RACKSPACE HOSTING, INC. - RAX Securities Registration Statement (S-1) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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The following is an excerpt from a S-1 SEC Filing, filed by RACKSPACE INC on 4/25/2008.

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RACKSPACE HOSTING, INC. - S-1 - 20080425 - AUDITORS_OPINION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Rackspace, Inc.:

We have audited the accompanying consolidated balance sheets of Rackspace, Inc. and subsidiaries (the Company) as of December 31, 2006 and 2007, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audit of the consolidated financial statements, we have also audited financial statement schedule II. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rackspace, Inc. and subsidiaries as of December 31, 2006 and 2007, and the results of their operations and their cash flows for the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

April 24, 2008

F-2

Index to Financial Statements

RACKSPACE, INC. AND SUBSIDIARIES—

CONSOLIDATED BALANCE SHEETS


	December 31,						Pro Forma Stockholders’ Equity (Unaudited) December 31, 2007
	2006			2007
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	8,374		$	24,937
Accounts receivable, net of allowance for doubtful accounts and customer credits of $2,037 in 2006 and $2,841 in 2007		16,122			25,449
Prepaid expenses and other current assets		3,432			7,757

Total current assets		27,928			58,143
Property and equipment, net		102,448			227,055
Goodwill		—			3,574
Intangible assets, net		1,262			5,812
Other non-current assets		1,345			7,229

Total assets	$	132,983		$	301,813


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	28,758		$	67,087
Current portion of deferred revenue		7,510			13,540
Current portion of obligations under capital and finance method leases		8,935			25,198
Current portion of debt		899			2,902

Total current liabilities		46,102			108,727
Non-current deferred revenue		2,412			4,402
Non-current obligations under capital and finance method leases		7,538			23,312
Non-current debt		1,952			60,039
Other non-current liabilities		4,489			8,460

Total liabilities		62,493			204,940

COMMITMENTS AND CONTINGENCIES

Stockholders’ equity:
Series A Convertible Preferred stock, $0.001 par value per share (aggregate involuntary liquidation preference: $13,412) 50,000,000 shares authorized in 2006 and 2007; 1,214,837 issued and outstanding shares, no shares issued and outstanding pro forma (unaudited)		1			1		—
Common stock, $0.001 par value per share: 300,000,000 shares authorized; 99,750,483 and 101,211,223 shares issued, 99,667,778 and 101,128,518 shares outstanding, 102,426,060 shares issued and 102,343,355 shares outstanding pro forma (unaudited)		100			101		102
Treasury stock, at cost: 82,705 common shares held		(126	)		(126	)	(126	)
Additional paid-in capital		31,312			40,082		40,082
Accumulated other comprehensive income		730			513		513
Retained earnings		38,473			56,302		56,302

Total stockholders’ equity		70,490			96,873		96,873

Total liabilities and stockholders’ equity	$	132,983		$	301,813

See accompanying notes to the consolidated financial statements.

F-3

Index to Financial Statements

RACKSPACE, INC. AND SUBSIDIARIES—

CONSOLIDATED STATEMENTS OF INCOME


	Years Ended December 31,
	2005			2006			2007
	(In thousands, except per share data)
Net revenues	$	138,768		$	223,966		$	362,017
Costs and expenses:
Cost of revenues		40,987			64,889			118,225
Sales and marketing		21,837			35,667			53,930
General and administrative		38,968			59,832			102,777
Depreciation and amortization		20,193			32,335			56,476

Total costs and expenses		121,985			192,723			331,408

Income from operations		16,783			31,243			30,609

Other income (expense):
Interest expense		(808	)		(1,095	)		(3,643	)
Interest and other income		633			572			828

Total other income (expense)		(175	)		(523	)		(2,815	)

Income before income taxes		16,608			30,720			27,794
Income taxes		5,836			10,900			9,965

Net Income	$	10,772		$	19,820		$	17,829

Net income per share
Basic	$	0.12		$	0.20		$	0.18

Diluted	$	0.11		$	0.19		$	0.17

Weighted average number of shares outstanding
Basic		91,793			100,310			101,278

Diluted		99,657			104,032			106,618

Pro forma net income per share
Basic (unaudited)							$	0.18

Diluted (unaudited)							$	0.17

Pro forma weighted average number of shares outstanding
Basic (unaudited)								101,278

Diluted (unaudited)								106,618

See accompanying notes to the consolidated financial statements.

F-4

Index to Financial Statements

RACKSPACE, INC. AND SUBSIDIARIES—

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2005			2006			2007
	(In thousands)
Cash Flows From Operating Activities
Net income	$	10,772		$	19,820		$	17,829
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		20,193			32,335			56,476
Loss on disposal and impairment of equipment, net		249			538			1,895
Provision for bad debts and customer credits		2,374			2,436			4,094
Deferred income taxes		1,615			(326	)		(3,479	)
Share-based compensation expense		272			1,090			4,252
Other noncash compensation expense		73			55			156
Excess tax benefits from share-based compensation arrangements		(2,443	)		(372	)		(562	)
Changes in certain assets and liabilities
Accounts receivables		(5,314	)		(10,114	)		(13,357	)
Prepaid expenses and other current assets		(1,277	)		(961	)		(2,271	)
Accounts payable and accrued expenses		5,966			11,112			39,341
Deferred revenues		2,118			4,643			6,578
Other non-current assets		119			(171	)		(5,863	)
Other non-current liabilities		(12	)		545			(154	)

Net cash provided by operating activities		34,705			60,630			104,935

Cash Flows From Investing Activities
Purchases of property and equipment		(35,431	)		(55,017	)		(105,360	)
Purchase and renovations for headquarter facility		—			—			(35,381	)
Proceeds from disposal of property and equipment		304			210			358
Acquisition of Webmail.us, Inc., net of cash acquired		—			—			(338	)

Net cash used in investing activities		(35,127	)		(54,807	)		(140,721	)

Cash Flows From Financing Activities
Principal payments of capital and finance method leases		(4,530	)		(7,394	)		(13,877	)
Principal payments of notes payable		(93	)		(100	)		(3,901	)
Borrowings on line of credit		3,000			—			61,146
Payments on line of credit		(6,000	)		—			(5,000	)
Payments for debt issuance costs		(53	)		(35	)		(301	)
Proceeds from sale leaseback transactions		—			—			8,456
Receipt of Texas Enterprise Fund Grant		—			—			5,000
Purchase of treasury stock		(105	)		(21	)		—
Proceeds from issuance of common stock, net		9,970			1,240			—
Proceeds from exercise of stock options		3			367			294
Payments to retire stock options and warrants		(927	)		(75	)		—
Excess tax benefits from share-based compensation arrangements		—			372			562

Net cash provided by (used in) financing activities		1,265			(5,646	)		52,379
Effect of exchange rate changes on cash		(110	)		176			(30	)

Increase in cash and cash equivalents		733			353			16,563
Cash and equivalents, beginning of period		7,288			8,021			8,374

Cash and cash equivalents, end of period	$	8,021		$	8,374		$	24,937

Supplemental cash flow information:
Acquisition of property and equipment by capital and finance method leases		6,365			17,244			37,458
Acquisition of property and equipment by notes payable		—			1,581			6,691
Cash payments for interest, net of amount capitalized		750			849			3,148
Cash payments for income taxes		4,609			7,517			13,945

See accompanying notes to the consolidated financial statements.

F-5

Index to Financial Statements

RACKSPACE, INC. AND SUBSIDIARIES—

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


	Years Ended December 31, 2005, 2006, and 2007
	Preferred Stock			Common Stock			Treasury Stock					Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares		Amount			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total Stockholders’ Equity
	(In thousands except share data)
Balance as of December 31, 2004	1,214,837	$	1	89,763,683	$	90	—		$	—		$	20,768		$	519		$	7,881	$	29,259
Issuance of common stock
Exercise of stock options (including excess tax benefit of $2,137)	—		—	3,720,550		4	—			—			(2,193	)		—			—		(2,189	)
Retirement of warrants and stock options (net of excess benefit $306)	—		—	—		—	—			—			(621	)		—			—		(621	)
Issuance of common stock to board of directors	—		—	31,580		—	—			—			73			—			—		73
Sale of common stock for cash (net of related costs of $30)	—		—	4,761,905		4	—			—			9,966			—			—		9,970

Total issuance of common stock	—		—	8,514,035		8	—			—			7,225			—			—		7,233
Share-based compensation expense	—		—	—		—	—			—			272			—			—		272
Purchase of Treasury Stock	—		—	—		—	(50,000	)		(105	)		—			—			—		(105	)
Comprehensive income:
Net income																			10,772		10,772
Cumulative translation adjustment																(718	)				(718	)

Total comprehensive income																					10,054

Balance as of December 31, 2005	1,214,837	$	1	98,277,718	$	98	(50,000	)	$	(105	)	$	28,265		$	(199	)	$	18,653	$	46,713

Issuance of common stock
Exercise of stock options (including excess tax benefit of $340)	—		—	949,080		1	—			—			706			—			—		707
Retirement of stock options (net of excess benefit of $32)	—		—	—		—	—			—			(43	)		—			—		(43	)
Issuance of common stock to board of directors	—		—	23,685		—	—			—			55			—			—		55
Sale of common stock for cash (net of related costs of $10)	—		—	500,000		1	—			—			1,239			—			—		1,240

Total issuance of common stock	—		—	1,472,765		2	—			—			1,957			—			—		1,959
Share-based compensation expense	—		—	—		—	—			—			1,090			—			—		1,090
Purchase of Treasury Stock	—		—	—		—	(32,705	)		(21	)		—			—			—		(21	)
Comprehensive income:
Net income																			19,820		19,820
Cumulative translation adjustment																929					929

Total comprehensive income																					20,749

Balance as of December 31, 2006	1,214,837	$	1	99,750,483	$	100	(82,705	)	$	(126	)	$	31,312		$	730		$	38,473	$	70,490

F-6

Index to Financial Statements

RACKSPACE, INC. AND SUBSIDIARIES—

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME—(continued)


	Years Ended December 31, 2005, 2006, and 2007
	Preferred Stock			Common Stock			Treasury Stock					Additional Paid-In Capital		Accumulated other Comprehensive Income (Loss)			Retained Earnings		Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares		Amount			Additional Paid-In Capital		Accumulated other Comprehensive Income (Loss)			Retained Earnings		Total Stockholders’ Equity
	(In thousands except share data)
Issuance of common stock
Exercise of stock options (including excess tax benefit of $562)	—		—	472,760		—	—			—			856		—			—		856
Issuance of common stock to board of directors	—		—	31,580		—	—			—			156		—			—		156
Issuance of restricted stock to Mailtrust employees	—		—	353,805		—	—			—			—		—			—		—
Shares issued in business combination	—		—	587,595		1	—			—			3,419		—			—		3,420
Shares issued in Mosso equity acquisition	—		—	15,000		—	—			—			87		—			—		87

Total issuance of common stock	—		—	1,460,740		1	—			—			4,518		—			—		4,519

Share-based compensation expense	—		—	—		—	—			—			4,252		—			—		4,252
Comprehensive income:
Net income																		17,829		17,829
Unrealized loss on derivative instrument, net of tax															(322	)				(322	)
Cumulative translation adjustment															105					105

Total comprehensive income																				17,612

Balance as of December 31, 2007	1,214,837	$	1	101,211,223	$	101	(82,705	)	$	(126	)	$	40,082	$	513		$	56,302	$	96,873

See accompanying notes to the consolidated financial statements.

F-7

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Index to Financial Statements

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