10KSB 1 a19081e10ksb.htm FORM 10KSB e10ksb
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
     
þ   ANNUAL REPORT UNDER SECTION 13 OR 15(d ) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
     
o   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
(State or other jurisdiction of
incorporation or organization) 		  95-2829956
(IRS Employer Identification No.)
539 Bryant Street, San Francisco, California 94107
(Address of principal executive offices, including zip code)
(415) 551-3260
(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 þ No o
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. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes þ No o
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.)                    
The Registrant’s revenues for the fiscal year ended December 31, 2005 were $12.
The approximate aggregate market value of voting stock held by non-affiliates of the Registrant was $785,324 as of December 31, 2005 based on the closing bid price on December 31, 2005. 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.
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 þ No o
As of December 31, 2005, 742,108 shares of Common Stock, $0.01 par value, were outstanding.
Transitional Small Business Disclosure Format: Yes o No þ
 
 

 

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TABLE OF CONTENTS
             
        Page
PART I:        
 
            
  Description of Business     3  
  Description of Property     3  
  Legal Proceedings     3  
  Submission of Matters to a Vote of Security Holders     3  
 
            
PART II:        
 
            
  Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities     4  
  Management’s Discussion and Analysis or Plan of Operations     4  
  Financial Statements     5  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     6  
  Controls and Procedures     6  
  Other Information     6  
 
            
PART III:        
 
            
  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act     7  
  Executive Compensation     8  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     10  
  Certain Relationships and Related Transactions     10  
 
            
PART IV:        
 
            
  Exhibits     11  
  Principal Accountant Fees and Services     11  
 
            
SIGNATURES     12  
 EXHIBIT 21.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2

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PART 1
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
Ironstone Group, Inc, (“Ironstone”) a Delaware corporation, was incorporated in 1972. Since 1986, a majority of Ironstone’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”). In September 2003, Ironstone repurchased all of these shares. Such repurchased shares are currently being held as treasury stock. The Hambrecht 1980 Revocable Trust presently owns over 50% of Ironstone’s outstanding voting shares.
BUSINESS STRATEGY
Currently, the Company is reviewing options and new business opportunities. At December 31, 2005, the Company had $21,060 in marketable securities, $3,629 in cash, an investment in Salon Media Group, Inc. valued at $5,901,000, warrants to purchase Salon Media Group, Inc. common stock valued at $595,647 and tax loss carry-forwards at its disposal.
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.
EMPLOYEES
As of December 31, 2005, the Company had one part-time employee. This employee received no compensation and is not subject to a collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTY
The Company’s principal executive offices are located at 539 Bryant Street, San Francisco, California and its telephone number is (415) 551-3260.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during 2005.

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PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Information regarding the recent trading activity of the Company‘s Common Stock is reported on the OTC Bulletin Board and the Company is not aware of any recent material trading activity in shares of its Common Stock. As of December 31, 2005, there were approximately 800 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 OR PLAN OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
While the Company continues to evaluate business opportunities, its sole source of revenue is from the sale of marketable securities. Management has classified these marketable securities, in accordance with SFAS No. 115, as available for sale. These securities are recorded at fair market value, and any unrealized gains and losses are reported as a separate component of shareholders’ equity. For marketable securities for which there is an other-than-temporary impairment, an impairment loss is recognized as a realized loss.
Ironstone’s primary expenses are generated from maintaining regulatory reporting compliance, such as quarterly review and annual audit of the financial statements, seeking legal counsel when appropriate, and consulting fees.
RESULTS OF OPERATIONS
Year ended December 31, 2005
Revenues for 2005 were $12, an increase of $1 as compared to 2004.
Costs and expenses for 2005 totaled $94,013, a decrease of $122,023 or 56% as compared to 2004. The decrease was primarily due to an increase in state filing fees of $43,235, offset by a decrease in $157,365 impairment loss on marketable securities taken in 2004,and a decrease in legal and professional fees of $6,506.
Year ended December 31, 2004
Revenues for 2004 were $11, a decrease of $121,629 as compared to 2003. The revenue decrease was due to the sale of marketable securities and lower interest and other income and the return on investment of the proceeds in 2003.
Costs and expenses for 2004 totaled $216,036, an increase of $78,638 or 57% as compared to 2003. The increase was primarily due to a $157,365 impairment loss on marketable securities in 2004, offset by a decrease in legal and professional fees of $68,792.

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LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the year ended December 31, 2005 was $71,864. Working capital at December 31, 2005 was $6,406,940, an increase of $4,419,923 from 2004. The increase is primarily due to the valuation of Salon Media Group, Inc. Series C Preferred, at fair value conversion price.
Cash decreased by $3,731 from $7,360 at the end of 2004 to $3,629 at the end of 2005. The decrease is due to the use of available cash for operating expenses. The Company has a line of credit agreement with First Republic Bank which it will use to meet its cash needs over the next 12 months (see Note 5 to Consolidated Financial Statements).
While the Company explores new business opportunities, the primary capital resource of the Company is 843 shares of Series C Preferred Stock of Salon Media Group, Inc. (“Salon”). These shares were converted on December 31, 2003 from Convertible Promissory Notes purchased by the Company and are convertible to common stock at any time. The Series C Preferred Stock is convertible into common stock of Salon at the conversion rate determined by dividing the Series C Preferred Stock per share price of $800 by the Series C Conversion Price of $0.04, or at the rate of one share of Series C Preferred Stock to 20,000 shares of common stock. If converted, the Company’s shares of Series C Preferred Stock represent 16,860,000 shares or 8.7% of Salon’s common stock outstanding as of December 31, 2005. The investment in Salon is valued at the converted common stock value of $0.35 per share, or $5,901,000, at December 31, 2005.
Additionally, in conjunction with making the investment in Salon, the Company received warrants to purchase 1,950,000 shares of common stock in Salon at prices from $0.04182-$0.05256 per share. The warrants are under anti-dilution protection and in February 2004 were revalued downward to a range of $0.04169-$0.05181 in conjunction with the issuance of additional Series C Preferred Stock. The warrants have a weighted average price of $0.0445, are fully exercisable and expire three years from issuance. The warrants were valued at $0.3055 per share, or $595,647, at December 31, 2005.
The investment and warrants with Salon are classified as available for sale and, therefore, a related unrealized gain of $4,517,637 has been included in comprehensive income in 2005.
As of March 11, 2006, Salon’s common stock was trading at $0.27 per share. There can be no assurance that a market will continue to exist for either the Series C Preferred Stock currently owned by the Company or the common stock of Salon should it be converted or the warrants exercised.
The Company may obtain additional equity or working capital through additional 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.
On February 7, 2006, the Company exercised their option to purchase 300,000 shares of Salon as these warrants were going to expire on February 11, 2006. The Company used a cashless exercise option, in which Salon distributed the shares to the Company less the number of shares that would need to have been sold at the market price of the stock on that day to cover the cost of exercising the warrants. The warrants were exercisable at $0.04505918 per share and the stock price at the closing of trading on February 8, 2006 was $0.36, resulting in the Company receiving 262,450 shares from the exercise of the warrant.
Furthermore, on March 7, 2006, the Company exercised their option to purchase an additional 300,000 shares as these warrants were going to expire on March 12, 2006. The Company once again used a cashless exercise option. The warrants were exercisable at $0.04168543 per share and the stock price at the closing of trading on March 7, 2006 was $0.28, resulting in the Company receiving 255,337 shares from the exercise of the warrants.
The Company expects to continue to exercise warrants over the course of the year as they approach expiration date, including an additional 300,000 that expire on March 25, 2006 and another 300,000 that expire on April 10, 2006. The Company may continue to utilize a cashless exercise option, or may decide to pay in full for the warrants, depending upon funds available and the exercise price of the warrants in question.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required to be filed herewith begin on page F-1.

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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
     As of December 31, 2005, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Company’s principal executive and financial officer concluded that as of December 31, 2005 there were material weaknesses in the Company’s disclosure controls and procedures. These items are described in the following paragraph. There were no changes in the Company’s controls and procedures during the fourth quarter ended December 31, 2005.
     The Company does not have an adequate number of independent board members nor therefore an independent audit committee. In addition, the lack of multiple employees results in the Company’s inability to have a sufficient segregation of duties within its accounting and financial activities. These absences constitute material weaknesses in the Company’s corporate governance structure.
Changes in internal controls
     On February 27, 2006, the Company’s Board of Directors accepted the resignation of Mr. Robert Hambrecht as Chief Financial Officer of the Company and approved the appointment of Mr.Quock Fong in his place. The existence of a second executive officer of the Company has resulted in a significant improvement in the Company’s internal controls. The Company has also added a bookkeeper.
ITEM 8B. OTHER INFORMATION
None.

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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS
                 
Name   Age   Director Since
Edmund H. Shea, Jr.
     74       1993  
 
                
William R. Hambrecht
     70       2003  
 
                
Robert H. Hambrecht
     39       2003  
Edmund H. Shea, Jr. has served as director of the Company since October 1993. He is a co-founder of J. F. Shea Co., Inc., a diversified construction, land development and venture capital investment company, and has served as its Executive Vice President and a director since 1954. He holds a B. S. degree from M. I. T.
William R. Hambrecht is the Chairman and Co-Chief Executive Officer of WR Hambrecht + Co which he founded in January 1998. He was co-founder of Hambrecht & Quist in 1968 where he held various executive management positions until he resigned in December 1997. He holds a B.S. from Princeton University.
Robert H. Hambrecht was a founding partner of W.R. Hambrecht + Co., an investment banking firm, founded in January 1998, and is presently a Managing Director. From 1996 through January 1998, Mr. Hambrecht was Vice President of H&Q Venture Partners, a venture capital firm. From 1994 to 1996, Mr. Hambrecht was employed by Unterberg Harris, an investment banking firm. Mr. Hambrecht earned a master’s degree in public administration from Columbia University in 1993. Mr. Hambrecht also serves on the Board of Directors of four privately-held companies and one public company.
EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the Company’s executive officers as of December 31, 2005. A summary of the background and experience of each of these individuals is set forth after the table.
             
Name   Age   Position
Robert H. Hambrecht
    39     Chief Executive Officer, Chief Financial Officer and Secretary
In July 2005, Anna-Marie E. Schweizer resigned as Chief Financial Officer, with Mr. Hambrecht replacing her in this position. The appointment was approved by the Board. On February 27, 2006, the Board appointed Mr. Quock Fong as Chief Financial Officer. Mr. Hambrecht resigned from this position as Chief Financial Officer, while retaining his role as Chief Executive Officer and Secretary.
Code of Ethics
     The Company has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all of the Company’s employees (including its executive officers) and directors. The Company shall provide to any person without charge, upon request, a copy of the Code. Any such request must be made in writing to the Company, c/o Robert H. Hambrecht, 530 Bryant Street, Suite 100, San Francisco, CA 94107.

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ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Each non-employee director of the Company is entitled to receive a fee for each meeting attended in person (plus $500 for each committee meeting attended by committee members on a day other than a Board meeting date). The members of the Board of Directors are also eligible for reimbursement for their expenses incurred in connection with attendance at Board meetings in accordance with Company policy.
Outside directors may also receive stock option grants under the Company’s 1993 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”). Only non-employee directors of the Company or an affiliate of such directors (as defined in the Internal Revenue Code of 1986, as amended from time to time, hereinafter the “Code”) are eligible to receive options under the Directors’ Plan. Options granted under the Directors’ Plan are not intended to qualify as incentive stock options under the Code.
Options under the Directors’ Plan have a ten-year term; however, each option will terminate prior to the expiration date if the optionee’s service as a non-employee director, or, subsequently, as an employee, of the Company terminates. The exercise price of each option under the Directors’ Plan must be equal to the fair market value of the Common Stock on the date of grant. All options issued pursuant to the Directors’ Plan vest at a rate of 1/36 per month for 36 months following the date of the grant of the option, or in the event the grant was delayed pending compliance by the Company with certain securities law requirements, the date from which the grant was delayed.

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COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows that, for the fiscal year ended December 31, 2005, no compensation was awarded or paid to, or earned by, the Company’s Chief Executive Officer or the Company’s Chief Financial Officer.
                                 
NAME AND PRINCIPAL                           OTHER ANNUAL
POSITION   YEAR   SALARY ($)   BONUS   COMPENSATION ($)
 
Robert H. Hambrecht
     2005       —       —       —  
Chief Executive Officer, Chief Financial Officer and Secretary
                                
 
                                
Anna-Marie E. Schweizer
     2005       —       —       —  
Chief Financial Officer (through July, 2005)
                                
STOCK OPTION GRANTS AND EXERCISES
The 1994 Equity Incentive Plan (the “Plan”) provides for the grant of (i) both incentive and non-statutory stock options and (ii) rights to purchase restricted stock, together “Stock Awards”, to the Company’s directors, officers and employees. Directors who are not salaried employees of or consultants to the Company or to any affiliate of the Company are not eligible to participate in the Plan. As of December 31, 2005, options to purchase a total of 6,000 shares were outstanding under the Plan, no shares had been purchased pursuant to the Plan and 331,680 shares remained available for future issuance there under.
The Plan is administered by the Board of Directors of the Company. The Board has the power to construe and interpret the Plan and, subject to the provisions of the Plan, to determine the number of persons to whom and the dates on which Stock Awards will be granted, the number of shares that may be exercised, the type or types of such Stock Awards to be granted, the exercise price of such Stock Award when appropriate and other terms of the Stock Award.
The maximum term of options under the Plan is typically ten years; however, in the event that an optionee’s service to the Company terminates, that optionee’s options will expire 90 days after the optionee’s service to the Company terminates. Option grants under the Plan typically vest over a five-year period at the rate of 1/10 on the date six months after the date of grant and 1/60 per month thereafter. The exercise price of non-statutory options may not be less than 85% of the fair market value of the Common Stock subject to the option on the date of grant; the exercise price of incentive options may not be less than 100% of the fair market value of the Common Stock subject to the option on the date of the grant.
No options or rights to purchase restricted stock were granted to the Company’s executive officer during the fiscal year ended December 31, 2005.

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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the ownership of the Company’s Common Stock as of December 31, 2005 by: (i) each director and nominee for director; (ii) all officers and directors of the Company as a group; and (iii) all those known by the Company to be beneficial owners of more than five percent of its Common Stock.
BENEFICIAL OWNERSHIP (1)
                 
    NUMBER OF SHARES OF   PERCENT
BENEFICIAL OWNER   COMMON STOCK   TOTAL (2)
William R. Hambrecht
     432,604       58.3  
539 Bryant Street
                
San Francisco, CA 94107
                
 
                
Edmund H. Shea, Jr. and related entities
     113,173       15.2  
655 Brea Canyon Road
                
Walnut, CA 91789
                
 
                
All executive officers and directors as a group (2 persons)
     545,777       73.5  
 
(1)   This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G, if any, filed with the Securities and Exchange Commission (the “SEC”). Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, the Company believes that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.
 
(2)   Applicable percentages are based on 742,108 shares outstanding on December 31, 2005 adjusted as required by rules promulgated by the SEC.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Commencing February 11, 2003, the Company executed a series of convertible promissory notes with Salon Media Group that converted to 843 shares of Series C Preferred Stock on December 30, 2003. In April 2003 Salon announced the appointment of Elizabeth Hambrecht as its Chief Financial Officer, Treasurer and Secretary. In October 2003 she was appointed President of Salon Media Group and in February 2004 she was appointed Chief Executive Officer. Ms. Hambrecht is the daughter of William R. Hambrecht and the sister of Robert H. Hambrecht.

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PART IV
ITEM 13. EXHIBITS
     
Exhibit    
Number   Description
21.1
  Subsidiaries of Ironstone Group, Inc.
31.1
  Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
31.2
  Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
32.1
  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows the aggregate amounts of audit fees and audit-related fees that the principal accountant billed in each of the last two fiscal years. There were no tax fees or other fees paid to the accountant in the last two fiscal years.
                 
    2005     2004  
Audit — Related Fees
   $ 31,120     $ 22,850  
 
            
Since the Board of Directors does not have an audit committee, the principal auditor is engaged by the Chief Executive Officer and the Chief Financial Officer on behalf of the Company’s Board of Directors.

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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 29, 2006   By:   /s/ Robert H. Hambrecht
         
 
              Robert H. Hambrecht  
 
                 
 
              Chief Executive Officer  
 
                  
Date: March 29, 2006   By:   /s/ Quock Q. Fong
         
 
              Quock Q. Fong  
 
                 
 
              Chief Financial Officer  
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
         
Signature   Title   Date
 
/s/ Robert H. Hambrecht
  Director, Chief Executive Officer, and Secretary   March 29, 2006
Robert H. Hambrecht
                     (Principal Executive Officer)    
 
        
/s/ Quock Q. Fong
  Chief Financial Officer,   March 29, 2006
         
Quock Q. Fong
                     (Principal Financial Officer)    
 
        
/s/ Edmund H. Shea, Jr.
  Director   March 29, 2006
         
Edmund H. Shea, Jr.
        
 
        
/s/ William R. Hambrecht
  Director   March 29, 2006
         
William R. Hambrecht
        

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Ironstone Group, Inc.
We have audited the accompanying consolidated balance sheet of Ironstone Group, Inc. and Subsidiaries as of December 31, 2005, and the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ironstone Group, Inc. and Subsidiaries as of December 31, 2005, and their results of operations and cash flows for each of the two years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/ J. H. Cohn LLP
San Diego, California
March 14, 2006

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IRONSTONE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005
         
ASSETS:
        
Current assets:
        
Cash
   $ 3,629  
Marketable securities available for sale, at fair value
     21,060  
Salon Media Group, Inc. Series C Preferred, at fair value
     5,901,000  
Warrants to purchase Salon Media Group common stock, at fair value
     595,647  
 
      
 
        
Total assets
   $ 6,521,336  
 
      
 
        
LIABILITIES AND SHAREHOLDERS EQUITY
        
Liabilities:
        
Line of credit borrowings
   $ 88,383  
Accounts payable
     26,013  
 
      
 
        
Total Liabilities
     114,396  
 
      
 
        
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 1,487,644 shares are issued
     14,878  
Additional paid-in capital
     21,170,385  
Accumulated deficit
     (20,071,425 )
Accumulated other comprehensive income
     5,814,977  
 
      
 
     6,928,815  
Less: Treasury Stock 745,536 shares
     (521,875 )
 
      
 
        
Total shareholders’ equity
     6,406,940  
 
      
 
        
Total liabilities and shareholders’ equity
   $ 6,521,336  
 
      
The accompanying notes are an integral part of these consolidated financial statements.

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IRONSTONE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Years Ended December 31, 2005 and 2004
                 
    2005     2004  
Revenues — interest and other income
   $ 12     $ 11  
 
            
Total revenues
     12       11  
 
            
Costs and expenses:
                
Impairment loss on marketable securities
             157,365  
Legal and other professional fees
     50,409       56,915  
State filing fee
     43,235          
Miscellaneous expenses
     369       1,756  
 
            
Total costs and expenses
     94,013       216,036  
 
            
 
                
Loss from operations
     (94,001 )     (216,025 )
 
                
Other income (expense):
                
Interest expense
     (3,713 )     (172 )
 
            
 
                
Net loss
   $ (97,714 )   $ (216,197 )
 
            
 
                
COMPREHENSIVE INCOME, NET OF TAX:
                
Net loss
   $ (97,714 )   $ (216,197 )
Unrealized holding gain arising during the year:
                
Unrealized holding gain arising during the period
     4,517,637       1,290,570  
Reclassification adjustment for impairment loss included in net loss
             157,365  
 
            
 
                
Comprehensive income
   $ 4,419,923     $ 1,231,738  
 
            
 
                
Basic and diluted loss per share:
                
Net loss per share
   $ (0.13 )   $ (0.29 )
 
            
Weighted average shares
     742,108       742,209  
 
            
The accompanying notes are an integral part of these consolidated financial statements.

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IRONSTONE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2005 and 2004
                                                                 
                                    Accumulated        
                    Additional             Other        
    Common Stock     Paid-In     Accumulated     Comprehensive     Treasury Stock        
    Shares     Amount     Capital     Deficit     Income/(Loss)     Shares     Amount     Total  
Balances, January 1, 2004
     1,487,847     $ 14,878     $ 21,170,385     $ (19,757,514 )   $ (150,595 )     745,536     $ (521,875 )   $ 755,279  
 
                                                                
Retirement of stock
     (203 )                                                     —  
Other comprehensive income
                                     1,447,935                       1,447,935  
Net loss
                             (216,197 )                             (216,197 )
 
 
                                                
Balances, December 31, 2004
     1,487,644       14,878       21,170,385       (19,973,711 )     1,297,340       745,536       (521,875 )     1,987,017  
 
Other comprehensive income
                                     4,517,637                       4,517,637  
Net loss
                             (97,714 )                             (97,714 )
 
                                                                
 
                                                
Balances, December 31, 2005
     1,487,644     $ 14,878     $ 21,170,385     $ (20,071,425 )   $ 5,814,977       745,536     $ (521,875 )   $ 6,406,940  
 
                                                
The accompanying notes are an integral part of these consolidated financial statements.

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IRONSTONE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005 and 2004
                 
    2005     2004  
CASH FLOWS FROM OPERATING ACTIVITIES:
                
Net loss
   $ (97,714 )   $ (216,197 )
Adjustments to reconcile net loss to net cash used in operating activities:
                
Impairment loss on marketable securities
     —       157,365  
Changes in operating assets and liabilities:
                
Other assets
     —       578  
Accounts payable
     25,850       (7,963 )
 
            
Net cash used in operating activities
     (71,864 )     (66,217 )
 
            
 
                
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Net proceeds from line of credit
     68,133       20,250  
 
            
Net cash provided from financing activities
     68,133       20,250  
 
            
 
                
Net decrease in cash
     (3,731 )     (45,967 )
 
                
Cash at beginning of year
     7,360       53,327  
 
            
 
                
Cash at end of year
   $ 3,629     $ 7,360  
 
            
 
                
Supplemental disclosure of cash flow information
        
Cash paid during the year for interest
   $ 3,713     $ 172  
 
            
The accompanying notes are an integral part of these condensed consolidated financial statements.

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IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities
Ironstone Group, Inc. and subsidiaries have no operations but are seeking appropriate business combination opportunities.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Ironstone Group, Inc. and its subsidiaries, AcadiEnergy, Inc., Belt Perry Associates, Inc., DeMoss Corporation, and TaxNet, Inc. (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.
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 and investments at December 31, 2005 is based on quoted market prices. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. For marketable securities for which there is an other-than-temporary impairment, an impairment loss is recognized as a realized loss.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
Income Taxes
The Company and its wholly owned subsidiaries file a consolidated federal income tax return. Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred income taxes. Deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Deferred income taxes are also recognized for net operating loss carryforwards that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Earnings <Loss> per share
Basic earnings (loss) per share (“EPS”) excludes dilution 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 potentially dilutive securities, except where inclusion of potentially dilutive securities would have an anti-dilutive effect, using only the average stock price during the period in the computation.
Options to purchase 6,000 shares of the Company’s common stock were outstanding during 2005, but were not included in the computation of diluted EPS as their effect would be anti-dilutive. During 2004, 7,600 options were outstanding, but were not included in the computation of diluted EPS.

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IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
2. INVESTMENT IN SALON MEDIA GROUP, INC.
The Company owns 843 shares of Series C Preferred Stock of Salon Media Group, Inc. (“Salon”). These shares resulted from the December 31, 2003 conversion of Convertible Promissory Notes purchased by the Company and are convertible to common stock at any time. The Series C Preferred Stock is convertible into common stock of Salon at the conversion rate determined by dividing the Series C Preferred Stock per share price of $800 by the Series C Conversion Price of $0.04, or at the rate of one share of Series C Preferred Stock to 20,000 shares of common stock. If converted, the Company’s shares of Series C Preferred Stock represent 16,860,000 common shares of Salon or 8.7% of Salon’s common stock outstanding as of December 31, 2005. The investment in Salon is valued at the converted common stock value of $0.35 per share, or $5,901,000 at December 31, 2005.
Additionally, in conjunction with making the investment in Salon, the Company received 1,950,000 warrants to purchase common stock in Salon at prices ranging from $0.04182 — $0.05256 per share. The warrants are under anti-dilution protection and in February 2004 were revalued downward to a range of $0.01469 — $0.05181 in conjunction with the issuance of Series C Preferred Stock. The warrants have a weighted average price of approximately $0.04, are fully exercisable and expire three years from issuance. The warrants were valued at approximately $0.30 per share, or $595,647, at December 31, 2005.
On February 7, 2006, the Company exercised its option to purchase 300,000 shares of Salon as these warrants were going to expire on February 11, 2006. The Company used a cashless exercise option, in which Salon distributed the shares to the Company less the number of shares that would need to have been sold at the market price of the stock on that day to cover the cost of exercising the warrants. The warrants were exercisable at $0.04505918 per share and the stock price at the closing of trading on February 8, 2006 was $0.36, resulting in the Company receiving 262,450 shares from the exercise of the warrant.
Furthermore, on March 7, 2006, the Company exercised its option to purchase an additional 300,000 shares as these warrants were going to expire on March 12, 2006. The Company once again used a cashless exercise option. The warrants were exercisable at $0.04168543 per share and the stock price at the closing of trading on March 7, 2006 was $0.28, resulting in the Company receiving 255,337 shares from the exercise of the warrants.
The Company expects to continue to exercise warrants over the course of the year as they approach expiration date, including an additional 300,000 that expire on March 25, 2006 and another 300,000 that expire on April 10, 2006. The Company may continue to utilize a cashless exercise option, or may decide to pay in full for the warrants, depending upon funds available and the exercise price of the warrants in question.
4. RELATED PARTY TRANSACTIONS
The President and Chief Executive Officer of Salon is the daughter of a member of the Board of Directors and the sister of the Chief Executive Officer.
5. LINE OF CREDIT ARRANGEMENT
With Board approval, on September 23, 2004, the Company entered into a line of credit arrangement with First Republic Bank (the “lender”). The line of credit has a borrowing limit of $100,000 with interest based upon the lender’s prime rate. Interest is payable monthly and was 7.25% at December 31, 2005. The line automatically renewed on September 23, 2005, and will renew upon review by the lender on an annual basis. The line is guaranteed by Robert H. Hambrecht, Chief Executive Officer, and William R. Hambrecht, Board Director. At December 31, 2005, the outstanding balance under the line was $88,383. On February 9, 2006, the First Republic Bank line of credit borrowing limit was expanded from $100,000 to $150,000 and the due date was extended to February 2007.

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IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
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, 2005 and 2004 are as follows:
                 
    2005     2004  
Deferred tax assets:
                
Operating loss carryforward
   $ 9,257,000     $ 9,505,000  
Impairment of marketable securities
             67,000  
Less valuation allowance
     (6,941,000 )     (9,008,000 )
 
            
Deferred tax assets — net
     2,316,000       564,000  
Deferred tax liability — unrealized gain on marketable securities
     (2,316,000 )     (564,000 )
 
            
Deferred income taxes — net
   $ —     $ —  
 
            
The valuation allowance decreased by approximately $2,067,000 from 2004 to 2005 due to the expiration of net operating loss carryforwards and the increase in the deferred tax liability related to unrealized gains on marketable securities. As of December 31, 2005, the Company has Federal net operating loss carryforwards for tax purposes of approximately $27,131,000 and California net operating loss carryforwards of approximately $553,000. These carryforwards will expire in 2006 to 2025.
Section 382 of the Internal Revenue Code of 1986, as amended, imposes an annual limitation on the availability of net operating loss carryforwards to offset taxable income when an ownership change occurs. Due to the redemption of shares of common stock in 2003, the Company underwent such an “ownership change.” Therefore, the Company’s use of losses incurred through the date of the “ownership change” will be limited to approximately $48,000 per year.
In the opinion of management, based on the Section 382 limitation discussed above, and the remaining carryover period, the realization of such carryforwards is not likely and, accordingly, a valuation allowance has been recorded to offset such amount in its entirety.
7. SHAREHOLDERS’ EQUITY
Treasury Stock — On September 15, 2003, the Board of Directors authorized the Company to purchase 745,536 shares of Company common stock at $0.70 per share for an aggregate purchase price of $521,875. The repurchase represented 50.11% of the issued and outstanding shares of the Company. As of December 31, 2005, the treasury shares are held by the Company.
Preferred Stock — The Company is authorized to issue up to five million shares of preferred stock without further shareholder approval; the rights, preferences and privileges of which would be determined at the time of issuance. No shares have ever been issued.
Stock Option Plans — 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 there under and the Board of Directors determined that no further grants would be made under this plan. As of December 31, 2005 and 2004, 331,680 shares were available for grant under the Plans. 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 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.

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IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
SHAREHOLDERS’ EQUITY (continued)
Stock Option Plans (continued)
During 2005 and 2004, no options were granted, exercised or forfeited.
A summary of the status of the options issued under the Plan for the two years ended December 31, 2005 and 2004 is presented below:
                 
            Average
            Price per
    Shares   Share
Outstanding at January 1, 2004
     11,175     $ 1.76  
 
                
Expired
     (3,575 )   $ 3.55  
 
                
 
                
Outstanding at December 31, 2004
     7,600     $ .85  
 
                
Expired
     (1,600 )   $ 1.06  
 
                
 
                
Outstanding at December 31, 2005
     6,000     $ .88  
 
                
The following table summarizes information about fixed price stock options outstanding at December 31, 2005:
                         
    Options Outstanding and Exercisable
    Number           Weighted-
      Range of   Outstanding   Remaining   Average
Exercise Prices   12/31/05   Contractual Life   Exercise Price
$0.50
     3,200     1 year   $ 0.50  
$1.31
     2,800     2 year   $ 1.31  
 
                        
 
                        
$0.50 - $1.31
     6,000             $ 0.88  
 
                        

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