10-Q 1 a2049468z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______. Commission File Number: 000-31411 ------------------------ ZENGINE, INC. (Exact name of registrant as specified in its charter) DELAWARE 31-1638932 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 901 PARKER STREET BERKELEY, CALIFORNIA 94710 4750 HEMPSTEAD STATION DRIVE DAYTON, OHIO 45429 (Addresses of principal executive offices) (Zip Codes) Registrant's telephone numbers, including area codes: (510) 665 6680 (937) 291 8282 ------------------------ Securities registered pursuant to Section 12(b) of the Act: Not applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days (or for such shorter period that the Registrant was required to file such reports): Yes X No --- --- Number of shares of Common Stock outstanding as of May 10, 2001: 17,373,094 ZENGINE, INC. FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2001 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION

As used in this report on Form 10-Q, unless the context otherwise requires, the terms "we," "us," or "the Company" and "Zengine" refer to Zengine, Inc., a Delaware corporation., and its subsidiary, Zengine K.K., a Japanese corporation. PART I. ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ZENGINE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 ZENGINE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 ZENGINE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 ZENGINE, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of presentation The accompanying unaudited condensed consolidated financial statements of Zengine, Inc. include the accounts of Zengine and it's wholly owned subsidiary ("Zengine" or the "Company"). These statements are unaudited and, in the opinion of management, include all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company's financial position as of March 31, 2001 and the results of its operations and cash flows for the interim periods presented. The condensed consolidated balance sheet data for September 30, 2000 are derived from the audited financial statements, which are included in the Company's Annual Report on Form 10-K, which should be read in connection with these financial statements. In accordance with the rules of the Securities and Exchange Commission ("SEC"), these unaudited condensed consolidated financial statements do not include all disclosures required by generally accepted accounting principles but conform to the guidelines for interim financial information as provided by the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of the Company's operations for the interim periods presented are not necessarily indicative of the operating results for the full fiscal year or any future interim periods. 2. Income taxes No provision or benefit for income taxes has been provided in these financial statements because the Company presently believes that, more likely than not, it will not have sufficient income before income taxes to utilize its net operating loss carryforwards and other net deferred tax assets for the year ending September 30, 2001, or that sufficient income before income taxes will be realized in periods subsequent to September 30, 2001 to utilize its net operating loss carryforward and other net deferred tax assets. It is possible that the Company's valuation allowance could decrease in the near term if Zengine's operations are able to demonstrate sustained profitability. 3. Comprehensive income Prior to the three months ended March 31, 2001, the Company had no components of comprehensive income other than net income; accordingly, net income and comprehensive income were the same. For the three months ended March 31, 2001, comprehensive income was $336,283, after deducting from net income the currency translation adjustments of $27,788 related to the Company's Japanese subsidiary. 4. Earnings per share Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the reporting period. The calculation of diluted earnings per share is similar to basic, except that weighted average number of shares outstanding include the additional dilution from potential common stock such as stock options and restricted stock awards, to the extent inclusion of the potential common stock is dilutive. 5. Related party transactions During the quarter ended December 31, 2000, the Company made an advance to subsidiaries of MCSi, Inc., the majority stockholder of the Company ("MCSi"), totaling $8,500,000 as a 90 day secured note (the Note) to assist in purchasing the assets of Intellisys Group, Inc. Interest on the Note accrues monthly based on the "prime rate" as published in the Wall Street Journal. The loan was unanimously approved by the Board of Directors of Zengine. During the three months ended March 31, 2001, MCSi repaid $3.7 million of this loan and the Company extended the repayment of the remainder to July 1, 2001 on the same terms and conditions as the original note. Zengine and MCSi have entered into four other agreements, three of which expire in October 2001, including an administrative services agreement, a distribution services agreement, e-commerce services agreement and a real and personal property lease which expired on May 1, 2001. The lease is currently being renegotiated. 4 ZENGINE, INC. NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS With respect to all of its transactions with MCSi, the Company and MCSi have agreed to a monthly "net" settlement procedure. The following table summarizes the net receivable due from MCSi related to the aforementioned agreements as of March 31, 2001: Net amount receivable from MCSi as of October 1, 2000 ....................................... 2,447,840 Amounts received as payment of stock subscription receivable ................................ (1,738,341) Net amount receivable from MCSi subsidiaries arising from the second Demand Note ............ 8,500,000 Amounts received as payment of second Demand Note ........................................... (3,741,300) Amounts receivable from MCSi arising from the ecommerce services agreement .................. 2,414,139 Amounts receivable from MCSi arising from interest on the Demand Note ....................... 433,651 Amounts receivable from MCSi arising from current account activity .......................... 1,989,429 Amounts payable to MCSi arising from the distribution services agreement .................... (826,758) Amounts payable to MCSi arising from the administrative services and the leasing agreements.. (435,000) ----------- Net amount receivable from MCSi and MCSi subsidiaries ....................................... 9,043,660 ===========

Additional details of related party transactions are found in Note 4 to the Company's audited financial statements in the Form 10-K for the year ended September 30, 2000. 6. Equity As more fully described in Note 4 to the Company's audited financial statements in the Form 10-K for the year ended September 30, 2000, the Company issued a warrant to purchase its common stock to a client in connection with an e-commerce service arrangement between the Company and the client. The value of that warrant was being amortized to income over the period of the e-commerce services arrangement. In January, 2001, the Company purchased the warrant. The estimated fair value of the warrant on the date it was acquired by the Company was treated as an equity transaction. The amount paid in excess of the fair value was charged to operations. 7. Segment Reporting In accordance with Statement of Financial Accounting Standard No. 131 "Disclosures About Segments of an Enterprise and Related Information", the operations of the Company comprise a single segment and are reported as such to the President and Chief Executive Officer, who is the chief operating decision maker for the Company. 5 ZENGINE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES THERETO INCLUDED ELSEWHERE HEREIN. NOTE AS TO FORWARD-LOOKING STATEMENTS The following information contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act") and is subject to the safe harbor created by that Act. Generally, these statements relate to business plans or strategies, projected or anticipated benefits from potential acquisitions, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in the affairs of the Company or the industry in which it conducts business. These forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods or by the use of forward-looking terminology such as "anticipate," "believe," "commitment," "consider," "continue," "could," "encourage," "estimate," "expect," "intend," "in the event of," "may," "plan," "present," "propose," "prospect," "update," "whether," "will," "would," future or conditional verb tenses, similar terms, variations on such terms or negatives of such terms. Although the Company believes that the anticipated results or other expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that those results or expectations will be attained. Actual results could differ materially from those indicated in such statements due to risks, uncertainties and changes with respect to a variety of factors, including, but not limited to, the following: the Company's limited operating history, the Company's history of operating losses, expected fluctuations of quarterly results, its lengthy sales cycle, potential performance delays, the potential loss of a major client, dependence upon its client's business and product sales, short term advertising fees, potential loss of key employees, potential difficulties in managing growth, the ability of its systems to accommodate significant growth, potential software defects and system errors, potential product liability litigation, its ability to adequately protect its trademarks or brand identity, privacy concerns, potential breach of e-commerce security measures, the numerous risks and uncertainties of doing business in a foreign country, and the relationship and affiliated transactions with its major stockholder, MCSi. OVERVIEW Zengine, Inc. is a sell-side ebusiness software and service provider. Zengine delivers flexible, reliable, long-term solutions for employee, customer and e-commerce applications. By combining the cost and operational efficiencies of outsourcing with the accessibility and control of an in-house solution, Zengine empowers its clients to make more informed decisions by improving the way information flows through their organizations. Zengine's technology platform provides a standardized, modular framework that can be customized quickly and easily to scale, add functionality and provide seamless software upgrades to meet the specific requirements of its individual clients. The Company's comprehensive suite of fully integrated software and services eliminates the need for the combination of disparate "best of breed" offerings. The result is a proprietary technology platform that delivers complete sell-side ebusiness solutions, at a fraction of the time and cost of existing alternatives. Zengine offers a full range of software and services for business-to-business and business-to-consumer applications including: Platform Hosting, User Interface Design, Content and Publishing Management, Ebusiness Management, E-Commerce Platform, Sales Force Automation, Merchandising, Advertising/PR, Campaign Planning, Fulfillment, Call Center, and Reporting and Analysis. In performing services under the Zengine business model, the Company enters into contractual arrangements with its clients that describe the services Zengine will perform. The Company generates revenues through service fees, which include consulting, integration and set-up, monthly subscription and transaction fees and product sales directly to consumers through web sites Zengine has developed and operates; and from advertising and sponsorships on Web pages the Company services on its client's stores. 6 ZENGINE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000 REVENUE Revenue for the periods presented is summarized as follows:

The increase in revenues for all periods shown above reflects the continued increase in the launches of Zengine's clients' e-commerce Web sites, e-commerce consulting revenues along with revenues from the sale of products on Company owned and operated Web sites. At March 31, 2001, the Company had 17 e-commerce clients, as compared to 7 e-commerce clients at March 31, 2000. Service fees, product sales and consulting fees increased by $3,156,256 and $5,621,768, respectively, for the three and six month periods ended March 31, 2001 over similar periods in 2000 as a result of the growth described in the proceeding paragraph. Advertising and sponsorship fees decreased by $544,226 for the three month period ended March 31, 2001 compared to the three month period ended March 31, 2000. This decrease occurred because the Company recognized $671,900 in revenue during the three month period ended March 31, 2000 for services performed in previous periods but for which written customer agreements were not obtained until the second quarter of fiscal 2000. Advertising and sponsorship fees increased by $1,199,521 for the six month period ended March 31, 2001 compared to the six month period ended March 31, 2000 as the result of an increase in the number of advertising and placement orders. Service fee revenue from the MCSi dedicated Web sites was: Three months ended March 31, 2001 $ 1,229,341 ------------------- Three months ended March 31, 2000 $ 825,055 ------------------- Six months ended March 31, 2001 $ 2,414,139 ------------------- Six months ended March 31, 2000 $ 1,309,828 -------------------

Zengine's current arrangement to service the MCSi dedicated Web sites expires on October 1, 2001. The Company's advertising and sponsorship revenue is primarily derived from original equipment manufacturer ("OEM") advertisers who either placed banner advertisements on clients' Web pages, which the Company serves, or purchased preferential placement of the OEM products on clients' electronic stores. Zengine provided advertising or sponsorship services to 9 clients in the six months ended March 31, 2001 as compared to 11 clients in the six months ended March 31, 2000. MCSi has supply arrangements with the OEM companies that purchase advertising from Zengine. Although the Company negotiates each OEM advertising arrangement, MCSi's relationship with the OEM companies could have influenced the Company's obtaining the advertising and Zengine may not have obtained the advertising without MCSi's relationship. 7 ZENGINE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COST OF REVENUE AND GROSS MARGIN The Company's cost of revenue includes the amortization of capitalized computer software costs, the costs of its employees to perform integration and other services, the fees it pays to MCSi under the distribution services agreement, and the cost of products sold through Company owned and operated Web sites. The Company's gross margin percentage will fluctuate depending primarily on the timing as to when it adds additional employees to perform integration and other services and changes in its sales mix between lower margin product sales and the Company's service offerings, which provide higher margins. Gross margins for the periods presented were: Three months ended March 31, 2001 73.1 % ------- Three months ended March 31, 2000 93.2 % ------- Six months ended March 31, 2001 74.3 % ------- Six months ended March 31, 2000 89.4 % ------

The increase in costs of revenue and reductions in gross margin percentage primarily reflect an increase in the relative product mix towards lower margin product sales through Company owned and operated Web sites. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses as a percentage of revenue for the periods presented were: Three months ended March 31, 2001 82.2 % ------ Three months ended March 31, 2000 71.6 % ------- Six months ended March 31, 2001 78.6 % ------- Six months ended March 31, 2000 86.0 % -------

Zengine's primary selling, general and administrative expenses relate to sales function labor costs, its administrative service and leasing arrangements with MCSi, marketing costs, costs associated with the Company's information systems and non-cash expenses related to stock based compensation and other equity arrangements. Selling, general and administrative expenses were and will be primarily influenced by the timing of when the Company adds additional personnel to support these functions. INTEREST INCOME Interest income increased substantially during the three and six month periods ended March 31, 2001 compared to the three and six month periods ended March 31, 2000 as a result of investing the proceeds of the Company's initial public offering ("IPO") which occurred on September 20, 2000. Average rate on interest earning assets was 5.40% and 5.74% for the three and six month periods ended March 31, 2001, respectively. LIQUIDITY AND CAPITAL RESOURCES During the six months ended March 31, 2001, cash used in operations was $634,913 primarily as a result of net income offset by an increase in accounts receivable and other assets. The Company used $9,412,338 of cash for investing activities primarily as a result of a loan to MCSi described in Note 5 to the consolidated financial statements included herein and for the purchase of equipment and development of software. Cash used in financing activities of $7,956,237 was primarily the result of the purchase of 753,617 shares of the Company's common stock for $8,554,716. Available cash is held in short-term high quality investments. On September 20, 2000 the Company completed its IPO resulting in net proceeds of approximately $50.5 million. Prior to its IPO the Company looked to MCSi to provide financial and capital resources it required to carry on its business activities. Subsequent to the IPO, MCSi's lending arrangements prohibited it from loaning the Company money to provide funding for its operations. If the proceeds from the IPO are not sufficient to fund future operating and investing needs, Zengine may have to look to other sources of financing, such as bank loans or the issuance of debt or equity securities. In any event, the Company believes that the capital resources provided by the IPO will be sufficient to enable it to conduct its operations for the foreseeable future. 8 ZENGINE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes that there have been no material changes in the reported market risks faced by the Company since the fiscal year ended September 30, 2000 except that the Company commenced operations of its wholly owned subsidiary in Japan during the three month period ending March 31, 2001, which subjects the Company to foreign exchange risk. To date the Company has not, nor does it intend to, engage in hedging or other transactions to control its foreign currency fluctuations. See Zengine's Annual Report on Form 10-K for the fiscal year ended September 30, 2000 under Item 7A "Quantitative and Qualitative Disclosures About Market Risk." 9 ZENGINE, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Zengine held its Annual Meeting of Stockholders at the Mandarin Oriental Hotel, 222 Sansome Street, San Francisco, California on Wednesday, February 28, 2001 at 10:30 a.m. Pacific Time. At the meeting, a quorum was represented by the holders of voting common stock in person or by proxy. The meeting considered two matters requiring stockholder vote: (i) the election of two directors for a three year term expiring in 2004 and (ii) the ratification of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ended September 30, 2001. With respect to the election of directors, the Board of Directors' nominees received the votes as set forth below:

Directors of Zengine whose terms of office will continue include: Mr. Anthony W. Liberati and Mr. Richard V. Hopple, whose terms expire in 2002 and Mr. Michael E. Peppel and Mr. Joseph M. Savarino, whose terms of office expire in 2003, or until their successors are elected and qualified. PricewaterhouseCoopers LLP was ratified as the Company's independent accountants by a vote of: 15,902,713 FOR; 329 AGAINST; and 1,216 ABSTAINING. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) None. (b) No reports on Form 8-K have been filed by the Company during the quarter ended March 31, 2001. 10 ZENGINE, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZENGINE, INC. By: /s/ JOSEPH M. SAVARINO ------------------------------------------- Joseph M. Savarino President and Chief Executive Officer Date: May 14, 2001 By: /s/ LOUIS T. LIPINSKI ------------------------------------------- Louis T. Lipinski Vice President and Chief Financial Officer Date: May 14, 2001

ZENGINE INC 10-Q