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): August 18, 2000
KEYNOTE SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation)
000-27241 94-3226488
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(Commission (IRS Employer
File Number) Identification No.)
2855 Campus Drive, San Mateo, CA 94403
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(Address of principal executive offices) (Zip Code)
(650) 522-1000
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(Registrant's telephone number, including area code)
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(Former name or former address, if changed since last report)
Keynote Systems, Inc. hereby amends Item 7 of its Current Report on
Form 8-K, initially filed with the Securities and Exchange Commission on
September 1, 2000, in connection with the completion of its acquisition of
Digital Content, L.L.C., a Texas limited liability corporation.
Item 7: Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
DIGITAL CONTENT, L.L.C.
Financial Statements
December 31, 1999
(With Independent Auditors' Report Thereon)
1
Independent Auditors' Report
The Board of Directors
Digital Content, L.L.C.:
We have audited the accompanying balance sheet of Digital Content, L.L.C. (the
Company) as of December 31, 1999, and the related statements of operations,
members' capital and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Digital Content, L.L.C. as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ KPMG LLP
Mountain View, California
October 25, 2000
2
DIGITAL CONTENT, L.L.C.
Balance Sheet
December 31, 1999
Assets
Current assets:
Cash and cash equivalents $ 27,810
Accounts receivable, less allowance for doubtful accounts of $0 99,365
Prepaid expenses and other current assets 47,223
------------------
Total current assets 174,398
Property and equipment, net 64,638
Other assets 12,248
------------------
Total assets $ 251,284
==================
Liabilities and Members' Capital
Current liabilities:
Accounts payable $ 36,574
Payroll taxes payable 3,393
Deferred revenue 50,601
------------------
Total current liabilities 90,568
Commitments
Membership interests 79,881
Undistributed income 80,835
------------------
Members' capital 160,716
------------------
Total liabilities and members' capital $ 251,284
==================
See accompanying notes to financial statements.
3
DIGITAL CONTENT, L.L.C.
Statement of Operations
Year ended December 31, 1999
Revenue:
Subscription services $ 737,219
------------------
Operating expenses:
Cost of subscription services 285,526
Sales and marketing 194,008
Operations 117,572
General and administrative 112,128
------------------
Total operating expenses 709,234
------------------
Net income $ 27,985
==================
See accompanying notes to financial statements.
4
DIGITAL CONTENT, L.L.C.
Statement of Changes in Members' Capital
Year ended December 31, 1999
Membership Undistributed
interests income Total
------------------- ------------------ ------------------
Balances, December 31, 1998 $ 78,548 52,850 131,398
Capital contributed 1,333 -- 1,333
Net income -- 27,985 27,985
------------------- ------------------ ------------------
Balances, December 31, 1999 $ 79,881 80,835 160,716
=================== ================== ==================
See accompanying notes to financial statements.
5
DIGITAL CONTENT, L.L.C.
Statement of Cash Flows
Year ended December 31, 1999
Cash flows from operating activities:
Net income $ 27,985
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 52,072
Changes in operating assets and liabilities:
Accounts receivable (43,907)
Prepaid expenses and other current assets (17,430)
Accounts payable 33,469
Payroll taxes payable 2,932
Deferred revenue 20,805
------------------
Net cash provided by operating activities 75,926
------------------
Cash flows used in investing activities - purchase of property
and equipment (53,421)
------------------
Cash flows from financing activities:
Capital contribution 1,333
Repayment of advance from member (24,935)
------------------
Net cash used in financing activities (23,602)
------------------
Net decrease in cash and cash equivalents (1,097)
Cash and cash equivalents, beginning of year 28,907
------------------
Cash and cash equivalents, end of year $ 27,810
==================
See accompanying notes to financial statements.
6
DIGITAL CONTENT, L.L.C.
Notes to Financial Statements
December 31, 1999
(1) Organization and Summary of Significant Accounting Policies
(a) The Company
Digital Content, L.L.C. (the Company), founded in 1995, provides
website accessibility monitoring for e-businesses. The Company's
service constantly monitors the availability of its customers'
mission-critical network, web servers and applications from an end
user perspective.
The Company is organized under the provision of the Texas Limited
Liability Company but as a result, ownership interests in the
Company are evidenced by certificates of "membership interests"
rather than shares of capital stocks. Accordingly, the
accompanying financial statements present these interests as
members' capital.
(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 and Operating Expenses
Revenues are derived principally from website accessibility
monitoring services. Revenue is recognized ratably over the period
the services are delivered. Subscription revenues billed in
advance are deferred upon invoicing and are recognized ratably
over the service period.
Cost of subscription services represents primarily all the
Company's direct costs for employees and consultants. These
employees and consultants are engaged in providing the Company's
services. Sales and marketing and general and administrative
expenses contain primarily non-payroll costs. Operations expenses
primarily relate to Network access costs and other infrastructure
costs.
(d) Research and Development
Research and development costs are 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) Income Taxes
No provision has been made in these financial statements for
income taxes as the income of the Company is passed through, and
reported by, the holders of membership interests.
(f) 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, the Company did not have any
investments.
7
DIGITAL CONTENT, L.L.C.
Notes to Financial Statements
December 31, 1999
(g) Accounts Receivable
Accounts receivable are recorded net of the related allowance for
doubtful accounts. Management, considering current information and events
regarding the customers' ability to repay their obligations, considers an
account to be doubtful when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms.
The allowance for doubtful accounts as of December 31, 1999 was $0 as
management considers it probable that the Company will be able to collect
all amounts due.
(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 or double-declining balance method over
the estimated useful lives of the assets which range between three and
ten years.
(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 and accounts payable. 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 three major financial institutions. The Company's accounts
receivables are derived from customers located in the United States.
(l) Comprehensive Income
The Company has no components of other comprehensive income.
8
DIGITAL CONTENT, L.L.C.
Notes to Financial Statements
December 31, 1999
(m) Recent Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB)
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 the Company's
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.
In March 2000, the FASB's Emerging Issues Task Force (EITF)
reached a consensus on EITF No. 00-2, Accounting for the Costs of
Developing a Web Site. EITF No. 00-2 provides guidance on
accounting for web site development costs and is effective for
fiscal quarters beginning after June 30, 2000. The impact of this
statement on the Company's statement of operations is not expected
to be material.
In March 2000, the EITF reached a consensus on EITF No. 00-3,
Application of AICPA Statement of Position 97-2, Software Revenue
Recognition, to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware. The Company does not
expect that the adoption of EITF No. 00-3 will have a material
impact on its financial statements or results of operations.
9
DIGITAL CONTENT, L.L.C.
Notes to Financial Statements
December 31, 1999
(2) Property and Equipment
Property and equipment, stated at cost net of accumulated depreciation
and amortization, as of December 31, 1999 consisted of the following:
Office equipment $ 24,582
Furniture and fixtures 14,854
Computer hardware 153,141
Computer software 16,338
---------------
208,915
Less accumulated depreciation (144,277)
---------------
Property and equipment, net $ 64,638
---------------
(3) Segment Information
The Company has determined that it operates in a single operating
segment: the provision of website accessibility monitoring services
designed specifically for Internet web sites. All of the Company's
long-lived assets are located in the United States.
(4) Subsequent Events
In August 2000, the Company signed a merger agreement with Keynote
Systems, Inc. (Keynote). Keynote purchased the Company for $15 million in
cash, plus up to an additional $10 million in cash based on successful
achievement of certain performance goals.
(5) Commitments and Contingencies
A commitment was given by the Company to the Vice President of Sales and
Services that in the event of the sale of the Company in the year 2000,
the Company would pay him a bonus of $200,000 at the sole discretion of
the Company.
The bonus of $200,000 was paid in August 2000 out of the cash
consideration of $15 million received from Keynote for the acquisition.
10
DIGITAL CONTENT, L.L.C.
Unaudited Condensed Financial Statements
June 30, 2000 and 1999
11
DIGITAL CONTENT, L.L.C.
Unaudited Condensed Balance Sheet
June 30, 2000
Assets
Current assets:
Cash and cash equivalents $ 39,642
Accounts receivable, less allowance for doubtful accounts 108,168
Prepaid expenses and other current assets 57,783
---------------
Total current assets 205,593
Property and equipment, net 98,141
---------------
Total assets $ 303,734
===============
Liabilities and Members' Capital
Current liabilities:
Accounts payable $ 17,337
Payroll taxes payable 6,124
Deferred revenue 63,975
---------------
Total current liabilities 87,436
Commitments
Membership interests 105,958
Undistributed income 110,340
---------------
Members' capital 216,298
---------------
Total liabilities and members' capital $ 303,734
===============
See accompanying notes to unaudited condensed financial statements.
12
DIGITAL CONTENT, L.L.C.
Unaudited Condensed Statements of Operations
Six months ended June 30, 2000 and 1999
2000 1999
------------------- ------------------
Revenue:
Subscription services $ 540,073 321,874
------------------- ------------------
Operating expenses:
Cost of subscription services 245,274 119,632
Sales and marketing 96,719 84,686
Operations 70,570 52,945
General and administrative 71,928 50,469
------------------- ------------------
Total operating expenses 484,491 307,732
------------------- ------------------
Net income $ 55,582 14,142
=================== ==================
See accompanying notes to unaudited condensed financial statements.
13
DIGITAL CONTENT, L.L.C.
Unaudited Condensed Statement of Changes in Members' Capital
Six months ended June 30, 2000
Membership Undistributed
interests income Total
----------------- ----------------- -----------------
Balances, beginning of period $ 79,881 80,835 160,716
Net income -- 55,582 55,582
Undistributed income allocated to membership interests 26,077 (26,077) --
----------------- ----------------- -----------------
Balances, end of period $ 105,958 110,340 216,298
================= ================= =================
See accompanying notes to unaudited condensed financial statements.
14
DIGITAL CONTENT, L.L.C.
Unaudited Condensed Statements of Cash Flows
Six months ended June 30, 2000 and 1999
2000 1999
------------------- ------------------
Cash flows from operating activities:
Net income $ 55,582 14,142
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 20,862 23,141
Changes in operating assets and liabilities:
Accounts receivable (8,802) (318)
Prepaid expense and other current assets (10,560) (3,824)
Accounts payable (19,237) 9,987
Payroll taxes payable 2,732 139
Deferred revenue 13,374 7,845
------------------- ------------------
Net cash provided by operating activities 53,951 51,112
------------------- ------------------
Cash flows used in investing activities - purchase of property
and equipment (54,365) (24,574)
------------------- ------------------
Cash flows from financing activities:
Capital contribution -- 1,333
Payments received on loan 12,246 --
Advance from member -- (1,581)
------------------- ------------------
Net cash provided by (used in) financing activities 12,246 (248)
------------------- ------------------
Net increase in cash and cash equivalents 11,832 26,290
Cash and cash equivalents, beginning of period 27,810 28,907
------------------- ------------------
Cash and cash equivalents, end of period $ 39,642 55,197
=================== ==================
See accompanying notes to unaudited condensed financial statements.
15
DIGITAL CONTENT, L.L.C.
Notes to Unaudited Condensed Financial Statements
June 30, 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. The results of operations for the
six-month periods ended June 30, 2000 and 1999 are not necessarily
indicative of the results to be expected for any subsequent period.
(2) Subsequent Event
In August 2000, the Company signed a merger agreement with Keynote
Systems, Inc. (Keynote). Keynote purchased the Company for $15 million in
cash, plus up to an additional $10 million in cash, based on successful
achievement of certain performance goals.
(3) Commitments and Contingencies
. A commitment was given by the Company to the Vice President of
Sales and Services that in the event of the sale of the Company
in the year 2000, the Company would pay him a bonus of $200,000
at the sole discretion of the Company.
The bonus of $200,000 was paid in August 2000 out of the cash
consideration of $15 million received from Keynote for the
acquisition.
. On May 1, 2000, the Company entered into an agreement to lease
office space in a commercial shopping center located in Plano,
Texas. The lease is for 5 years, commencing on July 1, 2000 and
expiring on June 30, 2005. Monthly lease payments are for
graduated amounts ranging from $420 to $1,050. In addition, the
lessee is liable for common area maintenance, property insurance
and real estate taxes estimated at $294 per month. The global
commitment amounts to approximately $50,820.
16
(b) Pro Forma Financial Information.
KEYNOTE SYSTEMS, INC. AND SUBSIDIARY
Unaudited Pro Forma Combined Condensed Financial Statements
Year ended September 30, 1999 and nine months
ended June 30, 2000
The following unaudited pro forma combined condensed financial statements
are presented for illustrative purposes only and are not necessarily
indicative of the combined financial position or results of operations
for future periods or the results of operations or financial position
that actually would have been realized had Keynote Systems, Inc. and
Velogic, Inc. and Digital Content, L.L.C. (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 the Companies,
included elsewhere in this submission and in Keynote Systems, Inc.'s Form
10-K filed December 21, 1999 and Form 10-Q filed August 14, 2000. The
following unaudited pro forma combined condensed financial statements
give effect to Keynote Systems, Inc.'s acquisition of the Companies 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 the Companies.
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 or the financial position of the Company that would
have resulted had the acquisitions been consummated as of the date or for
the period indicated, and the pro forma financial data exclude certain
purchase adjustments related to the acquisitions that may 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, 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
purchase accounting 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 balance sheet assumes that the
acquisition of Digital Content, L.L.C. took place on June 30, 2000, and
combines Keynote Systems, Inc.'s June 30, 2000 consolidated balance sheet
with Digital Content, L.L.C.'s June 30, 2000 balance sheet. The Keynote
Systems, Inc. June 30, 2000 balance sheet includes assets and liabilities
relating to the acquisition of Velogic, Inc., which was completed June 3,
2000.
The unaudited pro forma combined condensed statements of operations
assume the acquisitions 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
Digital Content, L.L.C.'s and Velogic, Inc.'s audited statements of
operations for the year ended December 31, 1999 and their unaudited
statements of operations for the nine months ended June 30, 2000,
respectively.
17
KEYNOTE SYSTEMS, INC. AND SUBSIDIARY
Unaudited Pro Forma Combined Condensed Balance Sheets
June 30, 2000
(in thousands)
Historical Pro forma
------------------------------ ----------------------------
Assets Digital
Keynote Content Adjustments Combined
-------------- -------------- ------------- ----------
Current assets:
Cash and cash equivalents $ 356,402 40 (15,000) 1(a) 341,442
Accounts receivable, net 6,633 108 -- 6,741
Prepaid and other current assets 1,692 58 -- 1,750
--------- --------- -------- --------
Total current assets 364,727 206 (15,000) 349,933
Property and equipment, net 6,764 98 -- 6,862
Loans to related parties and other assets 729 -- -- 729
Goodwill and other intangible assets 39,378 -- 8,549 1(b) 47,927
--------- --------- -------- --------
Total assets $ 411,598 304 (6,451) 405,451
========= ========= ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and capital lease obligation - current
portion $ 1,316 -- -- 1,316
Accounts payable and accrued expenses 6,447 24 200 1(a) 6,671
Deferred revenue 5,652 64 -- 5,716
--------- --------- -------- --------
Total current liabilities 13,415 88 200 13,703
Notes payable and capital lease obligation, less current 1,134 -- -- 1,134
portion
--------- --------- -------- --------
Total liabilities 14,549 88 200 14,837
--------- --------- -------- --------
Stockholders' equity:
Common stock 27 -- -- 27
Additional paid-in capital 411,343 -- -- 411,343
Deferred compensation (879) -- (6,435) 1(c) (7,314)
Members' capital -- 216 (216) 1(d) --
Accumulated (deficit) income (13,442) -- -- (13,442)
--------- --------- -------- --------
Total stockholders' equity 397,049 216 (6,651) 390,614
--------- --------- -------- --------
Total liabilities and stockholders' equity $ 411,598 304 (6,451) 405,451
========= ========= ======== ========
See accompanying notes to unaudited pro forma combined condensed financial
statements.
18
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 Historical Pro forma
--------------------- ---------------------------- ---------- ---------------------------
Digital
Keynote Content Adjustments Combined Velogic Adjustments Combined
----------- --------- ------------- ----------- ---------- ------------ ----------
Revenue:
Subscription services $ 7,055 737 -- 7,792 -- -- 7,792
Consulting services 217 -- -- 217 99 -- 316
----- ------ ------ ------ ----- ------- -----
Total revenues 7,272 737 -- 8,009 99 -- 8,108
----- ------ ------ ------ ----- ------- -----
Expenses:
Cost of subscription services 2,314 285 -- 2,599 -- -- 2,599
Cost of consulting services 444 -- -- 444 567 -- 1,011
Research and development 2,059 -- -- 2,059 755 -- 2,814
Sales and marketing 5,331 194 -- 5,525 364 -- 5,889
Operations 1,639 118 -- 1,757 446 -- 2,203
General and administrative 1,642 112 -- 1,754 1,158 -- 2,912
Amortization of goodwill and
other intangibles and other -- -- 9,222 2(a) 9,222 -- 13,501 2(a) 22,723
acquisition-related charges
Amortization of stock-based 858 -- -- 858 -- -- 858
compensation
------- ------ ------ ------- ------ ------- -------
Total expenses 14,287 709 9,222 24,218 3,290 13,501 41,009
------- ------ ------ ------- ------ ------- -------
(Loss) income from (7,015) 28 (9,222) (16,209) (3,191) (13,501) (32,901)
operations
Other (expense) income, net (95) -- -- (95) 49 -- (46)
------- ------ ------ ------- ------ ------- -------
Net (loss) income $(7,110) 28 (9,222) (16,304) (3,142) (13,501) (32,947)
======= ====== ====== ======= ====== ======= =======
Basic and diluted net loss per $ (1.54) (6.07)
share
======= =======
Shares used in computing basic and
diluted net loss per share 4,622 802 2(b) 5,424
======= ======= =======
See accompanying notes to unaudited pro forma combined condensed financial
statements.
19
KEYNOTE SYSTEMS, INC. AND SUBSIDIARY
Unaudited Pro Forma Combined Statement of Operations
Nine months ended June 30, 2000
(In thousands, except per share amounts)
Historical Pro forma Historical Pro forma
-------------------- ---------------------------- ---------- -----------------------
Digital
Keynote Content Adjustments Combined Velogic Adjustments Combined
-------- ---------- ------------- ----------- ---------- ------------ --------
Revenue:
Subscription services 20,733 724 -- 21,457 -- (3) 2(c) 21,454
Consulting services 956 -- -- 956 145 -- 1,101
------ ----- -------- ------ ------ ------- ------
Total revenues 21,689 724 -- 22,413 145 (3) 22,555
------ ----- -------- ------ ------ ------- ------
Expenses:
Cost of subscription services 6,870 295 -- 7,165 -- (11) 2(c) 7,154
Cost of consulting services 1,086 -- -- 1,086 -- (109) 2(c) 977
Research and development 3,405 -- -- 3,405 1,261 (113) 2(c) 4,553
Sales and marketing 11,617 171 -- 11,788 1,373 (89) 2(c) 13,072
Operations 3,256 96 -- 3,352 1,265 -- 2(c) 4,617
General and administrative 3,503 152 -- 3,655 2,992 (35) 2(c) 6,612
Amortization of goodwill and 1,125 -- 2,090 2(a) 3,215 -- 9,001 2(a) 12,216
other intangibles
Amortization of stock-based 256 -- -- 256 -- -- 256
compensation
------ ----- -------- ------ ------ ------- -------
Total expenses 31,118 714 2,090 33,922 6,891 8,644 49,457
----- ----- -------- ------ ------ ------- -------
(Loss) income from
operations (9,429) 10 (2,090) (11,509) (6,746) (8,647) (26,902)
Other income, net 8,675 -- -- 8,675 (91) -- 8,584
------ ----- -------- ------ ------ ------- -------
Net (loss) income (754) 10 (2,090) (2,834) (6,837) (8,647) (18,318)
====== ===== ======== ====== ====== ======= =======
Basic and diluted net loss per share (0.03) $ (0.72)
====== =======
Shares used in computing basic 802 2(b)
and diluted net loss per 24,566 (85) 2(c) 25,283
====== ======= =======
See accompanying notes to unaudited pro forma combined condensed financial
statements.
20
KEYNOTE SYSTEMS, INC. AND SUBSIDIARY
Unaudited Pro Forma Combined Condensed Financial Statements
Year ended September 30, 1999 and nine months
ended June 30, 2000
On June 2, 2000, Keynote acquired all of the outstanding capital stock of
Velogic, Inc. (Velogic) 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 result of Velogic
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 goodwill and
intangible assets are being amortized on a straight-line basis over an
estimated life of 3 years.
On August 18, 2000, Keynote acquired Digital Content, L.L.C. (Digital
Content) for $15 million plus up to an additional $10 million in cash
(note 3). The acquisition was accounted for as a purchase with the
results of Digital Content included from the acquisition date. Of the
purchase consideration, $6.4 million relates to compensation for
employment and is deferred on the acquisition date and amortized over the
required employment term of 6 months. The excess of the purchase price
over the fair value of tangible net assets acquired amounted to
approximately $8.5 million, with $5.4 million attributable to goodwill
and $3.1 million attributable to other intangible assets. The goodwill
and intangible assets are being amortized on a straight-line basis over
an estimated life of 3 years.
(1) Unaudited Pro Forma Combined Condensed Balance Sheet
The pro forma combined balance sheet as of June 30, 2000 gives effect to
the Digital Content acquisition as if it had occurred on June 30, 2000.
The following adjustments have been reflected in the unaudited pro forma
combined balance sheet:
(a) Adjustment to reflect cash issued as consideration for the
acquisition of Digital Content, and accrued transaction costs.
(b) Adjustment to record goodwill and other intangible assets resulting
from the allocation of Digital Content's and Velogic's purchase
price.
(c) Adjustment to reflect deferred compensation related to the Digital
Content acquisition.
(d) Adjustment to eliminate members' capital of Digital Content.
(2) Unaudited Pro Forma Combined Condensed Statement of Operations
The pro forma combined condensed statements of operations give effect to
the two acquisitions as if they 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 from 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 Digital Content's and
Velogic's purchase price and to record the compensation expense
related to the Digital Content acquisition. The pro forma adjustment
reflects goodwill
21
KEYNOTE SYSTEMS, INC. AND SUBSIDIARY
Unaudited Pro Forma Combined Condensed Financial Statements
Year ended September 30, 1999 and nine months
ended June 30, 2000
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 of Velogic, including shares to be issued for options
and warrants.
(c) Adjustment to eliminate the operations of Velogic, for the period
from June 3, 2000 to June 30, 2000, which are already included in
the consolidated results of operations of Keynote.
(3) Commitments and Contingencies
Keynote has committed to pay contingent consideration to the members of
Digital Content subject to the following conditions:
If Digital Content's revenues for the 12 months ending December 31, 2001
equal or exceed $5 million, an earnout amount of $10 million shall be
distributed pro rata by Keynote to the members, except for those members
who were employees of Digital Content on the agreement date who are no
longer employees of Digital Content on the payment date, according to
each Digital Content member's percentage interest. Notwithstanding the
previous sentence, in the event that Digital Content's revenues for the
12 months ending December 31, 2001 equal or exceed $4 million but are
less than $5 million, an earnout amount of $5 million shall be
distributed pro rata by Keynote to the members according to each Digital
Content member's percentage interest.
Keynote has also committed to pay up to an additional $3.9 million
contingent consideration to the shareholders of Velogic, Inc. dependent
on the achievement of revenue targets in the year ending December 31,
2000, plus an additional $3.9 million dependent on the achievement of
revenue targets in the year ending December 31, 2001. In the event that
these targets are met, the contingent consideration will be accounted for
as additional purchase price.
22
(c) Exhibit.
The following Exhibit is filed herewith:
23.01 Consent of KPMG LLP.
23
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: November 1, 2000 By: /s/ John Flavio
---------------------
John Flavio
Vice President of Finance,
Chief Financial Officer and Secretary
24
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- ------------------------------------------
23.01 Consent of KPMG LLP.