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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the Fiscal Year Ended September 30, 2002
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from
to
Commission File Number 000-27241
KEYNOTE SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
| Delaware |
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94-3226488 |
| (State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer Identification
No.) |
| 777 Mariners Island Blvd, San Mateo, CA |
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94404 |
| (Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code:
(650) 403-2400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value Per Share, and the Associated Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
As of December 19, 2002, the aggregate market value of voting stock held by non-affiliates of the Registrant was $159,442,522.
The number of shares of the Registrant’s common stock outstanding as of December 19, 2002 was 22,999,772.
Documents incorporated by reference: portions of the Registrant’s proxy statements for its 2003 annual meeting of stockholders are incorporated by reference.
KEYNOTE SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL
YEAR ENDED SEPTEMBER 30, 2002
PART I
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Business |
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Properties |
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Legal Proceedings |
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Submission of Matters to a Vote of Security Holders |
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Executive Officers |
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| PART II |
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Market for the Registrant’s Common Stock and Related Stockholder Matters |
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Selected Consolidated Financial Data |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Qualitative and Quantitative Disclosures About Market Risks |
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Financial Statements and Supplementary Data |
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Changes In and Disagreements with Accountants on Accounting and Financial Disclosure |
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| PART III |
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Directors and Executive Officers of the Registrant |
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Executive Compensation |
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Security Ownership of Certain Beneficial Owners and Management |
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Certain Relationships and Related Transactions |
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| PART IV |
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Controls and Procedures |
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Exhibits, Financial Statement Schedules and Reports on Form 8-K |
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FORWARD-LOOKING STATEMENTS
Except for historical information, this annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our anticipated revenue, margins, costs and expenses. These forward-looking statements
include, among others, statements including the words “expect,” “anticipate,” “intend,” “believe” and similar language. Our actual results may differ significantly from those projected in the forward-looking
statements. Factors that might cause or contribute to these differences include, but are not limited to, those discussed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors
That May Impact Future Operating Results” and elsewhere in this report. You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the quarterly reports on
Form 10-Q and current reports on Form 8-K that we may file in fiscal 2003. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this annual report on Form 10-K. We undertake no
obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
The trademarks of Keynote Systems, Inc. in the United States and other countries include Keynote®, Perspective®, the Internet Performance
Authority®, MyKeynote™ and the names of our services and performance indices. This report may also contain trademarks and/or registered trademarks of other companies
and organizations.
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PART I
Overview
Keynote offers services that enable enterprises to benchmark, test and manage their electronic business, or e-business, applications and
systems, both inside and outside the firewall. Our services are designed to provide “total performance management” by allowing enterprise customers to improve the quality of their e-business from the end-user perspective through
cost-effective and easy-to-use web performance management and testing solutions. We provide outsourced services and appliances, which do not require complex and costly software implementations, configuration or maintenance by our customers. We
believe that enterprises who use our services can leverage their existing software and hardware, improve customer satisfaction and reduce capital expenditures.
Our web performance management services, which consists of our web performance benchmarking and application performance management services, allow customers to benchmark, assure and improve the
end-to-end performance of their e-business applications and systems. Our web performance testing services offer a range of services that test a variety of aspects of a web site from technical efficiency to end-user experience.
The foundation of our web performance management and testing services is an extensive network of strategically located
measurement computers, running our proprietary software, connected to the major Internet backbones in over 50 cities worldwide, plus a sophisticated operations center for collecting, analyzing and disseminating web site performance and availability
data. This infrastructure, together with our services, and in some cases, with Keynote-managed appliances placed within customers’ infrastructure, provide customers the ability to access their results in real-time over the Internet through any
standard web browser.
Our web performance management services measure and analyze performance data 24 hours a
day, 7 days a week from an end-user perspective. We had over 1,680 measurement computers deployed in over 50 cities and in over 120 locations on September 30, 2002. As of September 30, 2002, our measurement computers measured the performance of
approximately 8,150 universal resource locators, or URLs.
We offer our web performance benchmarking services,
some of our application performance management and testing services on a subscription basis. Subscription fees vary based on the number of URLs measured, the number of measurement locations, the number of devices monitored, the frequency of the
measurements, the additional features ordered, and the type of services. We offer consulting and support services, which are part of our application performance measurement and testing services, on a per engagement basis. Consulting and support
services revenue has represented to 10% or less of total revenue to date.
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Keynote Services
We currently offer the following services:
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Date of Introduction
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| Web Performance Benchmarking Services: |
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| Web Site Perspective—Business Edition |
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April 1997 |
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| Web Site Perspective—Consumer Edition |
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December 1999 |
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| Transaction Perspective |
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April 1999 |
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| Streaming Perspective |
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October 2000 |
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| Wireless Perspective |
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October 2001 |
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| Application Performance Management Services: |
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| Red Alert |
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August 2000 |
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| Enterprise Perspective: |
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| Private Agents |
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January 1999 |
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| Enterprise Adapters |
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July 2001 |
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| Traffic Perspective |
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July 2002 |
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| Keynote Diagnostic Services |
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November 2001 |
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| Web Performance Testing Services: |
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| LoadPro |
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July 2000 |
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| Test Perspective |
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July 2001 |
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| WebEffective |
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October 2002 |
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| WebIntegrity |
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October 2002 |
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| NetMechanic |
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July 2002 |
Web Performance Management Services
Our web performance management services consist of web performance benchmarking services and application performance management services.
Our web performance management services enable customers to measure the performance of their e-business sites for reporting and comparison purposes, assure their performance for the purposes of internal and external service level agreements, alert
when problems arise to expedite the time to repair, and diagnose performance problems to assign problems to the appropriate people within an organization to reduce downtime. Using these services, our customers can also compare their performance
against competing sites selected by the customer and also against our performance indices such as the Keynote Business 40 Index, the Keynote Consumer 40 Index, The Keynote Web Broker Trading Index or other vertical-industry indexes.
Our web performance management services include reporting, alarming and on-demand diagnostic tools and expertise. Performance
measurements are delivered to our data center, headquartered in San Mateo, California, and can be accessed by our customers in real-time via MyKeynote, our browser-based web interface, through a daily email report or through direct raw data feeds.
Customers can configure threshold-based performance alarms based on response times and error counts. When performance degradation occurs, notification alarms are sent to customers via email or pager systems or integrated directly into event
management systems such as CA Unicenter, HP Openview or IBM Tivoli.
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Web Performance Benchmarking Services
Our web benchmarking services measure and monitor e-business sites from the end-user perspective, using our worldwide infrastructure of
measurement computers. Our benchmarking services include our Perspective family of services. Our customers typically enter into an initial three to twelve month subscription agreement to purchase our benchmarking services and then may choose to
renew these services on an annual, semi-annual or month-to-month basis. These services enable customers to analyze full-page measurement data, from worldwide locations over high speed (T3) and low speed (56kb modems) connections, to pinpoint and
address the cause of a performance delay. A full-page download consists of a hypertext markup language, or HTML, page along with all associated images and complex page structures. The full-page download time can be further dissected into network
level components, such as domain name service lookup time or redirect time, as well as web-level information such as individual page level components such as GIFs, Javascript and flash content. This level of detail allows network engineers and web
site managers to precisely pinpoint the cause of any performance delay and quickly resolve it. As changes are made to web site content, connectivity or architecture, the resulting effect on performance can also be precisely measured and compared.
We also maintain automated diagnostic centers at all measurement locations which allow our customers to
investigate performance bottlenecks and delays using on-demand diagnostics. Customers can trace a URL request from any location, performing error analysis and pinpointing which Internet service provider, backbone provider or other source is
responsible for the performance delay.
Our web performance benchmarking services consist of the following:
Web Site Perspective. These services enable customers to measure web site
performance from multiple points on the Internet, giving insight into what the end-users are experiencing. We offer two editions of these services:
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Business Edition. This service enables customers to quickly identify and diagnose problems with web sites accessed through T-3 and
other high-speed business connections on major backbones. |
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Consumer Edition. This service enables customers to measure a user’s web site experience using the various Internet access
methods typically used in homes, such as dial-up connections, cable modems and digital subscriber lines. This service provides web site operators with information about how their web sites perform for lower-bandwidth users, the performance of secure
pages, SSLs, across phone lines and impact of graphical content on the performance of a web page. |
Transaction Perspective. This service measures the time it takes to execute an interactive transaction that involves the display of multiple web pages, such as placing an online stock trade order. This
service provides customers with accurate and timely information they need to compare and trend performance, monitor compliance with Service Level Agreements, or SLAs, and detect, diagnose and repair end-to-end performance problems in their business
infrastructure.
Streaming Perspective. This service monitors the quality of
streaming audio and video on the Internet from our worldwide infrastructure. Streaming Perspective supports Real Media from Real Networks and Windows Media from Microsoft, the two primary standards on the Internet.
Wireless Perspective. This service measures the performance of wireless data services from major cities
across major wireless networks, using actual wireless devices. We support over 25 devices, including Palm OS devices, RIM pagers, Short Message Service, or SMS, and Wireless Application Protocol, or WAP, phones.
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Application Performance Management Services
Used with our benchmarking services, our application performance management services provide additional monitoring and diagnostic
capabilities from within our customers’ data centers and from behind their corporate firewalls. Our application management performance management services consist of the following:
Red Alert. We offer monitoring and alarm services with our Red Alert service. Red Alert monitors a customer’s Internet connection, web
servers, and routers at least four times each hour throughout the day, and emails or pages the customer whenever the site becomes inaccessible, returns incorrect data, or is slow in responding to connection requests. Red Alert can monitor virtually
any Internet device, including secure web servers, mail servers and domain name servers.
Enterprise
Perspective. This family of services is designed to help customers correlate their performance inside and outside the firewall, understand how internal device failures affect end-user performance, and monitor end-to-end
performance data from a single console. This family consists of the following services:
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Enterprise Adapters. Our enterprise adapters are designed to allow our customers to integrate our end-user and Internet
performance data into their existing enterprise management systems, so that customers can effectively maintain the availability of their web-based applications on either side of the firewall. Our services are certified with IBM Tivoli, CA Unicenter,
HP Openview and any simple network management protocol, or SNMP, compliant system. |
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Private Agents. Private Agents are measurement computers placed inside or outside a customer’s firewall as directed by the
customer and measure the performance of internal networks, system architecture, and other local processes. When combined with our other Perspective services, Private Agents enable customers to correlate web performance inside the firewall with what
end users are experiencing outside of the firewall, which is designed to enable a faster and more precise trouble-shooting. |
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Traffic Perspective. This service combines information about real-time end-user traffic with data collected by our benchmarking
services to create a non-intrusive service to quantify, isolate, diagnose and resolve web performance issues. |
Keynote Diagnostic Service. This service offers three service levels that provide advanced diagnostic assistance and premier service capabilities across all of our benchmarking, application performance
management and testing services.
Professional Services. Our professional services
organization provides engagement-based and ongoing custom services to our customers. When certain data is not available from our standard measurement services, our professional services organization can create and deploy agents to gather the
specific performance data a customer wants. Some of the services our professional services organization can provide include:
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Custom Developed Reports. We can develop reports on a daily, weekly or monthly basis and deliver them via email and to a web
site. |
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Expert Analysis. We assist customers in fine-tuning web sites to achieve optimum service levels. We provide:
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Diagnostic analysis—to identify and resolve performance and availability problems. |
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Comparative analysis—to understand trends in performance. |
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Competitive analysis—to improve competitive performance. |
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Best Practices. We can assist in instituting best practices to help customers design web site infrastructure to optimize
e-business performance. We also offer SLA Design to create Service Level Agreements and return on investment analysis to clarify and identify the successful elements. |
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Web Performance Testing Services
To meet customers’ needs to develop, deploy, and maintain complex, dynamically generated web sites, we offer testing services for
load testing, content testing and user experience testing. Our testing services are designed to simulate realistic conditions for testing performance. All of our testing services are deployed in flexible ways to meet customer needs. Some services,
such as LoadPro and WebEffective, are offered as full-service engagements, and others, such as Test Perspective and WebIntegrity, are offered on a self-service basis. For full-service engagements of LoadPro or WebEffective, we provide a team of
professional service consultants who can provide a methodology and testing expertise for our customers.
Our web
performance testing services consist of the following:
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LoadPro. This load-testing service is designed for pre-deployment testing of web sites. We create loads that simulate the
complexity of the Internet and the behavior of end-users. These test conditions allow our customers to simulate how their web sites will perform before deployment. Our testing professionals complete an analysis of the load-testing results and
recommend solutions to our customers. |
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Test Perspective. This service is a cost-effective alternative to our LeadPro service and allows customers to run diagnostic
tests, and load tests on demand, and receive immediate feedback on modifications made on a web site or any other aspect of the network. Test Perspective is a service hosted by us that provides self-service control for day-to-day testing of web site
changes, periodic load tests, or diagnostic tests to pinpoint unexpected network or infrastructure performance problems. |
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WebEffective. This service enables customers to test, understand and improve the total quality of user experience of their web
sites. WebEffective provides diagnostic tools that are designed to deliver a comprehensive understanding of what real users do. Available as a fully outsourced service or as a hosted service, WebEffective determines whether a web site is effective
in meeting its business goals, and quickly identifies site effectiveness problems. |
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WebIntegrity. This is a web site content testing service developed to meet the testing needs of enterprises operating large web
sites. WebIntegrity adds an additional layer of testing functionality to Keynote’s testing solutions, and is offered to customers either as a service hosted by us or is a self-service appliance placed within a customer’s infrastructure. It
provides link integrity testing, HTML standards conformance testing, browser compatibility testing and spell check. Users of the tool can also configure their tests with the optional parameter to identify areas of their web site that may not conform
to Section 508 of the U.S. Rehabilitation Act of 1973, which requires that web sites and pages be accessible to individuals with disabilities. |
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NetMechanic. This is a self-service, web site content testing service for smaller web sites. NetMechanic provides content
checking, including link integrity testing, browser compatibility testing and spell check for sites that use standard HTML coding. Over 16,000 individual subscribers used NetMechanic, as of September 30, 2002, to test their web sites before or after
deploying new changes. |
Technology and Infrastructure
Our performance measurement infrastructure consists of three key components: measurement and data collection infrastructure, our operations and data center, and
reporting and analysis tools.
Measurement and Data Collection Infrastructure
Our measurement computers are Windows-based computers that run our proprietary software to replicate the experience of a user accessing
web sites through a standard web browser. We designed our measurement-computer software to perform thousands of download measurements concurrently without distorting or affecting the integrity of any single measurement. The measurement computers are
located at the facilities of Internet
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service providers that are selected to be statistically representative of Internet users. At some locations, we employ multiple Internet connections and install equipment racks that can
accommodate multiple measurement computers. The hosting arrangements for our measurement computers typically have terms ranging from three months to one year. We typically pay a small set-up fee and pay monthly fees to continue to locate the
measurement computers at these locations. We also pay additional monthly fees for communications lines.
These
measurement computers access a web site to download web pages and execute multi-page transactions, while taking measurements of every component in the process. The computers take measurements continually throughout the day, at intervals as short as
three minutes, depending on the customer’s requirements and subscription service level.
As of September 30,
2002, we had deployed more than 1,680 measurement computers in 61 domestic and 62 international locations, with some locations having multiple measurement computers in order to provide different types of measurement services or to accommodate
changes in measurement volume. We continually upgrade and balance our network capacity to meet the needs of our customers.
Operations and Database Center
Our operations center, located in San Mateo, California, is
designed to be scalable to support large numbers of measurement computers and to store, analyze and manage large amounts of data from these computers. Our measurement computers receive instructions from, and return collected data to, our operations
center. The data are stored in a large database that incorporates a proprietary transaction-processing system that we designed to be efficient in storing and delivering measurement data with fast response times. We also employ many proprietary,
high-performance application server computers that manage the collection of measurement data, the insertion of the data into our database and the dissemination of this data to our customers in a variety of forms and delivery methods.
Reporting and Analysis Tools
We offer the following tools for reporting and analysis of performance measurement data:
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Pager and Email Alerts. Our customers can be notified by email or pager when download times exceed a particular value in specific
cities or error counts indicate that a web site is unresponsive. |
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Daily Email Reports. Our customers can receive a daily email that summarizes the performance and availability of measured web
sites and compares them to industry averages for the same time period. |
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Web-Based Analysis. Using their web browsers and a password, our customers can access our online interface, MyKeynote, to
retrieve, view and analyze measurement data in multiple formats. |
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Data Feed. Our customers can retrieve measurement data through an application program interface, or API, or through bulk file
transfers using an industry-standard file-transfer protocol. This allows our customers to embed our measurement data in their own software to create custom data-analysis applications. |
Customers
We sell
the majority of our services to our customers on a subscription basis. For the year ended September 30, 2002, no one customer accounted for more than 10% of our total revenue. As of September 30, 2002, we provided services to approximately
2,350 companies including 62 of the Fortune 100 companies.
Our 10 largest customers, based on revenue for the
fiscal year ended September 30, 2002, were Akamai, American Express, Compaq Computer (acquired by Hewlett-Packard in May 2002), Cable & Wireless, Federal Reserve Information, Hewlett-Packard, IBM, Intermedia Communications/Digex, Microsoft and
Sprint.
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Sales, Marketing and Customer Support
Sales
We sell our services to
our largest customers through our field sales organization and to our small- to medium-sized customers through our telesales organization. Over the past year, we have shifted our sales model from primarily a telesales model to an enterprise team
sales model. In addition, we have focused on named accounts, which are some of our large enterprise customers, and several vertical markets such as government, online retail, and financial services. Our enterprise sales teams consist of direct sales
representatives and sales engineers who serve as technical resources, located in 10 metropolitan areas across the United States to allow increased face-to-face interaction with our largest customers. In addition to the enterprise sales teams across
the country, we have telesales personnel located in San Mateo, California and Plano, Texas. These telesales personnel focus primarily on our small- to medium-sized customers and also provide telephone and email sales support and customer service to
our enterprise customers. We believe that through the combined use of our enterprise sales teams and telesales personnel, we are able to efficiently focus our sales resources on interfacing with a large variety of customers, which is designed to
ensure customer satisfaction. We also believe this enables us to quickly offer new services to our existing customers. We also market and sell a few of our services through our self-service web site, where customers can sign up and try, purchase,
and use our services.
In addition, domestically, we distribute our services through web-hosting and Internet
service providers such as IBM Global Services and EDS, who manage e-business web sites for other companies. These companies sell or bundle our services to their customer base as a value-added service and as a management tool for their
customers’ web sites. We also sell to content distribution providers, such as Akamai and Cable & Wireless, who use our services as a pre-sales tool for their potential customers or in service level agreements with their existing customers.
We also market our services through several other technology companies, such as VeriSign, on a “lead referred” basis. Internationally, we use a direct sales approach in the United Kingdom and sell through reseller partners throughout the
rest of Europe, the Middle East, Africa and Asia.
Marketing
We maintain an active marketing program designed to demonstrate to Fortune 1000 companies the breadth and depth of our web performance
management and testing technology. We have established and are building on our brand as The Internet Performance Authority. We are actively expanding our services to provide our customers with “total performance management” which is
designed to encompass all aspects of user experience as it relates to e-business.
Our marketing program includes
advertising, Internet marketing, trade events, public relations, and our own Global Internet Performance Conferences. Our semiannual Global Internet Performance Conference events, held in New York and San Francisco, provide an opportunity for us and
our partners to brief industry chief information officers, chief technology officers, information technology executives, and network administrators on emerging solutions, new methodologies, and best practices to help customers optimize e-business
performance. We use these conferences to update customers on our latest performance services, and to deliver a broader understanding of the role our services can play in optimizing e-business. We also sponsor a series of regional Performance
Briefings to give executives in key markets insight into our “total performance management” strategy.
Another key element of our marketing strategy is our industry-standard benchmark indices that evaluate and rank the relative performance of various Web sites. Our indices include:
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Keynote Business 40 Internet Performance Index. 40 selected business web sites measured for performance and availability every 15
minutes using high speed connections. |
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Keynote Consumer 40 Internet Performance Index. 40 selected consumer web sites measured for performance and availability every 15
minutes using dial-up, cable modem and DSL connections. |
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Keynote Government 40 Internet Performance Index. 40 key federal government web sites. |
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Keynote Web Broker Trading Index. 15 leading online trading sites, based on performance and success rates of actual stock
buy-order transactions submitted on their web sites. |
Customer Support
We believe that a high level of customer support is important to our success. We believe our customers view our services as a
way to improve their ability to provide a high quality of service in their e-business. Therefore, we provide customer support by email and telephone. We develop and expand our customer support services based on feedback received from our existing
customers and formal customer satisfaction surveys conducted by an independent third party.
In November 2001, we
introduced our fee-based Keynote Diagnostic Services (initially known as Advanced Technical Services), which provides three different diagnostic level packages. Our diagnostic services offer a range of services from less complex technical support to
more demanding, in-depth support and diagnostic needs of enterprise customers on a 24 hours a day, 7 days a week basis. These services provide advanced diagnostic assistance and premier service capabilities across all of our benchmarking,
application performance management and testing services.
Research and Development
The Internet is characterized by rapid technological developments, frequent new application or service introductions and evolving industry
standards. The ongoing evolution of the Internet requires us to continually improve the functionality, features and reliability of our web performance management and web performance testing services, particularly in response to competing offerings.
Therefore, we believe that our future success will depend in large part on our ability to maintain and enhance our current services and to develop or acquire new services and technologies that achieve market acceptance. The success of service
introductions depends on several factors, including properly defining the scope of the new services and timely completion, introduction and market acceptance of our new services. If new Internet, networking or telecommunication technologies or
standards are widely adopted or if other technological changes occur, we may need to expend significant resources to adapt our services.
Our research and development expenses were $8.4 million for the fiscal year ended September 30, 2002, $7.3 million for the fiscal year ended September 30, 2001, and $5.5 million for the fiscal year ended September 30,
2000.
Competition
The market for web performance benchmarking, testing, and application performance management services is rapidly evolving. Our competitors vary in size and in the scope and breadth of the products and services that they
offer. We face competition from companies that offer software and services with features similar to our services such as Mercury Interactive, Gomez Advisors, Segue Software, WatchFire, and a variety of small companies that offer a combination of
testing, market research capabilities and data. While we believe these services are not as comprehensive as ours, customers could still choose to use these services or these companies could enhance their services to offer all of the features we
offer. As we expand the scope of our products and services, we expect to encounter many additional market-specific competitors.
We could also face competition from other companies, which currently do not offer services similar to our services, but offer software or services related to web performance benchmarking, testing, and application performance
management, such as WebCriteria, MIDS Matrix IQ Service, and INS INSoft Division, an unit of Lucent Technologies, and free services that measure web site availability, including Internet Weather Report, a unit of MIDS Matrix IQ Service. In addition,
companies that sell systems management software, such as
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BMC Software, CompuWare, CA-Unicenter, HP-Openview, Quest Software, NetIQ, Precise Software and IBM’s Tivoli Unit, with some of whom we have strategic relationships, could choose to
offer services similar to ours.
In the future, we intend to expand our service offerings and to continue to
measure the impact of new Internet technologies such as Internet telephony, wireless networking, and Web Services and, as a result, could face competition from other companies. Some of our existing and future competitors have or may have longer
operating histories, larger customer bases, greater brand recognition in similar businesses, and significantly greater financial, marketing, technical and other resources. In addition, some of our competitors may be able to devote greater resources
to marketing and promotional campaigns, to adopt more aggressive pricing policies, and to devote substantially more resources to technology and systems development.
Increased competition may result in price reductions, increased costs of providing our services and loss of market share, any of which could seriously harm our business. We
may not be able to compete successfully against our current and future competitors.
Intellectual Property
We are a technology company whose success depends on developing and protecting our intellectual property assets.
Intellectual Property Assets
Our principal intellectual property assets consist of our trademarks, service marks, our patents, our patent applications and the proprietary software we developed to provide our services. Trademarks
are important to our business because they represent our brand name and we use them in our marketing and promotional activities as well as in the delivery of our services. Our trademarks include our registered trademark Keynote, Perspective, and The
Internet Performance Authority. Our trademark on Keynote is pending registration outside of the United States. We have other trademarks that have not been registered with the U.S. Patent and Trademark Office.
We currently have two issued U.S. patent and no foreign patents. We have six pending U.S. patent applications and no pending foreign
patent applications related to our web performance management and web performance testing services. It is possible that no patents will be issued from our currently pending patent applications and that our issued patents or potential future patents
may be found invalid or unenforceable, or otherwise be successfully challenged. It is also possible that any patent issued to us may not provide us with any competitive advantages, that we may not develop future proprietary products or technologies
that are can be patented, and that the patents of others may seriously limit our ability to do business. In this regard, we have not performed any comprehensive analysis of patents of others that may limit our ability to do business.
Our proprietary software consists of the software we developed or acquired that is an integral part of our testing and
application performance management services as well as that which collects, stores, and delivers our measurement data to customers. We have also developed software that we use to provision and process customer orders and billings.
Protection of Our Intellectual Property
The intellectual property we use in our business is important to us. Despite our efforts, we may be unable to prevent others from infringing upon or misappropriating our
intellectual property, which could harm our business.
Legal standards relating to the validity, enforceability
and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving, and the future viability or value of any of our intellectual property rights is uncertain. Effective trademark, copyright and
trade secret protection may not be
12
available in every country in which our products are distributed or made available. Furthermore, our competitors may independently develop similar technology that substantially limits the value
of our intellectual property, or they may design around patents issued to us.
The use of our services by many of
our customers is governed by a web-based subscription agreement, but for some of our larger customers, additional terms and conditions may be added by means of a formal, written contract. Each time customers use our services, they “click”
on a web page to agree to terms and conditions that are posted on our web site, and our relationship with these customers is then governed by these terms and conditions and any written agreements that may exist. There is a possibility that a court,
arbiter or regulatory body could deem this type of agreement to be invalid or determine that the terms and conditions governing the agreement do not fully protect our intellectual property rights. If that were to occur, our business could be harmed.
Although we are not currently engaged in litigation, we may in the future need to initiate a lawsuit to enforce
our intellectual property rights and to protect our patents, trademarks and copyrights. Any litigation could result in substantial costs and diversion of resources and could seriously harm our business. To date, we have not been notified that our
technologies infringe the proprietary rights of anyone. We cannot assure you that others will not claim that we have infringed proprietary rights with respect to past, current or future technologies. We expect that we could become subject to
intellectual property infringement claims as the number of our competitors grows and our services overlap with competitive offerings. These claims, even if not meritorious, could be expensive and divert management’s attention from operating our
company. If we become liable for infringing the intellectual property rights of others, we would be required to pay a substantial damage award and to develop non-infringing technology, obtain a license or cease selling the services that contain the
infringing intellectual property. We may be unable to develop non-infringing technology or to obtain a license on commercially reasonable terms, if at all.
Licensed Technology
We license certain statistical,
graphical and database technologies from third parties. We cannot assure you that these technology licenses will not infringe the proprietary rights of others or will continue to be available to us on commercially reasonable terms, if at all. The
loss of this technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost. If we do not obtain or develop substitute technology, we could be unable to offer all of the features or
functionality that we desire to include in our services.
Employees
As of September 30, 2002, we had a total of 227 employees, of which 221 were based in the United States, and 6 were based internationally. None of our employees are
represented by a collective bargaining agreement nor have we experienced any work stoppage. We believe that our relationships with our employees are good. Our future success depends on our ability to attract, motivate and retain our key personnel.
We may be unable to retain our key employees, including our management team, and experienced engineers, or to attract, assimilate or retain other highly qualified employees. Although a number of other technology companies have also implemented
workforce reductions, there remains substantial competition for highly skilled employees with experience in the Internet industry, which requires a unique knowledge base. None of our key employees are bound by agreements that could prevent them from
terminating their employment at any time.
As of September 30,
2002, our facilities primarily consisted of our headquarters building in San Mateo, California, a 188,000 square foot building which we own. We currently occupy approximately 67,000 square feet of this facility which is our principal
sales/marketing, product development and administrative location and
13
contains our operations personnel and data center. We purchased the building from our lessor on September 30, 2002, before the expiration of the synthetic lease arrangement in 2005. We believe
that our facilities are adequate for our current and future needs. We also have a five-year lease, expiring in December 2005, for approximately 8,000 square feet of office space in Plano, Texas, for our Red Alert and NetMechanic operations. We also
have a lease, expiring in April 2003, for 1,615 square feet of office space in Seattle, Washington, for our wireless operations. See Note 12 of the Notes to Consolidated Financial Statements for additional information regarding our lease agreements.
Item 3. Legal Proceedings.
Beginning on
August 16, 2001, a number of class action lawsuits were filed in the United States District Court for the Southern District of New York against us, certain of our officers, and the underwriters of our initial public offering. These lawsuits are
essentially identical, and were brought on behalf of those who purchased our securities between September 24, 1999 and August 19, 2001. These complaints allege generally that the underwriters in certain initial public offerings, including ours,
allocated shares in those initial public offerings in unfair or unlawful ways, such as requiring the purchaser to agree to buy in the aftermarket at a higher price or to buy shares in other companies with higher than normal commissions. The
complaint also alleges that we had a duty to disclose the activities of the underwriters in the registration statement relating to our initial public offering. The complaints have been consolidated into a single action with cases brought against
over three hundred other issuers and their underwriters that make similar allegations regarding the initial public offerings of those issuers. The plaintiffs’ counsel and the individual named defendants’ counsel have reached an agreement
whereby the individual named defendants have been dismissed from the case, without any payments by us. The case against the underwriters and us continues, however, plaintiffs’ counsel and the underwriters have both been offered settlement
proposals. We are currently evaluating each proposal. We believe the claims are without merit and intend to defend the actions vigorously. However, these claims, even if not meritorious, could be expensive to defend and divert management’s
attention from operating our company.
We are subject to legal proceedings, claims, and litigation arising in the
ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s consolidated
financial position, results of operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 4A. Executive Officers.
The
following table presents information regarding our executive officers as of December 19, 2002:
| Name
|
|
Age
|
|
Position
|
| Umang Gupta |
|
53 |
|
Chairman of the Board and Chief Executive Officer |
| John Flavio |
|
55 |
|
Senior Vice President of Finance and Chief Financial Officer |
| Donald Aoki |
|
45 |
|
Vice President of Engineering |
| Lloyd Taylor |
|
44 |
|
Vice President of Operations |
| Richard Rudolph |
|
40 |
|
Vice President of Worldwide Sales |
| Arnold Waldstein |
|
53 |
|
Vice President of Marketing and Business Development |
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 Centura Software Corporation. He previously held various positions with Oracle Corporation and IBM.
14
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.
John Flavio has served as our chief financial officer since July 1999 and as our senior vice president of finance since October
2001. From July 1999 to October 2001, he also served as our vice president of finance. From July 1993 to July 1999, he served as chief financial officer, senior vice president, administration and finance, secretary and treasurer of Mosaix Inc., a
provider of call management systems and customer relationship management applications, which was acquired by Lucent Technologies in July 1999. Mr. Flavio holds a B.S. degree in finance from Santa Clara University and is a certified public
accountant.
Donald Aoki has served as our vice president of engineering since May 1997. From December 1994
to May 1997, he served as a business unit general manager of Aspect Telecommunications, a supplier of customer relational management solutions. Mr. Aoki holds a B.S. degree in computer science from the University of Southern California and a M.S.
degree in electrical engineering and computer science from the Massachusetts Institute of Technology.
Lloyd
Taylor has served as our vice president of operations since January 1999. From January 1997 to December 1998, he served as vice president of technical operations of the Web Site Management Group of Digex, Inc., a web site management services
company. Mr. Taylor holds an M.S.E.E. degree in electrical engineering from Johns Hopkins University and a B.S.E.E. degree in electrical engineering and a B.S.C.S. degree in computer science, each from Washington University.
Richard Rudolph has served as our vice president of worldwide sale since December 2001. From February 2001 to December 2001, he
served as senior vice president of global sales and business development for webHancer Corporation, a provider of web performance measurement and analysis. From April 1999 to January 2001, he served as vice president of sales at WebTrends, a web
site performance measurement and analysis company. From June 1997 to April 1999, he held sales positions at Extensis Corporation, a provider of products and services for electronic publishing. Mr. Rudolph holds a B.S. degree in economics from Oregon
State University.
Arnold Waldstein has served as our vice president of marketing and business development
since April 2002. From May 1999 to March 2002, Mr. Waldstein served as vice president of marketing and strategic alliances for Moai Technologies, an online strategic sourcing company. From March 1998 to May 1999, he founded and served as chief
executive officer of Waldstein Consulting, a boutique consulting firm. From February 1996 to February 1998, he served as vice president of marketing and business development at Electric Communities, an online services company. Mr. Waldstein holds a
B.A. degree in English from Ohio University.
15
PART II
Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters.
Price Range of Common Stock
Our common stock has traded on the Nasdaq National
Market under the symbol “KEYN” since our initial public offering on September 24, 1999. Prior to this time, there was no public market for our common stock. On December 19, 2002, we had 22,999,772 shares of our common stock outstanding
held by 136 stockholders of record. Because many brokers and other institutions hold our stock on behalf of stockholders, we believe the total number of beneficial holders is greater than that represented by these record holders. The following table
presents the high and low sales price per share of our common stock for the period indicated, as reported on the Nasdaq National Market:
| |
|
High
|
|
Low
|
| Fiscal Year ended September 30, 2002 |
|
|
|
|
|
|
| Fourth Quarter |
|
$ |
7.65 |
|
$ |
6.07 |
| Third Quarter |
|
|
9.75 |
|
|
7.15 |
| Second Quarter |
|
|
10.50 |
|
|
8.40 |
| First Quarter |
|
|
9.40 |
|
|
6.95 |
| |
| Fiscal Year ended September 30, 2001 |
|
|
|
|
|
|
| Fourth Quarter |
|
$ |
10.95 |
|
$ |
6.50 |
| Third Quarter |
|
|
14.10 |
|
|
8.75 |
| Second Quarter |
|
|
18.25 |
|
|
9.88 |
| First Quarter |
|
|
29.31 |
|
|
12.50 |
The market price of our common stock has fluctuated in the past and
is likely to fluctuate in the future. In addition, the market prices of securities of other technology companies, particularly Internet-related companies, have been highly volatile. This volatility is often unrelated to the operating performance of
these companies. Factors that may have a significant effect on the market price of our common stock include:
| |
• |
|
actual or anticipated variations in our quarterly operating results; |
| |
• |
|
announcements of new Internet performance measurement service offerings by us or our competitors; |
| |
• |
|
announcements of technological innovations; |
| |
• |
|
competitive developments; |
| |
• |
|
changes in financial estimates by securities analysts; |
| |
• |
|
failure in one or more future quarters of our operating results to meet the expectations of securities analysts or investors; |
| |
• |
|
changes in market valuations of Internet-related companies; |
| |
• |
|
additions or departures of key personnel, notably our management team and experienced engineers; |
| |
• |
|
conditions and trends in the Internet industries; and |
| |
• |
|
general economic conditions. |
Dividend Policy
We have never declared or paid any cash dividends on our common stock or
other securities. In addition, the synthetic lease arrangement with respect to our headquarters building, which was terminated in September 30, 2002, prevented us from paying cash dividends. We do not anticipate paying cash dividends in the
foreseeable future.
16
Item 6. Selected Consolidated Financial Data.
The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and related Notes appearing in Item 8, and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” appearing in Item 7 in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended September 30, 2002, 2001, and 2000, and the consolidated balance sheet data as of
September 30, 2002 and 2001, are derived from and are qualified in their entirety by our Consolidated Financial Statements that have been audi