(GOLDEN TELECOM LOGO)
The NEXT LEVEL GOLDEN TELECOM INC. Annual Report 2004
THE NEXT LEVEL - signifies the vision of Golden Telecom's leadership after
wrapping-up five phenomenal years of performance as a publicly traded company
with financial and operational results increasing across the board.
OUR VISION IS STRAIGHTFORWARD - TO BE THE LEADING TELECOMMUNICATIONS PROVIDER OF
CHOICE FOR BOTH BUSINESS CUSTOMERS AND INTERNET CONSUMERS IN RUSSIA AND THE CIS.
01 VISION AND VALUES
02 CHAIRMAN'S LETTER TO SHAREHOLDERS
03 FINANCIAL PERFORMANCE
04 REPORT FROM THE PRESIDENT
06 OPERATIONAL AND FINANCIAL HIGHLIGHTS 2000-2004
10 BUSINESS AND CORPORATE SERVICES
12 CARRIER AND OPERATOR SERVICES
14 CONSUMER INTERNET AND MOBILE SERVICES
16 BOARD OF DIRECTOR'S
18 KEY MANAGEMENT
20 FINANCIAL REVIEW
21 Selected Financial Data
23 Management's Discussion and Analysis of Financial Condition and Results of Operations
45 Report of Independent Registered Public Accounting Firm
46 Consolidated Balance Sheets
48 Consolidated Statements of Operations
49 Consolidated Statements of Cash Flows
50 Consolidated Statements of Shareholders' Equity
51 Notes to Consolidated Financial Statements
84 Management's Report on Internal Control over Financial Reporting and Report of Independent
Registered Public Accounting Firm
01 GOLDEN TELECOM INC. Annual Report 2004
THE GOLDEN RULES
AT GOLDEN TELECOM, WE STRIVE TO CREATE AND MAINTAIN A CULTURE THAT REPRESENTS
THE SHARED VALUES OF OUR CUSTOMERS, SHAREHOLDERS, AND EMPLOYEES. THE FOLLOWING
"GOLDEN RULES" REFLECT THE VALUES THAT GOVERN OUR DAILY OPERATIONS COMPANY WIDE:
o We operate our business honestly and professionally.
o We encourage open communications with our customers and partners based on
trustworthiness and respect. We believe that prudent investment in long term
mutually profitable relationships with our customers and our partners is a
key component to the success of our company.
o Our constant goal is to establish and maintain a stable and dynamic business
environment as a foundation for long term development and growth. To achieve
this goal, we focus on the current and future needs of our customers,
maintain financial discipline to create value for our shareholders and
commit to the highest level of professional development in our workforce.
o We provide a work environment in which entrepreneurial and innovative
behaviour, teamwork, and excellence are rewarded.
o We are respectful of the communities and the environment in which we
operate.
o We acknowledge that we are dependent upon the successful development of the
communities where we operate for our own current and future success.
o We are passionately committed to our customers, shareholders, employees and
partners.
02 GOLDEN TELECOM INC. Annual Report 2004
CHAIRMAN'S LETTER TO SHAREHOLDERS
Phenomenal Five
(PHOTO OF PETR AVEN)
Dear Shareholders,
THE THEME OF THIS REPORT - THE NEXT LEVEL - SIGNIFIES THE VISION OF GOLDEN
TELECOM'S LEADERSHIP AFTER WRAPPING-UP FIVE PHENOMENAL YEARS OF PERFORMANCE AS A
PUBLICLY TRADED COMPANY WITH FINANCIAL AND OPERATIONAL RESULTS INCREASING ACROSS
THE BOARD.
A determined management team with a clear and united mission propelled our
company to a top position as the leading independent telecommunications provider
in Russia, with 22 percent of the country's market share and a noteworthy
presence in the Ukraine and the Commonwealth of Independent States (CIS).
The past five years were not without challenges and presented an uphill climb
for company management navigating an ever changing, emerging market in Russia
and the CIS. We reached the summit of a historic Golden Telecom milestone this
past fall, when key management opened the morning trading on the NASDAQ National
Market in New York. This served as a testament to the company's performance and
also elevated Golden Telecom's standing as a corporate leader in Russia and the
Russian telecommunications sector. This type of recognition speaks volumes about
our past successes and sets the stage for The Next Level of the company's
development.
While continued growth and creating shareholder value remain top priorities for
Golden Telecom's management, board members, and employees, instilling confidence
in investors that company leaders act with integrity takes precedence. Through
strong corporate governance and a commitment to financial transparency, Golden
Telecom produces operational and financial results you can trust.
Along with you, our shareholders, we look forward to ascending new summits,
overcoming future challenges and celebrating significant milestones as Golden
Telecom reaches The Next Level.
Sincerely,
/s/ PETR AVEN
PETR AVEN
Chairman, Board of Directors
GOLDEN TELECOM, INC.
03 GOLDEN TELECOM INC. Annual Report 2004
FINANCIAL PERFORMANCE
For the year ended December 31,
US$ millions (except per share data) 2004 2003 Changes %
-------------------------------------------------------------------------------------------------------------
FINANCIAL RESULTS
Revenues* 584.0 360.5 +62.0
Income from operations 95.5 69.7 +37.0
Net income 64.8 55.4 +17.0
Net income per share - diluted 1.77 1.90 -6.8
Weighted average shares - diluted 36.6 29.1 +25.8
Purchases of property, plant and equipment and intangible assets 114.6 63.7 +79.9
Cash spent on acquisitions, net of cash acquired 15.5 12.3 +26.0
-------------------------------------------------------------------------------------------------------------
As of December 31,
FINANCIAL POSITION
Total assets 805.8 729.2 +10.5
Total debt and capital leases, including current portion 4.0 8.0 -50.0
Shareholders' equity 626.4 584.3 +7.2
-------------------------------------------------------------------------------------------------------------
2004 2003
US$ HIGH LOW High Low
------------------------------------------------------------------------------------
CLOSING PRICES PER SHARE
First quarter 36.63 28.24 15.19 12.27
Second quarter 35.93 22.77 24.50 14.58
Third quarter 30.97 23.61 32.76 22.50
Fourth quarter 31.45 25.94 30.11 25.18
------------------------------------------------------------------------------------
TOTAL REVENUE* US$m
2001-2004
(BAR CHART)
2001 2002 2003 2004
140.0 198.7 360.5 584.0
REVENUE PER DIVISION* US$m
2004
(PIE CHART)
Mobile Services 15.8
Consumer Internet Services 45.5
Business and Corporate Services 197.9
Carrier and Operator Services 324.8
* Amounts above are net of eliminations, equity ventures and affiliate
adjustments. On pages 3 through 15, "Revenues" and "Income (loss) from
operations" exclude equity method ventures that are included in the business
segment information presented in Note 14 to the Consolidated Financial
Statements.
04 GOLDEN TELECOM INC. Annual Report 2004
REPORT FROM THE PRESIDENT
The Next Level
(PHOTO OF PRESIDENT)
Dear Valued Shareholder,
FEW COMPANIES ACHIEVE THE LEVEL OF SUCCESS GOLDEN TELECOM REACHED IN 2004. IN
OUR MOST IMPRESSIVE YEAR TO DATE, THE COMPANY REPORTED $584 MILLION IN ANNUAL
REVENUES, UP 62 PERCENT OVER 2003; $95.5 MILLION IN OPERATING INCOME, UP 37
PERCENT OVER 2003; AND $64.8 MILLION IN NET INCOME, UP 17 PERCENT OVER 2003.
05 GOLDEN TELECOM INC. Annual Report 2004 Report from the President
Golden Telecom's financial performance in 2004 rounded out five years of solid
performance as a publicly traded company on the NASDAQ National Market, marking
a milestone event for the company and setting the stage for The Next Level of
success.
Not only did Golden Telecom achieve outstanding operational and financial
results, we also revised the company's vision to reflect the values of our
customers, employees, and you - our shareholders. Highlighted at the beginning
of this report, the "Golden Rules" deserve significant attention as they define
our corporate culture and help shape the company's future. With these principles
in mind, the Golden Telecom team continually strives to take our business to The
Next Level in terms of geographic and operational scope, innovative technology,
financial transparency, service, strategic partnerships, and our workforce.
As the No. 1 independent telecommunications operator in Moscow, Kiev, and Nizhny
Novgorod, Golden Telecom currently serves more than 250 of the top 500 companies
operating in Russia in terms of revenue size, and maintains the widest
geographic reach among independent operators in Russia. Poised for The Next
Level of growth and technology, the Russian telecommunications market looks much
different today than when Golden Telecom first entered the public domain five
years ago. However, this ever-changing telecommunications landscape offers many
opportunities for Golden Telecom as we explore ways to increase penetration
levels across the fixed line telecommunications and Internet spectrum.
From an operational standpoint, Golden Telecom is reaching higher by
strengthening our core business of serving corporate customers through fixed
line voice and data networks, as well as taking our wholesale business to a new
level with further development of carrier and operator services. In addition,
our Internet business offers exponential growth opportunities as the fledgling
market gains momentum in Russia. The right combination of these lines of
businesses and an active mergers and acquisitions program throughout 2004 helped
Golden Telecom diversify revenue streams, improve profitability, and continue
gaining critical mass in regional markets.
As we carry forward our operational strategy of steady, regional growth in each
line of business, Golden Telecom has a responsibility to maintain the highest
standards of financial transparency and reporting. Continuing to build upon the
solid foundation laid by senior management over the past five years, the company
appointed two new executive officers in 2004, Michal Cupa as Chief Operating
Officer and Brian Rich as Chief Financial Officer. In the beginning of 2005, we
also brought in a new General Counsel and Corporate Secretary, Derek Bloom. The
combined leadership of our new and veteran executives is helping drive Golden
Telecom to The Next Level in 2005 and beyond.
Although Golden Telecom's accomplishments throughout 2004 were impressive, the
highlight of the year came not as a result of the previous 12 months'
performance, but from Golden Telecom's collective progress over the past five
years. In late September, the company celebrated its fifth year as a publicly
traded company on the NASDAQ National Market in New York. The opening buzzer
marked the start of that day's trading for NASDAQ brokers, but for Golden
Telecom's executives it symbolized the beginning of a new era for our company,
its employees, and its shareholders as we reach for the next plateau.
Our past achievements combine to create a solid foundation, which allows us to
set higher goals, meet higher standards, and potentially reap higher rewards. As
your CEO, I look forward to leading the company to achieve The Next Level of
success in the years ahead with the support of an outstanding executive team,
board of directors, and employees. We appreciate your support and hope you will
continue investing in Golden Telecom's future.
Sincerely,
/s/ ALEXANDER VINOGRADOV
ALEXANDER VINOGRADOV
Chief Executive Officer
GOLDEN TELECOM, INC.
06 GOLDEN TELECOM INC. Annual Report 2004
OPERATIONAL AND
FINANCIAL HIGHLIGHTS 2000-2004
Five-year Climb to the Top
THE FOUNDATION SUPPORTING GOLDEN TELECOM FOR THE NEXT LEVEL WAS CAREFULLY BUILT
BY STRONG LEADERS AND DEDICATED EMPLOYEES.
IN THIS REVIEW, GOLDEN TELECOM REMEMBERS THE MILESTONES AND ACCOMPLISHMENTS OF
FIVE PHENOMENAL YEARS.
2000
o Establishes direct connection to broadband Internet and data networks in
Europe and the United States
o Acquires outstanding interests in Sovam Teleport Kiev
o Acquires 51 percent of Commercial Information Networks, the largest ISP in
Nizhny Novgorod
o Trades its Russian mobile assets for 24 percent stake in MCT Corp.
o Signs supply agreement with Cisco Systems, acquiring equipment for Internet
Protocol network
o Collaborates with Russia's Alfa Bank on Internet payment systems and banking
services
o Opens Internet data center in Moscow, providing Internet hosting services to
local businesses
o Launches Web-enabled call center for online customer care and technical
support
o Acquires leading horizontal Russian and English language portal, IT INFOART
STARS
o Acquires Agama family of Russian Web properties, including top-ranked search
engine Aport
2001
o Majority of Golden Telecom (GLDN) shares sold to consortium led by Alfa
Group
o Acquires Moscow-based ISP Cityline, with operations in St. Petersburg,
Nizhny Novgorod, Tyumen, and Kaliningrad
o Acquires 51 percent stake in Ekaterinburg-based ISP Uralrelcom
o Acquires 51 percent stake in Nizhny Novgorod-based Agentstvo Delovoi Svyazi
(ADS)
2002
o Acquires remaining 50 percent stake in Sovintel
o Becomes Russia's third largest alternative Internet and data provider, by
consolidating businesses in Nizhny Novgorod
2003
o Begins operating Sovintel under Golden Telecom brand
o Tapped as primary communications provider for President Vladimir Putin's
consumer hotline, the company's call center operators delivered a record,
1.6 million questions to the Russian president
o Acquires 100 percent of SibChallenge Telecom in Krasnoyarsk
o Acquires 100 percent of Comincom & Combellga
o Partners with VimpelCom to build a fiber optic cable spanning from Moscow to
Ufa
o Builds backbone network in St. Petersburg
07 GOLDEN TELECOM INC. Annual Report 2004 Operational and Financial
Highlights 2000-2004
MAKING CONNECTIONS
Golden Telecom's 2004 Network Coverage
(MAP OF NETWORK COVERAGE)
2004
o ACQUIRES 62 PERCENT OF WESTBALT TELECOM IN KALININGRAD
o ACQUIRES 54 PERCENT OF BUZTON IN UZBEKISTAN
o ACQUIRES 50 PERCENT PLUS 1 SHARE OF SAMARA TELECOM IN SAMARA
o PAYS FIRST DIVIDEND IN FIRST QUARTER AND THREE MORE THROUGHOUT THE YEAR
o COMPLETES OPERATIONAL MERGER OF COMINCOM AND COMBELLGA INTO SOVINTEL
o CELEBRATES FIVE YEARS OF SUCCESS ON NASDAQ
o HONORED AS "THE COMPANY MAKING THE MOST SIGNIFICANT CONTRIBUTION TO THE
DEVELOPMENT OF THE RUSSIAN INTERNET"
08 GOLDEN TELECOM INC. Annual Report 2004 Operational and Financial
Highlights 2000-2004
1999-2004
(PHOTO OF BUILDINGS)
09 GOLDEN TELECOM INC. Annual Report 2004 Operational and Financial
Highlights 2000-2004
For the year ended December 31,
US$ millions (except per share data) 2000 2001 2002 2003 2004
---------------------------------------------------------------------------------------------------------------------------
FINANCIAL RESULTS
Revenues 113.1 140.0 198.7 360.5 584.0
Income (loss) from operations (15.1) (45.3) 31.4 69.7 95.5
Net income (loss) (10.3) (39.0) 29.8 55.4 64.8
Net income (loss) per share - diluted (0.43) (1.65) 1.21 1.90 1.77
Weighted average shares - diluted 24.1 23.6 24.5 29.1 36.6
Purchases of property, plant and equipment 37.1 27.9 29.4 63.7 114.6
and intangible assets
Cash paid for acquisitions, net of cash acquired 24.3 33.4 51.2 12.3 15.5
---------------------------------------------------------------------------------------------------------------------------
As of December 31,
FINANCIAL POSITION
Total assets 348.5 300.4 435.8 729.2 805.8
Total debt and capital leases, including current portion 12.7 22.2 40.5 8.0 4.0
Shareholders' equity 287.2 224.9 311.5 584.3 626.4
---------------------------------------------------------------------------------------------------------------------------
SHARE PRICE 1999-2004
(LINE CHART)
As of March 8, 2005, there were approximately 17 holders of record of our common
stock.
10 GOLDEN TELECOM INC. Annual Report 2004
BUSINESS AND
CORPORATE SERVICES
Reaching Higher
(BACKGROUND PHOTO)
BUSINESS AND CORPORATE SERVICES
REVENUE 2003-2004
UP 72%
11 GOLDEN TELECOM INC. Annual Report 2004 Business and Corporate Services
REVENUE US$m
BUSINESS AND CORPORATE SERVICES
2001 2002 2003 2004
54.1 91.7 188.9 324.8
GOLDEN TELECOM'S BUSINESS AND CORPORATE SERVICES DIVISION REACHES HIGHER BY
OPENING LINES OF COMMUNICATION BETWEEN THE RUSSIAN GOVERNMENT AND ITS CITIZENS.
(PHOTO OF WORKERS IN OFFICE)
ON DECEMBER 1, 2004, GOLDEN TELECOM'S CALL CENTER BEGAN OPERATING A
GOVERNMENT-SPONSORED HOTLINE, ANSWERING RUSSIAN CITIZEN'S QUESTIONS REGARDING
NEW SOCIAL ASSISTANCE PROGRAMS, GRANTED UNDER PUBLIC FEDERAL LAW NO. 122.
THROUGHOUT THE MONTH, NEARLY 60 GOLDEN TELECOM OPERATORS AND THE RUSSIAN
FEDERATION MINISTRY OF HEALTH AND PENSION FUND EXPERTS FIELDED QUESTIONS WITH
GOLDEN TELECOM OPERATORS PROCESSING NEARLY 11,000 CALLS DURING THE FIRST TWO
DAYS. IN 2005, GOLDEN TELECOM CONTINUED REACHING OUT TO RUSSIAN COMMUNITIES, AS
THE PROJECT LASTED THROUGH MARCH.
GOLDEN TELECOM PLACES A PREMIUM ON GIVING BACK, NOT ONLY TO THE COMMUNITIES
WHERE IT OPERATES, BUT PRIMARILY, TO ITS SHAREHOLDERS. AS THE COMPANY'S MOST
PROFITABLE AND ESTABLISHED DIVISION, BUSINESS AND CORPORATE SERVICES CONTRIBUTED
$324.8 MILLION TO 2004 REVENUE, UP 72 PERCENT OVER 2003 AND $72.3 MILLION TO
2004 OPERATING INCOME, UP 52 PERCENT OVER 2003.
IN 2004, BUSINESS AND CORPORATE SERVICES SIGNED AGREEMENTS WITH 99 NEW
MULTI-TENANT BUSINESS CENTERS AND 10 TRADE CENTERS, OCCUPYING A COMBINED 1
MILLION SQUARE METERS OF OFFICE SPACE IN THE COMPANY'S NO.1 MARKET, MOSCOW. IN
ADDITION TO ACQUIRING MORE THAN 9,000 NEW CORPORATE CLIENTS IN MOSCOW, BUSINESS
AND CORPORATE SERVICES EXPERIENCED SIGNIFICANT GROWTH AMONG EXISTING CUSTOMERS,
WITH MORE THAN 60 PERCENT OF NEW INSTALLATIONS GENERATING FROM EXISTING BUSINESS
CUSTOMERS.
GOLDEN TELECOM'S BUSINESS AND CORPORATE SERVICES DIVISION OPERATES A NUMBER OF
COMPETITIVE LOCAL EXCHANGE CARRIERS (CLECS) THAT OWN AND OPERATE A FULLY-DIGITAL
OVERLAY NETWORK SERVING MOST OF RUSSIA'S MAJOR POPULATION CENTERS INCLUDING ST.
PETERSBURG, ARKHANGELSK, KHABAROVSK, IRKUTSK, VORONEZH, EKATERINBURG,
VLADIVOSTOK, AND UFA. THE BUSINESS AND CORPORATE SERVICES DIVISION OFFERS A
LARGE RANGE OF TELECOMMUNICATION SERVICES INCLUDING NETWORK ACCESS, HARDWARE AND
SOFTWARE SOLUTIONS, WITH INSTALLATION, CONFIGURATION, AND MAINTENANCE SUPPORT.
12 GOLDEN TELECOM INC. Annual Report 2004
CARRIER AND
OPERATOR SERVICES
Whole New Level in Wholesale
GOLDEN TELECOM'S CARRIER AND OPERATOR SERVICES DIVISION, A WHOLESALE PROVIDER OF
VOICE, DATA, AND INTERNET SERVICES TO TELECOMMUNICATIONS OPERATORS, REACHED A
WHOLE NEW LEVEL OF SUCCESS IN 2004, REPORTING ANNUAL REVENUE OF $198.9 MILLION,
A 55 PERCENT INCREASE OVER 2003 AND OPERATING INCOME OF $28.2 MILLION, AN 8
PERCENT INCREASE OVER 2003.
(PHOTO OF WORKPLACE)
INVESTMENTS IN SAMARA TELECOM, WESTBALT TELECOM AND BUZTON, AS WELL AS THE
COMPLETION OF THE COMPANY'S INTEGRATION WITH COMINCOM AND COMBELLGA LARGELY
CONTRIBUTED TO THE DIVISION'S SUCCESS, EXPANDING ITS NETWORK AND PROVIDING KEY
REGIONAL CAPACITY.
GOLDEN TELECOM'S INTEGRATION OF ITS SOVINTEL SUBSIDIARY WITH COMINCOM AND
COMBELLGA ESTABLISHED A STRONG WHOLESALE AND RETAIL PRESENCE IN THE CENTRAL,
NORTHERN, SOUTHERN-EUROPEAN, AND URAL REGIONS OF RUSSIA. IN 2004, GOLDEN TELECOM
SUCCESSFULLY EXPANDED ITS REGIONAL PRESENCE AND PLANS TO CONTINUE INCREASING ITS
MARKET SHARE IN SMALLER AREAS THROUGHOUT 2005.
CONNECTING BUSINESSES AND PEOPLE ACROSS DIVERSE REGIONS AND MULTIPLE TIME ZONES
DEMANDS EXTENSIVE INFRASTRUCTURE, AND GOLDEN TELECOM'S NEXT LEVEL OF SERVICE TO
ITS CUSTOMERS IS THE CONSTRUCTION OF A FIBER OPTIC CABLE EXTENDING FROM MOSCOW,
THE COMPANY'S NO.1 MARKET, TO UFA, THROUGH NIZHNY NOVGOROD AND KAZAN. WITH THE
FIRST PHASE OF THE PROJECT COMPLETED IN 2004, THE CABLE CURRENTLY REACHES AS FAR
AS KAZAN. ONCE FINISHED IN 2005, THIS CABLE WILL STRETCH MORE THAN 500 MILES
ALONG THE COMPANY'S BUSIEST TRAFFIC ROUTE.
GOLDEN TELECOM'S CARRIER AND OPERATOR SERVICES DIVISION NOT ONLY LINKS RUSSIA'S
TELECOMMUNICATIONS PROVIDERS WITH THEIR CLIENTS, BUT IT ALSO PROVIDES
INTERNATIONAL BUSINESSES WITH A PASSPORT TO RUSSIA AND THE CIS THROUGH
RELATIONSHIPS WITH GLOBAL CARRIERS. THESE RE-MARKETER AGREEMENTS SUPPLY GLOBAL
TELECOMMUNICATIONS COMPANIES WITH ACCESS TO GOLDEN TELECOM'S NETWORK FOR DATA
AND VOICE SERVICES AND CONNECT THE WORLD TO MORE THAN 200 CITIES IN RUSSIA AND
THE CIS.
13 GOLDEN TELECOM INC. Annual Report 2004 Carrier and Operator Services
REVENUE US$m
CARRIER AND OPERATOR SERVICES
2001 2002 2003 2004
58.5 73.9 128.5 198.9
(BACKGROUND PHOTO)
SECURING RUSSIA'S FINANCIAL COMMUNITY IN 2004, GOLDEN TELECOM HELPED IMPROVE
SECURITY OVER ELECTRONIC INFORMATION FOR NEARLY 140 FINANCIAL INSTITUTIONS IN
RUSSIA AND THE CIS, BY CONNECTING THEM TO THE SOCIETY FOR WORLDWIDE INTERBANK
FINANCIAL TELECOMMUNICATION'S (SWIFT) SECURED INTERNET PRIVATE NETWORK (SIPN)
THROUGH ITS RELATIONSHIP WITH A GLOBAL TELECOMMUNICATIONS CARRIER.
SWIFT, AN INDUSTRY-OWNED COOPERATIVE SUPPLYING SECURE, STANDARDIZED MESSAGING
SERVICES AND INTERFACE SOFTWARE TO 7,500 FINANCIAL INSTITUTIONS IN 200
COUNTRIES, PROVIDES A STANDARDIZED PLATFORM FOR EXCHANGING SECURE, RELIABLE
MESSAGES BETWEEN FINANCIAL INSTITUTIONS. THE SWIFT COMMUNITY INCLUDES BANKS,
BROKER/DEALERS, INVESTMENT MANAGERS, AND OTHER INFRASTRUCTURES INCLUDING
PAYMENTS, SECURITIES, TREASURY AND TRADE.
CARRIER AND OPERATOR SERVICES
REVENUE 2003-2004
UP 55%
14 GOLDEN TELECOM INC. Annual Report 2004
CONSUMER INTERNET
AND MOBILE SERVICES
Pioneering Russia's eFrontier
CONSUMER INTERNET SERVICES
REVENUE 2003-2004
UP 48%
(PHOTO OF CUSTOMER SERVICE)
IN NOVEMBER 2004, THE RUSSIAN FEDERATION CELEBRATED THE 10TH ANNIVERSARY OF THE
RUSSIAN INTERNET (RUNET). AS PART OF THIS MILESTONE EVENT, GOLDEN TELECOM WAS
RECOGNIZED AS "THE COMPANY MAKING THE MOST SIGNIFICANT CONTRIBUTION TO THE
DEVELOPMENT OF THE RUSSIAN INTERNET." DRAMATIC IMPROVEMENTS IN INTERNET
INFRASTRUCTURE AND INCREASES IN ACTIVITY OVER THE PAST DECADE HAVE MADE RUSSIA'S
DOMAIN ZONE "RU" ONE OF THE WORLD'S MOST ACTIVELY DEVELOPING TWO-LETTER DOMAIN
ZONES.
15 GOLDEN TELECOM INC. Annual Report 2004 Consumer Internet and
Mobile Services
REVENUE US$m
CONSUMER INTERNET SERVICES
2001 2002 2003 2004
13.8 21.8 30.8 45.5
REVENUE US$m
MOBILE SERVICES
2001 2002 2003 2004
14.4 13.0 13.9 15.8
(BACKGROUND PHOTO)
MOBILE SERVICES
REVENUE 2003-2004
UP 14%
AS A PIONEER OF THE RUSSIAN EFRONTIER, GOLDEN TELECOM'S CONSUMER INTERNET
DIVISION CONTRIBUTED $45.5 MILLION TO 2004 ANNUAL REVENUE, UP 48 PERCENT OVER
2003 AND $2.2 MILLION IN OPERATING INCOME, A $4.5 MILLION CHANGE FROM A $2.3
MILLION LOSS IN 2003.
GOLDEN TELECOM OFFERS CONSUMER INTERNET SERVICES ACROSS RUSSIA, KAZAKHSTAN, AND
UZBEKISTAN THROUGH ITS BRAND ROL, AND IN THE UKRAINE THROUGH SVIT-ON-LINE.
SERVICES ARE PRIMARILY PROVIDED THROUGH DIAL-UP INTERNET, IN ECONOMICALLY VIABLE
URBAN AREAS THROUGH SALES OF PRE-PAID USAGE CARDS. AS OF DECEMBER 2004, ROL AND
SVIT-ON-LINE WERE AVAILABLE AT MORE THAN 13,000 POINTS-OF-SALE THROUGHOUT THE
COMPANY'S COVERAGE AREA. GOLDEN TELECOM ALSO PROVIDES ATTRACTIVE ALTERNATIVE
SERVICES TO DIAL-UP INTERNET INCLUDING ASYMMETRIC DIGITAL SUBSCRIBER LINE (ADSL)
SERVICES IN AREAS SUCH AS ST. PETERSBURG, NIZHNY NOVGOROD, AND ROSTOV-ON-DON.
AS A FOUNDING FORCE IN RUSSIA'S DEVELOPING CONSUMER INTERNET MARKETPLACE, GOLDEN
TELECOM TAKES ITS COMMITMENT TO LEADING RUSSIA AND THE COUNTRIES OF THE CIS TO
THE NEXT LEVEL OF INNOVATION IN TELECOMMUNICATIONS SERIOUSLY. THE COMPANY
CONTINUES TO IMPLEMENT NEW CONSUMER INTERNET TECHNOLOGIES AND IS CURRENTLY
TESTING AND PUTTING INTO SERVICE A RANGE OF PRODUCTS FOR CONSUMERS FROM
BROADBAND PRODUCTS TO WIRELESS INTERNET.
IN ADDITION, GOLDEN TELECOM'S CONSUMER MOBILE SERVICES DIVISION COVERS A
POPULATION AREA OF OVER 4.6 MILLION PEOPLE THROUGH ITS CELLULAR NETWORK IN THE
UKRAINE. GOLDEN TELECOM'S MOBILE SERVICES DIVISION CONTRIBUTED $15.8 MILLION TO
2004 ANNUAL REVENUE, UP 14 PERCENT OVER 2003. GOLDEN TELECOM INCREASED ITS
MOBILE SUBSCRIBER BASE AT YEAR-END 2004 TO 57,490, UP 44 PERCENT OVER YEAR-END
SUBSCRIBERS IN 2003.
16 GOLDEN TELECOM INC. Annual Report 2004
BOARD OF DIRECTORS
Take it from the Top
PETR AVEN
Alfa Bank, President
GOLDEN TELECOM, INC.
Board of Directors, Chairman
Nominating and Corporate Governance Committee, Chairman
ALEXANDER VINOGRADOV
Golden Telecom, Inc., President and
Chief Executive Officer
GOLDEN TELECOM, INC.
Executive Committee Member
MICHAEL CALVEY
Baring Vostok Capital Partners, Co-Managing Partner
Baring Private Equity Partners Limited, Senior Partner
GOLDEN TELECOM, INC.
Audit Committee Member
Executive Committee Member
Nominating and Corporate Governance
Committee Member
JAN THYGESEN
Telenor Networks, Executive Vice President
Telenor Nordic Mobile, Chief Executive Officer
MICHAEL NORTH
Eurokapital Verwaltungs GmbH, Managing Director
GOLDEN TELECOM, INC.
Compensation Committee Member
ASHLEY DUNSTER
Capital Research International, Inc., Vice President
GOLDEN TELECOM, INC.
Audit Committee Member
Nominating and Corporate Governance
Committee Member
ANDREY KOSOGOV
Alfa Bank, First Deputy Chairman of the Executive Board
GOLDEN TELECOM, INC.
Compensation Committee, Chairman
Executive Committee Member
KJELL JOHNSEN
Telenor Networks, Vice President
GOLDEN TELECOM, INC.
Executive Committee, Chairman
Compensation Committee Member
Nominating and Corporate Governance
Committee Member
DAVID HERMAN
General Motors, Russia and the Commonwealth of
Independent States, Former Vice President (Retired)
GOLDEN TELECOM, INC.
Audit Committee, Chairman
Compensation Committee Member
VLADIMIR ANDROSIK
Svyazinvest, Advisor to General Director
17 GOLDEN TELECOM INC. Annual Report 2004 Board of Directors
Left column: (PHOTO OF DIRECTORS)
PETR AVEN
ALEXANDER VINOGRADOV
MICHAEL CALVEY
JAN THYGESEN
MICHAEL NORTH
Right column:
ASHLEY DUNSTER
ANDREY KOSOGOV
KJELL JOHNSEN
DAVID HERMAN
VLADIMIR ANDROSIK
18 GOLDEN TELECOM INC. Annual Report 2004
KEY MANAGEMENT
Leading the Way
ALEXANDER VINOGRADOV
PRESIDENT, CHIEF EXECUTIVE OFFICER
With more than 20 years of telecommunications industry experience, Alexander
Vinogradov is President and Chief Executive Officer of Golden Telecom, Inc. and
has served as a member of its Board of Directors since November 2001. Under his
leadership, the company became the No.1 independent telecommunications operator
in Moscow, Kiev, and Nizhny Novgorod. Prior to his role as Chief Executive
Officer, Mr. Vinogradov held a number of management positions with Golden
Telecom's subsidiary Sovintel. Prior to working with Sovintel and during the
first half of his career, Mr. Vinogradov worked for the Main Center for
Management of Long-Distance Communications of the USSR, where he lead numerous
commercial and technical development programs. Mr. Vinogradov holds a degree
from the Moscow Telecommunications Institute. In 2003, Mr. Vinogradov was
honored with the distinction of "Master of Communications of the Russian
Federation" by the Russian Ministry of Communications for his long-standing
telecommunications service, leadership, and expertise.
MICHAL CUPA
SENIOR VICE PRESIDENT, CHIEF OPERATING OFFICER
Michal Cupa joined Golden Telecom, Inc. as Chief Operating Officer in February
2004, bringing nearly 15 years of telecommunications experience to the company.
From 1999 to 2004, Mr. Cupa served as Chief Executive Officer of Contactel, an
alternative telecommunications operator in the Czech Republic. Prior to his role
at Contactel, Mr. Cupa held a number of leadership positions with Prague-based
telecommunications provider Cesky Telecom including Head of Strategy and Policy,
Director of Network Development, Chief Operating Officer, and Executive Vice
President for Networks and Value Added Services. Mr. Cupa holds a Master's in
Business Administration from the University of Chicago in Barcelona, Spain, a
Master's in Business Telecommunications from the Delft University of Technology
in the Netherlands, and a Master's in Telecommunications Technology from the
Czech Technical University in Prague.
BRIAN RICH
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
With more than 10 years of experience in emerging markets including the Middle
East, East Asia, South and Central America, and India, Brian Rich is the Chief
Financial Officer of Golden Telecom, Inc. Before joining Golden Telecom in
August 2004, Mr. Rich worked for an Atlanta-based independent power provider,
Mirant Corp., serving as the CFO of its profitable international business unit
headquartered in Hong Kong. Prior to his role as CFO of the international group,
Mr. Rich lead a number of mergers and acquisitions in North and South America
for Mirant Corp., which was formerly known as Southern Energy, Inc. before
spinning-off from its parent, Southern Company, in an initial public offering.
From 1996 to 1998, upon appointment by the Governor of the State of Alabama, Mr.
Rich served as Assistant Director of Finance and Deputy Attorney General for the
State. Mr. Rich holds a Bachelor's degree and a Juris Doctor degree from,
respectively, Tulane University and Tulane University Law School.
DEREK BLOOM
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY
With an extensive background of advising businesses in Russia on legal matters,
Derek Bloom is the General Counsel and Corporate Secretary of Golden Telecom,
Inc. Before joining Golden Telecom in February 2005, Mr. Bloom was a partner
with Coudert Brothers, practicing law in both Moscow and St. Petersburg for
nearly 10 years. While with Coudert Brothers, Mr. Bloom specialized in a variety
of in-bound investments in Russia including secured lending, joint ventures, and
financial leasing transactions. Mr. Bloom's leadership experience includes
coordinating a consortium of advisers to the Russian Federal Commission for the
Securities Market, which wrote Russia's Corporate Governance Code. Before coming
to Moscow in 1995, Mr. Bloom practiced United States securities law as a partner
with Elias, Mate, Tiernan & Herrick, a Washington, DC based law firm. Mr. Bloom
holds a Bachelor's degree and a Juris Doctor degree from Brown University and
Boston University School of Law, respectively. Additionally, Mr. Bloom holds a
LLM in taxation from the Georgetown University Law Center.
OLEG MALIS
SENIOR VICE PRESIDENT, DIRECTOR OF MERGERS AND ACQUISITIONS
Oleg Malis is the Director of Mergers and Acquisitions for Golden Telecom, Inc.
In this role, Mr. Malis led Golden Telecom's recent mergers and acquisitions,
including the purchases of Comincom and Combellga, SibChallenge Telecom, 62
percent of WestBalt Telecom, 54 percent of Buzton, and 50 percent plus 1 of
share of Samara Telecom. Prior to joining Golden Telecom in 2001, Mr. Malis
founded ZAO Investelectrosvyaz and ZAO Corbina which provided mobile
telecommunications related services in Russia. Mr. Malis holds a degree from
Moscow State Aviation Technological University in Systems Engineering.
19 GOLDEN TELECOM INC. Annual Report 2004 Key Management
From left to right:
MICHAL CUPA
Senior Vice President,
Chief Operating Officer
DEREK BLOOM (PHOTO OF MANAGEMENT)
Senior Vice President,
General Counsel and
Corporate Secretary
ALEXANDER VINOGRADOV
President,
Chief Executive Officer
BRIAN RICH
Senior Vice President,
Chief Financial Officer
OLEG MALIS
Senior Vice President,
Director of Mergers and Acquisitions
20 GOLDEN TELECOM INC. Annual Report 2004
FINANCIAL REVIEW
21 SELECTED FINANCIAL DATA
23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
45 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
46 CONSOLIDATED BALANCE SHEETS
as of December 31, 2003 and 2004
48 CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2002, 2003 and 2004
49 CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2002, 2003 and 2004
50 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 2002, 2003 and 2004
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
76 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
21 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data at December
31, 2000, 2001, 2002, 2003 and 2004, and for all of the years presented are
derived from consolidated financial statements of Golden Telecom, Inc. which
have been audited by Ernst & Young (CIS) Limited, independent auditors.
The data should be read in conjunction with the consolidated financial
statements, related notes, and other financial information included in this
document.
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ 113,089 $ 140,038 $ 198,727 $ 360,534 $ 583,978
Cost of revenues (excluding depreciation and amortization) 50,954 63,685 91,189 181,085 300,588
Gross margin 62,135 76,353 107,538 179,449 283,390
Selling, general and administrative (excluding depreciation
and amortization) 45,420 48,935 46,147 64,384 112,855
Depreciation and amortization 31,851 41,398 29,961 45,334 74,999
Impairment charge -- 31,291 -- -- --
Income (loss) from continuing operations (15,136) (45,271) 31,430 69,731 95,536
Equity in earnings (losses) of ventures (285) 8,155 4,375 4,687 278
Interest income (expense), net 7,126 777 (667) (872) 559
Foreign currency gain (loss) (390) (647) (1,174) (232) 660
Other non-operating expense (148) -- -- -- --
Minority interest (431) (117) (527) (480) (1,506)
Provision for income taxes 990 1,902 4,627 17,399 30,744
Net income (loss) before cumulative effect of change in
accounting principle (10,254) (39,005) 28,810 55,435 64,783
Cumulative effect of change in accounting principle -- -- 974 -- --
Net income (loss) (10,254) (39,005) 29,784 55,435 64,783
Income (loss) from continuing operations per share - basic (0.63) (1.92) 1.30 2.45 2.64
Net income (loss) per share before cumulative effect of change
in accounting principle - basic (0.43) (1.65) 1.20 1.20 1.79
Cumulative effect of change in accounting principle -- -- 0.04 0.04 --
Net income (loss) per share - basic (0.43) (1.65) 1.24 1.95 1.79
Weighted average shares - basic 24,096 23,605 24,102 28,468 36,226
Income (loss) from continuing operations per share - diluted (0.63) (1.92) 1.28 2.40 2.61
Net income (loss) per share before cumulative effect of change
in accounting principle - diluted (0.43) (1.65) 1.17 1.90 1.77
Cumulative effect of change in accounting principle -- -- 0.04 -- --
Net income (loss) per share - diluted (0.43) (1.65) 1.21 1.90 1.77
Weighted average shares - diluted 24,096 23,605 24,517 29,107 36,553
Cash dividends per common share -- -- -- -- 0.80
22 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
AT DECEMBER 31,
----------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 57,889 $ 37,404 $ 59,625 $ 65,180 $ 53,699
Investments available for sale 54,344 8,976 -- -- --
Property and equipment, net 82,377 98,590 166,121 283,110 347,891
Investments in and advances to ventures 49,629 45,981 721 251 742
Goodwill and intangible assets, net 70,045 57,146 127,669 248,843 247,570
Total assets 348,456 300,384 435,810 729,226 805,768
Long-term debt, including long-term capital lease obligations 15,658 10,733 29,732 3,963 1,738
Minority interest 3,337 5,967 2,187 2,722 11,738
Shareholders' equity 287,241 224,892 311,506 584,279 626,381
Refer to note 5 to the Consolidated Financial Statements for descriptions of
recent acquisitions that impact the comparability of financial information.
Other business combinations not disclosed in the footnotes were as follows:
In February 2000, Golden Telecom (Ukraine), acquired 99% of Sovam Teleport
Ukraine, including a 51% interest previously held by third parties. Sovam
Teleport Ukraine is a provider of data and Internet services to Ukraine-based
business. In March 2000, the Company acquired the assets of Referat.ru and
Absolute Games, two leading vertical Internet portals in the education and
computer gaming categories of the Russian Internet. In April 2000, the Company
acquired the assets of Fintek, a prominent Moscow-based Web design studio and
51% of Commercial Information Networks, the largest Internet service provider in
Nizhny Novgorod. In September 2000, SFMT-Rusnet, Inc., a wholly-owned
subsidiary, acquired 25% of SA Telcom LLP, a telecommunications and data
services provider in Kazakhstan, bringing its ownership interest in this company
up to 100%. The combined purchase price was less than $3.0 million in cash.
In October 2000, the Company acquired the assets of IT INFOART STARS, a
leading horizontal Russian and English language Internet portal, for
approximately $8.3 million in cash. In December 2000, the Company acquired Agama
Limited ("Agama") that owns the Agama family of web properties for approximately
$13.1 million in cash and the issuance of 399,872 shares of the Company's common
stock valued at $3.8 million.
In December 2000, the Company acquired an approximately 24% ownership
interest in MCT Corp. in exchange for the Company's 100% ownership of Vostok
Mobile B.V., a Netherlands registered private limited holding company that owned
the Company's Russian mobile operations.
Refer to note 4 to the Consolidated Financial Statements for a description
of the change in method of accounting for goodwill in 2002.
In the third quarter of 2004, management determined that the Company has
been inadvertently carrying accruals for estimated taxes, other than income
taxes. Management concluded these accruals for estimated taxes should have been
considered unnecessary and reversed prior to January 1, 2000. The net effect of
the correction of this non-cash error was to reduce current liabilities and
non-current liabilities by $2.0 million each with an offsetting decrease to
accumulated deficit of $4.0 million in all periods presented. This adjustment
had no effect on the reported results of operations in any of the periods
presented.
23 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
ITEM 7. 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 for each of the years ended December 31, 2004, 2003, and
2002. This discussion should be read in conjunction with the "Selected Financial
Data" and the Company's Consolidated Financial Statements and the notes related
thereto appearing elsewhere in this Report.
OVERVIEW
We are a leading facilities-based provider of integrated telecommunication
and Internet services in major population centers throughout Russia and other
countries of the Commonwealth of Independent States ("CIS"). We offer voice,
data and Internet services to corporations, operators and consumers using our
metropolitan overlay network in major cities including Moscow, Kiev, St.
Petersburg, Nizhny Novgorod, Samara, Kaliningrad, Krasnoyarsk, Almaty, and
Tashkent, and via intercity fiber optic and satellite-based networks, including
approximately 220 combined access points in Russia and other countries of the
CIS. In addition, we offer mobile services in Kiev and Odessa.
We organize our operations into four business segments, as follows:
o BUSINESS AND CORPORATE SERVICES ("BCS"). Using our fiber optic and
satellite-based networks in and between major metropolitan areas of
Russia, Ukraine and other countries of the CIS, we provide business and
corporate services including voice and data services to corporate
clients across all geographical markets and all industry segments, other
than telecommunications operators;
o 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;
o 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, Kazakhstan, and Uzbekistan; and
o MOBILE SERVICES. Using our mobile networks in Kiev and Odessa, Ukraine,
we provide mobile services with value-added features, such as voicemail,
roaming and messaging services on a subscription and prepaid basis.
We intend, wherever possible, to offer all of our integrated
telecommunication services under the Golden Telecom brand, although, some
services still carry local brands because of recent acquisitions. Our dial-up
Internet services are distributed under the ROL brand in Russia, Kazakhstan and
Uzbekistan 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 13 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.
Traditionally, we have 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 dollar ("USD") -
ruble exchange rate, so when the ruble devalues, their prices effectively become
lower in relation to our prices. The ruble exchange rate with the USD has become
relatively stable since early 2000 and appreciated in 2003 and 2004 so price
pressures associated with devaluation have eased considerably. We cannot be
certain that the exchange rate will remain stable in the future and therefore we
may experience additional price pressures.
RECENT ACQUISITIONS
In August 2003, we completed the acquisition of 100% ownership interest in
OOO Sibchallenge ("Sibchallenge"), a telecommunications service provider in
Krasnoyarsk, Russia, for cash consideration of approximately $15.4 million. The
acquisition
24 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
of Sibchallenge establishes our presence in the Krasnoyarsk region. In addition,
Sibchallenge has numbering capacity and interconnect agreements.
In December 2003, we completed the acquisition of 100% of the shares in OAO
Comincom ("Comincom"), and its wholly-owned subsidiary, OAO Combellga
("Combellga") 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 provided telecommunications services,
principally to major hotels, business offices, embassies and mobile
communication companies through its telecommunications network in Russia. As of
December 1, 2004, all assets, liabilities, rights and obligations of Comincom
and Combellga were transferred to Sovintel as part of the legal merger of these
three wholly-owned subsidiaries.
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. In April 2004, we 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. In April 2004, we completed the acquisition of the
remaining 49% ownership interest in OOO Uralrelcom that we did not already own.
In May 2004, we completed the acquisition of a 54% ownership interest in SP
Buzton ("Buzton"), an alternative telecommunications operator in Uzbekistan.
These companies were acquired for approximately $16.0 million in cash, with $1.1
million held in escrow for a period of one year related to Balticom and $0.5
million payable for Buzton upon 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, which together
comprise one of the largest regional alternative operators in Russia. Their
operations are in Rostov-on-Don and the surrounding region. Upon closure, Nodama
will receive $45.0 million in cash of which $5.0 million will be placed in
escrow for a period of one year subject to the achievement of certain financial
conditions. Amounts in the escrow may be used to compensate us in the event of
the realization of certain contingent liabilities in the acquired entities.
While we expected to consummate this transaction in 2004, it has taken the
seller additional time to conclude this transaction. The consummation of the
transaction is conditioned upon, among other things, the completion of
satisfactory due diligence and the seller's fulfilment of certain conditions
precedent. The transaction is expected to close in the first half of 2005.
OTHER DEVELOPMENTS
On January 1, 2004, a new law "On Telecommunications" (the "New Law") came
into effect in Russia. The New Law sets the legal basis for the
telecommunications business in Russia and defines the status that state bodies
have in the telecommunications sector. The New Law was designed to create a new
interconnect pricing regime in 2004 that should be more transparent and unified,
if fairly implemented. However, as of December 31, 2004, this pricing regime has
not been implemented. The New Law also creates a universal service charge
calculated as a percentage of revenue which is not expected to exceed 3% of
certain revenues of a telecommunications company. It is expected that the first
payments of the universal service charge will be made in 2005. The New Law may
increase the regulation of our operations, as it is intended to regulate
licenses for long distance, international long distance and Voice over Internet
Protocol ("VoIP"). 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 March of 2005, we submitted an application for an intercity and
international license in Russia. This license would allow us to handle
long-distance voice traffic for our customers and other licensed operators,
including mobile operators. This license is an integral component to our
strategy of becoming the number one nationwide operator in Russia. This
intercity and international license regime is an important component to Russia's
liberalization plans for telecommunications. In anticipation of approval in
2005, we are planning the implementation of essential infrastructure including a
number of long-distance switches.
Recognizing that many of the markets in which we operate are complex, in
particular as it relates to business, regulatory, political and cultural
matters, we occasionally seek experienced local partners to assist in markets
where we are likely to encounter operational difficulties. We have been
cooperating with local partners in Ukraine to resolve commercial and regulatory
disputes with monopoly
25 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
operators and regulatory authorities in Ukraine but had not previously finalized
the compensation arrangement for the services. In addition to or in lieu of cash
compensation, the Board of Directors approved the sale of a non-controlling
interest in Golden Telecom (Ukraine) ("GTU") to such parties.
Upon approval of our Board of Directors, in August 2004 we entered into a
compensation arrangement for services provided to assist us in resolving
commercial and regulatory disputes with monopoly operators and regulatory
authorities in Ukraine. Our local partners have provided services on a success
fee basis. Our Board of Directors approved an arrangement that effectively
transferred 20% of the shares in GTU owned by us to the local partners as
compensation for the services already provided and certain additional services
to be provided. Under this arrangement, we paid the local partners $0.5 million
in cash and granted the local partner an option to purchase 20% of GTU for $0.5
million in cash, in a transaction where the cash and the value of the services
were approximately $3.6 million. This transaction closed in the third quarter of
2004, when the performance was completed and the option was exercised and
resulted in a charge to operating income of approximately $3.6 million. The
excess of the fair value of consideration exchanged for services over the book
value of 20% of net assets of GTU was recorded as a credit to the consolidated
equity, rather than income since we did not believe that the method of
determining fair value met the objectively determinable criteria as required by
Staff Accounting Bulletin Topic 5H. Fair value of the option approximated the
fair value of shares transferred to the local partner due to the short exercise
period of the option and was determined using the discounted cash flow valuation
method. We continue to believe that Ukraine offers promising investment
opportunities but that there are still political and commercial risks associated
with operating in Ukraine.
In July 2004, our Board of Directors adopted a Long-Term Incentive Bonus
Plan ("LTIBP") for our senior management, effective as of January 1, 2004. The
LTIBP is designed to reward senior management with annual bonus awards
consisting of 100% restricted shares for our officers and 50% restricted shares
and 50% cash payments for other qualified employees participating in LTIBP if we
meet certain targets for net income growth established by the Board of
Directors. In addition, the program provides for a one-time grant of a limited
amount of shares to senior management in an aggregate amount not exceeding
50,000 shares. The LTIBP is intended to act as a retention mechanism for senior
management as the cash payments and the restricted stock vest over a three year
period. It is expected that the LTIBP will act as a substitute for our Equity
Participation Plan under which significant amounts of stock options were, in the
past, granted to senior management. During the twelve months ended December 31,
2004 we did not record any expenses associated with the LTIBP as we did not
achieve the operational and financial targets for 2004. We currently anticipate
repurchasing from time to time in the open market, a number of our shares equal
to the number of our shares that are subject to awards under the LTIBP. We have
not granted any shares under the LTIBP.
In the third quarter of 2004, management determined that we had been
inadvertently carrying accruals for estimated taxes, other than income taxes.
Management concluded these accruals for estimated taxes should have been
considered unnecessary and reversed prior to January 1, 2000. The net effect of
the correction of this non-cash error was to reduce current liabilities and
non-current liabilities by $2.0 million each with an offsetting decrease to
accumulated deficit of $4.0 million in all periods presented. This adjustment
had no effect on the reported results of operations in any of the periods
presented.
In February 2005, we received notice from Vimpelcom, our largest customer,
that it is diverting a volume of traffic away from us pursuant to the telephone
traffic routing provisions of the New Law and the General Scheme for operation
of the Russian GSM Network promulgated by the Russian Ministry of
Communications. At this point, we are in discussions with Vimpelcom and
regulatory agencies and cannot accurately predict what will be the impact of
this new issue on our operations going forward. Since January 1, 2005, we have
lost approximately $0.2 million in revenue due to Vimpelcom's action.
HIGHLIGHTS AND OUTLOOK
Since early 2000 we have witnessed a recovery in the Russian market, but
downward pricing pressures persist from increased competition and the global
trend toward lower telecommunications tariffs. In 2003 and 2004, our traffic
volume increases exceeded the reduction in tariffs on certain types of voice
traffic. This is a contributing factor to the increases in our revenue in 2003
and 2004, although the major factor of revenue increases in 2004 was the
acquisition of Comincom. We expect that this trend of year over year increases
in traffic volume will continue as long as the Russian economy continues to
develop at its current pace. Although our revenue growth is strong, our overall
margins continue to be impacted by price increases for services received from
monopolistic incumbent operations.
In order to handle additional traffic volumes, we have expanded and will
continue to expand our fiber optic capacity along our heavy traffic and high
cost routes to mitigate declines in traffic margins, reduce our unit
transmission costs and ensure sufficient capacity to meet the growing demand for
data and Internet services. We expect to continue to add additional transmission
capacity, which due to its fixed cost nature can initially depress margins, but
will over time allow us to improve or maintain our margins.
We continue to follow our strategy of regional expansion. The project for
the construction of the inter-city fiber optic link which we launched in the
middle of 2004 will be continued into the second half of 2005. At present, we
are constructing an inter-city fiber optic link from Moscow to Ufa through
Nizhny Novgorod and Kazan. Subject to weather conditions, we expect that this
inter-city fiber optic link will be operational in the second half of 2005. To
date, this inter-city fiber optic link has been completed from Moscow to
Noginsk. We intend to connect our operations in the European part of Russia to
this backbone network and plan to invest a total of approximately $40.0 million
to $50.0 million in this and related backbone projects through 2007.
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.
26 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
A significant portion of our carrier revenue is generated from the Ukrainian
cellular operators' large volumes of international and long distance traffic.
Price and quality of services are the primary factors in their purchase
decision. In 2004, several Ukrainian cellular operators, including UMC and
Kyivstar, received international communications license. Nevertheless, Ukrainian
Mobile Communications ("UMC"), one of our largest customers, continued sending a
large volume of outgoing international traffic through our network. Also,
cellular operators have an increasing demand for some value added services like
our "800" service.
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 2005.
During the twelve months ended December 31, 2004, we incurred consulting and
employee termination costs associated with the operational integration of
Comincom into our operations which has been recorded in selling, general and
administrative expense. In addition, we have incurred costs associated with,
among other things, Sarbanes-Oxley compliance and other consulting and
recruiting expenses.
The rapid growth of the telecommunications market in Russia, Ukraine, and
the CIS is fueled by macroeconomic growth and the inflow of direct foreign
investment. We anticipate that the economic growth in these markets will create
additional demand for telecommunications services. Additionally, in line with
worldwide trends, we are starting to observe new customer demands for more
sophisticated telecommunications and Internet services as well as other new
technologies. We are responding to these customer demands by testing and
implementing new technologies such as VoIP, wireless local loop and high-speed
consumer Internet. Such new technologies will remove some of the barriers to
access that some of our customers currently face. For example, with wireless
local loop, we can connect remote customers to our network by by-passing the
incumbents' wire network in order to provide higher quality access. Our
customers are willing to pay a premium for this type of technology and customer
service.
With respect to 2005, we continue to see growth opportunities organically,
through select acquisitions, and through the development of new lines. While our
research indicates the telecommunications sector growth in business segments in
the Moscow and St. Petersburg markets of fixed telecommunications services will
continue to grow, we believe that the bulk of our growth will come from the key
regions of Rostov-On-Don, Nizhny Novgorod, Samara, Ufa, Krasnoyarsk,
Vladivostok, Khabarovsk, and Ekaterinburg.
We will continue to align the strategy of each of our business segments with
market forces in the countries where we operate. In BCS, our strategy is to
focus on and grow our market-share through attractive service offerings
supported by excellent customer care. We are focused on expanding into the
regions as well as the fast growing small and medium-sized enterprise or ("SME")
and the small office / home office or ("SOHO") markets. In these cases where the
potential SME and SOHO customer is not on our network, our ability to fully
benefit from growth in these market segments largely depends on the regulatory
situation and our ability to get access to the copper and other infrastructure
of the incumbent operators under reasonable terms and conditions. In Carrier and
Operator Services our strategy for future years will focus on partnering with
more mobile operators in the regions. We aim to provide mobile operators with
the right solutions for their needs and thereby benefit from the mobile operator
expansion and growth. Our 2004 growth in Consumer and Internet Services
indicates that our dial-up business continues to be very strong. However, we
also recognize that new technologies are making their way into Russia, Ukraine,
and CIS. Thus, we continue to "beta" test new technologies that will benefit
consumers and allow us to strengthen our market position as well as to up-sell
to our existing dial-up customer base. A recent example of this is our
implementation of WiMax and Wi-Fi in selected areas of Russia. Also, with low
penetration of dial-up services throughout the regions, we continue to see
potential in this market.
CRITICAL ACCOUNTING POLICIES
The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend our business activities. To
assist that understanding, management has identified our "critical accounting
policies". These policies have the potential to have a significant impact on our
financial statements, either because of the significance of the financial
statement item to which they relate, or because they require judgment and
estimation due to the uncertainty involved in measuring, at a specific point in
time, events which are continuous in nature.
Revenue recognition policies; we recognize operating revenues as services
are rendered or as products are delivered to customers and installed. Under
multiple-delivery contracts, involving a combination of product delivery,
installation and maintenance, connection and service fees, revenues are
recognized based on the relative fair value of the respective amounts. Elements
are grouped if they are inseparable or objective evidence of fair value does not
exist. Certain revenues, such as connection and installation fees, are deferred.
We also defer direct incremental costs related to connection fees, not exceeding
the revenue deferred. Deferred revenues are subsequently recognized over the
estimated average customer lives, which are periodically reassessed by us, and
such reassessment may impact our future operating results. In determining the
recording of revenue, estimates and assumptions are required in assessing the
expected conversion of the revenue streams to cash collected.
Allowance for doubtful accounts policies; the allowance estimation process
requires management to make assumptions based on historical results, future
expectations, the economic and competitive environment, changes in the
creditworthiness of our customers,
27 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
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 $2.2 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
2004, 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 foreign subsidiary. We have determined in
accordance with the functional currency criteria of SFAS No. 52, "Foreign
Currency Translation", that the USD should be considered the functional currency
of all foreign subsidiaries. There are subjective elements in this
determination, including a weight given to each specific criteria established by
SFAS No. 52. Changes in the underlying business transactions could lead to
different functional currency determination for a particular subsidiary, which
would have an impact on its reported financial position and results of
operations.
CRITICAL ACCOUNTING ESTIMATES
Accounting estimates are an integral part of the financial statements
prepared by management and are based upon management's current judgments.
Certain accounting estimates are particularly sensitive because of their
significance to the financial statements and because of the possibility that
future events affecting them may differ markedly from management's current
judgment. We believe the following items represent such particularly sensitive
accounting estimates:
Allowance for doubtful accounts; any changes in the underlying assumptions
of recoverability of accounts receivable by respective aging group or certain
specific accounts that are excluded from the specific and general allowances
could have a material effect on our current and future results of operations. We
believe that the allowance for doubtful accounts is adequate to cover estimated
losses in our accounts receivable balances under current conditions.
28 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
No. 46"). 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. We
did not identify any previously formed SPEs that are VIEs. Therefore the
adoption of FIN No. 46R did not have an impact on the financial position or
results of operations.
In December 2004, the FASB issued Statement on Financial Accounting Standard
("SFAS") No. 123R (revised 2004), "Share Based Payment", which is a revision of
SFAS No. 123, "Accounting for Stock-Based Compensation" SFAS No. 123R supersedes
APB No. 25, "Accounting for Stock Issued to Employees and amends SFAS No. 95,
"Statement of Cash Flows". Under SFAS No. 123R, companies must calculate and
record the cost of equity instruments, such as stock options or restricted
stock, awarded to employees for services received in the income statement; pro
forma disclosure is no longer permitted. The cost of the equity instruments is
to be measured based on fair value of the instruments on the date they are
granted (with certain exceptions) and is required to be recognized over the
period during which the employees are required to provide services in exchange
for the equity instruments. SFAS No. 123R is effective in the first interim or
annual reporting period beginning after June 15, 2005.
SFAS No. 123R provides two alternatives for adoption: (1) a "modified
prospective" method in which compensation cost is recognized for all awards
granted subsequent to the effective date of this statement as well as for the
unvested portion of awards outstanding as of the effective date and (2) an
"modified retrospective" method which follows the approach in the "modified
prospective" method, but also permits entities to restate prior periods to
reflect compensation cost calculated under SFAS No. 123 for pro forma amounts
disclosure. We plan to adopt SFAS No. 123R using the modified prospective
method. As we currently account for share based payments to employees in
accordance with the intrinsic value method permitted under ABP No. 25, no
compensation expense is recognized. The impact of adopting SFAS No. 123R cannot
be accurately estimated at this time, as it will depend on the amount of share
based awards granted in future periods. However, had we adopted SFAS No. 123R in
a prior period, the impact would approximate the impact of SFAS No. 123 as
described in the disclosure of pro forma net income and earnings per share. SFAS
No. 123R also requires that tax benefits received in excess of compensation cost
be reclassified from an operating cash flow to a financing cash flow in the
Consolidated Statement of Cash Flows. This change in classification will reduce
net operating cash flows and increase net financing cash flows in the periods
after adoption.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets". SFAS No. 153 addresses the measurement of exchanges of nonmonetary
assets. The guidance in APB Opinion No. 29, "Accounting for Nonmonetary
Transactions" ("APB No. 29"), is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. The guidance in APB No. 29, however, included certain exceptions to
that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial
29 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. This provisions of SFAS No. 153 are effective for financial statements
for fiscal years beginning after June 15, 2005. Earlier application is permitted
for nonmonetary asset exchanges incurred during fiscal years beginning after the
date SFAS No. 153 was issued. The adoption of the provisions of SFAS No. 153 is
not expected to have a material impact on our results of operations or financial
position.
RESULTS OF OPERATIONS
The results of our four business segments from the operations of our
consolidated entities combined with the non-consolidated entities where we are
actively involved in the day-to-day management, are shown in note 14 "Segment
Information - Line of Business Data" to our consolidated financial statements.
In addition, revenue and costs from related parties are shown in note 13
"Related Party Transactions".
In accordance with SFAS No. 52, we have determined that the functional
currency of each foreign subsidiary is the USD, as the majority of our cash
flows are indexed to, or denominated in USD. Through December 31, 2002, Russia
had been considered to be a highly inflationary environment. From January 1,
2003, Russia ceased to be considered as a highly inflationary economy. As we
believe that the functional currency of each foreign subsidiary is the USD, 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 16% in
2002, 14% in 2003 and 12% in 2004. The Russian government expects inflation to
be approximately 11% in 2005. 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:
o Consolidated Results. Consolidated Results of Operations for the Year Ended
December 31, 2004 compared to the Consolidated Results of Operations for the
Year Ended December 31, 2003
o Consolidated Financial Position. Consolidated Financial Position at December
31, 2004 compared to Consolidated Financial Position at December 31, 2003
o Consolidated Results. Consolidated Results of Operations for the Year Ended
December 31, 2003 compared to the Consolidated Results of Operations for the
Year Ended December 31, 2002
o Consolidated Financial Position. Consolidated Financial Position at December
31, 2003 compared to Consolidated Financial Position at December 31, 2002
CONSOLIDATED RESULTS - CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2004 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2003
REVENUE
Our revenue increased by 62% to $584.0 million for the year ended December
31, 2004 from $360.5 million for the year ended December 31, 2003. The overall
increase in revenue was due primarily to the consolidation of 100% of Comincom's
results of operations for a full year and, with respect to our existing
business, an increase in customer base and services provided to existing
customers, partially offset by lower prices for certain services. The breakdown
of revenue by business group was as follows:
30 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
CONSOLIDATED REVENUE CONSOLIDATED REVENUE
FOR THE YEAR FOR THE YEAR
ENDED DECEMBER 31, 2003 ENDED DECEMBER 31, 2004
------------------------- -------------------------
(IN MILLIONS)
REVENUE
Business and Corporate Services $ 188.9 $ 324.8
Carrier and Operator Services 128.5 198.9
Consumer Internet Services 30.8 45.5
Mobile Services 13.9 15.8
Eliminations (1.6) (1.0)
------------------------- -------------------------
TOTAL REVENUE $ 360.5 $ 584.0
Business and Corporate Services. Revenue from BCS increased by 72% to $324.8
million for the year ended December 31, 2004 from $188.9 million for the year
ended December 31, 2003. The primary reason for the increase is due to the
acquisition of 100% ownership interest in Comincom in the fourth quarter of
2003. We began consolidating Comincom into our results of operations from
December 1, 2003. Comincom's revenue from BCS was $90.7 million for the year
ended December 31, 2004. BCS revenue increased by approximately $8.3 million due
to the 2004 acquisitions of ST-HOLDING, Balticom, and Buzton. We began
consolidating these three companies into our results at various points during
the first half of 2004. Additionally, $3.5 million of the total increase is due
to 2004 being the first full year that we consolidated the results of
Sibchallenge, an August 2003 acquisition. The remainder of the increase was the
result of expanding our pre-existing business. In addition to the above factors,
in our largest market, Moscow, we had increases in our domestic traffic revenues
due to adding approximately 9,100 new corporate customers and signing up 99 new
multi-tenant business centers and 10 new trade centers in the year ended
December 31, 2004 along with actively promoting new services among our client
base. BCS Moscow recognized approximately $23.7 million in revenue from new
contracts in 2004 and grew the number of its Direct Inward Dialing lines from
102,037 as of December 31, 2003 to approximately 116,668 as of December 31,
2004.
Revenue from the BCS division of GTU increased by 52% to $28.8 million for
the year ended December 31, 2004 from $19.0 million for the year ended December
31, 2003. The increase in revenue was due to a 63% increase in the number of
serviced voice lines and a 28% increase in average rate per minute of use. The
latter was caused by the calling party pays ("CPP") principle of settlement
rates introduced by the Ukrainian Parliament in late 2003, which has increased
revenue and settlement rates to Ukrainian mobile networks.
Carrier and Operator Services. Revenue from Carrier and Operator Services
increased by 55% to $198.9 million for the year ended December 31, 2004 from
$128.5 million for the year ended December 31, 2003. The primary reason for the
increase is due to the acquisition of 100% ownership interest in Comincom in the
fourth quarter of 2003. We began consolidating Comincom into our results of
operations from December 1, 2003. Comincom's revenue from Carrier and Operator
Services was $21.6 million for the year ended December 31, 2004. Also, revenue
increased by approximately $2.5 million due to the 2004 acquisitions of
ST-HOLDING, Balticom, and Buzton. We began consolidating these three companies
into our results at various points during the first half of 2004. Additionally,
$4.7 million of the total increase is due to 2004 being the first full year that
we consolidated the results of Sibchallenge, an August 2003 acquisition. We have
expanded our operations with existing partners and added a number of new
carriers specifically in the regions with increased volumes of traffic,
including VoIP. In addition, we continue to expand our business with major
cellular providers both in the capital and in the regions, which helped offset
general tariff declines, although pricing pressures still exist.
Revenue for the Carrier and Operator Services division of GTU increased by
71% to $19.8 million for the year ended December 31, 2004 from $11.6 million for
the year ended December 31, 2003. The increase in revenue was due to a 91%
increase in incoming international traffic which we are able to terminate in a
number of cities in Ukraine, offset by a 34% decrease in outgoing international
traffic.
Consumer Internet Services. Revenue from Consumer Internet Services
increased by 48% to $45.5 million for the year ended December 31, 2004 from
$30.8 million for the year ended December 31, 2003. The increase is largely the
result of increases in the number of dial-up Internet subscribers from 363,545
at December 31, 2003 to 413,351 at December 31, 2004 and the average revenue per
Internet subscriber increasing from approximately $8.39 per month to
approximately $9.03 per month over the same period.
Mobile Services. Revenue from Mobile Services increased by 14% to $15.8
million for the year ended December 31, 2004 from $13.9 million for the year
ended December 31, 2003. Active subscribers increased from 40,026 at December
31, 2003 to 57,490 at December 31, 2004 due to an increase in the number of
prepaid subscribers driven by the overall Ukrainian mobile market growth. The
average revenue per active subscriber has decreased by 11% to approximately
$27.23 per month due to the decrease in the subscription fee for the tariff plan
which allows for unlimited local calls for a fixed payment as well as decrease
in the number of the subscribers using the said tariff plan and due to an
increase in the share of prepaid subscribers with lower activity and no fixed
charge.
31 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
EXPENSES
The following table shows our principal expenses for the years ended
December 31, 2003 and December 31, 2004:
CONSOLIDATED EXPENSES CONSOLIDATED EXPENSES
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2004
--------------------- ---------------------
(IN MILLIONS)
COST OF REVENUE
Business and Corporate Services $ 84.8 $ 141.2
Carrier and Operator Services 74.9 127.5
Consumer Internet Services 20.2 26.9
Mobile Services 2.8 6.0
Eliminations (1.6) (1.0)
--------------------- ---------------------
TOTAL COST OF REVENUE 181.1 300.6
Selling, general and administrative 64.4 112.9
Depreciation and amortization 45.3 75.0
Equity in earnings of ventures (4.7) (0.3)
Interest income (1.1) (1.1)
Interest expense 2.0 0.6
Foreign currency (gain)/ loss 0.2 (0.7)
Provision for income taxes $ 17.4 $ 30.7
Cost of Revenue
Our cost of revenue increased by 66% to $300.6 million for the year ended
December 31, 2004 from $181.1 million for the year ended December 31, 2003.
Business and Corporate Services. Cost of revenue from BCS increased by 67%
to $141.2 million, or 43% of revenue, for the year ended December 31, 2004 from
$84.8 million, or 45% of revenue, for the year ended December 31, 2003. The
primary reason for the increase in cost of revenue and the decrease in cost of
revenue as a percentage of revenue was due to the acquisition of 100% ownership
interest in Comincom in the fourth quarter of 2003. We began consolidating
Comincom into our results of operations from December 1, 2003. Comincom's cost
of revenue from BCS was $36.0 million for the year ended December 31, 2004, or
40% of its revenue. BCS cost of revenue increased by approximately $3.2 million
due to the 2004 acquisitions of ST-HOLDING, Balticom, and Buzton. We began
consolidating these three companies into our results at various points during
the first half of 2004. Additionally, $1.1 million of the total increase is due
to 2004 being the first full year that we consolidated the results of
Sibchallenge, an August 2003 acquisition. Cost of revenue as a percentage of
revenue decreased as we leveraged the fixed cost portion of our operations over
increased volumes.
Cost of revenue for the BCS division of GTU increased by 60% to $14.6
million, or 51% of revenue, for the year ended December 31, 2004 from $9.1
million, or 48% of revenue, for the year ended December 31, 2003. Cost of
revenue increased as a percentage of revenue due to the increased volume of
lower margin traffic to mobile networks.
Carrier and Operator Services. Cost of revenue from Carrier and Operator
Services increased by 70% to $127.5 million, or 64% of revenue, for the year
ended December 31, 2004 from $74.9 million, or 58% of revenue, for the year
ended December 31, 2003. The primary reason for the increase in cost of revenue
was due to the acquisition of 100% ownership interest in Comincom in the fourth
quarter of 2003. We began consolidating Comincom into our results of operations
from December 1, 2003. Comincom's cost of revenue from Carrier and Operator
Services was $12.4 million, or 57% of its revenue, for the year ended December
31, 2004. Also, cost of revenue increased by approximately $0.2 million due to
the 2004 acquisition of ST-HOLDING, Balticom, and Buzton. The increase in cost
of sales resulting from these acquisitions was minimal since the vast majority
of their cost of revenue is incurred with other majority-owned subsidiaries and
is, therefore, eliminated in consolidation. We began consolidating these three
companies into our results at various points during the first half of 2004.
Additionally, $1.2 million of the total increase is due to 2004 being the first
full year that we consolidated the results of Sibchallenge, an August 2003
acquisition. The increase in cost of revenue as a percentage of revenue 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, the cost of
revenue as a percentage of revenue increased due to higher volumes of lower
margin VoIP sales.
Cost of revenue for the Carrier and Operator Services division of GTU
increased by 98% to $16.0 million, or 81% of revenue, for the year ended
December 31, 2004 from $8.1 million, or 70% of revenue, for the year ended
December 31, 2003. Cost of revenue increased as a percentage of revenue due to a
91% increase in lower margin international incoming traffic and a 34% decrease
in higher margin international outgoing traffic.
32 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
Consumer Internet Services. Cost of revenue from Consumer Internet Services
increased by 33% to $26.9 million, or 59% of revenue, for the year ended
December 31, 2004 from $20.2 million, or 66% of revenue, for the year ended
December 31, 2003. The decrease as a percentage of revenue was mainly due to
leveraging the fixed cost portion of our operations over increased volumes.
Mobile Services. Cost of revenue from Mobile Services increased by 114% to
$6.0 million, or 38% of revenue, for the year ended December 31, 2004 from $2.8
million, or 20% of revenue, for the year ended December 31, 2003. The cost of
revenue as a percentage of revenue increased 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.
Selling, General and Administrative
Our selling, general and administrative expenses increased by 75% to $112.9
million, or 19% of revenue, for the year ended December 31, 2004 from $64.4
million, or 18% of revenue, for the year ended December 31, 2003. The primary
reason for the increase was acquisitions occurring in late 2003 and in 2004.
Other factors contributing to the increase were reserves and write-offs of
unrecoverable value-added taxes in certain subsidiaries, increased bad debt
expense, expenses associated with the December 1, 2004 legal merger and
integration of Comincom and Combellga including expense charges related to
payroll and assets taxes directly related to the legal merger, increase in cost
related to increases in temporary staffing, cost associated with new senior
management recruitment and employment, and additional expenses associated with
Sarbanes-Oxley compliance. In addition, in the third quarter of 2004, we
incurred $3.6 million in consulting fees in association with the transfer of 20%
of our ownership interest in GTU to a Ukrainian partner in exchange for services
provided by the partner.
Depreciation and Amortization
Our depreciation and amortization expenses increased by 66% to $75.0 million
for the year ended December 31, 2004 from $45.3 million for the year ended
December 31, 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 $18.9 million for the year ended December 31, 2004.
Equity in Earnings of Ventures
The earnings after interest and tax charges from our investments in
non-consolidated ventures decreased to $0.3 million for the year ended December
31, 2004 from $4.7 million for the year ended December 31, 2003. The decrease in
equity in earnings was mainly due to receiving a $4.7 million dividend from MCT
in the fourth quarter of 2003.
Interest Income
Our interest income for the year ended December 31, 2004 remained unchanged
from the $1.1 million for the year ended December 31, 2003.
Interest Expense
Our interest expense was $0.6 million for the year ended December 31, 2004
down from $2.0 million for the year ended December 31, 2003. Debt, excluding
capital lease obligations, at December 31, 2004 was $0.2 million compared to
$1.2 million at December 31, 2003. On June 30, 2003, we settled $30.0 million of
outstanding debt plus accrued interest under a credit facility with ZAO
Citibank.
Foreign Currency Gain (Loss)
Our foreign currency gain was $0.7 million for the year ended December 31,
2004, compared to a foreign currency loss of $0.2 million for the year ended
December 31, 2003. The improvement in foreign currency loss is 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.
Minority Interest
Our minority interest was $1.5 million for the year ended December 31, 2004,
compared to a $0.5 million for the year ended December 31, 2003. The increase
was the result of minority interests in the earnings of GTU, ZAO Samara Telecom,
ZAO WestBalt Telecom and Buzton. Except for GTU, each of these consolidated
subsidiaries was acquired during the first half of 2004. Minority interests in
the earnings of GTU arose in 2004 due to the sale of a non-controlling interest
to our local partners in Ukraine.
33 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
Provision for Income Taxes
Our charge for income taxes was $30.7 million for the year ended December
31, 2004 compared to $17.4 million for the year ended December 31, 2003. Our
effective tax rate was 32% for the year ended December 31, 2004 compared to 24%
for the year ended December 31, 2003 partly as a result of increases in
non-deductible expenses in 2004, versus recording a deferred tax benefit related
to the reduction of a deferred tax asset valuation allowance in 2003. The
overall increase in income tax expense is primarily due to the acquisition of
100% ownership interest in Comincom and subsequent consolidation of Comincom
from December 1, 2003 into our results of operations. In addition, there were
increased levels of taxable profits being incurred in our Russian and Ukrainian
subsidiaries in the year ended December 31, 2004 as compared to the year ended
December 31, 2003.
Net Income and Net Income per Share
Our net income for the year ended December 31, 2004 was $64.8 million,
compared to a net income of $55.4 million for the year ended December 31, 2003.
Our net income per share of common stock decreased to $1.79 for the year
ended December 31, 2004, compared to a net income per share of $1.95 for the
year ended December 31, 2003. The decrease 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 36,225,531 in the year ended December 31,
2004, compared to 28,467,677 in the year ended December 31, 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 decreased
to $1.77 for the year ended December 31, 2004, compared to a net income per
common share of $1.90 for the year ended December 31, 2003. The decrease 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 36,552,547 the year ended December 31, 2004,
compared to 29,106,540 for the year ended December 31, 2003.
CONSOLIDATED FINANCIAL POSITION - SIGNIFICANT CHANGES IN CONSOLIDATED FINANCIAL
POSITION AT DECEMBER 31, 2004 COMPARED TO CONSOLIDATED FINANCIAL POSITION AT
DECEMBER 31, 2003
Accounts Receivable
Accounts receivable increased from December 31, 2003 to December 31, 2004 as
a result of increased revenue during the period ended December 31, 2004 and
slower collections from customers.
Property and Equipment
Our property and equipment increased at December 31, 2004 as compared to
December 31, 2003 mainly as a result of continuing capital expenditures.
Intangible Assets
Our intangible assets increased at December 31, 2004 as compared to December
31, 2003 as a result of our acquisition of ST-HOLDING in February 2004, our
acquisition of Balticom Mobile in April 2004, Buzton in May 2004 and the build
out of new numbering capacity.
Minority Interest
Our minority interest increased at December 31, 2004 as compared to December
31, 2003 as a result of minority interests in the equity of GTU, ZAO Samara
Telecom, ZAO WestBalt Telecom and Buzton. Except for GTU, each of these
consolidated subsidiaries was acquired during the first half of 2004. Minority
interests of GTU arose in 2004 due to the sale of a non-controlling interest to
our local partners in Ukraine.
Stockholders' Equity
Shareholders' equity increased from December 31, 2003 to December 31, 2004
as a result of our net income of $64.8 million, cash proceeds of approximately
$4.9 million received from the exercise of employee stock options, partially
offset by declaring and paying $29.0 million dividends for the year ended
December 31, 2004.
In addition, we transferred 20% of the ownership interest in GTU to a
Ukrainian partner in exchange for services provided by the partner in August
2004. The excess of the fair value of consideration exchanged for services over
the book value of 20% of net assets of GTU was recorded as a credit to the
consolidated equity.
In the third quarter of 2004, management determined that we have been
inadvertently carrying accruals for estimated taxes, other than income taxes.
Management concluded these accruals for estimated taxes should have been
considered unnecessary and reversed
34 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
prior to January 1, 2000. The net effect of the correction of this non-cash
error was to reduce current liabilities and non-current liabilities by $2.0
million each with an offsetting decrease to accumulated deficit of $4.0 million
in all periods presented.
CONSOLIDATED RESULTS - CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2003 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2002
REVENUE
Our revenue increased by 81% to $360.5 million for the year ended December
31, 2003 from $198.7 million for the year ended December 31, 2002. The overall
increase in revenue was largely due to the consolidation of Sovintel's results
of operations for a full year. The breakdown of revenue by business group was as
follows:
CONSOLIDATED REVENUE CONSOLIDATED REVENUE
FOR THE YEAR FOR THE YEAR
ENDED DECEMBER 31, 2002 ENDED DECEMBER 31, 2003
----------------------- -----------------------
(IN MILLIONS)
REVENUE
Business and Corporate Services $ 91.7 $ 188.9
Carrier and Operator Services 73.9 128.5
Consumer Internet Services 21.8 30.8
Mobile Services 13.0 13.9
Eliminations (1.7) (1.6)
----------------------- -----------------------
TOTAL REVENUE $ 198.7 $ 360.5
Business and Corporate Services. Revenue from BCS increased by 106% to
$188.9 million for the year ended December 31, 2003 from $91.7 million for the
year ended December 31, 2002. The primary reason for the increase is due to the
acquisition of the remaining 50% ownership interest in Sovintel which was
completed in the third quarter of 2002. We began consolidating Sovintel into our
results of operations from September 17, 2002. In addition, we had increases in
our domestic traffic revenues due to adding approximately 1,600 new corporate
customers and signing up 74 new multi-tenant business centers in the year ended
December 31, 2003 along with actively promoting new services among our client
base. In addition, in the fourth quarter of 2003, we had approximately $5.0
million in customer premises equipment sales, higher than we have experienced in
previous quarters.
The acquisition of 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 BCS increased by $6.7 million for the year ended December 31, 2003.
Revenue from the BCS division of GTU increased by 15% to $19.0 million for
the year ended December 31, 2003 from $16.5 million for the year ended December
31, 2002. The increase in revenue was due to an increase in the total intercity
minutes of use by business and corporate clients and an increase in monthly
recurring charges offset by lower equipment sales.
Carrier and Operator Services. Revenue from Carrier and Operator Services
increased by 74% to $128.5 million for the year ended December 31, 2003 from
$73.9 million for the year ended December 31, 2002. The primary reason for the
increase is due to the acquisition of the remaining 50% ownership interest in
Sovintel, which was completed in the third quarter of 2002. We began
consolidating Sovintel into our results of operations from September 17, 2002.
In addition, we have added a number of new carriers with increased volumes of
traffic, especially 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.
The acquisition of 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 Carrier and Operator Services increased by $2.0 million for the year ended
December 31, 2003.
Revenue for the Carrier and Operator Services division of GTU increased by
93% to $11.6 million for the year ended December 31, 2003 from $6.0 million for
the year ended December 31, 2002. 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 41% to $30.8 million for the year ended December 31, 2003 from
$21.8 million for the year ended December 31, 2002. The increase is largely the
result of increases in the number of dial-up Internet subscribers from 242,155
at December 31, 2002 to 363,545 at December 31, 2003 and the average revenue per
Internet subscriber increasing from approximately $7.84 per month to
approximately $8.39 per month over the same period.
35 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
Mobile Services. Revenue from Mobile Services increased by 7% to $13.9
million for the year ended December 31, 2003 from $13.0 million for the year
ended December 31, 2002. Active subscribers increased from 35,386 at December
31, 2002 to 40,026 at December 31, 2003 and the average revenue per active
subscriber has increased by 8% to approximately $30.74 per month due to an
increasing number of subscribers on a tariff plan which allows for unlimited
local calls for a fixed payment of $99 per month. As a result of the adoption of
the CPP principle by the Ukrainian Parliament on September 17, 2003, we were
unable to charge our mobile customers for incoming calls and our revenues were
reduced accordingly.
EXPENSES
The following table shows our principal expenses for the years ended
December 31, 2002 and December 31, 2003:
CONSOLIDATED EXPENSES CONSOLIDATED EXPENSES
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2003
------------------------- -------------------------
(IN MILLIONS)
COST OF REVENUE
Business and Corporate Services $ 47.9 $ 84.8
Carrier and Operator Services 27.4 74.9
Consumer Internet Services 14.6 20.2
Mobile Services 3.0 2.8
Eliminations (1.7) (1.6)
------------------------- -------------------------
TOTAL COST OF REVENUE 91.2 181.1
Selling, general and administrative 46.1 64.4
Depreciation and amortization 30.0 45.3
Equity in earnings of ventures (4.4) (4.7)
Interest income (1.6) (1.1)
Interest expense 2.2 2.0
Foreign currency loss 1.2 0.2
Provision for income taxes $ 4.6 $ 17.4
Cost of Revenue
Our cost of revenue increased by 99% to $181.1 million for the year ended
December 31, 2003 from $91.2 million for the year ended December 31, 2002.
Business and Corporate Services. Cost of revenue from BCS increased by 77%
to $84.8 million, or 45% of revenue, for the year ended December 31, 2003 from
$47.9 million, or 52% of revenue, for the year ended December 31, 2002. The
increase in cost of revenue and the decrease in cost of revenue as a percentage
of revenue are mainly due to the acquisition of the remaining 50% ownership
interest in Sovintel which was completed in the third quarter of 2002. We began
consolidating Sovintel into our results of operations from September 17, 2002.
In addition, in the fourth quarter of 2003, we had approximately $5.0 million in
customer premises equipment sales with significantly lower margins as part of a
strategy to provide a wider range of communication and Internet technology
products to our existing customers.
The acquisition of 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, cost of
revenue from Business and Corporate Services increased by $2.9 million for the
year ended December 31, 2003.
Cost of revenue for the Business and Corporate Services division of GTU
increased by 20% to $9.1 million, or 48% of revenue, for the year ended December
31, 2003 from $7.6 million, or 46% of revenue, for the year ended December 31,
2002.
Carrier and Operator Services. Cost of revenue from Carrier and Operator
Services increased by 173% to $74.9 million, or 58% of revenue, for the year
ended December 31, 2003 from $27.4 million, or 37% of revenue, for the year
ended December 31, 2002. The increase in cost of revenue and the increase in
cost of revenue as a percentage of revenue was due to the acquisition of the
remaining 50% ownership interest in Sovintel which was completed in the third
quarter of 2002. Sovintel's cost of revenue as a percentage of revenue is
traditionally lower margin bilateral voice. We began consolidating Sovintel into
our results of operations from September 17, 2002.
Cost of revenue for the Carrier and Operator Services division of GTU
increased by 113% to $8.1 million, or 70% of revenue, for the year ended
December 31, 2003 from $3.8 million, or 63% of revenue, for the year ended
December 31, 2002. Cost of revenue increased as a percentage of revenue due to
the increased volumes of lower margin international incoming and outgoing
traffic.
36 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
The acquisition of 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, cost of
revenue from Carrier and Operator Services increased by $1.4 million for the
year ended December 31, 2003.
Consumer Internet Services. Cost of revenue from Consumer Internet Services
increased by 38% to $20.2 million, or 66% of revenue, for the year ended
December 31, 2003 from $14.6 million, or 67% of revenue, for the year ended
December 31, 2002. The decrease as a percentage of revenue was mainly due to
additional low cost interconnect capacity becoming available in the third
quarter of 2002.
Mobile Services. Cost of revenue from Mobile Services decreased by 7% to
$2.8 million, or 20% of revenue, for the year ended December 31, 2003 from $3.0
million, or 23% of revenue, for the year ended December 31, 2002. The cost of
revenue as a percentage of revenue decreased due to 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 40% to $64.4
million, or 18% of revenue, for the year ended December 31, 2003 from $46.1
million, or 23% of revenue, for the year ended December 31, 2002. This increase
in selling, general and administrative expenses was mainly due to increases in
employee related costs, advertising, inventory obsolescence, bad debt expense,
consulting costs associated with the operational integration of Comincom, and
other selling, general and administrative expenses arising from the
consolidation of Sovintel from September 17, 2002 and the consolidation of
Comincom from December 1, 2003 into our results of operations.
Depreciation and Amortization
Our depreciation and amortization expenses increased by 51% to $45.3 million
for the year ended December 31, 2003 from $30.0 million for the year ended
December 31, 2002. The increase was due in part to depreciation on continuing
capital expenditures of the consolidated entities, but primarily relates to our
acquisition of the remaining 50% of Sovintel and subsequent consolidation of
Sovintel as of September 17, 2002 into our results of operations. In addition,
depreciation and amortization increased by $1.7 million due to the consolidation
of Comincom into our results of operations from December 1, 2003.
Equity in Earnings of Ventures
The earnings after interest and tax charges from our investments in
non-consolidated ventures increased to $4.7 million for the year ended December
31, 2003 from $4.4 million for the year ended December 31, 2002. We recognized
earnings at Sovintel of $9.6 million for the period from January 1, 2002 to
September 16, 2002, which more than offset our recognized losses in MCT of $5.1
million. The increase in equity in earnings was mainly due to receiving a $4.7
million dividend from MCT in the fourth quarter of 2003, an equity investment in
which we have ceased recognition of losses as they exceeded our investment base,
partly offset by the effects of the acquisition of the remaining 50% of Sovintel
and its subsequent consolidation as of September 17, 2002 into our results of
operations.
Interest Income
Our interest income was $1.1 million for the year ended December 31, 2003
down from $1.6 million for the year ended December 31, 2002. The decrease in
interest income mainly reflects lower interest rates earned on deposits in
short-term US money market funds.
Interest Expense
Our interest expense was $2.0 million for the year ended December 31, 2003
down from $2.2 million for the year ended December 31, 2002. Debt, excluding
capital lease obligations, at December 31, 2003 was $1.2 million compared to
$33.1 million at December 31, 2002. On June 30, 2003, we settled $30.0 million
of outstanding debt plus accrued interest under a credit facility with ZAO
Citibank. There was no penalty for the early settlement of this debt however an
additional $0.2 million of previously capitalized financing costs was recognized
during the second quarter of 2003 which was previously being recognized over the
life of the facility.
Foreign Currency Loss
Our foreign currency loss was $0.2 million for the year ended December 31,
2003, compared to a foreign currency loss of $1.2 million for the year ended
December 31, 2002. The improvement in foreign currency loss is 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.
37 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
Provision for Income Taxes
Our charge for income taxes was $17.4 million for the year ended December
31, 2003 compared to $4.6 million for the year ended December 31, 2002. Our
effective tax rate was 24% for the year ended December 31, 2003 compared to 14%
for the year ended December 31, 2002. The increase is primarily due to the
acquisition of the remaining 50% of Sovintel and subsequent consolidation of
Sovintel from September 17, 2002 into our results of operations. In addition,
there were increased levels of taxable profits being incurred in our Russian and
Ukrainian subsidiaries in the year ended December 31, 2003 as compared to the
year ended December 31, 2002. In the fourth quarter of 2002, we recognized the
full benefit of carry-forward tax losses of $2.8 million at our wholly-owned
Russian subsidiary, Teleross, which previously had been recognized on a
quarterly basis and we recognized $0.8 million of current deferred tax assets at
GTU. In the fourth quarter of 2003, we recognized the full benefit of US
carry-forward tax losses resulting in a deferred tax benefit of approximately
$1.9 million.
Cumulative Effect of a Change in Accounting Principle
We adopted SFAS No. 142 "Accounting for Goodwill," effective from January 1,
2002. As a result, we recorded a cumulative effect of a change in accounting
principle for negative goodwill (deferred credit) arising on our equity method
investments in the amount of $1.0 million for the year ended December 31, 2002.
Net Income and Net Income per Share
Our net income for the year ended December 31, 2003 was $55.4 million,
compared to a net income of $29.8 million for the year ended December 31, 2002.
Our net income per share of common stock increased to $1.95 for the year
ended December 31, 2003, compared to a net income per share of $1.24 for the
year ended December 31, 2002. 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 28,467,677 in the year ended December 31,
2003, compared to 24,101,943 in the year ended December 31, 2002. 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 $1.90 for the year ended December 31, 2003, compared to a net income per
common share of $1.21 for the year ended December 31, 2002. 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 29,106,540 the year ended December 31, 2003,
compared to 24,516,803 for the year ended December 31, 2002.
CONSOLIDATED FINANCIAL POSITION - SIGNIFICANT CHANGES IN CONSOLIDATED FINANCIAL
POSITION AT DECEMBER 31, 2003 COMPARED TO CONSOLIDATED FINANCIAL POSITION AT
DECEMBER 31, 2002
On December 1, 2003, we completed the acquisition of 100% of the shares of
Comincom previously held by Telenor and began consolidating the results of
operations and financial position of Comincom. Significant fluctuations in
certain balance sheet items as of December 31, 2003 as compared to December 31,
2002, were mainly due to the consolidation of Comincom into our financial
position. The most significant fluctuations of certain balance sheet items
include accounts receivable, property and equipment, goodwill and intangible
assets, accounts payable and accrued expenses, deferred tax liabilities and
shareholders' equity. Other significant changes in balance sheet items,
excluding the effect of consolidating Comincom are discussed below.
Accounts Receivable
Accounts receivable increased from December 31, 2002 to December 31, 2003 as
a result of increased revenue during the period ended December 31, 2003 and
slower collections from customers.
Intangible Assets
Our intangible assets increased at December 31, 2003 as compared to December
31, 2002 as a result of our acquisition of Sibchallenge in August 2003.
Debt Obligations
Our debt position decreased at December 31, 2003 as compared to December 31,
2002 as a result of retiring our debt that consisted mainly of the Citibank
Credit Facility of $30.0 million.
38 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
Stockholders' Equity
Shareholders' equity increased from December 31, 2002 to December 31, 2003
as a result of our net income of $55.4 million and proceeds of approximately
$23.7 million received from the exercise of employee stock options.
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; (2) amortization of certain
acquired intangible assets is not deductible for income tax purposes; and (3)
write-offs of certain assets are not deductible for tax purposes. In 2002, as a
result of our Russian and Ukrainian subsidiaries profitability and reasonable
certainty of future profits, we reduced the valuation allowance for deferred tax
assets in the appropriate Russian and Ukrainian subsidiaries. As of December 31,
2004, we had a deferred tax asset of approximately $2.2 million related to net
operating loss carry-forward for US federal income tax purposes. We have
concluded that these US loss carry-forwards will be realizable as we anticipate
generating future taxable income in the US primarily by earning interest income
on intercompany loans to our foreign subsidiaries. We have also recorded a
deferred tax asset of $0.6 million related to net operating loss carry-forwards
for Cyprus tax purposes. However, we have recorded a full valuation allowance
since we do not anticipate recognizing taxable income in our Cyprus entity in
the foreseeable future since it has generate tax losses since 2003. We also had
approximately $10.8 million of other deferred tax assets arising from deductible
temporary differences in our non-US subsidiaries. Due to the continued
profitability of these subsidiaries, we fully anticipate that these other
deferred tax assets will be realized through the generation of future taxable
income. More information about income taxes and a reconciliation of the
statutory federal income tax rate to the effective income tax rate for each
period is included in note 11 to our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents was $53.7 million and $65.2 million as of
December 31, 2004 and December 31, 2003, respectively. Our total restricted cash
as of December 31, 2004 remained unchanged from the $1.0 million as of December
31, 2003. The restricted cash is maintained in connection with certain of our
debt obligations as described below.
During the twelve months ended December 31, 2004, we had net cash inflows of
$145.1 million from our operating activities. During the twelve months ended
December 31, 2003, we had net cash inflows of $87.0 million from our operating
activities. This increase in net cash inflows from operating activities at
December 31, 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 twelve months ended December 31, 2004, we received approximately
$566.8 million in cash from our customers for services and we paid approximately
$386.1 million to suppliers and employees. During the twelve months ended
December 31, 2003, we received approximately $342.8 million in cash from our
customers for services and we paid approximately $237.7 million to suppliers and
employees.
We used cash of $128.4 million and $68.0 million for investing activities
for the twelve months ended December 31, 2004 and 2003, respectively, which were
principally attributable to building our telecommunications networks and
acquisitions. Network investing activities totaled $114.6 million for the twelve
months ended December 31, 2004 and included capital expenditures principally
attributable to building out our telecommunications network. The majority of
network investing activities related to construction of last mile access, the
intercity fiber project and network upgrades as a result of increased customer
connections. Network investing activities totaled $63.7 million for the twelve
months ended December 31, 2003. During 2005, we expect our capital expenditures
program will continue at a level sufficient to support our strategic and
operating needs and will remain consistent, as a percentage of revenue, with
2003 and 2004 capital expenditures as a percentage of revenue.
We used cash of $15.5 million for the year ended December 31, 2004 for
acquisitions which include ST-HOLDING, Buzton, Uralrelcom, and Balticom Mobile.
We used cash of $12.3 million of the year ended December 31, 2003 for
acquisitions principally attributable to acquiring Sibchallenge.
In October 2003, MCT declared a cash dividend of $1.90 per common share to
holders of record as of October 27, 2003. Our portion of this cash dividend was
approximately $4.7 million and was received in November 2003.
For the year ended December 31, 2004, we received $4.9 million net proceeds
from the exercise of employee stock options and for the year ended December 31,
2003, we received $23.7 million net proceeds from the exercise of employee stock
options.
In 2004, we paid quarterly dividends of $0.20 per common share to
shareholders totaling $29.0 million. In February 2005 our Board of Directors
declared a cash dividend of $0.20 per common share to shareholders of record as
of March 17, 2005. The total amount of payable of approximately $7.3 million
will be paid to shareholders on March 31, 2005.
We had working capital of $83.8 million as of December 31, 2004 and $90.3
million as of December 31, 2003. At December 31, 2004, we had total debt,
excluding capital lease obligations, of approximately $0.2 million, none of them
were current maturities. At
39 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
December 31, 2003, we had total debt, excluding capital lease obligations, of
approximately $1.2 million, of which $1.0 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 September 2001, we entered into a five year lease for the right to use up
to VC-3 fiber optic capacity on major routes within Russia to support the
increase in our interregional traffic and regional expansion strategy. In
December 2001, we issued a $9.1 million loan to the company that provided the
capital lease. The loan has payment terms of 56 months, which started in January
2002, and carries interest at the rate of 7 percent per annum.
In the ordinary course of business, we have entered into long-term
agreements for satellite transponder capacity. In the twelve months ended
December 31, 2004, we entered into approximately $57.8 million of satellite
transponder capacity agreements generally with terms of 10 years.
Some of our operating companies have received debt financing through direct
loans from affiliated companies. In addition, certain operating companies have
borrowed funds under a back-to-back, seven-year credit facility for up to $22.7
million from a Russian subsidiary of Citibank. Under this facility, we provide
full cash collateral, held in London, and recorded on our balance sheet as
restricted cash, for onshore loans made by the bank to our Russian registered
joint ventures. In a second, similar facility, we provide full cash collateral
for a short term back-to-back, revolving, credit facility for up to $10.0
million from the same bank for two of our larger Russian operating companies.
The funding level as of December 31, 2004 for all 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 our capital expenditure requirements.
However, the actual amount and timing of our future cash requirements may differ
materially from our current estimates because of changes or fluctuations in our
anticipated investments, revenue, operating costs and network expansion plans,
timing of acquisitions, and access to alternative sources of financing on
favorable terms. Further, in order for us to compete successfully, we may
require substantial additional cash to continue to develop our networks and meet
the funding requirements of our operations and ventures. To the extent our
current sources are not sufficient to meet these requirements, we may raise
additional funds through a dilutive equity issuance, additional borrowings with
or without collateralization, the divestment of non-core assets, the suspension
or cessation of dividend payments or a combination of the foregoing.
We may not be able to obtain additional financing on favorable terms. As a
result, we may be subject to additional or more restrictive financial covenants,
our interest obligations may increase significantly and our shareholders may be
adversely diluted. Our failure to generate sufficient funds in the future,
whether from operations or by raising additional debt or equity capital, may
require us to delay or abandon some or all of our anticipated expenditures, to
sell assets, or both, which could have a material adverse effect on our
operations. We are negotiating with a financial institution to secure an
unsecured credit facility of $45.0 million to fund, in principle part, our
acquisition of Hudson Telecom, Inc. Such facility is expected to contain
restrictive covenants that will limit the flexibility of our operations.
As part of our drive to increase our network capacity, reduce costs and
improve the quality of our service, we have leased additional fiber optic
capacity and entered into agreements for satellite-based network capacity; the
terms 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.
40 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
As of December 31, 2004, we had the following contractual obligations,
including short- and long-term debt arrangements commitments for future payments
under non-cancelable lease arrangements and purchase obligations:
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------
(IN THOUSANDS)
LESS
THAN 1 1 - 3 3 - 5
TOTAL YEAR YEARS YEARS THEREAFTER
---------- ---------- ---------- ---------- ----------
Long-term debt $ 200 $ -- $ 200 $ -- $ --
Capital lease obligations 4,145 2,553 1,592 -- --
Non-cancelable lease obligations 12,053 4,485 5,790 1,527 251
Purchase obligations - (1) 84,488 21,431 29,317 15,873 17,867
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 100,886 $ 28,469 $ 36,899 $ 17,400 $ 18,118
========== ========== ========== ========== ==========
(1) Purchase obligations mainly include our contractual legal obligations for
the future purchase of equipment, interconnect, and satellite transponder
capacity.
41 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our treasury function has managed our funding, liquidity and exposure to
interest rate and foreign currency exchange rate risks. Our investment treasury
operations are conducted within guidelines that have been established and
authorized by our audit committee. In accordance with our policy, we do not
enter into any treasury management transactions of a speculative nature.
The ruble and the hryvna are generally non-convertible outside Russia and
Ukraine, respectively, so our ability to hedge against further devaluation by
converting to other currencies is significantly limited. Further, our ability to
convert rubles and hryvna into other currencies in Russia and Ukraine,
respectively, is subject to rules that restrict the purposes for which
conversion and the payment of foreign currencies are allowed.
Given that much of our operating costs are indexed to or denominated in USD,
including employee compensation expense, capital expenditure and interest
expense, we have taken specific steps to minimize our exposure to fluctuations
in the appropriate foreign currency. Although local currency control regulations
require us to collect virtually all of our revenue in local currency, certain
ventures generally either price or invoice in USD or index their invoices and
collections to the applicable USD exchange rate. Customer contracts may include
clauses allowing additional invoicing if the applicable exchange rate changes
significantly between the invoice date and the date of payment, favorable terms
for early or pre-payments and heavy penalty clauses for overdue payments.
Maintaining the USD value of our revenue subjects us to additional tax on
exchange gains.
Although we are attempting to match revenue, costs, borrowing and repayments
in terms of their respective currencies, we may experience economic loss and a
negative impact on earnings as a result of foreign currency exchange rate
fluctuations.
Our cash and cash equivalents are held largely in interest bearing accounts,
in USD, however we do have bank accounts denominated in Russian rubles and
Ukrainian hryvna. The book values of such accounts at December 31, 2004 and 2003
approximate their fair value. Cash in excess of our immediate operating needs is
invested in US money market instruments. In accordance with our investment
policy, we maintain a diversified portfolio of low risk, fully liquid
securities.
We are exposed to market risk from changes in interest rates on our
obligations and we also face exposure to adverse movements in foreign currency
exchange rates. We have developed risk management policies that establish
guidelines for managing foreign currency exchange rate risk and we also
periodically evaluate the materiality of foreign currency exchange exposures and
the financial instruments available to mitigate this exposure.
The following table provides information (in thousands) about our cash
equivalents, investments available for sale, convertible loan, and debt
obligations that are sensitive to changes in interest rates.
2004 2003
2005 2006 2007 2008 2008 THEREAFTER TOTAL TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash equivalents $ 53,699 $ -- $ -- $ -- $ -- $ -- $ 53,699 $ 65,180
Note receivable $ 2,338 $ 1,494 $ -- $ -- $ -- $ -- $ 3,832 $ 5,582
Fixed rate 7.00% 7.00% -- -- -- -- 7.00% 7.00%
Long-term debt,
including current
portion
Variable rate $ -- $ 200 $ -- $ -- $ -- $ -- $ 200 $ 1,150
Average interest rate -- 2.70% -- -- -- -- -- --
42 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
The following table provides information about our financial instruments by
local currency and where applicable, presents such information in USD
equivalents (in thousands). The table summarizes information on instruments that
are sensitive to foreign currency exchange rates, including foreign currency
denominated debt obligations.
2004 2003
2005 2006 2007 2008 2009 THEREAFTER TOTAL TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Current assets
Russian rubles $ 57,969 $ -- $ -- $ -- $ -- $ -- $ 57,969 $ 49,961
Average foreign
currency exchange
rate 27.75 -- -- -- -- -- -- --
Ukrainian hryvna $ 6,692 $ -- $ -- $ -- $ -- $ -- $ 6,692 $ 4,719
Average foreign
currency exchange
rate 5.31 -- -- -- -- -- -- --
Kazakhstan Tenge $ 875 $ -- $ -- $ -- $ -- $ -- $ 875 $ 824
Average foreign
currency exchange
rate 130 -- -- -- -- -- -- --
Uzbekistan Soom $ 546 $ -- $ -- $ -- $ -- $ -- $ 546 $ --
Average foreign
currency exchange
rate 1,058 -- -- -- -- -- -- --
LIABILITIES
Current liabilities
Russian rubles $ 25,268 $ -- $ -- $ -- $ -- $ -- $ 25,268 $ 16,283
Average foreign
currency exchange
rate 27.75 -- -- -- -- -- -- --
Ukrainian hryvna $ 4,906 $ -- $ -- $ -- $ -- $ -- $ 4,906 3,053
Average foreign
currency exchange
rate 5.31 -- -- -- -- -- -- --
Kazakhstan Tenge $ 49 $ -- $ -- $ -- $ -- $ -- $ 49 $ 356
Average foreign
currency exchange
rate 130 -- -- -- -- -- -- --
Uzbekistan Soom $ 359 $ -- $ -- $ -- $ -- $ -- $ 359 $ --
Average foreign
currency exchange
rate 1,058 -- -- -- -- -- -- --
Our interest income and expense are most sensitive to changes in the general
level of U.S. interest rates. In this regard, changes in U.S. interest rates
affect the interest earned on our cash equivalents and short-term investments as
well as interest paid on debt.
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 business and growth strategy, (viii) our intentions to
expand our fiber optic capacity and add transmission capacity; (ix) our
intention to continue to use the assets of recently acquired companies in the
manner such assets were previously used; (x) our plans to repurchase from time
to time in the open market a number of shares equal to the number of shares that
are subject to awards under the LTIBP, (xi) the impact of critical accounting
policies, and (xii) the political, regulatory and financial situation in the
markets in which we operate, including the effect of the new law "On
Telecommunications" and its supporting regulations, 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, including the impact of the new law
"On Telecommunications" and its supporting regulations, 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 this
Form 10-K.
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 factor 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.
43 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
GOLDEN TELECOM, INC.
PAGE
----
FINANCIAL STATEMENTS
Report of Independent Auditors 45
Consolidated Balance Sheets as of December 31, 2003 and 2004 46
Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004 48
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004 49
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2003 and 2004 50
Notes to Consolidated Financial Statements 51
EDN SOVINTEL LLC
FINANCIAL STATEMENTS
Report of Independent Auditors
Statements of Income for the period from January 1 to September 16, 2002
Statements of Cash Flows for the period from January 1 to September 16, 2002
Notes to Financial Statements
44 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
AUDITED FINANCIAL STATEMENTS
GOLDEN TELECOM, INC.
YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
WITH REPORT OF INDEPENDENT AUDITORS
45 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Shareholders
Golden Telecom, Inc.
We have audited the accompanying consolidated balance sheets of Golden
Telecom, Inc. as of December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2004. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Golden Telecom,
Inc. at December 31, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the financial statements, in 2002 the Company
changed its method of accounting for goodwill.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Golden Telecom,
Inc.'s internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 11, 2005 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG (CIS) LIMITED
Moscow, Russia
March 11, 2005
46 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
DECEMBER 31,
------------------------------
2003 2004
------------ ------------
(SEE NOTE
16)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 65,180 $ 53,699
Accounts receivable, net of allowance for doubtful accounts of $13,896 and
$23,205 at December 31, 2003 and 2004, respectively 74,016 89,177
VAT receivable 14,819 19,022
Prepaid expenses 12,232 13,793
Deferred tax asset 5,995 7,863
Other current assets 15,909 16,738
------------ ------------
TOTAL CURRENT ASSETS 188,151 200,292
Property and equipment:
Telecommunications equipment 311,965 396,060
Telecommunications network held under capital leases 28,712 28,958
Furniture, fixtures and equipment 27,245 34,721
Other property 13,080 12,797
Construction in progress 34,234 61,136
------------ ------------
415,236 533,672
Accumulated depreciation (132,126) (185,781)
------------ ------------
Net property and equipment 283,110 347,891
Goodwill and intangible assets:
Goodwill 144,008 146,254
Telecommunications service contracts, net of accumulated
amortization of $13,619 as of December 31,
2003 and $21,917 as of December 31, 2004 66,622 70,333
Contract-based customer relationships, net of accumulated
amortization of $2,859 as of December 31,
2003 and $10,883 as of December 31, 2004 32,310 25,966
Licenses, net of accumulated amortization of $1,854 as of
December 31, 2003 and $2,515 as of December 31, 2004 2,103 1,843
Other intangible assets, net of accumulated amortization
of $5,492 as of December 31, 2003 and $6,684 as
of December 31, 2004 3,800 3,174
------------ ------------
Net goodwill and intangible assets 248,843 247,570
Restricted cash 1,005 1,012
Other non-current assets 8,117 9,003
------------ ------------
TOTAL ASSETS $ 729,226 $ 805,768
============ ============
The accompanying notes are an integral part of these financial statements.
47 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
DECEMBER 31,
------------------------------
2003 2004
------------ ------------
(SEE NOTE
16)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 65,779 $ 81,474
VAT Payable 10,167 14,235
Debt maturing within one year 950 --
Current capital lease obligations 3,067 2,301
Deferred revenue 9,192 11,761
Due to affiliates and related parties 3,495 3,199
Other current liabilities 5,249 3,572
------------ ------------
TOTAL CURRENT LIABILITIES 97,899 116,542
Long-term debt, less current portion 200 200
Long-term deferred tax liability 24,461 24,244
Long-term deferred revenue 13,725 23,124
Long-term capital lease obligations 3,763 1,538
Other non-current liabilities 2,177 2,001
------------ ------------
TOTAL LIABILITIES 142,225 167,649
Minority interest 2,722 11,738
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value (10,000,000 shares
authorized; none issued and outstanding at
December 31, 2003 and 2004) -- --
Common stock, $0.01 par value (100,000,000 shares
authorized; 35,948,094 shares issued and
outstanding at December 31, 2003 and 36,322,490
shares issued and outstanding at December 31, 2004) 359 363
Additional paid-in capital 663,464 669,777
Accumulated deficit (79,544) (43,759)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 584,279 626,381
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 729,226 $ 805,768
============ ============
The accompanying notes are an integral part of these financial statements.
48 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF US$, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2003 2004
---------- ---------- ----------
REVENUE:
Telecommunication services $ 189,680 $ 358,724 $ 581,521
Revenue from affiliates and related parties 9,047 1,810 2,457
---------- ---------- ----------
TOTAL REVENUE 198,727 360,534 583,978
OPERATING COSTS AND EXPENSES:
Access and network services (excluding depreciation and amortization) 91,189 181,085 300,588
Selling, general and administrative (excluding depreciation and amortization) 46,147 64,384 112,855
Depreciation and amortization 29,961 45,334 74,999
---------- ---------- ----------
TOTAL OPERATING EXPENSES 167,297 290,803 488,442
---------- ---------- ----------
INCOME FROM OPERATIONS 31,430 69,731 95,536
OTHER INCOME (EXPENSE):
Equity in earnings of ventures 4,375 4,687 278
Interest income 1,569 1,084 1,131
Interest expense (2,236) (1,956) (572)
Foreign currency gain (loss) (1,174) (232) 660
---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 2,534 3,583 1,497
---------- ---------- ----------
Income before minority interest and income taxes 33,964 73,314 97,033
Minority interest (527) (480) (1,506)
Income taxes 4,627 17,399 30,744
---------- ---------- ----------
Income before cumulative effect of change in accounting principle 28,810 55,435 64,783
Cumulative effect of change in accounting principle 974 -- --
---------- ---------- ----------
NET INCOME $ 29,784 $ 55,435 $ 64,783
========== ========== ==========
Basic earnings per share of common stock:
Income before cumulative effect of a change in accounting principle 1.20 1.95 1.79
Cumulative effect of a change in accounting principle 0.04 -- --
---------- ---------- ----------
Net income per share - basic $ 1.24 $ 1.95 $ 1.79
========== ========== ==========
Weighted average common shares outstanding - basic 24,102 28,468 36,226
========== ========== ==========
Diluted earnings per share of common stock:
Income before cumulative effect of a change in accounting principle 1.17 1.90 1.77
Cumulative effect of a change in accounting principle 0.04 -- --
---------- ---------- ----------
Net income per share - diluted $ 1.21 $ 1.90 $ 1.77
========== ========== ==========
Weighted average common shares outstanding - diluted 24,517 29,107 36,553
========== ========== ==========
Cash dividends per share $ -- $ -- $ 0.80
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
49 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US$)
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2003 2004
---------- ---------- ----------
OPERATING ACTIVITIES
Net income $ 29,784 $ 55,435 $ 64,783
Adjustments to Reconcile net income to Net Cash Provided by Operating Activities:
Depreciation 23,560 34,837 56,818
Amortization 6,401 10,497 18,181
Equity in earnings of ventures (4,375) (4,687) (278)
Minority interest 527 480 1,506
Foreign currency (gain) loss 1,174 232 (660)
Deferred tax benefit (4,213) (3,117) (4,606)
Bad debt expense 2,061 3,592 10,065
Other (196) (96) (136)
Changes in assets and liabilities:
Accounts receivable (5,419) (15,302) (22,964)
Accounts payable and accrued expenses (240) (3,928) 26,288
Other assets and liabilities 1,582 9,031 (3,908)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,646 86,974 145,089
INVESTING ACTIVITIES
Purchases of property and equipment and intangible assets (29,431) (63,737) (114,649)
Acquisitions, net of cash acquired (51,214) (12,282) (15,522)
Loan received from equity investee 9,973 -- --
Cash received from escrow account 3,000 -- --
Restricted cash 1,884 510 (7)
Purchase of investments available for sale (2,000) -- --
Proceeds from investments available for sale 10,976 -- --
Dividend received from affiliated companies 1,955 4,775 95
Other investing 2,688 2,704 1,705
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (52,169) (68,030) (128,378)
FINANCING ACTIVITIES
Proceeds from debt 30,000 -- --
Repayments of debt (10,107) (35,132) (950)
Net proceeds from exercise of employee stock options 5,904 23,737 4,895
Cash dividends paid -- -- (28,998)
Other financing (1,618) (1,910) (3,385)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 24,179 (13,305) (28,438)
Effect of exchange rate changes on cash and cash equivalents (435) (84) 246
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 22,221 5,555 (11,481)
Cash and cash equivalents at beginning of period 37,404 59,625 65,180
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 59,625 $ 65,180 $ 53,699
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
50 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003, AND 2004
(IN THOUSANDS OF US$, EXCEPT SHARE DATA)
COMMON STOCK TREASURY STOCK ADDITIONAL ACCUMULATED TOTAL
------------------------ ------------------------ PAID-IN DEFICIT DEFICIT
SHARES AMOUNT SHARES AMOUNT CAPITAL (SEE NOTE 16) EQUITY
---------- ---------- ---------- ---------- ---------- ------------- ----------
Balance at December 31, 2001, as
reported 24,790 $ 248 (2,273) $ (25,000) $ 414,407 $ (168,811) $ 220,844
Prior period adjustment, see
note 16 -- -- -- -- -- 4,048 4,048
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001, as
restated 24,790 $ 248 (2,273) $ (25,000) $ 414,407 $ (164,763) $ 224,892
Compensatory common stock
grants -- -- -- -- 340 -- 340
Exercise of employee stock
options 480 5 -- -- 5,822 -- 5,827
Retirement of treasury shares (2,273) (23) 2,273 25,000 (24,977) -- --
Acquisition of EDN Sovintel LLC 4,024 40 -- -- 50,623 -- 50,663
Net income -- -- -- -- -- 29,784 29,784
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 27,021 $ 270 -- $ -- $ 446,215 $ (134,979) $ 311,506
Exercise of employee stock
options 1,919 19 -- -- 23,834 -- 23,853
Acquisition of OAO Comincom 7,008 70 -- -- 193,415 -- 193,485
Net income -- -- -- -- -- 55,435 55,435
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 35,948 $ 359 -- $ -- $ 663,464 $ (79,544) $ 584,279
Exercise of employee stock
options 374 4 -- -- 4,775 -- 4,779
Sale of 20% of Golden Telecom
(Ukraine) (see note 18) -- -- -- -- 1,538 -- 1,538
Cash dividends paid -- -- -- -- -- (28,998) (28,998)
Net income -- -- -- -- -- 64,783 64,783
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2004 36,322 $ 363 -- $ -- $ 669,777 $ (43,759) $ 626,381
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
51 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS OPERATIONS
Golden Telecom, Inc. ("GTI" or the "Company") is a leading facilities-based
provider of integrated telecommunication and Internet services in major
population centers throughout Russia and other countries of the Commonwealth of
Independent States ("CIS"). The Company offers voice, data and Internet services
to corporations, operators and consumers using its metropolitan overlay network
in major cities including Moscow, Kiev, St. Petersburg, Nizhny Novgorod, Samara,
Kaliningrad, Krasnoyarsk, Almaty, and Tashkent, and via intercity fiber optic
and satellite-based networks, including approximately 220 combined access points
in Russia and other countries of the CIS. The Company offers mobile services in
Kiev and Odessa in Ukraine. Golden Telecom was incorporated in Delaware on June
10, 1999 for the purpose of acting as a holding company for Global TeleSystems,
Inc.'s ("GTS") operating entities within the CIS and supporting non-CIS holding
companies (the "CIS Entities"). On September 29, 1999, GTS transferred its
ownership rights in the CIS Entities to the Company in anticipation of the
Company's initial public offering ("IPO") which closed on October 5, 1999.
The CIS Entities were subsidiaries of GTS prior to the transfer of ownership
rights of the CIS Entities to the Company, and after the IPO, GTS retained an
approximately 67% interest in the Company. On May 11, 2001, GTS completed the
sale of approximately 12.2 million shares, or approximately 50%, of GTI's common
stock to a group of investors led by Alfa Group ("Alfa"), a leading Russia-based
financial and industrial concern, and two of the Company's previously existing
major shareholders, Capital International Global Emerging Markets Private Equity
Fund, L.P. and investment funds managed by Barings Vostok Capital Partners,
including Cavendish Nominees Limited and First NIS Regional Fund SICAV. In July
2001, the Company completed a buy-back of $25.0 million, or approximately 2.3
million shares, of the Company's common stock from a subsidiary of GTS and in
October 2001, GTS sold the remaining approximately 0.6 million shares of GTI's
common stock and ceased being a shareholder of the Company.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING
PRONOUNCEMENTS
Principles of Consolidation
Wholly owned subsidiaries and majority owned ventures where the Company has
operating and financial control are consolidated. Those ventures where the
Company exercises significant influence, but does not exercise operating and
financial control are accounted for by the equity method. All significant
inter-company accounts and transactions are eliminated upon consolidation.
Results of subsidiaries acquired and accounted for by the purchase method
have been included in operations from the relevant date of acquisition.
Foreign Currency Translation
The functional currency of all the Company's foreign subsidiaries is the
United States dollar ("USD") because the majority of their revenues, costs,
property and equipment purchased, and debt and trade liabilities is either
priced, incurred, payable or otherwise measured in USD. Each of the legal
entities domiciled in the CIS maintains its records and prepares its financial
statements in the local currency, principally either Russian rubles or Ukrainian
hryvna, in accordance with the requirements of domestic accounting and tax
legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in the CIS and other non-US jurisdictions
in that they reflect certain adjustments, recorded on the entities' books, which
are appropriate to present the financial position, results of operations and
cash flows in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). The principal adjustments are related to
revenue recognition, foreign currency translation, deferred taxation,
consolidation, and depreciation and valuation of property and equipment and
intangible assets.
The Company follows a translation policy in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 52, "Foreign Currency Translation,"
as amended by SFAS No. 130, "Reporting Comprehensive Income". The temporal
method is used for translating assets and liabilities of the Company's legal
entities domiciled in the CIS and other non-United States jurisdictions.
Accordingly, monetary assets and liabilities are translated at current exchange
rates while non-monetary assets and liabilities are translated at their
historical rates. Income and expense accounts are translated at average monthly
rates of exchange. The resultant translation adjustments are included in the
operations of the subsidiaries and ventures. Generally, the ruble is not
convertible outside of Russia. The official exchange rate which is established
by the Central Bank of Russia is a reasonable approximation of market rate. The
official exchange rates which are used for translation in the accompanying
financial statements at the balance sheet date were 29.45 and 27.75 rubles per
USD as of December 31, 2003 and 2004, respectively. 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. The
change had no impact on the consolidated financial statements.
52 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The translation of local currency denominated assets and liabilities into
USD for the purpose of these financial statements does not indicate that the
Company could realize or settle in USD the reported values of the assets and
liabilities. Likewise, it does not indicate that the Company could return or
distribute the reported USD value of capital to its shareholders.
Cash and Cash Equivalents and Restricted Cash
The Company classifies cash on hand and deposits in banks, including
commercial paper, money market accounts, and any other investments with an
original maturity of three months or less from the date of purchase, that the
Company may hold from time to time, as cash and cash equivalents. Restricted
cash is primarily related to cash held in escrow at a financial institution for
the collateralization of debt obligations that certain of the Company's
consolidated subsidiaries and equity ventures have borrowed from such financial
institution.
Accounts Receivable
Accounts receivable are shown at their net realizable value which
approximates their fair value. The allowance for doubtful accounts is estimated
by a combination of applying estimated loss percentages against the aging of
accounts receivable and specific identification. Bad debt expense for the years
ended December 31, 2002, 2003 and 2004 was $2.1 million, $3.6 million and $10.1
million, respectively.
Inventories
Inventories, which are classified as other current assets, are stated at the
lower of cost or market. Cost is computed on either a specific identification
basis or a weighted average basis.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the lesser of the estimated lives, ranging from five to
ten years for telecommunications equipment and three to five years for
furniture, fixtures and equipment and other property, or their contractual term.
Construction in process reflects amounts incurred for the configuration and
build-out of telecommunications equipment not yet placed into service.
Maintenance and repairs are charged to expense as incurred. The Company has
included in property and equipment, capitalized leases in the amount of $28.7
million and $29.0 million at December 31, 2003 and 2004, respectively, with
associated accumulated depreciation of $9.2 million and $13.4 million as of
December 31, 2003 and 2004, respectively. Amortization of assets recorded under
capital leases is included with depreciation expense for the years ended
December 31, 2002, 2003, and 2004.
Goodwill and Intangible Assets
Goodwill represents the excess of acquisition costs over the fair value of
the net assets of acquired businesses, and was amortized on a straight-line
basis over its estimated useful life, five years, until December 31, 2001.
Beginning January 1, 2002, goodwill has been identified as an indefinite lived
asset in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
and accordingly amortization of goodwill ceased as of that date. Intangible
assets, which are stated at cost, consist principally of telecommunications
service contracts, contract based customer relationships, licenses, software and
content and are amortized on a straight-line basis over the lesser of their
estimated useful lives, generally five to ten years, or their contractual term.
In accordance with Accounting Principles Board ("APB") Opinion No. 17,
"Intangible Assets" and SFAS No. 142 "Goodwill and Other Intangible Assets", the
Company continues to evaluate the amortization period to determine whether
events or circumstances warrant revised amortization periods. Additionally, the
Company considers whether the carrying value of such assets should be reduced
based on the future benefits.
Goodwill Impairment Assessment
Goodwill is reviewed annually, as of the beginning of the fourth quarter,
for impairment or whenever it is determined that impairment indicators exit. The
Company determines whether an impairment has occurred by assigning goodwill to
the reporting units identified in accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets", and comparing the carrying amount of the reporting
unit to the fair value of the reporting unit. If a goodwill impairment has
occurred, the Company recognizes a loss for the difference between the carrying
amount and the implied fair value of goodwill. No such losses were recognized in
the three years ended December 31, 2002, 2003 and 2004.
53 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Long-Lived Assets
Long-lived assets to be held and used by the Company are reviewed to
determine whether an event or change in circumstances indicates that the
carrying amount of the asset may not be recoverable. For long-lived assets to be
held and used, the Company bases its evaluation on such impairment indicators as
the nature of the assets, the future economic benefit of the assets, any
historical or future profitability measurements, as well as other external
market conditions or factors that may be present. If such impairment indicators
are present or other factors exist that indicate that the carrying amount of the
asset may not be recoverable, the Company determines whether an impairment has
occurred through the use of an undiscounted cash flows analysis of assets at the
lowest level for which identifiable cash flows exist. If impairment has
occurred, the Company recognizes a loss for the difference between the carrying
amount and the fair value of the asset. The fair value of the asset is measured
using discounted cash flow analysis or other valuation techniques. No such
losses were recognized in the three years ended December 31, 2002, 2003 and
2004.
Income Taxes
The Company accounts for income taxes using the liability method required by
SFAS No. 109, "Accounting for Income Taxes." For interim reporting purposes, the
Company also follows the provisions of Accounting Principles Board No. 28,
"Interim Financial Reporting," which requires the Company to account for income
taxes based on the Company's best estimate of the effective tax rate expected to
be applicable for the full fiscal year on a current year-to-date basis. The rate
so determined is based on the currently enacted tax rates of the Company in the
United States and the Company's subsidiaries in Russia and other CIS countries
and includes the Company's best estimate of the annual tax effect of
non-deductible expenses, primarily related to amortization of intangible assets,
foreign exchange and other permanent differences as well as the estimates as to
the realization of certain deferred tax assets. Deferred income taxes result
from temporary differences between the tax bases of assets and liabilities and
the bases as reported in the consolidated financial statements. The Company does
not provide for deferred taxes on the undistributed earnings of its foreign
subsidiaries, as such earnings are generally intended to be reinvested in those
operations permanently. In the case of non-consolidated entities, except MCT
Corp. ("MCT"), where our partner requests that a dividend be paid, the amounts
are not expected to have a material impact on the Company's income tax
liability. It is not practical to determine the amount of unrecognized deferred
tax liability for such reinvested earnings.
Revenue Recognition
The Company records as revenue the amount of telecommunications and Internet
services rendered, as measured primarily by the minutes of traffic processed and
the time spent online using Internet services. Revenue from service contracts is
accounted for when the services are provided. Billings received in advance of
service being performed are deferred and recognized as revenue as the service is
performed. The Company also defers up front connection fees which is recognized
over the estimated life of the customer. The Company recognizes revenue from
equipment sales when title to the equipment passes to the customer. The Company
defers the revenue on installed equipment until installation and testing are
completed and accepted by the customer. Revenues are stated net of any
value-added taxes charged to customers. Certain other taxes that are based on
revenues earned were incurred at a rate of 1% in 2002, and have been included in
operating expenses since these taxes are incidental to the revenue cycle.
The Company has deferred connection fees and capitalized direct incremental
costs related to connection fees, not exceeding the revenue deferred. The
deferral of revenue and capitalization of cost of revenue related to connection
fees will be recognized over the estimated life of the customer. The total
amount of deferred connection fees revenue was $20.0 million and $33.8 million
as of December 31, 2003 and 2004, respectively. The total amount of capitalized
direct incremental costs related to connection fees was $5.2 million and $8.0
million as of December 31, 2003 and 2004, respectively.
In the fourth quarter of 2002, the Company re-assessed the average life of
the customer and concluded that the average life of the customer increased from
three to five years except for Golden Telecom (Ukraine) ("GTU") which remained
at two years for customers in the Business and Corporate Services Division and
Operator and Carrier Services Division and eighteen months for customers in the
Mobile Services division. The impact of increasing the average life of the
customer from three to five years was approximately $0.7 million reduction in
revenue and $0.4 million decrease in cost of revenue in the fourth quarter of
2002. The impact of this change in customer life was $0.3 million reduction on
net income and $0.01 per common share - basic for the year ended December 31,
2002.
54 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 2002, the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force issued its consensus concerning Revenue Arrangements with
Multiple Deliverables ("EITF 00-21"). EITF 00-21 addresses how to determine
whether a revenue arrangement involving multiple deliverables should be divided
into separate units of accounting, and, if separation is appropriate, how the
arrangement consideration should be measured and allocated to the identified
accounting units. The guidance in EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on the Company's
consolidated financial position or results of operations.
Advertising
The Company expenses the cost of advertising as incurred. Advertising
expense for the years ended December 31, 2002, 2003 and 2004 was $3.7 million,
$5.2 million and $4.7 million, respectively.
Government Pension Funds
The Company contributes to the local state pension funds and social funds,
on behalf of all its CIS employees. In Russia, starting from January 1, 2001 all
social contributions, including contributions to the pension fund, were
substituted with a unified social tax ("UST") calculated by the application of a
regressive rate from 35.6% to 5% to the annual gross remuneration of each
employee. The Company allocates UST to three social funds, including the pension
fund, where the rate of contributions to the pension fund vary from 28% to 5%,
respectively, depending on the annual gross salary of each employee. The
contributions are expensed as incurred.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from non-owner sources. For the years ended December
31, 2002, 2003 and 2004, comprehensive income for the Company is equal to net
income.
Off Balance Sheet Risk and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash, cash equivalents, and accounts and
notes receivable. Of the $53.7 million of cash and cash equivalents held at
December 31, 2004, $31.0 million was held in United States ("US") money market
instruments in US financial institutions. The remaining balance is being
maintained in US-owned banks and local financial institutions within the CIS.
The Company extends credit to various customers, principally in Russia and
Ukraine, and establishes an allowance for doubtful accounts for specific
customers that it determines to have significant credit risk. The Company
generally does not require collateral to extend credit to its customers. In
2001, the Company granted an unsecured loan to a party in a lease agreement, as
disclosed in note 8.
Stock-Based Compensation
The Company follows the provisions of 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 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB No. 28, "Interim Financial Reporting", to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earrings per share in annual and interim financial
statements. The Company has adopted the amendments to SFAS No. 123 disclosure
provisions required under SFAS No. 148 but will continue to use the intrinsic
value method under APB No. 25 to account for stock-based compensation. As such,
the adoption of SFAS No. 148 did not have a significant impact of the Company's
consolidated financial position or results of operations.
55 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 years due to
the vesting period of the stock options and the fair value of additional stock
options in future years.
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------------------
2002 2003 2004
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported $ 29,784 $ 55,435 $ 64,783
Deduct: total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects 7,937 3,183 1,922
------------ ------------ ------------
Pro forma net income $ 21,847 $ 52,252 $ 62,861
============ ============ ============
Net income per share:
Basic - as reported $ 1.24 $ 1.95 $ 1.79
Basic - pro forma 0.91 1.84 1.74
Diluted - as reported 1.21 1.90 1.77
Diluted - pro forma 0.89 1.80 1.72
In December 2004, the FASB issued SFAS No. 123R (revised 2004), "Share Based
Payment", which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation" SFAS No. 123R supersedes APB No. 25, "Accounting for Stock Issued
to Employees and amends SFAS No. 95, "Statement of Cash Flows". Under SFAS No.
123R, companies must calculate and record the cost of equity instruments, such
as stock options or restricted stock, awarded to employees for services received
in the income statement; pro forma disclosure is no longer permitted. The cost
of the equity instruments is to be measured based on fair value of the
instruments on the date they are granted (with certain exceptions) and is
required to be recognized over the period during which the employees are
required to provide services in exchange for the equity instruments. SFAS No.
123R is effective in the first interim or annual reporting period beginning
after June 15, 2005.
SFAS No. 123R provides two alternatives for adoption: (1) a "modified
prospective" method in which compensation cost is recognized for all awards
granted subsequent to the effective date of this statement as well as for the
unvested portion of awards outstanding as of the effective date and (2) an
"modified retrospective" method which follows the approach in the "modified
prospective" method, but also permits entities to restate prior periods to
reflect compensation cost calculated under SFAS No. 123 for pro forma amounts
disclosure. The Company plans to adopt SFAS No. 123R using the modified
prospective method. As the Company currently accounts for share based payments
to employees in accordance with the intrinsic value method permitted under ABP
No. 25, no compensation expense is recognized. The impact of adopting SFAS No.
123R cannot be accurately estimated at this time, as it will depend on the
amount of share based awards granted in future periods. However, had the Company
adopted SFAS No. 123R in a prior period, the impact would approximate the impact
of SFAS No. 123 as described in the disclosure of pro forma net income and
earnings per share. SFAS No. 123R also requires that tax benefits received in
excess of compensation cost be reclassified from an operating cash flow to a
financing cash flow in the Consolidated Statement of Cash Flows. This change in
classification will reduce net operating cash flows and increase net financing
cash flows in the periods after adoption.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). 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 VIEs.
Therefore the adoption of FIN No. 46R did not have an impact on the financial
position or results of operations.
56 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Derivative Instruments and Hedging Activities
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003. The adoption of the provisions of SFAS No. 149 did
not have an impact on the Company's results of operations or financial position.
Financial Instruments
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities. The provisions of SFAS No. 150 are effective for financial
instruments entered into or modified after May 31, 2003 and to all other
instruments that exist as of the beginning of the first interim financial
reporting period beginning after June 15, 2003. The Company does not have any
financial instruments that meet the provisions of SFAS No. 150, therefore,
adopting the provisions of SFAS No. 150 did not have an impact on the Company's
results of operations or financial position.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities, and short- and long-term debt approximate
their fair value. The fair value of notes receivable, including the long-term
portion that are included in other current and non-current assets, respectively
was $5.6 million and $3.7 million at December 31, 2003 and 2004, respectively as
determined by discounting future payments by 5.5% at December 31, 2003 and by
5.0% at December 31, 2004. At December 31, 2003 and 2004, the Company held no
debt at fixed rates.
Exchanges of Nonmonetary Assets
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets". SFAS No. 153 addresses the measurement of exchanges of nonmonetary
assets. The guidance in APB Opinion No. 29, "Accounting for Nonmonetary
Transactions" ("APB No. 29"), is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. The guidance in APB No. 29, however, included certain exceptions to
that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This provisions of SFAS No. 153 are effective for financial
statements for fiscal years beginning after June 15, 2005. Earlier application
is permitted for nonmonetary asset exchanges incurred during fiscal years
beginning after the date SFAS No. 153 was issued. The adoption of the provisions
of SFAS No. 153 is not expected to have a material impact on the Company's
results of operations or financial position.
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 prior year amounts have been reclassified to conform to the
presentation adopted in the current year. Such reclassifications did not affect
the consolidated statements of operations.
57 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3: NET INCOME PER SHARE
Basic earnings per share at December 31, 2003 and 2004 is computed on the
basis of the weighted average number of common shares outstanding. Diluted
earnings per share at December 31, 2003 and 2004 is 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 twelve months ended December 31,
2003 and 2004 was 10,000 stock options.
The components of basic and diluted earnings per share were as follows:
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------------------
2002 2003 2004
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income before cumulative effect of a change in accounting principle $ 28,810 $ 55,435 $ 64,783
============ ============ ============
Weighted average shares outstanding of:
Common stock 24,102 28,468 36,226
Dilutive effect of:
Employee stock options 415 639 327
------------ ------------ ------------
Common stock and common stock equivalents 24,517 29,107 36,553
============ ============ ============
Earnings per share before cumulative effect of a change in accounting principle:
Basic $ 1.20 $ 1.95 $ 1.79
============ ============ ============
Diluted $ 1.17 $ 1.90 $ 1.77
============ ============ ============
NOTE 4: GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and No.
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001.
Upon the adoption of SFAS No. 142, the Company recorded a cumulative effect
of a change in accounting principle for negative goodwill (deferred credit)
arising on the Company's equity method investments in the amount of $1.0
million. The impact of non-amortization of goodwill on the Company's net income
for the twelve months ended December 31, 2002 was approximately $15.0 million
increase, or $0.62 per share of common stock - basic.
Amortization expense for intangible assets for the twelve months ended
December 31, 2002, 2003 and 2004 was $6.4 million, $10.5 million and $18.2
million, respectively. Amortization expense for the succeeding five years is
expected to be as follows: 2005 - $17.8 million, 2006 - $16.5 million, 2007 -
$15.6 million, 2008 - $13.8 million and 2009 - $8.2 million. 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 DECEMBER 31, 2004
--------------------------- ---------------------------
(IN THOUSANDS)
----------------------------------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
------------ ------------ ------------ ------------
Amortized intangible assets:
Telecommunications service contracts $ 80,241 $ (13,619) $ 92,250 $ (21,917)
Contract-based customer relationships 35,169 (2,859) 36,849 (10,883)
Licenses 3,957 (1,854) 4,358 (2,515)
Other intangible assets 9,292 (5,492) 9,858 (6,684)
------------ ------------ ------------ ------------
Total $ 128,659 $ (23,824) $ 143,315 $ (41,999)
============ ============ ============ ============
Other intangible assets include software, Internet software and related
content, as well as other intangible assets.
58 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The changes on the carrying amount of goodwill for the years ended December
31, 2003 and 2004, respectively, are as follows:
BUSINESS
& CARRIER &
CORPORATE OPERATOR
SEGMENT SEGMENT TOTAL
------------ ------------ ------------
(IN THOUSANDS)
Balance as of December 31, 2002 $ 28,096 $ 43,607 $ 71,703
Goodwill related to acquisitions 56,796 15,509 72,305
------------ ------------ ------------
Balance as of December 31, 2003 $ 84,892 $ 59,116 $ 144,008
Goodwill related to acquisitions 1,932 314 2,246
------------ ------------ ------------
Balance as of December 31, 2004 $ 86,824 $ 59,430 $ 146,254
============ ============ ============
NOTE 5: BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS
ACQUISITIONS IN 2002
In August 2002, the Company acquired approximately 31% of GTU, a majority
owned subsidiary, for cash consideration of approximately $5.2 million,
including $3.7 million recorded as a liability, net of $0.3 million discount,
determined at the rate of 6.11%. The acquisition was accounted for as a purchase
business combination under US GAAP. The Company has recorded approximately $1.8
million of contract-based customer relationship intangible assets that are
amortized over a period of approximately 5 years. There was no goodwill recorded
as a result of this transaction.
In September 2002, subsidiaries of the Company completed the acquisition of
50% of EDN Sovintel LLC ("Sovintel") that the Company did not own from Open
Joint Stock Company Rostelecom ("Rostelecom"), pursuant to an Ownership Interest
Purchase Agreement, dated March 13, 2002, by and among subsidiaries of the
Company and Rostelecom, bringing the Company's ownership in Sovintel to 100%.
The total purchase price of approximately $113.1 million consisted of
approximately $50.7 million in GTI's common stock, representing 4,024,067
shares, $10.0 million in cash consideration, $46.0 million in promissory note
consideration (see discussion below), and direct transaction costs of
approximately $7.1 million, including an investment banking fee of approximately
$3.3 million paid to an affiliate of Alfa, a shareholder of the Company.
Sovintel provides worldwide communications services, principally to major
hotels, business offices and mobile communication companies through its
telecommunications network in Russia. The Company began consolidating the
results of operations of Sovintel on September 17, 2002.
In September 2002, TeleRoss LLC ("TeleRoss"), a wholly-owned Russian
subsidiary of the Company, issued a three month $46.0 million non-interest
bearing note payable to Rostelecom in partial settlement of the acquisition of
the remaining 50% ownership interest in Sovintel previously held by Rostelecom.
TeleRoss was required to and settled the note, in full, in December 2002. This
non-interest bearing note payable was recorded net of $0.7 million discount
representing imputed interest.
The acquisition of the remaining 50% of Sovintel was accounted for as a
purchase business combination in accordance with SFAS No. 141, "Business
Combinations". As the transaction reflected acquisition of the remaining 50%
interest in Sovintel which was not previously owned by the Company, the Company
has recorded the net assets acquired at 50% of estimated fair value and 50% of
historical US GAAP carrying values. The following is a condensed balance sheet
of Sovintel as of September 17, 2002, reflecting purchase price allocation to
the net assets acquired:
59 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 17, 2002
--------------------
(IN THOUSANDS)
ASSETS:
Current assets $ 43,223
Property and equipment, net 64,124
Telecommunications service contracts intangible assets, net 14,742
Contract based customer relationship intangible assets, net 6,350
Licenses, net 562
Other intangible assets, net 300
Goodwill 54,262
Other assets 11,114
--------------------
Total assets $ 194,677
LIABILITIES:
Current liabilities $ 23,774
Non-current liabilities 8,514
--------------------
Net assets $ 162,389
Less: previous carrying value of the Company's equity method investment in Sovintel (49,283)
--------------------
Total purchase consideration and acquisition costs $ 113,106
====================
Consideration and acquisition costs:
Cash consideration $ 10,000
Promissory note consideration, net of discount 45,307
GTI shares consideration 50,663
Direct transaction costs 7,136
--------------------
Total purchase consideration and acquisition costs $ 113,106
====================
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 approximately $14.7 million to
telecommunications service contracts intangible assets which are amortized over
a weighted average period of approximately 9 years, approximately $6.4 million
to contract based customer relationship intangible assets which are amortized
over a weighted average period of approximately 5 years, approximately $0.6
million to licenses which are amortized over a weighted average period of 5
years, and approximately $0.3 million to other identified intangible assets
which are amortized over 5 years. Property and equipment was adjusted to fair
value using a net current replacement cost valuation method. The excess purchase
price over the fair value of the net tangible and intangible assets acquired of
approximately $54.3 million has been assigned to goodwill and is not deductible
for tax purposes. Approximately $26.1 million of this goodwill has been assigned
to the Business and Corporate Services reportable segment and approximately
$28.2 million of this goodwill has been assigned to the Carrier and Operator
Services reportable segment. In accordance with SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", the
Company will not amortize the goodwill recorded in connection with the
acquisition of the remaining 50% of Sovintel. The goodwill will be tested for
impairment at least annually.
The following unaudited pro forma combined results of operations for the
Company give effect to the Sovintel business combination as if it had occurred
at the beginning of 2002. These pro forma amounts are provided for informational
purposes only and do not purport to present the results of operations of the
Company had the transactions assumed therein occurred on or as of the date
indicated, nor is it necessarily indicative of the results of operations which
may be achieved in the future.
60 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
TWELVE MONTHS ENDED
DECEMBER 31, 2002
--------------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenue $ 286,998
Income (loss) before cumulative effect of a change in accounting principle 36,587
Cumulative effect of a change in accounting principle 974
--------------------
Net income (loss) $ 37,561
====================
Basic earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change in accounting principle $ 1.36
Cumulative effect of a change in accounting principle 0.04
--------------------
Net income (loss) per share - basic $ 1.40
====================
Weighted average common shares - basic 26,748
====================
Diluted earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change in accounting principle $ 1.34
Cumulative effect of a change in accounting principle 0.04
--------------------
Net income (loss) per share - diluted $ 1.38
====================
Weighted average common shares - diluted 27,163
====================
ACQUISITIONS IN 2003
In August 2003, the Company completed the acquisition of 100% of OOO
Sibchallenge ("Sibchallenge"), a telecommunications service provider in
Krasnoyarsk, Russia. The total purchase price of approximately $15.4 million
consisted of cash consideration of approximately $15.0 million and approximately
$0.4 million in direct transaction costs, including an investment banking fee of
$0.3 million paid to Belongers Limited, an affiliate of Alfa, a shareholder of
the Company. The acquisition of Sibchallenge establishes GTI's presence in the
Krasnoyarsk region. In addition, Sibchallenge has numbering capacity and
interconnect agreements.
The acquisition of 100% of Sibchallenge was accounted for as a purchase
business combination in accordance with SFAS No. 141, "Business Combinations".
The following is the condensed balance sheet of Sibchallenge as of August 31,
2003 reflecting purchase price allocation to the net assets acquired:
AUGUST 31, 2003
---------------
(IN THOUSANDS)
ASSETS:
Current assets $ 1,792
Property and equipment 7,057
Telecommunications service contracts intangible assets, net 11,175
---------------
Total assets $ 20,024
===============
LIABILITIES:
Current liabilities $ 1,519
Non-current liabilities 3,121
---------------
Net assets $ 15,384
===============
Consideration and acquisition costs:
Cash consideration 15,000
Direct transaction costs 384
---------------
Total purchase consideration and transaction costs $ 15,384
===============
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 approximately $11.2 million to
telecommunications service contracts intangible assets. These identified
intangible assets are amortized over a period of 10 years. There was no goodwill
recorded as a result of this transaction. The results of operations of
Sibchallenge have been included in the Company's consolidated operations since
August 31, 2003.
61 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In December 2003, the Company completed the acquisition of 100% of the
shares in OAO Comincom ("Comincom") from Nye Telenor East Invest as ("Telenor"),
pursuant to a Share Exchange Agreement. The total purchase price of
approximately $195.3 million consisted of approximately $193.5 million in GTI's
common stock, representing 7,007,794 shares and direct transaction costs of
approximately $1.8 million. The purchase consideration has been determined using
the closing date of the transaction as December 1, 2003. Accordingly, the GTI
shares issued in consideration are valued based on the average closing price of
the Company's common stock for the five consecutive trading days between
November 26, 2003 and December 2, 2003, which was $27.61 per share. Comincom
provides telecommunications services, principally to major hotels, business
offices and mobile communication companies through its telecommunications
network in Russia, including Moscow, St. Petersburg, Voronezh, Samara and
several other major population centers. The Company began consolidating the
results of operations of Comincom on December 1, 2003.
The acquisition of 100% of the shares in Comincom was accounted for as a
purchase business combination in accordance with SFAS No. 141, "Business
Combinations. The following is the condensed balance sheet of Comincom as of
December 1, 2003 reflecting the purchase price allocation to the net assets
acquired:
DECEMBER 1, 2003
----------------
(IN THOUSANDS)
ASSETS:
Current assets $ 38,191
Property and equipment 84,749
Telecommunications service contracts intangible assets, net 17,344
Contract-based customer relationship intangible assets, net 26,847
Licenses, net 546
Goodwill 72,305
Other assets 1,575
---------------
Total assets $ 241,557
===============
LIABILITIES:
Current liabilities $ 28,678
Non-current liabilities 17,535
---------------
Net assets $ 195,344
===============
Consideration and acquisition costs:
GTI shares consideration 193,485
Direct transaction costs 1,859
---------------
Total purchase consideration and acquisition costs $ 195,344
===============
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 approximately $17.3 million to
telecommunications service contracts intangible assets which will be amortized
over a weighted average period of approximately 10 years, approximately $26.8
million to contract-based customer relationship intangible assets which will be
amortized over a weighted average period of approximately 5 years, and
approximately $0.5 million to licenses which will be amortized over a weighted
average period of 4 years. Property and equipment was adjusted to fair value
using a net current replacement cost valuation method. The excess purchase price
over the fair value of the net tangible and intangible assets acquired of
approximately $72.3 million has been assigned to goodwill and is not deductible
for tax purposes. Approximately $15.5 million of this goodwill has been assigned
to the Carrier and Operator Services reportable segment and approximately $56.8
million of this goodwill has been assigned to the Business and Corporate
Services reportable segment. In accordance with SFAS No. 141, "Business
Combinations", and SFAS No. 142 "Goodwill and Other Intangible Assets", the
Company will not amortize the goodwill recorded in connection with the
acquisition of 100% of the shares in Comincom. The goodwill will be tested for
impairment at least annually.
The following unaudited pro forma combined results of operations for the
Company give effect to the Sovintel, Sibchallenge and Comincom business
combinations as if they had occurred at the beginning of 2002 and to give effect
to the Sibchallenge and Comincom business combinations as if they had occurred
at the beginning of 2003. These pro forma amounts are provided for informational
purposes only and do not purport to present the results of operations of the
Company had the transactions assumed therein occurred on or as of the date
indicated, nor is it necessarily indicative of the results of operations which
may be achieved in the future.
62 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
TWELVE MONTHS ENDED
DECEMBER 31,
-----------------------------
2002 2003
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenue $ 371,226 $ 458,276
Income before cumulative effect of a change in accounting principle 43,368 61,802
Cumulative effect of a change in accounting principle 974 --
------------ ------------
Net income $ 44,342 $ 61,802
============ ============
Basic earnings per share of common stock:
Income before cumulative effect of a change in accounting principle $ 1.30 $ 1.77
Cumulative effect of a change in accounting principle 0.03 --
------------ ------------
Net income (loss) per share - basic $ 1.33 $ 1.77
============ ============
Weighted average common shares - basic 33,454 34,990
============ ============
Diluted earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change in accounting principle $ 1.28 $ 1.74
Cumulative effect of a change in accounting principle 0.03 --
------------ ------------
Net income (loss) per share - diluted $ 1.31 $ 1.74
============ ============
Weighted average common shares - diluted 33,869 35,539
============ ============
ACQUISITIONS IN 2004
In February 2004, the Company completed the acquisition of 100% ownership
interest in ST-HOLDING s.r.o. ("ST-HOLDINGS"), 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. 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. In April 2004, the Company
completed the acquisition of the remaining 49% ownership interest in OOO
Uralrelcom that the Company did not already own. In May 2004, the Company
completed the acquisition of a 54% ownership interest in SP Buzton ("Buzton"),
an alternative telecommunications operator in Uzbekistan. These companies were
acquired for approximately $16.0 million in cash, with $1.1 million held in
escrow for a period of one year related to Balticom and $0.5 million payable for
Buzton upon satisfactory achievement of certain conditions. The results of
ST-HOLDINGS have been included in the Company's consolidated operations since
February 1, 2004. The results of Balticom have been included in the Company's
consolidated operations since April 30, 2004. The results of Buzton have been
included in the Company's consolidated operations since May 31, 2004.
In August 2004, the Company entered into a share purchase agreement with
Nodama Holdings, Ltd. ("Nodama"), to acquire 100% of Hudson Telecom, Inc., a
Delaware corporation, which owns 100% of OOO Digital Telephone Networks and OOO
Digital Telephone Switches, together comprising one of the largest regional
alternative operators in Russia operating in Rostov-on-Don and the surrounding
region. Upon closure, Nodama will receive $45.0 million in cash of which $5.0
million will be placed in escrow for a period of one year subject to the
achievement of certain financial conditions. Amounts in the escrow may be used
to compensate the Company in the event of the realization of certain contingent
liabilities in the acquired entities. While the Company had expected to
consummate this transaction in 2004, it has taken Nodama additional time to
conclude this transaction. The consummation of the transaction is conditioned
upon, among other things, the completion of satisfactory due diligence and the
seller's fulfillment of certain conditions precedent. The transaction is
expected to close in the first half of 2005.
63 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6: INVESTMENTS IN AND ADVANCES TO VENTURES
The Company has various investments in ventures that are accounted for by
the equity method. The Company's ownership percentages in its equity method
investments, in the periods shown, range from approximately 22% to 50%.
The Company has financed the operating and investing cash flow requirements
of several of the Company's ventures in the form of cash advances. The Company
aggregates all of the receivable and payable balances with the ventures in the
Company's investments in and cash advances to the ventures.
For all periods presented through December 31, 2004, the significant
investments accounted for under the equity method and the percentage interest
owned consist of the following:
EQUITY METHOD ENTITIES
PERIOD OWNERSHIP
-------------------------- ---------
Sovintel Through September 16, 2002 50%
Other Regional Ventures All 50%
TeleRoss Samara Through June 2002 50%
MCT From December 2000 22%-24%
TeleRoss Samara and Sovintel are accounted for using the consolidation
method subsequent to the dates indicated above.
The following table presents summarized income statement information from
the Company's significant equity investee, Sovintel, for the period January 1,
2002 to September 16, 2002. Effective September 17, 2002, the Company began
consolidating the results of operations of Sovintel as a result of the
acquisition of the 50% interest not controlled previously.
PERIOD FROM JANUARY 1 TO
SEPTEMBER 16, 2002
------------------------
(IN THOUSANDS)
Revenue $ 101,261
Gross margin 45,248
Operating income 25,875
Net income 19,115
The Company recognized equity in losses related to its investment in MCT of
$5.1 million for the year ended December 31, 2002, reducing the carrying value
of the Company's investment in MCT to zero. In August 2003, MCT concluded a
binding agreement with OJSC Mobile TeleSystems ("MTS") on the sale of five of
its cellular operators. MTS paid MCT approximately $70.0 million and assumed
certain guarantees as part of the transaction. In October 2003, MCT declared a
cash dividend of $1.90 per common share to shareholders of record as of October
27, 2003. The Company's portion of this cash dividend was approximately $4.7
million. This cash dividend was received in November 2003 and is classified as
part of equity in earnings in the consolidated statement of operations. In
November 2004, MCT concluded the sale of its 88% interest in Sibintertelecom to
MTS for approximately $41.0 million. Consideration has been given to the
resumption of equity accounting; however management does not believe that the
Company's share of income resulting from the sale of assets that MCT has made
would exceed losses that had previously not been recognized once the investment
in MCT had been reduced to zero.
64 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7: SUPPLEMENTAL BALANCE SHEET INFORMATION
DECEMBER 31,
-------------------------
2003 2004
---------- -----------
(IN THOUSANDS)
Other current assets consist of:
Inventory $ 7,932 $ 8,911
Notes receivable 1,972 2,338
Other current assets 6,005 5,489
---------- ----------
Total other current assets $ 15,909 $ 16,738
========== ==========
Other non-current assets consist of:
Notes receivable $ 3,610 $ 1,494
Investments in and advances to ventures 251 742
Other non-current assets 4,256 6,767
---------- ----------
Total other non- current assets $ 8,117 $ 9,003
========== ==========
Accounts payable and accrued expenses consists of:
Accounts payable $ 45,389 $ 57,566
Interest payable 11 2
Accrued compensation 2,241 3,046
Accrued other taxes 1,092 480
Accrued access and network services 9,471 11,262
Other accrued expenses 7,575 9,118
---------- ----------
Total accounts payable and accrued expenses $ 65,779 $ 81,474
========== ==========
Other current liabilities consists of:
Non-trade liabilities to GTS $ 2,904 $ 2,904
Other current liabilities 2,345 668
---------- ----------
Total other current liabilities $ 5,249 $ 3,572
========== ==========
NOTE 8: DEBT OBLIGATIONS AND CAPITAL LEASES
The Company paid interest of $4.8 million, $2.0 million and $0.6 million in
2002, 2003 and 2004, respectively.
Some of the Company's operating companies have received debt financing
through direct loans from affiliated companies. In addition, certain operating
companies have borrowed funds under a $22.7 million back-to-back, seven-year
credit facility from a Russian subsidiary of Citibank. Under this facility, the
Company provides full cash collateral, held in London and recorded on our
balance sheet as restricted cash, for onshore loans made by the bank to the
Company's Russian registered ventures. In a second, similar facility, the
Company provides full cash collateral for a $10.0 million short term
back-to-back, revolving, credit facility from the same bank for the Company's
larger Russian operating companies. The funding level as of December 31, 2004
for all these facilities totaled $1.0 million, of which $0.2 million was funded
to the Company's consolidated subsidiaries and $0.8 million was funded to the
Company's affiliates. The loan facilities carry interest at a rate equal to the
three-month London Inter-Bank Offering Rate ("LIBOR") plus 1.0 percent per annum
(equivalent to approximately 2.7%, on average for loans outstanding, at December
31, 2004) and mature between December 2006 and January 2007.
In the first quarter of 2000, the Company entered into a lease for fiber
capacity, including facilities and maintenance, from Moscow to Stockholm. The
lease has a term of ten years with an option to renew for an additional five
years. Prepayments were made to the lessor in April 2000, August 2000 and
February 2001. These prepayments have been offset in the balance sheet against
the capital lease obligation.
In September 2001, the Company entered into a five year lease for the right
to use up to VC-3 fiber optic capacity on major routes within Russia to support
the increase in the Company's interregional traffic and regional expansion
strategy. The lease is classified as a capital lease in the balance sheet. In
December 2001, GTI issued a $9.1 million loan to the same company that has
provided the lease. The loan has payment terms of 56 months, which started in
January 2002, and carries interest at the rate of 7 percent per annum.
65 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table presents minimum lease payments under capital leases:
LEASE PAYMENTS
(IN THOUSANDS)
2005 $ 2,553
2006 1,592
--------------
4,145
Less: interest 306
--------------
Total principal payments $ 3,839
==============
In September 2002, ROL Holdings Limited ("ROLH"), a wholly-owned Cypriot
subsidiary of the Company, entered into a secured $30.0 million credit facility
with ZAO Citibank ("Citibank Credit Facility"). ROLH drew upon the Citibank
Credit Facility in the fourth quarter of 2002 to fund the repayment of $30.0
million of the $46.0 million non-interest bearing promissory note issued to
Rostelecom by TeleRoss in connection with the acquisition of the remaining 50%
ownership interest in Sovintel previously held by Rostelecom. In June 2003, the
Company settled early the $30.0 million of outstanding debt plus accrued
interest. There was no penalty for the early settlement of this debt however an
additional $0.2 million of previously capitalized financing costs was recognized
as interest expense which was previously being recognized over the life of the
facility.
NOTE 9: SHAREHOLDERS' EQUITY
Common Stock
In July 2001, the Company completed a buy-back of $25.0 million, or
approximately 2.3 million shares, of the Company's common stock at $11.00 per
share, from a subsidiary of GTS. In the fourth quarter of 2002, the Company
retired approximately 2.3 million of the Company's common stock held in
treasury.
In August 2002, the Company issued 4,024,067 shares of common stock to
Rostelecom in partial settlement of the purchase price for the acquisition of
the remaining 50% ownership interest in Sovintel, previously held by Rostelecom.
In December 2003, the Company issued 7,007,794 shares of common stock to
Telenor in settlement of the purchase price for the acquisition of 100%
ownership interest in Comincom, previously held by Telenor.
The Company's outstanding shares of common stock increased by 1,918,882
shares and 374,396 shares in the twelve months ended December 31, 2003 and 2004,
respectively issued in connection with the exercise of employee stock options.
The Company has reserved 1,361,681 shares of common stock for issuance to
certain employees and directors in connection with the 1999 Equity Participation
Plan.
Preferred Stock
On May 17, 2000, the Company's shareholders authorized 10 million shares of
preferred stock, none of which have been issued.
Additional Paid-In Capital
As further described in note 18, in August 2004, the Company transferred 20%
of the ownership interest in GTU to a Ukrainian partner in exchange for services
provided by the partner. The excess of the fair value of consideration exchanged
for services over the book value of 20% of net assets of GTU in the amount of
$1.5 million was recorded as a credit to the consolidated equity.
Dividends
During 2004, the Company paid four quarterly dividends of $0.20 per common
share, for a total of $0.80 per common share for the year. The total amount paid
by the Company was $29.0 million.
66 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10: STOCK OPTION PLANS
The Company has established the 1999 Equity Participation Plan of Golden
Telecom, Inc., (the "Option Plan"). The Company has granted and intends to offer
stock options to key employees and members of the Board of Directors of the
Company. The Company recognized $0.5 million in compensation expense in the year
ended December 31, 2002, in connection with options granted to employees of the
Company's equity investees. Under the Option Plan not more than 4,320,000 shares
of common stock (subject to anti-dilution and other adjustment provisions) are
authorized for issuance upon exercise of options or upon vesting of restricted
or deferred stock awards. Options granted under the Option Plan vest over a
three-year term from the date of grant with one-third vesting after one year and
one thirty-sixth vesting each month thereafter and expire ten years from the
date of grant.
The fair value of options granted under the GTI Option Plan in 2002 are
estimated to be $8.77 per common share, in 2003 are estimated to be between
$9.39 and $15.05 per common share and in 2004 are estimated to be $14.59 per
common share, on the date of grant using the Black Scholes option pricing model
with the following assumptions:
TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------
2002 2003 2004
---------- ---------- ----------
Risk free interest rate 4.71% 2.89 - 3.55% 4.39%
Dividend yield 0.0% 0.0% 3.0%
Expected life (years) 3.0 3.0 3.0
Volatility 123% 104 - 108% 95%
Additional information with respect to stock options activity is summarized
as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2003 2004
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- ---------- ----------
Outstanding at beginning of year 2,657,073 $ 12.75 904,272 $ 13.48
Options granted 195,000 14.56 5,000 26.61
Options exercised (1,918,882) 12.43 (374,396) 12.76
Options expired (20,054) 27.06 -- --
Options forfeited (8,865) 15.63 (17,863) 12.00
---------- ----------
Outstanding at end of year 904,272 13.48 517,013 14.18
========== ==========
Options exercisable at end of year 566,324 $ 13.49 448,818 $ 14.07
The following table summarizes information about stock options outstanding:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- -----------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES NUMBER LIFE EXERCISE NUMBER EXERCISE
AT DECEMBER 31, 2004: OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
---------------------- --------------- --------------- --------------- --------------- ---------------
$ 12.00 212,156 5.7 $ 12.00 212,156 $ 12.00
14.00 174,900 8.1 14.00 111,705 14.00
15.63 94,957 5.3 15.63 94,957 15.63
19.45 20,000 3.4 19.45 20,000 19.45
26.61 5,000 4.4 26.61 -- --
33.25 10,000 5.4 33.25 10,000 33.25
67 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11: INCOME TAXES
The Company accounts for income taxes using the liability method required by
FASB Statement No. 109 "Accounting for Income Taxes".
The components of income before income taxes and minority interest were as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2003 2004
---------- ---------- ----------
(IN THOUSANDS)
Pretax income:
Domestic $ 5,823 $ 5,754 $ (4,853)
Foreign 28,141 67,560 101,886
---------- ---------- ----------
$ 33,964 $ 73,314 $ 97,033
========== ========== ==========
The following is the Company's significant components of the provision for
income taxes attributable to continuing operations:
YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2003 2004
---------- ---------- ----------
(IN THOUSANDS)
Domestic - current $ 16 $ -- $ --
Domestic - deferred -- (1,861) (373)
Foreign - current 8,824 20,516 35,350
Foreign - deferred (4,213) (1,256) (4,233)
---------- ---------- ----------
$ 4,627 $ 17,399 $ 30,744
========== ========== ==========
The Company paid income taxes of $8.5 million, $17.5 million and $36.1
million in 2002, 2003 and 2004, respectively.
US taxable income or losses recorded are reported on the Company's
consolidated US income tax return. The Company was allocated its proportionate
share, $23.6 million, of GTS' US net operating loss carry-forwards in 1999. As
of December 31, 2004, the Company had net operating loss carry-forwards for US
federal income tax purposes of approximately $6.5 million expiring in fiscal
years 2010 through 2019. The Company also has net operating loss carry-forwards
for Cyprus tax purposes of approximately $13.2 million which do not expire.
The reconciliation of the US statutory federal tax rate of 35.0% to the
Company's effective tax rate is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2003 2004
---------- ---------- ----------
Tax expense at US statutory rates (35.0)% (35.0)% (35.0)%
Non-deductible expenses/non-taxable income:
Amortization (0.7) (0.4) (0.6)
Equity in earnings 5.8 -- 0.1
Other non-deductible expenses (5.3) (4.9) (7.3)
Foreign exchange differences (1.2) (0.1) 0.2
Different foreign tax rates 7.7 9.3 11.4
Change in valuation allowance 15.1 3.1 --
Other permanent differences -- 4.3 (0.5)
---------- ---------- ----------
Tax expense (13.6)% (23.7)% (31.7)%
========== ========== ==========
68 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred tax assets and liabilities are recorded based on temporary
differences between book bases of assets and liabilities and their bases for
income tax purposes. The following table summarizes major components of the
Company's deferred tax assets and liabilities:
DECEMBER 31,
--------------------------
2003 2004
---------- ----------
(IN THOUSANDS)
Deferred Tax Assets:
Net operating loss carry-forwards $ 2,514 $ 2,793
Accrued expenses 2,525 2,027
Deferred revenue 4,800 7,639
Other deferred tax assets 1,117 1,180
Valuation allowance (559) (559)
---------- ----------
Total deferred tax asset $ 10,397 $ 13,080
========== ==========
Deferred Tax Liabilities:
Accrued revenue $ -- $ 16
Deferred expenses 1,306 1,958
Intangible assets 21,489 23,472
Fixed assets 5,468 3,720
Other deferred tax liabilities 600 295
---------- ----------
Total deferred tax liability $ 28,863 $ 29,461
========== ==========
Net deferred tax liability $ (18,466) $ (16,381)
========== ==========
The following table presents the Company's deferred tax assets and
liabilities as of December 31, 2003 and 2004 attributable to different tax
paying components in different tax jurisdictions:
DECEMBER 31,
--------------------------
2003 2004
---------- ----------
(IN THOUSANDS)
Deferred Tax Assets:
US tax component $ 1,861 $ 2,234
Foreign tax component 8,536 10,846
---------- ----------
Total deferred tax asset $ 10,397 $ 13,080
========== ==========
Deferred Tax Liability:
US tax component $ -- $ --
Foreign tax component 28,863 29,461
---------- ----------
Total deferred tax liability $ 28,863 $ 29,461
========== ==========
Net deferred tax liability $ (18,466) $ (16,381)
========== ==========
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004. Also in December 2004, the FASB issued FASB Staff Position
No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creations Act of 2004. The
Company does not expect the adoption of these new tax provisions to have a
material impact on the Company's consolidated financial position, results of
operations, or cash flows, since the Company does not have any substantive
operations in the United States.
NOTE 12: COMMITMENTS AND CONTINGENCIES
Leases
The Company has various cancelable and non-cancelable operating lease
agreements for equipment and office space with terms ranging from one to five
years. Rental expense for operating leases aggregated $4.9 million, $4.9
million, and $6.5 million for the years ended December 31, 2002, 2003 and 2004,
respectively.
Future minimum lease payments under non-cancelable operating leases with
terms of one year or more, as of December 31, 2004, are as follows: 2005 - $4.5
million, 2006 - $2.4 million, 2007 - $1.7 million, 2008 - $1.7 million, 2009 -
$1.4 million, and thereafter - $0.4 million.
Other Commitments and Contingencies
The Company has future purchase commitments of $24.6 million and $84.5
million as of December 31, 2003 and 2004, respectively.
In the ordinary course of business, the Company has issued financial
guarantees on debt for the benefit of certain of its non-consolidated ventures,
which is all collateralized by cash as described in note 8. The Company expects
that all the collateralized debt will be repaid by the ventures.
69 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Major Customers
The Company had one major customer in the Carrier and Operator reporting
segment, representing $23.1 million, or 12%, of total revenues in 2002, $27.6
million, or 8%, of total revenues in 2003 and $31.0 million, or 5%, of total
revenue in 2004.
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
December 31, 2003 and 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.
The Company's wholly-owned subsidiary, Sovintel, is engaged in litigation
with the Russian tax inspectorate in regard to claims against Comincom and OAO
Combellga ("Combellga"), both of which merged into Sovintel on December 1, 2004,
issued by the tax inspectorate on respectively. In accordance with the tax
inspectorate decision, Comincom and Combellga are required to pay additional
taxes, fines and penalties in the amount equal to approximately $5.5 million for
years ended December 31, 2001 and 2002. Comincom and Combellga filed lawsuits
against the tax inspectorate disputing the claims, and the court ruled in favor
of the Company in both cases by dismissing the tax inspectorate's claims on
January 21, 2005 and December 20, 2004, respectively. The Company expects that
the tax inspectorate will appeal this decision. The term for last appeal expires
in May 2005. The Company does not consider an unfavorable outcome of this matter
probable at this time. While the Company intends to defend its position
vigorously, it is difficult to predict with any degree of certainty the ultimate
outcome of this litigation due to the state of the Russian judicial system.
Since the tax claims relate to periods before the Company acquired 100% of the
shares of Comincom, they are covered by the indemnification provisions of the
Share Exchange Agreement between the Company and Telenor. Therefore, in case of
unfavorable outcome of this litigation the Company intends to seek
indemnification from Telenor.
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" (the "New Law") came
into effect in Russia. The New Law sets the legal basis for the
telecommunications business in Russia and defines the status that state bodies
have in the telecommunications sector. The New Law was designed to create a new
interconnect pricing regime in 2004 that should be more transparent and unified,
if fairly implemented, and it creates a universal service charge calculated as a
percentage of revenue, which is not expected to exceed 3% of certain revenue. It
is expected that the first payments of the universal service charge will be made
in 2005. The New Law may increase the regulation of the Company's operations, as
it is intended to regulate licenses for long distance, international long
distance and Voice over Internet Protocol. 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 the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to the
developing markets and evolving fiscal and regulatory environments in which the
Company operates. In the opinion of management, the Company's liability, if any,
in all pending litigation, other legal proceeding or other matters, will not
have a material effect upon the financial condition, results of operations or
liquidity of the Company.
NOTE 13: RELATED PARTY TRANSACTIONS
Transactions with the Company's equity investees, Alfa affiliates,
Rostelecom, and Telenor were as follows, for the years ended December 31:
2002 2003 2004
---------- ---------- ----------
(IN THOUSANDS)
Revenue from equity investees $ 7,499 $ 98 $ 116
Revenue from Rostelecom 446 575 404
Revenue from Telenor -- 3 139
Revenue from Alfa affiliates 1,102 1,134 1,798
---------- ---------- ----------
$ 9,047 $ 1,810 $ 2,457
========== ========== ==========
2002 2003 2004
---------- ---------- ----------
(IN THOUSANDS)
Cost of revenue from equity investees 8,527 4,790 4,798
Cost of revenue from Rostelecom 5,154 16,860 25,809
Cost of revenue from Telenor -- 27 332
Cost of revenue from Alfa affiliates -- -- 56
---------- ---------- ----------
$ 13,681 $ 21,677 $ 30,995
========== ========== ==========
The related party revenue and cost of revenue from Rostelecom included in
the income statement represents revenue and cost of revenue from September 2002,
the date Rostelecom became a shareholder.
70 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The revenue and cost of revenue from Telenor included in the income
statement represents revenue and cost of revenue from December 2003, the date
Telenor became a shareholder.
Included in other current assets at December 31, 2003 is approximately $0.3
million of accounts receivable from Alfa affiliates, approximately $0.2 million
of accounts receivable from Rostelecom, and approximately $0.1 million of
accounts receivable from Telenor. Included in other current assets at December
31, 2004 is approximately $0.3 million of accounts receivable from Alfa
affiliates, approximately $0.1 million of accounts receivable from Rostelecom,
and approximately $0.1 million of accounts receivable from Telenor.
The Company maintains bank accounts with Alfa Bank, which act as one of the
clearing agents for the payroll of the Russian staff of the Company. The
balances at these bank accounts were minimal at December 31, 2003 and 2004. In
addition, certain of the Company's Russian subsidiaries maintain current
accounts with Alfa Bank. The amounts on deposit were minimal at December 31,
2003 and $0.1 million at December 31, 2004.
The Company maintains bank accounts with International Moscow Bank. The
Company's Chief Executive Officer's spouse is a member of the Executive Board of
International Moscow Bank. The amounts on deposit were approximately $5.1
million at December 31, 2003 and $1.7 million at December 31, 2004.
The Company incurred approximately $3.3 million in consulting costs from an
affiliate of Alfa in relation to the acquisition of the remaining 50% of
Sovintel previously held by Rostelecom in 2002 and approximately $0.3 million in
consulting costs from an affiliate of Alfa in relation to the acquisition of
Sibchallenge in 2003. In addition, in 2003 the Company incurred approximately
$0.1 million in consulting costs from an affiliate of Alfa related to a
potential acquisition that was subsequently withdrawn from the market. In 2004,
the Company incurred approximately $0.1 million in consulting costs from an
affiliate of Alfa in relation to a potential acquisition.
The Company has entered into a consulting services agreement with Alfa
Telecom under which the price was subject to adjustments. This consulting
services agreement became effective on April 1, 2003 and terminated on December
31, 2004. The Company has reached an agreement with Alfa Telecom, in which
compensation for the services provided under the consulting services agreement
were in the aggregate $0.5 million for the period of April 1, 2003 through
December 31, 2004.
In September 2002, several Russian subsidiaries of the Company entered into
a one year agreement with OOO Alfa Insurance, an affiliate of Alfa, to provide
the Company's Russian employees with medical and dental insurance services. The
amount payable under this agreement was approximately $0.3 million.
In December 2002, the Company entered into a one year agreement with OOO
Alfa Insurance, an affiliate of Alfa, to provide the Company with property and
equipment liability insurance. The amount payable under this agreement was
approximately $0.2 million. In December 2003, the Company entered into a one
year agreement with OOO Alfa Insurance, an affiliate of Alfa, to provide the
Company with property and equipment liability insurance. The amount payable
under this agreement was approximately $0.2 million. The Company extended this
agreement until February 2005 and in February 2005, the Company entered into a
one year agreement with OOO Alfa Insurance, an affiliate of Alfa, to provide the
Company with property and equipment liability insurance. The amount payable
under this agreement is approximately $0.2 million.
A member of the Company's executive management is a relative of the general
director of two Russian based telecommunications services providers. The Company
received revenue from these two telecommunications services providers in the
amount of approximately $2.9 million and $5.3 million for the years ended
December 31, 2003 and December 31, 2004, respectively and incurred costs to
these two telecommunications services providers in the amount of approximately
$1.8 million and $1.9 million in the years ended December 31, 2003 and December
31, 2004, respectively. At December 31, 2003, the Company had accounts
receivable of approximately $0.5 million and accounts payable of approximately
$0.4 million with these two telecommunications services providers. At December
31, 2004, the Company had accounts receivable of approximately $0.7 million and
accounts payable of approximately $0.3 million with these two telecommunications
services providers.
The Company provides telecommunications services to a marketing firm where
the former Chief Financial Officer's spouse is the Chief Executive Officer. The
Company received revenue of approximately $0.1 million for the year ended
December 31, 2003 from the marketing firm.
71 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company issued loans to Russian employees principally to finance the
purchase of apartments in Russia. The amount of loans outstanding was
approximately $0.6 million at December 31, 2003 and approximately $0.3 million
at December 31, 2004. These loans typically have a 4% to 10% interest rate per
annum and are typically payable over 3 years. In November 2002, the Company
issued an approximately $0.1 million loan to the Finance Director of Sovintel, a
wholly-owned subsidiary of the Company which was partially forgiven by the
Company in 2004.
NOTE 14: 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 business for the twelve months ended December 31, 2002, 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. 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, the Company managed
business segments based on telecommunications products the Company provided. In
April 2003, the Company re-designed the business segments around customer
characteristics, and in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", 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. The Company has restated segment
information for prior periods to conform to the presentation adopted in the
current period.
72 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
------------------------
BUSINESS CARRIER BUSINESS EQUITY
AND AND CONSUMER MOBILE CORPORATE & SEGMENT CONSOLIDATED METHOD AFFILIATE
CORPORATE OPERATOR INTERNET SERVICES ELIMINATIONS TOTAL RESULTS VENTURES ADJUSTMENTS
---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- -----------
(IN THOUSANDS)
TWELVE MONTHS
ENDED DECEMBER
31, 2002
Revenue from
external
customers $ 149,170 $ 104,609 $ 21,800 $ 13,001 $ -- $ 288,580 $ 198,727 $ (105,861) $ 16,008
Intersegment
revenue 502 717 -- -- (1,219) -- -- -- --
Operating
income
(loss) 36,975 28,620 (4,356) 3,553 (6,511) 58,281 31,430 (26,851) --
Identifiable
assets 161,635 202,134 41,896 9,383 24,315 439,363 435,810 (3,553) --
Capital
expenditures 29,375 15,417 2,908 449 222 48,371 29,430 (18,941) --
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
------------------------
BUSINESS CARRIER BUSINESS EQUITY
AND AND CONSUMER MOBILE CORPORATE & SEGMENT CONSOLIDATED METHOD AFFILIATE
CORPORATE OPERATOR INTERNET SERVICES ELIMINATIONS TOTAL RESULTS VENTURES ADJUSTMENTS
---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- -----------
(IN THOUSANDS)
TWELVE MONTHS
ENDED
DECEMBER
31, 2003
Revenue from
external
customers $ 188,087 $ 128,048 $ 30,775 $ 13,895 $ -- $ 360,805 $ 360,534 $ (4,861) $ 4,590
Intersegment
revenue 649 793 -- -- (1,442) -- -- -- --
Operating
income (loss) 47,603 26,503 (2,457) 5,278 (6,976) 69,951 69,731 (220) --
Identifiable
assets 385,087 236,635 52,584 6,566 52,042 732,914 729,226 (3,688) --
Capital
expenditures 40,231 20,317 2,851 569 90 64,058 63,737 (321) --
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
------------------------
BUSINESS CARRIER BUSINESS EQUITY
AND AND CONSUMER MOBILE CORPORATE & SEGMENT CONSOLIDATED METHOD AFFILIATE
CORPORATE OPERATOR INTERNET SERVICES ELIMINATIONS TOTAL RESULTS VENTURES ADJUSTMENTS
---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- -----------
(IN THOUSANDS)
TWELVE MONTHS
ENDED
DECEMBER
31, 2004
Revenue from
external
customers $ 324,814 $ 198,027 $ 45,515 $ 15,808 $ -- $ 584,164 $ 583,978 $ (4,710) $ 4,524
Intersegment
revenue -- 1,016 -- -- (1,016) -- -- -- --
Operating
income (loss) 72,345 28,637 2,159 4,729 (11,756) 96,114 95,536 (578) --
Identifiable
assets 435,276 261,424 57,732 5,693 49,562 809,687 805,768 (3,919) --
Capital
expenditures 80,107 33,223 4,920 1,025 178 119,453 118,101 (1,352) --
73 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 December 31, 2002, 2003, and 2004 is
as follows:
CORPORATE,
OTHER
COUNTRIES CONSOLIDATED
RUSSIA UKRAINE & ELIMINATIONS RESULTS
--------------- --------------- --------------- ---------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2002
Revenue $ 166,319 $ 35,488 $ (3,080) $ 198,727
Long-lived assets 275,209 24,541 1,512 301,262
YEAR ENDED DECEMBER 31, 2003
Revenue $ 318,426 $ 44,524 $ (2,416) $ 360,534
Long-lived assets 509,339 24,236 2,886 536,461
YEAR ENDED DECEMBER 31, 2004
Revenue $ 522,018 $ 64,455 $ (2,495) $ 583,978
Long-lived assets 563,856 27,995 11,116 602,967
NOTE 15: SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes significant non-cash investing and financing
activities for the Company.
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------------------
2002 2003 2004
---------- ---------- ----------
(IN THOUSANDS)
Issuance of common stock in connection with acquisitions $ 50,663 $ 193,485 $ --
Amounts payable in connection with business acquisitions 3,500 -- 400
Capitalized leased assets -- 420 --
NOTE 16: PRIOR PERIOD ADJUSTMENT
In the third quarter of 2004, management determined that the Company has
been inadvertently carrying accruals for estimated taxes, other than income
taxes. Management concluded these accruals for estimated taxes should have been
considered unnecessary and reversed prior to January 1, 2000. The net effect of
the correction of this non-cash error was to reduce current liabilities and
non-current liabilities by $2.0 million each with an offsetting decrease to
accumulated deficit of $4.0 million in all periods presented. This adjustment
had no effect on the reported results of operations in any of the periods
presented.
74 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 17: 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% shares for officers of
the Company and 50% shares and 50% cash payments for other qualified employees
participating in LTIBP if the Company meets certain targets for net income
growth established by the Board of Directors. In addition, the program provides
for a one-time grant of a limited amount of shares to senior management in an
aggregate amount not exceeding 50,000 shares. The LTIBP is intended to act as a
retention mechanism for senior management as the cash payments and the
restricted stock vest over a three year period. It is expected that the LTIBP
will act as a substitute for the Company's Equity Participation Plan under which
significant amounts of stock options were, in the past, granted to senior
management. During the twelve months ended December 31, 2004 the Company did not
record any expense associated with the LTIBP as the Company did not achieve the
operational and financial targets for 2004. The Company currently anticipates
repurchasing from time to time in the open market a number of the Company's
shares equal to the number of the Company's shares that are subject to awards
granted under the LTIBP. The Company has not granted any shares under the LTIBP.
NOTE 18: SALE OF MINORITY INTEREST IN SUBSIDIARY
Recognizing that many of the markets in which the Company operates are
complex, in particular as it relates to business, regulatory, political and
cultural matters, the Company occasionally seeks experienced local partners to
assist in markets where the Company is likely to encounter operational
difficulties. GTI has been cooperating with local partners in Ukraine to resolve
commercial and regulatory disputes with monopoly operators and regulatory
authorities in Ukraine but had not previously finalized the compensation
arrangement for the services. In addition to or in lieu of cash compensation,
the Board of Directors approved the sale of a non-controlling interest in GTU to
such parties.
Upon approval of GTI's Board of Directors, in August 2004 the Company
entered into a compensation arrangement for services provided to assist the
Company in addressing commercial and regulatory disputes with monopoly operators
and regulatory authorities in Ukraine. The Company's local partners have
provided services on a success fee basis. The Company's Board of Directors
approved an arrangement that effectively transferred 20% of the shares in GTU
owned by the Company to the local partners as compensation for the services
already provided and certain additional services to be provided. Under this
arrangement, the Company paid the local partners $0.5 million in cash and
granted the local partners an option to purchase 20% of GTU for $0.5 million in
cash, in a transaction where the cash and the value of the services were
approximately $3.6 million. This transaction closed in the third quarter of
2004, when the performance was completed and the option was exercised and
resulted in a charge to operating income of approximately $3.6 million. The
excess of the fair value of consideration exchanged for services over the book
value of 20% of net assets of GTU was recorded as a credit to the consolidated
equity, rather than income since the Company did not believe that the method of
determining fair value met the objectively determinable criteria as required by
Staff Accounting Bulletin Topic 5H. Fair value of the option approximated the
fair value of shares transferred to the local partner due to the short exercise
period of the option and was determined using the discounted cash flow valuation
method.
75 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
GOLDEN TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 19: QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
ACTUAL
FOR THE THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2003 2003 2003 2003
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 78,376 $ 80,762 $ 90,095 $ 111,301
Cost of Revenues 37,299 39,436 44,883 59,467
Gross Margin 41,077 41,326 45,212 51,834
Selling, general and administrative 13,438 13,385 15,764 21,797
Net income 12,820 11,835 12,506 18,274
Net income per share(1)- basic 0.47 0.43 0.44 0.59
Net income per share(1)- diluted $ 0.47 $ 0.42 $ 0.43 $ 0.58
ACTUAL
FOR THE THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2004 2004 2004 2004
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 133,174 $ 138,873 $ 152,713 $ 159,218
Cost of Revenues 68,279 70,215 77,953 84,141
Gross Margin 64,895 68,658 74,760 75,077
Selling, general and administrative 26,393 25,118 29,518 31,826
Net income 14,651 16,909 16,111 17,112
Net income per share(1)- basic 0.41 0.47 0.44 0.47
Net income per share(1)- diluted $ 0.40 $ 0.46 $ 0.44 $ 0.47
----------
(1) The sum of the earnings per share for the four quarters will generally not
equal earnings per share for the total year due to changes in the average
number of common shares outstanding.
NOTE 20: SUBSEQUENT EVENTS
In February 2005, the Board of Directors of the Company declared a cash
dividend of $0.20 per common share to shareholders of record as of March 17,
2005. The Company will pay the total amount of approximately $7.3 million to
shareholders on March 31, 2005.
76 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, Application
of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004. Also in December 2004, the FASB issued FASB Staff Position No. FAS 109-2,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creations Act of 2004. The Company does not
expect the adoption of these new tax provisions to have a material impact on the
Company's consolidated financial position, results of operations, or cash flows,
since the Company does not have any substantive operations in the United States.
NOTE 12: COMMITMENTS AND CONTINGENCIES
LEASES
The Company has various cancelable and non-cancelable operating lease agreements
for equipment and office space with terms ranging from one to five years. Rental
expense for operating leases aggregated $4.9 million, $4.9 million, and $6.5
million for the years ended December 31, 2002, 2003 and 2004, respectively.
Future minimum lease payments under non-cancelable operating leases with terms
of one year or more, as of December 31, 2004, are as follows: 2005 - $4.5
million, 2006 - $2.4 million, 2007 - $1.7 million, 2008 - $1.7 million, 2009 -
$1.4 million, and thereafter - $0.4 million.
OTHER COMMITMENTS AND CONTINGENCIES
The Company has future purchase commitments of $24.6 million and $84.5 million
as of December 31, 2003 and 2004, respectively.
In the ordinary course of business, the Company has issued financial guarantees
on debt for the benefit of certain of its non-consolidated ventures, which is
all collateralized by cash as described in note 8. The Company expects that all
the collateralized debt will be repaid by the ventures.
MAJOR CUSTOMERS
The Company had one major customer in the Carrier and Operator reporting
segment, representing $23.1 million, or 12%, of total revenues in 2002, $27.6
million, or 8%, of total revenues in 2003 and $31.0 million, or 5%, of total
revenue in 2004.
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 December 31, 2003
and 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.
The Company's wholly-owned subsidiary, Sovintel, is engaged in litigation with
the Russian tax inspectorate in regard to claims against Comincom and OAO
Combellga ("Combellga"), both of which merged into Sovintel on December 1, 2004,
issued by the tax inspectorate on respectively. In accordance with the tax
inspectorate decision, Comincom and Combellga are required to pay additional
taxes,
77 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
fines and penalties in the amount equal to approximately $5.5 million for years
ended December 31, 2001 and 2002. Comincom and Combellga filed lawsuits against
the tax inspectorate disputing the claims, and the court ruled in favor of the
Company in both cases by dismissing the tax inspectorate's claims on January 21,
2005 and December 20, 2004, respectively. The Company expects that the tax
inspectorate will appeal this decision. The term for last appeal expires in May
2005. The Company does not consider an unfavorable outcome of this matter
probable at this time. While the Company intends to defend its position
vigorously, it is difficult to predict with any degree of certainty the ultimate
outcome of this litigation due to the state of the Russian judicial system.
Since the tax claims relate to periods before the Company acquired 100% of the
shares of Comincom, they are covered by the indemnification provisions of the
Share Exchange Agreement between the Company and Telenor. Therefore, in case of
unfavorable outcome of this litigation the Company intends to seek
indemnification from Telenor.
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" (the "New Law") came into
effect in Russia. The New Law sets the legal basis for the telecommunications
business in Russia and defines the status that state bodies have in the
telecommunications sector. The New Law was designed to create a new interconnect
pricing regime in 2004 that should be more transparent and unified, if fairly
implemented, and it creates a universal service charge calculated as a
percentage of revenue, which is not expected to exceed 3% of certain revenue. It
is expected that the first payments of the universal service charge will be made
in 2005. The New Law may increase the regulation of the Company's operations, as
it is intended to regulate licenses for long distance, international long
distance and Voice over Internet Protocol. 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 the ordinary course of business, the Company may be party to various legal
and tax proceedings, and subject to claims, certain of which relate to the
developing markets and evolving fiscal and regulatory environments in which the
Company operates. In the opinion of management, the Company's liability, if any,
in all pending litigation, other legal proceeding or other matters, will not
have a material effect upon the financial condition, results of operations or
liquidity of the Company.
NOTE 13: Related Party Transactions
Transactions with the Company's equity investees, Alfa affiliates, Rostelecom,
and Telenor were as follows, for the years ended December 31:
US$ '000s 2002 2003 2004
----------------------------------------- ----- ----- -----
Revenue from equity investees 7,499 98 116
Revenue from Rostelecom 446 575 404
Revenue from Telenor -- 3 139
Revenue from Alfa affiliates 1,102 1,134 1,798
----- ----- -----
9,047 1,810 2,457
----- ----- -----
78 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
US$ '000s 2002 2003 2004
-------------------------------------------- ------ ------ ------
Cost of revenue from equity investees 8,527 4,790 4,798
Cost of revenue from Rostelecom 5,154 16,860 25,809
Cost of revenue from Telenor -- 27 332
Cost of revenue from Alfa affiliates -- -- 56
------ ------ ------
13,681 21,677 30,995
------ ------ ------
The related party revenue and cost of revenue from Rostelecom included in the
income statement represents revenue and cost of revenue from September 2002, the
date Rostelecom became a shareholder.
The revenue and cost of revenue from Telenor included in the income statement
represents revenue and cost of revenue from December 2003, the date Telenor
became a shareholder.
Included in other current assets at December 31, 2003 is approximately $0.3
million of accounts receivable from Alfa affiliates, approximately $0.2 million
of accounts receivable from Rostelecom, and approximately $0.1 million of
accounts receivable from Telenor. Included in other current assets at December
31, 2004 is approximately $0.3 million of accounts receivable from Alfa
affiliates, approximately $0.1 million of accounts receivable from Rostelecom,
and approximately $0.1 million of accounts receivable from Telenor.
The Company maintains bank accounts with Alfa Bank, which act as one of the
clearing agents for the payroll of the Russian staff of the Company. The
balances at these bank accounts were minimal at December 31, 2003 and 2004. In
addition, certain of the Company's Russian subsidiaries maintain current
accounts with Alfa Bank. The amounts on deposit were minimal at December 31,
2003 and $0.1 million at December 31, 2004.
The Company maintains bank accounts with International Moscow Bank. The
Company's Chief Executive Officer's spouse is a member of the Executive Board of
International Moscow Bank. The amounts on deposit were approximately $5.1
million at December 31, 2003 and $1.7 million at December 31, 2004.
The Company incurred approximately $3.3 million in consulting costs from an
affiliate of Alfa in relation to the acquisition of the remaining 50% of
Sovintel previously held by Rostelecom in 2002 and approximately $0.3 million in
consulting costs from an affiliate of Alfa in relation to the acquisition of
Sibchallenge in 2003. In addition, in 2003 the Company incurred approximately
$0.1 million in consulting costs from an affiliate of Alfa related to a
potential acquisition that was subsequently withdrawn from the market. In 2004,
the Company incurred approximately $0.1 million in consulting costs from an
affiliate of Alfa in relation to a potential acquisition.
The Company has entered into a consulting services agreement with Alfa Telecom
under which the price was subject to adjustments. This consulting services
agreement became effective on April 1, 2003 and terminated on December 31, 2004.
The Company has reached an agreement with Alfa Telecom, in which compensation
for the services provided under the consulting services agreement were in the
aggregate $0.5 million for the period of April 1, 2003 through December 31,
2004.
In September 2002, several Russian subsidiaries of the Company entered into a
one year agreement with OOO Alfa Insurance, an affiliate of Alfa, to provide the
Company's Russian employees with medical and dental insurance services. The
amount payable under this agreement was approximately $0.3 million.
79 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
In December 2002, the Company entered into a one year agreement with OOO Alfa
Insurance, an affiliate of Alfa, to provide the Company with property and
equipment liability insurance. The amount payable under this agreement was
approximately $0.2 million. In December 2003, the Company entered into a one
year agreement with OOO Alfa Insurance, an affiliate of Alfa, to provide the
Company with property and equipment liability insurance. The amount payable
under this agreement was approximately $0.2 million. The Company extended this
agreement until February 2005 and in February 2005, the Company entered into a
one year agreement with OOO Alfa Insurance, an affiliate of Alfa, to provide the
Company with property and equipment liability insurance. The amount payable
under this agreement is approximately $0.2 million.
A member of the Company's executive management is a relative of the general
director of two Russian based telecommunications services providers. The Company
received revenue from these two telecommunications services providers in the
amount of approximately $2.9 million and $5.3 million for the years ended
December 31, 2003 and December 31, 2004, respectively and incurred costs to
these two telecommunications services providers in the amount of approximately
$1.8 million and $1.9 million in the years ended December 31, 2003 and December
31, 2004, respectively. At December 31, 2003, the Company had accounts
receivable of approximately $0.5 million and accounts payable of approximately
$0.4 million with these two telecommunications services providers. At December
31, 2004, the Company had accounts receivable of approximately $0.7 million and
accounts payable of approximately $0.3 million with these two telecommunications
services providers.
The Company provides telecommunications services to a marketing firm where the
former Chief Financial Officer's spouse is the Chief Executive Officer. The
Company received revenue of approximately $0.1 million for the year ended
December 31, 2003 from the marketing firm.
The Company issued loans to Russian employees principally to finance the
purchase of apartments in Russia. The amount of loans outstanding was
approximately $0.6 million at December 31, 2003 and approximately $0.3 million
at December 31, 2004. These loans typically have a 4% to 10% interest rate per
annum and are typically payable over 3 years. In November 2002, the Company
issued an approximately $0.1 million loan to the Finance Director of Sovintel, a
wholly-owned subsidiary of the Company which was partially forgiven by the
Company in 2004.
NOTE 14: Segment Information
LINE OF BUSINESS DATA
The Company operates in four segments within the telecommunications industry.
The four segments are: (1) Business and Corporate Services; (2) Carrier and
Operator Services; (3) Consumer Internet Services; and (4) Mobile Services. The
following tables present financial information for both consolidated
subsidiaries and equity investee ventures, segmented by the Company's lines of
business for the twelve months ended December 31, 2002, 2003 and 2004,
respectively. Transfers between lines of businesses are included in the
adjustments to reconcile segment to consolidated results. The Company evaluates
performance based on the operating income (loss) of each strategic business
unit, among other performance measures. Prior to the completion of the
acquisition of the remaining 50% ownership interest in Sovintel and the
subsequent merger of TeleRoss into Sovintel in April 2003, the Company managed
business segments based on telecommunications products the Company provided. In
April 2003, the Company re-designed the business segments around customer
characteristics, and in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", the Company has presented
the following four segments consistent with the information used by the chief
operating decision maker to manage the operations for purposes of making
operating decisions and allocating resources. The Company has restated segment
information for prior periods to conform to the presentation adopted in the
current period.
80 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
12 months ended December 31, 2002
Adjustments to reconcile
business segment to
consolidated results
Business Carrier Business Equity
and and Consumer Mobile Corporate segment Consolidated method Affiliate
US$ '000s Corporate Operator Internet Services eliminations total results ventures adjustments
----------------------- --------- -------- -------- -------- ------------ -------- ------------ ------------ ------------
Revenue from
external customers 149,170 104,609 21,800 13,001 -- 288,580 198,727 (105,861) 16,008
Intersegment revenue 502 717 -- -- (1,219) -- -- -- --
Operating income (loss) 36,975 28,620 (4,356) 3,553 (6,511) 58,281 31,430 (26,851) --
Identifiable assets 161,635 202,134 41,896 9,383 24,315 439,363 435,810 (3,553) --
Capital expenditures 29,375 15,417 2,908 449 222 48,371 29,430 (18,941) --
--------- -------- -------- -------- ------------ -------- ------------ ------------ ------------
12 months ended December 31, 2003
Adjustments to reconcile
Business segment to
consolidated results
Business Carrier Business Equity
and and Consumer Mobile Corporate segment Consolidated method Affiliate
US$ '000s Corporate Operator Internet Services eliminations total results ventures adjustments
----------------------- --------- -------- -------- -------- ------------ -------- ------------ ------------ ------------
Revenue from
external customers 188,087 128,048 30,775 13,895 -- 360,805 360,534 (4,861) 4,590
Intersegment revenue 649 793 -- -- (1,442) -- -- -- --
Operating income (loss) 47,603 26,503 (2,457) 5,278 (6,976) 69,951 69,731 (220) --
Identifiable assets 385,087 236,635 52,584 6,566 52,042 732,914 729,226 (3,688) --
Capital expenditures 40,231 20,317 2,851 569 90 64,058 63,737 (321) --
--------- -------- -------- -------- ------------ -------- ------------ ------------ ------------
12 months ended December 31, 2004
Adjustments to reconcile
business segment to
consolidated results
Business Carrier Business Equity
and and Consumer Mobile Corporate segment Consolidated method Affiliate
US$ '000s Corporate Operator Internet Services eliminations total results ventures adjustments
----------------------- --------- -------- -------- -------- ------------ -------- ------------ ------------ ------------
Revenue from
external customers 324,814 198,027 45,515 15,808 -- 584,164 583,978 (4,710) 4,524
Intersegment revenue -- 1,016 -- -- (1,016) -- -- -- --
Operating income (loss) 72,345 28,637 2,159 4,729 (11,756) 96,114 95,536 (578) --
Identifiable assets 435,276 261,424 57,732 5,693 49,562 809,687 805,768 (3,919) --
Capital expenditures 80,107 33,223 4,920 1,025 178 119,453 118,101 (1,352) --
--------- -------- -------- -------- ------------ -------- ------------ ------------ ------------
81 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
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 December 31, 2002, 2003, and 2004 is as
follows:
Corporate,
other
countries & Consolidated
US$ '000s Russia Ukraine eliminations results
---------------------------- ------ ------- ------------ ------------
Year ended December 31, 2002
Revenue 166,319 35,488 (3,080) 198,727
Long-lived assets 275,209 24,541 1,512 301,262
Year ended December 31, 2003
Revenue 318,426 44,524 (2,416) 360,534
Long-lived assets 509,339 24,236 2,886 536,461
Year ended December 31, 2004
Revenue 522,018 64,455 (2,495) 583,978
Long-lived assets 563,856 27,995 11,116 602,967
------- ------- ------------ ------------
NOTE 15: Supplemental Cash Flow Information
The following table summarizes significant non-cash investing and financing
activities for the Company.
12 months ended December 31
US$ '000s 2002 2003 2004
-------------------------------------------------------- ------ ------- ----
Issuance of common stock in connection with acquisitions 50,663 193,485 --
Amounts payable in connection with business acquisitions 3,500 -- 400
Capitalized leased assets -- 420 --
------ ------- ----
NOTE 16: Prior Period Adjustment
In the third quarter of 2004, management determined that the Company has been
inadvertently carrying accruals for estimated taxes, other than income taxes.
Management concluded these accruals for estimated taxes should have been
considered unnecessary and reversed prior to January 1, 2000. The net effect of
the correction of this non-cash error was to reduce current liabilities and
non-current liabilities by $2.0 million each with an offsetting decrease to
accumulated deficit of $4.0 million in all periods presented. This adjustment
had no effect on the reported results of operations in any of the periods
presented.
NOTE 17: 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% shares for officers of
the Company and 50% shares and 50% cash payments for other qualified employees
participating in LTIBP if the Company meets certain targets for net income
growth established by the Board of Directors. In addition, the program provides
for a one-time grant of a limited amount of shares to senior management in an
aggregate amount not exceeding 50,000 shares. The LTIBP is intended to act as a
retention
82 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
mechanism for senior management as the cash payments and the restricted stock
vest over a three year period. It is expected that the LTIBP will act as a
substitute for the Company's Equity Participation Plan under which significant
amounts of stock options were, in the past, granted to senior management. During
the twelve months ended December 31, 2004 the Company did not record any expense
associated with the LTIBP as the Company did not achieve the operational and
financial targets for 2004. The Company currently anticipates repurchasing from
time to time in the open market a number of the Company's shares equal to the
number of the Company's shares that are subject to awards granted under the
LTIBP. The Company has not granted any shares under the LTIBP.
NOTE 18: Sale of Minority Interest in Subsidiary
Recognizing that many of the markets in which the Company operates are complex,
in particular as it relates to business, regulatory, political and cultural
matters, the Company occasionally seeks experienced local partners to assist in
markets where the Company is likely to encounter operational difficulties. GTI
has been cooperating with local partners in Ukraine to resolve commercial and
regulatory disputes with monopoly operators and regulatory authorities in
Ukraine but had not previously finalized the compensation arrangement for the
services. In addition to or in lieu of cash compensation, the Board of Directors
approved the sale of a non-controlling interest in GTU to such parties.
Upon approval of GTI's Board of Directors, in August 2004 the Company entered
into a compensation arrangement for services provided to assist the Company in
addressing commercial and regulatory disputes with monopoly operators and
regulatory authorities in Ukraine. The Company's local partners have provided
services on a success fee basis. The Company's Board of Directors approved an
arrangement that effectively transferred 20% of the shares in GTU owned by the
Company to the local partners as compensation for the services already provided
and certain additional services to be provided. Under this arrangement, the
Company paid the local partners $0.5 million in cash and granted the local
partners an option to purchase 20% of GTU for $0.5 million in cash, in a
transaction where the cash and the value of the services were approximately $3.6
million. This transaction closed in the third quarter of 2004, when the
performance was completed and the option was exercised and resulted in a charge
to operating income of approximately $3.6 million. The excess of the fair value
of consideration exchanged for services over the book value of 20% of net assets
of GTU was recorded as a credit to the consolidated equity, rather than income
since the Company did not believe that the method of determining fair value met
the objectively determinable criteria as required by Staff Accounting Bulletin
Topic 5H. Fair value of the option approximated the fair value of shares
transferred to the local partner due to the short exercise period of the option
and was determined using the discounted cash flow valuation method.
83 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
NOTE 19: Quarterly Financial Data (Unaudited)
Summarized quarterly financial data is as follows:
Actual
For the three months ended
March 31, June 30, September 30, December 31,
US$ '000 (except per share data) 2003 2003 2003 2003
-------------------------------- --------- -------- ------------- -----------
Revenues 78,376 80,762 90,095 111,301
Cost of Revenues 37,299 39,436 44,883 59,467
Gross Margin 41,077 41,326 45,212 51,834
Selling, general and administrative 13,438 13,385 15,764 21,797
Net income 12,820 11,835 12,506 18,274
Net income per share (1) - basic 0.47 0.43 0.44 0.59
Net income per share (1) - diluted 0.47 0.42 0.43 0.58
Actual
For the three months ended
March 31, June 30, September 30, December 31,
US$ '000 (except per share data) 2004 2004 2004 2004
-------------------------------- --------- -------- ------------- -----------
Revenues 133,174 138,873 152,713 159,218
Cost of Revenues 68,279 70,215 77,953 84,141
Gross Margin 64,895 68,658 74,760 75,077
Selling, general and administrative 26,393 25,118 29,518 31,826
Net income 14,651 16,909 16,111 17,112
Net income per share (1) - basic 0.41 0.47 0.44 0.47
Net income per share (1) - diluted 0.40 0.46 0.44 0.47
(1) The sum of the earnings per share for the four quarters will generally not
equal earnings per share for the total year due to changes in the average
number of common shares outstanding.
NOTE 20: Subsequent events
In February 2005, the Board of Directors of the Company declared a cash dividend
of $0.20 per common share to shareholders of record as of March 17, 2005. The
Company will pay the total amount of approximately $7.3 million to shareholders
on March 31, 2005.
84 GOLDEN TELECOM INC. Annual Report 2004 Financial Review
MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2004 based on the framework in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on that evaluation, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2004.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by Ernst & Young
(CIS) Limited, an independent registered public accounting firm, as stated in
their report which is included elsewhere herein.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Golden Telecom, Inc.
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Golden Telecom, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Golden Telecom, Inc.'s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of the internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
In our opinion, management's assessment that Golden Telecom, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Golden Telecom, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2004 consolidated financial
statements of Golden Telecom, Inc.'s and our report dated March 11, 2005
expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG (CIS) Limited
Moscow, Russia
March 11, 2005
INDEPENDENT AUDITORS GENERAL INFORMATION
Ernst & Young (CIS) Limited General information about the
company may be obtained by
STOCKHOLDER INFORMATION contacting:
ANNUAL MEETING
May 19th, 2005 INVESTOR RELATIONS
The Annual Meeting of Golden Telephone: +7 095 797 9300
Telecom, Inc. will be held at Facsimile: +7 095 797 9330
1:00 pm at the Klementinum salon, Email: ir@gldn.net
9th floor of the Hotel Internet: www.goldentelecom.com
InterContinental Praha
Namesti Curiovych 43/5, The consolidated financial
110 00 Prague 1, statements for Golden Telecom, Inc.
The Czech Republic for the fiscal year ended
December 31, 2004 included in this
Telephone: +420 29663 1111 Annual Report are also contained in
Facsimile: +420 29663 1123 the Form 10-K that was filed with the
United States Securities and
A formal notice, together with the Exchange Commission on March 14,
proxy form, will be mailed to all 2005, which document contains
stockholders of record entitled to additional information about the
vote. company.
REGISTER AND TRANSFER AGENT
Correspondence concerning Golden
Telecom, Inc. stock holdings or
changes of address should be
directed to:
Mellon Investor Services LLC
85 Challenger Road
Ridgefield Park
NJ 07660
Telephone: +1 201 329 8127
Facsimile: +1 201 329 8967
Internet: www.mellon-investor.com
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