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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, 1998
[ ] 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)
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DELAWARE 95-2829956
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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550 15TH STREET, FLOOR 2, SAN FRANCISCO, CA 94103
(Address of principal executive offices, including zip code)
(415) 551-8603
(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, 1998 were
$553,023.
The approximate aggregate market value of voting stock held by non-affiliates of
the Registrant was $151,319 as of March 16, 1999 based on the closing bid price
on March 16, 1999. 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 16, 1999, 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
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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
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PART 1
ITEM 1. BUSINESS
BACKGROUND
Ironstone Group, Inc., ("Ironstone") 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 550 15th Street,
Floor 2, San Francisco, CA 94103 and its telephone number is (415) 551-8603.
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 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.
BUSINESS
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). As of September 30, 1998, the company had terminated all
property and tax service operations. Currently, the company is reviewing options
to utilize significant tax loss carryforwards good through 2007 through
investments in other companies.
The Company's principal business activities were conducted through Belt Perry.
Belt Perry was 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 provided for
Belt Perry to be paid a portion of the amount, if any, by which the client's
property taxes were reduced as a result of an appeal processed by Belt Perry.
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REAL PROPERTY TAX APPEALS
Belt Perry performed real property tax consulting work for over 2,000
commercial, industrial and residential clients, primarily in the states of
Arizona and California through its former offices in Phoenix, Arizona and San
Diego, Los Angeles and San Rafael, California. Belt Perry obtained 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 included
the review and analysis of property records and the filing of property tax
appeals. Belt Perry employed state-certified appraisers who were 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 was the basic document
used by the appraiser to support the opinion of property valuation (see
"Proprietary System"). Belt Perry typically charged 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 were generated from real property tax
appeals.
Arizona Appeal Process
Most of Arizona's real property tax appeals were handled as administrative
appeals, which typically began with a filing with the county assessor, and if
such process did not produce results satisfactory to BPA, BPA may have appealed
as far as the Tax Court Division of the Superior Court of Arizona (the "Superior
Court"). Property valuations were set by the county assessor and mailed to
property owners between January and March of each year. Property owners had 45
days to appeal the valuation under the administrative appeal process.
BPA would download certain counties' property tax valuations into its computer
system. An appraiser then used the computer system to obtain the county
assessor's valuation for each parcel owned by BPA's clients and determined
whether or not such valuations appeared reasonable based on the appraiser's
initial valuation of the property. If the appraiser concluded that the
assessor's valuation was too high, a property tax appeal was 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 have accepted or denied an appeal. If an appeal was denied, BPA
had 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 determined the appropriate valuation. If the decision rendered by
the Equalization Board was unsatisfactory to BPA, BPA had 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 was similar to that of Arizona,
but generally involved only two levels: the county assessor and County Board of
Equalization. Although there was occasionally a judicial review through the
Superior Court, it was 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 had to be filed by September 15 of the same year.
PERSONAL PROPERTY TAX APPEALS
Belt Perry filed 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 were filed to contest depreciation
rates, items not classified correctly, and assessor audits. Belt Perry typically
charged 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, was a national referral network of
property tax consultants providing tax appeal services throughout the United
States and Canada. BPA charged TaxNet affiliates certain subscription and other
fees.
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PROPRIETARY SYSTEM
BPA had 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 devoted to each property tax appeal. The system held tens of thousands
of market and equity comparable property records, including the property tax
rolls for certain counties of Arizona. The software performed 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 was 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
Currently, the Company is reviewing options to invest in new business
opportunities. The Company has over $2,000,000 in marketable securities and
significant tax loss carryforwards at its disposal.
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.
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 sold the property
and tax services group in October 1998. In addition, the Company had taken steps
to further reduce operating expenses by closing nonprofitable locations. The
Company's Arizona and Northern California operations ceased and the process to
sublease the office spaces had commenced.
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.
RESTRUCTURING
During 1998, the Board of Directors continued with the Company's withdrawal from
the real and personal property tax consulting business, including a
restructuring and wind down of the Belt Perry property and tax services group.
During September 1998, the company initiated an early lease termination on its
former San Diego office facilities, and in an effort to reduce its monthly rent
expense, signed a one-year lease for a smaller office space. In addition,
management had begun the process to terminate the Company's 401(k) Plan and
subsidiary corporations. As of September 30, 1998, the Company's operation
relating to its property tax consulting business had ceased.
During October 1998, a former officer of the Company completed an Asset
Purchase Agreement (the "Agreement") to acquire from the Company certain
furniture, equipment and intangibles in exchange for a lump sum purchase price
of $10,000 and the assumption of an existing equipment lease. The Agreement also
transfers ownership in the existing trade receivables in exchange for 50% of all
collections, net of expenses, for a period of one year.
Separate from the Agreement, the former officer assumed the lease on the San
Diego office facilities.
On September 30, 1998 the former officer's resignation took effect, and the
concurrent appointment of a new officer by the Company's Board of Directors took
place.
EMPLOYEES
As of March 30, 1999, the Company had one part-time employee. This employee is
not subject to a collective bargaining agreement.
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ITEM 2. PROPERTIES
The Company's principal executive offices are located in 250 square feet of
office space in San Francisco, 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, as well
as its San Rafael office space. 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
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 1998.
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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 16, 1999, there
were approximately 1,018 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, 1998
Revenues for 1998 were $553,023, a decrease of $1,915,379 or 77.6% as compared
to 1997. 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 close the Company's Arizona, Northern California, and Southern
California operations and cease the Company's operations relating to its
property tax consulting business as of September 30, 1998.
Costs and expenses for 1998 decreased $958,348 or 31.5% as compared to 1997.
This decrease was primarily due to reductions in salaries and wages and rent
expense as facilities and operations closed.
Salaries and wages decreased $1,238,909 or 69.5% primarily due to the effects of
closing locations and discontinuing its property tax consulting business as of
September 30, 1998.
Bad debts expense increased $480,249 or 608% as a result of the Company's
restructuring and wind down, collection and settlement efforts to resolve
delinquent accounts accelerates, and many accounts previously considered
collectible have been written off in full.
Rent expense decreased $108,761 or 35.2% 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, 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 Companys
consolidating office space and renegotiating the leases related to the Phoenix,
Arizona and San Diego and San Rafael, California offices.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities for the year ended December 31, 1998 was
$419,796. Due to a reduction in accounts receivable and closing down operations,
working capital at December 31, 1998 was $2,622,310, a decrease of $268,281 or
9% from 1997.
Net cash provided by investing activities for the year ended December 31, 1998
was $25,200, consisting of proceeds from sales of property and equipment.
Net cash used by financing activities for the year ended December 31, 1998 was
$178,248, consisting of payments on notes payable and capital lease obligations.
Cash decreased by $572,844 from $1,151,616 at the end of 1997 to $578,772 at the
end of 1998. Management believes that its current level of cash and anticipated
cash flow from operations will be adequate to meet its operating needs through
1999.
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
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. Due to business
shutdown, there are no ongoing projects that may be affected by Year 2000. The
Comnpany will not incur any additional cost for Y2K compliance. The Company has
updated its system and the software being used is believed to be Y2K compliant.
The Company does not believe there will be a material impact based on business
associations with vendors or clients.
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, 1999. A summary of the background and
experience of each of these individuals is set forth after the table.
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NAME AGE POSITION
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Robert W. Rembowski 52 Chief Executive Officer, Chief Financial
Officer and Secretary
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Mr. Rembowski has served as Chief Executive Officer, Chief Financial Officer and
as Secretary since October 1998.
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
NUMBER DESCRIPTION
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11.1 Statement Regarding Computation of Earnings Per Share
21.1 Subsidiaries of Ironstone Group, Inc.
27.1 Financial Data Schedule
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(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: April 9, 1999 By: /s/ Robert W. Rembowski
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Robert W. Rembowski
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.
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SIGNATURE TITLE DATE
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/s/ Robert W. Rembowski Chief Executive Officer, April 9, 1999
- ------------------------ Chief Financial Officer and
Robert W. Rembowski Secretary
(Principal Executive Officer
and Principal Financial Officer)
/s/ Edmund H. Shea, Jr. Director April 9, 1999
- ------------------------
Edmund H. Shea, Jr.
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IRONSTONE GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Independent auditors' report................................................ F-2
Consolidated balance sheet at December 31, 1998............................. F-3
Consolidated statements of operations and comprehensive loss for the years
ended December 31, 1998 and 1997............................................ F-4
Consolidated statements of shareholders' equity for the years ended
December 31, 1998 and 1997.................................................. F-5
Consolidated statements of cash flows for the years ended
December 31, 1998 and 1997.................................................. F-6
Notes to consolidated financial statements.................................. F-8
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F-1
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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, 1998, and the related consolidated
statements of operations and comprehensive loss, 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, 1998, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, during 1998 the Company
withdrew from property tax operations.
San Diego, California
March 29, 1999
F-2
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IRONSTONE GROUP, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
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ASSETS:
Current assets:
Cash $ 578,772
Marketable securities available for sale, cost of $886,177 2,303,000
Accounts receivable from former officer 26,870
Prepaid expenses 2,941
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Total current assets 2,911,583
Other assets 1,911
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Total assets $ 2,913,494
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 22,744
Margin loan 157,367
Deferred revenue 102,000
Other current liabilities 7,162
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Total current liabilities 289,273
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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 (19,977,866)
Accumulated other comprehensive income 1,416,823
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Total shareholders' equity 2,624,221
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Total liabilities and shareholders' equity $ 2,913,494
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The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-3
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IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
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1998 1997
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Revenues:
Consulting fees $ 512,688 $ 2,421,849
Interest and other income 40,335 46,553
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Total revenues 553,023 2,468,402
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Costs and expenses:
Salaries and wages, payroll taxes and benefits 543,495 1,782,404
Collection fee expense -- --
Depreciation 36,192 83,648
Amortization 87,563 128,858
Bad debt expense 559,241 78,992
Rent expense 199,815 308,576
Legal and other professional fees 222,260 180,481
Advertising and promotion 2,272 23,935
Office expense 14,296 84,508
Referral and split fees 24,747 79,441
Travel and entertainment 5,919 28,742
Research expense 11,022 75,040
Communications 11,456 34,423
Interest expense 13,548 44,721
Other operating expenses 131,480 106,146
Restructuring charges 218,262 --
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Total costs and expenses 2,081,568 3,039,915
----------- -----------
Loss before income taxes and minority interest (1,528,545) (571,513)
Income tax provision (3,300) (3,250)
Minority interest -- 271
----------- -----------
Net loss $(1,531,845) $ (574,492)
=========== ===========
Net loss per share -- basic and diluted $ (1.03) $ (0.39)
=========== ===========
Average shares outstanding -- basic 1,487,870 1,487,870
Average shares outstanding -- diluted 1,487,870 1,487,870
COMPREHENSIVE LOSS NET OF TAX:
Net loss ($1,531,845) $ (574,492)
Unrealized holding gain (loss) arising
during the year 1,052,800 (135,811)
---------- -----------
Comprehensive (loss) $ (479,045) $ (710,303)
========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 16
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
------------ -------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances,
January 1, 1997 1,487,870 $ 14,879 $ 21,170,385 $ (17,871,529) $ 499,834 $ 3,813,569
Other Comprehensive loss (135,811) (135,811)
Net Loss (574,492) (574,492)
---------- --------- ------------ ------------- ----------- -----------
Balances,
December 31, 1997 1,487,870 14,879 21,170,385 (18,446,021) 364,023 3,103,266
Other Comprehensive income 1,052,800 1,052,800
Net loss (1,531,845) (1,531,845)
Balances,
========== ========= ============ ============= =========== ===========
December 31, 1998 1,487,870 $ 14,879 $ 21,170,385 $ (19,977,866) $ 1,416,823 $ 2,624,221
========== ========= ============ ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-5
<PAGE> 17
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,531,845) $ (574,492)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation 36,192 83,648
Amortization 87,563 128,858
Loss on purchase of minority interest in consolidated subsidiaries -- 1,245
Undistributed minority interest in consolidated subsidiaries -- (271)
Net (gain) loss on disposition of intangibles, property and equipment 73,553 (8,685)
Changes in assets and liabilities net of effects of purchase of minority
interests in consolidated subsidiaries:
Accounts receivable 1,153,289 2,746,605
Other current assets 46,778 60,134
Other assets (1,911) (40,411)
Accounts payable (61,790) (110,503)
Accrued compensation (104,920) (555,118)
Other current liabilities (116,705) (212,248)
----------- -----------
Net cash provided (used) by operating activities (419,796) 1,518,762
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 25,200 16,946
Purchase of property and equipment -- (24,152)
Purchase of minority interests in consolidated subsidiaries -- (101,433)
----------- -----------
Net cash provided (used) by investing activities 25,200 (108,639)
----------- -----------
FINANCING ACTIVITIES:
Payments on line of credit -- (350,000)
Payments on capital lease obligations (28,248) (56,892)
Payments on notes payable (150,000) (381,158)
----------- -----------
Net cash used by financing activities (178,248) (788,050)
----------- -----------
Net increase (decrease) in cash (572,844) 622,073
Cash at beginning of year 1,151,616 529,543
----------- -----------
Cash at end of year $ 578,772 $ 1,151,616
=========== ===========
</TABLE>
(continued)
F-6
<PAGE> 18
IRONSTONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $3,350 $ 51,683
Income taxes 0 54,071
</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> 19
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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 AcadiEnergy, Inc., a Delaware corporation, 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. During 1998 the Company closed its Arizona,
Northern California, and Southern California operations and ceased operations
relating to its property tax consulting business as of September 30, 1998,
which represented substantially all the operations of the Company for 1998 and
1997.
Restructuring
During 1998 the Company's board of directors decided to withdraw from the
property tax consulting business and approved a restructuring plan, which was
developed and implemented by management. The company recorded one time
restructuring charges in the amount of approximately $218,000. Restructuring
charges included current cash requirements for severance cost. As of December
31, 1998, no restructuring accrual balance remains.
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.
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, 1998 is based
on quoted market prices.
Property and Equipment
Property and equipment were stated at cost and depreciated using accelerated
methods over the estimated useful lives of three to seven years.
Long-Lived Assets
Management reviews the Company's long-term assets for possible impairment
whenever events or circumstances indicate the carrying amount of an asset may
not be recoverable.
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> 20
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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 capital 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 1997 amounts have been reclassified to conform to the 1998 presentation.
2. MARKETABLE SECURITIES
All marketable securities are classified as available for sale. The cost and
fair value of marketable securities at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED FAIR
COST GAIN VALUE
---------- ---------- ----------
<S> <C> <C> <C>
Corporate equity securities $ 886,177 $1,416,823 $2,303,000
========== ========== ==========
</TABLE>
All marketable securities are invested in the common stock of one corporation
(Interlinq Software). The Company has entered into a margin loan agreement
("Margin Loan") with Hambrecht & Quist LLC, a major shareholder 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, 1997 through December 31, 1998 ranged between 8.50% and
7.75% per annum (7.25% at December 31, 1998). At December 31, 1998, the Company
owed $157,367 on the Margin Loan.
F-9
<PAGE> 21
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
3. ACCOUNTS RECEIVABLE FROM FORMER OFFICER
Accounts receivable from former officer consists of accounts receivable
transferred to a former officer in exchange for 50% of all collections, net of
expenses for a period of one year. The balance of $26,870 represents the
amount management expects to receive from the former officer. See Note 14.
4. PROPERTY AND EQUIPMENT
The Company sold all remaining property and equipment at September 30, 1998.
Depreciation expense on owned and leased assets was $36,192 and $83,648 for the
years ended December 31, 1998 and 1997, respectively.
5. GOODWILL
The Company wrote off all remaining goodwill associated with the acquisition of
BPC at September 30, 1998. There is no remaining goodwill at December 31, 1998.
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, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Differences between book and tax basis of property $ 18,495
Operating loss carryforwards 28,500,956
-----------
Total deferred income taxes 28,519,451
Less valuation allowance 28,519,451
Deferred income taxes -- net $ 0
============
</TABLE>
F-10
<PAGE> 22
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
The Company's income tax provision of $3,300 (1998) and $3,250 (1997) relates to
annual franchise and minimum taxes charged by the states in which the Company is
incorporated or does business. The primary difference between the income tax
provisions for the years ended December 31, 1998 and 1997 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, 1998, the Company has
net operating loss carryforwards for tax purposes of approximately $80,317,986.
These carryforwards will expire in the years 1999 to 2018.
The Tax Reform Act 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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Federal statutory tax rate (34.0)% (34.0)%
Effect of net operating loss carryforward
and valuation allowance 34.0 % 34.0 %
State income tax, net of Federal benefit .2 % .6 %
-------- ------
Effective income tax rate .2 % .6 %
======== ======
</TABLE>
F-11
<PAGE> 23
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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.
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 11). 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 11). 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. Such amount was paid in 1998.
F-12
<PAGE> 24
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
9. NOTES PAYABLE
There are no notes payable at December 31, 1998
<TABLE>
<S> <C>
Notes payable to former minority shareholders of BPA, were 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 provided 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 ranged from 0% to 7% per
annum and was based on BPA's revenue between 1994 and 1996. The Company made the
final scheduled payments in 1998. $150,000
--------
Total notes payable at December 31, 1997 $150,000
========
</TABLE>
10. 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> 25
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
11. 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 $106,923 and $90,743 for the years
ended December 31, 1998 and 1997, respectively, was $169,452 and $308,576 for
the years ended December 31, 1998 and 1997, respectively.
Scheduled minimum lease payments under non-cancelable operating leases for the
years ending December 31st are as follows:
<TABLE>
<CAPTION>
Lease Sublease Net Lease
Obligations Revenues Obligations
----------- -------- -----------
<S> <C> <C> <C>
1999 $118,254 $(108,864) $ 9,390
2000 28,296 (28,296) 0
-------- --------- --------
Total minimum operating lease payments $146,550 $(137,160) $ 9,390
======== ========= ========
</TABLE>
In addition the Company has obligations on equipment leases which have been sold
to related parties. The related parties are making payments of $8,292 in 1999
and $2,220 in 2000, for which the Company is legally liable in case of
non-payment.
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, 1998, 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, 1998 pending the completion of the appeal process.
F-14
<PAGE> 26
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
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.
12. 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 $0 and $8,920 for
the years ended December 31, 1998 and 1997, respectively. It is management's
intent to terminate the plan in 1999.
13. 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> 27
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
13. STOCK OPTIONS (CONTINUED)
A summary of stock option transactions during 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
SHARES
OPTIONS AVAILABLE WEIGHTED AVERAGE
OUTSTANDING FOR GRANT EXERCISE PRICE
----------- ---------- ----------------
<S> <C> <C> <C>
Balance, January 1, 1997 105,393 233,887 $3.24
Granted 3,200 (3,200) $0.50
Expired (86,903) 86,903 $3.10
-------- -------
Balance, December 31, 1997 21,690 317,590 $3.23
-------- -------
Granted 2,800 (2,800) $1.13
Expired (13,315) 13,315 $4.00
-------- -------
Balance, December 31, 1998 11,175 328,105 $1.71
======== =======
Options exercisable at year-end 7,979 $2.05
========
</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, 1998 would have been increased by $9,814 (.01 per
share) and the Company's net loss for the year ended December 31, 1997 would
have been increased by $9,293 (.01 per share). The fair market value of the
options granted during 1998 is estimated as $521 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield, volatility rate of 69%, 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 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.
14. 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 notes payable to former minority shareholders of BPA
was $1,829 and $10,157 for the years ended December 31, 1998 and 1997,
respectively.
During October 1998, the former officer of the Company completed an Asset
Purchase Agreement (the "Agreement") to acquire from the Company certain
furniture, equipment and intangibles in exchange for a lump sum purchase price
of $10,000 and the assumption of an existing equipment lease. The Agreement also
transferred ownership in the existing trade receivables in exchange for 50% of
all collections, net of expenses, for a period of approximately one year.
Separate from the Agreement, the former officer assumed the lease on the San
Diego office facilities.
F-16
<PAGE> 28
IRONSTONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
15. 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>
Depreciation/amortization period
Asset/Liability Description Amount (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.
16. 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 1998 and 1997 was
1,487,870. The weighted average dilutive common shares for 1998 and 1997 was
1,487,870. Common stock equivalents for 1998 and 1997 were not included in
computing the weighted average dilutive shares because their effects were
anti-dilutive.
17. SUBSEQUENT EVENT
In January and February 1999 the Company purchased 78,000 shares of Flexi
International Software, Inc. The shares were purchased at various prices ranging
from $1.625 to $2.4375 per share. Total cost was $166,345.
***
F-17
<PAGE> 1
EXHIBIT 11.1
IRONSTONE GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE - BASIC AND DILUTED
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income (loss) available to common shareholders $(1,531,845) $ (574,492)
=========== ===========
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 $ (1.03) $ (0.39)
=========== ===========
</TABLE>
<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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 578,772
<SECURITIES> 2,303,000
<RECEIVABLES> 73,107
<ALLOWANCES> 46,237
<INVENTORY> 0
<CURRENT-ASSETS> 2,911,583
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,913,494
<CURRENT-LIABILITIES> 289,273
<BONDS> 0
0
0
<COMMON> 14,879
<OTHER-SE> 2,609,342
<TOTAL-LIABILITY-AND-EQUITY> 2,913,494
<SALES> 512,688
<TOTAL-REVENUES> 553,023
<CGS> 0
<TOTAL-COSTS> 2,081,568
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,548
<INCOME-PRETAX> (1,528,545)
<INCOME-TAX> (3,300)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,531,845)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
