SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 2, 2000
KEYNOTE SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware
-----------------------------------------------------
(State or other jurisdiction of incorporation)
000-27241 94-3226488
- --------------------- ---------------------
(Commission (IRS Employer
File Number) Identification No.)
2855 Campus Drive, San Mateo, CA 94403
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(650) 522-1000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name or former address, if changed since last report)
-1-
Item 7: Financial Statements, Pro Forma Financial Information and Exhibits
On June 16, 2000, Keynote Systems, Inc. (the "Company") filed a Form
8-K to report its acquisition of Velogic, Inc. (Velogic"). Pursuant to Item 7 of
Form 8-K, the Company indicated that it would file certain financial information
no later than the date required by Item 7 of Form 8-K. This Amendment No. 1 is
filed to provide the required financial information.
(a) Financial Statements of Business Acquired.
-2-
VELOGIC, INC.
Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
-3-
Independent Auditors' Report
The Board of Directors
Velogic, Inc.:
We have audited the accompanying balance sheets of Velogic, Inc. (a development
stage company) (the Company) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' deficit and cash flows for the year
ended December 31, 1999 and for the periods from inception (October 28, 1998) to
December 31, 1999 and 1998. 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 auditing standards generally accepted
in the United States of America. 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 Velogic, Inc. (a development
stage company) as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the year ended December 31, 1999 and for the
periods from inception (October 28, 1998) to December 31, 1999 and 1998, in
conformity with accounting principles generally accepted in the United States of
America.
August 11, 2000
-4-
VELOGIC, INC.
(a development stage company)
Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
------------ ----------
Current assets:
Cash and cash equivalents $ 954,253 4,453
Accounts receivable 7,350 --
Prepaid expenses and other current assets 63,168 19,721
------------ -------
Total current assets 1,024,771 24,174
Property and equipment, net 175,206 3,303
Other assets 36,900 --
------------ -------
Total assets $ 1,236,877 27,477
============ =======
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 80,415 34,859
Accrued expenses 62,456 2,322
Capital lease obligations - current portion 47,448 --
------------ -------
Total current liabilities 190,319 37,181
Capital lease obligations, less current portion 86,857 --
------------ -------
Total liabilities 277,176 37,181
------------ -------
Commitments
Redeemable convertible Series A preferred stock, $0.001 par value, 13,000,000
shares authorized; 11,745,295 and no shares issued
and outstanding in 1999 and 1998, respectively. 3,098,059 --
Stockholders' deficit:
Common stock, $0.001 par value; 50,000,000 shares authorized; 6,655,000 and
8,000,000 shares issued and outstanding
in 1999 and 1998, respectively 6,655 8,000
Additional paid-in capital 2,052,350 --
Deferred compensation (1,038,000) --
Deficit accumulated during the development stage (3,159,363) (17,704)
------------ -------
Total stockholders' deficit (2,138,358) (9,704)
------------ -------
Total liabilities and stockholders' deficit $ 1,236,877 27,477
============ =======
See accompanying notes to financial statements.
-5-
VELOGIC, INC.
(a development stage company)
Statements of Operations
Period from Period from
inception inception
(October 28, (October 28,
Year ended 1998) to 1998) to
December 31, December 31, December 31,
1999 1998 1999
------------------ ------------------ -------------------
Revenue:
Consulting services $ 98,624 -- 98,624
------------------ ------------------ -------------------
Operating expenses:
Cost of consulting services 566,711 27 566,738
Research and development 754,802 204 755,006
Sales and marketing 363,711 -- 363,711
Operations 446,227 -- 446,227
General and administrative 1,158,361 16,673 1,175,034
------------------ ------------------ -------------------
Total operating expenses 3,289,812 16,904 3,306,716
------------------ ------------------ -------------------
Loss from operations (3,191,188) (16,904) (3,208,092)
Interest income, net 50,329 -- 50,329
------------------ ------------------ -------------------
Loss before income taxes (3,140,859) (16,904) (3,157,763)
Income tax expense 800 800 1,600
------------------ ------------------ -------------------
Net loss $ (3,141,659) (17,704) (3,159,363)
================== ================== ===================
See accompanying notes to financial statements.
-6-
VELOGIC, INC.
(a development stage company)
Statements of Stockholders' Deficit
Year ended December 31, 1999 and periods from inception (October 28, 1998) to
December 31, 1999 and 1998
Defecit
accumulated
Additional during the Total
Common stock paid-in Deferred development stockholders'
-------------------
Shares Amount capital compensation stage equity (deficit)
------ ------ ------- ------------ ----- ----------------
Balances, October 28, 1998 -- $ -- -- -- -- --
Issuance of common stock at $0.001
per share to founders for cash 8,000,000 8,000 -- -- -- 8,000
Net loss -- -- -- -- (17,704) (17,704)
---------- ---------- --------- ---------- --------- ---------
Balances, December 31, 1998 8,000,000 8,000 -- -- (17,704) (9,704)
Issuance of common stock at $0.07
per share 50,000 50 3,450 -- -- 3,500
Repurchase of common stock from
founders at $0.001 per share (1,495,000) (1,495) -- -- -- (1,495)
Deferred stock compensation related
to stock option grants to employees -- -- 1,164,000 (1,164,000) -- --
Amortization of deferred stock
compensation -- -- -- 126,000 -- 126,000
Common stock and stock options
issued for services 100,000 100 231,900 -- -- 232,000
Warrants issued for services -- -- 653,000 -- -- 653,000
Net loss -- -- -- -- (3,141,659) (3,141,659)
--------- ---------- --------- ---------- ---------- ----------
Balances, December 31, 1999 6,655,000 $ 6,655 2,052,350 (1,038,000) (3,159,363) (2,138,358)
========= ========== ========= ========== ========== ==========
See accompanying notes to financial statements.
-7-
VELOGIC, INC.
(a development stage company)
Statements of Cash Flows
Period from Period from
inception inception
(October 28, (October 28,
Year ended 1998) to 1998) to
December 31, December 31, December 31,
1999 1998 1999
------------------ ------------------ -----------------
Cash flows from operating activities:
Net loss $ (3,141,659) (17,704) (3,159,363)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 48,645 174 48,819
Option and warrant expense 1,011,000 -- 1,011,000
Changes in operating assets and
liabilities (net of effect of noncash
investing and financing activities):
Accounts receivable (7,350) -- (7,350)
Prepaid expenses and other
current assets (43,447) (19,721) (63,168)
Accounts payable 45,556 34,859 80,415
Accrued expenses 60,134 2,322 62,456
Other assets (36,900) -- (36,900)
------------------ ------------------ -----------------
Net cash used in operating
activities (2,064,021) (70) (2,064,091)
------------------ ------------------ -----------------
Cash flows used in investing activities - purchase
of property and equipment (59,354) (3,477) (62,831)
------------------ ------------------ -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,500 8,000 11,500
Proceeds from issuance of redeemable
convertible Series A preferred stock 3,098,059 -- 3,098,059
Payments to repurchase common stock (1,495) -- (1,495)
Payments for capital lease obligations (26,889) -- (26,889)
------------------ ------------------ -----------------
Net cash provided by financing
activities 3,073,175 8,000 3,081,175
------------------ ------------------ -----------------
Net increase in cash and cash equivalents 949,800 4,453 954,253
Cash and cash equivalents, beginning of period 4,453 -- --
------------------ ------------------ -----------------
Cash and cash equivalents, end of period $ 954,253 4,453 954,253
================== ================== =================
Supplementary cash flow information:
Cash paid for interest $ 8,904 -- 8,904
================== ================== =================
Cash paid for taxes $ 600 200 800
================== ================== =================
Supplementary disclosure of noncash financing
activities:
Capital lease financing of plant and
equipment $ 161,194 -- 161,194
================== ================== =================
Deferred stock compensation related to stock
option grants to employees $ 1,164,000 -- 1,164,000
================== ================== =================
See accompanying notes to financial statements.
-8-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
(1) Organization and Summary of Significant Accounting Policies
(a) The Company
Velogic, Inc. (the Company), founded on October 28, 1998, provides
load testing services designed specifically for Internet web sites.
The Company's service is designed to help e-businesses maximize the
technical and financial performance of their web sites. The Company
utilizes a model to simulate users and identifies ways to reduce site
outages and increase customer satisfaction. The full-service web site
load testing service enables e-businesses to predetermine web site
capacity for expected visitor loads.
(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 the disclosure of contingent assets and liabilities at
the financial statement date and the reported results of operations
during the reporting period. Actual results could differ from these
estimates.
(c) Revenue Recognition
Revenues are derived principally from load service testing. Revenue is
recognized when the load testing services are delivered.
Cost of revenues represents the direct costs for employees and
consultants who are engaged in providing the Company's services and
maintaining the operational infrastructure.
(d) Research and Development
Research and development costs are generally expensed as incurred.
Statement of Financial Accounting Standard (SFAS) No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed, requires the capitalization of certain software development
costs subsequent to the establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs
incurred by the Company between completion of the working model and
the point at which the product is ready for general release have been
insignificant. Accordingly, the Company has charged all such costs to
research and development expense in the period incurred.
(e) Stock-Based Compensation
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation. This statement establishes financial accounting and
reporting standards for stock-based compensation, including employee
stock option plans. As allowed by SFAS No. 123, the Company measures
compensation expense under the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations.
-9-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
(f) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be recovered.
(g) Cash Equivalents
The Company considers all highly liquid investments with maturities of
90 days or less from the date of purchase to be cash equivalents. As
of December 31, 1999 and 1998, the Company did not have any
investments.
(h) Property and Equipment
Property and equipment consist of office equipment, furniture and
fixtures, and computer hardware and software. Property and equipment
are stated at cost, net of accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful
lives of the assets of three years. Equipment purchased under capital
leases is amortized on a straight-line basis over the lesser of the
estimated useful life of the asset or the lease term.
(i) Other Assets
Other assets consist principally of deposits for the office lease.
(j) Fair Value of Financial Instruments
The Company's financial instruments are primarily comprised of cash,
accounts receivable, accounts payable and debt. The carrying amounts
of these assets and liabilities approximate their fair value.
(k) Concentration of Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist primarily of cash and cash
equivalents and accounts receivable. Cash and cash equivalents are
deposited with one major financial institution. The Company's accounts
receivables are derived from customers located in the United States.
Four customers accounted for all of the Company's revenues for the
year ended December 31, 1999.
(l) Comprehensive Income (loss)
The Company has no components of other comprehensive loss for any
period presented.
-10-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
(m) Recent Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes methods 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 does not engage in hedging activities, the adoption of SFAS
No. 133 is not expected to have a significant impact on its financial
position, results of operations or cash flows. The Company will be required
to implement SFAS No. 133, as amended, for the year ending December 31,
2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A and SAB 101B, which provides guidance on
the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that
must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. In June 2000, the SEC issued SAB
101B which delayed the implementation of SAB 101. The Company must adopt
SAB 101 no later than the fourth quarter of 2000. The SEC has recently
indicated it intends to issue further guidance with respect to the adoption
of specific issues addressed by SAB 101. Until such time as this additional
guidance is issued, the Company is unable to assess the impact, if any, it
may have on its financial position or results of operations.
(2) Property and Equipment
Property and equipment, stated at cost net of accumulated depreciation and
amortization, as of December 31, 1999 and 1998 consisted of the following:
December 31,
------------------------------------
1999 1998
--------------- ---------------
Office equipment $ 34,748 --
Furniture and fixtures 32,444 --
Computer hardware 140,443 3,477
Computer software 16,390 --
--------------- ---------------
224,025 3,477
Less accumulated depreciation and amortization (48,819) (174)
--------------- ---------------
Property and equipment, net $ 175,206 3,303
=============== ===============
Property and equipment includes $129,851 net of amortization of $31,343, of
equipment under capital leases as of December 31, 1999.
-11-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
(3) Commitments
Lease
The Company leases its office space under a noncancelable operating
sublease agreement that commenced on February 15, 1999 and expires on June
30, 2000.
In February 1999, the Company entered into a Master Lease Agreement with a
financial institution for the purchase of up to $300,000 of equipment.
Advances under this agreement are treated as capital leases and may only be
used to finance purchases of equipment. Advances are secured by the assets
acquired. The advances bear interest at 3.75% above the 36-month Treasury
rate. The rate will be fixed at the time of each advance. The capital lease
term is for 36 months. Installments include both principal and interest. At
the end of the amortization period, the Company shall remit to the lender a
final payment equal to 8% of the aggregate advances. The first capital
lease was funded on May 12, 1999 for $149,254. As of December 31, 1999, the
Company owed $134,305 under this capital lease arrangement.
Future minimum lease payments under the noncancelable capital and operating
leases as of December 31, 1999 are as follows:
Capital Operating
leases leases
------------------- --------------------
Year ending December 31:
2000 $ 56,515 71,100
2001 56,515 --
2002 35,488 --
2003 -- --
2004 -- --
------------------- -------------------
Total 148,518 $ 71,100
===================
Less amount representing interest (14,213)
-------------------
Present value of minimum capital lease payments 134,305
Less current portion of capital lease obligations (47,448)
-------------------
Long-term portion of capital lease obligations $ 86,857
===================
Total rent expense for the operating lease was $124,350 and $0 for the
year ended December 31, 1999 and the period from inception (October 28,
1998) to December 31, 1998, respectively.
-12-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
(4) Redeemable Convertible Preferred Stock and Stockholders' Deficit
(a) Redeemable Convertible Preferred Stock
In 1999, the Company issued 11,745,295 Series A redeemable convertible
preferred shares at a price of $0.265625 per share under a stock
purchase agreement.
Each share of Series A preferred stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance
of such share, at the office of the Company or any transfer agent for
such stock, into fully paid and nonassessable shares of common stock.
The number of shares of common stock to which a holder of preferred
stock shall be entitled upon conversion shall be determined by
dividing the stock issue price by the conversion price for the stock
in effect at the time that such certificate is surrendered for
conversion. The conversion price per share for shares of the stock
shall initially be the shares' issue price, subject to adjustment as
hereinafter provided.
Conversion
Each share of Series A preferred stock shall automatically be
converted into shares of common stock at the then applicable
conversion price upon the earlier to occur of (i) the date specified
by written consent or agreement of shareholders holding at least a
majority of the then outstanding shares of Series A preferred stock,
voting together as a separate class, or (ii) immediately upon the
closing of the sale of the Company's common stock in a firm
commitment, underwritten public offering registered under the
Securities Act of 1933, as amended, at a price of not less than $1.328
per share (as adjusted for any stock split, stock dividends,
recapitalization or the like) and aggregate proceeds to the Company
(before deduction for underwriters' discounts and expenses relating to
the issuance, including and without limitation fees of the Company's
counsel) equal to at least $15,000,000.
Dividend Provisions
The holders of the Series A preferred stock, in preference to any
dividend on the common stock, shall be entitled to receive
noncumulative dividends at the rate of 8% of the Series A issue price
($0.265625) (as adjusted for any stock dividends, combinations or
splits with respect to such shares) per annum payable out of funds
legally available thereof. Such dividends shall be payable only when,
as, and if declared by the Board of Directors.
-13-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of Series A
preferred stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets or surplus funds of the
Company to the holders of the common stock by reason of their
ownership thereof, an amount equal to the sum of $0.265625 per share,
plus all declared but unpaid dividends on such share for each share of
Series A preferred stock then held by them. If, upon any liquidation,
distribution, or winding up of the Company, the assets of the Company
shall be insufficient to make payment in full as set forth above to
all holders of Series A preferred stock, then such assets shall be
distributed among the holders of Series A preferred stock then
outstanding, ratably in proportion to the full amounts to which they
would otherwise be respectively entitled.
Voting
The preferred stock will be voted equally with the shares of common
stock and not as a separate class, at any annual or special meeting of
the shareholders of the Company, and may act by written consent in the
same manner as the common stock, in either case upon the following
basis: each holder of shares of the preferred stock shall be entitled
to the number of votes equal to the respective number of shares of
common stock into which such shares of preferred stock could be
converted immediately after the close of business on the record date
fixed for such meeting or the effective date of such written consent.
Redemption
At the election of the holders of the majority of the Series A
preferred stock, the Company shall redeem the outstanding Series A
preferred stock in three equal annual installments beginning on the
fifth anniversary after the Series A preferred stock original issue
date and ending on the date two years from such first redemption date.
Such redemptions shall be at a purchase price per share equal to the
Series A issue price plus declared and unpaid dividends.
(b) Common Stock
For the year ended December 31, 1999 and the period ended December 31,
1998, the Company sold 50,000 and 8,000,000 shares of common stock to
employees and investors for $0.07 and $0.001 per share, respectively.
Of these shares, 3.9 million and 7.2 million are subject to repurchase
at December 31, 1999 and 1998, respectively, by the Company, at the
price paid by the stockholder, in the event of termination of services
by the stockholder to the Company. The shares sold in 1998 were
founders common stock. In 1999, 1,495,000 shares of founders common
stock subject to repurchase were repurchased by the Company at $0.001
per share upon termination of one of the founders. For the year ended
December 31, 1999 and the period from inception to December 31, 1998,
the Company issued 100,000 and 0 shares, respectively, of the
Company's common stock in exchange for services. These shares were
valued at the Company's best estimate of fair value of $1 per share at
time of issuance and as a result charged $100,000 to expense. In
addition, the Company granted 833,000 stock options to non-employees
for services which were
-14-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
valued at $132,000 using the Black-Scholes option pricing model, and
were expensed in accordance with Emerging Issues Task Force Abstract
96-18, (EITF 96-18), Accounting for Equity Instruments that are
issued to other than employees for Acquiring, or in Conjunction with
Selling, Goods or Services. The following assumptions were used in the
Black-Scholes option pricing model: 80% volatility, 10 year
contractual life, no dividends, a 5.87% risk free interest rate and a
weighted average fair value of the underlying common stock of $0.222.
As of December 31, 1999 and 1998, an aggregate of 8 million shares of
common stock were reserved for issuance upon exercise of warrants, the
conversion of preferred stock, outstanding stock options and stock
options reserved for issuance.
(c) Stock Warrants
For the year ended December 31, 1999 and the period ended December 31,
1998, the Company issued stock warrants to purchase an aggregate of
3,158,000 and 0 shares, respectively, of common stock to third-party
service providers. The warrants have an exercise price of $0.07 per
share. The warrants were valued using the Black-Scholes option pricing
model using the following assumptions: 80% volatility, 10 year
contractual life, no dividends, a 5.87% risk free interest rate and an
assumed fair value of the underlying common stock of $1.00. The total
expense recorded under EITF 96-18 aggregated $650,000 and $0 has been
expensed for the year ended December 31, 1999 and the period from
inception to December 31, 1998, respectively.
In 1999 and 1998, the Company also issued warrants for the purchase of
50,950 and 0 shares, respectively, of preferred stock in exchange for
services. The warrants were valued using the Black-Scholes option
pricing model with the same assumptions as for the common stock
discussed above. As of December 31, 1999 and 1998, 325,000 and 0
warrants, respectively, for services were exercisable.
-15-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
(d) 1998 Incentive Stock Plan
During the period ended December 31, 1998, the Company adopted the
1998 Stock Plan (the Plan). Under the Plan, the exercise price of the
options to purchase stock is $0.07, the fair value of common stock as
determined by the Board of Directors. Options vesting is determined by
the Board. The typical vesting for an employee of the Company is as
follows: 12/48th after the first 12 months with 1/48th vesting monthly
thereafter, with complete vesting after 4 years of service.
Information with respect to stock option activity is summarized as
follows:
Options
available Number of Price per
for grant shares share
--------------- --------------- ---------------
Shares authorized 8,000,000 8,000,000 $ --
Options granted -- -- --
--------------- --------------- ---------------
Balance at December 31, 1998 8,000,000 8,000,000 --
Options granted 5,758,000 5,758,000 0.07
Options exercised -- -- --
Options canceled (150,000) (150,000) 0.07
--------------- --------------- ---------------
Balance at December 31, 1999 2,392,000 2,392,000 $ 0.07
=============== =============== ===============
Year ended December 31, 1999
----------------------------------------------------
Number of shares Weighted average
fair value
----------------------------------------------------
Weighted-average fair value of options granted
during the year with exercise prices equal to
fair value at date of grant 3,270,000 $0.012
Weighted-average fair value of options granted
during the year with exercise prices less than
fair value at date of grant 2,488,000 $0.552
-16-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
As of December 31, 1999, and December 31, 1998, no options to exercise
shares were exercisable.
With respect to stock options granted to employees during the year
ended December 31, 1999, the Company recorded $1,164,000 in deferred
stock compensation for the difference at the grant or issuance date
between the exercise price of each stock option granted and the fair
value of the underlying common stock. This amount is being amortized
over the vesting period, generally four years, consistent with the
method described in FASB Interpretation No. 28. Amortization of
deferred stock compensation was $126,000 during 1999.
(5) Income Taxes
Income tax expense consisted of:
Period from
inception
(October 28,
Year ended 1998) to
December 31, December 31,
1999 1998
------------------- -------------------
Current:
Federal $ - --
State 800 800
------------------- -------------------
Total current tax expense 800 800
------------------- -------------------
Deferred:
Federal -- --
State -- --
------------------- -------------------
Total deferred tax expense -- --
------------------- -------------------
Total tax expense $ 800 800
=================== ===================
-17-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
The income tax expense for the year ended December 31, 1999 and the period
from inception (October 28, 1998) to December 31, 1998, respectively,
differed from the amounts computed by applying the U.S. federal income tax
rate of 34% to pretax income as a result of the following:
Period from
inception
(October 28,
Year ended 1998) to
December 31, December 31,
1999 1998
------------------- -------------------
Federal tax at statutory rate $ (1,067,900) (4,500)
State taxes 800 800
Net operating loss not benefited 1,066,800 4,500
Nondeductible expenses 1,100 --
-------------------- -------------------
Total tax expense $ 800 800
=================== ===================
The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are set forth below:
Period from
inception
(October 28,
Year ended 1998) to
December 31, December 31,
1999 1998
------------------- -------------------
Deferred tax assets: $
Accruals and reserves 6,000 --
Plant and equipment 3,000 --
Stock options and warrants 313,000 --
Net operating loss carryforwards and income tax 931,000 5,000
credits
------------------- -------------------
Gross deferred tax assets 1,253,000 5,000
Valuation allowance (1,253,000) (5,000)
------------------- -------------------
Total deferred tax assets -- --
------------------- -------------------
Total deferred tax liabilities -- --
------------------- -------------------
Net deferred tax assets $ -- --
=================== ===================
-18-
VELOGIC, INC.
(a development stage company)
Notes to Financial Statements
December 31, 1999 and 1998
Based on the available objective evidence, management believes it is more
likely than not that the net deferred tax assets will not be realizable;
therefore, management has established a full valuation allowance for the
deferred tax assets. As of December 31, 1999 and 1998, the valuation
allowance for deferred tax assets was $1,253,000 and $5,000, respectively.
The net change in the total valuation allowance was $1,248,000 and $5,000
for 1999 and 1998, respectively.
The Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $3,538,000 and $3,505,000,
respectively, available to reduce future income subject to income taxes.
The federal net operating loss carryforwards expire in 2020. The California
net operating loss carryforwards expire in 2006.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the
Internal Revenue Code. The Company has not yet determined whether an
ownership change occurred due to significant stock transactions in each of
the reporting years disclosed. If an ownership change occurred, utilization
of the net operating loss carryforwards could be reduced significantly.
(6) Segment Information
The Company has determined that it operates in a single operating segment:
the provision of load testing services designed specifically for Internet
web sites. All of the Company's long-lived assets are located in the
United States.
(7) Subsequent Events
On March 1, 2000, the Company obtained a second capital lease for $150,746.
As of March 31, 2000, the Company owed $280,797 under the two capital lease
arrangements.
In March 2000, the Company obtained $2 million in convertible promissory
notes as a result of two bridge financing arrangements with two venture
capital firms. The notes were for $1 million each. The bridge loans had an
interest rate of 8% due upon repayment or conversion. The bridge loans
included a conversion feature which stated that the outstanding principal
and interest would be convertible at the option of the holder or upon a
change in control into shares of the Company's common stock. In addition
warrants for 200,000 shares of Series B Preferred Stock were issued.
In May 2000, the Company signed a merger agreement with Keynote Systems,
Inc. (Keynote). Keynote purchased the Company for 830,684 shares of Keynote
stock, plus up to an additional $7.8 million in cash or stock at the
determination of Keynote based upon successful achievement of certain
performance goals. The acquisition was accounted for as a purchase.
-19-
VELOGIC, INC.
Unaudited Condensed Financial Statements
March 31, 2000 and 1999
VELOGIC, INC.
(a development stage company)
Unaudited Condensed Balance Sheet
March 31, 2000
Assets
Current assets:
Cash and cash equivalents $ 2,056,257
Accounts receivable 42,325
Prepaid expenses and other current assets 104,983
-------------
Total current assets 2,203,565
Property and equipment, net 412,100
Other assets 36,900
-------------
Total assets $ 2,652,565
=============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 171,850
Accrued expenses 216,205
Note payable - bridge financing 1,870,000
Capital lease obligations - current portion 114,681
-------------
Total current liabilities 2,372,736
Capital lease obligations, less current portion 166,116
-------------
Total liabilities 2,538,852
-------------
Commitments
Redeemable convertible Series A preferred stock; $0.001 par
value; 13,000,000 shares authorized; 11,782,942 shares
issued and outstanding. 3,147,059
Stockholders' deficit:
Common stock, $0.001 par value; 50,000,000 shares authorized; 10,275,750
shares issued and outstanding 10,276
Shareholder Notes (70,000)
Deferred compensation (3,486,000)
Additional paid-in capital 7,091,862
Deficit accumulated during the development stage (6,579,484)
-------------
Total stockholders' deficit (3,033,346)
-------------
Total liabilities and stockholders' deficit $ 2,652,565
=============
-21-
VELOGIC, INC.
(a development stage company)
Unaudited Condensed Statements of Operations
Three months ended March 31,
-----------------------------
2000 1999
----------- -----------
Revenue:
Consulting services $ 52,843 --
----------- -----------
Operating expenses:
Cost of consulting services 260,914 65,564
Research and development 543,245 111,677
Sales and marketing 602,097 14,177
Operations 412,704 25,295
General and administrative 1,655,508 99,994
----------- -----------
Total operating expenses 3,474,468 316,707
----------- -----------
Loss from operations (3,421,625) (316,707)
Interest income, net 1,504 22,869
----------- -----------
Loss before income taxes (3,420,121) (293,838)
Income tax expense -- 800
----------- -----------
Net loss $(3,420,121) (294,638)
=========== ===========
-22-
VELOGIC, INC.
(a development stage company)
Unaudited Statement of Stockholders' Deficit
Three months ended March 31, 2000
Deficit
accumulated
Common stock Additional during the Total
----------------------- paid-in Shareholder Deferred development stockholders'
Shares Amount capital Notes compensation stage deficit
---------- ---------- ----------- --------- ------------ ------------ -------------
Balances, December 31, 1999 6,655,000 $ 6,655 2,052,350 -- (1,038,000) (3,159,363) (2,138,358)
Issuance of common stock in
connection with stock options
exercised 3,014,750 3,015 222,758 (70,000) -- -- 155,773
Issuance of common stock in
connection with exercise of
warrants 428,000 428 29,532 -- -- -- 29,960
Common stock and stock options
issued for services 178,000 178 231,222 -- -- -- 231,400
Deferred stock compensation related
to stock options granted to
employees -- -- 2,860,000 -- (2,860,000) -- --
Amortization of deferred stock
compensation -- -- -- -- 412,000 -- 412,000
Warrants issued for services -- -- 1,566,000 -- -- -- 1,566,000
Warrants issued in connection
with bridge loan -- -- 130,000 -- -- -- 130,000
Net loss -- -- -- -- -- (3,420,121) (3,420,121)
---------- ---------- ----------- -------- ----------- ----------- ----------
Balances, March 31, 2000 10,275,750 $ 10,276 7,091,862 (70,000) (3,486,000) (6,579,484) (3,033,346)
========== ========== =========== ======== =========== =========== ==========
-23-
VELOGIC, INC.
(a development stage company)
Unaudited Statements of Cash Flows
Three months ended March 31,
-----------------------------
2000 1999
------------- ---------
Cash flows from operating activities:
Net loss $ (3,420,121) (294,638)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 24,901 5,800
Option and warrant expense 2,258,400 --
Changes in operating assets and
liabilities (net of effect of noncash
investing and financing activities):
Accounts receivable (34,975) --
Prepaid expense and other current assets (41,815) (79,933)
Accounts payable 91,435 (4,466)
Accrued expenses 153,749 12,859
------------- ---------
Net cash used in operating activities (968,426) (360,378)
------------- ---------
Cash flows used in investing activities - purchase of property
and equipment (98,989) (95,239)
------------- ---------
Cash flows from financing activities:
Proceeds from bridge financing 2,000,000 --
Proceeds from issuance of common stock 185,733 --
Proceeds from issuance of redeemable preferred stock -- 3,077,280
Payments for capital lease obligations (16,314) --
------------- ---------
Net cash provided by financing activities 2,169,419 3,077,280
------------- ---------
Net increase in cash and cash equivalents 1,102,004 2,621,663
Cash and cash equivalents, beginning of period 954,253 4,453
------------- ---------
Cash and cash equivalents, end of period $ 2,056,257 2,626,116
============= =========
Supplementary cash flow information:
Cash paid for interest $ 2,662 --
============= ===========
Cash paid for taxes $ -- 600
============= ===========
Supplementary disclosure of noncash financing activities:
Capital lease financing of plant and equipment $ 150,746 --
============= ===========
Deferred stock compensation related to stock option grants
to employees 2,860,000 --
============= ===========
-24-
VELOGIC, INC.
(a development stage company)
Notes to Unaudited Condensed Financial Statements
March 31, 2000 and 1999
(1) Basis of Presentation
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles and reflect all adjustments, consisting only of normal recurring
adjustments which in the opinion of management are necessary to fairly
state the Company's financial position, results of operations, and cash
flows for the periods presented. Through March 31, 2000, the Company was
active in providing services, acquiring equipment and raising capital, and
had a limited amount of revenue from operations. The results of operations
for the three months ended March 31, 2000 are not necessarily indicative of
the results to be expected for any subsequent quarter.
(2) Stockholders' Deficit
(a) Redeemable Convertible Preferred Stock
During the first quarter ended March 31, 2000, the Company issued
37,647 Series A redeemable convertible preferred shares at a price
of $0.265625 in exchange for services. The shares were valued at the
Company's best estimate of fair value of $1 per share at time of
issuance and as a result charged $49,000 to expense.
(b) Common Stock
For the three months ended March 31, 2000, the Company issued 178,000
shares of common stock in exchange for services. The shares were
valued at $231,400, which was charged to expense during the period.
As of March 31, 2000, an aggregate of 8 million shares of common stock
were reserved for issuance upon exercise of warrants, the conversion
of preferred stock, outstanding stock options and stock options
reserved for issuance.
(c) Stock Warrants
For the three month period ended March 31, 2000, the Company issued
warrants to purchase an aggregate of 680,000 shares of common stock to
a third-party service provider. The warrants have an exercise price of
$0.07 per share. The warrants were valued using the Black-Scholes
option pricing model using the following assumptions: 80% volatility,
10 year contractual life, no dividends, a 5.87% risk free interest
rate and an assumed fair value of $1.30 for the underlying common
stock. The total expense recorded under Emerging Issues Task Force
Abstract 96-18, (EITF 96-18), Accounting for Equity Instruments that
are issued to Other than employees for Acquiring, or in conjunction
with selling, Goods or Services, aggregated $820,000 and has been
expensed in the period ended March 31, 2000. In addition, the
Company recorded $746,000 of non-employee compensation related to
the vesting of warrants granted in 1999.
-25-
VELOGIC, INC.
(a development stage company)
Notes to Unaudited Condensed Financial Statements
March 31, 2000 and 1999
(d) 1998 Incentive Stock Plan
During the period ended December 31, 1998, the Company adopted the
1998 Stock Plan (the Plan). Under the Plan, the exercise price of the
options to purchase stock is $0.07, the fair value price of common
stock as determined by the Board of Directors. Options vesting is
determined by the Board. The typical vesting for an employee of the
Company is as follows: 12/48th after the first 12 months with 1/48th
vesting monthly thereafter, with complete vesting after 4 years of
service.
The Company issued 2,969,250 shares of common stock in connection with
employee options exercised. The options were exercised at $0.07 per
share.
The Company issued 45,500 shares of common stock in connection with
non-employee options exercised. The options were exercised at $0.07
per share.
With respect to stock options granted to employees during the period
ended March 31, 2000, the Company recorded $2,860,000 in deferred
stock compensation for the difference at the grant or issuance date
between the exercise price of each stock option granted and the fair
value of the underlying common stock. This amount is being amortized
over the vesting period, generally four years, consistent with the
method described in FASB Interpretation No. 28. Amortization of
deferred stock compensation was $412,000 during the three months
ended March 31, 2000.
(3) Convertible Promissory Note and Warrant
In March 2000 the Company issued two convertible promissory notes and
warrants to two of its investors in the amount of $1,000,000 each at an
interest rate of 8%. The notes are due on December 31, 2000.
(a) Note
The notes are convertible into shares of Series B Preferred Stock upon
the initial closing of a Series B Preferred Stock financing, based on
the balance of the note outstanding and the price per share of the
initial closing of the financing. Interest is due upon repayment of
the note or the conversion of the principal amount of the note into
shares of Series B preferred stock.
(b) Warrant
In connection with the notes, warrants to issue 200,000 shares of
Series B Preferred Stock were issued with an aggregate fair value of
$130,000 using the Black-Scholes option pricing model. This amount
is being amortized to interest expense over the term of the note.
The warrant is exercisable upon the occurrence of the Series B
Preferred Stock financing or a Change of Control.
The loans were paid off in full in June 2000 upon the acquisition of the
Company by Keynote Systems, Inc. See subsequent event discussion in note 4.
-26-
VELOGIC, INC.
(a development stage company)
Notes to Unaudited Condensed Financial Statements
March 31, 2000
(4) Subsequent Event
In May 2000, the Company signed a merger agreement with Keynote Systems,
Inc. (Keynote). Keynote purchased the Company for 830,684 shares of Keynote
stock, plus up to an additional $7.8 million in cash or stock at the
determination of Keynote, based upon successful achievement of certain
performance goals. The acquisition was accounted for as a purchase.
In March 2000, the Company had two outstanding loans with a financial
institution for its capital lease arrangement. In June 2000, both loans
were paid in full following the Keynote acquisition.
-27-
(b) Pro Forma Financial Information.
KEYNOTE SYSTEMS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
are presented for illustrative purposes only and are not necessarily
indicative of the combined condensed results of operations for future
periods or the results of operations that actually would have been realized
had Keynote Systems, Inc. and Velogic, Inc. (the Companies) been a combined
company during the specified periods. The unaudited pro forma combined
condensed financial statements, including the related notes, are qualified
in their entirety by reference to, and should be read in conjunction with,
the historical consolidated financial statements and related notes thereto
of Keynote Systems, Inc. and Velogic, Inc., included elsewhere in this
submission and in Keynote Systems, Inc.'s Form 10-K dated December 21, 1999
and Form 10-Q dated August 14, 2000. The following unaudited pro forma
combined condensed financial statements give effect to Keynote Systems,
Inc.'s acquisition of Velogic, Inc. using the purchase method of
accounting. The pro forma combined condensed financial statements are based
on the respective historical audited and unaudited financial statements and
related notes of Keynote Systems, Inc. and Velogic, Inc.
The pro forma adjustments are preliminary and are based upon available
information and certain assumptions that management believes are
reasonable. The pro forma financial data do not necessarily reflect the
results of operations of the Company that would have resulted had the
acquisitions been consummated for the period indicated, and the pro forma
financial data exclude the nonrecurring effects of certain purchase
adjustments related to the acquisitions that will be reflected in financial
statements prepared in accordance with generally accepted accounting
principles. The pro forma adjustments are based on management's preliminary
assumptions regarding purchase accounting adjustments that will be
determined in accordance with the purchase accounting provisions of APB
Opinion No. 16, Business Combinations, and related pronouncements. The
actual allocation of the purchase price will be adjusted in accordance with
SFAS No. 38, Accounting for Preacquisition Contingencies of Purchase
Enterprises, to the extent that actual amounts differ from management's
estimates. The actual adjustments may differ materially from those
presented in these pro forma financial statements. A change in the pro
forma adjustments would result in a reallocation of the purchase price
affecting the value assigned to the long-term tangible and intangible
assets or, in some circumstances, resulting in a charge to the statement of
operations. The effect of these changes on the statement of operations will
depend on the nature and amounts of the assets and liabilities adjusted.
See notes to the pro forma combined condensed financial statements.
The unaudited pro forma combined condensed statements of operations assume
the acquisition took place on October 1, 1998, and combines Keynote
Systems, Inc.'s audited consolidated statements of operations for the year
ended September 30, 1999 and the unaudited consolidated statement of
operations for the nine months ended June 30, 2000 with Velogic, Inc.'s
audited statement of operations for the year ended December 31, 1999 and
its unaudited statement of operations for the nine months ended March 31,
2000, respectively.
-28-
KEYNOTE SYSTEMS, INC. AND SUBSIDIARY
Unaudited Pro Forma Combined Condensed Statement of Operations
Year ended September 30, 1999
(In thousands, except per share amounts)
Historical Pro forma
---------------------------------- ------------------------------------
Keynote Velogic Adjustments Combined
--------------- ---------------- --------------- ----------------
Revenue:
Subscription services $ 7,055 -- -- 7,055
Consulting services 217 99 -- 316
--------------- ---------------- --------------- ----------------
Total revenues 7,272 99 -- 7,371
--------------- ---------------- --------------- ----------------
Operating expenses:
Cost of subscription services 2,314 -- -- 2,314
Cost of consulting services 444 567 -- 1,011
Research and development 2,059 755 -- 2,814
Sales and marketing 5,331 364 -- 5,695
Operations 1,639 446 -- 2,085
General and administrative 1,642 1,158 -- 2,800
Amortization of goodwill and other
intangible assets -- -- 13,501 1(a) 13,501
Amortization of stock-based compensation 858 -- -- 858
--------------- ---------------- --------------- ----------------
Total operating expenses 14,287 3,290 13,501 31,078
--------------- ---------------- --------------- ----------------
Loss from operations (7,015) (3,191) (13,501) (23,707)
Interest (expense) income, net (95) 49 -- (46)
--------------- ---------------- --------------- ----------------
Net loss $ (7,110) (3,142) (13,501) (23,753)
=============== ================ =============== ================
Basic and diluted net loss per share $ (1.54) (4.36)
=============== ================
Shares used in computing basic and diluted
net loss per share 4,622 831 1(b) 5,453
=============== ================
See accompanying note to unaudited pro forma combined condensed financial
statements.
-29-
KEYNOTE SYSTEMS, INC. AND SUBSIDIARY
Unaudited Pro Forma Combined Condensed Statement of Operations
Nine months ended June 30, 2000
(In thousands, except per share amounts)
Historical Pro forma
------------------------------------- -----------------------------------------------
Keynote Velogic Adjustments Combined
----------------- ----------------- --------------------- -----------------
Revenue:
Subscription services $ 20,733 -- (3) 1(c) 20,730
Consulting services 956 87 1,043
----------------- ----------------- --------------------- -----------------
Total revenues 21,689 87 (3) 21,773
----------------- ----------------- --------------------- -----------------
Operating expenses:
Cost of subscription services 6,870 -- (11) 1(c) 6,859
Cost of consulting services 1,086 -- (109) 1(c) 977
Research and development 3,405 1,023 (113) 1(c) 4,315
Sales and marketing 11,617 854 (89) 1(c) 12,382
Operations 3,256 1,304 -- 4,560
General and administrative 3,503 2,600 (35) 1(c) 6,068
Amortization of goodwill and other
intangible assets 1,125 -- 9,001 1(a) 10,126
Amortization of stock-based
compensation 256 -- -- 256
----------------- ----------------- --------------------- -----------------
Total operating expenses 31,118 5,781 8,644 45,543
----------------- ----------------- --------------------- -----------------
Loss from operations (9,429) (5,694) (8,647) (23,770)
Interest income, net 8,675 22 -- 8,697
================= ================= ===================== =================
Net loss $ (754) (5,672) (8,647) (15,073)
================= ================= ===================== =================
Basic and diluted net loss per share $ (0.03) (0.59)
================= =================
Shares used in computing basic and 831 1(b)
diluted net loss per share 24,566 (85) 1(c) 25,312
================= =================
See accompanying note to unaudited pro forma combined condensed financial
-30-
KEYNOTE SYSTEMS, INC. AND SUBSIDIARY
Note to Unaudited Pro Forma Combined Condensed Financial Statements
June 30, 2000 and September 30, 1999
(1) Unaudited Pro Forma Combined Condensed Statement of Operations
On June 2, 2000, Keynote Systems, Inc. acquired all of the outstanding
capital stock of Velogic, Inc. in exchange for 830,684 shares of its
common stock, plus up to an additional $7.8 million in cash or stock at
the determination of Keynote. Total consideration given, including direct
acquisition costs, aggregated approximately $39.2 million. The
acquisition was accounted for as a purchase with the results of Velogic,
Inc. included from the acquisition date. The excess of the purchase price
over the fair value of tangible net assets acquired amounted to
approximately $40.5 million, with $36.4 million attributable to goodwill
and $4.1 million attributable to other intangible assets. The intangible
assets are being amortized on a straight-line basis over an estimated
life of 3 years.
Velogic, Inc. provides load testing services designed specifically for
Internet web sites to help e-businesses maximize the technical and
financial performance of their site. The Company utilizes a unique
business-impact model to simulate users and identifies ways to reduce site
outages and increase customer satisfaction. The full-service web site load
testing service enables e-businesses to predetermine site capacity for
expected visitor loads.
The pro forma combined condensed statement of operations gives effect to
the acquisition as if it had occurred on October 1, 1998.
The historical statement of operations for Keynote for the period ended
June 30, 2000 reflects the acquisition of Velogic, Inc. from on June 3,
2000 to June 30, 2000.
The following adjustments have been reflected in the unaudited pro forma
combined condensed statement of operations:
(a) Adjustment to record the amortization of goodwill and intangible
assets resulting from the allocation of Velogic, Inc.'s purchase
price. The pro forma adjustment reflects goodwill and other intangible
assets amortized on a straight-line basis over an estimated life of
three years, beginning October 1, 1998.
(b) Adjustment to reflect the shares issued as consideration for the
acquisition, including shares to be issued for options and warrants.
(c) Adjustment to eliminate the operations of Velogic, Inc. for the
period from June 3, 2000 to June 30, 2000, which are already
included in the results of operations of Keynote.
(c) Exhibits.
The following Exibit is filed herewith
23.01 Concent of KFMG LLP
-31-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
KEYNOTE SYSTEMS, INC.
Date: August 16, 2000 By: /s/ John Flavio
___________________________________________
John Flavio
Vice President of Finance, Chief Financial
Officer and Secretary