##### 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 June 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
    
    51-0391303(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 Representative Office Golden TeleServices, Inc.
1 Kozhevnichesky Proezd
Moscow, Russia 115114
    
    115114(Address of principal executive office)
    
    (Zip Code)
 (011-7-501) 797-9300
 þ o
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I.FINANCIAL INFORMATIONItem 1 Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of December
31, 2005, and June 30, 2006 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2005 and 2006 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 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 *
    
    
    19Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4 Controls and Procedures
    
    
    42PART II. OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    43Item 1A Risk Factors
    
    
    43Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3 Defaults Upon Senior Securities
    
    
    43Item 4 Submission of Matters to a Vote of Security Holders
    
    
    43Item 5 Other information
    
    
    44Item 6 Exhibits
    
    
    44Signatures
    
    
    45Employment Agreement and Amendment to Employee AgreementCertification of PEO Pursuant to Section 302Certification of PFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
   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,
    
    
    June 30,2005
    
    
    2006ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    67,176
    
    
    $
    36,411Accounts receivable, net of allowance for doubtful accounts of
$27,327 and $29,980 at December 31, 2005 and June 30, 2006, respectively
    
    
    91,709
    
    
    
    117,993VAT receivable
    
    
    21,986
    
    
    
    18,290Prepaid expenses
    
    
    8,083
    
    
    
    8,277Taxes receivable, excluding VAT
    
    
    181
    
    
    
    2,634Notes receivable
    
    
    1,494
    
    
    
    3,380Deferred tax asset
    
    
    8,994
    
    
    
    10,620Other current assets
    
    
    11,334
    
    
    
    13,426TOTAL CURRENT ASSETS
    
    
    210,957
    
    
    
    211,031Property and equipment, net of accumulated depreciation of $247,096
and $281,786 at December 31, 2005 and June 30, 2006, respectively
    
    
    407,907
    
    
    
    449,660Goodwill and intangible assets:Goodwill
    
    
    149,249
    
    
    
    156,164Intangible assets, net of accumulated amortization of $60,648 and $69,788 at
December 31, 2005 and June 30, 2006, respectively
    
    
    93,880
    
    
    
    96,756Net goodwill and intangible assets
    
    
    243,129
    
    
    
    252,920Restricted cash
    
    
    566
    
    
    
    229Other non-current assets
    
    
    19,652
    
    
    
    22,084TOTAL ASSETS
    
    $
    882,211
    
    
    $
    935,924
  3




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##### Table of Contents



GOLDEN TELECOM, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
 December 31,
    
    
    June 30,2005
    
    
    2006LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    89,404
    
    
    $
    109,453VAT payable
    
    
    17,190
    
    
    
    6,812Debt maturing within one year
    
    
    
    
    
    
    957Current capital lease obligation
    
    
    1,941
    
    
    
    1,290Deferred revenue
    
    
    16,799
    
    
    
    18,971Due to affiliates and related parties
    
    
    2,470
    
    
    
    3,167Other current liabilities
    
    
    4,079
    
    
    
    5,482TOTAL CURRENT LIABILITIES
    
    
    131,883
    
    
    
    146,132Long-term debt, less current portion
    
    
    27
    
    
    
    183Long-term deferred tax liability
    
    
    22,287
    
    
    
    23,353Long-term deferred revenue
    
    
    30,878
    
    
    
    33,531Long-term capital lease obligations
    
    
    2,340
    
    
    
    1,944Other non-current liabilities
    
    
    
    
    
    
    1,460TOTAL LIABILITIES
    
    
    187,415
    
    
    
    206,603Minority interest
    
    
    19,693
    
    
    
    24,975SHAREHOLDERS EQUITYPreferred stock, $0.01 par value (10,000,000 shares
authorized; none issued and outstanding at December 31, 2005
and June 30, 2006)
    
    
    
    
    
    
    Common stock, $0.01 par value (100,000,000 shares authorized;
36,458,490 and 36,628,413 shares issued and outstanding at December 31,
2005 and June 30, 2006, respectively)
    
    
    365
    
    
    
    366Additional paid-in capital
    
    
    671,998
    
    
    
    673,977Deferred equity compensation
    
    
    (455
    )
    
    
    Retained earnings
    
    
    3,195
    
    
    
    30,003TOTAL SHAREHOLDERS EQUITY
    
    
    675,103
    
    
    
    704,346TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    882,211
    
    
    $
    935,924
  4




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GOLDEN TELECOM, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006REVENUE:Telecommunication services
    
    $
    164,392
    
    
    $
    195,242
    
    
    $
    319,990
    
    
    $
    371,889Revenue from affiliates and related parties
    
    
    1,117
    
    
    
    1,726
    
    
    
    1,984
    
    
    
    3,219TOTAL REVENUE
    
    
    165,509
    
    
    
    196,968
    
    
    
    321,974
    
    
    
    375,108OPERATING COSTS AND EXPENSES:Access and network services (excluding depreciation
and amortization)
    
    
    86,191
    
    
    
    105,608
    
    
    
    166,188
    
    
    
    199,001Selling, general and administrative (excluding
depreciation and amortization)
    
    
    28,828
    
    
    
    33,569
    
    
    
    56,414
    
    
    
    67,450Depreciation and amortization
    
    
    20,150
    
    
    
    23,923
    
    
    
    39,871
    
    
    
    46,572TOTAL OPERATING COSTS AND EXPENSES
    
    
    135,169
    
    
    
    163,100
    
    
    
    262,473
    
    
    
    313,023INCOME FROM OPERATIONS
    
    
    30,340
    
    
    
    33,868
    
    
    
    59,501
    
    
    
    62,085OTHER INCOME (EXPENSE):Equity in earnings (losses) of ventures
    
    
    (70
    )
    
    
    347
    
    
    
    (168
    )
    
    
    671Interest income
    
    
    524
    
    
    
    156
    
    
    
    900
    
    
    
    803Interest expense
    
    
    (350
    )
    
    
    (74
    )
    
    
    (437
    )
    
    
    (150
    )Foreign currency gains (losses)
    
    
    (603
    )
    
    
    669
    
    
    
    (239
    )
    
    
    1,575TOTAL OTHER INCOME (EXPENSE)
    
    
    (499
    )
    
    
    1,098
    
    
    
    56
    
    
    
    2,899Income before income taxes and minority interest
    
    
    29,841
    
    
    
    34,966
    
    
    
    59,557
    
    
    
    64,984Income taxes
    
    
    9,355
    
    
    
    11,356
    
    
    
    18,498
    
    
    
    20,770Minority interest
    
    
    719
    
    
    
    965
    
    
    
    1,265
    
    
    
    2,103Income before cumulative effect of a change in
accounting principle
    
    
    19,767
    
    
    
    22,645
    
    
    
    39,794
    
    
    
    42,111Cumulative effect of a change in accounting principle,
net of tax of $52
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    681NET INCOME
    
    $
    19,767
    
    
    $
    22,645
    
    
    $
    39,794
    
    
    $
    41,430Basic earnings per share of common stock:Income before cumulative effect of a change in
accounting principle
    
    $
    0.54
    
    
    
    0.62
    
    
    $
    1.10
    
    
    
    1.15Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Net income per share  basic
    
    $
    0.54
    
    
    $
    0.62
    
    
    $
    1.10
    
    
    $
    1.13Weighted average common shares  basic
    
    
    36,334
    
    
    
    36,600
    
    
    
    36,329
    
    
    
    36,537Diluted earnings per share of common stock:Income before cumulative effect of a change in
accounting principle
    
    $
    0.54
    
    
    $
    0.62
    
    
    $
    1.09
    
    
    
    1.15Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Net income per share  diluted
    
    $
    0.54
    
    
    $
    0.62
    
    
    $
    1.09
    
    
    $
    1.13Weighted average common shares  diluted
    
    
    36,571
    
    
    
    36,716
    
    
    
    36,573
    
    
    
    36,687Cash dividends per common share
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.40
    
    
    $
    0.40
  5




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GOLDEN TELECOM, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 Six Months Ended June 30,2005
    
    
    2006OPERATING ACTIVITIES:Net income
    
    $
    39,794
    
    
    $
    41,430Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:Depreciation
    
    
    30,908
    
    
    
    36,545Amortization
    
    
    8,963
    
    
    
    10,027Equity in (earnings) losses of ventures
    
    
    168
    
    
    
    (671
    )Foreign currency (gain) losses
    
    
    239
    
    
    
    (1,575
    )Bad debt expense
    
    
    4,681
    
    
    
    4,555Stock appreciation rights compensation expense
    
    
    
    
    
    
    2,273Cumulative effect of a change in accounting principle, net of tax of $52
    
    
    
    
    
    
    681Other
    
    
    (1,445
    )
    
    
    452Changes in assets and liabilities:Accounts receivable
    
    
    (11,126
    )
    
    
    (27,855
    )Accounts payable and accrued expenses
    
    
    4,887
    
    
    
    22,916VAT, net
    
    
    2,796
    
    
    
    (6,552
    )Other changes in assets and liabilities
    
    
    6,367
    
    
    
    (1,055
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    86,232
    
    
    
    81,171INVESTING ACTIVITIES:Purchases of property and equipment and intangible assets
    
    
    (44,362
    )
    
    
    (81,206
    )Acquisitions, net of cash acquired
    
    
    (946
    )
    
    
    (16,486
    )Restricted cash
    
    
    452
    
    
    
    337Other investing
    
    
    1,300
    
    
    
    (1,794
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (43,556
    )
    
    
    (99,149
    )FINANCING ACTIVITIES:Net proceeds from exercise of employee stock options
    
    
    565
    
    
    
    2,306Cash dividends paid
    
    
    (14,543
    )
    
    
    (14,622
    )Other financing
    
    
    (1,085
    )
    
    
    (1,062
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (15,063
    )
    
    
    (13,378
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (90
    )
    
    
    591Net increase (decrease) in cash and cash equivalents
    
    
    27,523
    
    
    
    (30,765
    )Cash and cash equivalents at beginning of period
    
    
    53,699
    
    
    
    67,176CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    81,222
    
    
    $
    36,411
  6




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##### Table of Contents



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
 Intangible Assets
  As of December 31, 2005
    
    
    As of June 30, 2006(in thousands)Weighted Average
    
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    AccumulatedAmortization Lives
    
    
    Cost
    
    
    Amortization
    
    
    Cost
    
    
    AmortizationAmortized intangible assets:Telecommunications service contracts
    
    10 years
    
    $
    99,366
    
    
    $
    (32,009
    )
    
    $
    103,668
    
    
    $
    (37,712
    )Contract-based customer relationships
    
    5 years
    
    
    36,849
    
    
    
    (18,241
    )
    
    
    37,091
    
    
    
    (21,847
    )Licenses
    
    11 years
    
    
    7,176
    
    
    
    (3,182
    )
    
    
    12,744
    
    
    
    (3,565
    )Other intangible assets
    
    5 years
    
    
    11,137
    
    
    
    (7,216
    )
    
    
    13,041
    
    
    
    (6,664
    )Total
    
    
    
    
    
    $
    154,528
    
    
    $
    (60,648
    )
    
    $
    166,544
    
    
    $
    (69,788
    )
  Comprehensive Income
  Stock-Based Compensation
  7




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##### Table of Contents



GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005(in thousands, except per share data)Net income, as reported
    
    $
    19,767
    
    
    $
    39,794Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    149
    
    
    
    330Pro forma net income
    
    $
    19,618
    
    
    $
    39,464Net income per share:Basic  as reported
    
    $
    0.54
    
    
    $
    1.10Basic  pro forma
    
    
    0.54
    
    
    
    1.09Diluted  as reported
    
    
    0.54
    
    
    
    1.09Diluted  pro forma
    
    
    0.54
    
    
    
    1.08
     Income Taxes
  8




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##### Table of Contents



GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Functional Currency
   Use of Estimates in Preparation of Financial Statements
  Comparative Figures
  Recent Accounting Pronouncements
 Exchanges of Nonmonetary Assets
  Accounting Changes and Error Corrections
  9




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##### Table of Contents



GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Note 3: Net Income Per Share
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006(in thousands, except per share data)Income before cumulative effect of a change in
accounting principle
    
    $
    19,767
    
    
    $
    22,645
    
    
    $
    39,794
    
    
    $
    42,111Weighted average outstanding of:Common stock shares
    
    
    36,334
    
    
    
    36,600
    
    
    
    36,329
    
    
    
    36,537Dilutive effect of:Employee stock options
    
    
    237
    
    
    
    116
    
    
    
    244
    
    
    
    150Common stock and common stock equivalents
    
    
    36,571
    
    
    
    36,716
    
    
    
    36,573
    
    
    
    36,687Net income per share before cumulative effect of a change
in accounting principle:Basic
    
    $
    0.54
    
    
    $
    0.62
    
    
    $
    1.10
    
    
    $
    1.15Diluted
    
    $
    0.54
    
    
    $
    0.62
    
    
    $
    1.09
    
    
    $
    1.15
 Note 4: Business Combinations
   10




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##### Table of Contents



GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
     Note 5: Shareholders Equity
 Common Stock
   Dividends
   11




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##### Table of Contents



GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Note 6: Stock Option and Stock Appreciation Rights Plans
     Six Months EndedJune 30, 2006Weighted-average volatility
    
    
    51.0
    %Expected dividend yield
    
    
    3.2
    %Expected term
    
    1.59  5 yearsRisk-free rate
    
    
    5.1
    %
 12




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  WeightedAverageExercise
    
    
    AggregateSARs
    
    
    Price
    
    
    Intrinsic Value(in thousands)Outstanding at January 1,
2006
    
    
    1,251,800
    
    
    $
    29.19SARs granted
    
    
    60,000
    
    
    
    31.46SARs exercised
    
    
    
    
    
    
    SARs expired
    
    
    
    
    
    
    SARs forfeited
    
    
    (42,400
    )
    
    
    28.95Outstanding at June 30,
2006
    
    
    1,269,400
    
    
    
    29.30
    
    
    $
    Exercisable at June 30, 2006
    
    
    
    
    
    $
    
    
    
    $
    
  Note 7: Commitments and Contingencies
 Tax Matters
    13




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Russian Environment and Current Economic Situation
    14




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  Other Commitments and Contingencies
   Other Matters
   Note 8: Investments in and Advances to Ventures
  15




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
  As of December 31, 2005
    
    
    As of June 30, 2006(in thousands)Equity in net assets acquired
    
    $
    11,565
    
    
    $
    12,366Goodwill as part of investment
    
    
    1,313
    
    
    
    1,313Difference between fair value and historical value of
assets acquired
    
    
    (1,095
    )
    
    
    (1,225
    )Cash advances and other
    
    
    (894
    )
    
    
    (713
    )Total investments in and advances to ventures
    
    $
    10,889
    
    
    $
    11,741
  Note 9: Segment Information
 Line of Business Data
  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 EndedJune 30, 2005Revenue from external
customers
    
    $
    96,432
    
    
    $
    54,455
    
    
    $
    10,728
    
    
    $
    3,905
    
    
    $
    
    
    
    $
    165,520
    
    
    $
    165,509
    
    
    $
    (615
    )
    
    $
    604Intersegment revenue
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    26,148
    
    
    
    7,116
    
    
    
    (553
    )
    
    
    1,019
    
    
    
    (3,340
    )
    
    
    30,390
    
    
    
    30,340
    
    
    
    (50
    )
    
    
    Identifiable assets
    
    
    459,911
    
    
    
    288,345
    
    
    
    58,375
    
    
    
    4,048
    
    
    
    35,050
    
    
    
    845,729
    
    
    
    842,393
    
    
    
    (3,336
    )
    
    
    Capital expenditures
    
    
    14,992
    
    
    
    5,983
    
    
    
    1,355
    
    
    
    83
    
    
    
    18
    
    
    
    22,431
    
    
    
    22,338
    
    
    
    (93
    )
    
    
    
 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 EndedJune 30, 2006Revenue from external
customers
    
    $
    113,073
    
    
    $
    71,398
    
    
    $
    12,243
    
    
    $
    2,621
    
    
    $
    
    
    
    $
    199,335
    
    
    $
    196,968
    
    
    $
    (4,210
    )
    
    $
    1,843Intersegment revenue
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    30,787
    
    
    
    7,399
    
    
    
    667
    
    
    
    501
    
    
    
    (4,468
    )
    
    
    34,886
    
    
    
    33,868
    
    
    
    (1,018
    )
    
    
    Identifiable assets
    
    
    520,706
    
    
    
    364,875
    
    
    
    73,136
    
    
    
    9,145
    
    
    
    (2,968
    )
    
    
    964,894
    
    
    
    935,924
    
    
    
    (28,970
    )
    
    
    Capital expenditures
    
    
    22,318
    
    
    
    9,365
    
    
    
    5,067
    
    
    
    5,614
    
    
    
    24
    
    
    
    42,388
    
    
    
    41,873
    
    
    
    (515
    )
    
    
    
 16




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##### Table of Contents



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)Six Months EndedJune 30, 2005Revenue from external
customers
    
    $
    184,519
    
    
    $
    107,434
    
    
    $
    22,512
    
    
    $
    7,528
    
    
    $
    
    
    
    $
    321,993
    
    
    $
    321,974
    
    
    $
    (1,166
    )
    
    $
    1,147Intersegment revenue
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    49,342
    
    
    
    14,861
    
    
    
    1,163
    
    
    
    2,110
    
    
    
    (7,972
    )
    
    
    59,504
    
    
    
    59,501
    
    
    
    (3
    )
    
    
    Identifiable assets
    
    
    459,911
    
    
    
    288,345
    
    
    
    58,375
    
    
    
    4,048
    
    
    
    35,050
    
    
    
    845,729
    
    
    
    842,393
    
    
    
    (3,336
    )
    
    
    Capital expenditures
    
    
    29,103
    
    
    
    11,370
    
    
    
    2,301
    
    
    
    180
    
    
    
    107
    
    
    
    43,061
    
    
    
    42,963
    
    
    
    (98
    )
    
    
    
 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)Six Months EndedJune 30, 2006Revenue from external
customers
    
    $
    216,432
    
    
    $
    133,821
    
    
    $
    24,502
    
    
    $
    5,211
    
    
    $
    
    
    
    $
    379,966
    
    
    $
    375,108
    
    
    $
    (8,089
    )
    
    $
    3,231Intersegment revenue
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    57,016
    
    
    
    14,432
    
    
    
    304
    
    
    
    1,035
    
    
    
    (8,922
    )
    
    
    63,865
    
    
    
    62,085
    
    
    
    (1,780
    )
    
    
    Identifiable assets
    
    
    520,706
    
    
    
    364,875
    
    
    
    73,136
    
    
    
    9,145
    
    
    
    (2,968
    )
    
    
    964,894
    
    
    
    935,924
    
    
    
    (28,970
    )
    
    
    Capital expenditures
    
    
    43,123
    
    
    
    17,400
    
    
    
    7,962
    
    
    
    5,661
    
    
    
    29
    
    
    
    74,175
    
    
    
    73,460
    
    
    
    (715
    )
    
    
    
 Geographic Data
   Corporate,OtherCountries &
    
    
    ConsolidatedRussia
    
    
    Ukraine
    
    
    Eliminations
    
    
    Results(in thousands)Three months endedJune 30, 2005Revenue
    
    $
    146,921
    
    
    $
    19,033
    
    
    $
    (445
    )
    
    $
    165,509Long-lived assets
    
    
    566,945
    
    
    
    28,992
    
    
    
    11,403
    
    
    
    607,340
 Corporate,OtherCountries &
    
    
    ConsolidatedRussia
    
    
    Ukraine
    
    
    Eliminations
    
    
    Results(in thousands)Three months endedJune 30, 2006Revenue
    
    $
    175,430
    
    
    $
    19,359
    
    
    $
    2,179
    
    
    $
    196,968Long-lived assets
    
    
    654,249
    
    
    
    57,659
    
    
    
    12,736
    
    
    
    724,644
 17




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GOLDEN TELECOM, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)
 Corporate,OtherCountries &
    
    
    ConsolidatedRussia
    
    
    Ukraine
    
    
    Eliminations
    
    
    Results(in thousands)Six months ended June 30, 2005Revenue
    
    $
    286,414
    
    
    $
    36,586
    
    
    $
    (1,026
    )
    
    $
    321,974Long-lived assets
    
    
    566,945
    
    
    
    28,992
    
    
    
    11,403
    
    
    
    607,340
 Corporate,OtherCountries &
    
    
    ConsolidatedRussia
    
    
    Ukraine
    
    
    Eliminations
    
    
    Results(in thousands)Six months ended June 30, 2006Revenue
    
    $
    334,480
    
    
    $
    37,054
    
    
    $
    3,574
    
    
    $
    375,108Long-lived assets
    
    
    654,249
    
    
    
    57,659
    
    
    
    12,736
    
    
    
    724,644
 Note 10: Subsequent Events
  18




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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
   19




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Regulatory Developments
   20




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21




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Other Developments
      22




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Highlights and Outlook
    23




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24




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Critical Accounting Policies
  Revenue recognition policies
 Allowance for doubtful accounts policies
 Long-lived asset recovery policies;
 Goodwill and assessment of impairment;
 Valuation allowance for deferred tax asset;
 25




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##### Table of Contents



Business segment information;
 Functional currency;
  Stock-based compensation;
 Critical Accounting Estimates
  Allowance for doubtful accounts;
 Tax provisions;
 Useful lives of property and equipment and certain intangible assets;
 Business combinations;
 26




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Recent Accounting Pronouncements
          27




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##### Table of Contents



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 June 30, 2006, compared to the Consolidated Results of
Operations for the Three Months Ended June 30, 2005
 
    
    Consolidated Results.Consolidated Results of Operations for the Six
Months Ended June 30, 2006, compared to the Consolidated Results of
Operations for the Six Months Ended June 30, 2005
 
    
    Consolidated Financial Position.Consolidated Financial Position at
June 30, 2006, compared to Consolidated Financial Position at December
31, 2005
 Consolidated Results  Consolidated Results of Operations for the Three Months Ended June 30, 2006,
compared to the Consolidated Results of Operations for the Three Months Ended June 30, 2005
 Revenue
  Consolidated Revenue
    
    
    Consolidated RevenueFor the Three Months
    
    
    For the Three MonthsEnded June 30, 2005
    
    
    Ended June 30, 2006(in millions)REVENUEBusiness and Corporate Services
    
    $
    96.4
    
    
    $
    113.0Carrier and Operator Services
    
    
    54.5
    
    
    
    69.2Consumer Internet Services
    
    
    10.7
    
    
    
    12.2Mobile Services
    
    
    3.9
    
    
    
    2.6TOTAL REVENUE
    
    $
    165.5
    
    
    $
    197.0
  Consolidated Revenue
    
    
    Consolidated RevenueFor the Three Months
    
    
    For the Three MonthsEnded June 30, 2005
    
    
    Ended June 30, 2006(in millions)REVENUEMoscow
    
    $
    109.2
    
    
    $
    121.7Northwest region of Russia
    
    
    14.2
    
    
    
    18.0Other regions of Russia and CIS
    
    
    28.3
    
    
    
    42.3Ukraine
    
    
    19.0
    
    
    
    19.4Eliminations
    
    
    (5.2
    )
    
    
    (4.4
    )TOTAL REVENUE
    
    $
    165.5
    
    
    $
    197.0
 28




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##### Table of Contents



Business and Corporate Services.
  (in whole numbers)BCS Moscow customer statistics on June 30:
    
    2005
    
    
    2006
    
    
    % ChangeTotal clients
    
    
    23,100
    
    
    
    23,559
    
    
    
    2
    %Business centers
    
    
    735
    
    
    
    855
    
    
    
    16
    %Trade centers
    
    
    60
    
    
    
    78
    
    
    
    30
    %Hotels
    
    
    47
    
    
    
    51
    
    
    
    9
    %Direct inward dialing lines
    
    
    122,350
    
    
    
    131,250
    
    
    
    7
    %Ethernet / Metropolitan Ethernet Network connections
    
    
    1,350
    
    
    
    2,172
    
    
    
    61
    %High speed Internet active contracts
    
    
    345
    
    
    
    694
    
    
    
    101
    %
    Carrier and Operator Services.
  29




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##### Table of Contents



Consumer Internet Services.
 Mobile Services.
 Expenses
  Consolidated Expenses
    
    
    Consolidated ExpensesFor the Three Months
    
    
    For the Three MonthsEnded June 30, 2005
    
    
    Ended June 30, 2006(in millions)COST OF REVENUEBusiness and Corporate Services
    
    $
    41.3
    
    
    $
    48.0Carrier and Operator Services
    
    
    35.8
    
    
    
    48.4Consumer Internet Services
    
    
    7.3
    
    
    
    7.9Mobile Services
    
    
    1.8
    
    
    
    1.3TOTAL COST OF REVENUE
    
    
    86.2
    
    
    
    105.6Selling, general and administrative
    
    
    28.8
    
    
    
    33.5Depreciation and amortization
    
    
    20.2
    
    
    
    24.0Equity in (earnings)/ losses
of ventures
    
    
    0.1
    
    
    
    (0.4
    )Interest income
    
    
    (0.5
    )
    
    
    (0.1
    )Interest expense
    
    
    0.3
    
    
    
    0.1Foreign currency (gain)/ loss
    
    
    0.5
    
    
    
    (0.7
    )Minority interest
    
    
    0.7
    
    
    
    1.0Provision for income taxes
    
    
    9.4
    
    
    
    11.4
 30




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Cost of Revenue
  Business and Corporate Services.
    Carrier and Operator Services.
    Consumer Internet Services.
  Mobile Services.
 31




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Selling, General and Administrative
  Depreciation and Amortization
  Equity in Earnings (Losses) of Ventures
  Interest Income
  Interest Expense
  Foreign Currency Gain (Loss)
  Minority Interest
  Provision for Income Taxes
  32




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##### Table of Contents



Net Income and Net Income per Share
    Consolidated Results  Consolidated Results of Operations for the Six Months Ended June 30, 2006,
compared to the Consolidated Results of Operations for the Six Months Ended June 30, 2005
 Revenue
  Consolidated Revenue
    
    
    Consolidated RevenueFor the Six Months
    
    
    For the Six MonthsEnded June 30, 2005
    
    
    Ended June 30, 2006(in millions)REVENUEBusiness and Corporate Services
    
    $
    184.5
    
    
    $
    216.2Carrier and Operator Services
    
    
    107.5
    
    
    
    129.3Consumer Internet Services
    
    
    22.5
    
    
    
    24.4Mobile Services
    
    
    7.5
    
    
    
    5.2TOTAL REVENUE
    
    $
    322.0
    
    
    $
    375.1
  Consolidated Revenue
    
    
    Consolidated RevenueFor the Six Months
    
    
    For the Six MonthsEnded June 30, 2005
    
    
    Ended June 30, 2006(in millions)REVENUEMoscow
    
    $
    213.2
    
    
    $
    233.8Northwest region of Russia
    
    
    27.5
    
    
    
    34.5Other regions of Russia and CIS
    
    
    55.6
    
    
    
    80.6Ukraine
    
    
    36.6
    
    
    
    37.1Eliminations
    
    
    (10.9
    )
    
    
    (10.9
    )TOTAL REVENUE
    
    $
    322.0
    
    
    $
    375.1
 Business and Corporate Services.
  33




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##### Table of Contents



Carrier and Operator Services.
    Consumer Internet Services.
 Mobile Services.
 34




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##### Table of Contents



Expenses
  Consolidated Expenses
    
    
    Consolidated ExpensesFor the Six Months
    
    
    For the Six MonthsEnded June 30, 2005
    
    
    Ended June 30, 2006(in millions)COST OF REVENUEBusiness and Corporate Services
    
    $
    78.9
    
    
    $
    92.0Carrier and Operator Services
    
    
    69.4
    
    
    
    88.5Consumer Internet Services
    
    
    14.6
    
    
    
    16.0Mobile Services
    
    
    3.3
    
    
    
    2.5TOTAL COST OF REVENUE
    
    
    166.2
    
    
    
    199.0Selling, general and administrative
    
    
    56.4
    
    
    
    67.4Depreciation and amortization
    
    
    39.9
    
    
    
    46.6Equity in (earnings)/ losses
of ventures
    
    
    0.2
    
    
    
    (0.7
    )Interest income
    
    
    (0.9
    )
    
    
    (0.8
    )Interest expense
    
    
    0.4
    
    
    
    0.2Foreign currency (gain)/ loss
    
    
    0.2
    
    
    
    (1.6
    )Minority interest
    
    
    1.3
    
    
    
    2.1Provision for income taxes
    
    
    18.5
    
    
    
    20.8Cumulative effect of a change in
accounting principle, net of tax
    
    $
    
    
    
    $
    0.7
 Cost of Revenue
  Business and Corporate Services.
    Carrier and Operator Services.
   35




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##### Table of Contents



Consumer Internet Services.
  Mobile Services.
 Selling, General and Administrative
  Depreciation and Amortization
  Equity in Earnings (Losses) of Ventures
  Interest Income
  Interest Expense
  36




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##### Table of Contents



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
    Consolidated Financial Position  Significant Changes in Consolidated Financial Position at June
30, 2006, compared to Consolidated Financial Position at December 31, 2005
 Accounts Receivable
  Intangible Assets
  37




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Other Non-Current Liabilities
  Minority Interest
  Shareholders Equity
  Income Taxes
  Liquidity and Capital Resources
  Consolidated Cash Flows
    
    
    Consolidated Cash FlowsFor the Six Months
    
    
    For the Six MonthsEnded June 30, 2005
    
    
    Ended June 30, 2006(in millions)CASH FLOWSProvided by operating activities
    
    $
    86.2
    
    
    $
    81.2Used in investing activities
    
    
    (43.5
    )
    
    
    (99.2
    )Used in financing activities
    
    
    (15.1
    )
    
    
    (13.4
    )Effect of exchange rate changes
    
    
    (0.1
    )
    
    
    0.6Net increase (decrease) in cash
and cash equivalents
    
    $
    27.5
    
    
    $
    (30.8
    )
   38




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39




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##### Table of Contents



Credit Rating Agency
    
    Rating
    
    OutlookStandard & Poors
    
    BB-
    
    StableMoodys
    
    B2
    
    Stable
   Contractual Obligations
  40




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##### Table of Contents



Special Note Regarding Forward Looking Statements
     41




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  42




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 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
  (1)
    
    The votes cast for each of the Companys ten nominees for election to the Companys Board
of Directors and the shareholder nominee were as follows:
 Nominee
    
    For
    
    WithheldPetr Aven
    
    
    27,492,980
    
    
    
    4,371,615Vladimir Bulgak
    
    
    27,542,445
    
    
    
    4,322,150Patrick Gallagher
    
    
    27,572,847
    
    
    
    4,291,748David Herman
    
    
    27,497,937
    
    
    
    4,366,658Kjell Johnsen
    
    
    27,542,445
    
    
    
    4,322,150Alexey Khudyakov
    
    
    27,492,980
    
    
    
    4,371,615Oleg Malis
    
    
    26,407,259
    
    
    
    5,457,336Ronny Naevdal
    
    
    27,542,445
    
    
    
    4,322,150David Smyth
    
    
    27,572,847
    
    
    
    4,291,748Jean-Pierre Vandromme
    
    
    27,550,626
    
    
    
    4,313,969Dmitry Korol
    
    
    6,074,683
    
    
    
    18,040,350
 (2)
    
    To approve the Golden Telecom, Inc. 2005 Stock Appreciation Rights Plan  FOR 31,545,205
shares; AGAINST 96,934 shares; ABSTAIN 222,456 shares.(3)
    
    Ratification of selection of Ernst & Young LLC as the Companys independent auditors for
2006  FOR 31,835,504 shares; AGAINST 28,491 shares; ABSTAIN 600 shares.
 43




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##### Table of Contents



Item 5. Other Information
 
 
 Item 6. Exhibits
 Designation
    
    Description10.1*
    
    Employment Agreement and Amendment to Employment Agreement between EDN Sovintel LLC and Ilya Smirnov,
Vice-President, Acting General Counsel and Corporate Secretary.10.2
    
    Restricted Stock Agreement between GTI and David Herman. (Incorporated by reference to Exhibit 10.1 to
the Companys current report on Form 8-K dated May 25, 2006).10.3
    
    Restricted Stock Agreement between GTI and Patrick Gallagher. (Incorporated by reference to Exhibit
10.2 to the Companys current report on Form 8-K dated May 25, 2006).10.4
    
    Restricted Stock Agreement between GTI and David Smyth. (Incorporated by reference to Exhibit 10.3 to
the Companys current report on Form 8-K dated May 25, 2006).10.5
    
    Restricted Stock Agreement between GTI and Vladimir Bulgak. (Incorporated by reference to Exhibit 10.4
to the Companys current report on Form 8-K dated May 25, 2006).10.6
    
    Restricted Stock Agreement between GTI and Kjell Johnsen. (Incorporated by reference to Exhibit 10.5
to the Companys current report on Form 8-K dated May 25, 2006).10.7
    
    Restricted Stock Agreement between GTI and Ronny Naevdal. (Incorporated by reference to Exhibit 10.6
to the Companys current report on Form 8-K dated May 25, 2006).10.8
    
    Restricted Stock Agreement between GTI and Alexey Khudyakov. (Incorporated by reference to Exhibit
10.7 to the Companys current report on Form 8-K dated May 25, 2006).10.9
    
    Restricted Stock Agreement between GTI and Oleg Malis. (Incorporated by reference to Exhibit 10.8 to
the Companys current report on Form 8-K dated May 25, 2006).10.10
    
    Form of Restricted Stock Agreement for awards of Restricted Stock under the 1999 Equity Participation
Plan, as amended. (Incorporated by reference to Exhibit 10.9 to the Companys current report on Form
8-K dated May 25, 2006).10.11
    
    Separation Agreement by and between the Company and Derek A. Bloom. (Incorporated by reference to
Exhibit 10.1 to the Companys current report on Form 8-K dated July 14, 2006).31.1*
    
    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.
 
 *
    
    Filed herewith. 44




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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)
  45




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##### Table of Contents



EXHIBIT
INDEX
 Designation
    
    Description10.1*
    
    Employment Agreement and Amendment to Employment Agreement between EDN Sovintel LLC and Ilya Smirnov,
Vice-President, Acting General Counsel and Corporate Secretary.10.2
    
    Restricted Stock Agreement between GTI and David Herman. (Incorporated by reference to Exhibit 10.1 to
the Companys current report on Form 8-K dated May 25, 2006).10.3
    
    Restricted Stock Agreement between GTI and Patrick Gallagher. (Incorporated by reference to Exhibit
10.2 to the Companys current report on Form 8-K dated May 25, 2006).10.4
    
    Restricted Stock Agreement between GTI and David Smyth. (Incorporated by reference to Exhibit 10.3 to
the Companys current report on Form 8-K dated May 25, 2006).10.5
    
    Restricted Stock Agreement between GTI and Vladimir Bulgak. (Incorporated by reference to Exhibit 10.4
to the Companys current report on Form 8-K dated May 25, 2006).10.6
    
    Restricted Stock Agreement between GTI and Kjell Johnsen. (Incorporated by reference to Exhibit 10.5
to the Companys current report on Form 8-K dated May 25, 2006).10.7
    
    Restricted Stock Agreement between GTI and Ronny Naevdal. (Incorporated by reference to Exhibit 10.6
to the Companys current report on Form 8-K dated May 25, 2006).10.8
    
    Restricted Stock Agreement between GTI and Alexey Khudyakov. (Incorporated by reference to Exhibit
10.7 to the Companys current report on Form 8-K dated May 25, 2006).10.9
    
    Restricted Stock Agreement between GTI and Oleg Malis. (Incorporated by reference to Exhibit 10.8 to
the Companys current report on Form 8-K dated May 25, 2006).10.10
    
    Form of Restricted Stock Agreement for awards of Restricted Stock under the 1999 Equity Participation
Plan, as amended. (Incorporated by reference to Exhibit 10.9 to the Companys current report on Form
8-K dated May 25, 2006).10.11
    
    Separation Agreement by and between the Company and Derek A. Bloom. (Incorporated by reference to
Exhibit 10.1 to the Companys current report on Form 8-K dated July 14, 2006).31.1*
    
    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.
 
 *
    
    Filed herewith.