Financial Statements of NATIONAL CAPITAL FREENET INCORPORATED Year ended December 31, 1998 AUDITORS' REPORT TO THE BOARD OF DIRECTORS We have examined the statement of financial position of National Capital FreeNet Incorporated as at December 31, 1998 and the statements of operations, changes in net assets and cash flows for the year then ended. 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. Except as explained in the following paragraph, we conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In common with many non-profit organizations, the company derives revenue from donations, fundraising and promotional items, the completeness of which is not susceptible of satisfactory audit verification. Accordingly, our verification of these revenues was limited to the amounts recorded in the records of the company and we were not able to determine whether any adjustments might be necessary to donation, fundraising and promotional items revenue, excess (deficiency) of revenue over expenses, assets and net assets. In our opinion, except for the effect of adjustments, if any, which we might have determined to be necessary had we been able to satisfy ourselves concerning the completeness of the revenue referred to in the preceding paragraph, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1998 and the results of its operations and its cash flows for the year then ended in accordance with generally accepted accounting principles. As required by the Canada Corporations Act, we report that, in our opinion, these principles have been applied on a consistent basis. Chartered Accountants Ottawa, Canada February 3, 1999 NATIONAL CAPITAL FREENET INCORPORATED Statement of Financial Position December 31, 1998, with comparative figures for 1997 Assets 1998 1997 Cash $ 50,021 $ 28,728 Prepaid expenses 252 252 ------- ------- 50,273 28,980 Equipment and software: Computer equipment 133,409 132,909 Telecommunications equipment 101,575 95,579 Systems software 48,784 48,784 Business equipment 7,033 7,033 ------- ------- 290,801 284,305 Less accumulated amortization 241,426 195,769 ------- ------- 49,375 88,536 ------- ------- $ 99,648 $ 117,516 ======= ======= Liabilities and Net Assets Liabilities: Accounts payable and accrued liabilities $ 7,713 $ 11,542 Deferred contributions related to equipment and software (note 2) 38,328 57,706 Net assets: Unrestricted 4,232 (40,268) Invested in capital assets 49,375 88,636 ------- ------- 53,607 48,268 ------- ------- $ 99,648 $ 117,516 ======= ======= See accompanying notes to financial statements. On behalf of the Board: __________________________ Director __________________________ Director NATIONAL CAPITAL FREENET INCORPORATED Statement of Operations Year ended December 31, 1998, with comparative figures for 1997 1998 1997 Revenue: Donations $ 197,593 $ 236,530 Fundraising 43,313 7,522 Amortization of deferred contributions (note 2) 25,019 31,156 ------- ------- 265,925 275,208 Expenses: Telecommunications 68,280 76,534 Administration and professional fees 67,504 72,710 Amortization 45,657 63,410 Office staff and supplies 45,242 43,701 Systems administration 29,946 43,669 Fundraising 3,957 546 ------- ------- 260,586 300,570 ------- ------- Excess (deficiency) of revenue over expenses $ 5,339 $ (25,362) ======= ======= See accompanying notes to financial statements. NATIONAL CAPITAL FREENET INCORPORATED Statement of Changes in Net Assets Year ended December 31, 1998, with comparative figures for 1997 Invested in Total Total capital Unrestricted 1998 1997 assets Balance, beginning of year $88,536 $(40,268) $48,268 $73,630 Excess (deficiency) of revenue over expenses - 5,339 5,339 (25,362) Additions to equipment 855 (855) - - Contributed equipment and software 5,641 (5,641) - - Amortization (45,657) 45,657 - - ------- ------- ------- ------- Balance, end of year $49,375 $ 4,232 $53,607 $48,268 ======= ======= ======= ======= See accompanying notes to financial statements. NATIONAL CAPITAL FREENET INCORPORATED Statement of Cash Flows Year ended December 31, 1998, with comparative figures for 1997 1998 1997 Cash provided by (used in): Operations: Excess (deficiency) of revenue over expenses $ 5,339 $ (25,362) Items not involving cash: Amortization of deferred contributions (25,019) (31,156) Amortization 45,657 63,410 Changes in non-cash working capital items: Accounts payable and accrued liabilities (3,829) (108) ------- ------- 22,148 6,784 Investing activity: Purchase of computer and telecommunications equipment (855) (3,891) Refund of purchase on return of computer and telecommunications equipment - 7,467 ------- ------- (855) 3,576 ------- ------- Increase in cash 21,293 10,360 Cash, beginning of year 28,728 18,368 ------- ------- Cash, end of year $ 50,021 $ 28,728 ======= ======= See accompanying notes to financial statements. NATIONAL CAPITAL FREENET INCORPORATED Notes to Financial Statements Year ended December 31, 1998 National Capital FreeNet Incorporated is a non-profit organization, the aims and objectives of which are to establish and operate a community based computer network to store, access and exchange information between individuals and organizations in the national capital region. The Company was incorporated on September 29, 1992 under the Canada Corporations Act as a non-profit organization without share capital within the meaning of the Income Tax Act (Canada) and accordingly is exempt from income tax. 1. Significant accounting policies: These financial statements have been prepared in accordance with generally accepted accounting principles. The significant accounting policies are summarized as follows: (a) Equipment and software: Equipment and systems software which is purchased is recorded at cost. Contributed equipment and software is recorded as an asset at fair value at the date of contribution. Contributed equipment and software is recognized as revenue at an amount equal to the related depreciation on those assets. Depreciation is provided on the straight-line basis using an annual rate of 25%. (b) Revenue recognition: Government grants provided for specific purposes are recognized as revenue in the period in which the related expenses are incurred. Unrestricted government grants are recognized as revenue when received. (c) Contributed services: Contributed services are recognized when a fair value can be reasonably estimated and when the services would otherwise have been purchased. (d) 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. 2. Deferred contributions: Deferred contributions relate to the unrecognized portion of contributed equipment and software. The changes in the deferred contributions balance for the year are as follows: 1998 1997 Balance, beginning of year $ 57,706 $ 55,022 Add contributed equipment and software 5,641 33,840 Less amount recognized as revenue (25,019) (31,156) ------- ------- Balance, end of year $ 38,328 $ 57,706 ======= ======= 3. Uncertainty due to the Year 2000 Issue: The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect the Company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. ------------------- end of file -- Jeff Bossert (bossert@freenet.carleton.ca) : Vice-President, Treasurer and Director, National Capital FreeNet Senior Engineer, Comgate Engineering