FreeSoft Rt’s Annual Report 20043 EFFICIENCY RATIOS ... financial losses, which brought down the...

FreeSoft Rt’s Annual Report 2004 March 29, 2005. Vilmos Vaspál, Chairman of the Board of Directors

Table of Contents

I. GENERAL PROFILE............................................................................................................. 4

1 INFORMATION FOR INVESTORS ............................................................................................ 4

1.1 Company data .............................................................................................................. 4

1.2 Stock Information ......................................................................................................... 4

1.3 Corporate Management ............................................................................................... 5

2 THE HISTORY AND FOUNDING OF THE COMPANY................................................................... 6

2.1 About Fríz 68 Szolgáltató és Kereskedelmi Rt ............................................................. 6

2.2 About FreeSoft Kft........................................................................................................ 6

2.2.1 The history of FreeSoft Kft between 1990 and 2003 .......................................... 7

2.3 A change in the life of the companies: the foundation of FreeSoft Szoftverfejlesztő és Számítástechnikai Szolgáltató Rt ........................................................ 8

3 FREESOFT RT’S CURRENT CONDITION .................................................................................. 8

3.1 The company’s core activities ...................................................................................... 8

3.1.1 Document management and collaboration.......................................................... 9

3.1.2 Business Intelligence......................................................................................... 10

3.1.4 Upgrading traditional IT systems...................................................................... 12

3.1.5 Service.............................................................................................................. 13

3.1.6 Internet application design ................................................................................ 14

3.1.7 Business Mobility.............................................................................................. 15

3.1.8 International offices........................................................................................... 17

3.1.9 High-volume document digitalization and data entry at the Bátonyterenye Data Entry Center (BAK) .................................................................... 17

3.1.10 Investment activities within the IT segment ..................................................... 17

II. FREESOFT RT’S FINANCIAL REPORT FOR THE FINANCIAL YEAR ENDING ON DECEMBER 31, 2004 ...................................................................................................... 19

III. APPENDIX TO FREESOFT RT’S ANNUAL REPORT FOR 2004................................ 35

1 ABOUT FREESOFT .............................................................................................................. 35

1.1 Core Activities ............................................................................................................ 35

1.2 Key data about the company ...................................................................................... 36

1.2.1 The composition and the modifications of the Corporation’s share capital ........................................................................................................................... 36

1.2.2 Business year..................................................................................................... 36

1.2.3 Signatories......................................................................................................... 36

1.2.4 Ownership Structure.......................................................................................... 36

2 GENERAL INFORMATION.................................................................................................... 38

3 EFFICIENCY RATIOS ............................................................................................................ 38

4 LIQUIDITY .......................................................................................................................... 40

4.1 Debt and credit ratios ................................................................................................ 40

4.2 Efficiency ratios.......................................................................................................... 40

4.3 Profitability ................................................................................................................ 40

4.4 Capital market ratios ................................................................................................. 41

5 FURTHER INFORMATION FOR THE BALANCE SHEET ............................................................ 41

5.1 Fixed assets (intangible assets and tangible assets) in detail .................................... 45

5.1.1 The gross value and the cumulated depreciation of invested assets ................. 45

5.1.2 Net value of fixed assets on December 31, 2004 .............................................. 46

5.2 Financial investments................................................................................................. 46

5.3 Securities purchased for trading ................................................................................ 47

5.4 Valuation of liquid assets .......................................................................................... 47

5.5 Accruals and deferrals ............................................................................................... 47

5.5.1 Prepaid expenses and accrued income .............................................................. 47

5.5.2 Accrued expenses and deferred income ............................................................ 48

6 FURTHER INFORMATION FOR THE PROFIT AND LOSS STATEMENT....................................... 48

6.1 Comparative figures of the private FreeSoft Rt. (former Fríz Rt.) and the public FreeSoft Rt............................................................................................................. 48

6.2 Comparative figures of FreeSoft Kft. and the public FreeSoft Rt. ............................. 51

6.3 Material type expenditure .......................................................................................... 52

6.5 Depreciation charges ................................................................................................. 53

6.6 Extraordinary revenue and expenditure .................................................................... 53

7 LIST OF ITEMS WHICH INCREASE OR REDUCE THE TAX BASIS .............................................. 53

8 CASH FLOW REPORT ........................................................................................................... 54

9 ASSUMING RESPONSIBILITY FOR THE ANNUAL REPORT FOR THE YEAR 2004...................... 56

I. GENERAL PROFILE

1 INFORMATION FOR INVESTORS

1.1 Company data

Company Name: FreeSoft Szoftverfejlesztő és Számítástechnikai Szolgáltató Rt. (formerly Fríz 68 Szolgáltató és Kereskedelmi Rt.) Corporate Form: Public Limited Company Registered address: 1119 Budapest, Vahot u. 6. Site: 3070 Bátonyterenye, Kossuth L. u. 2. Company Registry No.: 01-10-044993 VAT number: 12011069-2-43 Statistic ID number: 12011069-7222-114-00 Share Capital: HUF 1,435,000,000 Founded: January 8, 1995 Date of transformation: April 2, 2004 Date of public listing: September 22, 2004

The activities of the Corporations according to TEÁOR ‘03 (Gazdasági Tevékenységek Egységes Ágazati Osztályozási Rendszere, Standard Industrial Classification System of Business Activities):

22.11'03 Book Publishing 22.12'03 Daily Newspaper Publishing 22.13'03 Publishing Periodicals 22.14'03 Publishing Sound Recordings 22.33'03 Multiplication of Computer Media 70.20'03 Renting and Operating Property 71.33'03 Renting Office Equipment and Computers 72.10'03 Hardware Consultation 72.21'03 Software Publishing 72.22'03 Other Software Consultation and Provision (main activity) 72.30'03 Data Processing 72.40'03 Database activities, online publishing 72.60'03 Other Computing Activities 74.12'03 Accounting and Tax Advise 74.13'03 Market Research and Opinion Polls 74.14' 03 Business Consultation 74.15’03 Assets Management 80.42’03 Unclassified Adult and Other Training

1.2 Stock Information Type of Shares: registered equity, dematerialized

Nominal Value of Shares: 1,000 HUF/share Number of Shares: 1,435,000 ISIN code of shares: HU 0000071030 Series of Shares: “A” Sequence Numbers of Shares: 0000001 - 1435000 Exchange Rate (12/31/2004): 2,140 HUF/share P/E (12/31/2004) 29 After-tax profit per share: HUF 74.8 Ownership Structure (%): Vilmos Vaspál 25.14%

Edit Vincze 19.01% László Molnár 6.13% Tibor Horváth 6.13% Employees 5.02% Institutional 1.82% Public ownership 36.75%

1.3 Corporate Management Board of Directors: Vilmos Vaspál, Chairman of the Board of Directors

Ilona Eck, member of the Board of Directors Dr. Gáborné Móricz, member of the Board of Directors

Board of Supervisors: Ferenc Báti László Jobbágy G. Dr. Márta Radnai

Chief Executive Officer: János Keresztesi

2 THE HISTORY AND FOUNDING OF THE COMPANY

2.1 About Fríz 68 Szolgáltató és Kereskedelmi Rt

The company was founded on January 8, 1995 by Kaptár Befektetési Rt (90%) and Kristóf Nobilis (10%) under the name Fríz 68 Faipari Termelő és Kereskedelmi Rt. The goal was, in line with Kaptár Rt’s investment strategy of buying companies in trouble, to revitalize the activities of a highly indebted, bankrupt timber industrial company named TÖFA Hungária Kft by purchasing its assets and re-launching production without the financial burdens. Purchasing the assets was successful, but the repayment of the transaction’s VAT content had been delayed for months, and before that, no employees had been admitted and no working assets were provided. Meanwhile market conditions changed (previous customers had signed contracts with other suppliers), and as a result, production did not launch. Therefore, the corporation sold its machinery in 1996, then the Törökszentmiklós facility in early 1998. Reflecting the above events, the corporation at its General Meeting on September 25, 1997 changed its name to Fríz 68 Szolgáltató és Kereskedelmi Rt. In addition, they decided that they delete Timber Industrial Activities from their list of activities, and in the future they would specialize in Information Technology Services, Business Consultation and Real Estate Utilization. As this was a different strategy, Kaptár Rt gradually withdrew from the company, selling a part of its share to the leaders of the company as an element in their compensation package. The company successfully provided services, primarily information technology services as a subcontractor. This activity was less capital-intensive, so the corporation always had liquid assets in addition to the current assets necessary for the operation. They invested these assets typically in public shares, in derivative stock exchange transactions, and when the possibility became available, in foreign shares. These activities brought diverse results: The fall of the stock exchange rates in the autumn of 1998 because of the Russian crisis, and the dramatic change in the public opinion about the technology industry in 2000 caused significant financial losses, which brought down the corporation’s own capital under the legal minimum in those years, whereas the outstanding results in 1999 and 2001 restored the capital positions. Because of the abundance of financial resources together with solid business, the owners and the leaders of the corporation considered finding additional options to better utilize assets around the base activities rather than take risky trips in the world of stock exchange. As a result, negotiations started with the owners and the leaders of the corporation’s largest customer, FreeSoft Kft about the possibility to match FreeSoft Kft’s ambitious growth plans with Fríz 68 Rt’s capabilities.

2.2 About FreeSoft Kft

The company’s core activity was the development and implementation (design, creation, deployment, maintenance) of custom IT application systems, representation and sales of international products related to the professional areas, and the provision of IT services (consultation, training). The company’s team of professionals accumulated significant experience and acquired wide-ranging skills related to SUN, HP (Compaq, DEC), IBM, Unix and Linux, and also Microsoft Windows computers. All the above mentioned platforms are present at FreeSoft, which

ensures the appropriate knowledge for the employees to address the various challenges successfully.

2.2.1 The history of FreeSoft Kft between 1990 and 2003

FreeSoft was founded in 1990, specifically to market Ingres-based products and the software applications the company developed for this platform. The choice of the name was characteristic of the spirit of the emerging company: the name FreeSoft was created by concatenating the words free(lancer) and soft(ware). Initial efforts were aimed at two goals: to acquire deep knowledge about Ingres-based development and operating technologies quickly, and to make customers aware of the opportunities provided by Ingres. FreeSoft soon established beneficial relationships with the major organizations in business life and their IT managers. In the first half of the 1990s, the strategy was built on selling licenses for products which represented leading technology, and on development and implementation services for applications related to the sold products. This resulted in acquiring the knowledge of various areas such as CASE systems (Westmount), imaging (Trimco), workflow (CSE). With several years of experience, the company felt strong enough to start developing and distributing its own products. FreeSoft consistently focused on the market segments of medium businesses and enterprises. The business strength of the company is well demonstrated by the fact that it was part of the winning team of many PHARE or Public Procurement tenders, or was the winning main contractor. Major customers included the Hungarian Copyright Authority, Hungarocamion, MASPED-TRIAS, Csepel Művek Fémmű, the newly launched Budapest Stock Exchange, ÁPV Rt, BAF (currently PSZÁF), and finally the largest customer, the Hungarian Tax Authority (APEH). In the second half of the 1990s the largest challenge both from the business and the professional aspect was the need to compensate the disappearance of Ingres. FreeSoft became partner of the manufacturer of the largest competitive product, ORACLE, and in the time since achieved an international authorized partner status. Together with this change, the challenge of migrating Ingres-based products also had to be tackled, which was seen as an especially difficult, and at the same time, attractive task. This solution resulted in the migration knowledge base which has been continuously evolving since, and in the future may represent a significant value on the international market as well. Another important business area was the application of business systems, which also started to strengthen in this period nationwide. FreeSoft as an ORACLE partner became the reseller of the Oracle Applications product; this role also involves the implementation of the products and the development of additional components. The most significant reference in this area was the deployment for the entire organization of Postabank. With the adoption of major applications in Hungary, an increasing demand for the administration of running systems emerged; for this challenge, FreeSoft offered the products of BMC, another large US company. Until the end of the 1990s, both the revenue and the number of employees were continuously on the rise.

In the period between 2000 and 2003, two serious blows hit the company: the global crisis of the industry (the dotcom bubble burst), and the decrease in governmental orders. It became apparent that survival required a significant renewal both professionally and in the business sense. In order to finance the indispensable changes, in February 2000 FreeSoft decided to issue bonds worth HUF 148 million. Looking back, after having repaid the bonds, it still seems true that it was the professional investments made possible by this move that saved the company from the serious financial condition characteristic of 2000 and 2001. While in 1999 the majority of the company’s revenues originated from custom software development, by 2003, this had shifted towards services (office automation, e-Business, 3A). Traditionally, the most significant part of the company’s revenues came from governmental orders. Financial year 2001 was the financial nadir in the company’s life, primarily because of the reduction in governmental orders. As a result of the professional and business change in direction, in 2002 the structure of the revenues fundamentally changed; a significant part (39%) of the revenues resulted from services provided abroad.

2.3 A change in the life of the companies: the foundation of FreeSoft Szoftverfejlesztő és Számítástechnikai Szolgáltató Rt

As a result of the negotiations between Fríz 68 Rt and FreeSoft Kft, the general meeting of Fríz Rt on July 30, 2003 decided on a HUF 990 million private increase of the share capital, which was realized with the contribution of FreeSoft Kft’s shares worth HUF 880 million, and to provide the funds required for the additional expansion plans, with HU 110 million in cash. After that, a decision was made about the merger with FreeSoft Kft (then owned 100% by the corporation). The merger actually took place after the creation of asset inventory and asset balance drafts, and the merger documentation. At the same time, the general meeting modified the name of the company to FreeSoft Szoftverfejlesztő és Számítástechnikai Szolgáltató Rt (FreeSoft Software Development and Information Technology Services Corporation). The Company Registry approved and registered the merger of Fríz 68 (FreeSoft) Rt and FreeSoft Kft on April 2, 2004. After becoming a public corporation and the authorization of capital increase via the stock exchange, a subscription process took place between July 22 and 27, 2004. During this investors subscribed to 385,000 shares at a 180% exchange rate, which resulted in FreeSoft Rt acquiring HUF 693 million of fresh capital.

3 FREESOFT RT’S CURRENT CONDITION

3.1 The company’s core activities In the current state of the company, ten core activity areas can be defined:

o Document management and collaboration o Business Intelligence o Custom development o Upgrading traditional IT systems o Services

o Internet application design o Business Mobility o International offices o High-volume document digitalization, data entry o Investment activities within the IT segment

3.1.1 Document management and collaboration

FreeSoft Rt.’s Document Management and Collaboration Division is committed to provide flexible, cost effective and fully functional Enterprise Content Management (ECM) products and services to players in the Hungarian governmental and business sectors. Within the general ECM functionality, we specialize in two areas: Records Management, and collaboration solutions built around document management capabilities.

Records Management The role of a records managements system is to strictly track the important and sensitive documents and other unstructured data (e-mail, chat log, electronic forms), and follow up their lifecycle for various organizations. FreeSoft Rt. is one of the largest companies in Hungary in the area of records management, and a market leader in governmental records management. As a result of our implementations so far, X users are using our solutions at X organizations and X organizational units, and approximately X documents are registered in X registration books. Our records management solutions cover the implementation of a packaged software product, the related custom development, and, on the other hand, the provision of general records management services. Our product, KIR, provides a platform-independent, scalable, highly customizable solution for various document management needs, from small businesses with a few hundred documents a year to geographically distributed enterprises with thousands of employees dealing with hundreds of thousands of records and documents. With its web-based, 3-tier design, it is an easy to install and manage, user-friendly solution. It is important that all functionality runs on the server, so users' machines do not require any maintenance, and do not store sensitive data. It can be used from anywhere, only Internet access is required. This way it is an ideal choice also for organizations with multiple sites. It provides full support for the entire document management cycle, from registration to destruction. An important feature is that it supports both traditional paper-based and electronic documents, including the digitalization of paper-based documents and handling e-mails. In addition to or instead of its own functionality for handling digital document contents, it can integrate with professional document management and collaboration systems such as Oracle Collaboration Suite or Microsoft SharePoint Portal Server. It maintains a full, modifiable, hierarchical set of partner master data. Its granular rights management can support organizations where all officers perform document management tasks related to their job, and also organizations where document management events are entered later, by dedicated employees.

Services

You have surely felt at times that the business records and documents which have accumulated over the years require more and more energy to keep organized and retrievable. Our KIR product, the general document management and process support system offers a comprehensive solution to this problem. Our highly skilled professionals, who have nearly 10 years of experience in designing, implementing and deploying document management systems, quickly and efficiently assess, discuss and document the customer’s needs, and then prepare an action plan. As a result of this, our colleagues create the Implementation Document, which reflects the customer's needs, and details the method of implementation and the schedule. FreeSoft Rt. offers document management solutions which fully support the basic functions of governmental organizations (central and local governmental agencies, other public institutions), and which comply with EU recommendations (MOREQ), international standards (ISO15489), and Hungarian law (Records Management Act, Electronic Signature Act and other applicable regulations). Recently it has also become important for non-governmental organizations to strictly track sensitive documents; recent corporate scandals have resulted in increased requirements in the areas of document security and compliance. In addition to offering a packaged product which can meet even the most sophisticated needs, FreeSoft Rt can directly provide any services related to document management as part of the project. Specifically:

o Assessment of the organization's document management requirements and the needs of the involved employees, formulating a recommendation for paper-based and electronic document management

o Development of a document management policy, preparation of an archival plan

o High-volume, retroactive digitalization and indexing of documents o Recording document-like information from external sources (customers, partners),

automatic preprocessing (receipt, partial registration) via electronic forms. o Integration of an e-mail system in the document management procedures

o Development of data entry solutions, actual data entry

3.1.2 Business Intelligence

The area includes support for the internally developed “NOVA” financial and accounting system which was successful 4 or 5 years ago, deployment of Oracle Applications’ logistics and financial modules, and the development of Oracle-based (Oracle Financials Analyzer or OFA, Oracle Sales Analyzer or OSA) Business Intelligence solutions. After a stagnation in the previous years, implementation activities related to the financial and logistics modules of Oracle Applications are again on the rise, thanks to the web-release of the product, and the launch of the e-Business Suite (EBS), and in the area of BI, the Enterprise Planning and Budgeting (EPB) suites. FreeSoft laid the foundations of its business reputation with the 1997 implementation of Oracle Applications at Postabank. Since then, FreeSoft's customers include companies like Szerencsejáték Rt., Masped Capital, Hungarocamion, T-Mobile (former Westel), Vodafone, Expressz Kiadó, Ministry of Defense Financial Calculation and Pension Determination Directorate, Fővárosi Közterületfenntartó Vállalat or Bábolna Rt.

In 2003, the list of references became even longer, with ArtisJus Hungarian Copyright Authority and the Nyíregyháza College. In 2004, we completed the “Business Value-based Management System” at MÁV Rt, the Hungarian national railways. A significant success of the division is to have won the tender with the “most advantageous” offer for the version upgrade of MÁV Rt’s GIR (Business Management Information System), and in February 2005, the largest implementation project in the history of FreeSoft started.

3.1.3 Custom Applications

This is traditionally FreeSoft's largest and strongest professional area, which also serves as a background for the other divisions, because software development is present in all our projects. Since 1990, our company has successfully completed several large-scale projects, typically on UNIX, NT, VMS operating systems, using Oracle and other relational database management systems. Our long-lasting business relationships demonstrate that our customers are satisfied with our work, and that they rely on our services in the long term. Our company’s main strength, the continuous ability to innovate in development, opens up additional professional and business markets for us.

FreeSoft Rt. performs its development activities according to an ISO 9001:2000 Quality Assurance system. Our Quality Assurance system is continuously revised with reference to customers’ needs and changing technologies. Our projects are primarily based on the PRINCE methodology, adjusted to the ISO 9001:2000 standard.

Technological Background

Our software development is based on Java, JSP, XML (HTML) tools and Internet protocols (DCOM, ActiveX, IIOP, X400, X500, LDAP, CORBA). Our Oracle RDBMS-based development projects are based on FreeSoft’s development technology, in line with our strategy in the past years. As a part of this, we have created base classes and base forms with extremely flexibly adjustable functionality, and a methodology, which ensures high-volume, rapid development and minimizes errors. The framework is designed according to the MVC (Model, View, Controller) principles, it is 100% pure Java and J2EE compatible, and it provides a HTML/JSP or a GUI/Java swing user interface. As a result, it runs on any J2EE application server, it is easy and quick to extend, simple to install and update.

In our development activities we rely on Jdeveloper and NetBeans Java-based development tools, in multi-tier solutions Apache and Oracle iAS servers are used as application servers, while the database servers are usually Oracle 8i or Oracle 9i systems.

This results in 100% pure JAVA, because JAVA code can be stored an run in every tier. Reflecting their increasing role, the software design phase uses OO and UML techniques. Because of the popularity Windows clients in traditional Client/Server architectures, we need to have a good command of C and C++ (with MFC and COM extensions), or in a wider context, the knowledge of Microsoft development environments.

Internet Helpdesk Service Pilot Phase On February 14, 2005, we launched the pilot phase of our Internet-based error tracking system to support the users of the Museum Registration System.

The service is available 7x24. Users can track the history of their reports, and receive notifications about the events.

3.1.4 Upgrading traditional IT systems

By transforming applications running on heterogeneous platforms and written in legacy programming languages, FreeSoft assists customers in creating a standardized and maintainable software environment, and operating and integrating existing applications on the J2EE platform.

Comprehensive automated transformation services for the J2EE platform for customers and partners: transformation of the user interface and the business logic, deployment of a leading relational database management technology, platform-independent code (Java, XML), web-based presence, intranet/Internet technology. In compliance with today's requirements, the target environment is the latest 3-tier architecture (database server, application server, client), which, by running the business logic in the middle tier, allows for the use of a thin web client, in other words the application can be accessed from a browser.

The systems that FreeSoft can port to a Java/RDBMS environment include: Cobol/DB2, Natural/Adabas, Ingres/4GL, Informix/4GL, MSAccess, IMS, IDMS etc.

Our company is an Oracle Authorized Business Partner, and is a member of Oracle's worldwide migration organization, ORACLE MTI (Migration Technology Initiative).

The operation and integration of older platforms, including legacy systems which have been running for decades is a challenge for IT professionals, because:

o They need to consider the lack of hardware and software support.

o The application was created with a large-scale investment and a long development cycle. It is critical to protect this investment.

o Company-specific business functionality is only provided by the existing application, so it cannot be replaced with other products without losses.

o The application is difficult or impossible to modify.

o The issue of decreasing license and maintenance fees is a problem to be solved.

o It is increasingly difficult to provide the skilled professionals to manage obsolete technologies.

Benefits of the modernization/transformation:

o Retirement of older, no longer strategically valuable platforms. The standardized, homogeneous environment (one platform – one language) is easy to maintain.

o Leveraging the Web. o A possibility of extending functionality. o Manageability: scalability, reliability, increased performance. o Less time and risk compared to the redevelopment of the application. o Compared to replacement with a software package: no need for retraining, business

processes remain unchanged, less expensive (license fees). The process of modernization/transformation: Modernization always takes place as part of a project, using automated software (or “converter tools”), in the following steps:

o Identification of key system parameters via surveys, estimated proposal.

o IT assessment, consultation, comprehensive evaluation of applications running on the different platforms. Preparation of a quotation and the project plan.

o Extraction of the business logic, identification of interdependencies, code cleansing.

o FreeSoft’s solution – Legacy IT Application Transformation, or automated application migration – ensures the original functionality and data integrity. Database migration and data consolidation on relational database management systems, code conversion process supported with custom-made software tools.

o Manual rewriting of various language constructions which are impossible to convert, any necessary manual corrections, re-authoring supported with automation.

o Testing the converted applications by components, modification of the components as required, possible redesign using UML.

o Deployment and operation of the converted, platform-independent Java applications on a 3-tier (Internet/intranet) or a Client/Server architecture. As a result of the identical functionality and look, the new application can immediately go live.

o Further development with the latest Internet development tools.

3.1.5 Service

The business information stored in corporate IT systems is a significant asset to businesses. The error-free, secure and continuous operation of these systems is critical to the business of a company.

After the USA and Europe, computer crime has gone through a sharp increase also in Hungary. According to a survey, the damage caused by computer crime has multiplied in recent years.

More and more corporate executives recognize their information security risks and contact a specialized company to provide an impartial and realistic picture of the company’s security situation. Today, in addition to enterprises, also small and medium businesses realize the importance of this necessity.

As a response to the increase in the demand for information security projects, FreeSoft Kft set up its Information Security division as early as 1999 to assist customers in the establishment of the information security level appropriate to their activities. In addition to FreeSoft's own team of experts, this division maintains close partnerships with respected professionals in the information security area. Our work is based on the international methodology of ISACA (Information Systems Audit and Control Association), according to the following topics:

Preparation of an IT audit

o Assessment of the IT and, more specifically, the Information Security situation, to reveal the possible “false sense of security”.

o The audit covers the data security revision of all IT processes, including servers, applications and networks. A site survey and an IT risk assessment is performed.

o The audit results in an “Action Plan”, which proposes a solution to eliminate the defects which were revealed.

As part of the audit, computerized “hacker proof” tests are performed on our customers’ Internet-connected and internal devices (Internet/intranet web servers, firewalls, routers, databases, internal servers). As the Hungarian reseller of ISS (Internet Security Systems, market leader of information security tests with a 40% market share), we use ISS information security scanner products to check settings.

Development of a policy system

After the audit, the next step is to develop or update the IT Data Security Policy and the Information Security Policy System, and to prepare the missing policies.

Deployment of the policy system, compliance with the policies

After the deployment of the policy system, the contents of the policies need to be deployed, and enforced during operation.

Internal Data Security audits

After the deployment of the Policy System, the internal data security audit plans are prepared, which form the basis of the internal revision procedures.

Elimination of the revealed defects

After performing the previous tasks, the next step is to eliminate the identified defects, and to implement the specific solutions for other tasks in the Action Plan, including:

o designing and deploying firewall systems o designing and deploying real-time intrusion detection and interception systems o audit of VPN and e-business solutions

Our information security projects are implemented by our specialized professionals with international IT audit certifications, and by qualified ISS data security engineers, to the great satisfaction of our customers.

3.1.6 Internet application design

BIG FISH Internet is an outstanding Hungarian web development team, which assists its customers in achieving business success with its unique and innovative solutions from simple Internet presence to comprehensive e-business solutions for different areas. With its reliability and experience, relationships between the company and its customers can be planned for the long term; its activities cover anything under the term “Web” from developing the strategy through design, production and management.

BIG FISH Internet has been running under its current name since 2000, but its predecessors and the founding members started their web development and design activities already in 1998, when Internet was in its early days in Hungary.

Despite its relatively short history, and as a result of the team’s professional experience, BIG FISH Internet is an active and significant contributor in various fields within the corporate business sector. Our experience includes nationwide entertainment portal systems such as Est or Habostorta, Web-based systems handling large amounts of data and complex relationships such as K&H Bank’s portal, and we cooperate with agency partners like Leo Burnett Budapest, MindShare Media or Red-stars Hungary.

At the end of 2004, a significant event occurred in BIG FISH Internet’s life: FreeSoft Rt. as a professional investor signed an agreement with the owners about purchasing 100% of BIG FISH’s shares. As a result, BIG FISH Internet has been operating as a division of FreeSoft Rt. since this January, keeping its previous activities and the extra which makes BIG FISH a brand. Currently approx. 20 active colleagues are available to BIG FISH (with additional subcontractors), whose majority specializes in designing, organizing and implementing Internet-based systems; the rest of the team performs graphical and creative design, data processing and hosting. Most of our employees have numerous years of professional experience, and several people have been working with us since the beginnings.

The development of BIG FISH Internet was defined by orders from companies such as MatávNet, MALÉV, Procter & Gamble, Argosz Biztosító Rt, Fundamenta, Sanoma Budapest, Compaq Hungary, Concorde Értékpapír Rt, Trigránit Rt. (Westend, Pólus, Millenniumi Városközpont), Kereskedelmi és Hitelbank, Vivendi Telecom Hungary, Virusbuster, Nestlé, Unilever or UPC. BIG FISH Internet’s activities:

o Internet-based consultation and training o Design and organization of Internet and Intranet systems

o Development, testing and implementation of Internet and Intranet systems o Graphical works, web design o Online marketing: preparation of design and creative tools (banners, microsites, games) o Comprehensive management of Internet and Intranet systems o Domain Name Registration

3.1.7 Business Mobility

The division develops its solutions based on mobile and Internet technologies to mobilize corporate business processes and the related services. Our goal is to mobilize

o logistics o sales processes o internal and external communications o content provision

Through deploying our solutions at our customers, we learned that mobile technology is not simply a new IT tool, but can add a significant contribution to the improvement of the competitiveness of a business.

Personal Information Management

Communication is an inseparable part of business. E-mails, calendars and electronic business cards have made business activities more dynamic. But today these tools are primarily available only on fixed workstations. As a result, business communication is rather confined to our workplace, or even to our own computer. A feasible solution is to mobilize communication; this is not only a convenience, but can also result in significant savings. By not having to go back to the office simply to download the mails every day, significant time and travel costs may be saved. Partners are served faster, and the entire amount of corporate information becomes accessible, so you can check the exact location of an appointment from the central database on the road.

With our solutions, each enterprise communication system can be made mobile. In addition, we can also build the horizontal network which is necessary for this:

Distribution Management – Sales Force Automation The Distribution Management system developed by our company provides standardized handling of:

o End-users’ orders through B2C interfaces o Requests from distributors and resellers o The ordered and reserved items by the sales force o Carriers’ activities

Orders are processed in a unified workflow, and then transferred by the message broker interface to the corporate information system. The system’s capabilities are all device-independent, which means that they are accessible from the Internet, mobile phones or PDAs. This way, key information to company management is always accessible and possible to organize. Using our product usually results in

o a 2% to 4% increase in revenues

o a 5% to 15% decrease in costs

o a 5% to 8% increase in service levels

With our products, your employees and agents through the Internet from anywhere can o access current products and prices o access the warehouse inventory o reserve items

o trace the status of their orders and reservations o provide the delivery date for their customers

Purchasers at the headquarters can o continuously trace orders o optimize inventory o meet customers needs on a just-in-time basis to reduce logistic costs o online analyze data and make decisions based on up-to-date information to directly

interact with the system

Mobile Promotion

The sales procedure does not end when the selected product is purchased; rather on the contrary, this is the moment to start building customer loyalty and preparing the stimulation for additional purchases. Today a generally accepted technique of retaining customers is to organize various games or prize drawings related to purchases.

Still, mobile solutions can increase customer loyalty and brand building more efficiently and in a wider range, adjusted to the unique opportunities of the product and the marketing strategy. Our post sales support solutions can implement promotion campaigns with fast deployment and comprehensive services, using a full range of mobile and web-based capabilities.

o SMS promotion, prize drawings

o Community games. Customers can play a game characteristic of the company or the products, and the best players receive rewards after a drawing.

o Individual games. JAVA-based games adjusted to the company's image, which can be downloaded to the phones.

o Mobil Gifts. Users can customize their phones with the most current pictures of extreme sports, graphics or nature photos, sounds and musical pieces that they receive as gifts.

Mobile Media Portal

State-of-the-art, up-to-date information is a key necessity in the information society. In addition to printed and electronic press, technologies capable of digital information and interactions (such as the Internet or mobile communication) have become important media. To meet all these requirements, editorial systems need to be able to handle all types of digital media.

The technological capabilities of Mobile Media Portal and the expertise of an editorial team will result in the satisfaction and approval of readers or users.

In addition to providing every feature of Internet portals, Mobile Media Portal efficiently supports all requirements of the users or the readers, and the editorial processes necessary for the collection of current information by the integrated management of communication channels.

Mobile Media Portal is a publishing system designed for the world of integrated media. Mobile Media Portal integrates all communication channels in a single editorial system. With a single deployment and central maintenance, it supports

o Web, WAP and PDA interfaces o text and multimedia applications o Internet and mobile-based live broadcasts

We provide the product as part of a lease, based on the ASP (Application Service Provision) business model. This means that

o There are no one-off development costs o No investment is required to build a separate IT infrastructure o No need to pay the price for setting up and maintaining Communication and IT security

The IT infrastructure built by our company provides full security and high availability both for Internet-based and mobile communication. Our professionals are continuously available to ensure your presence in the area of complex media Mobile Media Portal is a single portal engine not specific to any digital media or format, but covers all digital media in use today. Mobile Media Portal can provide unified service to all readers, viewers or listeners in a way that editors do not need to know the technological requirements of the various media. They can focus on creating the news item, the program or the article, and the system automatically generates the layout optimized for the Web, WAP or PDA, and delivers the content to the target audience according to the receiving device. What multimedia capabilities can be implemented with Mobile Media Portal?

o In addition to text news, Mobile Media Portal supports all types of multimedia formats and digital broadcasting technologies as required o Delivering audio, video or images associated with news items or articles (streaming media, MMS, video e-mail) o Searchable multimedia storage and authoring with markers o Real-time Multicast-based broadcasting both over mobile and Internet protocols 3.1.8 International offices

FreeSoft Kft had cooperated for years with professionals from respected IT companies in the German market. After winning them over as managers or employees, FreeSoft Rt. founded FreeSoft Deutschland GmbH in order to achieve more success in the EU markets. The newly established company’s goal is to participate in large-scale EU projects primarily in the areas of software deployment, consultation and software development by getting closer to the German market (Equity capital: EUR 25,000). Our plans for 2005 include entering the US market; this will be assisted by the subsidy from the Ministry of Information Technology and Telecommunication, from the tender named “Supporting the entry to the US market for small and medium-sized businesses” in 2004. Our Virginia office is expected to open in the first half of 2005, but we are already working on building our US partner channel.

3.1.9 High-volume document digitalization and data entry at the Bátonyterenye Data Entry Center (BAK)

We operate a Data Entry Centre in Bátonyterenye, Nógrád county, which specializes in high-volume document digitalization and data entry. It provides useful work in a modern setting to individuals with multiple disadvantages.

3.1.10 Investment activities within the IT segment

In December 2004, we successfully concluded the acquisition negotiations with the owners of BIG FISH Internet Kft., and as a result, we obtained first a controlling ownership, and in January 2005 exclusive (100%) ownership in the company which has significant experience in webdesign (Equity capital: HUF 24 million; Revenue in 2004: HUF 120 million).

Already at the end of 2004, advanced negotiations were taking place about purchasing MoolTech Kft, which specializes in programming mobile phones. The acquisition was finalized in March 2005. (Equity capital: HUF 3 million; Annual revenue in 2004: HUF 40 million).

On March 21, 2005, we purchased all shares of AXIS Számítástechnikai Kft. (Equity capital: HUF 30 million, revenue in 2004: HUF 1.2 billion, so FreeSoft Rt. became AXIS Kft.’s 100% owner. The full purchase price was HUF 239.68 million. According to the agreement, the sellers purchased FreeSoft shares for half of the purchase price.

II. FREESOFT RT’S FINANCIAL REPORT FOR THE FINANCIAL YEAR

ENDING ON DECEMBER 31, 2004

FreeSoft Rt.

1116 Budapest, Vahot u. 6. (1) 371-2910

Annual Report 12/31/2004

Date: March 29, 2005.

director (representative) of the company

12011069722211400

01-10-044993

12011069722211400 Statistic ID number 01-10-044993 Company Registry Number

„A” BALANCE SHEET Assets Figures in HUF thousand

Number

Description

12/31/2003

Adjustment of prior years

12/31/2004

a

b

c d

e

1

A. Fixed assets 880,032 -

1,194,189

2

I. INTANGIBLE ASSETS - -

725,799

3

Capitalized value of foundation and restructuring costs

4

Capitalized value of research and development costs

5

Concessions and similar rights and assets

6

Intellectual property - -

3,113

7

Goodwill

722,686

8

Advance payments on intangible assets

9

Revaluation of intangible assets

10

II. TANGIBLE ASSETS 32 -

50,076

11

Land and buildings and related concessions and similar rights

12

Technical equipment, machinery and vehicles

13

Other equipment, fittings and vehicles 32 -

50,076

14

Breeding stock

15

Capital WIP, renovations

16

Advance payments on Capital WIP

17

Revaluation of tangible assets

18

III. FINANCIAL INVESTMENTS 880,000 -

418,314

19

Long term investments in related companies

38,569

20

Long term loans given to related companies

21

Other long term investments 880,000 -

2,000

22

Long term loans given to other investees

23

Other long term loans given

24

Securities representing long term loans

379,745

25

Revaluation of financial investments

- 2,000

Date: March 29, 2005. director (representative) of the company

12011069722211400 Statistic ID number 01-10-044993 Company Registry Number „A” BALANCE SHEET Assets

Figures in HUF thousand Number

Description

12/31/2003


12/31/2004

a

b

c

d

c

26

B. CURRENT ASSETS 175,679 -

956,097

27

I. INVENTORIES - -

1,638

28

Raw materials and consumables

29

Work in progress and semi-finished products

590

30

Animals

31

Finished goods

32

Goods

1,048

33

Advance payments on inventories

34

II. RECEIVABLES 689 -

572,365

35

Trade accounts receivable (debtors)

478,674

36

Receivables from related companies

36,367

37

Receivables from other investees

38

Bills of exchange receivable

39

Other receivables 689 -

57,324

40

III. MARKETABLE SECURITIES 171,816 -

325,712

41

Investments in related companies

42

Other investments 161,810

43

Own shares, own quotas

44

Securities representing loans held for sale 10,006

325,712

45

IV. LIQUID ASSETS 3,174 -

56,382

46

Cash in hand, checks 519 -

1,180

47

Bank deposits 2,655 -

55,202

48

C. PREPAID EXPENSES AND ACCRUED INCOME

- -

1,954

49

Accrued income - -

280

50

Prepaid expenses - -

1,674

51

Deferred expenses

52

Total assets 1,055,711 - 2,152,240


12011069722211400 Statistic ID number 01-10-044993 Company Registry Number „A” BALANCE SHEET Liabilities


Description

12/31/2003


12/31/2004

a

b

c

d

e

53

D. SHAREHOLDERS’ EQUITY 1,055,398 -

1,841,299

54

I. ISSUED CAPITAL 1,050,000 -

1,435,000

55

of which: treasury shares repurchased at face value

56

II. ISSUED BUT NOT PAID CAPITAL (-)

57

III. CAPITAL RESERVES

308,000

58

IV. RETAINED EARNINGS FROM PREVIOUS YEARS

3,260 -

5,398

59

V. NON-DISTRIBUTABLE RESERVES

60

VI. REVALUATION RESERVE

61

VII. PROFIT PER BALANCE SHEET 8,658 -

92,901

62

E. PROVISIONS - -

-

63

Provisions for expected liabilities

64

Provisions for future expenses

65

Other provision

66

F. LIABILITIES 163 -

306,848

67

I. SUBORDINATED LIABILITIES - -

-

68

Subordinated liabilities to related companies

69

Subordinated liabilities to other investees

70

Subordinated liabilities to other enterprises

71

II. LONG-TERM LIABILITIES - -

579

72

Long term credits

73

Convertible bonds

74

Debts on the issue of bonds

75

Investment and development loans

76

Other long term loans

77

Long term liabilities to related companies

78

Long term liabilities to other investees

79

Other long term liabilities

579


12011069722211400 Statistic ID number 01-10-044993 Company Registry Number „A” BALANCE SHEET Liabilities


Description

12/31/2003


12/31/2004

a

b

c d

e

80

III. SHORT-TERM LIABILITIES 163 -

306,269

81

Short term credits -

82

of which: convertible bonds

83

Short term loans

84

Advance payments received from customers

85

Trade accounts payable (creditors) 44 -

276,900

86

Bills of exchange payable

87

Short term liabilities to related companies

88

Short term liabilities to other investees

89

Other short term liabilities 119 -

29,369

90

G. ACCRUED EXPENSES AND DEFERRED INCOME

150 -

4,093

91

Deferred revenues

92

ACCRUED EXPENSES AND DEFERRED INCOME

150 -

4,093

93

Deferred income

94 Total liabilities 1,055,711 2,152,240

12011069722211400 Statistic ID number 01-10-044993 Company Registry Number „A” PROFIT AND LOSS STATEMENT (cost by nature) Number

Description

12/31/2003


12/31/2004

a

b

c d

c

1

1 Net domestic sales revenues 21,680 -

680,575

2

2 Net export sales revenues - -

145,177

3

I. NET SALES REVENUES (01+02) 21,680 -

825,752

4

3 Change in self-manufactured inventories ±

5

4 Capitalized value of self-manufactured assets

6

II. CAPITALIZED VALUE OF OWN PERFORMANCE (±03+04)

- -

-

7

III. Other revenues 44 -

968

8

of which: reversal of impairment loss provision - -

9

5 Cost of raw materials 58 -

15,197

10

6 Value of services used 1,653 -

144,672

11

7 Value of other services 3,749 -

5,057

12

8 Cost of goods sold 3,668 -

246,660

13

9 Value of recharged services - -

254,040

14

IV. MATERIAL TYPE EXPENDITURE (05+06+07+08+09)

9,128 -

665,626

15

10 Wages 2,000 .

63,564

16

11 Other payments to personnel - -

12,058

17

12 Personnel related contributions 808 -

25,217

Figures in HUF thousand

18

V. PAYMENTS TO PERSONNEL (10+11+12) 2,808 -

100,839

19

VI. Depreciation charge 386 -

12,806

20

VII. Other expenses 1,219 -

16,504

21

of which: impairment loss provision - -

886

22

A. TRADING PROFIT (I±II+III-IV-V-VI-VII) 8,183 -

30,945


12011069722211400 Statistic ID number 01-10-044993 Company Registry Number „A” PROFIT AND LOSS STATEMENT (cost by nature) Number

Description

12/31/2003


12/31/2004

a

b

c d

e

23

13 Dividend received 20,973

16,852

24

of which: received from related companies

25

14 Gain on sale of investment 19,026

26


27

15 Interest received and gain on financial investments

28


29

16 Other interest received 392 -

7,509

30


31

17 Other revenues from financial transactions 51,517 -

222,216

32

of which: revaluation

33

VIII. REVENUES FROM FINANCIAL TRANSACTIONS (13+14+15+16+17)

91,908 -

246,577

34

18 Loss on financial investments

35

of which: given to related companies

36

19 Interest paid 561 -

189

37

of which: given to related companies

38

20 Impairment loss of financial investment, securities and bank deposits

- -

2,000


39

21 Other expenditures of financial transactions 90,872 -

179,657

40

of which: revaluation

41

IX. EXPENDITURES OF FINANCIAL TRANSACTIONS (18+19±20+21)

91,433 -

181,846

42

B. FINANCIAL PROFIT VIII-IX) 475 -

64,731

43

C. PROFIT ON ORDINARY BUSINESS (±A±B) 8,658 -

95,676

44

X. EXTRAORDINARY REVENUES - -

1

45

XI. Extraordinary expenditure - -

25

46

D. PROFIT ON EXTRAORDINARY EVENTS (X-XI)

- -

24

47

E. NET PROFIT BEFORE TAXATION (±C±D) 8,658 -

95,652

48

XII. Tax liability - -

2,751

49

F. AFTER TAX PROFIT (±E-XII) 8,658 -

92,901

50

22 Dividends paid out of accumulated profit reserve

51

23 Dividends paid (approved) out of current year profits

52

G. NET PROFIT PER BALANCE SHEET (±F+22-23)

8,658 -

92,901


12011069722211400 Statistic ID number 01-10-044993 Company Registry Number CASH FLOW REPORT

Figures in HUF

thousand Number

Description

12/31/2003

12/31/2004

Change in %

a

b

c

d

e

Change in cash provided by operating activities I. (Operating cash flow, rows 1-13)

-133,694 -341,451

-155.40%

1

Profit or loss before tax ± -12,315 80,545

654.04%

2

Depreciation charge + 386 12,806

3,217.62%

3

Loss in value/write back of loss in value ± 2,886

100.00%

4

Difference between provisions made and used ±

0.00%

5

Proceeds from sale of invested assets ± 257

100.00%

6

Change in trade accounts payable ± -13,156 263,527

200,309%

7

Change in other short term liabilities ± 2,052 26,499

1,291.39%

8

Change in accrued expenses ± - 3,943

100.00%

9

Change in trade accounts receivables ± 3,125 -478,674

-15,217.57

%

10

Change in current assets (except for: trade accounts and liquid assets) ±

109,682 -248,536

-126.60%

11

Change in prepaid expenses ± 1,954

-100.00%

12

Corporate tax paid (payable) - 2,751

100.00%

13

Dividend paid, payable -

0.00%

II.

Change in cash used in investing activities (Investment cash flow, rows 14-16)

-859,028 -297,175

65.41%

14 Purchase of invested assets - 880,000 314,157 -64.30%

15

Sales of invested assets + 130

100.00%

16

Dividend received + 20,972 16,852

-19.65%

Change in cash provided by financing activities III. (Financing cash flow, rows 17-27)

989,800 691,834

-30.10%

17

Share issue (capital increase) + 990,000 693,000

-30.00%

18

Bond issue +

0.00%

19

Borrowings +

0.00%

20

Repayment, cancellation of long term loans and bank deposits +

0.00%

21

Cash received +

0.00%

22

Share withdrawal -

0.00%

23

Bond redemption -

0.00%

24

Loan repayment - 200

-100.00%

25

Long term loans given and bank deposits -

0.00%

26

Cash transferred - 1,745

100.00%

27

Change in liabilities towards the owners and in other long term liabilities ±

579

100.00%

IV.

Change in liquid assets (Rows ±I±II±III.) ± -2,922 53,208

1,820.93%


Independent Auditor’s Report

To the shareholders of Szoftverfejlesztő és Számítástechnikai Szolgáltató Részvénytársaság

We have performed the audit of FreeSoft Rt.’s balance sheet for December 31, 2004 (in which the total and equal sum of assets and liabilities is HUF 2,152,240 thousand, and the balance sheet profit is HUF 92,901 thousand, and audited the profit and loss statement and the additional appendix for the year 2004, contained in the corporation’s Annual Report for 2004. The preparation of the audit is the responsibility of the management. Our task is to form an opinion about the annual report based on the audit, and to judge the coherence of the business report and the annual report.

We conducted the audit according to the Hungarian National Standards of audit, and the other Hungarian laws and regulations applicable to auditing. Under the terms of these regulations, sufficient evidence needs to be collected to support the statement that the annual report does not contain materially incorrect facts. The audit performed covered the examination of a sample from the documents supporting the figures of the annual report, in addition it included the evaluation of the applied accounting policies, the management’s important estimations, and the presentation of the annual report. We are convinced that our efforts provided sufficient evidence for us to grant the auditor’s clause.

During the audit, we revised FreeSoft Rt’s annual reports, its parts and items, the supporting books and documents according to the valid national audit standards, and we gained sufficient and appropriate evidence that the annual report had been made according to the Accountancy Act and the general principles of accounting.

In our opinion the annual report, in which the total and equal sum of assets and liabilities is HUF 2,152,240 thousand, and the balance sheet profit is HUF 92,901, provides a realistic and reliable picture of FreeSoft Rt’s state on December 31, 2004. The business report is consistent with the annual report.

Budapest, 29.03.05 MANTAX

Könyvvizsgáló és Tanácsadó Kft. 1025 Budapest, Berkenye u. 8/b, Registration number: 000870

Győző Czene chartered auditor Chamber membership No.: 000140

III. APPENDIX TO FREESOFT RT’S ANNUAL REPORT FOR 2004

1 ABOUT FREESOFT

1.1 Core Activities

The Company Registry registered the fusion of FreeSoft Rt and FreeSoft Kft on April 2, 2004; the resulting corporation continues the core activities of the limited company (Kft). The company’s core activity is the development of custom IT application systems, representation and sales of international products related to the professional areas, and the provision of IT services (consultation, training) primarily for the developed and represented products, supporting the entire lifecycle of IT systems (design, installation, deployment, maintenance), delivering complex IT services. FreeSoft has significant experience in deploying database management systems, because the Kft had been the Hungarian distributor of the Ingres relational database management system for years, and a key element in its current strategy is selling the Oracle database manager in Hungary. The company’s services include requirements analysis, system design, application development, testing and training, one of its key strengths is the redesign and redevelopment of existing systems to the „open environment”, which is also a Hungarian governmental recommendation. The Kft had established excellent partnerships with hardware providers, so when customers’ challenges require, a “turnkey” solution can be offered. The company’s team of professionals has accumulated significant experience and acquired wide-ranging skills related to HP, SUN, IBM, Unix and Linux, and Microsoft Windows NT Server computers. All the above mentioned platforms exist at FreeSoft, which ensures the appropriate knowledge for the employees to address the various challenges successfully. The corporation’s business policy is built on the principle that rather than making a single deal, the goal is to establish and maintain a long term relationship. The applications implemented by the company include custom-made products and ready-made generic developments as well. The company’s activities are grouped around the following key areas: o Document management and collaboration o Business Intelligence o Custom applications o Upgrading traditional it systems o Services (continuous operation of IT systems) o Internet application design o Business Mobility (Mobile Internet)

o Document digitalization and data entry at the Bátonyterenye Data Entry Center

1.2 Key data about the company

1.2.1 The composition and the modifications of the Corporation’s share capital

The Company Registry registered the fusion of FreeSoft Rt (share capital: HUF 1,050,000,000) and FreeSoft Kft on April 2, 2004; as a result, the private company became a public corporation. The public stock subscription that took place between 22 and 27 July, 2004 resulted in the subscription to 385,000 shares at the nominal value of HUF 385,000,000 (three hundred and eighty five million), at a 180% subscription price. The stock issue brought HUF 693 million fresh capital to the corporation, and the share capital rose to HUF 1,435,000,000, (one billion four hundred and thirty five thousand).

1.2.2 Business year

The business year starts on January 30 and ends on December 31.

1.2.3 Signatories • Vilmos Vaspál, Chairman of the Board of Directors • Ilona Eck, member of the Board of Directors, Chief Business Officer • Dr. Gáborné Móricz, member of the Board of Directors

1.2.4 Ownership Structure

The company’s ownership structure before the issue of shares

Domestic individuals14%

Employee-owned 7%

Domestic institutional investors 2%

Vilmos Vaspál 35%

Tibor Horváth 8%

László Molnár 8%

Edit Vincze 26%

The company’s ownership structure after the issue of shares

Vilmos Vaspál 25%

Domestic individuals 37%

Edit Vincze 19%

László Molnár 6%Tibor Horváth

6%Domestic institutional investors

2%

Employee-owned5%

2 GENERAL INFORMATION

FreeSoft Rt creates it Balance Sheet according to the Accountancy Act, Form version “A”. The Profit and Loss Statement has been prepared with the “cost by nature” method. The corporation follows the basic principles described by the Accountancy Act, in coherence with the Hungarian practice both in daily bookkeeping and in preparing the annual report. The report contains audited, non-consolidated figures (according to Section 119 (2) in the Accountancy Act) . The depreciation of fixed assets is based on the gross value, and uses a straight-line method. The company applies immediate depreciation for fixed assets and intellectual properties whose individual value is not higher than HUF 50,000. The fixed assets of FreeSoft Kft (which merged on April 2, 2004) were incorporated in FreeSoft Rt’s assets at their net value. The company registers the software purchased for its own use as intangible assets, and usually depreciates them in 3 years. Due to its core activity, the corporation replaces its own software applications more frequently than three years (because of new releases), since a software development company needs to keep pace with technological advances. In the case of such software, depreciation is accounted for according to the actual lifecycle of software, in compliance with the accountancy and the tax law. Purchased inventories are valued at actual purchase price. The company creates custom made software, therefore usually has no internally produced inventories. Inventories are usually stored for a very short time in the warehouses (between purchasing and delivery), so inventory values are always very low. Costs for projects for which there is no live customer order are financed from the company’s own funds, hoping that the product can later be sold, or as an internal software product, can be used to provide services. Direct costs are registered during the entire development period as expenditure for work in progress. The revaluation of internally produced inventories is done according to the accounting policies cost calculation rules, at direct cost price. The company defines direct cost price as the expenditure which can be directly related to the human resources working in a project established to create a specific product.

3 EFFICIENCY RATIOS The following table shows the liquidity position, efficiency and profitability of the company. Because of the organizational change, the comparison to the previous year does not provide realistic figures.

Name of ratio

12/31/2003

12/31/2004

Liquidity ratios Liquidity ratio

56,127.48% 309%

Liquidity fast rate

56,127.48% 308%

Dynamic liquidity rate

-1,667.74% -220%

Turnover speed of net current capital (number of turns)

0.1748 1.4592

Net operating capital

175,366 647,689

Debt and credit ratios Proportion of shareholders’ equity to equities and liabilities

99.97% 85.55%

Proportion of external capital to shareholders’ equities

0.02% 16.66%

Proportion of long-term liabilities to lasting liabilities and equities

0.00% 0.03%

Long-term dynamic liquidity ratio

-1,699.54% 0.38%

Interest cover

1,643.32% 50,709.52%

Profitability ratio

Return on Assets (%)

1.53% 5.79%

Profit to revenue ratio (%)

39.94% 11.25%

Assets turnover ratio (number of turns)

0.04 0.51

Customer turnover ratio (number of turns)

13.88 3.45

Average collection time from debtors (days)

26.31 105.79

Inventory turnover ratio (number of turns)

Not applicable 1,008.24

Average storage time of inventories (days)

Not applicable 0.36

Return ratio of fixed assets (turn)

466.24 32.96

Proportion of personal type expenditure to added value (%)

15.59% 31.02%

Return on Ordinary Share Interests (%)

1.56% 7.48%

Added value (HUF thousand)

18,012 325,052

Market ratios

Profit per ordinary share unit (Ft/share)

15.60 74.77

Price to Earnings (P/E) Not applicable 28.62

Market exchange rate per book value (%)

Not applicable 167%

Stock exchange rate on 12/31/2004 (Ft/share)

2,140

4 LIQUIDITY

According to the liquidity ratio, on December 31, 2004 the corporation possessed three times (308%) the amount of the short-term liabilities. The company is in a stable financial condition.

The quick liquidity ratio, which includes accrued assets in addition to inventories, shows that the corporation’s very liquid assets (current assets) were 3.08 as much as the short term liabilities, but this also shows a more than 99% (99.18) decrease. From the liquidity ratios it is apparent that the corporation has been able to settle its short term liabilities, its cash balance was sufficient to pay liabilities before their due dates.

On the Balance Sheet date long-term liabilities included the debt resulting from buying two company cars.

4.1 Debt and credit ratios

It is also apparent from debt and credit ratios that 14.45% of the company’s total assets were financed from debt, and that 0.03% of constant financing (long-term liabilities related to the invested capital) originates from debt. The merger of the two companies and the stock issue together stabilized the financial condition of the Corporation.

4.2 Efficiency ratios

The turnover ratio of goods inventories measures the number of times inventories ran out (in the given year) and the number of times they had to be replenished, based on the revenues of services sold. In the financial year 2004, the average inventories of the company were so low that the turnover rate shows 1008 turns.

Compared to the previous period, the collection time of outstanding items shows a 4-time increase (402.16%). This is because the actual activities of the company require a certain proportion of outstanding items.

The revenues generated by invested assets increased, but the assets turnover ratio did not reach 1 (0.52).

4.3 Profitability The calculated profitability figures provide a picture about the general performance of the company and the management. The profit to revenue ratio expresses the part of a single Forint of revenue which appears as profit; and because this ratio does not include interest, this profit margin is not influenced by the way of financing the company. In 2003, FreeSoft Kft’s profit to revenue ratio was 2.3%.

The net profit margin also includes interest burdens, but in this particular year hardly any interest costs were incurred, so there is no point in presenting this figure separately. It is the same as the profit to revenue ratio. According to 2004 performances, HUF 100 of revenue resulted in HUF 11.25 after-tax revenue.

The Return on Assets (the proportion of profit after tax to the average total assets) was -5.79%.

The Return on Ordinary Share Interests was 7.48%. This figure shows the proportion of profit after tax to the average share capital.

4.4 Capital market ratios

Capital market ratios in general can only be interpreted from 2004, when the company became public. Still, for a comparison, the profit per share ratio may be provided also for the year 2004. This figure produced a nearly 5-time increase (479.29%), from HUF 15.6 per share to HUF 74.77 per share. The closing exchange rate of FreeSoft Rt’s shares on December 31, 2004 was HUF 2,140 per share. The market exchange rate was 167% of book value.

The P/E - Price/Earnings Ratio at the end of the year was 29. This matches the international level common in the industry.

5 FURTHER INFORMATION FOR THE BALANCE SHEET

The following tables contain the current and the previous year figures of the Balance Sheet rows in thousand HUF, highlighting the changes between the B/S date in the previous year and the current year. The fact that in the base year the Rt. performed essentially only financial activities, and FreeSoft Kft's activities only became part of it during the current year makes this comparison unrealistic.

Figures in thousand HUF

Description 12/31/2003 12/31/2004

Change in %

A.

Fixed assets 880,032 1,194,189

36%

I.

INTANGIBLE ASSETS 725,799

II.

TANGIBLE ASSETS 32 50,076

156,388%

III.

FINANCIAL INVESTMENTS 880,000 418,314

-52%

B.

Current Assets 175,679 956,097

444%

I.

INVENTORIES - 1,638

II.

RECEIVABLES 689 572,365

82,972%

III.

MARKETABLE SECURITIES 171,816 325,712

90%

IV.

LIQUID ASSETS 3,174 56,382

1,676%

C.

Prepaid expenses and accrued income - 1,954

Total Assets 1,055,711 2,152,240

104%

Description 12/31/2003

12/31/2004

Change in %

D.

Shareholders equity 1055,398 1,841,299

74%

I.

ISSUED CAPITAL 1050,000 1,435,000

37%


II.

ISSUED BUT NOT PAID CAPITAL (-)

III.

CAPITAL RESERVES

308,000

IV.

RETAINED EARNINGS FROM PREVIOUS YEARS

-3,260 5,398

-266%

V.

NON-DISTRIBUTABLE RESERVES

VI.

REVALUATION RESERVE

VII.

PROFIT PER BALANCE SHEET

8,658 92,901

973%

E.

Provisions

- -

F.

Liabilities

163 306,848

188,150%

I.

SUBORDINATED LIABILITIES

- -

II.

LONG-TERM LIABILITIES

579

III.

SHORT-TERM LIABILITIES

163 306,269

187,795%

G.

Accrued expenses and deferred income

150 4,093

2,629%

Total liabilities

1,055,711 2,152,240

104%

FreeSoft Rt’s Balance Sheet total increased by 104% compared to December 31, 2003, and the proportion of shareholders’ equity increased by 74% as a result of the public share issue. The Balance Sheet profit is more than ten times as much as last year’s.

Reflecting ordinary operations, the level of liabilities increased, primarily because of payable amounts to suppliers. This also accounts for the increase in accrued expenses, but they still do represent a significant amount. The accruals are made up of fees of “continuous services” (telephone, internet, electricity) which need to be paid afterwards, in the following year.

The rest of the liabilities are composed as follows: Not due tax liabilities: HUF 23,762 thousand Debt to employees (for the 12th month salaries): HUF 5,607 thousand From the change in the assets side of the Balance Sheet it is apparent that the assets of the company increased by 104%, due to the asset components received as the result of the merger, and the raising of the shareholder’s equity.

Receivables amounted to HUF 572,365 thousand, of which HUF 478,674 thousand were customers’ outstanding items. By the time the Balance Sheet was prepared, the following two items remained outstanding: Name of debtor

Debt

Keravill Rt.

601,610

IT Kht.

131,250

Total outstanding items

732,860

Keravill Rt is being liquidated, which guarantees payment, IT Kht is a governmental organization, and the central budget is a very late payer. No impairment loss needs to be booked.

In line 36 (Receivables from related companies), HUF 36,367 thousand is listed. It represents the HUF value of a loan of EUR 147,000 to FreeSoft Deutschland GmbH by the parent company to launch activities. The amount of other receivables includes HUF 35,003 thousand, which represents shares that the corporation loaned until March 31, 2005. Other receivables further itemized: Description

Amount

EA Alfa Kft. 3-month rental deposit

9,387,638

TÁNYA prepayment

3,182,000

Overpayment of rehabilitation contribution

105,600

Overpayment of local business tax

185,895

VAT overpayment

9,459,837

Running projects in the year have partially or completely were closed, so no manufacturing costs have been accrued. To provide a more realistic picture, we present the key items in the Rt’s balance sheet in comparison to the Kft’s figures in the year 2003.


Description

FreeSoft Kft. 12/31/2003

Freesoft Rt. 12/31/2004

Change in %

A.

Fixed assets

42,352 1,194,189

2,720%

I.

INTANGIBLE ASSETS

3,208 725,799

22,525%

II.

TANGIBLE ASSETS

37,144 50,076

35%

II

FINANCIAL INVESTMENTS

2,000 418,314

20,816%

B.

Current Assets

216,516 956,097

342%

I.

INVENTORIES

- 1,638

II. 0

RECEIVABLES

115,268 572,365

397%

III.

MARKETABLE SECURITIES

24,050 325,712

1,254%

IV.

LIQUID ASSETS

77,198 56,382

-27%

C.

Prepaid expenses and accrued income

17,226 1,954

-89%

Total assets

276,094 2,152,240

680%

Description


FreeSoft Rt. 12/31/2004

Change in %

D.

Shareholders equity

211,096 1,841,299

772%

I.

ISSUED CAPITAL

15,000 1,435,000

9,467%


II.

ISSUED BUT NOT PAID CAPITAL (-)

III.

CAPITAL RESERVES

308,000

IV.

RETAINED EARNINGS FROM PREVIOUS YEARS

180,979 5,398

-97%

V.

NON-DISTRIBUTABLE RESERVES

VI.

REVALUATION RESERVE

VII.

PROFIT PER BALANCE SHEET

15,117 92,901

515%

E.

Provisions

- -

F.

Liabilities

62,877 306,848

388%

I.

SUBORDINATED LIABILITIES

- -

II.

LONG-TERM LIABILITIES

3,436 579

-83%

III. SHORT-TERM LIABILITIES 59,441 306,269 415%

G.

Accrued expenses and deferred income

2,121 4,093

93%

Total liabilities

276,094 2,152,240

680%

5.1 Fixed assets (intangible assets and tangible assets) in detail

5.1.1 The gross value and the cumulated depreciation of invested assets Changes 2004

Description

Opening balance 2004 Increase

Decrease

Closing balance 2004

GROSS VALUES

Intangible assets

0 727,568

727,568

Tangible assets

200 61,967 886

61,281

- Machinery

56,888 784

56,104

- Other assets

200 5,079 102

5,177

GROSS VALUE TOTAL:

200 789,535 886

788,849

DEPRECIATION

Intangible assets

1,769

1,769

Tangible assets

168 11,037

11,205

- Machinery

10,008

10,008

- Other assets

168 1,029

1,197

DEPRECIATION TOTAL

168 12,806

12,974

Of intangible assets HUF 722,686 thousand is goodwill, HUF 2,853 thousand is the value of assets taken over from the Kft, and HUF 2,029 thousand is purchases during the year. The tangible assets of the corporation increased by HUF 61,767 thousand. Of this increase HUF 24,880 thousand is new purchases, and HU 37,087 thousand resulted from taking over the assets of the merged FreeSoft Kft.

As regards the depreciation in 2004, we must mention the fact that the assets of the merged Kft were taken over at net value, and this value is shown in the Rt’s books as the gross value.

According to Section 52(6) of the Accountancy Act, no depreciation is written off for goodwill. The depreciation amount for the current year is 53% lower than the depreciation of the Kft’s assets in the year 2003. This is due to the fact that the assets were taken over at net value, since altogether nearly HUF 27 million worth of assets were newly purchased.

5.1.2 Net value of fixed assets on December 31, 2004 Changes 2004

Description

Opening balance 2004 Increase

Decrease

Closing balance 2004

NET VALUES

Intangible assets

0 727,568 1,769

725,799

Tangible assets

32 61,967 11,923

50,076

- Machinery

56,888 10,792

46,096

- Other assets

32 5,079 1,131

3,980

NET VALUE TOTAL:

32 789,535 13,692

775,875

As it is apparent from the above table, the average depreciation of the corporations fixed assets is 1.6%. This is due to the fact that goodwill does not depreciate, and it has an overwhelming weight among assets. The average depreciation of tangible assets was 18.3, and the depreciation of other intangible assets was 36.2%.

5.2 Financial investments

The corporation took over an investment from the Kft in HSA Magyar Szoftverfejlesztő Kft of HUF 2,000 thousand (8.3%). By the end of 2004, HSA Kft. lost 94% of its issued capital. There is no hope of reversing this process, therefore FreeSoft Rt. registered a 100% value loss for this investment.

The corporation acquired 50.42% of BigFish Internet-technológiai Kft. on December 30, 2004, and on January 5, 2005 a 100% ownership was achieved. BigFish Kft. is a widely accepted Internet technology company with a significant market share, its annual revenue exceeds HUF 100 million. Domestic comparative analyses place the company among the Top 10 web developers. In last year’s Balance Sheet, the share of a nominal value of HUF 12,100 is presented at the HUF 32,368 thousand purchase price.

During 2004, FreeSoft Deutschland GmbH. was founded in Germany, as the first step in FreeSoft’s international acquisitions. The investment date is November 18, 2004, nominal and book value is HUF 6,200 thousand (EUR 25,000). It is in 100% ownership of FreeSoft Rt. Business has started, first realized revenue is planned for 2005.

The corporation keeps its temporarily free current assets primarily in safe state securities. The following long-term securities kept until due date are included in the Balance Sheet for December 31, 2004:

Type of security

Book value on December 31, 2004

MAK 2006/F

HUF 379,745 thousand

Securities total


5.3 Securities purchased for trading

On December 31, 2004, the corporation possessed the following securities which had been purchased for trading:

Type of security

Book value on December 31, 2004

Discount Treasury bills


Shares


Securities total


The entire securities portfolio contains only Hungarian discount treasury bills and shares.

5.4 Valuation of liquid assets

In addition to the HUF current accounts, the corporations liquid assets included amounts in currency cash registers in EUR and USD, and on a currency current account (EUR). Liquid assets were not revalued on the Balance Sheet date (in compliance with the accounting policy), because the impact of the revaluation (foreign exchange gain) of all liquid assets in foreign currency would have been insignificant, less than 0.001% of Balance Sheet total.

According to corporate accounting policy, foreign liquid assets only have to be revalued on the Balance Sheet date if all currency items (including amounts in currency accounts and currency cash registers) at the year-end valuation show a significant exchange rate difference. The limits are as follows: revaluation has to take place if the exchange rate difference exceeds 2 percent of the Balance Sheet total of the business year in question, or HUF 500 million, whichever amount is the lowest.

5.5 Accruals and deferrals

5.5.1 Prepaid expenses and accrued incomeDescription

Amount (thousand HUF)

Revenue

267

Interest for deposits

13

Insurance fee 3

Material costs (primarily subscription fee for professional periodicals)

743

Software Support fee

927

Total accruals

1,954

The corporation partially or completely closed its projects during the year 2004, so no project costs had to be accrued.

5.5.2 Accrued expenses and deferred income Description

Amount (thousand HUF)

Transferred services

150

Bank charges

8

Telecommunication fees

954

Other services invoiced retroactively

761

Retroactively invoiced training fees

2,220

Total accruals and deferrals

4,093

The accruals are made up of fees for “continuous services” (telephone, internet) which need to be paid afterwards, in the following year and retroactively invoiced training fees.

6 FURTHER INFORMATION FOR THE PROFIT AND LOSS STATEMENT

6.1 Comparative figures of the private FreeSoft Rt. (former Fríz Rt.) and the public FreeSoft Rt

Description

12/31/2003

12/31/2004

Change in %

1

Net domestic sales revenues

21,680 680,575

3,039%

2

Net export sales revenues

145,177

I.

Net sales revenues

21,680 825,752

3,709%

II.

Capitalized value of own performance

III. Other revenues 44 968 2,100%

of which: reversal of impairment loss provision

3

Material costs

58 15,197

26,102%

4

Value of services used

1,653 144,672

8,652%

5

Value of other services

3,749 5,057

35%

6

Cost of goods sold

3,668 246,660

6,625%

7

Value of recharged services

254,040

IV.

Material type expenditure (03+04+05+06+07)

9,128 665,626

7,192%

8

Wages

2,000 63,564

3,078%

9

Other payments to personnel

- 12,058

10

Personnel related contributions

808 25,217

3,021%

V.

Payments to personnel (10+11+12)

2,808 100,839

3,491%

VI.

Depreciation charge

386 12,806

3,218%

VII.

Other expenses

1,219 16,504

1,254%

of which: impairment loss provision

886

A.

TRADING PROFIT (I±II+III-IV-V-VI-VII)

8,183 30,945

278%

VII.

Revenues for financial transactions

91,908 246,577

168%

IX.

Expenditures of financial transactions

91,433 181,846

99%

B.

FINANCIAL PROFIT (VIII-IX)

475 64,731

13,528%

C.

PROFIT ON ORDINARY BUSINESS (±A±B)

8,658 95,676

1,005%

X.

Extraordinary revenues

1

XI.

Extraordinary expenditures

25

D.

PROFIT ON EXTRAORDINARY EVENTS (X-XI)

- -24

E.

NET PROFIT BEFORE TAXATION (±C±D)

8,658 95,652

1,005%

XII.

Tax liability

- 2,751

F. AFTER TAX PROFIT (±E-XII) 8,658 92,901 973%

22

Dividends paid out of accumulated profit reserve

23 Dividends paid (approved) out of current year profits

G.

NET PROFIT PER BALANCE SHEET (±F+22-23)

8,658 92,901

973%

With FreeSoft Kft’s merger on April 2, 2004, the revenue changed by orders of magnitude, increased more than 31-times. The operating profit is more than 270% (278%) higher. As a result of the merger taking place during the year, revenues do not include the first quarter revenue realized by the Kft (HUF 94,649 thousand). Together with this amount the annual revenue was HUF 920 million.

The profit amount also increased significantly (from HUF 8,658 thousand to HUF 92,901 thousand), almost 11-times as much as in the previous year. Due to the factors which reduce the basis of corporate tax, the corporation’s tax liability’s amounted to 2.9%.

Net sales

revenues Trading Profit

Financial Profit

Profit on ordinary business

Pre-tax profit

After tax profit

Profit per Balance Sheet

12/31/2003 21,880 8,183 475 8,658 8,658 8,658 8,658 12/31/2004 825,752 30,945 64,731 95,676 95,652 92,901 92,901

6.2 Comparative figures of FreeSoft Kft. and the public FreeSoft Rt.

Description


FreeSoft Rt. 12/31/2004

Change in %

1

Net domestic sales revenues

460,414 680,575

48%

2

Net export sales revenues

173,285 145,177

-16%

I.

Net revenue of sales (01 + 02)

633,699 825,752

30%

II.

Capitalized value of own performance

III.

Other revenues

14,942 968

-94%

of which: reversal of impairment loss provision

8

3

Material costs

13,018 15,197

17%

4

Value of services used

168,235 144,672

-14%

5

Value of other services

5,492 5,057

-8%

6

Cost of goods sold

49,240 246,660

401%

7

Value of recharged services

257,153 254,040

-1%

IV.

Material type expenditure (03+04+05+06+07)

493,138 665,626

35%

8

Wages

46,312 63,564

37%

9

Other payments to personnel

8,385 12,058

44%

10

Personnel related contributions

19,087 25,217

32%

V.

Payments to personnel (10+11+12)

73,784 100,839

37%

VI.

Depreciation charge

27,150 12,806

-53%

VII.

Other expenses

39,975 16,504

-59%

of which: impairment loss provision

24,398 886

-96%

A.

TRADING PROFIT (I±II+III-IV-V-VI-VII)

14,594 30,945

112%

VII.

Revenues for financial transactions

10,982 246,577

2,145%

IX.

Expenditure for financial transactions

10,799 181,846

1584%

B.

FINANCIAL PROFIT OR LOSS (VIII-IX)

183 64,731 35,272%

C.

PROFIT ON ORDINARY BUSINESS (±A±B)

14,777 95,676

547%

X.

Extraordinary revenues

882 1

-100%

XI.

Extraordinary expenditure

542 25

-95%

D.

PROFIT ON EXTRAORDINARY EVENTS (X-XI)

340 24

-107%

E.

NET PROFIT BEFORE TAXATION (±C±D)

15,117 95,652

533%

XII.

Tax liability

- 2,751

F.

AFTER TAX PROFIT (±E-XII)

15,117 92,901

515%

22

Dividends paid out of accumulated profit reserve

23

Dividends paid (approved) out of current year profits

G.

NET PROFIT PER BALANCE SHEET (±F+22-23)

15,117 92,901

515%

6.3 Material type expenditure

Such a high change in the material type expenditure was caused by the incorporation of the Kft’s activities. To provide a more realistic picture of the costs and expenses and the profit, we present the key items in the Rt’s Profit and loss statement in comparison to the Kft’s figures in the year 2003. Material type expenditures increased by 35% compared to the similar figures of the Kft in 2003. The net revenue of sales increased quicker (by 48%).

6.4 Personal type expenditure

Wages and other personnel type payments per groups of employees:

Group of employees

Wages (thousand HUF)

Other payments to personnel (thousand HUF)

Number of employees

FTE

61,515

12,058

39

Old-age pensioner

2,049

2

Total:

63,564

12,058

41

By taking over the Kft’s activities, wages and personnel type payments suddenly increased. Compared to FreeSoft Kft’s year 2003 figures, personnel type expenditure increased by 37%.

The corporation only employs professionals as full-time employees. No work outside employment was performed in this financial year, but for large software development and deployment projects subcontractors were hired.

Elected officials (members of the Board of Directors and the Board of Supervisors) received no special remuneration for these tasks.

6.5 Depreciation charges

Depreciation decreased by 53% compared to the 2003 figures of the Kft. This results from the fact that FreeSoft Rt took over the Kft’s assets at their net value, and depreciation is based on this value. The gross value of fixed assets compared to the Kft's figures decreased by 62 percent.

6.6 Extraordinary revenue and expenditure

In 2004, the amount of extraordinary revenue and expenditure was a loss of HUF 24 thousand.

7 LIST OF ITEMS WHICH INCREASE OR REDUCE THE TAX BASIS Total items reducing the pre-tax profit: 95,168,949

Amount from accrued losses in previous years 13,667,000

Received dividend 16,851,992

Value of fixed assets sold 130,000

Fiscal Depreciation 12,806,418

Deductible for Public Foundations (100%) 1,756,991

Deductible for Public Foundations (150%) 562,500

50% of received royalties 26,664,086

50% of profit from stock transactions 21,161,914

25% of HIPA (Local Business Tax)

1,568,048

Total items increasing the pre-tax profit: 16,708,584

Provisions for expected losses

Value loss of fixed assets 885,927

Book value of sold fixed assets

Economic depreciation 12,806,418

Fixed assets transferred free of charge 386,991

Amount transferred to public foundations 1,745,000

Other extraordinary expenditure

24,572

Tax liability related to previous years

Self-check extra charge

Business relationships’ costs above 0.5%

859,676

8 CASH FLOW REPORT


Number

Description

12/31/2003

12/31/2004

Change in %

a

b

c d

e

I.

Change in cash provided by operating activities (Operating cash flow, rows 1-13)

-133,694 -341,451

-155.40%

1

Profit or loss before tax ±

-12,315 80,545

654.04%

2

Depreciation charge +

386 12,806

3,217.62%

3

Loss in value/write back of loss in value ±

2,886

100.00%

4

Difference between provisions made and used ±

0.00%

5

Proceeds from sale of invested assets ±

257

100.00%

6

Change in trade accounts payable ±

-13,156 263,527

2,003.09%

7

Change in other short term liabilities ±

-2,052 26,499

1,291.39%

8

Change in accrued expenses ±

- 3,943

100.00%

9

Change in trade accounts receivables ±

3,125 -478,674

-15,217.57%

10

Change in current assets (except for: trade accounts and liquid assets) ±

-109,682 -248,536

-126.60%

11

Change in prepaid expenses ±

-1,954

-100.00%

12

Corporate tax paid (payable) -

2,751

100.00%

13

Dividend paid, payable -

0.00%

II.

Change in cash used in investing activities (Investment cash flow, rows 14-16)

-859,028 -297,175

65.41%

14

Purchase of invested assets -

880,000 314,157

-64.30%

15

Sales of invested assets +

130

100.00%

16

Dividend received +

20972 16,852

-19.65%

III.

Change in cash provided by financing activities (Financing cash flow, rows 17-27)

989,800 691,834

-30.10%

17

Share issue (capital increase) +

990,000 693,000

-30.00%

18

Bond issue +

0.00%

19

Borrowings +

0.00%

20

Repayment, cancellation of long term loans and bank deposits +

0.00%

21

Cash received +

0.00%

22

Share withdrawal -

0.00%

23

Bond redemption -

0.00%

24

Loan repayment -

200

-100.00%

25

Long term loans given and bank deposits -

0.00%

26

Cash transferred -

1,745

100.00%

27

Change in liabilities towards the owners and in other long term liabilities ±

579

100.00%

IV.

Change in liquid assets (Rows ±I±II±III) ±

-2,922 53,208

1,820.93%

The analysis of cash resources and cash usage was based on the actuals on the last two financial year’s Balance Sheet date (December 31).

Cash resources in 2004 increased by HUF 53.208 thousand. The fresh capital obtained by the stock issue allowed for increased investment activities, which kept the investment cash flow on the negative side, but the minus of the investment cash flow was significantly lower in 2004 than it had been in the previous year. The highly negative operating cash flow results from the revenue of projects which were completed at the end of the year is represented as debtors’ outstanding items in the cash flow table. Not even the strongly positive change in the pre-tax profit without dividends was able to compensate for this.

The current year brought a significant stabilization in the financial condition of the company.

9 ASSUMING RESPONSIBILITY FOR THE ANNUAL REPORT FOR THE YEAR 2004

I assume responsibility for the reliability of the figures, the analyses and deductions contained in this Annual Report for 2004.

The Annual Report contains realistic figures and statements, and does not hide any fact which is important from the aspect of judging the corporation’s condition.

Budapest, March 29, 2005

Vilmos Vaspál, Chairman of the Board of Directors

FreeSoft Rt’s Annual Report 20043 EFFICIENCY RATIOS ... financial losses, which brought down the...

Documents

Transcript of FreeSoft Rt’s Annual Report 20043 EFFICIENCY RATIOS ... financial losses, which brought down the...