<PAGE>
EXHIBIT 99.1
Report of Independent Accountants
To the Shareholders and Board of Directors of
WireSpeed Communications Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of WireSpeed
Communications Corporation at December 31, 1999, and the results of its
operations and its cash flows of the year then ended, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
On June 14, 2000, the Company entered into an agreement to be acquired by Red
Hat, Inc.
/s/ PricewaterhouseCoopers LLP
------------------------------
Raleigh, North Carolina
June 26, 2000
<PAGE>
WireSpeed Communications Corporation
Balance Sheets
<TABLE>
<CAPTION>
Assets
December 31, March 31,
1999 2000
-------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,025 $ 2,245
Trade accounts receivable, net of allowances for doubtful
accounts of $41,811 at December 31, 1999 and
March 31, 2000 52,877 319,906
Related party accounts receivable, net allowance for doubtful
accounts of $23,877 at December 31, 1999 and
March 31, 2000 110,701 48,328
Unbilled accounts receivable 59,922 39,050
------------ ------------
Total current assets 245,525 409,529
Property and equipment, net 200,536 202,744
------------ ------------
Total assets $ 446,061 $ 612,273
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 50,765 $ 134,267
Accrued vacation 54,561 54,635
Accrued salaries 122,098 129,059
Other accrued liabilities 3,019 6,001
Short-term borrowings 385,407 419,242
------------ ------------
Total current liabilities 615,850 743,204
Notes payable 9,807 9,200
Stockholders' deficit:
Common stock, $0.01 par value, 2,000,000 shares authorized; 1,338,000
and 1,481,258 shares issued at December 31, 1999 and March 31, 2000,
respectively; 1,038,000 shares outstanding at December 31, 1999 and
March 31, 2000 13,380 14,813
Additional paid-in capital 10,907,762 15,350,192
Treasury stock, at cost, 300,000 and 443,258 shares, at
December 31, 1999 and March 31, 2000, respectively (20,343) (21,243)
Accumulated deficit (11,080,395) (15,483,893)
------------ ------------
Total stockholders' deficit (179,596) (140,131)
------------ ------------
Total liabilities and stockholders' deficit $ 446,061 $ 612,273
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
WireSpeed Communications Corporation
Statements of Operations
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
------------- -------------
(unaudited)
<S> <C> <C>
Revenue $ 1,621,049 $ 672,368
Cost of revenue 484,856 242,833
------------- -----------
Gross profit 1,136,193 429,535
------------- -----------
Operating expenses:
General and administrative (excludes $2,511,070 and $1,226,506,
respectively, of stock-based compensation) 979,771 310,020
Sales and marketing (excludes $4,185,109 and $3,217,357,
respectively, of stock-based compensation) 284,940 64,871
Stock-based compensation 6,696,179 4,443,863
------------- -----------
Total operating expenses 7,960,890 4,818,754
------------- -----------
Loss from operations (6,824,697) (4,389,219)
Other income (expenses), net (22,007) (14,279)
------------- -----------
Net loss $ (6,846,704) $(4,403,498)
============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
WireSpeed Communications Corporation
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Additional Total
Common Stock Treasury Stock Paid-in Accumulated Stockholder
Shares Amount Shares Amount Capital Deficit Deficit
------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 900,000 $ 9,000 300,000 $ (20,343) $ 543,000 $ (560,728) $ (29,071)
Issuance of shares to officers 282,300 2,823 -- -- 6,693,356 -- 6,696,179
Stock dividend 155,700 1,557 -- -- 3,671,406 (3,672,963) --
Net loss -- -- -- -- -- (6,846,704) (6,846,704)
--------- -------- -------- --------- ------------ ------------- ------------
Balance at December 31, 1999 1,338,000 13,380 300,000 (20,343) 10,907,762 (11,080,395) (179,596)
Issuance of shares to officers
(unaudited) 143,258 1,433 -- -- 4,442,430 -- 4,443,863
Net loss (unaudited) -- -- -- -- -- (4,403,498) (4,403,498)
Purchase of treasury stock (unaudited) -- -- 143,258 (900) -- -- (900)
--------- -------- -------- --------- ------------ ------------- ------------
Balance at March 31, 2000 (unaudited) 1,481,258 $ 14,813 443,258 $ (21,243) $ 15,350,192 $ (15,483,893) $ (140,131)
--------- -------- -------- --------- ------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
WireSpeed Communications Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
------------- ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,846,704) $ (4,403,498)
Adjustments to reconcile net loss to net
cash used in operating activities:
Stock-based compensation expense 6,696,179 4,443,863
Depreciation 38,098 27,336
Loss on sale of property and equipment 36,548 -
Provision for doubtful accounts 65,688 -
Changes in operating assets and liabilities:
Accounts receivable 31,668 (267,029)
Unbilled accounts receivable 26,750 20,872
Related party accounts receivable (169,945) 62,373
Notes payable (1,944) (607)
Accounts payable 15,633 83,502
Accrued expenses 30,571 10,017
------------- ------------
Net cash used in operating activities (77,458) (23,171)
------------- ------------
Cash flows from investing activities:
Purchase of property and equipment (112,014) (29,544)
Proceeds from sale of property and equipment 22,522 -
------------- ------------
Net cash used in investing activities (89,492) (29,544)
------------- ------------
Cash flows from financing activities:
Repurchase of common stock - (900)
Proceeds from short-term borrowings 604,553 33,835
Payments on short-term borrowings (416,496) -
------------- ------------
Net cash provided by financing activities 188,057 32,935
------------- ------------
Net increase (decrease) in cash and cash equivalents 21,107 (19,780)
Cash and cash equivalents, beginning of period 918 22,025
------------- ------------
Cash and cash equivalents, end of period $ 22,025 $ 2,245
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
WireSpeed Communications Corporation
Notes to Financial Statements
1. Nature of the Business
WireSpeed Communications Corporation (previously known as Rheyn
Technologies) (the "Company") was incorporated as an Alabama corporation on
October 26, 1995. The Company provides customized embedded network
software solutions.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original or
remaining maturity of three months or less at the date of purchase to be
cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash equivalents, accounts receivable, accounts payable, accrued expenses,
short-term borrowings and notes payable to employees approximate their fair
values due to their short maturities. Based on borrowing rates currently
available to the Company for loans with similar terms, the carrying value
of short-term borrowings and notes payable approximates fair value.
6
<PAGE>
Concentration of Credit Risk and Significant Customers
Financial instruments, which potentially expose the Company to concentrations of
credit risk, consist primarily of trade and related party accounts receivable.
To minimize risk, ongoing credit evaluations of customers' financial condition
are performed, although collateral generally is not required. Revenues and trade
receivables from significant customers as a percentage of total reported
accounts receivable and revenue as of and during the year ended December 31,
1999 and the three month period ended March 31, 2000 were as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
----------- ---------
<S> <C> <C>
Revenues:
Customer A 17% -
Customer E 14% -
Receivables:
Customer A 23% 12%
Customer B 16% -
Customer C 15% -
Customer D 11% -
Customer F - 20%
Customer G - 23%
Customer H - 13%
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated
useful lives, which range from five to seven years, using the straight-line
method. Upon retirement or sale, the cost of assets disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is credited or charged to income. Repairs and maintenance costs are
expensed as incurred.
Revenue Recognition
The Company's revenues are derived from consulting agreements in which the
Company bills customers for actual time and expenses incurred by the Company.
The Company recognizes revenues related to these agreements as the services are
provided to the customer.
7
<PAGE>
Stock-Based Compensation
The Company accounts for stock-based compensation based on the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB No. 25), which states that no compensation expense is
recorded for stock options or other stock-based awards to employees that
are granted with an exercise price equal to or above the estimated fair
value per share of the Company's common stock on the grant date. In the
event that stock options are granted with an exercise price below the
estimated fair value of the Company's common stock at the grant date, the
difference between the fair value of the Company's common stock and the
exercise price of the stock option is recorded as deferred compensation.
Deferred compensation is amortized to compensation expense over the vesting
period of the stock option. The Company recognized $6,696,179 and
$4,443,863 in non-cash stock based compensation expense related to
amortization of deferred compensation during the year ended December 31,
1999 and the three-month period ended March 31, 2000, respectively. The
Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), which requires compensation expense to be disclosed based on
the fair value of the options granted at the date of the grant.
Cash Flows
The Company made cash payments for interest and taxes of $34,124 and $0,
respectively, during the year ended December 31, 1999. Also, during the
year ended December 31, 1999, the Company also received property and
equipment with a cost of $66,735 in exchange for settlement of all accounts
receivable from a related party, which is not reflected in the accompanying
statement of cash flows.
Advertising Costs
Advertising costs are charged to operating expense as incurred.
Advertising costs were approximately $10,706 for the year ended December
31, 1999.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," requires a full set of
general purpose financial statements to be expanded to include the
reporting of "comprehensive income." Comprehensive income is comprised of
two components, net income and other comprehensive income. For the year
ended December 31, 1999 the Company had no items of other comprehensive
income.
Income Taxes
The Company was incorporated as a Sub-Chapter S corporation under the
Internal Revenue Code. All income of the Company accrues directly to the
stockholders and all income taxes are paid by the stockholders at the
individual level of taxation; therefore, the Company pays no federal or
state income taxes.
8
<PAGE>
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 provides
specific guidance, among other things, as to the recognition of revenue
related to up-front non-refundable fees and services received in connection
with a contractual arrangement. The provisions of SAB 101 were adopted for
the year ended December 31, 1999. The adoption of SAB 101 did not have a
material impact on the Company's financial condition or results of
operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives), and for
hedging activities. SFAS 133, as amended by SFAS 137, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application encouraged. The Company does not currently intend, nor
does it intend to in the future, to use derivative instruments and
therefore does not expect that the adoption of SFAS 133 will have any
impact on its financial position or results of operations.
3. Property and Equipment
<TABLE>
<CAPTION>
Estimated
useful life December 31,
(years) 1999
<S> <C> <C>
Computer hardware 5 $ 234,738
Furniture and fixtures 7 50,611
Computer software 5 12,094
----------
297,443
Less - accumulated depreciation (96,907)
----------
$ 200,536
==========
</TABLE>
4. Lines of Credit
At December 31, 1999, the Company had entered into two line of credit
agreements with a bank. One of these lines of credit provided for a
$300,000 line of credit for working capital purposes. Interest on this line
of credit is based on the prime interest rate. At December 31, 1999, the
prime interest rate was 8.5%. The Company also has a $200,000 line of
credit with an interest rate of 8.75% for the acquisition of property and
equipment. At December 31, 1999, the Company had drawn down $199,096 and
$186,312 on the working capital and property and equipment lines of credit,
respectively. These lines of credit are collaterialized by accounts
receivable and property and equipment of the Company.
9
<PAGE>
5. Common Stock and Stock-Based Compensation
Each share of common stock is entitled to one vote. The holders of common
stock are also entitled to receive cash dividends when declared by the
Board of Directors. No such dividends have been declared as of December
31, 1999 and March 31, 2000. At December 31, 1999 and March 31, 2000, the
Company had 1,038,000 shares of common stock outstanding.
In January 1999, the Company granted 282,300 shares of its common stock to
two employees of Company in exchange for their services. The Company
recorded charges totaling $6,696,179 related to these transactions based on
the estimated fair value of the Company's common stock at the date of these
transactions.
In March 1999, the Company also issued a stock dividend of 155,700 shares
of common stock to existing shareholders of the Company. The Company
recorded a charge of $3,672,963 against accumulated deficit and a
corresponding increase to common stock and additional paid in capital
related to this dividend based on the estimated fair value of the Company's
common stock at the date of this transaction.
6. Related Parties
The Company is part of an overhead sharing agreement with a group of
companies whereby certain overhead expenses including health insurance,
401(k) plan, rent as well as certain payroll costs for certain employees is
shared among this group of companies. The Company bills these companies
for any general and administrative expenses incurred by the Company on
behalf of these other companies and records such billing as a reduction of
general and administrative expense. The Company also performs trade
services for these companies. At and for the year ended December 31, 1999,
the Company generated $392,781 in revenue and had $19,306 of trade accounts
receivable from related parties. Also, as of December 31, 1999, the
Company had $134,578 of other accounts receivable from these companies
related to general and administrative expenses incurred by the Company that
have been billed to these related parties and $3,526 of accounts payable to
these companies. During the year ended December 31, 1999, the Company
wrote off $15,512 of accounts receivable from related parties. At December
31, 1999, the Company has also recorded a reserve of $23,877 against the
accounts receivable from related parties balance to reflect the amount the
Company believes it will be unable to collect.
The Company also rents its office from a related party under a lease
agreement scheduled to expire in June 2000. Monthly rent under this
agreement is $8,652. During the year ended December 31, 1999, the Company
paid $74,785 in rent to this related party.
Certain employees of a related company performed services for the Company
which were billed based on the actual amount of time spent by these
individuals performing services for the Company. These charges were
expensed based on the nature of the services provided. During the year
ended December 31, 1999, the Company recorded $78,223 and $28,491 of sales
and marketing, and general and administrative expenses, respectively,
related to these billings.
10
<PAGE>
7. 401(k) Savings Plan
At December 31, 1999, the Company had established a defined contribution
savings plan under Section 401(k) of the Internal Revenue Code. This plan
covers substantially all employees who meet minimum age and service
requirements and allows participants to defer a portion of their annual
compensation on a pre-tax basis. Company contributions to the plan may be
made at the discretion of the Board of Directors. To date there were no
contributions made to the plan by the Company.
8. Subsequent Event (unaudited)
On January 3, 2000, the Company repurchased 143,258 shares of its common
stock from six shareholders in exchange for $900. The repurchase of these
shares is reflected at cost in the accompanying financial statements.
In addition, in January 2000, the Company granted 39,458 shares of common
stock to two existing shareholders and 103,800 shares of common stock to an
employee of the Company. The Company recorded a one-time charge of
$4,443,863 related to these based on the estimated fair value of the
Company's common stock at that date, as determined by the Board of
Directors.
On March 21, 2000 and April 26, 2000, the Company declared 100-for-1 and 6-
for-1 stock splits. These stock splits are reflected in the accompanying
financial statements.
On May 1, 2000, the Company's Board of Directors approved the WireSpeed
Communications Corporation Stock Option Plan (the "Stock Option Plan").
Under the Stock Option Plan, the Company can issue up to 500,000 options to
purchase the Company's common stock. During May and June 2000, the Company
granted 57,950 options under the Stock Option Plan. The Company recorded
deferred compensation of $1,939,587 related to these stock option grants to
reflect the difference between the estimated fair value of the Company's
common stock at the date of issuance and the exercise price of the options.
Certain employees received accelerated vesting to reflect previous service
to the Company. As a result, $739,384 of the deferred compensation charge
was immediately expensed at the date the related options were granted. The
remaining deferred compensation balance will be recognized over the
remaining vesting period of these options.
On June 14, 2000, the Company entered into a stock purchase agreement with
Red Hat, Inc. ("Red Hat") and on July 27, 2000, the acquisition of the
Company by Red Hat was completed. Under the terms of this agreement, Red
Hat acquired all of the outstanding shares of the Company in exchange of
1,461,119 shares of Red Hat common stock and options to purchase 64,246
shares of Red Hat common stock. In addition, the Company can earn up to an
additional $49,500,000 of Red Hat stock based on achievement by the
WireSpeed business of specific revenue milestones for the six month periods
ended February 28, 2001, August 31, 2001 and February 28, 2002.
11
