##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-27423
 
 Golden Telecom, Inc.
  DELAWARE
(State or other jurisdiction of 
incorporation or organization)
    
    51-0391303
(I.R.S. Employer
Identification No.)Representative Office Golden TeleServices, Inc. 
1 Kozhevnichesky Proezd 
Moscow, Russia 115114
(Address of principal executive office)
    
    115114
(Zip Code)
 (011-7-501) 797-9300
 þ o
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I.FINANCIAL INFORMATION
    
    
    
    3Item 1 Financial Statements (Unaudited)
    
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2005,
and September 30, 2006 (Unaudited)
    
    
    
    3Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 2005 and 2006 (Unaudited)
    
    
    
    5Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2005 and 2006 (Unaudited)
    
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations *
    
    
    
    21Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    
    46Item 4 Controls and Procedures
    
    
    
    46PART II. OTHER INFORMATION
    
    
    
    47Item 1 Legal Proceedings
    
    
    
    47Item 1A Risk Factors
    
    
    
    47Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    
    47Item 3 Defaults Upon Senior Securities
    
    
    
    47Item 4 Submission of Matters to a Vote of Security Holders
    
    
    
    47Item 5 Other information
    
    
    
    47Item 6 Exhibits
    
    
    
    48Signatures
    
    
    
    49Certification of PEO Pursuant to Section 302Certification of PFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  
 *
    
    Please refer to the special note regarding forward-looking statements in this
section. 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 GOLDEN TELECOM, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In Thousands, Except Share Data)
 (Unaudited)
 December 31,
    
    
    September 30,2005
    
    
    2006ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    67,176
    
    
    $
    37,179Accounts receivable, net of allowance for doubtful accounts of
$27,327 and $31,087 at December 31, 2005 and September 30, 2006, respectively
    
    
    91,709
    
    
    
    138,269VAT receivable
    
    
    21,986
    
    
    
    20,954Prepaid expenses
    
    
    8,083
    
    
    
    8,970Taxes receivable, excluding VAT
    
    
    181
    
    
    
    1,772Notes receivable
    
    
    1,494
    
    
    
    405Deferred tax asset
    
    
    8,994
    
    
    
    10,346Other current assets
    
    
    11,334
    
    
    
    14,187TOTAL CURRENT ASSETS
    
    
    210,957
    
    
    
    232,082Property and equipment, net of accumulated depreciation of $247,096
and $327,414 at December 31, 2005 and September 30, 2006, respectively
    
    
    407,907
    
    
    
    506,050Goodwill and intangible assets:Goodwill
    
    
    149,249
    
    
    
    177,901Intangible assets, net of accumulated amortization of $60,648 and $81,581 at
December 31, 2005 and September 30, 2006, respectively
    
    
    93,880
    
    
    
    99,877Net goodwill and intangible assets
    
    
    243,129
    
    
    
    277,778Investments in and advances to ventures
    
    
    10,889
    
    
    
    11,313Notes receivable
    
    
    
    
    
    
    2,500Restricted cash
    
    
    566
    
    
    
    231Advances for
acquisitions
    
    
    
    
    
    
    7,722Other non-current assets
    
    
    8,763
    
    
    
    11,098TOTAL ASSETS
    
    $
    882,211
    
    
    $
    1,048,774
  3




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##### Table of Contents



GOLDEN TELECOM, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In Thousands, Except Share Data)
 (Unaudited)
 December 31,
    
    
    September 30,2005
    
    
    2006LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    89,404
    
    
    $
    127,028VAT payable
    
    
    17,190
    
    
    
    10,423Debt maturing within one year
    
    
    
    
    
    
    1,340Current capital lease obligation
    
    
    1,941
    
    
    
    770Deferred revenue
    
    
    16,799
    
    
    
    20,092Due to affiliates and related parties
    
    
    2,470
    
    
    
    3,917Other current liabilities
    
    
    4,079
    
    
    
    5,188TOTAL CURRENT LIABILITIES
    
    
    131,883
    
    
    
    168,758Long-term debt, less current portion
    
    
    27
    
    
    
    117Long-term deferred tax liability
    
    
    22,287
    
    
    
    29,010Long-term deferred revenue
    
    
    30,878
    
    
    
    34,628Long-term capital lease obligations
    
    
    2,340
    
    
    
    1,763Other non-current liabilities
    
    
    
    
    
    
    2,600TOTAL LIABILITIES
    
    
    187,415
    
    
    
    236,876Minority interest
    
    
    19,693
    
    
    
    27,497SHAREHOLDERS EQUITYPreferred stock, $0.01 par value (10,000,000 shares
authorized; none issued and outstanding at December 31, 2005
and September 30, 2006)
    
    
    
    
    
    
    Common stock, $0.01 par value (100,000,000 shares authorized;
36,458,490 and 36,638,413 shares issued and outstanding at December 31,
2005 and September 30, 2006, respectively)
    
    
    365
    
    
    
    366Additional paid-in capital
    
    
    671,998
    
    
    
    674,194Deferred equity compensation
    
    
    (455
    )
    
    
    Retained earnings
    
    
    3,195
    
    
    
    54,232Accumulated other comprehensive income
    
    
    
    
    
    
    55,609TOTAL SHAREHOLDERS EQUITY
    
    
    675,103
    
    
    
    784,401TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    882,211
    
    
    $
    1,048,774
  4




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GOLDEN TELECOM, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In Thousands, Except Per Share Data)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006REVENUE:Telecommunication services
    
    $
    168,716
    
    
    $
    227,144
    
    
    $
    488,706
    
    
    $
    599,033Revenue from affiliates and related parties
    
    
    1,214
    
    
    
    1,573
    
    
    
    3,198
    
    
    
    4,792TOTAL REVENUE
    
    
    169,930
    
    
    
    228,717
    
    
    
    491,904
    
    
    
    603,825OPERATING COSTS AND EXPENSES:Access and network services (excluding depreciation
and amortization)
    
    
    88,345
    
    
    
    128,153
    
    
    
    254,533
    
    
    
    327,154Selling, general and administrative (excluding
depreciation and amortization)
    
    
    30,967
    
    
    
    37,505
    
    
    
    87,381
    
    
    
    104,955Depreciation and amortization
    
    
    20,594
    
    
    
    26,389
    
    
    
    60,465
    
    
    
    72,961TOTAL OPERATING COSTS AND EXPENSES
    
    
    139,906
    
    
    
    192,047
    
    
    
    402,379
    
    
    
    505,070INCOME FROM OPERATIONS
    
    
    30,024
    
    
    
    36,670
    
    
    
    89,525
    
    
    
    98,755OTHER INCOME (EXPENSE):Equity in earnings of ventures
    
    
    669
    
    
    
    350
    
    
    
    501
    
    
    
    1,021Interest income
    
    
    772
    
    
    
    185
    
    
    
    1,672
    
    
    
    988Interest expense
    
    
    (94
    )
    
    
    (91
    )
    
    
    (531
    )
    
    
    (241
    )Foreign currency gains (losses)
    
    
    (125
    )
    
    
    73
    
    
    
    (364
    )
    
    
    1,648TOTAL OTHER INCOME
    
    
    1,222
    
    
    
    517
    
    
    
    1,278
    
    
    
    3,416Income before income taxes and minority interest
    
    
    31,246
    
    
    
    37,187
    
    
    
    90,803
    
    
    
    102,171Income taxes
    
    
    12,014
    
    
    
    11,110
    
    
    
    30,512
    
    
    
    31,880Minority interest
    
    
    837
    
    
    
    1,848
    
    
    
    2,102
    
    
    
    3,951Income before cumulative effect of a change in
accounting principle
    
    
    18,395
    
    
    
    24,229
    
    
    
    58,189
    
    
    
    66,340Cumulative effect of a change in accounting principle,
net of tax of $52
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    681NET INCOME
    
    $
    18,395
    
    
    $
    24,229
    
    
    $
    58,189
    
    
    $
    65,659Basic earnings per share of common stock:Income before cumulative effect of a change in
accounting principle
    
    $
    0.51
    
    
    $
    0.66
    
    
    $
    1.60
    
    
    $
    1.82Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Net income per share  basic
    
    $
    0.51
    
    
    $
    0.66
    
    
    $
    1.60
    
    
    $
    1.80Weighted average common shares  basic
    
    
    36,411
    
    
    
    36,633
    
    
    
    36,356
    
    
    
    36,570Diluted earnings per share of common stock:Income before cumulative effect of a change in
accounting principle
    
    $
    0.50
    
    
    $
    0.66
    
    
    $
    1.59
    
    
    $
    1.81Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Net income per share  diluted
    
    $
    0.50
    
    
    $
    0.66
    
    
    $
    1.59
    
    
    $
    1.79Weighted average common shares  diluted
    
    
    36,637
    
    
    
    36,723
    
    
    
    36,595
    
    
    
    36,699Cash dividends per common share
    
    $
    0.20
    
    
    $
    
    
    
    $
    0.60
    
    
    $
    0.40
  5




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GOLDEN TELECOM, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In Thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2005
    
    
    2006OPERATING ACTIVITIES:Net income
    
    $
    58,189
    
    
    $
    65,659Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:Depreciation
    
    
    47,021
    
    
    
    57,493Amortization
    
    
    13,444
    
    
    
    15,468Equity in earnings of ventures
    
    
    (501
    )
    
    
    (1,021
    )Foreign currency (gain) losses
    
    
    364
    
    
    
    (1,648
    )Bad debt expense
    
    
    6,501
    
    
    
    6,964Stock appreciation rights compensation expense
    
    
    
    
    
    
    4,626Cumulative effect of a change in accounting principle, net
of tax of $52
    
    
    
    
    
    
    681Other
    
    
    232
    
    
    
    1,177Changes in assets and liabilities:Accounts receivable
    
    
    (15,103
    )
    
    
    (49,948
    )Accounts payable and accrued expenses
    
    
    10,071
    
    
    
    32,345VAT, net
    
    
    3,849
    
    
    
    (5,609
    )Other changes in assets and liabilities
    
    
    4,235
    
    
    
    3,669NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    128,302
    
    
    
    129,856INVESTING ACTIVITIES:Purchases of property and equipment and intangible assets
    
    
    (70,330
    )
    
    
    (122,687
    )Acquisitions, net of cash acquired
    
    
    (4,791
    )
    
    
    (17,674
    )Restricted cash
    
    
    449
    
    
    
    335Other investing
    
    
    2,243
    
    
    
    (7,201
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (72,429
    )
    
    
    (147,227
    )FINANCING ACTIVITIES:Net proceeds from exercise of employee stock options
    
    
    1,003
    
    
    
    2,429Cash dividends paid
    
    
    (21,828
    )
    
    
    (14,622
    )Other financing
    
    
    (2,660
    )
    
    
    (1,465
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (23,485
    )
    
    
    (13,658
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (137
    )
    
    
    1,032Net increase (decrease) in cash and cash equivalents
    
    
    32,251
    
    
    
    (29,997
    )Cash and cash equivalents at beginning of period
    
    
    53,699
    
    
    
    67,176CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    85,950
    
    
    $
    37,179
  6




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GOLDEN TELECOM, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1: Basis of Presentation
   Note 2: Summary of Significant Accounting Policies and Recent Accounting Pronouncements
 Summary of Significant Accounting Policies
 Functional Currency
 Foreign Currency Translation .
  Comprehensive Income
 Reporting Comprehensive Income
 7




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##### Table of Contents



GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006(in thousands)Net income
    
    $
    18,395
    
    
    $
    24,229
    
    
    $
    58,189
    
    
    $
    65,659Foreign currency translation adjustment
    
    
    
    
    
    
    55,609
    
    
    
    
    
    
    
    55,609Comprehensive income
    
    $
    18,395
    
    
    $
    79,838
    
    
    $
    58,189
    
    
    $
    121,268
 Intangible Assets
  As of December 31, 2005
    
    
    As of September 30, 2006(in thousands)Weighted Average
    
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    AccumulatedAmortization Lives
    
    
    Cost
    
    
    Amortization
    
    
    Cost
    
    
    AmortizationAmortized intangible assets:Telecommunications service contracts
    
    10 years
    
    $
    99,366
    
    
    $
    (32,009
    )
    
    $
    112,793
    
    
    $
    (43,906
    )Contract-based customer relationships
    
    5 years
    
    
    36,849
    
    
    
    (18,241
    )
    
    
    41,468
    
    
    
    (26,238
    )Licenses
    
    11 years
    
    
    7,176
    
    
    
    (3,182
    )
    
    
    13,095
    
    
    
    (4,044
    )Other intangible assets
    
    5 years
    
    
    11,137
    
    
    
    (7,216
    )
    
    
    14,102
    
    
    
    (7,393
    )Total
    
    
    
    
    
    $
    154,528
    
    
    $
    (60,648
    )
    
    $
    181,458
    
    
    $
    (81,581
    )
  Stock-Based Compensation
 Accounting for Stock-Based Compensation, Accounting
for Stock Issued to Employees.
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005(in thousands, except per share data)Net income, as reported
    
    $
    18,395
    
    
    $
    58,189Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    145
    
    
    
    475Pro forma net income
    
    $
    18,250
    
    
    $
    57,714Net income per share:Basic  as reported
    
    $
    0.51
    
    
    $
    1.60Basic  pro forma
    
    
    0.50
    
    
    
    1.59Diluted  as reported
    
    
    0.50
    
    
    
    1.59Diluted  pro forma
    
    
    0.50
    
    
    
    1.58
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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Share Based Payment Statement of Cash Flows
    Income Taxes
 Accounting for Income Taxes. Interim Financial Reporting,
 Use of Estimates in Preparation of Financial Statements
  9




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Comparative Figures
  Recent Accounting Pronouncements
 Exchanges of Nonmonetary Assets
 Exchanges of Nonmonetary Assets
 Accounting Changes and Error Corrections
 Accounting Changes and Error Corrections Accounting Changes Reporting Changes in Interim
Financial Statements
 Uncertainty in Income Taxes
 Accounting for
Uncertainty in Income Taxes  an interpretation of SFAS Statement 109 Accounting for Contingencies
 Fair Value Measurements
 Fair Value Measurements
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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Prior Year Misstatements
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements.
 Note 3: Net Income Per Share
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006(in thousands, except per share data)Income before cumulative effect of a change in
accounting principle
    
    $
    18,395
    
    
    $
    24,229
    
    
    $
    58,189
    
    
    $
    66,340Weighted average outstanding of:Common stock shares
    
    
    36,411
    
    
    
    36,633
    
    
    
    36,356
    
    
    
    36,570Dilutive effect of:Employee stock options
    
    
    226
    
    
    
    90
    
    
    
    239
    
    
    
    129Common stock and common stock equivalents
    
    
    36,637
    
    
    
    36,723
    
    
    
    36,595
    
    
    
    36,699Net income per share before cumulative effect of a change
in accounting principle:Basic
    
    $
    0.51
    
    
    $
    0.66
    
    
    $
    1.60
    
    
    $
    1.82Diluted
    
    $
    0.50
    
    
    $
    0.66
    
    
    $
    1.59
    
    
    $
    1.81
 Note 4: Business Combinations
  Business Combinations Goodwill and Other Intangible Assets
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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Business Combinations Goodwill and Other Intangible Assets
  Business Combinations Goodwill and Other Intangible Assets
  Business Combinations Goodwill and Other Intangible Assets
   12




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note 5: Shareholders Equity
 Common Stock
   Dividends
   Note 6: Stock Option and Stock Appreciation Rights Plans
   13




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
   Nine Months EndedSeptember 30, 2006Weighted-average volatility
    
    
    45.4
    %Expected dividend yield
    
    
    2.6
    %Expected term
    
    1.34  5 yearsRisk-free rate
    
    
    4.6
    %
  WeightedAverageExercise
    
    AggregateSARs
    
    Price
    
    Intrinsic Value(in thousands)Outstanding at January 1,
2006
    
    
    1,251,800
    
    
    $
    29.19SARs granted
    
    
    177,000
    
    
    
    27.94SARs exercised
    
    
    
    
    
    
    SARs expired
    
    
    
    
    
    
    SARs forfeited
    
    
    (106,400
    )
    
    
    28.91Outstanding at September 30,
2006
    
    
    1,322,400
    
    
    
    29.04
    
    
    $
    1,604Exercisable at September 30,
2006
    
    
    66,667
    
    
    $
    29.83
    
    
    $
    28
  14




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note 7: Commitments and Contingencies
 Tax Matters
     Russian Environment and Current Economic Situation
  15




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
   16




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Other Commitments and Contingencies
    Other Matters
   17




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Note 8: Investments in and Advances to Ventures
   As of December 31, 2005
    
    
    As of September 30, 2006(in thousands)Equity in net assets acquired
    
    $
    11,565
    
    
    $
    12,537Goodwill as part of investment
    
    
    1,313
    
    
    
    1,313Difference between fair value and historical value of
assets acquired
    
    
    (1,095
    )
    
    
    (1,290
    )Cash advances and other
    
    
    (894
    )
    
    
    (1,247
    )Total investments in and advances to ventures
    
    $
    10,889
    
    
    $
    11,313
  Note 9: Segment Information
 Line of Business Data
  18




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Adjustments to ReconcileBusiness Segment toConsolidated ResultsBusiness
    
    Carrier
    
    
    
    
    
    
    
    
    
    
    
    
    
    Business
    
    
    
    
    
    Equityand
    
    and
    
    Consumer
    
    Mobile
    
    Corporate &
    
    Segment
    
    Consolidated
    
    Method
    
    AffiliateCorporate
    
    Operator
    
    Internet
    
    Services
    
    Eliminations
    
    Total
    
    Results
    
    Ventures
    
    Adjustments(in thousands)Three Months Ended
September 30, 2005Revenue from external
customers
    
    $
    99,544
    
    
    $
    56,736
    
    
    $
    10,093
    
    
    $
    3,558
    
    
    $
    
    
    
    $
    169,931
    
    
    $
    169,930
    
    
    $
    (603
    )
    
    $
    602Intersegment revenue
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    27,811
    
    
    
    8,000
    
    
    
    (1,240
    )
    
    
    857
    
    
    
    (5,314
    )
    
    
    30,114
    
    
    
    30,024
    
    
    
    (90
    )
    
    
    Identifiable assets
    
    
    473,149
    
    
    
    295,295
    
    
    
    61,762
    
    
    
    3,724
    
    
    
    33,909
    
    
    
    867,839
    
    
    
    864,879
    
    
    
    (2,960
    )
    
    
    Capital expenditures
    
    
    21,406
    
    
    
    7,933
    
    
    
    3,690
    
    
    
    79
    
    
    
    17
    
    
    
    33,125
    
    
    
    32,995
    
    
    
    (130
    )
    
    
    
 Adjustments to ReconcileBusiness Segment toConsolidated ResultsBusiness
    
    Carrier
    
    
    
    
    
    
    
    
    
    
    
    
    
    Business
    
    
    
    
    
    Equityand
    
    and
    
    Consumer
    
    Mobile
    
    Corporate &
    
    Segment
    
    Consolidated
    
    Method
    
    AffiliateCorporate
    
    Operator
    
    Internet
    
    Services
    
    Eliminations
    
    Total
    
    Results
    
    Ventures
    
    Adjustments(in thousands)Three Months Ended
September 30, 2006Revenue from external
customers
    
    $
    129,723
    
    
    $
    87,830
    
    
    $
    11,340
    
    
    $
    2,428
    
    
    $
    
    
    
    $
    231,321
    
    
    $
    228,717
    
    
    $
    (4,683
    )
    
    $
    2,079Intersegment revenue
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    35,564
    
    
    
    9,774
    
    
    
    (2,723
    )
    
    
    152
    
    
    
    (5,030
    )
    
    
    37,737
    
    
    
    36,670
    
    
    
    (1,067
    )
    
    
    Identifiable assets
    
    
    589,160
    
    
    
    407,521
    
    
    
    83,270
    
    
    
    9,852
    
    
    
    (11,328
    )
    
    
    1,078,475
    
    
    
    1,048,774
    
    
    
    (29,701
    )
    
    
    Capital expenditures
    
    
    25,382
    
    
    
    10,880
    
    
    
    6,894
    
    
    
    2,412
    
    
    
    2
    
    
    
    45,570
    
    
    
    44,450
    
    
    
    (1,120
    )
    
    
    
 Adjustments to ReconcileBusiness Segment toConsolidated ResultsBusiness
    
    Carrier
    
    
    
    
    
    
    
    
    
    
    
    
    
    Business
    
    
    
    
    
    Equityand
    
    and
    
    Consumer
    
    Mobile
    
    Corporate &
    
    Segment
    
    Consolidated
    
    Method
    
    AffiliateCorporate
    
    Operator
    
    Internet
    
    Services
    
    Eliminations
    
    Total
    
    Results
    
    Ventures
    
    Adjustments(in thousands)Nine Months Ended
September 30, 2005Revenue from external
customers
    
    $
    284,063
    
    
    $
    164,170
    
    
    $
    32,605
    
    
    $
    11,086
    
    
    $
    
    
    
    $
    491,924
    
    
    $
    491,904
    
    
    $
    (1,769
    )
    
    $
    1,749Intersegment revenue
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    77,153
    
    
    
    22,861
    
    
    
    (77
    )
    
    
    2,967
    
    
    
    (13,286
    )
    
    
    89,618
    
    
    
    89,525
    
    
    
    (93
    )
    
    
    Identifiable assets
    
    
    473,149
    
    
    
    295,295
    
    
    
    61,762
    
    
    
    3,724
    
    
    
    33,909
    
    
    
    867,839
    
    
    
    864,879
    
    
    
    (2,960
    )
    
    
    Capital expenditures
    
    
    50,509
    
    
    
    19,303
    
    
    
    5,991
    
    
    
    259
    
    
    
    124
    
    
    
    76,186
    
    
    
    75,958
    
    
    
    (228
    )
    
    
    
 Adjustments to ReconcileBusiness Segment toConsolidated ResultsBusiness
    
    Carrier
    
    
    
    
    
    
    
    
    
    
    
    
    
    Business
    
    
    
    
    
    Equityand
    
    and
    
    Consumer
    
    Mobile
    
    Corporate &
    
    Segment
    
    Consolidated
    
    Method
    
    AffiliateCorporate
    
    Operator
    
    Internet
    
    Services
    
    Eliminations
    
    Total
    
    Results
    
    Ventures
    
    Adjustments(in thousands)Nine Months Ended
September 30, 2006Revenue from external
customers
    
    $
    346,155
    
    
    $
    221,651
    
    
    $
    35,842
    
    
    $
    7,639
    
    
    $
    
    
    
    $
    611,287
    
    
    $
    603,825
    
    
    $
    (12,772
    )
    
    $
    5,310Intersegment revenue
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    92,580
    
    
    
    24,205
    
    
    
    (2,419
    )
    
    
    1,187
    
    
    
    (13,952
    )
    
    
    101,601
    
    
    
    98,755
    
    
    
    (2,846
    )
    
    
    Identifiable assets
    
    
    589,160
    
    
    
    407,521
    
    
    
    83,270
    
    
    
    9,852
    
    
    
    (11,328
    )
    
    
    1,078,475
    
    
    
    1,048,774
    
    
    
    (29,701
    )
    
    
    Capital expenditures
    
    
    68,505
    
    
    
    28,280
    
    
    
    14,856
    
    
    
    8,073
    
    
    
    31
    
    
    
    119,745
    
    
    
    117,910
    
    
    
    (1,835
    )
    
    
    
 19




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##### Table of Contents



GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Geographic Data
   Corporate,OtherCountries &
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Three months ended September 30, 2005Revenue
    
    $
    151,334
    
    
    $
    18,324
    
    
    $
    272
    
    
    $
    169,930Long-lived assets
    
    
    578,583
    
    
    
    34,800
    
    
    
    11,847
    
    
    
    625,230
 Corporate,OtherCountries &
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Three months ended September 30, 2006Revenue
    
    $
    205,174
    
    
    $
    21,539
    
    
    $
    2,004
    
    
    $
    228,717Long-lived assets
    
    
    737,559
    
    
    
    63,091
    
    
    
    13,311
    
    
    
    813,961
 Corporate,OtherCountries &
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Nine months ended September 30, 2005Revenue
    
    $
    437,748
    
    
    $
    54,910
    
    
    $
    (754
    )
    
    $
    491,904Long-lived assets
    
    
    578,583
    
    
    
    34,800
    
    
    
    11,847
    
    
    
    625,230
 Corporate,OtherCountries &
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Nine months ended September 30, 2006Revenue
    
    $
    539,654
    
    
    $
    58,593
    
    
    $
    5,578
    
    
    $
    603,825Long-lived assets
    
    
    737,559
    
    
    
    63,091
    
    
    
    13,311
    
    
    
    813,961
 Note 10: Subsequent Events
   20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
   
    
    Business and Corporate Services (BCS). Using our fiber optic and satellite-based
networks in and between major metropolitan areas of Russia, Ukraine and other countries of
the CIS, we provide business and corporate services including voice and data services to
corporate clients across all geographical markets and all industry segments, other than
telecommunications operators;
    
    Carrier and Operator Services.Using our fiber optic and satellite-based networks in and
between major metropolitan areas of Russia, Ukraine and other countries of the CIS, we
provide a range of carrier and operator services including voice and data services to
foreign and Russian telecommunications and mobile operators;
    
    Consumer Internet Services.Using our fiber optic and satellite-based networks, we
provide Internet access to the consumer market and web content offered through a family of
Internet portals throughout Russia, Ukraine, Kazakhstan, and Uzbekistan; and
    
    Mobile Services. Using our mobile networks in Kiev and Odessa, Ukraine, we provide mobile
services with value-added features, such as voicemail, roaming and messaging services on a
subscription and prepaid basis.
     Recent Acquisitions
   21




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Regulatory Developments
   22




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23




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Other Developments
  24




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Highlights and Outlook
    25




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26




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Critical Accounting Policies
  27




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##### Table of Contents



Revenue recognition policie
 Allowance for doubtful accounts policies
 Long-lived asset recovery policies
 Goodwill and assessment of impairment Goodwill and Other Intangible Assets
 Valuation allowance for deferred tax asset
 Business segment information
 Functional currency Foreign Currency Translation .
 28




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##### Table of Contents



Stock-based compensation;
 Critical Accounting Estimates
  Allowance for doubtful accounts;
 Tax provisions; Accounting for
Contingencies Accounting for Income Taxes
 Useful lives of property and equipment and certain intangible assets;
 Business combinations; Business Combinations
 Recent Accounting Pronouncements
 Accounting for Stock-Based
Compensation Accounting
for Stock Issued to Employees
 29




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##### Table of Contents



Share Based Payment Accounting for Stock Issued to Employees Statement of Cash Flows
      30




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Results of Operations
   The discussion of our results of operations is organized as follows:
 
    
    Consolidated Results.Consolidated Results of Operations for the Three
Months Ended September 30, 2006, compared to the Consolidated Results
of Operations for the Three Months Ended September 30, 2005
 
    
    Consolidated Results.Consolidated Results of Operations for the Nine
Months Ended September 30, 2006, compared to the Consolidated Results
of Operations for the Nine Months Ended September 30, 2005
 
    
    Consolidated Financial Position.Consolidated Financial Position at
September 30, 2006, compared to Consolidated Financial Position at
December 31, 2005
 Consolidated Results  Consolidated Results of Operations for the Three Months Ended September 30,
2006, compared to the Consolidated Results of Operations for the Three Months Ended September 30,
2005
 Revenue
  Consolidated Revenue
    
    
    Consolidated RevenueFor the Three Months
    
    
    For the Three MonthsEnded September 30, 2005
    
    
    Ended September 30, 2006(in millions)REVENUEBusiness and Corporate Services
    
    $
    99.5
    
    
    $
    129.5Carrier and Operator Services
    
    
    56.7
    
    
    
    85.5Consumer Internet Services
    
    
    10.1
    
    
    
    11.3Mobile Services
    
    
    3.6
    
    
    
    2.4TOTAL REVENUE
    
    $
    169.9
    
    
    $
    228.7
 31




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##### Table of Contents



Consolidated Revenue
    
    
    Consolidated RevenueFor the Three Months
    
    
    For the Three MonthsEnded September 30, 2005
    
    
    Ended September 30, 2006(in millions)REVENUEMoscow
    
    $
    110.0
    
    
    $
    144.8Northwest region of Russia
    
    
    15.1
    
    
    
    19.0Other regions of Russia and CIS
    
    
    30.3
    
    
    
    49.3Ukraine
    
    
    18.3
    
    
    
    21.5Eliminations
    
    
    (3.8
    )
    
    
    (5.9
    )TOTAL REVENUE
    
    $
    169.9
    
    
    $
    228.7
 Business and Corporate Services.
  (in whole numbers)
    
    2005
    
    2006
    
    % ChangeBCS Moscow customer statistics on September 30:Total clients
    
    
    23,075
    
    
    
    23,416
    
    
    
    1
    %Business centers
    
    
    760
    
    
    
    886
    
    
    
    17
    %Trade centers
    
    
    65
    
    
    
    84
    
    
    
    29
    %Hotels
    
    
    47
    
    
    
    52
    
    
    
    11
    %Direct inward dialing lines
    
    
    124,700
    
    
    
    134,000
    
    
    
    7
    %Ethernet / Metropolitan Ethernet Network connections
    
    
    1,476
    
    
    
    2,371
    
    
    
    61
    %High speed Internet active contracts
    
    
    396
    
    
    
    834
    
    
    
    111
    %
   32




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##### Table of Contents



Carrier and Operator Services.
    Consumer Internet Services.
 Mobile Services.
 Expenses
  33




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##### Table of Contents



Consolidated Expenses
    
    
    Consolidated ExpensesFor the Three Months
    
    
    For the Three MonthsEnded September 30, 2005
    
    
    Ended September 30, 2006(in millions)COST OF REVENUEBusiness and Corporate Services
    
    $
    42.5
    
    
    $
    56.5Carrier and Operator Services
    
    
    37.1
    
    
    
    60.6Consumer Internet Services
    
    
    7.1
    
    
    
    9.7Mobile Services
    
    
    1.6
    
    
    
    1.4TOTAL COST OF REVENUE
    
    
    88.3
    
    
    
    128.2Selling, general and administrative
    
    
    31.0
    
    
    
    37.5Depreciation and amortization
    
    
    20.6
    
    
    
    26.4Equity in earnings of ventures
    
    
    (0.7
    )
    
    
    (0.3
    )Interest income
    
    
    (0.8
    )
    
    
    (0.2
    )Interest expense
    
    
    0.1
    
    
    
    0.1Foreign currency (gain)/ loss
    
    
    0.2
    
    
    
    (0.1
    )Minority interest
    
    
    0.8
    
    
    
    1.8Provision for income taxes
    
    
    12.0
    
    
    
    11.1
 Cost of Revenue
  Business and Corporate Services.
    Carrier and Operator Services.
   34




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##### Table of Contents



Consumer Internet Services.
  Mobile Services.
 Selling, General and Administrative
  Depreciation and Amortization
  Equity in Earnings of Ventures
  Interest Income
  Interest Expense
  35




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##### Table of Contents



Foreign Currency Gain (Loss)
  Minority Interest
  Provision for Income Taxes
  Net Income and Net Income per Share
    Consolidated Results  Consolidated Results of Operations for the Nine Months Ended September 30,
2006, compared to the Consolidated Results of Operations for the Nine Months Ended September 30,
2005
 Revenue
  Consolidated Revenue
    
    
    Consolidated RevenueFor the Nine Months
    
    
    For the Nine MonthsEnded September 30, 2005
    
    
    Ended September 30, 2006(in millions)REVENUEBusiness and Corporate Services
    
    $
    284.0
    
    
    $
    345.7Carrier and Operator Services
    
    
    164.2
    
    
    
    214.7Consumer Internet Services
    
    
    32.6
    
    
    
    35.7Mobile Services
    
    
    11.1
    
    
    
    7.7TOTAL REVENUE
    
    $
    491.9
    
    
    $
    603.8
 36




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##### Table of Contents



Consolidated Revenue
    
    
    Consolidated RevenueFor the Nine Months
    
    
    For the Nine MonthsEnded September 30, 2005
    
    
    Ended September 30, 2006(in millions)REVENUEMoscow
    
    $
    323.2
    
    
    $
    378.6Northwest region of Russia
    
    
    42.6
    
    
    
    53.5Other regions of Russia and CIS
    
    
    85.5
    
    
    
    128.6Ukraine
    
    
    54.9
    
    
    
    58.6Eliminations
    
    
    (14.3
    )
    
    
    (15.5
    )TOTAL REVENUE
    
    $
    491.9
    
    
    $
    603.8
 Business and Corporate Services.
     Carrier and Operator Services.
    37




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##### Table of Contents



Consumer Internet Services.
 Mobile Services.
 Expenses
  Consolidated Expenses
    
    
    Consolidated ExpensesFor the Nine Months
    
    
    For the Nine MonthsEnded September 30, 2005
    
    
    Ended September 30, 2006(in millions)COST OF REVENUEBusiness and Corporate Services
    
    $
    121.4
    
    
    $
    148.5Carrier and Operator Services
    
    
    106.5
    
    
    
    149.2Consumer Internet Services
    
    
    21.7
    
    
    
    25.6Mobile Services
    
    
    4.9
    
    
    
    3.9TOTAL COST OF REVENUE
    
    
    254.5
    
    
    
    327.2Selling, general and administrative
    
    
    87.4
    
    
    
    104.9Depreciation and amortization
    
    
    60.5
    
    
    
    72.9Equity in earnings of ventures
    
    
    (0.5
    )
    
    
    (1.0
    )Interest income
    
    
    (1.7
    )
    
    
    (1.0
    )Interest expense
    
    
    0.5
    
    
    
    0.2Foreign currency (gain)/ loss
    
    
    0.4
    
    
    
    (1.6
    )Minority interest
    
    
    2.1
    
    
    
    3.9Provision for income taxes
    
    
    30.5
    
    
    
    31.9Cumulative effect of a change in
accounting principle, net of tax
    
    $
    
    
    
    $
    0.7
 Cost of Revenue
  Business and Corporate Services.
    Carrier and Operator Services.
 38




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##### Table of Contents



Consumer Internet Services.
  Mobile
Services.
 Selling, General and Administrative
  Depreciation and Amortization
  39




---



##### Table of Contents



Equity in Earnings of Ventures
  Interest Income
  Interest Expense
  Foreign Currency Gain (Loss)
  Minority Interest
  Provision for Income Taxes
  Cumulative Effect of a Change in Accounting Principle
  Net Income and Net Income per Share
    40




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##### Table of Contents



Consolidated Financial Position  Significant Changes in Consolidated Financial Position at
September 30, 2006, compared to Consolidated Financial Position at December 31, 2005
 Accounts Receivable
  Intangible Assets
  Other Non-Current Liabilities
  Minority Interest
  Shareholders Equity
  Income Taxes
  Liquidity and Capital Resources
  41




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##### Table of Contents



Consolidated Cash Flows
    
    
    Consolidated Cash FlowsFor the Nine Months
    
    
    For the Nine MonthsEnded September 30, 2005
    
    
    Ended September 30, 2006(in millions)CASH FLOWSProvided by operating activities
    
    $
    128.3
    
    
    $
    129.9Used in investing activities
    
    
    (72.4
    )
    
    
    (147.2
    )Used in financing activities
    
    
    (23.5
    )
    
    
    (13.7
    )Effect of exchange rate changes
    
    
    (0.1
    )
    
    
    1.0Net increase (decrease) in cash
and cash equivalents
    
    $
    32.3
    
    
    $
    (30.0
    )
            42




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##### Table of Contents



Credit Rating Agency
    
    Rating
    
    OutlookStandard & Poors
    
    BB-
    
    StableMoodys
    
    
    B2
    
    
    Stable
    43




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##### Table of Contents



Contractual Obligations
  44




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##### Table of Contents



Special Note Regarding Forward Looking Statements
     45




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  46




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Failure to receive access codes may prevent the Company from further developing its long distance
business
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  47




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##### Table of Contents



Item 6. Exhibits
 Designation
    
    Description31.1
    
    Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 48




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##### Table of Contents



SIGNATURES
  GOLDEN TELECOM, INC.
(Registrant)By:
    
    /s/ BORIS SVETLICHNYName:
    
    Boris SvetlichnyTitle:
    
    Senior Vice-President, Chief Financial Officer and Treasurer(Principal Financial Officer)By:
    
    /s/ MICHAEL D. WILSONName:
    
    Michael D. WilsonTitle:
    
    Vice-President and Corporate Controller
(Principal Accounting Officer)
  49




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##### Table of Contents



Designation
    
    Description31.1
    
    Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 50