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Pealkiri

EXPLANATORY MEMORANDUM TO THE INTERIM REPORT OF AS STARMAN'S GROUP FOR 2008 YEAR

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General

The success of Starman continued in 2008. 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 12,863,922 shares in Starman, i.e. 98.55% of the company's
share capital. The agenda of the special general meeting to be held at the end
of February 2009 includes a proposal that Baltic Moontech Holding AS buy out
the remaining shares, as well. Thereafter the company will be delisted from the
Tallinn Stock Exchange. 
Starman Group's total revenue for 2008 amounted to 22.8 million Euros,
representing a 27% increase on the same period a year ago. EBITDA for 2008
amounted to 7.4 million Euros and the net profit attributable to shareholders
from ordinary business operations to 3.3 million Euros - respectively a 24% and
40% 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 1.6 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. 

Financial ratios
A selection of ratios for evaluating the economic activities in the year 2008:
 	       2006	2007	2008 
Sales increase	25%	19%	26%
EBITDA margin	40%	33%	32%
Gross margin 	21%	13%	13%
Net margin	19%	13%	11%
Revenue/average assets	0.72	0.73	0.82
 			
Equity ratio	58%	57%	54%
Debt to equity	0.56	0.57	0.54
Debt/EBITDA	1.19	1.41	1.18
Investments/EBITDA	0.83	1.15	0.90
 			
Current ratio	1.09	0.91	0.82
Invoice turnover rate (annual)	20.0	21.5	17.4


Definitions:
Sales increase = increase compared to the same period last year
EBITDA = operating profit + depreciation, amortisation and impairments
EBITDA margin = EBITDA / total revenue
Gross margin = operating profit / total revenue
Net margin = net profit attributable to shareholders / total revenue
Equity ratio = total equity / total assets
Debt = borrowings + long-term borrowings
Current ratio = current assets / current liabilities
Invoice turnover rate = period sales / accounts receivable at the end of 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 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 2008, accounting for 42% and 29% of the total
revenue, respectively. The share of telephony service was 16% and that of the
DTT service, growing much faster than the others, was 7%. 
Revenue from internet services increased by 18% during the year. 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 December 2008, the company had a total of 137 thousand cable television
customers, 8.4% 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 2.9%, 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 did not entail any changes
for the customers. 
Revenue from internet services increased by 13% during the year. At the end of
December 2008, the company had 54 thousand internet customers, representing a
13% 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. However, lately there has been a certain
deceleration of the decline rate - the average figure for 2008 dropped 5%
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 sales for 2008 still increased 16%. As at the end of
December 2008, the company had 52 thousand telephony clients, i.e. 21% more
than at the same time last year. The ARPU of the telephony service, which had
been quite stable earlier, has been declining significantly from the beginning
of 2007. A similar trend continued in 2008 - the period's average figure
decreased 12% 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 2008, the average
aggregate revenue from the given services per client was 13% higher than 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 possible positive developments
relating to the fact that the switchover to digital broadcasting will take
place 2 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 4.6 times when compared to 2007, with growth in the
fourth quarter being 23% compared to the third quarter. In December 2008 the
DTT service already constituted 9.9% of the company's total revenue, and this
share is expected to increase significantly in the near future. At the end of
December 2008, Eesti Digitaaltelevisiooni AS had 26 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 increase by 3.3 times in 2008 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 15.4 million Euros in 2008,
representing a 28% growth year-on-year. The fact that the operating expenses
grew somewhat faster than the revenue is attributable to ZUUMtv to a notable
extent - when eliminating the direct costs relating to this newly launched
product, the increase in operating expenses would amount to 12%. The
transmission charge payable to Levira should be regarded the major expense item
relating to ZUUMtv. 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 of expenses related to
the rental of communication ducts should also be mentioned. These expenses have
a potential of a further decline (see Note 14 for more details). 
Personnel expenses grew by 29% over the 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 277 in 2008 (as compared to 231 in 2007).
As at 31 December 2008, the company employed 280 people. Part-time employees
accounted for 24% of the staff. The average number of employees translated to
the full employment equivalent was 235 in 2008, having grown 16% 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 147 thousand Euros, i.e., 0.6% of the turnover for the period (0.4% in
2007). In 2008, losses and discounts of inventories amounted to 102 thousand
Euros (48 thousand Euros in 2007). Both figures are still rather modest, their
notable growth being a result of the overall economic downturn. 
EBITDA for the year 2008 amounted to 7.4 million Euros. When eliminating the
direct influence of ZUUMtv, the EBITDA margin would amount to an excellent 45%.
Hence, 2008 was record-breaking, all the previous years considered, as regards
the traditional services. 

Depreciation costs grew by 20% over the year. 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 successful
growth in the sphere of the DTT service. 
The net profit attributable to shareholders for 2008 amounted to 2.5 million
Euros. The result for minority shareholders - their share in the loss of Eesti
Digitaaltelevisiooni AS - was 1 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 2008, Starman's investments in fixed assets amounted to 6.6 million Euros,
representing a 3% decrease on the last year's figure. The company made the
following investments: 3.4 million Euros in cable network construction and
renovation; 1.8 million Euros in STBs (incl. 1.6 million for provision of
ZUUMtv), 0.6 million Euros in internet equipment (incl. 0.6 million Euros in
Head-Ends); 0.4 million Euros in telephone modems; and 0.5 million Euros in
other spheres. 
Among investments in the cable network, projects aiming at network expansion
stand out even more than in the previous 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 31.12.08, Starman's network
covered 280 thousand households with 271 thousand - i.e. 97% - of the
households being served by a network with the data communication facility (as
at 31.12.07 the comparable figures were 266 thousand, 251 thousand and 94%,
respectively). In 2008, the acquisition of cable networks from AS NOM was the
major network investment. 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. Most 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 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. As to
financing, mostly the company's own resources were used in 2008. The growth of
external funding was smaller than planned - the growth by 0.3 million Euros
accounted for just 5% of the company's investments in non-current assets in the
period. As a result of local banks' apprehension of risks in the context of the
global financial crisis, which in the fourth quarter reached a level where even
fairly secure business projects did not qualify as projects eligible for
funding on reasonable conditions, external funding in the amount 1.8 million
Euros was engaged from the major shareholder of the company at the end of the
year. The high level of inventories as at 31 December 2008 is mainly due to the
STBs designated for the ZUUMtv offer included in the balance sheet of Eesti
Digitaaltelevisiooni AS and the network expansion projects to be launched in
the near future. 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: Interim Report of the Group for 2008 year