LITHUANIAN ICT MARKET NEWS May, 2004

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1 LITHUANIAN ICT MARKET NEWS May, 2004 M&A, buyouts Fund raising Corporate restructuring Strategic advisory Egle Stasytyte Lithuanian ICT market news is a periodical review of recent developments in the sector of information technology, fixed and cellular telecommunications and Internet access. Baltic IT leaders seek for partnerships and greater specialization to gain competitive edge IT service companies focus on efficiency Baltic IT services market Leaders of Baltic IT services sector in 2003, Euro '000 IT services revenue Change of IT services rev. Services as % of total rev. Total revenue Change of total rev / /02 MicroLink Group (EE)* 18,624 18,972-2% 32% 58,200 61,200-5% Dati Group (LV) 10,386 13,338-22% 100% 10,386 13,338-22% Sonex Group (LT) 9,268 10,426-11% 17% 55,317 41,995 32% Alna Group (LT)** 7,623 7,343 4% 40% 18,946 22,675-16% Informacines Technologijos (LT) 6,266 4,821 30% 83% 7,552 6,699 13% IT Alise (LV) 5,059 4,802 5% 85% 5,938 6,222-5% BCS (EE) 2,549 2,697-5% 41% 6,153 7,701-20% Tilde Group (LV) 2,480 1,681 48% 83% 3,002 2,055 46% Blue Bridge (LT)*** 2,201 2,288-4% 14% 16,045 16,958-5% Sintagma Group (LT) 1,998 1,564 28% 30% 6,632 4,634 43% Helmes (EE) 1,879 1,612 17% 31% 6,091 6,605-8% New Vision (LT)**** 1,668 n.a. n.a. 20% 8,515 n.a. n.a. Algoritmu sistemos (LT) 1,412 1,063 33% 92% 1,526 1,066 43% HNIT-Baltic GeoInfoServisas (LT) 1,403 1,011 39% 62% 2,273 1,863 22% Baltic Amadeus (LT) 1, % 12% 8,386 8,081 4% Elva-1 (LV) % 19% 3,355 2,758 22% Compservis (LT) n.a. 999 n.a. n.a. n.a. 5,659 n.a. DataPro (LV) n.a. 827 n.a. n.a. n.a. 1,410 n.a. Average -0.2% 35% 2.9% Source: data provided by the management of the companies Baltic IT leaders in added value in 2003, Euro '000 Added value per Av. number of employee Change Added value Change employees / / Helmes (EE) % 2,641 1,937 36% Elva-1(LV) % 1,582 1,234 28% MicroLink Group (EE) % 21,000 15,200 38% HNIT-Baltic GeoInfoServisas (LT) % 1, % Informacines Technologijos (LT) % 3,719 3,424 9% Alna Group (LT)** 22 n.a. n.a. 5,445 n.a. n.a. 251 n.a. Tilde Group (LV) % 1, % IT Alise (LV) % 3,066 3,025 1% Sintagma Group (LT) % 1,944 1,395 39% Dati Group (LV) % 6,571 7,065-7% BCS (EE) % 1,409 1,373 3% New Vision (LT)**** n.a. n.a. n.a. n.a. n.a. n.a. 110 n.a. Blue Bridge (LT)*** n.a. n.a. n.a. n.a. n.a. n.a Algoritmu sistemos (LT) n.a. n.a. n.a. n.a. n.a. n.a Baltic Amadeus (LT) n.a. n.a. n.a. n.a. n.a. n.a Sonex Group (LT) n.a. n.a. n.a. n.a. n.a. n.a Average % % - - Average per working day, EUR Source: data provided by the management of the companies * Approximate share of IT services revenue of total revenue ** Financial results do not include data on Alna's daughter company UAB Alnos biuro sistemos and it's subsidiary UAB Konferenciju ir audiovizualines sistemos, which engage in office supplies *** Only the parent company **** The member of Varos Group. New Vision was mould after structural transformation in Varos Group in 2003, therefore the results for 2002 are not available In our list IT service revenues include software development, programming, system integration, maintenance, software and system implementation, training, consulting services and sales of software products developed in-house. These revenues do not include any sales of hardware, resold software, office equipment or other products. Based on the methodology implemented by Eurostat, value added is calculated from gross operating income by adjusting for operating subsidies and indirect taxes. Both tables do not include results of foreign companies subsidiaries and affiliates. Disclaimer: The information contained in this document has been obtained from external sources, which we believe to be reliable. Although Prime Investment has taken steps to ensure the accuracy of the information presented we do not guarantee that it is accurate or complete, or make warranties regarding results of its usage.

2 Prime Investment Page 2 of 2 Following the data of Baltic IT companies, in 2003 IT service market tightened by 0.2% compared to an average increase of 2.9% of total IT sales. The top three companies - Microlink Group, Dati Group and Sonex Group, which jointly hold 52% of Baltic IT services market, experienced a drop down by 10.4% in revenue generated from IT services and impinged the tempo of the entire IT services market. Excluding the top three Baltic IT companies, the sales from IT services grew by 14.2% in At the same time competition continued to intensify as the top three Baltic IT service companies lost part of their market share to their smaller rivals. With the companies ability to compete increasingly depending upon the knowledgeable workforce able to continuously produce added value to their companies, we have expanded our review by introducing in a new indicator value added at a factor cost. Value added per employee is a measure of a company s performance efficiency. Unfortunately, in our first attempt to introduce the efficiency measurement of Baltic IT companies, we have not been able to collect data from some companies, which we believe would have placed well in the rankings. In 2003 an average employee of a Baltic IT service company created value added of EUR 98 per working day, an increase of 10% compared to EUR 90 in In 2003 Helmes (EE) emerged as the leader in the Baltics in terms of its performance efficiency, which amounted to EUR 169 per employee per working day, followed by Elva-1 (LV) with EUR 141, trailed by Microlink Group (EE), HNIT-Baltic GeoInfoServisas (LT) and Informacines Technologijos (LT), which each had their employee produce EUR 122 of value added per working day in With a view that focus on core business would facilitate stronger growth and competitiveness in the Baltic and EU markets, the largest IT service companies have been stripping away extraneous business lines and reinforcing their IT service teams by establishing partnerships with international industry leaders. Microlink refined its IT solutions and services activity by selling Delfi, the Baltics largest Internet portal in December 2003 and divesting its shares in SAF tehnika in May Alna tried to improve their ability to cater to large global IT service contracts by establishing a strategic alliance with vmoksha Technologies, the IT services leader in India in February In April 2004 Alna and Sonex Group, former competitors, decided to swap their business units, thus asserting greater specialization in their core business lines and becoming strategic partners. Market news Lithuanian IT market upwards by 9% EU funding and government initiatives to drive Lithuanian ICT market! Despite sluggish expansion of global IT market in 2003, Lithuanian IT sector continued to grow. Infobalt, the ICT Association in Lithuania, estimated the size of Lithuanian IT market at EUR 327m in The market recorded an annual growth of around 9% compared to 2002.! An inflow of financing from EU structural funds as well as increasing government IT spending is expected to contribute to further growth of Lithuanian ICT market in According to the state investment programs, in 2003 the Government increased its internal IT expenditure by 9.6% to EUR 29m. During 2003 in cooperation with alliance Window to the Future, the Government established 100 public Internet access points, developed online public access services and founded science and technology parks in consort with Lithuanian universities. The Government is budgeting EUR 32m for public ICT development programs in In addition, accordingly to Single Programming Document of Lithuania, a total funding of EUR 55m is planned for the development of IT services and infrastructure over , out of which 75% will be contributed by EU funds and the rest by national budget. Activities indicated for direct support include establishment and development of official information source systems, electronic public services, data transmission networks, public Internet access points and creation of Lithuanian information environment.

3 Prime Investment Page 3 of 3 Outsource2Lithuania to encourage IT exports The growth of Internet usage in the Baltics lost momentum! According to Infobalt, in 2003 IT services exports increased by 9% amounting to EUR 38.2m. Aimed at positioning Lithuanian IT companies among leading providers of IT near-shore outsourcing services in Europe, in February 2004 Infobalt presented Outsource2Lithuania, a project developed to unite Lithuanian ICT exporters. The participants will benefit from development of strong Outsource2lithuania brand name, qualified information presentation and effective international marketing strategy. Infobalt expects 40 companies to join the project, which is expected to cost around EUR thousand in the first year.! Over 2003 growth of Internet penetration rates decelerated in all Baltic countries showed the research conducted by TNS Emor. The growth rate of Internet users in Estonia decreased from 30% in 2002/2001 to 9% in 2003/2002, while Latvia slowed from 24% to 10% over the same periods. Although Lithuania showed the largest growth rate of Internet usage among the Baltic countries reaching 25%, the speed has dropped compared to 82% achieved over 2002/2001. According to TNS Emor, 47% of the population used Internet in Estonia in 2003, while 25% of the population was online in Lithuania and 23% connected to Internet in Latvia. Internet banking market ply for active users Online reaches 1.4% of Lithuanian adspend Low level of computer usage offers longterm growth prospects! In 2003 the number of Internet banking users in Lithuania more than doubled, as 639 thousand clients were registered for Internet banking service at the end of the year compared to 305 thousand at the end of Hansabankas ranked first with 344 thousand registered customers, of whom 1 / 3 were active Internet banking users, followed by Vilniaus bankas, which reported a total of 245 thousand registered Internet banking clients of whom ½ were actively using the service.! Growth of Internet audiences and the ever-extending Internet role in consumer s daily lives were the key drivers of Lithuanian Internet advertising market in According to TNS Gallup, Internet advertising expenditure increased by almost 150% totalling EUR 1.07m in 2003 compared to EUR 0.43m in Internet advertising share of Lithuanian media advertising budgets have increased from 0.6% to 1.4%. Internet advertising markets in Latvia and Estonia were worth EUR 1.26m and EUR 1.79m in 2003 representing 1.9% and 3.0% of all media advertising expenditures respectively.! High PC sales price compared with the rest of the Baltics inhibits home use of IT in Lithuania. According to eeurope+2003, 22% of Lithuania s households had at least one computer at home in 2003, while the same indicator in Latvia and Estonia stood at 30% and 37% respectively. Average PC acquisition costs represented 366% of gross monthly household income in Lithuania whereas it was 204% in Latvia and 184% in Estonia. In an effort to foster IT usage in Lithuania, Government assented to the proposal to introduce tax incentive for people purchasing PC for home use. According to the proposal, Lithuanian residents may deduct the PC acquisition costs including licensed software of up to LTL (app. EUR 1 158) from their taxable income once in three years. The proposal, which is still subject to parliamentary approval, is expected to facilitate the home use of PCs and reduce the percentage of pirated software. Telco market upturn driven by mobile users! As a result of sharpened competition Lithuanian telecommunication market experienced price cuts, leading to continued growth in mobile customer base. According to Lithuanian Communications Regulatory Authority, cellular penetration rate increased from 47.5% in 2002 to 60.9% in At the same time Lietuvos Telekomas continued to loose its fixed line users dropping from 27.0% to 23.9% in the respective periods. Revenue-wise, telecommunication market grew by 25% reaching EUR 587m in Corporate news Fixed-line telephony revenue of Lietuvos Telekomas burns down! Although the expiry of Lietuvos Telekomas monopoly established no real competition in fixed-line telephony market, expansion of mobile telephony eroded Lietuvos Telekomas revenue in During 2003, consolidated revenue of Lietuvos Telekomas amounted to LTL 812m a drop down of 16.1% compared to LTL 968m in Decreased number of customers and reduced tariffs resulted in a decline of 22.7% in revenue from fixed-line telephony services,

4 Prime Investment Page 4 of 4 which accounted for 78% of total turnover. On the other hand, the revenue from Internet and data communication services as well as other services increased by 9.0% and 44.6% respectively. Following fixed-line market liberalization as of 1 January 2003, 17 new operators provided fixed-line telephony service at the end of 2003, though they did not pose any threat to Lietuvos Telekomas position as only 4 of them were rendering call services through their own telecommunication network and the others interconnected via Lietuvos Telekomas network or used VoIP technology. Despite slower growth mobile operators manage to uplift EBITDA margins! EBITDA of mobile operators increased at a greater rate than their overall sales figures in Omnitel announced its revenue of LTL 769m, an increase of 10%, while EBITDA went up by 21% to LTL 336m giving the EBITDA margin of 44%. Bite GSM reported its annual turnover of LTL 377m up by 16%, whereas EBITDA grew by 43% to LTL 88m giving the EBITDA margin of 23% in Tele2 has not reported any official data, though market experts estimate its turnover to be in the range of LTL m. Omnitel ranked first with thousand subscribers followed by Tele2, which is estimated to have 592 thousand customers at the end of Bite GSM reported its subscriber base to be 529 thousand, including 22 thousand clients of mobile virtual network operators. In IQ of 2004 compared to the IQ of 2003, the revenue of Omnitel grew by 9% reaching LTL 191m, whereas EBITDA grew by 3% and made up 45% of revenue. Bite GSM increased its revenue and EBITDA by 5% and 4% respectively earning a 24% EBITDA margin on LTL 92m of revenue. At this juncture mobile operators must stay alert as the increasing competition resulting in higher marketing expenditures might lead to the erosion of EBITDA margins. Wholesalers to enhance their competitive abilities! Tech Data, a group of three computer and software wholesalers in Lithuania, Latvia and Estonia, was bought out by Askembla Growth Fund, the Scandinavian private equity fund investing in the Baltic states in January Renamed to TD Baltic, the companies will continue to collaborate with Tech Data Corporation, the leading global provider of IT products headquartered in USA. In 2003 the consolidated sales of Tech Data in Lithuania, Latvia and Estonia reached EUR 71m. In March 2004 GNT Group, the largest IT wholesale distributor in Finland with subsidiaries in Lithuania (GNT Lietuva), Latvia (GNT Latvia) and Estonia (GNT Eesti) joined European Wholesale Group, a consortium of leading independent national distributors. The Consortium offers its members pan-european co-marketing programs to address a large number of resellers. GNT Group posted revenue of EUR 532m, of which about 25% accounted for Baltic operations in Microlink hones its focus on IT business! In December 2003 Microlink sold Delfi, which runs six news portals in three Baltic states to Findexa, a leading business directory publisher in Norway owned by Texas Pacific Group. The deal was valued at EUR 5.1m. In the financial year of 2002/2003, consolidated Delfi s revenue amounted to EUR 1.5m. The sale was one of the series of disposals in line with Microlink s strategy to concentrate on its core IT service business. In May 2004 SAF Tehnika, manufacturer of wireless telecommunications equipment completed an initial public offering, which enabled Microlink to divest its controlling share in the company. Shares representing 48.39% of SAF Tehnika valued at EUR 25.8m were sold to a broad base of international and Latvian investors. The founders and five executives own the remaining 51.61% of the company. Varos Group turn to new expansion opportunities Alna and Sonex Group to cut off their competition! To benefit from an increasing portfolio of technological solutions, Varos Group (VG), a pan-baltic provider of IT and engineering solutions, developed a model for strategic partnership with small technology companies. Possibility to expand operations across the Baltic States by offering complex solutions together with VG attracted Girba, a designer of electronic security systems, which was the first to enter strategic partnership with VG in March VG s approach is to acquire minority interest in a company with a seat on the Board of Directors while allowing a company to gain the membership in VG. In 2003 VG generated EUR 15.9m revenue, a 23% increase compared to 2002.! In an effort to reinforce their positions in the Baltics and EU by increasing their specialization in core business, Alna and Sonex Group, the largest Lithuanian IT companies, decided to swap parts of their businesses. Sonex Group is taking over 100% shares of Alnos Infrastrukturos Sprendimai, an IT infrastructure solutions provider, while Alna is going to take over Sonex Sistemos and Softex Latvia, developers of business management systems in Lithuania and Latvia. After the deal is accomplished, Sonex Group will specialise in the field of big infrastructure projects, hardware manufacturing as well as delivery of technical support

5 Prime Investment Page 5 of 5 services. Alna will focus on the development of business management systems and delivery of programming and IT outsourcing services. EBRD increased its stake in Sonex Group Finish post seizes Baltic market of electronic payment services! In April 2004 Sonex Group made a new share issue, by which EBRD increased its stake to 36%. Mr. A. Bartusevicius, the chairman of the board of Sonex Group owns the remaining 64%. EBRD is also an investor in Microlink and Alna.! In May 2004 Suomen posti, the post corporation in Finland, acquired Nacionalinis atsiskaitymu centras, Nacionalais Maksajumu Centras and Eesti Maksekeskuse, the providers of electronic invoice presentation and payment services in Lithuania, Latvia and Estonia. The consolidated annual turnover of three companies, which were previously owned by Swedgiro, the subsidiary of Swedish post, amounted to EUR 11m.