Börsiteade

Pealkiri

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

Teade

General                                                                         

The success of Starman continued in 2007. Telephony service 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 process, which valued the company at 
43.7 million euros, the share price offered to all shareholders in the takeover 
bid exceeded that of the IPO by almost 72%, the aggregate value of the company  
thus amounting to 74.8 million euros. This deal certifies Starman's current     
success and good prospects for the future. After having acquired the initial    
54.04% of the company's shares, a consortium of financial investors led by      
Bancroft Private Equity LLP has acquired more shares in both the mandatory      
takeover bid and a number of separate market transactions. At the moment, Baltic
Moontech Investments Holding AS representing the above financial investors holds
a total of 8,505,727 shares in Starman, i.e. 65.16% of the company's share      
capital. Given the current structure of shareholders, delisting of the company  
from Tallinn Stock Exchange will probably be applied for in the near future.    
Starman Group's total revenue for 2007 amounted to 18.0 million euros,          
representing a 19% increase on the same period a year ago. EBITDA for 2007      
amounted to 6.0 million euros and net profit attributable to shareholders to 2.4
million euros - respectively a 1% and 15% 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, 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 1.6 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.                                                                  
The results for the fourth quarter were affected by seasonal factors, for it is 
usual that a number of special offers are made in the autumn which result in a  
decline in profitability. At the same time, success of the autumn sales expanded
the company's clientele and thus created better premises for the increase of    
revenue in the near future.                                                     
                                                                                
Financial ratios                                                                
A selection of ratios for evaluating the economic activities in the year 2007:  
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|                                |     2005     |     2006     |     2007      |
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| Sales increase                 |          26% |          25% |           19% |
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| EBITDA margin                  |          33% |          40% |           33% |
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| Gross margin                   |          15% |          21% |           13% |
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| Net margin                     |          12% |          19% |           13% |
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| Revenue/average assets         |         0.67 |         0.72 |          0.73 |
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|                                |              |              |               |
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| Equity ratio                   |          54% |          58% |           57% |
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| Debt to equity                 |         0.69 |         0.56 |          0.57 |
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| Debt/EBITDA                    |         1.76 |         1.19 |          1.41 |
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| Investments/EBITDA             |         1.16 |         0.83 |          1.15 |
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|                                |              |              |               |
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| Current ratio                  |         0.67 |         1.09 |          0.91 |
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| Invoice turnover rate (annual) |         20.2 |         20.0 |          21.5 |
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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                
Equity ratio =                                                                  
equity / total assets                                                           
Debt = borrowings + long-term borrowings                                        
Current ratio =                                                                 
current assets / current liabilities                                            
Invoice turnover rate = revenue for the                                         
period / accounts receivable at the end of the period                           

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 2007, accounting for 45% and 33% of the 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 the cable television services increased 14% in comparison with the 
year 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. At the end of December 2007, the company had a  
total of 133 thousand cable television customers, 5.8% of which were digital    
television users. The number of cable television customers at the end of        
December exceeded the last year's relevant figure by 1.1%, quite a good result  
given the saturated market and tightened competition.                           
Revenue from the internet services increased 12% year-on-year. At the end of    
December 2007, the company had 48 thousand internet customers, representing a   
22% increase in comparison 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 2007 dropping 11%
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. In the second half of the year, a slowdown of the internet ARPU's  
decrease rate could be observed.                                                
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 2007 having increased 32% in comparison with the same period a year 
ago. As at the end of December 2007, the company had 43 thousand telephony      
clients, i.e. 41% 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 2007 decreased   
15% 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 2007, the average aggregate revenue
from the given services per client was 14% 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 December, Eesti
Digitaaltelevisiooni AS had 10 thousand customers and ZUUMtv covered 97% of     
Estonian households.                                                            
Starman's operating expenses amounted to 12.1 million euros in 2007,            
representing a 32% growth year-on-year. 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 14%. 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 annual increase of marketing expenses by  
40% 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 34%) 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.             
Personnel expenses increased 24% 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 231 in 2007 (as compared to 210 in 2006). As
at 31 December 2007, the company employed 256 people. Part-time employees       
accounted for 19% of the staff. The average number of employees translated to   
the full employment equivalent was 203 in 2007, having grown only 5% compared to
the same figure a year ago. While the number of employees translated to the full
employment equivalent remained stable at just below 200 during the first nine   
months of 2007, the fourth quarter witnessed a significant growth and, by the   
end of December, the relevant figure had risen to as much as 226. The rise in   
the number of employees is related to both the expected increase in business    
volumes and a reduction of certain outsourced activities.                       
As to expenses related to asset valuation, the provision for bad debts amounted 
to 65 thousand euros, i.e. to merely 0.4% of the period turnover just like year 
ago. In 2007, losses and discounts of inventories amounted to 48 thousand euros 
(in 2006, to 64 thousand euros).                                                
EBITDA for the year 2007 amounted to 6.0 million euros. When eliminating the    
direct influence of ZUUMtv, the EBITDA margin would amount to an excellent 43%. 
Hence, 2007 was record-breaking in terms of profitability of traditional        
services.                                                                       
Depreciation costs increased 27% in comparison with the year 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 2007 amounted to 2.4 million    
euros. The result for minority shareholders - their share in the loss of Eesti  
Digitaaltelevisiooni AS - was 0.7 million euros negative. When assessing profit 
figures, one should note that the results include the income tax expenditure of 
0.17 million euros related to disbursement of dividends.                        

Balance sheet, investments and financing                                        
In 2007, Starman's investments in fixed assets amounted to 6.8 million euros,   
representing a 37% increase on the last year's figure. The company made the     
following investments: 3.2 million euros in cable network construction and      
renovation; 1.1 million euros in STBs (incl. 0.9 million for provision of       
ZUUMtv), 0.8 million euros in internet equipment (incl. 0.6 million euros in    
Head-Ends); 0.6 million euros in telephone modems; 0.5 million euros in analogue
cable television Head-Ends; and 0.7 million euros 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, Pärnu,
and Haapsalu in 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 at 31 December 2007, Starman's network
covered 266 thousand households with 251 thousand - i.e. 94% - of the households
being served by a network with the data communication facility (as at 31        
December 2006 the comparable figures were 251 thousand, 225 thousand and 90%,   
respectively). At the beginning of 2007 cable networks in Rapla and Kehra were  
upgraded to support data communication, and in the second half of the year      
respective work was started in Kuressaare and Valga; minor network modernisation
works continued also in Tallinn and Ida-Virumaa.                                
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 also 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 0.7 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 2007, external funding was increased by 1.2 million euros as well. 
The high level of inventories as at 31 December 2007 is mainly due to the       
network expansion 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 2007