the outstanding loans and obligations as of March 31,
2006, including all future advances of any kind. Collateral
that has been provided through May 8, 2006 is:
3. Cross Pledge Collateral Agreement
GLSCO, ELM, the ELM RIRA, 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 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, 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 deduc ting 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 each party should receive from the
excess collateral. 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
Mr. Edward L. Machulak
May 8, 2006
Page 13 of 15 Pages
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 ELM and 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 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 12 included in the April 9, 1990
confirmation letter.
6. Re-Execution Agreement(s)
In the event ELM deems that it is necessary or advisable for him to have
Commerce re-execute any document(s) entered into, including, but not
limited to the promissory note(s) or collateral agreement(s), Commerce
will re-execute such document(s) reasonably required by ELM. Commerce
also acknowledges that Commerce may be liable to pay certain costs
related to any of the transactions entered into with ELM. If at a later
date ELM determines that an error has been made in the payment of such
costs to him then he 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 ELM's written request. The failure of Commerce to comply
with Commerce's obligation(s) hereunder shall constitute a default and
shall entitle ELM to the remedies available for default under any
provisions of the agreements including, but not limited to the promissory
no te(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 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 under this confirmation
agreement.
Mr. Edward L. Machulak
May 8, 2006
Page 14 of 15 Pages
8. Real Estate Ownership Adjacent to San Sebastian Gold Mine, Inc. (SSGM)
Commerce acknowledges that ELM personally owns the real estate he
purchased in January of 1988 which is 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. Commerce also agrees to sell, assign
and transfer at no cost to ELM, the exploration concession rights
included in the New SSGM Exploration Concession/License rights granted by
the GOES under Resolution No. 27 dated February 24, 2003 (delivered March
3, 2003) and the exploitation rights granted by the GOES under Agreement
No. 591 dated May 20, 2004 (delivered June 4, 2004) pertaining to this
parcel of land. (Reference is made to Exhibit B, "Concesion de
Exploracio El Paraiso" - plat map that identifies the ELM (Macay) "92.13
Hectareas," (more or less) 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
Mr. Edward L. Machulak
May 8, 2006
Page 15 of 15 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, 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, President 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 8, 2006
Exhibit A to Exhibit 99.2
RENEWED PROMISSORY NOTE
Borrower: Commerce Group Corp. Lender: Edward L. Machulak
6001 North 91st Street 903 West Green Tree Rd.
Milwaukee, WI 53225 Milwaukee, WI 53217
Principal Amount: $9,698,412.44
Initial Rate: 2.000% + prime rate, but not less than 16.000%
Date of Renewed Note: March 31, 2006
PROMISE TO PAY. COMMERCE GROUP CORP. ("Borrower") promises to pay to EDWARD
L. MACHULAK ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Nine Million Six Hundred Ninety Eight
Thousand Four Hundred Twelve and 44/100 Dollars ($9,698,412.44), together with
interest, paid monthly, on the unpaid principal balance from March 31, 2006,
until paid in full.
PAYMENT. This is an open-ended, secured, on-demand payment, renewed
promissory note. Interest is to be paid monthly. The Lender, at its
discretion, can add the monthly interest due to the principal balance. Unless
otherwise agreed or required by applicable law, payments will be applied first
to any accrued unpaid interest; and then to principal. The annual interest
rate for this Note is computed on a 365/360 basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding and the interest is payable monthly.
Borrower will pay Lender at Lender's address shown above or at such other
place as Lender may designate in writing.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in the prime rate as quoted in the Wall
Street Journal plus two percent, but not less than sixteen percent per annum.
Borrower understands that Lender may make loans to the Borrower based on other
rates as well. The prime rate as of this date is 7.750% per annum. The
interest rate to be applied to the unpaid principal balance of this Note will
be at a rate of 2.000 percentage points over the prime rate, but not less than
16.000% per annum. NOTICE: Under no circumstances will the interest rate on
this Note be less than 16.000% per annum or more than the maximum rate allowed
by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to pay on demand,
the entire amount due. Rather, any payment will reduce the principal balance
due. Borrower agrees not to send Lender payments marked "paid in full,"
"without recourse," or similar language. If Borrower sends such a payment,
Lender may accept it without losing any of Lender's rights under this Note,
and Borrower will remain obligated to pay any further amount owed to Lender.
INTEREST AFTER DEFAULT. Upon default, including failure to pay on demand,
Lender, at its option, may, if permitted under applicable law, increase the
variable interest rate on this Note to 6.000 percentage points over the prime
rate or over the 16.000% rate, whichever is higher. The interest rate will
not exceed the maximum rate permitted by applicable law.
DEFAULT. Each of the following shall constitute an event of default ("Event
of Default") under this Note:
Payment Default. Borrower fails to make any payment when demand is made
under this Note.
Other Defaults. Borrower fails to comply with or to perform any other
term, obligation, covenant or condition contained in this Note or in any
of the related documents or to comply with or to perform any term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
Default in Favor of Third Parties. Borrower or any Grantor defaults
under any loan, extension of credit, security agreement, purchase or
sales agreement, or any other agreement, in favor of any other creditor
or person that may materially affect any of Borrower's property or
Borrower's ability to repay this Note or perform Borrower's obligations
under this Note or any of the related documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf under this Note
or the related documents is false or misleading in any material respect,
either now or at the time made or furnished or becomes false or
misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against
Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower or by any
governmental agency against any collateral securing the loan. However,
this Event of Default shall not apply if there is a good faith dispute by
Borrower as to the validity or reasonableness of the claim which is the
basis of the creditor or forfeiture proceeding and if Borrower gives
Lender written notice of the creditor or forfeiture proceeding and
deposits with Lender monies or a surety bond for the creditor or
forfeiture proceeding, in an amount determined by Lender, in its sole
discretion, as being an adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness or any Guarantor
disputes the validity of, or liability under, any guaranty of the
indebtedness evidenced by this Note.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of
this Note is impaired.
Insecurity. Lender in good faith believes itself insecure.
LENDER'S RIGHTS. Upon default or upon demand, the Lender may declare the
entire unpaid principal balance on this Note and all accrued unpaid interest
immediately due, and then Borrower will pay that amount.
COLLATERAL. Borrower acknowledges this Note is secured by all security
agreements, guarantees, mortgages, and other security instruments previously
granted, contemporaneously granted, and granted in the future, and it has the
collateral and other rights all as contained in a certain confirmation
agreement dated May 10, 2004 between all parties contained therein, and as
subsequently amended and updated from time to time.
ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses, whether or not there is a
lawsuit, including attorneys' fees, expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction), and
appeals. If not prohibited by applicable law, Borrower also will pay any
court costs, in addition to all other sums provided by law.
GOVERNING LAW. This Note will be governed by, construed and enforced in
accordance with the laws of the State of Wisconsin. This Note has been
accepted by Lender in the State of Wisconsin.
OTHER LOAN AGREEMENTS. If Borrower and Lender have either previously or
contemporaneously entered into a Loan or Confirmation Agreements, it is agreed
that this Note is subject to the terms and conditions of such Loan or
Confirmation Agreements. For purpose of this provision, Loan or Confirmation
Agreements shall include, but not be limited to, a Business Loan Agreement or
any other Loan or Confirmation Agreements.
SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower,
and upon Borrower's successors and assigns, and shall inure to the benefit of
Lender and Lender's heirs, executors, administrators, successors and assigns.
GENERAL PROVISIONS. This Note benefits Lender and its successors and assigns,
and binds Borrower and Borrower's successors, assigns, and representatives.
Lender may delay or forgo enforcing any of its rights or remedies under this
Note without losing them. Borrower and any other person or corporation who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, and notice of dishonor. Upon any change in
the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that
Lender may renew or extend (repeatedly and for any length of time) this loan
or release any party or guarantor or collateral; or impair, fail to realize
upon or perfect Lender's security interest in the collateral; and take any
other action deemed necessary by Lender without the consent of or notice to an
yone. All such parties also agree that Lender may modify this loan without
the consent of or notice to anyone other than the party with whom the
modification is made. The obligations under this Note are joint and several.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE
TERMS OF THE NOTE.
BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.
BORROWER:
COMMERCE GROUP CORP.
/s/ Edward L. Machulak
______________________________________________
By: Edward L. Machulak, President
/s/ Edward A. Machulak
_____________________________________________________
By: Edward A. Machulak, Vice President and Secretary
Exhibit A-1 to Exhibit 99.2
(Schedule of all transactions pertaining
to the activities relating to Exhibit A
to Exhibit 99.2 for the fiscal year
ending March 31, 2006 has been purposely
omitted as it only reflects the calculations
of principal and interest.)