10-Q 1 a10qsb-301final.txt 10Q MARCH 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 Commission file number 0-29403 RHINO ENTERPRISES GROUP, INC., a Nevada corporation 2925 LBJ Freeway, Suite 188, Dallas, Texas 75234 (972) 241-2669 IRS Tax ID #: 88-0333844 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of May 10, 2001, there were 1,705,721 shares of common stock, $0.001 par value, of the registrant issued and outstanding. Transitional Small Business Disclosure Format (check one) YES [ ] NO [X] -1- PART I: FINANCIAL INFORMATION Item 1. Financial Statements: The consolidated financial statements for the quarter ended March 31, 2001 for Rhino Enterprises Group, Inc. ("Rhino" or the "Company") follow. RHINO ENTERPRISES GROUP, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND DECEMBER 31, 2000 ASSETS 3-31-2001 12-31-2000 ---------------------- ------------ ----------- Current Assets Cash $ 10,870 $ 7,920 Accounts receivable 67,709 64,436 Inventory 4,000 4,000 ------------ ----------- Total Current Assets 82,579 76,356 ------------ ----------- Property, plant and equipment -- net 212,370 222,797 Investment in e-Data Alliance Corp. 129,387 132,443 Intangible assets -- net 174,466 194,050 Goodwill -- net 92,342 94,072 Deposits 14,621 14,621 Deferred marketing expense 800,000 800,000 Advances to operating and start-up entities 518,968 1,485,999 ------------ ----------- Total Non-current Assets 1,942,154 2,943,982 ------------ ----------- Total Assets $ 2,024,733 $ 3,020,338 ============ =========== CURRENT LIABILITIES ----------------------------- Accounts payable $ 655,685 $ 577,079 Accrued expenses 696,668 568,917 Notes payable 4,092,695 3,939,590 ------------ ----------- Total Current Liabilities 5,445,048 5,085,586 Deferred marketing obligation 800,000 800,000 ------------ ----------- Total Liabilities 6,245,048 5,885,586 ------------ ----------- STOCKHOLDERS' DEFICIT ------------------------------ Common stock 1,706 1,706 Preferred stock 334 334 Paid in capital 2,050,405 2,050,405 Accumulated deficit (6,201,934) (4,846,867) Non-controlling interest 1,864 1,864 Treasury stock, at cost (72,690) (72,690) ------------ ----------- Total Stockholders' Deficit (4,220,315) (2,865,248) ------------ ----------- Total Liabilities and Stockholders' Deficit $ 2,024,733 $ 3,020,338 ============ =========== See Notes to Consolidated Financial Statements. -2- RHINO ENTERPRISES GROUP, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 3-31-2001 3-31-2000 --------- --------- REVENUES $ 292,331 $ 7,523 COST OF REVENUES 182,024 2,500 -------- -------- GROSS PROFIT 110,307 5,023 -------- -------- GENERAL AND ADMINISTRATIVE EXPENSES Operating costs 86,489 165,735 Personnel costs 195,753 253,258 Legal and professional fees 93,118 66,671 Write off uncollectible advances 986,300 0 Depreciation and amortization 22,854 24,656 --------- -------- Total General and Administrative Expenses 1,384,514 510,320 --------- -------- LOSS FROM OPERATIONS (1,274,207) (505,297) --------- -------- OTHER INCOME (EXPENSE) Interest income 6,945 38,797 Interest expense (74,289) (70,238) Other 4,156 2,218 Equity in loss of e-Data Alliance Corp. (3,056) (29,345) -------- -------- Total Other Income (Expense) (66,244) (58,568) -------- -------- LOSS BEFORE INCOME TAX (1,340,451) (563,865) PROVISION FOR INCOME TAX 0 0 --------- -------- NET LOSS $(1,340,451) $(563,865) ========= ======== LOSS PER SHARE $ (0.79) $ (0.36) ========= ======== See Notes to Consolidated Financial Statements. -3- RHINO ENTERPRISES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 3-31-2001 3-31-2000 ---------- ---------- CASH FROM OPERATING ACTIVITIES Net Loss $(1,340,451) $(563,865) Add (deduct) non cash items affecting net loss - Depreciation and amortization 30,880 24,656 Interest accrued but not paid 73,917 84,579 Interest on advances accrued not collected (6,929) (21 697) Write off unrecoverable advances 986,300 0 Equity in losses of investee 3,056 29,345 Increase in accounts receivable (3,273) 0 Increase in accounts payable 78,606 54 206 Increase in accrued expenses 39,218 5,661 --------- --------- Net Cash Used By Operations (138,676) (387,115) --------- --------- CASH USED BY INVESTING ACTIVITIES Purchase equipment 0 (19,605) Proceeds from sale of equipment 861 37,869 Advances to operating and start-up entities (12,340) (611,633) Collect advances from operating and start-up entities 0 455,232 --------- --------- Net Cash Used by Investing Activities (11,479) (138,137) --------- --------- CASH PROVIDED BY FINANCING ACTIVITIES Borrowings 153,105 654,338 Repayments 0 (364,524) Purchase treasury stock 0 (72 690) --------- --------- Net Cash Provided by Financing Activities 153,105 217,124 --------- --------- NET CHANGE IN CASH 2,950 (308,128) CASH, beginning of quarter 7,920 390,071 --------- --------- CASH, end of quarter $ 10,870 $ 81,943 ========= ========= See Notes to Consolidated Financial Statements. RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - NATURE OF OPERATIONS Rhino Enterprises Group, Inc. has two operating segments business incubation and eye care. Our business incubation activities include providing management, consulting services, and financing to assist both start-up and emerging or developing entities as well as established operating enterprises to avail themselves of various growth opportunities. Our eye care segment is positioning itself to be a leading provider of affordable laser eye surgical procedures. In addition, we intend to develop our web site - www.Eyesite.com - to provide information, products and services related to vision correction and eye care. See further discussion in Note N- Operating Segments. We are highly leveraged and have accumulated a considerable deficit from operations. Our ability to repay our indebtedness and related interest charges is dependent on our ability to obtain additional working capital. See Note K for further discussion of our liquidity and capital resources. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of Rhino Enterprises Group, Inc. and our wholly-owned subsidiary Executive Assistance, Inc., our 90%-owned subsidiary - Eyesite.com, Inc, and our 68% - owned subsidiary, Framing Systems, Inc. Significant inter-company transactions and balances have been eliminated in consolidation. Reclassifications Certain reclassifications have been made to the 2000 amounts to conform to the 2001 presentation. -4- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Accounting Estimates The preparation of consolidated financial statements requires us to make estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Actual results could differ from those estimates. Allowance for Uncollectible Accounts Receivable We believe that an allowance for uncollectible accounts receivable was not necessary at March 31, 2001. Inventory Inventory consists of medical supplies and is recorded at cost. Property, Plant and Equipment Fixed assets are recorded at cost and depreciated over their estimated useful lives, which range from three to ten years, using the straight-line method. Investment in e-Data Alliance Corp. We account for our 50%-owned investee, e-Data Alliance Corp. ("e- Data") using the equity method of accounting. We record our share of e-Data's income or loss and either increase or decrease our investment in e-Data accordingly. Intangible Assets Intangible assets consist of certain proprietary knowledge and an internet web-site domain totaling $287,439 and are being amortized over 3 years. -5- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Goodwill Goodwill represents the excess purchase price over the fair market value of net assets acquired of Executive Assistance, Inc. and Framing Systems, Inc. totaling $103,769. Goodwill is being amortized on a straight-line basis over 15 years. Accumulated amortization of intangibles and goodwill was $124,635 and $103,322 as of March 31, 2001 and December 31, 2000, respectively. Amortization expense of intangibles and goodwill is shown below for the quarters ended March 31, 2001 and 2000 - 2001 2000 -------- -------- Intangibles $19,583 $20,000 Goodwill 1,730 1,678 Impairment of Long-Lived Assets We account for the impairment of long-lived assets in accordance with SFAS No. 121 which requires that such assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. We have recorded an impairment charge of $986,300 related to unrecoverable advances to start up and operating entities as of the date of these consolidated financial statements. (See Note D below). Income Tax Accounting Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes. Deferred tax assets or liabilities are recognized for temporary differences between the tax basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent future tax consequences of those temporary differences. RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Revenue Recognition We utilize informal agreements to provide management, consulting services and other financial assistance to operating companies and start-up entities. Typical agreements call for either a flat monthly fee or hourly rates plus reimbursement of out-of- pocket expenses. Revenues from such agreements are recognized as services are provided. Our web-hosting services are billed on a monthly basis and revenues recognized accordingly; while web site design revenues are recognized as the services are performed. Lasik surgeries fees are recorded when procedures are performed. In 1999, the staff of the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), which presents some of the staff's interpretations of the application of generally accepted accounting principles to revenue recognition. We adopted SAB 101 during 2000 and believe that the accompanying consolidated financial statements comply with the provisions of SAB 101. Comprehensive Income (SFAS No. 130) We have no components of "other comprehensive income". Advertising We expense advertising ($19,650 and $64,858 in the quarters ended March 31, 2001 and 2000, respectively) as it is incurred. Loss Per Share Loss per share was computed using the weighted monthly average number of common shares outstanding during the periods, and the anti-dilutive effect of stock options discussed in Note M below was excluded. -5- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Stock-based Compensation We have elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees in accounting for our employee stock options. Under APB No. 25, if the exercise price of an employee's stock options equals or exceeds the market price of the underlying stock on the date of grant and certain other plan conditions are met, no compensation expense is recognized. See Note O regarding pro forma net loss per common share information as required by the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation. We account for stock-based awards issued to non-employees in accordance with the fair value method of SFAS No.123 and Emerging Issues Task Force Issue No. 96-18. Consequently, we measure the cost of such awards based on the estimated fair market value of the stock awards using the Black-Scholes option-pricing model. NOTE C - INVESTMENT IN e-DATA ALLIANCE CORP. On December 17, 1999, we acquired (for $200,000 cash) 50% of the outstanding shares of e-Data Alliance Corp. ("e-Data"), a Texas corporation, which provides web hosting, off-site data storage, and web site design and data base services. The data servers operated by e-Data are located in premium telecommunications facilities in Dallas. Un-audited condensed financial information of e-Data for the quarters ended March 31, 2001 and 2000 follows: -6- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C - INVESTMENT IN e-DATA ALLIANCE CORP. (continued) Balance Sheets 3-31-2001 3-31-2000 --------------------------------- --------- --------- Cash $ 10,106 $ 79,420 Receivables 8,281 21,814 Other current assets 9,000 9,000 --------- --------- Total Current Assets 27,387 110,234 Property, plant and equipment, net 41,387 57,040 --------- --------- Total Assets $ 68,774 $ 167,274 ========= ========= Current Liabilities $ 0 $ 14,742 Stockholders' Equity 68,774 152,532 -------- -------- Total Liabilities and Stockholder's Equity $ 68,774 $ 167,274 ========= ========= Statements of Operations ------------------------------------- Revenues $ 8,392 $ 24,490 Operating Expenses 14,504 76,586 --------- --------- Net Loss $ (6,112) $ (52,096) ========= ========= -7- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C INVESTMENT IN e-DATA ALLIANCE CORP., continued The acquisition agreement with e-DATA provides, among other things, that we place contracts with various media marketing entities to purchase $800,000 of advertising. Due to current cash constraints and the uncertainty of obtaining additional resources through borrowings and/or sale of equity securities, we may not be able to fulfill our part of the acquisition agreement regarding the advertising. If we were not be able to honor that commitment, we would re- negotiate the acquisition agreement. NOTE D- ADVANCES TO OPERATING AND START-UP ENTITIES As a vital part of our strategic role as a business incubator, we advance funds to established operating entities and start-up or emerging enterprises under the terms of a financing arrangement which typically provides for recoupment in one of three forms - (1) Our primary preference is to convert all or a significant portion of the outstanding advances into an equity position in lieu of receiving cash. (2) Cash representing the return of all advances plus an amount for the time value of money. The repayment of any advances usually is scheduled for a period of three to five years in the future. (3) Repayment of any advances is accelerated if the entity obtains cash infusions from public sources. Subsequent to the end of the first quarter and prior to the filing of this Form 10-QSB, certain information came to our attention involving three of the entities to which we had advanced funds that called into question the ultimate recoupment of our investment. Our assessment of these new circumstances caused us to conclude that it was more likely than not that we would not recoup our advances and consequently we have written them off. -8- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE D ADVANCES TO OPERATING AND START-UP ENTITIES, continued The following table summarizes outstanding advances: 3-31-2001 12-31-2000 --------- ---------- Advances to operating enterprises - Energy Systems Solutions, Inc. $ 0 $ 329,691 Teman Electrical Contractors, Inc. 0 318,766 Memorabilia and Antiquities, Inc. 29,290 19,793 Sarwin Family, LLC 140,236 138,164 R and R Foods, Inc. 6,090 6,000 Eyemakers, Inc. 184,632 182,211 --------- --------- 360,248 994,625 --------- --------- Advances to start-up entities - Emerging Pharmacy Solutions, Inc. 0 335,000 Legend Security, Inc. 16,372 16,130 Target Marketing International, Inc. 48,941 48,218 Historic Inns of America, Inc. 3,449 3,398 Canton Auction House, Inc. 39,208 38,628 Swan River Corporation 50,750 50,000 --------- --------- 158,720 491,374 --------- --------- Total Advances $ 518,968 $1,485,999 ======== ========= Advances are generally due in periods ranging from 3 to 5 years, bear interest at 6% and are unsecured. The totals shown above includes approximately $60,000 of accrued interest. Our policy is to require entities to which we advance funds to sign a financing agreement(described above)thus protecting our investment. -9- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE D ADVANCES TO OPERATING AND START-UP ENTITIES, continued As part of our ongoing business strategy, we continue to seek investment opportunities which complement our existing portfolio. Operating decisions for the various entities are made by the managers of those business entities. Our Board of Directors makes investment decisions and all other capital resource allocations. The boards of each enterprise to which we advance funds make similar decisions for their entities. NOTE E - STOCKHOLDERS' DEFICIT Capital Structure We are authorized to issue 25,000,000 shares of common stock with a par value of $0.001 per share. At March 31, 2001, there were 1,705,721 shares outstanding. Our subsidiary, Eyesite.com, Inc. is authorized to issue 5,000,000 shares of convertible, cumulative preferred stock, $0.002 par value, of which 1,000,000 shares have been designated as 14% Cumulative Convertible Preferred Stock, Series A by Eyesite.com, Inc.'s Certificate of Designation. The Series A preferred shares are convertible at anytime six months after issuance into one share of Eyesite.com, Inc.'s common stock, including all accrued and unpaid dividends. The conversion price is $2.50 per share. Further, at Eyesite.com, Inc.'s option, the Series A preferred shares are convertible at any time after six months from issuance, upon 30 days notice, in whole or part, at $2.50 per share. Finally, if the "ask" price of Eyesite.com, Inc.'s common stock as quoted on the OTC Bulletin Board or other exchange ever meets or exceeds $3.25 per share for ten consecutive trading days, then each outstanding share of Series A preferred stock is mandatorily convertible into one share of Eyesite.com, Inc.'s common stock, including all accrued and unpaid dividends at $2.50 per share. There were no transactions involving our capital structure during the quarter ended March 31, 2001. -10- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F- NOTES PAYABLE 3-31-2001 12-31-2000 --------- ---------- Note payable to Digital Information & Virtual Access, Inc., 6% interest, unsecured. Note is due on demand $1,029,888 $1,029,888 Notes payable to Southern Leasing, Inc., 8% interest, unsecured, due on demand 136,480 136,480 Notes payable to Net.Return, Inc. 10% interest, unsecured. Notes are due during 2001 2,507,000 2,507,000 Note payable to Hart-Prince Group, Inc., 8% interest, unsecured, due on demand 25,000 25,000 Notes payable to Southern Leasing, Inc., interest ranging from 8% to 10%, due during 2001 163,200 163,200 Note payable to The Strateia Group, Inc., interest at 10%, unsecured and due on demand 80,962 78,022 Note payable to Media Star Productions, Inc., interest at 10%, unsecured and due on demand 132,165 0 Other 18,000 0 --------- --------- Total Indebtedness $4,092,695 $3,939,590 ========= ========= -11- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G-- LOSS PER SHARE The following table summarizes the amounts used to calculate the loss per share as reported in the accompanying consolidated statements of operations. For the Quarters Ended March 31 ---------------------------------- 2001 2000 ---------- --------- Net Loss $1,340,451 $ 563,865 Add - deemed preferred stock dividend 14,616 0 --------- --------- Loss applicable to common stockholders $1,355,067 $ 563,865 ========= ========= Weighted average number of shares outstanding 1,705,721 1,566,292 ========= ========= Loss per Share $(0.79) $(0.36) ========= ========= NOTE H - LEASE COMMITMENTS We operate in sub-leased facilities under the terms of a month-to-month rental agreement. The primary tenant is one of our shareholders. Rent expense was $19,662 for the quarter ended March 31, 2001, and $21,568 for the quarter ended March 31, 2000. We also agreed to reimburse our landlord for overhead expenses such as telephone, utilities, etc. based on the square-footage occupied. Our arrangement calls for monthly billings. Management believes that the allocation method used for overhead reimbursements is reasonable. -12- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE H - LEASE COMMITMENTS, continued Our Dallas Eyesite Laser Center, which opened July 1, 2000, operates in facilities leased from an unrelated third party. Rent expense was $15,061 for the quarter ended March 31, 2001. The lease term is three years. In connection with the opening of our Dallas Eyesite Laser Center, we entered into an operating lease agreement for the surgical laser device which performs the eye surgery. The terms of the lease provide for payments of $225 per procedure with a base minimum of 70 procedures per month for the first year ($15,750 per month). The base minimum number of procedures per month for the second and third years are negotiable. The amounts shown below represent our minimum lease obligations through the terms of our existing leases. FUTURE OBLIGATIONS ----------- December 31, 2001 $350,552 December 31, 2002 683,698 December 31, 2003 456,999 NOTE I - INCOME TAX We have tax net operating loss carry-forwards of approximately $3,700,000 which expire, if not used, starting in 2010. Deferred tax assets of approximately $1,258,000 have been fully allowed for, since we believe that it is not "more likely than not" that these tax benefits will be realized. Consolidated tax returns are not filed. Each entity files separately. The 2000 tax returns are under extension. -13- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE J - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at March 31, 2001 and December 31, 2000 consisted of the following - 3-31-2001 12-31-2000 --------- ---------- Equipment $ 132,540 $133,549 Furniture and fixtures 63,871 63,871 Automobiles 0 0 Leasehold improvements 54,082 54,082 --------- -------- 250,493 251,502 Less - accumulated depreciation (38,123) (28,705) --------- -------- Net property, plant and equipment $ 212,370 $222,797 ========= ======== Depreciation expense (included in general and administrative expenses) was $9,418 and $2,978 for the quarters ended March 31, 2001 and 2000, respectively. In 2001 $8,026 of depreciation was included in "cost of revenues". NOTE K - LIQUIDITY AND CAPITAL RESOURCES Since restarting operations in 1999, we have incurred losses and accumulated a deficit of approximately $6,158,600. In addition, we have approximately $5,500,000 of current liabilities against approximately $83,000 of current assets. -14- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE K LIQUIDITY AND CAPITAL RESOURCES, continued We have been able to obtain long term capital resources through private placement offerings of our common and preferred stock, and to arrange for short term liquidity by issuing notes payable. However, there can be no assurance that we may not continue to experience liquidity problems or be successful in obtaining sufficient working capital on a timely basis in the future. We anticipate that we will have to continue to sell common and/or preferred stock and borrow additional funds to provide sufficient working capital to fund operations during 2001. NOTE L -- RELATED PARTY TRANSACTIONS The following summarizes the transactions with related parties during the quarter ended March 31, 2001 - Memorabilia and Antiquities, Inc. ("M&A") is a corporation owned by our chief executive officer, who owns 11.6% of our outstanding common stock. M&A owed us $19,793 at January 1, 2001 for advances made to them during prior years. During the quarter, M&A received additional advances of $9,497 leaving an outstanding balance due us of $29,290. Media Star Productions, Inc. ("MEDIA") is an entity whose CEO is also the CEO of The Strateia Group, Inc., which owns 6.3% of our outstanding common stock. During the fourth quarter of 2000, MEDIA paid us $110,000 (income in advance) for certain information technology services which will be recognized into our income at the rate of $8,000 per month beginning November, 2000. At January 1, 2001, we had a liability of $139,586 to MEDIA, consisting of unearned income of $94,000 and the obligation to reimburse MEDIA for funding certain expenditures. During the quarter ended March 31, 2000, MEDIA advanced an additional $132,165 for working capital, and we recognized $24,000 of the unearned income, leaving a liability of $247,751. -15- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE L - RELATED PARTY TRANSACTIONS, continued The Strateia Group, Inc. ("Strateia") is one of our shareholders with a 6.3% ownership position. As mentioned in Note H - Lease Commitments, we sub-lease office facilities from them. At January 1, 2001, we had an outstanding balance of $102,750 due to Strateia which consists of $78,022 in a note payable with the remainder in trade payables. During the quarter ended March 31, 2001, Strateia advanced us an additional $37,000 leaving a balance owed to Strateia of $139,750. Digital Information and Virtual Access, Inc. ("DIVA") is an entity whose CEO is also the CEO of The Strateia Group, Inc. mentioned above. At January 1, 2001, we had an obligation to DIVA of $1,085,486, which included accrued interest of $55,598. The only activity during the quarter ended March 31, 2001, was the accrual of $15,448 additional interest expense resulting in a balance owed of $1,100,934 at March 31, 2001. NOTE M -- STOCK OPTIONS The following table summarizes activity related to our outstanding stock options: No. of Options -------------- Balance at December 31, 1999 952,500 Granted 175,000 Exercised ( 89,495) Expired (373,332) -------------- Balance at December 31, 2000 664,673 Granted 0 Exercised 0 Expired 0 -------------- Balance at March 31, 2001 664,673 ============== -16- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE M - STOCK OPTIONS, continued At March 31, 2001, exercisable options outstanding are as follows: Range of Exercise Prices Number Exercisable ------------------------ ------------------ Granted at $0.25 per share 129,517 Granted at $0.50 per share 175,000 ------- 304,517 ------- The terms of options to purchase shares of our common stock are summarized below - Option Price -------------------- Weighted Average Number Contractual Weighted Range of Exercise Prices Granted Life Average Total ------------------------ --------- ----------- ---------- ------- Granted at market value $0.50 489,673 5.0 years $0.25 $122,418 Granted at market value $0.25 175,000 5.0 years $0.50 87,500 ------- ----- ------- 664,673 $0.32 $209,918 ====== ==== ====== Options granted during 1999 had an exercise price equal to the market value of the underlying common stock. Options granted during 2000 had an exercise price less than the fair market of the underlying common stock. Had compensation cost for our stock options been determined in accordance with SFAS No. 123, our net loss and loss per share would have been adjusted to the pro forma amounts indicated below. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. -17- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE M - STOCK OPTIONS, continued Quarter Ended March 31 ---------------------------------- 2001 2000 ---------- --------- Net loss reported, adjusted for deemed dividend $(1,355,067) $ (563,865) Pro forma amount assuming SFAS No. 123 $(1,359,855) $ (566,272) Loss per common share as reported $ (0.79) $ (0.36) Pro forma loss per share assuming SFAS No. 123 $ (0.80) $ (0.36) The fair value of options granted to employees and non-employees was estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for grants in 1999 and 2000 - dividend yield of 0%, volatility of 0%, risk-free interest rate estimated as 6%; estimated life of 5 years. The estimated fair value of options granted to employees in 1999 was $0.06 per share. The estimated fair value of the options granted during 2000 to employees was $0.875 per share, while the estimated fair value of options granted to non- employees was $0.50 per share. The model is based on historical stock prices and volatility, which, due to low volume of transactions, may not be representative of future price variances. -18- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - OPERATING SEGMENT INFORMATION We organize and manage our business in two operating segments - business incubation and eye care services. The business incubation segment includes the parent company, Rhino, its subsidiaries Executive Assistance, Inc. and Framing Systems, Inc., and its equity method investee, e-Data Alliance Corp. This segment provides various forms of assistance (in the form of management, consulting services, and financing) to assist start-up enterprises as well as established operating companies to position themselves for growth opportunities. Segment revenues consist of fees, overhead reimbursements, interest income on funds advanced in the form of short term notes, earnings of subsidiaries and equity method investees. Our eye care services segment represents the activities of our 90%-owned subsidiary Eyesite.Com, Inc. All operations, at present, are located within the United States. Revenues arise from sales primarily to unrelated third parties. The accounting policies followed in presenting the segment information are the same as those described in the summary of significant accounting policies included in our consolidated financial statements. A summary, by segment, of our significant assets, liabilities, revenues and expenses is presented below for the quarters ended March 31, 2001, and 2000. -19- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - OPERATING SEGMENT INFORMATION, continued
Asset Data March 31, 2001 Incubator Eye Care Eliminations Consolidated ============================= ------------ ------------ -------------- -------------- Current Assets $ 766,869 $ 64,190 $ (748,480) $ 82,579 Advances 334,336 184,632 0 518,968 Investment in equity method investees 129,387 0 0 129,387 Other long-lived assets 1,004,165 299,634 (10,000) 1,293,799 ------------ ------------ -------------- -------------- Total Assets $ 2,234,757 $ 548,456 $ (758,480) $ 2,024,733 ============ ============ ============== ============== Profit and Loss Information Three Months Ended March 31, 2001 =============================================================== Revenues - external sources $ 0 $ 292,331 $ 0 $ 292,331 Inter-segment revenues 0 0 0 0 Interest income 4,525 2,420 0 6,945 Other income 4,155 0 0 4,155 Cost of revenues 0 (182,023) 0 (182,023) Operating expenses (243,624) (131,736) 0 (375,360) Interest expense (67,560) (6,729) 0 (74,289) Depreciation and amortization (14,931) (6,194) (1,729) (22,854) Equity in losses of e-Data (3,056) 0 0 (3,056) Write off advances (986,300) 0 0 (986,300) ------------ ------------ -------------- -------------- Net Loss $ (1,306,791) $ (31,931) $ (1,729) $ (1,340,451) ============ ============ ============== ============== Asset Data March 31, 2000 Incubator Eye Care Eliminations Consolidated ============================= ------------ ------------ -------------- -------------- Current Assets $ 50,268 $ 56,675 $ 0 $ 106,943 Advances 1,966,493 181,506 (407,554) 1,740,445 Investment in equity method investees 170,655 0 0 170,655 Other long-lived assets 1,080,205 102,043 (11,627) 1,170,621 ------------ ------------ -------------- -------------- Total Assets $ 3,267,621 $ 340,224 $ (419,181) $ 3,188,664 ============ ============ ============== ==============
-20- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - OPERATING SEGMENT INFORMATION, continued
Profit and Loss Information for the Three Months Ended March 31, 2000 ===================================================================== Revenues from external sources $ 1,500 $ 6,023 $ 0 $ 7,523 Inter-segment revenues 0 0 0 0 Interest income 35,255 3,542 0 38,797 Other income 2,218 0 0 2,218 Equity in losses of e-Data (29,345) 0 0 (29,345) Operating expenses (295,261) (192,903) 0 (488,164) Interest expense (69,413) (825) 0 (70,238) Depreciation and amortization (15,988) (6,990) (1,678) (24,656) ------------ ------------ -------------- -------------- Net Loss $ (371,034) $ (191,153) $ (1,678) $ (563,865) ============ ============ ============= ==============
NOTE O - CONTINGENCIES As of the date of the auditor's report on these consolidated financial statements, several of the notes comprising our obligation to Net.Return, Inc. (See Note F - Notes Payable) are past due. Efforts of management to renew, extend or renegotiate the terms and conditions of those notes have proved unsuccessful to date. It is uncertain as to the ultimate disposition of the notes payable to Net. Return, Inc. Management is continuing with efforts to resolve this matter. -21- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE O - CONTINGENCIES, continued The Company has been notified of a recommendation by the staff of the Securities and Exchange Commission (the "Commission") that the Commission bring a civil injunction action against the Company and two (2) of its directors, alleging certain violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Company has hired securities counsel and intends to defend itself and its directors against such allegations and proposed action. NOTE P - SUBSEQUENT EVENTS Subsequent to March 31, 2001, the following events and/or transactions have occurred: (1) We established an investment banking relationship with Donner Corp. International. Simultaneously, we entered into consulting agreements with two employees of Donner to provide us with expertise and strategies related to our capital structure and long-term financing needs. Compensation to be paid under the terms of these agreements will be in the form of cash, stock and options to purchase our common stock. (2) We filed an S-8 Registration Statement for the issuance of 600,000 shares of our common stock issuable pursuant to consultant agreements with two affiliates and a third employee of Donner Corp. International. The consultants may purchase these shares under warrants priced at $1.25 per share. (3) We issued 450,000 fully-vested stock options to our directors at $0.375 per share, exercisable over five years. (4) We received $320,000 from a third party in the form of a demand loan. These funds were used to make payments of $152,000 on note obligations, advance $120,000 to Swan River Corporation, and the remainder was used for working capital. -22- RHINO ENTERPRISES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE P - SUBSEQUENT EVENTS, continued (5) We entered into an agreement with an individual consultant who will be compensated with options to purchase up to 50,000 shares of our common stock at $0.25 per share over three years. (6) We set aside 250,000 shares of our common restricted stock to used to fund an Incentive Stock Ownership and Employee Stock Ownership Plan that might be established at some future date. (7) We set aside 2,000,000 shares of common restricted stock to be used to finance future operations and activities. Item 2. Management's Discussion and Analysis The following discussion of the financial condition and results of operations of Rhino Enterprises Group, Inc. and its business segments should be read in conjunction with the Management's Discussion and Analysis and the consolidated financial statements and the notes thereto included in the Company's annual filing on Form 10-KSB. This quarterly report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as "anticipates", "expect", "will", "believes", "foresees", "could", "may" or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available as of the date thereof, and we assume no obligation to update any forward-looking statement or risk factors. -23- Factors That May Impact Future Operating Results ------------------------------------------------ We operate in a rapidly changing environment that involves numerous risks and uncertainties. This section lists some, but not all, of the factors, risks, and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Important factors that could cause the actual results, performance or achievement of the Company to differ materially from the Company's expectations include, but are not limited to the following: 1) one or more of the assumptions or other factors discussed in connection with particular forward-looking statements prove not to be accurate; 2) mistakes in estimates of revenues and expenses; 3) the Company's inability to obtain additional capital through borrowing's or the sale of securities; 4) non-acceptance of the Company's services in the marketplace for whatever reason; 5) the Company's inability to support any product or service to meet market demand; 6) generally unfavorable economic conditions which would adversely affect the Company, its subsidiaries or any of the companies to which we have advanced funds; 7) loss of key personnel and the inability to hire and/or retain competent personnel; and 8) if the Company experiences unanticipated problems and/or "force majeure" events (including but not limited to accidents, fires, acts of God, etc.) or is adversely affected by problems of its suppliers, shippers, customers or others. All written or oral forward- looking statements attributable to the Company are expressly qualified in their entirety by such factors. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We are dependent upon our current management team. Should any one or more of our management team leave, we could face a financial setback or suffer in other ways related to our planned business. It could take a significant period of time to locate and train replacements, if and when necessary. We have an employment agreement with our President, which may be terminated upon certain circumstances. This agreement was filed as an exhibit to the Company's First Amendment to the Form 10-SB filed with the Securities and Exchange Commission. -24- Since revenues are not presently sufficient to provide enough working capital to fund current operations, we are dependent upon outside financing. It may be difficult to borrow additional funds or have access to additional funds via some other method. If such a situation occurs, we may not be able to make debt service payments, provide the services we have planned, increase our staff as planned or otherwise grow our business. There are significant debt obligations which must be repaid in cash at some point or we must explore other alternatives for repayment, which could be in the form of conversion of debt to equity, replacement financing and/or repayment by an offering of securities. It may be difficult to repay the existing debt when due, extend the due date of the existing debt, reach some agreement with regard to converting the debt to equity or otherwise satisfy our obligation. Likewise, if a new source of financing is found to replace our current sources, we could face similar risks in the future with regard to our ability to repay or otherwise take care of any future debt. Also, any additional issuances of securities, whether in the form of converting debt to equity or the form of a securities offering, would dilute the share value of current shareholders. One of our business segments advances funds to small operating and start-up entities. These advances are evidenced with an interest bearing note and financing agreement so as to protect our investment. There is a risk that these entities will not be able to repay their advances. We are carrying these advances as assets on our balance sheet. The Company anticipates that these start-up and small operating companies may take 3 to 5 years to be in a position to repay our advances. If, because of current economic conditions and the effect of the lack of availability of capital to the start-up and small operating companies, or their inability to successfully implement their business plans, or because of actual results and lack of acceptance by the market place, the Company believes the carrying value of these advances may become impaired, their company would adjust carrying value to reflect anticipated recoverability. Alternatively, we may seek to convert the advances into an equity interest in the entity. However, we may face difficulty in negotiating with such borrowers with regard to the ability to convert the debt into equity or the conversion ratio. If the advances are converted -25- into equity of the borrowing entity, there exists a great possibility that the equity interest will not be a liquid investment or that the value of such equity interest will not be at or near the value of the advances made. Further, if one or more of the entities to which funds have been advanced is unable to repay the advance when due or if the advance is converted into a non-liquid equity investment, we could face a working capital shortage. Our eye care-business segment has planned its operation in accordance with current legislation. If new legislation is passed at a local, state or federal level, it could materially adversely affect our strategic plan. We face the risks that we might not be able to (1) continue our business as planned, (2) adjust our business plan in accordance with any new legislation, or (3) operate in such a manner that would eventually be profitable. In order to grow as planned, we will have to hire additional personnel for a number of positions. The current low unemployment rate presents a challenge to locate and attract qualified individuals to fill the positions that might be necessary. We face the risk that we might not be able to (1) fill every position as it becomes available in a timely manner, (2) retain employees we currently have or that may be hired, or (3) offer a compensation package to attract top quality candidates to our positions. Results of Operations --------------------- The Company posted revenues of $292,331 for the quarter ended March 31, 2001, up from $7,523 for the same quarter in 2000. This revenue was derived from our eyecare business segment. Cost of goods sold was $182,024 for the quarter ended March 31, 2001 while cost of goods sold was $2,500 for the comparable period in 2000. In the event that working capital becomes available to promote and advertise our Eyesite Laser Center, we anticipate that our eyecare segment revenue will grow in the ensuing quarters. However, if resources are not available, we anticipate that revenue growth will be negligible. Our incubation segment did not produce any revenues other than interest income accrued -26- on advances during the first quarter and we do not anticipate this segment producing significant revenue during the remainder of this fiscal year. The Company's total general and administrative expenses increased from $510,320 in the first quarter of 2000 to $1,384,514 in the same period of 2001. The overall increase in general and administrative expenses was due to the write-off $986,300 of certain advances in our incubation segment that we presently believe to be unrecoverable. Exclusive of this write- off, general and administrative expenses decreased by $112,106, reflecting the reduction of personnel and other overhead costs since the Company is continuing to experience cash flow and liquidity problems. We had $986,300 in losses from writing off unrecoverable advances in the first quarter of 2001, compared to no such losses for the same period in 2000. We expected to obtain capital resources either from borrowings or the sale of securities during the first quarter of 2001 to fund both our operating expenses and business incubation activities. However, we received only minimal amounts of working capital to fund overhead and personnel costs. Consequently, there were no resources available for the business incubation segment to further assist the start-up and small operating entities to which we had previously advanced funds. This, in combination with weak and deteriorating economic conditions, adversely impacted three specific entities and the implementation of their business plans. Therefore, we have re- assessed the prospects of the viability of their business strategy without additional funding from our business incubation segment. We have concluded that our advances to these three entities have been impaired and we wrote them off. Other Income/(Expense) went from $58,568 net expense in the first quarter of 2000 to $66,244 expense in the first quarter of 2001. The net increase was due to a reduction in interest income of $31,582 due to our writing-off certain advances discussed above. Additionally, interest expense increased by $4,051 over the same period a year ago. Finally, our share of the loss in e-Data declined from $(29,345) to $(3,056). If resources become available to implement our incubation strategy, the Company will continue to advance funds to companies as a way to pursue -27- business opportunities. This would mean that interest expense would possibly increase in the future if capital resources are obtained by borrowings. It would also mean that interest income would possibly increase if additional advances are made. Financial Condition ------------------- At quarter end, cash and cash equivalents were $10,870 as compared to $7,920 at the beginning of the period. Operating activities used $138,676 of cash in the first quarter of 2001. The majority of the cash utilized by operations in the first quarter was attributable to the payment of general and administrative costs. Investing activities consumed $11,479 of cash during the first quarter primarily from advances to start-up and operating activities. Financing activities provided the Company with $153,105 of cash during the first quarter, all from borrowings. Cash flow from anticipated repayments on advances, and revenues from our eyecare segment are not sufficient at this time to fund current operations, provide capital for our business incubation activities and provide growth capital for our eyecare segment. In order to fund these activities, we will need to obtain additional capital through additional borrowings or the sale of securities. There is no guarantee that we will be able to obtain such capital. If we cannot obtain additional capital, our ability to continue operations will be in doubt. Additionally, the Company has significant debt obligations which must be repaid. It may be difficult to repay the existing debt when due or negotiate changes such as extending the term or reaching an agreement to convert the debt to equity or otherwise satisfy our obligation. The Company will attempt to negotiate satisfactory arrangements with our lenders. -28- PART II - OTHER INFORMATION (Items 3, 4 and 5 have been omitted as there is no information to report.) Item 1. Legal Proceedings The Company has been notified of a recommendation by the staff of the Securities and Exchange Commission (the "Commission") that the Commission bring a civil injunction action against the Company and two (2) of its directors, alleging certain violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Company has hired securities counsel and intends to defend itself and its directors against such allegations and proposed action. Item 2. Changes in Securities. There were no changes in securities for the quarter ended March 31, 2001. On May 7, 2001, the Company filed an S-8 Registration Statement under The Securities Act of 1933 to register 600,000 shares of the Company's $0.001 par value common stock Item 6. Exhibits and Reports on Form 8-K. Exhibits - none Reports on Form 8-K ------------------------------------------------------------ During the quarter ended March 31, 2001, the Company did not file any reports on Form 8-K with the Securities and Exchange Commission. On May 7, 2001, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission reporting on an investment banking agreement with Donner Corp. International and the filing of an S-8 Registration Statement under the Securities Act of 1933 and the registration of 600,000 shares of the Company's $0.001 par value common stock. -29- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Rhino Enterprises Group, Inc. (Registrant) Date: May 15, 2001 By:/S/ DANIEL H. WEAVER -------------------------------- Daniel H. Weaver Chief Financial Officer and duly authorized officer -30-