<PAGE>
Filed pursuant to Rule 424(b)(4)
Registration No. 333-94651
[KEYNOTE LOGO]
5,750,000 Shares
Common Stock
Keynote Systems, Inc. is offering 2,000,000 shares of its common stock and
the selling shareholders are offering an additional 3,750,000 shares. Our
common stock is quoted on the Nasdaq National Market under the symbol "KEYN."
On February 17, 2000, the last sale price of our common stock as reported by
the Nasdaq National Market was $107.06 per share.
---------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Public Offering Price................................... $ 105.00 $603,750,000
Underwriting Discounts and Commissions.................. $ 4.725 $ 27,168,750
Proceeds to Keynote..................................... $100.275 $200,550,000
Proceeds to Selling Shareholders........................ $100.275 $376,031,250
</TABLE>
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The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. any representation to the contrary is a
criminal offense.
Keynote has granted the underwriters a 30-day option to purchase up to an
additional 862,500 shares of common stock to cover any over-allotments.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on February 24, 2000.
---------------------
Robertson Stephens
Chase H&Q
Dain Rauscher Wessels
Wit SoundView
The date of this prospectus is February 17, 2000.
<PAGE>
INSIDE FRONT COVER OF PROSPECTUS
Caption at Top of Page: "Keynote enables companies to measure, assure and
improve their quality of service, allowing them to increase competitiveness and
customer satisfaction."
Caption at Upper Middle of Page: "Keynote Enables E-Commerce Sites to:"
Two Captions in Boxes at Lower Middle of Page: "Measure site performance from
numerous locations worldwide" and "Compare site performance to competitors' and
industry benchmarks."
Three Captions in Boxes at Bottom of Page: "Assure customers reach their site
all the time and quality of service benchmarks are achieved," "Diagnose and
pinpoint the source of problems: content, server, web site, internet
infrastructure" and "Improve site performance by implementing changes to content
or network infrastructure."
Keynote logo appears in extreme bottom right corner. All text overlays a
graphic of a globe.
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. In this prospectus, "Keynote,"
"we," "us" and "our" refer to Keynote Systems, Inc.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Price Range of Common Stock.............................................. 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 35
Management............................................................... 49
Certain Transactions..................................................... 59
Principal and Selling Shareholders....................................... 63
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 71
Underwriting............................................................. 73
Legal Matters............................................................ 75
Experts.................................................................. 75
Where You Can Find Additional Information................................ 75
Index to Financial Statements............................................ F-1
</TABLE>
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Keynote(R) is our registered trademark and Perspective(TM), Lifeline(TM),
Consumer Perspective(TM), The Internet Performance Authority(TM), My
Keynote(TM) and AccuStat(TM) are our trademarks or service marks. This
prospectus also contains trademarks of other companies and organizations.
3
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PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our financial statements and accompanying
notes appearing elsewhere in this prospectus.
Keynote Systems, Inc.
Keynote provides Internet performance measurement and diagnostic services
that enable electronic commerce, or e-commerce, companies to measure, assure
and improve the quality of service of their web sites. E-commerce web sites
face a different set of competitive challenges than those faced by conventional
"bricks and mortar" stores. In order to discourage customers from "clicking
away" to competing web sites, e-commerce web sites must deliver fast page
downloads, efficient transactions and high reliability of access. According to
a 1999 study by Zona Research, approximately $4.4 billion per year in e-
commerce sales in the United States may be lost due to unacceptable download
speeds and the resulting user abandonment of online transactions.
Our Services
We currently offer three primary services, Keynote Perspective, Keynote
Consumer Perspective and Keynote Lifeline. These services measure web-site
performance and availability, including the time it takes for a user to
download web pages.
We first introduced Keynote Perspective in April 1997 and recently
introduced a new version in December 1999. This version included our My Keynote
service, which offers our customers the ability to personalize their service.
We introduced Keynote Consumer Perspective in December 1999. Keynote
Perspective and Keynote Consumer Perspective are targeted for e-commerce web
sites with heavy levels of traffic. These services measure the performance and
availability of web sites by measuring the time it takes for pages and page
components to be downloaded to a user's personal computer. Keynote Perspective
is designed to measure a user's experience through the connections commonly
used to access the Internet from the workplace. Keynote Perspective also
measures the time it takes to complete a customer transaction on an e-commerce
web site. With this service, measurements can be taken from multiple geographic
locations around the world and from three-minute to four-hour intervals.
Keynote Consumer Perspective is designed to measure a user's experience with
various other Internet access methods typically used in homes, such as dial-up
connections, cable modems and digital subscriber lines. With this service,
measurements can be taken from specified locations in 10 metropolitan areas and
from 10-minute to one-hour intervals.
Our Keynote Lifeline service, which was introduced in July 1999, is
targeted for regionally oriented web sites and web sites with lower traffic
levels. This lower-priced service measures the time it takes to download web
pages to one or two locations in the United States. Measurements can be taken
every 10 minutes or once per hour.
In January 1999, we introduced our Competitive Audit and Diagnostic Audit
professional services offerings. With Competitive Audit, we measure the
performance of a customer's web site and evaluate its performance against other
web sites in the customer's industry. We also identify any bottlenecks or
stress points in the customer's web site or its connections to the Internet. In
our Diagnostic Audit, our consultants work with our customers to further
evaluate quality of service issues and provide specific recommendations to them
as to how they can improve their web site's quality of service.
The foundation of our services is an extensive network of strategically
located measurement computers connected to the major Internet backbones in
dozens of metropolitan areas worldwide. We also have an operations center for
collecting, analyzing and disseminating Internet performance and availability
data. We believe our customers can use our services to measure the performance
of their web sites and to ensure that their e-commerce web sites are not
experiencing performance problems such as outages, slow web page download
speeds or slow transaction processing times. With this information, we believe
the web sites can improve their customer satisfaction and reduce support costs.
In addition, it is easy for customers to begin using our services. With only a
web browser, customers can try, purchase and immediately use our services.
4
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We market and sell our services primarily through a direct telesales force
in the United States. We also market our services through Network Solutions and
VeriSign, which are companies that provide services complementary to ours. Our
customers currently include over 700 leading e-commerce companies. Our 10
largest customers, based on revenues for the quarter ended December 31, 1999,
consist of Akamai, American Express, Charles Schwab, Digex, Digital Island,
Flycast, GlobalCenter, Microsoft, Sandpiper Networks and VeriSign.
Our Strategy
Our growth strategy is to expand our leadership in providing Internet
performance measurement and diagnostic services to e-commerce web sites.
To achieve this goal we intend to:
. increase awareness of Keynote as "The Internet Performance
Authority(TM)" through marketing programs;
. pursue marketing relationships with companies that sell products or
services complementary to our services;
. offer new features and services in order make our customers continually
aware of the importance of Keynote's services for measuring and
ensuring the quality of service of their web sites;
. expand our operations internationally; and
. expand our services to measure other aspects of quality of service and
other new Internet technologies.
We Have Incurred Significant Losses and We May Not Become Profitable
We have incurred losses of $12.7 million since we were formed in June 1995.
In addition, we had a net loss of $2.0 million for the three months ended
December 31, 1999, $7.1 million for the fiscal year ended September 30, 1999
and a net loss of $2.9 million for the 1998 fiscal year. We expect to incur net
losses for the foreseeable future. The market for Internet-related products and
services is highly competitive and we could face intense competition in the
future. Therefore, we may not achieve or sustain profitability.
Unless otherwise indicated, all information contained in this prospectus
assumes:
. no exercise of the underwriters' over-allotment option;
. the exercise of outstanding options to purchase 65,375 shares of our
common stock prior to the completion of this offering; and
. the exercise of outstanding warrants to purchase 163,529 shares of our
common stock prior to the completion of the offering.
5
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The Offering
<TABLE>
<C> <S>
Common stock offered by Keynote.................... 2,000,000 shares
Common stock offered by selling shareholders....... 3,750,000 shares
Common stock to be outstanding after the offering.. 25,837,660 shares
Use of proceeds.................................... For general corporate
purposes, capital
expenditures and working
capital. See "Use of
Proceeds."
Nasdaq National Market symbol...................... KEYN
</TABLE>
The number of shares of our common stock to be outstanding immediately
after the offering is based on the number of shares outstanding as of December
31, 1999. This number does not include 1,992,487 shares of our common stock
subject to options and 7,273 shares issuable upon exercise of warrants
outstanding as of December 31, 1999.
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended Three Months Ended
September 30, December 31,
--------------------------------- --------------------
1996 1997 1998 1999 1998 1999
------ ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 30 $ 81 $ 1,539 $ 7,272 $ 889 $4,796
Loss from operations.... (628) (2,018) (2,957) (7,015) (737) (2,795)
Net loss................ (622) (2,049) (2,918) (7,110) (798) (2,036)
Net Loss Per Share:
Basic and diluted....... $(0.23) $ (0.84) $ (1.10) $ (1.54) $ (0.27) $ (0.09)
Weighted average
shares--basic and
diluted............... 2,733 2,434 2,649 4,622 3,004 22,798
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C> <C> <C>
Balance Sheet Da-
ta:
Cash and cash
equivalents..... $69,208 $269,529
Working capital.. 67,022 267,343
Total assets..... 79,262 279,583
Notes payable,
less current
portion......... 2,311 2,311
Total sharehold-
ers' equity .... 69,127 269,448
</TABLE>
See note 2 to our financial statements for a description of the method that
we used to compute our basic and diluted net loss per share.
The as adjusted balance sheet data give effect to the sale of the 2,000,000
shares of common stock that Keynote is offering under this prospectus at the
public offering price of $105.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses, the
exercise of options to purchase 65,375 shares of our common stock prior to the
completion of this offering and the exercise of warrants to purchase 163,529
shares of our common stock prior to the completion of this offering. See
"Capitalization."
Keynote Systems, Inc. was incorporated in California in June 1995. Our
principal offices are located at 2855 Campus Drive, San Mateo, California
94403. Our telephone numbers at this location are (650) 522-1000 and 1-800-
KEYNOTE. The information on our web site does not constitute a part of this
prospectus.
6
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RISK FACTORS
You should carefully consider the risks described below before buying
shares in this offering. If any of the following risks actually occur, our
business, results of operations and financial condition could be seriously
harmed, the trading price of our common stock could decline and you may lose
all or part of your investment.
This prospectus includes statistical data regarding the Internet industry.
These data are taken or derived from information published by sources including
Zona Research and International Data Corporation. Although we believe that
these data are generally indicative of the matters reflected in those reports,
these data are inherently imprecise, and we caution you to read these data in
connection with the rest of the disclosure in this document, particularly this
"Risk Factors" section.
Risks Related to our Business
We are an early stage company with an unproven business model which makes it
difficult to evaluate our current business and future prospects.
We have only a limited operating history upon which to base an evaluation
of our current business and future prospects. We began offering our Internet
performance measurement services in May 1997. We introduced the most recent
version of Keynote Perspective in December 1999, Keynote Consumer Perspective
in December 1999 and Keynote Lifeline in July 1999. We formed our professional
services organization in January 1999. The revenue and income potential of our
business and the related market are unproven. In addition, because of our
limited operating history and because the market for Internet performance
measurement and diagnostic services is relatively new and rapidly evolving, we
have limited insight into trends that may emerge and affect our business.
Before investing, you should evaluate the risks, expenses and problems
frequently encountered by companies such as ours that are in the early stages
of development and that are entering new and rapidly changing markets such as
Internet performance measurement.
We have incurred losses, we expect to incur future losses and we may never
achieve profitability.
We have experienced operating losses in each quarterly and annual period
since inception and we expect to incur significant losses in the future. We
incurred net losses of $7.1 million for the fiscal year ended September 30,
1999 and $2.0 million for the three months ended December 31, 1999. As of
December 31, 1999, we had an accumulated deficit of $14.7 million. We believe
that our operating expenses will continue to increase as we grow our business.
As a result, although this offering will provide, and our initial public
offering provided, us with cash for our working capital, we will need to
significantly increase our revenues to achieve and maintain profitability, as
reflected in our financial statements. We may not be able to sustain our recent
revenue growth rates. In fact, we may not have any revenue growth, and our
revenues could decline. For a more detailed description of our operating
results, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The success of our business depends on customers renewing their subscriptions
for our services and purchasing additional services.
We depend on achieving high customer renewal rates for our revenues. Our
customers have no obligation to renew our services and therefore, they could
cease using our services at any time. We cannot assure you that we will
continue to experience high renewal rates. Our customer renewal rates may
decline as a result of a number of factors, including consolidations in the
Internet industry or if a significant number of our customers cease operations.
Further, because of the relatively small size of initial orders, we depend on
sales to new customers and sales of additional services to our existing
customers.
In addition, initial sales of our services and subsequent customer follow-
up are conducted almost exclusively by telephone. A few customers have, in the
past, expressed a preference for more personal, face-to-face customer service.
Dissatisfaction by a customer with the nature or quality of our services could
lead that
7
<PAGE>
customer to elect not to renew its subscription to our services. If our
renewal-rate percentage declines, our revenues could decline unless we are able
to obtain additional customers or sources of revenues.
Our quarterly financial results are subject to significant fluctuations, and if
our future results are below the expectations of public-market analysts and
investors, the price of our common stock may decline.
As indicated in our "Quarterly Results of Operations" on page 30, our
results of operations could vary significantly from quarter to quarter. For
example, our operating loss decreased to $798,000 for the quarter ended
December 31, 1998 from $1.0 million for the quarter ended September 30, 1998
and then increased to $1.1 million for the quarter ended March 31, 1999, to
$1.8 million for the quarter ended June 30, 1999 and to $3.5 million for the
quarter ended September 30, 1999 and then decreased to $2.0 million for the
three months ended December 31, 1999. We expect to incur significant sales and
marketing expenses to promote our brand and our services, as well as additional
expenses to expand our presence world wide. If revenues fall below our
expectations, we will not be able to reduce our spending rapidly in response to
the shortfall.
Other factors that could affect our quarterly operating results include
those described below and elsewhere in this prospectus:
. the renewal rate of subscriptions to our Internet performance
measurement services;
. our ability to increase the number of web sites we measure for our
existing customers in a particular quarter;
. our ability to attract new customers in a particular quarter;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our operations infrastructure, including our
planned international expansion; and
. the amount and timing of professional services revenues.
Due to these and other factors, we believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as indicators of our future performance. It is possible that in
some future periods, our results of operations may be below the expectations of
public-market analysts and investors. If this occurs, the price of our common
stock may decline.
The success of our business depends on the widespread adoption of the Internet
by businesses and consumers for e-commerce and communications.
Because our business is based on providing performance measurement and
diagnostic services for web sites, the Internet must be widely adopted, in a
timely manner, as a means of electronic commerce, or e-commerce, and
communications. Because e-commerce and communications over the Internet are new
and evolving, it is difficult to predict the size of this market and its
sustainable growth rate. In addition, we believe that the use of the Internet
for conducting business transactions could be hindered for a number of reasons,
including, but not limited to:
. security concerns including the potential for fraud or theft of stored
data and information communicated over the Internet;
. inconsistent quality of service, including well-publicized outages of
popular web sites;
. lack of availability of cost-effective, high-speed service;
. limited numbers of local access points for corporate users;
. delay in the development of enabling technologies or adoption of new
standards;
. inability to integrate business applications with the Internet;
8
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. the need to operate with multiple and frequently incompatible
products; and
. a lack of tools to simplify access to and use of the Internet.
Our operating results depend on sales of our Keynote Perspective service.
Because we have only recently begun to offer professional services and we
only recently introduced our Keynote Consumer Perspective and Keynote Lifeline
services, the success of our business currently depends, and for the immediate
future will continue to substantially depend, on the sale of our Keynote
Perspective service. Therefore, we believe that initial sales and renewals of
our Keynote Perspective service will account for substantially all of our
revenues for the immediate future. A decline in the price of, or fluctuation in
the demand for, Keynote Perspective, or our inability to maintain or increase
sales, would cause our revenues to decline.
If one of our competitors' Internet performance measurement service is adopted
as the industry standard for measuring the speed and reliability of web sites,
we may lose existing customers or encounter difficulties in attracting new
customers.
To date, no Internet performance measurement service has been adopted as an
accepted industry standard for measuring the speed and reliability of web
sites. As a result, if one of our current or potential competitors develops an
Internet performance measurement service that is adopted as the industry
standard, our customers may turn to the services provided by these competitors.
In addition, it would be more difficult for us to attract the additional
customers for our Internet performance measurement services that are necessary
for our business to grow. If this were to occur, our business would be harmed.
Improvements to the infrastructure of the Internet could reduce or eliminate
demand for our Internet performance measurement services.
The demand for our Internet performance measurement services could be
reduced or eliminated if future improvements to the infrastructure of the
Internet lead companies to conclude that measuring and evaluating the
performance of their web sites is no longer important to their business. The
Internet is a complex, heterogeneous network of communications networks with
multiple operators and vendors supplying and managing the underlying
infrastructure as well as connections to this infrastructure. Because the
inherent complexity of the Internet currently causes significant e-commerce
quality of service problems for companies, the vendors and operators that
supply and manage the underlying infrastructure are continuously seeking to
improve the speed, availability, reliability and consistency of the Internet.
If these vendors and operators succeed in significantly improving the
performance of the Internet, which would result in corresponding improvements
in the performance of companies' web sites, demand for our services would
likely decline.
It would be more difficult for us to deliver our services and therefore earn
revenues if we cannot expand and manage our computer infrastructure
successfully.
We will need to deploy a large number of measurement computers if we
experience an increase in our customer base or if we expand our operations and
measurement capabilities on a worldwide basis. These computers are responsible
for measuring the performance of web sites and collecting performance data and
it is critical to our ability to deliver our services that they operate
effectively. We currently measure the performance of approximately 7,000 web-
site addresses for our customers. Based on the number of measurement computers
we currently have deployed and the communications capacity available to these
computers, we believe we are able to measure the performance of approximately
15,000 web-site addresses. We are in the process of deploying additional
measurement computers and upgrading the underlying infrastructure so that we
will have the ability by the end of fiscal year 2000 to measure in excess of
40,000 web-site addresses. With more measurement computers deployed, we will
need to monitor and maintain a larger and more geographically dispersed
computer network, which would require us to devote significant additional
resources for these tasks. In addition, if we experience increases in the
number of our customers
9
<PAGE>
prior to deploying additional measurement computers, our existing
infrastructure may not have the capacity to accommodate the additional
customers. This could result in outages, interruptions or slower response
times, any of which could impair our ability to retain and attract customers.
We may face liability for supplying inaccurate information to our customers or
from our customers' use of the data that we provide.
We may face liability if the information that we supply to our customers is
inaccurate. The data that we collect and store in our measurement database,
although reported to customers at over a 99% level of accuracy, may contain
inaccuracies due to distortions and bottlenecks caused by inadequate network
capacity preventing our measurement computers from gaining access to all
requested measurements. Any dissatisfaction by our customers with our
measurement data would impair our credibility in the marketplace and
significantly harm our ability to attract new customers and retain existing
customers. In addition, if we were to supply customers with inaccurate
information, these customers might initiate litigation against us on such
theories as breach of contract, breach of warranty or negligence. Our general
insurance policy does not specifically cover liability for providing inaccurate
data.
Our customers are responsible for the manner in which they use the data
that we provide to them, and our customer contracts provide that each customer
must indemnify us for any damages arising from their use of the data, reports
or analyses. However, we cannot be certain that these contract provisions
provide us with sufficient legal protection. For example, a company could use
our comparative performance data, which evaluates the relative performance of
the company's web site against web sites in an industry, and make claims to
assert that their service is superior to those of their competitors or that
their competitors' services are inferior. As a result, a third party might
initiate litigation against one of our customers on such theories as
defamation, trade libel or unfair competition relating to the customer's use of
the information that we provided to them. Even if the information that we
provided were accurate, we could be named as a defendant in any resulting
litigation. Any litigation could be expensive and could divert management's
attention from operating our company.
We may face liability for publishing indices that evaluate and rank the
relative Internet performance of web sites.
We periodically publish indices that evaluate and rate the relative
performance of various e-commerce web sites in a particular market segment.
Some companies whose web sites have performed poorly in our published indices
have asserted that our indices are not indicative of the overall consumer
experience because the indices do not measure qualitative factors such as web-
site content, navigability and appearance. Companies could potentially bring a
claim against us if they believe that their business has been harmed by their
low ranking in one of our indices. In addition, if the information published in
one of our performance indices is inaccurate, we could lose credibility in the
marketplace. This could harm our ability to attract new customers and retain
existing customers, and could result in potentially expensive litigation
against us on such theories as defamation, trade libel or unfair competition.
The inability of our services to perform properly could result in loss of or
delay in revenues, injury to our reputation or other harm to our business.
Services as complex as those we offer may not perform as we expect. We have
given credits to a limited number of customers as a result of past problems
with our service, though we do not believe that any customers failed to renew
their subscription to our services due to these problems. Despite our testing,
our existing or future services may not perform as expected due to unforeseen
problems, including those related to the year 2000, which could result in loss
of or delay in revenues, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to our reputation,
increased insurance costs or increased service costs.
10
<PAGE>
These problems could also result in tort or warranty claims. Although we
attempt to reduce the risk of losses resulting from any claims through warranty
disclaimers and liability-limitation clauses in our customer agreements, these
contractual provisions may not be enforceable in every instance. Furthermore,
although we maintain errors and omissions insurance, this insurance coverage
may not adequately cover us for claims. If a court refused to enforce the
liability-limiting provisions of our contracts for any reason, or if
liabilities arose that were not contractually limited or adequately covered by
insurance, we could be required to pay damages.
If we do not continually improve our services in response to technological
changes, including changes to the Internet, we may encounter difficulties
retaining existing customers and attracting new customers.
The ongoing evolution of the Internet requires us to continually improve
the functionality, features and reliability of our Internet performance
measurement and diagnostic services, particularly in response to competitive
offerings. If we do not succeed in developing and marketing new services that
respond to competitive and technological developments and changing customer
needs, we may encounter difficulties retaining existing customers and
attracting new customers. We must also introduce any new Internet services as
quickly as possible. The success of new services depends on several factors,
including properly defining the scope of the new services and timely
completion, introduction and market acceptance of our new services. If new
Internet, networking or telecommunication technologies or standards are widely
adopted or if other technological changes occur, we may need to expend
significant resources to adapt our services.
Our services and brand name might not attain the brand awareness necessary for
our business to succeed.
We believe that maintaining and strengthening the Keynote brand is an
important aspect of our business and an important element in attracting new
customers. Our efforts to build our brand will involve significant expense. To
promote our brand, we may increase our marketing budget or increase our
financial commitment to building our brand. If our brand-building strategy is
unsuccessful, we may fail to attract enough new customers or retain our
existing customers to the extent necessary to realize a sufficient return on
our brand-building efforts.
If we are not successful in selling our Keynote Lifeline service, our revenues
may fall short of our expectations.
We introduced our Keynote Lifeline service in July 1999, and we have
currently sold this service to over 50 customers. We cannot be certain that
there will be increased customer demand for this service or that we will be
successful in penetrating this segment of the market. In addition, because our
Keynote Lifeline service is sold at a lower price than our Keynote Perspective
service, we will need to sell our Keynote Lifeline service to a large volume of
customers in order to significantly grow our revenues. We may not succeed in
selling our Keynote Lifeline service on a wide-scale.
We face growing competition which could make it difficult for us to acquire and
retain customers.
The market for Internet performance measurement and diagnostic services is
new and rapidly evolving. We expect competition in this market to intensify in
the future. Our competitors vary in size and in the scope and breadth of the
products and services that they offer. Our principal competitors today include
Freshwater Software, Internet Resources Group, Inverse Network Technology, a
unit of Visual Networks, and Service Metrics, a unit of Exodus Communications.
We also indirectly compete with WebCriteria, MIDS Matrix IQ Service, and INS
INSoft Division, and free services such as the WebSite Garage unit of Netscape,
NetMechanic and Internet Weather Report. While the free services are not as
comprehensive as ours, as they only take measurements from one location, they
do not measure the speed of transactions and they only measure simple download
time, customers could still choose to use these less comprehensive services.
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If we expand the scope of our products and services, we may encounter many
additional, market-specific competitors. These potential competitors include
companies that sell network management software such as CompuWare HP-Overview
and IBM's Tivoli Unit, and companies that sell load-testing software such as
Mercury Interactive and Segue Software, each of which has announced products
that could potentially compete with us in the future. Some of our competitors
have, and our future competitors may have:
. longer operating histories;
. larger customer bases;
. greater brand recognition in similar businesses; and
. significantly greater financial, marketing, technical and other
resources.
In addition, some of our competitors may be able to:
. devote greater resources to marketing and promotional campaigns;
. adopt more aggressive pricing policies; and
. devote substantially more resources to technology and systems
development.
Increased competition may result in price reductions, increased costs of
providing our services and loss of market shares, any of which could seriously
harm our business. We may not be able to compete successfully against our
current and future competitors.
A limited number of customers account for a significant portion of our
revenues, and the loss of a major customer could harm our operating results.
For the fiscal year ended September 30, 1999, 10 customers accounted for
approximately 32% and for the three months ended December 31, 1999, 10
customers accounted for approximately 42% of our total revenues. This trend may
continue in the future. We cannot be certain that customers that have accounted
for significant revenues in past periods, individually or as a group, will
renew our services and continue to generate revenue in any future period. In
addition, our customer agreements can generally be terminated at any time with
little or no penalty. If we lose a major customer, our revenues could decline.
In order to grow our business, we need to establish and maintain relationships
with other companies to help market our Internet performance measurement and
diagnostic services.
In order to increase sales of our Internet performance measurement and
diagnostic services worldwide, we must complement our direct sales force with
relationships with companies to market and sell our services to their
customers. If we are unable to maintain our existing contractual marketing and
distribution relationships, or fail to enter into additional relationships, we
will have to devote substantially more resources to the direct sale and
marketing of our services. We would also lose anticipated revenues from
customer referrals and other co-marketing benefits. Our success depends in part
on the ultimate success of these relationships and the ability of these
companies to market and sell our services. Our existing relationships do not,
and any future relationships may not, afford us any exclusive marketing or
distribution rights. Therefore, they could reduce their commitment to us at any
time in the future. Many of these companies have multiple relationships and
they may not regard us as significant for their business. In addition, these
companies may terminate their relationships with us, pursue other relationships
with our competitors or develop or acquire products or services that compete
with our services. Even if we succeed in entering into these relationships,
they may not result in additional customers or revenues.
In addition, growth in the sales of our services depends on our ability to
obtain domestic and international resellers, distributors and integrators who
will market and sell our services on our behalf. In the future, we intend to
increase our indirect distribution channels through distribution arrangements.
We may not be successful in establishing relationships with these companies,
and any of these relationships, if established, may not increase our revenue.
12
<PAGE>
In order to grow our business, we must attract and retain qualified personnel
while competition for personnel in our industry is intense.
We may be unable to retain our key employees, namely our management team
and experienced engineers, or to attract, assimilate or retain other highly
qualified employees. The volatility and current market price of our common
stock may make it more difficult for us to recruit, hire and retain qualified
personnel or cause us to incur higher salary costs. We have from time to time
in the past experienced, and we expect in the future to continue to experience,
difficulty in hiring and retaining highly skilled employees with experience in
the Internet industry, a complex industry that requires a unique knowledge
base. In addition, there is significant competition for qualified employees in
the Internet industry. Umang Gupta, our chief executive officer, is our only
key employee with whom we have entered into an employment agreement. Our other
key employees are not bound by employment agreements that could prevent them
from terminating their employment at any time.
In addition, because we sell our Internet performance measurement and
diagnostic services primarily through our telesales force, we believe that we
will need to attract additional sales personnel to grow our revenues. Our
ability to deliver our services also depends on our ability to attract and
retain operations personnel. There is a shortage of qualified sales and
operations personnel and competition for personnel in our industry is intense.
If we are unable to hire, train, motivate or retain qualified employees,
including sales and operations personnel, our business could be harmed.
If our professional services are not accepted by the market, our results of
operations could be harmed.
We formed our professional services organization in January 1999. As a
result, we have limited experience in delivering consulting services and we may
not be able to successfully introduce additional consulting services. We will
also need to successfully market these services to potential customers. There
are many experienced firms which offer computer network and Internet-related
consulting services. These consulting services providers include the consulting
groups of "Big Five" accounting firms, such as Andersen Consulting and Ernst &
Young, as well as consulting divisions of large technology companies such as
IBM. Because we do not have an established reputation for delivering consulting
services, because this area is very competitive, and due to our general
inexperience in delivering consulting services, we may not succeed in selling
these services.
If we are unable to attract, educate and retain qualified professional service
personnel, we may not be able to successfully expand our professional services
organization.
We plan to increase the number of our professional services personnel. If
we hire additional services personnel prior to securing a large customer base
our operating results would be adversely affected as we would incur expenses
for these personnel without commensurate revenue increases. This was the reason
that our cost of consulting services revenues exceeded our consulting services
in the fiscal year ended September 30, 1999 and in the three months ended
December 31, 1999. Competition for highly qualified professional services
personnel with knowledge of our industry is intense. We cannot be certain that
we can attract or retain a sufficient number of professional services personnel
that our business requires. In addition, new employees will require training
and education, and consequently, they will take time to reach full
productivity.
The growth of our business depends on the continued performance of and future
improvements to the Internet.
The growth in Internet traffic has caused frequent periods of decreased
performance, requiring Internet service providers and web sites on the Internet
to upgrade their infrastructures. Our ability to increase the speed with which
we provide services to our customers and to increase the scope of these
services is limited by and depends upon the speed and reliability of the
Internet. Consequently, the emergence and growth of the market for our services
and, consequently our revenues, depends on the performance of and future
improvements to the Internet.
13
<PAGE>
Because we have expanded our operations, our success will depend on our ability
to manage our growth, improve our existing systems and implement new systems,
procedures and controls.
We are expanding, and we intend to continue to expand, our operations by
deploying additional measurement computers, both domestically and
internationally, hiring new personnel and implementing and integrating new
accounting and control systems to manage this expansion. We may encounter
difficulties in managing this growth. Our ability to compete effectively and to
manage any future expansion of our operations will require us to continue to
improve our financial and management controls, reporting systems and procedures
on a timely basis. We may not succeed in these efforts and a disruption could
impair our ability to retain existing customers or attract new customers.
Our network infrastructure could be disrupted by a number of different
occurrences, which could impair our ability to retain existing customers or
attract new customers.
All data collected from our measurement computers are stored in and
distributed from our operations center. Therefore, our operations depend upon
our ability to maintain and protect our computer systems, most of which are
located at our corporate headquarters in San Mateo, California which is an area
susceptible to earthquakes. If we experience outages at our operations center,
we would not be able to receive data from our measurement computers and we
would not be able to deliver our services to our customers. We currently do not
have a redundant system for computer-network and other services at an alternate
site. Therefore, our operations systems are vulnerable to damage from break-
ins, computer viruses, unauthorized access, vandalism, fire, floods,
earthquakes, power loss, telecommunications failures and similar events.
Although we maintain insurance against fires and general commercial liability,
the amount and scope of this coverage may not be adequate. If our operations
center is damaged, causing a disruption in our services, this could impair our
ability to retain existing customers or attract new customers.
If our computer infrastructure is not functioning properly, we may not be
able to deliver our services in a timely or accurate manner. We have
occasionally experienced outages of our service in the past, the last of which
occurred approximately six months ago. The outages that we have experienced
have lasted no more than a few hours, with the longest outage that occurred in
the fall of 1998 having lasted approximately 12 hours. These outages have been
caused by a variety of factors including operator error, the failure of a back-
up computer to operate when the primary computer ceased functioning and power
outages. Although we do not believe we have lost any customers due to these
prior outages, any outage for any period of time could cause us to lose
customers.
Hackers, or individuals who attempt to breach our network security, could,
if successful, misappropriate proprietary information or cause interruptions in
our services. Although we have not yet experienced any breaches of our network
security or sabotage, we might be required to expend significant capital and
resources to protect against, or to alleviate, problems caused by hackers. We
may not have a timely remedy against a hacker who is able to breach our network
security. In addition to purposeful security breaches, the inadvertent
transmission of computer viruses could expose us to litigation or to a material
risk of loss.
Our measurement computers are located at sites which we do not own or operate
and it could be difficult for us to maintain or repair them if they do not
function properly.
Our measurement computers are located at facilities that are not owned by
us or our customers. Instead, these computers are installed at locations near
various Internet access points worldwide. Because we do not own or operate
these facilities, we have little control over how these computers are
maintained on a day-to-day basis. We do not have long-term contractual
relationships with the companies that operate the facilities where our
measurement computers are located. We may have to find new locations for these
computers if we are unable to maintain or develop relationships with these
companies or if these companies cease their operations. In addition, if our
measurement computers were not functioning properly, we may not be immediately
aware of these difficulties or we may not be able to repair or service these
computers on a timely basis as we may not
14
<PAGE>
have immediate access to our measurement computers. Our ability to collect data
in a timely manner could be impaired if we are unable to maintain and repair
our computers should performance problems arise.
The success of our business depends on our ability to protect and enforce our
intellectual property rights.
The intellectual property we use in our business is important to us. We
have trademarks, service marks, one issued U.S. patent and one U.S. patent
application with respect to our Internet performance measurement technology,
and we have also developed proprietary software that we use to deliver our
services to our customers. Despite our efforts, we may be unable to prevent
others from infringing upon or misappropriating our intellectual property,
which could harm our business.
It is possible that no patent will issue from our currently pending patent
application. Moreover, new patent applications may not result in issued patents
and may not provide us with any competitive advantages over, or may be
challenged by, others. Legal standards relating to the validity, enforceability
and scope of protection of intellectual property rights in Internet-related
industries are uncertain and still evolving, and the future viability or value
of any of our intellectual property rights is uncertain. Effective trademark,
copyright and trade secret protection may not be available in every country in
which our products are distributed or made available. Furthermore, our
competitors may independently develop similar technology that substantially
limits the value of our intellectual property, or they may design around
patents issued to us.
Most of our customers' use of our services is governed by web-based
subscription agreements, rather than by means of a formal, written contract.
Each time customers use our services, they "click" on a web page to agree to
terms and conditions that are posted on our web site, and our relationship with
these customers is then governed by these terms and conditions. There is a
possibility that a court, arbiter or regulatory body could deem this type of
agreement to be invalid or determine that the terms and conditions governing
the agreement do not fully protect our intellectual property rights. If that
were to occur, our business could be harmed. Although we are not currently
engaged in litigation, we may in the future need to initiate a lawsuit to
enforce our intellectual property rights and to protect our patents, if issued,
trademarks and copyrights. Any litigation could result in substantial costs and
diversion of resources and could seriously harm our business. For a description
of our intellectual property, see "Business--Intellectual Property."
Others might bring infringement claims against us or our suppliers that could
harm our business.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We expect that we
could become subject to intellectual property infringement claims as the number
of our competitors grows and our services overlap with competitive offerings.
These claims, even if not meritorious, could be expensive and divert
management's attention from operating our company. If we become liable to
others for infringing their intellectual property rights, we would be required
to pay a substantial damage award and to develop noninfringing technology,
obtain a license or cease selling the services that contain the infringing
intellectual property. We may be unable to develop noninfringing technology or
to obtain a license on commercially reasonable terms, if at all.
We depend on technologies licensed from other companies for portions of our
services.
We cannot assure you that our technology licenses will not infringe the
proprietary rights of others or will continue to be available to us on
commercially reasonable terms, if at all. We license statistical, graphical,
database and other technologies from third parties to operate our services. The
loss of this technology could require us to obtain or develop substitute
technology of lower quality or performance standards or at greater cost. If we
do not obtain or develop substitute technology, we could be unable to offer all
of the features or functionality that we desire to include in our services.
15
<PAGE>
If we expand our international activities, our business will be susceptible to
additional risks associated with international operations.
We believe we must expand the sales of our services outside the United
States and hire additional international personnel. Therefore, we expect to
commit significant resources to expand our international sales and marketing
activities, which represented an insignificant portion of our total revenues
for the fiscal year ended September 30, 1999 and our prior periods. In
addition, we intend to deploy additional measurement computers worldwide, which
would require us to maintain and service computers over larger distances.
Conducting international operations would subject us to risks we do not face in
the United States. These include:
. currency exchange rate fluctuations;
. seasonal fluctuations in purchasing patterns;
. unexpected changes in regulatory requirements;
. maintaining and servicing computer hardware in distant locations;
. longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
. difficulties in managing and staffing international operations;
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
. the burdens complying with a wide variety of foreign laws; and
. and reduced protection for intellectual property rights in some
countries.
The Internet may not be used as widely in other countries and the adoption
of e-commerce may evolve slowly or may not evolve at all. As a result, we may
not be successful in selling our services to customers in markets outside the
United States.
Our business might be harmed if the systems we use are not year 2000 compliant
or if our customers or potential customers alter their purchasing patterns as a
result of the year 2000 problem.
Our information technology systems could be impaired or cease to operate
due to computer systems or software products being unable to distinguish
between 20th and 21st century dates, which is known as the year 2000 problem.
Notwithstanding the passage of January 1, 2000, our business could still face
year 2000 problems. If our Keynote Perspective, Consumer Perspective and
Lifeline services and our network of measurement computers fail to accurately
measure, process and assess web-site performance data due to the year 2000
problem, we could lose customers. We also rely on technology supplied by other
companies. These companies may experience year 2000 related problems. Any year
2000 problems experienced by us or any of these companies could harm our
business. Additionally, because the Internet is comprised of numerous computers
and communications lines, it may fail to function properly or at all, causing
unavailability or disruption of Internet services. If either of these occurred,
we may be unable to measure Internet performance which would cause our revenues
to decline.
Customers', or potential customers', purchasing plans could be affected by
year 2000 issues if they need to expend significant resources to correct their
existing systems. This situation could result in reduced funds available for
these customers to purchase our services. As a result, some customers may defer
the purchase of our services until after the year 2000. A decrease in the
demand for our services due to customers' year 2000 issues could harm our
business.
A previous version of our Keynote Perspective service which we no longer
sell was not year 2000 compliant. Despite our testing and remediating, our
services may contain errors or faults with respect to the year 2000. Although
there are no users of non-year 2000 compliant versions of our services, we may
face liability in the future for any unknown or unforeseen errors or faults
relating to the year 2000. Although our directors' and officers' liability
insurance will cover liability arising from year 2000 claims, this insurance
16
<PAGE>
policy has a low coverage limit, has a deductible of $250,000 and will only
cover at most an amount equal to 25% of the final claim. Therefore, we could
incur significant expenses if we were subject to one of these types of claims.
We currently have limited contingency plans with respect to the year 2000
problem, and these consist of our having established connections with other
Internet service providers to provide service if our primary Internet service
provider fails. If we experience other year 2000 issues, we may not be able to
react quickly.
We may face difficulties assimilating and may incur costs associated with any
future acquisitions.
As part of our business strategy, we may seek to acquire or invest in
businesses, products or technologies that we feel could complement or expand
our business, augment our market coverage, enhance our technical capabilities
or that may otherwise offer growth opportunities. Acquisitions could create
risks for us, including:
. difficulties in assimilation of acquired personnel, operations and
technologies;
. unanticipated costs associated with the acquisition;
. diversion of management's attention from other business concerns;
. adverse effects on existing business relationships with resellers of
our service and our customers; and
. use of substantial portions of our available cash, including the
proceeds of this offering, to consummate the acquisition.
Risk Related to this Offering
Our officers, directors and other existing shareholders will own a large
percentage of our voting stock and will be able to control us.
After this offering and assuming no additional issuances of common stock,
our officers, directors and 5% or greater shareholders will beneficially own or
control, directly or indirectly, 8,706,008 shares of our common stock, which in
the aggregate will represent approximately 33.4% of the outstanding shares of
our common stock. As a result, if these persons act together, they will have
the ability to influence all matters submitted to our shareholders for
approval, including
. the election and removal of directors and
. any merger, consolidation or sale of all or substantially all of our
assets.
This ability to exercise influence over all matters requiring shareholder
approval could prevent or significantly delay another company or person from
acquiring or merging with us. For a further discussion of the stock ownership
of our officers, directors and 5% or greater shareholders, please see
"Principal and Selling Shareholders."
The market price for our common stock, like other technology stocks, may
continue to be volatile and could result in class-action securities litigation
against us.
The market prices of the securities of Internet-related companies have been
especially volatile, including the market price of our common stock. The value
of your investment in our common stock could decline due to the impact of any
of the following factors upon the market price of our common stock:
. actual or anticipated variations in our quarterly operating results;
. announcements of new Internet performance measurement service
offerings by us or our competitors;
17
<PAGE>
. announcements of technological innovations;
. competitive developments;
. changes in financial estimates by securities analysts;
. failure in one or more future quarters of our operating results to
meet the expectations of securities analysts or investors;
. changes in market valuations of Internet-related companies;
. additions or departures of key personnel, notably our management team
and experienced engineers;
. conditions and trends in the Internet and e-commerce industries; and
. general economic conditions.
Further, the stock markets, particularly the Nasdaq National Market on
which our common stock is listed, have experienced substantial price and volume
fluctuations. These fluctuations have particularly affected the market prices
of equity securities of many technology and Internet-related companies and have
often been unrelated or disproportionate to the operating performance of those
companies. The trading prices of many technology companies' stocks are at or
near historical highs. These high trading prices may not be sustained. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against that company. Litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources. See "Price Range
of Common Stock."
Future sales of our common stock may cause our stock price to decline.
Sales of a large number of shares of our common stock in the market after
this offering, or the belief that these sales could occur, could cause a drop
in the market price of our common stock. Upon completion of this offering, we
will have outstanding 25,837,660 shares of common stock. Of these shares, the
4,600,000 shares sold in our initial public offering as well as the 5,750,000
shares to be sold in this offering will be freely tradable without restriction
or further registration under the Securities Act, unless the shares are
purchased by our "affiliates."
The remaining 15,487,660 shares of common stock outstanding upon completion
of this offering will be "restricted securities," as that term is defined under
Rule 144 of the Securities Act. Our directors, executive officers and other
shareholders who held a total of 18,392,332 shares, or over 95%, of the total
outstanding shares of our common stock immediately prior to our initial public
offering, have executed lock-up agreements that limit their ability to sell
common stock. These shareholders have agreed not to sell or otherwise dispose
of any shares of our common stock until March 23, 2000 without the prior
written approval of FleetBoston Robertson Stephens Inc. In addition, our
officers, directors and selling shareholders, who will hold 14,360,017 shares
of common stock after this offering, have agreed not to sell or otherwise
dispose of any shares of our common stock for a period of 90 days from the date
of this prospectus. When the lock-up agreements expire, these shares and shares
underlying outstanding stock options and warrants will become eligible for
sale, in some cases only subject to the volume, manner of sale and notice
requirements of Rule 144. As of December 31, 1999 there were outstanding
options to purchase 1,992,487 shares of our common stock and outstanding
warrants to purchase 7,273 shares of our common stock.
Assuming the cash exercise of these options and warrants outstanding as of
December 31, 1999, the remaining 17,487,420 shares of our common stock will
become eligible for public sale as follows:
. 0 shares as of the date of this prospectus;
. 3,068,994 shares as of March 23, 2000;
. 5,288 shares as of April 26, 2000;
. 23,224 shares as of April 30, 2000;
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<PAGE>
. 22,624 shares as of May 11, 2000;
. 14,360,017 shares 90 days after the date of this prospectus; and
. 7,273 shares one year after the date of this prospectus.
We are uncertain of our ability to obtain additional financing for our future
capital needs.
We may need to raise funds in the future to meet our working capital and
capital expenditure needs. However, we may not be successful in raising
additional funds at all or on terms that are favorable to us. We expect the net
proceeds from this offering, together with our existing cash and cash
equivalents, will be sufficient to meet our working capital and capital
expenditure needs for at least the next twelve months. After that, we may need
additional funds to fund more rapid expansion, to expand our marketing
activities, to develop new or enhance existing services or products, to respond
to competitive pressures or to acquire complementary services, businesses or
technologies.
New investors will experience immediate and substantial dilution from this
offering.
The public offering price of our common stock is substantially higher than
the book value per share of the outstanding common stock. As a result,
investors purchasing stock in this offering will experience an immediate
dilution in the net tangible book value of the common stock of $94.57 per
share, based on the number of outstanding shares as of December 31, 1999. In
the past, we issued options and warrants to acquire our common stock at prices
significantly below the current market price. To the extent these outstanding
options and warrants are ultimately exercised, there will be further dilution
to investors in this offering.
Management might apply the net proceeds from this offering to uses that do not
improve our operating results or market value.
The net proceeds from the sale of our common stock in this offering will be
added to our general working capital. We have not reserved or allocated the net
proceeds for any specific purpose, and we cannot specify with certainty how we
will use these proceeds. Consequently, our management will have broad
discretion with respect to the application of proceeds from this offering, and
you will not have the opportunity, as part of your investment in our common
stock, to assess whether the proceeds are being used appropriately. The net
proceeds may be used for corporate purposes that do not improve our operating
results or market value. Pending application of the proceeds, they might be
placed in investments that do not produce income or that lose value.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. In some cases, you can identify forward-looking statements
by terms such as "may," "might," "could," "will," "should," "expect," "plan,"
"intend," "forecast," "anticipate," "believe," "estimate," "predict,"
"foreseeable," "potential," "continue" or the negative of these terms or other
comparable terminology. The forward-looking statements contained in this
prospectus involve known and unknown risks, uncertainties and other factors
that may cause our or our industry's actual results, level of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
statements. These factors include, among others, those listed under "Risk
Factors" and elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements.
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<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 2,000,000 shares of
common stock that we are offering will be approximately $199.9 million, based
on the public offering price of $105.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $286.3 million. We will not receive any
proceeds from the sale of shares of common stock by the selling shareholders.
We intend to use the proceeds for working capital, capital expenditures and
other general corporate purposes. In addition, we may use a portion of the net
proceeds from this offering to acquire or invest in businesses, technologies or
products that are complementary to our business. We currently have no
commitments or agreements with respect to any acquisitions. Pending our use of
the net proceeds, we intend to invest them in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future. In
addition, the terms of our loan agreements prevent us from paying cash
dividends.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "KEYN" since September 24, 1999. Prior to this time, there was no public
market for our common stock. We had approximately 112 shareholders as of
December 31, 1999, but because brokers and other financial institutions hold
many of the shares on behalf of shareholders, we believe the total number of
beneficial holders is greater than that represented by these record holders.
<TABLE>
<CAPTION>
Common
Stock Price
--------------
High Low
------- ------
<S> <C> <C>
Fiscal Year Ended September 30, 1999
Fourth Quarter (from September 24, 1999)....................... $ 33.38 $17.25
Fiscal Year Ended September 30, 2000
First Quarter ................................................. 82.00 23.50
Second Quarter (through February 17, 2000)..................... 126.50 69.00
</TABLE>
On February 17, 2000, the last reported sales price of our common stock on
the Nasdaq National Market was $107.06 per share.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
The as adjusted information reflects the sale of the 2,000,000 shares of common
stock that we are offering, at the public offering price of $105.00 per share,
after deducting underwriting discounts and commissions and our estimated
offering expenses, the exercise of options to purchase 65,375 shares of our
common stock prior to the completion of this offering and the exercise of
warrants to purchase 163,529 shares of our common stock prior to the completion
of this offering.
<TABLE>
<CAPTION>
As of December
31, 1999
------------------
As
Actual Adjusted
-------- --------
(in thousands,
except share
data)
<S> <C> <C>
Notes payable, less current portion........................ $ 2,311 $ 2,311
-------- --------
Shareholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding, actual and
as adjusted............................................. -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized, 23,608,756 shares issued and outstanding,
actual; 50,000,000 shares authorized, 25,837,660 shares
issued and outstanding, as adjusted..................... 24 26
Additional paid-in capital................................. 85,249 285,568
Deferred stock-based compensation.......................... (1,049) (1,049)
Notes receivable from shareholders......................... (373) (373)
Accumulated deficit........................................ (14,724) (14,724)
-------- --------
Total shareholders' equity ............................... 69,127 269,448
-------- --------
Total capitalization..................................... $ 71,438 $271,759
======== ========
</TABLE>
The share numbers above exclude:
. 1,992,487 shares issuable upon the exercise of outstanding stock
options as of December 31, 1999, at a weighted average exercise price
of $6.16 per share;
. 7,273 shares issuable upon the exercise of warrants outstanding as of
December 31, 1999;
. 400,000 shares available as of December 31, 1999, for sale under our
employee stock purchase plan; and
. 4,903,887 shares available as of December 31, 1999, for future grant
under our stock plans described in this prospectus.
You should read this table together with "Management--Director
Compensation," "Management--Employee Benefit Plans," "Description of Capital
Stock," notes 5, 6 and 7 of the notes to our financial statements and note 3 of
the notes to our unaudited condensed consolidated financial statements.
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<PAGE>
DILUTION
Our net tangible book value as of December 31, 1999 was $69.1 million or
$2.93 per share. Net tangible book value per share is determined by dividing
the number of outstanding shares of common stock into our net tangible book
value, which is our total tangible assets less total liabilities. After giving
effect to the receipt of the estimated net proceeds from this offering, based
on the public offering price of $105.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses, from
the exercise of options to purchase 65,375 shares of our common stock prior to
the completion of this offering and from the exercise of warrants to purchase
163,529 shares of our common stock prior to the completion of this offering,
our net tangible book value as of December 31, 1999 would have been
approximately $269.4 million, or $10.43 per share. This represents an immediate
increase in net tangible book value of $7.50 per share to existing shareholders
and an immediate dilution of $94.57 per share to new investors purchasing
shares at the assumed public offering price. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share.................................... $105.00
Net tangible book value per share as of December 31, 1999......... $2.93
Increase per share attributable to new investors.................. 7.50
-----
Net tangible book value per share after offering................... 10.43
-------
Dilution per share to new investors................................ $ 94.57
=======
</TABLE>
22
<PAGE>
SELECTED FINANCIAL DATA
The tables that follow present portions of our financial statements and are
not complete. You should read the following selected financial data together
with our financial statements and related notes to our financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected statement of operations data for the years ended
September 30, 1997, 1998 and 1999 and the balance sheet data as of
September 30, 1998 and 1999 are derived from our financial statements that have
been audited by KPMG LLP, independent certified public accountants, included
elsewhere in this prospectus. The statement of operations data for the period
from June 15, 1995 (inception) to September 30, 1995 and the year ended
September 30, 1996 and the balance sheet data as of September 30, 1995, 1996
and 1997 are derived from audited financial statements that are not included in
this prospectus. The statement of operations data for the three months ended
December 31, 1998 and 1999 and the balance sheet data as of December 31, 1999
are derived from the unaudited condensed consolidated financial statements
included elsewhere in this prospectus. The interim unaudited consolidated
financial statements reflect all normal recurring adjustments that are, in the
opinion of management, necessary for a fair presentation of our financial
position at December 31, 1999, and our results of operations and cash flows for
the interim periods ended December 31, 1999 and 1998. The historical results
presented below are not necessarily indicative of the results to be expected
for any future fiscal period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Period From
June 15, 1995 Three Months
(inception) Ended
to Years Ended September 30, December 31,
September 30, --------------------------------- ---------------
1995 1996 1997 1998 1999 1998 1999
------------- ------ ------- ------- ------- ------ -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Subscription services.. $ -- $ -- $ 81 $ 1,539 $ 7,055 $ 889 $ 4,579
Consulting services.... 28 30 -- -- 217 -- 217
----- ------ ------- ------- ------- ------ -------
Total revenues........ 28 30 81 1,539 7,272 889 4,796
----- ------ ------- ------- ------- ------ -------
Expenses:
Cost of subscription
services............. -- -- 209 580 2,314 168 2,066
Cost of consulting
services............. -- -- -- -- 444 -- 254
Research and
development.......... -- 392 732 1,226 2,059 325 841
Sales and marketing.... -- 186 817 1,529 5,331 627 2,728
Operations............. -- -- 63 514 1,639 229 777
General and
administrative....... 16 80 278 647 1,642 254 840
Amortization of stock-
based compensation... -- -- -- -- 858 23 85
----- ------ ------- ------- ------- ------ -------
Total expenses........ 16 658 2,099 4,496 14,287 1,626 7,591
----- ------ ------- ------- ------- ------ -------
Income (loss) from
operations.......... 12 (628) (2,018) (2,957) (7,015) (737) (2,795)
Interest income
(expense), net........ (1) 6 (31) 39 (95) (61) 759
----- ------ ------- ------- ------- ------ -------
Net income (loss)..... $ 11 $ (622) $(2,049) $(2,918) $(7,110) $ (798) $(2,036)
===== ====== ======= ======= ======= ====== =======
Net income (loss) per
share:
Basic and diluted...... $0.03 $(0.23) $ (0.84) $ (1.10) $ (1.54) $(0.27) $ (0.09)
===== ====== ======= ======= ======= ====== =======
Weighted average
shares--basic and
diluted.............. 322 2,733 2,434 2,649 4,622 3,004 22,798
===== ====== ======= ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
As of September 30, As of
-------------------------------------- December 31,
1995 1996 1997 1998 1999 1999
---- ------ ------- ------- ------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............. $10 $ 545 $ 1,150 $ 2,293 $64,647 $69,208
Working capital........... 22 551 1,007 2,164 62,288 67,022
Total assets.............. 39 711 1,670 3,918 71,071 79,262
Notes payable, less
current portion......... -- -- 199 303 2,591 2,311
Redeemable convertible
preferred stock......... -- 1,262 3,828 8,529 -- --
Total shareholders' equity
(deficit)............... 35 (567) (2,588) (5,552) 63,242 69,127
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following Management's Discussion and Analysis of
Financial Condition and Results of Operations together with the financial
statements and related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors" and elsewhere in this
prospectus.
Overview
Keynote was founded in June 1995 to measure Internet performance and to
market and sell the information derived from our measurement results. In April
1997, we began to sell Keynote Perspective, a service that measures the
performance and availability of web file downloads. In September 1997, we
released and updated all existing customers to a new version of Keynote
Perspective, which allowed our customers to view the performance data online
without installing any software. Our next release of Keynote Perspective, in
July 1998, allowed our customers to download and analyze the performance of
entire web pages, including text and graphics. In April 1999, we released a new
version of Keynote Perspective, which included our Transaction service, which
measures the time it takes to execute an interactive transaction that involves
the display of multiple web pages, such as placing an online stock trade order.
In July 1999, we introduced our Keynote Lifeline service. In December 1999, we
introduced our most recent version of Keynote Perspective. In December 1999, we
introduced Keynote Consumer Perspective which measures web-site performance via
Internet access methods typically used from the home, such as dial-up
connections, cable modems and digital subscriber lines. In January 1999, we
began offering consulting services, which are designed to assist our customers
in evaluating, interpreting and improving their performance measurement and
diagnostic results.
Our direct sales organization also provides telephone and e-mail sales
support, telemarketing services and pre-sales technical support. We believe our
direct sales approach enables us to focus our resources on ascertaining the
needs of our customers, to devote significant attention to customer
satisfaction and to quickly offer new services to our existing customers.
We also distribute our services through web-hosting and Internet service
providers such as Digex and GlobalCenter, which manage e-commerce web sites for
other companies. These companies sell or bundle our services to part of their
customer base as a value-added service to these customers and as a management
tool for themselves. We also market our services through VeriSign and Network
Solutions, which are companies that sell services complementary to ours.
We derive and expect to continue to derive all of our subscription revenues
from the sale of our Internet performance measurement, consulting and
diagnostic services. Keynote Perspective is a subscription-based service which
our customers purchase for an initial three-month term and then may renew their
subscription on a month-to-month basis. Subscription fees vary based on the
number of web-site addresses measured, the number of measurement locations, the
frequency of the measurements and the additional features ordered. Although
consulting revenues have not been significant to date, we believe that
consulting revenues may become more important in the future as we pursue
additional consulting opportunities. Our international revenues to date have
not been significant.
We recognize revenues ratably as services are performed. We typically
invoice our customers monthly in advance for our services. Any unearned revenue
is recorded as deferred revenue on our balance sheet. As of December 31, 1999,
we had recorded $2.8 million of deferred revenue. Revenues from our consulting
services are recognized as the services are performed; a typical project lasts
one month. For longer consulting projects, we anticipate recognizing revenue on
a percentage-of-completion basis.
Our business has grown since inception, with total revenues of $81,000 for
the fiscal year ended September 30, 1997, $1.5 million for the fiscal year
ended September 30, 1998, $7.3 million for the fiscal
24
<PAGE>
year ended September 30, 1999 and $4.8 million for the three months ended
December 31, 1999. We incurred net losses of $2.0 million for the fiscal year
ended September 30, 1997, $2.9 million for the fiscal year ended September 30,
1998, $7.1 million for the fiscal year ended September 30, 1999 and $2.0
million for the three months ended December 31, 1999. We expect to incur
significant losses in the future.
Results of Operations
The following table sets forth our revenues, expenses, interest income
(expense) and net loss as a percentage of total revenues for the years ended
September 30, 1997, 1998 and 1999 and the three months ended December 31, 1998
and 1999:
<TABLE>
<CAPTION>
Three Months
Years Ended Ended
September 30, December 31,
-------------------- ----------------
1997 1998 1999 1998 1999
------ ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Subscription services................. 100% 100% 97% 100% 95%
Consulting services................... -- -- 3 -- 5
------ ---- --- ------ ------
Total revenues...................... 100 100 100 100 100
Expenses:
Cost of subscription services......... 258 38 32 19 43
Cost of consulting services........... -- -- 6 -- 5
Research and development.............. 904 80 28 37 18
Sales and marketing................... 1,009 99 73 71 57
Operations............................ 78 33 23 26 16
General and administrative............ 343 42 23 29 18
Amortization of stock-based
compensation........................ -- -- 12 3 2
------ ---- --- ------ ------
Total expenses...................... 2,592 292 197 185 159
Loss from operations............. (2,492) (192) (97) (83) (58)
Interest income (expense), net......... (38) 2 (1) (7) 16
------ ---- --- ------ ------
Net loss............................ (2,530)% (190)% (98)% (90)% (42)%
====== ==== === ====== ======
</TABLE>
Quarters Ended December 31, 1998 and 1999
Revenues
Revenues were $4.8 million for the three months ended December 31, 1999 and
$889,000 for the three months ended December 31, 1998, representing an increase
of $3.9 million, or 439%. Subscription services represented 95% of total
revenues for the three months ended December 31, 1999 and 100% of total
revenues for the three months ended December 31, 1998. The increase in total
revenues was attributable to the increase in both the number of new customers
and the increase in revenue from existing customers. For the three months ended
December 31, 1999, one customer accounted for approximately 11% of total
revenues. For the three months ended December 31, 1998, no customers accounted
for more than 10% of total revenues.
Expenses
Cost of Subscription Services. Cost of subscription services consists of
connection fees to Internet service providers for bandwidth usage of our
measurement computers around the world and depreciation, maintenance and other
equipment charges for our measurement infrastructure. Cost of subscription
services was $2.1 million for the three months ended December 31, 1999 and
$168,000 for the three months ended December 31, 1998, representing an increase
of $1.9 million, or 1130%. This increase was primarily due to the greater
number of measurement computers deployed and additional bandwidth consumption,
resulting in higher
25
<PAGE>
connection fees and more depreciation and equipment charges. In addition,
during the three months ended December 31, 1999, we continued to increase
measurement capacity and bandwidth at our existing locations, and expand our
measurement infrastructure. Cost of subscription services was 45% of
subscription services for the three months ended December 31, 1999 and 19% of
subscription services for the three months ended December 31, 1998. We expect
to continue to increase measurement capacity in fiscal 2000, and we anticipate
that cost of subscription services will increase.
Cost of Consulting Services. Cost of consulting services consists of
compensation expenses for consulting personnel and related costs. Our cost of
consulting services was $254,000 for the three months ended December 31, 1999
and $0 for the three months ended December 31, 1998. Cost of consulting
services exceeded consulting services revenue for the three months ended
December 31, 1999 because our consulting division was formed in January 1999.
We expect that the cost of consulting services as a percentage of consulting
services revenue will be greater than the cost of subscription services as a
percentage of subscription services revenues.
Research and Development. Research and development expenses consist
primarily of compensation and related costs for research and development
personnel and outside contractors. Our research and development expenses were
$841,000 for the three months ended December 31, 1999 and $325,000 for the
three months ended December 31, 1998, representing an increase of $516,000, or
159%. This increase was primarily related to the increase in software
engineers, project management and quality assurance personnel and outside
consultants. To date, all research and development expenses have been expensed
as incurred. We believe that a significant increase in our research and
development investment is essential for us to maintain our market position and
to continue to enhance and expand our services. Accordingly, we anticipate
research and development expenses are likely to increase in the foreseeable
future.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
lead-referral fees, marketing programs and travel expenses. Our sales and
marketing expenses were $2.7 million for the three months ended December 31,
1999 and $627,000 for the three months ended December 31, 1998, representing an
increase of $2.1 million or 335%. This increase reflects our investment in
additional personnel in our sales and marketing organization and marketing
programs. It also includes salaries and referral fees to recruit and hire sales
management, sales representatives and sales engineers. We believe that a
significant increase in our sales and marketing efforts is essential for us to
maintain our market position and to further increase acceptance of our
services. Accordingly, we anticipate sales and marketing expenses will increase
in the foreseeable future.
Operations. Operations expenses consist primarily of compensation and
related costs for management personnel, technical support employees who manage
and maintain our measurement and headquarters infrastructure and support our
customers. Our operations personnel also work closely with other departments to
assure the reliability of our services and to support our sales and marketing
activities. Operations expenses were $777,000 for the three months ended
December 31, 1999 and $229,000 for the three months ended December 31, 1998,
representing an increase of $548,000 or 239%. This increase was primarily
related to the hiring of personnel to manage and support our growing customer
base. We believe that continued investment is necessary to support our ability
to successfully develop, deploy and operate our growing Internet measurement
infrastructure, as well as to successfully support our customer base.
Accordingly, we anticipate that operations costs will increase in the
foreseeable future.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses, accounting, legal and
administrative expenses, insurance, professional service fees and other general
corporate expenses. Our general and administrative expenses were $839,000 for
the three months ended December 31, 1999 and $254,000 for the three months
ended December 31, 1998, representing an increase of $585,000, or 231%. This
increase was primarily related to hiring additional employees to support the
growth of our business, as well as increases in costs associated with becoming
a public company. We believe that our general and administrative expenses will
continue to increase as a result of the continued expansion of our
26
<PAGE>
administrative staff and expenses associated with being a public company,
including annual and other public reporting costs, directors' and officers'
liability insurance and investor relations programs.
Amortization of Stock-Based Compensation. Some options granted prior to
December 31, 1999 have been considered to be compensatory, as the estimated
fair value for accounting purposes was greater than the stock price as
determined by the board of directors on the date of grant. As a result, we have
recorded $86,000 and $23,000 in stock-based compensation expense for the three
months ended December 31, 1999 and 1998, respectively, relating to the
amortization of deferred compensation expense and had an aggregate of $1.0
million of deferred compensation remaining to be amortized as of December 31,
1999. Deferred compensation is amortized on a straight-line basis over the
vesting period of the options. We expect amortization of approximately $341,000
in fiscal 2000, $341,000 in fiscal 2001, $341,000 in fiscal 2002 and $112,000
in fiscal 2003.
Interest Income (Expense), Net
Net interest income (expense) was $759,000 for the three months ended
December 31, 1999 and $(61,000) for the three months ended December 31, 1998,
representing an increase of $820,000. The increase was primarily due to higher
interest income from our increase in cash and cash equivalents resulting from
the proceeds we received from our initial public offering.
Fiscal Years Ended September 30, 1998 and 1999
Revenues
Revenues were $1.5 million for fiscal 1998 and $7.3 million for fiscal
1999, representing an increase of $5.8 million, or 387%. Subscription services
represented 100% of total revenues for fiscal 1998 and 97% of total revenues
for fiscal 1999. The increase in total revenues was attributable to the
increase in both the number of new customers and the increase in revenue from
existing customers. For fiscal 1998, one customer, Digex, accounted for
approximately 15% of total revenues. For fiscal 1999, no single customer
accounted for more than 10% of total revenues.
Expenses
Cost of Subscription Services. Cost of subscription services was $580,000
for fiscal 1998 and $2.3 million for fiscal 1999, representing an increase of
$1.7 million, or 293%. This increase was primarily due to the greater number of
measurement computers deployed, resulting in higher connection fees and more
depreciation and equipment charges. In addition, in the fourth quarter of
fiscal 1999, we began increasing measurement capacity at our existing
locations, and began expanding our measurement infrastructure. Cost of
subscription services was 38% of subscription services for fiscal 1998 and 33%
of subscription services for fiscal 1999.
Cost of Consulting Services. Our cost of consulting services was $0 for
fiscal 1998 and $444,000 for fiscal 1999. Cost of consulting services exceeded
consulting services revenue for fiscal 1999 because our consulting division was
formed in January 1999 and generated limited revenue during fiscal 1999
Research and Development. Our research and development expenses were $1.2
million for fiscal 1998 and $2.1 million for fiscal 1999, representing an
increase of $900,000, or 75%. This increase was primarily related to our
increased hiring of software engineers, project management and quality
assurance personnel and increased use of outside consultants.
Sales and Marketing. Our sales and marketing expenses were $1.5 million for
fiscal 1998 and $5.3 million for fiscal 1999, representing an increase of $3.8
million, or 253%. This increase reflects our investment in additional personnel
in our sales and marketing organization and marketing programs. It also
includes salaries and referral fees to recruit and hire sales management, sales
representatives and sales engineers.
27
<PAGE>
Operations. Operations expenses were $514,000 for fiscal 1998 and $1.6
million for fiscal 1999, representing an increase of $1.1 million, or 214%.
This increase was primarily related to the hiring of personnel to manage and
support our growing customer base.
General and Administrative. Our general and administrative expenses were
$647,000 for fiscal 1998 and $1.6 million for fiscal 1999, representing an
increase of $953,000, or 147%. This increase was primarily related to hiring
additional employees to support the growth of our business, as well as
increases in costs associated with becoming a public company.
Amortization of Stock-Based Compensation. Some options granted during
fiscal 1999 have been considered to be compensatory, as the estimated fair
value for accounting purposes was greater than the stock price as determined by
the board of directors on the date of grant. As a result, we have recorded
$858,000 in stock-based compensation expense for fiscal 1999 relating to the
amortization of deferred compensation expense and had an aggregate of $1.1
million of deferred compensation remaining to be amortized as of that date.
Deferred compensation is amortized on a straight-line basis over the vesting
period of the options. In addition, we recorded a compensation charge of
$81,000 during fiscal 1999 as a result of our granting of approximately 85,000
performance-based stock options to various employees. The $858,000 of stock-
based compensation for the year ended September 30, 1999 relates to the
following items in the accompanying 1999 statement of operations: $31,000 cost
of consulting services; $68,000 research and development; $138,000 sales and
marketing; $52,000 operations; and $569,000 general and administrative.
Interest Income (Expense), Net
Net interest income (expense) was $39,000 for fiscal 1998 and $(95,000) for
fiscal 1999, representing a decrease of $134,000. This decrease was primarily
due to higher interest expense related to obligations under equipment loans and
notes payable, partially offset by higher interest income from cash and cash
equivalents.
Provision for Income Taxes
No provision for federal and state income taxes has been recorded because
we have experienced net losses since inception that has resulted in deferred
tax assets. In light of our recent history of operating losses, we have
provided a valuation allowance for all of our deferred tax assets, as we are
presently unable to conclude that it is more likely than not that the deferred
tax asset will be realized.
As of September 30, 1999, we had net operating loss carryforwards for
federal income tax reporting purposes of approximately $10.6 million available
to reduce future income subject to income taxes. As of September 30, 1999, we
had net operating loss carryforwards for state income tax purposes of
approximately $6.2 million available to reduce future income subject to income
taxes. The federal net operating loss carryforwards expire in various periods
through 2019. State net operating loss carryforwards expire in various periods
through 2004. In addition, as of September 30, 1999, we had federal research
and development tax credit carryforwards of approximately $154,000. The federal
credit carryforwards expire in various periods through 2019. As of September
30, 1999, we had California research and development tax credit carryforwards
of approximately $140,000. The California credit may be carried over
indefinitely. The U.S. Tax Reform Act of 1986 contains provisions that limit
the net operating loss carryforwards and research and development credits
available to be used in any given year upon the occurrence of certain events,
including a significant change to ownership.
Fiscal Years Ended September 30, 1997 and 1998
Revenues
Revenues were $81,000 in fiscal 1997 and $1.5 million in fiscal 1998,
representing an increase of $1.4 million. One customer, MCI, accounted for 11%
of total revenues for fiscal 1997, and one customer, Digex, accounted for 15%
of total revenues for fiscal 1998.
28
<PAGE>
Commercial release of our measurement services commenced in May 1997. The
increase in revenues from fiscal 1997 to fiscal 1998 primarily reflects our
increased customer base and the commercial acceptance of our Internet
measurement services.
Expenses
Cost of Subscription Services. Cost of subscription services was $209,000
in fiscal 1997 and $580,000 in fiscal 1998, representing an increase of
$371,000, or 178%. The increase resulted from the payment of connection fees to
Internet service providers for our measurement computers around the world and
depreciation, maintenance and other equipment charges for our measurement
infrastructure. As a percentage of subscription services revenues, cost of
subscription services was 38% in fiscal 1998.
Cost of Consulting Services. Cost of consulting services was $0 in fiscal
1997 and 1998. Our consulting division was formed in January 1999.
Research and Development. Research and development expenses were $732,000
in fiscal 1997 and $1.2 million in fiscal 1998, representing an increase of
$468,000, or 64%. The increase was primarily related to our increased hiring of
software engineers, project management and quality assurance personnel and
increased use of outside contractors to support our development and testing
activities.
Sales and Marketing. Sales and marketing expenses were $817,000 in fiscal
1997 and $1.5 million in fiscal 1998, representing an increase of $683,000, or
84%. The increase reflected the addition of personnel in our sales and
marketing organizations, as well as costs associated with increased selling
efforts to develop market awareness of our services.
Operations. Operations expenses were $63,000 in fiscal 1997 and $514,000 in
fiscal 1998, representing an increase of $451,000, or 716%. The increase was
primarily related to the increase in the number of personnel to manage and
support our growing customer base.
General and Administrative. General and administrative expenses were
$278,000 in fiscal 1997 and $647,000 in fiscal 1998, representing an increase
of $369,000, or 133%. The increase was primarily the result of increased
compensation and related employee expenses for additional finance and
administrative personnel to support the growth of our business during these
periods.
Interest Income (Expense), Net
Net interest (expense) income was $(31,000) in fiscal 1997 and $39,000 in
fiscal 1998. The interest expense in fiscal 1997 was related to obligations
under equipment loans and notes payable. The interest income in fiscal 1998
reflected interest earned on cash in interest-bearing accounts during the
respective periods in the fiscal year ended September 30, 1997 and 1998.
29
<PAGE>
Quarterly Results of Operations
The following table sets forth unaudited statement of operations data for
the nine quarters ended December 31, 1999. The data have been derived from
unaudited condensed financial statements not included in this prospectus that
have been prepared on the same basis as the audited financial statements and,
in the opinion of our management, include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the information
when read in conjunction with the audited financial statements and related
notes. These operating results are not necessarily indicative of results of any
future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------------
June
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, 30, Sept. 30, Dec. 31,
1997 1998 1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- --------- -------- --------- ------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Subscription services.. $ 208 $ 337 $ 403 $ 591 $ 889 $ 1,275 $ 1,862 $ 3,029 $ 4,579
Consulting services.... -- -- -- -- -- 26 57 134 217
----- ----- ----- ------- ------ ------- ------- ------- -------
Total revenues........ 208 337 403 591 889 1,301 1,919 3,163 4,796
----- ----- ----- ------- ------ ------- ------- ------- -------
Expenses:
Cost of subscription
services............. 86 89 155 250 168 285 522 1,339 2,066
Cost of consulting
services............. -- -- -- -- -- 87 167 190 254
Research and
development.......... 262 237 339 388 325 338 634 762 841
Sales and marketing.... 292 285 354 598 627 936 1,426 2,342 2,728
Operations............. 41 80 171 222 229 320 475 616 777
General and
administrative....... 154 154 151 188 254 189 406 791 840
Amortization of stock-
based compensation... -- -- -- -- 23 123 88 625 85
----- ----- ----- ------- ------ ------- ------- ------- -------
Total expenses........ 835 845 1,170 1,646 1,626 2,278 3,718 6,665 7,591
----- ----- ----- ------- ------ ------- ------- ------- -------
Loss from operations.. (627) (508) (767) (1,055) (737) (977) (1,799) (3,502) (2,795)
Interest income
(expense), net........ (7) (1) 32 15 (61) (88) 3 51 759
----- ----- ----- ------- ------ ------- ------- ------- -------
Net loss.............. $(634) $(509) $(735) $(1,040) $ (798) $(1,065) $(1,796) $(3,451) $(2,036)
===== ===== ===== ======= ====== ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues:
Subscription services.. 100% 100% 100% 100% 100% 98% 97% 96% 95%
Consulting services.... -- -- -- -- -- 2 3 4 5
----- ----- ----- ------- ------ ------- ------- ------- -------
Total revenues........ 100 100 100 100 100 100 100 100 100
----- ----- ----- ------- ------ ------- ------- ------- -------
Expenses:
Cost of subscription
services............. 41 26 38 42 19 22 27 42 43
Cost of consulting
services............. -- -- -- -- -- 7 9 6 5
Research and
development.......... 126 70 84 66 37 26 33 24 18
Sales and marketing.... 140 85 88 101 70 72 74 74 57
Operations............. 20 24 42 38 26 25 25 19 16
General and
administrative....... 74 46 38 32 29 15 21 25 18
Amortization of stock-
based compensation... -- -- -- -- 3 9 5 20 2
----- ----- ----- ------- ------ ------- ------- ------- -------
Total expenses........ 401 251 290 279 183 176 194 210 159
----- ----- ----- ------- ------ ------- ------- ------- -------
Loss from operations.. (301) (151) (190) (179) (83) (75) (94) (110) (58)
Interest income
(expense), net........ (3) (0) 8 3 (7) (7) (0) (1) 16
----- ----- ----- ------- ------ ------- ------- ------- -------
Net loss.............. (305)% (151)% (182)% (176)% (90)% (82)% (94)% (111)% (42)%
===== ===== ===== ======= ====== ======= ======= ======= =======
</TABLE>
30
<PAGE>
During the nine quarters ended December 31, 1999, our subscription revenues
consistently grew as a result of increased demand for Internet performance
measurement and diagnostic services. In addition, beginning in the first
quarter of fiscal 1999, we created a new consulting services organization to
help customers to maximize the value of the information they receive to improve
their web-site performance.
The trends discussed in the annual comparisons of operating results from
fiscal 1997 to fiscal 1999 apply generally to the comparison of results of
operations for the nine quarters ended December 31, 1999. In general, expenses
increased significantly as a result of:
. increased personnel;
. increased depreciation and other equipment costs for our expanding
measurement computers infrastructure;
. increased spending for marketing and promotional activities;
. higher recruiting and related hiring expenses for additional senior
management and other personnel;
. increased co-location fees for our measurement computers; and
. increased use of independent contractors and other outside services
for continued research and development activities.
Liquidity and Capital Resources
Since our inception, we have funded our operations primarily through
private placements of our common stock and convertible redeemable preferred
stock with strategic investors, venture capital firms and private investors.
Prior to our initial public offering, we had raised approximately $25.8
million, net of offering costs, from the sale of common stock and preferred
stock. In our initial public offering, we raised $56.7 million, net of issuance
costs, including $7.8 million raised from the exercise of the underwriters'
over-allotment option, which occurred in fiscal 2000. In addition, we financed
our operations through subordinated and other debt, equipment loans and a
capital lease. The principal balance outstanding at December 31, 1999 for these
loans and leases was approximately $3.9 million. At December 31, 1999, we had
approximately $69.2 million in cash and cash equivalents investments.
Net cash used in operating activities was $1.8 million in fiscal 1997, $2.7
million in fiscal 1998 and $4.7 million in fiscal 1999. For all of these
periods, net cash used in operating activities was primarily the result of net
operating losses and changes in accounts receivable and prepaid expenses,
partially offset by changes in deferred revenues and depreciation of property
and equipment. Net cash used in operating activities was $2.0 million in the
three months ended December 31, 1999 and $519,000 in the three months ended
December 31, 1998. Net cash used in operating activities was primarily the
result of net operating losses and changes in accounts receivable and prepaid
expenses, partially offset by changes in deferred revenues, accounts payable
and accrued expenses and depreciation of property and equipment.
Since inception, our investing activities have been purchases of property
and equipment. Capital expenditures totaled $423,000 in fiscal 1997, $1.0
million in fiscal 1998 and $2.6 million for fiscal 1999. Capital expenditures
totaled $976,000 in the three months ended December 31, 1999 and $155,000 in
the three months ended December 31, 1998.
Our financing activities provided $2.9 million in fiscal 1997, $4.9 million
in fiscal 1998 and $69.7 million in fiscal 1999. In fiscal 1997, we sold $2.6
million of our Series B redeemable convertible preferred stock, which amount
included $900,000 in principal amount of bridge loans from earlier that year.
In addition, we received approximately $300,000 from our equipment loans. In
fiscal 1998, we received $4.7 million in net proceeds in connection with the
sale of our Series C redeemable convertible preferred stock. During fiscal
1999, we received $48.9 million, net of issuance costs, in connection with our
initial public offering, excluding $7.8 million raised from the exercise of the
underwriters' over-allotment option, which occurred in fiscal 2000.
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In addition, we received $17.5 million in net proceeds in connection with the
private sale of stock in fiscal 1999. Of these proceeds, we received $14.8
million from the sale of Series D redeemable convertible preferred stock and
$2.7 million from the sale of common stock and option and warrant exercises. In
addition, we received $3.6 million in proceeds from equipment and other loans
which was slightly offset by $440,000 in loan repayments. Our financing
activities provided $7.5 million in the three months ended December 31, 1999
and $2.6 million in the three months ended December 31, 1998. In the three
months ended December 31, 1999, we raised $7.8 million from the exercise of the
underwriter over-allotment option from our initial public offering. During the
three months ended December 31, 1998, we received $2.7 million in proceeds from
our equipment loans.
As of December 31, 1999, our principal commitments consisted of $3.9
million in loans and capital leases. We have granted a security interest in
substantially all of our assets to secure these loans. The interest rate on our
loans in the form of equipment notes ranged from 5.60% to 10.25% per year and
the interest rate on the loans in the form of a promissory note bore interest
at a rate of 8.25% per year. As of December 31, 1999, we also had commitments
of approximately $482,000 in future lease payments for our headquarters
facility. We had no material commitments for capital expenditures as of
December 31, 1999. Because we expect to continue to increase the number of our
measurement computers and increase their measurement capacity, we expect that
we will make additional capital expenditures to purchase this equipment. We
anticipate that we will also experience an increase in our capital expenditures
and lease commitments consistent with our anticipated growth in operations,
infrastructure and personnel.
We believe the net proceeds of this offering, together with our existing
cash and cash equivalents, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next 12
months. After that time, if cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities or to obtain a credit facility. If additional funds are raised
through the issuance of debt securities, these securities could have rights,
preferences and privileges senior to holders of common stock, and the term of
this debt could impose restrictions on our operations. The sale of additional
equity or convertible debt securities could result in additional dilution to
our shareholders, and we may not be able to obtain additional financing on
acceptable terms, if at all. If we are unable to obtain this additional
financing, our business may be harmed.
Year 2000 Compliance
Background of Year 2000 Issues
Many currently installed computer systems and software products are unable
to distinguish between twentieth-century dates and twenty-first century dates
because these systems were developed using two digits rather than four to
determine the applicable year. For example, computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This error could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. As a result, many companies' software and computer systems
may need to be upgraded or replaced to comply with these year 2000
requirements. Notwithstanding the passage of January 1, 2000, our business
could still face year 2000 problems.
State of Readiness
Our business depends on the operation of many systems that could
potentially be affected by year 2000-related problems. Those systems include,
among others:
. hardware and software systems used by us to deliver services to
customers, including our proprietary software systems as well as
software supplied by other companies;
. communications networks such as the Internet and private Intranets;
. the internal systems of our customers and suppliers;
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. the hardware and software systems used internally by us in the
management of our business; and
. non-information technology systems and services, such as power,
telephone systems and building systems.
Representatives of the research and development, operations and
administrative departments have been charged with the responsibility of
formulating and implementing our year 2000 readiness and have completed a
phased approach to analyzing our operations and relationships as they relate to
the year 2000 problem. The phases of our year 2000 program are as follows:
. assignment of responsibility for external issues, such as products
licensed by us from third parties, internal issues, such as systems,
facilities, equipment and software;
. inventory of our operations and relationships subject to the year 2000
problem;
. comprehensive analysis, including impact analysis and cost analysis,
of our year 2000 readiness; and
. remediation and testing.
Our services rely on a combination of our proprietary software and
commercial software distributed by vendors such as Microsoft, Oracle and Sun
Microsystems. We tested our service infrastructure in September 1998 and August
1999 and found no unremediated year 2000-related problems. The service
infrastructure consists of software needed to provide service, measure
performance, store measurement data and report results. All the dates and the
date datatype used in these systems are year 2000 compliant.
Since our customers do not download any of our software on their computer
systems, we believe that our services should not create additional year 2000
problems for our customers' computer systems.
We have reviewed our important internal management information, software
and other systems in order to identify any products, services or systems that
are not year 2000 compliant. We have received written year 2000 representations
from all significant vendors and third parties. Nineteen vendors represented
that their products are year 2000 compliant. We have not contacted our web
hosting and backbone providers, such as Digex, UUNET and Cable & Wireless,
which provide Internet connectivity to our remote measurement computers.
To date, we have not encountered any material year 2000 problems with our
computer systems or any other equipment that might be subject to these
problems. We have not incurred material costs in connection with our year 2000
efforts to date and do not expect to do so in the future, other than diversion
of employee time from other projects.
We could also experience serious harm to our business if we fail to
identify all year 2000 dependencies in our systems and in the systems of our
suppliers, customers and financial institutions. We cannot assure you that the
total cost of year 2000 compliance will not be material to our business. We may
not identify and remediate all significant year 2000 problems on a timely
basis, remediation efforts may involve significant time and expense, and
unremediated problems may seriously harm our business.
Risks
Extended power outages or widespread failures across the Internet would
create disruptions that would take time to repair. The amount of time required
for repairs would depend on the severity of the power outages or widespread
failures.
Users of our services generally rely on sophisticated hardware and complex
software products used by our customers which may not be year 2000 compliant.
Success of our year 2000 compliance efforts may depend on the success of our
customers in dealing with their year 2000 issues. We sell our services to
companies in a variety of industries, each of which may be experiencing
different year 2000 compliance issues.
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Customer difficulties with year 2000 issues might require us to devote
additional resources to resolve underlying problems.
Although we have not been a party to any litigation or arbitration
proceeding to date about our services and year 2000 compliance issues, we
cannot assure you that we will not in the future be required to defend our
services in these proceedings, or to negotiate resolutions of claims based on
year 2000 issues. The costs of defending and resolving year 2000-related
disputes, regardless of the merits of these disputes, and any liability for
year 2000-related damages, including consequential damages, would seriously
harm our business, results of operations and financial condition. In addition,
we believe that purchasing patterns of customers and potential customers may be
affected by year 2000 issues as companies expend significant resources to
correct or upgrade their current software systems for year 2000 compliance or
defer additional software purchases until after 2000. As a result, some
customers and potential customers may have more-limited budgets available to
purchase services such as those offered by us, and others may choose to refrain
from changes in their information technology environment until after 2000. To
the extent year 2000 issues cause significant delay in, or cancellation of,
decisions to purchase our services, our business would be seriously harmed.
If we experience year 2000 issues with our services or network
infrastructure, we could be unable to perform measurements or analyze and
deliver data to our customers. This could result in loss of customers and
revenues as well as the potential for litigation. This could also require us to
devote significant resources to remediating our services or network
infrastructure, which would divert our personnel from other important business
activities. If we experience year 2000 issues with respect to our other
systems, we could be unable to process orders or bill our customers. It could
also require us to devote significant resources to correct problems with these
systems.
Contingency Plan
We have developed a Business Continuity and Contingency Plan to mitigate
problems that could result if our automated systems are unable to recognize
year 2000 dates. The plan helps to ensure the continuity of our core business
processes by identifying, assessing, managing and mitigating year 2000 risks.
Resources critical to operating our core business processes and key support
processes have been identified so that in the event of a failure of our
services, a basic level of service can be provided to our customers until the
normal level of services can be restored. The plan identifies risks and
threats, establishes mitigation strategies for the identified risks and threats
and provides contingencies in the event risk mitigation efforts fail.
Qualitative and Quantitative Disclosures about Market Risks
Interest Rate Sensitivity. Our interest income and expense could be
sensitive to changes in the general level of U.S. interest rates, particularly
because most of our cash equivalents are invested in short-term debt
instruments. If market interest rates were to change immediately and uniformly
by ten percent from levels at December 31, 1999, the fair value of our cash
equivalents and the interest earned on those cash equivalents would change by
an insignificant amount.
Foreign Currency Fluctuations. We have not had any significant transactions
in foreign currencies, nor do we have any significant balances that are due or
payable in foreign currencies at December 31, 1999.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we
do not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a
material impact on our financial position, results of operations or cash flows.
We will be required to adopt SFAS No. 133 in fiscal 2001.
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BUSINESS
Overview
Keynote provides Internet performance measurement and diagnostic services
to companies that operate e-commerce web sites. We market Keynote Perspective,
Keynote Consumer Perspective and Keynote Lifeline, global services that measure
and assure the quality of service of e-commerce web sites around the world. The
foundation of these services is an extensive network of strategically located
measurement computers connected to the major Internet backbones in dozens of
metropolitan areas worldwide, plus a sophisticated operations center for
collecting, analyzing and disseminating Internet performance and availability
data. We believe that companies who use our services can increase revenues,
improve customer satisfaction and retention, reduce support costs and gain a
competitive advantage. We have designed our services to be easy for customers
to try, purchase and use on a subscription basis. Our customers include over
700 leading e-commerce companies, with our 10 largest customers based on
revenues for the quarter ended December 31, 1999 consisting of Akamai, American
Express, Charles Schwab, Digex, Digital Island, Flycast, Global Center,
Microsoft, Sandpiper Networks and VeriSign.
Industry Background
The Internet has emerged as a global medium for communication, content
delivery and electronic commerce, or e-commerce, and Internet use continues to
increase rapidly. E-commerce is evolving into a mission-critical component of
many companies' operations, and is dramatically changing how businesses
interact with their customers, suppliers and partners. Many large companies
such as FedEx, General Motors, Merrill Lynch and Pfizer now use their web sites
as a fundamental, cost-effective way of communicating product and shipment
information and conducting business transactions. At the same time, the
Internet has spawned new businesses such as Amazon.com and Yahoo!, whose
success is tied exclusively to their online offerings. International Data
Corporation forecasts that the number of Internet users will grow from
approximately 142 million in 1998 to 502 million by 2003, with commensurate
growth in e-commerce from $50 billion to $1.3 trillion over the same period.
The competitive e-commerce environment has created a different set of
challenges than those faced by conventional "bricks and mortar" stores. These
challenges include price standardization, product commoditization, constant
change in the competitive landscape, decreased customer loyalty and low
switching costs, plus the need for consistent high quality of service and end-
user satisfaction with the online experience. As a result, a key differentiator
for many businesses with online offerings can be their quality of service. In
e-commerce, quality of service encompasses all aspects of a customer's
interactions with a web site that affect the customer's satisfaction with the
experience and the desire to repeat it. Quality of service can generally be
measured, analyzed and improved along the dimensions of speed, availability and
consistency across time and geography. To attract and retain customers, e-
commerce web sites must offer fast page downloads, efficient transactions and
high reliability all the time or customers may "click away" to a competitor who
offers comparable products and services. According to a 1999 study by Zona
Research, approximately $4.4 billion per year in e-commerce sales in the United
States may be lost due to unacceptable download speeds and the resulting
abandonment of online transactions by users.
Despite substantial investments in e-commerce, building and maintaining a
high performance e-commerce site remains a significant challenge. The Internet
is a complex, heterogeneous network of communications networks with multiple
operators and vendors supplying and managing the underlying infrastructure. To
reach customers through the Internet, a company must transmit information from
its web site through an Internet service provider, which then passes the data
to an Internet backbone provider. Web pages are transmitted to the customer
across multiple Internet backbones and service providers along an often
indirect path that is determined as the information passes between backbones.
There are over 40 major backbone providers in the United States, such as Sprint
and UUNET, and thousands of different Internet access providers, such as
America Online and EarthLink. In addition to the inherent complexity of the
Internet, many internal and external factors contribute to the e-commerce
quality of service problem. These factors include inadequate
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networking hardware, servers and server software, poorly constructed
applications, inadequate communications capacity and poor interconnections
between Internet backbone providers. Compounding the quality of service
problem, e-commerce companies are inherently global in nature with a
geographically dispersed customer base and around-the-clock operations.
Despite improvements in many underlying Internet technologies, the quality
of service problem is increasing. Due to the heterogeneous nature of the
Internet, no single vendor of these Internet technologies has the perspective
or the incentive to help companies identify and remedy the causes of the
problem. As a result, companies have been forced to rely upon anecdotal
customer complaints and limited data to respond to problems after they have
already occurred and customers and revenues have already been lost. The
challenge of assuring performance for e-commerce sites is only increasing as
their offerings expand into additional web-site addresses, also known as
uniform resource locators, or URLs, and as they become increasingly feature-
rich and complex. International Data Corporation forecasts that the number of
URLs on the Internet will grow from approximately 925 million in 1998 to 13.1
billion in 2003.
Given the global, around-the-clock nature of e-commerce, there is a demand
today for an independent Internet performance solution that provides companies
objective information from around the world all the time to enable e-commerce
sites to measure, assure and improve e-commerce quality of service from the
perspective of their customers.
The Keynote Solution
We provide Internet performance measurement and diagnostic services that
enable e-commerce companies to measure, assure and improve quality of service
of their web sites. Key features of our solution include:
Independent Third Party. We do not sell web servers, web software,
networking equipment or web hosting services. Therefore, customers can be
assured that we do not have any incentive to report performance problems
with respect to particular types of equipment or service providers and
that we deliver unbiased Internet performance measurement and diagnostic
services. Our Internet performance indices of business and consumer web
sites are regularly published in leading publications such as Business
Week, Computerworld, Smart Money, The Industry Standard and USA Today. We
believe that having our indices appear in these national publications
provides us with additional credibility as an independent provider of
performance measurement and diagnostic services.
Comprehensive Global Measurement Infrastructure. Because performance
problems can occur at many different locations throughout the Internet, we
have deployed an extensive network of measurement computers and an
operations center for collecting and disseminating performance data. Our
computers are currently deployed in 79 U.S. and 40 international locations
and currently execute over 16 million performance measurements per day.
This extensive infrastructure enables us to provide our customers with
comprehensive, up-to-the-minute performance data that can be used to
assure and improve their quality of service.
Subscription Service. Our customers purchase our Internet performance
measurement and diagnostic services on a subscription basis with an
initial three-month term. With only a web browser, customers can try,
purchase and immediately use our services without the need to develop an
internal computer infrastructure or install any software. In addition, as
changes occur in the Internet or our services, our customers do not need
to update their systems or change the way they receive information from
us.
Easy-to-Use Viewing and Analysis. Our automated service continually
collects and delivers quality-of-service data around the clock to our
customers and enables them to conveniently view, analyze and act on the
performance measurements. Our proprietary statistical software filters,
sorts, summarizes
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and presents the large volume of complex performance measurement data in
easy-to-understand charts, graphs and tables. Customers can view
performance and diagnostic reports through any web browser, and can be
notified by email or pager when performance thresholds are reached.
Comprehensive Range of Service Offerings. In order to extend the reach
of our services to a broad cross-section of e-commerce web sites, we offer
our entry-level Keynote Lifeline service which measures a web site from
one or two geographic locations. Keynote Perspective is a comprehensive
offering that features measurements of benchmark pages, full pages, secure
pages and multi-page transactions from multiple locations and Internet
backbones. Keynote Perspective is designed to measure a user's Internet
experience from connections typically used from the workplace. Keynote
Consumer Perspective measures full pages and secure pages via various
Internet access methods typically used from the home, such as dial-up
connections cable modem and digital subscriber lines.
Focused Consulting Services. Consulting enhances our subscription
services by helping our customers to evaluate and respond to their
performance-measurement and diagnostic results. We provide our customers
with performance audits producing a detailed report on their e-commerce
web-site performance. Our customers often use these audits as formal,
disinterested performance reports to their own management and customers.
To help our customers to architect new web-site offerings, we also plan to
provide in-depth performance consulting along with live testing of
prototype designs, based on our experiences with major e-commerce sites.
Strategy
Our objective is to maintain and expand our leadership in providing
Internet performance measurement and diagnostic services to e-commerce web
sites. Key elements of our strategy are:
Extend Market Penetration. We plan to continue to build our internal
sales and marketing capabilities by increasing the size of our direct
sales force and the number of our telesales call centers. We continue to
seek the most appropriate way to enter the lower-price segment of the
market, and therefore, we plan to promote our entry-level service,
Lifeline, as an easy-to-try, easy-to-buy Internet performance solution. If
successful, we will then seek to sell additional services to these entry-
level customers, such as our Keynote Perspective and Keynote Consumer
Perspective services. We also plan to continue to promote, and seek to
have published, our performance indices. We believe that if these indices
become well-publicized in the market, potential customers will be more
interested in measuring the performance of their web sites against these
indices and will therefore increase demand for our services. In addition,
we will continue to actively develop co-marketing relationships with
Internet service providers and other suppliers of complementary products
and services to our target customers.
Increase Customer Reliance on our Services. We intend to introduce new
features for our services so that our customers remain focused on their
web site's performance and our services in particular as their e-commerce
web sites grow. We currently offer daily performance reporting via email
and intend to offer additional reporting methods designed to keep our
customers constantly aware of their web site's performance. We also
recently introduced bi-weekly online training programs for our customers.
We intend to develop and market additional service components to add value
to our customers' attempts to improve the quality of service of their e-
commerce web sites, similar to our recent introduction of a service to
measure the efficiency and success rates in initiating and completing
multi-page electronic transactions.
Expand Our Brand Awareness as "The Internet Performance
Authority(TM)." We intend to expand our traditional and online marketing
strategies to increase customer awareness and brand recognition, including
advertisements in the trade and business press, direct email and other
targeted marketing campaigns. For example, we are planning to host an
annual Internet performance conference to serve as an important branding
and customer-recruitment event. In addition, we intend to expand our
roster of published web performance indices to include major e-commerce
segments such as banking, shopping and portals, and we intend to publish
these indices in relevant industry publications.
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Establish Relationships with Complementary Vendors. We believe that a
significant market opportunity exists to sell our services to companies
with high-volume or mission-critical web sites. Therefore, we believe that
we can benefit from co-marketing relationships with other companies that
sell complementary products and services to our target customers. We have
important contractual relationships with VeriSign and Network Solutions to
co-market our services to their own customers on a co-branded basis
bundled with their own services, and we will seek to increase the number
of these relationships. In addition, we intend to pursue relationships
with major consulting firms in order to encourage them to recommend and
specify our services to their Fortune 500 customers.
Increase Our International Presence. We believe that the international
expansion of e-commerce provides us with significant opportunities to
offer our services globally. We plan to increase both the number of
international locations where we provide services and the number of
measurement computers deployed internationally. In December 1999, we
established operations in Paris, France to expand our European operations.
We currently sell our services directly to international customers, which
include BBC, Dell (Japan), ANZ Bank and TNT Express, and we intend to
pursue reseller relationships in Europe, the Pacific Rim region and Latin
America in order to increase our international presence. To date, revenues
from our international customers have been insignificant for each of our
fiscal years. We also intend to pursue relationships with providers of
complementary products and services in Europe, the Pacific Rim region and
Latin America. As a result, we anticipate that we will commit significant
resources as a result of our proposed international expansion.
Expand Our Service Offerings Into All Aspects of Quality of Service
for E-Commerce. We have recently broadened our measurement services to
include a variety of Internet access methods, such as dial-up modem,
digital subscriber lines, cable modem and other broadband access
technologies, from either stationary or mobile computing devices. We
intend to expand our service offerings by measuring the speed with which a
web site can be navigated and desired content can be located. In addition,
we intend to measure the impact of new Internet technologies, such as
streaming audio and video, multi-casting and Internet telephony.
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Keynote Services
Our services enable customers to measure, assure and improve their e-
commerce quality of service from multiple vantage points around the world.
These services are summarized in the following table:
<TABLE>
<CAPTION>
Service Offerings Features Prices
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Keynote Perspective. Targets . measures performance and From $295 per month per URL
e-commerce web sites with a availability of web-page measured and from $995 per
national or worldwide downloads through the month for transaction
customer base as well as connections commonly used measurement, with higher
heavy traffic levels. in the workplace prices depending on
frequency and breadth of
geographic coverage of
measurements
. measures transaction exe-
cution time
. measurements taken from
multiple locations around
the world
. measurements taken around
the clock at each location
at customer-specified in-
tervals of 3 minutes to 4
hours
- ------------------------------------------------------------------------------------------
Keynote Consumer . measures performance and From $495 per month per URL
Perspective. Targets availability of web-page measured, with higher prices
e-commerce web sites with a downloads through various depending on types of
national or worldwide Internet access methods Internet access methods
customer base as well as commonly used in the home, measured and frequency and
heavy traffic levels. such as dial-up breadth of geographic
connections, cable modems coverage of measurements
and digital subscriber
lines
. measurements for dial-up
connections and digital
subscriber lines taken
from 10 metropolitan areas
and measurements for cable
modems taken in San
Francisco, California
. measurements taken around
the clock at customer-
specified intervals of 10
minutes to 1 hour
- ------------------------------------------------------------------------------------------
Keynote Lifeline. Targets . measures performance and $695 per year per URL
regionally-oriented web availability of web page measured
sites and web sites with downloads
lower traffic levels.
. measurements taken from
one or two locations in
the United States selected
by the customer
. measurements taken around
the clock at intervals of
10 minutes or 1 hour
- ------------------------------------------------------------------------------------------
Professional Services . Competitive Audit to From $5,000 per engagement,
compare web-site depending on size and
performance and complexity
availability against
multiple competitive web
sites
. Advanced Diagnostic Audit
to make specific recommen-
dations to improve quality
of service
. custom consulting engage-
ments
</TABLE>
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Keynote Perspective and Keynote Consumer Perspective are sold on a monthly
subscription basis and Keynote Lifeline is sold only on an annual subscription
basis.
We were founded in June 1995 and until we released our Keynote Perspective
service in April 1997, we were engaged in market research and the design and
engineering of our services. We have introduced additional versions of this
service, most recently in December 1999, so that Perspective now includes the
ability to measure web page download times, secure web page downloads and
multi-page transactions and offers our customers a greater ability to
personalize their service. In July 1999, we introduced our Keynote Lifeline
service. In December 1999, we introduced our Keynote Consumer Perspective
service, which is designed to measure web-site performance via various Internet
access methods typically used in homes, such as dial-up connections, cable
modems or digital subscriber lines. Also, in January 1999, we formed our
professional services organization. In April 1997, we had deployed measurement
computers in 18 locations, and the number of locations increased to 119 at
December 31, 1999. Our measurement computers currently measure the performance
of approximately 7,000 web sites. We intend to deploy additional measurement
computers and upgrade the underlying infrastructure so that we will have the
ability to measure in excess of 40,000 web-site addresses by the end of fiscal
2000.
Keynote Perspective, Keynote Consumer Perspective and Keynote Lifeline
The foundation of our services is a worldwide network of measurement
computers that run our proprietary measurement and data-collection software,
plus an operations center for storing and disseminating performance data. Our
measurement computers measure and analyze performance data around the clock
from an end-user perspective, from Internet connection points in over 35 large
metropolitan areas on a variety of Internet backbones. Keynote Perspective,
Keynote Consumer Perspective and Keynote Lifeline require no installation,
configuration or update maintenance by customers because all software runs on
our computers and produces results that can be accessed over the Internet
through any web browser.
Our services measure the most common forms of end-user interaction with a
web site--downloading simple, complex or secure web pages and completing multi-
page transactions over the Internet. Keynote Perspective measures the user's
experience at work, where Internet connections are typically over T-1 lines.
Keynote Consumer Perspective measures the user's experience at home, where
Internet connections are typically over cable modems, dial-up modems or digital
subscriber lines.
Benchmark Page. This portion of Keynote Perspective and Keynote Lifeline
measures and compares the download time of a single web object such as a text
file or graphic element. With this data, web-site managers can measure and
manage the effect of user geography and Internet backbones on the end user's
perceived performance of their web site.
Full Page. This portion of Keynote Perspective, Keynote Consumer
Perspective and Keynote Lifeline measures the time it takes to access and
download all of the elements of a web page, including the text file and any
graphic images and complex page structures. Full Page is targeted at fast-
changing web sites, enabling them to measure the effects of web-page design on
end users' experience with the web site over time and geography.
Secure Page. This portion of Keynote Perspective and Keynote Consumer
Perspective measures the time it takes to access a secure, encrypted page or
execute a single-page transaction through a secure page. This enables web sites
to manage the effect of content and security applications on end users'
experience with web pages containing sensitive information such as account
balances or credit-card numbers.
Transaction. This portion of Keynote Perspective measures the time it takes
to execute an interactive transaction that involves the display of multiple web
pages. This enables web sites to optimize the performance of e-commerce
transactions by tracking the effects of web-page content and back-end
processing on end users' experience. A brokerage transaction, for example,
might include a series of interactions with a login page, a balance-inquiry
page, a stock-quote page, a buy-order page, a confirm-order page and a logout
page.
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Key features of our Keynote Perspective, Keynote Consumer Perspective and
Keynote Lifeline services include:
Standard and Custom Reporting. Measurements are delivered to our customers
through threshold-based alarms by email or pagers as well as online through a
web-browser-based interface. Summary reports that are delivered to customers by
email on a daily basis provide quick access to hourly, daily and weekly
performance data. Our customers can configure performance alarms based on
thresholds such as time-interval and city parameters to automatically notify
them when performance problems occur.
Comprehensive Diagnostics. A "drill down" feature allows our customers to
specify a time period and metropolitan area and then to search specific data to
localize, analyze and diagnose problems. We also maintain automated diagnostic
centers at all measurement locations which allow our customers to investigate
performance bottlenecks and delays by tracing a URL request from that location,
performing error analysis and pinpointing which Internet service provider,
backbone provider or other source is responsible for the performance delay.
Our customers can also analyze full-page measurement data to pinpoint and
address the cause of a performance delay. A full-page download consists of a
hypertext markup language page along with all associated images and complex
page structures. The full-page download time can be further dissected into as
many as six constituent elements, such as domain name service lookup time or
redirect time. This level of detail allows network engineers and web-site
managers to precisely pinpoint the cause of any performance delay and quickly
resolve it. As changes are made to web-site content, connectivity or
architecture, the resulting effect on performance can also be precisely
measured and compared.
Comparative Analysis. In addition to delivering consistent performance, e-
commerce sites must ensure that they can perform more quickly and reliably than
competing web sites. Our customers can compare their performance against
competing sites selected by the customer and also against our performance
indices--the Keynote Business 40 Index, the Keynote Consumer 40 Index and the
Keynote Web Broker Trading Index.
Multiple Views of Web Site Performance. From any web browser, our customers
can easily access historical web-site performance data over any time range
within the previous six weeks. This data can be displayed in summary form as
well as in customizable graphs that depict performance and types of error over
time, metropolitan area or Internet backbone provider. This data can also be
easily downloaded, archived and used in our customers' other applications.
Custom Measurement Computers. For companies that implement extranets or
other private computer networks, we can deploy custom measurement computers to
measure the performance of these networks from specified locations and at
specified times. These measurement computers can be deployed near the company's
own web site, at key Internet access points used by the company, or at the
other business offices of the company or its suppliers and customers.
Measurements are delivered to our operations center where they are integrated
with and compared to other public web-site measurement data.
Professional Services
In order to help our customers maximize the benefits of our services, we
offer two audits: the Competitive Audit and the Diagnostic Audit.
Competitive Audit. Our Competitive Audit is designed to provide an
unbiased, comprehensive report on a customer's web-site performance and
availability as compared to their competitors, as determined by the customer,
and industry benchmarks. The Competitive Audit typically requires four weeks to
complete and comprises the following phases:
. Measurement. We measure the quality of service that a customer's web
site provides to its users over differing geographies and times;
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. Evaluation. We analyze these measurements to evaluate the performance
and reliability of a customer's web site compared to both the
customer's competitors and to industry benchmarks;
. Diagnosis. We identify bottlenecks and stress points in a customer's
web site and in the web site's connection to the Internet. We do this
by looking at download and transaction times, and by examining the
types of errors encountered and their patterns over geography and
time; and
. Improvement. We recommend practical changes the customer can implement
to improve quality of service.
Diagnostic Audit. Our Diagnostic Audit is a follow-on service that
complements our Competitive Audit to more closely analyze the e-commerce
quality of service problems that were highlighted by the Competitive Audit.
These consulting engagements can be individually structured and may vary both
in the length of the audit and in the nature of the services we provide. For
example, we can work with the customer's staff to provide recommendations in
the areas of Internet connectivity, multiple hosting sites and the impact of
caching and other content-distribution strategies.
Technology and Architecture
We designed our Internet performance measurement infrastructure to allow us
to implement a flexible, scalable solution to e-commerce quality of service
problems. Our architecture consists of three key components: measurement
computers, our operations center and reporting and analysis tools.
KEYNOTE GLOBAL INFRASTRUCTURE GRAPHIC
[The captions in the diagram are "Performance Measurement," "Data Collection,
Storage and Dissemination" and "Easy-to-Use Reporting and Analysis." The left
side of the diagram under the Performance Measurement caption has the caption
"Measurement Computers." Beneath this caption are two icons with the caption
"Customer Web Sites." From these icons are four two-way arrows pointing at four
icons representing our measurement computers. In the center of the diagram
under the Data Collection, Storage and Dissemination caption is the caption
"Scalable Operations Center." Below the caption is an icon representing our
operations center. The caption under the icon reads "Multiple database and
applications servers. In the right side of the diagram under the Easy-to-Use
Reporting and Analysis" caption are four icons. One is a pager with a caption
beneath it which reads "Pager and email alerts." Below that is a computer with
a caption which reads "Daily email reports." Below that is a computer with a
caption below it which reads "Web-based analysis." The last picture is a
computer with a caption below it which reads "Data Feed (API/FTP)."]
Measurement Computers. Our measurement computers are Windows-based
computers that run our proprietary software to replicate the experience of a
user accessing web sites through a standard web browser. We designed our
measurement-computer software to perform thousands of download measurements
concurrently without distorting or affecting the integrity of any single
measurement. The measurement computers are located at the facilities of
Internet service providers that are selected to be statistically representative
of Internet users in that geographic location. At some locations, we employ
multiple Internet connections and install equipment racks that can accommodate
multiple measurement computers, allowing for large-scale, rapid deployment of
additional measurement computers. The hosting arrangements typically have terms
ranging from three months to one year, although our more recent agreements have
typically had a one-year term. We typically pay a small set-up fee and pay
monthly fees to continue to locate the measurement computers at these
locations. These fees typically are less than $1,000 per computer. We also pay
additional fees for communications lines. For the fiscal year ended September
30, 1999, fees related to operating our measurement computer network
infrastructure, without taking into account non-cash expenses related to the
depreciation of computer hardware, represented approximately 12% of our total
expenses for that period.
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These computers access a web site to download web pages and execute multi-
page transactions, just like end users do, while taking measurements of every
component in the process. The computers take measurements continually
throughout the day, at intervals as short as three minutes, depending on the
customer's requirements and subscription service level.
As of December 31, 1999, we had deployed more than 300 measurement
computers in 79 domestic and 40 international locations, with some locations
having multiple measurement computers in order to provide different types of
measurements or to accommodate higher measurement volume. Our measurement
computers currently execute more than 16 million performance measurements each
day.
We intend to continue to expand the number of measurement computers so that
we can have the ability to measure in excess of 100,000 web site address by the
end of this calendar year, as compared to the approximately 7,000 web site
addresses we currently measure. We are in the process of upgrading our
communications lines to our existing and new measurement computers. Therefore,
we expect that our cost of subscription services will increase substantially
over our next fiscal year. We intend to fund the cash portion of these expenses
from our available cash, which was $69.2 million as of December 31, 1999, and
from customer revenue.
Scalable Operations Center. Our operations center is designed to be
scalable to support large numbers of measurement computers and to store,
analyze and manage large amounts of data from these computers. Our measurement
computers receive instructions from, and return collected data to, our
operations center. The data are stored in a large database under a proprietary
transaction-processing system that we designed to be efficient in storing and
delivering measurement data with sub-second response times that are independent
of increases in capacity. We also employ many proprietary, high-performance
application server computers that manage the collection of measurement data,
the insertion of the data into our database and the dissemination of this data
to our customers in a variety of forms and delivery methods.
Easy-to-use Reporting and Analysis Tools
. Pager and Email Alerts. Our customers are notified by email or pager
when download times exceed a particular value in specific cities or
error counts indicate that a web site is unresponsive.
. Daily Email Reports. Our customers can receive a daily or weekly email
that summarizes the performance and availability of measured web sites
and compares them to industry averages for the same time period.
. Web-Based Analysis. Through their web browsers, our customers can
login to our operations center with a password to retrieve, view and
analyze measurement data in multiple formats.
. Data Feed. Our customers may also retrieve measurement data through an
application program interface, or API, or through bulk file transfers
using an industry-standard file-transfer protocol called FTP. This
allows our customers to embed our measurement data in their own
software to create custom data-analysis applications.
We have occasionally experienced outages of our service in the past caused
by a variety of factors, including operator error, the failure of a back-up
computer to operate when the primary computer ceased functioning and power
outages. We have addressed these problems by improving our procedures, by
performing more thorough quality assurance on our internally developed software
and by upgrading our power supply systems. We also have meetings subsequent to
each outage to identify the cause of the outage to ensure that the same problem
does not occur in the future. Other than power outages in our previous
facilities, we have not experienced multiple outages caused by the same
problem.
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Customers
We sell our Keynote Perspective and Keynote Consumer Perspective services
to our customers on a subscription basis. Our customers typically enter into an
initial three-month subscription agreement to purchase our services and then
may choose to renew these services on a monthly basis after the initial term.
As of December 1999, we were providing our services to over 700 companies. The
following is a list of each of our customers that purchased $2,500 or more of
our services in December 1999:
Online Retailer Content Sites Financial Services
Amazon.com America West Airlines American Express
Barnes&Noble.com Citysearch.com Ameritrade
Circuit City C|NET Charles Schwab
E-greetings Networks FairMarket Citibank
eToys IQ.com Datek Online
Finger Hut iWon.com Discover Brokerage
Gap Online Listen.com Direct
GE Appliance LivePerson Dun & Bradstreet
Office Depot LookSmart E*TRADE Group
Petsmart.com Microsoft Fidelity
Shopnow National Library of FirstUSA
Tickets.com Medicine Hanover Direct
Realtor.com Nasdaq-Amex
Internet Infrastructure Sabre Salomon Smith Barney
Actual IT Snowball.com State Street Bank
Adero The Learning Company Vanguard Group
Akamai Technologies Trip Online Washington Mutual Bank
Concentric Viacom
CUC International WebGenesis Fortune 500
Data Return WebMD General Motors
Digex Whirlpool Pfizer
Digital Island
Exodus Communications Computer Products Advertising Services
Global Center Compaq Adforce
GTE Dell Computer Adknowledge
InterNAP EMC Avenue A Media
NetMind Hewlett Packard Bell South
Nortel Networks IBM Intelliventures
Sandpiper Intel DoubleClick
Sprint Intraware Flycast
Starwave NECX
US Internetworking Newbridge Networks Media and Information
USA.Net Oracle CNBC.com
Verio Sybase Encyclopedia Britannica
VeriSign Symantec Financial Times
TechData Prentice Hall
USA Today
Portals
eBay
GO2 Technologies
GoTo.com
Remarq Communities
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Sales, Marketing and Customer Support
Sales
We sell our services primarily through our direct sales organization in San
Mateo, California. Our direct sales organization also provides telephone and
email sales support, telemarketing services and pre-sales technical support. We
believe our direct sales approach enables us to focus our resources on
ascertaining the needs of our customers, to devote significant attention to
customer satisfaction and to quickly offer new services to our existing
customers. We also market our services through our web site where customers can
sign up to try, purchase and use our services.
We also distribute our services through web-hosting and Internet service
providers such as Digex and GlobalCenter, which manage e-commerce web sites for
other companies. These companies sell or bundle our services to part of their
customer base as a value-added service to these customers and as a management
tool for themselves. We also market our services through VeriSign and Network
Solutions, which are companies that sell services complementary to ours.
Marketing
We maintain an active marketing program designed to create brand awareness
through industry-standard benchmark indices that evaluate and rank the relative
performance of various web sites. Keynote indices include:
. Keynote Business 40 Index of 40 selected business web sites, published
regularly in leading newspapers and trade publications;
. Keynote/Internet World Web Performance Index of 20 leading consumer
web sites, published in each edition of Internet World magazine;
. Keynote Consumer 40 Index of 40 selected consumer web sites in the
categories of portal/search and on-line retailers, brokerage firms and
travel services, published weekly by us;
. Boardwatch/Keynote Backbone Web Hosting Index of major U.S. Internet
backbone providers, published regularly in Boardwatch magazine; and
. Keynote Web Broker Trading Index of leading online stock brokers,
based on performance and success rates of actual stock buy-order
transactions submitted on their web sites, published weekly by us and
available on the web site of Smart Money.
Our Site of the Week highlights the performance and availability results of
a different e-commerce web site each week. We also publish a free weekly
electronic newsletter on Internet performance that is transmitted to thousands
of subscribers. Our key personnel have been featured in leading financial
programs on both television and radio and have been quoted extensively in
leading trade publications and newspapers.
In all of our advertising and promotional materials, we offer e-commerce
web sites the opportunity to try our Perspective service on a trial basis with
a Free Performance Appraisal. This no-charge trial exposes potential customers
to all aspects of our service with real performance data collected for a URL of
the customer's choice and typically a competitor's URL.
Customer Support
We believe that a high level of customer support is integral to our success
in creating solutions that our customers will view as indispensable to their
ability to provide high quality of service in all aspects of their e-commerce
business. Therefore, we provide customer support around the clock by email and
telephone. We have developed and expanded our customer support services based
on feedback received from our existing customers. This feedback is supplemented
by formal customer satisfaction surveys conducted by an independent third
party. In addition, a strategic accounts team manages our relationships with
our largest customers.
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Research and Development
We believe that our future success will depend in large part on our ability
to maintain and enhance our current services and to develop new services that
achieve market acceptance. For example, we have developed and are deploying
automated measurement computers around the world to measure quality of service
via various Internet access methods to Internet service providers in these
locations.
Our research and development expenses for the three months ended December
31, 1999 were $841,000, for fiscal 1999 were $2.1 million, for fiscal 1998 were
$1.2 million, for fiscal 1997 were $732,000 and for fiscal 1996 were $392,000.
The Internet is characterized by rapid technological developments, frequent
new application introductions and evolving industry standards. The emerging
nature of this market and its rapid evolution will require that we continually
improve our services, particularly in response to competing offerings. We must
also introduce new services or enhancements as quickly as possible. The success
of a service introduction depends on several factors, including proper
definition of new services, timely completion and introduction of new services,
differentiation of new services from those of our competitors and market
acceptance. We may not be successful in developing and marketing new services
that respond to competitive and technological developments and changing
customer needs. In addition, other technological changes could render our
existing services obsolete or require us to make substantial expenditures to
adapt our services.
Competition
The market for Internet performance measurement and diagnostic services is
new and rapidly evolving. We expect competition in this market to intensify in
the future. Our current competitors vary in size and in the scope and breadth
of the products and services that they offer. In the future, new competitors
could enter our market. These competitors could include large companies with
longer operating histories as well as new companies. Our principal competitors
today include Freshwater Software, Inverse Network Technology, a unit of Visual
Networks, and Service Metrics, a unit of Exodus Communications. We also
indirectly compete with WebCriteria, Internet Resources Group, MIDS Matrix IQ
Service, and INS INSoft Division, and free services such as the WebSite Garage
unit of Netscape, NetMechanic and Internet Weather Report. These free services
are not as comprehensive as ours because they only measure simple download
time, not the speed of transactions, and they only take measurements from one
location.
We expect that if we are successful in our strategy to expand the scope of
our services, we may encounter many additional, market-specific competitors.
These potential competitors include companies that sell network management
software such as CompuWare, HP-Openview and IBM's Tivoli Unit, and companies
that sell load-testing software such as Mercury Interactive and Segue Software,
each of which has announced products that could potentially compete with us in
the future.
We believe that the principal competitive factors affecting our market are:
. product features;
. product performance, including scalability, flexibility, availability
and cost-effectiveness;
. quality of support and service; and
. company reputation.
Although we believe that our services currently compete favorably with
respect to these factors, our market is relatively new and is rapidly evolving.
We may not be able to maintain our competitive position against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other resources.
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Some of our competitors have, and our future competitors may have:
. longer operating histories;
. larger customer bases;
. greater brand recognition in similar businesses; and
. significantly greater financial, marketing, technical and other
resources.
In addition, some of our competitors may be able to:
. devote greater resources to marketing and promotional campaigns;
. adopt more aggressive pricing policies; and
. devote substantially more resources to technology and systems
development.
We may not be able to compete successfully against our current and future
competitors. See "Risk Factors--We face growing competition which could make it
difficult for us to acquire and retain customers."
Intellectual Property
We are a technology company whose success depends on developing and
protecting our intellectual property assets.
Our Intellectual Property Assets
Our principal intellectual property assets consist of our trademarks, our
patent applications and the software we developed to provide our services.
Trademarks are important to our business because they represent our brand name
and we use them in our marketing and promotional activities as well as with
delivering our services. Our trademarks include our registered trademark
Keynote(R). This trademark has not been registered as a trademark outside of
the United States. We have other trademarks which have not been registered with
the U.S. Patent and Trademark Office. These include Perspective(TM),
Lifeline(TM), Consumer Perspective(TM), My Keynote(TM), The Internet
Performance Authority(TM) and Accustat(TM).
We currently have one issued U.S. patent, we have applied for one U.S.
patent and we have no pending foreign patent applications. The issued U.S.
patent and the U.S. patent application relate to our technology that measures
the speed of Internet transactions. It is possible that no patent will be
issued from our currently pending patent application and that our current
patent or potential future patents may be found invalid or unenforceable, or
otherwise be successfully challenged. It is also possible that any patent
issued to us may not provide us with any competitive advantages, that we may
not develop future proprietary products or technologies that are patentable,
and that the patents of others may seriously limit our ability to do business.
In this regard, we have not performed any comprehensive analysis of patents of
others that may limit our ability to do business.
Our proprietary software consists of the software we developed to store and
deliver our measurement data to customers. We also have developed software that
we use to process customer orders and billings.
How We Protect Our Intellectual Property
To protect our proprietary technology, we rely primarily on patent,
trademark, service mark, trade dress, copyright and trade secret laws and
restrictions, as well as confidentiality procedures and contractual provisions.
Despite our efforts to protect our proprietary rights, we may be unable to
prevent others from infringing upon or misappropriating our intellectual
property. Any steps we take to protect our intellectual property may be
inadequate, time consuming and expensive. In addition, the laws of some
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States.
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Most of our customers' use of our services is governed by web-based license
agreements, rather than by means of a formal, written contract. Each time
customers use our service, they "click" on a web page to agree to certain terms
and conditions that are posted on our web site, which terms and conditions
impose restrictions on the customer's use of our services and our measurement
data. In addition, we seek to avoid disclosure of our trade secrets by
requiring each of our employees and others with access to our proprietary
information to execute confidentiality agreements with us. We protect our
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection.
It is Possible That We Could Become Subject to Litigation
To date, we have not been notified that our technologies infringe the
proprietary rights of anyone. We cannot assure you that others will not claim
that we have infringed proprietary rights with respect to past, current or
future technologies. We expect that we could become subject to intellectual
property infringement claims as the number of our competitors grows and our
services overlap with competitive offerings. These claims, even if without
merit, could be expensive and divert management's attention from operating our
company. If we become liable for infringing intellectual property rights, we
would be required to pay a substantial damage award and to develop non-
infringing technology, obtain a license or cease selling the products that
contain the infringing intellectual property. We may be unable to develop non-
infringing technology or to obtain a license on commercially reasonable terms,
if at all.
We License Technology Used in Providing Our Services
We license certain statistical, graphical and database technologies from
others. We cannot assure you that these technology licenses will not infringe
the proprietary rights of others or will continue to be available to us on
commercially reasonable terms, if at all. The loss of this technology could
require us to obtain substitute technology of lower quality or performance
standards or at greater cost. Please see "Risk Factors--The success of our
business depends on our ability to protect and enforce our intellectual
property rights" and "--Others might bring infringement claims against us or
our suppliers that could harm our business."
Employees
As of December 31, 1999, we had a total of 121 employees. None of our
employees are subject to a collective bargaining agreement, and we believe that
our relations with our employees are good. Our future success depends on our
ability to attract, motivate and retain our key personnel. Competition for
employees in our industry is intense. Please see "Risk Factors--In order to
grow our business, we must attract and retain qualified personnel while
competition for personnel in our industry is intense."
Facilities
Our principal offices are located in San Mateo, California, where we occupy
approximately 25,000 square feet under a sublease that expires in June 2000. We
have agreed to enter into a new sublease that will allow us to occupy
approximately 40,000 square feet in our current facility. We anticipate that
this sublease will expire in February 2001. We believe that our existing
facilities are adequate for our current needs and that suitable additional or
alternative space will be available in the future on commercially reasonable
terms. Our operations center is located at our facility in San Mateo,
California and we do not have a redundant center as backup. Our business could
be adversely affected if we experience any outages or system disruptions at
this location. Please see "Risk Factors--Our network infrastructure could be
disrupted by a number of different occurrences, which could impair our ability
to retain existing customers or attract new customers."
Legal Proceedings
From time to time, we could become involved in litigation relating to
claims arising out of our ordinary course of business. We are not presently
involved in any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table presents information regarding our executive officers
and directors as of December 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Umang Gupta............. 50 Chairman of the Board and Chief Executive Officer
Eugene Shklar........... 50 Vice President of Public Services and Director
Roger Higgins........... 56 Vice President of International Sales
Donald Aoki............. 42 Vice President of Engineering
Lloyd Taylor............ 41 Vice President of Operations
James Salazar........... 39 Vice President of Professional Services
John Flavio............. 52 Vice President of Finance, Chief Financial Officer and Secretary
Marlene Williamson...... 44 Vice President of Marketing
Thomas Roll............. 39 Vice President of U.S. Sales
David Cowan............. 33 Director
Mark Leslie............. 54 Director
Stratton Sclavos........ 37 Director
</TABLE>
Umang Gupta has served as a director since September 1997 and as our chief
executive officer and chairman of the board of directors since December 1997.
From January 1996 to December 1997, he was a private investor and an advisor to
high-technology companies. From October 1984 to January 1996, he was the
founder and chairman of the board and chief executive officer of Centura
Software Corporation, formerly known as Gupta Corporation, a client/server
tools and database company. Prior to founding Gupta Corporation, from 1980 to
1984, he was with Oracle Corporation, a database company, where his last
position held was vice president and general manager of its Microcomputer
Products Division. From 1973 to 1980, he held various sales and marketing
positions at IBM. Mr. Gupta holds a B.S. degree in chemical engineering from
the Indian Institute of Technology, Kanpur, India, and an M.B.A. degree from
Kent State University.
Eugene Shklar has served as our vice president of public services since
August 1999 and as one of our directors since September 1997. From August 1996
to August 1999, Mr. Shklar served as our vice president of marketing. From May
1994 to July 1996, he was a private investor and self-employed consultant to
several high-technology start-up companies in Silicon Valley. From July 1993 to
April 1994, he was a founding employee and served as executive director of
product marketing of Siebel Systems, Inc., a supplier of web-based front-office
software systems. From April 1992 to April 1993, Mr. Shklar was vice president
of marketing of Gupta Corporation. Before that, he served for five years at
Oracle Corporation as director of marketing for both the PC Products Division
and the Networked Products Division, for two years at 3Com Corporation, a
networking company, as director of product marketing, and for seven years as
vice president of marketing and sales of Software House, Inc., a supplier of
relational database software. Mr. Shklar studied applied mathematics and
computer science at Harvard University.
Roger Higgins has served as our vice president of international sales since
December 1999 and as our vice president of worldwide sales from February 1997
to December 1999. From March 1996 to December 1996, he served as vice president
of sales, marketing and services with Decisive Technology, an Internet survey
software company. From September 1992 to December 1995, he held several offices
at Make Systems, a network management and simulation software company,
including vice president of field operations from January 1995 to December
1995, as vice president of marketing from September 1993 to December 1994 and
as vice president of strategic accounts and international from September 1992
to August 1993. Before this, Mr. Higgins was a vice president at Clarity
Software, a Unix software company, and Agilis Corporation, a manufacturer of
hand-held computers, and was a director with Russell Reynolds Associates, an
executive recruitment company. Mr. Higgins was the founding international vice
president for 3Com Corporation, a networking company, between 1985 and 1988 and
for GriD Systems, a portable computer company, between 1983 and 1985. Before
this, Mr. Higgins spent 10 years with Xerox in international sales and
marketing roles, after an initial career with IBM UK. He holds a B.Sc. degree
from London University.
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Donald Aoki has served as our vice president of engineering since May 1997.
From December 1994 to May 1997, he served as a business unit general manager
and from March 1994 to December 1994 as a director of software development at
Aspect Telecommunications, a supplier of customer relationship management
solutions. From 1992 to 1994, Mr. Aoki served as director of development of
TIBCO, a financial information systems company, and from 1985 to 1992 as senior
director of development for Oracle Corporation. Mr. Aoki holds a B.S. degree in
computer science from the University of Southern California and a S.M. degree
in electrical engineering and computer science from the Massachusetts Institute
of Technology.
Lloyd Taylor has served as our vice president of operations since January
1999. From January 1997 to December 1998, he served as vice president of
technical operations of the Web Site Management Group of Digex, Inc., a web-
site management services company. From May 1981 to January 1997, he served in
various positions at the Applied Physics Laboratory at Johns Hopkins
University, most recently as corporate telecommunications manager, where he
designed and implemented computer systems for several NASA space shuttle
missions and highly secure encryption systems for military applications. Mr.
Taylor holds an M.S.E.E. degree in electrical engineering from Johns Hopkins
University and a B.S.E.E. degree in electrical engineering and a B.S.C.S.
degree in computer science from Washington University.
James Salazar has served as our vice president of professional services
since March 1999. From October 1994 to March 1999, he served as president of
the San Mateo Division of Cohesive Technology Solutions, a network consulting
company recently acquired by Exodus Communications. Before this, Mr. Salazar
spent two years at Tandem Computers Inc. managing network support activities.
He began his career at Ungermann-Bass, Inc. in the consulting support
organization. Mr. Salazar holds a B.S. degree in business administration and an
M.B.A. degree, each from San Jose State University.
John Flavio has served as our vice president of finance, chief financial
officer and secretary since July 1999. From July 1993 to July 1999, he served
as chief financial officer, senior vice president, administration and finance,
secretary and treasurer of Mosaix Inc., a provider of call management systems
and customer relationship management applications, which was recently acquired
by Lucent Technologies. Prior to joining Mosaix, Mr. Flavio worked for a number
of high-technology companies, including serving as chief financial officer for
Lumisys Inc., a manufacturer of digital cameras used for medical x-ray
scanning, and Ministor Peripherals, a manufacturer of sub-miniature disk drives
used in portable computers. Mr. Flavio holds a B.S. degree in finance from
Santa Clara University and is a certified public accountant.
Marlene Williamson has served as our vice president of marketing since
August 1999. From August 1997 to May 1999, she served as director of
communications for IBM, a personal computer manufacturer. From October 1994 to
August 1997, she served as vice president of marketing for Acer Inc., a
personal computer manufacturer. From 1987 to 1994, she held a variety of
positions at Apple Computer, Inc., a personal computer manufacturer, most
recently as manager of worldwide consumer marketing. Prior to this, Ms.
Williamson was the director of marketing communications and sales promotions at
Zenith Data Systems, a manufacturer of personal computers, from 1984 to 1987.
Ms. Williamson holds a B.S. degree in journalism from Ohio University and an
M.B.A. degree from DePaul University.
Thomas Roll has served as our vice president of U.S. sales since December
1999 and as our general manager of national sales from September 1998 to
November 1999. From October 1997 to September 1998, Mr. Roll served as vice
president of sales and technical support for Elron Software, a provider of
Internet and network management software tools. From June 1996 to October 1997,
Mr. Roll served as vice president of sales and technical support, and from May
1995 to June 1996 as director of operations, of ON Technology, which was
subsequently acquired by Elron Software. From March 1993 to May 1995, Mr. Roll
was vice president of sales and marketing for Command Software, a developer of
anti-virus and security software.
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<PAGE>
David Cowan has been one of our directors since March 1998. Since August
1996, Mr. Cowan has been a general partner of Bessemer Venture Partners, a
venture capital investment firm, where he now serves as the managing general
partner. Mr. Cowan was an associate at Bessemer Venture Partners from July 1992
to July 1996. From August 1996 to April 1997, he served as chief executive
officer of Visto Corporation, an Internet services company. From January 1995
to June 1996, he served as chairman of the board, and from January to June 1995
as chief financial officer, of VeriSign, Inc., a provider of digital
certificates and related Internet trust services. Mr. Cowan also serves as a
director on the boards of VeriSign, Worldtalk Communications Corporation, which
recently agreed to be acquired by Tumbleweed Communications Corp. and Flycast
Communications Corporation, which was recently acquired by CMGI, Inc. as well
as the boards of several private companies. Mr. Cowan holds an A.B. degree in
mathematics and computer science and an M.B.A. degree from Harvard University.
Mark Leslie has been one of our directors since June 1999. He has served as
chairman and chief executive officer of VERITAS Software Corporation, a storage
management software company, since 1990, and as a director since 1988. He also
serves on the boards of Brocade Communications Systems, Inc. and Versant Object
Technology Corporation. Mr. Leslie holds a B.A. degree in physics and math from
New York University, and he completed Harvard Business School's program for
management development.
Stratton Sclavos has been one of our directors since April 1999. Since July
1995, Mr. Sclavos has been the president, chief executive officer and a
director of VeriSign, Inc. From October 1993 to June 1995, he served as vice
president of worldwide marketing and sales of Taligent, Inc., a business
development software company that was a joint venture between Apple Computer,
IBM and Hewlett-Packard. Mr. Sclavos is also a director of Network Solutions,
Inc., and Marimba, Inc. Mr. Sclavos holds a B.S. degree in electrical and
computer engineering from the University of California, Davis.
Board Composition
We currently have five directors. Mr. Cowan was appointed to our board
under the provisions of a stock purchase agreement among us, Bessemer Venture
Partners and investors in our Series C preferred stock. Mr. Sclavos was
appointed to our board under the terms of a stock purchase agreement among us,
VeriSign and investors in our Series D preferred stock. These provisions
terminated upon completion of our initial public offering.
Directors are elected by the shareholders at each annual meeting of
shareholders to serve until the next annual meeting of shareholders or until
their successors are duly elected and qualified. There are no family
relationships among any of our directors, officers or key employees.
Board Committees
Our board of directors has a compensation committee and an audit committee.
Compensation Committee. The current members of our compensation committee
are Messrs. Cowan and Leslie. The compensation committee reviews and makes
recommendations to our board concerning salaries and incentive compensation for
our officers and employees. The compensation committee also administers our
1999 Equity Incentive Plan and 1999 Employee Stock Purchase Plan.
Audit Committee. The current members of our audit committee are Messrs.
Sclavos and Leslie. Our audit committee reviews and monitors our financial
statements and accounting practices, makes recommendations to our board
regarding the selection of independent auditors and reviews the results and
scope of audits and other services provided by our independent auditors.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee has at any time since our
formation been one of our officers or employees. None of our executive officers
currently serves or in the past has served as a member
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of the board of directors or compensation committee of any entity that has one
or more executive officers serving on our board or compensation committee.
Prior to the creation of our compensation committee, all compensation decisions
were made by our full board. Neither Mr. Gupta nor Mr. Shklar participated in
discussions by our board with respect to each of his own compensation.
Director Compensation
Cash Compensation. Our directors do not receive cash compensation for their
services as directors, but are reimbursed for their reasonable expenses in
attending board and board committee meetings.
Option Grants. Each eligible director who is not our employee and who was a
member of our board on September 24, 1999 or becomes a member of our board
after that date, will be granted an option to purchase 50,000 shares of common
stock under our 1999 Equity Incentive Plan, at an exercise price to be equal to
the fair market value of our common stock on the date of grant, unless that
director has previously received an option grant before that date. The options
will have 10-year terms and will terminate three months following the date the
director ceases to be one of our directors or consultants or 12 months if the
termination is due to death or disability. All options granted under the plan
will vest over three years. One-third of the shares subject to these options
will become exercisable on the earlier of one year following the director's
appointment to our board of directors or the first annual meeting of our
shareholders following the grant of the option. The remaining shares subject to
this option will vest ratably monthly over the two years from the date on which
shares first become exercisable. Any unvested shares subject to these options
will become immediately exercisable upon a transaction which results in a
change of our control.
Executive Compensation
The following table presents compensation information for fiscal 1999 paid
or accrued by our chief executive officer, each of our four other most highly
compensated executive officers whose salary and bonus for fiscal 1999 was more
than $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
----------------------- ------------
Securities
Fiscal Underlying
Name and Principal Position Year Salary Bonus Options
--------------------------- ------ -------- ------- ------------
<S> <C> <C> <C> <C>
Umang Gupta........................... 1999 $188,288 $ -- --
Chairman and Chief Executive Officer 1998 119,704 -- 1,750,000
1997 -- -- 47,989
Roger Higgins......................... 1999 185,479 88,145 --
Vice President of International Sales 1998 181,466 61,034 --
1997 145,417 3,423 207,860
Donald Aoki........................... 1999 166,920 -- 50,000
Vice President of Engineering 1998 144,748 -- --
1997 53,045 -- 193,514
Eugene Shklar......................... 1999 122,271 -- --
Vice President of Public Services 1998 58,184 -- --
1997 93,000 -- 161,100
Lloyd Taylor.......................... 1999 114,001 -- 200,000
Vice President of Operations 1998 -- -- --
1997 -- -- --
</TABLE>
John Flavio, our vice president of finance and chief financial officer,
joined us in July 1999 and is compensated at an annual salary of $170,000.
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<PAGE>
Option Grants in Fiscal 1999
The following table presents stock option grants under our 1996 Stock
Option Plan and 1999 Stock Option Plan during fiscal 1999 to our chief
executive officer and our four other most highly compensated executive
officers.
All options granted under our 1996 Stock Option Plan and 1999 Stock Option
Plan are either incentive stock options or nonqualified stock options. Options
granted under our 1996 Stock Option Plan are, and options granted under our
1999 Stock Option Plan may be, immediately exercisable subject to our right to
repurchase these shares upon termination of the optionee's employment with us.
This right generally lapses as to 25% of the shares subject to the option one
year from the date of grant and as to 2.083% of the shares each succeeding
month. Options granted under our 1999 Stock Option Plan that are not
immediately exercisable generally vest over four years and become exercisable
as to 25% of the shares subject to the option and as to 2.083% of the shares
each succeeding month. Options expire 10 years from the date of grant.
Options were granted at an exercise price equal to the fair market value of
our common stock, as determined by our board on the date of grant. In fiscal
1999, we granted to our employees options to purchase a total of 2,079,900
shares of our common stock.
Potential realizable values are computed by
. multiplying the number of shares of common stock subject to a given
option by $25.00, the closing price per share of our common stock on
the Nasdaq National Market on September 30, 1999,
. assuming that the aggregate option exercise price derived from that
calculation compounds at the annual 5% or 10% rates shown in the table
for the entire 10 year term of the option, and
. subtracting from that result the aggregate option exercise price.
The 5% and 10% assumed annual rates of stock price appreciation are
required by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Exercise Price Appreciation
Underlying Granted to Price for Option Term
Options Employees Per Share Expiration ---------------------
Name Granted (#) in Fiscal 1999 ($/share) Date 5% ($) 10% ($)
---- ----------- -------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Umang Gupta............. -- --% $ -- -- $ -- $ --
Roger Higgins........... -- -- -- -- -- --
Donald Aoki............. 50,000 2.4 8.00 6/27/2009 1,636,118 2,842,178
Eugene Shklar........... -- -- -- -- -- --
Lloyd Taylor............ 150,000 7.2 0.50 1/3/2009 6,033,355 9,651,534
50,000 2.4 8.00 6/27/2009 1,636,118 2,842,178
</TABLE>
Aggregated Option Exercises in Fiscal 1998 and Option Values at September 30,
1999
The following table presents the number of shares acquired and the value
realized upon exercise of stock options during fiscal 1999 and the number of
shares of common stock subject to "vested" and "unvested" stock options held as
of September 30, 1999 by our chief executive officer and our four other most
highly compensated executive officers. Also presented are values of "in-the-
money" options, which represent the positive difference between the exercise
price of each outstanding stock option and $25.00, the closing price per share
of our common stock on the Nasdaq National Market on September 30, 1999.
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<PAGE>
Each of the options granted to the optionees listed in the table below was
either immediately exercisable upon grant, subject to our right to repurchase
the option shares upon termination of the optionee's employment, or generally
vests over four years. In the case of immediately exercisable options, our
right to repurchase the shares generally lapses over four years and as to 25%
of the shares subject to the option one year from the date of grant and as to
2.083% of the shares each succeeding month. In the case of options that are not
immediately exercisable, these options generally vest over four years and
become exercisable as to 25% of the shares subject to the option one year from
the date of grant and as to 2.083% of the shares each succeeding month. In the
table below, in the case of immediately exercisable options, the heading
"vested" refers to shares as to which our right of repurchase has lapsed and
the heading "unvested" refers to shares that we have the right to repurchase
upon termination of the optionee's employment.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Number of Underlying Unexercised In-the-Money Options at
Shares Options at September 30, 1999 September 30, 1999
Acquired on Value ----------------------------- -----------------------
Name Exercise Realized Vested Unvested Vested Unvested
---- ----------- -------- ------------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Umang Gupta............. -- $ -- -- -- $ -- $ --
Roger Higgins........... -- -- -- -- -- --
Donald Aoki............. 833 4,998 418 48,749 7,106 828,733
Eugene Shklar........... 85,000 12,750 -- -- -- --
Lloyd Taylor............ 150,000 -- -- 50,000 -- 850,000
</TABLE>
Employee Benefit Plans
1996 Stock Option Plan
As of December 31, 1999, options to purchase 275,587 shares of common stock
were outstanding under the 1996 Stock Option Plan. The 1996 plan terminated
upon the completion of our initial public offering and no options have been or
will be granted under the plan after that time. However, termination did not
affect any outstanding options, all of which will remain outstanding until
exercised or until they terminate or expire by their terms. Options granted
under the plan are subject to terms substantially similar to those described
below with respect to options granted under the 1999 Equity Incentive Plan.
1999 Stock Option Plan
As of December 31, 1999, options to purchase 1,649,726 shares of common
stock were outstanding under the 1999 Stock Option Plan. The plan terminated
upon the completion of our initial public offering, at which time our 1999
Equity Incentive Plan became effective. As a result, no options have been or
will be granted under the plan after that time. However, termination did not
affect any outstanding options, all of which will remain outstanding until
exercised or until they terminate or expire by their terms. Options granted
under the plan are subject to terms substantially similar to those described
below with respect to options granted under the 1999 Equity Incentive Plan.
1999 Equity Incentive Plan
Shares Reserved Under the Plan. The board of directors has adopted and our
shareholders have approved the 1999 Equity Incentive Plan. The board has
reserved 5,000,000 shares of common stock available for grant under this plan.
In addition to the shares reserved by the board, upon completion of our initial
public offering on September 24, 1999, a total of 36,437 additional shares
previously reserved for grant under the 1996 Stock Option Plan and the 1999
Stock Option Plan became available for grant and issuance under the Equity
Incentive Plan. These shares:
. had not been issued;
. were not subject to outstanding grants;
. had been issued but were subsequently forfeited or repurchased by us;
or
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<PAGE>
. were subject to options that expired or became unexercisable.
Shares under the Equity Incentive Plan as well as shares subject to options
outstanding under our 1996 Stock Option Plan and 1999 Stock Option Plan will
again be available for grant and issuance under the plan if these shares:
. are subject to issuance upon exercise of an option granted under the
plan that cease to be subject to the option for any reason other than
exercise of the option;
. have been issued upon the exercise of an option granted under the plan
that are subsequently forfeited or repurchased by us at the original
purchase price; or
. are subject to an award granted pursuant to a restricted stock
purchase agreement under the plan that are subsequently forfeited or
repurchased by us at the original issue price.
In addition, on January 1, 2000 and on January 1 of each following year, the
total number of shares reserved for issuance under the plan will increase
automatically by a number of shares equal to 5% of our outstanding shares on
December 31 of the preceding year.
Term of the Plan. The plan became effective on September 24, 1999.
The plan will terminate after 10 years, unless it is terminated earlier by
our board. The plan authorizes the award of options, restricted stock awards
and stock bonuses.
If we are dissolved, liquidated or have a "change in control" transaction,
outstanding awards may be assumed or substituted by the successor corporation,
if any. In the discretion of the compensation committee, the vesting of these
awards may accelerate upon one of these transactions.
Administration of the Plan. The plan is administered by our compensation
committee, all of the members of which are "non-employee directors" under
applicable federal securities laws and "outside directors" as defined under
applicable federal tax laws. The compensation committee has the authority to
construe and interpret the plan, grant awards and make all other determinations
necessary or advisable for the administration of the plan. Grants of options to
purchase less than 15,000 shares can be authorized by Umang Gupta, our Chief
Executive Officer, and/or John Flavio, our Chief Financial Officer, and
ratified by the compensation committee.
Types of Awards Under the Plan. The plan provides for the grant of both
incentive stock options that qualify under Section 422 of the Internal Revenue
Code and nonqualified stock options. Incentive stock options may be granted
only to our employees or employees of a parent or subsidiary of us. All other
awards, other than incentive stock options, may be granted to our employees,
officers, directors, consultants, independent contractors and advisors or those
of any parent or subsidiary of us, provided the consultants, independent
contractors and advisors render bona fide services not in connection with the
offer and sale of securities in a capital-raising transaction. The exercise
price of incentive stock options must be at least equal to the fair market
value of our common stock on the date of grant. The exercise price of incentive
stock options granted to 10% shareholders must be at least equal to 110% of the
fair market value of our common stock on the date of grant. The exercise price
of non-qualified stock options must be at least equal to 85% of the fair market
value of our common stock on the date of grant.
Our nonemployee directors are entitled to receive automatic annual grants
of fully vested options to purchase 50,000 shares of our common stock, as
described under "Management--Director Compensation."
Options granted under the plan will either be exercisable as they vest or
will be immediately exercisable subject to our right of repurchase that lapses
as the shares vest. In general, options will vest over a four-year period.
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<PAGE>
The maximum term of options granted under the plan is 10 years.
Awards, other than nonqualified stock options, granted under the plan may
not be transferred in any manner other than by will or by the laws of descent
and distribution. The plan allows exceptions to this restriction with respect
to awards that are nonqualified stock options. They may be exercised during the
lifetime of the optionee only by the optionee. The compensation committee could
provide for differing provisions in individual award agreements, but only with
respect to awards that are not incentive stock options. Options granted under
the plan generally may be exercised for a period of time after the termination
of the optionee's service to us or a parent or subsidiary of us. Options will
generally terminate three months after the termination of employment or twelve
months if the termination is due to death or disability.
The purchase price for restricted stock will be determined by our
compensation committee. Stock bonuses may be issued for past services or may be
awarded upon the completion of certain services or performance goals.
1999 Employee Stock Purchase Plan
The board has adopted and our shareholders have approved the 1999 Employee
Stock Purchase Plan. The plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code. Rights granted
under the plan will not be transferable by a participant other than by will or
the laws of descent and distribution.
Shares Reserved Under the Plan. The board of directors has reserved 400,000
shares of common stock under this plan. On each January 1, the aggregate number
of shares reserved for issuance under this plan will increase automatically by
a number of shares equal to 1% of our outstanding shares on December 31 of the
preceding year. The aggregate number of shares reserved for issuance under the
plan may not exceed 4,000,000.
Administration of the Plan. The plan is administered by our compensation
committee. Our compensation committee has the authority to construe and
interpret the plan, and its decisions will be final and binding.
Eligibility to Participate. Employees generally will be eligible to
participate in the plan if they are employed 10 days before the beginning of
the applicable offering period and they are customarily employed by us, or our
parent or any subsidiaries that we designate, for more than 20 hours per week
and more than five months in a calendar year and are not, and would not become
as a result of being granted an option under the plan, 5% shareholders of us or
our designated parent or subsidiaries. Participation in the plan will end
automatically upon termination of employment for any reason.
How Purchases Are Made. Under the plan, eligible employees will be
permitted to acquire shares of our common stock through payroll deductions.
Eligible employees may select a rate of payroll deduction between 2% and 10% of
their compensation and are subject to maximum purchase limitations.
Each offering period under the plan will be for two years and consist of
four six-month purchase periods. The first offering period began on September
24, 1999. Offering periods and purchase periods will begin on February 1 and
August 1 of each year. However, the length of the first offering period will be
less than two years, and the length of the first purchase period will be more
than six months.
The plan provides that, in the event of our proposed dissolution or
liquidation, each offering period that commenced prior to the closing of the
proposed event shall continue for the duration of the offering period, provided
that the compensation committee may fix a different date for termination of the
plan. The purchase price for our common stock purchased under the plan is 85%
of the lesser of the fair market value of our common stock on the first or last
day of the applicable offering period. The compensation committee has the power
to change the duration of offering periods without shareholder approval, if the
change is announced at least 15 days prior to the beginning of the affected
offering period.
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<PAGE>
Term of the Plan. The plan became effective on September 24, 1999. The plan
will terminate 10 years from the date the plan was adopted by our board, unless
it is terminated earlier under the terms of the plan. The board has the
authority to amend, terminate or extend the term of the plan, except that no
action may adversely affect any outstanding options previously granted under
the plan.
Amendments to the Plan. Except for the automatic annual increase of shares
described above, shareholder approval is required to increase the number of
shares that may be issued or to change the terms of eligibility under the plan.
The board may make amendments to the plan as it determines to be advisable if
the financial accounting treatment for the plan is different from the financial
accounting treatment in effect on the date the plan was adopted by the board.
401(k) Plan
We sponsor a defined contribution plan intended to qualify under Section
401 of the Internal Revenue Code, or a 401(k) plan. Employees who are at least
21 years old and who have been employed with us for at least 90 days are
generally eligible to participate and may enter the plan as of the first day of
any calendar quarter. Participants may make pre-tax contributions to the plan
of up to 15% of their eligible earnings, subject to a statutorily prescribed
annual limit. Each participant is fully vested in his or her contributions and
the investment earnings. We may make matching contributions on a discretionary
basis to the plan, but we have not previously done so. Contributions by the
participants or us to the plan, and the income earned on these contributions,
are generally not taxable to the participants until withdrawn. Contributions by
us, if any, are generally deductible by us when made. Participant and company
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
Employment Contract and Termination of Employment and Change in Control
Arrangements
Employment Contract and Termination of Employment Arrangement
In December 1997, we entered into an employment agreement with Umang Gupta,
our chief executive officer. This agreement establishes Mr. Gupta's annual base
salary and eligibility for benefits and bonuses.
Option. Under this agreement, Mr. Gupta was granted an option to purchase
1,750,000 shares of common stock at an exercise price of $0.20 per share. This
option was immediately exercisable, subject to our right to repurchase the
shares of common stock upon termination of his employment. Mr. Gupta exercised
this option in April 1998. Our right of repurchase has now lapsed as to all of
these shares.
Warrant. Under this agreement, Mr. Gupta was granted a warrant to purchase
265,000 shares of common stock at a purchase price of $1.30 per share. Mr.
Gupta exercised this warrant and sold 125,000 shares of common stock in our
initial public offering.
Termination. This agreement continues until it is terminated upon written
notice by Mr. Gupta or us. If his employment is terminated by us for cause or
if he voluntarily elects to terminate his employment, we must pay his salary
and other benefits through the date of his termination. If his employment is
terminated by us without cause or if he terminates his employment due to a
material reduction in his salary or benefits, a material change in his
responsibilities or a sale of us, we must pay his salary and benefits through
the date of his termination and his salary for six additional months after this
date.
In connection with a loan agreement, dated as of May 1999, Mr. Gupta agreed
that, except in the case of a sale of us, he will not voluntarily elect to
terminate his employment before the earlier of December 31, 2001 or the date on
which a successor chief executive officer commences employment with us.
Change in Control Arrangements
The vesting of options held by executive officers will accelerate upon:
. termination of that officer's employment with us without cause; and
57
<PAGE>
. any sale of all or substantially all of our assets, any merger of us
with another company or any other corporate reorganization in which
more than 50% of our voting power is transferred.
Our right to repurchase any unvested shares held by our executive officers
will expire upon:
. termination of that officer's employment with us without cause; or
. any sale of all or substantially all of our assets, any merger of us
with another company or any other corporate reorganization in which
more than 50% of our voting power is transferred.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our articles of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages resulting from a
breach of their fiduciary duty as one of our directors, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for any transaction from which the director derived an improper
personal benefit;
. for acts or omissions that a director believes to be contrary to the
best interests of us or our shareholders or that involve the absence
of good faith on the part of the director;
. for acts or omissions that show a reckless disregard for the
director's duty to us or our shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of a serious
injury to us or our shareholders;
. under Section 310 of the California Corporations Code regarding
contracts in which a director has a material or financial interest; or
. under Section 316 of the California Code regarding improper dividends,
loans and guarantees.
These provisions are permitted under California law.
Our bylaws provide that we:
. must indemnify our directors, officers and employees to the fullest
extent permitted by California law, subject to very limited
exceptions;
. must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by California law, subject to very limited exceptions; and
. may enter into agreements with any of our directors, officers,
employees or agents that provide for indemnification of expenses
incurred to the fullest extent permitted by our articles of
incorporation and California law.
We have entered into indemnification agreements with each of our current
directors and executive officers to give them additional contractual assurances
regarding the scope of the indemnification provided in our articles of
incorporation and bylaws and to provide additional procedural protections in
the event of litigation. Presently, there is no pending litigation or
proceeding involving any of our directors, executive officers or employees for
which indemnification is sought. We are not aware of any threatened litigation
that may result in claims for indemnification. Upon completion of our
reincorporation in the State of Delaware, we intend to enter into new
indemnification agreements with our directors and executive officers on terms
substantially similar to the existing indemnification agreements.
We have obtained liability insurance for our directors and officers as well
as a rider to extend that coverage for public securities matters.
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CERTAIN TRANSACTIONS
Other than Mr. Gupta's employment agreement, described in "Management" and
the transactions described below, since we were formed there has not been, nor
is there currently proposed, any transaction or series of similar transactions
to which we were or will be a party:
. in which the amount involved exceeds $60,000; and
. in which any director, executive officer, holder of more than 5% of
our common stock or any member of their immediate family had or will
have a direct or indirect material interest.
Preferred Stock Financings
In May and June 1996, we sold a total of 3,039,222 shares of Series A
preferred stock at a purchase price of $0.42 per share. In July 1997, Eugene
Shklar purchased 74,937 shares of Series A preferred stock from a purchaser of
the Series A preferred stock at a purchase price of $1.10 per share. In July
1997, we sold a total of 2,333,420 shares of Series B preferred stock at a
purchase price of $1.10 per share. In March 1998, we sold a total of 3,848,986
shares of Series C preferred stock at a purchase price of $1.30 per share. In
April and May 1999, we sold a total of 3,367,272 shares of Series D preferred
stock at a purchase price of $4.42 per share and a total of 438,480 shares of
common stock at a purchase price of $4.42 per share.
Purchasers of our preferred and common stock include, among others, the
following of our executive officers, directors and holders of more than 5% of
our outstanding stock:
<TABLE>
<CAPTION>
Series A Series B Series C Series D Aggregate
preferred preferred preferred preferred Common consideration
Shareholder stock stock stock stock stock paid
- ----------- --------- --------- --------- --------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
VeriSign, Inc. ......... -- -- -- 1,263,200 438,481 $7,521,427.81
GE Capital Equity
Investments, Inc. .... -- -- -- 1,583,711 -- 7,000,000.41
Entities associated with
Bessemer Venture
Partners ............. -- -- 2,446,153 226,245 -- 4,000,000.94
Entities and individuals
associated with
Wheatley Partners II,
L.P.. ................ 595,238 715,532 407,692 -- -- 1,537,085.86
Umang Gupta............. -- 90,909 -- -- -- 100,000.45
Eugene Shklar........... 74,937 565,773 611,538 113,122 -- 1,948,823.24
</TABLE>
All of the share numbers described above reflect the conversion of each
outstanding share of Series A preferred stock, Series B preferred stock and
Series D preferred stock into one share of common stock and the conversion of
each outstanding share of Series C preferred stock into 1.06 shares of common
stock immediately prior to the closing of our initial public offering in
September 1999.
Warrants
In January 1997, in connection with a bridge loan financing, we issued
warrants to purchase a total of 81,092 shares of common stock at a purchase
price of $0.05 per share to Wheatley Partners II, L.P. (formerly known as
Applewood Associates, L.P.), a holder of more than 5% of our outstanding common
stock, and entities associated with Wheatley Partners, including warrants to
purchase 12,816 shares of common stock issued to each of Woodland Partners,
L.P. and Irwin Lieber. In September 1999, Wheatley Partners, Woodland Partners
and Mr. Lieber exercised these warrants. We also issued a warrant to purchase a
total of 70,000 shares of common stock at a purchase price of $0.05 per share
to Eugene Shklar. In July 1997, Mr. Shklar exercised this warrant.
In connection with the employment agreement we entered into in December
1997 with Umang Gupta, we issued Mr. Gupta a warrant to purchase a total of
265,000 shares of common stock at a purchase price of $1.30 per share, which he
exercised in September 1999.
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Loans to Executive Officers
Umang Gupta. In April 1998, we loaned $280,000 to Umang Gupta, secured by a
loan and pledge agreement, in connection with his exercise of options to
purchase shares of our common stock. In May 1999, we loaned $300,000 to Mr.
Gupta, evidenced by a full recourse promissory note and secured by a stock
pledge agreement, in connection with the acceleration of the lapse of our
repurchase right with respect to the shares of our common stock owned by him.
In June 1999, these loans were consolidated into a single loan. This loan
accrues interest at a rate of 6% per year and is due and payable on or before
December 31, 2001.
Lloyd Taylor. In January 1999, we loaned $150,000 to Lloyd Taylor, our vice
president of operations, secured by a loan and security agreement, in
connection with his relocation to California. The loan accrues interest at a
rate of 9% per year and is due and payable on or before January 2002.
In January 1999, we loaned an additional $75,000 to Mr. Taylor, secured by
a loan and pledge agreement, in connection with his exercise of his option to
purchase 150,000 shares of our common stock. The loan accrues interest at a
rate of 7% per year and is payable on or before January 2004.
Marlene Williamson. In November 1999, we loaned $263,000 to Marlene
Williamson, our Vice President of Marketing, secured by a loan and security
agreement, in connection with her relocation to California. The loan accrues
interest at a rate of 6% per year and is due and payable on or before May 2000.
John Flavio. In December 1999, we loaned $200,000 to John Flavio, our Chief
Financial Officer, secured by a loan and security agreement, in connection with
his relocation to California. The loan accrues interest at a rate of 6% per
year and is due and payable on or before June 2000.
Option Grants to Executive Officers and Directors
Umang Gupta. In September and December 1997, we granted to Umang Gupta
options to purchase a total of 1,797,989 shares of common stock at an exercise
price of $0.20 per share. Mr. Gupta exercised these options in April 1998.
Eugene Shklar. In August 1996 and June 1997, we granted to Eugene Shklar
options to purchase a total of 431,100 shares of common stock at an exercise
price of $0.05 per share. In July 1997, 25,000 of these 431,100 shares were
canceled. In July 1997, we granted Mr. Shklar an option to purchase a total of
45,000 shares of common stock at an exercise price of $0.20 per share. In
February 1999, a total of 2,500 of these 45,000 shares were canceled. Mr.
Shklar exercised his options as to the remaining 448,600 shares in September
1996, June 1997 and January 1999.
Roger Higgins. In February and June 1997, we granted to Roger Higgins
options to purchase a total of 207,859 shares of common stock at an exercise
price of $0.05 per share. Mr. Higgins exercised these options in February and
June 1997.
Donald Aoki. In May and June 1997, we granted to Donald Aoki options to
purchase a total of 193,513 shares of common stock at an exercise price of
$0.05 per share. Mr. Aoki exercised these options in June 1997 and December
1998. In June 1999, we granted Mr. Aoki options to purchase 50,000 shares of
common stock at an exercise price of $8.00 per share.
Thomas Roll. In September 1998, we granted Thomas Roll options to purchase
a total of 100,000 shares of common stock at an exercise price of $0.24 per
share. Mr. Roll exercised these options as to 30,000 shares in April 1999. In
January 1999, we granted Mr. Roll options to purchase 20,000 shares of common
stock at an exercise price of $0.60 per share. In June 1999, we granted Mr.
Roll options to purchase 30,000 shares of common stock at an exercise price of
$8.00 per share.
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<PAGE>
Lloyd Taylor. In January 1999, we granted to Lloyd Taylor an option to
purchase 150,000 shares of common stock at an exercise price of $0.50 per
share. Mr. Taylor immediately exercised this option. In June 1999, Mr. Taylor
was granted an option to purchase 50,000 shares of common stock at an exercise
price of $8.00 per share.
James Salazar. In March 1999, we granted James Salazar an option to
purchase 112,500 shares of common stock at an exercise price of $1.60 per
share.
John Flavio. In June 1999, we granted John Flavio an option to purchase
205,000 shares of common stock at an exercise price of $8.00 per share.
Marlene Williamson. In August 1999, we granted Marlene Williamson an option
to purchase 150,000 shares of common stock at an exercise price of $9.00 per
share.
Mark Leslie. In June 1999, we granted Mark Leslie an option to purchase
50,000 shares of common stock at an exercise price of $8.00 per share. Mr.
Leslie exercised this option with respect to 30,000 shares in June 1999.
Memorandum of Understanding with Verisign, Inc.
In February 1999, we entered into a memorandum of understanding with
VeriSign, Inc. Mr. Stratton Sclavos, a member of our board of directors, is the
chief executive officer and a director of VeriSign. Under the agreement,
Keynote granted VeriSign a non-exclusive license to sell two different
customized versions of Keynote Perspective and a one-year subscription to
Keynote Lifeline to VeriSign's customers as an integrated part of VeriSign's
product offerings. In order to implement the product offerings subject to the
agreement, Keynote agreed to construct a network of 50 measurement computers in
25 domestic and international cities. To help cover the costs of Keynote's
initial expenditures, VeriSign made a $250,000 advance available to Keynote
prior to the commencement of the joint marketing and distribution program.
VeriSign also agreed to promote Keynote's services as part of its regular
communications with customers, such as quarterly newsletters, and through a
VeriSign web site that focuses on security-related issues.
The customized versions of Perspective that VeriSign may sell under the
agreement are each one month in duration and offer measurements from either:
. 10 different cities of the customer's choice, including up to two
international locations, or
. 25 different cities of the customer's choice, including up to four
international locations.
The agreement provides that if VeriSign is generating at least 500
introductory Perspective sales per month within six months from the beginning
of the program, then VeriSign will make available to Keynote an additional
$250,000 advance. If the program is not generating 500 of these sales per month
within six months from the beginning of the program, then Keynote may reduce
the number of measurement computers deployed under the agreement. If the
program is not generating 100 introductory Perspective sales per month within
six months from the beginning of the program, then either Keynote or VeriSign
may terminate the agreement by providing 60 days' advance written notice to the
other party, with VeriSign entitled to recover the balance of the money it
advanced to Keynote ratably over the remainder of the term of the agreement.
The memorandum of understanding provides that VeriSign is entitled to offer
the 10-city and 25-city versions of the introductory Perspective service as an
integrated part of its product offerings. VeriSign will pay Keynote $50 for
each 10-city version and $100 for each 25-city version of the introductory
Perspective service. All of the fees that VeriSign pays to Keynote for the
subscriptions VeriSign sells to its customers are deducted from the funds that
it advanced to Keynote until such advance is repaid, with a maximum of $10,417
in fees per month to be deducted from the advance. Any fees per month in excess
of $10,417 are retained by Keynote. In the event that Keynote converts the
introductory Perspective customer into a paying Perspective customer during the
life of the VeriSign-bundled introductory Perspective subscription or within 30
days after this period, Keynote will pay VeriSign a one-time conversion bounty
of $1,400.
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VeriSign also has the right to sell a one-year subscription to Lifeline,
and VeriSign will receive a 50% discount to this service. This discount will
increase to 57% if, after the agreement has been in effect for six months,
VeriSign is paying Keynote more than $100,000 per month for the Lifeline
service. However, if after the agreement has been in effect for six months,
VeriSign is paying Keynote less than $34,750 per month for the Lifeline
service, the parties can renegotiate the discount and/or volume commitments. If
Keynote converts the Lifeline customer into a paying Perspective customer
during the life of the VeriSign-bundled Lifeline subscription or within 30 days
after this period, Keynote will pay VeriSign a one-time conversion bounty of
$1,400. In addition, if a program generates leads for Perspective, Keynote will
pay VeriSign $150 for each lead which turns into a paying customer within 90
days of receipt of the lead.
The agreement provides that if Keynote makes available a similar service
with better terms to any customer, Keynote will provide VeriSign with the same
superior terms for the remainder of the term of the agreement. Keynote also
agreed not to enter into a similar agreement involving the bundling of its
services with certain competitors of VeriSign.
The initial term of the memorandum of understanding is two years, unless
the parties enter into a formal marketing and services agreement prior to that
time which supersedes the agreement. The agreement will continue for a series
of one-year extensions subsequent to the initial two-year term unless either
party provides written notice to the other of its intent not to renew the
agreement.
Through December 31, 1999, Keynote has received from VeriSign approximately
$295,000 in revenue from this agreement. Through December 31, 1999, Keynote has
paid $68,000 to VeriSign under this agreement.
Keynote believes that the terms of the memorandum of understanding, taken
as a whole, were no less favorable to Keynote than Keynote could have obtained
from unaffiliated third parties.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table presents information as to the beneficial ownership of
our common stock as of December 31, 1999 and as adjusted to reflect the sale of
the common stock in this offering by:
. each shareholder known by us to be the beneficial owner of more than
5% of our common stock;
. each of our directors;
. each executive officer listed in the management table above;
. all directors and executive officers as a group; and
. each selling shareholder.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated below, to our knowledge, the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of December 31, 1999 are deemed to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. Unless indicated below, the address for each director,
officer and 5% shareholder listed below is c/o Keynote Systems, Inc., 2855
Campus Drive, San Mateo, California 94403.
The percentage of common stock beneficially owned is based on 23,608,756
shares of common stock outstanding as of December 31, 1999. Entries denoted by
an asterisk represent less than 1%.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Prior to the Offering After the Offering
------------------------- Number of ----------------------
Name of Beneficial Owner Number Percent Shares Offered Number Percent
- ------------------------ ------------- ----------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Directors, Officers and
5% Shareholders:
Entities and individuals
associated with 2,821,237 11.9% 600,000 2,221,237 8.6%
Wheatley Partners II,
L.P.(1)...............
80 Cuttermill Road,
Suite 311
Great Neck, New York
11021
Entities associated with
Bessemer Venture 2,672,398 11.3 534,480 2,137,918 8.3
Partners(2)...........
535 Middlefield Road
Menlo Park, California
94025
VeriSign, Inc........... 1,701,681 7.2 340,336 1,361,345 5.3
1350 Charleston Road
Mountain View,
California 94043
GE Capital Equity 1,583,711 6.7 316,742 1,266,969 4.9
Investments, Inc.(3)..
120 Long Ridge Road
Stamford, Connecticut
06927
Umang Gupta(4).......... 2,542,232 10.8 125,000 2,417,232 9.4
Roger Higgins(5)........ 332,859 1.4 200,000 132,859 *
Donald Aoki(6).......... 310,600 1.3 4,500 306,100 1.2
Eugene Shklar(7)........ 2,023,139 8.6 -- 2,023,139 7.8
Lloyd Taylor (8)........ 150,000 * 37,500 112,500 *
John Flavio (9)......... 20,000 * 20,000 -- *
James Salazar (10)...... 28,125 * -- 28,125 *
Thomas Roll (11)........ 67,291 * 35,000 32,291 *
Marlene Williamson
(12).................. 5,000 * 1,500 3,500 *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Prior to the Offering After the Offering
------------------------- Number of ---------------------
Name of Beneficial Owner Number Percent Shares Offered Number Percent
- ------------------------ ------------- ------------------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
David Cowan (13)........ 2,705,731 11.4% 534,480 2,171,251 8.4%
Mark Leslie (14)........ 83,333 * -- 83,333 *
Stratton Sclavos (15)... 1,735,014 7.3 340,336 1,394,678 5.4
All 12 directors and
executive officers
as a group (16)........ 10,004,324 42.0 1,298,316 8,706,008 33.4
Other Selling
Shareholders:
David Bernard (17)...... 22,993 * 12,000 10,993 *
Entities and individuals
associated with
Gerald S. Casilli
(18).................. 860,605 3.6 367,908 492,697 1.9
Comdisco, Inc. (19)..... 186,754 * 186,754 -- *
Catherine Cranston 15,000 * 3,000 12,000 *
Melbye................
Jason Cranston ......... 15,000 * 3,000 12,000 *
John T. Cranston........ 55,000 * 11,000 44,000 *
John T. Cranston, Jr. .. 50,000 * 10,000 40,000 *
Riley Cranston.......... 15,000 * 3,000 12,000 *
Cranston Company........ 100,000 * 20,000 80,000 *
Dalewood Associates, 333,140 1.4 65,000 268,140 1.0
L.P...................
F&W Investments 1997 and 65,770 * 13,122 52,648 *
1998..................
Guoqiang Ge (20)........ 35,000 * 18,000 17,000 *
Robert Gladstone........ 79,058 * 20,000 59,058 *
Roger Gladstone......... 51,916 * 20,000 31,916 *
Eric Hamer (21)......... 22,500 * 5,000 17,500 *
Theodore Horwitz (22)... 20,000 * 2,000 18,000 *
David E. Kratter........ 139,897 * 70,000 69,897 *
Mark E. Kratter......... 28,022 * 14,000 14,022 *
Matthew R. Kratter...... 28,022 * 14,000 14,022 *
Jin Liu (23)............ 2,500 * 625 1,875 *
Magnuson Revocable Trust
dated 1/24/94,
Richard P. and Amy C.
Magnuson, trustees... 139,897 * 30,000 109,897 *
Adam R. Mckee (24)...... 10,520 * 8,000 2,520 *
Frederick L. Mueller 68,907 * 20,658 48,249 *
(25)..................
David Nussbaum.......... 79,058 * 15,000 64,058 *
Olive Hill Investment 595,238 2.5 150,000 445,238 1.7
Partners, L.P.........
Glenn E. Penisten....... 139,891 * 119,048 20,843 *
Amy Pierce (26)......... 2,031 * 1,875 156 *
Andrew Popell .......... 333,334 1.4 83,334 250,000 *
Michael Siffin (27)..... 4,166 * 3,300 866 *
William E. Steele....... 45,455 * 25,455 20,000 *
Samuel Urcis............ 146,838 * 119,047 27,791 *
Venture Lending & 52,020 * 52,020 -- *
Leasing, Inc..........
Venture Lending & 46,796 * 46,796 -- *
Leasing II, Inc.......
Sofia Yeung (28)........ 10,416 * 2,000 8,416 *
</TABLE>
- --------
(1) Represents 1,773,824 shares held by Wheatley Partners II, L.P., 150,000
shares held by Brookwood Partners, L.P., 362,394 shares held by Woodland
Partners, 512,395 shares held by Irwin Lieber and 22,624 shares held by
Barry Fingerhut. Of the shares to be sold in this offering, 300,000 will be
sold by Wheatley Partners II, L.P., 150,000 will be sold by Woodland
Partners and 150,000 will be sold by Irwin Lieber.
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<PAGE>
(2) Represents 1,432,734 shares held by Bessemer Venture Partners IV, L.P.,
995,049 shares held by Bessec Ventures IV L.P. and 244,615 shares held by
Bessemer Venture Investors IV L.P. Of the shares to be sold in this
offering, 286,547 shares will be sold by Bessemer Venture Partners IV,
L.P., 199,010 shares will be sold by Bessec Ventures IV L.P. and 48,923
shares will be sold by Bessemer Venture Investors IV L.P.
(3) GE Capital Equity Investments, Inc., a wholly-owned subsidiary of General
Electric Capital Corporation, shares beneficial ownership with General
Electrical Capital Corporation with respect to all of the shares held of
record by GE Capital Equity Investments, Inc.
(4) Includes 80,000 shares held by the Gupta Family 1999 Irrevocable Trust.
Mr. Gupta disclaims beneficial ownership of the shares held by this entity
except to the extent of his pecuniary interest in them. Of the shares
being sold, 115,000 will be sold by Mr. Gupta and 10,000 shares will be
sold by the Gupta Family 1999 Irrevocable Trust.
(5) Includes 125,000 shares held by the Roger W. Higgins and Priscilla Higgins
Revocable Trust. Mr. Higgins disclaims beneficial ownership of the shares
held by this entity except to the extent of his pecuniary interest in
them. Of the shares held by Mr. Higgins, 57,975 remained subject to our
right of repurchase as of December 31, 1999.
(6) Includes 5,000 shares held by Mr. Aoki as trustee for his minor children.
Includes 2,503 shares subject to an option exercisable within 60 days of
December 31, 1999. Of the shares held by Mr. Aoki, 59,522 remained subject
to our right of repurchase as of December 31, 1999.
(7) Of the shares held by Mr. Shklar, 57,939 remained subject to our right of
repurchase as of December 31, 1999.
(8) Of the shares held by Mr. Taylor, 150,000 remained subject to our right of
repurchase as of December 31, 1999.
(9) Includes 12,500 shares subject to an option exercisable within 60 days of
December 31, 1999 and 7,500 shares subject to an option exercisable upon
the completion of this offering.
(10) Includes 28,125 shares subject to an option exercisable within 60 days of
December 31, 1999.
(11) Includes 37,291 shares subject to options exercisable within 60 days of
December 31, 1999.
(12) Includes 5,000 shares subject to an option exercisable within 60 days of
December 31, 1999.
(13) Represents 1,432,734 shares held by Bessemer Venture Partners IV, L.P.,
995,049 shares held by Bessec Ventures IV L.P. and 244,615 shares held by
Bessemer Venture Investors IV L.P. Includes 33,333 shares subject to an
option exercisable within 60 days of December 31, 1999. Of the shares to
be sold in this offering, 286,547 shares will be sold by Bessemer Venture
Partners IV, L.P., 199,010 shares will be sold by Bessec Ventures IV L.P.
and 48,923 shares will be sold by Bessemer Venture Investors IV L.P. Mr.
Cowan, one of our directors, is a general partner of the general partner
of these entities. Mr. Cowan disclaims beneficial ownership of the shares
held by these entities except to the extent of his pecuniary interest in
them.
(14) Represents 30,000 shares held by Leslie Investments, LLC. Mr. Leslie
disclaims beneficial ownership of the shares held by this entity except
to the extent of his pecuniary interest in them. Includes 20,000 shares
subject to an immediately exercisable option and 33,333 shares subject to
an option exercisable within 60 days of December 31, 1999.
(15) Represents 1,701,681 shares held by VeriSign, Inc. Includes 33,333 shares
subject to an option exercisable within 60 days of December 31, 1999. Of
the shares to be sold in this offering, all will be sold by VeriSign. Mr.
Sclavos, one of our directors, is president and chief executive officer
of VeriSign. Mr. Sclavos disclaims beneficial ownership of the shares
held by VeriSign except to the extent of his pecuniary interest in them.
(16) Includes 355,436 shares subject to our right of repurchase as of December
31, 1999, 185,418 share subject to options exercisable within 60 days of
December 31, 1999, 7,500 shares subject to an option exercisable upon the
closing of this offering and 20,000 shares subject to an immediately
exercisable option.
(17) Includes 6,771 shares subject to an option exercisable within 60 days of
December 31, 1999.
(18) Represents 189,517 shares held by Casilli 1995 Unitrust; 523,696 shares
held by Casilli Revocable Trust; 68,196 shares held by Gerald A. Casilli
Trust; 5,000 shares held by Leon J. Casilli Trust; 68,196 shares
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<PAGE>
held by Michelle A. Casilli Trust; 1,000 shares held by Thomas A. Casilli
Trust; and 5,000 shares held by Salvador Puglisi. Of the shares to be sold
in this offering, 59,516 will be sold by Casilli 1995 Unitrust; 250,000
shares will be sold by Casilli Revocable Trust; 23,196 shares will be sold
by Gerald A. Casilli Trust; 3,000 shares will be sold by Leon J. Casilli
Trust; 28,196 shares will be sold by Michelle A. Casilli Trust; 1,000
shares will be sold by Thomas A. Casilli Trust; and 3,000 shares will be
sold by Salvador Puglisi. Mr. Casilli disclaims beneficial ownership of
the shares held by these entities and individuals except to the extent of
his pecuniary interest in them.
(19) Includes 163,529 shares subject to an immediately exercisable warrant.
(20) Of the shares held by Mr. Ge, 11,641 remained subject to our right of
repurchase as of December 31, 1999.
(21) Of the shares held by Mr. Hamer, 11,406 remained subject to our right of
repurchase as of December 31, 1999.
(22) Includes 156 shares subject to an option exercisable within 60 days of
December 31, 1999. Of the shares held by Mr. Horowitz, 156 remained
subject to our right of repurchase as of December 31, 1999.
(23) Of the shares held by Ms. Liu, 1,823 remained subject to our right of
repurchase as of December 31, 1999.
(24) Includes 10,520 shares subject to an option exercisable within 60 days of
December 31, 1999.
(25) Of the shares held by Mr. Mueller, 22,323 remained subject to our right
of repurchase as of December 31, 1999.
(26) Includes 2,031 shares subject to an option exercisable within 60 days of
December 31, 1999.
(27) Includes 833 shares subject to an option exercisable within 60 days of
December 31, 1999.
(28) Includes 5,416 shares subject to an option exercisable within 60 days of
December 31, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
$0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par
value per share. As of December 31, 1999, there were outstanding 23,608,756
shares of common stock held of record by approximately 112 shareholders and
options to purchase 2,057,862 shares of common stock.
Common Stock
Dividend Rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
at the times and in the amounts as our board may from time to time determine.
Voting Rights. Each common shareholder is entitled to one vote for each
share of common stock held on all matters submitted to a vote of shareholders.
Cumulative voting for the election of directors is not provided for in our
articles of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
No Preemptive or Similar Rights. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to Receive Liquidation Distributions. Upon our liquidation,
dissolution or winding-up, the assets legally available for distribution to our
shareholders are distributable ratably among the holders of our common stock
and any participating preferred stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding preferred stock and payment
of other claims of creditors. Each outstanding share of common stock is, and
all shares of common stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
Preferred Stock
We are authorized to issue preferred stock in one or more series. We can
also establish the number of shares to be included in each series, to fix the
rights, preferences and privileges of the shares of each series and any of its
qualifications, limitations or restrictions. Our board can also increase or
decrease the number of shares of any series, but not below the number of shares
of that series then outstanding, without any further vote or action by the
shareholders.
The board may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of the common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things:
. have the effect of delaying, deferring or preventing a change in our
control;
. may cause the market price of our common stock to decline; or
. impair the voting and other rights of the holders of our common stock.
We have no current plans to issue any shares of preferred stock.
Proposed Reincorporation
We intend to reincorporate in the State of Delaware after our annual
meeting of shareholders to be held on February 22, 2000. Our authorized capital
stock will consist of 100,000,000 shares of common stock, $0.001 par value per
share, and 5,000,000 shares of preferred stock, $0.001 par value per share, and
the rights, preferences and privileges of the common stock and preferred stock
will be substantially unchanged as a result of the reincorporation.
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Warrants
As of December 31, 1999, we had outstanding warrants to purchase 7,273
shares of our common stock at an exercise price of $1.10 per share. These
warrants expire on December 31, 2002 and June 30, 2003.
Registration Rights
The holders of approximately 13,609,773 shares of common stock have the
right to require us to register their shares with the Securities and Exchange
Commission so that those shares may be publicly resold. They also have the
right to include their shares in any registration statement we file.
Demand Registration Rights
At any time after March 29, 2000, shareholders with registration rights can
request that we file a registration statement so that they can publicly sell
their shares. The underwriters of any underwritten offering will have the right
to limit the number of shares to be included in the filed registration
statement.
Who May Make a Demand. At any time after March 29, 2000, GE Capital Equity
Investments, Inc., VeriSign, Inc. or the holders of at least 50% of the shares
having registration rights have the right to demand that we file a registration
statement. The aggregate amount of securities to be sold under the registration
statement must exceed $7.5 million. If we are eligible to file a registration
statement on Form S-3, any holder of shares having registration rights has the
right to demand that we file a registration statement on Form S-3, as long as
the amount of securities to be sold under the registration statement exceed
$750,000.
Number of Times Holders Can Make Demands. We will be required to file one
registration statement for each of GE Capital, VeriSign and the holders of at
least 50% of shares having registration rights. If we are eligible to file a
registration statement on Form S-3, we are not required to file more than one
registration statement during any 12 month period.
Postponement. We may postpone the filing of a registration statement for up
to 90 days once in a 12-month period if we determine that the filing would be
seriously detrimental to us or our shareholders.
Piggyback Registration Rights
If we register any securities for public sale, shareholders with
registration rights will have the right to include their shares in that
registration statement. The underwriters of any underwritten offering will have
the right to limit the number of shares to be included in the registration
statement.
Expenses of Registration
We will pay all expenses relating to any demand or piggyback registration.
However, we will not pay for any expenses of any demand registration if the
request is subsequently withdrawn by the holders of a majority of the shares
having registration rights, subject to very limited exceptions.
Expiration of Registration Rights
The registration rights described above will expire five years after this
offering is completed. The registration rights will terminate earlier with
respect to a particular shareholder if:
. that holder owns less than 1% of our outstanding securities;
. that holder can resell all of its securities in a three month period
under Rule 144 of the Securities Act; and
. we are subject to the reporting requirements of the Securities
Exchange Act.
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Anti-Takeover Provisions
Our articles of incorporation provides that our board of directors may
issue preferred stock with voting or other rights without shareholder action.
Our bylaws also provide that we will indemnify officers and directors against
losses that they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in connection with
takeover defense measures. These provisions may have the effect of delaying,
discouraging or preventing changes in our management.
Upon the completion of our proposed reincorporation in the State of
Delaware, our certificate of incorporation and bylaws will also contain
additional anti-takeover provisions. These will include:
. the elimination of the ability of stockholders to call special
meetings of stockholders;
. a requirement that stockholder actions may only occur at a duly called
stockholder meeting and not by a consent in writing; and
. the implementation of procedures for stockholders to propose new
business.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board of directors and in the policies
formulated by the board of directors and to discourage transactions that may
involve an actual or threatened change of control of Keynote. These provisions
are designed to reduce our vulnerability to an unsolicited acquisition
proposal. The provisions also are intended to discourage tactics that may be
used in proxy fights. However, these provisions also are intended to discourage
others from making tender offers for our shares and, as a consequence, they
also may inhibit fluctuations in the market price of our shares that could
result from actual or rumored takeover attempts. These provisions also may have
the effect of preventing changes in our management.
We will also become subject to Section 203 of the Delaware General
Corporation Law. Unless our stockholders adopt an amendment to the contrary,
our stock is no longer listed on a national securities exchange or our
stockholders consent, this section prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder, unless:
. prior to becoming an interested stockholder, the board of directors of
the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned (1) by persons who
are directors and also officers and (2) by employee stock plans in
which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
. on or subsequent to becoming an interested stockholder, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent,
by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines a business combination to include:
. any merger or consolidation involving the corporation and the
interested stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
69
<PAGE>
. any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder except upon the exercise, exchange or conversion of
securities exercisable for, exchangeable for or convertible into stock
of such composition, upon a merger of a parent and a subsidiary, or
upon an exchange offer by the corporation to purchase stock made on
the same terms to all holders of said stock;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder;
or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our articles of incorporation limit the liability of directors to the
fullest extent permitted by California law. In addition, our articles of
incorporation and bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by California law. We have entered
into separate indemnification agreements with our directors and executive
officers that provide them indemnification protection in the event our articles
of incorporation is subsequently amended. Upon the completion of our
reincorporation in the State of Delaware, we will enter into new
indemnification agreements with our directors and executive officers. For more
information, please see "Management--Indemnification of Directors and Executive
Officers and Limitation of Liability."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company. The address of our transfer agent and registrar is
40 Wall Street, New York, New York 10005, and its telephone number at this
location is (212) 936-5100.
Listing
Our common stock is quoted on the Nasdaq National Market under the trading
symbol "KEYN."
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock, including shares issued
upon exercise of outstanding warrants or options, in the public market after
this offering could adversely affect market prices prevailing from time to time
and could impair our ability to raise capital through the sale of our equity
securities. Furthermore, as described below, no shares currently outstanding
will be available for sale immediately after this offering due to contractual
restrictions on resale. Sales of substantial amounts of our common stock in the
public market after these restrictions lapse could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 27,837,420
shares of common stock, assuming the cash exercise of outstanding warrants to
purchase 7,273 shares of common stock and the exercise of outstanding options
to purchase 1,992,487 shares of common stock, as of December 31, 1999, and
assuming no exercise of the underwriters' over-allotment option. Of these
shares, the 5,750,000 shares sold in this offering and the 4,600,000 shares
sold in our initial public offering will be freely tradable without restriction
under the Securities Act unless purchased by our "affiliates."
The remaining 17,487,420 shares will become eligible for public sale as
follows:
<TABLE>
<CAPTION>
Approximate Number of
Additional Shares
Date that May be Sold Comment
---- --------------------- -------------
<C> <C> <S>
Date of this prospectus 0 Freely
tradable
shares
March 23, 2000 3,068,994 Underwriter's
initial
public
offering
lock-up
released.
These shares
may be sold
under Rule
144, 144(k)
or 701
April 26, 2000 5,288 Restricted
securities
held for at
least one
year may be
sold under
Rule 144
April 30, 2000 23,224 Restricted
securities
held for at
least one
year may be
sold under
Rule 144
May 11, 2000 22,624 Restricted
securities
held for at
least one
year may be
sold under
Rule 144
90 days after the date of this prospectus 14,360,017 Underwriter's
public
offering
lock-up
released.
These shares
may be sold
under Rule
144, 144(k)
or 701
One year after the date of this prospectus 7,273 Restricted
securities
held for at
least one
year may be
sold under
Rule 144
</TABLE>
Lock-Up Agreements
All of our officers and directors and substantially all of our shareholders
have signed lock-up agreements under which they agreed not to sell, dispose of,
loan, pledge or grant any rights with respect to any shares of common stock or
any securities convertible into or exercisable or exchangeable for shares of
common stock without the prior written consent of FleetBoston Robertson
Stephens Inc. until March 23, 2000. All of our officers and directors, selling
shareholders have signed a similar lock-up agreement under which they have
agreed to the same restrictions described above for a period of 90-days from
the date of this prospectus.
FleetBoston Robertson Stephens Inc. may choose to release some of these
shares from these restrictions prior to the expiration of these 90-day or 180-
day periods, although it has no current intention to do so, other than with
respect to releasing shares to be sold by the selling shareholders in this
offering.
71
<PAGE>
Rule 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which
will equal approximately 258,376 shares immediately after this
offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, shares that have been held by a non-affiliate for at least two
years may be sold in the open market immediately after the lock-up agreements
expire.
Rule 701
Any employee, officer or director of, or consultant to, us who purchased
his or her shares under a written compensatory plan or contract may be entitled
to sell his or her shares in reliance on Rule 701. Rule 701 permits affiliates
to sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell these shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All Rule 701 shares became freely tradable 90 days after the date of
the prospectus relating to our initial public offering. However, all shares
issued under Rule 701 are subject to lock-up agreements and will only become
eligible for sale when the 180-day lock-up agreements expire on March 23, 2000.
Registration Rights
Upon completion of this offering, the holders of 13,609,773 shares of
common stock, or their transferees, will be entitled to certain rights with
respect to the registration of those shares under the Securities Act. For a
discussion of these rights please see "Description of Capital Stock--
Registration Rights." After these shares are registered, they will be freely
tradable without restriction under the Securities Act.
Warrants
As of December 31, 1999, we had outstanding warrants to purchase 7,273
shares of common stock. When these warrants are exercised and the exercise
price is paid in cash, the shares must be held for one year before they can be
sold under Rule 144. These warrants contain a "net exercise" provision. This
provision allows a holder to exercise the warrant for a lesser number of shares
of common stock instead of paying cash. The number of shares which would be
issued in this case would be based upon the market price of the common stock at
the time of the net exercise. If the warrant had been held for at least one
year at the time of the net exercise, the shares of common stock could be
publicly sold under Rule 144. After the lock-up agreements in connection with
our initial public offering, described above, expire, each of the outstanding
warrants will have been outstanding for at least one year.
Stock Options
We filed a registration statement on Form S-8 under the Securities Act
covering shares of common stock reserved for issuance under our stock option
and employee stock purchase plans. As of December 31, 1999, options to purchase
1,992,487 shares of common stock were issued and outstanding. Shares registered
under this registration statement on Form S-8 will, subject to Rule 144 volume
limitations applicable to our affiliates, be available for sale in the open
market immediately after the lock-up agreements expire.
72
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., Dain Rauscher
Incorporated and SoundView Technology Group, Inc., have entered into an
underwriting agreement with us and the selling shareholders to purchase the
number of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all of the shares listed
below if any shares are purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc. ............................ 2,472,500
Chase Securities Inc............................................ 1,351,250
Dain Rauscher Incorporated...................................... 1,351,250
SoundView Technology Group, Inc. ............................... 575,000
---------
Total....................................................... 5,750,000
=========
</TABLE>
Generally, we and the selling shareholders have agreed to indemnify each
underwriter against liability arising out of any untrue statement contained in
the registration statement, any preliminary prospectus or the final prospectus,
or the omission of a material fact required to be stated in the registration
statement or such prospectus necessary to make the statements in the
registration statement or such prospectus not misleading. In addition, we and
the selling shareholders have agreed to indemnify each underwriter against
liability arising out of violations of laws or regulations of foreign
jurisdictions where reserved shares have been offered. The underwriters have
agreed to indemnify us and the selling shareholders against liability with
respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the registration statement, any preliminary prospectus or
the final prospectus in reliance upon and in conformity with written
information furnished to us by that underwriter through FleetBoston Robertson
Stephens Inc. expressly for use in the registration statement, such preliminary
prospectus or the prospectus. For more detailed information on the terms of
indemnification contained in the underwriting agreement, please see Exhibit
1.01 to the registration statement.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of various legal matters by counsel for the underwriters and other
conditions. The underwriters reserve the right to withdraw, cancel or modify
this offer and to reject orders in whole or in part.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 862,500 additional shares of common stock at the same price per
share as we and the selling shareholders will receive for the 5,750,000 shares
that the underwriters have agreed to purchase. To the extent that the
underwriters exercise this option, each of the underwriters will have a firm
commitment, to purchase approximately the same percentage of these additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the 5,750,000 shares in this
offering. If purchased, these additional shares will be sold by the
underwriters on the same terms as those on which the 5,750,000 shares are being
sold.
Lock-Up Agreement. Each of our officers, directors and selling shareholders
has agreed with the representatives or us for a period of 90 days after the
effective date of this prospectus, not to dispose of or hedge any shares of
common stock, or securities convertible into or exchangeable for shares of
common stock, now owned or later acquired by them without the prior written
consent of FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson
Stephens Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. All
of the shares of common stock subject to the lock-up agreements will be
eligible for sale in the public market upon the expiration of the lock-up
agreements, subject to holding period, volume limitations and other conditions
of Rule 144.
73
<PAGE>
Future Sales. In addition, we have agreed that during the period of 90 days
following the effective date of this prospectus, we will not, without the prior
written consent of FleetBoston Robertson Stephens Inc., subject to limited
exceptions, dispose of or hedge any shares of common stock, or any securities
convertible into, exercisable for or exchangeable for shares of common stock,
other than our sales of shares in this offering, the issuance of common stock
upon the exercise of outstanding options or warrants or our issuance of options
or shares under existing stock option or stock purchase plans. See "Shares
Eligible for Future Sales."
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, some persons participating in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for the purchase of
the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering. A "penalty bid"
is an arrangement permitting the representatives to reclaim the selling
concession otherwise accruing to an underwriter or syndicate member in
connection with the offering if the common stock originally sold by this
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
this underwriter or syndicate member. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Commissions and Discounts. The representatives of the underwriters have
advised us that the underwriters propose initially to offer the shares of
common stock to the public at the public offering price set forth on the cover
page of this prospectus, and to certain dealers at that price less a concession
not in excess of $2.83 per share of common stock. The underwriters may allow,
and such dealers may reallow, a discount not in excess of $0.10 per share of
common stock to certain other dealers. After the public offering, the public
offering price, concession and discount may change.
The following table shows the per share and total underwriting discount to
be paid by us to the underwriters and the proceeds before expenses to us. This
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Total
Per Without Total With
Share Option Option
-------- ------------ ------------
<S> <C> <C> <C>
Public offering price................. $ 105.00 $603,750,000 $694,312,500
Underwriting discount................. $ 4.725 $ 27,168,750 $ 31,244,063
Proceeds, before expenses, to
Keynote............................. $100.275 $200,550,000 $287,037,187
</TABLE>
The underwriting fee will be an amount equal to the offering price per
share to the public of the common stock, less the amount paid by the
underwriters to Keynote per share of common stock. The underwriting fee is 4.5%
of the public offering price. The expenses of the offering, exclusive of the
underwriting discount, are estimated at $700,000 and are payable entirely by
us. These expenses include: filing fees of approximately $222,116; legal,
accounting and other professional services fees of approximately $445,000; road
show related expenses of approximately $30,000; and approximately $2,884 in
miscellaneous expenses.
Internet Distribution. A prospectus in electronic format is being made
available on the Internet web site maintained by Wit SoundView's affiliate, Wit
Capital Corporation.
A copy of the prospectus in electronic format will be made available on the
Internet web sites hosted by E*OFFERING Corp. and E*TRADE Securities, Inc.
E*TRADE will accept Conditional Offers to purchase shares from all of its
customers that pass and complete an online eligibility profile. In the event
that the demand for shares from the customers of E*TRADE exceeds the amounts of
shares allocated to it, E*TRADE will use a random allocation methodology to
distribute shares in even lots of 100 shares per customer.
74
<PAGE>
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus. Brobeck,
Phleger & Harrison LLP, Palo Alto, California, will pass upon certain legal
matters in connection with this offering for the underwriters. As of December
31, 1999, an investment partnership of Fenwick & West LLP beneficially owned an
aggregate of 65,770 shares of our common stock.
EXPERTS
The financial statements of Keynote as of September 30, 1999 and 1998, and
for each of the years in the three-year period ended September 30, 1999 have
been included in this prospectus in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere in this
prospectus, and upon the authority of KPMG LLP as experts in accounting and
auditing.
Effective February 1999, our board of directors engaged KPMG LLP as our
principal accountants to audit our financial statements. Keynote did not
consult with KPMG LLP on any accounting or financial reporting matters in the
periods before their appointment. The change in accountants was approved by the
board. Arthur Andersen LLP served as our independent auditors from inception
until the dismissal of Arthur Andersen effective February 1999, which was
approved by our board. Arthur Andersen performed the first full fiscal year
audit of our financial statements for the then fiscal year ended December 31,
1996, as well as the audit for the fiscal year ended December 31, 1997. The
report of Arthur Andersen on our financial statements prepared in connection
with the December 31, 1996 and 1997 audits was unqualified. Furthermore, in
connection with the December 31, 1997 and 1996 audits and during the subsequent
interim period prior to the dismissal of Arthur Andersen, there were no
disagreements between Arthur Andersen and us on any matters of accounting
principals or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of Arthur Andersen, would
have caused Arthur Andersen to make reference to the subject matter of such
disagreements in connection with its report.
Subsequent to KPMG LLP's completion of the audit for the fiscal year ended
December 31, 1998, we changed our fiscal year end from December 31, to
September 30. As the prior year audits performed by Arthur Andersen were as of
December 31, KPMG LLP audited the prior periods ended September 30 for the
purposes of inclusion in this prospectus.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered by this prospectus. This prospectus does not contain all
of the information set forth in the registration statement and related exhibits
and schedules. For further information with respect to us and our common stock
being offered, see the registration statement and the related exhibits and
schedules. Statements contained in this prospectus concerning the contents of
any contract or any other document are not necessarily complete. If a contract
or document has been filed as an exhibit to the registration statement, please
see the copy of the contract or document that has been filed. Each statement in
this prospectus relating to a contract or document filed as an exhibit is
qualified in all respects by the filed exhibit. The registration statement and
the related exhibits and schedules, may be inspected without charge at the
principal office of the Securities and Exchange Commission located at Room
1024, 450 Fifth Street, Washington, D.C., 20549. Copies of all or any part of
the registration statement may be obtained from that office after payment of
fees prescribed by the Securities and Exchange Commission. The Securities and
Exchange Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.
We are subject to the information and periodic reporting requirements of
the Exchange Act and file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. These periodic
reports, proxy statements and other information are available for inspection at
the Securities and Exchange Commission's public reference rooms and its web
site, which is described above.
75
<PAGE>
KEYNOTE SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets as of September 30, 1999 and 1998......................... F-3
Statements of Operations for the years ended September 30, 1999, 1998 and
1997................................................................... F-4
Statements of Shareholders' Equity (Deficit) for the years ended
September 30, 1999, 1998 and 1997...................................... F-5
Statements of Cash Flows for the years ended September 30, 1999, 1998 and
1997................................................................... F-6
Notes to Financial Statements ........................................... F-7
Unaudited Condensed Consolidated Balance Sheet as of December 31, 1999... F-16
Unaudited Condensed Consolidated Statements of Operations for the three
months ended December 31, 1999 and 1998................................ F-17
Unaudited Condensed Consolidated Statement of Shareholders' Equity for
the three months ended December 31, 1999............................... F-18
Unaudited Condensed Consolidated Statements of Cash Flows for the three
months ended December 31, 1999 and 1998................................ F-19
Notes to Unaudited Condensed Consolidated Financial Statements........... F-20
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Keynote Systems, Inc.:
We have audited the accompanying balance sheets of Keynote Systems, Inc.
(the Company) as of September 30, 1999 and 1998, and the related statements of
operations, shareholders' equity (deficit), and cash flows for each of the
years in the three-year period ended September 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Keynote Systems, Inc. as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 1999
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
October 25, 1999
F-2
<PAGE>
KEYNOTE SYSTEMS, INC.
BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30,
-----------------
1999 1998
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 64,647 $ 2,293
Accounts receivable, less allowance for doubtful accounts
of $255 and $22, as of September 30, 1999 and 1998 2,295 454
Prepaids and other current assets......................... 333 55
-------- -------
Total current assets................................... 67,275 2,802
Property and equipment, net................................. 3,277 1,105
Loans to related parties.................................... 451 --
Other assets................................................ 68 11
-------- -------
$ 71,071 $ 3,918
======== =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable.......................... $ 1,189 $ 194
Current portion of capital lease obligation............... 133 --
Accounts payable and accrued expenses..................... 2,578 206
Deferred revenue.......................................... 1,087 238
-------- -------
Total current liabilities.............................. 4,987 638
Notes payable, less current portion......................... 2,591 303
Capital lease obligation, less current portion.............. 251 --
-------- -------
Total liabilities...................................... 7,829 941
Commitments
Redeemable convertible preferred stock, $0.001 par value;
50,000,000 and 39,781,478 shares authorized as of
September 30, 1999 and 1998, respectively; 18,007,523
shares issued and outstanding as of September 30, 1998;
aggregate liquidation preference of $8,564 as of September
30, 1998; no shares issued and outstanding as of September
30, 1999.................................................. -- 8,529
Shareholders' equity (deficit):
Common stock, $0.001 par value; 50,000,000 shares
authorized; 22,908,688 and 4,927,301 shares issued and
outstanding as of September 30, 1999 and 1998,
respectively............................................ 23 5
Additional paid-in capital................................ 77,430 347
Deferred stock-based compensation......................... (1,135) --
Shareholder notes receivable.............................. (388) (326)
Accumulated deficit....................................... (12,688) (5,578)
-------- -------
Total shareholders' equity (deficit)................... 63,242 (5,552)
-------- -------
$ 71,071 $ 3,918
======== =======
</TABLE>
See accompanying notes to the financial statements
F-3
<PAGE>
KEYNOTE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended September
30,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenue:
Subscription services............................ $ 7,055 $ 1,539 $ 81
Consulting services.............................. 217 -- --
------- ------- -------
Total revenues................................ 7,272 1,539 81
------- ------- -------
Expenses
Cost of subscription services.................... 2,314 580 209
Cost of consulting services...................... 444 -- --
Research and development......................... 2,059 1,226 732
Sales and marketing.............................. 5,331 1,529 817
Operations....................................... 1,639 514 63
General and administrative....................... 1,642 647 278
Amortization of stock-based compensation......... 858 -- --
------- ------- -------
Total expenses................................ 14,287 4,496 2,099
------- ------- -------
Loss from operations.......................... (7,015) (2,957) (2,018)
Interest income (expense), net..................... (95) 39 (31)
------- ------- -------
Net loss...................................... $(7,110) $(2,918) $(2,049)
======= ======= =======
Basic and diluted net loss per share............... $ (1.54) $ (1.10) $ (0.84)
======= ======= =======
Shares used in computing basic and diluted net loss
per share........................................ 4,622 2,649 2,434
======= ======= =======
</TABLE>
See accompanying notes to the financial statements
F-4
<PAGE>
KEYNOTE SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Total
Common Stock Additional Deferred Shareholder Shareholders'
------------------ Paid-in Stock-Based Notes Accumulated (Deficit)
Shares Amount Capital Compensation Receivable Deficit Equity
---------- ------ ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of September
30, 1996.............. 2,703,333 $ 3 $ 57 $ -- $ (16) $ (611) $ (567)
Issuance of common stock
pursuant to exercise
of stock options for
cash and notes and
purchase of restricted
shares with notes..... 902,165 1 46 -- (32) -- 15
Repurchase of common
stock................. (10,000) -- (1) -- -- -- (1)
Repayment of shareholder
notes receivable...... -- -- -- -- 14 -- 14
Net loss................ -- -- -- -- -- (2,049) (2,049)
---------- --- ------- ------- ----- -------- -------
Balances as of September
30, 1997.............. 3,595,498 4 102 -- (34) (2,660) (2,588)
Issuance of common stock
pursuant to exercise
of stock options for
cash and notes and
purchase of restricted
shares with notes..... 1,845,116 2 365 -- (294) -- 73
Repurchase of common
stock................. (513,313) (1) (120) -- -- -- (121)
Repayment of shareholder
notes receivable...... -- -- -- -- 2 -- 2
Net loss................ -- -- -- -- -- (2,918) (2,918)
---------- --- ------- ------- ----- -------- -------
Balances as of September
30, 1998.............. 4,927,301 5 347 -- (326) (5,578) (5,552)
Issuance of common stock
pursuant to exercise
of stock options for
cash and notes and
purchase of restricted
shares with notes..... 1,610,084 2 2,807 -- (79) -- 2,730
Deferred compensation
related to stock
option grants......... -- -- 1,911 (1,911) -- -- --
Repurchase of common
stock................. (92,598) -- (11) -- -- -- (11)
Repayment of shareholder
notes receivable...... -- -- -- -- 17 -- 17
Amortization of stock-
based compensation.... -- -- -- 776 -- -- 776
Conversion of redeemable
preferred stock to
common stock.......... 12,588,901 12 23,355 -- -- -- 23,367
Compensation related to
performance based
stock options......... -- -- 81 -- -- -- 81
Issuance of common stock
in initial public
offering, net of
issuance costs of
$5,306................ 3,875,000 4 48,940 -- -- -- 48,944
Net loss................ -- -- -- -- -- (7,110) (7,110)
---------- --- ------- ------- ----- -------- -------
Balances as of September
30, 1999.............. 22,908,688 $23 $77,430 $(1,135) $(388) $(12,688) $63,242
========== === ======= ======= ===== ======== =======
</TABLE>
See accompanying notes to the financial statements
F-5
<PAGE>
KEYNOTE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended September
30,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(7,110) $(2,918) $(2,049)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................. 868 336 133
Amortization of discount on notes............. 43 10 2
Amortization of stock-based compensation...... 776 -- --
Compensation related to performance based
stock options............................... 81 -- --
Changes in operating assets and liabilities:
Accounts receivable......................... (1,841) (399) (55)
Prepaids, other assets, and loans to related
parties................................... (786) (32) (9)
Accounts payable and accrued expenses....... 2,372 128 61
Deferred revenue............................ 849 169 69
------- ------- -------
Net cash used for operating activities.... (4,748) (2,706) (1,848)
------- ------- -------
Cash flows used for investing activities:
Purchases of property and equipment.............. (2,622) (1,011) (423)
------- ------- -------
Cash flows from financing activities:
Repayments of notes payable and capital leases... (440) (134) (38)
Proceeds from issuance of notes payable.......... 3,646 338 320
Issuance of warrants to purchase preferred stock
in connection with notes....................... 50 41 16
Net proceeds from issuance of preferred stock.... 14,788 4,661 1,650
Proceeds from bridge financing................... -- -- 900
Proceeds from issuance of common stock........... 2,730 73 15
Repurchase of common stock....................... (11) (121) (1)
Repayments of shareholder notes.................. 17 2 14
Issuance of common stock in initial public
offering, net of issuance costs................ 48,944 -- --
------- ------- -------
Net cash provided by financing
activities.............................. 69,724 4,860 2,876
------- ------- -------
Net increase in cash and cash equivalents.......... 62,354 1,143 605
Cash and cash equivalents at beginning of the
year............................................. 2,293 1,150 545
------- ------- -------
Cash and cash equivalents at end of the year....... $64,647 $ 2,293 $ 1,150
======= ======= =======
Noncash financing activities:
Conversion of bridge financing to preferred
stock.......................................... $ -- $ -- $ 900
======= ======= =======
Issuance of common stock for shareholder notes
receivable..................................... $ 79 $ 294 $ 32
======= ======= =======
Deferred compensation related to stock option
grants......................................... $ 1,911 $ -- $ --
======= ======= =======
Purchase of property and equipment through
capital leases................................. $ 418 $ -- $ --
======= ======= =======
Conversion of preferred stock to common stock.... $23,367 $ -- $ --
======= ======= =======
</TABLE>
See accompanying notes to the financial statements
F-6
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY
Keynote Systems, Inc. (the Company) was incorporated on June 15, 1995. The
Company provides Internet performance measurement and diagnostic services that
enable e-commerce companies to measure, assure and improve the quality of
service of their web sites.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) REVENUE RECOGNITION
Subscription services revenue consists of fees from subscriptions to the
Company's Internet measurement and diagnostic services. Subscription revenues
are deferred upon the customer's invoicing and are recognized ratably over the
service period, generally ranging from one to twelve months. Deferred revenue
is comprised entirely of deferred subscription revenue. Revenue from consulting
services is recognized as the services are performed, typically a period of one
month. For longer consulting projects, the Company anticipates recognizing
revenue on a percentage of completion basis.
Cost of subscription revenues consists of connection fees to Internet
service providers for deployment of the Company's computer measurement agents
around the world, depreciation, maintenance and other equipment charges for the
Company's measurement infrastructure. Cost of consulting services consists of
compensation for consulting personnel and related costs. Operations expenses
consist primarily of compensation and related costs for management personnel,
technical support employees and consultants who manage and maintain the
Company's measurements and headquarter infrastructure and support the Company's
customer base.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) CASH AND CASH EQUIVALENTS
The Company considers all cash and highly liquid investments with an
original maturity of three months or less to be cash equivalents. The Company
is exposed to credit risk in the event of default of the financial institutions
to the extent of the amounts recorded on the balance sheet.
(d) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method
over the estimated useful lives of the respective assets, generally three
years. Equipment under capital leases is amortized over the shorter of the
useful life of the equipment or the lease term. Leasehold improvements are
amortized over the shorter of the estimated useful lives of the assets or the
lease term.
(e) COMPREHENSIVE INCOME (LOSS)
The Company has no components of other comprehensive loss for any period
presented.
F-7
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(f) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and equipment notes payable
approximates fair market value. Cash and cash equivalents and accounts
receivable approximate fair market value due to their short-term nature.
Equipment notes approximate fair market value as interest rates on these notes
approximate market rates. Financial instruments that subject the Company to
concentrations of credit risk consists primarily of cash and cash equivalents
and trade accounts receivable.
Credit risk is concentrated in North America. The Company performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company has had immaterial
write-offs of accounts receivable to date. Based on its ongoing credit
evaluations, the Company has adequately reserved for doubtful accounts as of
the date of each balance sheet presented herein.
(g) PREPAIDS AND OTHER ASSETS
Prepaids and other assets consist principally of deposits under operating
leases, advances to employees and prepayments.
(h) STOCK-BASED COMPENSATION
The Company accounts for stock option grants under Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting For Stock-Based Compensation,
which permits the use of the intrinsic-value method in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting For Stock Issued
To Employees, and related interpretations. Expense associated with stock-based
compensation is being amortized ratably over the vesting period of the
individual award.
(i) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is established when necessary to reduce
deferred tax assets to the amounts the Company expects to realize.
(j) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(k) SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred until technological
feasibility has been established. To date, the Company's service offerings have
been available for general release concurrent with the establishment of
technological feasibility and, accordingly, no development costs have been
capitalized.
F-8
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(l) ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company classifies its investments in debt and equity securities as
available-for-sale. Available-for-sale securities are carried at fair market
value, which approximates amortized cost. As of September 30, 1999 and 1998,
the Company had no investments in debt or equity securities.
(m) NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock excluding shares of restricted stock subject
to repurchase summarized below. Diluted net loss per share is computed using
the weighted-average number of shares of common stock outstanding and, when
dilutive, potential common shares from options and warrants to purchase common
stock using the treasury stock method and from convertible securities using the
as "if-converted" basis. The following potential common shares have been
excluded from the computation of diluted net loss per share because the effect
would have been antidilutive (in thousands):
<TABLE>
<CAPTION>
Years Ended
September 30,
-----------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Shares outstanding under stock options....................... 1,926 742 297
Shares of restricted stock subject to repurchase............. 1,479 2,036 1,028
Shares issuable pursuant to warrants to purchase:
Convertible preferred stock................................ -- 390 36
Common stock............................................... 272 110 110
Shares of convertible preferred stock on an "as-if" converted
basis...................................................... -- 9,222 5,373
</TABLE>
The weighted-average exercise price of outstanding stock options was $6.16,
$0.21, and $0.13 for the years ended September 30, 1999, 1998 and 1997,
respectively. The weighted-average purchase price of restricted stock was
$0.25, $0.16, and $0.06, for the years ended September 30, 1999, 1998 and 1997,
respectively. The weighted-average exercise price of the convertible preferred
stock warrants was $1.26, and $1.10 for the years ended September 30, 1998 and
1997, respectively. The weighted-average exercise price of common stock
warrants was $1.52, $0.05 and $0.05 for the years ended September 30, 1999,
1998 and 1997.
(n) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. Because the Company does not currently hold any derivative
instruments and do not engage in hedging activities, we expect that the
adoption of SFAS No. 133 will not have a material impact on the Company's
financial position, results of operations or cash flows. The Company will be
required to adopt SFAS No. 133 in fiscal 2001.
(3) SHAREHOLDER NOTES RECEIVABLE AND LOANS TO RELATED PARTIES
In April 1998, the Company issued a shareholder note to an officer for
$280,000 for the purchase of common stock. In May 1998, the Company issued a
shareholder note to this officer for $300,000, in connection with the
acceleration of the lapse of the Company's repurchase right with respect to the
shares of common stock owned by him. In June 1999, these loans were
consolidated into a single loan that accrues interest at a rate of 6% per annum
and is due and payable on or before December 31, 2001. The loan is with full
recourse and secured by a stock pledge agreement.
F-9
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In January 1999, the Company issued a full recourse shareholder note to an
officer, secured by a stock pledge agreement for $75,000 related to the
purchase of common stock. The note accrues interest at a rate of 7% per annum
and is payable on or before January 2004. Additionally, the Company loaned the
officer $150,000 in connection with a relocation he made upon joining the
Company. The loan is secured by a security agreement, accrues interest at a
rate of 9% per annum and is due and payable on or before January 2002.
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
---------------
1999 1998
------- ------
<S> <C> <C>
Computer equipment and software........................... $ 4,495 $1,536
Furniture and fixtures.................................... 142 52
Leasehold improvements.................................... 16 16
------- ------
4,653 1,604
Less accumulated depreciation and amortization............ (1,376) (499)
------- ------
$ 3,277 $1,105
======= ======
</TABLE>
(5) NOTES PAYABLE
Notes payable comprised the following (in thousands):
<TABLE>
<CAPTION>
September
30,
------------
1999 1998
------ ----
<S> <C> <C>
Equipment notes at an annual interest rate of between 5.6%
and 10.25% payable in monthly installments, aggregating
approximately $123,000 monthly through April 2002......... $3,089 $542
Promissory note at an annual interest rate of 8.25% payable
in February 2002.......................................... 750 --
Discount.................................................... (59) (45)
------ ----
3,780 497
Less current portion........................................ 1,189 194
------ ----
$2,591 $303
====== ====
</TABLE>
As of September 30, 1999, the aggregate maturities of notes payable for the
years ending September 30, 2000, 2001 and 2002 are as follows: $1,189,000,
$1,661,000 and $989,000, respectively. The Company has granted a security
interest in a portion of its assets to secure the equipment and promissory
notes.
In connection with certain of the equipment notes, the Company issued
warrants for the purchase of 145,454 shares of common stock at $0.55 per share
and warrants for the purchase of 376,238 shares of common stock at $0.65 and
$0.90 per share. Of the 145,454 warrants issued, 72,727 expire on December 31,
2002, and 72,727 expire on June 30, 2003. The 376,238 warrants expire by June
30, 2004. As of September 30, 1999, the lender had not exercised the warrants.
The fair value of the warrants on the dates of issuance determined using the
Black-Scholes option-pricing model has been recorded, as a discount on the
notes payable. The value of the warrants recorded in each of the years ended
September 30, 1999 and 1998 were $50,000 and $41,000, respectively. The fair
value of each warrant was estimated using the following assumptions: no
dividends, risk free interest rate of between 5.5% and 6.7%, volatility of 50%
and a contractual life of five years. The note discount is being amortized to
interest expense using the interest method over the term of the related notes
payable.
F-10
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock outstanding as of September 30,
1998, was as follows:
<TABLE>
<CAPTION>
Shares Issued and Carrying
Designated Outstanding Value
---------- ----------- ----------
<S> <C> <C> <C>
Series:
Series A................................... 6,078,444 6,078,444 $1,261,790
Series A1.................................. 6,078,444 -- --
Series B................................... 4,812,295 4,666,841 2,582,371
Series B1.................................. 4,812,295 -- --
Series C................................... 8,138,476 7,262,238 4,735,923
Series C1.................................. 8,138,476 -- --
---------- ---------- ----------
38,058,430 18,007,523 $8,580,084
========== ========== ==========
</TABLE>
The issuance costs associated with the issuance of Series A, B, and C
redeemable convertible preferred stock was approximately $15,000, $16,000, and
$60,000, respectively.
In fiscal 1999, the Company raised $14.8 million by issuing 6,734,545
shares of Series D redeemable convertible preferred stock. The issuance costs
associated with issuing Series D redeemable convertible preferred stock was
approximately $82,000. In September of 1999, the Company completed its initial
public offering of common stock. Each share of preferred stock was converted
into 0.50 shares of common stock at the option of the shareholder, except for
Series C that converted into 0.53 shares of common stock.
(7) SHAREHOLDERS' EQUITY (DEFICIT)
(a) 1999 EQUITY INCENTIVE PLAN
In September 1999, the Company adopted the 1999 Equity Incentive Plan
(Incentive Plan). The Incentive Plan provides for the award of incentive stock
options, nonqualified stock options, restricted stock awards and stock bonuses.
Options may be exercisable only as they vest or may be immediately exercisable
with the shares issued subject to the Company's right of repurchase that lapses
as the shares vest. In general, options will vest over a four-year period. As
of September 30, 1999, the Company was authorized to issue up to 5.1 million
shares of common stock in connection with its 1999 Equity Incentive Plan (the
Plan) to employees, directors, and consultants, which includes options reserved
for issuance under the Company's 1996 and 1997 stock option plans, which plans
terminated upon the completion of the Company's initial public offering. The
number of shares reserved under the Incentive Plan will increase automatically
on January 1 of each calendar year by a number of shares equal to 5% of the
Company's outstanding shares on the preceding December 31.
Stock options granted prior to April 1999 were generally immediately
exercisable subject to a restricted stock purchase agreement whereby the
Company has the right to repurchase the unvested portion of the shares upon the
voluntary or involuntary termination of the purchaser's employment with the
Company at the original issuance cost. The Company's right of repurchase lapses
with respect to 25% of the shares after one year and ratably on a monthly basis
over the following three years. Through September 30, 1999, 1.5 million shares
of common stock issued upon exercise of stock options are subject to repurchase
at a weighted-average price of $0.25 per share. Certain of these restricted
shares were issued to officers and employees of the Company for full recourse
promissory notes with interest rates ranging from 6% to 7% and terms of 5
years.
Under the Plan, the exercise price for incentive stock options is at least
100% of the stock's fair market value on the date of the grant for employees
owning less than 10% of the voting power of all classes of stock,
F-11
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
and at least 110% of the fair market value on the date of grant for employees
owning more than 10% of the voting power of all classes of stock. For
nonqualified stock options, the exercise price is also at least 110% of the
fair market value on the date of grant for employees owning more than 10% of
the voting power of all classes of stock and no less than 85% for employees
owning less than 10% of the voting power of all classes of stock. Options
expire 10 years after the date of grant.
(b) 1999 EMPLOYEE STOCK PURCHASE PLAN
In September 1999, the Company adopted the 1999 Employee Stock Purchase
Plan (Purchase Plan) and reserved 400,000 shares of common stock for issuance
under this plan. The number of shares reserved under the Purchase Plan will
increase automatically on January 1 of each calendar year by a number of shares
equal to 1% of the Company's outstanding shares on the preceding December 31.
Under the Purchase Plan, eligible employees may defer an amount not to exceed
10% of the employee's compensation, as defined in the Purchase Plan, to
purchase common stock of the Company. The purchase price per share will be 85%
of the lesser of the fair market value of the common stock on the first day of
the applicable offering period or the last day of each purchase period. The
Purchase Plan will be intended to qualify as an "employee stock purchase plan"
under Section 423 of the Internal Revenue Code. Through September 30, 1999, no
shares had been issued under this plan, and 400,000 shares had been reserved
for future issuance.
(c) STOCK SPLIT
On September 20, 1999, the Company effected a 1-for-2 reverse stock split
of its common stock. The accompanying financial statements give effect to the
1-for-2 reverse stock split.
(d) STOCK-BASED COMPENSATION
The Company uses the intrinsic-value method in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for any of its stock options granted because the exercise price of
each option equaled or exceeded the fair value of the underlying common stock
as of the grant date for each stock option, except for certain stock options
granted in fiscal 1999. For those option grants, the Company recorded deferred
stock compensation of $1.9 million for the difference at the grant date between
the exercise price of each stock option granted and the fair value of the
underlying common stock. This amount is being amortized on a straight line
basis over the vesting period, generally four years. The $858,000 of stock-
based compensation for the year ended September 30, 1999 relates to the
following items in the accompanying 1999 statement of operations: $31,000 cost
of consulting services; $68,000 research and development; $138,000 sales and
marketing; $52,000 operations; and $569,000 general and administrative. Had the
Company determined compensation costs based on the fair value at the grant date
for its stock options under SFAS No. 123 for all of the Company's stock-based
compensation plans, net loss and basic and diluted net loss per share would
have been as follows:
<TABLE>
<CAPTION>
Years Ended September
30,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net loss (in thousands):
As reported.................................. $(7,110) $(2,918) $(2,049)
======= ======= =======
Pro forma.................................... $(7,297) $(2,934) $(2,051)
======= ======= =======
Basic and diluted net loss per share:
As reported.................................. $ (1.54) $ (1.10) $ (0.84)
======= ======= =======
Pro forma.................................... $ (1.58) $ (1.11) $ (0.84)
======= ======= =======
</TABLE>
F-12
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of each option was estimated on the date of grant using
Black-Scholes option pricing model. The calculation includes the following
weighted-average assumptions: no dividends, expected volatility of 70% risk
free interest rate of 5.45%, 5.55%, and 6.22% for fiscal 1999, 1998 and 1997,
respectively, and expected life of 2.50, 2.84, and 3.17 years for fiscal 1999,
1998 and 1997, respectively.
The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for the grants in fiscal 1999:
no expected dividends, expected volatility of 70%, risk-free rate of 5.45% and
expected life of 1.33 years. The weighted-average fair value of the purchase
rights granted under the Purchase Plan during fiscal 1999 was $9.90 per share.
A summary of activity under the Company's option plans is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning
of the year................. 742 $0.21 297 $0.14 75 $0.05
Granted....................... 2,080 5.92 2,346 0.21 1,106 0.07
Exercised..................... (798) 0.66 (1,845) 0.20 (832) 0.05
Canceled...................... (98) 0.78 (56) 0.13 (52) 0.05
----- ----- ------ ----- ----- -----
Outstanding at the end of the
year........................ 1,926 6.16 742 0.21 297 0.14
===== ===== ====== ===== ===== =====
Options exercisable at end of
the year.................... 567 1.47 642 0.21 185 0.13
===== ===== ====== ===== ===== =====
Weighted-average fair value of
options granted during the
year with exercise prices
equal to fair value at date
of grant.................... 2.90 0.03 0.01
Weighted-average fair value of
options granted during the
year with exercise prices
less than fair value at date
of grant.................... 2.61 -- --
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Ave. Number Average
Outstanding Contractual Exercise Outstanding Exercise
Exercise Prices At 9/30/99 Life Price At 9/30/99 Price
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.05 12 7.51 $0.05 12 $0.05
From $0.20 to $0.24 137 8.67 0.23 133 0.23
From $0.50 to $0.60 133 9.24 0.52 113 0.50
From $1.60 to $3.20 326 10.00 1.88 246 1.61
$4.42 97 10.00 4.42 43 4.42
From $8.00 to $9.00 1010 10.00 8.30 20 8.00
$11.00 211 10.00 11.00 -- --
----- ----- ----- --- -----
1,926 9.84 $6.16 567 $1.47
===== ===== ===== === =====
</TABLE>
F-13
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has granted approximately 85,000 performance-based stock
options to various employees. The Company has accounted for the options in
accordance with APB 25. As a result, the Company recorded a compensation charge
of $81,000 during the year ended September 30, 1999.
(8) INCOME TAXES
The differences between the income tax benefit computed at the federal
statutory rate of 34% and the Company's tax provision for the years ended
September 30, 1999 and 1998 are a result of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Computed "Expected" tax expense................... $(2,417,543) $(991,914)
Non-deductible expenses........................... 197,170 2,022
Net operating losses not utilized................. 2,220,373 989,892
----------- ---------
Total........................................... $ -- $ --
=========== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
September 30, 1999 and 1998 are presented in the following table (in
thousands):
<TABLE>
<CAPTION>
September 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Deferred start-up costs $ 169 $ 235
Net operating loss carryforwards........................ 3,957 1,832
Tax credit carryforwards................................ 247 141
Other................................................... 414 21
------- -------
Total deferred tax assets............................... 4,787 2,229
Valuation allowance..................................... (4,769) (2,229)
------- -------
Net deferred tax assets................................. 18 --
------- -------
Deferred tax liabilities:
Plant and equipment................................... (18) --
Total deferred tax liabilities........................ (18) --
------- -------
Net deferred tax asset (liability)...................... $ -- $ --
======= =======
</TABLE>
In light of the Company's recent history of operating losses, the Company
has provided a valuation allowance for all of its deferred tax assets as it is
presently unable to conclude that it is more likely than not that the deferred
tax assets will be realized. The net change in the valuation allowance for
fiscal 1999 and 1998 was $1.2 million and $2.5 million, respectively.
As of September 30, 1999, the Company had net operating loss carryforwards
for federal income tax reporting purposes of approximately $10.6 available to
reduce future income subject to income taxes. As of September 30, 1999, the
Company had net operating loss carryforwards for state income tax purposes of
approximately $6.2 million available to reduce future income subject to income
taxes. The federal net operating loss carryforwards expire in various periods
through 2019. State net operating loss carryforwards expire in various periods
through 2004. In addition, as of September 30, 1999, the Company had federal
research and development tax credit carryforwards of approximately $154,000.
The federal credit carryforwards expire in various periods through 2019. As of
September 30, 1999, the Company had California research and development tax
credit carryforwards of approximately $140,000. The California credit may be
carried over
F-14
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
indefinitely. The U.S. Tax Reform Act of 1986 contains provisions that limit
the net operating loss carryforwards and research and development credits
available to be used in any given year upon the occurrence of certain events,
including a significant change to ownership. The Company has not determined
whether an ownership change has occurred which could limit the availability of
net operating losses.
(9) LEASES
The Company leases its facilities and certain equipment under noncancelable
operating leases, which expire on various dates through December 2000.
Additionally, the Company has recorded equipment under capital lease. At
September 30, 1999, future minimum payments under the leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ending September 30, Operating Capital
-------------------------- --------- -------
<S> <C> <C>
2000..................................................... $726 $154
2001..................................................... -- 154
2002..................................................... -- 116
---- ----
$726 424
====
Less amount representing interest........................ (40)
----
Present value of minimum lease payments.................. 384
Current portion of capital lease obligation.............. 133
----
Capital lease obligation, less current portion........... $251
====
</TABLE>
Rent expense for the years ended September 30, 1999, 1998 and 1997 was
approximately $551,000, $115,000 and $84,000, respectively.
(10) GEOGRAPHIC, SEGMENT, AND SIGNIFICANT CUSTOMER INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way management organizes the operating
segments within the Company for making operating decisions and assessing
financial performance. The Company's chief operating decision-maker is
considered to be the chief executive officer (CEO). The financial information
the CEO reviews is identical to the information presented in the accompanying
statements of operations. Therefore, the Company has determined that it
operates in a single operating segment: developing and selling services to
measure, assure and improve the quality of service of web sites.
The Company markets its products from its operations in the United States.
International sales are primarily to customers in Europe. These sales and
foreign-owned assets are not significant. All the Company's long-lived assets
are located in the United States.
Significant customer information is as follows:
<TABLE>
<CAPTION>
Percent of
Total
Percent of Accounts
Total Revenue Receivable
---------------- --------------
Years Ended At
September 30, September 30,
---------------- --------------
1999 1998 1997 1999 1998
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Customer A...................................... -- 1% 11% -- --
Customer B...................................... 4% 15% 1% -- 10%
</TABLE>
F-15
<PAGE>
KEYNOTE SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents........................................ $ 69,208
Accounts receivable, net......................................... 4,100
Current portion of loans to related parties...................... 491
Prepaids and other current assets................................ 831
--------
Total current assets.......................................... 74,630
Property and equipment, net........................................ 3,813
Loans to related parties, less current portion..................... 456
Other assets....................................................... 363
--------
$ 79,262
========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of notes payable................................. $ 1,192
Current portion of capital lease obligations..................... 135
Accounts payable and accrued expenses............................ 3,467
Deferred revenue................................................. 2,814
--------
Total current liabilities..................................... 7,608
Notes payable, less current portion................................ 2,311
Capital lease obligations, less current portion.................... 216
--------
Total liabilities............................................. 10,135
Shareholders' equity:
Common stock..................................................... 24
Additional paid-in capital....................................... 85,249
Deferred stock-based compensation................................ (1,049)
Shareholder notes receivable..................................... (373)
Accumulated deficit.............................................. (14,724)
--------
Total shareholders' equity.................................... 69,127
--------
$ 79,262
========
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
F-16
<PAGE>
KEYNOTE SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended December
31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Subscription services.................................... $ 4,579 $ 889
Consulting services...................................... 217 --
-------- --------
Total revenues........................................ 4,796 889
Expenses
Cost of subscription services............................ 2,066 168
Cost of consulting services.............................. 254 --
Research and development................................. 841 325
Sales and marketing...................................... 2,728 627
Operations............................................... 777 229
General and administrative............................... 839 254
Amortization of stock-based compensation................. 86 23
-------- --------
Total expenses........................................ 7,591 1,626
-------- --------
Loss from operations.................................. (2,795) (737)
Interest income (expense), net............................. 759 (61)
-------- --------
Net loss.............................................. $ (2,036) $ (798)
======== ========
Loss per share:
Basic and diluted..................................... $ (0.09) $ (0.27)
Weighted average common shares outstanding:
Basic and diluted..................................... 22,798 3,004
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
F-17
<PAGE>
KEYNOTE SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Deferred Total
------------------ Paid-in Stock-Based Shareholder Accumulated Shareholders'
Shares Amount Capital Compensation Note Receivable Deficit Equity
----------- ------ ---------- ------------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of September
30, 1999.............. $22,905,055 $23 $77,430 $(1,135) $(388) $(12,688) $63,242
Issuance of common stock
in public offering,
net of issuance costs
of $589............... 600,000 1 7,810 -- -- -- 7,811
Issuance of common stock
pursuant to exercise
of stock options and
warrants for cash..... 100,068 -- 9 -- -- -- 9
Repayment of shareholder
notes receivable...... -- -- -- -- 15 -- 15
Amortization of stock-
based compensation.... -- -- -- 86 -- 86
Net loss................ (2,036)
----------- --- ------- ------- ----- -------- -------
Balances as of December
31, 1999.............. $23,068,756 $24 $85,249 $(1,049) $(373) $(14,724) $71,163
=========== === ======= ======= ===== ======== =======
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
F-18
<PAGE>
KEYNOTE SYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
---------------
1999 1998
------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(2,036) $ (796)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................... 440 114
Amortization of discount on notes....................... 8 9
Amortization of stock based compensation................ 86 23
Changes in operating assets and liabilities:
Accounts receivable................................... (1,805) (95)
Prepaids and other assets............................. (1,289) (12)
Accounts payable and accrued expenses................. 889 (10)
Deferred revenue...................................... 1,727 248
------- ------
Net cash used for operating activities.............. (1,980) (519)
------- ------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of property and equipment........................ (976) (155)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable................................ (318) (59)
Proceeds from issuance of notes payable.................... -- 2,694
Proceeds from public offering, net of issuance costs....... 7,811 --
Repayments of shareholder notes............................ 15 --
Issuance of common stock, net of issuance costs............ 9 13
------- ------
Net cash provided by financing activities........... 7,517 2,648
------- ------
Net increase in cash and cash equivalents.................... 4,561 1,974
Cash and cash equivalents at beginning of the period......... 64,647 2,293
------- ------
Cash and cash equivalents at end of the period............... $69,208 $4,268
======= ======
NONCASH FINANCING ACTIVITIES:
Issuance of common stock for shareholder notes receivable.. $ -- $ 4
======= ======
Deferred compensation related to stock option grants....... $ -- $ 363
======= ======
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
F-19
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying interim unaudited condensed consolidated financial
statements reflect all normal recurring adjustments that are, in the opinion of
management, necessary for a fair presentation of the financial position of
Keynote Systems, Inc. (the Company) at December 31, 1999, and the results of
operations and cash flows for the interim periods ended December 31, 1999 and
1998.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions on Form 10-Q and, therefore,
do not include all information and footnotes necessary for a complete
presentation of the Company's results of operations, financial position and
cash flows. We filed audited financial statements that included all information
and footnotes necessary for a complete presentation for each of the years in
the three year period ended September 30, 1999 in the Company's annual report
on Form 10-K for the fiscal year ended September 30, 1999.
The results of operations for any interim period are not necessarily
indicative of the Company's results of operations for any other future interim
period or for a full fiscal year.
(2) COMPREHENSIVE LOSS
The Company has no components of other comprehensive loss for any period
presented.
(3) SHAREHOLDERS' EQUITY
In October 1999, the Company raised $7.8 million, net of issuance costs
from the exercise of the underwriters' over-allotment option to purchase
600,000 shares of the Company's common stock granted in connection with its
initial public offering.
(4) NET LOSS PER SHARE
The following potential common shares have been excluded from the
computation of diluted net loss per share because the effect would have been
antidilutive (in thousands):
<TABLE>
<CAPTION>
Three
Months
ended
December
31,
-----------
1999 1998
----- -----
<S> <C> <C>
Shares outstanding under stock options....................... 2,058 701
Shares of restricted stock subject to repurchase............. 675 1,949
Shares issuable pursuant to warrants to purchase:
Convertible preferred stock................................ -- 537
Common stock............................................... 7 110
Shares of convertible preferred stock on an "as-if-converted"
basis...................................................... -- 9,222
</TABLE>
The weighted-average exercise price of outstanding stock options was $6.81
and $0.21 for the three months ended December 31, 1999 and 1998, respectively.
The weighted-average purchase price of restricted stock was $0.19 and $0.14,
for the three months ended December 31, 1999 and 1998, respectively. The
weighted-average exercise price of the convertible preferred stock warrants was
$1.34 for the three months ended December 31, 1998. The weighted-average
exercise price of the common stock warrants was $1.10 and $0.05 for the three
months ended December 31, 1999 and 1998, respectively.
F-20
<PAGE>
KEYNOTE SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, AcSec issued Statement of Position (SOP) No. 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP No. 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. We adopted SOP No. 98-1 as of
October 1, 1999, which did not have a significant impact on our financial
statements.
(6) SHAREHOLDER NOTES RECEIVABLE AND LOANS TO RELATED PARTIES
During the three months ended December 31, 1999, the Company loaned
$463,000 to two officers of the Company, secured by a loan and security
agreement, in connection with relocation. The loans accrue interest at a rate
of 6% per year and are due and payable on or before June 2000.
(7) SEGMENT INFORMATION
In December 1999, the Company opened an international office located in
Paris, France. For the three months ended December 31, 1999, one customer
accounted for approximately 12% of total revenues.
(8) SUBSEQUENT EVENTS
In January 2000, the Company filed a Registration Statement on Form S-1 in
connection with the proposed public offering of 4,750,000 shares of its common
stock. The Company is offering 1,000,000 shares and the selling shareholders
are offering an additional 3,750,000 shares. An additional 712,500 shares will
be offered if the underwriters exercise their over-allotment option
F-21
<PAGE>
[KEYNOTE LOGO]
<PAGE>
Filed pursuant to Rule 424(b)(4) Registration No. 333-94651
[KEYNOTE LOGO]
5,750,000 Shares
Common Stock
Keynote Systems, Inc. is offering 2,000,000 shares of its common stock and
the selling shareholders are offering an additional 3,750,000 shares. Our
common stock is quoted on the Nasdaq National Market under the symbol "KEYN."
On February 17, 2000, the last sale price of our common stock as reported by
the Nasdaq National Market was $107.06 per share.
---------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Public Offering Price................................... $ 105.00 $603,750,000
Underwriting Discounts and Commissions.................. $ 4.725 $ 27,168,750
Proceeds to Keynote..................................... $100.275 $200,550,000
Proceeds to Selling Shareholders........................ $100.275 $376,031,250
</TABLE>
---------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. any representation to the contrary is a
criminal offense.
Keynote has granted the underwriters a 30-day option to purchase up to an
additional 862,500 shares of common stock to cover any over-allotments.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on February 24, 2000.
---------------------
Robertson Stephens International
Chase H&Q
Dain Rauscher Wessels
Wit SoundView
The date of this prospectus is February 17, 2000.
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., Dain Rauscher
Incorporated and SoundView Technology Group, Inc., have entered into an
underwriting agreement with us and the selling shareholders to purchase the
number of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all of the shares listed
below if any shares are purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc. and FleetBoston Robertson
Stephens International Limited.............................. 2,472,500
Chase Securities Inc.......................................... 1,351,250
Dain Rauscher Incorporated.................................... 1,351,250
SoundView Technology Group, Inc. ............................. 575,000
---------
Total..................................................... 5,750,000
=========
</TABLE>
Generally, we and the selling shareholders have agreed to indemnify each
underwriter against liability arising out of any untrue statement contained in
the registration statement, any preliminary prospectus or the final prospectus,
or the omission of a material fact required to be stated in the registration
statement or such prospectus necessary to make the statements in the
registration statement or such prospectus not misleading. In addition, we and
the selling shareholders have agreed to indemnify each underwriter against
liability arising out of violations of laws or regulations of foreign
jurisdictions where reserved shares have been offered. The underwriters have
agreed to indemnify us and the selling shareholders against liability with
respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the registration statement, any preliminary prospectus or
the final prospectus in reliance upon and in conformity with written
information furnished to us by that underwriter through FleetBoston Robertson
Stephens Inc. expressly for use in the registration statement, such preliminary
prospectus or the prospectus. For more detailed information on the terms of
indemnification contained in the underwriting agreement, please see Exhibit
1.01 to the registration statement.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of various legal matters by counsel for the underwriters and other
conditions. The underwriters reserve the right to withdraw, cancel or modify
this offer and to reject orders in whole or in part.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 862,500 additional shares of common stock at the same price per
share as we and the selling shareholders will receive for the 5,750,000 shares
that the underwriters have agreed to purchase. To the extent that the
underwriters exercise this option, each of the underwriters will have a firm
commitment, to purchase approximately the same percentage of these additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the 5,750,000 shares in this
offering. If purchased, these additional shares will be sold by the
underwriters on the same terms as those on which the 5,750,000 shares are being
sold.
Lock-Up Agreement. Each of our officers, directors and selling shareholders
has agreed with the representatives or us for a period of 90 days after the
effective date of this prospectus, not to dispose of or hedge any shares of
common stock, or securities convertible into or exchangeable for shares of
common stock, now owned or later acquired by them without the prior written
consent of FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson
Stephens Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. All
of the shares of common stock subject to the lock-up agreements will be
eligible for sale in the public market upon the expiration of the lock-up
agreements, subject to holding period, volume limitations and other conditions
of Rule 144.
73
