Financial Statements of NATIONAL CAPITAL FREENET INCORPORATED Year ended December 31, 2000 AUDITORS' REPORT TO THE BOARD OF DIRECTORS We have examined the statement of financial position of National Capital FreeNet Incorporated as at December 31, 2000 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 Canadian 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 and fundraising, 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 donations and fundraising revenue, excess 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, 2000 and the results of its operations and its cash flows for the year then ended in accordance with Canadian 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 12, 2001 NATIONAL CAPITAL FREENET INCORPORATED Statement of Financial Position December 31, 2000, with comparative figures for 1999 2000 1999 Assets Current assets: Cash $ 39,857 $ 86,561 Segregated cash (note 3) 58,783 - Accounts receivable 1,050 5,340 Prepaid expenses 432 252 ======================== $100,122 $ 92,153 Capital assets: Computer equipment 145,498 144,398 Telecommunications equipment 156,132 127,374 Systems software 100,139 71,230 Business equipment 7,033 7,033 ======================= 408,802 350,035 Less accumulated amortization 274,814 272,484 133,988 77,551 ======================== $234,110 $169,704 Liabilities and Net Assets Current liabilities: Accounts payable and accrued liabilities $ 7,328 $ 7,595 Deferred revenue (note 3) 58,783 - ====================== $ 66,111 $ 7,595 Deferred contributions related to 108,338 74,935 equipment and software (note 2) Net assets: Unrestricted 34,011 84,558 Invested in capital assets 25,650 2,616 59,661 87,174 ======================== $234,110 $169,704 See accompanying notes to financial statements. On behalf of the Board: David Millman(Treasurer)_ Director Seline Herz-Fischler(1st VP)_ Director NATIONAL CAPITAL FREENET INCORPORATED Statement of Operations Year ended December 31, 2000, with comparative figures for 1999 2000 1999 Revenue: Donations $167,411 $179,828 Network projects 68,170 120,451 Amortization of deferred contributions 38,515 27,444 (note 2) Fundraising 7,265 12,299 ========================= $281,361 $340,022 Expenses: Telecommunications 65,615 64,046 Network projects 63,263 66,295 Administration and professional fees 59,437 59,370 Office staff and supplies 44,950 40,986 Amortization of capital assets 44,239 35,875 Systems administration 29,597 34,250 Fundraising 1,773 5,633 ======================== $308,874 $306,455 Excess (deficiency) of revenue over expenses $(27,513) $33,567 See accompanying notes to financial statements. NATIONAL CAPITAL FREENET INCORPORATED Statement of Changes in Net Assets Year ended December 31, 2000, with comparative figures for 1999 Invested in 2000 1999 Unrestricted capital assets Total Total Balance, $84,558 $2,616 $87,174 $53,607 beginning of year Excess (deficiency) of revenue over expenses (27,513) - (27,513) 33,567 Purchase of (28,758) 28,758 - - capital assets Amortization of 44,239 (44,239) - - capital assets Amortization of (38,515) 38,515 - - deferred contributions related to capital assets Balance, $34,011 $25,650 $59,661 $87,174 end of year See accompanying notes to financial statements. NATIONAL CAPITAL FREENET INCORPORATED Statement of Cash Flows Year ended December 31, 2000, with comparative figures for 1999 2000 1999 Cash provided by (used in): Operations: Excess (deficiency) of revenue over expenses $(27,513) $33,567 Items not involving cash: Amortization of deferred contributions (38,515) (27,444) Amortization 44,239 35,875 Changes in non-cash working capital items: Accounts receivable 4,290 (5,340) Prepaid expenses (180) - Accounts payable and accrued liabilities (267) (118) Deferred revenue 58,783 - ================== 40,837 36,540 Investing activities: Contribution of capital assets 71,918 64,051 Contribution of capital assets put in service (71,918) (64,051) Purchase of capital assets (28,758) - ====================== (28,758) - Increase in cash and cash equivalents 12,079 36,540 Cash and cash equivalents, beginning of year 86,561 50,021 Cash and cash equivalents, end of year $98,640 $86,561 The Company considers cash and cash equivalents to be highly liquid investments with original maturities of three months or less. See accompanying notes to financial statements. NATIONAL CAPITAL FREENET INCORPORATED Notes to Financial Statements Year ended December 31, 2000 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 Canadian generally accepted accounting principles. The significant accounting policies are summarized as follows: (a) Capital assets: Equipment and systems software which is purchased is recorded at cost. Contributed equipment and software is recorded as a capital asset at fair value at the date of contribution. Contributed equipment and software is recorded as a deferred contribution and recognized as revenue at an amount equal to the related amortization on those assets. Amortization is provided on the straight-line basis using an annual rate of 25%. (b) Revenue recognition: Project revenue to fund specific future project expense is deferred and recognized in the period in which the related expenses are incurred. Donations are recognized in the year 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 Canadian 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 revenue and expenses during the period. Actual results could differ from those estimates. NATIONAL CAPITAL FREENET INCORPORATED Notes to Financial Statements, page 2 Year ended December 31, 2000 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: 2000 1999 Balance, beginning of year $74,935 $38,328 Add contributed equipment and software 71,918 64,051 Less amount recognized as revenue (38,515) (27,444) Balance, end of year $108,338 $74,935 3. Deferred revenue: Deferred revenue includes revenue received for projects contracted for in the year and to be completed in the following year. Details of the year-end balance are as follows: 2000 1999 Office of Learning Technologies Thin Client Startup $50,615 $ - Office of Learning Technologies Authenticated Webmail Expansion Services 8,168 - ================= $58,783 $ -