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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 (Commission file number: 0-27423) Golden Telecom, Inc.  Delaware
    
    51-0391303(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 Representation Office Golden TeleServices, Inc.
1 Kozhevnichesky Proezd
Moscow, Russia 115114
(Address of principal executive office) (011-7-501) 797-9300
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ] At November 4, 2004 there were 36,279,929 outstanding shares of common
stock of the registrant.




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TABLE OF CONTENTS PagePART I.
    
    FINANCIAL INFORMATION
    
    1Item 1
    
    Condensed Consolidated Financial Statements of Golden Telecom, Inc. (unaudited)
    
    1Condensed Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004
    
    1Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2004
    
    3Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2004
    
    4Notes to Condensed Consolidated Financial Statements
    
    5Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations *
    
    15Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    33Item 4
    
    Controls and Procedures
    
    33PART II.
    
    OTHER INFORMATION
    
    34Item 6
    
    Exhibits
    
    34Signatures
    
    
    
    35Certification of CEO Pursuant to Section 302Certification of CFO 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.




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PART I. FINANCIAL INFORMATION 
 Item 1. Condensed Consolidated Financial Statements of Golden Telecom, Inc. GOLDEN TELECOM, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands of US$, Except Share Data)
(unaudited) December 31,
    
    September 30,2003
    
    2004(see Note 10)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    65,180
    
    
    $
    61,289Accounts receivable, net of allowance for doubtful accounts of
$13,896 and $21,628 at December 31, 2003 and
September 30, 2004, respectively
    
    
    74,016
    
    
    
    90,921VAT receivable
    
    
    14,819
    
    
    
    18,122Prepaid expenses and advances to suppliers
    
    
    12,232
    
    
    
    12,457Deferred tax asset
    
    
    5,995
    
    
    
    4,887Other current assets
    
    
    15,909
    
    
    
    21,222TOTAL CURRENT ASSETS
    
    
    188,151
    
    
    
    208,898Property and equipment, net of accumulated depreciation of $132,126
and $171,465 at December 31, 2003 and September 30, 2004, respectively
    
    
    283,110
    
    
    
    335,542Goodwill and intangible assets:Goodwill
    
    
    144,008
    
    
    
    146,255Intangible assets, net of accumulated amortization of $23,824 and $37,393 at
December 31, 2003 and September 30, 2004, respectively
    
    
    104,835
    
    
    
    104,035Net goodwill and intangible assets
    
    
    248,843
    
    
    
    250,290Restricted cash
    
    
    1,005
    
    
    
    1,010Other non-current assets
    
    
    8,117
    
    
    
    9,261TOTAL ASSETS
    
    $
    729,226
    
    
    $
    805,001
 See notes to condensed consolidated financial statements. 1




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GOLDEN TELECOM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands of US$, Except Share Data)
(unaudited) December 31,
    
    September 30,2003
    
    2004(see Note 10)LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    65,779
    
    
    $
    80,357VAT payable
    
    
    10,167
    
    
    
    16,253Debt maturing within one year
    
    
    950
    
    
    
    425Current capital lease obligation
    
    
    3,067
    
    
    
    2,374Deferred revenue
    
    
    9,192
    
    
    
    12,111Due to affiliates and related parties
    
    
    3,495
    
    
    
    4,258Other current liabilities
    
    
    5,249
    
    
    
    3,818TOTAL CURRENT LIABILITIES
    
    
    97,899
    
    
    
    119,596Long-term debt, less current portion
    
    
    200
    
    
    
    200Long-term deferred tax liability
    
    
    24,461
    
    
    
    25,214Long-term deferred revenue
    
    
    13,725
    
    
    
    20,900Long-term capital lease obligations
    
    
    3,763
    
    
    
    2,093Other non-current liabilities
    
    
    2,177
    
    
    
    2,678TOTAL LIABILITIES
    
    
    142,225
    
    
    
    170,681Minority interest
    
    
    2,722
    
    
    
    11,090SHAREHOLDERS EQUITYPreferred stock, $0.01 par value (10,000,000 shares
authorized; none issued and outstanding at December 31, 2003
and September 30, 2004)
    
    
    
    
    
    
    Common stock, $0.01 par value (100,000,000 shares authorized;
35,948,094 shares issued and outstanding at December 31,
2003 and 36,279,929 shares issued and outstanding at September 30, 2004)
    
    
    359
    
    
    
    363Additional paid-in capital
    
    
    663,464
    
    
    
    669,218Accumulated deficit
    
    
    (79,544
    )
    
    
    (46,351
    )TOTAL SHAREHOLDERS EQUITY
    
    
    584,279
    
    
    
    623,230TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    729,226
    
    
    $
    805,001
 See notes to condensed consolidated financial statements. 2




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GOLDEN TELECOM, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands of US$, Except Per Share Data)
(unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004REVENUE:Telecommunication services
    
    $
    89,714
    
    
    $
    152,213
    
    
    $
    248,153
    
    
    $
    423,129Revenue from affiliates and related parties
    
    
    381
    
    
    
    500
    
    
    
    1,080
    
    
    
    1,631TOTAL REVENUE
    
    
    90,095
    
    
    
    152,713
    
    
    
    249,233
    
    
    
    424,760OPERATING COSTS AND EXPENSES:Access and network services (excluding depreciation
and amortization)
    
    
    44,833
    
    
    
    77,953
    
    
    
    121,618
    
    
    
    216,447Selling, general and administrative (excluding
depreciation and amortization)
    
    
    15,764
    
    
    
    29,518
    
    
    
    42,587
    
    
    
    81,029Depreciation and amortization
    
    
    11,135
    
    
    
    19,504
    
    
    
    32,082
    
    
    
    55,184TOTAL OPERATING COSTS AND EXPENSES
    
    
    71,782
    
    
    
    126,975
    
    
    
    196,287
    
    
    
    352,660INCOME FROM OPERATIONS
    
    
    18,313
    
    
    
    25,738
    
    
    
    52,946
    
    
    
    72,100OTHER INCOME (EXPENSE):Equity in earnings (losses) of ventures
    
    
    (25
    )
    
    
    7
    
    
    
    (54
    )
    
    
    250Interest income
    
    
    254
    
    
    
    241
    
    
    
    859
    
    
    
    781Interest expense
    
    
    (182
    )
    
    
    (123
    )
    
    
    (1,760
    )
    
    
    (473
    )Foreign currency gain (losses)
    
    
    (177
    )
    
    
    (443
    )
    
    
    36
    
    
    
    (667
    )Minority interest
    
    
    (127
    )
    
    
    (245
    )
    
    
    (342
    )
    
    
    (784
    )TOTAL OTHER INCOME (EXPENSE)
    
    
    (257
    )
    
    
    (563
    )
    
    
    (1,261
    )
    
    
    (893
    )Income before income taxes
    
    
    18,056
    
    
    
    25,175
    
    
    
    51,685
    
    
    
    71,207Income taxes
    
    
    5,550
    
    
    
    9,064
    
    
    
    14,524
    
    
    
    23,536NET INCOME
    
    $
    12,506
    
    
    $
    16,111
    
    
    $
    37,161
    
    
    $
    47,671Basic earnings per share of common stock:Net income per share  basic
    
    $
    0.44
    
    
    $
    0.44
    
    
    $
    1.35
    
    
    $
    1.32Weighted average common shares  basic
    
    
    28,157
    
    
    
    36,278
    
    
    
    27,570
    
    
    
    36,200Diluted earnings per share of common stock:Net income per share  diluted
    
    $
    0.43
    
    
    $
    0.44
    
    
    $
    1.32
    
    
    $
    1.30Weighted average common shares  diluted
    
    
    29,072
    
    
    
    36,551
    
    
    
    28,251
    
    
    
    36,544Cash dividends per common share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.40
 See notes to condensed consolidated financial statements. 3




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GOLDEN TELECOM, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of US$)
(unaudited) Nine Months Ended September 30,2003
    
    2004OPERATING ACTIVITIESNet income
    
    $
    37,161
    
    
    $
    47,671Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:Depreciation
    
    
    24,798
    
    
    
    41,606Amortization
    
    
    7,284
    
    
    
    13,578Equity in (earnings) losses of ventures, net of dividends received
    
    
    54
    
    
    
    (250
    )Foreign currency (gain) losses
    
    
    (36
    )
    
    
    667Other
    
    
    (528
    )
    
    
    (67
    )Changes in assets and liabilities:Accounts receivable
    
    
    (10,195
    )
    
    
    (15,535
    )Accounts payable and accrued expenses
    
    
    2,164
    
    
    
    22,079VAT, net
    
    
    (3,036
    )
    
    
    2,984Other changes in assets and liabilities
    
    
    5,455
    
    
    
    (2,895
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    63,121
    
    
    
    109,838INVESTING ACTIVITIESPurchases of property and equipment and intangible assets
    
    
    (42,838
    )
    
    
    (86,062
    )Acquisitions, net of cash acquired
    
    
    (15,345
    )
    
    
    (15,022
    )Restricted cash
    
    
    377
    
    
    
    (5
    )Other investing
    
    
    2,105
    
    
    
    932NET CASH USED IN INVESTING ACTIVITIES
    
    
    (55,701
    )
    
    
    (100,157
    )FINANCING ACTIVITIES:Repayments of debt
    
    
    (31,123
    )
    
    
    (525
    )Net proceeds from exercise of employee stock options
    
    
    20,327
    
    
    
    4,220Cash dividends paid
    
    
    
    
    
    
    (14,478
    )Other financing
    
    
    (1,357
    )
    
    
    (2,540
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (12,153
    )
    
    
    (13,323
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    16
    
    
    
    (249
    )Net decrease in cash and cash equivalents
    
    
    (4,717
    )
    
    
    (3,891
    )Cash and cash equivalents at beginning of period
    
    
    59,625
    
    
    
    65,180CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    54,908
    
    
    $
    61,289
 See notes to condensed consolidated financial statements. 4




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GOLDEN TELECOM, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Financial Presentation and Disclosures Golden Telecom, Inc. (GTI or the Company) is a leading
facilities-based provider of integrated telecommunication and Internet services
in major population centers throughout Russia and other countries of the
Commonwealth of Independent States (CIS). The Company offers voice, data and
Internet services to corporations, operators and consumers using its
metropolitan overlay network in major cities including Moscow, Kiev, St.
Petersburg, Nizhny Novgorod, Samara, Kaliningrad, Krasnoyarsk, Almaty, and
Tashkent, and via intercity fiber optic and satellite-based networks, including
approximately 200 combined access points in Russia and other countries of the
CIS. The Company offers mobile services in Kiev and Odessa. The financial statements included herein are unaudited and have been
prepared in accordance with accounting principles generally accepted in the
United States of America (US GAAP) for interim financial reporting and United
States Securities and Exchange Commission (SEC) regulations. Certain
information and footnote disclosures normally included in complete financial
statements prepared in accordance with US GAAP and SEC rules and regulations
have been condensed or omitted pursuant to such US GAAP and SEC rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments of a normal and recurring nature necessary to present fairly the
Companys financial position, results of operations and cash flows for the
interim periods. These financial statements should be read in conjunction with
the Companys 2003 audited consolidated financial statements and the notes
related thereto. The results of operations for the three and nine months ended
September 30, 2004 may not be indicative of the operating results for the full
year. Note 2: Summary of Significant Accounting Policies and New Accounting Pronouncements Summary of Significant Accounting Policies Goodwill and Intangible Assets The total gross carrying value and accumulated amortization of the
Companys intangible assets by major intangible asset class is as follows: As of December 31, 2003
    
    As of September 30, 2004(in thousands)Accumulated
    
    
    
    
    
    AccumulatedCost
    
    Amortization
    
    Cost
    
    AmortizationAmortized intangible assets:Telecommunications service contracts.
    
    $
    78,235
    
    
    $
    (13,619
    )
    
    $
    90,462
    
    
    $
    (19,569
    )Contract-based customer relationships
    
    
    35,169
    
    
    
    (2,859
    )
    
    
    36,849
    
    
    
    (9,015
    )Licenses
    
    
    3,957
    
    
    
    (1,854
    )
    
    
    4,242
    
    
    
    (2,323
    )Other intangible assets
    
    
    11,298
    
    
    
    (5,492
    )
    
    
    9,875
    
    
    
    (6,486
    )Total
    
    $
    128,659
    
    
    $
    (23,824
    )
    
    $
    141,428
    
    
    $
    (37,393
    )
 Other intangible assets include software, Internet software and related
content, as well as other intangible assets. Comprehensive Income Comprehensive income is defined as the change in equity of a business
enterprise during a period from non-owner sources. For the three and nine
months ended September 30, 2003 and 2004, respectively, comprehensive income
for the Company is equal to net income. 5




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GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Stock-Based Compensation The Company follows the provisions of Statement of Financial Accounting
Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, for its
Equity Participation Plan. SFAS No. 123 establishes a fair value method of
accounting for employee stock options and similar equity instruments. The fair
value method requires compensation cost to be measured at the grant date based
on the value of the award and to be recognized over the service period. SFAS
No. 123 generally allows companies to either account for stock-based
compensation under the fair value method of SFAS No. 123 or under the intrinsic
value method of Accounting Principles Board (APB) No. 25, Accounting for
Stock Issued to Employees. The Company has elected to account for its
stock-based compensation in accordance with the provisions of APB No. 25 and
present pro forma disclosures of results of operations as if the fair value
method had been adopted. The effect of applying SFAS No. 123 on the reported net income, as
disclosed below is not representative of the effects on net income in future
periods due to the vesting period of the stock options and the fair value of
additional stock options in future periods. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004(in thousands, except per share data)Net income, as reported
    
    $
    12,506
    
    
    $
    16,111
    
    
    $
    37,161
    
    
    $
    47,671Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    885
    
    
    
    454
    
    
    
    2,621
    
    
    
    1,357Pro forma net income
    
    $
    11,621
    
    
    $
    15,657
    
    
    $
    34,540
    
    
    $
    46,314Net income per share:Basic  as reported
    
    $
    0.44
    
    
    $
    0.44
    
    
    $
    1.35
    
    
    $
    1.32Basic  pro forma
    
    
    0.41
    
    
    
    0.43
    
    
    
    1.25
    
    
    
    1.28Diluted  as reported
    
    
    0.43
    
    
    
    0.44
    
    
    
    1.32
    
    
    
    1.30Diluted  pro forma
    
    
    0.40
    
    
    
    0.43
    
    
    
    1.22
    
    
    
    1.27
 Income Taxes The Company accounts for income taxes using the liability method required
by SFAS No. 109, Accounting for Income Taxes. For interim reporting purposes,
the Company also follows the provisions of Accounting Principles Board No. 28,
Interim Financial Reporting, which requires the Company to account for income
taxes based on the Companys best estimate of the effective tax rate expected
to be applicable for the full fiscal year on a current year-to-date basis. The
rate so determined is based on the currently enacted tax rates of the Company
in the United States and the Companys subsidiaries in Russia and other CIS
countries and includes the Companys best estimate of the annual tax effect of
non-deductible expenses, primarily related to amortization of intangible
assets, foreign exchange and other permanent differences as well as the
estimates as to the realization of certain deferred tax assets.
Deferred income taxes result from temporary differences between the tax bases
of assets and liabilities and the bases as reported in the consolidated
financial statements. The Company does not provide for deferred taxes on the
undistributed earnings of its foreign subsidiaries, as such earnings are
generally intended to be reinvested in those operations permanently. In the
case of non-consolidated entities, except MCT, where our partner requests that
a dividend be paid, the amounts are not expected to have a material impact on
the Companys income tax liability. It is not practical to determine the amount
of unrecognized deferred tax liability for such reinvested earnings. Use of Estimates in Preparation of Financial Statements The preparation of these consolidated financial statements, in conformity
with US GAAP, requires management to make estimates and assumptions that affect
amounts in the financial statements and accompanying notes and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. 6




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GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Comparative Figures Certain 2003 amounts have been reclassified to conform to the presentation
adopted in the current year. Such reclassifications did not affect the
consolidated statements of operations. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 amended
Accounting Research Bulletin No. 51, Consolidated Financial Statements, and
established standards for determining under what circumstances a variable
interest (VIE) should be consolidated with its primary beneficiary. FIN No.46
also requires disclosure about VIEs that are not required to be consolidated
but in which the reporting entity has a significant variable interest. In
December 2003, the FASB revised certain implementation provisions of FIN No.
46. The revised interpretation (FIN No. 46R) substantially retained the
requirements of immediate application of FIN No. 46 to VIEs created after
January 31, 2003. There were no such entities created after January 31, 2003.
With respect to older VIEs, the consolidation requirements under FIN No. 46R
apply not later than for the first financial year or interim period ending
after December 15, 2003, if such VIE is a special-purpose entity (SPE), and
no later than for the first financial year or interim period ending after March
15, 2004, if such a VIE is not a SPE. The Company did not identify any
previously formed SPEs that are VIEs. Therefore the adoption of FIN No. 46R did
not have a significant impact on the financial position or results of
operations. In October 2003, the FASB concluded that Statement on Financial Accounting
Standard (SFAS) No. 123R, Share Based Compensation, which would require the
Company to measure compensation cost for all share-based payments, including
employee stock options, at fair value would be effective for interim or annual
periods beginning after June 15, 2005. The Company is currently
estimating the impact of SFAS No. 123R on the results of operations and financial condition. Note 3: Net Earnings Per Share Basic earnings per share at September 30, 2003 and 2004 are computed on
the basis of the weighted average number of common shares outstanding. Diluted
earnings per share at September 30, 2003 and 2004 are computed on the basis of
the weighted average number of common shares outstanding plus the effect of
outstanding employee stock options using the treasury stock method. The
number of stock options excluded from the diluted earnings per share
computation, because their effect was antidilutive for the three months ended
September 30, 2003 and 2004 was 10,000 and 15,000 stock options, respectively.
The number of stock options excluded from the diluted earnings per share
computation, because their effect was antidilutive for the nine months ended
September 30, 2003 and 2004 was 154,261 and 15,000 stock options, respectively. 7




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GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) The components of basic and diluted earnings per share were as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2004
    
    2003
    
    2004(in thousands, except per share data)Net income
    
    $
    12,506
    
    
    $
    16,111
    
    
    $
    37,161
    
    
    $
    47,671Weighted average outstanding of:Common stock
    
    
    28,157
    
    
    
    36,278
    
    
    
    27,570
    
    
    
    36,200Dilutive effect of:Employee stock options
    
    
    915
    
    
    
    273
    
    
    
    681
    
    
    
    344Common stock and common stock equivalents
    
    
    29,072
    
    
    
    36,551
    
    
    
    28,251
    
    
    
    36,544Earnings per share:Basic
    
    $
    0.44
    
    
    $
    0.44
    
    
    $
    1.35
    
    
    $
    1.32Diluted
    
    $
    0.43
    
    
    $
    0.44
    
    
    $
    1.32
    
    
    $
    1.30
 Note 4: Business Combinations In February 2004, the Company completed the acquisition of 100% ownership
interest in ST-HOLDING s.r.o. (ST-HOLDING), a Czech company that owns 50%
plus one share in ZAO Samara Telecom, a telecommunications service provider in
Samara, Russia from ZAO SMARTS and individual owners. The total purchase price
of $4.8 million consisted of cash consideration of $4.4 million and $0.4
million recorded as a liability. The acquisition of 100% ownership interest in ST-HOLDING was accounted for
as a purchase business combination in accordance with SFAS No. 141, Business
Combinations. The Companys financial statements reflect the allocation of
the purchase price based on a fair value assessment of the assets acquired and
liabilities assumed and, as such, the Company has assigned $2.4 million to
telecommunications service contracts intangible assets and $0.2 million to
goodwill. These identified intangible assets will be amortized over a period
of 10 years. The results of operations of ST-HOLDING have been included in the
Companys consolidated operations since February 1, 2004. In April 2004, the Company completed the acquisition of 100% of the common
stock in OAO Balticom Mobile (Balticom) that owns 62% of ZAO WestBalt
Telecom, an alternative telecommunications operator in Kaliningrad, Russia, for
cash consideration of $7.2 million including $1.1 million held in escrow for a
period of one year. Amounts in escrow may be used to compensate the Company in
the event of the realization of certain contingent liabilities in the acquired
companies. The acquisition of 100% of the common stock in Balticom was accounted for
as a purchase business combination in accordance with SFAS No. 141, Business
Combinations. The Companys financial statements reflect the allocation of
the purchase price based on a fair value assessment of the assets acquired and
liabilities assumed and, as such, the Company has assigned $4.2 million to
telecommunications service contracts intangible assets and $1.7 million to
goodwill. These identified intangible assets will be amortized over a period
of 10 years. The results of operations of Balticom have been included in the
Companys consolidated operations since April 30, 2004. In April 2004, the Company completed the acquisition of the remaining 49%
ownership interest in OOO Uralrelcom that the Company did not already own for
cash consideration of $1.0 million. 8




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GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) In May 2004, the Company completed the acquisition of a 54% ownership
interest in SP Buzton (Buzton), an alternative telecommunications operator in
Uzbekistan. The total purchase price of approximately $3.0 million consisted
of cash consideration of $2.5 million and $0.5 million recorded as a liability
to be settled in cash upon the satisfactory achievement of certain conditions. The acquisition of the 54% ownership interest in Buzton was accounted for
as a purchase business combination in accordance with SFAS No. 141, Business
Combinations. The Companys financial statements reflect the allocation of
the purchase price based on a fair value assessment of the assets acquired and
liabilities assumed and, as such, the Company has assigned $0.8 million to
telecommunications service contracts intangible assets. These identified
intangible assets will be amortized over a period of 10 years. The results of
operations of Buzton have been included in the Companys consolidated
operations since May 31, 2004. In August 2004, the Company entered into a share purchase agreement with
Nodama Holdings, Ltd. (Nodama), to acquire 100% of Hudson Telecom, Inc., a
Delaware corporation, which owns 100% of OOO Digital Telephone Networks and OOO
Digital Telephone Switches, together comprising one of the largest regional
alternative operators in Russia operating in Rostov-on-Don and the surrounding
region. Upon closure, Nodama will receive $45.0 million in cash of which $5.0
million will be placed in escrow for a period of one year subject to the
achievement of certain financial conditions. Amounts in the escrow may be used
to compensate the Company in the event of the realization of certain contingent
liabilities in the acquired entities. The consummation of the transaction is
conditioned upon, among other things, the completion of satisfactory due
diligence and the sellers fulfilment of certain conditions precedent. The
transaction is expected to close in the fourth quarter of 2004. Note 5: Shareholders Equity Common Stock The Companys outstanding shares of common stock increased by 1,761,006
shares and 331,835 shares in the nine months ended September 30, 2003 and 2004,
respectively, due to shares which were issued in connection with the exercise
of employee stock options. In March 2004, the Company filed a Registration Statement on Form S-3 with
the SEC to register 3,839,823 shares of common stock held by the European Bank
for Reconstruction and Development, Capital International Global Emerging
Markets Private Equity Fund L.P., Cavendish Nominees Limited, and First NIS
Regional Fund SICAV in connection with an anticipated secondary offering of
these shares. In September 2004, the Company filed an application for
withdrawal of this Registration Statement which had not been declared effective
by the SEC and no shares of Common Stock had been sold pursuant to the
Registration Statement. Additional Paid-In Capital In August 2004, the Company transferred 20% of the ownership interest in
GTU to a Ukrainian partner in exchange for services provided by the partner.
The excess of the fair value of consideration exchanged for services over the
book value of 20% of net assets of GTU was recorded as a credit the
consolidated equity. Accumulated Deficit In the third quarter of 2004, management determined that the Company has
been inadvertently carrying accruals for estimated taxes, other than income
taxes. Management has now concluded these accruals for estimated taxes should
have been considered unnecessary and reversed prior to January 1, 2000. The net
effect of the correction of this non-cash error was to reduce current
liabilities and non-current liabilities by $2.0 million each with an offsetting
decrease to accumulated deficit of $4.0 million in all periods presented. This
adjustment had no effect on the reported results of operations in 2004. 9




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GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Dividends In February 2004, the Board of Directors of the Company declared a cash
dividend of $0.20 per common share to shareholders of record as of March 18,
2004. The Company paid the total amount of approximately $7.2 million to
shareholders on March 29, 2004. In May 2004, the Board of Directors of the Company declared a cash
dividend of $0.20 per common share to shareholders of record as of June 14,
2004. The Company paid the total amount of approximately $7.2 million to
shareholders on June 28, 2004. In November 2004, the Board of Directors of the Company declared a cash
dividend of $0.20 per common share to shareholders of record as of November 12,
2004. The Company will pay the total amount of approximately $7.3 million to
shareholders on November 22, 2004. Note 6: Commitments and Contingencies Tax Matters The Companys policy is to accrue for contingencies in the accounting
period in which a liability is deemed probable and the amount is reasonably
determinable. In this regard, because of the uncertainties associated with the
Commonwealth of Independent States taxes (CIS Taxes), the Companys final CIS
Taxes may be in excess of the estimated amount expensed to date and accrued at
September 30, 2004. It is the opinion of management that the ultimate
resolution of the Companys CIS Tax liability, to the extent not previously
provided for, will not have a material effect on the financial condition of the
Company. However, depending on the amount and timing of an unfavorable
resolution of any contingencies associated with CIS Taxes, it is possible that
the Companys future results of operations or cash flows could be materially
affected in a particular period. Russian Environment and Current Economic Situation The Russian economy, while deemed to be of market status beginning in
2002, continues to display certain traits consistent with that of a market in
transition. These characteristics have in the past included higher than normal
historic inflation, lack of liquidity in the capital markets, and the existence
of currency controls which cause the national currency to be illiquid outside
of Russia. The continued success and stability of the Russian economy will be
significantly impacted by the governments continued actions with regard to
supervisory, legal, and economic reforms. On January 1, 2004, a new law on telecommunications came into effect in
Russia. The law sets the legal basis for the telecommunications business in
Russia and defines the status that state bodies have in the telecommunications
sector. The Company cannot predict with any certainty how the new law will
affect the Company. The new law was designed to create a new interconnect
pricing regime in 2004 that should be more transparent and unified, if fairly
implemented. However, as of September 30, 2004, this pricing regime has not
been implemented. The new law also creates a universal service charge
calculated as a percentage of revenue which will be introduced from 2005. The
new law may increase the regulation of the Companys operations and until such
time as appropriate regulations consistent with the new law are promulgated,
there will be a period of confusion and ambiguity as regulators interpret the
legislation. Other Commitments and Contingencies In the ordinary course of business, the Company has issued financial
guarantees of debt for the benefit of certain of its non-consolidated ventures,
which is all collateralized by cash. The Company expects that all the
collateralized debt will be repaid by the ventures. The total amount guaranteed
at September 30, 2004 was approximately $0.8 million. In the ordinary course of business, the Company has entered into long-term
agreements for satellite transponder capacity. In the nine months ended
September 30, 2004, the Company entered into approximately $41.3 million of
satellite transponder capacity agreements with terms of generally 10 years. 10




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GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) In the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to
the developing markets and evolving fiscal and regulatory environments in which
the Company operates. In the opinion of management, the Companys liability, if
any, in all pending litigation, other legal proceeding or other matters, will
not have a material effect upon the financial condition, results of operations
or liquidity of the Company. Note 7: Segment Information Line Of Business Data The Company operates in four segments within the telecommunications
industry. The four segments are: (1) Business and Corporate Services; (2)
Carrier and Operator Services; (3) Consumer Internet Services; and (4) Mobile
Services. The following tables present financial information for both
consolidated subsidiaries and equity investee ventures, segmented by the
Companys lines of businesses for the three and nine months ended September 30,
2003 and 2004, respectively. Transfers between lines of businesses are included
in the adjustments to reconcile segment to consolidated results. The Company
evaluates performance based on the operating income (loss) of each strategic
business unit, among other performance measures. The Company has presented the
following four segments consistent with the information used by the chief
operating decision maker to manage the operations for purposes of making
operating decisions and allocating resources. 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, 2003Revenue from external
customers
    
    $
    46,470
    
    
    $
    32,796
    
    
    $
    7,215
    
    
    $
    3,649
    
    
    $
    
    
    
    $
    90,130
    
    
    $
    90,095
    
    
    $
    (1,241
    )
    
    $
    1,206Intersegment revenue
    
    
    78
    
    
    
    146
    
    
    
    
    
    
    
    
    
    
    
    (224
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    12,495
    
    
    
    7,031
    
    
    
    (835
    )
    
    
    1,679
    
    
    
    (1,937
    )
    
    
    18,433
    
    
    
    18,313
    
    
    
    (120
    )
    
    
    Identifiable assets
    
    
    166,776
    
    
    
    154,824
    
    
    
    43,983
    
    
    
    7,004
    
    
    
    110,141
    
    
    
    482,728
    
    
    
    478,977
    
    
    
    (3,751
    )
    
    
    Capital expenditures
    
    
    8,863
    
    
    
    5,649
    
    
    
    522
    
    
    
    83
    
    
    
    22
    
    
    
    15,139
    
    
    
    15,022
    
    
    
    (117
    )
    
    
    
 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, 2004Revenue from external
customers
    
    $
    84,491
    
    
    $
    53,152
    
    
    $
    10,878
    
    
    $
    4,173
    
    
    $
    
    
    
    $
    152,694
    
    
    $
    152,713
    
    
    $
    (1,175
    )
    
    $
    1,194Intersegment revenue
    
    
    
    
    
    
    277
    
    
    
    
    
    
    
    
    
    
    
    (277
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    19,554
    
    
    
    7,061
    
    
    
    497
    
    
    
    1,324
    
    
    
    (2,635
    )
    
    
    25,801
    
    
    
    25,738
    
    
    
    (63
    )
    
    
    Identifiable assets
    
    
    449,752
    
    
    
    267,709
    
    
    
    59,796
    
    
    
    5,351
    
    
    
    26,322
    
    
    
    808,930
    
    
    
    805,001
    
    
    
    (3,929
    )
    
    
    Capital expenditures
    
    
    18,579
    
    
    
    6,883
    
    
    
    1,250
    
    
    
    186
    
    
    
    38
    
    
    
    26,936
    
    
    
    26,579
    
    
    
    (357
    )
    
    
    
 11




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GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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, 2003Revenue from external
customers
    
    $
    128,478
    
    
    $
    89,093
    
    
    $
    21,437
    
    
    $
    10,413
    
    
    $
    
    
    
    $
    249,421
    
    
    $
    249,233
    
    
    $
    (3,526
    )
    
    $
    3,338Intersegment revenue
    
    
    647
    
    
    
    612
    
    
    
    
    
    
    
    
    
    
    
    (1,259
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    36,562
    
    
    
    19,306
    
    
    
    (1,895
    )
    
    
    4,254
    
    
    
    (5,069
    )
    
    
    53,158
    
    
    
    52,946
    
    
    
    (212
    )
    
    
    Identifiable assets
    
    
    166,776
    
    
    
    154,824
    
    
    
    43,983
    
    
    
    7,004
    
    
    
    110,141
    
    
    
    482,728
    
    
    
    478,977
    
    
    
    (3,751
    )
    
    
    Capital expenditures
    
    
    26,243
    
    
    
    14,617
    
    
    
    1,950
    
    
    
    292
    
    
    
    52
    
    
    
    43,154
    
    
    
    42,838
    
    
    
    (316
    )
    
    
    
 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, 2004Revenue from external
customers
    
    $
    236,375
    
    
    $
    143,249
    
    
    $
    33,448
    
    
    $
    11,780
    
    
    $
    
    
    
    $
    424,852
    
    
    $
    424,760
    
    
    $
    (3,905
    )
    
    $
    3,813Intersegment revenue
    
    
    
    
    
    
    640
    
    
    
    
    
    
    
    
    
    
    
    (640
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    54,731
    
    
    
    21,193
    
    
    
    2,077
    
    
    
    3,366
    
    
    
    (8,759
    )
    
    
    72,608
    
    
    
    72,100
    
    
    
    (508
    )
    
    
    Identifiable assets
    
    
    449,752
    
    
    
    267,709
    
    
    
    59,796
    
    
    
    5,351
    
    
    
    26,322
    
    
    
    808,930
    
    
    
    805,001
    
    
    
    (3,929
    )
    
    
    Capital expenditures
    
    
    60,276
    
    
    
    24,295
    
    
    
    3,640
    
    
    
    720
    
    
    
    59
    
    
    
    88,990
    
    
    
    88,013
    
    
    
    (977
    )
    
    
    
 Geographic Data Revenues from external customers are based on the location of the
operating company providing the service. The Company operated within two main geographic regions of the CIS: Russia
and Ukraine. Geographic information as of September 30, 2003 and 2004 is as
follows: 12




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##### Table of Contents



GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Corporate,OtherCountriesAnd
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Three Months Ended September 30,
2003Revenue
    
    $
    78,961
    
    
    $
    11,991
    
    
    $
    (857
    )
    
    $
    90,095Long-lived assets
    
    
    302,092
    
    
    
    23,764
    
    
    
    2,751
    
    
    
    328,607
 Corporate,OtherCountriesAnd
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Three Months Ended September 30,
2004Revenue
    
    $
    135,506
    
    
    $
    17,367
    
    
    $
    (160
    )
    
    $
    152,713Long-lived assets
    
    
    555,292
    
    
    
    27,422
    
    
    
    10,340
    
    
    
    593,054
 Corporate,OtherCountriesAnd
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Nine Months Ended September 30, 2003Revenue
    
    $
    219,250
    
    
    $
    31,852
    
    
    $
    (1,869
    )
    
    $
    249,233Long-lived assets
    
    
    302,092
    
    
    
    23,764
    
    
    
    2,751
    
    
    
    328,607
 Corporate,OtherCountriesAnd
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Nine Months Ended September 30, 2004Revenue
    
    $
    380,236
    
    
    $
    46,252
    
    
    $
    (1,728
    )
    
    $
    424,760Long-lived assets
    
    
    555,292
    
    
    
    27,422
    
    
    
    10,340
    
    
    
    593,054
 Note 8: Long Term Incentive Bonus Program In July 2004, the Board of Directors of the Company adopted a Long Term
Incentive Bonus Program (LTIBP) for senior management of the Company,
effective as of January 1, 2004. The LTIBP is designed to reward senior
management with annual bonus awards consisting of 100% restricted shares for
officers of the Company and 50% restricted shares and 50% cash payments for
other qualified employees participating in LTIBP if the Company meets certain
targets for net income growth established by the Board of Directors. In
addition, the program provides for a one-time grant of a limited amount of
restricted shares to senior management in an aggregate amount not exceeding
50,000 shares. The LTIBP is intended to act as a retention mechanism for
senior management as the cash payments and the restricted stock vest over a
three year period. It is expected that the LTIBP will act as a substitute for
the Companys Equity Participation Plan under which significant amounts of
stock options were, in the past, granted to senior management. The Company has
recorded $0.7 million compensation expense in the nine months ended September
30, 2004 associated with the LTIBP. The Company currently anticipates
repurchasing from time to time in the open market a number of the Companys
shares equal to the number of the Companys shares that are subject to awards
granted under the LTIBP. 13




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##### Table of Contents



GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Note 9: Sale of Minority Interest in Subsidiary Recognizing that many of the markets in which the Company operate are
complex, in particular as it relates to business, regulatory, political and
cultural matters, the Company occasionally seeks experienced local partners to
assist in markets where the Company is likely to encounter operational
difficulties. GTI has been cooperating with local partners in Ukraine to
resolve commercial and regulatory disputes with monopoly operators and
regulatory authorities in Ukraine but had not previously finalized negotiations
on the compensation arrangement for the services. In addition to or in lieu of
cash compensation, the Board of Directors approved the sale of a
non-controlling interest in Golden Telecom (Ukraine) (GTU) to such parties. Upon approval of GTIs Board of Directors, in August 2004 the Company
entered into a compensation arrangement for services provided to assist the
Company in addressing commercial and regulatory disputes with monopoly
operators and regulatory authorities in Ukraine. The Companys local partners
have provided services on a success fee basis. The Companys Board of Directors
approved an arrangement that effectively transferred 20% of the shares in GTU
owned by the Company to the local partners as compensation for the services
already provided and certain additional services to be provided. Under this
arrangement, the Company paid the local partners $0.5 million in cash and
granted the local partners an option to purchase 20% of GTU for $0.5 million in
cash, in a transaction where the cash and the value of the services were
approximately $3.6 million. This transaction closed in the third quarter of
2004, when the performance was completed and the option was exercised and
resulted in a charge to operating income of approximately $3.6 million. The
excess of the fair value of consideration exchanged for services over the book
value of 20% of net assets of GTU was recorded as a credit to the consolidated
equity. Fair value of the option approximated the fair value of shares
transferred to the local partner due to the short exercise period of the option
and was determined using the discounted cash flow valuation method. Note 10: Restatement In
the third quarter of 2004, management determined that the Company has
been inadvertently carrying accruals for estimated taxes, other than income
taxes. Management has now concluded these accruals for estimated taxes should
have been considered unnecessary and reversed prior to January 1, 2000. The net
effect of the correction of this non-cash error was to reduce current
liabilities and non-current liabilities by $2.0 million each with an offsetting
decrease to accumulated deficit of $4.0 million in all periods presented. This
adjustment had no effect on the reported results of operations in 2004. Note 11: Subsequent Events In November 2004, the Board of Directors of the Company declared a cash
dividend of $0.20 per common share to shareholders of record as of November 12,
2004. The Company will pay the total amount of approximately $7.3 million to
shareholders on November 22, 2004. 14




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##### Table of Contents



ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis relates to our financial condition
and results of operations of the Company for the three and nine months ended
September 30, 2003 and September 30, 2004. This discussion should be read in
conjunction with the Companys Condensed Consolidated Financial Statements and
the notes related thereto appearing elsewhere in this Report. Overview We are a leading facilities-based provider of integrated telecommunication
and Internet services in major population centers throughout Russia and other
countries of the Commonwealth of Independent States (CIS). We offer voice,
data and Internet services to corporations, operators and consumers using its
metropolitan overlay network in major cities including Moscow, Kiev, St.
Petersburg, Nizhny Novgorod, Samara, Kaliningrad, Krasnoyarsk, Almaty, and
Tashkent, and via intercity fiber optic and satellite-based networks, including
approximately 200 combined access points in Russia and other countries of the
CIS. In addition, we offer mobile services in Kiev and Odessa. We organize our operations into four business segments, as follows:  
    
    Business and Corporate 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 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 dial-up Internet access to the consumer market and
web content offered through a family of Internet portals throughout
Russia, Ukraine, and Kazakhstan; 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. We intend, wherever possible, to offer all of our integrated
telecommunication services under the Golden Telecom brand, although, due to the
acquisition of OAO Comincom (Comincom) in December 2003, some services still
carry the Combellga brand. Our dial-up Internet services are distributed under
the ROL brand in Russia and Kazakhstan and under the Svit-On-Line brand in
Ukraine. Additionally, we hold a minority interest in MCT Corp. (MCT), which in
turn has ownership interests in 15 mobile operations located throughout Russia
and in Uzbekistan, Tajikistan and Afghanistan. We treat our ownership interest
in MCT as an equity method investment and are not actively involved in the
day-to-day management of the operations. Most of our revenue is derived from high-volume business customers and
carriers. Our business customers include large multi-national companies, local
enterprises, financial institutions, hotels and government agencies. We believe
that the carriers, including mobile operators, which contribute a substantial
portion of our revenues, in turn derive a portion of their business from
high-volume business customers. Thus, we believe that the majority of our
ultimate end-users are businesses that require access to highly reliable and
advanced telecommunications facilities to sustain their operations. We have traditionally competed for customers on the basis of network
quality, customer service and range of services offered. In the past several
years, other telecommunications operators have also introduced high-quality
services to the segments of the business market in which we operate.
Competition with these operators is intense, and frequently results in
declining prices for some of our services, which adversely affect our revenues.
In addition, some of our competitors do not link their prices to the United
States (US) dollar  ruble exchange rate, so when the ruble devalues, their
prices effectively become lower in relation to our prices. The ruble exchange
rate with the US dollar has become relatively stable since early 2000 and
appreciated in 2003 and 2004 so price pressures associated with devaluation
have eased considerably. We cannot be certain that the exchange rate will
remain stable in the future and therefore we may experience additional price
pressures. 15




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Since early 2000 we have witnessed a recovery in the Russian market, but
downward pricing pressures persist from increased competition and the global
trend toward lower telecommunications tariffs. In 2003 and during 2004, our
traffic volume increases exceeded the reduction in tariffs on certain types of
voice traffic. This is a contributoring factor to the increases in our revenue
in 2003 and during 2004, although the major factor of revenue increases in 2004
was the acquisition of Comincom. We expect that this trend of year over year
increases in traffic volume will continue as long as the Russian economy
continues to develop at its current pace. Although our revenue growth is
strong, our overall margins continue to be impacted by price increases for
services received from monopolistic incumbent operators. In order to handle additional traffic volumes, we have expanded and will
continue to expand our fiber optic capacity along our heavy traffic and high
cost routes to mitigate declines in traffic margins, reduce our unit
transmission costs and ensure sufficient capacity to meet the growing demand
for data and Internet services. We expect to continue to add additional
transmission capacity, which due to its fixed cost nature can initially depress
margins, but will over time allow us to improve or maintain our margins. We continue to follow our strategy of regional expansion. The project for
the construction of the inter-city fiber optic link which we launched in the
middle of this year will be continued into 2005. At present, we are
constructing a fiber optic link from Moscow to Ufa through Nizhny Novgorod and
Kazan. Subject to weather conditions, we expect that this fiber optic line will
be operational in 2005. We intend to connect our operations in the European
part of Russia to this backbone network and plan to invest a total of
approximately $40 to $50 million in this and related backbone projects through
2007. On January 1, 2004, a new law on telecommunications came into effect in
Russia. The law sets the legal basis for the telecommunications business in
Russia and defines the status that state bodies have in the telecommunications
sector. The Company cannot predict with any certainty how the new law will
affect the Company. The new law was designed to create a new interconnect
pricing regime in 2004 that should be more transparent and unified, if fairly
implemented. However, as of September 30, 2004, this pricing regime has not
been implemented. The new law also creates a universal service charge
calculated as a percentage of revenue which will be introduced from 2005. The
new law may increase the regulation of our operations and until such time as
appropriate regulations consistent with the new law are promulgated, there will
be a period of confusion and ambiguity as regulators interpret the legislation. In Kiev, Ukraine we have entered into agreements to obtain sufficient
numbering capacity for our business services operations. Our ability to grow
our business services operations in Kiev may become limited if the parties who
provide our numbering capacity and other infrastructure requirements are unable
or unwilling to perform under their contracts with us. We have seen a significant year-over-year increase in our dial-up Internet
subscriber numbers and we expect the increase to continue, as our base of
regional subscribers expands. As additional dial-up capacity becomes available
in Moscow, we expect to increase our market share in the capital as well. We have continued to integrate our acquisitions and improve operational
efficiency while at the same time controlling costs. We expect to incur further
costs in connection with overall streamlining of our operations during 2004 and
2005. During the nine months ended September 30, 2004, we incurred consulting
and employee termination costs associated with the operational integration of
Comincom into our operations which has been recorded in selling, general and
administrative expense. In addition, we have incurred costs associated with,
among other things, Sarbanes-Oxley compliance, other consulting and recruiting
expenses and funding for our Long-Term Incentive Bonus Program (LTBIP). Recent Acquisitions and Other Developments In December 2003, we completed the acquisition of 100% of the shares in
Comincom from Nye Telenor East Invest for a total purchase price of
approximately $195.3 million, consisting of approximately $193.5 million in our
common stock and direct transaction costs of approximately $1.8 million. The
acquisition further strengthens our position in the key Moscow and St.
Petersburg communications markets, and positions us to realize operating and
capital expenditure synergies. Comincom provides telecommunications services,
principally to major hotels, business offices, embassies and mobile
communication companies through its telecommunications network in Russia. In February 2004, we completed the acquisition of 100% ownership interest
in ST-HOLDING s.r.o. (ST-HOLDING), a Czech company that owns 50% plus one
share in ZAO Samara Telecom, a telecommunications service provider in Samara,
Russia from ZAO 16




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SMARTS and individual owners. The total purchase price of approximately $4.8
million consisted of cash consideration of approximately $4.4 million and
approximately $0.4 million recorded as a liability. In April 2004, we completed the acquisition of 100% of the common shares
in OAO Balticom Mobile (Balticom) that owns 62% of ZAO WestBalt Telecom, an
alternative telecommunications operator in Kaliningrad, Russia, for cash
consideration of approximately $7.2 million including approximately $1.1
million held in escrow for a period of one year. Amounts in the escrow may be
used to compensate us in the event of the realization of certain contingent
liabilities in the acquired entities. In April 2004, we completed the acquisition of the remaining 49% ownership
interest in OOO Uralrelcom that we did not own for cash consideration of
approximately $1.0 million. In May 2004, we completed the acquisition of 54% ownership interest in SP
Buzton (Buzton), an alternative telecommunications operator in Uzbekistan.
The total purchase price of approximately $3.0 million consisted of cash
consideration of approximately $2.5 million and approximately $0.5 million
recorded as a liability to be settled in cash upon the satisfactory achievement
of certain conditions. In August 2004, we entered into a share purchase agreement with Nodama
Holdings, Ltd. (Nodama), to acquire 100% of the common stock in Hudson
Telecom, Inc., a Delaware corporation, which owns 100% ownership interest in
OOO Digital Telephone Networks and OOO Digital Telephone Switches, together
comprising one of the largest regional alternative operators in Russia
operating in Rostov-on-Don and the surrounding region. Upon closure, Nodama
will receive $45.0 million in cash of which $5.0 million will be placed in
escrow for a period of one year subject to the achievement of certain financial
conditions. Amounts in the escrow may be used to compensate us in the event of
the realization of certain contingent liabilities in the acquired entities.
The consummation of the transaction is conditioned upon, among other things,
the completion of satisfactory due diligence and the sellers fulfilment of
certain conditions precedent. The transaction is expected to close in the
fourth quarter of 2004. Recognizing that many of the markets in which we operate are complex, in
particular as it relates to business, regulatory, political and cultural
matters, we occasionally seek experienced local partners to assist in markets
where we are likely to encounter operational difficulties. We have been
cooperating with local partners in Ukraine to resolve commercial and regulatory
disputes with monopoly operators and regulatory authorities in Ukraine but had
not previously finalized negotiations on the compensation arrangement for the
services. In addition to or in lieu of cash compensation, the Board of
Directors approved the sale of a non-controlling interest in Golden Telecom
(Ukraine) (GTU) to such parties. Upon approval of GTIs Board of Directors, in August 2004 we entered into
a compensation arrangement for services provided to assist us in resolving
commercial and regulatory disputes with monopoly operators and regulatory
authorities in Ukraine. Our local partners have provided services on a success
fee basis. Our Board of Directors approved an arrangement that effectively
transferred 20% of the shares in GTU owned by us to the local partners as
compensation for the services already provided and certain additional services
to be provided. Under this arrangement, we paid the local partners $0.5 million
in cash and granted the local partner an option to purchase 20% of GTU for $0.5
million in cash, in a transaction where the cash and the value of the services
were approximately $3.6 million. This transaction closed in the third quarter
of 2004, when the performance was completed and the option was exercised and
resulted in a charge to operating income of approximately $3.6 million. The
excess of the fair value of consideration exchanged for services over the book
value of 20% of net assets of GTU was recorded as a credit to the consolidated
equity. Fair value of the option approximated the fair value of shares
transferred to the local partner due to the short exercise period of the option
and was determined using the discounted cash flow valuation method. We continue
to believe that Ukraine offers promising investment opportunities but that
there are still political and commercial risks associated with operating in
Ukraine. In July 2004, our Board of Directors adopted a LTIBP for our senior
management, effective as of January 1, 2004. The LTIBP is designed to reward
senior management with annual bonus awards consisting of 100% restricted shares
for our officers and 50% restricted shares and 50% cash payments for other
qualified employees participating in LTIBP if we meet certain targets for net
income growth established by the Board of Directors. In addition, the program
provides for a one-time grant of a limited amount of restricted shares to
senior management in an aggregate amount not exceeding 50,000 shares. The
LTIBP is intended to act as a retention mechanism for senior management as the
cash payments and the restricted stock vest over a three year period. It is
expected that the LTIBP will act as a substitute for our Equity Participation
Plan under which significant amounts of stock options were, in the past,
granted to senior management. We have recorded $0.7 million compensation
expense in the nine months ended September 30, 2004 17




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associated with the LTIBP. We currently anticipate repurchasing from time to
time in the open market, a number of our shares equal to the number of our
shares that are subject to awards under the LTIBP. In the third quarter of 2004, management has determined that we have been
inadvertently carrying accruals for estimated taxes, other than income taxes.
Management has now concluded these accruals for estimated taxes should have
been considered unnecessary and reversed prior to January 1, 2000. The net
effect of the correction of this non-cash error was to reduce current
liabilities and non-current liabilities by $2.0 million each with an offsetting
decrease to accumulated deficit of $4.0 million in all periods presented. This
adjustment had no effect on the reported results of operations in 2004. Critical Accounting Policies The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend our business activities. To
assist that understanding, management has identified our critical accounting
policies. These policies have the potential to have a significant impact on
our financial statements, either because of the significance of the financial
statement item to which they relate, or because they require judgment and
estimation due to the uncertainty involved in measuring, at a specific point in
time, events which are continuous in nature. Revenue recognition policies; we recognize operating revenues as services
are rendered or as products are delivered to customers and installed. Under
multiple-delivery contracts, involving a combination of product delivery,
installation and maintenance, connection and service fees, revenues are
recognized based on the relative fair value of the respective amounts. Elements
are grouped if they are inseparable or objective evidence of fair value does
not exist. Certain revenues, such as connection and installation fees, are
deferred. We also defer direct incremental costs related to connection fees,
not exceeding the revenue deferred. Deferred revenues are subsequently
recognized over the estimated average customer lives, which are periodically
reassessed by us, and such reassessment may impact our future operating
results. In determining the recording of revenue, estimates and assumptions
are required in assessing the expected conversion of the revenue streams to
cash collected. Allowance for doubtful accounts policies; the allowance estimation process
requires management to make assumptions based on historical results, future
expectations, the economic and competitive environment, changes in the
creditworthiness of our customers, and other relevant factors. Changes in the
underlying assumptions may have a significant impact on the results of our
operations. In particular, we have certain amounts due to and from subsidiaries
of a European telecommunications operator who is currently subject to
bankruptcy proceedings. The ultimate resolution of this matter will be affected
by a number of factors including the determination of legal obligations of each
party, the course of the bankruptcy proceedings, and the enforceability of any
determinations. We have recognized provisions based on our preliminary estimate
of net exposure on the resolution of these receivables and payables. If our
assessment proves to be incorrect we may have to recognize an additional
provision of up to $2.0 million, net of tax, although management believes that
the possibility of such an adverse outcome is remote. Long-lived asset recovery policies;this policy is in relation to
long-lived assets, consisting primarily of property and equipment and
intangibles, which comprise a significant portion of our total assets. Changes
in technology or changes in our intended use of these assets may cause the
estimated period of use or the value of these assets to change. We perform
periodic internal studies to confirm the appropriateness of estimated economic
useful lives for each category of current property and equipment. Additionally,
long-lived assets, including intangibles, are reviewed for impairment whenever
events or changes in circumstances have indicated that their carrying amounts
may not be recoverable. Estimates and assumptions used in both setting useful
lives and testing for recoverability of our long-lived assets require the
exercise of managements judgment and estimation based on certain assumptions
concerning the expected life of any asset and expected future cash flows from
the use of an asset. Goodwill and assessment of impairment;Commencing from the adoption of
Statement on Financial Accounting Standard (SFAS) No. 142, Goodwill and
Other Intangible Assets, on January 1, 2002, we perform goodwill impairment
testing annually as of October 1 or whenever impairment indicators exist. This
test requires a significant degree of judgment about the future events and it
includes determination of the reporting units, allocation of goodwill to the
reporting units and comparison of the fair value with the carrying amount of
each reporting unit. Based on the discounted cash flow valuations performed in
2003, we concluded that for all reporting units the fair value is in excess of
the respective carrying amounts. 18




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Valuation allowance for deferred tax asset;we record valuation allowances
related to tax effects of deductible temporary differences and loss
carryforwards when, in the opinion of management, it is more likely than not
that the respective tax assets will not be realized. Changes in our assessment
of probability of realization of deferred tax assets may impact our effective
income tax rate. Business segment information;we changed our reporting for business
segments in the second quarter of 2003. Prior to the completion of the
acquisition of the remaining 50% ownership interest in Sovintel and the
subsequent merger of TeleRoss into Sovintel in April 2003, we managed our
business segments based on telecommunications products that we provided. In
the first quarter of 2003, we re-designed our business segments around customer
characteristics. Currently, we report four segments within the
telecommunications industry: Business and Corporate Services, Carrier and
Operator Services, Consumer Internet Services and Mobile Services. A
significant portion of our cost structure, including our investment in
infrastructure, benefits multiple segments. As a result, we perform
allocations of certain costs in order to report business segment information
for management and financial reporting purposes. Applying different allocation
techniques and parameters could impact the reported results of individual
business segments. Functional currency;effective January 1, 2003, Russia is no longer
considered a hyperinflationary economy, therefore the determination of
functional currency for United States generally accepted accounting principles
(US GAAP) reporting purposes should be based on the analysis of the
underlying business transactions for each Russian subsidiary. We have
determined in accordance with the functional currency criteria of SFAS No. 52,
Foreign Currency Translation, that the US dollar should be considered the
functional currency of all Russian subsidiaries. There are subjective elements
in this determination, including a weight given to each specific criteria
established by SFAS No. 52. Changes in the underlying business transactions
could lead to different functional currency determination for a particular
subsidiary, which would have an impact on its reported financial position and
results of operations. Critical Accounting Estimates Accounting estimates are an integral part of the financial statements
prepared by management and are based upon managements current judgments.
Certain accounting estimates are particularly sensitive because of their
significance to the financial statements and because of the possibility that
future events affecting them may differ markedly from managements current
judgment. We believe the following items represent such particularly sensitive
accounting estimates: Allowance for doubtful accounts;any changes in the underlying assumptions
of recoverability of accounts receivable by respective aging group or certain
specific accounts that are excluded from the specific and general allowances
could have a material effect on our current and future results of operations.
We believe that the allowance for doubtful accounts is adequate to cover
estimated losses in our accounts receivable balances under current conditions. Tax provisions;in the course of preparing financial statements in
accordance with US GAAP, we record potential tax loss provisions under the
guidelines of SFAS No. 5, Accounting for Contingencies. In general SFAS No.
5 requires loss contingencies to be recorded when they are both probable and
reasonably estimable. In addition, we record other deferred tax provisions
under the guidelines of SFAS No. 109, Accounting for Income Taxes.
Significant judgment is required to determine when such provisions should be
recorded, and when facts and circumstances change, when such provisions should
be released. Useful lives of property and equipment and certain intangible assets;our
network assets and amortizable intangible assets are depreciated and amortized
over periods generally ranging from five to ten years. Any reduction or
increase in the estimated useful lives for a particular category of fixed
assets or intangible assets could have a material effect on our future results
of operations. Business combinations;SFAS No. 141, Business Combinations, requires us
to recognize the share in the assets of businesses acquired and respective
liabilities assumed based on their fair values. Our estimates of the fair
value of the identified intangible assets of businesses acquired are based on
our expectations of future results of operations of such businesses. In
particular, our valuation of Comincoms identified intangible assets might
change as the appropriate regulations consistent with the new Russian law on
telecommunications, that came into effect on January 1, 2004, are promulgated
and its effects on the future results of operations of Comincom become known. 19




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Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 amended
Accounting Research Bulletin No. 51, Consolidated Financial Statements, and
established standards for determining under what circumstances a variable
interest (VIE) should be consolidated with its primary
beneficiary. FIN No. 46
also requires disclosure about VIEs that are not required to be consolidated
but in which the reporting entity has a significant variable interest. In
December 2003, the FASB revised certain implementation provisions of FIN No.
46. The revised interpretation (FIN No. 46R) substantially retained the
requirements of immediate application of FIN No. 46 to VIEs created after
January 31, 2003. There were no such entities created after January 31, 2003.
With respect to older VIEs, the consolidation requirements under FIN No. 46R
apply not later than for the first financial year or interim period ending
after December 15, 2003, if such VIE is a special-purpose entity (SPE), and
no later than for the first financial year or interim period ending after March
15, 2004, if such a VIE is not a SPE. The Company did not identify any
previously formed SPEs that are VIEs. Therefore the adoption of FIN No. 46R did
not have a significant impact on the financial position or results of
operations. In October 2003, the FASB concluded that Statement on Financial Accounting
Standard (SFAS) No. 123R, Share Based Compensation, which would require us
to measure compensation cost for all share-based payments, including employee
stock options, at fair value would be effective for interim or annual periods
beginning after June 15, 2005. We are currently estimating the
impact of SFAS No. 123R on our results of operations and
financial position. Results of Operations We are a leading facilities-based provider of integrated telecommunication
and Internet services in major population centers throughout Russia and other
countries of the Commonwealth of Independent States (CIS). We offer voice,
data and Internet services to corporations, operators and consumers using its
metropolitan overlay network in major cities including Moscow, Kiev, St.
Petersburg, Nizhny Novgorod, Samara, Kaliningrad, Krasnoyarsk, Almaty, and
Tashkent, and via intercity fiber optic and satellite-based networks, including
approximately 200 combined access points in Russia and other countries of the
CIS. In addition, we offer mobile services in Kiev and Odessa. The results of
our four business segments from the operations of our consolidated entities
combined with the non-consolidated entities where we are actively involved in
the day-to-day management, are shown in footnote 7 Segment Information  Line
of Business Data to our consolidated financial statements. In accordance with SFAS No. 52, we have determined our functional currency
is the US dollar, as the majority of our cash flows are indexed to, or
denominated in US dollars. Through December 31, 2002, Russia had been
considered to be a highly inflationary environment. From January 1, 2003,
Russia ceased to be considered as a highly inflationary economy. As we believe
our functional currency is the US dollar, this change did not have a material
impact on our results of operations or financial position. According to Russian government estimates, inflation in Russia was 19% in
2001, 16% in 2002, and 14% in 2003. The Russian government expects inflation
to be approximately 10% in 2004. Although the rate of inflation has been
declining, any return to heavy and sustained inflation could lead to market
instability, new financial crises, reduction in consumer buying power and
erosion of consumer confidence. As of April 15, 2003, all assets, liabilities, rights and obligations of
TeleRoss were transferred to Sovintel as part of the legal merger of these two
wholly-owned subsidiaries. This resulted in the reorganization of our
operations along the lines of customer characteristics as opposed to the types
of telecommunications products we provide. Therefore, in accordance with SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information,
we have aligned our operating segments in the manner that the chief operating
decision maker manages the operations for purposes of making operating
decisions and allocating resources. The discussion of our results of operations is organized as follows:  
    
    Consolidated Results.Consolidated Results of Operations
for the Three Months Ended September 30, 2004 compared to the
Consolidated Results of Operations for the Three Months Ended
September 30, 2003 20




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
    
    Consolidated Results.Consolidated Results of Operations
for the Nine Months Ended September 30, 2004 compared to the
Consolidated Results of Operations for the Nine Months Ended
September 30, 2003  
    
    Consolidated Financial Position.Consolidated Financial
Position at September 30, 2004 compared to Consolidated Financial
Position at December 31, 2003 Consolidated Results  Consolidated Results of Operations for the Three Months
Ended September 30, 2004 Compared to the Consolidated Results of Operations for
the Three Months Ended September 30, 2003 Revenue Our revenue increased by 70% to $152.8 million for the three months ended
September 30, 2004 from $90.1 million for the three months ended September 30,
2003. The increase in revenue was due primarily to the consolidation of 100%
of Comincoms results of operations for the third quarter of 2004 and, with
respect to our existing business, an increase in customer base and services
provided to existing customers, partially offset by lower prices charged for
certain services. The breakdown of revenue by business group was as follows: Consolidated Revenue
    
    Consolidated RevenueFor the Three Months
    
    For the Three MonthsEnded September 30,2003
    
    Ended September 30, 2004(in millions)REVENUEBusiness and Corporate Services
    
    $
    46.7
    
    
    $
    84.6Carrier and Operator Services
    
    
    32.9
    
    
    
    53.4Consumer Internet Services
    
    
    7.2
    
    
    
    10.9Mobile Services
    
    
    3.6
    
    
    
    4.2Eliminations
    
    
    (0.3
    )
    
    
    (0.3
    )TOTAL REVENUE
    
    $
    90.1
    
    
    $
    152.8
 Business and Corporate Services.Revenue from Business and Corporate
Services increased by 81% to $84.6 million for the three months ended September
30, 2004 from $46.7 million for the three months ended September 30, 2003. We
had increases in our Russian traffic revenues due to the addition of
approximately 2,080 new corporate customers and new agreements with 28 new
multi-tenant business centers and 1 new trade center in the three months ended
September 30, 2004 along with actively promoting new services among our client
base. The acquisition of the 100% ownership interest in Comincom was completed
in the fourth quarter of 2003. We began consolidating Comincom into our
results of operations from December 1, 2003. As a result of consolidating
Comincom, revenue from Business and Corporate Services increased by $22.3
million for the three months ended September 30, 2004. Revenue from the Business and Corporate Services division of GTU increased
by 64% to $7.7 million for the three months ended September 30, 2004 from $4.7
million for the three months ended September 30, 2003. The increase in revenue
was due to an increase in the total intercity minutes and long distance minutes
of use by business and corporate clients and an increase in monthly recurring
charges corresponding to the increase in the number of lines in service. Carrier and Operator Services.Revenue from Carrier and Operator Services
increased by 62% to $53.4 million for the three months ended September 30, 2004
from $32.9 million for the three months ended September 30, 2003. We have
expanded our operations with existing partners and added a number of new
carriers with increased volumes of traffic, especially voice over Internet
Protocol (VoIP). In addition, we have increased the number of services that
we offer to cellular providers, which has more than offset general tariff
declines, although pricing pressures still exist. As a result of consolidating Comincom, revenue from Carrier and Operator
Services increased by $5.2 million for the three months ended September 30,
2004. Revenue for the Carrier and Operator Services division of GTU increased by
53% to $5.5 million for the three months ended September 30, 2004 from $3.6
million for the three months ended September 30, 2003. The increase in revenue
was due to increasing 21




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volumes of incoming international traffic which we are able to terminate
in a number of cities in Ukraine and to other mobile networks as well as
increasing volumes of outgoing international traffic. Consumer Internet Services.Revenue from Consumer Internet Services
increased by 51% to $10.9 million for the three months ended September 30, 2004
from $7.2 million for the three months ended September 30, 2003. The increase
is largely the result of increases in the number of dial-up Internet
subscribers from 291,167 at September 30, 2003 to 376,392 at September 30, 2004
and partly offset by the average revenue per Internet subscriber decreasing
from approximately $8.13 per month to approximately $7.40 per month over the
same period. Mobile Services.Revenue from Mobile Services increased by 17% to $4.2
million for the three months ended September 30, 2004 from $3.6 million for the
three months ended September 30, 2003. Active subscribers increased from
36,861 at September 30, 2003 to 55,760 at September 30, 2004 due to an
increasing number of prepaid subscribers driven by the overall Ukrainian mobile
market growth. The average revenue per active subscriber decreased by 21% to
approximately $26.26 per month mainly due to the increase in the
share of low-usage prepaid subscribers and due to the adoption of the calling party pays (CPP) principle by
the Ukrainian parliament in the third quarter of 2003. We are now unable to
charge our mobile customers for incoming calls and our average revenue per
subscriber decreased accordingly. Expenses The following table shows our principal expenses for the three months
ended September 30, 2003 and September 30, 2004: Consolidated Expenses
    
    Consolidated ExpensesFor the Three Months Ended
    
    For the Three Months EndedSeptember 30, 2003
    
    September 30, 2004(in millions)COST OF REVENUEBusiness and Corporate Services
    
    $
    20.5
    
    
    $
    35.6Carrier and Operator Services
    
    
    19.1
    
    
    
    34.7Consumer Internet Services
    
    
    4.9
    
    
    
    6.5Mobile Services
    
    
    0.7
    
    
    
    1.5Eliminations
    
    
    (0.3
    )
    
    
    (0.3
    )TOTAL COST OF REVENUE
    
    
    44.9
    
    
    
    78.0Selling, general and
administrative
    
    
    15.8
    
    
    
    29.5Depreciation and amortization
    
    
    11.2
    
    
    
    19.5Equity in earnings of ventures
    
    
    
    
    
    
    (0.1
    )Interest income
    
    
    (0.3
    )
    
    
    (0.2
    )Interest expense
    
    
    0.2
    
    
    
    0.2Foreign currency loss
    
    
    0.2
    
    
    
    0.5Provision for income taxes
    
    $
    5.6
    
    
    $
    9.0
 Cost of Revenue Our cost of revenue increased by 74% to $78.0 million for the three months
ended September 30, 2004 from $44.9 million for the three months ended
September 30, 2003. Business and Corporate Services.Cost of revenue from Business and
Corporate Services increased by 74% to $35.6 million, or 42% of revenue, for
the three months ended September 30, 2004 from $20.5 million, or 44% of
revenue, for the three months ended September 30, 2003. The decrease as a
percentage of revenue was mainly due to leveraging the fixed cost portion of
our operations over increased volumes. As a result of consolidating Comincom, cost of revenue from Business and
Corporate Services increased by $8.2 million for the three months ended
September 30, 2004. 22




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Cost of revenue for the Business and Corporate Services division of GTU
increased by 81 % to $3.8 million, or 49% of revenue, for the three months
ended September 30, 2004 from $2.1 million, or 45% of revenue, for the three
months ended September 30, 2003. Cost of revenue increased as a percentage of
revenue due to the increased volume of lower margin long distance traffic and
an increase in network operation costs. Carrier and Operator Services.Cost of revenue from Carrier and Operator
Services increased by 82% to $34.7 million, or 65% of revenue, for the three
months ended September 30, 2004 from $19.1 million, or 58% of revenue, for the
three months ended September 30, 2003. The increase in cost of revenue as a
percentage of revenue mainly resulted from settlements to other operators not
decreasing in line with the pricing concessions to our customers partially
offset by operational improvements in terms of efficient use of available
network resources. In addition, we had increasing volumes of lower margin VoIP
sales. As a result of consolidating Comincom, cost of revenue from Carrier and
Operator Services increased by $3.2 million for the three months ended
September 30, 2004. Cost of revenue for the Carrier and Operator Services division of GTU
increased by 80% to $4.5 million, or 82% of revenue, for the three months ended
September 30, 2004 from $2.5 million, or 69% of revenue, for the three months
ended September 30, 2003. Cost of revenue increased as a percentage of revenue
due to the increased volumes of lower margin international incoming and
outgoing traffic. Consumer Internet Services.Cost of revenue from Consumer Internet
Services increased by 33% to $6.5 million, or 60% of revenue, for the three
months ended September 30, 2004 from $4.9 million, or 68% of revenue, for the
three months ended September 30, 2003. The decrease as a percentage of revenue
was mainly due to leveraging the fixed cost portion of our operations over
increased volumes. Mobile Services.Cost of revenue from Mobile Services increased by 114% to
$1.5 million, or 36% of revenue, for the three months ended September 30, 2004
from $0.7 million, or 19% of revenue, for the three months ended September 30,
2003. The increase in cost of revenue as a percentage of revenue is mainly due
to the introduction of the CPP principle by the Ukrainian Parliament in the
third quarter of 2003 as settlement costs for traffic to other mobile networks
increased and is partly offset by the increased higher margin CPP
revenue from calls from other operators to our mobile network. Selling, General and Administrative Our selling, general and administrative expenses increased by 87% to $29.5
million, or 19% of revenue, for the three months ended September 30, 2004 from
$15.8 million, or 18% of revenue, for the three months ended September 30,
2003. This increase in selling, general and administrative expenses was mainly
due to increases in employee related costs, bad debt expense, rent and other
office expenses associated with the operational integration and consolidation
of Comincom from December 1, 2003 into our results of operations. In addition,
in the three months ended September 30, 2004, we incurred $3.6 million in
consulting fees in association with the transfer of 20% of our ownership
interest in GTU to a Ukrainian partner in exchange for services provided by the
partner. Depreciation and Amortization Our depreciation and amortization expenses increased by 74% to $19.5
million for the three months ended September 30, 2004 from $11.2 million for
the three months ended September 30, 2003. The increase was due in part to
depreciation on continuing capital expenditures of the consolidated entities,
but primarily relates to our acquisition of the 100% ownership interest in
Comincom and subsequent consolidation of Comincom as of December 1, 2003 into
our results of operations. As a result of consolidating Comincom, depreciation
and amortization increased by $5.2 million for the three months ended September
30, 2004. Equity in Earnings of Ventures The earnings after interest and tax charges from our investments in
non-consolidated ventures was $0.1 million for the three months ended September
30, 2004 compared to a negligible equity in earnings of ventures for the three
months ended September 30, 2003. 23




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##### Table of Contents



Interest Income Our interest income decreased to $0.2 million for the three months ended
September 30, 2004 from $0.3 million for the three months ended September 30,
2003. Interest Expense Our interest expense for the three months ended September 30, 2004
remained unchanged from the $0.2 million for the three months ended September
30, 2003. Debt, excluding capital lease obligations, at September 30, 2004 was
$0.6 million compared to $1.9 million at September 30, 2003. Foreign Currency Loss Our foreign currency loss increased to $0.5 million for the three months
ended September 30, 2004, from $0.2 million for the three months ended
September 30, 2003. The change is mainly due to the combination of movements in
exchange rates and changes in the amount of net monetary assets that we have
denominated in foreign currencies. Provision for Income Taxes Our charge for income taxes was $9.0 million for the three months ended
September 30, 2004 compared to $5.6 million for the three months ended
September 30, 2003. Our effective tax rate was 36% for the three months ended
September 30, 2004 compared to 31% for the three months ended September 30,
2003 as a result of increases in non-deductible expenses. The increase in
income tax expense is primarily due to the acquisition of 100% ownership
interest in Comincom and subsequent consolidation of Comincom from December 1,
2003 into our results of operations. In addition, there were increased levels
of taxable profits being incurred in our Russian and Ukrainian subsidiaries in
the three months ended September 30, 2004 as compared to three months ended
September 30, 2003. Net Income and Net Income per Share Our net income for the three months ended September 30, 2004 was $16.1
million, compared to a net income of $12.5 million for the three months ended
September 30, 2003. Our net income per share of common stock remained unchanged from the $0.44
net income per share for the three months ended September 30, 2003. Our number
of weighted average shares increased to 36,277,711 in the three months ended
September 30, 2004, compared to 28,157,339 in the three months ended September
30, 2003. The increase in outstanding shares was a direct result of the
Comincom acquisition and employee stock option exercises. Our net income per share of common stock on a fully diluted basis
increased to $0.44 for the three months ended September 30, 2004, compared to a
net income per common share of $0.43 for the three months ended September 30,
2003. The increase in net income per share of common stock on a fully diluted
basis was due to the increase in net income partly offset by an increase in the
number of weighted average shares assuming dilution to 36,551,126 for the three
months ended September 30, 2004, compared to 29,072,342 for the three months
ended September 30, 2003. Consolidated Results  Consolidated Results of Operations for the Nine Months
Ended September 30, 2004 Compared to the Consolidated Results of Operations for
the Nine Months Ended September 30, 2003 Revenue Our revenue increased by 70% to $424.8 million for the nine months ended
September 30, 2004 from $249.2 million for the nine months ended September 30,
2003. The increase in revenue was due primarily to the consolidation of 100%
of Comincoms results of operations for the nine months ended September 30,
2004 and, with respect to our existing business, an increase in new customers
and services provided to existing customers partially offset by lower prices
charged for certain services. The breakdown of revenue by business group was
as follows: 24




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##### Table of Contents



Consolidated Revenue
    
    Consolidated RevenueFor the Nine Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2003
    
    2004(in millions)REVENUEBusiness and Corporate Services
    
    $
    129.3
    
    
    $
    236.4Carrier and Operator Services
    
    
    89.5
    
    
    
    143.8Consumer Internet Services
    
    
    21.5
    
    
    
    33.4Mobile Services
    
    
    10.4
    
    
    
    11.8Eliminations
    
    
    (1.5
    )
    
    
    (0.6
    )TOTAL REVENUE
    
    $
    249.2
    
    
    $
    424.8
 Business and Corporate Services.Revenue from Business and Corporate
Services increased by 83% to $236.4 million for the nine months ended September
30, 2004 from $129.3 million for the nine months ended September 30, 2003. We
had increases in our Russian traffic revenues due to the addition of
approximately 6,880 new corporate customers and new agreements with of 81 new
multi-tenant business centers and 8 trade centers in the nine months ended
September 30, 2004 along with actively promoting new services among our client
base. The acquisition of the 100% ownership interest in Comincom was completed
in the fourth quarter of 2003. We began consolidating Comincom into our
results of operations from December 1, 2003. As a result of consolidating
Comincom, revenue from Business and Corporate Services increased by $67.3
million for the nine months ended September 30, 2004. Revenue from the Business and Corporate Services division of GTU increased
by 52% to $20.5 million for the nine months ended September 30, 2004 from $13.5
million for the nine months ended September 30, 2003. The increase in revenue
was due to an increase in the total intercity minutes and long distance minutes
of use by business and corporate clients and an increase in monthly recurring
charges corresponding to the increase in the number of lines in service. Carrier and Operator Services.Revenue from Carrier and Operator Services
increased by 61% to $143.8 million for the nine months ended September 30, 2004
from $89.5 million for the nine months ended September 30, 2003. We have added
a number of new carriers with increased volumes of traffic, especially voice
over Internet Protocol (VoIP), and increased the number of services that we
offer to cellular providers, which has more than offset general tariff
declines, although pricing pressures still exist. As a result of consolidating Comincom, revenue from Carrier and Operator
Services increased by $15.9 million for the nine months ended September 30,
2004. Revenue for the Carrier and Operator Services division of GTU increased by
77% to $14.0 million for the nine months ended September 30, 2004 from $7.9
million for the nine months ended September 30, 2003. The increase in revenue
was due to increasing volumes of incoming international traffic which we are
able to terminate in a number of cities in Ukraine and to other mobile
networks, as well as increasing volumes of outgoing international traffic. Consumer Internet Services.Revenue from Consumer Internet Services
increased by 55% to $33.4 million for the nine months ended September 30, 2004
from $21.5 million for the nine months ended September 30, 2003. The increase
is largely the result of increases in the number of dial-up Internet
subscribers from 291,167 at September 30, 2003 to 376,392 at September 30, 2004
and partly offset by the average revenue per Internet subscriber decreasing
from approximately $8.13 per month to approximately $8.02 per month over the
same period. Mobile Services.Revenue from Mobile Services increased by 13% to $11.8
million for the nine months ended September 30, 2004 from $10.4 million for the
nine months ended September 30, 2003. Active subscribers increased from 36,861
at September 30, 2003 to 55,760 at September 30, 2004 due to an increasing
number of prepaid subscribers driven by the overall Ukrainian mobile market growth. The
average revenue per active subscriber decreased by 17% to approximately $27.53
per month mainly due to the increase in the share of low-usage
prepaid subscribers and due to the
adoption of the CPP principle by the Ukrainian parliament in the third quarter
of 2003. We are now unable to charge our mobile customers for incoming calls
and our average revenue per subscriber decreased accordingly. 25




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##### Table of Contents



Expenses The following table shows our principal expenses for the nine months ended
September 30, 2003 and September 30, 2004: Consolidated Expenses
    
    Consolidated ExpensesFor the Nine Months Ended
    
    For the Nine Months EndedSeptember 30, 2003
    
    September 30, 2004(in millions)COST OF REVENUEBusiness and Corporate Services
    
    $
    56.1
    
    
    $
    100.5Carrier and Operator Services
    
    
    50.8
    
    
    
    92.4Consumer Internet Services
    
    
    14.4
    
    
    
    19.7Mobile Services
    
    
    1.8
    
    
    
    4.5Eliminations
    
    
    (1.5
    )
    
    
    (0.6
    )TOTAL COST OF REVENUE
    
    
    121.6
    
    
    
    216.5Selling, general and
administrative
    
    
    42.6
    
    
    
    81.0Depreciation and amortization
    
    
    32.1
    
    
    
    55.2Equity in (earnings) of ventures
    
    
    
    
    
    
    (0.3
    )Interest income
    
    
    (0.9
    )
    
    
    (0.8
    )Interest expense
    
    
    1.8
    
    
    
    0.5Foreign currency (gain) loss
    
    
    
    
    
    
    0.7Provision for income taxes
    
    $
    14.6
    
    
    $
    23.5
 Cost of Revenue Our cost of revenue increased by 78% to $216.5 million for the nine months
ended September 30, 2004 from $121.6 million for the nine months ended
September 30, 2003. Business and Corporate Services.Cost of revenue from Business and
Corporate Services increased by 79% to $100.5 million, or 43% of revenue, for
the nine months ended September 30, 2004 from $56.1 million, or 43% of revenue,
for the nine months ended September 30, 2003. As a result of consolidating Comincom, cost of revenue from Business and
Corporate Services increased by $26.0 million for the nine months ended
September 30, 2004. Cost of revenue for the Business and Corporate Services division of GTU
increased by 66% to $10.3 million, or 50% of revenue, for the nine months ended
September 30, 2004 from $6.2 million, or 46% of revenue, for the nine months
ended September 30, 2003. Cost of revenue increased as a percentage of revenue
due to the increased volume of lower margin long distance traffic and an
increase in network operation costs. Carrier and Operator Services.Cost of revenue from Carrier and Operator
Services increased by 82% to $92.4 million, or 64% of revenue, for the nine
months ended September 30, 2004 from $50.8 million, or 57% of revenue, for the
nine months ended September 30, 2003. The increase in cost of revenue as a
percentage of revenue mainly resulted from settlements to other operators not
decreasing in line with the pricing concessions to our customers partially
offset by operational improvements in terms of efficient use of available
network resources. In addition, we had increasing volumes of lower margin VoIP
sales. As a result of consolidating Comincom, cost of revenue from Carrier and
Operator Services increased by $9.7 million for the nine months ended September
30, 2004. Cost of revenue for the Carrier and Operator Services division of GTU
increased by 107% to $11.2 million, or 80% of revenue, for the nine months
ended September 30, 2004 from $5.4 million, or 68% of revenue, for the nine
months ended September 30, 2003. Cost of revenue increased as a percentage of
revenue due to the increased volumes of lower margin international incoming and
outgoing traffic. 26




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##### Table of Contents



Consumer Internet Services.Cost of revenue from Consumer Internet
Services increased by 37% to $19.7 million, or 59% of revenue, for the nine
months ended September 30, 2004 from $14.4 million, or 67% of revenue, for the
nine months ended September 30, 2003. The decrease as a percentage of revenue
was mainly due to leveraging the fixed cost portion of our operations over
increased volumes. Mobile Services.Cost of revenue from Mobile Services increased by 150% to
$4.5 million, or 38% of revenue, for the nine months ended September 30, 2004
from $1.8 million, or 17% of revenue, for the nine months ended September 30,
2003. The increase in cost of revenue as a percentage of revenue is mainly due
to the introduction of the CPP principle by the Ukrainian Parliament in the
third quarter of 2003 as settlement costs for traffic to other mobile networks
increased and is partly offset by the increased higher margin CPP
revenue from calls from other operators to our mobile network. Selling, General and Administrative Our selling, general and administrative expenses increased by 90% to $81.0
million, or 19% of revenue, for the nine months ended September 30, 2004 from
$42.6 million, or 17% of revenue, for the nine months ended September 30, 2003.
This increase in selling, general and administrative expenses was mainly due to
increases in employee related costs, advertising, bad debt expense, rent and
other office expenses and consulting and employee termination costs associated
with the operational integration and consolidation of Comincom from December 1,
2003 into our results of operations. In addition, in the nine months ended
September 30, 2004, we incurred $3.6 million in consulting fees in association
with the transfer of 20% of our ownership interest in GTU to a Ukrainian
partner in exchange for services provided by the partner. Depreciation and Amortization Our depreciation and amortization expenses increased by 72% to $55.2
million for the nine months ended September 30, 2004 from $32.1 million for the
nine months ended September 30, 2003. The increase was due in part to
depreciation on continuing capital expenditures of the consolidated entities,
but primarily relates to our acquisition of the 100% ownership interest in
Comincom and subsequent consolidation of Comincom as of December 1, 2003 into
our results of operations. As a result of consolidating Comincom, depreciation
and amortization increased by $15.4 million for the nine months ended September
30, 2004. Equity in Earnings of Ventures The earnings after interest and tax charges from our investments in
non-consolidated ventures increased to $0.3 million for the nine months ended
September 30, 2004 from a negligible amount for the nine months ended. Interest Income Our interest income decreased to $0.8 million for the nine months ended
September 30, 2004 from the $0.9 million for the nine months ended September
30, 2003. Interest Expense Our interest expense was $0.5 million for the nine months ended September
30, 2004 down from $1.8 million for the nine months ended September 30, 2003.
Debt, excluding capital lease obligations, at September 30, 2004 was $0.6
million compared to $1.9 million at September 30, 2003. On June 30, 2003, we
repaid $30.0 million of outstanding debt plus accrued interest under a credit
facility with ZAO Citibank. Foreign Currency Gain (Loss) Our foreign currency loss was $0.7 million for the nine months ended
September 30, 2004, compared to negligible for the nine months ended September
30, 2003. The change in our foreign currency loss is mainly due to the
combination of movements in exchange rates and changes in the amount of net
monetary assets that we have denominated in foreign currencies. 27




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##### Table of Contents



Provision for Income Taxes Our charge for income taxes was $23.5 million for the nine months ended
September 30, 2004 compared to $14.6 million for the nine months ended
September 30, 2003. Our effective tax rate was 33% for the nine months ended
September 30, 2004 compared to 28% for the nine months ended September 30, 2003
as a result of increases in non-deductible expenses. The increase in income
tax expense is primarily due to the acquisition of 100% ownership interest in
Comincom and subsequent consolidation of Comincom from December 1, 2003 into
our results of operations. In addition, there were increased levels of taxable
profits being incurred in our Russian and Ukrainian subsidiaries in the nine
months ended September 30, 2004 as compared to nine months ended September 30,
2003. Net Income and Net Income per Share Our net income for the nine months ended September 30, 2004 was $47.7
million, compared to a net income of $37.2 million for the nine months ended
September 30, 2003. Our net income per share of common stock decreased to $1.32 for the nine
months ended September 30, 2004, compared to a net income per share of $1.35
for the nine months ended September 30, 2003. The decrease in net income per
share of common stock was due to the increase in the number of weighted average
shares to 36,200,334 in the nine months ended September 30, 2004, compared to
27,569,748 in the nine months ended September 30, 2003 partly offset by an
increase in net income for the nine month ended September 30, 2004. The
increase in outstanding shares was a direct result of the Comincom acquisition
and employee stock option exercises. Our net income per share of common stock on a fully diluted basis
decreased to $1.30 for the nine months ended September 30, 2004, compared to a
net income per common share of $1.32 for the nine months ended September 30,
2003. The decrease in net income per share of common stock on a fully diluted
basis was due to the increase in the number of weighted average shares assuming
dilution to 36,544,037 for the nine months ended September 30, 2004, compared
to 28,251,106 for the nine months ended September 30, 2003 partly offset by an
increase in net income for the nine months ended September 30, 2003. Consolidated Financial Position  Significant Changes in Consolidated Financial
Position at September 30, 2004 compared to Consolidated Financial Position
at December 31, 2003 Accounts Receivable Accounts receivable increased from December 31, 2003 to September 30, 2004
as a result of increased revenue during the period ended September 30, 2004 and
slower collections from customers. Intangible Assets Our intangible assets increased at September 30, 2004 as compared to
December 31, 2003 as a result of our acquisition of ST-HOLDING in February
2004, our acquisition of Balticom Mobile in April 2004, Buzton in May 2004 and
the build out of new numbering capacity. Stockholders Equity Shareholders equity increased from December 31, 2003 to September 30,
2004 as a result of our net income of $47.7 million, cash proceeds of
approximately $4.2 million received from the exercise of employee stock
options, partially offset by declaring and paying $14.5 million dividends in
the nine months ended September 20, 2004. In addition, we transferred 20% of the ownership interest in GTU to a
Ukrainian partner in exchange for services provided by the partner in August
2004. The excess of the fair value of consideration exchanged for services
over the book value of 20% of net assets of GTU was recorded as a
credit to the
consolidated equity. In
the third quarter of 2004, management determined that we have been
inadvertently carrying accruals for estimated taxes, other than income taxes.
Management has now concluded these accruals for estimated taxes should have
been considered unnecessary and 28




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##### Table of Contents



reversed prior to January 1, 2000. The net effect of the correction of this
non-cash error was to reduce current liabilities and non-current liabilities by
$2.0 million each with an offsetting decrease to accumulated deficit of $4.0
million in all periods presented. Income Taxes Our effective rate of income tax differs from the US statutory rate due to
the impact of the following factors (1) different income tax rates and
regulations apply in the countries where we operate; and (2) amortization of
certain acquired intangible assets is not deductible for income tax purposes.
Prior to 2001, we had not recognized a tax benefit in relation to the deferred
tax assets of our Russian and Ukrainian entities due to uncertainty over the
application and future development of the tax regimes in the two countries.
However, in 2001 and 2002, as a result of our Russian and Ukrainian
subsidiaries profitability and reasonable certainty of future profits, we
recorded deferred tax assets in the appropriate Russian and Ukrainian
subsidiaries. In 2003, we recorded the full amount of deferred tax asset for
US loss carry-forwards for income tax purposes. Liquidity and Capital Resources Our cash and cash equivalents was $61.3 million and $65.2 million as of
September 30, 2004 and December 31, 2003, respectively. Our total restricted
cash was $1.0 million as of September 30, 2004 and December 31, 2003. The
restricted cash is maintained in connection with certain of our debt
obligations as described below. During the nine months ended September 30, 2004, we had net cash inflows
of $109.8 million from our operating activities. During the nine months ended
September 30, 2003, we had net cash inflows of $63.1 million from our operating
activities. This increase in net cash inflows from operating activities at
September 30, 2004 is mainly due to the increase of net income as a result of
increased revenues, and the consolidation of Comincom into our results of
operations and financial position from December 1, 2003. During the nine months ended September 30, 2004, we received approximately
$406.7 million in cash from our customers for services and we paid
approximately $274.3 million to suppliers and employees. During the nine
months ended September 30, 2003, we received approximately $231.7 million in
cash from our customers for services and we paid approximately $156.5 million
to suppliers and employees. We used cash of $100.2 million and $55.7 million for investing activities
for the nine months ended September 30, 2004 and September 30, 2003,
respectively, which were principally attributable to building our
telecommunications networks and acquisitions. Network investing activities
totaled $86.1 million for the nine months ended September 30, 2004. The
majority of network investing activities related to construction of last mile
access, intercity fiber project and network upgrades as a result of increased
customer connections. Network investing activities totaled $42.8 million for
the nine months ended September 30, 2003. We used cash of $15.0 million for the
nine months ended September 30, 2004 for our acquisition which include
ST-HOLDING, Buzton, Uralrelcom, and Balticom Mobile. For the nine months ended September 30, 2004, we received $4.2 million net
proceeds from the exercise of employee stock options and for the nine months
ended September 30, 2003, we received $20.3 million net proceeds from the
exercise of employee stock options. In February 2004, our Board of Directors declared a cash dividend of $0.20
per common share to shareholders of record as of March 18, 2004. We paid the
total amount payable of approximately $7.2 million to shareholders on March 29,
2004. In May 2004, our Board of Directors declared a cash dividend of $0.20 per
common share to shareholders of record as of June 14, 2004. We paid the total
amount payable of approximately $7.2 million to shareholders on June 28, 2004.
In November 2004, our Board of Directors declared a cash dividend of $0.20 per
common share to shareholders of record as of November 12, 2004. We will pay the
total amount payable of approximately $7.3 million to
shareholders on November 22, 2004. We had working capital of $89.3 million as of September 30, 2004 and $90.3
million as of December 31, 2003. At September 30, 2004, we had total debt,
excluding capital lease obligations, of approximately $0.6 million, of which
$0.4 million were current maturities. Total debt included amounts that were
fully collateralized by restricted cash. 29




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In the first quarter of 2000, we entered into a lease for the right to use
fiber optic capacity, including facilities and maintenance, from Moscow to
Stockholm. The lease has an initial term of ten years with an option to renew
for an additional five years. The lease required full prepayments as the
capacity increased from an STM-1 to an STM-4 to full capacity of STM-16. Full
prepayments were made to the lessor in April 2000, August 2000 and February
2001. These prepayments have been offset against the lease obligation in the
financial statements of the Company. We will continue to make payments for
maintenance for the term of the lease. In the ordinary course of business, we have entered into long-term
agreements for satellite transponder capacity. In the nine months ended
September 30, 2004, we entered into approximately $41.3 million of satellite
transponder capacity agreements generally with terms of 10 years. Some of our operating companies have received debt financing through
direct loans from affiliated companies. In addition, certain operating
companies have borrowed funds under a back-to-back, seven-year credit facility
for up to $22.7 million from a Russian subsidiary of Citibank. Under this
facility, we provide full cash collateral, held in London, and recorded on our
balance sheet as restricted cash, for onshore loans made by the bank to our
Russian registered joint ventures. In a second, similar facility, we provide
full cash collateral for a short term back-to-back, revolving, credit facility
for up to $10.0 million from the same bank for two of our larger Russian
operating companies. The funding level as of September 30, 2004 for all of
these facilities totaled $1.2 million, of which $0.2 million was funded to our
consolidated subsidiaries and $1.0 million was funded to our non-consolidated
entities. In the future, we may execute especially large or numerous acquisitions,
which may require us to raise additional funds through a dilutive equity
issuance, additional borrowings with or without collateralization, through the
divestment of non-core assets, to suspend or cease dividend payments, or a
combination of the foregoing. In case especially large or numerous
acquisitions do not materialize, we expect our cash flow from operations to be
sufficient to fund our expected requirements, including our capital expenditure
requirements. However, the actual amount and timing of our future cash
requirements may differ materially from our current estimates because of
changes or fluctuations in our anticipated investments, revenue, operating
costs and network expansion plans, timing of acquisitions, and access to
alternative sources of financing on favorable terms. Further, in order for us
to compete successfully, we may require substantial additional cash to continue
to develop our networks and meet the funding requirements of our operations and
ventures. To the extent our current sources are not sufficient to meet these
requirements, we may raise additional funds through a dilutive equity issuance,
additional borrowings with or without collateralization, the divestment of
non-core assets, the suspension or cessation of dividend payments or a
combination of the foregoing. We may not be able to obtain additional financing on favorable terms. As a
result, we may be subject to additional or more restrictive financial
covenants, our interest obligations may increase significantly and our
shareholders may be adversely diluted. Our failure to generate sufficient funds
in the future, whether from operations or by raising additional debt or equity
capital, may require us to delay or abandon some or all of our anticipated
expenditures, to sell assets, or both, which could have a material adverse
effect on our operations. We are currently in negotiations with a financial
institution to secure a credit facility of $40.0 million to fund, in principle
part, our acquisition of Hudson Telecom, Inc. Such facility is likely to
contain restrictive covenants that will limit the flexibility of our
operations. As part of our drive to increase our network capacity, reduce costs and
improve the quality of our service, we have leased additional fiber optic and
satellite-based network capacity; the terms of these leases are generally five
years or more and can involve significant advance payments. As demand for our
telecommunication services increases we expect to enter into additional
capacity agreements and may make significant financial commitments, in addition
to our existing commitments. 30




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##### Table of Contents



As of September 30, 2004, we had the following contractual obligations,
including short- and long-term debt arrangements, commitments for future
payments under non-cancelable lease arrangements and purchase obligations: Payments Due by Period(in thousands)Less
    
    1  3
    
    4 - 5Total
    
    than 1 year
    
    years
    
    years
    
    ThereafterShort- and long-term debt
    
    $
    625
    
    
    $
    425
    
    
    $
    200
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    4,866
    
    
    
    2,675
    
    
    
    2,191
    
    
    
    
    
    
    
    Non-cancelable lease
obligations
    
    
    11,085
    
    
    
    1,666
    
    
    
    6,491
    
    
    
    2,707
    
    
    
    221Purchase obligations
    
    
    81,443
    
    
    
    23,152
    
    
    
    24,088
    
    
    
    15,626
    
    
    
    18,577Total contractual cash
obligations
    
    $
    98,019
    
    
    $
    27,918
    
    
    $
    32,970
    
    
    $
    18,333
    
    
    $
    18,798
 31




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##### Table of Contents



Special Note Regarding Forward Looking Statements Certain statements contained in Managements Discussion and Analysis of
Financial Condition and Results of Operations and other parts of this
document, including, without limitation, those concerning (i) the impact of
critical accounting policies and estimates; (ii) future acquisitions and
capital expenditures; (iii) projected traffic volumes and other growth
indicators; (iv) anticipated revenues and expenses; (v) the Companys
competitive environment; (vi) the future performance of consolidated and equity
method investments; (vii) our intention to offer our services under the Golden
Telecom brand; (viii) our intentions to expand our fiber optic capacity and add
transmission capacity; (ix) our intention to continue to use the assets of
recently acquired companies in the manner such assets were previously used; (x)
the allocation of indirect numbering capacity from Ukrtelecom; (xi) the impact
of critical accounting policies and estimates; (xii) our relationship with our
local partners in Ukraine may not develop as we anticipate and that benefits of
such relationship may not materialize; (xiii) the possibility that we may not
be able to come to terms with the owners of our potential acquisition in
Rostov-on-Don; and (xiv) the political, regulatory and financial situation in
the markets in which we operate, including the effect of the new law On
Telecommunications, are forward-looking and concern the Companys projected
operations, economic performance and financial condition. These forward-looking
statements are made pursuant to the safe harbor provisions of the Securities
Litigation Reform Act of 1995. It is important to note that such statements
involve risks and uncertainties and that actual results may differ materially
from those expressed or implied by such forward-looking statements. Among the
key factors that have a direct bearing on the Companys results of operations,
economic performance and financial condition are the commercial and execution
risks associated with implementing the Companys business plan, our ability to
integrate recently acquired companies into our operations, the political,
economic and legal environment in the markets in which the Company operates,
increasing competitiveness in the telecommunications and Internet-related
businesses that may limit growth opportunities, and increased and intense
downward price pressures on some of the services that we offer. These and other
factors are discussed herein under Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Report. Additional information concerning factors that could cause results to
differ materially from those in the forward-looking statements are contained in
the Companys filings with the United States Securities and Exchange Commission
(the SEC) and especially in the Risks Factor Sections therein, including, but
not limited to, the Companys report on Form 10-K for the year ended December
31, 2003. In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
will likely result, are expected to, estimated, intends, plans,
projection and outlook) are not historical facts and may be forward-looking
and, accordingly, such statements involve estimates, assumptions and
uncertainties which could cause actual results to differ materially from those
expressed in the forward-looking statements. Accordingly, any such statements
are qualified in their entirety by reference to, and are accompanied by, the
factors discussed throughout this Report and investors, therefore, should not
place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which
such statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors may emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factors on the Companys business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements. 32




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ITEM 3.Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the information provided in Item 7A
of the Companys Annual Report on Form 10-K for the fiscal year ended December
31, 2003. 
 ITEM 4.Controls and Procedures The Companys management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Companys disclosure controls and procedures as of September 30, 2004.
Based on this evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures were effective as of September 30, 2004. There were no changes in
the Companys internal control over financial reporting during the third
quarter of 2004 that have materially affected, or are reasonably likely to
materially affect the Companys internal control over financial reporting. 33




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 6.Exhibits  a)
    
    Exhibits Designation
    
    Description31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 34




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. GOLDEN TELECOM, INC.(Registrant)By:
    
    /s/ BRIAN RICHName:
    
    Brian RichTitle:
    
    Chief Financial Officer and Treasurer
(Principal Financial Officer)By:
    
    /s/ MICHAEL D. WILSONName:
    
    Michael D. WilsonTitle:
    
    Corporate Controller
(Principal Accounting Officer)Date: November 5, 2004
 35




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##### Table of Contents



EXHIBIT INDEX Designation
    
    Description31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002