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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number: 000-27241

 

 

KEYNOTE SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware   94-3226488

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

777 Mariners Island Blvd., San Mateo, CA   94404
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (650) 403-2400

 

 

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  x    NO  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

  

Shares outstanding as of April 29, 2005

Common Stock, $.001 par value   20,252,324

 

Table of Contents

KEYNOTE SYSTEMS, INC.

 

TABLE OF CONTENTS

 

          Page
PART I—FINANCIAL INFORMATION
Item 1.    Financial Statements    3
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    19
Item 3.    Qualitative and Quantitative Disclosures about Market Risk    34
Item 4.    Controls and Procedures    34
PART II—OTHER INFORMATION
Item 1.    Legal Proceedings    34
Item 2.    Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities    34
Item 3.    Defaults Upon Senior Securities    35
Item 4.    Submission of Matters for a Vote of Security Holders    35
Item 5.    Other Information    35
Item 6.    Exhibits    35
Signatures         36

 

2

Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

 

Index to Unaudited Condensed Consolidated Financial Statements

 

     Page
Condensed Consolidated Balance Sheets as of March 31, 2005 and September 30, 2004    4
Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2005 and 2004    5
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2005 and 2004    6
Notes to Condensed Consolidated Financial Statements    7

 

3

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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     March 31,
2005
     September 30,
2004
  
ASSETS                 

Current assets:

                 

Cash and cash equivalents

    $ 24,520     $ 9,932  

Short-term investments

      124,825       138,185  
    
 

Total cash, cash equivalents, and short-term investments

      149,345       148,117  

Accounts receivable, less allowance for doubtful accounts of $588 and $758 as of March 31, 2005 and September 30, 2004, respectively

      7,746       6,138  

Prepaid and other current assets

      1,894       2,329  
    
 

Total current assets

      158,985       156,584  

Property and equipment, net

      34,415       34,573  

Goodwill

      26,494       24,442  

Identifiable intangible assets, net

      4,854       6,131  
    
 

Total assets

    $ 224,748     $ 221,730  
    
 
LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                 

Accounts payable

    $ 1,624     $ 1,692  

Accrued expenses

      10,903       10,188  

Current portion of capital lease obligation

      70       80  

Deferred revenue

      7,397       7,741  
    
 

Total current liabilities

      19,994       19,701  

Long term portion of capital lease obligation

      25       35  
    
 

Total liabilities

      20,019       19,736  
    
 

Commitments and contingencies - see Note 11

                 

Stockholders’ equity:

                 

Common stock

      20       19  

Treasury stock

      (2,345 )     (29 )

Additional paid-in capital

      343,348       339,734  

Accumulated deficit

      (135,621 )     (137,409 )

Accumulated other comprehensive loss

      (673 )     (321 )
    
 

Total stockholders’ equity

      204,729       201,994  
    
 

Total liabilities and stockholders’ equity

    $ 224,748     $ 221,730  
    
 

 

See accompanying notes to the condensed consolidated financial statements

 

4

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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

     Three months ended
March 31,
     Six months ended
March 31,
  
     2005
     2004
     2005
     2004
  

Revenue:

                                 

Subscription services

    $ 9,962     $ 8,941     $ 20,414     $ 17,736  

Professional services

      3,203       878       6,339       1,806  
    
 
 
 

Total revenue

      13,165       9,819       26,753       19,542  
    
 
 
 

Costs and Expenses:

                                 

Costs of subscription services

      1,309       1,298       2,660       2,804  

Costs of professional services

      2,440       765       4,868       1,437  

Research and development

      2,074       1,634       4,036       3,258  

Sales and marketing

      2,987       2,278       6,535       4,987  

Operations

      1,440       1,360       3,005       2,746  

General and administrative

      1,841       1,221       3,634       2,385  

Excess occupancy costs

      114       254       248       520  

Amortization of identifiable intangible assets

      677       372       1,341       734  
    
 
 
 

Total expenses

      12,882       9,182       26,327       18,871  
    
 
 
 

Income from operations

      283       637       426       671  

Interest income and other, net

      783       662       1,486       1,325  
    
 
 
 

Income before provision for income taxes

      1,066       1,299       1,912       1,996  

Provision for income taxes

      (69 )     (130 )     (124 )     (160 )
    
 
 
 

Net income

    $ 997     $ 1,169     $ 1,788     $ 1,836  
    
 
 
 

Net income per share:

                                 

Basic

    $ 0.05     $ 0.06     $ 0.09     $ 0.10  

Diluted

    $ 0.05     $ 0.06     $ 0.08     $ 0.09  

Shares used in computing basic and diluted net income per share:

                                 

Basic

      20,096       19,341       19,979       19,187  

Diluted

      21,214       20,833       21,276       20,637  

 

See accompanying notes to the condensed consolidated financial statements

 

5

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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

    

Six months ended

March 31,

  
     2005
     2004
  

Cash flows from operating activities:

                 

Net income

    $ 1,788     $ 1,836  

Adjustments to reconcile net income to net cash provided by operating activities:

                 

Depreciation and amortization of property and equipment

      1,594       2,013  

Amortization of debt investment premium

      1,793       2,137  

Amortization of identifiable intangible assets

      1,341       734  

Changes in operating assets and liabilities, net of acquired assets and liabilities:

                 

Accounts receivable, net

      (1,487 )     (319 )

Prepaids and other current assets

      233       208  

Accounts payable and accrued expenses

      (299 )     347  

Deferred revenue

      (352 )     1,414  
    
 

Net cash provided by operating activities

      4,611       8,370  
    
 

Cash flows from investing activities:

                 

Purchases of property and equipment

      (1,436 )     (936 )

Purchase of businesses and assets, net

      (681 )     (560 )

Sale of short-term investments

      70,520       92,646  

Purchases of short-term investments

      (59,305 )     (106,211 )
    
 

Net cash provided by (used in) investing activities

      9,098       (15,061 )
    
 

Cash flows from financing activities:

                 

Payment of capital leases

      (20 )     —    

Proceeds from issuance of common stock and exercise of stock options

      3,620       5,055  

Repurchase of outstanding common stock

      (2,321 )     —    

Final payment associated with prior year tender offers

      (400 )     —    
    
 

Net cash provided by financing activities

      879       5,055  
    
 

Net increase in cash and cash equivalents

      14,588       (1,636 )

Cash and cash equivalents at beginning of the period

      9,932       19,642  
    
 

Cash and cash equivalents at end of the period

    $ 24,520     $ 18,006  
    
 

 

See accompanying notes to the condensed consolidated financial statements

 

6

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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(1) Basis of Presentation

 

The accompanying interim unaudited condensed consolidated balance sheets, and condensed consolidated statements of operations and cash flows reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position of Keynote Systems, Inc. and subsidiaries (the “Company”) as of March 31, 2005, and the results of operations and cash flows for the interim periods ended March 31, 2005 and 2004.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), and therefore, do not include all information and footnotes necessary for a complete presentation of the Company’s results of operations, financial position and cash flows. This report should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended September 30, 2004 included in the Company’s Report on Form 10-K as filed with the SEC.

 

The results of operations and cash flows for any interim period are not necessarily indicative of the Company’s results of operations and cash flows for any other future interim period or for a full fiscal year.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements relate to the allowance for doubtful accounts, billing allowance and income taxes. Actual results could differ from thos