<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-12346
IRONSTONE GROUP, INC.
(Name of Registrant as specified in its charter)
DELAWARE 95-2829956
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9665 CHESAPEAKE DRIVE, SUITE 430, SAN DIEGO, CA 92123
(Address of principal executive offices, including zip code)
(619) 292-8777
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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[ ]
As of September 30, 1997, 1,487,870 shares of Common Stock, $0.01 par value,
were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TOTAL NUMBER OF PAGES: 11 INDEX TO EXHIBITS AT PAGE: N/A
<PAGE> 2
IRONSTONE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed consolidated statements of operations for the three and
nine months ended September 30, 1997 and 1996........................... 3
Condensed consolidated balance sheet at September 30, 1997............... 5
Condensed consolidated statements of cash flows for the nine months
ended September 30, 1997 and 1996....................................... 6
Notes to condensed consolidated financial statements..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 10
SIGNATURES.................................................................... 11
</TABLE>
2
<PAGE> 3
IRONSTONE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Consulting fees $ 524,302 $ 594,247
Subscription fees -- 4,874
Interest and other income 9,784 12,236
----------- -----------
Total revenues 534,086 611,357
----------- -----------
Costs and expenses:
Salaries and wages, payroll taxes and benefits 490,396 888,408
Depreciation 20,940 27,625
Amortization 36,298 22,939
Bad debt expense 40,178 35,662
Rent expense 63,594 108,951
Professional fees 49,681 (1,055)
Advertising and promotion 3,064 29,928
Office expense 22,274 48,263
Referral and split fees 19,993 39,871
Travel and entertainment 10,536 23,750
Research expense 21,941 21,273
Communications 7,600 15,325
Interest expense 5,878 31,546
Other operating expenses 26,543 49,540
----------- -----------
Total costs and expenses 818,916 1,342,026
----------- -----------
Loss before income taxes and minority interest (284,830) (730,669)
Income tax provision 1,021 --
Minority interest (978) (23,097)
----------- -----------
Net loss $ (284,873) $ (707,572)
=========== ===========
Net loss per common and common equivalent share:
Net loss per share $ (0.19) $ (0.48)
=========== ===========
Average shares outstanding 1,487,870 1,487,870
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 4
IRONSTONE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Consulting fees $ 1,866,107 $ 3,134,047
Subscription fees -- 14,624
Interest and other income 32,961 29,456
----------- -----------
Total revenues 1,899,068 3,178,127
----------- -----------
Costs and expenses:
Salaries and wages, payroll taxes and benefits 1,399,031 2,965,946
Depreciation 62,609 79,737
Amortization 92,560 68,691
Bad debt expense 45,721 188,314
Rent expense 245,839 316,911
Professional fees 163,472 180,297
Advertising and promotion 21,471 85,848
Office expense 73,589 149,847
Referral and split fees 71,116 85,139
Travel and entertainment 24,949 113,089
Research expense 57,144 69,030
Communications 26,563 50,981
Interest expense 37,052 88,078
Other operating expenses 80,855 136,889
----------- -----------
Total costs and expenses 2,401,971 4,578,797
----------- -----------
Loss before income taxes and minority interest (502,903) (1,400,670)
Income tax provision 4,321 3,300
Minority interest (271) (75,917)
----------- -----------
Net loss $ (506,953) $(1,328,053)
=========== ===========
Net loss per common and common equivalent share:
Net loss per share $ (0.34) $ (0.89)
=========== ===========
Average shares outstanding 1,487,870 1,487,870
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
IRONSTONE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Current assets:
Cash $ 978,352
Marketable securities available for sale 1,052,800
Accounts receivable, net of allowance for doubtful accounts
of $1,048,273 1,461,505
Prepaid expenses 75,082
------------
Total current assets 3,567,739
------------
Property and equipment - net 149,931
Costs in excess of net assets of acquired businesses - net 94,001
Other assets 42,966
------------
Total assets $ 3,854,637
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 84,726
Accrued compensation 186,582
Notes payable 266,558
Capitalized lease obligations - current portion 33,249
Deferred revenue 102,000
Accrued interest payable 5,978
Other current liabilities 190,511
------------
Total current liabilities 869,604
------------
Capitalized lease obligations - net of current portion 11,629
------------
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized of which there
are no issued and outstanding shares
Common stock, $0.01 par value, 25,000,000 shares authorized of
which 1,487,870 shares are issued and outstanding 14,879
Additional paid in capital 21,170,385
Accumulated deficit (18,378,483)
Unrealized gain on marketable securities available for sale 166,623
------------
Total shareholders' equity 2,973,404
------------
Total liabilities and shareholders' equity $ 3,854,637
============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
IRONSTONE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (506,953) $(1,328,053)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 62,609 79,737
Amortization 92,560 68,691
Loss on purchase of minority interest 1,245 26,598
Undistributed minority interest in consolidated subsidiaries (271) (75,917)
Net gain on sale of property and equipment (8,685) --
Changes in assets and liabilities:
Accounts receivable 2,465,258 2,002,047
Other current assets 34,771 (31,368)
Other assets (46,434) 2,688
Accounts payable (110,311) (107,225)
Accrued compensation (473,456) 12,251
Other current liabilities (296,992) (338,075)
----------- -----------
Net cash provided by operating activities 1,213,341 311,374
----------- -----------
INVESTING ACTIVITIES:
Purchase of marketable securities available for sale -- (227,316)
Purchase of property and equipment (25,183) (30,149)
Proceeds from sale of property and equipment 16,946 --
----------- -----------
Net cash used by investing activities (8,237) (257,465)
----------- -----------
FINANCING ACTIVITIES:
Purchase of minority interest (101,433) (92,500)
Payments on capitalized lease obligations (40,262) (32,986)
Payments on notes payable (264,600) (515,165)
Borrowings from line of credit -- 225,000
Payments on line of credit (350,000) --
----------- -----------
Net cash used by financing activities (756,295) (415,651)
----------- -----------
Net increase (decrease) in cash 448,809 (361,742)
Cash at beginning of period 529,543 754,158
----------- -----------
Cash at end of period $ 978,352 $ 392,416
=========== ===========
Non-cash investing and financing activities:
Borrowings from capitalized lease obligations $ 21,377 $ --
Notes payable attained from asset purchase 15,000 --
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE> 7
IRONSTONE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles Of Consolidation And Business Activities
Ironstone Group, 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.
Adjustments
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. The accompanying
condensed consolidated financial statements should be read in conjunction with
the Company's most recent Annual Report and Form 10-KSB for the year ended
December 31, 1996.
Seasonality Of Consulting Fee Revenue
Historically, a significant portion of the Company's revenue has been seasonal.
In fiscal 1996, a substantial portion of BPA's revenue was recognized in the
fourth quarter following taxing authority hearings scheduled during that period.
In addition, certain types of BPC's revenues which have generally been
recognized in the third quarter were not recognized until the fourth quarter
because certain real property value information was not made available by the
taxing authorities as of the end of the third quarter. For these and other
reasons, the results of operations for interim periods are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain 1996 amounts have been reclassified to conform to the 1997 presentation.
2. LINE OF CREDIT
In June 1997, the Company paid in full its revolving operating line of credit in
the amount of $350,000. The line of credit had a total available balance of
$500,000 and bore interest on amounts borrowed at the lending bank's prime rate
plus 1.25%. The line of credit was collateralized by BPA and BPC accounts
receivable and other business assets. At this time, the Company has not renewed
the line of credit.
7
<PAGE> 8
IRONSTONE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
3. NEW ACCOUNTING PRONOUNCEMENT
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 "Earnings Per Share" ("SFAS No. 128"),
effective for financial statements issued after December 15, 1997. This
statement provides simplified standards for the computation and presentation of
earnings per share ("EPS"), making EPS comparable to international standards.
SFAS No. 128 requires dual presentation of "Basic" and "Diluted" EPS by entities
with complex structures, replacing "Primary" and "Fully Diluted" EPS under APB
Opinion No. 15.
Basic EPS excludes dilution from common stock equivalents and is computed by
dividing net income (loss) applicable to common shareholders by the weighted
average number of common shares actually outstanding during the period. Diluted
EPS reflects the potential dilution from common stock equivalents, except where
inclusion of such common stock equivalents would have an antidilutive effect,
similar to Fully Diluted EPS, but uses only the average stock price during the
period as part of the computation.
Proforma EPS under SFAS No. 128 is computed as follows for the following
periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
LOSS SHARES EPS LOSS SHARES EPS
---- ------ --- ---- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Basic and Diluted EPS:
Loss applicable to
common shareholders $ (284,873) 1,487,870 $ (0.19) $ (707,572) 1,487,870 $ (0.48)
========== ========= ======= ========== ========= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
LOSS SHARES EPS LOSS SHARES EPS
---- ------ --- ---- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Basic and Diluted EPS:
Loss applicable to
common shareholders $ (506,953) 1,487,870 $ (0.34) $(1,328,053) 1,487,870 $ (0.89)
=========== ========= ======== ============ ========= ========
</TABLE>
Options on 22,295 and 115,933 shares of common stock as of September 30, 1997
and September 30, 1996, respectively, were not included in computing diluted EPS
because their effects are antidilutive.
8
<PAGE> 9
IRONSTONE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
4. ASSET PURCHASE
On April 17, 1997, the Company entered into an Asset Purchase Agreement with
Property Tax Consultants, Inc., a California corporation doing business as Tax
Management Group, Inc. ("TMG"), wherein the Company purchased certain assets
from TMG in exchange for $50,000 cash and a note payable of $15,000. The note is
payable in eight equal monthly installments beginning May 15, 1997.
5. PURCHASE OF MINORITY INTEREST
On July 17, 1997, BPC purchased from a minority shareholder of BPC, 166 shares
of BPC's issued and outstanding shares of common stock in exchange for $101,433
cash. The carrying value of the minority interest purchased was $100,188.
6. COMMITMENTS AND CONTINGENCIES
On April 1, 1997, BPA entered into an employment agreement (the "Agreement")
with an officer of the company. The Agreement specifies compensation and
incentive amounts and includes non-competition and non-solicitation clauses.
Bonuses and other incentive amounts are to be paid if certain BPA cash and
profit goals are achieved. Such amounts are expensed at the time they are earned
and are determined on an annual basis.
***
9
<PAGE> 10
IRONSTONE GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results Of Operations
Revenues for the three and nine month periods ended September 30, 1997 decreased
$77,271 and $1,279,059 or 12.64% and 40.25%, respectively, as compared to the
same periods in 1996. Such decreases are primarily due to a decline in the
California revenues resulting in large part from a reduction in the number of
taxing authority hearings scheduled during the first through third quarters of
1997. In fiscal 1996, the taxing authorities, aided by additional funding from
the State of California, increased the number of hearings scheduled in 1996 in
an effort to reduce the number of pending property tax appeals. Accordingly,
hearings scheduled in the first through third quarters of 1997 and the number of
pending property tax appeals as of the end of the first three quarters of 1997
have declined from the same periods in 1996.
Costs and expenses for the three and nine month periods ended September 30, 1997
decreased $523,110 and $2,176,826 or 38.98% and 47.54%, respectively, as
compared to the same periods in 1996 primarily due to the Company's effort to
reduce its overall operating costs. Such decreases are comprised primarily of
reductions in salaries and wages and bad debt expense. Salaries and wages
decreased $398,012 and $1,566,915 or 44.80% and 52.83% for the three and nine
month periods ended September 30, 1997, respectively, primarily due to
reductions in staff that occurred in January 1997. Bad debt expense increased
$4,516 and decreased $142,593 or 12.66% and 75.72% for the three and nine month
periods ended September 30, 1997, respectively. The third quarter increase was
primarily due to write-offs of several Taxnet accounts, and the nine month
period decrease resulted from the decline in revenues discussed above as well as
the reversal in the second quarter of $75,000 of bad debt expense originally
recorded in 1996 related to revenues billed under the revised California
contracts (see Note 13 in the Company's Form 10-KSB for the year ended December
31, 1996). This reversal was based on better than anticipated cash collections
related to these revenues.
Due to the seasonal nature of consulting fee revenue (discussed in Note 1 to the
condensed consolidated financial statements), the Company does not believe that
its results of operations for the three and nine month periods ended September
30, 1997 are necessarily indicative of the results of operations in future
periods.
Liquidity And Capital Resources
Net cash provided by operating activities for the three and nine month periods
ended September 30, 1997 was $460,591 and $1,213,341, respectively. Cash
increased $314,904 for the three month period ended September 30, 1997 primarily
due to the collections of accounts receivable, partially offset by the purchase
of a minority interest from an officer of BPC for $101,433. Cash increased
$448,809 for the nine month period ended September 30, 1997 primarily due to
collections of accounts receivable. Due in large part to a $333,211 reduction in
the unrealized gain on marketable securities held for sale that occurred in the
first and third quarters of 1997 and a $658,386 and $2,465,258 reduction in
accounts receivable for the three and nine month periods ended September 30,
1997, respectively, the Company's working capital decreased by $204,401 and
$1,035,471 during the three and nine month periods ended September 30, 1997,
respectively. Management believes that its current level of cash and anticipated
cash flow from operations will be adequate to meet its operating needs through
the end of 1997.
The Company may obtain additional equity or working capital through 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, or at
all.
Special Note Regarding Forward-Looking Statements
Certain of the statements in this document that are not historical facts
including, without limitation, statements of future expectations, projections of
financial condition and results of operations, statements of future economic
performance and other forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, are subject to known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to differ materially from
those contemplated in such forward-looking statements. In addition to the
specific matters referred to herein, important factors which may cause actual
results to differ from those contemplated in such forward-looking statements
include (i) the results of the Company's efforts to implement its business
strategy; (ii) actions of the Company's competitors and the Company's ability to
respond to such actions; (iii) changes in governmental regulation, tax rates and
similar matters; and (iv) other risks detailed in the Company's other filings
with the Commission.
10
<PAGE> 11
IRONSTONE GROUP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report on Form 10-QSB to be
signed on its behalf by the undersigned, thereunto duly authorized.
IRONSTONE GROUP, INC.
A DELAWARE CORPORATION
Date: November 10, 1997 By: /s/ Gerald G. Pinkston
--------------------------------
Gerald G. Pinkston
Chief 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Gerald G. Pinkston Chief Executive Officer November 10, 1997
- ------------------------------- (Principal Executive Officer)
Gerald G. Pinkston
/s/ Gerald G. Pinkston Chief Financial Officer November 10, 1997
- -------------------------------- (Principal Financial Officer and
Gerald G. Pinkston Principal Accounting Officer)
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 978,352
<SECURITIES> 1,052,800
<RECEIVABLES> 2,509,778
<ALLOWANCES> 1,048,273
<INVENTORY> 0
<CURRENT-ASSETS> 3,567,739
<PP&E> 405,790
<DEPRECIATION> 255,859
<TOTAL-ASSETS> 3,854,637
<CURRENT-LIABILITIES> 869,604
<BONDS> 311,436
0
0
<COMMON> 14,879
<OTHER-SE> 2,958,525
<TOTAL-LIABILITY-AND-EQUITY> 3,854,637
<SALES> 0
<TOTAL-REVENUES> 1,899,068
<CGS> 0
<TOTAL-COSTS> 2,401,971
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 45,721
<INTEREST-EXPENSE> 37,052
<INCOME-PRETAX> (502,632)
<INCOME-TAX> 4,321
<INCOME-CONTINUING> (506,953)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,953)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
