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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-12346
IRONSTONE GROUP, INC.
(Name of small business issuer in its charter)
DELAWARE 95-2829956
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
ONE BUSH STREET, SUITE 1100 SAN FRANCISCO, CA 94104
(Address of principal executive offices, including zip code)
(415) 576-3537
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities and 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
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B not contained herein, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB. X
---
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15 (d) of the Exchange Act after the
distribution of securities under A plan confirmed by a court. Yes X No
--- ---
The registrant's revenues for the fiscal year ended December 31, 1995
were $7,644,974.
The approximate aggregate market value of the registrant's voting
securities held by non-affiliates of the registrant, based on the price at which
such securities were last sold privately by the registrant, was $1,115,903 as of
March 24, 1996.
The number of shares of the registrant's Common Stock outstanding as of
March 24, 1996 was 1,487,870.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this report (the "1996 Proxy Statement").
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PART 1
ITEM 1 - BUSINESS
BACKGROUND
Ironstone Group, Inc., a Delaware corporation known as OXOCO, Inc.
prior to 1988 ("Ironstone" or the "Company"), was incorporated in 1972. Since
1986, a majority of the company's outstanding shares has been owned by
Hambrecht & Quist Group, a San Francisco-based investment banking and venture
capital firm, and its affiliates (collectively, "H&Q"), and H&Q presently owns
over 60% of the Company's outstanding voting securities. The Company's
principal offices are located at One Bush Street, Suite 1100, San Francisco, CA
94101, and its telephone number at that location is (415) 576-3537.
Bankruptcy
In January 1991, the Company filed a voluntary petition for protection
under Title 11 of the U.S. Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Northern District of California. The Company's First
Amended Plan of Reorganization, as modified (the "Plan"), was confirmed by that
Court on May 24, 1993, and the effective date pursuant to the terms of the Plan
was July 15, 1993.
Under the Plan, any cash or assets that remained with the Company for
the benefit of stockholders after satisfaction of all other obligations under
the Plan could, in the Company's sole and absolute discretion, be retained by
the Company for business operations or investments, distributed to all
stockholders on a pro rata basis or, distributed in part to certain stockholders
in order to eliminate their interests as stockholders. The Company determined it
to be in the best interests of the Company's stockholders for the Company to
retain the remaining assets.
Acquisition of Belt Perry Associates, Inc.
In October 1993, the Company purchased from Belt Perry Associates,
Inc., an Arizona corporation ("BPA"), 80% of BPA's outstanding shares for
consideration consisting of (i) a $2,500,000 cash payment (all of which was used
by BPA to redeem certain of its outstanding shares from existing shareholders)
and (ii) a guaranty by the Company of certain obligations of BPA in a maximum
aggregate amount of $3,500,000 payable to the redeemed BPA shareholders.
Simultaneously, the Company purchased from an existing shareholder, for a
$50,000 cash payment, 16% of the outstanding shares of Belt Perry Associates,
Inc., a California corporation ("BPC"), of which BPA is an 80% shareholder. In
addition, the BPC selling shareholder is entitled to receive contingent
incentive payments if certain BPC profit targets and other goals are achieved, a
portion of which payments is the obligation of the Company. The shares of BPA
and BPC that are not owned by the Company are subject to certain put and call
rights which, under certain circumstances, entitle the Company and/or the holder
of such shares to require that the shares be purchased by the Company for a
price equal to their fair market value.
The consideration paid by the Company for the shares of Belt Perry
Common Stock was determined pursuant to arm's length negotiations between the
Company and the shareholder of Belt Perry and was based on various factors
concerning the valuation of the business of Belt Perry. A more detailed
description of the Company's acquisition of Belt Perry and the full text of the
agreements related thereto are incorporated herein by reference from the 1993
8-K.
BPA and BPC are collectively referred to herein as "Belt Perry" and,
unless the context otherwise requires, the "Company" refers to Ironstone and its
consolidated subsidiaries.
IRONSTONE'S BUSINESS
Ironstone's principal business activities are conducted through Belt
Perry, which is engaged in the business of reviewing and, when deemed
appropriate, appealing, on behalf of property owners, real and personal property
tax assessments before governmental taxing authorities, concentrating primarily
on commercial, industrial and multi-tenant real estate in California and
Arizona. Belt Perry's agreements with its customers typically provide for Belt
Perry to be paid a portion of the amount, if any, by which the property taxes
are reduced as a result of an appeal prosecuted by Belt Perry.
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Real Property Tax Appeals
Belt Perry performs real property tax consulting work for over 3,000
commercial, industrial and residential clients, primarily in the states of
Arizona and California, through its offices in Phoenix, Arizona and San Diego,
Los Angeles and Larkspur (a suburb of San Francisco), California. The real
property tax appeal process is similar in most states.
Belt Perry obtains new clients through its account executives via
referrals, telephone and direct contact. Belt Perry coordinates the consulting
services performed, including the review and analysis of property records, and
the filing of administrative appeals and tax court cases. In Arizona, BPA
employs state-certified appraisers who are responsible for preparing the
supporting documentation and negotiating and arguing property tax appeals at
hearings on behalf of BPA's clients. A computer-generated appraisal report is
the basic document used by the appraiser to support the client's position with
the county assessor or the tax court. See "Proprietary System".
Belt Perry typically charges contingent fees based on a percentage of
the tax savings, if any, generated from the administrative appeal or court case.
The large majority of the Company's revenues are generated from real property
administrative appeals and court cases.
ARIZONA APPEAL PROCESS
Most of BPA's appeals are handled as administrative appeals, which
typically begin with a filing with the county assessor and may be appealed as
far as the Tax Court Division of the Superior Court of Arizona. Property
valuations are set by the county assessor and mailed to property owners on or
about November 15 of each year. Property owners have 45 days to appeal the
valuation for the administrative process.
BPA downloads certain counties' property tax rolls into its computer
system. An appraiser then uses the computer system to obtain the assessors'
valuations for each parcel owned by the client and determines whether or not
each parcel valuation appears reasonable based on the appraisers initial
valuation of the property. If the appraiser feels the assessor's valuation is
too high, an appeal is filed with the county assessor stating the appraiser's
position regarding the appropriate valuation to be used and the basis for such
valuation (i.e., income approach, market approach, etc.). The county assessor
may accept or deny an appeal. If an appeal is denied, BPA has the option of
filing an appeal with the County Board of Equalization (the "Equalization
Board"), which hears arguments from BPA and the assessor and then determines the
appropriate valuation. If an unfavorable decision is rendered by the
Equalization Board, BPA has the option of filing an appeal with the State Board
of Tax Appeals and, finally, with the Tax Court Division of the Superior Court
of Arizona. BPA consults with the client before proceeding to the Superior
Court.
CALIFORNIA APPEAL PROCESS
The California appeal process is similar to that of Arizona, but
generally involves only two levels: the assessor level and county Board of
Equalization. Although there is occasionally judicial review through the
Superior Court, it is typically very limited in scope. The normal assessment
period occurs between March 1 and July 1 of each year, and appeals must be filed
by September 15 of the same year. Due to the backlog of appeal applications,
many counties are currently taking 18 to 24 months to resolve the appeals.
Because there is a two-year statute of limitations on all appeal applications,
the taxpayer's opinion of value will prevail by default if the Board of
Equalization does not hold a hearing within two years from the filing. In 1995,
California introduced a roll correction process to reduce property tax
assessments which is discussed in Note-13 of the consolidated financial
statements.
Personal Property Tax Appeals
Belt Perry files personal property tax appeals for clients in more than
30 states. Municipalities typically charge personal property taxes based on the
assessed value of machinery, equipment, inventories not held for resale,
supplies and other miscellaneous items. Taxes owed are based on assessed value
multiplied by the applicable tax rate. Personal property appeals generally are
filed to contest depreciation rates. Items not classified correctly and assessor
audits. Belt Perry typically charges contingent fees based on a percentage of
the tax savings, if any, generated from the personal property tax appeal.
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TaxNet
BPA's wholly-owned subsidiary, TaxNet, is a national referral network
of property tax consultants providing tax appeal services throughout the United
States and Canada. BPA charges TaxNet affiliates certain license and other fees.
Proprietary System
BPA has developed a proprietary system (consisting of a database and
software system) that generates a substantial portion of the BPA appraisal
report and consequently significantly reduces the amount of administrative time
BPA personnel must devote to each appeal. The system currently holds tens of
thousands of market and equity comparable property records, including the
property tax rolls for certain counties of Arizona. The computer software
performs a number of different functions, including analysis of pertinent
details of county tax rolls to obtain valuations on the subject property and
comparable properties, preparation of market and equity comparables for the
subject property, preparation of the income analysis section of the appraisal
report, and generation of a substantial portion of the appraisal report
utilizing a standardized format. The database is updated on a regular basis by
using sales information obtained from third party sources and by obtaining
additional information on comparable properties selected from the county tax
rolls.
BUSINESS STRATEGY
The Company's strategy is to provide property and tax services with
current primary focus on providing real and personal property tax consulting
services. The Company's acquisition of Belt Perry has allowed the Company to
provide real and personal property tax consulting services in the western United
States, and the Company intends to explore additional opportunities in tax
related fields and information services. In addition, the Company will continue
to monitor the possibility of expanding its present core business through
alliances with other firms or individuals. Through such alliances the Company
can now provide utility rate audits, and sales and use tax services.
Most state and local taxing authorities have an annual deadline for the
filing of an appeal for tax relief by or on behalf of a property owner. Such
deadlines create a seasonality to the tax appeal business within certain
jurisdictions. The Company's challenge is to manage it's expenses properly while
providing high quality customer service in that regard. Due to changes in the
law in Arizona, the Company has reduced it's staff by 9 full-time employees.
There can be no assurance that the Company will acquire businesses,
form partnerships, or expand its existing operations into other fields, or at
all. Failure to expand the scope of services and information the Company offers
may have an adverse effect on the Company's results of operations.
COMPETITION
The tax consulting business is highly fragmented and very competitive.
Competitors include firms providing similar tax consulting services, lawyers,
accountants, real estate brokers and property managers. Increased competition
could result in fee reductions or reduced market share, either of which could
adversely affect the Company's results of operations. The Company believes it
can compete effectively in the commercial, industrial and multi-tenant real
property tax appeal and personal property tax markets, because of its trained
and experienced personnel, its network of offices and its data processing system
for appraising real estate.
MARKETING STRATEGY
The Company has recently endeavored to change the identity of Belt
Perry to conform with its own name, and all offices of Belt Perry now operate
under the name "Ironstone Group" . The Company currently has offices in Phoenix,
Arizona and Los Angeles, San Diego, San Francisco and Larkspur, California. In
addition, TaxNet has affiliates in 13 other cities.
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The Company intends to increase its' sales per employee by providing
additional training and support to its account executives. The Company also
intends to increase the number of services offered and sold by its account
executives. By providing training and additional sales opportunities, the
Company believes it can provide real and personal property tax services to
individual, corporate and institutional clients. There can be no assurance that
increased revenue and profitability will result from these efforts. Furthermore,
the elapsed time between the filing of an appeal and its resolution means that
increased sales efforts now may not translate into increased revenue for one to
two years. The failure to expand the Company's revenue would result in a slower
rate of growth or no growth at all in the next year, could impede the Company's
ability to compete, could result in reduced market share, and may prevent the
Company from expanding into new markets, any of which would have an adverse
effect on the Company's results of operations.
In order to expand its present regional client base, and in an effort
to broaden its marketing presence, the Company has entered into strategic
relationships. The Company has entered into a referral agreement with Grubb &
Ellis Company ("Grubb & Ellis"). Grubb & Ellis is a national real estate firm
that specializes in the sale and leasing of commercial properties with
approximately 1,100 commercial real estate sales people nationwide. The Company
believes that potential referrals from, and access to, information possessed by
Grubb & Ellis will be of great use in arguing for a reduced value of clients'
property. The Company has also formed an alliance with Fields and Associates, a
premier sales and use tax consulting firm in Burlingame, California. Both
companies hope to leverage their relationships through referrals and joint
activities. The Company has also retained an expert in the area of utility rate
audits to provide that service to its clients.
In addition to the above-described relationships, the Company intends
to seek additional alliances intended to broaden the Company's market base and
services provided. There can be no assurance that any such alliances will be
established.
The Company believes that an important aspect of it's marketing and
sales program is to provide on going customer service, such as periodic updates
on the status of various appeals and periodic opinions regarding the value upon
which tax savings may based. The Company is continually working to improve and
expand its management information systems in order to be able to quickly and
accurately provide a status report of a portfolio of properties in multiple
locations. In addition, the Company intends to continue to refine its systems
capability in order to achieve tax reductions for future clients with the same
degree of success that is has achieved to date. There can be no assurance that
the Company will succeed in these endeavors.
The primary objectives of the Company in 1996 will be to increase the
revenues from the present core business while controlling expenses, and to
identify and begin the launch of new business that complement the Company's
focus on providing information and tax-related services. The Company will also
seek alliances with accounting firms that do not otherwise provide real and
personal property tax consulting services.
EMPLOYEES
As of March 24, 1996, Ironstone had 3 employees, BPA had 31 full-time
employees, and BPC had 40 full-time employees. None of the Company's employees
is subject to a collective bargaining agreement. The Company believes that its
relations with its employees are good.
ITEM 2 - PROPERTIES
Ironstone's executive offices are located in 175 square feet of leased
office space in San Francisco, California. BPA leases approximately 16,000 and
2,200 square feet of office space in Phoenix, Arizona and Larkspur, California
respectively. Such leases expire in June 1999 and February 1997, respectively.
BPC leases approximately 9,700 and 1,700 square feet of office space in San
Diego and Los Angeles, California, respectively. The San Diego lease expires in
September of 1997 and the Los Angeles lease expired in February 1996, and is now
on a month-to month basis. The Company believes that its current space is
adequate for its operations.
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ITEM 3 - LEGAL PROCEEDINGS
In January 1994, as part of the Plan, the Company settled a disputed
claim with an individual for $100,000, the payment of which was to be made to
the individual from the last $100,000 owed and paid by St. George Crystal, Ltd.
on the Notes. As discussed below in "Management's Discussion and Analysis or
Plan of Operation", in December 1994, the Company sold its remaining 30%
undivided interest in the Notes. In February 1995, the Company and the
court-appointed receiver for the Notes received notice from the individual that,
as a result of the Company's disposition of the Notes, the $100,000 owed to such
individual was due. The Company believes that no payment is due to such
individual at this time, and that while such amount may ultimately become due,
the Company will not be responsible for such payment. To date, no suit has been
filed against the Company, of which the Company is aware.
In April 1995, litigation was commenced by St. George Crystal, Ltd.
("SGC") in Pittsburgh, Pennsylvania against Ironstone, and others with regard to
enforcement of obligations owing under notes executed by SGC and the validity of
the assignment of those notes by Ironstone. The case was transferred to the
United States Bankruptcy Court for the Northern District of California in San
Francisco, and the Court has since stated its intention to dismiss the case
fully. Accordingly, it is expected that the transaction by which the notes were
assigned by Ironstone will be left intact.
Other than legal proceedings in which it is involved in the ordinary
course of its business, the Company is not a party to any other material legal
proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the
fourth quarter of 1995.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is not aware of any material recent trading activity in
shares of its Common Stock, and, as of the time of the filing of this Annual
Report on Form 10-KSB, the Company's Common Stock is not eligible for
publication of quotations on any securities market. As of March 24, 1996, there
were approximately 1,056 holders of record of the Company's Common Stock. The
Company has not paid any dividends since its inception and does not intend to
pay any dividends on its Common Stock in the foreseeable future.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS
RESULTS OF OPERATIONS
General
In October 1993, Ironstone acquired 80% of the stock of BPA for
$2,500,000 in cash and a guaranty of certain obligations of BPA in a maximum
aggregate amount of $3,500,000. Simultaneously, the Company paid $50,000 in cash
to a BPC shareholder for 16% of the outstanding stock of BPC, an 80%-owned
subsidiary of BPA. The BPC shareholder is also entitled to receive certain
contingent incentive payments, a portion of which payments is the Company's
obligation. The funds used to complete the acquisition were raised in a private
offering of 2,280,617 shares of the Company's Series A Preferred Stock at $1.00
per share. In August 1994, the Company elected to convert the shares of Series A
Preferred into Common Stock, resulting in the issuance of an aggregate of
760,113 shares of Common Stock.
Year ended December 31, 1995
Revenues for 1995 were $7,644,974, a decline of $420,326 or 5.2% as
compared with fiscal 1994. This decline was entirely attributable to a decrease
in interest income of $454,259 while operating revenues increased by $33,933 as
compared to 1994, due to an increase in California revenues of $800,218 and a
decrease in Arizona revenues of $766,285. Costs and expenses for 1995 increased
by $1,053,223 over fiscal 1994 due to increases in bad debt, amortization, and
non-operating expenses. Bad debt expense has increased $203,416 primarily as a
result of management's decision to increase its bad debt reserve by $115,000, as
it relates to roll correction revenue. (See Note 13 - consolidated financial
statements). For the year, amortization and write-off of intangibles, resulting
from the initial majority acquisition and subsequent minority purchases of Belt
Perry, was $1,410,351 as compared to $353,549 in 1994. This significant increase
reflects management's decision to write-down the goodwill created upon the
purchases of BPA to reflect the impairment of this asset. Non-operating expenses
in 1995 increased $444,945 as compared to 1994 reflecting management's decision
to write-off its investments in a sales and use tax software product and on-line
career service, which projects were abandoned.
Statement of Financial Accounting Standards ("SFAS"), No. 121 and No.
123 as described in Note 19 of the accompanying consolidated financial
statements, become effective in 1996. Management of the Company does not believe
that adoption of SFAS No. 121 will have a material effect on the financial
position or results of operations. The Company has determined that it will not
change its method of accounting for stock based compensation under SFAS No. 123;
however, the Company will be required to have additional related disclosures in
the 1996 financial statements.
Year Ended December 31, 1994
During fiscal 1994, the operations of Belt Perry were fully integrated
into the Company, resulting in an increase in revenues of $6,982,486 or 645% as
compared with fiscal 1993. Costs and expenses for fiscal 1994 also increased
substantially as compared to fiscal 1993 primarily due to the inclusion of the
operations of Belt Perry and the amortization of intangible assets recorded upon
the acquisition of Belt Perry by the Company. The net effect of these changes
was an increase in net income of $1,551,392.
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In December 1994, the Company sold its undivided thirty Percent (30%)
interest in certain promissory notes, stock and warrants of St. George Crystal
for $620,625 plus the release of $357,995 being held by the Company and the
receiver in bankruptcy for the benefit of the company and AMFAC or its assigns.
The resulting gain of $209,606 from the sale is reflected in the Statement of
Operations for fiscal 1994; however, only $189,988 of the proceeds from the sale
are included in cash on the Company's balance sheet for December 31, 1994, with
the remaining $788,632 (which was received on January 18, 1995) shown as an
other receivable.
LIQUIDITY AND CAPITAL RESOURCES
At the end of fiscal 1995, the Company's working capital was
$3,248,711, representing a decrease of $562,703 from fiscal 1994. Cash and cash
equivalents decreased from $1,599,613 at the end of fiscal 1994 to $754,158 at
the end of fiscal 1995. This decrease was due primarily to payments in reduction
of notes payable and the purchase of marketable securities and property and
equipment.
On May 11, 1995, Belt Perry Associates, Inc. ("BPC") purchased from a
minority shareholder of BPC, an additional 2% of BPC's issued and outstanding
shares of common stock for (i) cash in the amount of $20,000 and (ii) an
agreement to pay $50,000 on May 1, 1996 and May 1, 1997. In the event a payment
is not timely made by BPC, the selling minority shareholder shall have the right
to receive 167 shares sold in lieu of payment. As of December 31, 1995, $50,000
payable per the agreement is included in Due to Officer-Current Portion and the
remaining $50,000 payable per the agreement is included in Due to Officer-Net of
Current Portion. Costs in excess of assets acquired has been increased by
$75,255 and is being amortized over the remaining life of the original
acquisition period of 60 months. The carrying value of the minority interest
purchased was $44,745.
In addition, on September 19, 1995, Belt Perry Associates, Inc. ("BPA")
purchased from a minority shareholder of BPA, an additional 418 shares of BPA's
issued and outstanding shares of common stock for a note in the amount of
$269,200 payable in twenty-four monthly installments of $11,931, principal and
interest, bearing interest at 6% per annum, beginning October 1, 1995. The
Company has provided a guaranty of this obligation. The note is collateralized
by BPA common stock held by the Company. Approximately $40,000 of the excess of
the purchase price over the net assets acquired is being amortized over the
remaining estimated five year life of the original purchase, with the balance of
such excess being written off in 1995. The carrying value of the minority
interest purchased was $90,758.
Management believes that its current level of cash, anticipated cash
flow from operations and funds available under its line of credit will be
adequate to meet operating needs through the end of 1996.
The Company may obtain additional equity or working capital though bank
borrowings and public or private sales of equity securities and exercises of
outstanding stock options. There can be no assurance, however, that such
additional financing will be available on terms favorable to the Company, if at
all.
ITEM 7 - FINANCIAL STATEMENTS
The financial statements required to be filed herewith begin on page
F-1.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 9 - DIRECTORS, EXECUTIVES OFFICERS, PROMOTING AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS
The information required by this Item concerning the Company's
directors is incorporated by reference from the sections captioned "Proposal 1:
Election of Directors" and "Certain Transactions" contained in the 1996 Proxy
Statement.
IDENTIFICATION OF EXECUTIVE OFFICERS
The following table sets forth the names and certain other information
regarding the Company's executive officers as of March 24, 1996
NAME AGE POSITION HELD
Robert L. Miller 43 Chief Executive Officer and Chairman of the
Board of Directors
Mark M. Glickman 47 Chief Financial Officer
Mr. Miller has served as Chairman of the Board since May 1991 and as
Chief Executive Officer since February 1994 and served as President from May
1991 to October 1993. He has been a sole legal practitioner since 1980. Mr.
Miller is also a director of ADAC Laboratories.
Mr. Glickman has served as the Company's Chief financial Officer since
August 1994 and served as Vice President, Finance from October 1993 to August
1994 and Treasurer and Chief Financial Officer from May 1991 to October 1993. He
has been a self-employed certified public accountant since 1983 and has also
served as a part-time or full-time officer of several companies, including
President, Chief Operating Officer and a director of Visual Technology, Inc., a
manufacturer of computer terminals, from January 1989 to March 1990; Chief
Financial Officer and a director of Ridge Computers, a computer manufacturer,
from February 1988 to January 1990; and Director of Taxes for ADAC Laboratories,
a manufacturer of medical diagnostic imaging equipment, from 1986 to 1994.
ITEM 10 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the section captioned "Executive Compensation" contained in the 1996 Proxy
Statement.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the 1996 Proxy Statement.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
the section captioned "Certain Transactions" contained in the 1996 Proxy
Statement.
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PART IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NUMBER
11.1 Statement Regarding Computation of Earnings Per Share.
21.1 Subsidiaries of Ironstone Group, Inc.
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1995, the
registrant did not file any reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report on Form
10-KSB to be signed on its behalf by he undersigned, thereunto duly authorized
on the 24th day of March 1996.
IRONSTONE GROUP, INC.
By: /s/ Robert L. Miller
-----------------------------
ROBERT L. MILLER
CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
(Principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf on the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Robert L. Miller Chief Executive Officer and March 26, 1996
- ----------------------- Chairman of the Board
ROBERT L. MILLER (Principal executive officer)
/s/ Mark M. Glickman Chief Financial Officer March 26, 1996
- ----------------------- (Principal financial officer)
MARK M. GLICKMAN
/s/ Edmund H. Shea, Jr. Director March 26, 1996
- -----------------------
EDMUND H. SHEA, JR.
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IRONSTONE GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Independent auditors' report............................................... F-2
Consolidated balance sheet at December 31, 1995............................ F-3
Consolidated statements of operations for the years ended
December 31, 1995 and 1994................................................ F-4
Consolidated statements of shareholders' equity for the years ended
December 31, 1995 and 1994................................................ F-5
Consolidated statements of cash flows for the years ended
December 31, 1995 and 1994................................................ F-6
Notes to consolidated financial statements................................. F-8
F-1
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INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
Ironstone Group, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheet of Ironstone Group,
Inc. and subsidiaries as of December 31, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of two
years in the period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Ironstone Group, Inc.
and subsidiaries at December 31, 1995, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 22, 1996
<PAGE> 14
IRONSTONE GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995
----
<S> <C>
ASSETS:
Current assets:
Cash $ 754,158
Marketable securities available for sale (Note 2) 686,000
Accounts receivable, net of allowance for doubtful
accounts of $792,220 (Note 3) 3,875,136
Prepaid expenses 50,209
------------
Total current assets 5,365,503
------------
Property and equipment (Note 5) 245,372
Costs in excess of net assets of acquired businesses-net
(Note 6) 255,404
Other assets 13,242
------------
Total assets $ 5,879,521
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 160,338
Accrued interest payable (Note 16) 33,351
Accrued compensation 443,595
Customer deposits (Note 13) 104,060
Line of credit (Note 8) 125,000
Due to officer-current portion (Note 9) 472,061
Capitalized lease obligations-current portion (Note 10) 44,606
Notes payable-current portion (Notes 11, 12, and 20) 695,492
Income taxes payable (Note 7) 3,250
Other current liabilities 35,039
------------
Total current liabilities 2,116,792
------------
Due to officer-net of current portion (Note 9) 50,000
Capitalized lease obligations-net of current portion (Note 10) 63,765
Notes payable-net of current portion (Notes 11, 12, and 20) 515,691
------------
Total non-current liabilities 629,456
------------
Minority interest in consolidated subsidiaries
(Notes 9, 12, and 20) 360,729
------------
Commitments and contingencies (Notes 13, 14, and 20)
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized of which there
are no issued and outstanding shares (Note 18)
Common stock, $0.01 par value, 25,000,000 shares
authorized of which 1,487,870 shares are
issued and outstanding (Notes 15 and 18) 14,879
Additional paid in capital 21,170,385
Accumulated deficit (18,439,859)
Unrealized holding gain on marketable securities
available for sale (Note 2) 27,139
------------
Total shareholders' equity 2,772,544
------------
Total liabilities and shareholders' equity $ 5,879,521
============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 15
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revenues:
Consulting fees (Note 13) $ 7,561,238 $ 7,527,431
Subscription fees 26,884 26,758
Interest and other income (Note 4) 56,852 511,111
----------- -----------
Total revenues 7,644,974 8,065,300
----------- -----------
Costs and expenses (Note 16):
Salaries and wages, payroll taxes and benefits 4,489,052 4,831,820
(Notes 9, 13 and 14)
Amortization and write-off of a portion of
goodwill (Note 6) 1,410,351 353,549
Depreciation (Note 5) 121,518 101,860
Bad debt expense 581,246 377,830
Rent expense (Note 13) 411,906 418,805
Professional fees 325,584 432,908
Advertising and promotion 242,882 151,058
Office expense 207,849 284,329
Referral and split fees 200,427 222,621
Travel and entertainment 133,091 175,666
Research expense 97,467 111,919
Interest expense (Notes 8, 9, 10 and 11) 81,417 138,829
Communications 80,255 110,301
Other operating expenses 74,990 123,627
Bankruptcy administration expenses -- 14,635
Non-operating expenses (Note 17) 444,945 --
----------- -----------
Total costs and expenses 8,902,980 7,849,757
----------- -----------
Income (loss) before income taxes and
minority interest (1,258,006) 215,543
Income tax provision (Note 7) 3,250 4,250
Minority interest (Note 12) 108,108 (14,050)
----------- -----------
Net income (loss) $(1,369,364) $ 225,343
=========== ===========
Net income (loss) per common and common equivalent share:
Net income (loss) per share $ (0.92) $ 0.15
=========== ===========
Average shares outstanding (Note 1) 1,487,870 1,511,322
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 16
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK AT PAR COMMON STOCK AT PAR PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- -------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
December 31, 1993 2,280,617 $ 22,806 15,130,940 $ 151,309 $21,097,099 $(17,295,838)
Conversion of preferred
stock (Note 18) (2,280,617) (22,806) 760,113 7,601 15,205
One-for-twenty common
stock split (Note 18) (14,374,533) (143,744) 143,744
Stock option and note
receivable from officer
cancelled (Note 15) (28,650) (287) (85,663)
Net income 225,343
---------- -------- ---------- --------- ----------- ------------
Balances,
December 31, 1994 -- -- 1,487,870 14,879 21,170,385 (17,070,495)
Unrealized holding gain on
marketable securities
(Note 2)
Net loss (1,369,364)
---------- -------- ---------- --------- ----------- ------------
Balances,
December 31, 1995 -- $ -- 1,487,870 $ 14,879 $21,170,385 $(18,439,859)
========== ======== ========== ========= =========== ============
<CAPTION>
NOTE UNREALIZED
RECEIVABLE HOLDING GAIN
FROM ON MARKETABLE
OFFICER SECURITIES TOTAL
---------- ------------- -----------
<S> <C> <C> <C>
Balances,
December 31, 1993 $(85,950) $ -- $ 3,889,426
Conversion of preferred
stock (Note 18)
One-for-twenty common
stock split (Note 18)
Stock option and note
receivable from officer
cancelled (Note 15) 85,950
Net income 225,343
-------- ------- -----------
Balances,
December 31, 1994 -- -- 4,114,769
Unrealized holding gain on
marketable securities
(Note 2) 27,139 27,139
Net loss (1,369,364)
-------- ------- -----------
Balances,
December 31, 1995 $ -- $27,139 $ 2,772,544
======== ======= ===========
</TABLE>
F-5
<PAGE> 17
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(1,369,364) $ 225,343
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 121,518 101,860
Amortization and write-off of goodwill 1,410,351 353,549
Undistributed minority interest 108,108 (14,050)
Loss on sale of assets 3,382 --
Changes in assets and liabilities net of effects
from purchase of minority interests (Note 12):
Accounts receivable (549,978) (1,141,367)
Other current assets 58,070 557,778
Other assets 90,021 (57,675)
Accounts payable (72,395) (12,395)
Accrued compensation 137,688 (90,162)
Pre-petition liabilities -- (357,255)
Other current liabilities (96,588) (104,557)
----------- -----------
Net cash used in operating activities (159,187) (538,931)
----------- -----------
INVESTING ACTIVITIES:
Collection of other receivable 788,632 --
Purchase of marketable securities (658,861) --
Decrease in notes receivable -- 532,463
Purchase of property and equipment (108,580) (144,635)
----------- -----------
Net cash provided by investing activities 21,191 387,828
----------- -----------
FINANCING ACTIVITIES:
Borrowings from line of credit 125,000 --
Borrowings from capitalized lease obligations -- 104,529
Payments on capitalized lease obligations (33,644) --
Payments on notes payable (798,815) (455,579)
----------- -----------
Net cash used in financing activities (707,459) (351,050)
----------- -----------
Net decrease in cash (845,455) (502,153)
Cash at beginning of year 1,599,613 2,101,766
----------- -----------
Cash at end of year $ 754,158 $ 1,599,613
=========== ===========
</TABLE>
(Continued)
F-6
<PAGE> 18
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $142,863 $56,378
Income taxes 3,250 3,250
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
On October 14, 1993, Belt Perry Associates, Inc., a California corporation
("BPC"), entered into a purchase, employment and deferred consideration
agreement (the "Agreement") with an officer and minority shareholder of BPC (the
"Officer") in exchange for 1,667 shares of BPC's issued and outstanding shares
of common stock (the "Shares"). Included in the Agreement, is the specification
of deferred contingent amounts to be paid if certain BPC profit goals are
achieved. Additional consideration for the Shares became payable as of December
31, 1994 in the amount of $300,000 and was paid to the Officer in May 1995.
On October 14, 1993, an officer of the Company purchased 28,650 of post-split
shares of common stock evidenced by a note payable to the Company in the amount
of $85,950. The note bore interest at 4.81% per annum, with principal and
interest due on November 12, 1997 or 90 days after the officer terminated
employment with the Company. The note was collateralized by the 28,650
post-split shares of common stock. In October 1994, the 28,650 post-split shares
of common stock were canceled in exchange for cancellation of the note payable
to the Company in the amount of $85,950.
On December 20, 1994, Belt Perry Associates, Inc., an Arizona corporation
("BPA"), purchased from a minority shareholder of BPA, 700 shares of BPA's
issued and outstanding shares of common stock in exchange for a note payable by
BPA and a guarantee by the Company in the amount of $208,000. In conjunction
with this purchase, the Company was relieved of $350,000 initial acquisition
indebtedness associated with the acquisition of BPA (Notes 6 and 12).
During 1994, the Company incurred additional costs related to the acquisition of
BPA and BPC due to valuation adjustments in the amount of $66,700.
On May 11, 1995, BPC purchased from an officer and minority shareholder of BPC,
167 shares of BPC's issued and outstanding shares of common stock in exchange
for (i) $20,000 cash and (ii) an agreement to pay $50,000 on May 1, 1996 and May
1, 1997 (Notes 6 and 12).
On September 19, 1995, BPA purchased from a minority shareholder of BPA, 418
shares of BPA's issued and outstanding shares of common stock in exchange for a
note payable by BPA and a guarantee by the Company in the amount of $269,200
(Notes 6 and 12).
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE> 19
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Business Activities
Ironstone Group, Inc., formerly OXOCO INC., (the "Company"), consolidates the
financial statements of its majority-owned subsidiaries Belt Perry Associates,
Inc., an Arizona corporation ("BPA"), Belt Perry Associates, Inc., a California
corporation ("BPC"), Taxnet, Inc., an Arizona corporation ("Taxnet"), and DeMoss
Corporation, a California corporation ("DeMoss"). All significant inter-company
transactions have been eliminated in consolidation. The Company's significant
business activities include reducing, for a fee, ad valorem taxes assessed to
owners of real and personal property, generally in the Arizona and California
markets.
Consulting Fee Revenue
Ad valorem tax consulting fees are contracted for primarily on a contingency
basis. Other methods of contracting include flat fees and mixed fees (i.e., a
combination of contingency and flat fees). Consulting fee revenues are generally
recognized when the assessed ad valorem values and resulting taxes are reduced
either by settlement through administrative appeal or judgment in court
proceedings where all appeals have been fully exhausted.
Subscription Fee Revenue
Subscription fee revenues representing subscription to the Taxnet affiliation
network of ad valorem tax consultants are recognized over the life of the
related contracts. Fees are billed on an annual basis and generally range
between $500 and $2,000.
Legal Fees
Retainers are paid to various attorneys to initiate and continue court actions
in ad valorem tax appeals. Due to the uncertainty of the outcome of these court
actions, the retainers are expensed when paid.
Marketable Securities
Marketable securities have been classified by management as available for sale
in accordance with Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). In accordance with SFAS No. 115, marketable securities are recorded at
fair value and any unrealized holding gains and losses are excluded from
earnings and reported as a net amount in a separate component of shareholders'
equity until realized. The fair value of the Company's marketable securities at
December 31, 1995 is based on quoted market prices.
Property and Equipment
Property and equipment are stated at cost and depreciated using accelerated
methods over the estimated useful lives of five to seven years.
Costs in Excess of Net Assets of Acquired Businesses
The Company has classified as costs in excess of net assets of acquired
businesses the excess of the purchase price over the fair value of the net
assets of acquired businesses. Such excess costs are being amortized using the
straight-line method over the estimated period of future benefit of five years.
At each balance sheet date, the Company evaluates the recoverability of the
unamortized excess costs and based on such evaluation, management believes that
a permanent impairment of the unamortized excess costs has occurred as of
December 31, 1995 (Note 6).
F-8
<PAGE> 20
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). In
accordance with SFAS No. 109, deferred taxes are recorded using a liability
approach (Note 7).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share information is based on the
weighted average number of shares of common stock, including common stock
equivalent shares (except where inclusion of such common stock equivalent shares
would have an anti-dilutive effect), outstanding during the periods presented,
computed using the treasury stock method. The number of shares of common stock
outstanding each year reflects the conversion of the outstanding convertible
preferred stock which occurred on August 18, 1994 and the one-for-twenty reverse
stock split that was completed on June 22, 1994 (Note 18). The weighted average
number of shares of common and common equivalent stock used in the computation
of earnings per common and common equivalent share was 1,487,870 and 1,511,322
for the years ended December 31, 1995 and 1994, respectively.
Reclassifications
Certain 1994 amounts have been reclassified to conform to the 1995 presentation.
2. MARKETABLE SECURITIES
All marketable securities are classified as available for sale by management.
The cost and fair value of marketable securities at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
NET
UNREALIZED
HOLDING
COST GAINS FAIR VALUE
---- ----- ----------
<S> <C> <C> <C>
Corporate equity securities $ 658,861 $ 27,139 $ 686,000
========= ======== =========
</TABLE>
All marketable securities are invested in the common stock of one corporation
(Interlinq Software). The Company has entered into a margin loan agreement
("Margin Loan") with Hambrecht & Quist LLC, a major shareholder, pledging all
marketable securities as collateral for the Margin Loan. The Margin Loan bears
interest at Hambrecht & Quist LLC's margin loan rate, which for the period from
November 30, 1995 through December 31, 1995, the time period of the borrowing,
ranged between 8.75% and 8.50% per annum. At December 31, 1995, the Company owed
$6,376 on the Margin Loan which is included in Other Current Liabilities.
F-9
<PAGE> 21
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Accounts receivable trade $ 4,623,353
Advances to employees 5,003
Due from current and former minority shareholders of BPA 39,000
Less allowance for doubtful accounts (792,220)
-----------
Accounts receivable - net $ 3,875,136
===========
</TABLE>
4. OTHER RECEIVABLE
On December 30, 1994, the Company sold its undivided 30% interest in certain
promissory notes, stock and warrants of St. George Crystal, Ltd. for $620,625
plus the release of certain funds being held for the benefit of the Company and
others. The resulting gain of $209,606 is included in Interest and Other Income
for the year ended December 31, 1994. The receivable of $788,632 arising from
this transaction was collected on January 18, 1995. See Note 13 discussing
litigation related to this transaction.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Computer equipment and software $ 266,535
Furniture and office equipment 119,235
---------
Total property and equipment 385,770
Less accumulated depreciation (140,398)
---------
Property and equipment - net $ 245,372
=========
</TABLE>
At December 31, 1995, computer equipment and software included $144,390 of
leased assets (Note 10).
Depreciation expense was $121,518 and $101,860 for the years ended December 31,
1995 and 1994, respectively.
6. COSTS IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES
During the fourth quarter of 1995, management determined that there had been an
impairment of the costs in excess of net assets acquired ("goodwill") associated
with the acquisition of BPA, and accordingly, wrote-off substantially all of the
remaining BPA goodwill. This determination was made based on BPA's operating
losses from the acquisition date of October 13, 1993 through December 31, 1995.
At December 31, 1995, the balance of goodwill of $426,922 is comprised primarily
of costs in excess of net assets acquired associated with the acquisition of
BPC, adjusted for an additional minority interest buyback in May 1995 (Note 12).
F-10
<PAGE> 22
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
6. COSTS IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES (CONTINUED)
Costs in excess of net assets of acquired businesses has been adjusted as
follows:
<TABLE>
<S> <C>
Costs in excess of net assets of acquired businesses-net
at December 31, 1994 $ 1,412,058
Cost of 167 shares of BPC's issued and outstanding common stock
in excess of carrying value of minority interest (Note 12) 75,255
Cost of 418 shares of BPA's issued and outstanding common stock
in excess of carrying value of minority interest (Note 12) 178,442
Amortization and write-off of excess costs (1,410,351)
-----------
Costs in excess of net assets of acquired businesses-net
at December 31, 1995 $ 255,404
===========
Costs in excess of net assets of acquired businesses consists of the following
at December 31, 1995:
Costs in excess of net assets of acquired businesses $ 426,922
Less accumulated amortization (171,518)
---------
Costs in excess of net assets of acquired businesses-net $ 255,404
=========
7. INCOME TAXES
SFAS No. 109 requires the recognition of deferred tax assets and liabilities for
the expected future consequences of events that have been recognized in the
financial statements or tax returns. Deferred income taxes reflect the net tax
effects of (i) temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes and (ii) operating loss and tax credit carryforwards. The tax effects
of significant items comprising the Company's deferred income taxes at December
31, 1995 are as follows:
Deferred tax assets:
Differences between book and tax basis of property $ 402,663
Operating loss carryforwards 28,581,519
Deferred tax liabilities:
Differences between book and tax basis of property (203,289)
------------
Total deferred income taxes 28,780,893
Less valuation allowance (28,780,893)
------------
Deferred income taxes - net $ --
============
The provision for income taxes consists of the following:
1995 1994
---- ----
<S> <C> <C>
Current:
Federal $ -- $ --
State 3,250 4,250
Deferred -- --
------ ------
Total $3,250 $4,250
====== ======
</TABLE>
F-11
<PAGE> 23
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
7. INCOME TAXES (CONTINUED)
The state income tax provision relates to annual franchise and minimum taxes
charged by the states in which the Company is incorporated or does business. The
primary difference between the income tax provision for the years ended December
31, 1995 and 1994 and the income tax benefit (provision) which would be computed
based upon the statutory income tax rate and the net income (loss) is due to not
recording the potential benefit of the net operating loss carryforwards. As of
December 31, 1995, the Company had net operating loss carryforwards for tax
purposes of approximately $81,443,000. These carryforwards will expire in the
years 1996 to 2008.
The Tax Reform Act ("TRA") of 1986 significantly limited the amount of net
operating loss carryforwards that are available to offset future taxable income
when an ownership change occurs. The amount of the net operating loss that may
be available for use in future years may be limited.
In the opinion of management, based on limitations on the use of tax operating
losses and the results of recent operations, the realization of such operating
losses is not more likely than not, and accordingly, a valuation reserve has
been recorded to offset such amount in its entirety.
8. LINE OF CREDIT
In June 1995, the Company obtained a $500,000 revolving operating line of credit
with interest accruing on amounts borrowed at the lending bank's prime rate (8%
at December 31, 1995) plus 1.25%. The line of credit is collateralized by BPA
and BPC accounts receivable and other business assets. At December 31, 1995, the
Company had $125,000 outstanding on the line of credit. The line of credit
matures and is payable in full in June 1996.
9. DUE TO OFFICER
On October 14, 1993, BPC entered into a purchase, employment, and deferred
consideration agreement (the "Agreement") with an officer and minority
shareholder of BPC (the "Officer") in exchange for 1,667 shares of BPC's issued
and outstanding shares of common stock (the "Shares"). The Agreement specifies
compensation, incentive and termination amounts (Note 13) and includes a
non-competition clause. Included in the Agreement, is the specification of
deferred contingent amounts to be paid if certain BPC profit goals are achieved.
Additional consideration for the Shares became payable as of December 31, 1994
in the amount of $300,000 and was paid to the Officer in May 1995.
In addition, as a result of BPC meeting certain profit goals for 1995 and 1994,
incentive amounts of $390,561 and $33,000 were payable as of December 31, 1995
and 1994, respectively. At December 31, 1995, $422,061 of incentive amounts
remain payable and are due in full on or before April 30, 1996. Accordingly,
such amount is included in Due to Officer-Current Portion at December 31, 1995.
On May 11, 1995, BPC purchased from the Officer, 167 shares of BPC's issued and
outstanding shares of common stock in exchange for (i) $20,000 cash and (ii) an
agreement to pay $50,000 on May 1, 1996 and May 1, 1997. In the event a payment
is not made timely by BPC, the Officer shall have the right to receive 167
shares of common stock in lieu of payment. At December 31, 1995, the first
$50,000 payable per the agreement is included in Due to Officer-Current Portion
and the remaining $50,000 payable per the agreement is included in Due to
Officer-Net of Current Portion.
All amounts due to the Officer that are not paid on their respective due dates
shall accrue interest at the prime rate of interest as announced by Bank of
America N.T. and S.A., or its successor, plus 4% per annum until such amounts
are paid in full.
F-12
<PAGE> 24
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
10. CAPITALIZED LEASE OBLIGATIONS
Capitalized lease obligations consist of the following at December 31, 1995:
<TABLE>
<S> <C>
Capitalized lease obligation to a leasing company, bearing interest at
11.5% per annum, with principal and interest due in thirty-six equal
monthly installments of $3,468 beginning December 10, 1994, residual
payment of $5,358 due within ten days of the thirty-sixth payment,
collateralized by computer equipment and software. Amount necessary
to reduce the total lease payments to their present value is $20,852.
Unamortized present value of the total lease payments is $ 74,184
Capitalized lease obligation to a leasing company, bearing interest at 10% per
annum, with principal and interest due in thirty-six equal monthly
installments of $1,127 beginning September 11, 1995, residual payment of
$3,450 due within ten days of the thirty-sixth payment, collateralized by
computer equipment. Amount necessary to reduce the total lease payments to
their present value is $6,536.
Unamortized present value of the total lease payments is 34,187
---------
Total 108,371
Less current portion 44,606
---------
Total capitalized lease obligations - net of current portion $ 63,765
=========
Scheduled net minimum lease payments for years ending December 31st are as
follows:
1996 $ 44,606
1997 51,850
1998 11,915
---------
Total capitalized lease obligations $ 108,371
=========
</TABLE>
11. NOTES PAYABLE
Notes payable consist of the following at December 31, 1995:
<TABLE>
<S> <C>
Note payable to a former minority shareholder of BPA, bearing interest at 5%
per annum, with principal and interest payable in four equal quarterly
installments beginning April 1, 1995,
collateralized by BPA common stock held by the Company. $ 52,000
Note payable to a former minority shareholder of BPA, bearing interest at 6%
per annum, with principal and interest payable in twenty-four equal monthly
installments beginning October 1, 1995,
collateralized by BPA common stock held by the Company. 237,318
Notes payable to former and current minority shareholders of BPA, bearing
interest at 5% per annum, with principal and interest payable in four equal
annual installments beginning December 31, 1994. 221,865
</TABLE>
F-13
<PAGE> 25
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
11. NOTES PAYABLE (CONTINUED)
<TABLE>
<S> <C>
Notes payable to former and current minority shareholders of BPA, bearing
interest at 5% per annum, with principal and interest payable in four annual
installments beginning April 30, 1994, collateralized by BPA common stock held
by the Company. These notes provide for a deferral in the payment of both
principal and interest of no more than nine months at the election of the
Company. The interest rate on the deferred principal ranges from 0% to 7%
based upon BPA's revenue between 1994 and 1997. The Company has elected to
defer the second payment, which was originally due on April 30, 1995. 700,000
----------
Total 1,211,183
Less current portion 695,492
----------
Total notes payable - net of current portion $ 515,691
==========
Scheduled principal payments for years ending December 31st are as follows:
1996 $ 695,492
1997 365,691
1998 150,000
----------
Total notes payable $1,211,183
==========
</TABLE>
At December 31, 1995, the fair value of the Company's notes payable was
$1,142,263. The fair value was estimated using discounted cash flow analyses
based on the Company's incremental borrowing rate for similar types of borrowing
arrangements.
12. PURCHASE OF MINORITY INTERESTS
On December 20, 1994, BPA purchased from a minority shareholder of BPA, 700
shares of BPA's issued and outstanding shares of common stock in exchange for a
note payable by BPA and a guarantee by the Company in the amount of $208,000. In
conjunction with this purchase, the Company was relieved of $350,000 initial
acquisition indebtedness associated with the acquisition of BPA.
On May 11, 1995, BPC purchased from an officer and minority shareholder of BPC
(the "Officer"), 167 shares of BPC's issued and outstanding shares of common
stock in exchange for (i) $20,000 cash and (ii) an agreement to pay $50,000 on
May 1, 1996 and May 1, 1997. In the event a payment is not made timely by BPC,
the Officer shall have the right to receive 167 shares of common stock in lieu
of payment (Note 9). Costs in Excess of Net Assets of Acquired Businesses has
been increased by $75,255 and is being amortized over the remaining life of the
original estimated period of future benefit of five years associated with the
acquisition of BPC (Note 6). The carrying value of the minority interest
purchased was $44,745.
On September 19, 1995, BPA purchased from a minority shareholder of BPA, 418
shares of BPA's issued and outstanding shares of common stock in exchange for a
note payable of $269,200. The note bears interest at 6% per annum with principal
and interest payable in twenty-four equal monthly installments beginning October
1, 1995. The note is collateralized by BPA common stock held by the Company, and
the Company has provided a guaranty of this obligation. Approximately $40,000 of
the excess purchase price over the net assets acquired is being amortized over
the remaining life of the original estimated period of future benefit of five
years associated with the acquisition of BPA, with the balance of such excess
being written-off in 1995 (Note 6). The carrying value of the minority interest
purchased was $90,758.
F-14
<PAGE> 26
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
BPA and BPC have entered into certain operating leases primarily for office
space. In connection with the office space leases, BPA and BPC are responsible
for certain monthly operating and maintenance expenses. Rent expense under all
operating leases was $411,906 and $418,805 for the years ended December 31, 1995
and 1994, respectively.
Future minimum lease payments under non-cancelable operating leases for the
years ending December 31st are as follows:
<TABLE>
<S> <C>
1996 $ 434,179
1997 340,503
1998 233,333
1999 125,957
2000 8,553
----------
Total minimum operating lease payments $1,142,525
==========
</TABLE>
Employment Agreements
BPA and BPC have entered into employment agreements with several employees
effective through 1996. Each agreement specifies compensation, incentive and
termination amounts and includes a non-competition clause. Incentive and
termination amounts are expensed at the time they are earned. Incentive amounts
are contingent upon the Company reaching certain levels of profitability and
certain other subjective criteria and are determined on an annual basis. All
employees subject to employment agreements may be terminated for cause or at the
discretion of management.
In one employment agreement with an officer and minority shareholder of BPC (the
"Officer"), the Company is obligated to pay $220,000 to the Officer if either
the Company or the Officer terminates the Officer's employment for any reason
during 1996.
California Roll Correction Revenue
In June 1995, the state of California passed an amendment to the California
Revenue and Taxation Code that permits the local taxing authorities within
California to approve and process property value reductions for up to one year
after the delivery of the property tax roll if the reduction reflects a decline
in market value. The process to record the reduction in market value is referred
to as a "Roll Correction". During the last six months of 1995, the Company
recorded $514,017 in consulting revenue as a direct result of Roll Corrections.
The Company's customers will receive corrected tax bills and/or tax refunds for
Roll Corrections achieved through the efforts of the Company. The Company has
received numerous inquiries from its customers regarding invoices for Roll
Corrections. Management believes that Roll Correction revenues and the
associated receivables are collectible, despite the current level of customer
inquiry.
At this time, it is uncertain whether or not the Company will experience an
increase in its bad debt expense as a result of recording Roll Correction
revenue. In light of this uncertainty, management has provided an additional bad
debt provision of $115,000 for the year ended December 31, 1995.
F-15
<PAGE> 27
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Court Case under Appeal
During 1992, a judgment was rendered in Tax Court (the "1992 Judgment") in a
court case in which BPA had appealed a 1990 property tax valuation on behalf of
a client. The 1992 Judgment resulted in a significant property tax savings for
the client on which BPA's contingency fee was approximately $82,000. The taxing
authority filed an appeal to the Court of Appeals. The Court of Appeals upheld
the original 1992 Judgment and rejected a motion to reconsider. The taxing
authority then filed an appeal to the Arizona Supreme Court. The Arizona Supreme
Court reversed both the Court of Appeals and the Tax Court's decisions and
judgments. The case is now back before the Tax Court and will be heard along
with other pending appeals for the 1991 through 1994 tax years filed by BPA on
behalf of the client. At December 31, 1995, the case remains unresolved. During
1993, the County Treasurer made a payment to BPA on behalf of BPA's client of
approximately $100,000 (BPA's contingent fee plus interest) related to the 1992
Judgment. Such payment is included in Customer Deposits pending the completion
of the appeal process.
As a result of the 1992 Judgment, the Company's management and legal counsel
estimated total contingency fees of approximately $435,000, for the 1990 through
1994 tax years related to the same client. Such amount has not been accrued at
December 31, 1995 pending the completion of the appeal process.
Litigation
In January 1991, the Company filed a voluntary petition for protection under
Title 11 of the U.S. Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Northern District of California. The Company's First
Amended Plan of Reorganization, as modified (the "Plan"), was confirmed by that
Court on May 24, 1993, and the effective date pursuant to the terms of the Plan
was July 15, 1993.
In January 1994, as part of the Plan, the Company settled a disputed claim with
an individual for $100,000, the payment of which was to be made to the
individual from the last $100,000 owed and paid by St. George Crystal, Ltd.
("SGC") on certain promissory notes, stocks and warrants (the "Notes"). In
December 1994, the Company sold its remaining 30% undivided interest in the
Notes. In February 1995, the Company and the court-appointed receiver for the
Notes received notice from the individual that, as a result of the Company's
disposition of the Notes, the $100,000 owed to such individual was due. The
Company believes that no payment is due to such individual at this time, and
that while such amount may ultimately become due, the Company will not be
responsible for such payment.
In April 1995, litigation was commenced by SGC in Pittsburgh, Pennsylvania
against the Company and others regarding the enforcement of obligations owing
under the Notes executed by SGC and the validity of the assignment of those
Notes by the Company. The case was transferred to the United States Bankruptcy
Court for the Northern District of California in San Francisco, and the Court
has since stated its intention to dismiss the case fully. Accordingly, it is
expected that the transaction by which the Notes were assigned by the Company
will be left intact.
Other than legal proceedings arising in the ordinary course of business, the
Company is not a party to any other material legal proceedings.
Put and Call Rights
After September 30, 1996, the BPA and BPC shares held by the minority
shareholders are subject to call by BPA or the Company at a price equal to the
appraised fair market value at the time of call.
F-16
<PAGE> 28
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
After September 30, 1998, the minority shareholders of BPA and BPC have the
right to require the Company to purchase their shares at the appraised fair
market value at the time of the transaction.
Both the put and call options expire on December 31, 1999.
14. DEFINED CONTRIBUTION PLAN
The Company has adopted a defined contribution plan under Section 401(k) of the
Internal Revenue Code. Under this plan, employees may contribute a maximum of
15% of their annual wages subject to certain restrictions. Company contributions
are discretionary and are equal to a percentage of the employee's eligible
contributions for the related plan year. All employees of the Company are
eligible to participate. Company contributions were zero for 1995 and 1994.
15. STOCK OPTIONS
The Company has adopted a 1989 Equity Incentive Plan, a 1993 Non-Employee
Directors' Stock Option Plan and a 1994 Equity Incentive Plan (collectively, the
"Plans"). In March 1994, the 1989 Plan was amended to reduce the number of
shares reserved thereunder and the Board of Directors determined that no further
option grants would be made under the 1989 Plan. The Plans provide for incentive
stock options to be granted at not less than 100% of the fair market value of
the stock at the date of grant and an exercise period of no more than 10 years.
A summary of stock option transactions during 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Shares Average
Available Option
Options for Price Per
Outstanding Grant Share
----------- --------- ---------
<S> <C> <C> <C>
Balance, December 31, 1993 101,300 76,050 $ 3.00
Adoption of 1994 Equity Incentive Plan 240,000
Amendment to 1989 Incentive Equity Plan (78,070)
Canceled (58,680) 58,680 $ 3.00
Granted 58,680 (58,680) $ 3.00
Expired (21,320) 21,320 $ 3.00
------- -------
Balance, December 31, 1994 79,980 259,300
Granted 52,308 (52,308) $ 4.00
Expired (15,780) 15,780 $ 4.00
------- -------
Balance, December 31, 1995 116,508 222,772
======= =======
</TABLE>
16. RELATED PARTY TRANSACTIONS
In addition to the related party transactions described elsewhere in the
accompanying consolidated financial statements and notes, the Company had the
following related party transactions:
F-17
<PAGE> 29
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
16. RELATED PARTY TRANSACTIONS (CONTINUED)
During 1994, BPA purchased computer software and data processing services from
Unique Software, Inc. ("USI") and Unique Software Store, Inc. ("USSI") for
$14,976. Both USI and USSI are owned by a minority shareholder of BPA.
In December 1994, the Company offset a note receivable from a minority
shareholder of BPA against a note payable to the same minority shareholder with
a principal amount of $44,368.
During 1995 and 1994, the Company paid BPA minority shareholders consulting fees
of $122,240 and $56,340, respectively.
Interest expense related to notes payable to BPA current and former minority
shareholders was $66,212 and $36,617 for the years ended December 31, 1995 and
1994, respectively.
At December 31, 1995, the Company owed $33,350 to BPA current and former
minority shareholders related to interest on notes payable. Such amount is
included in Accrued Interest Payable.
At December 31, 1995, current and former minority shareholders of BPA owed
$39,000 to the Company. Such amount is included in Accounts Receivable (Note 3).
During 1995, the Company paid Hambrecht and Quist LLC, a major shareholder,
brokerage commissions of $5,880.
17. NON-OPERATING EXPENSES
During 1995, the Company incurred $291,387 to develop an on-line resume and
career placement service ("Placement Service"). As of September 30, 1995, the
Company ceased development of the Placement Service. All costs and expenses
related to the development of the Placement Service are included in
Non-Operating Expenses for the year ended December 31, 1995.
During 1995 and 1994, the Company incurred $153,558 to develop a sales and use
tax software computer program for resale ("Software Program"). All costs related
to the Software Program were initially capitalized to Other Current Assets. As
of December 31, 1995, the Company abandoned the resale of the Software Program.
All costs related to the Software Program have been written-off and are included
in Non-Operating Expenses for the year ended December 31, 1995.
18. SHAREHOLDERS' EQUITY
Preferred Stock Conversion
On November 8, 1993, the Company completed a private placement of 2,280,617
pre-split shares (see below) of the Company's Series A Preferred Stock
("Preferred") for aggregate proceeds to the Company of $2,280,617. The Company
exercised its right to cause the conversion of all outstanding shares of
Preferred into 760,113 post-split shares of common stock effective on August 18,
1994. The accompanying consolidated financial statements and notes reflect the
conversion of Preferred to common stock for all periods presented.
Reverse Stock Split
On June 22, 1994, the Company completed a one-for-twenty reverse stock split
affecting the Company's common stock. The accompanying consolidated financial
statements and notes reflect the reverse stock split for all periods presented.
F-18
<PAGE> 30
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
19. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").
The Company has not completed the process of evaluating the impact that will
result from adopting SFAS No. 121. However, management does not believe the
adoption will have a significant impact on the Company's financial position and
results of operations. SFAS No. 121 is required to be adopted in the first
quarter of 1996.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, "Accounting for Stock Based Compensation"
("SFAS No. 123"). The Company has determined that it will not change to the fair
value method and will continue to use Accounting Principles Board Opinion No. 25
for measurement and recognition of employee stock based compensation. SFAS No.
123 will require additional disclosures in the 1996 financial statements.
20. SUBSEQUENT EVENTS
On January 11, 1996, BPA and a former shareholder and noteholder of BPA
("Noteholder") entered into an agreement to refinance all principal payments due
to Noteholder on existing indebtedness between December 31, 1995 and January 31,
1996 in the amount of $269,709. The agreement provides for BPA to pay Noteholder
$134,854 plus accrued interest on or before January 15, 1996 with the remaining
principal amount of $134,854 secured by a note payable bearing interest at 12%
per annum. The note is due in twelve equal monthly installments beginning
February 15, 1996. The note is collateralized by BPA common stock held by the
Company and the Company has provided a guaranty of this obligation.
On February 1, 1996, the Company committed to purchase from a minority
shareholder of BPA 182 shares of BPA's issued and outstanding shares of common
stock in exchange for $50,000 cash.
The foregoing consolidated financial statements do not reflect the above
subsequent event transactions.
***
F-19
<PAGE> 31
EXHIBIT INDEX
EXHIBIT
NUMBER
11.1 Statement Regarding Computation of Earnings Per Share
21.1 Subsidiaries of Ironstone Group, Inc.
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
IRONSTONE GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
PRIMARY AND FULLY DILUTED
Net income (loss) available to common shareholders $(1,369,364) $ 225,343
=========== ==========
Average outstanding common and equivalent shares 1,487,870 1,511,322
=========== ==========
Net income (loss) per common and equivalent share $ (0.92) $ 0.15
=========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
AcadiEnergy, Inc., a Delaware corporation, is a 100%-owned subsidiary of the
registrant.
Belt Perry Associates, Inc., an Arizona corporation ("BPA"), is a 90.80%-owned
subsidiary of the registrant.
Belt Perry Associates, Inc., a California corporation ("BPC"), is 81.63% owned
by BPA and 16.33% owned by the registrant.
DeMoss Corporation, a California corporation, is a 100%-owned subsidiary of the
registrant.
TaxNet, Inc., an Arizona corporation, is a 100%-owned subsidiary of BPA.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000723269
<NAME> IRONSTONE GROUP, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 754,158
<SECURITIES> 686,000
<RECEIVABLES> 4,667,356
<ALLOWANCES> 792,220
<INVENTORY> 0
<CURRENT-ASSETS> 5,365,503
<PP&E> 385,770
<DEPRECIATION> 140,398
<TOTAL-ASSETS> 5,879,521
<CURRENT-LIABILITIES> 2,116,792
<BONDS> 1,319,554
0
0
<COMMON> 14,879
<OTHER-SE> 3,118,394
<TOTAL-LIABILITY-AND-EQUITY> 5,879,521
<SALES> 0
<TOTAL-REVENUES> 7,644,974
<CGS> 0
<TOTAL-COSTS> 8,902,980
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 581,246
<INTEREST-EXPENSE> 81,417
<INCOME-PRETAX> (1,366,114)
<INCOME-TAX> 3,250
<INCOME-CONTINUING> (1,369,364)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,369,364)
<EPS-PRIMARY> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
