<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.01 PAR VALUE
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[ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, 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 Registrant 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, 1997 were
$2,468,402.
The approximate aggregate market value of voting stock held by non-affiliates of
the Registrant was $254,980 as of March 20, 1998 based on the closing bid price
on March 20, 1998. Shares of voting stock held by each officer and director and
by each person who owns 5% or more of the outstanding voting stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive.
As of March 20, 1998, 1,487,870 shares of Common Stock, $0.01 par value, were
outstanding.
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 "1998 Proxy Statement").
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I:
Item 1. Business................................................................................3
Item 2. Properties..............................................................................6
Item 3. Legal Proceedings.......................................................................6
Item 4. Submission of Matters to a Vote of Security Holders.....................................6
PART II:
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................7
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................7
Item 7. Financial Statements and Supplementary Data.............................................8
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..............................................................................8
PART III:
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act.......................................................9
Item 10. Executive Compensation..................................................................9
Item 11. Security Ownership of Certain Beneficial Owners and Management..........................9
Item 12. Certain Relationships and Related Transactions..........................................9
PART IV:
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................10
SIGNATURES........................................................................................11
</TABLE>
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PART 1
ITEM 1. BUSINESS
BACKGROUND
Ironstone Group, Inc., a Delaware corporation known as OXOCO, Inc. prior to 1988
(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 70% of the Company's
outstanding voting shares.
The Company's principal executive offices are located at 9665 Chesapeake Drive,
Suite 430, San Diego, CA 92123 and its telephone number is (619) 292-8777.
BANKRUPTCY
In January 1991, the Company filed a voluntary petition for protection under
Title 11 of the U.S. Code in the United States Bankruptcy Court for the Northern
District of California (the "Bankruptcy Court"). The Company's First Amended
Plan of Reorganization, as modified (the "Plan"), was confirmed by the
Bankruptcy Court on May 24, 1993, and the effective date pursuant to the terms
of the Plan was July 15, 1993. On May 13, 1996, the Bankruptcy Court issued an
order at the Company's request which (i) confirmed that the Company's Plan had
been fully administered and (ii) closed the Company's Chapter 11 case.
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, 16% of the outstanding
shares of Belt Perry Associates, Inc., a California corporation ("BPC"), of
which BPA is an 80% shareholder, for a cash payment of $50,000. In addition, the
BPC selling shareholder is entitled to receive contingent incentive payments if
certain BPC profit targets and other goals are achieved.
BPA and BPC are collectively referred to herein as "Belt Perry" and Ironstone
and its consolidated subsidiaries are collectively referred to herein as the
"Company".
The consideration paid by the Company for the shares of Belt Perry was
determined pursuant to arm's length negotiations between the Company and the
shareholders 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 Form 8-K.
During 1994 through 1996, BPA purchased from the minority shareholders of BPA,
all remaining minority interests in BPA's outstanding shares. During 1995 and
1997, BPC purchased from the minority shareholder of BPC, all remaining minority
interests in BPC's outstanding shares.
In January 1998, the Company's Board of Directors approved a plan for the
Company to divest itself of the Belt Perry property and tax services group (see
Business Strategy).
BUSINESS
The Company's principal business activities are conducted through Belt Perry.
Belt Perry 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 residential real estate in Arizona and
California. Belt Perry's agreements with its clients typically provide for Belt
Perry to be paid a portion of the amount, if any, by which the client's property
taxes are reduced as a result of an appeal processed by Belt Perry.
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REAL PROPERTY TAX APPEALS
Belt Perry performs real property tax consulting work for over 2,000 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 San Rafael, California. Belt Perry obtains new clients through its account
executives via referrals and telephone and direct contact.
Counties charge real property taxes based on the assessed value of real property
multiplied by the applicable tax rate. Belt Perry's consulting services include
the review and analysis of property records and the filing of property tax
appeals. Belt Perry employs state-certified appraisers who are responsible for
preparing documentation supporting an opinion of property valuation and
negotiating and arguing property tax appeals at hearings on behalf of Belt
Perry's clients. A computer-generated appraisal report is the basic document
used by the appraiser to support the opinion of property valuation (see
"Proprietary System"). Belt Perry typically charges contingent fees based on a
percentage of the tax savings, if any, resulting from the property tax appeal.
The majority of the Company's revenues are generated from real property tax
appeals.
Arizona Appeal Process
Most of Arizona's real property tax appeals are handled as administrative
appeals, which typically begin with a filing with the county assessor, and if
such process does not produce results satisfactory to BPA, BPA may appeal as far
as the Tax Court Division of the Superior Court of Arizona (the "Superior
Court"). Property valuations are set by the county assessor and mailed to
property owners between January and March of each year. Property owners have 45
days to appeal the valuation under the administrative appeal process.
BPA downloads certain counties' property tax valuations into its computer
system. An appraiser then uses the computer system to obtain the county
assessor's valuation for each parcel owned by BPA's clients and determines
whether or not such valuations appear reasonable based on the appraiser's
initial valuation of the property. If the appraiser concludes that the
assessor's valuation is too high, a property tax appeal is filed with the
assessor stating the appraiser's position regarding the appropriate valuation
and the basis for such valuation (i.e., income approach, market approach, etc.).
The 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
subsequently determines the appropriate valuation. If the decision rendered by
the Equalization Board is unsatisfactory to BPA, BPA has the option of filing an
appeal with the State Board of Tax Appeals and, finally, with the Superior
Court.
California Appeal Process
The California real property tax appeal process is similar to that of Arizona,
but generally involves only two levels: the county assessor 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 January 1 and July 1 of each year, and appeals filed with
the Equalization Board must be filed by September 15 of the same year.
PERSONAL PROPERTY TAX APPEALS
Belt Perry files personal property tax appeals on behalf of 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 multiplied by the applicable tax rate.
Personal property tax 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.
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 subscription and other
fees.
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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 property tax 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 software performs a
number of different functions, including analysis of pertinent details of county
property tax rolls to obtain valuations on selected properties and comparable
properties, preparation of market and equity comparables for selected
properties, 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 with property
sales information obtained from third party sources and with additional
information on comparable properties selected from the county tax rolls.
BUSINESS STRATEGY
The Company's strategy was to provide property tax and tax-related services with
the primary focus on providing real and personal property tax consulting
services. The Company's acquisition of Belt Perry allowed the Company to provide
real and personal property tax consulting services primarily in the western
United States. Consistent with its strategy to seek out opportunities to expand
its core services, during 1997 the Company purchased certain assets of the
personal property tax consulting division of Property Tax Consultants, Inc., a
California corporation doing business as Tax Management Group, Inc.
Economic factors heavily influence the real and personal property tax
assessments by governmental taxing authorities and, consequently, Belt Perry's
business was influenced by these same factors. Due to economic factors in
Arizona and California, which resulted in property valuations in 1997 being held
fairly constant with the 1996 valuations, Belt Perry realized significant
declines in the number of real property tax appeals filed as well as the revenue
associated with such appeals in 1997. As a result, the Company reduced its Belt
Perry staff by 28 full-time employees between January 1997 and January 1998.
Most governmental taxing authorities have an annual deadline for the filing of a
property tax appeal. Such deadlines create a seasonality to the property tax
appeal business within certain jurisdictions. The Company's challenge was to
effectively manage its expenses and personnel levels while providing high
quality customer service.
In January 1998, the Company's Board of Directors approved a plan for the
Company to divest itself of the Belt Perry property and tax services group and
to actively pursue other business opportunities. The Company is currently
seeking a prospective purchaser of the property and tax services group. In
addition, the Company has taken steps to further reduce operating expenses by
closing nonprofitable locations. As of January 31, 1998, the Company's Arizona
and Northern California operations ceased and the process to sublease the office
spaces had commenced. The Southern California offices are now responsible for
the day-to-day operations of the Belt Perry group. The Company will attempt to
maximize its revenue potential in 1998 by continuing to work its pending real
and personal property tax appeals, while continuing to reduce its operating
expenses.
There can be no assurance that the Company will acquire businesses, form
additional alliances, or expand its existing services. Failure to expand the
scope of services provided by the Company may have an adverse effect on the
Company's results of operations.
COMPETITION
The property tax consulting business is highly fragmented and very competitive.
The Company's 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 residential real property and personal property tax markets due to
its trained and experienced personnel, its network of offices and its
proprietary system for appraising real estate.
MARKETING STRATEGY
In 1995, the Company 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, Inc.
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The primary objectives of the Company in 1998 will be to pursue new business
opportunities and divest itself of the Belt Perry property and tax services
group. The Company intends to diversify its holdings by seeking additional
business opportunities. Utilizing the services of its majority shareholder,
Hambrecht & Quist, an investment banking and venture capital firm, the Company
will identify and invest in small to mid-range companies in various industries
that show promising growth. There can be no assurance that additional business
opportunities will result from these efforts.
In addition, the Company intends to divest itself of the Belt Perry property and
tax services group by merger or sale of its assets to other(s) in the industry,
or liquidation. The Company is currently utilizing its industry contacts and
strategic relationships to identify potential buyers for the property and tax
services group. There can be no assurance that a prospective purchaser will
result from these efforts.
EMPLOYEES
As of March 20, 1998, the Company had 10 total employees, all full-time
employees of BPC. None of the Company's employees are subject to a collective
bargaining agreement. The Company believes that its relations with its employees
are good.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in 250 square feet of
leased office space in San Diego, California. BPA leases approximately 9,900 and
800 square feet of office space in Phoenix, Arizona and San Rafael, California,
respectively. Such leases expire in June 2000 and March 2000, respectively. The
Company subleases the majority of its office space in Phoenix, Arizona and is
currently negotiating to sublease the remaining portion of that space as well as
the San Rafael office space. BPC leases approximately 7,500 and 1,700 square
feet of office space in San Diego and Los Angeles, California, respectively. The
San Diego lease expires in September 1999, and the Los Angeles lease is on a
month-to-month basis. The Company believes that its current space is adequate
for its operations.
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.
("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, and again on May 6, 1996, 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 in the event the Company were to make such payment
it would be indemnified.
In April 1995, litigation was commenced by SGC in Pittsburgh, Pennsylvania
against the Company and others with regard to enforcement of obligations owing
under the Notes executed by SGC and the validity of the assignment of the Notes
by the Company. The case was transferred to the Bankruptcy Court. On March 6,
1996, the Bankruptcy Court issued an Order Dismissing Adversary Proceeding which
provided in part that "Defendant Ironstone Group, Inc....and Defendant Michael
Y. McGovern hold(s) no interest in the proceeds of the [SGC Loan Documents],"
thereby confirming the validity of the assignment.
On June 10, 1996, a settlement agreement was entered into by SGC and various
other parties settling most but not all disputes among them. In particular, the
individual's claim against the Company for $100,000 referred to in the first
paragraph above was resolved by the settlement.
Other than legal proceedings in which BPA and BPC are involved in the ordinary
course of 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 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is not eligible for publication of quotations on any
securities market and the Company is not aware of any recent material trading
activity in shares of its Common Stock. As of March 20, 1998, there were
approximately 1,029 holders of record of the Company's Common Stock. The Company
has not paid cash dividends on its Common Stock since its inception and does not
intend to pay cash dividends on its Common Stock in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year ended December 31, 1997
Revenues for 1997 were $2,468,402, a decrease of $6,112,810 or 71.2% as compared
to 1996. This decrease was primarily due to reductions in the number of real
property appeals filed in California and Arizona, coupled with management's
decision to reinstate the Company's former contracts with its California clients
and return to its prior billing methods. The reduction in the number of real
property appeals filed was the result of 1997 property valuations being held
fairly constant with the 1996 valuations, as well as the Company's change in
focus from real property tax consulting to diversification and concentration on
marketing and growing personal property compliance, valuation and other
consulting services.
Costs and expenses for 1997 decreased $4,962,586 or 62.0% as compared to 1996.
This decrease was primarily due to reductions in salaries and wages, bad debts
and rent expense.
Salaries and wages decreased $2,333,304 or 56.7% primarily due to the effects of
a decrease in the Phoenix, Arizona and San Rafael, California office personnel
in early January 1997, as well as voluntary salary reductions by certain
executives in 1997.
Bad debts expense decreased $1,929,993 or 96.1% primarily due to the decrease in
revenues discussed above, as well as the mid-year reversal of $75,000 of bad
debt expense previously recorded in 1996 related to revenues billed under the
revised California contracts for the San Rafael, California office. This
reversal was the direct result of actual collections being better than
anticipated for these revenues.
Rent expense decreased $111,065 or 26.5% primarily due to the Company's
consolidating office space and renegotiating the leases related to the Phoenix,
Arizona and San Diego and San Rafael, California offices.
Year ended December 31, 1996
Revenues for fiscal 1996 were $8,581,212, an increase of $936,238 or 12.3% as
compared to fiscal 1995. This increase was due to a $2,080,265 increase in the
California revenues partially offset by a $1,123,327 decrease in the Arizona
revenues. The increase in the California revenues resulted primarily from a
revision to the Company's contracts with its California clients which revised
the Company's method of billing. The decision to revise the California contracts
was based on market conditions as well as current practice by the Company's
major competitors. The decrease in the Arizona revenues was primarily due to
economic and political factors in Arizona, which resulted in 1996 property
valuations being held fairly constant with the 1995 valuations. As a result, BPA
realized a significant decline in the number of property tax appeals filed in
1996 as well as the revenue associated with such appeals.
Costs and expenses for fiscal 1996 decreased by $900,479, a decrease of 10.1% as
compared to fiscal 1995. This decrease was primarily due to decreases in
salaries and wages, amortization expense and non-operating expenses, partially
offset by an increase in bad debt expense.
Bad debt expense increased $1,427,739 or 246% primarily due to management's
decision to increase its bad debt provision by approximately $1,378,700 related
to revenues billed under the revised California contracts discussed above.
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Salaries and wages decreased by $373,344 or 8.3% primarily due to the effects of
a decrease in personnel that occurred in the later part of 1995 as well as
voluntary salary reductions by certain executive officers in 1996.
Amortization expense decreased by $1,318,721 or 93.5% as a result of the
write-down in 1995 of goodwill associated with the acquisition of BPA to reflect
the impairment of this asset.
Non-operating expenses decreased by $444,945 or 100% as a result of the
write-off in 1995 of costs and expenses associated with the development of a
sales and use tax software product for resale and an on-line resume and career
placement service. Such projects were abandoned by the Company in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended December 31, 1997
was $1,518,762. Due to significant reduction in accounts receivable and payoff
of accrued incentives and bonuses, working capital at December 31, 1997 was
$2,890,591, a decrease of $843,015 or 22.6% from 1996.
Net cash used by investing activities for the year ended December 31, 1997 was
$7,206, consisting primarily of acquisitions of computer and office equipment
partially offset by proceeds from sales of similar assets.
Net cash used by financing activities for the year ended December 31, 1997 was
$889,483, consisting of payments on notes payable and capital lease obligations,
the second quarter payoff of the Company's revolving line of credit, and the
July 17, 1997 purchase of minority interest of 166 shares of BPC.
Cash increased by $622,073 from $529,543 at the end of 1996 to $1,151,616 at the
end of 1997. Management believes that its current level of cash and anticipated
cash flow from operations will be adequate to meet its operating needs through
1998.
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.
YEAR 2000 CONVERSION
The Company recognizes the need to ensure its future operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations or other date-sensitive
applications using the Year 2000 date are a known risk. The Company will be
addressing this risk to the availability and integrity of financial systems and
the reliability of operational systems in order to identify, evaluate and
implement system and/or application changes necessary to achieve a Year 2000
conversion with minimal effect on customers or disruption to future business
operations. The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications.
Management has not yet assessed the Year 2000 compliance expense and related
potential effect on the Company's future earnings.
The Company will initiate formal communications with its significant suppliers
to determine the extent to which the Company's interface systems would be
vulnerable to those third parties' failure to remediate their own Year 2000
issue. There can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems.
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, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS
The information required herewith is incorporated by reference from the sections
captioned "Proposal 1: Election of Directors" and "Certain Transactions"
contained in the 1998 Proxy Statement.
EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the Company's
executive officers as of March 30, 1998. A summary of the background and
experience of each of these individuals is set forth after the table.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gerald G. Pinkston 43 Chief Executive Officer,
Secretary and Treasurer
</TABLE>
Mr. Pinkston has served as Chief Executive Officer since January 1997 and as
Secretary and Treasurer since October 1997. He also served as President and
Chief Operating Officer from October 1993 to January 1997.
From March 1991 to October 1993, Mr. Pinkston served as President of BPC.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation" contained in the 1998 Proxy
Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herewith is incorporated by reference from the section
captioned "Security Ownership of Certain Beneficial Owners and Management"
contained in the 1998 Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herewith is incorporated by reference from the section
captioned "Certain Transactions" contained in the 1998 Proxy Statement.
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PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
<S> <C>
11.1 Statement Regarding Computation of Earnings Per Share 12
21.1 Subsidiaries of Ironstone Group, Inc. 13
</TABLE>
(b) REPORTS ON FORM 8-K
None.
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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-KSB to be
signed on its behalf by the undersigned, thereunto duly authorized.
IRONSTONE GROUP, INC.
A DELAWARE CORPORATION
Date: March 30, 1998 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 of 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, March 30, 1998
- ------------------------- Secretary and Treasurer
Gerald G. Pinkston (Principal Executive Officer
and Principal Financial Officer)
/s/ Edmund H. Shea, Jr. Director March 30, 1998
- -------------------------
Edmund H. Shea, Jr.
</TABLE>
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EXHIBIT 11.1
IRONSTONE GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE - BASIC AND DILUTED
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net income (loss) available to common shareholders $ (574,492) $ 568,329
========== ==========
Average outstanding common and equivalent shares - basic 1,487,870 1,487,870
========== ==========
Average outstanding common and equivalent shares - diluted 1,487,870 1,487,870
========== ==========
Net income (loss) per common and equivalent share - basic and diluted $ (0.39) $ 0.38
========== ==========
</TABLE>
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EXHIBIT 21.1
SUBSIDIARIES OF IRONSTONE GROUP, INC.
AcadiEnergy, Inc., a Delaware corporation, is a 100%-owned subsidiary of the
Company.
Belt Perry Associates, Inc., an Arizona corporation, ("BPA") is a 100%-owned
subsidiary of the Company.
Belt Perry Associates, Inc., a California corporation, is 83.33% owned by BPA
and 16.67% owned by the Company.
DeMoss Corporation, a California corporation, is a 100%-owned subsidiary of the
Company.
TaxNet, Inc., an Arizona corporation, is a 100%-owned subsidiary of BPA.
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IRONSTONE GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
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PAGE
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<S> <C>
Independent auditors' report............................................................................. F-2
Consolidated balance sheet at December 31, 1997.......................................................... F-3
Consolidated statements of operations for the years ended
December 31, 1997 and 1996.............................................................................. F-4
Consolidated statements of shareholders' equity for the years ended
December 31, 1997 and 1996.............................................................................. F-5
Consolidated statements of cash flows for the years ended
December 31, 1997 and 1996.............................................................................. F-6
Notes to consolidated financial statements............................................................... F-8
</TABLE>
F-1
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Ironstone Group, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheet of Ironstone Group,
Inc. and subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
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, 1997, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Diego, California
March 20, 1998
F-2
<PAGE> 16
IRONSTONE GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Current assets:
Cash $ 1,151,616
Marketable securities available for sale 1,250,200
Accounts receivable, net of allowance for doubtful accounts
of $760,706 1,180,158
Prepaid expenses 49,719
------------
Total current assets 3,631,693
------------
Property and equipment - net 127,861
Goodwill 71,062
Other assets 23,584
------------
Total assets $ 3,854,200
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 84,534
Accrued compensation 104,920
Margin loan 145,341
Notes payable 150,000
Capitalized lease obligations - current portion 18,415
Deferred revenue 102,000
Due to officer 95,000
Accrued interest payable 1,829
Other current liabilities 39,063
------------
Total current liabilities 741,102
------------
Capitalized lease obligations - net of current portion 9,833
------------
Commitments and contingencies (Note 12)
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 (18,446,022)
Unrealized gain on marketable securities available for sale 364,023
------------
Total shareholders' equity 3,103,265
------------
Total liabilities and shareholders' equity $ 3,854,200
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 17
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Consulting fees $ 2,421,849 $ 8,520,117
Subscription fees -- 19,500
Interest and other income 46,553 41,595
----------- -----------
Total revenues 2,468,402 8,581,212
----------- -----------
Costs and expenses:
Salaries and wages, payroll taxes and benefits 1,782,404 4,115,708
Depreciation 83,648 108,097
Amortization 128,858 91,630
Bad debt expense 78,992 2,008,985
Rent expense 308,576 419,641
Professional fees 180,481 252,802
Advertising and promotion 23,935 109,277
Office expense 84,508 188,203
Referral and split fees 79,441 112,161
Travel and entertainment 28,742 138,945
Research expense 75,040 95,457
Communications 34,423 66,184
Interest expense 44,721 105,040
Other operating expenses 106,146 190,371
----------- -----------
Total costs and expenses 3,039,915 8,002,501
----------- -----------
Income (loss) before income taxes and minority interest (571,513) 578,711
Income tax provision (3,250) (53,050)
Minority interest 271 42,668
----------- -----------
Net income (loss) $ (574,492) $ 568,329
=========== ===========
Net income (loss) per share - basic and diluted $ (0.39) $ 0.38
=========== ===========
Average shares outstanding - basic 1,487,870 1,487,870
Average shares outstanding - diluted 1,487,870 1,487,870
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 18
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL GAIN ON
COMMON STOCK PAID IN ACCUMULATED MARKETABLE
SHARES AMOUNT CAPITAL DEFICIT SECURITIES TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances,
January 1, 1996 1,487,870 $ 14,879 $ 21,170,385 $(18,439,859) $ 27,139 $ 2,772,544
Unrealized gain on
marketable securities 472,695 472,695
Net income 568,329 568,329
------------ ------------ ------------ ------------ ------------ ------------
Balances,
December 31, 1996 1,487,870 14,879 21,170,385 (17,871,530) 499,834 3,813,568
Unrealized loss on
marketable securities (135,811) (135,811)
Net loss (574,492) (574,492)
------------ ------------ ------------ ------------ ------------ ------------
Balances,
December 31, 1997 1,487,870 $ 14,879 $ 21,170,385 $(18,446,022) $ 364,023 $ 3,103,265
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 19
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (574,492) $ 568,329
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 83,648 108,097
Amortization 128,858 91,630
Loss on purchase of minority interest in consolidated subsidiaries 1,245 26,598
Undistributed minority interest in consolidated subsidiaries (271) (42,668)
Gain on sale of assets (8,685) --
Changes in assets and liabilities net of effects of purchase of
minority interests in consolidated subsidiaries:
Accounts receivable 2,746,605 (51,627)
Other current assets 60,134 (59,644)
Other assets (40,411) 7,219
Accounts payable (110,503) 34,699
Accrued compensation (555,118) 216,443
Other current liabilities (212,248) (102,276)
----------- -----------
Net cash provided by operating activities 1,518,762 796,800
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 16,946 --
Purchase of marketable securities available for sale -- (227,316)
Purchase of property and equipment (24,152) (36,966)
----------- -----------
Net cash used by investing activities (7,206) (264,282)
----------- -----------
FINANCING ACTIVITIES:
Borrowings from line of credit -- 225,000
Purchase of minority interests in consolidated subsidiaries (101,433) (242,500)
Payments on line of credit (350,000) --
Payments on capitalized lease obligations (56,892) (44,608)
Payments on notes payable (381,158) (695,025)
----------- -----------
Net cash used by financing activities (889,483) (757,133)
----------- -----------
Net increase (decrease) in cash 622,073 (224,615)
Cash at beginning of year 529,543 754,158
----------- -----------
Cash at end of year $ 1,151,616 $ 529,543
=========== ===========
</TABLE>
(continued)
F-6
<PAGE> 20
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
<S> <C> <C>
Interest $ 51,683 $129,598
Income taxes 54,071 3,250
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
On March 28, 1997, the Company entered into a non-cancelable capital lease
agreement with Sanwa Leasing Corporation for the acquisition of copier equipment
for the Company's San Rafael, California office. The $4,945 lease obligation is
payable in 36 equal monthly installments over the lease term commencing April 1,
1997. Upon expiration of the lease term, the Company has the right to return the
equipment, or the lease automatically extends for a minimum period of one year
with monthly rent payments at double the current stated rate.
On April 4, 1997, the Company entered into a non-cancelable capital lease
agreement with Banc One Leasing Corporation for the acquisition of copier
equipment for the Company's Phoenix, Arizona office. The $16,432 lease
obligation is payable in 36 equal monthly installments over the lease term
commencing April 1, 1997. Upon expiration of the lease term, the Company has the
right to return the equipment or exercise its option to purchase the equipment
for a buyout of approximately ten (10) percent of the original equipment cost at
lease inception.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 21
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
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 intercompany 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. In
January 1998, the Company's Board of Directors approved a plan for the Company
to divest itself of the Belt Perry property and tax services group (Note 18).
Consulting Fee Revenue
Ad valorem tax consulting fees are contracted 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 fees 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 gains and losses are excluded from earnings and
reported as a separate component of shareholders' equity until realized. The
fair value of the Company's marketable securities at December 31, 1997 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 three to seven years.
Long-Lived Assets
In accordance with 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 adopted SFAS No. 121 in 1996. The
Company has reviewed its assets for impairment and concluded that the impact on
the Company's financial position and results of operations from adopting SFAS
No. 121 is not significant.
Goodwill
The Company has classified as Goodwill 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 (Note 5).
F-8
<PAGE> 22
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of
estimated fair value information for financial instruments, whether or not
recognized in the Consolidated Balance Sheet. Fair values are based upon
estimates using present value or other valuation information techniques in cases
where quoted market prices are not available. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. SFAS No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. The carrying values of
cash, accounts receivable, notes payable and capitalized lease obligations
approximate their fair values due to the short term nature of these items. The
fair value of marketable securities is based on quoted market prices.
Income Taxes
The Company and its majority-owned 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 6).
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. MARKETABLE SECURITIES
All marketable securities are classified as available for sale. The cost and
fair value of marketable securities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED FAIR
COST GAIN VALUE
<S> <C> <C> <C>
Corporate equity securities $ 886,177 $ 364,023 $1,250,200
========== ========== ==========
</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 of the Company,
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 January 1, 1996 through December 31, 1997 ranged between 8.50% and
7.75% per annum (8.00% at December 31, 1997). At December 31, 1997, the Company
owed $145,341 on the Margin Loan.
F-9
<PAGE> 23
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Accounts receivable $ 1,938,840
Advances to employees and other 2,024
Less allowance for doubtful accounts (760,706)
-----------
Accounts receivable - net $ 1,180,158
===========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
Computer equipment and software $ 282,767
Furniture and office equipment 121,992
---------
Total property and equipment 404,759
Less accumulated depreciation (276,898)
---------
Property and equipment - net $ 127,861
=========
At December 31, 1997, computer equipment and software included $13,950 of
leased assets, and furniture and office equipment included $14,298 of leased
assets (Note 9).
Depreciation expense on owned and leased assets was $83,648 and $108,097 for the
years ended December 31, 1997 and 1996, respectively.
5. GOODWILL
At December 31, 1997, the balance of goodwill of $425,218 is comprised primarily
of goodwill associated with the acquisition of BPC, adjusted for a minority
interest buyback in May 1995 (Note 11).
Goodwill consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Goodwill $ 425,218
Less accumulated amortization (354,156)
---------
Goodwill - net $ 71,062
=========
</TABLE>
6. 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, 1997 are as follows:
F-10
<PAGE> 24
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
6. INCOME TAXES (CONTINUED)
<TABLE>
<S> <C>
Deferred tax assets:
Differences between book and tax basis of property $ 331,567
Operating loss carryforwards 28,842,405
Deferred tax liabilities:
Differences between book and tax basis of property (53,598)
------------
Total deferred income taxes 29,120,374
Less valuation allowance (29,120,374)
------------
Deferred income taxes - net $ --
============
</TABLE>
The provision for income taxes consists of the following at December 31, 1997
and 1996, respectively:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Current:
Federal $ -- $41,000
State 3,250 12,050
------- -------
Total $ 3,250 $53,050
======= =======
</TABLE>
The Company's income tax provision for 1997 relates to annual franchise and
minimum taxes charged by the states in which the Company is incorporated or does
business. The Company's income tax provision for 1996 represents federal
alternative minimum tax and state franchise and alternative minimum taxes. The
primary difference between the income tax provisions for the years ended
December 31, 1997 and 1996 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, 1997, the Company has net operating loss
carryforwards for tax purposes of approximately $80,271,069. These carryforwards
will expire in the years 1998 to 2012.
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
carryforward that may be available for use in future years may be limited.
In the opinion of management, based on limitations on the use of net operating
loss carryforwards, the realization of such carryforwards is not more likely
than not, and accordingly, a valuation reserve has been recorded to offset such
amount in its entirety.
The differences between the Federal statutory tax rate and the Company's
effective rate as a percentage of income before income taxes for the years ended
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Federal statutory tax rate (34.0)% 34.0 %
Tax on minority interest -- 2.3 %
Effect of net operating loss carryforward
and valuation allowance 34.0 % (36.3)%
Federal alternative minimum tax -- 6.6 %
State income tax, net of Federal benefit 0.6 % 1.9 %
------ ------
Effective income tax rate 0.6 % 8.5 %
====== ======
</TABLE>
F-11
<PAGE> 25
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
7. 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 December 31, 1997, the Company has not
renewed the line of credit.
8. DUE TO OFFICER
On October 14, 1993, BPC entered into a purchase and employment agreement (the
"Agreement") with an officer and minority shareholder of BPC (the "Officer") in
exchange for 1,333 shares of BPC's issued and outstanding shares of common
stock. The Agreement specifies compensation and incentive amounts and includes a
non-competition clause (Note 12). Incentive amounts are to be paid if certain
BPC profit goals are achieved. As a result of BPC meeting certain profit goals
for 1996 and 1995, incentive amounts of $202,022 became payable as of December
31, 1996 and were paid in full on April 30, 1997.
On May 11, 1995, BPC purchased from the Officer 167 shares of BPC's issued and
outstanding shares of common stock in exchange for $20,000 cash and an agreement
to pay $50,000 on May 1, 1996 and May 1, 1997. Both payments were made in full
on May 1, 1996 and May 1, 1997.
On April 1, 1997, BPA and BPC entered into an employment agreement (the
"Agreement") with the Officer. The Agreement specifies compensation and
incentive amounts and includes non-competition and non-solicitation clauses
(Note 12). Bonuses and other incentive amounts are to be paid if certain cash
and profit goals are achieved by BPA and BPC for 1997 and 1998. As a result of
BPA and BPC meeting certain cash and profit goals for 1997, bonuses of $95,000
became payable as of December 31, 1997. Accordingly, such amount is included in
Due to officer.
9. CAPITALIZED LEASE OBLIGATIONS
Future minimum lease payments under capitalized lease obligations at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 20,214
1999 8,292
2000 2,220
--------
Total minimum lease payments 30,726
Less amount representing interest (2,478)
--------
Present value of net minimum lease payments 28,248
Less current portion (18,415)
--------
Total capitalized lease obligations - net of
current portion $ 9,833
========
</TABLE>
F-12
<PAGE> 26
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
10. NOTES PAYABLE
Notes payable consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Notes payable to former minority shareholders of BPA, bearing interest at 5% per
annum, with principal and interest payable in four equal 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% per annum and is
based on BPA's revenue between 1994 and 1996. The Company has elected to defer
the final payments until January 31, 1998. $150,000
--------
Total notes payable - current $150,000
========
</TABLE>
At December 31, 1997, the fair value of the Company's notes payable was
$138,341. The fair value was estimated using discounted cash flow analyses based
on the Company's incremental borrowing rate for similar types of borrowing
arrangements.
11. PURCHASE OF MINORITY INTERESTS
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 $20,000 cash and an agreement to pay $50,000 on May 1, 1996 and May 1, 1997.
Goodwill, associated with the acquisition of BPC (Note 5), was increased by
$75,255 and is being amortized over the remaining life of the original estimated
period of future benefit of five years. 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 bore interest at 6% per annum with principal
and interest payable in 24 equal monthly installments beginning October 1, 1995,
and was paid in full in August 1997. Approximately $40,000 of the excess
purchase price over the net assets acquired was added to Goodwill and was
associated with the acquisition of BPA. Goodwill is being amortized over the
remaining life of the original estimated period of future benefit of five years,
with the balance of the excess written-off in 1995. The carrying value of the
minority interest purchased was $90,758.
On May 7, 1996, BPA purchased from a minority shareholder of BPA, 182 shares of
BPA's issued and outstanding shares of common stock in exchange for $50,000
cash. Goodwill was decreased by $1,704. The carrying value of the minority
interest purchased was $51,704.
On July 27, 1996, BPA purchased from a minority shareholder of BPA, 700 shares
of BPA's issued and outstanding shares of common stock in exchange for $42,500
cash and a note payable of $150,000. The note bore interest at Bank One,
Arizona, NA's prime rate with interest only payable September 1, 1996 and
principal and interest payable in three equal monthly installments beginning
October 1, 1996. At December 31, 1996, the note was paid in full. The carrying
value of the minority interest purchased was $165,902.
On July 17, 1997, BPC purchased from an officer and 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.
F-13
<PAGE> 27
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
BPA and BPC have entered into leases for office space and certain equipment
under agreements that have been classified as operating leases for financial
reporting purposes. In connection with the office space leases, BPA and BPC are
responsible for certain monthly operating and maintenance expenses. The majority
portion of one of BPA's facilities has been subleased. Rent expense under all
operating leases, net of sublease income of $90,743 and $67,877 for the years
ended December 31, 1997 and 1996, respectively, was $308,576 and $419,641 for
the years ended December 31, 1997 and 1996, respectively.
Scheduled minimum lease payments under non-cancelable operating leases for the
years ending December 31st are as follows:
<TABLE>
<S> <C>
1998 $291,627
1999 215,551
2000 37,882
--------
Total minimum operating lease payments $545,060
========
</TABLE>
Employment Agreements
On October 14, 1993, BPC entered into an employment agreement (the "Agreement")
with an officer and minority shareholder of BPC. The Agreement specifies
compensation and incentive amounts and includes a non-competition clause.
Incentive amounts are to be paid if certain BPC profit goals are achieved. Such
amounts are expensed at the time they are earned and are determined on an annual
basis (Note 8).
On April 1, 1997, BPA and BPC entered into an employment agreement (the
"Agreement") with an officer and minority shareholder of BPC. 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 cash and profit goals are achieved by BPA and BPC. Such amounts are
expensed as they are earned and are determined on an annual basis (Note 8).
Deferred Revenue
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 subsequently 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, 1997, the case remains
unresolved. During 1993, the County Treasurer made a payment to BPA on behalf of
BPA's client related to the 1992 Judgment of which $102,000 represents BPA's
contingent fee plus interest. Such amount is included in Deferred revenue
pending the completion of the appeal process.
As a result of the 1992 Judgment, the Company's management and legal counsel has
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 as
of December 31, 1997 pending the completion of the appeal process.
F-14
<PAGE> 28
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
In January 1991, the Company filed a voluntary petition for protection under
Title 11 of the U.S. Code in the United States Bankruptcy Court for the Northern
District of California (the "Bankruptcy Court"). The Company's First Amended
Plan of Reorganization, as modified (the "Plan"), was confirmed by the
Bankruptcy Court on May 24, 1993, and the effective date pursuant to the terms
of the Plan was July 15, 1993. On May 13, 1996, the Bankruptcy Court issued an
order at the Company's request which (i) confirmed that the Company's Plan had
been fully administered and (ii) closed the Company's Chapter 11 case.
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, and again on May 6, 1996, 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 in the event the Company were to make such payment
it would be indemnified. Accordingly, no amounts associated with this have been
accrued.
In April 1995, litigation was commenced by SGC in Pittsburgh, Pennsylvania
against the Company and others with regard to enforcement of obligations owing
under the Notes executed by SGC and the validity of the assignment of the Notes
by the Company. The case was transferred to the Bankruptcy Court. On March 6,
1996, the Bankruptcy Court issued an Order Dismissing Adversary Proceeding which
provided in part that "Defendant Ironstone Group, Inc....and Defendant Michael
Y. McGovern hold(s) no interest in the proceeds of the [SGC Loan Documents],"
thereby confirming the validity of the assignment.
On June 10, 1996, a settlement agreement was entered into by SGC and various
other parties settling most but not all disputes among them. In particular, the
individual's claim against the Company for $100,000 referred to in the first
paragraph above was resolved by the settlement.
Other than legal proceedings in which BPA and BPC are involved in the ordinary
course of business, the Company is not a party to any other material legal
proceedings.
13. DEFINED CONTRIBUTION PLAN
The Company has adopted a defined contribution plan under Section 401(k) of the
Internal Revenue Code (the "401(k) Plan"). Under the 401(k) 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. All employees are eligible
to participate in the 401(k) Plan. Company contributions were $8,920 and $15,334
for the years ended December 31, 1997 and 1996, respectively.
14. 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 Equity Incentive 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 this plan. The Plans provide
for incentive stock options to be granted at times and prices determined by the
Company's Board of Directors, to be granted at not less than 100% of the fair
market value of the Company's common stock on the date of grant. Options are
generally subject to a three or four-year vesting schedule. Options issued under
the Plans expire at the earlier of the end of the exercise period of no more
than ten years from the date of grant or 90 days following the grantee's end of
service to the Company.
F-15
<PAGE> 29
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
14. STOCK OPTIONS (CONTINUED)
A summary of stock option transactions during 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
SHARES
OPTIONS AVAILABLE EXERCISE PRICE
OUTSTANDING FOR GRANT PER SHARE
----------- --------- ---------
<S> <C> <C> <C>
Balance, January 1, 1996 116,508 222,772 $3.00-$4.00
Granted 4,370 (4,370) $4.00
Expired (15,485) 15,485 $4.00
------- -------
Balance, December 31, 1996 105,393 233,887 $3.00-$4.00
Granted 3,200 (3,200) $0.50
Expired (86,903) 86,903 $3.00-$4.00
------- -------
Balance, December 31, 1997 21,690 317,590 $0.50-$4.00
====== =======
</TABLE>
The Company applies APB 25 and related interpretations in accounting for the
Plans. Accordingly, no compensation expense has been recognized for the Plans,
as the options are granted at not less than 100% of the fair market value of the
Company's common stock. Had compensation cost been determined based upon the
fair market value on the date of grant for awards under the Plans consistent
with the methodology prescribed under Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation," the Company's net loss for
the year ended December 31, 1997 would have been increased by $9,293 and the
Company's net income for the year ended December 31, 1996 would have been
decreased by $8,980. The fair market value of the options granted during 1997 is
estimated as $937 on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: no dividend yield, volatility rate of 86%,
risk free interest rate of 6%, assumed no forfeiture rate and expected life of
three years. The fair market value of the options granted during 1996 is
estimated as $1,049 on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: no dividend yield, volatility rate of 66%,
risk free interest rate of 6%, assumed no forfeiture rate and expected life of
four years.
15. 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:
Interest expense related to incentive amounts payable to a minority shareholder
of BPC was $6,464 for the year ended December 31, 1996.
Interest expense related to notes payable to former minority shareholders of BPA
was $10,157 and $45,441 for the years ended December 31, 1997 and 1996,
respectively.
At December 31, 1997, the Company owed $1,829 to former minority shareholders of
BPA related to interest on notes payable. Such amount is included in Accrued
interest payable.
F-16
<PAGE> 30
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
16. 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 and
assumed certain liabilities of TMG's personal property consulting division in
exchange for $50,000 cash and a note payable of $15,000. The aggregate purchase
price of $65,000 has been allocated to the assets and liabilities acquired,
based upon their respective fair market values as follows:
<TABLE>
<CAPTION>
Asset/Liability Description Amount Depreciation/ amortization period
- --------------------------- ------ ---------------------------------
(years)
-------
<S> <C> <C>
Computer equipment $ 8,560 3
Customer lists 2,175 1
Intellectual property 10,000 5
Contract rights 49,259 1
Accrued compensation (4,994) --
--------
Total $ 65,000
========
</TABLE>
The note was payable in eight (8) equal monthly installments beginning May 15,
1997 and was paid in full on December 15, 1997.
17. EARNINGS PER SHARE - BASIC AND DILUTED
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 anti-dilutive effect,
similar to Fully Diluted EPS, but uses only the average stock price during the
period as part of the computation.
The weighted average number of shares of common stock for 1997 and 1996 was
1,487,870. The weighted average dilutive common shares for 1997 and 1996 was
1,487,870. Common stock equivalents for 1997 and 1996 were not included in
computing the weighted average dilutive shares because their effects were
anti-dilutive.
18. SUBSEQUENT EVENT
In January 1998, the Company's Board of Directors approved a plan for the
Company to divest itself of the (Belt Perry) property and tax services group and
to actively seek other business opportunities. The Company is currently seeking
a prospective purchaser of the property and tax services group. In addition, the
Company has taken steps to further reduce operating expenses by closing
nonprofitable locations. As of January 31, 1998, the Phoenix, Arizona and San
Rafael, California operations ceased and the process to sublease the office
spaces had commenced. The San Diego and Los Angeles, California offices are now
responsible for the day-to-day operations of the entire property and tax
services group.
***
F-17
<PAGE> 1
EXHIBIT 11.1
IRONSTONE GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE - BASIC AND DILUTED
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net income (loss) available to common shareholders $ (574,492) $ 568,329
========== ==========
Average outstanding common and equivalent shares - basic 1,487,870 1,487,870
========== ==========
Average outstanding common and equivalent shares - diluted 1,487,870 1,487,870
========== ==========
Net income (loss) per common and equivalent share - basic and diluted $ (0.39) $ 0.38
========== ==========
</TABLE>
12
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF IRONSTONE GROUP, INC.
AcadiEnergy, Inc., a Delaware corporation, is a 100%-owned subsidiary of the
Company.
Belt Perry Associates, Inc., an Arizona corporation, ("BPA") is a 100%-owned
subsidiary of the Company.
Belt Perry Associates, Inc., a California corporation, is 83.33% owned by BPA
and 16.67% owned by the Company.
DeMoss Corporation, a California corporation, is a 100%-owned subsidiary of the
Company.
TaxNet, Inc., an Arizona corporation, is a 100%-owned subsidiary of BPA.
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,151,616
<SECURITIES> 1,250,200
<RECEIVABLES> 1,940,864
<ALLOWANCES> 760,706
<INVENTORY> 0
<CURRENT-ASSETS> 3,631,693
<PP&E> 404,759
<DEPRECIATION> 276,898
<TOTAL-ASSETS> 3,854,200
<CURRENT-LIABILITIES> 741,102
<BONDS> 178,248
0
0
<COMMON> 14,879
<OTHER-SE> 3,088,386
<TOTAL-LIABILITY-AND-EQUITY> 3,854,200
<SALES> 0
<TOTAL-REVENUES> 2,468,402
<CGS> 0
<TOTAL-COSTS> 3,039,915
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 78,992
<INTEREST-EXPENSE> 44,721
<INCOME-PRETAX> (571,242)
<INCOME-TAX> 3,250
<INCOME-CONTINUING> (574,492)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (574,492)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
