SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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KEYNOTE SYSTEMS, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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4) Date Filed:
Keynote Systems, Inc.
777 Mariners Island Boulevard
San Mateo, California 94404
February 16, 2007
To our Stockholders:
You are cordially invited to attend the 2007 Annual Meeting of Stockholders
of Keynote Systems, Inc. to be held at our executive offices, located at 777
Mariners Island Boulevard in San Mateo, California, on Thursday, March 22, 2007
at 10:00 a.m., Pacific Time.
The matters expected to be acted upon at the meeting are described in
detail in the following notice of the 2007 Annual Meeting of Stockholders and
proxy statement.
We encourage you to use this opportunity to take part in the affairs of
Keynote Systems, Inc. by voting on the business to come before this meeting.
Whether or not you expect to attend the meeting, please complete, date, sign and
promptly return the accompanying proxy in the enclosed postage-paid envelope so
that your shares may be represented at the meeting. Returning the proxy does not
deprive you of your right to attend the meeting and to vote your shares in
person.
We look forward to seeing you at the meeting.
Sincerely,
/s/ Umang Gupta
---------------------------
Chairman of the Board
and Chief Executive Officer
Keynote Systems, Inc.
777 Mariners Island Boulevard
San Mateo, California 94404
NOTICE OF THE 2007 ANNUAL MEETING OF STOCKHOLDERS
To our Stockholders:
NOTICE IS HEREBY GIVEN that the 2007 Annual Meeting of Stockholders of
Keynote Systems, Inc. will be held at our executive offices, located at 777
Mariners Island Boulevard in San Mateo, California, on Thursday, March 22, 2007
at 10:00 a.m., Pacific Time, for the following purposes:
1. To elect seven members of Keynote's Board of Directors;
2. To ratify the selection of Deloitte & Touche LLP as Keynote's
independent auditors for the fiscal year ending September 30, 2007; and
3. To transact such other business as may properly come before the
meeting or any adjournment.
The foregoing items of business are more fully described in the proxy
statement accompanying this notice.
Only stockholders of record at the close of business on February 5, 2007
are entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof.
By Order of the Board of Directors,
/s/ ANDREW HAMER
Andrew Hamer
Secretary
San Mateo, California
February 16, 2007
Whether or not you expect to attend the Annual Meeting, please complete,
date, sign and promptly return the accompanying proxy in the enclosed
postage-paid envelope so that your shares may be represented at the meeting.
TABLE OF CONTENTS
Page
----
Proxy Statement for the 2007 Annual Meeting of Stockholders:
Proposal No. 1--Election of Directors 3
Nominees for Board of Directors 3
Corporate Governance and Board Matters 4
Director Compensation 6
Compensation Committee Interlocks and Insider Participation 7
Code of Ethics 7
Directors' Attendance at Annual Stockholder Meetings 7
Proposal No. 2--Ratification of Selection of Independent Auditors 8
Principal Accountant Fees and Services 8
Report of the Audit Committee 10
Security Ownership of Certain Beneficial Owners and Management 11
Executive Compensation 13
Summary Compensation Table 13
Option Grants in Fiscal 2006 14
Aggregated Option Exercises in Fiscal 2006 and Option Values
at September 30, 2006 15
Equity Compensation Plans 15
Employment Agreement with Chief Executive Officer 16
Other Change-of-Control Arrangements 16
Report of the Compensation Committee 17
Stock Price Performance Graph 19
Certain Relationships and Related Transactions 20
Stockholder Proposals for the 2008 Annual Meeting of Stockholders 20
Compliance Under Section 16(a) of the Securities Exchange Act of 1934 20
Other Business 20
The Report of the Audit Committee, the Report of the Compensation Committee
and the Stock Price Performance Graph contained in this proxy statement are
required by the Securities and Exchange Commission. The information in these
sections shall not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933 or under the Securities Exchange Act of 1934,
except to the extent that we specifically incorporate this information by
reference into such filings. In addition, this information shall not otherwise
be deemed to be "soliciting material" or to be filed under those Acts.
Keynote Systems, Inc.
777 Mariners Island Boulevard
San Mateo, California 94404
---------------
PROXY STATEMENT
FOR THE 2007 ANNUAL MEETING OF STOCKHOLDERS
---------------
February 16, 2007
The accompanying proxy is solicited on behalf of the board of directors of
Keynote Systems, Inc., a Delaware corporation, for use at the 2007 Annual
Meeting of Stockholders to be held at our executive offices, located at 777
Mariners Island Boulevard in San Mateo, California, on Thursday, March 22, 2007
at 10:00 a.m., Pacific Time. Only holders of record of our common stock at the
close of business on February 5, 2007, which is the record date, will be
entitled to vote at the Annual Meeting. At the close of business on the record
date, there were 17,206,020 shares of Keynote common stock outstanding. All
proxies will be voted in accordance with the instructions contained therein and,
if no choice is specified, the proxies will be voted in favor of the nominees
for director and the proposal presented in the accompanying notice of the Annual
Meeting and this proxy statement. This proxy statement and the accompanying form
of proxy were first mailed to stockholders on or about February 22, 2007. Our
annual report for the fiscal year ended September 30, 2006 is enclosed with this
proxy statement.
Voting Rights
Holders of our common stock are entitled to one vote for each share held as
of the record date.
Vote Needed for a Quorum
A quorum is required for our stockholders to conduct business at the Annual
Meeting. The holders of a majority of the shares of our common stock entitled to
vote on the record date, present in person or represented by proxy, will
constitute a quorum for the transaction of business.
Vote Required to Approve Proposal No. 1
With respect to Proposal No. 1, directors will be elected by a plurality of
the votes of the shares of our common stock present in person or represented by
proxy at the Annual Meeting and entitled to vote. The effectiveness of any of
the proposals is not conditioned upon the approval by our stockholders of any
other proposal by the stockholders.
Effect of Abstentions
If stockholders abstain from voting, including brokers holding their
customers' shares of record who cause abstentions to be recorded, these shares
are considered present and entitled to vote at the Annual Meeting. These shares
will count toward determining whether or not a quorum is present. However, these
shares will not be taken into account in determining the outcome of any of the
proposals.
Effect of "Broker Non-Votes"
If a stockholder does not give a proxy to its broker with instructions as
to how to vote the shares, the broker has authority under New York Stock
Exchange rules to vote those shares for or against certain "routine" matters,
such as all of the proposals to be voted on at the Annual Meeting. If a broker
votes shares that are unvoted by its customers for or against a proposal, these
shares are considered present and entitled to vote at the Annual Meeting. These
shares would count toward determining whether or not a quorum is present. These
shares would also be taken into account in determining the outcome of the
proposals.
Although the proposals to be voted on at the Annual Meeting are considered
"routine," where a matter is not "routine," a broker generally would not be
entitled to vote its customers' unvoted shares. These so-called "broker
non-votes" would count toward determining whether or not a quorum is present.
However, these shares would not be taken into account in determining the outcome
of any proposal that is not routine.
1
Adjournment of Meeting
In the event that sufficient votes in favor of the proposals are not
received by the date of the Annual Meeting, the persons named as proxies may
propose one or more adjournments of the Annual Meeting to permit further
solicitations of proxies. Any such adjournment would require the affirmative
vote of the majority of the shares of common stock present in person or
represented by proxy at the Annual Meeting.
Expenses of Soliciting Proxies
We will pay the expenses of soliciting proxies to be voted at the Annual
Meeting. Following the original mailing of the proxies and other soliciting
materials, we and/or our agents may also solicit proxies by mail, telephone,
telegraph or in person. Following the original mailing of the proxies and other
soliciting materials, we will request that brokers, custodians, nominees and
other record holders of our common stock forward copies of the proxy and other
soliciting materials to persons for whom they hold shares of common stock and
request authority for the exercise of proxies. In these cases, we will reimburse
the record holders for their reasonable expenses if they ask us to do so.
Revocability of Proxies
Any person signing a proxy in the form accompanying this proxy statement
has the power to revoke it prior to the Annual Meeting or at the Annual Meeting
prior to the vote. A proxy may be revoked by any of the following methods:
o a written instrument delivered to us stating that the proxy is
revoked;
o a subsequent proxy that is signed by the person who signed the earlier
proxy and is presented at the Annual Meeting; or
o attendance at the Annual Meeting and voting in person.
Please note, however, that if a stockholder's shares are held of record by
a broker, bank or other nominee and that stockholder wishes to vote at the
Annual Meeting, the stockholder must bring to the Annual Meeting a letter from
the broker, bank or other nominee confirming the stockholder's beneficial
ownership of the shares.
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PROPOSAL NO. 1
ELECTION OF DIRECTORS
At the Annual Meeting, stockholders will elect directors to hold office
until the next Annual Meeting of Stockholders and until their successors have
been elected and qualified or until a director's earlier resignation or removal.
The size of our board of directors is currently set at eight members and in
connection with the election of directors at the Annual Meeting the authorized
number of directors is being reduced to seven. Each of the current directors,
rather than Geoffrey Penney has been nominated for election by the Board of
Directors and has decided to stand for re-election. Mr. Penney has decided to
retire from the Board of Directors and not to stand for re-election but intends
to serve on the Board of Directors through the date of the Annual Meeting. The
seven nominees receiving the highest number of affirmative votes of the shares
entitled to vote will be elected at the Annual Meeting to be our directors. If
any nominee for any reason is unable to serve, or for good cause will not serve,
as a director, the proxies may be voted for a substitute nominee as the proxy
holder may determine. We are not aware of any nominee who will be unable to or,
for good cause, will not serve as a director.
Nominees for Board of Directors
The names of the nominees for election to our board of directors at the
Annual Meeting, and information about each of them, are included below.
Director
Name Age Principal Occupation Since
- ---- --- -------------------- -----
Umang Gupta 57 Chairman of the Board and Chief Executive Officer of Keynote 1997
David Cowan 41 General Partner of Bessemer Venture Partners 1998
Deborah Rieman 57 Retired President and Chief Executive Officer of Check Point Software 2002
Technologies Inc.
Mohan Gyani 55 Retired President and Chief Executive Officer of AT&T Wireless Mobility Services 2002
Raymond L. Ocampo Jr. 53 President and Chief Executive Officer, Samurai Surfer LLC 2004
Jennifer Bolt 42 Executive Vice President , Operations and Technology of Franklin Resources, Inc. 2004
Charles M. Boesenberg 58 Retired President and Chief Executive Officer of NetIQ, Inc. 2006
Umang Gupta has served as one of our directors since September 1997 and as
our Chief Executive Officer and Chairman of the board of directors since
December 1997. Previously, he was a private investor and an advisor to
high-technology companies and the founder and chairman of the board and chief
executive officer of Gupta Corporation. He previously held various positions
with Oracle Corporation and IBM. Mr. Gupta holds a B.S. degree in chemical
engineering from the Indian Institute of Technology, Kanpur, India, and an
M.B.A. degree from Kent State University.
David Cowan has served as one of our directors since March 1998. Since
August 1996, Mr. Cowan has served as a General Partner of Bessemer Venture
Partners, a venture capital investment firm. Mr. Cowan is also a director of
several private companies. Mr. Cowan holds an A.B. degree in mathematics and
computer science and a M.B.A. degree from Harvard University.
Deborah Rieman has served as one of our directors since January 2002 and as
our lead independent director since April 2004. Since June 1999, Dr. Rieman has
managed a private investment fund. From July 1995 to June 1999, Dr. Rieman was
the President and Chief Executive Officer of Check Point Software Technologies
Inc., an Internet security software company. Dr. Rieman also serves as a
director of Corning Inc., Kintera, Inc., and Tumbleweed Communications Inc. Dr.
Rieman holds a Ph.D. degree in mathematics from Columbia University and a B.A.
degree in mathematics from Sarah Lawrence College.
Mohan Gyani has served as one of our directors since January 2002. Since
January 2006, Mr. Gyani has served as Vice Chairman of the Board of Roamware,
Inc. and has been a private investor since December 2004. He served as Chief
Executive Officer and Chairman of Roamware from May 2005 to December 2005. Mr.
Gyani was a senior advisor to the Chairman and Chief Executive Officer of AT&T
Wireless from January 2003 to December 2004. He served as President and Chief
Executive Officer of AT&T Wireless Mobility Services from February 2000 to
January 2003. From 1995 to 1999, Mr. Gyani served as Executive Vice President
and Chief Financial Officer of AirTouch Communications. Mr. Gyani is a member of
the boards of directors of SIRF Technology Holdings, Inc., Safeway Inc.,
Epiphany Inc., Union Bank of California and two private companies. Mr. Gyani
holds an M.B.A. degree and a B.A. degree in business administration from San
Francisco State University.
3
Raymond L. Ocampo Jr. has served as one of our directors since March 2004.
Since April 2004, Mr. Ocampo has served as President and Chief Executive Officer
of Samurai Surfer LLC, a consulting and investment company. In November 1996,
Mr. Ocampo retired from Oracle Corporation, where he had served in various
senior and executive positions since 1986, most recently as Senior Vice
President, General Counsel and Secretary since September 1990. Mr. Ocampo is a
member of the boards of directors of CytoGenix, Inc., Intraware, Inc., PMI
Group, Inc. and VitalStream Holdings, Inc. Mr. Ocampo holds a J.D. degree from
Boalt Hall School of Law at the University of California at Berkeley and an A.B.
degree in Political Science from the University of California, Los Angeles.
Jennifer Bolt has served as one of our directors since April 2004. Ms. Bolt
has served as Executive Vice President, Operations and Technology of Franklin
Resources, Inc., a financial services company since May 2003. Prior to that
time, she served in various other capacities for Franklin Resources, Inc. or its
subsidiaries. She also serves as chairman of Franklin Capital Corporation and
Franklin Templeton Bank & Trust, director of Fiduciary Trust Company
International and is a member of Franklin Resources, Inc.'s Executive Committee.
Ms. Bolt holds a B.A. degree in economics and physical education from the
University of California at Davis.
Charles M. Boesenberg has served as one of our directors since September
2006. From January 2002, Mr. Boesenberg served as Chairman, CEO and President of
NetIQ, Inc. before it was acquired by Attachmate Corporation in June 2006. From
March 2000 to December 2001, Mr. Boesenberg served as President of Post PC
Ventures, a management and investment group. Mr. Boesenberg was president and
CEO of Integrated Systems, Inc. (ISI), a provider of embedded systems software,
from 1998 until ISI merged with Wind River Systems in February of 2000. Mr.
Boesenberg joined ISI from Magellan, where he was CEO From 1992 to 1994. Mr.
Boesenberg currently serves on the boards of directors of Callidus Software
Inc., Interwoven, Inc. and Rackable Systems, Inc.He holds a B.S. in mechanical
engineering from the Rose Hullman Institute of Technology and an M.S. in
business administration from Boston University.
The Board Recommends a Vote FOR the Election of
Each of the Nominated Directors.
Corporate Governance and Board Matters
Corporate Governance
Keynote maintains a corporate governance page on its website which includes
information about its corporate governance initiatives, including Keynote's Code
of Business Conduct and Ethics, Code of Ethics for Chief Executive Officer and
Senior Financial Department Personnel, Corporate Governance Guidelines, and
charters for the committees of the board of directors. The corporate governance
page can be found at www.keynote.com, by clicking on "Company," on "Investor
Relations," and then on "Corporate Governance."
Keynote's policies and practices reflect corporate governance initiatives
that are compliant with the listing requirements of NASDAQ and the corporate
governance requirements of the Sarbanes-Oxley Act of 2002, including:
o A majority of the board members are independent of Keynote and its
management;
o All members of the key board committees--the audit committee, the
compensation committee, and the nominating and governance
committee--are independent;
o Keynote has appointed a lead independent director;
o The independent members of the board of directors meet regularly
without the presence of management. Dr. Rieman, the lead independent
director, presides at these executive sessions;
o Keynote has a clear code of business conduct that is annually affirmed
by its employees;
o The charters of the board committees clearly establish their
respective roles and responsibilities;
o Keynote's audit committee has procedures in place for the anonymous
submission of employee complaints on accounting, internal accounting
controls, or auditing matters;
4
o Keynote has adopted a code of ethics that applies to its chief
executive officer and all senior members of its finance department,
including our chief financial officer; and
o Keynote has adopted corporate governance guidelines and principles.
Director Independence
The board has determined that each of our directors is an independent
director as defined by the rules of the NASDAQ Stock Market, other than Mr.
Gupta, who serves as an employee of Keynote as our chief executive officer. In
addition, the board has determined that each member of the audit committee meets
the additional independence criteria of the SEC required for audit committee
membership.
Board Meetings
The board met six times during the fiscal year ended September 30, 2006.
During this period each director attended at least 75% of the total number of
meetings held by the board and by all committees of the board on which such
director served, during the period that such director served.
Board Committees
Our board of directors has a compensation committee, an audit committee and
a nominating and governance committee. Each committee operates pursuant to a
written charter; copies of these written charters are available on our website
at www.keynote.com.
Compensation Committee. The current members of our compensation committee
are Mr. Cowan, Dr. Rieman and Ms. Bolt. Ms. Bolt serves as the chair. The board
of directors has determined that each member of the compensation committee is an
independent director as defined by the rules of the NASDAQ Stock Market, a
non-employee director within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and an outside director within the meaning of
Section 162(m) of the Internal Revenue Code. The compensation committee
considers and approves, or reviews and makes recommendations to our board
concerning salaries and incentive compensation for our officers and employees.
The compensation committee also administers our 1999 Equity Incentive Plan and
1999 Employee Stock Purchase Plan. The compensation committee met three times
during the fiscal year ended September 30, 2006.
Audit Committee. The current members of our audit committee are Mr. Gyani,
Mr. Penney, Mr. Ocampo and Mr. Boesenberg. Mr. Gyani serves as the chair. The
board of directors has determined that each member of the audit committee is an
independent director as defined by the rules of the Securities and Exchange
Commission and the NASDAQ Stock Market, and that each of them is able to read
and understand fundamental financial statements. The board of directors has also
determined that each of Mr. Gyani and Mr. Boesenberg is an "audit committee
financial expert" within the meaning of the rules of the Securities and Exchange
Commission and is "financially sophisticated" within the meaning of the rules of
the NASDAQ Stock Market. Our audit committee reviews our financial statements,
monitors our accounting policies and practices, appoints and oversees the
performance of our independent auditors and reviews the results and scope of
audits and other services provided by our independent auditors. The audit
committee met nine times during the fiscal year ended September 30, 2006.
5
Nominating and Governance Committee. The current members of our nominating
and governance committee are Mr. Cowan, Mr. Ocampo and Mr. Penney. Mr. Penney
currently serves as the chair. The board of directors has determined that each
member of the nominating and governance committee is an independent director as
defined by the rules of the NASDAQ Stock Market. Our nominating and governance
committee identifies, considers and recommends candidates to serve as members of
the board, makes recommendations regarding the structure and composition of the
board and board committees and oversees the annual board evaluation process. The
nominating and governance committee is also responsible for overseeing,
reviewing and making periodic recommendations concerning Keynote's corporate
governance policies. The nominating and governance committee met once during the
fiscal year ended September 30, 2006.
Consideration of Director Nominees
Our nominating and governance committee generally identifies nominees for
our board based upon recommendations by our directors and management. Charles M.
Boesenberg was appointed to our Board of Directors in September 2006 upon the
recommendation of the nominating and governance committee. Mr. Boesenberg was
brought to the attention of the nominating and governance committee by Mr.
Gupta, our chief executive officer. The nominating and governance committee will
also consider recommendations properly submitted by our stockholders in
accordance with the procedure set forth in our bylaws. Stockholders can
recommend qualified candidates for our board by writing to our corporate
secretary at Keynote Systems, Inc., 777 Mariners Island Boulevard, San Mateo, CA
94404. Submissions that are received that meet the criteria outlined below will
be forwarded to the nominating and governance committee for review and
consideration. We request that any such recommendations be made at least three
months prior to the end of the fiscal year ending September 30, 2007 to ensure
adequate time for meaningful consideration by the nominating and governance
committee. The nominating and governance committee intends to review
periodically whether a more formal policy regarding stockholder nominations
should be adopted.
The goal of the nominating and governance committee is to ensure that our
board possesses a variety of perspectives and skills derived from high-quality
business and professional experience. The nominating and governance committee
seeks to achieve a balance of knowledge, experience and capability on our board.
To this end, the nominating and governance committee seeks nominees with the
highest professional and personal ethics and values, an understanding of our
business and industry, diversity of business experience and expertise, a high
level of education, broad-based business acumen, and the ability to think
strategically. Although the nominating and governance committee uses these and
other criteria to evaluate potential nominees, we have no stated minimum
criteria for nominees. The nominating and governance committee does not use
different standards to evaluates nominees depending on whether they are proposed
by our directors and management or by our stockholders. To date, we have not
paid any third parties to assist us in this process.
Stockholder Communication with Our Board
Our stockholders may communicate with our board or any of our individual
directors by writing to them c/o Keynote Systems, Inc., 777 Mariners Island
Boulevard, San Mateo, CA 94404. In addition, all communications that are
received by our chief executive officer or chief financial officer that are
directed to the attention of our board are forwarded to our board. The
nominating and governance committee intends to consider whether it is
appropriate to adopt a more formal process for our stockholders to communicate
with our board.
Director Compensation
Directors who are employees of Keynote do not receive compensation from
Keynote for the services they provide as directors. Members of the board of
directors who are not employees of Keynote receive cash and equity compensation
for their service as directors.
Cash Compensation. Non-employee directors are each paid an annual
retainer fee of $25,000; this payment is subject to a director attending at
least three of the four regularly scheduled board meetings during the fiscal
year and at least 75% of the total number of board meetings held during the
fiscal year. In addition, members of the compensation committee and the
nominating and governance committee are each paid an annual fee of $5,000, and
members of the audit committee are each paid an annual fee of $10,000. The cash
retainers earned for the 2006 fiscal year by each of our non-employee directors
are indicated in the table below. All directors are also reimbursed for their
reasonable expenses in attending board and board committee meetings.
Equity Compensation. Our non-employee directors receive both automatic
option grants and discretionary option awards under our 1999 Equity Incentive
Plan. On the date he or she becomes a director, a new non-employee director
receives an automatic option grant to purchase 60,000 shares of our common
stock. These options vest over four years, with one-quarter of the shares
subject to the option vesting on the earlier of one year following the
director's appointment to the board of directors or the first annual meeting of
our stockholders following the grant of the option; the remaining shares subject
to these automatic grants vest ratably on a monthly basis following the initial
vesting date. The vesting of the options will accelerate in full upon a change
6
of control of Keynote. The automatic option grants have an exercise price equal
to the fair market value of our common stock on the date of grant and a ten year
term. In addition to these automatic option grants, our non-employee directors
receive discretionary option awards annually for committee service and upon
re-election at the annual meeting of stockholders. In fiscal 2006, the board of
directors made discretionary option awards to non-employee directors for service
on our standing committees, and on March 23, 2006, the date of our 2006 Annual
Meeting of Stockholders, each non-employee director who was re-elected to the
board of directors received an option to purchase 15,000 shares of our common
stock. Options for 5,000 shares were awarded for service on one of our three
standing committees; in addition, the chair of the audit committee received an
option for an additional 5,000 shares and the chairs of our compensation
committee and our nominating and governance committee each received options for
an additional 2,000 shares. The options awarded for committee service vest
monthly during the fiscal year and were fully vested at September 30, 2006. The
options awarded at the 2006 annual meeting of stockholders do not commence
vesting until our 2009 annual meeting of stockholders and then vest ratably on a
monthly basis with each option to be fully vested at our 2010 annual meeting of
stockholders. The discretionary options also have an exercise price equal to the
fair market value of our common stock on the date of grant and a ten year term;
these options will vest in full upon a change of control of Keynote.
Discretionary options were awarded to, and cash stipends earned by, our
non-employee directors during fiscal 2006 in the following amounts:
2006 Non-Employee Director Compensation
Name Number of Options Cash
---- ----------------- ----
Jennifer Bolt 22,000 $30,000
David Cowan 25,000 $35,000
Mohan Gyani 25,000 $35,000
Raymond L. Ocampo Jr. 25,000 $40,000
Geoffrey Penney 27,000 $40,000
Deborah Rieman 20,000 $30,000
In addition, Charles M. Boesenberg, who became a director of Keynote in
September 2006, received an automatic option grant under our 1999 Equity
Incentive Plan to purchase 60,000 shares of our common stock, at an exercise
price of $10.62, which was the fair market value of our common stock on the date
of his election to our board. One-quarter of the shares subject to this option
will vest on the date of the 2007 Annual Meeting. The remaining shares subject
to this option grant will vest ratably on a monthly basis over the three years
following the date of the 2007 Annual Meeting.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee has at any time since our
formation been one of our officers or employees. None of our executive officers
currently serves or in the past has served as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving on our board or compensation committee.
Code of Ethics
We have adopted a code of ethics that applies to our chief executive
officer and senior financial personnel, including our chief financial officer,
controller and all other employees engaged in the finance organization of
Keynote. This code of ethics is posted on our website at http://www.keynote.com.
Directors' Attendance at Annual Stockholder Meetings
Keynote encourages its board members to attend its annual meeting of
stockholders, but does not require attendance. Four of our directors attended
our 2006 annual meeting of stockholders. Mr. Gupta, chairman of our board and
our chief executive officer, has attended all of our annual meetings.
7
PROPOSAL NO. 2
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
KPMG LLP ("KPMG") served as our independent registered public accounting
firm for the fiscal year ended September 30, 2006. On December 27, 2006, Keynote
dismissed KPMG and retained Deloitte & Touche LLP ("Deloitte") as its
independent registered public accounting firm for the fiscal year ending
September 30, 2007. The audit committee approved the dismissal of KPMG and the
appointment of Deloitte. The audit committee requests that stockholders ratify
its selection of Deloitte to serve as Keynote's independent registered public
accounting firm for fiscal 2007. Ratification by our stockholders of the
selection of Deloitte as our independent auditors is not required by our bylaws
or otherwise. Nevertheless, our board of directors is submitting the selection
of Deloitte to our stockholders as a matter of good corporate practice. If our
stockholders fail to ratify this selection, the audit committee will reconsider
whether or not to retain Deloitte. Even if the selection is ratified, the audit
committee may direct the appointment of a different independent audit firm at
any time during the year if it determines that such a change would be in the
best interests of Keynote and our stockholders. We do not expect that any
representatives of KPMG will be present at the Annual Meeting. We do expect that
one or more representatives of Deloitte will be present at the Annual Meeting,
will be able to make a statement if they wish to do so, and will be able to
respond to appropriate questions.
The audit reports of KPMG on the consolidated financial statements of
Keynote as of and for the years ended September 30, 2006 and 2005 did not
contain an adverse opinion or disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles. The audit
report of KPMG on management's assessment of the effectiveness of internal
control over financial reporting as of September 30, 2005 and 2006 did not
contain an adverse opinion or disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles, except that
KPMG LLP's report indicated that the Company did not maintain effective internal
control over financial reporting as of September 30, 2005 because of the effect
of a material weakness related to the Company's accounting for income taxes.
In connection with KPMG's audits for the years ended September 30, 2005 and
2006 and in the subsequent interim period through December 27, 2006, there have
been (1) no disagreements with KPMG on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference thereto in their reports on financial statements for such
years, or (2) reportable events, except that KPMG advised Keynote of the
material weakness referred to above.
Keynote has provided KPMG with a copy of the foregoing disclosures. KPMG's
letter, dated January 4, 2007, stating whether it agrees with the statements
made by Keynote in its Current Report on Form 8-K filed with the SEC on January
4, 2007, is filed as Exhibit 16.01 to such Current Report on Form 8-K.
Keynote has not consulted with Deloitte during its two most recent fiscal
years or during any subsequent interim period prior to its appointment as our
independent auditor regarding either (i) the application of accounting
principles to a specified transaction either completed or proposed; or the type
of audit opinion that might be rendered to Keynote's consolidated financial
statements, and neither a written report was provided to Keynote nor oral advice
was provided that Deloitte concluded was an important factor considered by
Keynote in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was either the subject of disagreement
(as defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions) or a reportable event (within the meaning of Item 304(a)(1)(v) of
Regulation S-K).
The Board Recommends a Vote FOR the Ratification of the Selection of
Deloitte & Touche LLP
Principal Accountant Fees and Services
During the fiscal years ended September 30, 2005 and 2006, KPMG served as
Keynote's independent auditor. The aggregate fees billed by KPMG for
professional services rendered during such periods were as follows:
o Audit Fees. The aggregate fees billed by KPMG for professional
services rendered for the audit of Keynote's annual consolidated
financial statements, and review of the consolidated financial
statements included in Keynote's quarterly reports on Form 10-Q and
services that are normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements were
$1,864,000, including auditing services related to acquisitions, for
the fiscal year ended September 30, 2006 and $758,700, including
auditing services related to acquisitions, for the fiscal year ended
September 30, 2005;
o Audit-Related Fees. There were no fees billed by KPMG for assurance
and related services reasonably related to the performance of the
audit or review of Keynote's consolidated financial statements that
are not reported above under "Audit Fees" for the fiscal years ended
September 30, 2006 and September 30, 2005;
8
o Tax Fees. The aggregate fees billed by KPMG for professional services
rendered for tax compliance and tax advice planning were $233,300 for
the fiscal year ended September 30, 2005. There were no such fees for
the fiscal year ended September 30, 2006. The services for the fees
disclosed under this category include tax consultation and the
preparation of tax returns; and
o All Other Fees. For the fiscal year ended September 30, 2006, there
were no fees billed by KPMG for consultants related to Sarbanes-Oxley
404 compliance. The fees under this category were $243,000 for the
fiscal year ended September 30, 2005.
The audit committee determined that the provision of these services was
compatible with maintaining KPMG's independence.
9
REPORT OF THE AUDIT COMMITTEE
The current members of the audit committee are Mr. Gyani, Mr. Penney, Mr.
Ocampo and Mr. Boesenberg, each of whom is an "independent" director as defined
by the rules of the Securities and Exchange Commission and of the NASDAQ Stock
Market and is "financially literate" as required by NASDAQ rules. The board of
directors has also determined that each of Mr. Gyani and Mr. Boesenberg is an
"audit committee financial expert" within the meaning of the rules of the
Securities and Exchange Commission. Stockholders should understand that these
designations related to our audit committee members' experience and
understanding with respect to certain accounting and auditing matters do not
impose upon any of them any duties, obligations or liabilities that are greater
than those generally imposed on a member of the audit committee or of the board.
Keynote's financial and senior management supervise the systems of internal
controls and the financial reporting process. KPMG LLP, Keynote's independent
auditor for fiscal 2006, was responsible for performing an independent audit of
Keynote's consolidated financial statements in accordance with generally
accepted auditing standards and issuing a report on these consolidated financial
statements. The audit committee's responsibility is to monitor and oversee these
processes and the independence of Keynote's independent auditors.
The audit committee has reviewed Keynote's audited consolidated financial
statements for the fiscal year ended September 30, 2006 and has met with the
management of Keynote and its independent auditors to discuss the audited
consolidated financial statements. Keynote's management has represented to the
audit committee that Keynote's audited consolidated financial statements were
prepared in accordance with generally accepted accounting principles.
The audit committee has discussed with Keynote's independent auditors the
matters required to be discussed by Statement on Auditing Standards No. 61,
Codification of Statements on Auditing Standards, AU Section 380. The audit
committee has received from Keynote's independent auditors the written
disclosures and letter required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, and has discussed with them
their independence. The audit committee has also considered whether the
provision of non-audit services by Keynote's independent auditors is compatible
with maintaining the independence of the independent auditors.
Based on the review and discussions noted above, the audit committee
recommended to Keynote's board of directors that the audited consolidated
financial statements be included in Keynote's annual report on Form 10-K for the
fiscal year ended September 30, 2006, and be filed with the Securities and
Exchange Commission.
The audit committee selected KPMG LLP to be Keynote's independent auditor
for fiscal 2006 and, pursuant to the requirements of law and the charter of the
audit committee, pre-approved all audit and non-audit services provided to us by
the independent auditors during fiscal 2006.
Audit Committee
Mohan Gyani
Geoffrey Penney
Raymond L. Ocampo Jr.
Charles M. Boesenberg
10
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information as to the beneficial ownership of
our common stock as of December 31, 2006 by:
o each stockholder known by us to be the beneficial owner of more than
5% of our common stock;
o each of our directors;
o our chief executive officer and four other most highly compensated
executive officers who were serving as executive officers as of
September 30, 2006; and
o all of our directors and executive officers as a group.
The percentage ownership is based on 17,155,585 shares of common stock
outstanding, excluding shares of treasury stock, as of December 31, 2006. Shares
of common stock that are subject to options currently exercisable or exercisable
within 60 days of December 31, 2006, are deemed outstanding for the purposes of
computing the percentage ownership of the person holding these options but are
not deemed outstanding for computing the percentage ownership of any other
person. Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated below, to our knowledge, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Unless otherwise noted, the address for each stockholder
listed below is c/o Keynote Systems, Inc., 777 Mariners Island Boulevard, San
Mateo, CA 94404.
Shares Beneficially
Owned
-----
Number of
Name of Beneficial Owner Shares Percent
- ------------------------ ------ -------
Umang Gupta (1) 3,432,576 20.01%
David J. Greene & Co (2) 1,497,792 8.73%
S Squared Technology (3) 1,416,500 8.26%
Royal Capital Management, LLC (4) 1,100,000 6.41%
Dimensional Fund Advisors, LP (5) 983,166 5.73%
Donald Aoki (6) 384,874 2.24%
Raymond L. Ocampo Jr.(7) 139,944 *
David Cowan(8) 133,753 *
Mohan Gyani(9) 100,000 *
Geoffrey Penney(10) 97,000 *
Deborah Rieman(11) 85,000 *
Jennifer Bolt(12) 69,500 *
Krishna Khadloya (13) 163,860 *
Andrew Hamer(14) 42,706 *
Jeffrey Kraatz (15) 14,990 *
Charles M. Boesenberg -- *
All 15 directors and executive officers as
a group (16) 4,872,748 28.39%
- --------------------
11
* Indicates beneficial ownership of less than 1%.
(1) Includes 1,891,666 shares subject to options exercisable within 60 days.
(2) Based solely on information provided by David J. Greene & Co. in its
Schedule 13G filed with the Securities and Exchange Commission on February
8, 2007. The address of this entity is 599 Lexington Avenue, New York, NY
10022.
(3) Based solely on information provided by S Squared Technology, LLC and Royal
S Squared Technology Partners, L.P in its Schedule 13G filed with the
Securities and Exchange Commission on February 14, 2007 and consists of
1,201,000 shares held by S Squared Technology LLC and 215,400 shares held
by S Squared Technology Partners, L.P. The address of these entities is 515
Madison Avenue, New York, NY 10022.
(4) Based solely on information provided by Royal Capital Management, LLC in
its Schedule 13F filed with the Securities and Exchange Commission on or
prior to December 31, 2006.
(5) Based solely on information provided by Dimensional Fund Advisors, LP in
its Schedule 13G, as amended, filed with the Securities and Exchange
Commission on February 9, 2007. Dimensional Fund Advisors LP (formerly,
Dimensional Fund Advisors Inc.) ("Dimensional"), an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940,
furnishes investment advice to four investment companies registered under
the Investment Company Act of 1940, and serves as investment manager to
certain other commingled group trusts and separate accounts. These
investment companies, trusts and accounts are the "Funds." In its role as
investment advisor or manager, Dimensional possesses investment and/or
voting power over the securities of Keynote that are owned by the Funds,
and may be deemed to be the beneficial owner of the shares held by the
Funds. However, all securities reported in this table are owned by the
Funds. Dimensional disclaims beneficial ownership of such securities. The
address of Dimensional is 1299 Ocean Avenue, Santa Monica, CA 90401.
(6) Includes 53,862 shares held by the Aoki family trust, 3,842 shares held by
Mr. Aoki as trustee for his minor children and 650 shares held by the Frank
and Jeanne Aoki Revocable Trust, over which Mr. Aoki exercises investment
power. Mr. Aoki disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest in the shares. Includes 322,289 shares
subject to options exercisable within 60 days.
(7) Includes 34,716 shares held by Raymond L. Ocampo Jr. and Sandra O. Ocampo,
Trustees of Ocampo Revocable Trust UTA May 30, 1996, and 82,500 shares
subject to options exercisable within 60 days.
(8) Includes 95,000 shares subject to options exercisable within 60 days.
(9) Represents 100,000 shares subject to options exercisable within 60 days.
(10) Represents 97,000 shares subject to options exercisable within 60 days,
(11) Represents 85,000 shares subject to options exercisable within 60 days.
(12) Represents 69,500 shares subject to options exercisable within 60 days.
(13) Represents 154,891 shares subject to options exercisable within 60 days.
(14) Represents 42,706 shares subject to options exercisable within 60 days.
(15) Represents 14,990 shares subject to options exercisable within 60 days.
(16) Includes 3,132,058 shares subject to options exercisable within 60 days.
12
EXECUTIVE COMPENSATION
The following table presents compensation information for the fiscal years
ending September 30, 2004, 2005 and 2006 paid or accrued to our chief executive
officer and our four other most highly compensated executive officers who were
serving as executive officers as of September 30, 2006.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------- ------
Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary Bonus Commission Options Compensation(1)
- --------------------------- ---- ------ ----- ---------- ------- ---------------
Umang Gupta 2006 $284,400 $90,000 $ -- 500,000 $ 2,612
Chief Executive Officer 2005 237,000 37,500 -- -- $ 2,000
2004 225,000 150,000 -- -- $ 2,000
Donald Aoki
Senior Vice President and General 2006 200,000 18,255 -- 25,000 2,415
Manager of Customer Experience 2005 206,298 16,973 -- 55,000 2,000
Management 2004 169,305 29,334 -- 25,000 2,000
Andrew Hamer(2) 2006 180,000 20,854 -- 100,000 1,343
Vice President of Finance and 2005 47,813 10,000 -- 50,000 --
Chief Financial Officer 2004 -- -- -- -- --
Jeffrey Kraatz (3) 2006 150,000 -- 83,333 65,000 1,007
Vice President of Sales, Americas 2005 12,500 -- -- 40,000 --
and Asia Pacific 2004 -- -- -- -- --
Krishna Khadloya (4) 2006 173,000 19,774 -- 50,000 2,359
Vice President of Engineering 2005 159,129 8,805 -- 55,000 2,000
2004 135,996 10,912 -- 15,000 2,000
- ---------------------
(1) The amounts disclosed in the All Other Compensation column consist of
Keynote's matching contributions under our 401(k) plan and 2006 long-term
disability insurance premium the company paid for the officers.
(2) Mr. Hamer joined Keynote in June 2005 and became an executive officer of
Keynote in January 2006.
(3) Mr. Kraatz joined Keynote in September 2005 and became an executive officer
of Keynote in April 2006.
(4) Mr. Khadloya became an executive officer of Keynote in April 2006.
13
Option Grants in Fiscal 2006
The following table presents the grants of stock options under our 1999
Equity Incentive Plan during the fiscal year ended September 30, 2006 to our
chief executive officer and our four other most highly compensated executive
officers who were serving as executive officers as of September 30, 2006.
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
----------------- ------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees In Price Expiration
Name Granted Fiscal 2006 Per Share Date 5% 10%
---- ------- ----------- --------- ---- ---- ----
Umang Gupta 500,000 23.70% $11.68 02/02/2016 $3,672,744 $9,307,456
Donald Aoki 25,000 1.18% 10.31 06/30/2016 162,098 410,787
Andrew Hamer 75,000 3.56% 12.85 12/31/2015 606,098 1,536,070
25,000 1.18% 10.31 06/30/2016 162,098 410,787
Jeffrey Kraatz 65,000 3.08% 11.00 04/03/2016 441,189 1,126,039
Krishna Khadloya 50,000 2.37% 11.00 04/03/2016 339,377 866,184
All options granted under our 1999 Equity Incentive Plan are either
incentive stock options or nonstatutory stock options. Options granted under our
1999 Equity Incentive Plan generally vest and become exercisable over a
four-year period as to 25% of the shares subject to the option one year from the
date of grant and as to 2.083% of the shares each succeeding month. Options
expire 10 years from the date of grant. Options are granted at an exercise price
equal to the fair market value of our common stock on the date of grant. In the
year ending September 30, 2006, we granted to our employees options to purchase
a total of 2,109,809 shares of our common stock.
Potential realizable values are computed by:
o multiplying the number of shares of common stock subject to a given
option by the market price per share of our common stock on the date
of grant;
o assuming that the aggregate option exercise price derived from that
calculation compounds at the annual 5% or 10% rates shown in the table
for the entire 10-year term of the option; and
o subtracting from that result the aggregate option exercise price.
The 5% and 10% assumed annual rates of stock price appreciation are
required by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices. The closing
price per share of our common stock as reported on the NASDAQ Global Market on
September 29, 2006, was $10.53.
14
Aggregated Option Exercises in Fiscal 2006 and Option Values at
September 30, 2006
The following table presents the number of shares of common stock subject
to vested and unvested stock options held as of September 30, 2006 by our chief
executive officer and our four other most highly compensated executive officers
who were serving as executive officers as of September 30, 2006. Also reported
is the value of in-the-money stock options as of September 30, 2006, which
represents the positive difference between the aggregate exercise price of the
outstanding options and the aggregate fair market value of the options based on
$10.53, the closing price per share of our common stock on September 29, 2006,
as reported on the NASDAQ Global Market. The value of the unexercised
in-the-money options has not been, and may never be, realized.
Number of
Securities Underlying Value of Unexercised
Number of Unexercised Options In-the-Money Options
Shares at September 30, 2006 at September 30, 2006
Acquired Value -------------------------- --------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Umang Gupta -- $ -- 1,787,499 312,501 $3,913,000 $ --
Donald Aoki -- -- 309,165 79,585 454,887 5,500
Andrew Hamer -- -- 15,625 134,375 -- 5,500
Jeffrey Kraatz -- -- 10,000 95,000 -- --
Krishna Khadloya -- -- 146,247 91,254 85,900 --
Equity Compensation Plans
As of September 30, 2006, we maintained our 1999 Equity Incentive Plan and
1999 Employee Stock Purchase Plan, both of which were approved by our
stockholders. The following table gives information about equity awards under
those plans as of September 30, 2006:
(a) (b) (c)
Number of Shares
Remaining
Available for Equity
Compensation Plans
Number of Shares to Weighted-Average (Excluding Shares
be Issued Upon Exercise Exercise Price of Reflected
Plan Category of Outstanding Options Outstanding Options in Column (a))
- ------------- ----------------------- ------------------- --------------------
Equity compensation plans approved by stockholders 6,760,670 $ 13.24 2,174,425(1)
Total 6,760,670 $ 13.24 2,174,425
- ---------------------
(1) Of these, 1,468,296 shares remained available for grant under the 1999
Equity Incentive Plan and 706,129 shares remained available for grant under
the 1999 Employee Stock Purchase Plan. All of the shares available for
grant under the 1999 Equity Incentive Plan may be issued as restricted
stock, although we do not currently intend to do so.
15
Employment Agreement with Chief Executive Officer
We entered into an employment agreement with Umang Gupta, our chief
executive officer, in December 1997 and amended this agreement in November 2001.
This agreement, as amended, establishes Mr. Gupta's annual base salary and
eligibility for benefits and bonuses. In connection with the November 2001
amendment of this agreement, Mr. Gupta was granted an option to purchase
1,300,000 shares of common stock at an exercise price of $7.52 per share, which
is now fully vested. The employment agreement continues until it is terminated
upon written notice by Mr. Gupta or us. We must pay Mr. Gupta his salary and
other benefits through the date of any termination of his employment. If his
employment is terminated by us without cause or through his constructive
termination due to a material reduction in his salary or benefits, a material
change in his responsibilities or a sale of us if he is not the chief executive
officer of the resulting combined company, we must also pay his salary for six
additional months after that date.
Under the employment agreement, as amended, all shares subject to Mr.
Gupta's options, including the option granted on February 3, 2006 and any
options granted in the future, would vest in full 90 days following a sale of us
if Mr. Gupta is not the chief executive officer of the resulting combined
company. If his employment is terminated by us without cause or through his
voluntary termination, and if he assists in the transition to a successor chief
executive officer, vesting of the shares subject to his options would continue
for an additional 12 months. If his employment is terminated by us without cause
or due to his death or through his constructive termination due to a material
reduction in his salary or benefits or a material change in his
responsibilities, the shares subject to his options would vest in an amount
equal to the number that would vest during the six months following this
termination. If his employment is terminated by us for cause or due to his
disability or through his voluntary termination where he does not assist in the
transition to a successor chief executive officer, the vesting of any shares
subject to his options would cease on the date of termination.
Other Change-of-Control Arrangements
The options that we grant to our executive officers other than our chief
executive officer, as described above, under our 1999 Equity Incentive Plan
generally provide for acceleration of the vesting of such options upon the
occurrence of specified events. If the executive officer is terminated without
cause following a sale of our company that occurs within 12 or less months after
the date of grant of the option, that option vests immediately with respect to
25% of the shares subject to that option. If the executive officer is terminated
without cause following a sale of our company that occurs more than 12 months
after the date of grant of the option, that option vests immediately with
respect to all of the shares subject to that option. For the purposes of this
provision, a sale of our company includes any sale of all or substantially all
of our assets, or any merger or consolidation of us with or into any other
corporation, corporations, or other entity in which more than 50% of our voting
power is transferred. For purposes of this provision, cause means (i) willfully
engaging in gross misconduct that is materially and demonstrably injurious to
us; (ii) willful and continued failure to substantially perform the executive
officer's duties (other than incapacity due to physical or mental illness),
provided that this failure continues after our board of directors has provided
the executive officer with a written demand for substantial performance, setting
forth in detail the specific respects in which it believes the executive officer
has willfully and not substantially performed his or her duties and a reasonable
opportunity (to be not less than 30 days) to cure the failure. A termination
without cause includes a termination of employment by the executive officer
within 30 days following any one of the following events: (x) a 10% or more
reduction in the executive officer's salary that is not part of a general salary
reduction plan applicable to all officers of the successor company; (y) a change
in the executive officer's position or status to a position that is not at the
level of vice president or above with the successor(or, with respect to Mr.
Hamer, at the level of Chief Financial Officer or above); or (z) relocating the
executive officer's principal place of business, in excess of fifty (50) miles
from the current location of such principal place of business. In addition, each
of these executive officers is entitled to receive severance compensation of
three months of base salary in lieu of notice upon a termination without cause.
The options that we grant to our non-employee directors under the automatic
option grant provision of our 1999 Equity Incentive Plan provide that any
unvested shares subject to these options will become immediately exercisable and
fully vested upon a transaction that results in a change of control.
16
REPORT OF THE COMPENSATION COMMITTEE
The compensation committee of the board of directors administers Keynote's
executive compensation program. The current members of the compensation
committee are Ms. Bolt, Mr. Cowan and Dr. Rieman. Each is a non-employee
director within the meaning of Section 16 of the Securities Exchange Act of
1934, as amended, and an outside director within the meaning of Section 162(m)
of the Internal Revenue Code. None of Ms. Bolt, Mr. Cowan or Dr. Rieman has any
interlocking relationships as defined by the Securities and Exchange Commission.
General Compensation Philosophy
The role of the compensation committee is to review and set, or in the case
of compensation for the chief executive officer to approve subject to
ratification by the board of directors, the salaries and other compensation of
Keynote's executive officers and other key employees, and to make grants of
stock options and to administer the stock option and other employee equity and
bonus plans. Keynote's compensation philosophy for executive officers is to
relate compensation to corporate performance and increases in stockholder value,
while providing a total compensation package that is competitive and enables
Keynote to attract, motivate, reward and retain key executive officers and
employees. Accordingly, each executive officer's compensation package may, in
one or more years, be comprised of the following three elements:
o base salary that is designed primarily to be competitive with base
salary levels in effect at high technology companies in the San
Francisco Bay Area that are of comparable size to Keynote and with
which Keynote competes for executive personnel;
o annual variable performance awards, such as bonuses, payable in cash
and/or stock-based incentive awards, tied to the achievement of goals
based on Keynote's performance either generally, or in the given area
under the individual's management, and using financial or other
appropriate measures for determining achievement that are established
by the compensation committee; and
o long-term stock-based incentive awards that strengthen the mutuality
of interests between Keynote's executive officers and Keynote's
stockholders.
In preparing the Stock Price Performance Graph for this proxy statement,
Keynote used The Street.com Internet Sector Index as its published line of
business index. The compensation practices of most of the companies in that
index were not reviewed by Keynote when the compensation committee reviewed the
compensation information described above because such companies were determined
not to be competitive with Keynote for executive talent. Instead, the
compensation committee reviewed the compensation practices of a number of high
technology companies in the San Francisco Bay Area for which adequate
information was available for analysis.
Executive Compensation
During each fiscal year, the compensation committee meets with the chief
executive officer to review the objectives of Keynote and its executives for
such year and to establish parameters for performance-based year-end bonus
awards. Bonus awards may be based on achievement of corporate objectives as well
as on achievement of personal MBOs as determined by the chief executive officer.
Personal MBOs are established by the chief executive officer at the beginning of
the fiscal year and usually involve a mix of quantitative and qualitative goals.
At the conclusion of each fiscal year, the compensation committee meets with the
chief executive officer to review the performance of Keynote and its executive
officers against the corporate performance objectives and parameters that were
established for eligibility for performance-based bonuses and to award year-end
cash bonuses accordingly or, in the case of the chief executive officer, to
approve a performance-based cash bonus subject to ratification by the board of
directors. The compensation committee considers the recommendations of the chief
executive officer for the compensation of the other executive officers, and
considers the compensation of the chief executive officer outside of his
presence.
Base Salary. Salaries for executive officers for the fiscal year ended
September 30, 2006 were generally determined on an individual basis by
evaluating each executive officer's scope of responsibility, performance, prior
experience and salary history, as well as the salaries for similar positions at
comparable companies. We believe our executive's salaries are generally in the
mid-range of those companies that figured in our analysis.
Annual Incentive Awards. In the past, Keynote has included
performance-based bonuses, payable in cash and/or stock-based incentive awards,
as part of each executive officer's annual compensation plan. Annual
performance-based bonuses are based on mutually agreed upon goals and
objectives. This practice is expected to continue and each executive officer's
annual performance will be measured by the achievement of established goals and
objectives using quantitative and qualitative measures.
17
Long-Term Incentive Awards. The compensation committee believes that
equity-based compensation in the form of stock options links the interests of
executive officers with the long-term interests of Keynote's stockholders and
encourages executive officers to remain employed with Keynote. Stock options
generally have value for executive officers only if the price of our stock
increases above the fair market value on the grant date and the officer remains
employed with Keynote for the period required for the shares to vest.
Keynote grants stock options in accordance with its 1999 Equity Incentive
Plan. In the fiscal year ended September 30, 2006, stock options were granted to
certain executive officers to aid in the retention of those executive officers
and to align their interests with those of Keynote's stockholders. Stock options
typically are granted to an executive officer when he or she first joins us and
in connection with a promotion. The compensation committee may, however, grant
additional stock options to executive officers for other reasons such as for
retention or to attempt to ensure that a given executive officer's actual and
potential stockholdings (meaning shares held plus vested and unvested options)
will align his or her interests with those of Keynote's other stockholders. The
number of shares subject to each stock option granted is within the discretion
of the compensation committee and is based on anticipated future contribution
and ability to impact Keynote's results, past performance or consistency within
the officer's peer group, and the number of unvested options. In the fiscal year
ended September 30, 2006, the compensation committee considered these factors
and other factors as well. Stock options generally vest and become exercisable
over a four-year period, remain exercisable for as long as nine years after
vesting (so long as the executive remains in our employ), and are granted at a
price that is equal to the fair market value of Keynote's common stock on the
date of grant.
Chief Executive Officer Compensation
The compensation committee reviewed Mr. Gupta's performance and
compensation package in October 2005 and January 2006. At that time it
determined, subject to review and ratification by the board of directors, to
adjust Mr. Gupta's annual base salary from $237,000 per year to $284,400 for
fiscal 2006 and increase his performance-based target bonus to $180,000. The
compensation committee believes that revenue growth is an important element in
the long-term success of Keynote and the target bonus of the chief executive
officer should be paid primarily in relation to the improvement of Keynote's
financial and operating performance. For fiscal 2006, the compensation committee
therefore determined that Mr. Gupta's target bonus should be based entirely on
Keynote achieving profit and revenue objectives contained in the operating plan
approved by the board of directors. At the conclusion of fiscal 2006, the
compensation committee determined that Mr. Gupta had earned 50% of his target
bonus, $90,000, based on Keynote's fiscal 2006 performance against those profit
and revenue objectives. The board, with Mr. Gupta not present, reviewed and
ratified this determination. With respect to long term incentive compensation,
Mr. Gupta was granted a stock option on February 3, 2006, to purchase 500,000
shares of our common stock.
At the beginning of fiscal 2007, the compensation committee again reviewed
Mr. Gupta's performance, overall compensation package, the level of his existing
shareholdings and the vesting of his options. Based on that review, the
compensation committee determined that it would increase Mr. Gupta's base salary
to $300,000 for fiscal 2007 and maintain his performance-based target bonus at
$180,000. These determinations were reviewed and ratified by the board of
directors with Mr. Gupta not present. Mr. Gupta's performance-based bonus for
fiscal 2007 depends upon Keynote's achievement of corporate revenue and
operating cash flow objectives.
Internal Revenue Code Section 162(m) Limitation
Section 162(m) of the Internal Revenue Code limits the tax deduction in any
taxable year of a publicly held company to one million dollars for compensation
paid to the chief executive officer and its four other most highly compensated
executive officers. Having considered the requirements of Section 162(m), the
compensation committee believes that grants made pursuant to Keynote's 1999
Equity Incentive Plan meet the requirements that such grants be "performance
based" and are, therefore, exempt from the limitations of Section 162(m) on
deductibility. Historically, and for fiscal year 2006 as well, the combined
salary and bonus of each executive officer covered by Section 162(m) has been
below one million dollars. The compensation committee's present intention is to
structure compensation arrangements to maximize Keynote's available deductions
consistent with Section 162(m) unless the occasion should arise that the
compensation committee reasonably believes that the best interests of Keynote
and its stockholders will be served by structuring compensation for a given
executive officer, or executive officers, differently.
Compensation Committee
Jennifer Bolt
David Cowan
Deborah Rieman
18
STOCK PRICE PERFORMANCE GRAPH
The following graph and table compare the cumulative total stockholder
return on our common stock, the NASDAQ Composite Index and The Street.com
Internet Sector Index. The graph and table assume that $100 was invested in our
common stock, the NASDAQ Composite Index and The Street.com Internet Sector
Index on September 30, 2002, and calculates the annual return through September
30, 2006. The stock price performance on the following graph and table is not
necessarily indicative of future stock price performance.
[SEE SUPPLEMENTAL PDF]
--------------------------------------------------------------------------------------------
NASDAQ
Keynote Systems, Inc. Composite Index The Street.com Internet Sector index
- ------------------------- ------------------------ -------------------------- ----------------------------------------
September 30, 2002 $100 $100 $100
- ------------------------- ------------------------ -------------------------- ----------------------------------------
September 30, 2003 171 152 198
- ------------------------- ------------------------ -------------------------- ----------------------------------------
September 30, 2004 216 162 246
- ------------------------- ------------------------ -------------------------- ----------------------------------------
September 30, 2005 198 184 301
- ------------------------- ------------------------ -------------------------- ----------------------------------------
September 30, 2006 161 193 327
- ----------------------------------------------------------------------------------------------------------------------
19
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than the compensation arrangements that are described above in
"Director Compensation", "Employment Agreement with Chief Executive Officer" and
"Chief Executive Officer Compensation", since October 1, 2005, there has not
been, nor is there currently proposed, any transaction or series of similar
transactions to which we were or will be a party in which the amount involved
exceeds $60,000 and in which any director, executive officer, holder of more
than 5% of our common stock or any member of their immediate family had or will
have a direct or indirect material interest.
STOCKHOLDER PROPOSALS FOR THE 2008 ANNUAL MEETING OF STOCKHOLDERS
Proposals of stockholders intended to be presented at our 2008 Annual
Meeting of Stockholders and included in our proxy statement and form of proxy
relating to the meeting, pursuant to Rule 14a-8 under the Exchange Act, must be
received by us at our principal executive offices no later than 120 calendar
days before the one-year anniversary of the date of this proxy statement, or
October 19, 2007. In accordance with our bylaws, written notice of any proposals
of stockholders intended to be presented at the meeting but not included in our
proxy materials must be received by us at our principal executive offices not
less than 60 days nor more than 90 days before the one-year anniversary of the
date of the annual meeting to which this proxy statement relates. For the 2008
Annual Meeting, such notice must be received between December 22, 2007 and
January 21, 2008. Such notice must include information on the nominees for
election and the business to be brought before the meeting. Such notice must
also contain information concerning the stockholder submitting the proposal,
including its name and address, the number and class of shares of our capital
stock beneficially owned by such stockholder and any material interest that such
stockholder has in the business proposed to be brought before the meeting. We
reserve the right to reject, rule out of order, or take other appropriate action
with respect to any proposal that does not comply with these and other
applicable requirements, including conditions established by the Securities and
Exchange Commission.
COMPLIANCE UNDER SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16 of the Securities Exchange Act of 1934, as amended, requires our
directors and officers, and persons who own more than 10% of our common stock to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission and the NASDAQ Global Market. Such persons
are required by Securities and Exchange Commission regulations to furnish us
with copies of all Section 16(a) forms that they file.
Based solely on our review of the copies of such forms furnished to us and
written representations from our executive officers and directors, we found that
the following filings were late:
Mr. Aoki filed a Form 4 late relating to a gift of 750 shares of
common stock to a non-profit organization.
Mr. Cowan failed to file a Form 4 related to a gift of 1,870 shares of
common stock to a non-profit organization.
OTHER BUSINESS
The board of directors does not presently intend to bring any other
business before the Annual Meeting, and, so far as is known to the board, no
matters are to be brought before the Annual Meeting except as specified in the
notice of the Annual Meeting. As to any business that may properly come before
the Annual Meeting, however, it is intended that proxies, in the form enclosed,
will be voted in respect thereof in accordance with the judgment of the persons
voting such proxies.
Whether or not you expect to attend the meeting, please complete, date,
sign and promptly return the accompanying proxy in the enclosed postage-paid
envelope so that your shares may be represented at the meeting.
20
KEYNOTE SYSTEMS, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
This proxy is solicited on behalf of the board of directors of
Keynote Systems, Inc.
The undersigned hereby appoints Umang Gupta and Andrew Hamer, or either of
them, as proxies, each with full power of substitution, and hereby authorizes
them to represent and to vote, as designated on the reverse side, all shares of
common stock, $0.001 par value per share, of Keynote Systems, Inc. held of
record by the undersigned on February 5, 2007, at the Annual Meeting of
Stockholders to be held at the executive offices of Keynote Systems, Inc. in San
Mateo, California, on Thursday, March 22, 2007 at 10:00 a.m., Pacific Time, and
at any adjournments or postponements thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE
SEVEN NOMINEES LISTED IN PROPOSAL NO. 1 AND FOR PROPOSAL NO. 2. PLEASE SIGN,
DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE
OR BLACK INK AS SHOWN HERE |X|
1. ELECTION OF DIRECTORS
|_| FOR ALL NOMINEES Nominees: |_| Umang Gupta
|_| David Cowan
|_| Deborah Rieman
|_| Mohan Gyani
|_| Raymond L. Ocampo Jr.
|_| Jennifer Bolt
|_| Charles M. Boesenberg
|_| WITHHOLD AUTHORITY FOR ALL NOMINEES
|_| FOR ALL EXCEPT (SEE INSTRUCTION BELOW)
Instruction: To withhold authority to vote for any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the circle next to each nominee for
which you wish to withhold authority to vote, as shown here: o
2. RATIFICATION OF THE SELECTION OF DELOITTE & TOUCHE LLP AS KEYNOTE SYSTEMS,
INC.'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2007.
|_| FOR |_| AGAINST |_| ABSTAIN
THIS PROXY WILL BE VOTED AS DIRECTED ABOVE. WHEN NO CHOICE IS INDICATED,
THIS PROXY WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES LISTED IN PROPOSAL NO.
1 AND FOR PROPOSAL NO. 2. In their discretion, the proxy holders are authorized
to vote upon such other business as may properly come before the meeting or any
adjournments or postponements thereof to the extent authorized by Rule 14a-4(c)
promulgated under the Securities Exchange Act of 1934, as amended.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, YOU ARE
URGED TO COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE ANNUAL MEETING.
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that changes
to the registered name(s) on the account may not be submitted via this method.
|_|
Signature of Stockholder: ___________ Date: __________ Signature of
Stockholder: ____________ Date: __________
Note: This proxy must be signed exactly as the name appears hereon. If
shares are held jointly, each holder should sign. If signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
the signer is a corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If the signer is a partnership, please sign
full partnership name by authorized person, giving full title as such.