Market announcement

Title

EXPLANATORY MEMORANDUM TO THE INTERIM REPORT OF AS STARMAN'S GROUP FOR THE FIRST NINE MONTHS OF 2008

Message

General                                                                         

Success of Starman continued for the first nine months of the year. The company 
maintained its strong position in the spheres of cable-TV and the internet and  
further strengthened its position in the telephony market. Starman is currently 
offering the best bundled triple play service in the home user sector. The      
triple play service is now available to the majority of the company's customers.
Through its cable network, Starman is currently represented in most of Estonia's
major cities, predominantly in densely populated areas. In December 2006, the   
product portfolio of Starman was supplemented with a DTT (digital terrestrial   
television) service. ZUUMtv, which was positioned separately, is transmitted    
through air and Starman's cable network is not used for delivering this product.
ZUUMtv is expected to attract a considerable number of new customers in the near
future, especially in those regions of Estonia where Starman was not present    
thus far.                                                                       
A consortium of financial investors led by Bancroft Private Equity LLP acquired 
a majority holding in Starman at the end of 2007. At the moment, Baltic Moontech
Investments Holding AS representing the above financial investors holds a total 
of 9,361,627 shares in Starman, i.e. 71.72% of the company's share capital.     
Given the current structure of shareholders, delisting of the company from the  
Tallinn Stock Exchange will probably be applied for in the near future.         
Starman Group's total revenue for the first nine months of 2008 amounted to 16.6
million euros, representing a 25% increase compared to the same period a year   
ago. EBITDA for the first nine months of 2008 amounted to 5.4 million euros and 
net profit attributable to shareholders from ordinary business operations to 2.5
million euros - respectively an 18% and a 30% increase compared to the same     
figures last year. The good performance is built on the company's successful    
long-term activities relating to traditional services, where the best-ever      
results were achieved both in terms of volume and profitability. As expected,   
the starting ZUUMtv had a negative impact on Starman's profit figures. A drop of
1.3 million euros in EBITDA - Starman's main performance indicator - is directly
attributable to ZUUMtv, plus certain indirect costs whose amount cannot be      
determined precisely as they were allocated to a number of different products.  
The negative impact of ZUUMtv on the financial results of the Group is          
anticipated to continue also in the near future. However, in the long run the   
new product is expected to strengthen the company's market position and         
profitability.                                                                  

Financial ratios                                                                

A selection of ratios for evaluating the economic activities in the first nine  
months of 2008:                                                                 
--------------------------------------------------------------------------------
|                                | 2006         | 2007         | 9 months      |
|                                |              |              | 2008          |
--------------------------------------------------------------------------------
| Sales increase                 | 25%          | 19%          | 25%           |
--------------------------------------------------------------------------------
| EBITDA margin                  | 40%          | 33%          | 32%           |
--------------------------------------------------------------------------------
| Gross margin                   | 21%          | 13%          | 13%           |
--------------------------------------------------------------------------------
| Net margin                     | 19%          | 13%          | 10%           |
--------------------------------------------------------------------------------
| Revenue/average assets         | 0.72         | 0.73         | 0.81          |
--------------------------------------------------------------------------------
|                                |              |              |               |
--------------------------------------------------------------------------------
| Equity ratio                   | 58%          | 57%          | 55%           |
--------------------------------------------------------------------------------
| Debt to equity                 | 0.56         | 0.57         | 0.59          |
--------------------------------------------------------------------------------
| Debt/EBITDA                    | 1.19         | 1.41         | 1.28          |
--------------------------------------------------------------------------------
| Investments/EBITDA             | 0.83         | 1.15         | 0.97          |
--------------------------------------------------------------------------------
|                                |              |              |               |
--------------------------------------------------------------------------------
| Current ratio                  | 1.09         | 0.91         | 1.15*         |
--------------------------------------------------------------------------------
| Invoice turnover rate (annual) | 20.0         | 21.5         | 22.2          |
--------------------------------------------------------------------------------

Definitions:                                                                    
Sales increase = increase compared to the same period last                      
year                                                                            
EBITDA = operating profit + depreciation and amortisation                       
EBITDA margin =                                                                 
EBITDA / total revenue                                                          
Gross margin = operating profit / total revenue                                 
Net                                                                             
margin = net profit attributable to shareholders / total revenue                
Revenue /                                                                       
average assets - for comparison purposes, the revenue for the first nine months 
of 2008 has been multiplied by 4/3                                              
Equity ratio = equity / total assets                                            
Debt =                                                                          
borrowings + long-term borrowings                                               
Debt / EBITDA - for comparison purposes,                                        
EBITDA for the first nine months of 2008 has been multiplied by 4/3             
Current                                                                         
ratio = current assets / current liabilities                                    
Invoice turnover rate = revenue for                                             
the period / accounts receivable at the end of the period; for comparison       
purposes, revenue for the first nine months of 2008 has been multiplied by 4/3  
* As to this ratio, it should be borne in mind that because of the special      
nature of the accounting principles applied in preparing this report, only loans
repayable within the current financial year are recognised as short-term        
borrowings under current liabilities (i.e. in the case of nine months, loan     
payments due within the following three months) unlike the year-end figures     
where all loans repayable within the following year are recognised as short-term
borrowings. Consequently, the current ratio for nine months is somewhat         
overestimated vis-à-vis the year-end figures. Upon eliminating this difference  
from the figures of the first nine months of 2008, the current ratio amounts to 
0.80.                                                                           

Group structure                                                                 

Starman Group consists of AS Starman being the parent company and, starting from
October 2006, Eesti Digitaaltelevisiooni AS being a subsidiary company. 66% of  
shares in Eesti Digitaaltelevisiooni AS are held by Starman and 34% of the      
shares by AS Levira. The financial results of Eesti Digitaaltelevisiooni AS have
been consolidated into the Group report on a line-by-line basis, separately     
indicating the minority share.                                                  

Revenue and expenses                                                            

Traditionally, cable television and internet services contributed the majority  
of Starman's total revenue for the first nine months of 2008, accounting for 43%
and 30% of total revenue, respectively. The share of telephony service was 16%  
and that of the DTT service, growing much faster than the others services, was  
6%.                                                                             
Revenue from cable television services increased 18% compared to the first nine 
months of 2007. Organic growth in the market has mostly been achieved at the    
expense of price increase in recent years. In the first quarter of 2008 the     
prices of Starman's cable television services further approached those of       
countries with a similar living standard. In addition to the regular price      
increase, the ARPU (average revenue per user) is also supported by structural   
changes. As regards structural changes, the triple packages that do not contain 
smaller programme ranges and the new possibilities such as digital television   
should be mentioned. At the end of September 2008, the company had a total of   
137 thousand cable television customers, 6.9% of which were digital television  
users. The number of cable television customers at the end of September exceeded
the last year's relevant figure by 3.4%, quite a good result given the saturated
market and tightened competition. The increase in customer numbers in the second
quarter of 2008 resulted primarily from the expansion of the cable network. In  
the first quarter of 2008 Starman launched its own television channel called    
Neljas. During its short time of operation the channel has achieved the targets 
set, the most important of them being enhancement of the range of products      
offered to customers. Regardless of that, Starman decided to focus on its core  
activities and the channel was sold to a local media group, Kalev Meedia, in    
October 2008. The change in the channel's ownership does not affect the         
customers.                                                                      
Revenue from the internet services increased 13% in comparison with the first   
nine months of 2007. At the end of September 2008, the company had 52 thousand  
internet customers - a 17% increase compared with the same period a year ago.   
Starman maintained its position as the market leader of broadband internet for  
private customers in its footprint. In line with the general impacts of the     
market, the ARPU continued to show a downward trend. However, lately there has  
been a certain deceleration of the decline rate - the average figure for the    
first nine months of 2008 dropped 6% compared to the same figure a year ago.    
Starman's popular triple packages in which the internet services are cheaper    
have a major impact on the internet ARPU. However, the supporting influence of  
the triple packages on other services and, hence, also on the average aggregate 
revenue per user cannot be disregarded.                                         
As expected, the period of accelerated growth of the telephony service has      
ended; however, the revenue for the first nine months of 2008 has still         
increased 16% in comparison with the same period a year ago. As at the end of   
September 2008 the company had 49 thousand telephony clients, i.e. 27% more than
at the same time last year. The ARPU of the telephony service, which has been   
quite stable in the past, has been declining significantly from the beginning of
2007. A similar trend continued in the first nine months of 2008 - the period's 
average figure decreased 13% compared to the last year's relevant figure.       
Starman views its cable television, internet and telephony services as a single 
integrated service. Since the provision of the integrated service has remained a
part of the corporate strategy for a long period of time, and the services are  
designed to support each other, a separate analysis of the respective segments  
might not give the most accurate picture. In the first nine months of 2008, the 
average aggregate revenue from the given services per client was 14% higher in  
comparison with the same period a year ago.                                     
Important positive developments regarding ZUUMtv occurred at the beginning of   
2008. By now, eight Estonian-language TV channels, including the three main     
local channels, are available on the digital platform. The fact that not all of 
the main local channels were available on the digital platform affected the     
whole of the first year of operation of ZUUMtv, constituting a major divergence 
from the initial business plan. Given also the positive developments relating to
the fact that the switchover to digital broadcasting will take place two years  
earlier, not in 2012 as first planned, Eesti Digitaaltelevisiooni AS has much   
better chances of making up for the initial setback. Revenue from the DTT       
service was up 5.1 times on the first nine months of the previous year, with    
growth in the third quarter being 29% compared to the second quarter. In        
September 2008 the DTT service already constituted 8.2% of the company's total  
revenue, and this share is expected to increase significantly in the near       
future. At the end of September 2008, Eesti Digitaaltelevisiooni AS had 21      
thousand customers and ZUUMtv covered 97% of Estonian households.               
In comparison with previous years, the relative importance of the sale of goods 
and materials has significantly increased. The threefold increase in the first  
nine months of 2008, compared to the same period a year ago, is attributable to 
the substantial growth of the DTT market. It should be borne in mind, however,  
that the sale of goods and materials is merely an ancillary activity for the    
company, which is meant to support its principal activity, and therefore it     
cannot be regarded as a separate source of revenue.                             
Starman's operating expenses amounted to 11.2 million Euros in the first nine   
months of 2008, having grown 29% in comparison with the same period in 2007. The
fact that the growth in operating expenses was somewhat faster than the growth  
in revenue is clearly attributable to ZUUMtv - when eliminating the direct costs
relating to this newly launched product, the increase in operating expenses     
would amount to 12%. The impact of ZUUMtv is most notable among expenses        
reported under “Services purchased” which include the transmission charge       
payable to Levira as a major expense item. The amount of the transmission charge
depends primarily on coverage, and therefore its impact on profit figures after 
the product has just been introduced and customer figures are far from the      
company's long-term targets is quite substantial. Due to the operation of       
Starman's own TV channel, the growth in programme costs has been much greater   
than the growth in revenue. Of major expense items, transportation expenses     
(increases in the price of fuel and insurance, and new vehicles added to the    
fleet), office expenses (a need for more office space due to an increase in the 
number of employees), and personnel expenses have also shown fast growth        
compared to the same period a year ago. However, in respect of certain expense  
items growth figures have been quite modest and in some cases even negative. A  
decrease in expenses related to the rental of communication ducts should also be
mentioned. These expenses have a further potential from previous periods (see   
Note 14 for more details).                                                      
In the first nine months of 2008, personnel expenses increased 30% year on year.
As regards personnel expenses, it should be noted that this indicator includes  
81% of the total wage fund, since the remainder is capitalised in accordance    
with the corporate accounting rules. The average number of employees was 273 in 
the first nine months of 2008 (225 in the first nine months of 2007). As at 30  
September 2008, the company employed 285 people. Part-time employees accounted  
for 24% of the staff. The average number of employees translated to the full    
employment equivalent was 234 in the first nine months of 2008, up 18% compared 
to the same figure a year ago. The latter figure grew mainly in the second      
quarter of 2008 in connection with the expansion of the cable network and a     
continuing decrease in some outsourced services.                                
As to expenses related to asset valuation, the provision for bad debts amounted 
to 107 thousand euros, i.e. 0.7% of the turnover for the period (0.4% in the    
first nine months of 2007). Loss of inventories and discounts totalled 71       
thousand euros in the first nine months of 2008 (30 thousand euros in the first 
nine months of 2007). Both figures are still rather modest, their notable growth
being a result of the overall economic downturn.                                
EBITDA for the first nine months of 2008 amounted to 5.4 million euros. When    
eliminating the direct influence of ZUUMtv, the EBITDA margin would amount to an
excellent 45%. Hence, the first nine months of 2008 were record-breaking in     
terms of profitability of traditional services, compared to similar periods in  
previous years.                                                                 
Depreciation costs increased 20% in comparison with the first nine months of    
2007. Owing to the extensive investing activities carried out in recent years,  
the depreciation costs continued to have a considerable impact on the profit    
figures. However, a deceleration of the growth of depreciation costs can be     
noted for the first time in recent years. Considering the fact that traditional 
services have reached a mature stage, the continuation of this trend could only 
be hindered by an successful growth in the sphere of the DTT service.           
The net profit attributable to shareholders for the first nine months of 2008   
amounted to 1.6 million Euros. The result for minority shareholders - their     
share in the loss of Eesti Digitaaltelevisiooni AS - was 0.7 million euros      
negative. The net profit was adversely influenced by expenses not related to    
ordinary business operations, which amounted to 0.8 million euros (see Notes 3, 
8 and 11 for more details).                                                     

Balance sheet, investments and financing                                        

In the first nine months of 2008, Starman's investments in non-current assets   
amounted to 5.2 million euros, being equal to the relevant figure in the same   
period a year ago. The company made the following investments: 2.7 million euros
in cable network renovation and construction, 1.3 million euros in STBs (incl.  
1.2 million euros for provision of ZUUMtv), 0.5 million euros in internet       
equipment (incl. 0.5 million in Head-Ends), 0.3 million euros in telephone      
modems, and 0.4 million euros in other spheres.                                 
Among investments in the cable network, projects aiming at network expansion are
even more notable than last year. While a few years ago work aimed at the       
modernisation and enhancement of the data communication capability of the       
existing network constituted a major part of network investments, the relative  
share of that particular type of network investments has diminished, given the  
high level already achieved. As at 30 September 2008, Starman's network covered 
278 thousand households with 265 thousand - i.e. 95% - of the households being  
served by a network with the data communication facility (as at 30 September    
2007 the comparable figures were 261 thousand, 242 thousand and 93%,            
respectively). The most significant network investment in the first nine months 
of 2008 was the acquisition of cable networks from AS NOM. As a result, the     
coverage of Starman's network now includes Paldiski and Kohila; in addition, the
market position was strengthened in Kristiine district in Tallinn, and in       
Kadrina. The acquisition of these out-of-date networks temporarily reduced the  
share of Starman's network with data communication capacity. However, the       
company started upgrading the networks right away. Part of the work has already 
been completed and all customers connected to this network will be able to use  
all the major telecommunication services offered by Starman already in the near 
future. As regards other major network investments, network expansion projects  
in Tallinn, particularly in the Kalamaja district, in Haapsalu and Võru as well 
as projects aimed at enhancement of the network's data communication capability 
and expansion of the state-of-the-art network in Kuressaare, Paide and Valga    
should be mentioned.                                                            
Investments in telephone modems and STBs are directly related to the growth in  
the number of customers. Investments in internet equipment primarily enhanced   
quality in the environment of ever growing data communication volumes.          
Starman's balance sheet structure continues to be characterised by high         
capitalisation, a relatively low debt level and a sufficient liquidity. In the  
first nine months of 2008 mainly the company's own resources were used for      
financing. External funding increased by 0.8 million euros, accounting for about
16% of the company's investments in non-current assets in the period. The high  
level of inventories as at 30 September 2008 is mainly due to the network       
investment projects to be launched in the near future and the STBs designated   
for the ZUUMtv offer included in the balance sheet of Eesti Digitaaltelevisiooni
AS. Considering the delivery schedule of the STBs designated for the ZUUMtv     
offer and the anticipated market capacities for the new product, the level of   
these inventories will probably remain high also in the future.                 







Rändy Hütsi                                                                     
Member of the Management Board                                                  
+372 677 9977                                                                   

Additional information: AS Starman interim report for 9 months of 2008