Börsiteade

Pealkiri

EXPLANATORY MEMORANDUM TO THE INTERIM REPORT OF AS STARMAN'S GROUP FOR THE FIRST 9 MONTHS OF 2007

Teade

General                                                                         

Success of Starman continued for the first nine months of the year. Telephony   
services rendered a considerable additional impact on the strong market position
in the spheres of cable-TV and the internet. 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 last year, 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.                                                                       
In September, an important era for Starman came to an end when the investment   
fund Royalton Capital Investors, which had been the company's key shareholder   
for about seven years, sold the second and last part of its shares. While the   
first part was sold in June 2005 in an IPO, which valued the company at 43.7    
million euros, the share price offered to all shareholders today exceeds that of
the IPO by 72%, the aggregate value of the company thus amounting to 75.1       
million euros. This deal certifies Starman's current success and good prospects 
for the future. Currently, after having acquired the initial 54.04% of the      
company's shares, a consortium of financial investors led by Bancroft Private   
Equity LLP has made a mandatory takeover bid to all shareholders. If the        
takeover bid is successful for the bidder, delisting of Starman from Tallinn    
Stock Exchange will be applied for.                                             
Starman Group's total revenue for the first nine months of 2007 amounted to 13.2
million euros, representing a 17% increase compared to the same period a year   
ago. EBITDA for the first nine months of 2007 amounted to 4.6 million euros and 
net profit attributable to shareholders to 1.9 million euros - respectively a 4%
and 18% decrease compared to the same figures last year. The good performance is
built on the company's successful long-term activities relating to traditional  
services. As expected, the starting ZUUMtv had a negative impact on Starman's   
profit figures. A drop of 1.0 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 2007:                                                                 
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|                                | 2005         | 2006         | 9 months 2007 |
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| Sales increase                 | 26%          | 25%          | 18%           |
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| EBITDA margin                  | 33%          | 40%          | 34%           |
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| Gross margin                   | 15%          | 21%          | 14%           |
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| Net margin                     | 12%          | 19%          | 14%           |
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| Revenue/average assets         | 0.67         | 0.72         | 0.72          |
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|                                |              |              |               |
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| Equity ratio                   | 54%          | 58%          | 57%           |
--------------------------------------------------------------------------------
| Debt to equity                 | 0.69         | 0.56         | 0.57          |
--------------------------------------------------------------------------------
| Debt/EBITDA                    | 1.76         | 1.19         | 1.36          |
--------------------------------------------------------------------------------
| Investments/EBITDA             | 1.16         | 0.83         | 1.14          |
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|                                |              |              |               |
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| Current ratio                  | 0.67         | 1.09         | 1.41*         |
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| Invoice turnover rate (annual) | 20.2         | 20.0         | 24.7          |
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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 2007 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 2007 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 2007 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 2007, the current ratio amounts to 
0.98.                                                                           

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 line-by-line separately indicating the  
minority share.                                                                 

Management changes                                                              

In relation to having a new majority owner, an extraordinary general meeting of 
the company's shareholders was held on 25 October 2007. At the meeting, it was  
decided to remove some of the supervisory board members, to elect Tamas Szalai, 
Fred Martin and Krisztina Havas as new members of the supervisory board, and to 
re-elect the supervisory board members Indrek Kuivallik and Rain Lõhmus for an  
additional term of three years. From now on, Starman's supervisory board will   
have five members instead of the former seven.                                  

Revenue and expenses                                                            

Traditionally, cable television and internet services contributed the majority  
of Starman's total revenue for the first nine months of 2007, accounting for 46%
and 33% of total revenue, respectively. Telephony service, growing faster than  
the latter two, accounted for 17% of the total revenue for the period. The      
digital terrestrial television (DTT) service has no notable effect on the       
revenue yet.                                                                    
Revenue from cable television services increased 14% compared to the first nine 
months of 2006. Organic growth in the market has mostly been achieved at the    
expense of price increase in recent years. In the first quarter of 2007 the     
prices of Starman's cable television services further approached those of       
countries with a similar living standard but still remain rather low. 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. As to the digital television    
service launched in autumn 2005, a major improvement was introduced in the first
quarter of 2007 when the company piloted a video on demand service. The service 
is currently going through a test phase with nearly 500 customers - it was taken
to market cautiously, being still under constant development. At the end of     
September 2007, the company had a total of 132 thousand cable television        
customers, 5.2% 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 1.5%, quite a good result given the saturated market and tightened    
competition.                                                                    
Revenue from the internet services increased 10% in comparison with the first   
nine months of 2006. At the end of September 2007, the company had 45 thousand  
internet customers - a 25% 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, with the average figure of 
the first nine months of 2007 dropping 13% compared to the last year's relevant 
figure. Starman's popular triple packages in which the internet services are    
cheaper have a growing 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.                       
Of the three primary services, the telephony service continues to show the best 
growth figures, although the growth rate has somewhat decelerated, with the     
revenue for the first nine months of 2007 having increased 33% in comparison    
with the same period a year ago. As of the end of September 2007 the company had
39 thousand telephony clients, i.e. 50% more than at the same time last year.   
The ARPU of the telephony service, which has been quite stable so far, has been 
declining significantly from the beginning of 2007. The average ARPU for the    
first nine months of 2007 decreased 16% when compared to the corresponding      
figure of the previous year.                                                    
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, separate analysis of the respective segments    
might not give the most accurate picture. In the first nine months of 2007, the 
average aggregate revenue from the given services per client was 13% higher in  
comparison with the same period a year ago.                                     
ZUUMtv was launched with content slightly weaker than planned. Eesti            
Digitaaltelevisiooni AS is trying to make up for the initial setback by         
expanding the coverage area and improving the selection of programmes. The      
coverage area changed notably in the second quarter; by the end of the quarter  
ZUUMtv covered as much as 93% of Estonian households. Although the relevant     
figure was 60% at the launch of the product, it encompassed mainly densely      
populated areas such as Tallinn and Tartu where the traditional cable television
is more economically feasible and where the potential of ZUUMtv is thus         
relatively modest. While until now the three main local channels were available 
to ZUUMtv clients in analogue format, then from the end of April the first of   
them - Eesti Televisioon - is available digitally. At the end of September,     
Eesti Digitaaltelevisiooni AS had 6.5 thousand customers.                       
Starman's operating expenses amounted to 8.7 million euros in the first nine    
months of 2007, having grown 33% in comparison with the same period in 2006. The
fact that the operating expenses grew faster than the revenue is primarily      
attributable to ZUUMtv - when eliminating the direct costs relating to this     
newly launched product, the increase in operating expenses would amount to 13%. 
The impact of ZUUMtv is most notable among expenses reported under “Services    
purchased” which include the transmission charge payable to Levira as a new     
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. In addition to the impact of ZUUMtv, the increase 
of marketing expenses by 68% when compared to the first nine months of the      
previous year resulted from the continuing aggressive competition in promoting  
of telecommunications services. Of major expense items, expenses on the rental  
of communication ducts (a growth of 46%) and personnel expenses have also shown 
fast growth compared to the same period a year ago. All in all, despite the     
pressure on several input prices due to fast-growing salaries, the company has  
been quite successful in managing the growth in operating expenses.             
In the first nine months of 2007, personnel expenses increased 23% 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 225 in 
the first nine months of 2007 (208 in the first nine months of 2006). As of 30  
September 2007, the company employed 233 people. Part-time employees accounted  
for 21% of the staff. The average number of employees translated to the full    
employment equivalent was 199 in the first nine months of 2007, having grown    
only 3% compared to the same figure a year ago.                                 
As to expenses related to asset valuation, the provision for bad debts amounted 
to 53 thousand euros, i.e. to merely 0.4% of the period turnover just like in   
the corresponding period a year ago. Loss of inventories and discounts totalled 
30 thousand EUR in the first nine months of 2007 (68.4 thousand EUR in the first
nine months of 2006).                                                           
EBITDA for the first nine months of 2007 amounted to 4.6 million euros. When    
eliminating the direct influence of ZUUMtv, the EBITDA margin would amount to   
43%. Hence, the first nine months of 2007 were record-breaking in terms of      
profitability of traditional services.                                          
Depreciation costs increased 27% in comparison with the first nine months of    
2006. Owing to the extensive investing activities carried out in recent years,  
the depreciation costs continued to have a considerable impact on the profit    
figures.                                                                        
The net profit attributable to shareholders for the first nine months of 2007   
amounted to 1.9 million euros. The result for minority shareholders - their     
share in the loss of Eesti Digitaaltelevisiooni AS - was 0.4 million euros      
negative. When assessing profit figures one should note that the results include
the income tax expenditure of 0.17 million EUR related to disbursement of       
dividends.                                                                      

Balance sheet, investments and financing                                        

In the first nine months of 2007, Starman's investments in fixed assets amounted
to 5.19 million euros, representing a 37% increase compared to the same period a
year ago. The company made the following investments: 2.41 million euros in     
cable network construction and renovation; 0.70 million EEK in STBs (incl. 0.58 
million for provision of ZUUMtv), 0.62 million EEK in internet equipment (incl. 
0.47 million EEK in Head-Ends); 0.43 million EEK in analogue cable television   
Head-Ends; 0.42 million EEK in telephone modems; and 0.61 million EEK in other  
spheres.                                                                        
When compared to earlier years, projects aiming at network expansion are notable
among investments in the cable network. There are still some locations in       
Estonia where cable network expansion should be feasible, given the company's   
current success in providing telecommunications services. In addition to the    
usual trend of moving along with real estate developments in Tallinn and its    
surroundings the company made investments in, e.g., Tapa, Kadrina, Võru and     
Pärnu in the first nine months of 2007. While work aimed at the modernisation   
and enhancement of the data communication capability of the existing network is 
continued, the relative share of that particular type of network investments is 
diminishing, given the high level already achieved. As of 30 September 2007,    
Starman's network covered 261 thousand households with 242 thousand - i.e. 93% -
of the households being served by a network with the data communication facility
(as of 31 December 2006 the comparable figures were 251 thousand, 225 thousand  
and 90%, respectively). Investments in telephone modems and STBs are directly   
related to the growth in the number of customers. Investments in the internet   
and cable television equipment primarily enhanced quality in the environment of 
ever growing data communication volumes. As regards cable television equipment, 
a substantial part of investments is attributable to the network expansion      
mentioned above.                                                                
Starman's balance sheet structure continues to be characterised by high         
capitalisation, a relatively low debt level and a sufficient liquidity. As to   
the company's financing needs, dividend payments amounting to 0.75 million euros
made at the beginning of July had to be considered besides the investments to be
made in fixed assets. While mainly the company's own resources were used for    
financing in the first nine months 2007, external funding was increased to a    
certain extent as well. The high level of inventories as of 30 September 2007 is
mainly due to the value of STBs designated for the ZUUMtv offer amounting to    
0.84 million euros in the balance sheet of Eesti Digitaaltelevisiooni AS. In    
addition, several network expansion projects to be undertaken in the near future
have an impact on the level of inventories. 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 the first 9 months of 2007