##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 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 August 6, 2004 there were 36,276,579 outstanding shares of common stock
of the registrant.




---



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 June 30, 2004
    
    
    
    1Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2004
    
    
    
    3Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2004
    
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    
    5Item 2
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    
    14Item 4
    
    Controls and Procedures
    
    
    
    30PART II.
    
    OTHER INFORMATION
    
    
    
    31Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    
    31Signatures
    
    
    
    32Certification of PEO Pursuant to Section 302Certification of PFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
   *
    
    Please refer to the special note regarding forward-looking
statements in this section.




---



##### Table of Contents



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)
 December 31,
    
    June 30,2003
    
    2004(audited)
    
    (unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    65,180
    
    
    $
    45,804Accounts receivable, net of allowance for doubtful accounts of
$13,896 and $18,015 at December 31, 2003 and June 30, 2004, respectively
    
    
    74,016
    
    
    
    85,003VAT receivable
    
    
    14,819
    
    
    
    17,906Prepaid expenses and advances to suppliers
    
    
    12,232
    
    
    
    12,522Deferred tax asset
    
    
    5,995
    
    
    
    7,858Other current assets
    
    
    15,909
    
    
    
    19,774TOTAL CURRENT ASSETS
    
    
    188,151
    
    
    
    188,867Property and equipment, net of accumulated depreciation of $132,126
and $157,866 at December 31, 2003 and June 30, 2004, respectively
    
    
    283,110
    
    
    
    325,167Goodwill and intangible assets:Goodwill
    
    
    144,008
    
    
    
    146,254Intangible assets, net of accumulated amortization of $23,824 as of
December 31, 2003 and $32,768 as of June 30, 2004
    
    
    104,835
    
    
    
    107,226Net goodwill and intangible assets
    
    
    248,843
    
    
    
    253,480Restricted cash
    
    
    1,005
    
    
    
    1,008Other non-current assets
    
    
    8,117
    
    
    
    8,561TOTAL ASSETS
    
    $
    729,226
    
    
    $
    777,083
 See notes to condensed consolidated financial statements. 1




---



##### Table of Contents



GOLDEN TELECOM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands of US$, Except Share Data)
 December 31,
    
    June 30,2003
    
    2004(audited)
    
    (unaudited)LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    67,827
    
    
    $
    78,485VAT payable
    
    
    10,167
    
    
    
    12,975Debt maturing within one year
    
    
    950
    
    
    
    425Current capital lease obligation
    
    
    3,067
    
    
    
    2,483Deferred revenue
    
    
    9,192
    
    
    
    11,564Due to affiliates and related parties
    
    
    3,495
    
    
    
    3,305Other current liabilities
    
    
    5,249
    
    
    
    4,374TOTAL CURRENT LIABILITIES
    
    
    99,947
    
    
    
    113,611Long-term debt, less current portion
    
    
    200
    
    
    
    200Long-term deferred tax liability
    
    
    24,461
    
    
    
    26,917Long-term deferred revenue
    
    
    13,725
    
    
    
    18,641Long-term capital lease obligations
    
    
    3,763
    
    
    
    2,658Other non-current liabilities
    
    
    4,177
    
    
    
    4,677TOTAL LIABILITIES
    
    
    146,273
    
    
    
    166,704Minority interest
    
    
    2,722
    
    
    
    8,898SHAREHOLDERS EQUITYPreferred stock, $0.01 par value (10,000,000 shares
authorized; none issued and outstanding at December 31, 2003
and June 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 36,276,579 shares issued and outstanding at June 30, 2004)
    
    
    359
    
    
    
    363Additional paid-in capital
    
    
    663,464
    
    
    
    667,628Accumulated deficit
    
    
    (83,592
    )
    
    
    (66,510
    )TOTAL SHAREHOLDERS EQUITY
    
    
    580,231
    
    
    
    601,481TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    729,226
    
    
    $
    777,083
 See notes to condensed consolidated financial statements. 2




---



##### Table of Contents



GOLDEN TELECOM, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands of US$, Except Per Share Data)
 (unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004REVENUE:Telecommunication services
    
    $
    80,463
    
    
    $
    138,336
    
    
    $
    158,439
    
    
    $
    270,916Revenue from affiliates and related parties
    
    
    299
    
    
    
    537
    
    
    
    699
    
    
    
    1,131TOTAL REVENUE
    
    
    80,762
    
    
    
    138,873
    
    
    
    159,138
    
    
    
    272,047OPERATING COSTS AND EXPENSES:Access and network services (excluding depreciation
and amortization)
    
    
    39,436
    
    
    
    70,215
    
    
    
    76,735
    
    
    
    138,494Selling, general and administrative (excluding
depreciation and amortization)
    
    
    13,385
    
    
    
    25,118
    
    
    
    26,823
    
    
    
    51,511Depreciation and amortization
    
    
    10,542
    
    
    
    18,312
    
    
    
    20,947
    
    
    
    35,680TOTAL OPERATING COSTS AND EXPENSES
    
    
    63,363
    
    
    
    113,645
    
    
    
    124,505
    
    
    
    225,685INCOME FROM OPERATIONS
    
    
    17,399
    
    
    
    25,228
    
    
    
    34,633
    
    
    
    46,362OTHER INCOME (EXPENSE):Equity in earnings (losses) of ventures
    
    
    (148
    )
    
    
    243
    
    
    
    (29
    )
    
    
    243Interest income
    
    
    317
    
    
    
    271
    
    
    
    605
    
    
    
    540Interest expense
    
    
    (892
    )
    
    
    (155
    )
    
    
    (1,578
    )
    
    
    (350
    )Foreign currency gain (losses)
    
    
    23
    
    
    
    (1,051
    )
    
    
    213
    
    
    
    (224
    )Minority interest
    
    
    (123
    )
    
    
    (224
    )
    
    
    (215
    )
    
    
    (539
    )TOTAL OTHER INCOME (EXPENSE)
    
    
    (823
    )
    
    
    (916
    )
    
    
    (1,004
    )
    
    
    (330
    )Income before income taxes
    
    
    16,576
    
    
    
    24,312
    
    
    
    33,629
    
    
    
    46,032Income taxes
    
    
    4,741
    
    
    
    7,403
    
    
    
    8,974
    
    
    
    14,472NET INCOME
    
    $
    11,835
    
    
    $
    16,909
    
    
    $
    24,655
    
    
    $
    31,560Basic earnings per share of common stock:Net income per share  basic
    
    $
    0.43
    
    
    $
    0.47
    
    
    $
    0.90
    
    
    $
    0.87Weighted average common shares  basic
    
    
    27,480
    
    
    
    36,243
    
    
    
    27,271
    
    
    
    36,144Diluted earnings per share of common stock:Net income per share  diluted
    
    $
    0.42
    
    
    $
    0.46
    
    
    $
    0.89
    
    
    $
    0.86Weighted average common shares  diluted
    
    
    28,289
    
    
    
    36,539
    
    
    
    27,836
    
    
    
    36,523Cash dividends per common share
    
    $
    
    
    
    $
    0.20
    
    
    $
    
    
    
    $
    0.40
 See notes to condensed consolidated financial statements. 3




---



##### Table of Contents



GOLDEN TELECOM, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of US$)
 (unaudited)
 Six Months Ended June 30,2003
    
    2004OPERATING
ACTIVITIES:Net income
    
    $
    24,655
    
    
    $
    31,560Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:Depreciation
    
    
    16,304
    
    
    
    26,735Amortization
    
    
    4,643
    
    
    
    8,945Equity in (earnings) losses of ventures, net of dividends received
    
    
    29
    
    
    
    (243
    )Foreign currency (gain) losses
    
    
    (213
    )
    
    
    224Other
    
    
    80
    
    
    
    (1,052
    )Changes in assets and liabilities:Accounts receivable
    
    
    (8,266
    )
    
    
    (9,342
    )Accounts payable and accrued expenses
    
    
    8,187
    
    
    
    9,876VAT, net
    
    
    (2,039
    )
    
    
    (78
    )Other changes in assets and liabilities
    
    
    2,303
    
    
    
    (4,311
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    45,683
    
    
    
    62,314INVESTING
ACTIVITIES:Purchases of property and equipment and intangible assets
    
    
    (27,816
    )
    
    
    (54,368
    )Acquisitions, net of cash acquired
    
    
    
    
    
    
    (14,782
    )Restricted cash
    
    
    374
    
    
    
    (3
    )Other investing
    
    
    1,195
    
    
    
    260NET CASH USED IN INVESTING ACTIVITIES
    
    
    (26,247
    )
    
    
    (68,893
    )FINANCING ACTIVITIES:Repayments of debt
    
    
    (30,940
    )
    
    
    (525
    )Net proceeds from exercise of employee stock options
    
    
    7,970
    
    
    
    4,168Cash dividends paid
    
    
    
    
    
    
    (14,478
    )Other financing
    
    
    (867
    )
    
    
    (1,866
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (23,837
    )
    
    
    (12,701
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    81
    
    
    
    (96
    )Net decrease in cash and cash equivalents
    
    
    (4,320
    )
    
    
    (19,376
    )Cash and cash equivalents at beginning of period
    
    
    59,625
    
    
    
    65,180CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    55,305
    
    
    $
    45,804
 See notes to condensed consolidated financial statements. 4




---



##### Table of Contents



GOLDEN TELECOM, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Financial Presentation and Disclosures Golden Telecom, Inc. (GTI or the Company) is a provider of a broad
range of telecommunication services to businesses, other telecommunications
service providers and consumers. The Company provides these services through
its operation of voice, Internet and data networks, international gateways,
local access and various value-added services in the Commonwealth of
Independent States (CIS), primarily in Russia, and through its fixed line and
mobile operations in Ukraine. The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles 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 six months ended
June 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 June 30, 2004(in thousands)Accumulated
    
    
    
    
    
    AccumulatedCost
    
    Amortization
    
    Cost
    
    AmortizationAmortized intangible assets:Telecommunications service contracts
    
    $
    78,235
    
    
    $
    (13,619
    )
    
    $
    89,191
    
    
    $
    (17,186
    )Contract-based customer relationships
    
    
    35,169
    
    
    
    (2,859
    )
    
    
    35,169
    
    
    
    (7,144
    )Licenses
    
    
    3,957
    
    
    
    (1,854
    )
    
    
    4,150
    
    
    
    (2,181
    )Other intangible assets
    
    
    11,298
    
    
    
    (5,492
    )
    
    
    11,484
    
    
    
    (6,257
    )Total
    
    $
    128,659
    
    
    $
    (23,824
    )
    
    $
    139,994
    
    
    $
    (32,768
    )
 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 six months
ended June 30, 2003 and 2004, respectively, comprehensive income for the
Company is equal to net income. 5




---



##### Table of Contents



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
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004(in thousands, except per share data)Net income, as reported
    
    $
    11,835
    
    
    $
    16,909
    
    
    $
    24,655
    
    
    $
    31,560Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    867
    
    
    
    463
    
    
    
    1,736
    
    
    
    903Pro forma net income
    
    $
    10,968
    
    
    $
    16,446
    
    
    $
    22,919
    
    
    $
    30,657Net income per share:Basic  as reported
    
    $
    0.43
    
    
    $
    0.47
    
    
    $
    0.90
    
    
    $
    0.87Basic  pro forma
    
    
    0.40
    
    
    
    0.45
    
    
    
    0.84
    
    
    
    0.85Diluted  as reported
    
    
    0.42
    
    
    
    0.46
    
    
    
    0.89
    
    
    
    0.86Diluted  pro forma
    
    
    0.39
    
    
    
    0.45
    
    
    
    0.82
    
    
    
    0.84
 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. 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. 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. 6




---



##### Table of Contents



GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) New 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. Note 3: Net Earnings Per Share Basic earnings per share at June 30, 2003 and 2004 are computed on the
basis of the weighted average number of common shares outstanding. Diluted
earnings per share at June 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
June 30, 2003 and 2004 was 19,166 and 10,000 stock options, respectively. The
number of stock options excluded from the diluted earnings per share
computation, because their effect was antidilutive for the six months ended
June 30, 2003 and 2004 was 226,392 and 10,000 stock options, respectively. The components of basic and diluted earnings per share were as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004(in thousands, except per share data)Net income
    
    $
    11,835
    
    
    $
    16,909
    
    
    $
    24,655
    
    
    $
    31,560Weighted average outstanding of:Common stock
    
    
    27,480
    
    
    
    36,243
    
    
    
    27,271
    
    
    
    36,144Dilutive effect of:Employee stock options
    
    
    809
    
    
    
    296
    
    
    
    565
    
    
    
    379Common stock and common stock equivalents
    
    
    28,289
    
    
    
    36,539
    
    
    
    27,836
    
    
    
    36,523Earnings per share:Basic
    
    $
    0.43
    
    
    $
    0.47
    
    
    $
    0.90
    
    
    $
    0.87Diluted
    
    $
    0.42
    
    
    $
    0.46
    
    
    $
    0.89
    
    
    $
    0.86
 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. 7




---



##### Table of Contents



GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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. 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. 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. Note 5: Shareholders Equity Common Stock The Companys outstanding shares of common stock increased by 662,003
shares and 328,485 shares in the six months ended June 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. The Company is not selling any shares of common stock in this
offering, which has not been completed as of the date of these financial
statements. 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. 8




---



##### Table of Contents



GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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. 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
June 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 creates a new interconnect pricing regime in
2004 that should be more transparent and unified and it 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. In addition, the Company
has issued guarantees for the benefit of certain of its consolidated
subsidiaries. The total amount guaranteed at June 30, 2004 was approximately
$1.9 million. In the ordinary course of business, the Company has entered into long-term
agreements for satellite transponder capacity. In the six months ended June 30,
2004, the Company entered into approximately $41.3 million of satellite
transponder capacity agreements with terms of generally 10 years. 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. 9




---



##### Table of Contents



GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 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 six months ended June 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 June 30, 2003Revenue from external
customers
    
    $
    43,340
    
    
    $
    26,707
    
    
    $
    7,155
    
    
    $
    3,606
    
    
    $
    
    
    
    $
    80,808
    
    
    $
    80,762
    
    
    $
    (1,121
    )
    
    $
    1,075Intersegment revenue
    
    
    274
    
    
    
    159
    
    
    
    
    
    
    
    
    
    
    
    (433
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    13,502
    
    
    
    4,773
    
    
    
    (565
    )
    
    
    1,530
    
    
    
    (1,949
    )
    
    
    17,291
    
    
    
    17,399
    
    
    
    108
    
    
    
    Identifiable assets
    
    
    140,150
    
    
    
    155,945
    
    
    
    45,921
    
    
    
    7,472
    
    
    
    103,809
    
    
    
    453,297
    
    
    
    449,604
    
    
    
    (3,693
    )
    
    
    Capital expenditures
    
    
    9,840
    
    
    
    5,241
    
    
    
    933
    
    
    
    127
    
    
    
    11
    
    
    
    16,152
    
    
    
    16,027
    
    
    
    (125
    )
    
    
    
 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 June 30, 2004Revenue from external
customers
    
    $
    78,941
    
    
    $
    44,575
    
    
    $
    11,432
    
    
    $
    3,993
    
    
    $
    
    
    
    $
    138,941
    
    
    $
    138,873
    
    
    $
    (1,492
    )
    
    $
    1,424Intersegment revenue
    
    
    
    
    
    
    219
    
    
    
    
    
    
    
    
    
    
    
    (219
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    18,744
    
    
    
    7,983
    
    
    
    627
    
    
    
    1,218
    
    
    
    (2,949
    )
    
    
    25,623
    
    
    
    25,228
    
    
    
    (395
    )
    
    
    Identifiable assets
    
    
    429,728
    
    
    
    259,492
    
    
    
    57,743
    
    
    
    5,280
    
    
    
    28,978
    
    
    
    781,221
    
    
    
    777,083
    
    
    
    (4,138
    )
    
    
    Capital expenditures
    
    
    20,956
    
    
    
    8,552
    
    
    
    1,490
    
    
    
    221
    
    
    
    5
    
    
    
    31,224
    
    
    
    30,839
    
    
    
    (385
    )
    
    
    
 10




---



##### Table of Contents



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)Six Months Ended June 30, 2003Revenue from external
customers
    
    $
    82,008
    
    
    $
    56,297
    
    
    $
    14,222
    
    
    $
    6,764
    
    
    $
    
    
    
    $
    159,291
    
    
    $
    159,138
    
    
    $
    (2,285
    )
    
    $
    2,132Intersegment revenue
    
    
    569
    
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    (1,035
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    24,069
    
    
    
    12,275
    
    
    
    (1,060
    )
    
    
    2,575
    
    
    
    (3,132
    )
    
    
    34,727
    
    
    
    34,633
    
    
    
    (92
    )
    
    
    Identifiable assets
    
    
    140,150
    
    
    
    155,945
    
    
    
    45,921
    
    
    
    7,472
    
    
    
    103,809
    
    
    
    453,297
    
    
    
    449,604
    
    
    
    (3,693
    )
    
    
    Capital expenditures
    
    
    17,380
    
    
    
    8,968
    
    
    
    1,428
    
    
    
    209
    
    
    
    30
    
    
    
    28,015
    
    
    
    27,816
    
    
    
    (199
    )
    
    
    
 Adjustments to ReconcileBusiness Segment toConsolidated ResultsBusiness
    
    Carrier
    
    
    
    
    
    
    
    
    
    
    
    
    
    Business
    
    
    
    
    
    Equityand
    
    and
    
    Consumer
    
    Mobile
    
    Corporate &
    
    Segment
    
    Consolidated
    
    Method
    
    AffiliateCorporate
    
    Operator
    
    Internet
    
    Services
    
    Eliminations
    
    Total
    
    Results
    
    Ventures
    
    Adjustments(in thousands)Six Months Ended June 30, 2004Revenue from external
customers
    
    $
    151,884
    
    
    $
    90,097
    
    
    $
    22,570
    
    
    $
    7,607
    
    
    $
    
    
    
    $
    272,158
    
    
    $
    272,047
    
    
    $
    (2,730
    )
    
    $
    2,619Intersegment revenue
    
    
    
    
    
    
    363
    
    
    
    
    
    
    
    
    
    
    
    (363
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    35,177
    
    
    
    14,132
    
    
    
    1,580
    
    
    
    2,042
    
    
    
    (6,124
    )
    
    
    46,807
    
    
    
    46,362
    
    
    
    (445
    )
    
    
    Identifiable assets
    
    
    429,728
    
    
    
    259,492
    
    
    
    57,743
    
    
    
    5,280
    
    
    
    28,978
    
    
    
    781,221
    
    
    
    777,083
    
    
    
    (4,138
    )
    
    
    Capital expenditures
    
    
    41,697
    
    
    
    17,412
    
    
    
    2,390
    
    
    
    534
    
    
    
    21
    
    
    
    62,054
    
    
    
    61,434
    
    
    
    (620
    )
    
    
    
 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 June 30, 2003 and 2004 is as follows: 11




---



##### Table of Contents



GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Corporate,OtherCountriesAnd
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Three Months Ended June 30, 2003Revenue
    
    $
    71,210
    
    
    $
    10,641
    
    
    $
    (1,089
    )
    
    $
    80,762Long-lived assets
    
    
    279,892
    
    
    
    23,586
    
    
    
    2,007
    
    
    
    305,485
 Corporate,OtherCountriesAnd
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Three Months Ended June 30, 2004Revenue
    
    $
    124,148
    
    
    $
    15,464
    
    
    $
    (739
    )
    
    $
    138,873Long-lived assets
    
    
    548,273
    
    
    
    26,709
    
    
    
    10,028
    
    
    
    585,010
 Corporate,OtherCountriesAnd
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Six Months Ended June 30, 2003Revenue
    
    $
    140,289
    
    
    $
    19,861
    
    
    $
    (1,012
    )
    
    $
    159,138Long-lived assets
    
    
    279,892
    
    
    
    23,586
    
    
    
    2,007
    
    
    
    305,485
 Corporate,OtherCountriesAnd
    
    ConsolidatedRussia
    
    Ukraine
    
    Eliminations
    
    Results(in thousands)Six Months Ended June 30, 2004Revenue
    
    $
    244,730
    
    
    $
    28,885
    
    
    $
    (1,568
    )
    
    $
    272,047Long-lived assets
    
    
    548,273
    
    
    
    26,709
    
    
    
    10,028
    
    
    
    585,010
 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 the 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 retention mechanism 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 six months ended June 30, 2004 associated
with the LTIBP. The Company currently anticipates repurchasing from time to time in the open market, a number
of Company shares equal to the number of Company shares that are subject to awards granted under the LTIBP. 12




---



##### Table of Contents



GOLDEN TELECOM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Note 9: Subsequent Events 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. The consummation
of the transaction is conditioned upon, among other things, the completion of
satisfactory due diligence. The transaction is
expected to close in the third or fourth quarter of 2004. 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. 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 potential local partners in
Ukraine to resolve commercial disputes with incumbent operators in
Ukraine but had not previously negotiated compensation arrangement for the
services. In addition to or in lieu of cash compensation, the Board of
Directors have approved the transfer of a non-controlling interest in Golden
Telecom (Ukraine) (GTU) to such parties. In August 2004, the Company
entered into a compensation arrangement for services provided to assist the
Company in addressing disputes with incumbent operators in Ukraine. The Companys potential local partners have
provided services on a success fee basis. The Companys Board of Directors
approved an arrangement that will effectively transfer 20% of the shares in
GTU owned by the Company to the potential local partners as compensation for the services
already provided and certain additional services to be provided. Under this
arrangement, the Company will pay the potential local partners approximately
$0.5 million in cash and granted to the potential local partners an option to purchase 20% of GTU for $0.5 million in
cash. This transfer is expected to close in the third quarter of 2004 and
may result in a charge to operating income of up to approximately $4.0 million. 13




---



##### 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 six months ended
June 30, 2003 and June 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
telecommunications and Internet services to businesses and other high-usage
customers and telecommunications operators in approximately 200 combined access
points in Moscow, Kiev, St. Petersburg, Nizhny Novgorod, Samara, Kaliningrad,
Krasnoyarsk and other major population centers throughout Russia and other
countries of the Commonwealth of Independent States (CIS). We organize our
operations into four business groups, 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 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 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. Since early 2000 we have witnessed a recovery in the Russian market, but
downward pricing pressures persists 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. 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. 14




---



##### Table of Contents



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. 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. We cannot predict with any certainty how the new law will affect us.
The new law creates a new interconnect pricing regime in 2004 that should be
more transparent and unified and it 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. In 2003, we signed new amendments to the settlement agreement with
Ukrtelecom allowing incoming international traffic termination to Ukrainian
public switched telephone network (PSTN) via Ukrtelecoms network. Also, we
signed a new agreement with Utel for incoming international traffic termination
to Ukrainian PSTNs. State regulated tariffs for calls from the PSTN were also introduced, thus
allowing mobile operators to receive a share of revenue from calls made to
mobile networks. To effect calling party pays (CPP) settlements on our
network we entered into an interim agreement with Ukrtelecom that assigns a
national destination code numbering plan to our mobile customers and
reallocates our interconnect numbering capacity in Kiev and Odessa from our
mobile to our fixed network. This agreement became effective in November 2003
and enabled us to receive a settlement from revenue generated when a fixed line
party calls our mobile customer. 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.
During the six months ended June 30, 2004, we incurred approximately $1.8
million in 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. 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 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 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. 15




---



##### Table of Contents



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. The consummation of the transaction is
conditioned upon, among other things, the completion of satisfactory due
diligence. The transaction is expected to close in
the third or fourth quarter of 2004. Amounts in the escrow may be
used to compensate us in the event of the realization of certain
contingent liabilities in the acquired entities. 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 potential local partners in Ukraine to resolve
commercial disputes with
incumbent operators in Ukraine but had not previously
negotiated compensation arrangement for the services. In addition to or in
lieu of cash compensation, the Board of Directors have approved the
transfer of a
non-controlling interest in Golden Telecom (Ukraine) (GTU) to such parties. In
August 2004, we entered into
a compensation arrangement for services provided to assist us in addressing
disputes with incumbent operators in Ukraine. Our
potential local partners have provided services on a success fee basis. Our
Board of Directors approved an arrangement that will effectively transfers 20%
of the shares in GTU owned by us to the potential local partners as compensation for the
services already provided and certain additional services to be provided. Under
this arrangement, we will pay the potential local partners approximately $0.5
million in cash and granted to the potential local partners an option to purchase 20% of GTU for $0.5 million in cash.
This transfer is expected to close in the third quarter of 2004 and may
result in a charge to operating income of up to approximately $4.0 million. We
cannot be certain that our relationship with our potential local partners will develop in a
manner which is beneficial to us or that the benefits of such partnership will
not be outweighed by any loss of control over GTU that we may experience with
our potential local partners. In July 2004, our Board of Directors adopted a Long Term Incentive Bonus
Program (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
the 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 retention mechanism 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 six months ended June 30, 2004 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 granted under the LTIBP. 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 16




---



##### Table of Contents



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. 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. 17




---



##### Table of Contents



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. 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. Results of Operations GTI is a leading facilities-based provider of integrated
telecommunications and Internet services to businesses and other high-usage
customers and telecommunications operators in Moscow, Kiev, St. Petersburg,
Nizhny Novgorod, Samara, Krasnoyarsk and other major population centers
throughout Russia and other countries of the CIS. The results of our four business groups 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. 18




---



##### Table of Contents



We
currently believe 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 has been considered to be a highly inflationary environment. From
January 1, 2003, Russia ceased to be considered as a highly inflationary
economy. As we currently 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 June 30, 2004 compared to the Consolidated Results of
Operations for the Three Months Ended June 30, 2003Consolidated Results.Consolidated Results of Operations for the Six
Months Ended June 30, 2004 compared to the Consolidated Results of
Operations for the Six Months Ended June 30, 2003Consolidated Financial Position.Consolidated Financial Position at June
30, 2004 compared to Consolidated Financial Position at December 31, 2003 Consolidated Results  Consolidated Results of Operations for the Three Months
Ended June 30, 2004 Compared to the Consolidated Results of Operations for the
Three Months Ended June 30, 2003 Revenue Our revenue increased by 72% to $138.8 million for the three months ended
June 30, 2004 from $80.7 million for the three months ended June 30, 2003. The
overall increase in revenue was due to the consolidation of 100% of
Comincoms results of operations for the second quarter of 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: Consolidated Revenue
    
    Consolidated RevenueFor the Three Months
    
    For the Three MonthsEnded June 30, 2003
    
    Ended June 30, 2004(in millions)REVENUEBusiness and Corporate Services
    
    $
    43.6
    
    
    $
    78.9Carrier and Operator Services
    
    
    26.8
    
    
    
    44.7Consumer Internet Services
    
    
    7.2
    
    
    
    11.4Mobile Services
    
    
    3.6
    
    
    
    4.0Eliminations
    
    
    (0.5
    )
    
    
    (0.2
    )TOTAL REVENUE
    
    $
    80.7
    
    
    $
    138.8
 Business and Corporate Services.Revenue from Business and Corporate
Services increased by 81% to $78.9 million for the three months ended June 30,
2004 from $43.6 million for the three months ended June 30, 2003. We had
increases in our Russian traffic revenues due to the addition of approximately
2,400 new corporate customers and new agreements with 25 multi-tenant business
centers and 6 new trade centers in the three months ended June 30, 2004 along
with actively promoting new services among our client base. 19




---



##### Table of Contents



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 $23.7
million for the three months ended June 30, 2004. Revenue from the Business and Corporate Services division of GTU increased
by 49% to $6.7 million for the three months ended June 30, 2004 from $4.5
million for the three months ended June 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. Carrier and Operator Services.Revenue from Carrier and Operator Services
increased by 67% to $44.7 million for the three months ended June 30, 2004 from
$26.8 million for the three months ended June 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 $4.2 million for the three months ended June 30, 2004. Revenue for the Carrier and Operator Services division of GTU increased by
92% to $4.8 million for the three months ended June 30, 2004 from $2.5 million
for the three months ended June 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 as well as increasing volumes of
outgoing international traffic. Consumer Internet Services.Revenue from Consumer Internet Services
increased by 58% to $11.4 million for the three months ended June 30, 2004 from
$7.2 million for the three months ended June 30, 2003. The increase is largely
the result of increases in the number of dial-up Internet subscribers from
280,243 at June 30, 2003 to 385,541 at June 30, 2004 and partly offset by the
average revenue per Internet subscriber decreasing from approximately $8.17 per
month to approximately $7.47 per month over the same period. Mobile Services.Revenue from Mobile Services increased by 11% to $4.0
million for the three months ended June 30, 2004 from $3.6 million for the
three months ended June 30, 2003. Active subscribers increased from 36,314 at
June 30, 2003 to 50,975 at June 30, 2004 due to an increasing number of prepaid
subscribers on a tariff plan which allows for unlimited local calls for a fixed
payment. The average revenue per active subscriber has decreased by 18% to
approximately $27.46 per month mainly due to the decrease in the subscription fee
for the tariff plan which allows for unlimited local calls for a fixed payment
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 was reduced accordingly. Expenses The following table shows our principal expenses for the three months
ended June 30, 2003 and June 30, 2004: Consolidated Expenses
    
    Consolidated ExpensesFor the Three Months Ended
    
    For the Three Months EndedJune 30, 2003
    
    June 30, 2004(in millions)COST OF REVENUEBusiness and Corporate Services
    
    $
    18.9
    
    
    $
    34.3Carrier and Operator Services
    
    
    15.6
    
    
    
    27.8Consumer Internet Services
    
    
    4.8
    
    
    
    6.8Mobile Services
    
    
    0.6
    
    
    
    1.5Eliminations
    
    
    (0.5
    )
    
    
    (0.2
    )TOTAL COST OF REVENUE
    
    
    39.4
    
    
    
    70.2Selling, general and
administrative
    
    
    13.3
    
    
    
    25.1Depreciation and amortization
    
    
    10.5
    
    
    
    18.3Equity in (earnings) losses of
ventures
    
    
    0.1
    
    
    
    (0.2
    )Interest income
    
    
    (0.3
    )
    
    
    (0.3
    )
 20




---



##### Table of Contents



Consolidated Expenses
    
    Consolidated ExpensesFor the Three Months Ended
    
    For the Three Months EndedJune 30, 2003
    
    June 30, 2004(in millions)Interest expense
    
    
    0.9
    
    
    
    0.1Foreign currency loss
    
    
    
    
    
    
    1.0Provision for income taxes
    
    $
    4.8
    
    
    $
    7.4
 Cost of Revenue Our cost of revenue increased by 78% to $70.2 million for the three months
ended June 30, 2004 from $39.4 million for the three months ended June 30,
2003. Business and Corporate Services.Cost of revenue from Business and
Corporate Services increased by 81% to $34.3 million, or 43% of revenue, for
the three months ended June 30, 2004 from $18.9 million, or 43% of revenue, for
the three months ended June 30, 2003. As a result of consolidating Comincom, cost of revenue from Business and
Corporate Services increased by $9.7 million for the three months ended June
30, 2004. Cost of revenue for the Business and Corporate Services division of GTU
increased by 62 % to $3.4 million, or 51% of revenue, for the three months
ended June 30, 2004 from $2.1 million, or 47% of revenue, for the three months
ended June 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 78% to $27.8 million, or 62% of revenue, for the three
months ended June 30, 2004 from $15.6 million, or 58% of revenue, for the three
months ended June 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 $1.5 million for the three months ended June 30,
2004. Cost of revenue for the Carrier and Operator Services division of GTU
increased by 117% to $3.9 million, or 81% of revenue, for the three months
ended June 30, 2004 from $1.8 million, or 72% of revenue, for the three months
ended June 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 42% to $6.8 million, or 60% of revenue, for the three
months ended June 30, 2004 from $4.8 million, or 67% of revenue, for the three
months ended June 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
$1.5 million, or 38% of revenue, for the three months ended June 30, 2004 from
$0.6 million, or 17% of revenue, for the three months ended June 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 number of subscribers using the
unlimited local call tariff plan which does not lead to additional settlement
costs with other operators. Selling, General and Administrative Our selling, general and administrative expenses increased by 89% to $25.1
million, or 18% of revenue, for the three months ended June 30, 2004 from $13.3
million, or 16% of revenue, for the three months ended June 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. Depreciation and Amortization 21




---



##### Table of Contents



Our depreciation and amortization expenses increased by 74% to $18.3
million for the three months ended June 30, 2004 from $10.5 million for the
three months ended June 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 $5.1 million for the three months ended June 30,
2004. Equity in Earnings of Ventures The earnings after interest and tax charges from our investments in
non-consolidated ventures increased to $0.2 million for the three months ended
June 30, 2004 from losses of $0.1 million for the three months ended June 30,
2003. Interest Income Our interest income for the three months ended June 30, 2004 remained
unchanged from the $0.3 million for the three months ended June 30, 2003. Interest Expense Our interest expense was $0.1 million for the three months ended June 30,
2004 down from $0.9 million for the three months ended June 30, 2003. Debt,
excluding capital lease obligations, at June 30, 2004 was $0.6 million compared
to $1.2 million at June 30, 2003. On June 30, 2003, we
paid $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 $1.0 million for the three months ended June
30, 2004, compared to a negligible foreign currency gain for the three months
ended June 30, 2003. The change in our foreign currency gain to a 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. Provision for Income Taxes Our charge for income taxes was $7.4 million for the three months ended
June 30, 2004 compared to $4.8 million for the three months ended June 30,
2003. Our effective tax rate was 30% for the three months ended June 30, 2004
compared to 29% for the three months ended June 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 and the recognition of all deferred tax benefits relating to United
States (US) carry-forward tax losses during 2003. In addition, there were
increased levels of taxable profits being incurred in our Russian and Ukrainian
subsidiaries in the three months ended June 30, 2004 as compared to three
months ended June 30, 2003. Net Income and Net Income per Share Our net income for the three months ended June 30, 2004 was $16.9 million,
compared to a net income of $11.8 million for the three months ended June 30,
2003. Our net income per share of common stock increased to $0.47 for the three
months ended June 30, 2004, compared to a net income per share of $0.43 for the
three months ended June 30, 2003. The increase in net income per share of
common stock was due to the increase in net income partly offset by an increase
in the number of weighted average shares to 36,243,352 in the three months
ended June 30, 2004, compared to 27,479,784 in the three months ended June 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 $0.46 for the three months ended June 30, 2004, compared to a net
income per common share of $0.42 for the three months ended June 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 36,538,901 the three months ended
June 30, 2004, compared to 28,289,228 for the three months ended June 30, 2003. 22




---



##### Table of Contents



Consolidated Results  Consolidated Results of Operations for the Six Months
Ended June 30, 2004 Compared to the Consolidated Results of Operations for the
Six Months Ended June 30, 2003 Revenue Our revenue increased by 71% to $272.0 million for the six months ended
June 30, 2004 from $159.1 million for the six months ended June 30, 2003. The
overall increase in revenue was due to the consolidation of 100% of
Comincoms results of operations for the six months ended
June 30, 2004 and, with respect to our existing business, an
increase in new 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 Six Months
    
    For the Six MonthsEnded June 30, 2003
    
    Ended June 30, 2004(in millions)REVENUEBusiness and Corporate Services
    
    $
    82.6
    
    
    $
    151.8Carrier and Operator Services
    
    
    56.6
    
    
    
    90.4Consumer Internet Services
    
    
    14.3
    
    
    
    22.5Mobile Services
    
    
    6.8
    
    
    
    7.6Eliminations
    
    
    (1.2
    )
    
    
    (0.3
    )TOTAL REVENUE
    
    $
    159.1
    
    
    $
    272.0
 Business and Corporate Services.Revenue from Business and Corporate
Services increased by 84% to $151.8 million for the six months ended June 30,
2004 from $82.6 million for the six months ended June 30, 2003. We had
increases in our Russian traffic revenues due to the addition of approximately
4,800 new corporate customers and new agreements with 53 multi-tenant
business centers and 7 trade centers in the six months ended June 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 $45.0
million for the six months ended June 30, 2004. Revenue from the Business and Corporate Services division of GTU increased
by 45% to $12.8 million for the six months ended June 30, 2004 from $8.8
million for the six months ended June 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. Carrier and Operator Services.Revenue from Carrier and Operator Services
increased by 60% to $90.4 million for the six months ended June 30, 2004 from
$56.6 million for the six months ended June 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 $10.7 million for the six months ended June 30, 2004. Revenue for the Carrier and Operator Services division of GTU increased by
98% to $8.5 million for the six months ended June 30, 2004 from $4.3 million
for the six months ended June 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 as well as increasing volumes of
outgoing international traffic. Consumer Internet Services.Revenue from Consumer Internet Services
increased by 57% to $22.5 million for the six months ended June 30, 2004 from
$14.3 million for the six months ended June 30, 2003. The increase is largely
the result of increases in the number of dial-up Internet subscribers from
280,243 at June 30, 2003 to 385,421 at June 30, 2004 and partly offset by the
average revenue per Internet subscriber decreasing from approximately $8.28 per
month to approximately $8.12 per month over the same period. Mobile Services.Revenue from Mobile Services increased by 12% to $7.6
million for the six months ended June 30, 2004 from $6.8 million for the six
months ended June 30, 2003. Active subscribers increased from 36,314 at June
30, 2003 to 50,975 at June 30, 23




---



##### Table of Contents



2004 due to an increasing number of prepaid subscribers on a tariff plan
which allows for unlimited local calls for a fixed payment. The average revenue
per active subscriber has decreased by 16% to approximately $28.07 per month
mainly due to the decrease in the subscription fee for the tariff plan which
allows for unlimited local calls for a fixed payment 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 was reduced accordingly. Expenses The following table shows our principal expenses for the six months ended
June 30, 2003 and June 30, 2004: Consolidated Expenses
    
    Consolidated ExpensesFor the Six Months Ended
    
    For the Six Months EndedJune 30, 2003
    
    June 30, 2004(in millions)COST OF REVENUEBusiness and Corporate Services
    
    $
    35.6
    
    
    $
    64.9Carrier and Operator Services
    
    
    31.7
    
    
    
    57.7Consumer Internet Services
    
    
    9.5
    
    
    
    13.2Mobile Services
    
    
    1.1
    
    
    
    3.0Eliminations
    
    
    (1.2
    )
    
    
    (0.3
    )TOTAL COST OF REVENUE
    
    
    76.7
    
    
    
    138.5Selling, general and
administrative
    
    
    26.8
    
    
    
    51.5Depreciation and amortization
    
    
    20.9
    
    
    
    35.7Equity in (earnings) of ventures
    
    
    
    
    
    
    (0.2
    )Interest income
    
    
    (0.6
    )
    
    
    (0.6
    )Interest expense
    
    
    1.6
    
    
    
    0.3Foreign currency (gain) loss
    
    
    (0.2
    )
    
    
    0.2Provision for income taxes
    
    $
    9.0
    
    
    $
    14.5
 Cost of Revenue Our cost of revenue increased by 81% to $138.5 million for the six months
ended June 30, 2004 from $76.7 million for the six months ended June 30, 2003. Business and Corporate Services.Cost of revenue from Business and
Corporate Services increased by 82% to $64.9 million, or 43% of revenue, for
the six months ended June 30, 2004 from $35.6 million, or 43% of revenue, for
the six months ended June 30, 2003. As a result of consolidating Comincom, cost of revenue from Business and
Corporate Services increased by $17.8 million for the six months ended June 30,
2004. Cost of revenue for the Business and Corporate Services division of GTU
increased by 59% to $6.5 million, or 51% of revenue, for the six months ended
June 30, 2004 from $4.1 million, or 47% of revenue, for the six months ended
June 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 $57.7 million, or 64% of revenue, for the six
months ended June 30, 2004 from $31.7 million, or 56% of revenue, for the six
months ended June 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 $6.5 million for the six months ended June 30,
2004. 24




---



##### Table of Contents



Cost of revenue for the Carrier and Operator Services division of GTU
increased by 131% to $6.7 million, or 79% of revenue, for the six months ended
June 30, 2004 from $2.9 million, or 67% of revenue, for the six months ended
June 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 39% to $13.2 million, or 59% of revenue, for the six
months ended June 30, 2004 from $9.5 million, or 66% of revenue, for the six
months ended June 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 173% to
$3.0 million, or 39% of revenue, for the six months ended June 30, 2004 from
$1.1 million, or 16% of revenue, for the six months ended June 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 number of subscribers using the
unlimited local call tariff plan which does not lead to additional settlement
costs with other operators. Selling, General and Administrative Our selling, general and administrative expenses increased by 92% to $51.5
million, or 19% of revenue, for the six months ended June 30, 2004 from $26.8
million, or 17% of revenue, for the six months ended June 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. Depreciation and Amortization Our depreciation and amortization expenses increased by 71% to $35.7
million for the six months ended June 30, 2004 from $20.9 million for the six
months ended June 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 $10.2 million for the six months ended June 30, 2004. Equity in Earnings of Ventures The earnings after interest and tax charges from our investments in
non-consolidated ventures increased to $0.2 million for the six months ended
June 30, 2004 from a negligible amount for the six months ended. Interest Income Our interest income for the six months ended June 30, 2004 remained
unchanged from the $0.6 million for the six months ended June 30, 2003. Interest Expense Our interest expense was $0.3 million for the six months ended June 30,
2004 down from $1.6 million for the six months ended June 30, 2003. Debt,
excluding capital lease obligations, at June 30, 2004 was $0.6 million compared
to $2.2 million at June 30, 2003. On June 30, 2003, we
paid $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 $0.2 million for the six months ended June
30, 2004, compared to a foreign currency gain of $0.2 million for the six
months ended June 30, 2003. The change in our foreign currency gain 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 25




---



##### Table of Contents



Our charge for income taxes was $14.5 million for the six months ended
June 30, 2004 compared to $9.0 million for the six months ended June 30, 2003.
Our effective tax rate was 31% for the six months ended June 30, 2004 compared
to 27% for the six months ended June 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
and the recognition of all deferred tax benefits relating to US carry-forward
tax losses during 2003. In addition, there were increased levels of taxable
profits being incurred in our Russian and Ukrainian subsidiaries in the six
months ended June 30, 2004 as compared to six months ended June 30, 2003. Net Income and Net Income per Share Our net income for the six months ended June 30, 2004 was $31.6 million,
compared to a net income of $24.7 million for the six months ended June 30,
2003. Our net income per share of common stock decreased to $0.87 for the six
months ended June 30, 2004, compared to a net income per share of $0.90 for the
six months ended June 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
36,144,270 in the six months ended June 30, 2004, compared to 27,271,078 in the
six months ended June 30, 2003 partly offset by an increase in net income for
the six month ended June 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 $0.86 for the six months ended June 30, 2004, compared to a net
income per common share of $0.89 for the six months ended June 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 36,523,118 the six months ended June 30, 2004, compared to 27,835,614 for
the six months ended June 30, 2003 partly offset by an increase in net income
for the six months ended June 30, 2003. Consolidated Financial Position  Significant Changes in Consolidated Financial
Position at June 30, 2004 compared to Consolidated Financial Position at
December 31, 2003 Accounts Receivable Accounts receivable increased from December 31, 2003 to June 30, 2004 as a
result of increased revenue during the period ended June 30, 2004 and slower
collections from customers. Intangible Assets Our intangible assets increased at June 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
construction of new numbering capacity. Stockholders Equity Shareholders equity increased from December 31, 2003 to June 30, 2004 as
a result of our net income of $31.6 million, cash proceeds of approximately
$4.2 million received from the exercise of employee stock
options and partially offset by
declaring and paying $14.5 million dividends in the six months ended June 20,
2004. 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 26




---



##### Table of Contents



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 $45.8 million and $65.2 million as of
June 30, 2004 and December 31, 2003, respectively. Our total restricted cash
was $1.0 million as of June 30, 2004 and December 31, 2003. The restricted
cash is maintained in connection with certain of our debt obligations as
described below. During the six months ended June 30, 2004, we had net cash inflows of
$62.3 million from our operating activities. During the six months ended June
30, 2003, we had net cash inflows of $45.7 million from our operating
activities. This increase in net cash inflows from operating activities at June
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 six months ended June 30, 2004, we received approximately
$260.2 million in cash from our customers for services and we paid
approximately $185.7 million to suppliers and employees. During the six months
ended June 30, 2003, we received approximately $144.8 million in cash from our
customers for services and we paid approximately $92.4 million to suppliers and
employees. We used cash of $68.9 million and $26.2 million for investing activities
for the six months ended June 30, 2004 and June 30, 2003, respectively, which
were principally attributable to building our telecommunications networks and
acquisitions. Network investing activities totaled $54.4 million for the six
months ended June 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 $27.8 million for the six months ended June 30,
2003. We used cash of $14.8 million for the six months ended June 30, 2004 for
our acquisition of interests in ST-HOLDING, Buzton, Uralrelcom, and Balticom
Mobile. For the six months ended June 30, 2004, we received $4.2 million net
proceeds from the exercise of employee stock options and for the six months
ended June 30, 2003, we received $8.0 million net proceeds from the exercise of
employee stock options. 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 payable 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 payable of
approximately $7.2 million to shareholders on June 28, 2004. We had working capital of $75.3 million as of June 30, 2004 and $88.2
million as of December 31, 2003. At June 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. 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 six months ended June 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 27




---



##### Table of Contents



larger Russian operating companies. The funding level as of June 30, 2004 for
all of these facilities totaled $1.0 million, of which $0.2 million was funded
to our consolidated subsidiaries and $0.8 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 to finance 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
acquisitions, investments, revenue, operating costs and network expansion plans
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 are currently in negotiations with several financial
institutions to establish a credit facility of $30.0 million to
assist in funding our acquisition of Hudson Telecom, Inc. Such
facility is likely to contain restrictive covenants that will limit
the flexibility of our operations. The facility may also require a
company guarantee and a pledge of fixed assets. 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. 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. As of June 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)Lessthan 1
    
    1  3
    
    4 - 5Total
    
    year
    
    years
    
    years
    
    ThereafterShort- and long-term debt
    
    $
    625
    
    
    $
    425
    
    
    $
    100
    
    
    $
    100
    
    
    $
    Capital lease obligations
    
    
    5,645
    
    
    
    2,832
    
    
    
    2,813
    
    
    
    
    
    
    
    Non-cancelable lease
obligations
    
    
    12,667
    
    
    
    3,879
    
    
    
    5,882
    
    
    
    2,672
    
    
    
    234Purchase obligations
    
    
    73,394
    
    
    
    19,715
    
    
    
    21,099
    
    
    
    13,347
    
    
    
    19.233Total contractual cash
obligations
    
    $
    92,331
    
    
    $
    26,851
    
    
    $
    29,894
    
    
    $
    16,119
    
    
    $
    19,467
 28




---



##### 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) future
acquisitions and capital expenditures; (ii) projected traffic volumes and other
growth indicators; (iii) anticipated revenues and expenses; (iv) the Companys
competitive environment; (v) the future performance of consolidated and equity
method investments; (vi) our intention to offer our services under the Golden
Telecom brand; (vii) our intentions to expand our fiber optic capacity and add
transmission capacity; (viii) our intention to continue to use the assets of
recently acquired companies in the manner such assets were previously used;
(ix) the allocation of indirect numbering capacity from Ukrtelecom; (x) the
impact of critical accounting policies and estimates; (xi) the completion of
our proposed compensation arrangement with our potential partner in Ukraine;
(xii) our potential partner in Ukraine may not develop in a manner which is
beneficial to us or that benefits of such partnership will not outweigh any
loss of control over our Ukrainian operation; (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. 29




---



##### Table of Contents



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 June 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 June 30, 2004. There were no material changes in the Companys
internal control over financial reporting during the second quarter of 2004. 30




---



##### Table of Contents



PART II. OTHER INFORMATION ITEM 4.Submission of Matters to a Vote of Security Holders On May 20, 2004, the Company held its annual meeting of shareholders. In
connection with the meeting, the Company solicited proxies pursuant to
Regulation 14 under the Securities Exchange Act of 1934 from holders of record
of its common stock as of April 6, 2004. Each of the
Companys ten  nominees
for election to its Board of Directors was elected to a term ending at the
Companys annual meeting of shareholders to be held in 2005. One additional
proposal was submitted to shareholders for approval and was approved. (1) The
votes cast for each of the Companys ten  nominees for election
to the GTIs Board of Directors were as follows: Nominee
    
    For
    
    WithheldVladimir Androsik
    
    
    33,181,666
    
    
    
    101,693Peter Aven
    
    
    32,336,423
    
    
    
    946,936Michael Calvey
    
    
    33,257,053
    
    
    
    26,306Ashley Dunster
    
    
    33,257,053
    
    
    
    26,306David Herman
    
    
    33,276,091
    
    
    
    7,268Kjell Morten Johnsen
    
    
    33,262,968
    
    
    
    20,391Andrey Kosogov
    
    
    33,181,666
    
    
    
    101,693Michael North
    
    
    33,262,968
    
    
    
    20,391Jan Edvard Thygesen
    
    
    33,262,968
    
    
    
    20,391Alexander Vinogradov
    
    
    33,263,068
    
    
    
    20,391
  (2)
    
    Ratification of selection of Ernst & Young (CIS) Limited as the
Companys independent auditors for 2004  FOR 33,276,091 shares; AGAINST
7,268 shares; ABSTAIN 2,947,797 shares. 
 ITEM 6.Exhibits and Reports on Form 8-K 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
 b) Reports on Form 8-K Date of Report
    
    Subject of ReportMay 6, 2004
    
    Furnished Golden Telecom, Inc. announces first quarter 2004 results.May 10, 2004
    
    Golden Telecom, Inc. designated representatives will participate in investor conferences in Europe and the United States.May 12, 2004
    
    Golden Telecom, Inc. designated representatives will participate in investor conferences in Europe and the United States.
 31




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act 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/ DAVID STEWARTName:
    David StewartTitle:
    Chief Financial Officer and Treasurer (Principal Financial Officer) By:
    /s/ MICHAEL D. WILSONName:
    Michael D. WilsonTitle:
    Corporate Controller (Principal Accounting Officer) Date: August 6, 2004 32




---



##### Table of Contents



INDEX TO 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