-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NI3t7zaiUCPRcvgR42EXX/Kqjfd9P/H59Exb+SU4SKWBC2AgUwRS2dQliYK9zrRl Bb2WoWMxjMBXSFnMqUYMOg== 0001140377-05-000138.txt : 20050808 0001140377-05-000138.hdr.sgml : 20050808 20050808140326 ACCESSION NUMBER: 0001140377-05-000138 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050808 DATE AS OF CHANGE: 20050808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCE GROUP CORP /WI/ CENTRAL INDEX KEY: 0000109757 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 391942961 STATE OF INCORPORATION: WI FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07375 FILM NUMBER: 051005419 BUSINESS ADDRESS: STREET 1: 6001 N 91ST ST CITY: MILWAUKEE STATE: WI ZIP: 53225-1795 BUSINESS PHONE: 4144625310 MAIL ADDRESS: STREET 1: 6001 N 91ST ST CITY: MILWAUKEE STATE: WI ZIP: 53225 10-K 1 cgi_05k.txt FORM 10K FOR MARCH 31, 2005 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, 2005 Commission File Number 1-7375 COMMERCE GROUP CORP. (Exact name of registrant as specified in its charter) WISCONSIN 39-6050862 (State or other jurisdiction (I.R.S. Employer of 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 Pink Sheets 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. [ ] Indicate by check mark whether the Registrant is an accelerated file (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The aggregate market value of the 16,735,882 shares held by nonaffiliates of the registrant based on the closing price of the OTC BB on September 30, 2004 was $1,589,909. At March 31, 2005, there were 23,823,734 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of Form 10-K is incorporated herein by reference to the registrant's definitive Proxy Statement relating to its 2005 Annual Meeting of Stockholders, which will be filed with the Commission within 120 days after the end of the registrant's fiscal year. COMMERCE GROUP CORP. 2005 FORM 10-K ANNUAL REPORT For the Fiscal Year Ended March 31, 2005 TABLE OF CONTENTS Page PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . 12 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 23 Item 4. Submission of Matters to a Vote of Security Holders. . . . 23 Item 4(a). Executive Officers and Managers of the Company . . . . . . 23 PART II Item 5. Market for the Company's Common Stock and Related Stockholders' Matters. . . . . . . . . . . . . . . . . . . 25 Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 27 Item 7(a) Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . . . . . . . . 39 Item 8. Financial Statements and Supplementary Data. . . . . . . . 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . 71 Item 9(a). Controls and Procedures. . . . . . . . . . . . . . . . . . 72 Item 9(b) Other Information. . . . . . . . . . . . . . . . . . . . . 72 PART III Item 10. Directors and Executive Officers of the Registrant . . . . 72 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . 73 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . 73 Item 13. Certain Relationships and Related Transactions . . . . . . 73 Item 14. Principal Accounting Fees and Services . . . . . . . . . . 73 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . 73 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, commodity prices, production and reserve estimates, environmental and governmental regulations, availability of financing, force majeure events, and other risk factors as described from time to time in the Company's filings with the Securities and Exchange Commission. 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. 2 PART I Item 1. Business - ----------------- Glossary of Selected Mining Terms - --------------------------------- Cut-off Grade The minimum grade of ore used to establish reserves. Dore Unrefined gold and silver bullion consisting of approximately 90% precious metals that will be further refined to almost pure metal. Development Stage A "development stage" project is one which is undergoing preparation of an established commercially mineable deposit for its extraction but which is not yet in production. This stage occurs after completion of a feasibility study. Exploration Stage An "exploration stage" prospect is one which is not in either the development or production stage. Fault A surface or zone of rock fracture along which there has been displacement. Feasibility Study An engineering study designed to define the technical, economic, and legal viability of a mining project with a high degree of reliability. Formation A distinct layer of sedimentary rock of similar composition. Grade The metal content of ore, usually expressed in troy ounces per ton. Heap Leaching A method of recovering gold or other precious metals from a heap of ore placed on an impervious pad, whereby a dilute leaching solution is allowed to percolate through the heap, dissolving the precious metal, which is subsequently captured and recovered. Mineralized Material The term "mineralized material" refers to material that is not included in the reserve as it does not meet all of the criteria for adequate demonstration for economic or legal extraction. Mining Mining is the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product. Exploration continues during the mining process and, in many cases, mineral reserves are expanded during the life of the mine operations as the exploration potential of the deposit is realized. Net Smelter Return Royalty A defined percentage of the gross revenue from a resource extraction operation, less a proportionate share or transportation, insurance, and processing costs. Outcrop That part of a geologic formation or structure that appears at the surface of the earth. 3 Probable Reserves Reserves for which quantity and grade and/or quality are computed from information similar to that used for Proven Reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for Proven Reserves, is high enough to assume continuity between points of observation. Production Stage A "production stage" project is actively engaged in the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product. Proven Reserves Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling, and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well-defined that size, shape, depth and mineral content of reserves are well established. Reclamation The process of returning land to another use after mining is completed. Recoverable That portion of metal contained in ore that can be extracted by processing. Reserves That part of a mineral deposit which could be economically and legally extracted or produced at the time of reserve determination. Run-of-Mine Mined ore of a size that can be processed without further crushing. Strip Ratio The ratio between tonnage of waste and ore in an open pit mine. Waste Barren rock or mineralized material that is too low in grade to be economically processed. 4 GENERAL - ------- Commerce Group Corp. ("Commerce," the "Company," and/or the "Registrant") is the only precious metals company that has produced gold in the past twenty years in the Republic of El Salvador, Central America. Furthermore, since 1968, Commerce has been operative in the exploration, exploitation, development, and production of precious metals in El Salvador. Its gold ore reserves in the San Sebastian Gold Mine (SSGM) exceed 1.5 million ounces. Commerce's objectives are to obtain a sufficient amount of funds to expand its San Cristobal Mill and Plant and to commence an open-pit, heap-leach operation at its SSGM to produce gold at a profit. Commerce simultaneously continues to seek a compatible acquisition, merger, other business arrangement, or an endeavor in which synergism will prevail. This combination should enhance the value of Commerce's common shares. Commerce has been a Wisconsin-chartered corporation since its merger from a State of Delaware corporation on April 1, 1999, and its corporate headquarters are based in Milwaukee, Wisconsin. It was organized in 1962 and its common shares have been publicly traded since 1968. The Company's shares have been trading on the Over the Counter Bulletin Board (OTCBB) under the Symbol CGCO.OB from May 5, 1999 through January 20, 2005. Since January 21, 2005 its shares have been trading on the Pink Sheets under the trade symbol of CGCO.PK as a result of its former auditor not being registered with the Public Company Accounting Oversight Board (PCAOB) on or before the deadline date of October 22, 2003. Since the auditor was not registered, the financial statements for the period ended March 31, 2004 were regarded as being in non compliance with Section 102 of the Sarbanes- Oxley Act of 2002. Reference is made to the Company's Securities and Exchange Commission Form 8-Ks filed on January 21, 2005 and May 6, 2005. COMPANY'S WEBSITE - ----------------- Commerce has a website located at http://www.commercegroupcorp.com. This website can be used to access recent new releases, U.S. Securities and Exchange Commission filings, the Company's Annual Report, Proxy Statement, Board Committee Charter, and other items of interest. The contents of the Company's website are not incorporated into this document. The U.S. Securities and Exchange Commission filings, including supplemental schedules and exhibits can also be accessed free of charge through the U.S. Securities and Exchange Commission's website at: http://www.sec.gov. PRECIOUS METAL MINING - --------------------- Commerce continues to be engaged in the exploration, exploitation, development and production 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 is the operator of the San Sebastian Gold Mine ("SSGM"). Commerce's objective is to enhance the value of its shares by realizing profits from the production and sale of gold and silver, cash flow, and by increasing its gold/silver ore reserves. This may be achieved by its continuing to be a low-cost gold producer, by increasing production and by expanding its gold ore reserves. Commerce has an opportunity to increase its gold ore reserves since on March 3, 2003, it received the New San Sebastian Gold Mine Exploration Concession/License hereinafter identified as the "New SSGM." It is currently exploring this 42-square kilometer area (10,374 acres), which includes three formerly-operated mines and encompasses the SSGM. 5 The Government of El Salvador on May 25, 2004 granted the Nueva Esparta Exploration Concession/License which consists of 45 square kilometers of area (11,115 acres) and includes eight formerly operated gold and silver mines. This concession further enhances the potential to increase gold and silver ore reserves. It presently is concentrating on the exploration of the Montemayor Mine which is one of the eight formerly operated mines in this concession. Commerce's current goal is to secure sufficient capital to increase its production of gold to 113,000 ounces per year and to simultaneously develop additional gold/silver ore reserves. The Company expects to increase production by developing an open-pit, heap-leach operation on the SSGM site and by acquiring additional mill and related equipment which will increase the capacity of the processing of its higher grade virgin ore at the San Cristobal Mill and Plant ("SCMP"). The SSGM heap-leach operation should have the capability of producing (through processing a higher volume of gold ore of 2,000 to 6,000 tons per day) significantly more gold than what can be produced at the SCMP, which has a present capacity of processing 200 tons of gold ore per day. Commerce will also continue to explore areas contiguous to the SSGM site, and it also is planning exploratory and drill programs in its concession areas. OPERATIONS On December 31, 1999, the Joint Venture decided to temporarily suspend its processing of gold ore at its SCMP until such time as it has adequate funds to retrofit, restore, rehabilitate, and expand its mill and plant. An overhauling is needed to preserve the integrity of the equipment. The initial resumption of producing gold was with the SCMP used equipment the Joint Venture purchased on February 23, 1993. Even though the Joint Venture has maintained this mill and plant on a continuous basis, certain basic structural components are worn out and need to be replaced, retrofitted or overhauled. Another significant concern at that time was the substantial decline in the world market price of gold. Concurrent with the decision to suspend processing gold ore was the awareness to increase efficiency by expanding the SCMP facilities from the existing 200-ton-per- day capacity to a 500-ton-per-day operation. From March 31, 1995 through December 31, 1999 when production was suspended, 22,710 ounces of bullion containing 13,305 ounces of gold and 4,667 ounces of silver were produced at the SSGM and then sold at the respective current world market price. There are approximately 1.5 million ounces of proven and estimated gold ore reserves at the SSGM. Although the financial statement periods presented herein reflect that the SSGM is the only one of the Company's mining properties which has generated revenues, there are strong indications of commercial gold/silver ore present at some of the other gold mine sites. 6 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 Total ----------- ----------- ----------- ----------- ----------- San Sebastian Gold Mine (a) Virgin ore, dump and waste material 14,404,096 0.081 1,166,732 1,166,732 (b) Stope fill (estimated) 1,000,000 0.340 340,000 340,000 ----------- ----------- ----------- ----------- ----------- 15,404,096 1,166,732 340,000 1,506,732 =========== =========== =========== ===========
The anticipated recovery for processing via the SCMP will range from 85% to 95% and for heap leaching from 65% to 70%. SSGM JOINT VENTURE ARRANGEMENTS - ------------------------------- Commerce acquired 82 1/2% of the authorized and issued common 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. 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") 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. In order to maintain current accounting between Commerce and Sanseb, the interest charges to Sanseb on advances made by Commerce are kept separately. Therefore, when profits are earned, the interest due to Commerce when it is recorded will be paid from the cash distributions made to Sanseb. 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. On January 14, 2003, the Company entered into an amended and renewed 30-year lease agreement with Mineral San Sebastian Sociedad Anomina de Capital Variable (Misanse) pursuant to the approval of the Misanse shareholders and Misanse directors at a meeting held on January 12, 2003. The renewed lease is for a period of time commencing and coinciding with the date that the Company received its Renewed San Sebastian Gold Mine Exploitation Concession/License, hereinafter identified as the "Renewed SSGM," from the Ministry of Economy's Director of El Salvador Department of Hydrocarbons and Mines (DHM). The lease is automatically extendible for one or more equal periods. The Company will pay to Misanse for the rental of this real estate the sum of five percent of the sales of the gold and silver produced from this real estate, however, the payment will not be less than $343.00 per month. The Company has the right to assign this lease without prior notice or permission from Misanse. This lease is pledged as collateral for loans made to related parties (Item 8. Financial Statements and Supplementary Data, Note 7). 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. The Joint Venture Agreement authorizes Commerce to execute agreements on behalf of the Joint Venture. 7 ORGANIZATIONAL STRUCTURE AND MINING PROJECTS - -------------------------------------------- The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries, and its Commerce/Sanseb Joint Venture, but it excludes its 52% ownership of Mineral San Sebastian S.A. de C.V. Upon consolidation, all intercompany balances and transactions are eliminated.
Charter/Joint Venture Included in the Consolidated Statements % Ownership Place Date - --------------------------------------- ----------- ---------- ---------- Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959 Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974 San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970 San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968 Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964 Commerce/Sanseb Joint Venture ("Joint Venture") 90.0 Wisconsin & El Salvador 09/22/1987 Not included in the Consolidated Statements - ------------------------------------------- Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0 El Salvador 05/08/1960
Commerce was originally formed as a Wisconsin corporation (September 14, 1962). It 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. Misanse previously had a mining concession with the government of El Salvador and is the owner of the SSGM real estate. At that time, Misanse had assigned the mining concession to Commerce Group Corp. and San Sebastian Gold Mines, Inc., the mining operator formed on September 22, 1987 and known as the Commerce/Sanseb Joint Venture (Joint Venture). The Joint Venture operates the SCMP (the gold processing plant acquired on February 23, 1993) and has conducted exploration, exploitation, development and production at the SSGM since October 1968; it was also in production from 1972 through March 1978 and from April 1, 1995 through December 1999. It also performed exploration at the following mines: San Felipe-El Potosi (from September 1993 through November 1999) and its extension Capulin (from May 1995 through November 1999); Modesto (from August 1993 through July 1997); Hormiguero (from September 1993 through 1998) and Montemayor (from March 1995 through July 1997). Commerce also owns 82 1/2% of the San Sebastian Gold Mines, Inc. (SSGM) which was chartered as a Nevada corporation on September 4, 1968. From 2003 to the present the Joint Venture is performing exploration at the La Lola Mine, the Santa Lucia Mine, the Tabanco Mine, and the Montemayor Mine, which are included in the New SSGM and in the Nueva Esparta Concession/License. The Government of El Salvador has issued the Modesto and San Felipe-El Potosi mining concessions to others. Commerce's attorneys have challenged the legality of the issuance of these concessions. Commerce owns certain properties believed to be crucial to the Modesto Mine and it holds leases to the key property of the Montemayor Mine. It plans to apply for concessions on the Modesto property that it owns. It also has a lease agreement with the owners of the San Felipe-El Potosi Mine. Although the sub surface rights belong to the Government of El Salvador, access to the surface rights must be obtained from the owner. 8 All of the mines mentioned, including the eleven mines admitted in the two exploration concessions, 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 had its own diamond drilling rig and had contracted with others to explore the above-described SSGM potential targets in depth. All of the mining properties appear to have promising geologic prospects, alterations, and historical records that bear evidence that all have been mined and at one time in the past produced gold/silver. WORLD GOLD MARKET PRICE, CUSTOMERS AND COMPETITION - -------------------------------------------------- Since the Joint Venture was in operation and produced gold on a curbed start-up basis, its revenues, profitability and cash flow were greatly influenced by the world market price of gold. The gold world market price is generally influenced by basic supply and demand fundamentals. It 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 worldwide currencies, political and economic conditions, central bank sales or purchases, inflation, production costs in major gold-producing regions, and other factors. 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 similar transactions to minimize the risk of fluctuations in gold prices or currencies. The Company's present and past practice has been to sell its gold and silver at the world market spot prices. 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 worldwide 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 dor, was refined by and sold to a refinery located in the United States. At this time the Joint Venture believes that, due to its current 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 could have a large impact to offset either the price or supply of gold in the world market. There are many mining 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, its accessibility to the mine, its infrastructure, and its projected low cost of production may allow it to compete effectively and to produce reasonable profits. 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, interest rate fluctuations, and political instability have not had a material impact on the Company or its results of operations. SEASONALITY - ----------- Seasonality does not have a material impact on the Company's operations, but the rainy season in El Salvador (May through November) can subdue production. 9 ENVIRONMENTAL MATTERS - --------------------- Since the Government of El Salvador (GOES) has established a new Mining Law effective February 1996, its exploration, development, and production programs are subject to environmental protection. The GOES has established the Office of the El Salvador Ministry of Environment and Natural Resources (MARN). In order to comply with mining law, the Company was required to obtain environmental permits. On October 15, 2002, an environmental permit under MARN Resolution 474-2002 was issued for the SCMP. On October 21, 2002, an environmental permit under MARN Resolution 493-2002 was issued pertaining to the SSGM. 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 environmental 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 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 was required to prepare and present to such authorities data pertaining to the effect or impact that any proposed exploration 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. REPUBLIC OF EL SALVADOR, CENTRAL AMERICA INFORMATION SOURCES - ------------------------------------------------------------ The most current information about El Salvador can be obtained from the following sources: 1. General information can be obtained through the Internet from the following websites: http://www.usinfo.org.sv/eng/irc/svlinks.html and http://www.dirla.com/elsalvador2.html. 2. The U.S. Embassy in El Salvador can also be contacted at Final Boulevard Santa Elena Sur, Urbanizacion Santa Elena, Antiguo Cuscatl n, La Libertad, El Salvador, telephone (011) 503-278-4444 and fax (011) 503-278-6011 or at its website: http://www.elsalvador.usembassy.gov. OPERATIONS, OTHER THAN MINING - ----------------------------- Commerce independently and through its partially and wholly-owned subsidiaries conducted other business activities, which at present are dormant. Previous operations consisted of the following: (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"); and (3) advertising and various businesses, including Internet-related businesses, through its subsidiary, Ecomm Group Inc. ("Ecomm"). 10 LAND ACQUISITION, DEVELOPMENT, OWNERSHIP AND REAL ESTATE SALES - -------------------------------------------------------------- During the past years, the Company has substantially diminished its activities in the business of real estate development conducted principally through its subsidiaries San Luis Estates, Inc. ("SLE"), a Colorado corporation, and Universal Developers, Inc. ("UDI"), a Wisconsin corporation. At present, all activities have ceased. Misanse, the Company's majority-owned subsidiary (52%) owns the SSGM real estate consisting of approximately 1,470 acres. This real estate is located approximately two and one-half miles northwest of the city of Santa Rosa de Lima, off of the Pan American Highway (a four-lane highway), about 108 miles southeast of the capital city of San Salvador, El Salvador, and 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. The Company, on January 14, 2003, entered into a long term lease arrangement with Misanse. The Company also leases approximately 166 acres of real estate on which it has its SCMP and plans to process ore on this site. These facilities are located on the Pan American Highway, near the City of El Divisadero. The Company owns approximately 63 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. This real estate is pledged as collateral for funds advanced to the Company. It also leases approximately 175 acres of land considered to be the main part of the Montemayor Mine in the Department of Morazan. 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. Reference is made to "Item 2. Properties," for additional information. 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. EMPLOYEES - --------- As of March 31, 2005, the Company and its wholly-owned subsidiaries employed between 45 and 55 full-time persons, which number may adjust seasonally. The Company also employs up to four persons, including part- time help, in the United States. None of the Company's employees are covered by collective bargaining agreements. PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS & GOVERNMENT CONTRACTS - -------------------------------------------------------------------- Other than concessions, licenses and interests in mining properties granted by governmental authorities and private landowners, the Company does not own any material patents, trademarks, licenses, franchises or concessions. 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 when the Joint Venture is in production. The gold in dor, form is refined and then sold at the world market spot price to a refinery located in the United States. 11 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, exploitation, and development programs in the Republic of El Salvador, Central America. The Company believes that the United States 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. Item 2. Properties Mining Properties The table below provides a summary of the most significant mining properties in which Commerce Group Corp. or the Joint Venture has an interest. All of the properties are located in the Republic of El Salvador, Central America. More detailed information regarding each of these properties is provided in the text that follows.
Amount Date of Funds Interest to Make Date Mine Property Nature was Cost of Property will be Description of Interest Acquired Interest Operational Operational ----------- ----------- -------- --------- ----------------- ---------------- 1.San Sebastian Mineral 1968 5% of This is dependent It was in Mine located concession the gross on the scale of operation on a two and consisting precious production that curbed product- one-half miles of 100% metal management ion basis from northwest of ownership proceeds decides to 03/31/05 until the city of of the or perform. The December 31, Santa Rosa precious $343 a amount of 1999 when de Lima and metals month investment operations were the Pan extracted whichever could be from suspended due American from this is $5 million to the need to highway. mine. higher. to 100$ million. overhaul, repair, restore and expand the SCMP facilities. 2. San Felipe- El Salvador 07/06/93 5% of Undetermined Undetermined. El Postosi/ legal the gross until a Cauplin Mine counsel is precious preliminary located near in the metals drilling program the city of process of proceeds. is completed; Postosi, 18 reviewing estimated cost miles north- alternatives of drilling west of the to obtain is $2 million. city of San the mineral Miguel. concession. 12 3. Hormiguero Ownership 09/93 The Undetermined Undetermined. Mine located of the surface until a five miles tailings. use of preliminary southest of land drilling program the City of (rent) is completed; San Cristobal is to estimated cost Mill and Plant be of drilling near the city negotiated. is $2 million. of Comacaron. Mine surface channel trenching and adit cleaning should be completed to determine drilling costs. 4 Modesto Mine Application 09/93 On the Undetermined Undetermined. located near is to Company- until a the city of submitted owned preliminary Paisnal andfor a mineral land it drilling about 19 miles concession appears program is north of El on the real as if completed; Salvador, the estate owned this will estimated capital city. by the be an cost of Company to underground drilling own 100% mine, is $2 of the therefore, million. precious no cost metals for extracted interest. from the real estate owned by the Company. 5. Montemayor Application 07/95 It Undetermined Undetermined. Mine located is to be appears until a about 14 milessubmitted for that this preliminary northeast a mineral will be drilling of SCMP and concession an under- program is about six on the real ground completed; miles estate owned mine, estimated northwest of by the therefore, cost of SSGM. Company to current drilling own 100% of leases is $2 the precious will have million. metals to be extracted renegotiated from the and areas the extended. Company leases. 6 San Mil and Equipment Equipment To expand the Curbed product- Cristobal Plant owned 02/23/93 purchased plant, including ion commenced Mill and by Joint and and a crushing March 1995; Plant located Venture. there- extensive system to a expansion off the The real after retro- capacity of program in Pan American estate Lease fitting 500 tons per progress. Highway is owned 11/12/93 was and day; an estimated Operations west of the by an agency continues sum of up to suspended city of El of the to be $3 million may on 12/31/99 Divisadero. Government performed. be required, until the of El The all dependent existing Salvador. depreciation whether new or equipment is Includes investment used equipment overhauled, crushing through will be repaired, equipment 03/31/04 purchased. restored and located at is expansion the San $4,333,128. on the SCMP Sebastian facilities are Gold Mine. completed, and, dependent on the price of gold. 7. New San Exploration 02/03 Undeter- Undetermined Undetermined. Sebastian concession mined until Gold Mine issue by as exploration Exploration the negotiations at an Concession/ Government will be estimated License of El made with cost of $2 consisting Salvador the surface million is of 42 for 100% rights completed. square ownership owners. kilometers. of the precious metals.
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 coastal 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. Most of the reconstruction of the Pan American Highway from two lanes to four lanes (from the city of San Salvador to the Honduran border) has been completed. The city of Santa Rosa de Lima (approximately three miles from the SSGM) is one of the larger cities in the Eastern Zone. The SSGM is approximately 30 miles from the city of San Miguel, which is El Salvador's third 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. SSGM RESERVES AND OPERATION
GOLD ORE RESERVES (03/31/05) Contained Average Gold Tons Grade Ounces (1) ------------ ------------ ------------ Ore - virgin (includes 960,000 tons of dump material) 14,404,096 0.081 1,166,732 Stope fill (estimated) 1,000,000 0.340 340,000 ------------ ------------ ------------ Totals 15,404,096 1,506,732
(1) The estimated recoverable ounces of gold by processing: SCMP, 85% to 95%; heap leach, 65% to 70%. The dump material and stope fill at the SSGM are the by-products of past mining operations. 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 when the price of gold is at a level to process it profitably. The stope fill that is available was in the past (1900 era) 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 to accommodate the extraction of the higher grade of gold ore in 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. 14 At the turn of the twentieth century, the SSGM was rated as one of the richest gold mines in the world. The United Nations' 1969 Mineral Survey Report states that "unquestionably the San Sebastian deposit was the jewel of the El Salvador mining industry and one of the most prolific gold mines in Central America." 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 low grade gold ore than can be processed at the SCMP. 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. Approximately 960,000 tons of dump material present at the SSGM site, with grades ranging from 0.082 to 0.178 ounces of gold per ton, have been combined with the virgin ore reserves. 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, or it eventually will be encountered in the open-pit operations. 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 higher grade material. MISANSE MINING LEASE The Company (previously through the 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 Item 8. Financial Statements and Supplementary Data, Note 7, for related party interests.) SSGM MINING LEASE On January 14, 2003, the Company entered into an amended and renewed lease agreement with Mineral San Sebastian Sociedad Anomina de Capital Variable (Misanse) pursuant to the approval of the Misanse shareholders and directors at a shareholders' meeting and thereafter at a directors' meeting both held on January 12, 2003. The renewed lease is for a period to coincide with the term of its Renewed SSGM, which it received on August 29, 2003 from the DHM. It was automatically amended on May 20, 2004 to coincide with the extension of the term of the Renewed San Sebastian Gold Mine Exploitation Concession/License from 20 to 30 years. The lease is automatically extendible for one or more equal periods. The Company will pay to Misanse for the rental of this real estate the sum of five percent of the sales of the gold and silver produced from this real estate, however, the payment will not be less than $343.00 per month. The Company has the right to assign this lease without prior notice or permission from Misanse. This lease is pledged as collateral for loans made to related parties (Item 8. Financial Statements and Supplementary Data, Note 7). 15 MISANSE MINERAL CONCESSION/LICENSE-GOVERNMENT OF EL SALVADOR In El Salvador, the rights to minerals below the sub-surface are vested with the government. Mineral rights are granted by the government through concessions or licenses. On January 27, 1987, the Government of El Salvador 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. At that time this provided 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. Effective February 1996, the Government of El Salvador passed a law which required 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. As of July 2001, a series of revisions to the El Salvador Mining Law were made. A principal change is that the fee has been reduced to two percent of the gross gold receipts. RENEWED SAN SEBASTIAN GOLD MINE EXPLOITATION CONCESSION/LICENSE UNDER EL SALVADOR AGREEMENT NUMBER 591 DATED MAY 20, 2004 AND DELIVERED ON JUNE 4, 2004 (RENEWED SSGM) - APPROXIMATELY 1.2306 SQUARE KILOMETERS (304 ACRES) LOCATED IN THE DEPARTMENT OF LA UNION, EL SALVADOR, CENTRAL AMERICA 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. An inspection by the DHM was made. 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 tax. On August 29, 2003 the Office of the Ministry of Economy formally presented the Company with a twenty-year Renewed SSGM which was dated August 18, 2003. On May 20, 2004 (delivered June 4, 2004) the Government of El Salvador under this Agreement Number 591 extended the exploitation concession for a period of thirty (30) years. This Renewed SSGM replaces the collateral that the same parties held with the previous concession. 16 NEW SSGM EXPLORATION CONCESSION/LICENSE UNDER EL SALVADOR RESOLUTION NUMBER 27 (NEW SSGM) - APPROXIMATELY 40.7694 SQUARE KILOMETERS (10,070 ACRES) LOCATED IN THE DEPARTMENTS OF LA UNION AND MORAZAN, EL SALVADOR, CENTRAL AMERICA On October 20, 2002, the Company applied to the Government of El Salvador through the DHM 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 the Nueva Esparta is in the Department of Morazan, Republic of El Salvador, Central America. On February 24, 2003, the 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, the following three other formerly operative gold and silver mines included in the New SSGM are being explored: the La Lola Mine, the Santa Lucia Mine, and the Tabanco Mine. Historical data reflects the following: A French company operated the La Lola Mine in 1920; they developed two quartz veins, which were named La Lola and Buena Vista. From 1950 through 1953, Mr. Amadeo Tinetti produced 1,850 ounces of gold and 66,000 ounces of silver. The Tabanco Mine is south of the La Lola Mine. Records evidence and local citizens confirm that several levels of mining occurred. Isolated rich ore shoots reported to contain sulfides and silver chloride were encountered. The oxidized sulfide ore was mined from a width of three to six feet with a grade of 0.50 ounces per ton of gold and five ounces of silver. Records reflect that the Herrera family produced gold and silver beginning in the year 1780. In the Tepeyac vein very high-grade ore in one to two foot widths was encountered. A United Nation's team performed sampling and reported that in a sulfide bearing zone they found 0.31 ounces of gold and 4.52 ounces of silver in a 4.9 foot wide vein. The footwall host rock assayed at 0.22 ounces of gold and 41.29 ounces of silver. This footwall rock area location was not specifically identified, but the result lends strength to the recommendation that in any further sampling or mapping of veins in the epithermal environment, close attention will be directed to the wall rock. The third mine in this exploration concession is the Santa Lucia Mine in which Mr. Humberto Perla developed a 100 meter wide underground vein. This vein is the west continuation of the Granadilla and the Aro Nuevo veins located about two miles west of the SSGM property. NUEVA ESPARTA EXPLORATION CONCESSION/LICENSE (NUEVA ESPARTA) - 45 SQUARE KILOMETERS (11,115 ACRES) On or about October 20, 2002, the Company filed an application with the Government of El Salvador through the DHM for the Nueva Esparta, which consists of 45 square kilometers north and adjacent to the New SSGM. 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. On May 25, 2004 (received June 4, 2004) the Government of El Salvador under Resolution Number 271 issued the exploration concession for a period of four years with a right to request an additional four year extension. An important observation is that these mines form a belt of mineralization following a fault line from the SSGM to the Montemayor Mine for a distance of approximately five miles. Included in the Nueva Esparta are eight other formerly operated gold and silver mines known as: the Grande Mine, the Las Pinas Mine, the Oro Mine, the Montemayor Mine, the Baradero Mine, the Carrizal Mine, the La Joya Mine and the Copetillo Mine. Historical data reflects the following: 17 The Montemayor Mine has records that show that an English company commenced production of precious metals sometime about 1860. A report prepared by Mr. Fleury in 1878 stated that the area assayed approximately 48 ounces of silver and 0.85 ounces of gold per ton. Six underground workings were developed, but no records are available. A United Nation's report reflects a possible grade of twelve ounces of silver and 0.29 ounces of gold form a section of the Montemayor vein stope. The Montatita, Tempique, Guarumo, Santa Gertrudis and El Indio vein findings support expanded exploration. The Company has performed preliminary exploration in the Montemayor Mine are from 1995 through 1997. Its findings from the ore samples were very positive and encouraged additional exploration. Exploration will consist of locating workable ore within the known structures through mapping and sampling of vein outcrops and reopening, mapping and sampling of underground work. The El Baradero Mine is located near the Montemayor Mine. When in production, most of the ore processed at the Montemayor mill came from this area and the quality of the precious metals appeared to have the highest values. The veins identified in the area are the Saravia, Borbollon, Caraguito 1 to 3, Eulalio and the Miserocordia. At the La Joya Mine the Company, during previous exploration, discovered three parallel wide quartz veins averaging in width from six feet to twenty-seven feet running northwest by southeast dipping at 42 degrees southwest. More exploration will be concentrated in this tract. El Jimenito and Santa Teresa are two wide veins that the Company found at the El Carrizal Mine. They are 1,920 to 2,560 feet apart. The local residents recollect that free gold was found in the Santa Teresa Vein Adit. This mine is located between the La Joya and Copetillo Mines. One vein was discovered at the Copetillo Mine in an underground adit. It was developed into two sublevels connected to the south with one 100-foot shaft. Residents recall seeing free gold in the Canton Copetillo. The Las Pinas Mine is located in the Canton Las Caras and was in operation in 1935. It was developed for a five-year, 100-ton-per-day mill and plant. Records show that the average grade of silver was 5.10 ounces per ton and that the grade of gold averaged 0.06 ounces per ton. The La Joya Mine is located in the Canton La Joya. Records relating to activities were not preserved. While exploring the region, Commerce found three parallel wide quartz veins ranging from six to 25 feet running northwest to southeast. The grass roots exploration suggests that this is an area with great ore potential. At this time there is no available information about the Oro Mine. It is a short distance south of the Montemayor Mine. This could be a good exploration target. SSGM CURRENT STATUS The Company, through its Joint Venture is conducting the following activities: It is in the exploration, exploitation, development and pre-production mining stage which consists of completing its survey, mapping, site preparation, infrastructure, construction, planning, and the performance of the auxiliary work needed to resume 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. As an alternate, the Company is considering a joint venture, merger, acquisition, or any other mutually agreed upon business arrangement. 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 then gradually increasing the annual production of gold to 113,000 ounces. The Company's plans include placing its SCMP into production. Although it will be a low tonnage operation, the Company believes that it would be profitable since the present price of gold is over $400 an ounce. 18 PROPOSED SSGM OPEN-PIT, HEAP-LEACHING OPERATION The Joint Venture has placed the SCMP into a curbed production operation until it receives the funds that it requires or enters into a business arrangement. It now intends to obtain a sum of $9 million or more to commence an open-pit, heap-leaching operation at the SSGM site. An additional $8 million or more is estimated to be required for the crushing system, plant, 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 creative sources. With the anticipated production volume, there is more than a nine-year supply of gold ore and it is believed that a substantial amount of gold ore can be proven to continue operating at the same levels for a longer period. The Company's geologists have defined a body of ore consisting of 138 million tons of gold ore at a grade of 0.025 ounces of gold per ton. This reflects a potential of 3.4 million ounces of gold (including the existing 1.5 million ounces) and about 400,000 ounces of silver from this planned open-pit, heap-leaching operation. It would take about 64 years to process this body of gold ore at a production capacity of 6,000 tons per day. 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. 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. Since the Company has been granted the Renewed SSGM from the DHM, it is required to maintain environmental permits. The issuance of these permits is under the jurisdiction of the El Salvador Ministry of Environment and Natural Resources Office (MARN). On October 15, 2002, MARN issued an environmental permit under Resolution 474-2002 for the SCMP. On October 20, 2002, MARN issued an environmental permit under Resolution 493-2002 for the Renewed SSGM Exploitation area. A financial security (bond) has been submitted as required. 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. 19 All operations by the Company involving the exploration 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 is required to prepare and present to such authorities data pertaining to the effect or impact that any proposed exploration, exploitation 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. SAN FELIPE-EL POTOSI MINE ("POTOSI") AND ITS EXTENSION THE EL CAPULIN MINE ("EL CAPULIN") - -------------------------------------------------------------------------- POTOSI LOCATION The Joint Venture had commenced an exploration program on the Potosi property which is located approximately 18 miles northwest of the city of San Miguel, the third 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 and the exploration work performed by the Company indicate that the potential of developing a gold mine is above average. 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, with an option to renew the lease for an additional 25 years, for the purpose of mining and extracting minerals. Although the Company did not receive a concession/license from the DHM, it is preserving its rights under the lease agreement. 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 On or about September 2, 1993, the Joint Venture, acting as a nominee through one of its employees, filed an application with the DHM 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 DHM. 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. 20 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 title to 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. 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 permit 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 leased 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 silver-gold producing prospect is good. On April 22, 1997, a current exploration concession was filed with the El Salvador Minister of Economy's office in order to comply with the El Salvadoran Mining Law adopted in February 1996. During July 1997, the Minister of Economy 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 to operate a mine on this key part of the property. The concession/license for the Montemayor Mine is included in the Nueva Esparta concession granted to the Company on May 25, 2004. SAN CRISTOBAL MILL AND PLANT ("SCMP") RECOVERY AND PROCESSING SYSTEM - -------------------------------------------------------------------- SCMP LOCATION SCMP is located near the city of El Divisadero (bordering the Pan American Highway), and is approximately 13 miles east of the city of San Miguel, the third 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. On November 12, 1993, the Joint Venture entered into an agreement with Corporacion Salvadorena de Inversiones ("Corsain"), an El Salvadoran governmental agency, to lease for a period of ten years (expiring November 12, 1993), 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 west of the SSGM site. The basic annual lease payment was U.S. $11,500, payable annually in advance, unless otherwise amended, 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 was subject to increases based on any United States' inflationary rate adjustments. This lease agreement expired. On April 26, 2004, a three-year lease, which includes an automatic additional three-year extension subject to Corsain's review, was executed by and between Corsain and the Company. This lease is retroactive to November 12, 2003 and the monthly lease payments are $1,418.51 plus the El Salvadoran added value tax. The lease is subject to an annual increase based on the U.S. annual inflationary rate adjustments. The SCMP is strategically located to process ore from other mining projects. 21 SCMP MILL AND PLANT PROCESS DESCRIPTION CURRENT STATUS The SCMP (a precious metal cyanidation carbon-in-leach system) has a capacity of processing up to 200 tons of virgin ore per day. The following units of operations are required: crushing, grinding, thickening, agitated leaching and recovery of precious metals via a carbon-in-leach (CIL) system. The SCMP has been designed to process up to 500 tons of virgin ore per day. The SCMP operations were suspended as of December 31, 1999, as the plant, equipment, and facilities have been place on a care and maintenance status until such time as the Company has sufficient funds to complete a major overhaul in order to place it into operating condition and at a time the price of gold is stabilized to assure a profit. SCMP PROJECT OPERATING PLAN - --------------------------- CURRENT AND ANTICIPATED 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 from April 1, 1995 was from the SSGM tailings. After the SSGM tailings' resource was exhausted, virgin gold ore was excavated from the SSGM surface (Coseguina area) and hauled to the SCMP site for processing. 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 via the underground workings or from the surface of the main ore body. This gold ore will have to be crushed and pulverized, which increases the cost, but is expected to yield a 90% or higher recovery. The income, dependent on the market price of gold from the higher grade and recovery of gold ore, is expected to be substantially more than the cost involved, providing that the world gold market price does not decline to a level of unprofitability. The gold ore from the SSGM open-pit was loaded onto 20-25 ton dump trucks for transport to the SCMP. Trucks then hauled 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. The gold ore was received at the SCMP where it was 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 was then unloaded at the SCMP site and stockpiled in an area which was developed to allow storage of more than 50,000 tons. ENVIRONMENTAL MATTERS Reference is made to San Sebastian Gold Mine "ENVIRONMENTAL MATTERS." The same information applies. On October 15, 2002, an environmental permit (Resolution 474-2002) was issued to the Company by the Office of the El Salvadoran Ministry of Environment and Natural Resources. THE JOINT VENTURE 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. A total of 78,441 samples of exploration fire assays have been logged through March 31, 2005. This total does not include the assays that were performed for production purposes. 22 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 relatives, his wife, and a trust formed 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 - -------------------------- The Company is not a party to any material legal proceedings. However, on January 21, 2005, the Company filed a S.E.C. Form 8-K explaining why the Company changed its certified public accountant. The decision was made because the CPA failed to register as is required with the Public Company Accounting Oversight Board (PCAOB). Section 102 of the Sarbanes-Oxley Act of 2002 made it unlawful after October 22, 2003 for any U.S. public accounting firm or person associated with a U.S. public accounting firm that is not registered with the PCAOB to prepare, issue or to participate in the preparation or issuance of any audit report with respect to any issuer. Since the former auditor was not registered with the PCAOB, the Company retained another auditing firm on May 2, 2005. For more information reference is made to the following U.S. S.E.C. Form 8-K filings: January 21, 2005 and May 6, 2005. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were brought to a vote of security holders in the last quarter ended March 31, 2005. ITEM 4(A). EXECUTIVE OFFICERS AND MANAGERS OF THE COMPANY - ---------------------------------------------------------- Listed below are the names, ages and positions of the executive officers and managers of the Company and their business experience during the past five or more years. All officers are elected at the annual meeting of the directors, which is normally held after the annual shareholders' meeting. 23
Age as of Executive Offices Held Period Served Name March 31, 2005 With Company (1) In Office (2) - ------------- -------------- ----------------------------- ------------------ Edward L. Machulak 78 President, Chief Executive, Operating and Financial Officer 9/14/62 to present Treasurer 06/78 to present Edward A. Machulak (Son of the President) 53 Executive Vice President 10/16/92 to present Secretary 1/12/87 to present Assistant Secretary 4/15/86 to 1/12/87 Luis A. Limay 63 Project and Mine Manager 10/86 to 1995 Manager of El Salvador Operations 03/95 to present
(1) There have never been any undisclosed arrangements or 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, Director-Emeritus, 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, Robertson & Sodos, 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. He has been a member of the Audit Committee since February 9, 1998, the date that the Audit Committee was formed, and has been a Director-Emeritus since December 5, 1979. He is a Director and the President or Officer of: Homespan Realty Co., Inc.; San Luis Estates, Inc.; San Sebastian Gold Mines, Inc.; and Universal Developers, Inc. He is the Secretary and Treasurer of Ecomm Group Inc. He is the authorized representative of the Commerce/Sanseb Joint Venture. He is a Director, was the Treasurer, and as of January 12, 2003, was elected President 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. 24 EDWARD A. MACHULAK (son of Edward L. 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; Director-Emeritus since October 28, 2000; 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. He is also a Director, Vice President and Secretary of: Homespan Realty Co., Inc. and San Luis Estates, Inc.; and is a Director and Secretary of San Sebastian Gold Mines, Inc. He has been a Director and Secretary of Ecomm Group Inc. and was elected President on May 17, 2000. His business experience is as follows: Director and Corporate Secretary of General Lumber & Supply Co., Inc., a building material wholesale and retail distribution center from April 1, 1970 to November 1983; Director and President of Gamco, Inc., a marketing and advertising company, from November 1983 to present; Director and President of Circular Marketing, Inc., an advertising and marketing business, from March 1986 to present; Director and President of MacPak, an Internet developer from 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. LUIS ALFONSO LIMAY was appointed to the position of Project and Mine Manager in 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 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, a silver mining company that formerly operated 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 - -------------------------------------------- Since January 21, 2005, the Company's common shares have been trading on the Pink Sheets under the symbol CGCO.PK which results from its former public accounting firm certifying the Company's financial statements for its fiscal year ended March 31, 2004 while not being registered with the Public Company Accounting Oversight Board (PCAOB) as required under Section 102 of the Sarbanes-Oxley Act of 2002. The Company retained a new public accounting firm to meet the requirements of the PCAOB. Reference is made to the U.S. S.E.C. Form 8-K filings of January 21, 2005 and May 6, 2005 for more information. Since May 5, 1999, the Company's common shares are being traded on the Over the Counter Bulletin Board (OTCBB) under the symbol CGCO.OB. Prior to this time, the common shares were traded since 1968 on the Over the Counter, American Stock Exchange, Boston Stock Exchange and on the Nasdaq Smallcap. Since January 21, 2005, the Company's shares have been trading on the Pink Sheets. The following table reflects the range of high and low trade prices of the common shares as reported by the OTCBB through January 20, 2005, and thereafter on the Pink Sheets for the period ended March 31, 2005, as well as the highest and lowest trade price during each quarter through the period ended March 31, 2004. 25
For the period ended March 31, 2005 March 31, 2004 High Low High Low ----- ----- ----- ----- First quarter ending June 30 $0.25 $0.14 $0.30 $0.15 Second quarter ending September 30 $0.23 $0.08 $0.37 $0.21 Third quarter ending December 31 $0.20 $0.09 $0.31 $0.22 Fourth quarter ending March 31 $0.12 $0.08 $0.30 $0.20
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON SHARES - --------------------------------------------------- As of March 31, 2005, the common shares were held by approximately 3,600 shareholders; it is estimated that over 95% are United States' residents. As of March 31, 2005, the Company's transfer agent and registrar certified that there were 1,610 shareholders of record. 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 1,990. As of March 31, 2005, there were issued and outstanding: (a) 23,823,734 shares of common stock; and (b) no stock options were outstanding to purchase common stock. (C) EQUITY COMPENSATION PLANS - ------------------------------ None. (D) 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, 2005. 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. (E) ISSUE OF SECURITIES - ------------------------ During the fourth quarter ended March 31, 2005, the Company issued 179,048 of its common shares to its Directors in payment for annual Directors' fees, 114,286 common shares in payment for its annual Officer's compensation; and 65,952 common shares to a Director for services rendered. These shares were issued pursuant to a Securities and Exchange Commission Form S-8 Registration. Item 6. Selected Financial Data The following table sets forth certain financial information with respect to the Company and is qualified in its entirety by reference to the historical financial statements and notes thereto of the Company included in "Item 8. Financial Statements and Supplementary Data." The statement of operations and balance sheet data included in this table for each of the five years in the fiscal period ended March 31st, were derived from the audited financial statements and the accompanying notes to those financial statements. 26
Year Ended March 31 ------------------------------------------------------------- 2005 2004 2003 2002 2001 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA Total revenue $ 0 $ 0 $ 0 $ 38 $ 242,182 =========== =========== =========== =========== =========== Income (loss) from continuing operations $ (229,936) $ (237,790) $ (232,647) $ (303,465) $ (164,679) =========== =========== =========== =========== =========== Income (loss) from continuing operations per share: Basic and diluted $ (.0102) $ (.0113) $ (.0123) $ (.0186) $ (.0116) =========== =========== =========== =========== =========== Weighted average shares - basic and diluted 22,581,814 21,089,812 18,907,958 16,349,170 14,174,662 =========== =========== =========== =========== =========== Cash dividends per common share $ 0 $ 0 $ 0 $ 0 $ 0 =========== =========== =========== =========== =========== BALANCE SHEET DATA Working capital *1 $ 496,977 $ 504,882 $ 457,538 $ 199,573 $ 152,906 =========== =========== =========== =========== =========== Total assets $36,518,576 $39,419,381 $32,500,150 $31,390,671 $30,008,216 =========== =========== =========== =========== =========== Short-term obligations *1 $16,178,620 $13,981,516 $12,329,096 $11,486,216 $ 9,998,955 =========== =========== =========== =========== =========== Long-term obligations $ 0 $ 0 $ 0 $ 0 $ 0 =========== =========== =========== =========== =========== Shareholders' equity $20,339,956 $20,437,865 $20,171,054 $19,904,955 $20,009,261 =========== =========== =========== =========== ===========
*1 Although the majority of the short-term obligations are due on demand, some of these obligations have the attributes 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. 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 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. 27 Management's discussion and analysis ("MD&A") of the financial condition and results of operations of the Company should be read in conjunction with the audited consolidated financial statements and the notes thereto. The Company prepares and files its consolidated financial statements and MD&A in United States ("U.S.") dollars and in accordance with U.S. generally accepted accounting principles ("GAAP"). The following discussion provides information on the results of operations for each of the three years ended March 31, 2005, 2004 and 2003 and the financial condition, liquidity and capital resources for March 31, 2005 and 2004. The financial statements of the Company and the notes thereto contain detailed information that should be referred to in conjunction with this discussion. OVERVIEW - -------- The Company is in the precious metals exploration, exploitation, development, production business with mines that are located in the Republic of El Salvador, Central America. The Company's objective is to increase shareholder value by increasing its gold and silver ore reserves within the concession/license areas granted to the Company by the Government of El Salvador (GOES) and by processing these reserves at an above average profit. Substantial capital expenditures are required to find, develop and process gold ore. The Company's geologists and engineers believe that its existing precious metal reserves can be substantially increased by continuous exploration. The Company is determined to obtain the capital it requires to produce gold at its San Cristobal Mill and Plant facilities and to construct an open- pit, heap-leach operation on its San Sebastian Gold Mine site which 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 Company has no revenues because it is not in production and it requires funds to purchase the necessary equipment, inventory and working capital to commence processing the 15 million ton ore reserves which should contain approximately 1.5 million ounces of gold. The Company is determined to raise sufficient capital to enter into production. Its alternative is to joint venture, merge, be acquired or enter into a business combination that will benefit all parties concerned. All of the Company's mines are located in the Republic of El Salvador, Central America. The GOES has issued three concessions. 1. On August 30, 2004 the Renewed San Sebastian Gold Mine EXPLOITATION Concession/License (Renewed SSGM) was issued for a period of 30 years. This gives the Company the right to extract and process its ore reserves to produce gold and silver from the San Sebastian Gold Mine site. The Company's geologists have determined that there are approximately 1.2 million ounces of gold/silver in the 14.4 million tons of ore and they have estimated that there are an additional 340,000 ounces of gold/silver contained in the one million tons of stope fill. 2. On February 24, 2003, the GOES granted to the Company the New San Sebastian Gold Mine Exploration Concession/License (New SSGM) consisting of approximately 10,070 acres which encompass the Renewed SSGM Exploitation Concession/License. This concession gives the right to exploitation of the subsurface in this area. In this area there are three formerly operated mines: La Lola Mine, Santa Lucia Mine and Tabanco Mine. Presently the Company is performing exploration work at the Tabanco and La Lola Mine area. 3. On May 25, 2004 the GOES granted to the Company the Nueva Esparta Exploration Concession/License consisting of 11,115 acres of area to explore. This concession abuts the New SSGM Exploration Concession/License and it has eight formerly operated gold/silver mines: the Grande Mine, the Las Pinas Mine, the Oro Mine, the Montemayor Mine, the Barradero Mine, the Carrizal Mine, the La Joya Mine and the Copetillo Mine. The Company did exploration work on the Montemayor Mine from 1995 - 1997 and it has resumed its exploration work this year. 28 The Company is a U.S. Wisconsin chartered corporation engaged in exploration, exploitation, development and gold and silver production with its primary asset being the San Sebastian Gold Mine (SSGM). The SSGM is located in the Republic of El Salvador, Central America and produced over one million ounces of gold during the 1900-1917 period The Company became involved as an investor and then as a majority owner. Gold and silver was produced from mid-1972 through the first quarter of 1978. The suspension was caused by the El Salvador civil unrest which peace pact was entered into in December 1992 conditioned upon meeting the terms during a three- year period. Production of gold and silver commenced on April 1, 1995 and the operations were suspended during the first quarter of 2000 due to the low selling price of gold at that time and the need to retrofit, restore and expand the San Cristobal Mill and Plant (SCMP). The Company presently is seeking funds to restore the SCMP and to set up an open-pit, heap-leach operation at the SSGM site. Its alternative is to joint venture or to enter into a merger or business combination. On December 6, 2004, the Company was notified by NASDAQ that its Certified Public Accountant had not registered with the Public Company Accounting Oversight Board (PCAOB) prior to October 22, 2003 as is required by Section 102 of the Sarbanes-Oxley Act of 2002. After an oral hearing with NASD on January 13, 2005 they responded with a fax dated January 19, 2005 with their determination which basically stated that since the Company's independent accountant was not registered with the PCAOB, its financial statements were considered not being filed timely and "Accordingly the Panel determined that the company's securities are not eligible for continued quotation on the OTCBB and based on the filing delinquency to delete all quotations of the company's securities on the OTCBB effective with the open of business on Friday, January 21, 2005. The hearing file has been closed." From January 21, 2005 the Company's shares were quoted as CGCO.PK on the Pink Sheets. The Company anticipated resolving the SEC filing of its financial statements by retaining a new auditing firm and filing all financial reports timely. For more detailed information, the Company refers to the two S.E.C. Form 8-Ks filed on January 21, 2005 and May 6, 2005. The Company has retained an independent accounting firm which is registered with the PCAOB. CRITICAL ACCOUNTING POLICIES AND ESTIMATES - ------------------------------------------ The ensuing discussion and analysis of financial condition and results of operations are based on the Company's consolidated financial statements, prepared in accordance with accounting principles generally accepted in the United States of America and contained within this report on S.E.C. Form 10-K. Certain amounts included in or affecting the Company's financial statements and related disclosures must be estimated, requiring that certain assumptions be made with respect to values or conditions which cannot be made with certainty at the time the financial statements are prepared. Therefore, the reported amounts of the Company's assets and liabilities, revenues and expenses, and associated disclosures with respect to contingent assets and obligations are necessarily affected by these estimates. The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves that are the basis for future cash flow estimates and units-of-production amortization determination; recoverability and timing of gold production from the heap- leaching process; environmental, reclamation and closure obligations; asset impairments (including estimates of future cash flows); useful lives and residual values of intangible assets; fair value of financial instruments; valuation allowances for deferred tax assets; and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following significant assumptions and estimates affect its more critical practices and accounting policies used in the preparation of its consolidated financial statements. 29 A critical accounting policy is one that is important to the portrayal of the Company's financial condition and results, and requires the Company to make difficult subjective and/or complex judgments. Critical accounting policies cover accounting matters that are inherently uncertain because the future resolution of such matters is unknown. The Company believes the following accounting policies are critical policies; accounting for its gold ore reserves, environmental liabilities, income taxes and asset retirement obligations. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions for the reporting period and as of the financial statement date. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from those amounts. Gold ore reserves include reserves that represent estimated quantities of gold in which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reserves under existing economic and operating conditions. The gold ore reserves are based on estimates prepared by geology and mining consultants and are used to calculate depreciation, depletion and amortization (DD&A) and determine if any potential impairment exists related to the recorded value of the Company's gold ore reserves. Decline in the market price of gold may render certain reserves containing relatively lower grade of mineralization uneconomic to mine. Changes in capital and operating costs including other factors could materially and adversely affect ore reserves. The Company reviews, on an as needed basis, its estimates of costs of compliance with environmental laws and the cleanup of various sites, including sites in which governmental agencies have designated the Company as a potentially responsible party. When it is probable that obligations have been incurred and where a minimum cost or a reasonable estimate of the actual costs of compliance or remediation can be determined, the applicable amount is accrued. Actual costs can differ from estimates due to changes in laws and regulations, discovery and analysis of site conditions and changes in technology. The Company makes certain estimates, which may include various tax planning strategies, in determining taxable income, the timing of deductions and the utilization of tax attributes, which can differ from estimates due to changes in laws and regulations, discovery and analysis of site conditions and changes in technology. Management is required to make judgments based on historical experience and future expectations on the future abandonment cost, net of salvage value, of its mining properties and equipment. The Company reviews its estimate of the future obligation periodically and will accrue the estimated obligation based on the SFAS No. 143 "Account for Asset Retirement Obligations." From time to time, the Company estimates its ore reserves when it is in production. There are a number of uncertainties inherent in estimating quantities of reserves, including many factors beyond the control of the Company. Ore reserve estimates are based upon engineering evaluations of assay values derived from samplings of drill holes and other openings. Additionally, declines in the market price of gold may render certain reserves containing relatively lower grades of mineralization uneconomic to mine. Further, availability of permits, changes in operating and capital costs, and other factors could materially and adversely affect ore reserves. The Company uses its ore reserve estimates in determining the unit basis for mine depreciation and closure rates, as well as in evaluating mine asset impairments. Changes in ore reserve estimates could significantly affect these items. 30 The Company will assess its producing properties and undeveloped mineral claims and leases for impairment when events or changes in circumstances warrant and at least annually. For producing properties and equipment, an impairment is recognized when the estimated future cash flows (undiscounted and without interest) expected to result in the use of the asset are less than the carrying amount of that asset. Measurement of the impairment loss is based on discounted cash flows. Undeveloped mineral claims and leases are measured on a fair value basis. Fair value with respect to such mineral interest, pursuant to Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002, would generally be assessed with reference to comparable property sales transactions in the market place. The Emerging Issues Task Force (EITF) formed a committee to evaluate certain mining industry accounting issues, including issues arising from the application of SFAS No. 141, BUSINESS COMBINATIONS (SFAS No. 141) and SFAS No. 142, GOODWILL AND OTHER TANGIBLE ASSETS (SFAS No. 142) to business combinations within the mining industry, accounting for good will and other intangibles and the capitalization of costs after the commencement of production, including deferred stripping. The issues discussed also included whether mineral rights conveyed by leases represent tangible or intangible assets and the amortization of such assets. In March 2004, the EITF reached a consensus, subject to ratification by the FASB, that benefits from mineral deposits. The EITF also reached a consensus, subject to ratification by the FASB, on other mining related issues involving impairment and business combinations. On March 31, 2004, the FASB ratified the consensus of the EITF on other mining related issues involving impairment and business combinations. This did not have an impact to the Company's financial statements since it did not change the Company's accounting. The FASB also ratified the consensus of the EITF that mineral rights conveyed by leases should be considered tangible assets subject to the finalization of a FASB Staff Position (FSP) in this regard. On April 30, 2004, the FASB issued a FSP amending SFAS No. 141 and SFAS No. 142 to provide that certain mineral use rights are considered tangible assets and that mineral use rights should be accounted for based on their substance. If recharacterization of an asset results, prior period amounts in the statement of financial position are to be reclassified with any effects on amortization or depreciation prospectively applied The FSP is effective for the first reporting period beginning after April 29, 2004, with early adoption permitted. The Company does presently have the legal right to extract minerals from the Renewed SSGM granted to it by the GOES, the Company will continue to record the carrying value of the properties until it enters into production. No such occurrence has affected the Company during this period. The Company at least annually plans to assess its properties and undeveloped mineral claims and leases, if any, for impairment when events or changes in circumstances indicate that the properties may be impaired. For producing properties and equipment, an impairment is recognized when the estimated future cash flows (undiscounted and without interest) expected to result in the use of the asset are less than the carrying amount of that asset. Measurement of the impairment loss is based on discounted cash flows. Undeveloped mineral claims and leases are measured on a fair value basis. Fair value with respect to such mineral interest, pursuant to Statement of Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, effective January 1, 2002, would generally be assessed with reference to comparable property sales transaction in the market place. The expected values associated with potential property development are estimated using the traditional net present value analysis of revenues, costs and capital investment cash flow projections discounted at a risk-adjusted rate reflective to the time periods associated with each possible outcome. Assumptions underlying future cash flow estimates are subject to risks and uncertainties. Also, the occurrence of past market transactions does not mean that such comparable amounts would be applicable to the Company's situation. Any differences between significant assumptions and market conditions could have a material effect on the fair value estimate. 31 The financial statements for the fiscal years ended March 31, 2005, 2004 and prior years reflect and include Commerce Group Corp.'s subsidiaries and the Commerce Group Corp./Sanseb Joint Venture (Joint Venture) on a consolidated basis. Previously, 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. Now 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 to it and which is maintained additionally with a separate accounting. At such time when the profits from the gold mining operation are distributed, the interest earned on these advances will be paid first to the Company pursuant to an agreement entered into by the joint venture parties. For the fiscal year ended March 31, 2005, the Company was able to segregate the disbursements to the Joint Venture to identify the category to be charged. Reference is made to Item 8. Financial Statements and Supplementary Data, Note 2, for additional details. GOLD ORE RESERVES (03/31/05) The Company's geologists have defined the following San Sebastian Gold Mine gold ore reserves:
Tons Average Grade Ounces ----------- ------------- ------------- Virgin ore 14,404,096 0.081 1,166,732 Stope fill estimated 1,000,000 0.340 340,000 ----------- ------------- ------------- Totals 15,404,096 1,506,732 =========== =============
The estimated recoverable ounces by processing through the San Cristobal Mill and Plant ranges from 85% to 95%; the recovery of gold from the heap- leaching operations should range from 60% to 70%. PRECIOUS METAL MINING STRATEGY The Company has produced gold from 1972 through March 1978 at the SSGM site and from March 31, 1995 through December 31, 1999 at its SCMP. Its SCMP consisted primarily of used equipment that had been installed at its leased site by a previous mining company. The used processing equipment was acquired by the Joint Venture on February 23, 1993, and the SCMP operations were officially suspended as of March 31, 2000. During this period, the price of gold suffered a severe decline. Although while in operation at the SCMP site the Company has on a continuous basis repaired, maintained, modified, and restored the equipment, it presently lacks sufficient funds to retrofit and to expand the SCMP facilities. The Company has temporarily suspended its gold processing until such time as it has adequate funds for the retrofitting, rehabilitation, restoration, overhauling, and most importantly for the expansion of the SCMP facilities. During the last two fiscal periods, the price of gold has increased to a level to place the SCMP into a profitable position. The Company has a number of non-exclusive independent consulting agreements for the purpose of raising the sum of up to U.S. $20 million. The funds are to be used to purchase and install equipment, perform site development, working capital for the SSGM open-pit, heap-leaching operation, and for the retrofit and expansion of the Joint Venture's SCMP. 32 Through December 1999, the Joint Venture produced gold primarily from processing the SSGM tailings and from the virgin ore it was excavating from its SSGM open pit. The gold was processed at its SCMP facility which is located approximately 15 miles from the SSGM site. It is contemplating the installation of a pilot open-pit, heap-leaching gold-processing system on the SSGM site. The cone crushing system is being maintained 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. The Modesto Mine has been placed on a standby exploration program basis pending the advice from its legal counsel relative to the filing of applications for concessions (licenses) on the real estate that it owns. All of the mining properties are located in the Republic of El Salvador, Central America. The Joint Venture will continue its attempts to commence its production of gold from the SSGM site. 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. It intends to commence this gold-mining operation as soon as adequate funding is in place and providing the gold price remains at or above the current price level. Dependent on the grade of gold ore processed and the funds it is able to obtain, it then anticipates producing annually approximately 10,000 ounces of gold from the SCMP operation and eventually up to 113,000 ounces of gold from its SSGM open-pit, heap-leaching operation. The Joint Venture continues on a limited basis to conduct an exploration program to develop additional gold ore reserves at the SSGM. Since it has the New SSGM and the Nueva Esparta Exploration Concession/License, it is exploring the Mina Lola, the Tabanco Mine, the Santa Lucia Mine, and the Montemayor Mine. The Company produced gold at the SSGM site from 1972-1978 and the Joint Venture produced gold from March 1995 through December 1999 at the SCMP through a start-up or preliminary operation, which was a forerunner of its greater goals. The Company's revenues, profitability and cash flow are 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, acts of terrorism, or political and economic conditions, or for that matter, many other reasons. The combined effect of these and other 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. 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. RESULTS OF OPERATION FOR THE FISCAL YEAR ENDED MARCH 31, 2005 COMPARED TO MARCH 31, 2004 - -------------------------------------------------------------------------- There are no revenues as the Company has suspended its gold production until it is able to enter into a business arrangement or is able to procure the funds it requires to rehabilitate, retrofit, overhaul, and expand its SCMP to commence an open-pit, heap-leach operation at the SSGM site. The price of gold has stabilized at a price level that could assure a profitable operation. The Company recorded a net loss of $229,936 or $0.102 cents per share for its fiscal year ended March 31, 2005. This compares to a net loss of $237,790 or $.0113 cents per share for the fiscal year ended March 31, 2004. There was no current or deferred provision for income taxes during the fiscal period ended March 31, 2005 or 2004. Additionally, even though the Company has an operating tax loss carryforward, the Company has previously recorded a net deferred tax asset due to an assessment of the "more likely than not" realization criteria required by the Statement of Financial Accounting Standards No. 109, Accounting for Taxes. 33 Inflation did not have a material impact on operations in the fiscal years ended March 31, 2005 or 2004. The Company does not anticipate that inflation will have a material impact on continuing operations during the next fiscal year. Interest expense in the sum of $1,691,519 was recorded by the Company during this fiscal period compared to $1,433,298 for the same period in 2004, and it was eliminated with the interest income earned from the Joint Venture. Almost all of the costs and expenses incurred by the Company are allocated and charged to the Joint Venture. The Joint Venture capitalizes these costs and expenses and will continue to do so until such time when it is in production. 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 FOR THE FISCAL YEAR ENDED MARCH 31, 2004 COMPARED TO MARCH 31, 2003 - -------------------------------------------------------------------------- There are no revenues as the Company has suspended its gold production until it is able to enter into a business arrangement or is able to procure the funds it requires to rehabilitate, retrofit, overhaul, and expand its SCMP, and to commence an open-pit, heap-leach operation at the SSGM site. The price of gold has stabilized at a price level that could assure a profitable operation. The Company recorded a net loss of $237,790 or $.0113 cents per share. This compares to a net loss of $232,647 or $.0123 cents per share for the fiscal year ended March 31, 2003. There was no current or deferred provision for income taxes during the fiscal period ended March 31, 2004 or 2003. Additionally, even though the Company has an operating tax loss carryforward, the Company has previously recorded a net deferred tax asset due to an assessment of the "more likely than not" realization criteria required by the Statement of Financial Accounting Standards No. 109, Accounting for Taxes. Inflation did not have a material impact on operations in the fiscal years ended March 31, 2004 or 2003. The Company does not anticipate that inflation will have a material impact on continuing operations during the next fiscal year. Interest expense in the sum of $1,433,298 was recorded by the Company during this fiscal period compared to $1,212,976 for the same period in 2003, and it was eliminated with the interest income earned from the Joint Venture. Almost all of the costs and expenses incurred by the Company are allocated and charged to the Joint Venture. The Joint Venture capitalizes these costs and expenses and will continue to do so until such time when it is in full production. 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. FINANCING ACTIVITIES, LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------------------- As of December 31, 1999 and effective as of March 31, 2000, the Joint Venture suspended its SCMP operations and placed it on a stand-by case and maintenance status until such time as it would have adequate funding to repair, retrofit, overhaul and expand the mill to process its gold ore, and/or when it has funding to commence an open-pit, heap-leach operation. After almost five years of 24-hour-per-day operation with used equipment, the SCMP requires an overhaul. At that time the low price of gold did not provide an adequate cash reserve for these needs. Additional equipment has to be purchased, delivered and installed and the SCMP has to be retrofitted, overhauled and its capacity should be expanded. 34 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 2,000 ton-per-day open-pit, heap-leach, start-up operation may produce 1,280 ounces of gold per month. It is necessary to raise adequate funds from outside sources for this operation; the amount required is dependent on the targeted daily volume of production. The Company estimates that it will need up to U.S. $17 million to start a 2,000 ton-per-day open-pit, heap-leaching operation. Eventually the production capacity would be increased in stages to 6,000 tons per day so that annual production could be 113,000 ounces of gold at the SSGM. The use of the $17,000,000 proceeds is as follows: $8,250,000 for mining equipment and the completion of erecting a crushing system; $3,783,548 for the processing equipment and site and infrastructure costs; and a sum of $4,966,452 is to be used for working capital. The once depressed price of gold has substantially increased during the last two years. The Company's incredibly low common share market price is a major deterrent in raising cash for the Company's programs. 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 profits from the existing SCMP operation (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 is necessary for the Company to obtain funds from other sources. The Company may have to borrow funds by issuing open-ended, secured, on-demand or unsecured promissory notes, by selling its shares to its directors, officers and other interested accredited investors, or by entering into a joint venture, merging, or developing an acceptable form of a business combination with others. 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. The Company was unable to obtain sufficient funds during this fiscal year to complete the modification and expansion of the SCMP or for its open-pit, heap-leach operation. However, the Company did invest funds during this fiscal period, which were used to progress the erection of the cone crushing system, to maintain the SCMP, and to conduct exploration programs. 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. 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 will be greatly enhanced if the price of gold stays at the current or higher level. These exploration programs will involve airborne geophysics, stream chemistry, geological mapping, trenching, drilling, etc. The Joint Venture believes that it may be able to joint venture or enter into other business arrangements to share these exploration costs with other entities. 35 From September 1987 through March 31, 2005, the Company has advanced the sum of $48,953,121 to the Joint Venture (which includes interest charges payable to the Company), and three of the Company's subsidiaries have advanced the sum of $590,265, for a total of $49,543,386. This investment includes the charge of $31,200,773 for interest expense during this period of time. 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 initial retrofitting, repair, modernization and expansion of its SCMP facilities, for consumable inventory, for working capital, for exploration and holding costs of the San Felipe-El Potosi Mine, the Modesto Mine, the Montemayor Mine, the Tabanco Mine and the La Lola Mine, for SSGM infrastructure, including rewiring, repairing and installation of over two miles of the Company's electric power 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 and erection of a cone crushing system, for diamond drilling at the SSGM, for the purchase of a rod mill and a carbon regeneration system, for holding costs, and for many other related needs. RECENTLY ISSUED ACCOUNTING STANDARDS - ------------------------------------ In December 2004, the FASB issued SFAS No. 153, "EXCHANGES OF NON-MONETARY ASSETS AN AMENDMENT OF APB NO. 29." This Statement amends APB Opinion No. 29, "ACCOUNTING FOR NON-MONETARY TRANSACTIONS" to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. That exception required that some non-monetary exchanges be recorded on a carryover basis versus this Statement, which requires that an entity record a non-monetary exchange at fair value and recognize any gain or loss if the transaction has commercial substance. This Statement is effective for fiscal years beginning after June 15, 2005. At this time the Company believes that the adoption of SFAS No. 153 will not have a material impact on our financial position, net earnings or cash flows. In December 2004, the FASB issued SFAS No. 123 revised in 2004, "SHARE- BASED PAYMENT." This Statement is a revision of SFAS No 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," and supersedes APB No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." The Statement requires companies to recognize in the income statement the grant-date fair value of stock options and other equity based compensation issued to employees. This Statement is effective as of the beginning of the first interim or annual period that commences after June 15, 2005. At this time, the Company does not expect the effects of the adoption of SFAS No. 123 to have a material impact on the Company's financial position, net earnings or cash flows. In November 2004, the FASB issued SFAS No. 151, "INVENTORY COSTS -- AN AMENDMENT OF ARB NO. 43, CHAPTER 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "INVENTORY PRICING," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the effect that the adoption of SFAS 151 will have on its results of operations or financial position at this time, but it does not expect SFAS 151 to have a material effect. 36 In November 2004, the FASB issued EITF Issue No. 03-13, "APPLYING THE CONDITIONS IN PARAGRAPH 42 OF FASB STATEMENT NO. 144, ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, IN DETERMINING WHETHER TO REPORT DISCONTINUED OPERATIONS" (EITF No. 03-13). This issue assists in the development of a model for evaluating (a) which cash flows are to be considered in determining whether cash flows have been or will be eliminated and (b) what types of continuing involvement constitute significant continuing involvement. The guidance in this issue should be applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004. Previously reported operating results related to disposal transactions initiated within an enterprise's fiscal year that includes the date that this consensus was ratified (November 30, 2004) may be reclassified. The Company at this time does not believe that the adoption of EITF No. 031-13 will have a material impact on its financial position, net earnings or cash flows. In September 2004, the FASB issued EITF Issue No. 03-1, "THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS" (EITF No. 03-01). The guidance in EITF No. 03-1 was effective for other- than-temporary impairment evaluation made in reporting periods beginning after June 15, 2004. However, certain provisions regarding the assessment of whether an impairment is other than temporary have been delayed. Although the disclosure requirements continue to be effective in annual financial statements for fiscal year ending after December 15, 2003, for investments accounted for under SFAS No. 115 and 124. For all other investments addressed by EITF No. 03-1, the disclosures continue to be effective in annual financial statements for fiscal years ending after June 15, 2004. The Company at this time does not believe that the adoption of EITF No. 03-1 will have a material impact on its financial position, net earnings or cash flows. On April 30, 2004 the FASB issued a Staff Position (FSP) amending SFAS No. 141 and SFAS No. 142 to provide that certain mineral use rights are considered tangible assets and should be accounted for based on their substance. If recharacterization of an asset results, prior period amounts in the statement of financial position are to be reclassified with any effects on amortization or depreciation prospectively applied. The FSP was effective for the first reporting period beginning after April 29, 2004, with early adoption permitted. EMPLOYEES - --------- As of March 31, 2004, the Joint Venture employed between 45 and 55 full- time persons in El Salvador to perform its limited exploration, exploitation, and development programs; to complete the erection of the cone crushing system, to provide 24-hour seven-day-a-week security at three different sites; to provide engineering, geology, drafting, and computer- related services; and to handle the administration of its activities. None of the employees are covered by any collective bargaining agreements. It has developed a harmonious relationship with its employees, and it believes that at one time in the past, it was one of the largest single non- agricultural employers in the El Salvador Eastern Zone. Also, the Company employs up to four persons, including part-time help, in the United States. Since the Joint Venture has laid off most of its employees, the Joint Venture had to pay their severance pay and other benefits, therefore from time to time it sold and continues to sell the Company's common shares which were issued to the Commerce Group Corp. Employee Benefit Account. El Salvador employees are entitled to receive severance pay, which is based on one month's pay for each year of employment. RELATED PARTY LOANS, OBLIGATIONS AND TRANSACTIONS - ------------------------------------------------- The related party transactions are included in detail in the Notes to the Consolidated Financial Statements. 37 COMPANY ADVANCES TO THE JOINT VENTURE - ------------------------------------- Since September 1987 through March 31, 2005, the Company, and three of its subsidiaries, have advanced to the Joint Venture $48,953,121. Included in the total advances is the interest charged to the Joint Venture by the Company which amounts to $31,200,773 through March 31, 2005. So far, the Company furnished all of the funds required by the Joint Venture. The cost of the interest charge has been eliminated from these financial statements. EFFORTS TO OBTAIN CAPITAL - ------------------------- Since the concession was granted, and through the present time, substantial effort is exercised by the Directors and Officers in attempting to secure funding through various sources, all with the purpose to expand the operations of the SCMP, to construct an open-pit heap-leach operation at the SSGM site, and to continue the exploration of its other mining prospects. In more than one instance, the Company has encountered difficulty in negotiating reasonable terms and conditions. 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 the conflict. Even though many years have passed, the stigma of the past unfavorable political status in the Republic of El Salvador exists and therefore certain investors continue to be apprehensive 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 Company's common stock market price places the Company in a situation of substantially diluting its common shares in order to raise equity capital. The Company believes that it will be able to obtain adequate financing to conduct its operations from the same sources as in the past. There are no assurances that funds will be available, except at this time, there is a greater world-wide interest in the ownership of gold. The price of gold is at a favorable height which should encourage investors to invest in gold mining companies. 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. The El Salvador Department of Hydrocarbons and Mines (DHM) requires environmental permits to be issued in connection with the issuance of exploitation concessions. The issuance of these permits are under the jurisdiction of the El Salvador Ministry of Environment and Natural Resources Office (MARN). On October 15, 2002, MARN issued an environmental permit under Resolution 474-2002 for the SCMP. On October 20, 2002, MARN issued an environmental permit under Resolution 493-2002 for the Renewed SSGM Exploitation area. Reference is made to Item 1. Environmental Matters for additional details. 38 GUARANTEES - ---------- The Company has provided the Government of El Salvador with the following guarantees on September 27, 2002: three-year guarantees were issued by the Banco Agricola, S.C. on behalf of the Company to the Ministry of Environment and Natural Resources; Guarantee No. 1901-0000059-8 was issued for the San Cristobal Mill and Plant in the sum of $771.49; and Guarantee no. 1901-0000058-7 was issued for the Renewed SSGM in the sum of $14,428.68. On July 10, 2003 a one-year third party liability guarantee in the sum of $42,857.14 expiring July 10, 2004 was issued by Compania Anglo Salvadorena de Seguros, S.A. on behalf of the Company to the Ministry of Economy's Office of the Department of Hydrocarbons and Mines. The guaranty was renewed for the period of July 10, 2004 through July 10, 2005. DIVIDENDS - --------- For the foreseeable future, it is anticipated that the Company will use any of its earnings to finance its growth and expansion, therefore, dividends will not be paid to shareholders. IMPACT OF INFLATION - ------------------- The impact of inflation on the Company has not been significant in recent years because of the relatively low rates of inflation and deflation experienced in the United States. ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ---------------------------------------------------------------------- COMMODITY PRICES - ---------------- When in production, the Company's earnings and cash flow will be significantly impacted by changes in the market price of gold. Gold prices can fluctuate widely and are affected by numerous factors, such as demand, production levels, economic policies of central banks, producer hedging, and the strength of the U.S. dollar relative to other currencies. During the last five years, the average annual market price of gold has fluctuated between $270 per ounce and $425 per ounce. The Company has not been engaged in any hedging contracts whatsoever. Therefore, it had no outstanding forward gold contracts. As of March 31, 2005, the Company's debt payable to related parties was $11,364,188 and to others $269,179, for a total of $11,633,367. All of the debt is subject to interest at a rate of two to four percent over the prime rate, but not less than sixteen percent, payable monthly and more fully described in the financial statements. FOREIGN CURRENCY - ---------------- The Company conducts the majority of its business in the Republic of El Salvador, Central America. Currently, El Salvador is on the U.S. dollar system, and therefore all receipts and expenditures since January 1, 2001 are in U.S. dollars. 39 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - -------------------------------------------------------------------------- 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. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Index to Consolidated Financial Statements and Supplementary Financial Data Page Report of Independent Registered Public Accounting Firm. . . . . . . . 44 Financial Statements: Consolidated Balance Sheets, Years Ended March 31, 2005 and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Consolidated Statements of Operations, Years Ended March 31, 2005, 2004 and 2003. . . . . . . . . . . . . . . . . . . . . . . . . 46 Consolidated Statements of Changes in Shareholders' Equity Years Ended March 31, 2005, 2004 and 2003. . . . . . . . . . . . . . 47 Consolidated Statements of Cash Flows, Years Ended March 31, 2005, 2004 and 2003. . . . . . . . . . . . . . . . . . . . . . . . . 48 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 51 Selected Quarterly Financial Data (Unaudited). . . . . . . . . . . . . 71 Supplementary Financial Data: Report of Independent Accountant on the Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Schedules of financial statements 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. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Commerce Group Corp. Milwaukee, Wisconsin We have audited the accompanying consolidated balance sheets of Commerce Group Corp. (a Wisconsin corporation) as of March 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated statements referred to above present fairly, in all material respects, the consolidated financial position of Commerce Group Corp. as of March 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Chisholm, Bierwolf & Nilson, LLC Certified Public Accountants Bountiful, Utah May 18, 2005 41 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE Consolidated Balance Sheets--March 31
2005 2004 ------------ ------------ ASSETS ------- Current assets Cash $ 13,669 $ 30,348 Other current assets 218,528 219,098 Accounts receivable, related 584,468 584,011 Accounts receivable - 24,658 Mining supplies 39,562 39,562 Prepaid items and deposits 84,266 95,794 ------------ ------------ Total current assets 940,493 993,471 Property, plant and equipment, net 4,427,876 4,333,128 Mining resources investment 31,150,207 29,092,782 ------------ ------------ Total assets $ 36,518,576 $ 34,419,381 ============ ============ LIABILITIES ----------- Current liabilities Accounts payable $ 213,514 $ 262,704 Accounts payable, related 230,001 225,885 Notes and accrued interest payable to related parties 11,364,188 9,400,682 Notes and accrued interest payable to others 269,179 247,579 Accrued salaries 3,072,136 2,871,128 Accrued legal fees 32,981 327,015 Other accrued expenses 696,621 646,523 ------------ ------------ Total liabilities 16,178,620 13,981,516 Commitments and contingencies (Notes 2, 4, 5, 6, 7, 8, 10 & 12) SHAREHOLDERS' EQUITY --------------------- Preferred Stock Preferred stock, $0.10 par value: Authorized 250,000 shares; Issued and outstanding 2004-none; 2003-none $ 0 $ 0 Common stock, $0.10 par value: Authorized 50,000,000 shares; Issued and outstanding: 2005-23,823,734 2,382,373 2004-22,681,591 2,268,159 Capital in excess of par value 19,292,410 19,274,597 Retained earnings (deficit) (1,334,827) (1,104,891) ------------ ------------ Total shareholders' equity 20,339,956 20,437,865 ------------ ------------ Total liabilities and shareholders' equity $ 36,518,576 $ 34,419,381 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 42 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE Consolidated Statements of Operations For the Years Ended March 31
2005 2004 2003 ------------ ------------ ------------ Revenues: $ 0 $ 0 $ 0 Expenses: General and administrative $ 229,936 $ 237,790 $ 232,647 ------------ ------------ ------------ Total expenses 229,936 237,790 232,647 Net profit (loss) (229,936) (237,790) (232,647) Credit (charges) for income taxes 0 0 0 ------------ ------------ ------------ Net income (loss) after income tax credit (charge) $ (229,936) $ (237,790) $ (232,647) ============ ============ ============ Net income (loss) per share basic/diluted $ (.01) $ (.01) $ (.01) ============ ============ ============ Weighted av. basic/diluted common shares outstanding 22,581,814 21,089,812 18,907,958 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 43 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE Consolidated Statements of Changes in Shareholders' Equity For the Years Ended March 31, 2005, 2004 and 2003
Common Stock -------------------------------------- Capital in Retained Number of Excess of Earnings Shares Par Value Par Value (Deficit) ---------- ------------ ------------ ------------ Balances March 31, 2002 17,468,008 $ 1,746,801 $ 18,792,109 $ (634,454) Net loss for FY March 31, 2003 - - - (232,647) Common stock issued for: Dir./off./employee /services comp. 693,221 69,322 85,848 - Payment of debt 1,435,200 143,520 85,805 - Cash 811,000 81,100 33,650 - ---------- ------------ ------------ ------------ Balances March 31, 2003 20,407,429 2,040,743 18,997,412 (867,101) Net loss for FY March 31, 2004 (237,790) Common stock issued for: Dir./off./employee/ services comp. 630,862 63,086 92,014 - Payment of debt 928,300 92,830 138,657 - Stock options exercised for cash 230,000 23,000 6,500 - Cash 485,000 48,500 63,350 - Capital distribution - - (23,336) - ---------- ------------ ------------ ------------ Balances March 31, 2004 22,681,591 2,268,159 19,274,597 (1,104,891) Net loss for FY March 31, 2005 - - - (229,936) Common stock issued for: Dir./off./employee /services comp. 535,786 53,578 5,649 - Payment of debt 500,000 50,000 2,500 - Cash 106,357 10,636 9,664 - ---------- ------------ ------------ ------------ Balances March 31, 2005 23,823,734 $ 2,382,373 $ 19,292,410 $(1,334,827) ========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 44 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE Consolidated Statements of Cash Flows
For the Years Ended March 31 2005 2004 2003 ------------ ------------ ------------ Operating activities: Net loss $(229,936) $(237,790) $(232,647) Adjustments to reconcile net loss to net cash provided by used in) operating activities: Common stock issued for services rendered 59,227 155,100 155,170 Changes in assets and liabilities: Decrease (increase) in accounts receivable and other current assets 24,771 (24,977) (85,108) Decrease (increase) in prepaid items and deposits 11,528 (53,893) (16,856) Increase (decrease) in accounts payable and other accrued expenses 5,024 58,674 58,915 Increase (decrease) in accrued salaries 40,808 (94,101) 9,650 Increase (decrease) in accrued legal fees 5,966 74 12,138 ------------ ------------ ------------ Net cash provided by (used in) operating activities (82,612) (196,913) (98,738) Investing activities: Investment in mining resources and property, plant and equipment (300,454) (135,241) (214,089) ------------ ------------ ------------ Net cash used by investing activities (300,454) (135,241) (214,089) Financing activities: Cash received on related party notes payable 346,087 193,148 187,000 Common stock issued for cash 20,300 141,350 114,750 ------------ ------------ ------------ Net cash provided by financing activities 366,387 334,498 301,750 Net increase (decrease) in cash and cash equivalents (16,679) 2,344 (11,077) Cash - beg. of year 30,348 28,004 39,081 ------------ ------------ ------------ Cash - end of year $ 13,669 $ 30,348 $ 28,004 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 45 COMMERCE GROUP CORP., ITS SUBSIDIARIES, AND THE JOINT VENTURE Consolidated Statements of Cash Flows, continued Supplemental disclosures of cash information:
Supplemental disclosures of cash information: Year Ended March 31, 2005 March 31, 2004 -------------- --------------- A. Cash information $Amount $Amount 1. Accrued interest capitalized $1,691,519 $1,433,298 2. Interest expense paid in cash - - 3. Income taxes paid - - B. Non cash investing and financing Common stock issued for: 1. Director fees, officer compensation, employee benefits and services 535,786 $59,227 630,862 $155,100 2. Related party notes payable 500,000 $52,500 928,300 $231,487
C. Other supplemental disclosures 1. Other current assets consist of securities held by Commerce for the Commerce Group Corp. Employee Benefit Account, which are stated at cost of $86,080 at March 31, 2005. The funds are to be used to pay the El Salvadoran employee medical benefits and pension benefits as required by the El Salvadoran Government. The El Salvadoran vacation and Christmas bonus payments are due when earned while the severance pay is due and payable at such time when the employee has been discharged, retired, permanently laid off, death or when incapable of working due to permanent health/work related conditions. The Company has sole control and jurisdiction over this account and to the best of the Company's knowledge, there is absolutely no condition, right, or requirement by the El Salvadoran authorities to have such funds in any form of a reserve. Also included in other current assets are certain precious stones and jewelry stated at cost of $132,448 at March 31, 2005. 2. The accounts receivable, related consist of advances to Mineral San Sebastian S.A. (Misanse), which is 52% owned by the Company. These advances are an offset for the past and future Misanse rental charges that are included in the accounts payable. An accounting is as follows:
Misanse Others Total -------- -------- -------- Accounts receivable $584,468 $ 0 $584,468 Accounts payable $230,001 $213,514 $443,515
On January 14, 2003, at a Misanse shareholders' meeting held at the Company's City of San Miguel, El Salvador office, the shareholders and the Directors approved, confirmed and ratified the amount that Misanse owed the Company for advances and other obligations the Company incurred on behalf of Misanse. The amount due to Misanse at that time was also approved, ratified and confirmed. 46 The Company is of the opinion that it is appropriate to record the fact that Misanse owes the Company $584,468 and that the Company owes Misanse $230,001 as Misanse is not consolidated with the Company's financial records. When gold production commences, the 5% royalty payable to Misanse for rent of the San Sebastian Gold Mine property based on the gross proceeds from the sale of gold and the accounts payable offset will reduce this receivable until it is paid in full. 3. Mining supplies consist of consumable items used in processing gold ore, which are stated at the average cost. The accompanying notes are an integral part of these consolidated financial statements. 47 COMMERCE GROUP CORP., ITS SUBSIDIARIES AND THE JOINT VENTURE Notes to the Financial Statements March 31, 2005 (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 United States corporations, have formed the Commerce/Sanseb Joint Venture ("Joint Venture") for the purpose of performing gold mining, the sale of gold, 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, was produced (but not on a full production basis) in El Salvador and refined and sold in the United States. Expansion of exploration is a goal at the San Sebastian Gold Mine ("SSGM") which is located near the city of Santa Rosa de Lima. Expanded exploration is being limited at other mining projects until adequate funding is obtained under acceptable terms and conditions. All of the mining projects are located in the Republic of El Salvador, Central America. On March 3, 2003, the Company received an exploration license from the Government of El Salvador (GOES) dated February 24, 2003, for the exploration of minerals in an area encompassing the SSGM, consisting of 40.77 square kilometers (10,070 acres), which is hereafter referred to as the "New SSGM Exploration Concession/License" or the "New SSGM." This expanded area provides the Company with an opportunity to increase its gold and silver ore reserves. Included in this area are three formerly-operated gold and silver mines: the La Lola Mine, the Santa Lucia Mine and the Tabanco Mine. On May 20, 2004 (delivered June 4, 2004) the Company was granted an exploitation concession from the GOES consisting of 1.23 square kilometers (304 acres) for the exploration of the precious metals. Hereafter, this grant will be referred to as the Renewed San Sebastian Gold Mine Exploitation Concession/License (Renewed SSGM). On May 25, 2004 (received June 4, 2004) the GOES issued a second exploration concession consisting of 45 square kilometers (11,115 acres) hereinafter referred to as the Nueva Esparta. As of March 31, 2000 the Joint Venture had temporarily suspended the San Cristobal Mill and Plant ("SCMP") operations (operations ceased on December 31, 1999) until such time as it has adequate funds to retrofit, rehabilitate, restore and expand these facilities and until there is certainty that the price of gold will be stabilized at the current or a higher selling price. The Company continues to be cognizant of its cash needs until such time as it is able to produce adequate profits from its SSGM gold production. It will continue to attempt to obtain sufficient funds to assist the Joint Venture in placing the SSGM into production as the anticipated profits from the existing SCMP operation (unless accumulated over a period of time) appear insufficient to meet the SSGM capital and the other mining exploration requirements. In order to continue to follow its goal 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 is necessary for the Company to obtain funds from other sources. The 48 Company may have to borrow funds by issuing open-ended, secured, on- demand or unsecured promissory notes, by selling its shares to its directors, officers and other interested accredited investors, or by entering into a joint venture, merger, or developing an acceptable, creative form of a business combination. The Company's directors and officers, with the aid of investment bankers and finders, are aggressively seeking a compatible financial or business arrangement. The verbal and written proposals or arrangements received were not acceptable by the Company due to the terms and conditions. The Joint Venture plans to begin its open-pit, heap-leaching process on the SSGM site when adequate funding becomes available under fair and reasonable terms and conditions, and providing that the price of gold maintains the current price level. It also plans to continue its SSGM site preparation, the expansion of its exploration and exploitation targets, and the enlargement and development of its gold ore reserves. Furthermore, it plans to explore the potential of other gold mine exploration prospects in El Salvador. Concurrently, it is in the process of obtaining necessary funding for each of these separate programs while its Joint Venture is performing minor retrofit and rehabilitation work at the SCMP. It commenced an exploration program in the New SSGM and in the Nueva Esparta. (b) Basis of presentation: Management estimates and assumptions: Certain amounts included in or affecting the Company's financial statements and related disclosures must be estimated, requiring that certain assumptions be made with respect to values or conditions which cannot be made with certainty at the time the financial statements are prepared. Therefore, the reported amounts of the Company's assets and liabilities, revenues and expenses, and associated disclosures with respect to contingent assets and obligations are necessarily affected by these estimates. The Company evaluates these estimates on an ongoing basis, utilizing historical experience, consultation with experts, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from the Company's estimates. (2) Significant Accounting Policies - ------------------------------------ Consolidated Statements 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. The Company does not have corporate control of Misanse as the majority of Misanse's elected directors are El Salvadoran shareholders. 49
Charter/Joint Venture --------------------- Included in the Consolidated Statements % Ownership Place Date - --------------------------------------- ----------- ------------ ------------ Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959 Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974 San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970 San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968 Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964 Commerce/Sanseb Joint Venture ("Joint Venture") 90.0 Wisconsin & El Salvador 09/22/1987 Not included in the Consolidated Statements - ------------------------------------------- Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0 El Salvador 05/08/1960
MINORITY INTEREST During the periods ended March 31, 2005 and 2004, there were no expenses in the entities wherein minority interests existed. Minority interest as a whole is immaterial in these financial statements and therefore have not been presented. OTHER CURRENT ASSETS Other current assets consist of securities held as nominee for the Commerce Group Corp. Employee Benefit Account, and are stated at cost. Other current assets also include certain precious stones also stated at cost. ACCOUNTS RECEIVABLE The accounts receivable consist of advances to Misanse, a 52%-owned subsidiary, which will be offset for the Misanse rental charges included in the accounts payable. INTERCOMPANY BALANCES All intercompany balances and transactions have been eliminated in the consolidated financial statements. MINING SUPPLIES Mining supplies consist of consumable supplies used in connection with processing ore, and are stated at cost, which is lower than the market value. 50 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 units of production method at such time as it begins producing gold derived from the 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. 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 will be recognized when delivery has occurred, title and risk of loss passes to the buyer, and collectability is reasonably assured. Gold sales will be made in accordance with sales contracts where the price is fixed or determinable. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment is stated at the lower of cost or estimated net realizable value. Mining properties, development costs and plant and equipment will be depreciated when full production takes place using the units of production method based upon proven and probable reserves. Until the Company suspended its mining operations, the assets were depreciated using the straight-line method over estimated useful lives ranging from three to ten years. Depreciation and amortization expenses include the amortization of assets acquired, if any, under capital leases. Replacements and major improvements are capitalized. When in operation, maintenance and repairs will be 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. Since the Company suspended its gold processing operations effective March 31, 2000, it also ceased to depreciate its fixed 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. 51 IMPAIRMENTS The Company evaluates the carrying value of its properties and equipment when events or changes in circumstances indicate that the properties or equipment may be impaired and then at that time it plans to apply 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. Estimated future net cash flows, on an undiscounted basis, from each property are calculated using estimated recoverable ounces of gold (considering current proven and probable reserves and mineral resources expected to be converted into mineral reserves. The inclusion of mineral resources is based on various circumstances, including but not limited to, the existence and nature of known mineralization, location of the property, results of drilling; and analysis to demonstrate the ore is commercially recoverable), estimated future gold price realization (considering historical and current prices, price trends and related factors); and operating, capital and site restoration costs. Reduction in the carrying value of property, plant and equipment, with a corresponding charge to income, are recorded to the extent that the estimated future net cash flows are less than the carrying value. RECENTLY ISSUED ACCOUNTING STANDARDS In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and amends APB No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This Statement requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. SFAS No. 144 retains the fundamental provision of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This statement also retains APB No. 30's requirement that companies report discontinued operations separately from continuing operations. All provisions of this statement are effective in the first quarter of 2003. At this time, the Company believes that the impact of this standard should have no material impact on the financial statements taken as a whole. In December 2002, the Financial Accounting Standards Board issued Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS No. 148). SFAS No. 148, amends SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amendments to SFAS No. 123 are effective for financial statements for fiscal years ending after December 15, 2002. The Company will account for stock-based employee compensation using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees when such plan will be implemented by the Company. At that time, the Company will disclose the requirements of SFAS No. 148. No stock-based employee compensation has been provided as of this date, as no employee stock compensation was issued during the years ended March 31, 2005 and 2004. 52 ASSET RETIREMENT OBLIGATIONS: The Company, when the occurrence arises, plans to adopt a Statement of Financial Accounting Standards No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS (SFAS No. 143). SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Fair value is determined by estimating the retirement obligations in the period an asset is first placed in service and then adjusting that amount for estimated inflation and market risk contingencies to the projected settlement date of the liability. The result is then discounted to a present value from the projected settlement date to the date the asset was first placed in service. The present value of the asset retirement obligation is recorded as an additional property cost and as an asset retirement liability. The amortization of the additional property cost (using the units of production method) will be included in depreciation, depletion and amortization expense and the accretion of the discounted liability will be recorded as a separate operating expense in the Company's Statement of Operations. In December 2004, the FASB issued SFAS No. 153, "EXCHANGE OF NON-MONETARY ASSETS AN AMENDMENT OF APB NO. 29." This Statement amends APB Opinion No. 29, "ACCOUNTING FOR NON-MONETARY TRANSACTIONS" to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. That exception required that some non-monetary exchanges be recorded on a carryover basis versus this Statement, which requires that an entity record a non-monetary exchange at fair value and recognize any gain or loss if the transaction has commercial substance. This Statement is effective for fiscal year beginning after June 15, 2005. The Company, at this time, cannot determine the impact that the adoption of SFAS No. 153 may have on its financial position, net earnings, or cash flows. In December 2004, the FASB issued SFAS No. 123 revised 2004, "SHARE-BASED PAYMENT." This Statement is a revision of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," and supersedes APB No. 25, "Accounting for Stock Issued to Employees." The Statement requires companies to recognize in the income statement the grant-date fair value of stock options and other equity based compensation issued to employees. This Statement is effective as of the beginning of the first interim or annual period that commences after June 15, 2005. The Company cannot yet determine the impact that the adoption of SFAS No. 123 revised 2004 will have on its financial position, net earnings or cash flows. In November 2004, the FASB issued EITF Issue No. 03-13, "APPLYING THE CONDITIONS IN PARAGRAPH 42 OF FASB STATEMENT NO. 144, ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, IN DETERMINING WHETHER TO REPORT DISCONTINUED OPERATIONS" (EITF No. 0-3-13). This issue assists in the development of a model for evaluating (a) which cash flows are to be considered in determining whether cash flows have been or will be eliminated and (b) what types of continuing involvement constitute significant continuing involvement. The guidance in this issue should be applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004. Previously reported operating results related to disposal transaction initiated within an enterprise's fiscal year that includes the date that this consensus was ratified (November 30, 2004) may be reclassified. The Company at this time cannot determine the impact that the adoption of EITF No. 03-13 may have on its financial position, net earnings or cash flows. 53 In November 2004, the FASB issued SFAS No. 151, "INVENTORY COSTS -- AN AMENDMENT OF ARB NO. 43, CHAPTER 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "INVENTORY PRICING," to clarify the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule required that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current- period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company is evaluating the effect that the adoption of SFAS 151 may have on its results of operations or financial position but it does not expect SFAS 151 to have a material effect. In September 2004, the FASB issued EITF Issue No. 03-1, "THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS" (EITF NO. 03-1). The guidance in EITF No. 03-1 was effective for other- than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, certain provisions regarding the assessment of whether an impairment is other than temporary have been delayed. Although the disclosure requirements continue to be effective in annual financial statements for fiscal years ended after December 15, 2003, for investments accounted for under SFAS No. 115 and 124. For all other investments addressed by EITF No. 03-1, the disclosures continue to be effective in annual financial statements for fiscal years ending after June 15, 2004. The Company believes at this time that the adoption of EITF No. 03-1 will not have a material impact on its financial position, net earnings or cash flows. On April 30, 2004 the FASB issued a FASB Staff Position (FSP) amending SFAS No. 141 and SFAS No. 142 to provide that certain mineral use rights are considered tangible assets and should be accounted for based on their substance. If recharacterization of an asset results, prior period amounts in the statement of financial position are to be reclassified with any effects on amortization or depreciation prospectively applied. The FSP was effective for the first reporting period beginning after April 29, 2004, with early adoption permitted. The Company believes that at this time it is not necessary to reclassify any of its tangible assets. 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 mining properties. Estimates of future cash flows are subject to risks and uncertainties. It is possible that changes could occur which may affect the recoverability of property, plant and equipment. INTEREST CAPITALIZATION Interest costs are capitalized as part of the historical cost of facilities and equipment, if material. 54 INCOME TAXES The Company files a consolidated federal income tax return with its subsidiaries (See Note 9). The Joint Venture files a U.S. partnership return. EARNINGS (LOSS) PER COMMON SHARE The Company has in the past years reported its "Earnings per Share" (EPS) which presently complies with the provisions of Statement of Financial Accounting Standards No. 128 (SFAS No. 128). As required by this standard, the Company, if applicable, could report 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. However, the computation of diluted EPS shall not assume conversion, exercise, or contingent issuance of securities that would have an antidilutive effect on earnings per share. Shares issued on actual conversion, exercise, or satisfaction of certain conditions for which the underlying potential common shares were antidilutive shall be included in the computation as outstanding common shares from the date of conversion, exercise, or satisfaction of those conditions, respectively. Therefore, there is no difference in the earnings or the number of basic or diluted shares. The computation of earnings per share of common stock is based on the weighted average number of shares outstanding at the date of the financial statements.
Net Loss Shares Per-Share (Numerator) (Denominator) Amount ------------ ------------ ------------ For the year ended March 31, 2005: Basic EPS Net loss to common Shareholders $ (229,936) 22,581,814 $ (0.01) For the year ended March 31, 2004: ============ ============ ============ Basic EPS Net loss to common Shareholders $ (237,790) 21,089,812 $ (0.01) For the year ended March 31, 2003: ============ ============ ============ Basic EPS Net loss to common Shareholders $ (232,647) 18,907,958 $ (0.01) ============ ============ ============
FOREIGN CURRENCY The Company conducts the majority of its operations in the Republic of El Salvador, Central America. Currently, El Salvador is on the U.S. dollar system and therefore all receipts and expenditures since January 1, 2001 are in U.S. dollars. 55 RECLASSIFICATIONS Certain reclassifications have been made to prior year amounts to conform to the current year presentations. The Company changed the amounts classified as general & administrative expense from amounts previously recorded as mining resources. (3) Investment in Property, Plant, Equipment and Mining Resources - ----------------------------------------------------------------- The following is a summary of the investment in property, plant, equipment, mining resources and development costs:
March 31, 2005 March 31, 2004 ---------------------------------- ----------------------------------- Accumulated Accumulated Depre- Depre- Cost ciation Net Cost ciation Net ----------- ---------- ----------- ----------- ---------- ----------- Mineral Properties and Deferred Development $31,150,207 - $31,150,207 $29,092,782 - $29,092,782 Property, Plant and Equipment 6,680,019 2,252,143 4,427,876 6,585,271 2,252,143 4,333,128 ----------- ---------- ----------- ----------- ---------- ----------- $37,830,226 $2,252,143 $35,578,083 $35,678,053 $2,252,143 $33,425,910 =========== ========== =========== =========== ========== ===========
Vehicles, office, mining and laboratory equipment, buildings, etc. are stated at cost and are depreciated using the straight-line method over estimated useful lives of three to ten years. Maintenance and repairs are charged to expense as incurred. Since the Joint Venture suspended operations in view of the weak price of gold and the need to expand the SCMP facilities, no depreciation has been recorded during the following fiscal years. The Company is maintaining the property and equipment and will begin to depreciate them once operations commence again. (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 in 1968 to explore, exploit, research, and develop adequate gold reserves. Sanseb produced gold from the SSGM from 1972 through February 1978. 56 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 common shares of Sanseb, the Company in effect has over a 98% interest in the Joint Venture activities. 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, 2005, the Company's investments, including charges for interest expense to the Joint Venture, were $48,953,121 and three of the Company's subsidiaries' advances were $590,265 for a total of $49,543,386. 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, 2005 and 2004, the Company, Sanseb and three of the Company's subsidiaries have invested (including carrying costs) the following in its Joint Venture:
2005 2004 ------------ ------------ The Company's advances (net of gold sale proceeds) since 09/22/87 $48,953,121 $44,295,125 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 38,822,252 36,340,906 ------------ ------------ Total: 94,791,733 87,652,391 Advances by the Company's three subsidiaries 590,265 590,265 ------------ ------------ Combined total investment $ 95,381,998 $ 88,242,656 ============ ============
57 SSGM ACTIVITY The Company had no significant activity at the SSGM site from February 1978 through January 1987 due to the civil unrest in El Salvador. 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 proposed open-pit, heap-leaching operations at the SSGM. The Joint Venture plans to resume its exploration and expansion program to develop additional gold ore reserves in the area surrounding the minable gold ore reserves. Presently, it is completing the erection of its cone crushing system and performing minor rehabilitation repairs to its San Cristobal Mill and Plant. On February 24, 2003, the Ministry of Economy's Director of El Salvador Department of Hydrocarbons and Mines (DHM) granted an exploration concession referred to as the "New SSGM" which area includes and encompasses the existing SSGM. Presently the Company is in the process of exploring three of the formerly operated gold mines. On May 25, 2004, the Government of El Salvador (GOES) granted another exploration concession which is referred to as the "Nueva Esparta" and includes eight formerly operated gold and silver mines. Exploration has commenced on the Montemayor Mine. 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 common shares. The balance is owned by approximately 100 El Salvador, Central American, and United States' citizens. (B) SSGM MINING LEASE On January 14, 2003, the Company entered into an amended and renewed 30-year lease agreement with Mineral San Sebastian Sociedad Anomina de Capital Variable (Misanse) pursuant to the approval of the Misanse shareholders and Misanse directors at a meeting held on January 12, 2003. The renewed lease is for a period of thirty (30) years commencing on the date that the Company received its Renewed San Sebastian Gold Mine Exploitation Concession/License, hereinafter identified as the "Renewed SSGM," from the DHM. The lease is automatically extendible for one or more equal periods. The Company will pay to Misanse for the rental of this real estate the sum of five percent of the sales of the gold and silver produced from this real estate, however, the payment will not be less than $343.00 per month. The Company has the right to assign this lease without prior notice or permission from Misanse. This lease is pledged as collateral for loans made to related parties (Note 7). 58 (C) ONE EXPLOITATION AND TWO EXPLORATION MINERAL CONCESSIONS/LICENSES RENEWED SAN SEBASTIAN GOLD MINE EXPLOITATION CONCESSION/LICENSE UNDER EL SALVADOR AGREEMENT NUMBER 591 DATED MAY 20, 2004 AND DELIVERED ON JUNE 4, 2004 (RENEWED SSGM) - APPROXIMATELY 1.2306 SQUARE KILOMETERS (304 ACRES) LOCATED IN THE DEPARTMENT OF LA UNION, EL SALVADOR, CENTRAL AMERICA 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. An inspection by the DHM was made. 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 tax. On August 29, 2003 the Office of the Ministry of Economy formally presented the Company with a twenty-year Renewed SSGM which was dated August 18, 2003. On May 20, 2004 (delivered June 4, 2004) the Government of El Salvador under this Agreement Number 591 extended the exploitation concession for a period of thirty (30) years. This Renewed SSGM replaces the collateral that the same parties held with the previous concession. NEW SSGM EXPLORATION CONCESSION/LICENSE UNDER EL SALVADOR RESOLUTION NUMBER 27 (NEW SSGM) - APPROXIMATELY 40.7694 SQUARE KILOMETERS (10,070 ACRES) LOCATED IN THE DEPARTMENTS OF LA UNION AND MORAZAN, EL SALVADOR, CENTRAL AMERICA On October 20, 2002, the Company applied to the Government of El Salvador through the DHM 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 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, the following three other formerly operative gold and silver mines included in the New SSGM are being explored: the La Lola Mine, the Santa Lucia Mine, and the Tabanco Mine. NUEVA ESPARTA EXPLORATION CONCESSION/LICENSE (NUEVA ESPARTA) - 45 SQUARE KILOMETERS (11,115 ACRES) On or about October 20, 2002, the Company filed an application with the Government of El Salvador through the DHM for the Nueva Esparta, which consists of 45 square kilometers north and adjacent to the New SSGM. 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. On May 25, 2004 (received June 4, 2004) the Government of El Salvador under Resolution Number 271 issued the exploration concession for a period of four years with a right to request an additional four year extension. An important observation is that these mines form a belt of mineralization following a fault line from the SSGM to the Montemayor Mine for a distance of approximately five miles. Included in the Nueva Esparta are eight other formerly operated gold and silver mines known as: the Grande Mine, the Las Pinas Mine, the Oro Mine, the Montemayor Mine, the Baradero Mine, the Carrizal Mine, the La Joya Mine and the Copetillo Mine. 59 EL SALVADOR MINERAL PRODUCTION FEES As of July 2001, a series of revisions to the El Salvador Mining Law offer to make exploitation more attractive. The principal change is that the fee has been reduced to two percent of the gross gold and silver receipts. The Company believes that it is in compliance with the new law, and plans to file applications for all of the mining concessions in which it has an interest. SCMP LAND AND BUILDING LEASE On November 12, 1993, the Joint Venture entered into an agreement with Corporacion Salvadorena de Inversiones ("Corsain"), an El Salvadoran governmental agency, 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 west of the SSGM site. The basic annual lease payment was U.S. $11,500, payable annually in advance, unless otherwise amended, 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 was subject to increases based on any United States' inflationary rate adjustments. On April 26, 2004, a three-year lease, which includes an automatic additional three-year extension subject to Corsain's review, was executed by and between Corsain and the Company. This lease is retroactive to November 12, 2003 and the monthly lease payments are $1,418.51 plus the El Salvadoran added value tax. The lease is subject to an annual increase based on the U.S. annual inflationary rate adjustments. The SCMP is strategically located to process ore from other nearby mining projects. MODESTO MINE REAL ESTATE The Company owns 63 acres of land which are a key part of the Modesto Mine that is located near the city of El Paisnal, El Salvador. This real estate is subject to a mortgage and promissory note and is pledged as collateral to certain parties described in Note 7. SAN FELIPE-EL POTOSI MINE ("POTOSI") 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. MONTEMAYOR MINE The Joint Venture has leased approximately 175 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. 60 (5) SYNOPSIS OF REAL ESTATE OWNERSHIP AND LEASES - ------------------------------------------------- The Company's 52%-owned subsidiary, 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: the Company owns approximately 63 acres at the Modesto Mine; and 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 previously leased approximately 175 acres in the Department of Morazan in the Republic of El Salvador. The Company also leases on a month-to- month basis approximately 4,032 square feet of office space in Milwaukee, Wisconsin. (6) NOTES PAYABLE AND ACCRUED INTEREST - ---------------------------------------
03/31/05 03/31/04 ------------ ------------ Related Parties 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 Misanse lease, real estate and all other assets owned by the Company, its subsidiaries and the Joint Venture as collateral. (Note 7) $11,364,188 $9,400,682 Other Short-term notes and accrued interest (March 31, 2005, $134,179 and March 31, 2004, $112,579) issued to other non related parties, 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. 269,179 247,579 ------------ ------------ Total: $ 11,633,367 $ 9,648,261 ============ ============
(7) RELATED PARTY TRANSACTIONS - ------------------------------- The Company, in an attempt to preserve cash, had prevailed on its President to accrue his salary for the past 24 years, including vacation pay, for a total of $2,994,015 and $2,815,265 at March 31, 2005 and 2004, respectively. 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, 2005 and 2004: 61 The amount of cash funds which the Company has borrowed from its President from time to time, together with accrued interest, amounts to $7,909,686 and $6,565,817 at March 31, 2005 and 2004, respectively. 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. The Company had borrowed an aggregate of $1,022,396 and $915,066 at March 31, 2005 and 2004, respectively, including accrued interest, from the Company's President's Rollover Individual Retirement Account (ELM RIRA). These loans are evidenced by the Company's open-ended, secured, on-demand promissory note, with interest payable monthly at the prime rate plus four percent per annum, but not less than 16% per annum. On March 24, 2005, in order to reduce the Company's debt and to provide liquidity to the ELM RIRA, the Company sold to the ELM RIRA, 500,000 of its restricted common shares at a price of $.105 each for a total of $52,500. The sale price of the common shares was no less favorable than the sales price negotiated with other related and unrelated third parties during this period of time. 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 receives all of the net cash proceeds from the sale or from the pledge of these shares. The Company did not borrow any common shares during this fiscal year. The share loans, if any, are 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, as an individual, and not as a Director or Officer of the Company, presently owns a total of 467 Misanse common shares. There are a total of 2,600 Misanse common shares issued and outstanding. Also with the consent and approval of the Directors, a company in which the President has a 55% ownership, General Lumber & Supply Co., Inc. (GLSCO), entered into the following agreements, and the status is reflected as of March 31, 2005: 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 same related company provides administrative services, use of its vehicles, and other property, as required by the Company. 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. 62 In addition, this related company does from time to time use its credit facilities to purchase items needed for itself or for the Joint Venture's mining needs. This related company has been issued an open-ended, secured, on-demand promissory note which amounts to $1,659,754 and $1,262,390 at March 31, 2005 and 2004, respectively; the annual interest rate is four percent plus the prime rate, but not less than 16%, and it is payable monthly. The Company's Directors have consented and approved the following transactions of which the status of each are reflected as of March 31, 2005 and 2004: The President's wife's Rollover Individual Retirement Account (SM RIRA) has the Company's open-ended, secured, on-demand promissory note in the sum of $591,629 and $503,581 at March 31, 2005 and 2004, respectively, which bears interest at an annual rate of prime plus three percent, but not less than 16% and the interest is payable monthly. The Directors also have acknowledged that the wife of the President is to be compensated for her consulting fees due to her from October, 1, 1994 through September 30, 2000 or 72 months at $2,800 a month, and thereafter at $3,000 per month. The Company owes her as an individual and as a consultant, the sum of $363,600 and $327,600 at March 31, 2005 and 2004, respectively, for services rendered from October 1994. The Law Firm which represents the Company in which a son of the President is a principal is owed the sum of $332,981.50 for 1,799.90 hours of legal services rendered from July 1980 through March 31, 2005. By agreement on the date of payment, these fees are to be adjusted to commensurate with the current hourly fees charged by the Law Firm. The son of the President and his son's wife have the Company's open-ended, on-demand promissory note in the sum of $180,723 and $153,828 at March 31, 2005 and 2004, respectively, which bears interest at an annual rate of 16% payable monthly. 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 an option to receive cash at such time as the Company has profits and an adequate cash flow, or to at any time exchange the amount due to them for the Company's common shares. The Directors and Officers of the Company exercised their option to receive a total of 293,334 common shares valued at $.105 a share in lieu of any cash compensation for all amounts due to them as of March 31, 2005. In addition, during this period one Director received 65,952 of the Company's common shares for consulting services valued at $6,925. The Chairman/President does not receive any Director fees. 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. When full production commences, these capitalized costs will be charged as an expense based on a per unit 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. However, a separate accounting is maintained for the purpose of recording the amount that is due to the Company from the Joint Venture. 63 COMPANY NET ADVANCES TO THE JOINT VENTURE - -----------------------------------------
2005 2004 Advances Charges Advances Charges ----------- ----------- ----------- ----------- Beginning balances $44,295,125 $27,200,167 $40,181,015 $23,751,735 March 31, 2005 advances 4,657,996 4,000,606 4,114,110 3,448,432 ----------- ----------- ----------- ----------- Total Company advances 48,953,121 31,200,773 44,295,125 27,200,167 Advances by three of the Company's subsidiaries 590,265 0 590,265 0 ----------- ----------- ----------- ----------- Total net advances March 31, 2005 $49,543,386 $31,200,773 $44,885,390 $27,200,167 =========== =========== =========== ===========
(8) COMMITMENTS - ---------------- Reference is made to Notes 2, 4, 5, 6, 7, 10 and 12. (9) INCOME TAXES - ----------------- At March 31, 2005, the Company and its subsidiaries, excluding the Joint Venture, have estimated net operating losses remaining in a sum of approximately $6,397,280 which may be carried forward to offset future taxable income; the net operating losses expire at various times to the year of 2019. Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss, tax credit carry-forwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
March 31, 2005 2004 ------------ ------------ Deferred Tax Assets: Net Operating Loss Carry-forwards $ 2,175,000 $ 2,097,000 Valuation Allowance for Deferred Tax Assets (2,175,000) (2,097,000) ------------ ------------ Net Deferred Tax Assets: - - ============ ============
64 (10) DESCRIPTION OF SECURITIES A. COMMON STOCK The Company's Wisconsin Certificate of Incorporation effective as of April 1, 1999 authorizes the issuance of 50,000,000 shares of common stock, $0.10 par value per share of which 23,823,734 shares were issued and outstanding as of March 31, 2005. 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. B. PREFERRED STOCK There were no preferred shares issued and outstanding for the periods ending March 31, 2005 or 2004. The Company's Wisconsin Certificate of Incorporation authorizes the issuance of 250,000 shares of preferred stock, $0.10 par value. The preferred shares are issuable in one or more series. If issued, 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. C. STOCK OPTION ACTIVITY:
03/31/05 03/31/04 03/31/03 Weighted Weighted Weighted Option Average Option Average Option Average Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- -------- Outstanding, beg, yr., 210,000 $0.23 960,000 $0.21 670,000 $0.22 Granted 0 N/A 0 N/A 290,000 $0.19 Exercised 0 N/A (500,000) N/A 0 N/A Forfeited 0 N/A (60,000) N/A 0 N/A Expired (210,000) N/A (190,000) N/A 0 N/A --------- -------- --------- -------- --------- -------- Outstanding, end of yr. 0 $0.00 210,000 $0.23 960,000 $0.21 ========= ======== ========= ======== ========= ========
There were no stock options issued or outstanding as of March 31, 2005. 65 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 restricted common shares. Any share interest payable to the President is for shares loaned to the Company and/or for such shares loaned or pledged for collateral purposes, or for unpaid interest, from time to time, 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 from time to time 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 one year. As of March 31, 2005, there were no shares due to other parties for shares borrowed or for interest payment. F. S.E.C. FORM S-8 REGISTRATION On June 10, 2002, the Company filed its fifth Securities and Exchange Commission Form S-8 Registration Statement No. 333-90122 under the Securities Act of 1933, and it registered 1,500,000 of the Company's $0.10 par value common shares for the purpose of distributing shares pursuant to the plan contained in such registration. From the 1,500,000 shares registered 1,281,245 shares were issued, and 281,755 shares remain to be issued as of March 31, 2005. G. COMMERCE GROUP CORP. EMPLOYEE BENEFIT ACCOUNT (CGCEBA) This account was established for the purpose of compensating the Company's employees for benefits such as retirement, severance pay, and all other related compensation that is mandatory under El Salvadoran labor regulations, and/or as determined by the Officers of the Corporation. The Directors provide the Officers of the Company with the authority to issue its common shares to the CGCEBA on an as needed basis. Under this plan, payment can be made to any employee of the Company or the Company's subsidiaries. The CGCEBA has sold some of the shares issued to this account from time to time to meet its obligations primarily to its El Salvadoran employees. As of April 1, 2004, 385,000 shares remained in the account. 3,000 shares were sold, leaving a balance of 382,000 shares as of March 31, 2005. (11) LITIGATION - ---------------- There is no known pending litigation. 66 (12) CERTAIN CONCENTRATIONS AND CONCENTRATIONS OF CREDIT RISK - -------------------------------------------------------------- The Company is subject to concentrations of credit risk in connection with maintaining its cash primarily in two financial institutions for the amounts in excess of levels. One is insured by the Federal Deposit Insurance Corporation. The other is an El Salvadoran banking institution which the Company uses to pay its El Salvadoran obligations. The Company considers the U.S. institution to be financially strong and does not consider the underlying risk at this time with its El Salvadoran bank to be significant. To date, these concentrations of credit risk have not had a significant effect on the Company's financial position or results of operations. The Company is not subject to credit risk in connection with any hedging activities as it has not hedged any of its gold production. If the Company changes its policies, then it will only use highly-rated credit worthy counterparties, therefore it should not anticipate non-performance. (13) COMMITMENTS AND CONTINGENCIES - ---------------------------------- ENVIRONMENTAL COMPLIANCE Based upon current knowledge, the Company believes that it is in compliance with the U.S. and El Salvadoran 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. ENVIRONMENTAL GUARANTEES In connection with the issuance of environmental permits, the Company has provided the Government of El Salvador with the following guarantees on September 27, 2002: three-year guarantees were issued by the Banco Agricola, S.C. on behalf of the Company to the Ministry of Environment and Natural Resources; Guarantee No. 1901-0000059-8 was issued for the San Cristobal Mill and Plant in the sum of $771.49; and Guarantee No. 1901- 0000058-7 was issued for the Renewed SSGM Exploitation Concession/License in the sum of $14,428.68. In connection with the Renewed SSGM Exploitation Concession/License, on July 15, 2003 a one-year, third party liability guarantee (bond) in the sum of $42,857.14 was issued by Compania Anglo Salvadorena de Seguros, S.A. (Anglosal) on behalf of the Company to the Ministry of Economy's Office of the Department of Hydrocarbons and Mines. The Company pledged its SSGM laboratory real estate as collateral to Anglosal for the issuance of the bond. On August 24, 2004 the bond was renewed and will expire on July 15, 2005, unless it is renewed. 67 The El Salvadoran Environmental Law, Decree No. 233, 1998 and the General Regulation of the Environmental Law specify the following: - An environmental permit from the Ministry of Environment and Natural Resources (MARN) based on the approval of an Environmental Impact Assessment, is required for exploration, exploitation and industrial processing of minerals and fossil fuels; - The environmental permit requires the company to implement prevention, minimization or compensation measures established in the environmental management program, which is a component of the Environmental Impact Assessment; - A financial security (bond) is required that covers the total cost of the facilities or investment required to comply with the environmental management plans included in the Environmental Impact Assessment. Numeric standards for ambient air quality; emissions from fixed sources; maximum environmental noise levels; water quality and effluent limits are specified in various norms and regulation, including the Special Regulation of Technical Norms for Environmental Quality Decree No. 40, and the Special Regulations of Wastewater Decree No. 39. The El Salvadoran Department of Hydrocarbons and Mines (DHM) requires environmental permits to be issued in connection with the application of the Renewed SSGM. The issuance of these permits is under the jurisdiction of the El Salvador Ministry of Environment and Natural Resources Office (MARN). On October 15, 2002, MARN issued an environmental permit under Resolution 474-2002 for the SCMP. On October 20, 2002, MARN issued an environmental permit under Resolution 493-2002 for the Renewed SSGM Exploitation area. LEASE COMMITMENTS The month-to-month lease of its offices is described in note (7) Related Party Transactions of the Notes to the Consolidated Financial Statements. The lease of the SCMP and other mining leases are described in note (4) Commerce/Sanseb Joint Venture ("Joint Venture") and in note (5) Synopsis of Real Estate Ownership and Leases of the Notes to the Consolidated Financial Statements. CONFIRMATION AGREEMENTS The Company, with Directors' approval, as of the end of each fiscal year, enters into confirmation agreements with Edward L. Machulak as an individual, and not as a Director or Officer of the Company, the Edward L. Machulak Rollover Individual Retirement Account, General Lumber & Supply Co., Inc., and Sylvia Machulak as an individual and for the Sylvia Machulak Rollover Individual Retirement Account, to acknowledge the amount due, the collateral pledged, and other pertinent facts and understandings between the parties. These agreements are filed annually as exhibits to the SEC Form 10-K. INTERCOMPANY TRANSACTIONS AND OTHER TRANSACTIONS In addition to the transactions between the Company and General Lumber, and certain individuals who also are Directors and Officers of the Company and between the Company and its Officers, Directors and affiliates, the Company has had transactions with its subsidiaries, San Luis Estates, Inc., Universal Developers, Inc., Homespan Realty Co., Inc., Ecomm Group Inc., San Sebastian Gold Mines, Inc., Mineral San Sebastian S.A. de C.V., and substantial transactions with the Commerce/Sanseb Joint Venture. 68 The Company advances funds, allocates expenses, and charges for disbursements made to the Joint Venture. The Joint Venture in turn capitalizes all of these advances, allocations, expenses, and disbursements. The Company has adopted a policy to maintain a separate accounting of the amount due to it from Sanseb and the Joint Venture. This independent accounting will be maintained by the Company to reflect its investment and the amount due to it. This record will become the official document for future Joint Venture cash distributions. All of the advances and interest earned will be paid to the Company before the distribution to others of any of the Joint Venture's profits or cash flow. The Company maintains a separate accounting for the funds or credits advanced to the Joint Venture and for the interest charged which is at the prime rate quoted on the first business day of each month plus four percent and said interest is payable monthly. These advances, together with interest, are to be paid to the Company prior to the distribution of any of the Joint Venture profits, and are reflected as follows: Company Net Advances to the Joint Venture - -----------------------------------------
Total Interest Advances Charges ------------ ------------ Balance March 31, 2005 $44,295,125 $27,200,167 Advances during fiscal year ended March 31, 2005 4,657,996 4,000,606 ------------ ------------ Total Company's net advances 48,953,121 31,200,773 Advances by threes of the Company's subsidiaries 590,265 0 ------------ ------------ Total net advances as of March 31, 2005 $ 49,543,386 $ 31,200,773 ============ ============
(14) 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. The Company presently has two reportable segments: mining and other. The mining segment was engaged in the exploration of precious metals. The mining processing is temporarily suspended. The other segments are those activities that are combined for reporting purposes. There were no reportable activities in the Internet business; no income and no expenses were recorded. 69
Mining *1 El Salvador, Corporate Central America Headquarters ------------------ ------------------ Year ended March 31, 2005 Sales and revenues $ 0 $ 0 Depreciation & amortization 0 0 Operating income (loss) 0 (229,936) Total assets 36,286,379 232,197 Capital expenditures 2,152,172 0 Year ended March 31, 2004 Sales and revenues $ 0 $ 0 Depreciation & amortization 0 0 Operating income (loss) 0 (237,790) Total assets 34,169,935 249,446 Capital expenditures 1,861,353 0 Year ended March 31, 2003 Sales and revenues $ 0 $ 0 Depreciation & amortization 0 0 Operating income (loss) 0 (232,647) Total assets 32,277,568 222,582 Capital expenditures 806,764 0
*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 do not have control. (15) QUARTERLY FINANCIAL DATA (UNAUDITED) - ----------------------------------------- The following is a tabulation of unaudited quarterly operating results for 2005 and 2004:
Per Share Basic Operating Net Diluted Net Fiscal year ended 3/31/05 Revenues (Loss) Income/(Loss) - ------------------------- ---------- ------------ --------------- First quarter 6/30/04 $ 0 $ (50,586) $ (.0022) Second quarter 9/30/04 $ 0 $ (59,783) $ (.0027) Third quarter 12/31/04 $ 0 $ (50,586) $ (.0022) Fourth quarter 3/31/05 $ 0 $ (68,981) $ (.0031) ---------- ------------ --------------- $ 0 $ (229,936) $ (.0102) ========== ============ =============== Fiscal year ended 3/31/05 - ------------------------- First quarter 6/30/03 $ 0 $ (57,070) $ (.0027) Second quarter 9/30/03 $ 0 $ (54,691) $ (.0026) Third quarter 12/31/03 $ 0 $ (59,448) $ (.0028) Fourth quarter 3/31/04 $ 0 $ (66,581) $ (.0032) - ------------------------- ---------- ------------ --------------- $ 0 $ (237,790) $ (.0113) ========== ============ ===============
70 (16) Uncertainties The Company has experienced recurring operating losses since the gold extraction operations have been placed on a hold status. The Company has had no revenues during this phase and is therefore dependent upon raising capital to continue operations. During the past 5 years, the Company and its shareholders and officers have been unable to provide the capital necessary to continue the operations of the Company and the maintenance of the mine and related equipment. However, there is no guarantee that the Company can continue to provide required capital to keep the Company's assets maintained. If the Company was unable to raise sufficient funds, the Company would be unable to pay the employees maintaining its mining equipment in El Salvador, which could result in loss of assets or impairment thereof. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management believes it has sufficient reserves through loans from its principal officer through interested accredited investors to continue operations for the coming year. Management is also entertaining joint venture opportunities, and other financing in order to generate sufficient capital to begin the open pit heap leaching operation at the San Sebastian Gold Mine. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------------------- There has been a change in the Company's certified public accountant which resulted from the previous certified public accountant who audited and certified the Company's March 31, 2004 financial statements not being registered with the Public Company Accounting Oversight Board (PCAOB) as is required by Section 102 of the Sarbanes-Oxley Act of 2002. Therefore, the financial statements for the Company's fiscal year ended March 31, 2004 were regarded as being incomplete. In order to correct the deficiency, the Company on January 18, 2005 engaged a certified public accountant from Las Vegas, Nevada. The Company on January 21, 2005 filed an 8-K notifying that the previous accountant resigned and that the Company engaged its new independent account. The March 31, 2004 audit report prepared by the previous accountant did not contain an adverse opinion or was qualified or modified as to uncertainty audit scope or accounting principles. There were no disagreements with the previous accountant on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. After a lapse of time and upon preliminary review of the Company's financial records the new Las Vegas accountant explained that his firm did not have the capacity and time to audit the Company's financial statements within the due date time frame. This CPA firm referred the Company to Chisholm, Bierwolf & Nilson, LLC, Certified Public Accountants. On May 6, 2005, the Company filed with the U.S. Securities and Exchange Commission a Form 8-K explaining that on May 2, 2005 it engaged the accounting firm of Chisholm, Bierwolf & Nilson, LLC as independent certified accountants and simultaneously accepted the resignation of the Las Vegas accounting firm. For more details, reference is made to SEC Form 8-Ks filed on January 21, 2005 and May 6, 2005. 71 ITEM 9(A). CONTROLS AND PROCEDURES - ----------------------------------- Evaluation of Disclosure Controls and Procedures The Company maintains a system of disclosure controls and procedures. The term "disclosure controls and procedures," as defined by regulations of the Securities and Exchange Commission ("SEC"), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC under the Act is accumulated and communicated to the Company's management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions to be made regarding required disclosure. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K and have concluded that the Company's disclosure controls and procedures are effective as of the date of such evaluation. Changes in Internal Control Over Financial Reporting The Company also maintains a system of internal controls. The term "internal controls," as defined by the American Institute of Certified Public Accountants' Codification of Statement on Auditing Standards, AU Section 319, means controls and other procedures designed to provide reasonable assurance regarding the achievement of objectives in the reliability of the Company's financial reporting, the effectiveness and efficiency of the Company's operations and the Company's compliance with applicable laws and regulations. There have been no changes in the Company's internal controls or in other factors during the fourth fiscal quarter that could significantly affect the Company's internal control over financial reporting. ITEM 9(B). OTHER INFORMATION - ----------------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The information required by this item appears under the captions "Officers and Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Code of Ethics" included in the Company's definitive proxy statement for the 2005 Annual Meeting to be filed pursuant to Regulation 14A within 120 days after the end of the fiscal year and is incorporated by reference in this Annual Report on Form 10-K. Information regarding executive officers and managers is contained in Part I of this report under "Item 4(a). Executive Officers and Managers of the Company." 72 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 captions "Security Ownership of Directors and Management" and "Principal Shareholders" 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 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. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES - ------------------------------------------------ The information called for by Item 14 is incorporated by reference from the information under the caption "Fees to Independent Accountants" to be included 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. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------- (A) FINANCIAL STATEMENTS AND SCHEDULES See Index to Consolidated Financial Statements and Supplementary Financial Data in Item 8 of this report. Report of Independent Accountant on the Financial Statement Schedules 80 Schedule IV (1) Indebtedness of Related Parties 81 Schedule IV (2) Indebtedness to Related Parties 83 73 (B) REPORTS ON FORM 8-K The Form 8-K reports filed during the three months ended March 31, 2005 and subsequently filed are as follows: On January 21, 2005, the Company filed a S.E.C. Form 8-K explaining why the Company changed its certified public accountant. The decision was made because the CPA who certified the March 31, 2004 financial statements was not registered as is required with the Public Company Accounting Oversight Board (PCAOB). Section 102 of the Sarbanes-Oxley Act of 2002 made it unlawful after October 22, 2003 for any U.S. public accounting firm or person associated with a U.S. public accounting firm that is not registered with the PCAOB to prepare, issue or to participate in the preparation or issuance of any audit report with respect to any issuer. On May 6, 2005, the Company filed a S.E.C. Form 8-K to report the engagement of its newly registered certified public accountant. (C) EXHIBITS - ------------- 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 - ------- ---------------------- 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.) 74 Exhibit No. Description of Exhibit - ------- ---------------------- 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.) 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. 9 Voting Trust Agreement--not applicable. 10 Material contracts. 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.) 75 Exhibit No. Description of Exhibit - ------- ---------------------- 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.) 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. (Incorporated by reference to Exhibit 10.14 of the Company's Form 10-K for the year ended March 31, 1999.) 10.15 Three-year lease agreement by and between the Company and Corporacion Salvadorena de Inversiones ("Corsain"), an El Salvadoran governmental agency, covering the real estate known as the San Cristobal Mill and Plant (SCMP) executed on April 26, 2004, retroactive to November 13, 2003. (Incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended March 31, 2004.) 11* Schedule of Computation of Net Income Per Share 21* Subsidiaries and Joint Venture of the Company 23.1* Consent of Independent Certified Public Accountants Chisholm, Bierwolf & Nilson, LLC 76 Exhibit No. Description of Exhibit - ------- ---------------------- 31.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13(a)-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Executive Vice President and Secretary pursuant to Rule 13(a)-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Executive Vice President and Secretary pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.0 Additional Exhibits 99.1* Confirmation agreement, General Lumber & Supply Co., Inc., May 9, 2005. 99.2* Confirmation Agreement, Edward L. Machulak, May 9, 2005. 99.3* Confirmation Agreement, Edward L. Machulak Rollover Individual Retirement Account, May 9, 2005. 99.4* Confirmation Agreement, Sylvia Machulak as an individual and for her Rollover Individual Retirement Account, May 9, 2005. 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 S.E.C. Form S-8 Registration Statement No. 333-90122 filed under the Securities Act of 1933, as amended and declared effective June 10, 2002, registering one and one-half 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 June 10, 2002.) 281,755 shares remain to be issued as of March 31, 2005. 99.6(a) Consent of Independent Certified Public Accountant to incorporate by reference in the S.E.C. Form S-8 Registration Statement No. 333-90122 filed under the Securities Act of 1933 as amended and declared effective June 10, 2002 the Certified Public Accountant's report dated May 10, 2004 relating to the financial statements of the Company for the years ended March 31, 2004 and 2003. 77 Exhibit No. Description of Exhibit - ------- ---------------------- 99.7 Individual financial statements of majority-owned companies have been omitted because most of these companies are inactive and do not constitute a significant or material contribution to the Company.
78 COMMERCE GROUP CORP. FORM 10-K - MARCH 31, 2005 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 Report to be signed on its behalf by the undersigned, thereunto duly authorized on July 5, 2005. 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 - ---------------------- Edward L. Machulak Chairman of the Board of Directors, July 5, 2005 Member of Executive Committee, Member of Audit Committee, Director-Emeritus, President, Treasurer, Chief Executive, Operating and Financial Officer /s/ Edward A. Machulak - ---------------------- Edward A. Machulak Director, Member of Executive Committee, Director-Emeritus, Executive Vice President and Secretary July 5, 2005 /s/ Sidney Sodos - ---------------------- Sidney Sodos Director July 5, 2005 /s/ John H. Curry - ---------------------- John H. Curry Director and Member of Audit Committee July 5, 2005
79 COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES SCHEDULE IV (1) INDEBTEDNESS OF RELATED PARTIES - NON CURRENT YEARS ENDED MARCH 31, 2005, 2004, AND 2003 Commerce/Sanseb Joint Venture (Joint Venture)
Beginning of Additions to Deletions to Balance at End Name of Person (1) Period (3) Indebtedness(2) Indebtedness of Period (3) - ----------------- ------------ --------------- ------------ -------------- Year ended March 31, 2005 Joint Venture $44,885,391 $4,657,996 $0 $48,953,121 Year ended March 31, 2004 Joint Venture $40,771,280 $4,114,110 $0 $44,885,390 Year ended March 31, 2003 Joint Venture $37,320,188 $3,451,092 $0 $40,771,280
(1) Commerce Group Corp. (90% ownership) and San Sebastian Gold Mines, Inc. (10% ownership), Joint Venture ("Joint Venture"); includes the advances from three of the Company's subsidiaries. (2) The purpose of the advances is to continue the exploration, exploitation and development of the SSGM and the other mining prospects and activities managed by the Joint Venture 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. The standby maintenance and holding costs are also included. The addition to indebtedness is netted to include any adjustments for payments or credits. (3) Beginning with September 30, 1987, the total indebtedness includes the advances of $590,265 from three of the Company's subsidiaries. San Sebastian Gold Mines, Inc. (SSGM) - -------------------------------------
Beginning of Additions to Deletions to Balance at End Name of Person (1) Period (3) Indebtedness(2) Indebtedness of Period (3) - ----------------- ------------ --------------- ------------ -------------- Year ended March 31, 2005 SSGM $36,340,906 $2,481,346 $0 $38,822,252 Year ended March 31, 2004 SSGM $34,160,023 $2,180,883 $0 $36,340,906 Year ended March 31, 2003 SSGM $31,989,058 $2,170,965 $0 $34,160,023
(1) San Sebastian Gold Mines, Inc. (SSGM) in which Commerce Group Corp. owns 82 1/2% of its issued and outstanding common shares. (2) The advances to SSGM primarily consist of the interest due to the Company on SSGM's outstanding indebtedness. 80 This Page Left Blank Intentionally. COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES SCHEDULE IV(2) INDEBTEDNESS TO RELATED PARTIES CURRENT YEARS ENDED MARCH 31, 2005, 2004, AND 2003
Balance at (Deletions)to Balance Beginning Indebtedness at End Identity of Debtor of Period (1) of Period - ------------------ ------------ ------------ ------------ Year ended March 31, 2005 - ------------------------- President of the Company $6,565,817 $1,343,869(a) $7,909,686(a) President's RIRA 915,066 107,330(b) 1,022,396(b) President's Affiliated Company 1,262,390 397,365(c) 1,659,755(c) President's Wife's RIRA 503,581 88,047(d) 591,628(d) President's Son/Daughter-in-Law 153,828 26,895(d) 180,723(d) ---------- ---------- ----------- Total, notes payable $9,400,682 $1,963,506 $11,364,188 ========== ========== =========== President's Accrued Salary $2,815,265 $ 178,750(e) $ 2,994,015(e) ========== ========== =========== President's Wife's Consulting Fees $ 327,600 $ 36,000(f) $ 363,600(f) ========== ========== =========== Legal fees (President's son is a principal) $ 327,015 $ 5,966(g) $ 332,981(g) ========== ========== =========== Year ended March 31, 2004 President of the Company $5,521,516 $1,044,301(a) $6,565,817 President's RIRA 824,866 90,200(b) 915,066 President's Affiliated Company 1,120,442 141,948(c) 1,262,390 President's Wife's RIRA 429,391 74,190(d) 503,581 President's Son/Daughter-in-Law 131,165 22,663(d) 153,828 ---------- ---------- -------------- Total, notes payable $8,027,380 $1,373,302 $ 9,400,682 President's Accrued Salary $2,636,515 $ 178,750(e) $ 2,815,265 President's Wife's Consulting Fees $ 291,600 $ 36,000(f) $ 327,600 ========== ========== ============== Legal fees (President's son is a principal) $ 326,941 $ 74(g) $ 327,015 ========== ========== ============== Year ended March 31, 2003 President of the Company $4,643,856 $ 877,660(a) $ 5,521,516 President's RIRA 703,647 121,219(b) 824,866 President's Affiliated Company 1,098,193 22,249(c) 1,120,442 President's Wife's RIRA 366,289 63,102(d) 429,391 Others 111,889 19,276(d) 131,165 ---------- ---------- -------------- Total, notes payable $6,923,874 $1,103,506 $ 8,027,380 ========== ========== ============== President's Accrued Salary $2,457,765 $ 178,750(e) $ 2,636,515 ========== ========== ============== President's Wife's Consulting Fees $ 255,600 $ 36,000(f) $ 291,600 ========== ========== ============== Legal fees (President's son is a principal) $ 314,804 $ 12,137(g) $ 326,941 ========== ========== ==============
82 (1)(a)(b) The net additions to the open-ended, secured, on-demand promissory notes issued to the President of the Company, as an individual, and not as a Director or Officer of the Company, and his RIRA are from net cash advances and/or accrued interest. The President's RIRA on March 24, 2005 purchased 500,000 of the Company's restricted common shares, par value $.10, at a price of $.105 each, for a total of $52,500. Payment for this purchase was made by reducing the amount of debt due to the RIRA. (1)(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 incurred on behalf of the Company. (1)(d) The additions resulted from accrued interest earned during the fiscal year. (1)(e) The President's salary of $165,000 was accrued for the entire fiscal year. In addition, the Directors, pursuant to a resolution, compensated the President in the sum of $13,750 for one month's vacation pay. (1)(f) Twelve months of consulting fees at $3,000 per month for a total of $36,000. (1)(g) The addition of the amounts due to the Law Firm results for legal services rendered during this period. 83 EX-11 2 exh11.txt EXHIBIT 11 EXHIBIT 11 COMMERCE GROUP CORP. AND CONSOLIDATED SUBSIDIARIES -------------------------------------------------- SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE Years Ended March 31 2005 2004 2003 ---- ---- ---- BASIC/DILUTED - ------------- Net income (loss) for primary income per common share $ (229,936) $ (237,790) $ (232,647) ============ ============ ============= Weighted average number of common shares outstanding during the year - basic/diluted 22,581,814 21,089,812 18,907,958 ============ ============ ============= Income (loss) per common share - basic/diluted $ (.0102) $ (.0113) $ (.0123) ============ ============ ============= EX-21 3 exh21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES AND JOINT VENTURE OF THE COMPANY As of March 31, 2005, the Company owned a majority to 100% of the following securities of the following subsidiaries and Joint Venture: Charter/Joint Venture --------------------- Included in the % Consolidated Statements Ownership Place Date - ----------------------- --------- ----- ---- Homespan Realty Co., Inc. ("Homespan") 100.0 Wisconsin 02/12/1959 Ecomm Group Inc. ("Ecomm") 100.0 Wisconsin 06/24/1974 San Luis Estates, Inc. ("SLE") 100.0 Colorado 11/09/1970 San Sebastian Gold Mines, Inc. ("Sanseb") 82.5 Nevada 09/04/1968 Universal Developers, Inc. ("UDI") 100.0 Wisconsin 09/28/1964 Commerce/Sanseb Joint Venture ("Joint Venture") 90.0 Wisconsin 09/22/1987 & El Salvador Not included in the Consolidated Statements - ------------------------- Mineral San Sebastian, S.A. de C.V. ("Misanse") 52.0 El Salvador 05/08/1960 EX-23 4 exh231.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT -------------------------------------------------- We hereby consent to the incorporation by reference in the March 31, 2005 Form 10-K of Commerce Group Corp., its subsidiaries, and its Commerce/Sanseb Joint Venture of our report dated July 5, 2005, which appears in the annual report on Form 10-K for the year ended March 31, 2005. Chisholm, Bierwolf & Nilson, LLC Certified Public Accountants Bountiful, Utah July 5, 2005 EX-31 5 ex311.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER -------------------------------------------------------------------- PURSUANT TO RULE 13(a)-14(a)/15d-14(a) -------------------------------------- OF THE SECURITIES EXCHANGE ACT OF 1934, --------------------------------------- AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 -------------------------------------------------------------------- I, Edward L. Machulak, certify that: 1. I have reviewed this annual report on Form 10-K of Commerce Group Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 5, 2005 /s/ Edward L. Machulak ------------------------------- Edward L. Machulak Chairman, President, Treasurer, Chief Executive, Operating and Financial Officer EX-31 6 ex312.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF EXECUTIVE VICE PRESIDENT AND SECRETARY ------------------------------------------------------- PURSUANT TO RULE 13(a)-14(a)/15d-14(a) -------------------------------------- OF THE SECURITIES EXCHANGE ACT OF 1934, --------------------------------------- AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 -------------------------------------------------------------------- I, Edward A. Machulak, certify that: 1. I have reviewed this annual report on Form 10-K of Commerce Group Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 5, 2005 /s/ Edward A. Machulak ------------------------ Edward A. Machulak Executive Vice President, and Secretary EX-32 7 exh321.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Edward L. Machulak, Chairman, President, Treasurer, Chief Executive, Operating and Financial Officer of Commerce Group Corp., (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Form 10-K of the Company for the fiscal year ended March 31, 2005, (the "Form 10-K"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 5, 2005 /s/ Edward L. Machulak ------------------------------- Edward L. Machulak Chairman, President, Treasurer, Chief Executive, Operating and Financial Officer EX-32 8 exh322.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION OF EXECUTIVE VICE PRESIDENT AND SECRETARY PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Edward A. Machulak, Executive Vice President and Secretary of Commerce Group Corp., (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Form 10-K of the Company for the fiscal year ended March 31, 2005, (the "Form 10-K"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 5, 2005 /s/ Edward A. Machulak ------------------------------- Edward A. Machulak Executive Vice President, and Secretary EX-99 9 ex991.txt EXHIBIT 99.1 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 9, 2005 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 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 General Lumber & Supply Co., Inc. (GLSCO and/or Lender) as of Commerce's fiscal year ended March 31, 2005. 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 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, (then Bank One; now the prime rate published in the Wall Street Journal), 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, 2005 is $1,659,754.49. (Schedule of Principal and Interest as of March 31, 2005, Exhibit A) Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 2 of 13 Pages 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 GLSCO, and it will deduct any payments or credits made by Commerce to the current open-ended, secured, on-demand, outstanding Notes issued or obligations owed to GLSCO. However, on this date, Commerce's Directors have authorized its Officers to issue renewed annual note(s) (Exhibit B) 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 the following 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 Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 3 of 13 Pages 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 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. 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 Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 4 of 13 Pages 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 5, 1996 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, 2005, there is nothing 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. There were no transactions consummated during this fiscal year. e. 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 transactions that took place: Fiscal year end Revenues Expenses Profit March 31, 2002 $ 73,364.97 $40,202.17 $33,162.80 March 31, 2003 68,304.07 41,009.24 27,294.83 ----------- ---------- ---------- Balances $141,669.04 $81,211.41 $60,457.63 Interest July 1, 2001 through March 31, 2003 11,918.31 April 1, 2003 Total ---------- Addition to GLSCO Note (GJ4-P2; Entry 4-2) $72,375.94 ========== March 31, 2004 58,548.87 37,956.32 20,592.55 April 1, 2004 ========== Entry GJ4-P1; Addition to GLSCO Note 20,592.55 ========== March 31, 2005 58,182.12 37,093.47 21,088.65 April 1, 2005 ========== Entry GJ4-P1; Addition to GLSCO Note 21,088.65 ========== Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 5 of 13 Pages f. On April 1, 2005, the accounts payable amount due of $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. 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 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 4 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. c. 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 Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 6 of 13 Pages the precious metal ore reserves. Reference is made to Exhibit 5 included in the April 9, 1990 confirmation letter. d. 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, 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 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 UCC-4 continuation filing on June 27, 2001 at 8:55 a.m., Filing #02078155 (Exhibit B of the May 13, 2002 confirmation letter). e. 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 Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 7 of 13 Pages 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 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) 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 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. Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 8 of 13 Pages (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 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. Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 9 of 13 Pages (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. f. Acknowledgment of collateral provided through May 9, 2005 Commerce's Directors have on May 9, 2005 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 additional collateral for all of the outstanding loans and obligations as of March 31, 2005, including all future advances of any kind. Collateral that has been provided through May 9, 2005 is: Nueva Esparta Exploration Concession/License (Nueva Esparta) - 45 square kilometers (11,115 acres) Resolution No. 271 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, Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 10 of 13 Pages and the Oro Mine. A copy of the assignment dated May 9, 2005 is attached to this document (Exhibit C) and the Nueva Esparta Exploration Concession is attached to Exhibit C and referred to as Exhibit 1. 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 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. Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 11 of 13 Pages 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 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 it then it 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 to 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. Mrs. Sylvia Machulak President General Lumber & Supply Co., Inc. May 9, 2005 Page 12 of 13 Pages 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 9, 2005 Page 13 of 13 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: GENERAL LUMBER & SUPPLY CO., INC. /s/ Sylvia Machulak ________________________________ By: Sylvia Machulak, President Date: May 9, 2005 Exhibit A to Exhibit 99.1 (Schedule of Principal, Interest, Advances and Withdrawals as of March 31, 2005 has been purposely omitted as it only reflects the calculations of the principal and interest.) Exhibit B to Exhibit 99.1 RENEWED PROMISSORY NOTE Borrower: Commerce Group Corp. Lender: General Lumber & Supply Co., Inc. 6001 North 91st Street 6001 North 91st Street. Milwaukee, WI 53225 Milwaukee, WI 53225 Principal Amount: $1,659,754.49 Initial Rate: 4.000% + prime rate, but not less than 16.000% Date of Renewed Note: March 31, 2005 PROMISE TO PAY. COMMERCE GROUP CORP. ("Borrower") promises to pay to GENERAL LUMBER & SUPPLY CO., INC. ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million Six Hundred Fifty Nine Thousand Seven Hundred Fifty Four and 49/100 Dollars ($1,659,754.49), together with interest, paid monthly, on the unpaid principal balance from March 31, 2005, 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 four 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 currently is 5.750% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 4.000 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 C to Exhibit 99.1 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 existing substituted, consolidated 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, executors, administrators, successors and assigns, all who reside in the County of Milwaukee, State of Wisconsin, United States of America, individually and collectively referred to as "Le nders," all of Commerce's rights, titles, claims, remedies, and interests whatsoever in and to the exploration concession identified as the Nueva Esparta Exploration Concession/License which was granted by the Office of the Government of El Salvador Ministry of Economy's office and the Director of Hydrocarbons and Mines under its Resolution No. 271 dated May 28, 2004 (delivered June 4, 2004) to Commerce Group Corp. consisting of an area of 45 square kilometers identified as Cartographic Sheet Number 2657-111 (scale 1:50000) located in the municipality of Santa Rosa de Lima, in the Departments of Morazan and La Union, Republic of El Salvador, Central America, and more fully described in the attached Spanish and English Resolution No. 271 (Exhibit 1) which is made an integral part of this assignment. 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 9, 2005, and that the purpose of this Assignment is to provide additional 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 9th day of May 2005. 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 9th day of May, 2005, 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 Exhibit 1 to Exhibit C of Exhibit 99.1 [English translation of attached Spanish document.] MINISTRY OF ECONOMY Republic of El Salvador RESOLUTION No. 271 Ministry of Economy: San Salvador, at 9:05 AM of the day May 25, 2004. In view of the Recourse of Appeal introduced into the Directorate of Hydrocarbons and Mines, on December 19, 2003, before the Minister of Economy, by Sr. Jose Antonio Alfaro Castro, Lawyer, of this domicile, acting in his capacity of General Power of Attorney for the Company "COMMERCE GROUP CORP" of this domicile, against Resolution No. 178 issued at 14:10 on December 1, of the same year by the cited Directorate, that declares without standing the request for Exploration License that later on will say, and, HAVING READ THE ARGUMENTS AND CONSIDERING: I. That through the referenced Resolution the Directorate of Hydrocarbons and Mines of this Ministry declared without standing the Minerals Exploration License especially for gold an silver that Dr. Jose Antonio Alfaro Castro requested in the name of his mentioned grantor of Power on October 30, 2002 for the area called NUEVA ESPARTA for a surface extension of 45 square kilometers identified in cartographic sheet number 2657-III, scale 1 : 50,000 located in the municipality of Santa Rosa de Lima, in the Departments of Morazan and La Union respectively. II. That having admitted the Recourse, the files were transferred to the Secretary of State with prior notification to the referenced Company and receiving it, was sent to be heard for the term of the Law, on completing the hearing through the mentioned Power holder, expressed that based on Article 45 second line item in the Mining Law, he requested an opening of proofs, which was done and as well the applicant presented a document in which he stated that the Directorate of Hydrocarbons and Mines on issuing the referenced Resolution founded it on the following arguments: a) little geological investigation of the exploitation program presented (SIC); b) lack of sufficient technical capacity to develop the project on the part of the professionals proposed by the applying Company; c) That the applying Company did not fulfill the requirements in the first line item of Article 9 of the Mining Law; requirements that refer to the technical and financial capacity to develop mining projects. III. That in the referred to period of Proof, the applicant presented a new work plan prepared by known technicians in the material, in which a program of activities is reflected that complies with the requirements for this kind of project to be developed in the first four years by stages, projecting activities like geological mapping, opening of trenches, geochemistry, laboratory analysis; and the costs of investment in each stage. Presenting besides, the documents that contain the names of the companies that will participate in the Project; as well as the CV's of the companies that will participate in it, and the CV's of the technicians in the material that have the required qualifications, and the chart of investment, costs and expenses of the applying company, copy of the correspondence in which is sketched the financial capacity, in which for now the invested money has been for the payment of administrative expenses and in a lesser scale for investment in exploration, referring that it will be increased as reflected in the related project; with that it proves compliance with what is established in article 9 of the Mining Law. That with what is explained and with the documental proof that is presented, it overcomes the deficiencies expressed by the Directorate for Hydrocarbons and Mines, who asks that the Declaration Without Standing be reconsidered and grant the Exploration License requested. IV. Upon analyzing the resolution that is impugned, it is warned that in it conclusions were expressed in the sense that: " a) little geological investigation of the exploitation (sic) program presented"; b) "lack of technical capacity sufficient to develop the project on the part of the professionals proposed by the requesting company", without the argumentation, the criteria or the factual reasons being laid out in it that allows any analysis to arrive to said conclusions, therefore the reasoning is completely transparent in regard to valuing the documents presented with the application. V. Consequent with what is expressed, in matters of Exploration Licenses it is necessary to understand: That the text and spirit with which the Mining Law was issued, just as it was established in the Considering and in its articles 8 and 9, was that of granting Exploration Licenses and subsequently a concession for the exploration of minerals, to those companies that carry out this activity through the application of modern systems that allow fully to take advantage of the minerals, having conditioned as a requirement to acquire mining rights, the ideal; determining as ideal those who proved to have the technical and financial capacity to develop mining projects; that on reviewing the documents presented by the appellant as proof are: the new work plan for the Nueva Esparta Exploration project; program of exploration for the mining project, the program to be developed in four years and in four stages, one per year; letter and summary of Financial Statements, report of the Public A ccountant of the investment, costs and expenses made since January 1, 1999 to June 30, 2003, certified Balance Sheets and Financial Statements by the Public Auditor, documentation that has value as proof. With respect to the technical capacity, the names of companies are presented with letters of commitment that they will work in the exploitation; and curriculum vitae of the technicians that will participate in the project. From the latter it is concluded that the applying company indeed has a geological exploration project for an area with mining background and counts with technical personnel with technical capacity to develop the project, for which reason this Ministry considers that the applying company complies with the requirements that for that purpose the Law establishes in article 9, such as having technical and financial capacity to develop the mining project and resolves the recourse (of appeal) presented has standing. Therefore, In use of my legal faculties and based on what is established in Article 45 of the Mining Law and the considerations expressed; RESOLVE: 1. The Recourse of Appeal presented December 19, 2003 by Dr. Jose Antonio Alfaro Castro in his capacity as Power of Attorney for the Company COMMERCE GROUP CORP has standing; and leaves without effect Resolution 178 issued by the Directorate of Hydrocarbons and Mines of this Ministry at 14:00 hours of the day December 1, 2003. 2. Returns the present archives to their place of origin to the end of granting the License requested. 3. The Directorate of Mines and Hydrocarbons will proceed to carry out the corresponding monitoring to the end of assuring the fulfillment of the obligations on the part of the beneficiary under the pain of applying the sanctions that are legally applicable. MIGUEL E. LACAYO MINISTER [Seal of the Ministry of Economy] MINISTERIO DE ECONOMIA Republica de El Salvador, C.A. RESOLUCION No. 271 MINISTERIO DE ECONOMIA: San Salvador, a las nueve horas con cinco minutos del dia venticinco de mayo de dos mil cuatro. Visto el Recurso de Apelacion interpuesto en la Direccion de Hidrocarburos y Minas, el diecinueve de diciembre de 2003, para ante el Ministro de Economia, por el Doctor Jose Antonio Alfaro Castro, Abogado de esta domicilio, actuando como apoderado de la Sociedad COMMERCE GROUP CORP., en contra de la Resolucion No. 178 emitada a catorce horas con diez minutos del uno de diciembre del mismo ano de la citada Direccion, que declara sin lugar solicitud de Licencia de Explotacion que adelante se dira y, LEIDOS LOS AUTOS Y CONSIDERANDO: I. Que mediante la Resolucion recurrida, la Direccion de Hidrocarburos y Minas de este Ministerio, declaro sin lugar la Licencia de Exploracion de Minerales especialmente oro y plata que en nombre de su mencionado poderdante solicito el Doctor Alfaro Castro, el 30 de octubre del 2002, en el area denominada NUEVA ESPARTA, de una extension superficial de 45 kilometros cuadrados, identificada en la hoja cartografica numero 2657-III escala 1:50 ubicada, en los municipios de Sociedad y Santa Rosa de Lima, en los departamentos de Morazan y La Union respectivamente. II. Que admitido el Recurso, fueron trasladadas las diligencias a esta Secretaria de Estado, previa notificacion a la Sociedad recurrente; y recibidas las mismas se le mando a oir por el termino de Ley, quien al evacuar la audiencia por medio del mencionado Apoderado, expreso que en base al articulo 45 inciso segundo de la Ley de mineria, solicitaba se abriera a pruebas; por lo que asi se hizo, y en el mismo, el recurrente presento un escrito en el que manifiesta que la Direccion de Hidrocarburos y Minas al emitir la Resolucion recurrida, la fundamento en los argumentos siguientes: a) poca investigacion geologica del programa de explotacion presentado; b) falta de capacidad tecnica suficiente para desarrollar el proyecto de parte de los profesionales propuestos por la sociedad solicitante; c) Que la Sociedad solicitante no llena los requisitos senalados en el inciso primero del articulo 9 de la Ley de Mineria; requisitos que se refiere a la capacidad tecnica y financiera para desar rollar proyectos mineros. III. Que en el referido periodo de Prueba, el recurrente presento un nuevo plan de trabajo elaborado por tecnicos conocedores de la materia en donde se refleja un programa con actividades que cumplen los requisitos para esta clase proyectos a desarrollar en los primeros cuatro anos por etapas, proyectando actividades como mapeo geologico, apertura de trincheras geoquimicas, analisis de laboratorio; y los costos de inversion en cada etapa. Presentando ademas los documentos que contienen los nombres de las empresas que participaran en el Proyecto, asi como los curriculos de las empresas que participaran en el mismo, y los curriculos de los tecnicos en la materia que reunen los requisitos requeridos, y el cuadro de inversion, costos y gastos de la Sociedad solicitante, copia de correspondencia en donde se esboza la capacidad financiera, en la cual por ahora, el dinero invertido ha sido para el pago de gastos administrativos y en menos escala para inversion en exploracion refiriendo que se aumentara como se refleja en el proyecto relacionado: con lo que comprueba darle cumplimiento a lo que establece el articulo 9 de la Ley de Mineria. Que con lo expuesto y la prueba documental que presenta superan las deficiencias expresadas por la Direccion de Hidrocarburos y Minas y se pide se reconsidera la Declaratoria sin lugar y se otorgue la Licencia de exploracion solicidata. IV. Al analizar la resolucion que se impugna, se advierte que en la misma se expresaron conclusiones en el sentido que: "a) poca investigacion geologica del programa de explotacion presentado; b) falta de capacidad tecnica suficiente para desarrollar el proyecto de parte de los profesionales propuestos por la sociedad solicitante," sin que se expongan en la misma, la argumentacion, los criterios o razones facticas que permitan en cualquier analisis, llegar a dichas conclusiones, de manera que el razonamiento sea completamente transparente en cuanto a la valoracion de los documentos presentados con la solicitud. V. Consecuente con los expuesto en materia de Licencias de Exploracion ha de entenderse: Que el texto y el espiritu con que se emitio la Ley de Mineria, tal como se dejo establecido en el considerando I y articulo 8 y 9 de la misma, fue la de otorgar Licencias de Exploracion y subsiguiente concesion para la Exploracion de Minerales, a aquellas empresas que realicen esa actividad mediante la aplicacion de sistemas modernos que permitan el aprovechamiento integral de los minerales, habiendo condicionado como requisito para adquirir derechos mineros, la idonidad; determinado como idoneas quienes comprobaran tener capacidad tecnica y capacidad financiera para desarrollar proyectos mineros: que al revisar los documentos presentados por el apelante como prueba, son nuevo plan de trabajo de proyecto de exploracion Nueva Esparta, programa de exploracion del proyecto minero, el programa a desarrollar en los cuatro anos en cuatro etapas, una por ano: carta y resumen de Estados Financieros, informe de Contador Publico de la inversion, costos, y gastos efectuados desde el 01 de enero de 1999 al 30 de junio de 2003, Balance y Estados Financieros certificados por Auditor Publico, documentacion que tiene valor probatorio. Respecto a la capacidad tecnica presenta los nombres de empresas con cartas compromiso de que trabajaran en la exploitacion curriculun vitae de los tecnicos que participaran en el proyecto. De lo antes expuesto se concluye que la empresa solicitante si tiene un proyecto de exploracion geologica para un area con antecedentes mineros, y cuenta con personal tecnico con capacidad para desarrollar el proyecto, por lo que este Ministerio considera que la Sociedad solicitante cumple con las exigencias que al efecto establece la Ley en el articulo 9, como es el tener capacidad tecnica y financiera para desarrollar el proyecto minero y resuelve ha lugar al recurso interpuesto. Por tanto, En uso de mis facultades legales, y con base a lo establecido en el Art. 45 de la Ley de Mineria y las consideraciones expuestas. RESUELVO: 1. Ha lugar el recurso de Apelacion interpuesto el 19 de diciembre de dos mil tres, por el Doctor Alfaro Castro en calidad de Apoderado de la Sociedad COMMERCE GROUP CORP.; y Dejase sin efecto la resolucion178 emitada por la Direccion de Hidrocarburos y Minas de este Ministerio, a las catorce hora del dia uno de diciembre de dos mil tres. 2. Vuelvan las presentes diligencias a su lugar de origen a fin que se otorgue la licencia solicitada. 3. La Direccion de Minas e Hidrocarburos procecera a realizar el moniloreo correspondiente, a fin de asegurar el cumplimiento de las obligaciones por parte del beneficiario so pena de aplicar las sanciones que legalmente sean procedentes. Firma por: MIGUEL E. LACAYO, MINISTRO EX-99 10 ex992.txt EXHIBIT 99.2 EXHIBIT 99.2 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 9, 2005 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, 2005. 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, 2005, amounts to $7,909,685.66. 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 (Schedule of Principal and Interest for the year ended March 31, 2005, Exhibit A). 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 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. Mr. Edward L. Machulak May 9, 2005 Page 2 of 15 Pages However, on this date, Commerce's Directors have authorized its Officers to issue renewed annual note(s) (Exhibit B) 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 the following 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 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 Mr. Edward L. Machulak May 9, 2005 Page 3 of 15 Pages 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, Commerce owes ELM the following for accrued salaries and vacation: Annual Period Years 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, 2005 8.50 $165,000 1,402,500 ----- ---------- Balance 24.00 $2,664,015 Vacation Pay Months Payment ------------ ------ ------- April 1981 - March 31, 2005 24 $ 13,750 330,000 ---------- Total Due $2,994,015 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: Mr. Edward L. Machulak May 9, 2005 Page 4 of 15 Pages "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 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 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 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, 2005, 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, 2005 is as follows: 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, 2005 to ELM None Mr. Edward L. Machulak May 9, 2005 Page 5 of 15 Pages 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%. 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 Mr. Edward L. Machulak May 9, 2005 Page 6 of 15 Pages 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 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: Mr. Edward L. Machulak May 9, 2005 Page 7 of 15 Pages 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. 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. Mr. Edward L. Machulak May 9, 2005 Page 8 of 15 Pages 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). 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. Mr. Edward L. Machulak May 9, 2005 Page 9 of 15 Pages 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 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. Mr. Edward L. Machulak May 9, 2005 Page 10 of 15 Pages (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 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. Mr. Edward L. Machulak May 9, 2005 Page 11 of 15 Pages h. Acknowledgment of collateral provided through May 9, 2005 Commerce's Directors have on May 9, 2005 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 additional collateral for all of the outstanding loans and obligations as of March 31, 2005, including all future advances of any kind. Collateral that has been provided through May 9, 2005 is: Nueva Esparta Exploration Concession/License (Nueva Esparta) - 45 square kilometers (11,115 acres) Resolution No. 271 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 is attached to this document (Exhibit C) and the Nueva Esparta Exploration Concession is attached to Exhibit C and referred to as Exhibit 1. 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 Mr. Edward L. Machulak May 9, 2005 Page 12 of 15 Pages 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 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 Mr. Edward L. Machulak May 9, 2005 Page 13 of 15 Pages 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. 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). Mr. Edward L. Machulak May 9, 2005 Page 14 of 15 Pages 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 9, 2005 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 9, 2005 Exhibit A to Exhibit 99.2 (Schedule of Principal, Interest, Advances and Withdrawals as of March 31, 2005 has been purposely omitted as it only reflects the calculations of the principal and interest.) Exhibit B 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: $7,909,685.66 Initial Rate: 2.000% + prime rate, but not less than 16.000% Date of Renewed Note: March 31, 2005 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 Seven Million Nine Hundred Nine Thousand Six Hundred Eighty Five and 66/100 Dollars ($7,909,685.66), together with interest, paid monthly, on the unpaid principal balance from March 31, 2005, 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 currently is 5.750% 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 C to Exhibit 99.2 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 existing substituted, consolidated 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, executors, administrators, successors and assigns, all who reside in the County of Milwaukee, State of Wisconsin, United States of America, individually and collectively referred to as "Le nders," all of Commerce's rights, titles, claims, remedies, and interests whatsoever in and to the exploration concession identified as the Nueva Esparta Exploration Concession/License which was granted by the Office of the Government of El Salvador Ministry of Economy's office and the Director of Hydrocarbons and Mines under its Resolution No. 271 dated May 28, 2004 (delivered June 4, 2004) to Commerce Group Corp. consisting of an area of 45 square kilometers identified as Cartographic Sheet Number 2657-111 (scale 1:50000) located in the municipality of Santa Rosa de Lima, in the Departments of Morazan and La Union, Republic of El Salvador, Central America, and more fully described in the attached Spanish and English Resolution No. 271 (Exhibit 1) which is made an integral part of this assignment. 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 9, 2005, and that the purpose of this Assignment is to provide additional 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 9th day of May 2005. 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 9th day of May, 2005, 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 Exhibit 1 to Exhibit C of Exhibit 99.2 [English translation of attached Spanish document.] MINISTRY OF ECONOMY Republic of El Salvador RESOLUTION No. 271 Ministry of Economy: San Salvador, at 9:05 AM of the day May 25, 2004. In view of the Recourse of Appeal introduced into the Directorate of Hydrocarbons and Mines, on December 19, 2003, before the Minister of Economy, by Sr. Jose Antonio Alfaro Castro, Lawyer, of this domicile, acting in his capacity of General Power of Attorney for the Company "COMMERCE GROUP CORP" of this domicile, against Resolution No. 178 issued at 14:10 on December 1, of the same year by the cited Directorate, that declares without standing the request for Exploration License that later on will say, and, HAVING READ THE ARGUMENTS AND CONSIDERING: I. That through the referenced Resolution the Directorate of Hydrocarbons and Mines of this Ministry declared without standing the Minerals Exploration License especially for gold an silver that Dr. Jose Antonio Alfaro Castro requested in the name of his mentioned grantor of Power on October 30, 2002 for the area called NUEVA ESPARTA for a surface extension of 45 square kilometers identified in cartographic sheet number 2657-III, scale 1 : 50,000 located in the municipality of Santa Rosa de Lima, in the Departments of Morazan and La Union respectively. II. That having admitted the Recourse, the files were transferred to the Secretary of State with prior notification to the referenced Company and receiving it, was sent to be heard for the term of the Law, on completing the hearing through the mentioned Power holder, expressed that based on Article 45 second line item in the Mining Law, he requested an opening of proofs, which was done and as well the applicant presented a document in which he stated that the Directorate of Hydrocarbons and Mines on issuing the referenced Resolution founded it on the following arguments: a) little geological investigation of the exploitation program presented (SIC); b) lack of sufficient technical capacity to develop the project on the part of the professionals proposed by the applying Company; c) That the applying Company did not fulfill the requirements in the first line item of Article 9 of the Mining Law; requirements that refer to the technical and financial capacity to develop mining projects. III. That in the referred to period of Proof, the applicant presented a new work plan prepared by known technicians in the material, in which a program of activities is reflected that complies with the requirements for this kind of project to be developed in the first four years by stages, projecting activities like geological mapping, opening of trenches, geochemistry, laboratory analysis; and the costs of investment in each stage. Presenting besides, the documents that contain the names of the companies that will participate in the Project; as well as the CV's of the companies that will participate in it, and the CV's of the technicians in the material that have the required qualifications, and the chart of investment, costs and expenses of the applying company, copy of the correspondence in which is sketched the financial capacity, in which for now the invested money has been for the payment of administrative expenses and in a lesser scale for investment in exploration, referring that it will be increased as reflected in the related project; with that it proves compliance with what is established in article 9 of the Mining Law. That with what is explained and with the documental proof that is presented, it overcomes the deficiencies expressed by the Directorate for Hydrocarbons and Mines, who asks that the Declaration Without Standing be reconsidered and grant the Exploration License requested. IV. Upon analyzing the resolution that is impugned, it is warned that in it conclusions were expressed in the sense that: " a) little geological investigation of the exploitation (sic) program presented"; b) "lack of technical capacity sufficient to develop the project on the part of the professionals proposed by the requesting company", without the argumentation, the criteria or the factual reasons being laid out in it that allows any analysis to arrive to said conclusions, therefore the reasoning is completely transparent in regard to valuing the documents presented with the application. V. Consequent with what is expressed, in matters of Exploration Licenses it is necessary to understand: That the text and spirit with which the Mining Law was issued, just as it was established in the Considering and in its articles 8 and 9, was that of granting Exploration Licenses and subsequently a concession for the exploration of minerals, to those companies that carry out this activity through the application of modern systems that allow fully to take advantage of the minerals, having conditioned as a requirement to acquire mining rights, the ideal; determining as ideal those who proved to have the technical and financial capacity to develop mining projects; that on reviewing the documents presented by the appellant as proof are: the new work plan for the Nueva Esparta Exploration project; program of exploration for the mining project, the program to be developed in four years and in four stages, one per year; letter and summary of Financial Statements, report of the Public A ccountant of the investment, costs and expenses made since January 1, 1999 to June 30, 2003, certified Balance Sheets and Financial Statements by the Public Auditor, documentation that has value as proof. With respect to the technical capacity, the names of companies are presented with letters of commitment that they will work in the exploitation; and curriculum vitae of the technicians that will participate in the project. From the latter it is concluded that the applying company indeed has a geological exploration project for an area with mining background and counts with technical personnel with technical capacity to develop the project, for which reason this Ministry considers that the applying company complies with the requirements that for that purpose the Law establishes in article 9, such as having technical and financial capacity to develop the mining project and resolves the recourse (of appeal) presented has standing. Therefore, In use of my legal faculties and based on what is established in Article 45 of the Mining Law and the considerations expressed; RESOLVE: 1. The Recourse of Appeal presented December 19, 2003 by Dr. Jose Antonio Alfaro Castro in his capacity as Power of Attorney for the Company COMMERCE GROUP CORP has standing; and leaves without effect Resolution 178 issued by the Directorate of Hydrocarbons and Mines of this Ministry at 14:00 hours of the day December 1, 2003. 2. Returns the present archives to their place of origin to the end of granting the License requested. 3. The Directorate of Mines and Hydrocarbons will proceed to carry out the corresponding monitoring to the end of assuring the fulfillment of the obligations on the part of the beneficiary under the pain of applying the sanctions that are legally applicable. MIGUEL E. LACAYO MINISTER [Seal of the Ministry of Economy] MINISTERIO DE ECONOMIA Republica de El Salvador, C.A. RESOLUCION No. 271 MINISTERIO DE ECONOMIA: San Salvador, a las nueve horas con cinco minutos del dia venticinco de mayo de dos mil cuatro. Visto el Recurso de Apelacion interpuesto en la Direccion de Hidrocarburos y Minas, el diecinueve de diciembre de 2003, para ante el Ministro de Economia, por el Doctor Jose Antonio Alfaro Castro, Abogado de esta domicilio, actuando como apoderado de la Sociedad COMMERCE GROUP CORP., en contra de la Resolucion No. 178 emitada a catorce horas con diez minutos del uno de diciembre del mismo ano de la citada Direccion, que declara sin lugar solicitud de Licencia de Explotacion que adelante se dira y, LEIDOS LOS AUTOS Y CONSIDERANDO: I. Que mediante la Resolucion recurrida, la Direccion de Hidrocarburos y Minas de este Ministerio, declaro sin lugar la Licencia de Exploracion de Minerales especialmente oro y plata que en nombre de su mencionado poderdante solicito el Doctor Alfaro Castro, el 30 de octubre del 2002, en el area denominada NUEVA ESPARTA, de una extension superficial de 45 kilometros cuadrados, identificada en la hoja cartografica numero 2657-III escala 1:50 ubicada, en los municipios de Sociedad y Santa Rosa de Lima, en los departamentos de Morazan y La Union respectivamente. II. Que admitido el Recurso, fueron trasladadas las diligencias a esta Secretaria de Estado, previa notificacion a la Sociedad recurrente; y recibidas las mismas se le mando a oir por el termino de Ley, quien al evacuar la audiencia por medio del mencionado Apoderado, expreso que en base al articulo 45 inciso segundo de la Ley de mineria, solicitaba se abriera a pruebas; por lo que asi se hizo, y en el mismo, el recurrente presento un escrito en el que manifiesta que la Direccion de Hidrocarburos y Minas al emitir la Resolucion recurrida, la fundamento en los argumentos siguientes: a) poca investigacion geologica del programa de explotacion presentado; b) falta de capacidad tecnica suficiente para desarrollar el proyecto de parte de los profesionales propuestos por la sociedad solicitante; c) Que la Sociedad solicitante no llena los requisitos senalados en el inciso primero del articulo 9 de la Ley de Mineria; requisitos que se refiere a la capacidad tecnica y financiera para desar rollar proyectos mineros. III. Que en el referido periodo de Prueba, el recurrente presento un nuevo plan de trabajo elaborado por tecnicos conocedores de la materia en donde se refleja un programa con actividades que cumplen los requisitos para esta clase proyectos a desarrollar en los primeros cuatro anos por etapas, proyectando actividades como mapeo geologico, apertura de trincheras geoquimicas, analisis de laboratorio; y los costos de inversion en cada etapa. Presentando ademas los documentos que contienen los nombres de las empresas que participaran en el Proyecto, asi como los curriculos de las empresas que participaran en el mismo, y los curriculos de los tecnicos en la materia que reunen los requisitos requeridos, y el cuadro de inversion, costos y gastos de la Sociedad solicitante, copia de correspondencia en donde se esboza la capacidad financiera, en la cual por ahora, el dinero invertido ha sido para el pago de gastos administrativos y en menos escala para inversion en exploracion refiriendo que se aumentara como se refleja en el proyecto relacionado: con lo que comprueba darle cumplimiento a lo que establece el articulo 9 de la Ley de Mineria. Que con lo expuesto y la prueba documental que presenta superan las deficiencias expresadas por la Direccion de Hidrocarburos y Minas y se pide se reconsidera la Declaratoria sin lugar y se otorgue la Licencia de exploracion solicidata. IV. Al analizar la resolucion que se impugna, se advierte que en la misma se expresaron conclusiones en el sentido que: "a) poca investigacion geologica del programa de explotacion presentado; b) falta de capacidad tecnica suficiente para desarrollar el proyecto de parte de los profesionales propuestos por la sociedad solicitante," sin que se expongan en la misma, la argumentacion, los criterios o razones facticas que permitan en cualquier analisis, llegar a dichas conclusiones, de manera que el razonamiento sea completamente transparente en cuanto a la valoracion de los documentos presentados con la solicitud. V. Consecuente con los expuesto en materia de Licencias de Exploracion ha de entenderse: Que el texto y el espiritu con que se emitio la Ley de Mineria, tal como se dejo establecido en el considerando I y articulo 8 y 9 de la misma, fue la de otorgar Licencias de Exploracion y subsiguiente concesion para la Exploracion de Minerales, a aquellas empresas que realicen esa actividad mediante la aplicacion de sistemas modernos que permitan el aprovechamiento integral de los minerales, habiendo condicionado como requisito para adquirir derechos mineros, la idonidad; determinado como idoneas quienes comprobaran tener capacidad tecnica y capacidad financiera para desarrollar proyectos mineros: que al revisar los documentos presentados por el apelante como prueba, son nuevo plan de trabajo de proyecto de exploracion Nueva Esparta, programa de exploracion del proyecto minero, el programa a desarrollar en los cuatro anos en cuatro etapas, una por ano: carta y resumen de Estados Financieros, informe de Contador Publico de la inversion, costos, y gastos efectuados desde el 01 de enero de 1999 al 30 de junio de 2003, Balance y Estados Financieros certificados por Auditor Publico, documentacion que tiene valor probatorio. Respecto a la capacidad tecnica presenta los nombres de empresas con cartas compromiso de que trabajaran en la exploitacion curriculun vitae de los tecnicos que participaran en el proyecto. De lo antes expuesto se concluye que la empresa solicitante si tiene un proyecto de exploracion geologica para un area con antecedentes mineros, y cuenta con personal tecnico con capacidad para desarrollar el proyecto, por lo que este Ministerio considera que la Sociedad solicitante cumple con las exigencias que al efecto establece la Ley en el articulo 9, como es el tener capacidad tecnica y financiera para desarrollar el proyecto minero y resuelve ha lugar al recurso interpuesto. Por tanto, En uso de mis facultades legales, y con base a lo establecido en el Art. 45 de la Ley de Mineria y las consideraciones expuestas. RESUELVO: 1. Ha lugar el recurso de Apelacion interpuesto el 19 de diciembre de dos mil tres, por el Doctor Alfaro Castro en calidad de Apoderado de la Sociedad COMMERCE GROUP CORP.; y Dejase sin efecto la resolucion178 emitada por la Direccion de Hidrocarburos y Minas de este Ministerio, a las catorce hora del dia uno de diciembre de dos mil tres. 2. Vuelvan las presentes diligencias a su lugar de origen a fin que se otorgue la licencia solicitada. 3. La Direccion de Minas e Hidrocarburos procecera a realizar el moniloreo correspondiente, a fin de asegurar el cumplimiento de las obligaciones por parte del beneficiario so pena de aplicar las sanciones que legalmente sean procedentes. Firma por: MIGUEL E. LACAYO, MINISTRO EX-99 11 ex993.txt EXHIBIT 99.3 EXHIBIT 99.3 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 9, 2005 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 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 the Edward L. Machulak Rollover Individual Retirement Account (ELM RIRA and/or Lender) as of Commerce's fiscal year ended March 31, 2005. 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 The total amount of all of the open-ended, secured, on-demand promissory notes (Notes), together with interest due to the ELM RIRA, amounts to $1,022,395.77 as of March 31, 2005. These Notes, since April 1, 1994, bear interest, payable monthly, at the rate of 4% 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 (Schedule of Principal and Interest as of March 31, 2005, Exhibit A). 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 the ELM RIRA, and it will deduct any payments or credits made by Commerce to the current open-ended, secured, on-demand, outstanding Notes issued or obligations owed to the ELM RIRA. Mr. Edward L. Machulak Edward L. Machulak Rollover Individual Retirement Account May 9, 2005 Page 2 of 10 Pages However, on this date, Commerce's Directors have authorized its Officers to issue renewed annual note(s) (Exhibit B) 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 the following 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 ended March 31, 2005 to the following: General Lumber & Supply Co., Inc. (GLSCO); Edward L. Machulak as an individual and not as a Mr. Edward L. Machulak Edward L. Machulak Rollover Individual Retirement Account May 9, 2005 Page 3 of 10 Pages 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). 2. Other Agreements and Transactions a. On August 14, 2000, Commerce's Directors authorized Commerce's Officers to negotiate a sale of its non-income producing assets, in this case, precious stones and jewelry, to the ELM RIRA at Commerce's book value in exchange for a reduction of debt owed by Commerce to the ELM RIRA. The book value of the precious stones and jewelry is $132,447.77 as of March 31, 2005. b. On March 24, 2005, the ELM RIRA purchased from Commerce 500,000 of Commerce's restricted common shares, $.10 par value, at a unit price of $.105 a share, for a total of $52,500. The share price was established by using the same formula used by the Directors and others who purchased common shares on the same date. The average close bid price for the period beginning December 1, 2004 through February 11, 2005 was used. The payment for these Mr. Edward L. Machulak Edward L. Machulak Rollover Individual Retirement Account May 9, 2005 Page 4 of 10 Pages shares was made by reducing the outstanding promissory note balance due to the ELM RIRA by Commerce. 3. Acknowledgement of previously recorded collateral provided to the Lenders a. Historical information - San Sebastian Gold Mine Concession 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 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 2 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 Mr. Edward L. Machulak Edward L. Machulak Rollover Individual Retirement Account May 9, 2005 Page 5 of 10 Pages 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 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 Mr. Edward L. Machulak Edward L. Machulak Rollover Individual Retirement Account May 9, 2005 Page 6 of 10 Pages 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 20, 2004 (delivered June 4, 2004) the Government of El Salvador, under their Agreement No. 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. c. Acknowledgment of collateral provided through May 9, 2005 Commerce's Directors have on May 9, 2005 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 additional collateral for all of the outstanding loans and obligations as of March 31, 2005, including all future advances of any kind. Collateral that has been provided through May 9, 2005 is: Mr. Edward L. Machulak Edward L. Machulak Rollover Individual Retirement Account May 9, 2005 Page 7 of 10 Pages Nueva Esparta Exploration Concession/License (Nueva Esparta) - 45 square kilometers (11,115 acres) Resolution No. 271 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 is attached to this document (Exhibit C) and the Nueva Esparta Exploration Concession is attached to Exhibit C and referred to as Exhibit 1. 4. 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 deduct ing 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 Mr. Edward L. Machulak Edward L. Machulak Rollover Individual Retirement Account May 9, 2005 Page 8 of 10 Pages excess collateral. Then the amount due to each of them would be distributed accordingly. 5. 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. 6. Guarantors This agreement further confirms that Commerce and all of the following are guarantors to the obligations due to the ELM RIRA and 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 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 3 included in the April 9, 1990 confirmation letter. 7. Re-Execution Agreement(s) In the event the ELM RIRA deems that it is necessary or advisable for the ELM RIRA 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 the ELM RIRA. Commerce also acknowledges that Commerce may be liable to pay certain costs related to any of the transactions entered into with the ELM RIRA. If at a later date the ELM RIRA determines that an error has been made in the payment of such costs to the ELM RIRA, then the ELM RIRA 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 the ELM RIRA's written request. The failure of Commerce to comply with Commerce's obligation(s) Mr. Edward L. Machulak Edward L. Machulak Rollover Individual Retirement Account May 9, 2005 Page 9 of 10 Pages hereunder shall constitute a default and shall entitle the ELM RIRA to the remedies available for default und er any provisions of the agreements including, but not limited to the promissory note(s) and/or the collateral pledge agreement(s) and/or any other Commerce obligation(s). 8. 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 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 Mr. Edward L. Machulak Edward L. Machulak Rollover Individual Retirement Account May 9, 2005 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, 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 Rollover Individual Retirement Account Date: May 9, 2005 Exhibit A to Exhibit 99.3 (Schedule of Principal, Interest, Advances and Withdrawals as of March 31, 2005 has been purposely omitted as it only reflects the calculations of the principal and interest.) Exhibit B to Exhibit 99.3 RENEWED PROMISSORY NOTE Borrower: Commerce Group Corp. Lender: Edward L. Machulak RIRA 6001 North 91st Street 903 West Green Tree Rd. Milwaukee, WI 53225 Milwaukee, WI 53217 Principal Amount: $1,022,395.77 Initial Rate: 4.000% + prime rate, but not less than 16.000% Date of Renewed Note: March 31, 2005 PROMISE TO PAY. COMMERCE GROUP CORP. ("Borrower") promises to pay to the EDWARD L. MACHULAK ROLLOVER INDIVIDUAL RETIREMENT ACCOUNT ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million Twenty Two Thousand Three Hundred Ninety Five and 77/100 00 Dollars ($1,022,395.77), together with interest, paid monthly, on the unpaid principal balance from March 31, 2005, 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 four 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 currently is 5.750% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 4.000 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 C to Exhibit 99.3 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 existing substituted, consolidated 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, executors, administrators, successors and assigns, all who reside in the County of Milwaukee, State of Wisconsin, United States of America, individually and collectively referred to as "Le nders," all of Commerce's rights, titles, claims, remedies, and interests whatsoever in and to the exploration concession identified as the Nueva Esparta Exploration Concession/License which was granted by the Office of the Government of El Salvador Ministry of Economy's office and the Director of Hydrocarbons and Mines under its Resolution No. 271 dated May 28, 2004 (delivered June 4, 2004) to Commerce Group Corp. consisting of an area of 45 square kilometers identified as Cartographic Sheet Number 2657-111 (scale 1:50000) located in the municipality of Santa Rosa de Lima, in the Departments of Morazan and La Union, Republic of El Salvador, Central America, and more fully described in the attached Spanish and English Resolution No. 271 (Exhibit 1) which is made an integral part of this assignment. 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 9, 2005, and that the purpose of this Assignment is to provide additional 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 9th day of May 2005. 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 9th day of May, 2005, 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 Exhibit 1 to Exhibit C of Exhibit 99.3 [English translation of attached Spanish document.] MINISTRY OF ECONOMY Republic of El Salvador RESOLUTION No. 271 Ministry of Economy: San Salvador, at 9:05 AM of the day May 25, 2004. In view of the Recourse of Appeal introduced into the Directorate of Hydrocarbons and Mines, on December 19, 2003, before the Minister of Economy, by Sr. Jose Antonio Alfaro Castro, Lawyer, of this domicile, acting in his capacity of General Power of Attorney for the Company "COMMERCE GROUP CORP" of this domicile, against Resolution No. 178 issued at 14:10 on December 1, of the same year by the cited Directorate, that declares without standing the request for Exploration License that later on will say, and, HAVING READ THE ARGUMENTS AND CONSIDERING: I. That through the referenced Resolution the Directorate of Hydrocarbons and Mines of this Ministry declared without standing the Minerals Exploration License especially for gold an silver that Dr. Jose Antonio Alfaro Castro requested in the name of his mentioned grantor of Power on October 30, 2002 for the area called NUEVA ESPARTA for a surface extension of 45 square kilometers identified in cartographic sheet number 2657-III, scale 1 : 50,000 located in the municipality of Santa Rosa de Lima, in the Departments of Morazan and La Union respectively. II. That having admitted the Recourse, the files were transferred to the Secretary of State with prior notification to the referenced Company and receiving it, was sent to be heard for the term of the Law, on completing the hearing through the mentioned Power holder, expressed that based on Article 45 second line item in the Mining Law, he requested an opening of proofs, which was done and as well the applicant presented a document in which he stated that the Directorate of Hydrocarbons and Mines on issuing the referenced Resolution founded it on the following arguments: a) little geological investigation of the exploitation program presented (SIC); b) lack of sufficient technical capacity to develop the project on the part of the professionals proposed by the applying Company; c) That the applying Company did not fulfill the requirements in the first line item of Article 9 of the Mining Law; requirements that refer to the technical and financial capacity to develop mining projects. III. That in the referred to period of Proof, the applicant presented a new work plan prepared by known technicians in the material, in which a program of activities is reflected that complies with the requirements for this kind of project to be developed in the first four years by stages, projecting activities like geological mapping, opening of trenches, geochemistry, laboratory analysis; and the costs of investment in each stage. Presenting besides, the documents that contain the names of the companies that will participate in the Project; as well as the CV's of the companies that will participate in it, and the CV's of the technicians in the material that have the required qualifications, and the chart of investment, costs and expenses of the applying company, copy of the correspondence in which is sketched the financial capacity, in which for now the invested money has been for the payment of administrative expenses and in a lesser scale for investment in exploration, referring that it will be increased as reflected in the related project; with that it proves compliance with what is established in article 9 of the Mining Law. That with what is explained and with the documental proof that is presented, it overcomes the deficiencies expressed by the Directorate for Hydrocarbons and Mines, who asks that the Declaration Without Standing be reconsidered and grant the Exploration License requested. IV. Upon analyzing the resolution that is impugned, it is warned that in it conclusions were expressed in the sense that: " a) little geological investigation of the exploitation (sic) program presented"; b) "lack of technical capacity sufficient to develop the project on the part of the professionals proposed by the requesting company", without the argumentation, the criteria or the factual reasons being laid out in it that allows any analysis to arrive to said conclusions, therefore the reasoning is completely transparent in regard to valuing the documents presented with the application. V. Consequent with what is expressed, in matters of Exploration Licenses it is necessary to understand: That the text and spirit with which the Mining Law was issued, just as it was established in the Considering and in its articles 8 and 9, was that of granting Exploration Licenses and subsequently a concession for the exploration of minerals, to those companies that carry out this activity through the application of modern systems that allow fully to take advantage of the minerals, having conditioned as a requirement to acquire mining rights, the ideal; determining as ideal those who proved to have the technical and financial capacity to develop mining projects; that on reviewing the documents presented by the appellant as proof are: the new work plan for the Nueva Esparta Exploration project; program of exploration for the mining project, the program to be developed in four years and in four stages, one per year; letter and summary of Financial Statements, report of the Public A ccountant of the investment, costs and expenses made since January 1, 1999 to June 30, 2003, certified Balance Sheets and Financial Statements by the Public Auditor, documentation that has value as proof. With respect to the technical capacity, the names of companies are presented with letters of commitment that they will work in the exploitation; and curriculum vitae of the technicians that will participate in the project. From the latter it is concluded that the applying company indeed has a geological exploration project for an area with mining background and counts with technical personnel with technical capacity to develop the project, for which reason this Ministry considers that the applying company complies with the requirements that for that purpose the Law establishes in article 9, such as having technical and financial capacity to develop the mining project and resolves the recourse (of appeal) presented has standing. Therefore, In use of my legal faculties and based on what is established in Article 45 of the Mining Law and the considerations expressed; RESOLVE: 1. The Recourse of Appeal presented December 19, 2003 by Dr. Jose Antonio Alfaro Castro in his capacity as Power of Attorney for the Company COMMERCE GROUP CORP has standing; and leaves without effect Resolution 178 issued by the Directorate of Hydrocarbons and Mines of this Ministry at 14:00 hours of the day December 1, 2003. 2. Returns the present archives to their place of origin to the end of granting the License requested. 3. The Directorate of Mines and Hydrocarbons will proceed to carry out the corresponding monitoring to the end of assuring the fulfillment of the obligations on the part of the beneficiary under the pain of applying the sanctions that are legally applicable. MIGUEL E. LACAYO MINISTER [Seal of the Ministry of Economy] MINISTERIO DE ECONOMIA Republica de El Salvador, C.A. RESOLUCION No. 271 MINISTERIO DE ECONOMIA: San Salvador, a las nueve horas con cinco minutos del dia venticinco de mayo de dos mil cuatro. Visto el Recurso de Apelacion interpuesto en la Direccion de Hidrocarburos y Minas, el diecinueve de diciembre de 2003, para ante el Ministro de Economia, por el Doctor Jose Antonio Alfaro Castro, Abogado de esta domicilio, actuando como apoderado de la Sociedad COMMERCE GROUP CORP., en contra de la Resolucion No. 178 emitada a catorce horas con diez minutos del uno de diciembre del mismo ano de la citada Direccion, que declara sin lugar solicitud de Licencia de Explotacion que adelante se dira y, LEIDOS LOS AUTOS Y CONSIDERANDO: I. Que mediante la Resolucion recurrida, la Direccion de Hidrocarburos y Minas de este Ministerio, declaro sin lugar la Licencia de Exploracion de Minerales especialmente oro y plata que en nombre de su mencionado poderdante solicito el Doctor Alfaro Castro, el 30 de octubre del 2002, en el area denominada NUEVA ESPARTA, de una extension superficial de 45 kilometros cuadrados, identificada en la hoja cartografica numero 2657-III escala 1:50 ubicada, en los municipios de Sociedad y Santa Rosa de Lima, en los departamentos de Morazan y La Union respectivamente. II. Que admitido el Recurso, fueron trasladadas las diligencias a esta Secretaria de Estado, previa notificacion a la Sociedad recurrente; y recibidas las mismas se le mando a oir por el termino de Ley, quien al evacuar la audiencia por medio del mencionado Apoderado, expreso que en base al articulo 45 inciso segundo de la Ley de mineria, solicitaba se abriera a pruebas; por lo que asi se hizo, y en el mismo, el recurrente presento un escrito en el que manifiesta que la Direccion de Hidrocarburos y Minas al emitir la Resolucion recurrida, la fundamento en los argumentos siguientes: a) poca investigacion geologica del programa de explotacion presentado; b) falta de capacidad tecnica suficiente para desarrollar el proyecto de parte de los profesionales propuestos por la sociedad solicitante; c) Que la Sociedad solicitante no llena los requisitos senalados en el inciso primero del articulo 9 de la Ley de Mineria; requisitos que se refiere a la capacidad tecnica y financiera para desar rollar proyectos mineros. III. Que en el referido periodo de Prueba, el recurrente presento un nuevo plan de trabajo elaborado por tecnicos conocedores de la materia en donde se refleja un programa con actividades que cumplen los requisitos para esta clase proyectos a desarrollar en los primeros cuatro anos por etapas, proyectando actividades como mapeo geologico, apertura de trincheras geoquimicas, analisis de laboratorio; y los costos de inversion en cada etapa. Presentando ademas los documentos que contienen los nombres de las empresas que participaran en el Proyecto, asi como los curriculos de las empresas que participaran en el mismo, y los curriculos de los tecnicos en la materia que reunen los requisitos requeridos, y el cuadro de inversion, costos y gastos de la Sociedad solicitante, copia de correspondencia en donde se esboza la capacidad financiera, en la cual por ahora, el dinero invertido ha sido para el pago de gastos administrativos y en menos escala para inversion en exploracion refiriendo que se aumentara como se refleja en el proyecto relacionado: con lo que comprueba darle cumplimiento a lo que establece el articulo 9 de la Ley de Mineria. Que con lo expuesto y la prueba documental que presenta superan las deficiencias expresadas por la Direccion de Hidrocarburos y Minas y se pide se reconsidera la Declaratoria sin lugar y se otorgue la Licencia de exploracion solicidata. IV. Al analizar la resolucion que se impugna, se advierte que en la misma se expresaron conclusiones en el sentido que: "a) poca investigacion geologica del programa de explotacion presentado; b) falta de capacidad tecnica suficiente para desarrollar el proyecto de parte de los profesionales propuestos por la sociedad solicitante," sin que se expongan en la misma, la argumentacion, los criterios o razones facticas que permitan en cualquier analisis, llegar a dichas conclusiones, de manera que el razonamiento sea completamente transparente en cuanto a la valoracion de los documentos presentados con la solicitud. V. Consecuente con los expuesto en materia de Licencias de Exploracion ha de entenderse: Que el texto y el espiritu con que se emitio la Ley de Mineria, tal como se dejo establecido en el considerando I y articulo 8 y 9 de la misma, fue la de otorgar Licencias de Exploracion y subsiguiente concesion para la Exploracion de Minerales, a aquellas empresas que realicen esa actividad mediante la aplicacion de sistemas modernos que permitan el aprovechamiento integral de los minerales, habiendo condicionado como requisito para adquirir derechos mineros, la idonidad; determinado como idoneas quienes comprobaran tener capacidad tecnica y capacidad financiera para desarrollar proyectos mineros: que al revisar los documentos presentados por el apelante como prueba, son nuevo plan de trabajo de proyecto de exploracion Nueva Esparta, programa de exploracion del proyecto minero, el programa a desarrollar en los cuatro anos en cuatro etapas, una por ano: carta y resumen de Estados Financieros, informe de Contador Publico de la inversion, costos, y gastos efectuados desde el 01 de enero de 1999 al 30 de junio de 2003, Balance y Estados Financieros certificados por Auditor Publico, documentacion que tiene valor probatorio. Respecto a la capacidad tecnica presenta los nombres de empresas con cartas compromiso de que trabajaran en la exploitacion curriculun vitae de los tecnicos que participaran en el proyecto. De lo antes expuesto se concluye que la empresa solicitante si tiene un proyecto de exploracion geologica para un area con antecedentes mineros, y cuenta con personal tecnico con capacidad para desarrollar el proyecto, por lo que este Ministerio considera que la Sociedad solicitante cumple con las exigencias que al efecto establece la Ley en el articulo 9, como es el tener capacidad tecnica y financiera para desarrollar el proyecto minero y resuelve ha lugar al recurso interpuesto. Por tanto, En uso de mis facultades legales, y con base a lo establecido en el Art. 45 de la Ley de Mineria y las consideraciones expuestas. RESUELVO: 1. Ha lugar el recurso de Apelacion interpuesto el 19 de diciembre de dos mil tres, por el Doctor Alfaro Castro en calidad de Apoderado de la Sociedad COMMERCE GROUP CORP.; y Dejase sin efecto la resolucion178 emitada por la Direccion de Hidrocarburos y Minas de este Ministerio, a las catorce hora del dia uno de diciembre de dos mil tres. 2. Vuelvan las presentes diligencias a su lugar de origen a fin que se otorgue la licencia solicitada. 3. La Direccion de Minas e Hidrocarburos procecera a realizar el moniloreo correspondiente, a fin de asegurar el cumplimiento de las obligaciones por parte del beneficiario so pena de aplicar las sanciones que legalmente sean procedentes. Firma por: MIGUEL E. LACAYO, MINISTRO EX-99 12 ex994.txt EXHIBIT 99.4 EXHIBIT 99.4 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 9, 2005 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 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 the Sylvia Machulak Rollover Retirement Account (SM RIRA) and to Sylvia Machulak as an individual/consultant (SM), both referred to as Lenders, as of Commerce's fiscal year ended March 31, 2005. 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 The total amount of all of the open-ended, secured, on-demand promissory notes (Notes) together with interest due to the SM RIRA is $591,628.78 as of March 31, 2005. These Note(s) 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, (then Bank One; now the prime rate published in the Wall Street Journal), but not less than 16% per annum (Schedule of Principal and Interest as of March 31, 2005, Exhibit A). 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 the SM RIRA, and it will deduct any payments or credits made by Commerce to the current open-ended, secured, on-demand, outstanding Notes issued or obligations owed to the SM RIRA. Mrs. Sylvia Machulak Sylvia Machulak Rollover Individual Retirement Account May 9, 2005 Page 2 of 10 Pages However, on this date, Commerce's Directors have authorized its Officers to issue renewed annual note(s) (Exhibit B) 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 the following 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 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 Mrs. Sylvia Machulak Sylvia Machulak Rollover Individual Retirement Account May 9, 2005 Page 3 of 10 Pages (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). 2. Other Obligations - Consulting Fees Due to Sylvia Machulak as an Individual (SM) As of September 30, 2000, a sum of $201,600 (72 months at $2,800 per month) is due to SM for consulting services rendered pursuant to a Director resolution adopted on October 20, 2000. The Directors further acknowledge the continuance of SM's services at a sum of $3,000 per month beginning on October 1, 2000, and continuing until such time as terminated by the Directors or the President. Therefore, the amount due to SM as of March 31, 2005, is $363,600 (72 months at $2,800 and 54 months at $3,000). Reference is made to Exhibit B included in the April 5, 1996 confirmation letter. 3. Transactions other than Notes Entered into or Confirmed During the Fiscal Year with SM or the SM RIRA, Commerce, and its Subsidiaries There were no known non-routine transactions during this fiscal year ended March 31, 2005. Mrs. Sylvia Machulak Sylvia Machulak Rollover Individual Retirement Account May 9, 2005 Page 4 of 10 Pages 4. Collateral Pledged The collateral specifically pledged to the SM RIRA or as otherwise noted is as follows: a. 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. b. 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 4(a) 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. Mrs. Sylvia Machulak Sylvia Machulak Rollover Individual Retirement Account May 9, 2005 Page 5 of 10 Pages (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 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 Mrs. Sylvia Machulak Sylvia Machulak Rollover Individual Retirement Account May 9, 2005 Page 6 of 10 Pages 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 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. c. Acknowledgment of collateral provided through May 9, 2005 Commerce's Directors have on May 9, 2005 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, Mrs. Sylvia Machulak Sylvia Machulak Rollover Individual Retirement Account May 9, 2005 Page 7 of 10 Pages collectively and individually referred to as Lenders, as additional collateral for all of the outstanding loans and obligations as of March 31, 2005, including all future advances of any kind. Collateral that has been provided through May 9, 2005 is: Nueva Esparta Exploration Concession/License (Nueva Esparta) - 45 square kilometers (11,115 acres) Resolution No. 271 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 is attached to this document (Exhibit C) and the Nueva Esparta Exploration Concession is attached to Exhibit C and referred to as Exhibit 1. 5. 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 deducting Mrs. Sylvia Machulak Sylvia Machulak Rollover Individual Retirement Account May 9, 2005 Page 8 of 10 Pages 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. 6. 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. 7. Guarantors This agreement further confirms that Commerce and all of the following are guarantors to the obligations due to SM and 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 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 5 included in the April 9, 1990 confirmation letter. 8. Re-Execution Agreement(s) In the event the SM RIRA and/or SM deems that it is necessary or advisable for the SM RIRA and/or SM 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 the SM RIRA and/or SM. Commerce also acknowledges that Commerce may be liable to pay certain costs related to any of the transactions entered into with the SM RIRA and/or SM. If Mrs. Sylvia Machulak Sylvia Machulak Rollover Individual Retirement Account May 9, 2005 Page 9 of 10 Pages at a later date the SM RIRA and/or SM determines that an error has been made in the payment of such costs to the SM RIRA and/or SM, then the SM RIRA and/or SM 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 the SM RIRA's and/or SM's written request. The failure of Commerce to comply with Commerce's obligation(s) hereunder shall constitute a defaul t and shall entitle the SM RIRA and/or SM to the remedies available for default under any provisions of the agreements including, but not limited to the promissory note(s) and/or the collateral pledge agreement(s) and/or any other Commerce obligation(s). 9. 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 and/or SM, 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 Sylvia Machulak Rollover Individual Retirement Account May 9, 2005 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, 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: Accepted by: /s/ Sylvia Machulak /s/ Sylvia Machulak ____________________________________ ________________________________ Sylvia Machulak Rollover Individual Sylvia Machulak as an individual Retirement Account Date: May 9, 2005 Date: May 9, 2005 Exhibit A to Exhibit 99.4 (Schedule of Principal, Interest, Advances and Withdrawals as of March 31, 2005 has been purposely omitted as it only reflects the calculations of the principal and interest.) Exhibit B to Exhibit 99.4 RENEWED PROMISSORY NOTE Borrower: Commerce Group Corp. Lender: Sylvia Machulak RIRA 6001 North 91st Street 903 West Green Tree Rd. Milwaukee, WI 53225 Milwaukee, WI 53217 Principal Amount: $591,628.78 Initial Rate: 3.000% + prime rate, but not less than 16.000% Date of Renewed Note: March 31, 2005 PROMISE TO PAY. COMMERCE GROUP CORP. ("Borrower") promises to pay to the SYLVIA MACHULAK ROLLOVER INDIVIDUAL RETIREMENT ACCOUNT ("Lender"), or order, in lawful money of the United States of America, the principal amount of Five Hundred Ninety One Thousand Six Hundred Twenty Eight and 78/100 Dollars ($591,628.78), together with interest, paid monthly, on the unpaid principal balance from March 31, 2005, 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 three 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 currently is 5.750% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 3.000 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 C to Exhibit 99.4 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 existing substituted, consolidated 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, executors, administrators, successors and assigns, all who reside in the County of Milwaukee, State of Wisconsin, United States of America, individually and collectively referred to as "Le nders," all of Commerce's rights, titles, claims, remedies, and interests whatsoever in and to the exploration concession identified as the Nueva Esparta Exploration Concession/License which was granted by the Office of the Government of El Salvador Ministry of Economy's office and the Director of Hydrocarbons and Mines under its Resolution No. 271 dated May 28, 2004 (delivered June 4, 2004) to Commerce Group Corp. consisting of an area of 45 square kilometers identified as Cartographic Sheet Number 2657-111 (scale 1:50000) located in the municipality of Santa Rosa de Lima, in the Departments of Morazan and La Union, Republic of El Salvador, Central America, and more fully described in the attached Spanish and English Resolution No. 271 (Exhibit 1) which is made an integral part of this assignment. 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 9, 2005, and that the purpose of this Assignment is to provide additional 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 9th day of May 2005. 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 9th day of May, 2005, 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 Exhibit 1 to Exhibit C of Exhibit 99.4 [English translation of attached Spanish document] MINISTRY OF ECONOMY Republic of El Salvador RESOLUTION No. 271 Ministry of Economy: San Salvador, at 9:05 AM of the day May 25, 2004. In view of the Recourse of Appeal introduced into the Directorate of Hydrocarbons and Mines, on December 19, 2003, before the Minister of Economy, by Sr. Jose Antonio Alfaro Castro, Lawyer, of this domicile, acting in his capacity of General Power of Attorney for the Company "COMMERCE GROUP CORP" of this domicile, against Resolution No. 178 issued at 14:10 on December 1, of the same year by the cited Directorate, that declares without standing the request for Exploration License that later on will say, and, HAVING READ THE ARGUMENTS AND CONSIDERING: I. That through the referenced Resolution the Directorate of Hydrocarbons and Mines of this Ministry declared without standing the Minerals Exploration License especially for gold an silver that Dr. Jose Antonio Alfaro Castro requested in the name of his mentioned grantor of Power on October 30, 2002 for the area called NUEVA ESPARTA for a surface extension of 45 square kilometers identified in cartographic sheet number 2657-III, scale 1 : 50,000 located in the municipality of Santa Rosa de Lima, in the Departments of Morazan and La Union respectively. II. That having admitted the Recourse, the files were transferred to the Secretary of State with prior notification to the referenced Company and receiving it, was sent to be heard for the term of the Law, on completing the hearing through the mentioned Power holder, expressed that based on Article 45 second line item in the Mining Law, he requested an opening of proofs, which was done and as well the applicant presented a document in which he stated that the Directorate of Hydrocarbons and Mines on issuing the referenced Resolution founded it on the following arguments: a) little geological investigation of the exploitation program presented (SIC); b) lack of sufficient technical capacity to develop the project on the part of the professionals proposed by the applying Company; c) That the applying Company did not fulfill the requirements in the first line item of Article 9 of the Mining Law; requirements that refer to the technical and financial capacity to develop mining projects. III. That in the referred to period of Proof, the applicant presented a new work plan prepared by known technicians in the material, in which a program of activities is reflected that complies with the requirements for this kind of project to be developed in the first four years by stages, projecting activities like geological mapping, opening of trenches, geochemistry, laboratory analysis; and the costs of investment in each stage. Presenting besides, the documents that contain the names of the companies that will participate in the Project; as well as the CV's of the companies that will participate in it, and the CV's of the technicians in the material that have the required qualifications, and the chart of investment, costs and expenses of the applying company, copy of the correspondence in which is sketched the financial capacity, in which for now the invested money has been for the payment of administrative expenses and in a lesser scale for investment in exploration, referring that it will be increased as reflected in the related project; with that it proves compliance with what is established in article 9 of the Mining Law. That with what is explained and with the documental proof that is presented, it overcomes the deficiencies expressed by the Directorate for Hydrocarbons and Mines, who asks that the Declaration Without Standing be reconsidered and grant the Exploration License requested. IV. Upon analyzing the resolution that is impugned, it is warned that in it conclusions were expressed in the sense that: " a) little geological investigation of the exploitation (sic) program presented"; b) "lack of technical capacity sufficient to develop the project on the part of the professionals proposed by the requesting company", without the argumentation, the criteria or the factual reasons being laid out in it that allows any analysis to arrive to said conclusions, therefore the reasoning is completely transparent in regard to valuing the documents presented with the application. V. Consequent with what is expressed, in matters of Exploration Licenses it is necessary to understand: That the text and spirit with which the Mining Law was issued, just as it was established in the Considering and in its articles 8 and 9, was that of granting Exploration Licenses and subsequently a concession for the exploration of minerals, to those companies that carry out this activity through the application of modern systems that allow fully to take advantage of the minerals, having conditioned as a requirement to acquire mining rights, the ideal; determining as ideal those who proved to have the technical and financial capacity to develop mining projects; that on reviewing the documents presented by the appellant as proof are: the new work plan for the Nueva Esparta Exploration project; program of exploration for the mining project, the program to be developed in four years and in four stages, one per year; letter and summary of Financial Statements, report of the Public A ccountant of the investment, costs and expenses made since January 1, 1999 to June 30, 2003, certified Balance Sheets and Financial Statements by the Public Auditor, documentation that has value as proof. With respect to the technical capacity, the names of companies are presented with letters of commitment that they will work in the exploitation; and curriculum vitae of the technicians that will participate in the project. From the latter it is concluded that the applying company indeed has a geological exploration project for an area with mining background and counts with technical personnel with technical capacity to develop the project, for which reason this Ministry considers that the applying company complies with the requirements that for that purpose the Law establishes in article 9, such as having technical and financial capacity to develop the mining project and resolves the recourse (of appeal) presented has standing. Therefore, In use of my legal faculties and based on what is established in Article 45 of the Mining Law and the considerations expressed; RESOLVE: 1. The Recourse of Appeal presented December 19, 2003 by Dr. Jose Antonio Alfaro Castro in his capacity as Power of Attorney for the Company COMMERCE GROUP CORP has standing; and leaves without effect Resolution 178 issued by the Directorate of Hydrocarbons and Mines of this Ministry at 14:00 hours of the day December 1, 2003. 2. Returns the present archives to their place of origin to the end of granting the License requested. 3. The Directorate of Mines and Hydrocarbons will proceed to carry out the corresponding monitoring to the end of assuring the fulfillment of the obligations on the part of the beneficiary under the pain of applying the sanctions that are legally applicable. MIGUEL E. LACAYO MINISTER [Seal of the Ministry of Economy] MINISTERIO DE ECONOMIA Republica de El Salvador, C.A. RESOLUCION No. 271 MINISTERIO DE ECONOMIA: San Salvador, a las nueve horas con cinco minutos del dia venticinco de mayo de dos mil cuatro. Visto el Recurso de Apelacion interpuesto en la Direccion de Hidrocarburos y Minas, el diecinueve de diciembre de 2003, para ante el Ministro de Economia, por el Doctor Jose Antonio Alfaro Castro, Abogado de esta domicilio, actuando como apoderado de la Sociedad COMMERCE GROUP CORP., en contra de la Resolucion No. 178 emitada a catorce horas con diez minutos del uno de diciembre del mismo ano de la citada Direccion, que declara sin lugar solicitud de Licencia de Explotacion que adelante se dira y, LEIDOS LOS AUTOS Y CONSIDERANDO: I. Que mediante la Resolucion recurrida, la Direccion de Hidrocarburos y Minas de este Ministerio, declaro sin lugar la Licencia de Exploracion de Minerales especialmente oro y plata que en nombre de su mencionado poderdante solicito el Doctor Alfaro Castro, el 30 de octubre del 2002, en el area denominada NUEVA ESPARTA, de una extension superficial de 45 kilometros cuadrados, identificada en la hoja cartografica numero 2657-III escala 1:50 ubicada, en los municipios de Sociedad y Santa Rosa de Lima, en los departamentos de Morazan y La Union respectivamente. II. Que admitido el Recurso, fueron trasladadas las diligencias a esta Secretaria de Estado, previa notificacion a la Sociedad recurrente; y recibidas las mismas se le mando a oir por el termino de Ley, quien al evacuar la audiencia por medio del mencionado Apoderado, expreso que en base al articulo 45 inciso segundo de la Ley de mineria, solicitaba se abriera a pruebas; por lo que asi se hizo, y en el mismo, el recurrente presento un escrito en el que manifiesta que la Direccion de Hidrocarburos y Minas al emitir la Resolucion recurrida, la fundamento en los argumentos siguientes: a) poca investigacion geologica del programa de explotacion presentado; b) falta de capacidad tecnica suficiente para desarrollar el proyecto de parte de los profesionales propuestos por la sociedad solicitante; c) Que la Sociedad solicitante no llena los requisitos senalados en el inciso primero del articulo 9 de la Ley de Mineria; requisitos que se refiere a la capacidad tecnica y financiera para desar rollar proyectos mineros. III. Que en el referido periodo de Prueba, el recurrente presento un nuevo plan de trabajo elaborado por tecnicos conocedores de la materia en donde se refleja un programa con actividades que cumplen los requisitos para esta clase proyectos a desarrollar en los primeros cuatro anos por etapas, proyectando actividades como mapeo geologico, apertura de trincheras geoquimicas, analisis de laboratorio; y los costos de inversion en cada etapa. Presentando ademas los documentos que contienen los nombres de las empresas que participaran en el Proyecto, asi como los curriculos de las empresas que participaran en el mismo, y los curriculos de los tecnicos en la materia que reunen los requisitos requeridos, y el cuadro de inversion, costos y gastos de la Sociedad solicitante, copia de correspondencia en donde se esboza la capacidad financiera, en la cual por ahora, el dinero invertido ha sido para el pago de gastos administrativos y en menos escala para inversion en exploracion refiriendo que se aumentara como se refleja en el proyecto relacionado: con lo que comprueba darle cumplimiento a lo que establece el articulo 9 de la Ley de Mineria. Que con lo expuesto y la prueba documental que presenta superan las deficiencias expresadas por la Direccion de Hidrocarburos y Minas y se pide se reconsidera la Declaratoria sin lugar y se otorgue la Licencia de exploracion solicidata. IV. Al analizar la resolucion que se impugna, se advierte que en la misma se expresaron conclusiones en el sentido que: "a) poca investigacion geologica del programa de explotacion presentado; b) falta de capacidad tecnica suficiente para desarrollar el proyecto de parte de los profesionales propuestos por la sociedad solicitante," sin que se expongan en la misma, la argumentacion, los criterios o razones facticas que permitan en cualquier analisis, llegar a dichas conclusiones, de manera que el razonamiento sea completamente transparente en cuanto a la valoracion de los documentos presentados con la solicitud. V. Consecuente con los expuesto en materia de Licencias de Exploracion ha de entenderse: Que el texto y el espiritu con que se emitio la Ley de Mineria, tal como se dejo establecido en el considerando I y articulo 8 y 9 de la misma, fue la de otorgar Licencias de Exploracion y subsiguiente concesion para la Exploracion de Minerales, a aquellas empresas que realicen esa actividad mediante la aplicacion de sistemas modernos que permitan el aprovechamiento integral de los minerales, habiendo condicionado como requisito para adquirir derechos mineros, la idonidad; determinado como idoneas quienes comprobaran tener capacidad tecnica y capacidad financiera para desarrollar proyectos mineros: que al revisar los documentos presentados por el apelante como prueba, son nuevo plan de trabajo de proyecto de exploracion Nueva Esparta, programa de exploracion del proyecto minero, el programa a desarrollar en los cuatro anos en cuatro etapas, una por ano: carta y resumen de Estados Financieros, informe de Contador Publico de la inversion, costos, y gastos efectuados desde el 01 de enero de 1999 al 30 de junio de 2003, Balance y Estados Financieros certificados por Auditor Publico, documentacion que tiene valor probatorio. Respecto a la capacidad tecnica presenta los nombres de empresas con cartas compromiso de que trabajaran en la exploitacion curriculun vitae de los tecnicos que participaran en el proyecto. De lo antes expuesto se concluye que la empresa solicitante si tiene un proyecto de exploracion geologica para un area con antecedentes mineros, y cuenta con personal tecnico con capacidad para desarrollar el proyecto, por lo que este Ministerio considera que la Sociedad solicitante cumple con las exigencias que al efecto establece la Ley en el articulo 9, como es el tener capacidad tecnica y financiera para desarrollar el proyecto minero y resuelve ha lugar al recurso interpuesto. Por tanto, En uso de mis facultades legales, y con base a lo establecido en el Art. 45 de la Ley de Mineria y las consideraciones expuestas. RESUELVO: 1. Ha lugar el recurso de Apelacion interpuesto el 19 de diciembre de dos mil tres, por el Doctor Alfaro Castro en calidad de Apoderado de la Sociedad COMMERCE GROUP CORP.; y Dejase sin efecto la resolucion178 emitada por la Direccion de Hidrocarburos y Minas de este Ministerio, a las catorce hora del dia uno de diciembre de dos mil tres. 2. Vuelvan las presentes diligencias a su lugar de origen a fin que se otorgue la licencia solicitada. 3. La Direccion de Minas e Hidrocarburos procecera a realizar el moniloreo correspondiente, a fin de asegurar el cumplimiento de las obligaciones por parte del beneficiario so pena de aplicar las sanciones que legalmente sean procedentes. Firma por: MIGUEL E. LACAYO, MINISTRO -----END PRIVACY-ENHANCED MESSAGE-----