REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 or 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
Report on Form 6-K dated October 27, 2005
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TURKCELL ILETISIM HIZMETLERI A.S.
Turkcell Plaza
Mesrutiyet Caddesi No.153
34430 Tepebasi
Istanbul, Turkey
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(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
Form 20-F: |X| Form 40-F: |_|
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1):
Yes: |_| No: |X|
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):
Yes: |_| No: |X|
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes: |_| No: |X|
Enclosures: Operating and financial review for the six month and three month
periods ended June 30, 2005
1
OPERATING AND FINANCIAL REVIEW FOR THE SIX MONTH AND THREE MONTH PERIODS ENDED
JUNE 30, 2005
Overview
The financial information contained in the following discussion and
analysis has been prepared and is presented on a consolidated basis in
accordance with US GAAP in US dollars. The following discussion and analysis
should be read in conjunction with the consolidated balance sheets as of
December 31, 2003 and 2004 and the related consolidated statements of
operations, changes in shareholders' equity and comprehensive income, and cash
flows for each of the years in the three year period ended December 31, 2004 and
the related notes there to included in our annual report on Form 20-F for the
year ended December 31, 2004 (the "20-F") and the consolidated balance sheets as
of December 31, 2004 and June 30, 2005, and the related consolidated statements
of operations, changes in shareholders' equity and comprehensive income, and
cash flows for each of the three month and six month periods ended June 30, 2004
and 2005 included herein. The information as of June 30, 2005 and for the three
month and six month periods ended June 30, 2004 and 2005 is not audited.
Certain statements contained below, including information with respect
to our plans and strategy for our business, are forward-looking statements. The
statements contained in this discussion of operating results, which are not
historical facts, are forward-looking statements with respect to our plans,
projections or future performance, the occurrence of which involves certain
risks and uncertainties. For a discussion of important factors that could cause
actual results to differ materially from such forward-looking statements see
"Item 3D. Risk Factors" in our 20-F.
We were formed in 1993 and we commenced operations in 1994 pursuant to
a revenue sharing agreement with Turk Telekom. Since April 1998, we have
operated under a 25-year GSM license, which was granted upon payment of an
upfront license fee of $500 million. At the same time we entered into an
interconnection agreement with Turk Telekom for the interconnection of our
network with Turk Telekom's fixed-line network. On September 20, 2003, we signed
an agreement (the "Amended Agreement") with Turk Telekom amending certain
sections of the Interconnection Agreement dated April 24, 1998. As a result of
intervention by the Telecommunications Authority, we entered into a new
supplemental protocol with Turk Telekom in 2003.
Under the license, we pay ongoing license fees to the Turkish Treasury
equal to 15% of our gross revenue, which includes monthly fixed fees and
communication fees including taxes, charges and duties paid to the Turkish
Treasury. On June 25, 2005, the Turkish government declared that GSM operators
are required to pay monthly 10% portion of their existing ongoing license fee to
the Ministry of Transportation as universal service fund. As a result, starting
from June 30, 2005, we pay 90% of accrued ongoing license fee to the Turkish
Treasury as the treasury share and 10% of the accrued ongoing license fee to
Ministry of Transportation for the universal service fund. Since June 2004, SIM
card sales, outgoing roaming revenues and late payment interest charges have
been included in the definition of gross revenue and included in the monthly
ongoing license fees computations. Under our interconnection agreement with Turk
Telekom, we pay Turk Telekom an interconnection fee per call based on the type
and length of call for calls originating on our network and terminating on Turk
Telekom's fixed-line network, as well as fees for other services. We also
collect an interconnection fee from Turk Telekom for calls originating on their
fixed-line network and terminating on our network. We also have interconnection
agreements with Telsim Mobil Telekomunikasyon Hizmetleri A.S. ("Telsim"), TT&TIM
Iletisim Hizmetleri A.S. ("AVEA"), Milleni.com GMBH ("Milleni.com") and
Globalstar Avrasya Uydu Ses ve Data Iletisim A.S. ("Globalstar") pursuant to
which we have agreed, among other things, to pay interconnection fees to the
other parties for calls originating on our network and terminating on theirs,
and they have agreed to pay interconnection fees for calls originating on their
networks and terminating on ours.
2
From the time of our start-up through June 30, 2005, we have made
capital expenditures amounting to approximately $4.9 billion including the cost
of our licenses. The build-out of our network in Turkey is now substantially
complete, with coverage at June 30, 2005 of 100% of the Turkish population
living in cities of 10,000 or more people. As of June 30, 2005, our network
covers 99.94% of the Turkish population living in cities of 5,000 or more and
99.78% of the Turkish population living in cities of 3,000 or more. Coverage
also includes substantially the entire Mediterranean and Aegean coastline. We
meet the coverage requirements of our license.
Our subscriber base has expanded from 63,500 at year-end 1994 to
approximately 15.7 million at year-end 2002, 19.0 million at year-end 2003, 23.4
million at year-end 2004 and 25.6 million as of June 30, 2005. Based on the
announcements of the Telecommunications Authority, there are approximately 39.6
million subscribers in the Turkish GSM market as of June 30, 2005. The
penetration rate in the Turkish GSM market was approximately 55% as of June 30,
2005 and the market is expected to continue to grow. We expect some deceleration
in the growth of the Turkish GSM market during the second half of 2005 due to a
slow down in consumer demand already seen. In 2007, we expect that a 70%
penetration rate in the Turkish GSM market is likely to be achieved compared to
our previous estimate of 65%. We expect to achieve continued growth in our
subscriber base in 2005 overall but at a slower pace compared to that of 2004.
Our prepaid mobile service increases our market penetration and limits
our credit risk. This service permits access to our GSM services to subscribers
who prefer to avoid monthly billing or to better control their mobile
communication expenses. As of June 30, 2005, we had 20.4 million prepaid
subscribers. Average selling and marketing expenses per prepaid subscriber are
generally less than those per postpaid subscriber and average minutes of use per
prepaid subscriber and average revenue per prepaid subscriber tend to be lower
than for postpaid subscribers. Our average monthly minutes of use per subscriber
has increased 4% to 63.7 minutes for the six month period ended June 30, 2005
from 61.1 minutes for the same period in 2004, mainly due to the favorable
effect of the improving Turkish macroeconomic environment on consumer sentiment
along with volume and customer focused campaigns and mass loyalty programs. Our
average revenue per user increased 13% to $12.7 for the six month period ended
June 30, 2005 from $11.2 for the same period in 2004. The increase was mainly
due to the impact of additional legal provisions recorded for the three month
period ended June 30, 2004, increasing minutes of usage and tariff raises in
November 2004 and May 2005, despite the price discount initiatives which started
especially in the second half of 2004 (e.g. PSTN=Onnet) and the dilutive impact
of our prepaid subscriber base. We expect aggressive price discounts and
campaigns from competitors to continue. However with our strong customer focused
and balanced marketing activities, we expect that the blended minutes of usage
will improve slightly in 2005 compared to 2004. We expect average revenue per
subscriber to increase in 2005 compared to 2004. Improvement in minutes of
usage, increasing Value Added Services and increasing data revenue are factors
expected to impact average revenue per subscriber positively in 2005 while
expected decreases in incoming interconnection revenue, due to lower
interconnection rates, price discount initiatives started in the second half of
2004 and the dilutive impact of prepaid subscribers are factors expected to
impact average revenue per subscriber negatively in 2005. See "Item 5D. Trend
Information" in our 20-F.
Churn is the percentage calculated by dividing the total number of
subscriber disconnections, both voluntary and involuntary during a period by the
average number of subscribers for the period. In addition to voluntary
disconnections, under our disconnection process, subscribers who do not pay
their bills are disconnected from our network and included in churn upon the
commencement of the legal process to disconnect them, which occurs approximately
180 days from the due date of the unpaid bill. Pending disconnection, non-paying
subscribers are suspended from service (but are still considered subscribers)
and receive a suspension warning, which in some cases results in payment and
reinstatement of service. During the year ended December 31, 2004, in addition
to voluntary disconnections, we involuntarily disconnected 123,038 additional
subscribers for nonpayment of bills and our annual churn rate was 9.1%. For the
six month period ended June 30, 2005, in addition to voluntary disconnections,
we disconnected 67,583 subscribers for nonpayment of bills. Our churn rate
3
was 5.0% for the six month period ended June 30, 2005. We have a bad debt
provision in our financial statements for such non-payments and disconnections
which amounted to $133.9 million and $143.0 million as of December 31, 2004 and
June 30, 2005, respectively, which we believe is adequate. Prior to 2003, the
majority of subscriber disconnections were due to non payment of bills. However,
starting from 2003, the majority of involuntary subscriber disconnections were
prepaid subscribers' disconnections as a result of the increased number of
prepaid subscribers in our subscriber base. We expect our churn rate in 2005
overall to increase as a result of the increase in competition in the GSM mobile
market in 2005, but it is expected to be kept below 2003 levels.
International and Other Domestic Operations
In 2004, we invested in Digital Cellular Communications ("DCC"), which
is located in Ukraine and we continue to pursue investment opportunities in
Iran. Our operations in Ukraine commenced during the second quarter of 2004 and
on February 1, 2005, LLC Astelit ("Astelit"), which is a 99% owned subsidiary of
DCC commenced its operations with GSM 1800 technology by introducing its new
brand.
Our operations in Iran have not yet commenced. We expect that any
operations we conduct in Iran will be conducted through our 85% majority-owned
subsidiary, East Asian Consortium B.V. ("Eastasia") as a participant in the
Irancell Consortium ("Irancell" or the "Consortium"). On April 25, 2005, the
Iranian Parliament approved a revised proposal, which suggests a reduction of
Eastasia's stake in Irancell to 49% and includes several other amendments to the
terms of the license agreement originally agreed, and submitted these amendments
to the Guardian Council for their consent. In May 2005, the Guardian Council
gave their consent. The consent was approved by the Iranian President.
On September 2, 2005, our Board of Directors decided to continue with
the Irancell project and approved the ownership structure of Irancell with a
stake of 49% in Irancell for Eastasia. However, it has been stated that 21% of
the shares of Irancell should be transferred to the National Bank of Iran, Bank
Melli, and the parties should agree that these shares shall be publicly offered
in the third year following the initiation of the Irancell operations and these
agreed terms should be reflected into all agreements between the parties in
Irancell. Iranian Telecommunications Ministry has set November 21, 2005 as the
deadline with respect to the finalization of the shareholder structure of the
Consortium.
In the meantime, Eastasia has deposited EUR 172.7 million in Bank
Saderat Plc. located in London as its potential contribution to the GSM network
license fee and a portion of the initial capital, to show its willingness to
invest in Irancell. We have provided a deposit pledge with Garanti Bankasy in
the amount of EUR 91.6 million, and Garanti Bankasy provided a bank loan to
Eastasia for the same amount. The maturity of this loan is set as November 21,
2005 which is also the proposed deadline for the completion of the negotiations
over the shareholder structure of the Consortium.
We are continuing to negotiate the terms of our shareholding in
Irancell with the other members of the Consortium. The level of our shareholding
in the revised Consortium shareholder structure, including whether we will
participate at all in Irancell, is uncertain and subject to continuing
negotiation.
Although Irancell has plans for commencing operations in Iran, it has
not commenced operations in Iran and will not do so, if at all, prior to
finalizing the terms of the revised Consortium shareholder structure. Although
we do not currently conduct any operations in Iran, to the extent the members of
the Consortium finalize the shareholder structure of Irancell with one another
and Irancell commences operations in Iran, such operations may in the future be
material to us. As with any other investment, our potential investment in Iran
through Eastasia and the Consortium involves risk.
Notwithstanding the foregoing, we believe the Iranian Ministry of
Communication and Information Technology has not properly implemented the laws
and regulations passed by the Iranian Parliament in connection with the GSM
tender process, which was won by the Consortium. As a
4
result, we have brought a claim in Iranian courts seeking to compel the Ministry
to implement the laws and regulations passed by the Iranian Parliament in
connection with the GSM tender process.
For a description of, and additional information regarding our
international and other domestic operations see "Item 4B. Business
Overview--International Operations" and "--Other Domestic Operations" in our
20-F.
Critical Accounting Policies
For a discussion of our critical accounting policies, please see "Item
5. Operating and Financial Review and Prospects-Critical Accounting Policies"
in the 20-F. There have been no material changes in our critical accounting
policies since the date of the 20-F.
Revenues
Our revenues are mainly derived from communication fees, monthly fixed
fees, sales of SIM cards, commission fees and call center revenues.
Communication fees consist of charges for calls that originate or terminate on
our GSM network, including international roaming, and are based on minutes of
actual usage of service. Per-minute communication fees vary according to the
subscriber's service package. Monthly fixed fees are charged to each postpaid
subscriber in a specified monthly amount that varies according to the
subscriber's service package, regardless of actual use of our GSM network
services. SIM card revenues are receipts from the sale of SIM cards, which we
sell to handset importers and which are needed to operate a handset used by a
subscriber. Commission fees on betting business relate to operating a central
betting system and head agency fees. Such fees are recognized at the time the
services related to the betting games are rendered. Call center revenues consist
of revenues for call center services provided by our call center subsidiary to
affiliated and third party companies. In March 2001, we launched General Packet
Radio Services ("GPRS") in Turkey, which allows users to remain connected to the
network at all times for the receipt of data transmissions, enabling bearer
capability for WAP, SMS and internet applications. GPRS charges are based on the
amount of data downloaded by subscribers.
In June 2003, we commercially launched our new multifunctional mobile
service platform under the commercial name "Shubuo". Shubuo provides our
subscribers with access to quality content while creating a new medium for
subscriber brands to promote their goods and services. Under the Shubuo brand,
subscribers are allowed to choose from several service packages, each catering
to different interest areas including news, finance, football, flirt, city life
and music. Subscribers may choose from these services according to their
interests and buy individual packages for a monthly fee. Subscribers receive a
fixed number of text messages containing information on the subject they choose
and are able to utilize content-rich and personalized mobile internet services
allowing them to interact with other Shubuo subscribers through chat,
competition, voting, etc.
We recognize SIM card sales as revenue upon initial entry of a new
subscriber into the GSM network only to the extent of the direct costs
associated with providing these services. Excess SIM card sales are deferred and
recognized over the estimated effective subscription contract life. In
connection with postpaid and prepaid subscribers, we currently incur costs for
activation fees to dealers and other promotional expenses, which historically
offset all or substantially all of the subscription fees. We charge a usage fee
for certain services we offer, such as SMS, voicemail and data and facsimile
transmission. Our revenues depend on the number of subscribers, call volume and
tariff pricing.
As is the case throughout Europe, airtime charges generally are paid
only by the initiator of a call, except when a subscriber travels outside
Turkey, in which case we charge the subscriber for a portion of the incoming
call.
5
In accordance with the Telecommunications Law, we set our tariffs
independently, subject to maximum prices defined by the Telecommunications
Authority, which are based on, among other things, prices abroad for comparable
GSM services, the Turkish consumer price index and the US consumer price index.
We also notify the Telecommunications Authority at least seven days before the
amendment of any tariff. The net yearly effect of any devaluation of the New
Turkish Lira ("TRY") and inflation on our costs are carefully analyzed while
making price adjustments. We have taken actions to increase revenues, including
raising tariffs in November 2004 and May 2005. We also launched a variety of new
tariff packages to set tariffs according to customer satisfaction and to attract
new subscribers. We will continue to monitor the market and adjustments to our
tariffs will depend on the competitive, regulatory and macroeconomic
environment. We aim to strike the right balance between achieving our revenue
goals and maintaining our "better value for money" image in the market and will
continuously seek to offer products, services and tariff options that are in
line with the needs and expectations of our subscribers.
Although the Amending Law No. 4673, or "the Amending Law", has no
specific regulations regarding tariff policy, it authorizes the
Telecommunications Authority to scrutinize activities in contradiction to fair
competition. On the regulatory side, the Telecommunications Authority
implemented the cost-based interconnect tariffing for the telecommunications
sector. See "Item 4B-Business Overview-Regulation of the Turkish
Telecommunications Industry" in our 20-F.
Per the Amended Agreement, effective from September 20, 2003 onwards,
we charge Turk Telekom a net amount of TRY 0.2100 (equivalent to $0.16 at June
30, 2005) per minute after deducting VAT, communications tax and other taxes
from the basic one-minute charge for local, metropolitan and long-distance
traffic switched from Turk Telekom to our network instead of a net amount of
basic unit price minus $0.06. For incoming international calls that are
terminated at our network, we were charging Turk Telekom 30% of the
international settlement charge which is transferred by the foreign PSTN and GSM
operators to Turk Telekom. Under the Amended Agreement, we charge Turk Telekom
45% of the international settlement charge. On October 11, 2003, the
Telecommunications Authority resolved that we would charge TRY 0.1788
(equivalent to $0.13 at June 30, 2005) per minute for traffic originating on all
other mobile operators' networks and terminating on our network effective from
September 23, 2003. We believe the reference tariff structure defined by the
Telecommunications Authority during the fourth quarter of 2004, if applied, will
lead to further reductions in termination rates, as pricing terms of the
interconnection agreements among operators have not been established through
negotiations. For detailed information on reference pricing 20-F, see "Item 4B.
Business Overview--Regulation of the Turkish Telecommunications Industry" in our
20F. We entered into an interconnection agreement with Milleni.com in April
2001. Under the interconnection agreement with Milleni.com, we charged
Milleni.com a net amount of (euro)0.10 per minute for our network terminated
traffic. The interconnection agreement between Milleni.com and us has been
bilaterally terminated as of June 21, 2004. However, on February 21, 2005,
Bilisim Telekom, one of our subsidiaries, and Milleni.com have signed an
agreement to provide telecommunications services to each other whereby
Milleni.com may convey calls to our switch and we may convey calls to
Milleni.com's switch, for onward transmission to their destinations. Under the
new supplemental interconnection agreement signed with Globalstar on December
11, 2003, we charge Globalstar a net amount of $0.175 per minute for our network
terminated traffic. In addition, we charge Globalstar a net amount of $0.03 per
SMS.
The following table shows the amounts per minute we charge Turk
Telekom, Telsim and AVEA for calls terminating on our network as of June 30,
2005 and September 30, 2005 both in TRY and equivalent US dollars at June 30,
2005.
6
June 30, September 30,
2005 2005
-------------- -------------- ------------ ----------------
TRY USD TRY USD
-------------- -------------- ------------ ----------------
Turk Telekom 0.2017 0.15 0.1480 0.11
Telsim 0.1953 0.15 0.2005 0.15
AVEA 0.2065 0.15 0.2119 0.16
During 2001, we were approached by IsTim, a new competitor that began
its operations in March 2001 under the brand name of Aria, to negotiate a
national roaming agreement. These negotiations did not result in a mutual
agreement. Therefore, the discussions continued under the supervision of the
Telecommunications Authority, but we were unable to reach an agreement with
IsTim, and we commenced litigation proceedings to prevent the imposition of an
agreement by the Telecommunications Authority. The introduction of national
roaming in Turkey could have a negative impact on our revenues. For a
description of the dispute regarding the national roaming agreement and the
risks related to this dispute, see "Item 8A. Consolidated Statements and Other
Financial Information--Legal Proceedings--Dispute on National Roaming Agreement"
in our 20F.
We expect our revenues to increase at a slower pace in 2005 overall
compared to 2004, mainly due to the increase in our subscriber base and
appreciation of TRY, together with the improvement in the macroeconomic
indicators and improving minutes of usage.
Operating Costs
Direct Cost of Revenues
Direct cost of revenues includes mainly ongoing license fees,
transmission fees, base station rents, billing costs, depreciation and
amortization charges, repair and maintenance expenses directly related to
services rendered, roaming charges paid to foreign GSM operators for calls made
by our subscribers while outside Turkey, interconnection fees paid to Telsim,
AVEA, Milleni.com and Globalstar and wages, salaries and personnel expenses for
technical personnel. Direct cost of revenues also includes costs arising from
legal disputes, which relates to items included in direct cost of revenues. For
a detailed discussion of our legal and arbitration proceedings, see "Item.8A.
Consolidated Statements and Other Financial Information- Legal Proceedings" in
our 20-F.
Under the Amended Agreement, we paid Turk Telekom interconnection fees
of TRY 0.0500 (equivalent to $0.04 at June 30, 2005) per minute for local calls
from our network to the Turk Telekom fixed-line network and TRY 0.0700
(equivalent to $0.05 at June 30, 2005) per minute for non-local calls from our
network to the Turk Telekom fixed-line network. On the basis of the Amended
Agreement signed with Turk Telekom, we modify the interconnection fees according
to the consumer price index and foreign currency exchange rate on a quarterly
basis. For international calls originating on our network, we pay Turk Telekom
the normal one-unit call charge as outlined in Turk Telekom tariffs in force
without any discount. For international calls originating on our network, we
also pay Turk Telekom 70% of the net amount of the normal per-minute call
charge, as outlined under Turk Telekom's current tariffs.
On November 11, 2003, after the resolution of the Telecommunications
Authority on pricing terms, we and Telsim determined new pricing terms for our
interconnection agreement, which resulted in an amendment in the interconnection
agreement. Per the Telecommunications Authority resolution, we paid TRY 0.1788
(equivalent to $0.13 at June 30, 2005) per minute for calls originating on our
network and terminating on Telsim's network effective from September 23, 2003.
On the basis of our amended interconnection agreement signed with Telsim, we
modify the interconnection tariffs according to the consumer price index. On
October 11, 2003, the Telecommunications Authority resolved that we would pay
TRY 0.2338 (equivalent to $0.17 at June 30, 2005) per minute for traffic
7
originating on our network and terminating on Aria's or Aycell's network
effective from September 23, 2003.
We had entered into interconnection agreements with Is-Tim and Aycell
that were effective on March 9, 2001 and July 19, 2001, respectively. After the
merger of Is-Tim and Aycell under the company name of TT&TIM, we cancelled our
interconnection agreement with Aycell. Our interconnection agreement with Is-Tim
was renewed with TT&TIM, which changed its name to AVEA on October 15, 2004.
Under our interconnection agreement with Milleni.com, each of the
parties agreed to provide telecommunications services to each other whereby
Milleni.com could convey calls to Milleni.com's switch for onward transmission
to their destinations. Milleni.com charged us at various prices identified
within the scope of the agreement for the calls destined to numerous networks
internationally. The interconnection agreement between Milleni.com and us has
been bilaterally terminated as of June 21, 2004. However, on February 21, 2005,
Bilisim Telekom, our subsidiary, and Milleni.com signed an agreement to provide
telecommunications services to each other whereby Milleni.com may convey calls
to our switch and we may convey calls to Milleni.com's switch, for onward
transmission to their destinations.
The following table shows the amounts per minute we pay Turk Telekom,
Telsim and AVEA for calls terminating on our network as of June 30, 2005 and
September 30, 2005 both in TRY and equivalent US dollars at June 30, 2005.
June 30, September 30,
2005 2005
-------------- -------------- ------------ ----------------
TRY USD TRY USD
-------------- -------------- ------------ ----------------
Turk Telekom
Local Calls 0.0504 0.04 0.0340 0.03
Non-Local Calls 0.0706 0.05 0.0510 0.04
Telsim 0.1953 0.15 0.2005 0.15
AVEA 0.2700 0.20 0.2771 0.21
Under the Globalstar interconnection agreement, we pay Globalstar a net
amount of $0.40 per minute up to 500,000 minutes, $0.31 per minute for traffic
between 500,000-1,000,000 minutes, $0.25 per minute for traffic between
1,000,000-2,000,000 minutes and $0.20 per minute for traffic after 2,000,000
minutes. In addition, we pay Globalstar a net amount of $0.03 per SMS.
General and Administrative
General and administrative expenses consist of fixed costs including
company cars, office rent, office maintenance, travel, insurance, consulting,
wages, salaries and personnel expenses for non-technical and non-marketing
employees and other overhead charges. Our general and administrative expenses
also include bad debt expenses of our postpaid subscribers.
Selling and Marketing
Selling and marketing expenses consist of public relations, sales
promotions, dealer activation fees, advertising, subsidies, prepaid frequency
usage fees, wages, salaries and personnel expenses of sales and marketing
related employees and other expenses, including travel expenses, office
expenses, insurance, company car expenses, training and communication expenses.
The average acquisition cost was approximately $23.8 and $21.6 per new
subscriber for the six month periods ended June 30, 2005 and 2004, respectively.
We compute average acquisition cost per new subscriber by adding sales promotion
expenses, SIM card subsidies, activation fees and the special transaction tax
and dividing the sum by the gross number of new subscribers for the related
8
period. These costs are recorded as either selling and marketing expense or
reduction of revenue in our statements of operations. We believe the average
acquisition cost will increase in 2005 overall as a result of increasing
competition. Although we plan to keep our selling and marketing expenses stable
as a percentage of revenue based on foreseeable levels of competition, the total
amount of such expenses expected to continue increasing.
The following table shows information concerning our consolidated
statements of operations for the periods indicated.
Six Months ended Three Months ended
June 30, June 30,
----------------- ------------ ------------ -----------------
2004 2005 2004 2005
----------------- ------------ ------------ -----------------
Revenues 1,351.9 1,944.0 606.4 1,046.0
Direct cost of revenues (974.3) (1,100.9) (541.3) (577.4)
------- --------- ------- -------
Gross profit 377.6 843.1 65.1 468.6
General and administrative expenses (67.5) (71.0) (38.2) (35.9)
Selling and marketing expenses (153.0) (230.2) (77.0) (126.6)
------- ------ ------ -------
Operating income (loss) 157.1 541.9 (50.1) 306.1
Income from related parties, net 0.9 1.0 0.4 0.7
Interest income (expense), net (1.5) (25.1) 39.0 (1.9)
Other income, net 0.8 4.2 1.3 2.6
Equity in net income of unconsolidated investees 16.4 26.4 8.5 13.3
Minority interest in income (expense) at consolidated
subsidiaries 2.7 0.4 1.7 (1.5)
Translation gain (loss) 8.7 (10.9) 28.9 (6.8)
--- ------ ---- -----
Income before taxes 185.1 537.9 29.7 312.5
Income tax benefit (expense) 37.5 (195.8) 66.7 (98.8)
---- ------- ---- ------
Net income 222.6 342.1 96.4 213.7
The following table shows certain items in our consolidated statement
of operations as a percentage of revenues.
Six Months ended Three Months ended
June 30, June 30,
----------------- ------------ ------------ -----------------
2004 2005 2004 2005
----------------- ------------ ------------ -----------------
Statement of Operations (% of revenue)
Revenues
Communication fees 96.3 95.0 95.8 95.3
Commission fees on betting business 0.2 2.4 0.3 2.3
Monthly fixed fees 1.8 1.4 2.0 1.3
SIM card sales 1.1 0.9 1.0 0.8
Call center revenues 0.3 0.2 0.3 0.2
Other 0.3 0.1 0.6 0.1
Total revenues 100.0 100.0 100.0 100.0
Direct cost of revenues (72.1) (56.6) (89.3) (55.2)
Gross margin 27.9 43.4 10.7 44.8
General and administrative expenses (5.0) (3.6) (6.3) (3.4)
Selling and marketing expenses (11.3) (11.8) (12.7) (12.1)
Operating income (loss) 11.6 28.0 (8.3) 29.3
9
Six month period ended June 30, 2005 compared to six month period ended June 30,
2004 and three month period ended June 30, 2005 compared to the three month
period ended June 30, 2004
We had 25.6 million subscribers, including 20.4 million prepaid
subscribers, as of June 30, 2005, compared to 20.9 million subscribers,
including 15.9 million prepaid subscribers, as of June 30, 2004. During the
first six months of 2005, we added approximately 2.2 million net new subscribers
compared to 1.9 million net new subscribers for the same period in 2004. We
added 1.3 million net new subscribers to our network for the three month period
ended June 30, 2005 compared to 1.2 million net new subscribers for the same
period in 2004.
Revenues
Total revenues for the six month period ended June 30, 2005 increased
44% to $1,944.0 million from $1,351.9 million for the same period in 2004. The
increase in revenues is mainly due to the growth in the number of subscribers,
increased usage, and tariff increases and also to the negative impact of
additional legal provisions recorded for the three month period ended June 30,
2004. Revenue increased 73% to $1,046.0 million for the three month period ended
June 30, 2005 from $606.4 million for the same period in 2004 for the same
reasons.
Revenues from communication fees for the six month period ended June
30, 2005 increased 42% to $1,847.5 million from $1,302.5 million for the same
period in 2004 mainly due to increased usage, the increase in the subscriber
base and the increase in tariffs and the negative impact of additional legal
provisions recorded in the second quarter of 2004. Revenues from communication
fees increased 72% to $997.4 million for the three month period ended June 30,
2005 from $580.7 million for the same period in 2004. The rate of increase in
revenue from communication fees for the three month period ended June 30, 2005
was higher than the rate of increase for the six month period because of the
impact of additional legal provisions recorded for the three month period ended
June 30, 2004. Communication fees include SMS revenue, which amounted to $201.3
million for the six month periods ended June 30, 2005, $162.2 million for the
same period in 2004, $97.6 million for the three month period ended June 30,
2005 and $79.7 million for the three month the same period in 2004. Main
reasons per the increase in SMS revenue are the increase in the number of
subscribers, improvement in macroeconomic indicators and enhanced purchasing
power of subscribers.
Our majority-owned subsidiary Inteltek commenced its operations of
fixed odds betting games in April 2004, pursuant to the agreement signed with
Genclik ve Spor Genel Mudurlugu on October 2, 2003 and started to generate
commission revenue from betting business. Commission revenue from betting
business amounted to $46.9 million for the six month period ended June 30, 2005
compared to $2.1 million for the same period in 2004. In addition, commission
revenue from our betting business amounted to $24.4 million for the three month
period ended June 30, 2005, compared to $1.8 million for the same period in
2004.
Revenues from monthly fixed fees for the six month period ended June
30, 2005 increased 12% to $27.0 million from $24.2 million for the same period
in 2004 mainly due to the increase in our subscriber base and commencement of
operations in Ukraine. In addition, monthly fixed fees increased 11% to $13.6
million for the three month period ended June 30, 2005 from $12.3 million for
the same period in 2004.
SIM card revenues for the six month period ended June 30, 2005
increased 13% to $16.7 million from $14.8 million for the same period in 2004.
SIM card revenues increased 23% to $8.0 million for the three month period
ended June 30, 2005 from $6.5 million for the same period in 2004.
10
Direct cost of revenues
Direct cost of revenues increased 13% to $1,100.9 million for the six
month period ended June 30, 2005 from $974.3 million for the same period in 2004
mainly due to the increase in interconnection fees paid to Turk Telekom and the
increase in revenue-based costs such as the ongoing license fee paid to the
Turkish Treasury offset by the impact of the additional legal provisions related
to the disputes with Turk Telekom and the Turkish Treasury. For the same
reasons, direct cost of revenues increased 7% to $577.4 million for the three
month period ended June 30, 2005 from $541.3 million in the same period of 2004.
Interconnection costs increased 65% to $185.0 million for the six month
period ended June 30, 2005 from $112.4 million for the same period in 2004
mainly due to the increase in usage and the impact of legal provision related to
our dispute with Turk Telekom recorded for the three month period ended June 30,
2004. For the same reasons, interconnection costs increased 111% to $102.8
million for the three month period ended June 30, 2005 from $48.7 million for
the same period of 2004.
Ongoing license fees paid to the Turkish Treasury increased only 4% to
$379.4 million for the six month period ended June 30, 2005 from $366.1 million
for the same period in 2004. Although increase in revenues and the appreciation
of TRY against US dollars have the effect of increasing our ongoing license fees
to be paid to the Turkish Treasury, their effect was offset by an additional
one-time provision of $122.0 million for the treasury share on the ongoing
license fee dispute booked for the three month period ended June 30, 2004. Due
to the impact of this legal provision, ongoing license fees decreased 10% to
$205.2 million for the three month period ended June 30, 2005 compared to $228.6
million for the same period in 2004.
Transmission costs, site costs, information technology, network
maintenance expenses and infrastructure cost decreased approximately 37% to
$65.2 million for the six month period ended June 30, 2005 from $103.6 million
for the same period in 2004 mainly due to a one-time expense incurred with
respect to the Turk Telekom infrastructure dispute in the three month period
ended June 30, 2004. In accordance with the settlement discussions made with
Turk Telekom, we incurred an expense amounting to $36.4 million for the three
month period ended June 30, 2004. For this reason, these expenses decreased 47%
to $36.1 million for the three month period ended June 30, 2005 from $68.3
million in the same period of 2004. In addition, uncapitalizable antenna site
costs and expenses increased 32% to $75.5 million for the six month period ended
June 30, 2005 from $57.1 million for the same period in 2004 mainly due to the
increase in radio network operations. For the same reasons, uncapitalizable
antenna site costs and expenses increased 21% to $35.5 million for the three
month period ended June 30, 2005 from $29.3 million for the same period in 2004.
Roaming expenses increased 36% to $32.4 million for the six month
period ended June 30, 2005 from $23.8 million for the same period in 2004,
mainly due to the increase in roaming revenue generated from the calls made by
our subscribers while outside Turkey, primarily reflecting better economic
conditions and the fact that between June 30, 2004 and June 30, 2005 we added 54
new roaming operators for GSM, 86 for GPRS and 52 for Active Customised
Applications for Mobile Network Enhanced Logic ("active CAMEL") technologies
which enable our pre-paid subscribers to be able to roam on foreign operators'
networks. For the same reasons, roaming expenses increased 36% to $16.5 million
for the three month period ended June 30, 2005 from $12.1 million for the same
period in 2004.
Billing costs increased 3% to $13.9 million for the six month period
ended June 30, 2005 from $13.5 million for the same period in 2004. In addition
billing costs increased 2% to $6.9 million for the three month period ended June
30, 2005 from $6.8 million for the same period in 2004.
Depreciation and amortization charges increased 6% to $224.3 million
for the six month period ended June 30, 2005 from $211.6 million for the same
period in 2004 mainly due to the
11
increase in the capital expenditures, in particular with respect to Ukranian
operations. Depreciation and amortization expenses increased 8% to $115.1
million for the three month period ended June 30, 2005 from $107.1 million in
the same period of 2004. The amortization expense for our GSM license and other
telecommunication licenses was $14.7 million and $10.0 million for the first six
month periods ended June 30, 2005 and 2004 and $8.6 million and $5.0 million for
the three month periods ended June 30, 2005 and 2004, respectively.
The cost of SIM cards sold increased 29% to $22.8 million for the six
month period ended June 30, 2005 from $17.7 million for the same period in 2004,
reflecting primarily growth in the number of subscribers in 2005. The cost of
SIM cards sold increased 11% to $10.5 million for the three month period ended
June 30, 2005 from $9.5 million for the same period in 2004 for the same
reasons.
Wages, salaries and personnel expenses for technical personnel
increased 32% to $60.9 million for the six month period ended June 30, 2005 from
$46.3 million for the same period in 2004 mainly due to the appreciation of TRY
against US dollars, periodic increase in salaries, increase in headcount and
commencement of operations in Ukraine. For the same reasons, wages and salaries
and personnel expenses for technical personnel increased 38% to $30.4 million
for the three month period ended June 30, 2005 from $22.0 million for the same
period in 2004.
As a percentage of revenue, direct cost of revenues decreased to 57%
for the six month period ended June 30, 2005 from 72% for the same period in
2004 mainly due to additional legal provisions recorded for the three month
period ended June 30, 2004. In addition, as a percentage of revenue, direct cost
of revenues decreased to 55% for the three month period ended June 30, 2005 from
89% for the same period in 2004.
Gross profit increased to $843.1 million for the six month period ended
June 30, 2005 from $377.6 for the same period in 2004 mainly due to the impact
of additional legal provisions reflected on revenues and direct cost of revenues
for the three month period ended June 30, 2004 and the growth in the number of
subscribers and the increase in usage in 2005. For the same reasons, gross
profit increased to $468.6 million for the three month period ended June 30,
2005 from $65.0 million for the same period in 2004.
General and administrative expenses
General and administrative expenses increased 5% to $71.0 million for
the six month period ended June 30, 2005 from $67.5 million for the same period
in 2004, mainly due to the increases in wages, salaries and personnel expenses
and bad debt expense despite expenses paid in connection with the Iran GSM
license tender and the impact of early extinguishment of Cellco debt in the
first half of 2004. General and administrative expenses decreased 6% to $35.9
million for the three month period ended June 30, 2005 from $38.2 million for
the same period in 2004. As a percentage of revenues, general and administrative
expenses slightly decreased to 4% for the six month period ended June 30, 2005
from 5% for the same period in 2004. In addition, as a percentage of revenues,
general and administrative expenses decreased to 3% for the three month period
ended June 30, 2005 compared to 6% for the same period in 2004.
During 2004 and 2003, we invested in the 12.75% Senior Notes issued by
Cellco. The nominal value and amortized cost of such bonds amounted to $65.0
million and $73.1 million, respectively. Reacquisition of these bonds is
considered an early extinguishment of debt under the provisions of SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". The difference between the reacquisition price and net carrying
amount of Cellco bonds amounting to $8.1 million is recorded in general and
administrative expenses in the three month period ended June 30, 2004.
Bad debt expenses increased 72% to $12.2 million for the six month
period ended June 30,
12
2005 from $7.1 million for the same period in 2004. Since the implementation in
2004 of improved collection activities such as credit scoring, a new option
whereby subscribers can make payments under an installment plan and new
collection channels and improvement in the legal follow-up system to decrease
fraud, the positive impact of this new system decreased the bad debt expense in
the first quarter of 2004. Bad debt expenses decreased 34% to $4.7 million for
the three month period ended June 30, 2005 from $7.1 million for the same period
in 2004 mainly due to decreasing effects of collection activities in the three
month period ended June 30, 2004. We provided an allowance of $143.0 million and
$122.9 million for doubtful receivables for the six month period ended June 30,
2005 and 2004, respectively, identified based upon past experience.
In the first quarter of 2004, Turkcell made a payment to BNP Paribas
relating to the GSM license tender on behalf of Irancell. According to the
tender conditions, the Consortium that acquires the license will pay the
consultancy fees of BNP Paribas (which acts as consultant to the Iranian
Authorities). In the first quarter of 2004, we paid such consultancy fees and
charged $8.9 million to general and administrative expenses.
Wages, salaries and personnel expenses for non-technical and
non-marketing employees increased 44% to $25.8 million for the six month period
ended June 30, 2005 from $17.9 million for the same period in 2004 mainly due to
increase in headcount, periodic increase in salaries and the commencement of
operations in Ukraine. For the same reasons, these expenses increased 46% to
$12.7 million for the three month period ended June 30, 2005 from $8.7 million
for the same period in 2004.
Consulting expenses increased 18% to $7.3 million for the six month
period ended June 30, 2005 from $6.2 million for the same period in 2004, mainly
due to consulting services related with the commencement of operations in
Ukraine. For the same reason, consulting expenses increased 24% to $4.6 million
for the three month period ended June 30, 2005 from $3.7 million in the same
period of 2004.
Selling and marketing expenses
Selling and marketing expenses increased 51% to $230.2 million for the
six month period ended June 30, 2005 from $153.0 million for the same period in
2004, mainly due to the increase in prepaid subscribers' frequency usage fees,
increased advertising expenses resulting from intensifying competition and
increased activation fees. For the same reason, selling and marketing expenses
increased 64% to $126.6 million for the three month period ended June 30, 2005
from $76.9 million for the same period in 2004. As a percentage of revenues,
selling and marketing expenses were 12% and 11% for the six month periods ended
June 30, 2005 and 2004, respectively. In addition, as a percentage of revenues,
selling and marketing expenses were 12% and 13% for the three month periods
ended June 30, 2005 and 2004, respectively.
Total prepaid advertising, market research, product management, public
relations expenses and prepaid subscribers' frequency usage fee expenses
increased 70% to $121.5 million for the six month period ended June 30, 2005
from $71.5 million for the same period in 2004. The increase in 2005 stemmed
mainly from the increase in prepaid subscribers' frequency usage fees and
advertising expenses. For the same reasons, total prepaid advertising, market
research, product management, public relations expenses and prepaid subscribers'
frequency usage fee expenses increased 100% to $67.2 for the three month period
ended June 30, 2005 from $33.6 million in the same period of 2004.
Total postpaid advertising, market research, product management, public
relations and call center expenses increased 16% to $40.4 million for the six
month period ended June 30, 2005 from $34.8 million for the same period in 2004
mainly due to the increased advertising and customer relations expenses. Total
postpaid advertising, market research, product management, public relations and
call center expenses increased 3% to $20.5 million for the three month period
ended June 30, 2005 from $19.9 million in the same period of 2004.
13
Activation fees increased 84% to $24.7 million for the six month period
ended June 30, 2005 from $13.4 million for the same period in 2004 mainly due to
the increase in the number of activations and the increase in premiums per
activation. For the same reason, activation fees increased 93% to $14.1 million
for the three month period ended June 30, 2005 from $7.3 million in the same
period of 2004.
Wages, salaries and personnel expenses for selling and marketing
employees increased 38% to $24.1 million for the six month period ended June 30,
2005 from $17.5 million for the same period in 2004 mainly due to the increase
in the headcount, periodic increase in salaries and commencement of operations
in Ukraine. Wages, salaries and personnel expenses for selling and marketing
employees increased 48% to $12.1 million for the three month period ended June
30, 2005 from $8.2 million in the same period of 2004.
Operating income (loss)
Operating income increased to $541.9 million for the six month period
ended June 30, 2005 from $157.1 million for the same period in 2004, mainly due
to the increase in revenues and the impact of the additional legal provisions
recorded for the three month period ended June 30, 2004. Operating income was
$306.1 million for the three month period ended June 30, 2005 compared to
operating loss of $50.1 million for the three month period ended June 30, 2004
mainly due to the impact of additional legal provisions reflected on the
revenues and direct cost of revenues.
Interest income (expense), net
Interest expense net of interest income increased to $25.1 million for
the six month period ended June 30, 2005 compared to $1.5 million for the same
period in 2004. The increase in net interest expense was mainly due to the
effect of legal provisions. Interest expense related to legal provisions was
$59.0 million for the six month period ended June 30, 2005 compared to $30.7
million for the same period ended June 30, 2004. For the same reasons, net
interest expense was $1.9 million for the three month period ended June 30, 2005
compared to $39.0 million net interest income for the same period in 2004.
Interest expense related to legal provisions was $21.3 million for the three
month period ended June 30, 2005 compared to $24.4 million interest income for
the same period ended June 30, 2004.
Translation gain (loss)
We recorded a translation loss of $10.9 million for the six month
period ended June 30, 2005, compared to a translation gain of $8.7 million for
the same period in 2004. Translation loss experienced for the six month period
ended June 30, 2005 stemmed from the appreciation of TRY against the US dollar
for the first quarter of 2005. The translation gain experienced for the six
month period ended June 30, 2004 stemmed from the 6% devaluation of the TRY
against the US dollar for the six month period ended June 30, 2004. As we
recorded a significant amount of accruals against legal disputes on our balance
sheet for the three month period ended June 30, 2004 and nearly all of the
accruals are in terms of TRY, the devaluation of TRY resulted in a translation
gain. For the same reason, we recorded a $6.8 million translation loss for the
three month period ended June 30, 2005 compared to translation gain of a $28.9
million for the same period in 2004.
Income tax benefit (expense)
Income tax expense for the six month period ended June 30, 2005 was
$195.8 million and income tax benefit was $37.5 million for the same period in
2004. We establish valuation allowances in accordance with the provisions of
SFAS No. 109. We continually review the adequacy of the valuation allowance
based on changing conditions in the market place in which we operate and our
projections of future taxable income, among other factors. We forecast to have
taxable income in 2005 and onwards and have generated taxable income for past
two years. Recently, the economic and
14
political situation in Turkey has become more stable and there are positive
expectations about the near-term future. Further, there are positive
developments regarding the talks for Turkey's accession to the European Union.
On October 3, 2005, the member states of the European Union decided to start
accession discussions with Turkey. This decision is expected to have certain
political and economic benefits for Turkey in the near future. Furthermore, our
settlement agreements with Turk Telekom and the Turkish Treasury were signed in
the fourth quarter of 2004. As a result, as of June 30, 2005, our assessment of
the realizability of the deferred tax assets and related valuation allowance
requirements is consistent with that made at December 31, 2004. We concluded
that it was more likely than not that the deferred tax assets of $213.6 million
were realizable. Turkish tax legislation does not allow companies to file tax
returns on a consolidated basis. Therefore, we believe a valuation allowance
should continue to be provided on a portion of the deferred tax assets,
resulting from certain consolidated subsidiaries, as we are unable to conclude
that the likelihood of realizing these deferred tax assets is more likely than
not. Accordingly, a valuation allowance of approximately $17.3 million is
recorded as of June 30, 2005 (December 31, 2004: $17.2 million) for such
amounts. We believe that it is more likely than not that the net deferred tax
asset of approximately $213.6 million as of June 30, 2005 will be realized
through reversal of taxable temporary differences as well as future taxable
income exclusive of reversing taxable temporary differences. We will continue to
evaluate the realizability of our deferred tax assets including net operating
loss and tax credit carryforwards and the related impact on the valuation
allowance.
Equity in net income of unconsolidated investees
Our share of the net income of unconsolidated investees was $26.4
million for the six month period ended June 30, 2005 compared $16.4 million for
the same period in 2004. The increase in net income of unconsolidated investees
was mainly due to an increase in Fintur's net income to $63.7 million for the
six month period ended June 30, 2005 from $39.5 million for six month period
ended June 30, 2004. Net income of unconsolidated investees was $13.3 million
for the three month period ended June 30, 2005 compared to $8.5 million in the
same period of 2004.
Net income
Net income increased to $342.1 million for the six month period ended
June 30, 2005 compared to net income of $222.6 million for the same period in
2004. The increase was mainly due to the increase in operating income despite
the negative effect of the income tax charge for the period ended June 30, 2005
compared to income tax benefit for the same period ended June 30, 2004 and
increase in net interest expense for the six month period ended June 30, 2005
compared to the same period of 2004. Mainly due to the same reasons, net income
was $213.7 million for the three month period ended June 30, 2005 compared to a
net income of $96.4 million in the same period of 2004.
Taxation Issues in Telecommunications Sector
For a discussion of Turkish Tax legislation on telecommunications
revenues, please see "Item 5A. Operating Results-Taxation Issues in
Telecommunications Sector" in the 20-F. Other than as disclosed herein, there
have been no material changes in the taxes imposed on telecommunications
services since the date of the 20-F.
Investment Incentive Certificates
In 1993, 1997, 2000, 2001 and 2004, the Under Secretariat of the
Treasury approved investment incentive certificates for a program of capital
expenditures made by us and our subsidiaries in our mobile communications
operations, call center operations and betting games operations. Such incentives
entitle us to a 100% exemption from customs duty on imported machinery and
equipment and an investment tax benefit of 100% on qualifying expenditures. The
investment tax benefit takes the form of deductions for corporation tax
purposes, but these deductions were subject to withholding tax at a rate of
19.8% (for expenditures made after April 24, 2003, the investment tax
15
benefit equals 40% of qualifying expenditures but it is not subject to any
withholding tax). As of June 30, 2005, investment incentive certificates provide
for tax benefits on cumulative purchases of up to approximately $4.5 billion in
qualifying expenditures as defined in the certificates. As of June 30, 2005, we
had unused tax credit carryforwards under the certificates of approximately
$284.7 million ($313.1 million as of December 31, 2004) which can be carried
forward indefinitely. The certificates are denominated in TRY. However,
approximately $0.5 billion of qualifying expenditures through June 30, 2005
($0.7 billion as of December 31, 2004) under the certificates are indexed
against future inflation.
Law No. 4842, which made changes in certain taxation matters, was
announced on April 24, 2003. For a discussion of these changes, see "Item 5A.
Operating Results - Investment Incentive Certificates" in our 20-F.
Capital Transactions
On April 5, 2005, our board of directors declared that our statutory
paid-in capital would be increased from TRY 1,474.6 million to TRY 1,854.9
million by adding TRY 234.1 million out of the total dividend for 2004 and the
statutory capital inflation adjustment included in the financial statements
prepared in accordance with the accounting standards promulgated by the Capital
Markets Board of Turkey (the "CMB") amounting to TRY 146.2 million for 2004. The
increase of TRY 380.3 million was distributed to our shareholders in the form of
a stock split. The capital increase was accounted for as a stock split in our
accompanying consolidated financial statements. As a result of the aforesaid
transactions, we issued new shares with a total nominal value of TRY
380,247,980.
All share amounts and per share figures reflected in our historical
financial statements have been retroactively restated for the stock splits
discussed above.
On March 25, 2005, Cukurova Holding announced that it had an intention
to sell approximately 53% of its directly and indirectly held shares in Turkcell
Holding for a cash consideration of $3.1 billion to Sonera Holding BV
("Sonera"). Finalization of the transaction would have been subject to
completion of the final share purchase/sale agreement, due diligence reports and
obtaining the necessary permissions from regulatory authorities including an
exemption to be granted to Sonera by the CMB for not offering the same purchase
price per share for the public shares. If the transaction had been finalized as
planned, the Cukurova Group's effective interest in us would have decreased
approximately to 13.3% and Sonera's effective interest would have increased to
approximately 64.1%. On May 23, 2005, Cukurova Holding announced that the
exclusive negotiation obligation period was finalized without a conclusion on a
share purchase/sale agreement between the parties. In the same announcement, it
was noted that, as a result of public reaction and opinions raised at the Annual
Shareholders' Meeting on the issue, Cukurova Group would start to work on
options that may not lead to a change in our control structure and/or Turkcell
Holding's control structure. Following Cukurova Holding's announcement, Sonera
filed a request for arbitration at the International Court of Arbitration of the
International Chamber of Commerce. Sonera also filed a request for interim
measures at a civil court in Geneva. Sonera demanded that the court prohibit
Cukurova Holding from initiating or continuing negotiations to sell or pledge
shares in Turkcell Holding with third parties other than Sonera.
On June 13, 2005, the Cukurova Group announced that the Cukurova Group
and Alfa Group formed a $3.3 billion financial package. The financial package
consists of an approximately $1.7 billion six-year duration loan while the
remaining portion will be a year 2011 dated convertible bond. The bonds can be
exchanged into shares of a Cukurova Group company after 18 months, which may
lead to a 13.2% indirect ownership of Alfa Group in us. Finalization of the
transaction was subject to due diligence reports and obtaining the necessary
permissions from regulatory authorities. In the same announcement, it was noted
that the funds would be primarily used by the Cukurova Group to retire its
16
debt to the SDIF and finance the Cukurova Group's option regarding the
acquisition of Yapi Kredi Bank's shares in us and Turkcell Holding.
Effects of Inflation
The annual inflation rates in Turkey were 29.7%, 18.4% and 9.3% for the
years ended December 31, 2002, 2003 and 2004, respectively, based on the Turkish
consumer price index. Annualized inflation rates were 9.0% for the six-month
period ended June 30, 2005 and 8.9% for the same period in 2004. With the help
of tight monetary policy followed by the Central Bank of Turkey and 6.5% target
primary budget balance required by the IMF program, inflation has decreased to
single digit numbers. The current inflation target set by the Central Bank of
Turkey is 8% for 2005. With adherence to the IMF program and implementation of
structural reforms, inflation could be decreased further in 2005. Furthermore,
the Central Bank of Turkey announced that it will start inflation targeting from
2006. In addition to the IMF Program, negotiations for the accession of Turkey
to the European Union started on October 3, 2005, which will also be a very
important factor in the macro economic policies intended to decrease inflation.
For additional information about the effects of inflation, see "Item 3A.
Selected Financial Data - Exchange Rate Data" and "Item 3D. Risk Factors" in our
20-F.
New Accounting Standards Issued
In March 2005, the FASB issued FIN 47, "Accounting for Conditional
Asset Retirement Obligations an interpretation of SFAS No. 143". FIN 47
clarifies the term "conditional asset retirement obligation" as used in SFAS No.
143, "Accounting for Asset Retirement Obligations". An entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated. The
fair value of a liability for the conditional asset retirement obligation should
be recognized when incurred--generally upon acquisition, construction, or
development and/or through the normal operation of the asset. FIN 47 also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 is effective
no later than the end of fiscal years ending after December 15, 2005.
Retrospective application for interim financial information is permitted but is
not required. The adoption of FIN 47 is not expected to have a material effect
on our consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3". SFAS No.
154 provides guidance on the accounting for and reporting of accounting changes
and error corrections. It establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to the
newly adopted accounting principle. SFAS No. 154 also provides guidance for
determining whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when retrospective
application is impracticable. The correction of an error in previously issued
financial statements is not an accounting change. However, the reporting of an
error correction involves adjustments to previously issued financial statements
similar to those generally applicable to reporting an accounting change
retrospectively. Therefore, the reporting of a correction of an error by
restating previously issued financial statements is also addressed by SFAS No.
154. SFAS No. 154 shall be effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. Early adoption is
permitted for accounting changes and corrections of errors made in fiscal years
beginning after SFAS 154 is issued. The adoption of SFAS No. 154 is not expected
to have a material effect on our consolidated financial statements.
17
Liquidity and Capital Resources
Liquidity
We require significant liquidity to finance capital expenditures for
the expansion and improvement of our GSM network, for non-operational capital
expenditures, for working capital and to service our debt obligations. To date,
these requirements have been funded largely through supplier financings, bank
borrowings, and the issuance of $700 million in bonds by a finance vehicle,
Cellco Finance N.V. ("Cellco"), which issued $300 million of debt securities in
July 1998 and $400 million of debt securities in December 1999, and a rights
issue. As of June 30, 2005, total net outstanding payables related to the Cellco
transaction was $335 million. We extinguished the aggregate principal amount of
$400 million plus accrued interest on August 1, 2005. During 2003 and 2004, we
purchased Cellco notes with a nominal value of $65 million. Reacquisition of
these bonds is considered an early extinguishment of debt under the provisions
of SFAS No. 140 and netted against outstanding payables.
A summary of our consolidated cash flows for the six month periods ended
June 30, 2005 and 2004 are as follows:
(In millions of USD) 2004 2005
---- ----
Net cash provided by operating activities 318.1 563.4
Net cash used for investing activities (198.6) (464.5)
Net cash provided by (used for) financing activities 120.4 (182.1)
----- -------
Net cash increase (decrease) 239.9 (83.2)
===== ======
The net cash provided by our operating activities for the six month
period ended June 30, 2005 and 2004 amounted to $563.4 million and $318.1
million, respectively. The increase in 2005 was primarily due to the increase in
revenues in 2005 despite litigation related payments.
The net cash used for investing activities for the six month periods
ended June 30, 2005 and 2004 amounted to $464.5 million and $198.6 million,
respectively. Total investments in investees amounted to $223.0 million as of
June 30, 2005 compared to $168.1 million as of June 30, 2004. For the six month
period ended June 30, 2005, we spent approximately $451.2 million for capital
expenditures compared with $198.6 million for the same period in 2004. The
increase in capital expenditures was mainly due to the increase in capital
expenditures of DCC. The additional capital expenditures made by DCC in 2005
mainly represent new network investments. The remaining capital expenditures are
primarily due to increased capital expenditures for our GSM network in Turkey.
For the full year 2005, we are planning approximately $500.0 million capital
expenditures in our network in Turkey in order to improve capacity, replace some
of the phased out hardware, provide increased network functionality, and improve
network efficiency in order to better serve our customers.
The net cash used for financing activities for the six months period
ended June 30, 2005 amounted to $182.1 million and the net cash provided by
financing activities for the six month period ended June 30, 2004 amounted to
$120.4 million. As of June 30, 2005, $825.7 million was outstanding as
short-term and long-term borrowings. We also entered into lease agreements in
the amount of $82.5 million with various leasing companies ($64.9 million for
our headquarters and other real estate, $3.5 million for computers installed at
the building, office equipment and company cars and $14.1 million for a central
betting system).
During the first quarter of 2004, we have fully drawn down additional
borrowings of $100 million from Akbank in February 2004 and $100 million from
Garanti in March 2004. In addition, we have finalized the Syndicated Murabaha
facility with Islamic Development Bank and HSCB Bank AS, which became effective
on January 16, 2004 with the initial drawdown done on March 3, 2004.
During the first half of 2005 Astelit has drawn down additional
borrowings from Ericsson Credit AB, ABN Amro NV and HSBC Bank Plc to finance
capital expenditures and for working capital requirements. During the first half
of 2005, under the vendor financing agreement signed with
18
Ericsson AB and Ericsson Credit AB, Astelit has utilized additional borrowings
of $43.7 million. During the first half of 2005, under the vendor financing
agreement signed with Nokia Corporation ("Nokia") and ABN Amro NV, Astelit has
utilized an additional $64.3 million of borrowing. Astelit has also utilized
$3.8 million under the vendor financing agreement signed with Sysdate Pty Ltd
("Sysdate") and ABN Amro NV during the first half of 2005. Besides, Astelit
utilized $25.5 million from HSBC Bank Plc for working capital requirements.
Source of liquidity
We believe that we will be able to finance our current operations,
capital expenditures and financing costs and maintain and enhance our network in
2005 through our operating cash flow and our strong cash balance as of June 30,
2005. Additionally, we are continuously evaluating local and international
markets for new financing alternatives such as TRY denominated funding in order
to reduce currency mismatch of our balance sheet and extend the duration of our
loans while reducing our cost of borrowing.
Astelit, being in the start-up process, continues to create negative
operating cash flow and this is financed through external resources. Recently,
shareholders contributed an additional $50.0 million capital for working capital
requirements. For further financing sources, Astelit intends to rely on
international and/or local debt financing to refinance existing vendor loans,
additional capital expenditures, and working capital requirements. In this
respect, Astelit signed a mandate letter for a long term financing arrangement
with ING Bank N.V. and Standard Bank London Limited to arrange a financing of
$280.0 million with a maturity of six years. The financing will be in the form
of a syndicated loan and it is expected to be finalized in the second half of
2005 with the possibility of an increase in the facility amount from $280.0
million up to $350.0 million following banks' further analysis of credit and
market conditions. To date Astelit has not encountered any difficulties in
attracting short term loans from local banks for short term financing needs and
has utilized $23.0 million during the first half of 2005 of which $5.0 million
was repaid with the capital increase proceeds. These short term credits will be
refinanced through the proceeds of long term financing. Additionally, loans
amounting to $25.5 million from local sources were utilized in the three month
period ended June 30, 2005 and were fully repaid as of June 30, 2005.
On August 24, 2005, a TRY 50 million loan was obtained from West LB
A.G., London Branch with a tenor of 3 years. The interest and principal are
payable every 6 months and interest is calculated on a floating rate of 6 month
TRYibor (TRY Libor) minus 15 basis points. The facility will reduce the currency
risk on our balance sheet.
Off-balance sheet arrangements
Off-balance sheet arrangements refer to any transaction, agreement, or other
contractual arrangement involving an unconsolidated entity (other than
contingent liabilities arising from litigation, arbitration or regulatory
actions), under which a company has:
- provided guarantee contracts;
- retained or contingent interests in transferred assets;
- any obligation under derivative instruments classified as equity; or
- any obligation arising out of material variable interests in an
unconsolidated entity that provides financing, liquidity, market risk
or credit risk support to the company, or that engages in leasing,
hedging, or research and development arrangements with the company.
19
Based on the shareholders agreement signed on January 27, 2004 and
effective from April 2, 2004, we committed to arrange a maximum $150.0 million
of financing for DCC. We have substantially fulfilled our above-mentioned
commitment by acting as the guarantor of vendor financing agreements signed by
Astelit with Nokia and ABN Amro NV, Ericsson AB and Ericsson Credit AB and
Sysdate and ABN Amro NV. In return for these guarantees, we pledged minority
shares of Euroasia.
Irancell had been selected as the licensee to be authorized to build
and operate a nationwide GSM network in Iran and provide GSM services to the
Iranian market. The GSM license agreement was signed on September 12, 2004
between the Consortium and the Iranian Authorities. On September 26, 2004, both
the Iranian Parliament and the Guardian Council stated that the agreement
concerning the mobile phone network would become effective upon the approval of
the Parliament. Accordingly, Irancell must receive the Iranian Parliament's
approval prior to the payment of the EUR 300 million of license fee in order to
become the second licensed GSM operator in Iran. On April 25, 2005, the Iranian
Parliament approved a revised proposal, which suggests reduction of our stake in
Irancell to 49%, and submitted the proposal to the Guardian Council for their
consent. In May 2005, the Guardian Council gave their consent. The consent was
approved by the Iranian President.
On September 2, 2005, our Board of Directors decided to continue with
the Irancell project and approved the ownership structure of Irancell with a
stake of 49% in Irancell for Eastasia. However, it has been stated that 21% of
the shares of Irancell should be transferred to the National Bank of Iran, Bank
Melli, and the parties should agree that these shares shall be publicly offered
in the third year following the initiation of the Irancell operations and these
agreed terms should be reflected into all agreements between the parties in
Irancell. Iranian Telecommunications Ministry has set November 21, 2005 as the
deadline with respect to the finalization of the shareholder structure of the
Consortium.
In the meantime, Eastasia has deposited EUR 172.7 million in Bank
Saderat Plc. located in London as its potential contribution to the GSM network
license fee and a portion of the initial capital, to show its willingness to
invest in Irancell. We have provided a deposit pledge with Garanti Bankasy in
the amount of EUR 91.6 million, and Garanti Bankasy provided a bank loan to
Eastasia for the same amount. The maturity of this loan is set as November 21,
2005 which is also the proposed deadline for the completion of the negotiations
over the shareholder structure of the Consortium.
We are continuing to negotiate the terms of our shareholding in
Irancell with the other members of the Consortium. The level of our shareholding
in the revised Consortium shareholder structure, including whether we will
participate at all in Irancell, is uncertain and subject to continuing
negotiation.
Although Irancell has plans for commencing operations in Iran, it has
not commenced operations in Iran and will not do so, if at all, prior to
finalizing the terms of the revised Consortium shareholder structure. Although
we do not currently conduct any operations in Iran, to the extent the members of
the Consortium finalize the shareholder structure of Irancell with one another
and Irancell commences operations in Iran, such operations may in the future be
material to us. As with any other investment, our potential investment in Iran
through Eastasia and the Consortium involves risk.
Notwithstanding the foregoing, we believe the Iranian Ministry of
Communication and Information Technology has not properly implemented the laws
and regulations passed by the Iranian Parliament in connection with the GSM
tender process, which was won by the Consortium. As a result, we have brought a
claim in Iranian courts seeking to compel the Ministry to implement the laws and
regulations passed by the Iranian Parliament in connection with the GSM tender
process.
As a condition of the GSM license bid in Iran, the Consortium was
obliged to provide a payment guarantee to the Iranian Authorities of EUR 300.0
million for an upfront license fee. The payment guarantee becomes effective when
the license is formally awarded to Irancell. We guaranteed
20
EUR 210.0 million (equivalent to $253.1 million as of June 30, 2005) of this
guarantee through HSBC plc, which issued the payment guarantee under a syndicate
with Akbank and BNP Paribas with an initial maturity of September 7, 2004. Since
Irancell has not yet been established, we have notified HSBC plc that we would
not request any more extension of the payment guarantee beyond March 7, 2005 and
stated that HSBC plc could release the payment guarantee. On July 26, 2005, the
EUR 210 million guarantee was released. In addition to the upfront license fee,
if our Iranian subsidiary is formally established and if the license is awarded,
our Iranian subsidiary will pay an ongoing license fee based on the greater of
minimum precommitted gross revenues agreed with the Iranian Authorities, or the
actual gross revenues.
As of June 30, 2005, the outstanding amount of the purchase contracts
relating to advertising services was $18.0 million. As of June 30, 2005, we
obtained advertising services amounting to $15.0 million from Asli Gazetecilik
and the amount under the framework agreement signed with Asli Gazetecilik
decreased to $10.0 million. In addition, we routinely enter into operating
leases for property in the normal course of business. At June 30, 2005, there
were no commitments and contingent liabilities in material amounts arising from
such operating leases.
Guarantees given on behalf of Digital Platform are related to loans for
set-top boxes, head-end and uplink imports and working capital financing used
from the respective banks.
Contractual Obligations and Commercial Commitments
The following table illustrates our major contractual obligations and
commitments as of June 30, 2005.
(US$ Million) Payments due by period
Contractual Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
----- ---------------- --------- --------- -------------
Long-Term Borrowings 805.0 722.0 83.0 - -
Settlement Agreements 475.2 475.2 - - -
Finance Lease Obligations 6.1 5.1 1.0 - -
Purchase Obligations 121.8 89.7 32.1 - -
Advertising services 18.0 15.5 2.5 - -
GSM Equipment 76.3 61.5 14.8 - -
Baytur Dealer Loyalty Program 27.5 12.7 14.8 - -
Total Contractual Cash Obligations 1,408.1 1,292.0 116.1 - -
On December 24, 2004, we signed settlement agreements with the Turkish
Treasury and Turk Telekom to settle our disputes on the calculation and payment
of our 15% ongoing license fees from April 1998 through May 2004 and to settle
our interconnection dispute regarding call termination pricing, for the period
between April 1998 and September 2003, respectively and to end several other
related lawsuits. In connection with the settlement agreement with the Turkish
Treasury, we completed all payments as of June 30, 2005. With respect to the
interconnection settlement agreement with Turk Telekom, our outstanding
contractual obligation was $470.5 million as of June 30, 2005. After netting our
interconnection receivables from Turk Telekom, our outstanding payable is $450.5
million which is classified as current trade payables in our consolidated
financial statements as of June 30, 2005. On October 13, 2004, we also settled
our infrastructure usage dispute with Turk Telekom through negotiation. As of
June 30, 2005 our outstanding payable is $4.7 related to the infrastructure
settlement. We have paid, including interest, TRY 69.5 million (equivalent to
$51.8 million at June 30, 2005), TRY 266.5 million (equivalent to $198.7 million
at June 30, 2005) and TRY 571.5 million
21
(equivalent to $426.1 million at June 30, 2005) with respect to the
infrastructure usage dispute with Turk Telekom, settlement agreement with the
Turkish Treasury and settlement agreement with Turk Telekom, respectively as of
September 15, 2005. For more information related to these disputes, see "Item
8A. Consolidated Statements and Other Financial Information--Legal Proceedings"
in our 20- F.
Purchase obligations in relation to advertising services arise due to
the "Amended Framework Agreement" signed with Asli Gazetecilik on May 30, 2004,
extending the terms of the agreement until December 31, 2005, and the
sponsorships agreement signed with ADD Production Medya A.S. ("ADD") relating to
the sponsorship of Besiktas Jimnastik Klubu ("BJK"), a football club in
Istanbul, on June 21, 2004. In accordance with the "Amended Framework
Agreement", we paid $15.0 million and obtained advertising services amounting to
$15.0 million as of June 30, 2005. Subsequent to June 30, 2005, we paid $2.5
million and obtained advertising services amounting to $2.5 million in
accordance with this agreement.
With respect to the sponsorships agreement signed between ADD and us on
June 21, 2004, relating to the sponsorship of Besiktas Jimnastik Kulubu ("BJK"),
a football club in Istanbul, we have paid $7.0 million to ADD on June 23, 2004
for 2004-2005 and 2005-2006 Football League seasons. In connection with this
agreement, we have committed to pay $8.0 million to ADD in two equal
installments on July 1, 2006 and on July 1, 2007 with respect to 2006 - 2007 and
2007 - 2008 Football League seasons. On May 31, 2005, BJK informed ADD that they
want to terminate the agreement unilaterally and asked for the terms of
termination. On June 1, 2005, ADD informed BJK that the agreement may be
terminated immediately upon repayment of $3.5 million paid for the 2005-2006
Football League season, related stamp duty and interest and release of the
commitment amounting to $8.0 million. On June 21, 2005, ADD made a repayment to
us amounting to $3.5 million. On July 19, 2005 our commitment amounting to $8
million has been released with mutual agreement.
The principal shareholder of Baytur, a construction company, is the
Cukurova Group. Baytur committed to complete construction of 484 apartments
within the scope of an agreement signed among us, Baytur and the land owner,
which is a governmental organization, on October 19, 2004. The agreement amount
is $39.7 million and the project is planned to be completed in 2008. We paid
$12.2 million to Baytur within the scope of this contract as of June 30, 2005.
Purchase obligations in relation to GSM equipment arise from GSM
equipment supply and service contracts signed by Astelit. Astelit has entered
into an $89.0 million vendor financing agreement with Ericsson AB and Ericsson
Credit AB, EUR 125.0 million (equivalent to $150.7 million as of June 30, 2005)
with Nokia and ABN Amro NV and $7.2 million with Sysdate and ABN Amro NV. As of
June 30, 2005, Astelit has utilized $82.6 million, $89.7 million and $6.5
million of these facilities, respectively. As of June 30, 2005, our outstanding
purchase commitments under these facilities were $8.9 million, $61.5 million and
$5.9 million, respectively. On August 28, 2005, Astelit has entered into term
facility agreement with Ericsson AB and Ericsson Credit AB amounting to $45.0
million in accordance with the clause which allows Astelit to purchase
additional equipment and services within the vendor financial agreement.
Maturity of this additional financing is December 21, 2005.
22
Related Party Transactions
For a discussion of our transactions with related parties see "Item 7B.
Related Party Transactions" in our 20-F. There have been no material changes in
our related party transactions since the date of our 20-F.
Contingent Liabilities
The following table illustrates our major contingent liabilities as of
June 30, 2005.
Amount of contingent liability expiration per period
Remaining
Total amount commitment Less than 1 1 - 3 4 - 5 Over 5
USD million commited at June,30 2006 year years years years
-------- --------------- ---- ------ ----- -----
Guarantees 71.5 71.5 *
Irancell 253.1 253.1 253.1 - - -
Iranian Authorities 253.1 253.1 253.1 - - -
Digital Platform 61.9 10.1 10.1 - - -
BNP - Brussels (Buyer Credit) 50.2 7.2 7.2 - - -
BNP - Hungary (Buyer Credit) 11.7 2.9 2.9 - - -
--------------------------------------------------------------------------------------------------------------------------
----------
* Bank letter of guarantees are not given for a specific period. Most of the
guarantees will remain as long as the business relationship with the
counterparty continues.
As of June 30, 2005, we are contingently liable in respect of bank
letters of guarantee obtained from Yapi Kredi and given to the customs
authorities, private companies and other public organizations amounting to
$40.6 million. In addition, as of June 30, 2005, we are contingently liable in
respect of bank letters of guarantee obtained from other banks and given to
private companies and other public organizations amounting to $0.9 million.
In addition, on June 16, 2005, we agreed to form a consortium structure
to submit a bid on June 17, 2005 in the context of the privatization of Turk
Telekom. In addition we agreed with Turktell to have a 40%share in the
consortium. In the context of the bidding agreement, we gave a bank letter of
guarantee amounting to $30 million but since the bidding process was finalized
in favor of another party, the bank letter of guarantee has been released as of
July 8, 2005.
As a condition of the GSM license bid in Iran, the Consortium was
obliged to provide a payment guarantee to the Iranian Authorities amounting to
EUR 300 million for an upfront license fee. The payment guarantee becomes
effective when the license is formally awarded to Irancell. We have guaranteed
EUR 210 million (equivalent to $253.1 million at June 30, 2005) of this
guarantee through HSBC plc, which issued the payment guarantee under a syndicate
with Akbank and BNP Paribas with an initial maturity of September 7, 2004. Since
Irancell has not yet been established, we have notified HSBC plc that we would
not request any more extension of the payment guarantee and stated that HSBC plc
could release the payment guarantee. On July 26, 2005, the EUR 210 million
guarantee was released accordingly. In addition to the upfront license fee, if
our Iranian subsidiary is formally established and if the license is awarded,
our Iranian subsidiary will pay an ongoing license fee based on the greater of
minimum precommitted gross revenues agreed with the Iranian Authorities, or the
actual gross revenues.
Guarantees given on behalf of Digital Platform are related to loans for
set-top boxes, head-end and uplink imports and working capital financing used
from the respective banks.
We committed to arrange at maximum $150 million of financing for DCC
until the end of 2006. We have substantially fulfilled the above mentioned
commitment by acting as the guarantor of
23
the vendor financing agreements signed by Astelit with Ericsson AB and Ericsson
Credit AB, Nokia and ABN Amro NV and Sysdate and ABN Amro NV. In return of these
guarantees, we pledged minority shares of Euroasia.
Based on the shareholders loan agreement signed on January 6, 2005, the
shareholders of Euroasia committed to arrange $50.0 million of financing to
Euroasia in proportion to their respective shareholding in Euroasia. The loan
shall be used by Euroasia to fund its consolidated subsidiary Astelit. The
capital of Euroasia will be increased with an amount being equal to the
aggregate of the loan amount. Turktell Uluslararasi has fulfilled its commitment
amounting to $25.5 million. However, Eurocorp, which is one of the minority
shareholders of Euroasia, could not fulfil its commitment. As a result, in
accordance with the shareholders loan agreement, Eurocorp has agreed to sell its
1.4% interest in Euroasia to Turktell Uluslararasi with a consideration of $2.0
million. On May 19, 2005, the transaction was completed. Our effective interest
in Euroasia has increased to 52.4%. According to the share sale and purchase
agreement signed on June 2, 2005, Eurocorp has committed to sell its remaining
4.9% interest in Euroasia to Turktell Uluslararasi and another minority
shareholder with a cash consideration of $4.0 million and $3.3 million,
respectively. Based on the agreement, Turktell Uluslararasi elected to make
related payments in three installments in three years. On June 15, 2005,
required payments for the first installments amounting to $2.8 million and $2.3
million have been made by Turktell Uluslararasi and the other minority
shareholder, respectively. Our effective interest in Euroasia has increased to
54.2%. Until the financial closing of the long term financing arrangements,
based on the shareholders loan agreement signed on October 3, 2005, the
shareholders of Euroasia committed to arrange an additional $55.6 million of
financing to Euroasia in proportion to their respective shareholding in
Euroasia, first as a shareholder loan, then converted to equity through a
shareholders' resolution. We provided a deposit pledge in the amount of $30.6
million, representing our pro-rata share of shareholder financing, and HSBC
provided a bank loan to Euroasia for the same amount. All proceeds have been
used by Euroasia to fund its consolidated subsidiary, Astelit. On October 24,
2005, our board of directors, decided to pay TRY 35.0 million to Turktell
Uluslararasi, Turkcell's wholly owned subsidiary, in the form of capital
advance, which shall be used in the future capital increase of Astelit based in
Ukraine which is Turktell Uluslararasi's indirect subsidiary. Turktell
Uluslararasi, through a board decision dated 24 October, 2005, approved the
equity injection into Euroasia in the amount of $30.6 million, representing its
share. Therefore, the Euroasia loan will be paid down and replaced with the
equity injection prior to the end of November 2005. Following the $55.6 million
additional equity injection, the total equity in Euroasia, the parent of
Astelit, will be $203.6 million, with our shareholding being 54.4%.
The interconnection agreement with Turk Telekom provided for a
renegotiation of pricing terms after December 31, 2004, and in the event that
the parties could not agree on new terms by February 28, 2005, for referral to
the Telecommunications Authority for resolution. As we and Turk Telekom were
unable to agree on new terms, Turk Telekom referred the matter to the
Telecommunications Authority, which has temporarily set call termination fees
for calls terminating on each operator's network starting from August 10, 2005.
According to its resolution procedure, the Authority is expected to set final
termination fees, which are binding on us and Turk Telekom, by February 2006.
These temporary prices are not as favorable to us as they have been
previously, and the Telecommunications Authority may impose further reductions
in call termination fees. At this point, we are unable to estimate the timing
and impact of the possible changes to our fees. However, new pricing terms could
be lower and these could have a material adverse effect on our financial
position, results of operations and cash flows.
Liquidity Outlook
Under the current assumptions and circumstances, we expect to generate
sufficient cash to maintain our strong cash position and positive free cash flow
in the GSM business in Turkey. According to our current business plan for the
operations in Turkey, we believe that we will be able to finance our current
operations, capital expenditures and financing costs and maintain and enhance
our
24
network through our operating cash flow and our strong cash balance as of June
30, 2005. In addition, in order to build a GSM 1800 network and fund operations
in Ukraine, long term financing arrangements will be sufficient to fully fund
Astelit's business plan.
The forward-looking statements made here regarding our liquidity and
any other financial results are not a guarantee of performance. They are subject
to risks and uncertainties that could cause future activities and results of
operations to be different from those set forth in this MD&A.
Important factors that may adversely affect our projections include
general economic conditions, change in the competitive environment, developments
in the domestic and international capital markets, increased investments,
changes in telecommunication regulations. Please see "Item 3D. Risk Factors" in
our 20-F for a discussion of these and other factors that may affect our
projections.
General Economic Conditions
With the support of the encouraging outlook of the economy and the
positive consumer sentiment in the market, we expect our net cash generation
trend to be sustained. The Turkish government's efforts to engage in a new
economic program with the IMF lasting until 2007, acceptance of Turkey for
membership negotiations with the EU, recovery in consumer purchasing power in
line with developments such as sustainable GDP growth, decreasing inflation in
line with government targets, improved distribution of wealth and a growing
young and technology oriented population are projected to expand the GSM
penetration in the market.
However, any change in the above stated factors including structure of
the current competition might create need for additional financing for us.
Loans
In the first half of 2005, no borrowing has been obtained versus year
2004's total new financings of $300 million by Turkcell. On August 24, 2005, TRY
50 million (equivalent to $37.3 million at June 30, 2005) loan has been obtained
from West LB A.G., London Branch with a tenor of 3 years. The interest and
principal will be paid semiannually and interest is calculated on a floating
rate of 6 month TRYibor (TRY Libor) minus 15 basis points. The facility will
reduce the currency risk on our balance sheet.
The outstanding balance of senior notes issued by Cellco in 1999 has
been fully repaid on August 1, 2005. The loan had an interest rate of 12.75% and
its original maturity was August 1, 2005.
In Ukraine, Astelit signed a mandate letter for a long term financing
arrangement. On April 28, 2005, Astelit provided a mandate to ING Bank N.V. and
Standard Bank London Limited to arrange a financing of at least $280.0 million
with a maturity of six years to refinance Astelit's existing vendor loans,
additional capital expenditures and working capital requirements. The financing
will be in the form of a syndicated loan and it is expected to be finalized in
the fourth quarter of 2005.
We believe that we will be able to fully fund the operations in Turkey
by our cash from operations through the remainder of 2005, which includes the
repayment of approximately $433.2 million in debt principal and interest
obligations. Included in this debt repayment figure was the redemption of our
Cellco $400 million notes which was successfully paid from our cash flow on
August 1, 2005. In Ukraine, in order to build a GSM network and fund the
operations, long term financing arrangements will be sufficient to fully fund
Astelit's business plan through the end of 2005 which includes the repayment of
approximately $116.2 million in debt principal and interest obligations. Until
the financial closing of the long term financing arrangements, based on the
shareholders loan agreement signed on October 3, 2005, the shareholders of
Euroasia committed to arrange an additional $55.6 million of financing to
Euroasia in proportion to their respective
25
shareholding in Euroasia, first as a shareholder loan then converted to equity
through a shareholders' resolution. We provided a deposit pledge in the amount
of $30.6 million, representing our pro-rata share of shareholder financing, and
HSBC provided a bank loan to Euroasia for the same amount. All proceeds have
been used by Euroasia to fund its consolidated subsidiary, Astelit. On October
24, 2005, our board of directors, decided to pay TRY 35.0 million to Turktell
Uluslararasi, Turkcell's wholly owned subsidiary, in the form of capital
advance, which shall be used in the future capital increase of Astelit based in
Ukraine which is Turktell Uluslararasi's indirect subsidiary. Turktell
Uluslararasi, through a board decision dated 24 October, 2005, approved the
equity injection into Euroasia in the amount of $30.6 million representing its
share. Therefore, the Euroasia loan will be paid down and replaced with the
equity injection prior to the end of November 2005. Following the $55.6 million
additional equity injection, the total equity in Euroasia, the parent of
Astelit, will be $203.6 million, with our shareholding being 54.4%. Based on our
debt repayment schedule, and our current expectations regarding the domestic and
international macroeconomic environment, developments in the telecommunications
sector, pending litigation costs, capital expenditures and domestic and
international investments and partnerships obligations, we do not foresee any
funding gap in 2005. We continuously monitor and examine financing opportunities
to improve our financial condition and performance. We continuously evaluate
domestic and international debt and capital markets, looking for new financing
alternatives for both restructuring and contingency purposes. We maintain
effective relationships with financial institutions and watch the debt and
capital markets for possible club deals, bilateral and syndicated loans,
Eurobond issues, and many other financial instruments. We maintain our focus on
strategies that lower the weighted average cost of total borrowing and extend
the maturity of outstanding borrowings. We are reviewing the domestic loan
alternatives of either extending the existing facilities or obtaining additional
domestic debt denominated in TRY.
We cannot assure you that we will be able to obtain any of this
additional financing on terms that are satisfactory to us, or at all. If for any
reason adequate internal resources or external financing are not available as
needed, we may not be able to maintain and enhance the quality of our network or
to meet our other obligations and liabilities as they become due. This could
lead to a loss of subscribers and market share, as well as potential defaults
under, and refinancing or restructuring of, existing debt and other obligations,
all of which could have a material adverse effect on our business, consolidated
financial condition or results of operations, or liquidity.
Credit Ratings
Our debt ratings as of June 24, 2005:
Standard & Poor's B
Moody's B2
Fitch BB-
The ratings upgrade had no impact on the interest cost of our existing
debt. Any further upgrades from the ratings agencies may allow us to lower the
cost of borrowing for any future indebtedness in the domestic and international
debt and capital markets. Conversely, any ratings downgrade may limit our future
access to debt and capital markets and increase the cost of borrowing.
After the extinguishment of the Cellco notes in August 2005, Moody's no longer
has a valid credit rating for us. In addition, Fitch has upgraded our senior
unsecured local currency rating to BB from BB- and assigned it a stable outlook.
26
Dividend Payments
Until 2003, we did not make any dividend payments as a result of our
accumulated losses under previous CMB accounting standards. The CMB adopted new
accounting standards in 2003, which are generally in compliance with
International Financial Reporting Standards ("IFRS"). We have adopted these
accounting standards as of and for the year ended December 31, 2003 for CMB
reporting purposes, and we have generated profit under those accounting
standards.
In 2004, we declared that we would pay a dividend amounting to TRY
236.3 million (equivalent to $176.2 million at June 30, 2005), of which one
half, TRY 118.2 million (equivalent to $88.1 million as of June 30, 2005), was
distributed in cash and the other half was distributed in the form of bonus
shares in June and July 2004, respectively. We have adopted a dividend policy,
which is set out in its Corporate Governance Guidelines. As adopted, our general
dividend policy is to pay dividends to shareholders with due regard to trends in
our operating performance, financial condition and other factors. Our Board of
Directors intends to distribute cash dividends in an amount of not less than 50%
of our distributable profits for each fiscal year, starting with profits for
fiscal 2004. However, the payment of dividends will still be subject to cash
flow requirements of us, compliance with Turkish law and regulations and the
approval of, or amendment by, our Board of Directors and the General Assembly of
Shareholders.
On April 29, 2005, during the Annual Shareholders' Meeting, our
shareholders decided to distribute all of our distributable income (included in
the financial statements prepared in accordance with the accounting standards
promulgated by the CMB) for the year ended December 31, 2004. The dividend was
in the form of 50% cash and 50% bonus shares. The net distributable income,
after deducting legal reserves, amounted to TRY 500.3 million (equivalent to
$373.0 million at June 30, 2005). Accordingly, the dividend was distributed as
follows:
Amount per
share Total USD equivalent
(TRY in full) (TRY Million) June 30, 2005
------------- ------------- -------------
Dividend in cash 0.000134848 250.1 $ 186.5
Dividend in bonus shares - 234.1 174.5
Accordingly, the rate of the bonus share certificate to be issued for
each share having a nominal value of TRY 0.001 was declared as 0.0204997881%.
Distribution of the cash dividend payment to the shareholders commenced on May
17, 2005 and distribution of the bonus share certificates commenced on May 31,
2005.
New Technology Investments and Partnership Opportunities
Cash flow from the operations provides us with sufficient means to
implement our plans. However, new technologies are excluded from the current
projections, so addition of any new technology such as 3G technology or any new
partnership opportunity may require both higher operating expense and capital
expenditures leading to a need for additional cash injection in the future.
Investment in Iran
In order to get the GSM license in Iran, we have to establish Irancell
and pay EUR 300 million to the Iranian Authorities. We and other shareholders of
the Consortium were obliged to give a payment guarantee amounting to EUR 300
million, which is equivalent to the license fee. The GSM license agreement was
signed on September 12, 2004 between the Consortium and the Iranian Authorities.
On September 26, 2004, both the Iranian Parliament and the Guardian Council
stated that the agreement concerning the mobile phone network, would be
effective upon the approval of the Iranian Parliament. On April 25, 2005, the
Iranian Parliament approved a revised proposal, which suggested reduction of our
stake in Irancell to 49%, and submitted to the Guardian Council for their
27
consent. In May 2005, the Guardian Council gave their consent. The consent was
approved by the Iranian President.
On September 2, 2005, our Board of Directors decided to continue with
the Irancell project and approved the ownership structure of Irancell with a
stake of 49% in Irancell for Eastasia. However, it has been stated that 21% of
the shares of Irancell should be transferred to the National Bank of Iran, Bank
Melli, and the parties should agree that these shares shall be publicly offered
in the third year following the initiation of the Irancell operations and these
agreed terms should be reflected into all agreements between the parties in
Irancell. Iranian Telecommunications Ministry has set November 21, 2005 as the
deadline with respect to the finalization of the shareholder structure of the
Consortium.
In the meantime, Eastasia has deposited EUR 172.7 million in Bank
Saderat Plc. located in London as its potential contribution to the GSM network
license fee and a portion of the initial capital, to show its willingness to
invest in Irancell. We have provided a deposit pledge with Garanti Bankasy in
the amount of EUR 91.6 million, and Garanti Bankasy provided a bank loan to
Eastasia for the same amount. The maturity of this loan is set as November 21,
2005 which is also the proposed deadline for the completion of the negotiations
over the shareholder structure of the Consortium.
We are continuing to negotiate the terms of our shareholding in
Irancell with the other members of the Consortium. The level of our shareholding
in the revised Consortium shareholder structure, including whether we will
participate at all in Irancell, is uncertain and subject to continuing
negotiation.
Although Irancell has plans for commencing operations in Iran, it has
not commenced operations in Iran and will not do so, if at all, prior to
finalizing the terms of the revised Consortium shareholder structure. Although
we do not currently conduct any operations in Iran, to the extent the members of
the Consortium finalize the shareholder structure of Irancell with one another
and Irancell commences operations in Iran, such operations may in the future be
material to us. As with any other investment, our potential investment in Iran
through Eastasia and the Consortium involves risk.
Notwithstanding the foregoing, we believe the Iranian Ministry of
Communication and Information Technology has not properly implemented the laws
and regulations passed by the Iranian Parliament in connection with the GSM
tender process, which was won by the Consortium. As a result, we have brought a
claim in Iranian courts seeking to compel the Ministry to implement the laws and
regulations passed by the Iranian Parliament in connection with the GSM tender
process.
We have guaranteed EUR 210 million (equivalent to $253.1 million at
June 30, 2005) of this guarantee through HSBC plc, which issued the payment
guarantee under a syndicate with Akbank and BNP Paribas with an initial maturity
of September 7, 2004. Since Irancell was not established, we have notified HSBC
plc that we do not request any more extension of the payment guarantee and
stated that HSBC plc can release the payment guarantee. On July 26, 2005, EUR
210 million guarantee has been released. In addition to the upfront license fee,
if the Iranian subsidiary of us is formally established and if the license is
awarded, the Iranian subsidiary of us will pay an ongoing license fee based on
the greater of minimum precommitted gross revenues agreed with the Iranian
Authorities, or the actual gross revenues. Amounts paid by the Company as
capital advances to Irancell within 2004 have been repaid by Iranian authorities
on March 16 and March 17, 2005.
Quantitative and Qualitative Discussion of Market Risk
Our functional currency is the TRY for operations conducted in Turkey,
but certain revenues, purchases, operating costs and expenses and resulting
receivables and payables are denominated in foreign currencies, primarily US
dollars, Euros and Swedish Krona ("SEK"). In addition, our indebtedness is
principally in US dollars. Transactions denominated in foreign currencies are
recorded
28
at the exchange rates prevailing at the dates of the transactions. Assets and
liabilities denominated in foreign currencies are converted into TRY at the
exchange rates prevailing at the balance sheet date, with the resulting exchange
differences recognized in the determination of net income.
Market risk sensitive instruments consist of loans denominated in
foreign currencies (substantially in US dollars) totaled to $625.9 million,
representing almost all of total indebtedness at June 30, 2005.
The fair value of indebtedness as of June 30, 2005 has not changed
significantly compared to June 30, 2004 except our loan under the 1999 Issuer
Credit Agreement. The fair value of indebtedness as of June 30, 2005 is $335.8
million with carrying amount of $335 million. The fair value of our indebtedness
at June 30, 2004 was $359.3 million with carrying amount of $335 million.
We are exposed to foreign exchange availability and rate risks that
could significantly impact our ability to meet our obligations and finance our
network construction. A substantial majority of our debt obligations and capital
expenditures are, and are expected to continue to be, denominated in US dollars.
By contrast, substantial portion of our revenues are, and will continue to be,
denominated in TRY.
To manage our foreign exchange risk more efficiently, in 2005, we have
entered into $243.0 million notional of structured forward transactions to buy
US dollar against TRY. As of October 21, 2005, we have bought $304.0 million
through these transactions. We have also entered into $37.0 million notional of
structured forward transactions to sell US dollar against TRY where we sold
$37.0 million against TRY until October 21, 2005. As of October 21, 2005, we
have $36.0 million notional of structured forwards outstanding.
In 2005, we have also entered into SEK and EUR forward transactions. We
have entered into EUR 2.0 million notional of structured forward transactions
and as of October 21, 2005 we have bought EUR 4.0 million through these
transactions. We have also entered into EUR 6.0 million notional of outright
forward transactions to buy EUR against TRY and SEK 599.5 million notional of
outright forwards to buy SEK against US dollar with maturities from June to
December 2005. As of October 21, 2005, SEK 134.7 million notional of these
transactions is still outstanding.
We have run sensitivity analysis on our portfolio of structured US
dollar hedging products. We included two extreme case scenarios of 10%
appreciation and 10% depreciation of TRY/US dollar exchange rate. In case of 10%
depreciation, from a spot rate of 1.3592 on October 21, 2005, our total
structured US dollar call forward transaction size would fall to a total of $3.0
million with a total gain effect of $0.6 million. In the case of a 10%
appreciation our total structured US dollar call forward transaction size would
rise to $72.0 million with a total loss effect of $6.7 million.
All hedging transactions have been authorized and executed pursuant to
clearly defined policies and procedures, which provide that the transaction is
entered into to protect us from fluctuations in currency values. Analytical
techniques are used to manage and monitor foreign exchange risk which include
market valuation and sensitivity analysis. In addition, we keep a reasonable
proportion of our monetary assets in US dollars to reduce our currency exposure.
Furthermore, the maximum tariffs we may charge are adjusted periodically by the
Telecommunications Authority to account for, among other things, the devaluation
of the TRY.
29
Legal Proceedings
We are involved in various claims, which are described in "Item 8A.
Consolidated Statements and Other Financial Information - Legal Proceedings" in
our 20-F.
There has not been any material change in our legal and arbitration
proceedings since the date of our 20-F, except for the following:
Regarding the investigation of the Telecommunications Authority on
international voice traffic, on March 2, 2005, Turk Telekom notified us that we
have allegedly damaged Turk Telekom because of the interconnection agreement
signed with Milleni.com. Accordingly, Turk Telekom requested us to pay TRY 219
million (equivalent to $163 million at June 30, 2005) of principal and TRY 178
(equivalent to $133 million at June 30, 2005) of interest, which make a sum of
TRY 397 million (equivalent to $296 million at June 30, 2005) until March 7,
2005.
In addition, on August 19, 2005, Turk Telekom filed a lawsuit against
us in order to obtain an injunction and block all our deposits and receivables
in order to collect damage amounting TRY 451 million ($336 million at June 30,
2005) including principal and interest related to Milleni.com. The court
rejected the injunction request of Turk Telekom.
On April 15, 2005, Spor Toto Teskilat Mudurlugu, a governmental body,
notified Inteltek that Inteltek is obliged to pay TRY 1.4 million (equivalent to
$1.0 million at June 30, 2005) including 5% interest charge, with the claim of
the inadequacy of the system software, failure to spot dealer sales on a live
basis and lack of control mechanisms and cause for the non-collection of a
certain portion of turnover from dealers. Inteltek management believes that the
claim of Spor Toto Teskilat Mudurlugu has no legal basis and collection risks
from dealers belong to Spor Toto Teskilat Mudurlugu.
On August 29, 2005, we were notified that Telsim has initiated a
lawsuit claiming that, we have not applied the reference interconnection rates
determined by the Telecommunications Authority, and have charged interconnection
fees exceeding the ceiling rates approved by Telecommunications Authority.
Telsim requested an injunction to be applicable starting from August 1, 2005, to
cease this practice and requested collection of its damages totaling to TRY 26.1
million (equivalent to $19.5 million at June 30, 2005) including principal,
interest and penalty on late payment.
On June 23, 2005, our board of directors decided to allow Alfa Telecom
Turkey Limited ("Alfa Turkey") to conduct due diligence on us. On July 1, 2005,
Sonera filed a suit with the interim injunction demand against us in Beyoglu 2nd
Commercial Court of First Instance for the purpose of determining the invalidity
of the Board resolution dated June 23, 2005. On July 4, 2005, Beyoglu 2nd
Commercial Court of First Instance resolved to reject the interim injunction
demand. The case is still pending.
The interconnection agreement with Turk Telekom provided for a
renegotiation of pricing terms after December 31, 2004, and in the event that
the parties could not agree on new terms by February 28, 2005, for referral to
the Telecommunications Authority for resolution. As we and Turk Telekom were
unable to agree on new terms, Turk Telekom referred the matter to the
Telecommunications Authority, which has temporarily set call termination fees
for calls terminating on each operator's network starting from August 10, 2005.
According to its resolution procedure, the Authority is expected to set final
termination fees, which are binding on us and Turk Telekom, by February 2006. On
October 7, 2005 we filed a lawsuit against the Telecommunications Authority for
the injunction and cancellation of this decision, which has temporarily set call
termination fees for calls terminating on each operator's network starting from
August 10, 2005.
30
Other Matters
On August 19, 2005, Sonera announced that they filed a lawsuit against
Cukurova Holding in the Consiliation Court of the Vienna International Chamber
of Commerce since the shareholder agreement between Sonera and Cukurova Holding
has been violated.
With the amendment to the Privatization Law, on July 3, 2005, the
definition of the items that should be included in the gross revenue used in
the calculation of the amounts to be paid to the Turkish Treasury has been
amended. According to the amendment, interest charges for late collections and
indirect taxes such as value added taxes, special transaction tax and stamp
duty are excluded from the definition of the gross revenue. This amendment has
been approved by the President of the Turkish Republic and published in the
Official Gazette on July 21, 2005. This amendment will come into effect
pursuant to our application to the Telecommunications Authority for the
revision of related articles of the Licence Agreement and the respective
approval of the Danistay.
Within the framework of Cukurova Group`s proposal regarding our
purchase of 50% shares of A-Tel owned by Yapy Kredi in return for a
consideration amounting to $150 million, on October 24, 2005, our Board of
Directors decided to purchase 50% of A-Tel shares provided that such shares'
value concluded as per the tax, legal and financial due diligence review to be
conducted in A-Tel and the evaluation to be made by an audit firm or an
investment bank as per such due diligence report is at least $150 million.
31
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2004 AND JUNE 30, 2005 (Unaudited)
(In thousands, except share data)
December 31, June 30,
2004 2005
------------------- ------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 763,821 680,653
Held to maturity securities 45,329 52,472
Available for sale securities - 8,116
Trade receivables and accrued income, net (Note 5) 271,792 295,027
Due from related parties (Note 6) 103,948 49,045
Inventories 13,007 10,193
Prepaid expenses 23,685 99,934
Other current assets, includes $110,166 and $3,516 of restricted cash as
of December 31, 2004 and June 30, 2005, respectively (Note 7) 325,741 78,962
Deferred tax assets (Note 17) 277,589 221,435
------------------- ------------------
Total current assets 1,824,912 1,495,837
DUE FROM RELATED PARTIES (Note 8) 65,971 65,839
PREPAID EXPENSES 6,482 12,156
INVESTMENTS (Note 9) 197,760 222,963
HELD TO MATURITY SECURITIES 10,266 8,359
FIXED ASSETS, net (Note 10) 1,061,268 1,089,280
CONSTRUCTION IN PROGRESS (Note 11) 230,191 435,411
INTANGIBLES, net (Note 12) 881,511 875,702
GOODWILL 1,349 1,349
OTHER LONG TERM ASSETS 1,624 1,839
DEFERRED TAX ASSETS (Note 17) 80,163 5,115
------------------- ------------------
$ 4,361,497 4,213,850
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings (Note 13) $ 549,079 742,688
Trade payables (Note 14) 616,816 535,358
Due to related parties (Note 15) 6,711 17,393
Taxes payable (Note 17) 99,939 7,778
Provision for income taxes (Note 17) - 56,332
Other current liabilities and accrued expenses (Note 16) 523,475 503,429
------------------- ------------------
Total current liabilities 1,796,020 1,862,978
LONG TERM BORROWINGS (Note 18) 266,447 83,017
TRADE PAYABLES (Note 14) 213,740 2,395
LONG TERM LEASE OBLIGATIONS 3,284 1,001
RETIREMENT PAY LIABILITY 12,875 15,580
DEFERRED TAX LIABILITIES (Note 17) 11,757 12,967
MINORITY INTEREST 64,044 84,177
OTHER LONG TERM LIABILITIES 7,813 7,413
SHAREHOLDERS' EQUITY
Common stock
Par value 0.001 TRY; authorized, issued and outstanding 1,854,887,341,000
shares as of December 31, 2004 and June 30, 2005 (Note 19) 636,116 636,116
Additional paid in capital 178 178
Legal reserves 42,501 92,414
Accumulated other comprehensive income (Note 3) 2,244 1,078
Retained earnings 1,304,478 1,414,536
------------------- ------------------
Total shareholders' equity 1,985,517 2,144,322
COMMITMENTS AND CONTINGENCIES (Note 20)
------------------- ------------------
$ 4,361,497 4,213,850
=================== ==================
The accompanying notes are an integral part of these
consolidated financial statements.
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED
JUNE 30, 2004 AND 2005 (Unaudited)
(In thousands, except share data)
Three Month Ended Six Month Ended
June 30, June 30,
2004 2005 2004 2005
------------------- ------------------ ----------------- ------------------
(Unaudited) (Unaudited)
Revenues $ 606,338 1,046,020 1,351,886 1,943,990
Direct cost of revenues (541,325) (577,438) (974,332) (1,100,942)
------------------- ------------------ ------------------ ------------------
Gross profit 65,013 468,582 377,554 843,048
General and administrative expenses (38,181) (35,829) (67,486) (70,945)
Selling and marketing expenses (76,945) (126,616) (152,952) (230,194)
------------------- ------------------ ------------------ ------------------
Operating income (expense) (50,113) 306,137 157,116 541,909
Income from related parties, net 475 775 939 1,081
Interest income 38,510 37,959 75,351 74,161
Interest expense 440 (39,900) (76,933) (99,347)
Other income, net 1,334 2,679 847 4,206
Equity in net income of
unconsolidated investees (Note 9) 8,504 13,255 16,390 26,400
Minority interest in income (loss)
of consolidated subsidiaries 1,689 (1,532) 2,716 390
Translation gain (loss) 28,922 (6,797) 8,675 (10,855)
------------------- ------------------ ------------------ ------------------
Income before taxes 29,761 312,576 185,101 537,945
Income tax benefit (expense) (Note 17) 66,659 (98,836) 37,486 (195,798)
------------------- ------------------ ------------------ ------------------
Net income $ 96,420 213,740 222,587 342,147
=================== ================== ================== ==================
Basic and diluted earnings per common
share (Note 19) 0.000052 0.000115 0.000120 0.000184
======== ======== ======== ========
Weighted average number of common
shares outstanding (Note 19) 1,854,887,341,000 1,854,887,341,000 1,854,887,341,000 1,854,887,341,000
The accompanying notes are an integral part of these
consolidated financial statements.
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2004 AND 2005 (Unaudited)
(In thousands)
June 30, June 30,
2004 2005
---------------- -----------------
(Unaudited) (Unaudited)
Operating Activities:
Net income $ 222,587 342,147
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 211,557 224,273
Provision for retirement pay liability 610 2,705
Provision for inventories (1,015) (915)
Provision for doubtful receivables (12,983) 9,064
Accrued income (8,357) 39,229
Accrued expense 26,707 (179,619)
Equity in net income of unconsolidated investees (16,390) (26,400)
Translation adjustment - 30
Minority interest in income of consolidated subsidiaries 52,240 20,133
Provision for income taxes - 56,332
Deferred taxes 1,508 132,412
Changes in assets and liabilities:
Trade receivables (6,096) (31,626)
Due from related parties 2,282 55,035
Inventories 3,953 3,729
Prepaid expenses (53,089) (81,923)
Other current assets (132,231) 205,314
Taxes payable 27,175 (92,161)
Other long term assets (1,793) (388)
Due to related parties (1,382) 10,682
Trade payables 12,208 (295,198)
Other current liabilities (10,819) 168,551
Other long term liabilities 1,433 1,995
---------------- -----------------
Net cash provided by operating activities 318,105 563,401
Investing Activities:
Additions to fixed assets (122,438) (388,978)
Additions to intangibles (75,769) (62,171)
Investments in held to maturity securities - (5,237)
Investments in available for sale securities - (8,116)
Investments in investees (430) -
---------------- -----------------
Net cash used for investing activities (198,637) (464,502)
Financing Activities:
Proceeds from issuance of long and short term debt 342,297 160,294
Payment on long and short term debt (139,426) (150,115)
Net decrease in debt issuance expenses 396 1,736
Payment on lease obligations (7,493) (11,806)
Increase in lease obligations 2,712 -
Dividends paid (78,072) (182,176)
---------------- -----------------
Net cash provided by (used for) financing activities 120,414 (182,067)
---------------- -----------------
Net increase (decrease) in cash and cash equivalents 239,882 (83,168)
Cash and cash equivalents at the beginning of period 582,680 763,821
---------------- -----------------
Cash and cash equivalents at the end of period $ 822,562 680,653
================ =================
Supplemental cash flow information:
Interest paid $ 32,648 42,237
Income taxes paid - 99,939
Dividend paid 78,072 182,176
Capital lease obligations 2,712 1,003
The accompanying notes are an integral part of these
consolidated financial statements.
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2005
(Unaudited) (In thousands, except share data)
Common stock Additional
paid in Legal Comprehensive
Shares Amount capital reserves income
------------------ ---------------- --------------- ----------- -----------------
Balances at December 31, 2004 1,854,887,341,000 $ 636,116 178 42,501
Comprehensive income:
Net income 342,147
Other comprehensive income:
Translation adjustment (1,256)
Net unrealized capital
gain on available for
sale securities 90
-----------------
Comprehensive income 340,981
=================
Transfer to legal reserves 49,913
Dividend paid
------------------ ---------------- --------------- -----------
Balances at June 30, 2005 1,854,887,341,000 $ 636,116 178 92,414
================== ================ =============== ===========
Accumulated
other Total
Retained comprehensive shareholders'
earnings loss equity
------------ ---------------- ---------------
Balances at December 31, 2004 1,304,478 2,244 1,985,517
Comprehensive income:
Net income 342,147 342,147
Other comprehensive income:
Translation adjustment (1,256) (1,256)
Net unrealized capital
gain on available for
sale securities 90 90
Comprehensive income
Transfer to legal reserves (49,913) -
Dividend paid (182,176) (182,176)
------------ ---------------- ---------------
Balances at June 30, 2005 1,414,536 1,078 2,144,322
============ ================ ===============
The accompanying notes are an integral part of these
consolidated financial statements.
Turkcell Iletisim Hizmetleri Anonim Sirketi and Its Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2004 and June 30, 2005 (Unaudited) and for the Three
Month and Six Month Periods Ended June 30, 2004 and 2005 (Unaudited)
(Amounts in thousands of US Dollar unless otherwise stated except share
amounts)
(1) Business
Turkcell Iletisim Hizmetleri Anonim Sirketi ("Turkcell") was incorporated
on October 5, 1993 and commenced operations in 1994. It is engaged in
establishing and operating a Global System for Mobile Communications
("GSM") network in Turkey and neighboring states.
In April 1998, Turkcell signed a license agreement (the "License Agreement"
or "License") with the Ministry of Transportation and Communications of
Turkey (the "Turkish Ministry"), under which it was granted a 25 year GSM
license in exchange for a license fee of $500,000. The License permits
Turkcell to operate as a stand-alone GSM operator and frees it from some of
the operating constraints in the Revenue Sharing Agreement. Under the
License, Turkcell collects all of the revenue generated from the operations
of its GSM network and pays the Undersecretariat of Treasury (the "Turkish
Treasury") an ongoing license fee equal to 15% of its gross revenues.
Turkcell continues to build and operate its GSM network and is authorized
to, among other things, set its own tariffs within certain limits, charge
peak and off-peak rates, offer a variety of service and pricing packages,
issue invoices directly to subscribers, collect payments and deal directly
with subscribers.
On June 25, 2005, the Turkish government declared that GSM operators are
required to pay monthly 10% portion of their existing ongoing license fee
to the Ministry of Transportation as universal service fund in accordance
with the law no 5369. As a result, starting from June 30, 2005, Turkcell
pays the 90% of accrued ongoing license fee to the Turkish Treasury and 10%
to the Turkish Ministry as Universal Service Fund.
In July 2000, Turkcell completed an initial public offering with the
listing of its ordinary shares on the Istanbul Stock Exchange and American
Depositary Shares, or ADSs, on the New York Stock Exchange.
Turkcell owns a 41.45% interest in Fintur Holdings B.V. ("Fintur"), which
holds the majority of the Company's international GSM investments, with
majority ownership in GSM operations in Azerbaijan, Georgia, Kazakhstan and
Moldova. Fintur is accounted for under the equity method.
The Company also owns 100% of Kybrys Mobile Telekomunikasyon Limited
Sirketi ("Kybrys Telekom"), a company that operates GSM network in Northern
Cyprus.
In December 2003, the Company invested $50,000 in Digital Cellular
Communications ("DCC"), a Ukrainian telecommunications company with several
telecommunications licenses including a GSM 1800 license. In order to
facilitate the investment in DCC, the Company created a new wholly-owned
company named Euroasia Telecommunications Holding B.V. ("Euroasia") in the
Netherlands in February 2004, and capitalized it with cash contributions of
$50,000. The owners of DCC contributed 99% of the shares of DCC to Euroasia
in exchange for a 49% interest in Euroasia in May 2004. LLC Astelit
("Astelit") is a 99% owned subsidiary of DCC and has the title to the GSM
1800 license in Ukraine. On February 1, 2005, Astelit commenced its
operations with GSM 1800 technology. Euroasia, DCC and Astelit are the
consolidated subsidiaries of the Company as of June 30, 2005.
Turkcell and Ericsson Telekomunikasyon A.S. ("Ericsson Turkey") have
established a company named East Asian Consortium BV ("Eastasia"), with a
share capital of EUR 91 million, to invest in the Iranian
5
GSM business. Eastasia is a member of the Irancell Consortium (the
"Consortium"), which will own Irancell, and includes Turkcell and Ericsson
Turkey, and two Iranian companies, Parman Ertebat and Iran Electronic
Development Company. Turkcell and Ericsson Turkey own 85% and 15% of
Eastasia, respectively, and Turkcell was expected to indirectly own 51% of
Irancell through Eastasia and was expected to control 51% of the voting
shares. Turkcell has fully completed its capital contribution in Eastasia
in proportion to its shares in capital.
On September 12, 2004, the Iranian Authorities awarded the GSM license to
the Consortium. Under the license agreement the Consortium is obliged to
pay an upfront license fee of EUR 300 million and an ongoing license fee
based on a percentage of the greater of actual or precommitted gross
revenues. If the Consortium does not pursue the GSM license, the EUR 300
million payment under the guarantee will become payable immediately.
Turkcell guaranteed EUR 210 million portion of this guarantee through HSBC
plc. On July 26, 2005, EUR 210 million guarantee has been released.
On September 12, 2004, the GSM license agreement was signed between the
Consortium and the Iranian Authorities. On September 26, 2004, both the
Iranian Parliament and the Guardian Council stated that the agreement
concerning the mobile phone network would become effective upon the
approval of the Iranian Parliament. On April 25, 2005, the Iranian
Parliament approved a revised proposal, which suggested a reduction of
Turkcell's stake in Irancell to 49% and included several other amendments
to the terms of the license agreement originally agreed and submitted the
proposal to the Guardian Council for their consent. In May 2005, the
Guardian Council gave their consent. The consent was approved by the
Iranian President.
On September 2, 2005, the Board of Directors of Turkcell decided to
continue with the Irancell project and approved the ownership structure of
Irancell with a stake of 49% in Irancell for Eastasia. However, it has been
stated that 21% of the shares of Irancell should be transferred to the
National Bank of Iran, Bank Melli, and the parties should agree that these
shares shall be publicly offered in the third year following the initiation
of the Irancell operations and these agreed terms should be reflected into
all agreements between the parties in Irancell. Iranian Telecommunications
Ministry has set November 21, 2005 as the deadline with respect to the
finalization of the shareholder structure of the Consortium.
In the meantime, Eastasia has deposited EUR 172.7 million in Bank Saderat
Plc. located in London as its potential contribution to the GSM network
license fee and a portion of the initial capital, to show its willingness
to invest in Irancell. Turkcell provided a deposit pledge with Garanti
Bankasy in the amount of EUR 91.6 million, and Garanti Bankasy provided a
bank loan to Eastasia for the same amount. The maturity of this loan is set
as November 21, 2005 which is also the proposed deadline for the completion
of the negotiations over the shareholder structure of the Consortium.
Turkcell is continuing to negotiate the terms of its shareholding in
Irancell with the other members of the Consortium. The level of Turkcell's
shareholding in the revised Consortium shareholder structure, including
whether Turkcell will participate at all in Irancell, is uncertain and
subject to continuing negotiation.
Although Irancell has plans for commencing operations in Iran, it has not
commenced operations in Iran and will not do so, if at all, prior to
finalizing the terms of the revised Consortium shareholder structure.
Although Turkcell does not currently conduct any operations in Iran, to the
extent the members of the Consortium finalize the shareholder structure of
Irancell with one another and Irancell commences operations in Iran, such
operations may in the future be material to Turkcell. As with any other
investment, Turkcell's potential investment in Iran through Eastasia and
the Consortium involves risk.
Notwithstanding the foregoing, Turkcell believes the Iranian Ministry of
Communication and Information Technology has not properly implemented the
laws and regulations passed by the Iranian Parliament in connection with
the GSM tender process, which was won by the Consortium. As a result,
Turkcell has brought a claim in Iranian courts seeking to compel the
Ministry to implement the laws and regulations passed by the Iranian
Parliament in connection with the GSM tender process.
In addition, as of June 30, 2005, the Company was involved in various
activities, including call centers and database management, directory
assistance, advertising, operating a central betting system, Wireless
6
Application Protocol ("WAP") services, value added GSM services ("VAS"),
fixed line long distance call services and internet services through
various consolidated subsidiaries.
(2) Financial Position and Basis of Preparation of Financial Statements
The Company maintains their books of account and prepare their statutory
financial statements in their local currencies and in accordance with local
commercial practice and tax regulations applicable in their respective
countries of residence. The accompanying consolidated financial statements
are based on these statutory records, with adjustments and
reclassifications for the purpose of fair presentation in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"). The unaudited consolidated financial statements of the Company
as of June 30, 2005 and for the three month and six month periods ended
June 30, 2004 and 2005 in the opinion of the management of the Company,
include all the adjustments, consisting of normal recurring adjustments,
necessary for a fair statement of the results of such unaudited interim
periods.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with US GAAP. Actual amounts could differ from those estimates.
Significant estimates and assumptions include the depreciable/amortizable
lives of fixed assets and intangibles, amounts reflected as allowances for
doubtful receivables, valuation allowances on deferred tax assets and
amounts reflected as provisions for liabilities arising from legal
proceedings.
These unaudited interim financial statements should be read in conjunction
with the Company's Annual Report on Form 20-F.
(3) Comprehensive Income
Comprehensive income generally encompasses all changes in shareholders'
equity (except those arising from transactions with owners) and includes
net income, net unrealized capital gains or losses on available for sale
securities and foreign currency translation adjustments. The Company's
comprehensive income differs from net income applicable to common
shareholders only by the amount of the foreign currency translation
adjustment and unrealized gains on available for sale securities charged to
shareholders' equity for the period. Comprehensive income for the three
month and six month periods ended June 30, 2004 and 2005 was $97,241,
$207,528, $224,527 and $340,981, respectively.
(4) New Accounting Standards Issued
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations an interpretation of SFAS No. 143". FIN 47 clarifies
the term conditional asset retirement obligation as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations". An entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated.
The fair value of a liability for the conditional asset retirement
obligation should be recognized when incurred--generally upon acquisition,
construction, or development and/or through the normal operation of the
asset. FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. Retrospective application for interim
financial information is permitted but is not required. The adoption of FIN
47 is not expected to have a material effect on the Company's consolidated
financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3". SFAS No.
154 provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements
specific to the newly adopted accounting principle. SFAS No. 154 also
provides guidance for determining whether retrospective application of a
change in accounting principle is impracticable and for reporting a change
when retrospective application is impracticable. The correction of an error
in previously issued financial statements is not an accounting change.
However, the reporting of an
7
error correction involves adjustments to previously issued financial
statements similar to those generally applicable to reporting an accounting
change retrospectively. Therefore, the reporting of a correction of an
error by restating previously issued financial statements is also addressed
by SFAS No. 154. SFAS No. 154 shall be effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. Early adoption is permitted for accounting changes and corrections of
errors made in fiscal years beginning after SFAS 154 is issued. The
adoption of SFAS No. 154 is not expected to have a material effect on the
Company's consolidated financial statements.
(5) Trade Receivables and Accrued Income, net
At December 31, 2004 and June 30, 2005, the breakdown of trade receivables
and accrued income is as follows:
December 31, June 30,
2004 2005
--------------- ---------------
(Unaudited)
Receivables from subscribers $ 258,560 297,482
Accounts and checks receivable 77,027 69,732
--------------- ---------------
335,587 367,214
Accrued service income 70,120 70,793
Allowance for doubtful receivables (133,915) (142,980)
--------------- ---------------
$ 271,792 295,027
=============== ===============
The accrued service income represents revenues accrued for subscriber calls
(air-time), which have not been billed. Due to the volume of subscribers,
there are different billing cycles; accordingly, an accrual is made at each
period end to accrue revenues for services rendered but not yet billed.
Movements in the allowance for doubtful receivables are as follows:
December 31, June 30,
2004 2005
--------------- ---------------
(Unaudited)
Beginning balance $ 135,920 133,915
Provision for doubtful receivables 14,572 12,289
Write offs (22,890) (3,280)
Effect of change in exchange rate 6,313 56
-------------- ---------------
Ending balance $ 133,915 142,980
============== ===============
8
(6) Due from Related Parties
As of December 31, 2004 and June 30, 2005, the balance comprised:
December 31, June 30,
2004 2005
------------------- ---------------
(Unaudited)
KVK Teknoloji Urunleri AS ("KVK Teknoloji") $ 37,019 24,099
Digital Platform Iletisim Hizmetleri AS ("Digital Platform") 8,995 12,486
A-Tel Pazarlama ve Servis Hizmetleri AS ("A-Tel") 24,549 -
Parman Ertebat 20,982 -
Other 12,403 12,460
------------------- ---------------
$ 103,948 49,045
=================== ===============
Substantially all of the significant receivables from related parties are
from Cukurova Group companies.
Due from KVK Teknoloji, a company whose majority shares are owned by some
of the shareholders of the Company, mainly resulted from simcard and
prepaid card sales to this company.
Due from Digital Platform, a company whose majority shares are owned by
some of the shareholders of the Company, mainly resulted from receivables
from call center revenues, financial support for borrowing repayments and
advances given for current and planned sponsorships. (Note 8)
At December 31, 2004, due from A-Tel, a 50-50 joint venture of Yapi Kredi
Bankasi AS ("Yapy Kredi"), a shareholder of the Company and Savings Deposit
Insurance Fund ("SDIF"), mainly resulted from simcard and prepaid card
sales to this company.
At December 31, 2004, due from Parman Ertebat, an equity investment of one
of the shareholders of the Company, resulted from the payment of capital
contribution by Turkcell to Irancell's share capital on behalf of Parman
Ertebat. This receivable has been collected in March 2005.
(7) Other Current Assets
At December 31, 2004 and June 30, 2005, the balance comprised:
December 31, June 30,
2004 2005
------------------- ---------------
(Unaudited)
Value added tax ("VAT") receivable $ 149,777 30,866
Prepaid taxes 273 11,874
Advances to suppliers 3,381 7,440
Expenses to be invoiced for Iran GSM tender 6,578 5,760
Restricted cash 110,166 3,516
Promotional material 2,932 2,466
Deferred financing costs 3,204 1,641
Telecommunications Authority income accrual (Note 20) 39,903 -
Other 9,527 15,399
------------------- ----------------
$ 325,741 78,962
=================== ================
9
In accordance with the settlement agreements signed with Turk Telekom
regarding infrastructure and interconnection disputes, Turk Telekom has
issued invoices amounting to TRY 1,946.6 million (equivalent to $1,451,279
at June 30, 2005). Turkcell has the right to deduct VAT charged to Turkcell
on Turk Telekom invoices from its VAT payable amount. VAT receivable
represents the net balance of VAT on such invoices and VAT receivables and
payables arising in the ordinary course of business.
As of December 31, 2004, restricted cash represents the capital
contribution for Irancell deposited in escrow account in Iran. This cash
was released to Turkcell and paid back in March 2005.
(8) Due from Related Parties - Long Term
December 31, June 30,
2004 2005
--------------- ---------------
(Unaudited)
Digital Platform $ 64,199 65,805
Other 1,772 34
--------------- --------------
$ 65,971 65,839
=============== ===============
Due from Digital Platform mainly resulted from call center revenues,
financial support for borrowing repayments and advances given for current
and planned sponsorships. Receivables from Digital Platform have been
discounted at a rate of 6% resulting in a deduction of $9,680 as of June
30, 2005 (December 31, 2004: $11,406). Management expects to collect such
receivables until 2009. In addition to the short and long-term due from
Digital Platform, Turkcell is subject to a guarantee agreement of $10,097
(Note 20). Management believes that it is unlikely that the Company will
not recover such exposure based on the discussions with the management of
Digital Platform.
(9) Investments
At December 31, 2004 and June 30, 2005, investments in associated companies
were as follows:
December 31, June 30,
2004 2005
--------------- ---------------
(Unaudited)
Fintur $ 175,141 200,344
Aks Televizyon Reklamcilik ve Filmcilik
Sanayi ve Ticaret AS ("Aks TV") 15,750 15,750
Basin Yatirim Sanayi ve Ticaret AS
("Basin Yatirim") 6,869 6,869
--------------- ---------------
$ 197,760 222,963
=============== ===============
At December 31, 2004 and June 30, 2005, the Company's ownership interest in
Fintur was 41.45%. Fintur is accounted for under the equity method.
In 2003, the Company acquired a 6.24% interest in Aks TV and an 8.23%
interest in Basin Yatirim, media companies owned by the Cukurova Group.
Investments in these companies are accounted for under cost method.
10
Aggregate summarized information of Fintur as of December 31, 2004 and June
30, 2005 and for the three month and six month periods ended June 30, 2004
and 2005 are as follows:
December 31, June 30,
2004 2005
--------------------- -----------------
(Unaudited)
Current assets $ 146,258 167,368
Non-current assets 652,447 776,228
-------------------- -----------------
$ 798,705 943,596
==================== =================
Current liabilities $ 237,064 296,232
Non-current liabilities 256,029 280,925
Shareholders' equity 305,612 366,439
-------------------- -----------------
$ 798,705 943,596
==================== =================
3 month ended 3 month ended 6 month ended 6 month ended
June 30, 2004 June 30, 2005 June 30, 2004 June 30, 2005
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------------- ----------------- ----------------- -----------------
Revenues $ 129,247 201,705 237,896 368,821
Direct cost of revenues (54,064) (92,465) (100,720) (164,295)
Income before tax 29,616 50,112 55,495 89,574
Net income 20,516 31,977 39,542 63,690
11
(10) Fixed Assets, net
As of December 31, 2004 and June 30, 2005, the analysis of fixed assets is
as follows:
Useful December 31, June 30,
Lives 2004 2005
--------------- ------------------- ----------------
(Unaudited)
Operational fixed assets:
Base terminal stations 8 years $ 1,014,085 1,134,730
Mobile switching center/Base station controller 8 years 869,981 892,958
Minilinks 8 years 219,739 239,093
Supplementary system 8 years 37,440 37,927
GSM services equipment 8 years 91,575 94,950
Betting equipment 7-8 years 14,458 14,123
Call center equipment 5 years 12,110 21,204
Other 5 years - 2,481
------------------- ----------------
2,259,388 2,437,466
Accumulated depreciation (1,361,927) (1,504,977)
------------------ ----------------
Operational fixed assets, net 897,461 932,489
Non-operational fixed assets:
Land 899 986
Buildings 25 years 179,226 180,045
Furniture, fixture and equipment 4-5 years 165,301 163,137
Motor vehicles 4-5 years 8,710 10,073
Leasehold improvements 3-5 years 52,448 50,245
------------------- ----------------
406,584 404,486
Accumulated depreciation (242,777) (247,695)
------------------- ---------------
Non-operational fixed assets, net 163,807 156,791
------------------- ----------------
$ 1,061,268 1,089,280
=================== ================
At December 31, 2004 and June 30, 2005, total fixed assets acquired under
finance leases amounted to $81,497 and $82,500, respectively. Depreciation
of these assets amounted to $1,101, $1,151, $2,075 and $2,278 for the three
month and six month periods ended June 30, 2004 and 2005, respectively, and
is included in depreciation expense.
Depreciation expenses for the three month and six month periods ended June
30, 2004 and 2005 are $76,964, $80,096, $152,597 and $155,955,
respectively.
12
(11) Construction in Progress
At December 31, 2004 and June 30, 2005, construction in progress consisted
of expenditures in GSM and non-operational items is as follows:
December 31, June 30,
2004 2005
------------------- ----------------
(Unaudited)
Turkcell-GSM network $ 138,303 295,662
Astelit-GSM network 67,077 119,791
Turkcell-Other projects 6,915 10,882
Non-operational items 9,239 7,063
Kibris Telekom-GSM network 451 1,268
Other 8,206 745
------------------- ----------------
$ 230,191 435,411
=================== ================
(12) Intangibles, net
As of December 31, 2004 and June 30, 2005, intangibles consisted of the
following:
Useful December 31, June 30,
Lives 2004 2005
--------------- ------------------- ----------------
(Unaudited)
Computer software 3-8 years $ 860,253 918,674
GSM and other telecommunications licenses 4-25 years 572,181 575,900
Transmission lines 10 years 19,531 19,501
Central betting system operating right 4-5 years 2,641 2,642
Customer base 2 years 1,132 1,192
------------------ ----------------
1,455,738 1,517,909
Accumulated amortization (574,227) (642,207)
------------------- ----------------
$ 881,511 875,702
=================== ================
As of June 30, 2005, amortized intangible assets are as follows:
Gross carrying Accumulated
Amount Amortization
------------------- ----------------
Computer software $ 918,674 482,804
GSM and other telecommunications licenses 575,900 148,261
Transmission lines 19,501 9,627
Central betting system operating rights 2,642 830
Customer base 1,192 685
------------------ ----------------
$ 1,517,909 642,207
=================== ================
13
(13) Short Term Borrowings
At December 31, 2004 and June 30, 2005, short-term borrowings comprised the
following:
December 31, June 30,
2004 2005
------------------- ----------------
(Unaudited)
Current portion of long term borrowings (Note 18) $ 548,356 721,942
Other short term bank loans and overdrafts 723 20,746
------------------- ----------------
$ 549,079 742,688
=================== ================
(14) Trade Payables
At June 30, 2005, the balance mainly consists of the payable to Turk
Telekom relating to the settlements with respect to the disputes on Turk
Telekom interconnection fee and Turk Telekom infrastructure usage amounting
to $450,536 (December 31, 2004: $490,256) and $4,667 (December 31, 2004:
$32,649), respectively. At June 30, 2005, the payable due to the dispute on
Turk Telekom interconnection fee amounting to $450,536 is classified as
"short term trade payables" as a result of the payment terms agreed. The
remainder of the balance includes amounts due to Ericsson Turkey, Ericsson
Radio Systems AB ("Ericsson Sweden") and Ericsson AB totalling $12,554
(December 31, 2004: $15,138) resulting from fixed asset purchases, site
preparation and other services, and amounts due to other suppliers
totalling $67,601 (December 31, 2004: $78,773) arising in the ordinary
course of business.
At June 30, 2005, the long term trade payable balance mainly consists of
payables to Ericsson AB with respect to fixed asset purchases. At December
31, 2004, $213,740 of total payables due to the dispute on Turk Telekom
interconnection fee amounting to $703,996 is classified as `long term trade
payables' as a result of the payment terms agreed.
Turkcell is party to a series of supply agreements with Ericsson Turkey
(collectively the "Supply Agreements") under which Ericsson Turkey supplies
Turkcell with an installed and operating GSM network, spare parts, training
and documentation. The Supply Agreements also provide Turkcell a
non-exclusive restricted software license for GSM software. Under the
Supply Agreements, Ericsson Sweden guarantees all of Ericsson Turkey's
obligations to Turkcell.
(15) Due to Related Parties
As of December 31, 2004 and June 30, 2005, due to related parties
comprised:
December 31, June 30,
2004 2005
------------------- ----------------
(Unaudited)
ADD Production Medya A.S. ("ADD") $ - 13,271
Hobim Bilgi Islem Hizmetleri AS ("Hobim") 1,908 1,533
Baytur Insaat Taahhut A.S ("Baytur") 2,629 -
Yapy Kredi Sigorta AS ("Yapy Kredi Sigorta") 555 -
Other 1,619 2,589
------------------- ----------------
$ 6,711 17,393
=================== ================
Substantially all of the significant due to balances are related to
Cukurova Group companies.
Amount payable to ADD, a media planning and marketing company owned by
Cukurova Group, stems from a media purchasing agreement to benefit from the
expertise and bargaining power of ADD, regarding the formation of media
purchasing strategies for both postpaid and prepaid brands.
14
The amount payable to Hobim, a company whose majority shares are owned by
some of the shareholders of the Company, resulted from the invoice printing
services rendered by this company.
(16) Other Current Liabilities and Accrued Expenses
At December 31, 2004 and June 30, 2005, the balance comprised:
December 31, June 30,
2004 2005
------------------- ----------------
(Unaudited)
Taxes and withholdings $ 26,246 151,731
Deferred income 111,718 122,109
Ongoing license fee and universal service fund accrual 246,857 72,193
Selling and marketing expense accruals 26,941 51,761
Accrued interest on borrowings 25,043 23,739
Transmission fee accrual 10,037 16,187
Personnel bonus accrual 15,752 8,133
Roaming expense accrual 5,908 7,735
Telecommunications Authority share accrual 11,242 6,071
Lease obligations--short term portion 13,797 4,821
Other expense accruals 29,934 38,949
------------------- ---------------
$ 523,475 503,429
=================== ================
On December 24, 2004, Turkcell signed settlement agreements with the
Turkish Treasury and Turk Telekom regarding treasury share and
interconnection fee disputes.
Taxes and withholdings include VAT payable, special communications tax,
frequency usage fees payable to Telecommunications Authority and personnel
income taxes.
(17) Taxes on Income
The income tax benefit (expense) is attributable to income from continuing
operations and consists of:
3 Month Ended 6 Month Ended
June 30, June 30,
2004 2005 2004 2005
----------- ------------ ----------- ------------
(Unaudited) (Unaudited)
Current tax expense $ - (35,998) $ - (64,081)
Deferred tax benefit (expense) 66,659 (62,838) 37,486 (131,717)
----------- ------------ ----------- ------------
Income tax benefit (expense) $ 66,659 (98,836) $ 37,486 (195,798)
=========== ============ =========== ============
15
Income tax expense attributable to income from continuing operations was
$98,836 and $195,798 for the three month and six month periods ended June
30, 2005. These amounts are different from the amount computed by applying
the Turkish income tax rate of 30% (2004:33%) to pretax income from
continuing operations as a result of the following:
3 Month Ended 6 Month Ended
June 30, June 30,
2004 2005 2004 2005
----------- ------------ ----------- ------------
(Unaudited) (Unaudited)
Computed "expected" tax expense $ (8,339) (94,099) $ (59,833) (162,211)
Non taxable translation gain (6,133) 19,290 (39,180) (3,078)
Investment tax credit 8,073 314 13,901 2,182
Effect of change in tax rate 20,239 - 22,238 -
Change in valuation allowance 852 (5,100) (740) (73)
Non-taxable items 47,154 - 95,909 -
Other 4,813 (19,241) 5,191 (32,618)
----------- ------------ ----------- ------------
$ 66,659 (98,836) $ 37,486 (195,798)
=========== ============ =========== ============
For the six month periods ended June 30, 2004 and 2005, substantially all
income from continuing operations and related tax expense were domestic.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2004
and June 30, 2005 are presented below:
December 31, June 30,
2004 2005
------------------- ----------------
(Unaudited)
Deferred tax assets:
Accrued expenses $ 334,288 250,844
Accounts and other receivables (principally due
to allowance for doubtful accounts) and other 20,562 24,214
Net operating loss carry forwards 21,086 15,362
Tax credit carry forwards (Investment tax credit) 313,120 284,668
------------------- ----------------
Gross deferred tax assets 689,056 575,088
Less: Valuation allowances (17,177) (17,250)
------------------- ----------------
Deferred tax assets 671,879 557,838
Deferred tax liabilities:
Fixed assets and intangibles, principally due to
financial leases, differences in depreciation and
amortization, and capitalization of interest and
foreign exchange loss for tax purposes (325,884) (344,255)
------------------- ----------------
Total deferred tax liabilities (325,884) (344,255)
------------------- ----------------
Net deferred tax assets $ 345,995 213,583
=================== ===============
16
At June 30, 2005, net operating loss carry forwards are as follows:
Expiration
Year Amount Date
-------------- -------------------
2000 $ 3,786 2005
2001 3,958 2006
2002 1,867 2007
2003 9,681 2008
2004 34,324 2009
2005 1,024 2010 thereafter
Non taxable translation gain results from translation of TRY denominated
non-monetary assets and liabilities to the US Dollar, the functional and
reporting currency, in accordance with the relevant provisions of SFAS No.
52 as applied to entities in highly inflationary economies. Under SFAS No.
109, such translation differences between the tax and book basis of related
assets and liabilities do not give rise to temporary differences. Such
amounts are primarily attributable to translation gain resulting from the
translation of TRY denominated fixed assets and intangibles into the US
Dollar.
The Turkish Treasury approved investment incentive certificates for a
program of capital expenditures by Turkcell and its subsidiaries in GSM,
call center and betting games operations. Such incentives entitle the
Company to a 100% exemption from customs duty on imported machinery and
equipment and an investment tax benefit of 100% on qualifying expenditures.
The investment tax benefit takes the form of deductions for corporation tax
purposes, but such deductions are subject to withholding tax at the rate of
19.8% (for expenditures made after April 24, 2003, the investment tax
benefit equals 40% of qualifying expenditures but it is not subject to any
withholding tax). As of June 30, 2005, investment incentive certificates
provide for tax benefits on cumulative purchases of up to approximately
$4,461,932 (December 31, 2004: $4,459,855) in qualifying expenditures, as
defined in the certificates. As of June 30, 2005, the Company had unused
tax credit carryforwards under the certificates of approximately $284,668
(December 31, 2004: $313,120), which can be carried forward indefinitely.
The certificates are denominated in TRY. However, approximately $483,265 of
qualifying expenditures through June 30, 2005 (December 31, 2004: $677,433)
under such certificates is indexed against future inflation.
The Company establishes valuation allowances in accordance with the
provisions of SFAS No. 109. The Company continually reviews the adequacy of
the valuation allowance based on changing conditions in the market place in
which the Company operates and its projections of future taxable income,
among other factors. The Company forecasts taxable income in 2005 and
onwards and has generated taxable income for past two years. Currently,
economic and political situation in Turkey became more stable and there are
positive expectations about the near term future. Further, there are
positive developments regarding the Turkey's membership to the European
Union. On October 3, 2005, the member states of European Union have decided
to start membership discussions with Turkey. Such decision is expected to
have certain political and economic benefits for Turkey in near future.
Furthermore, the settlement agreements with Turk Telekom and the Turkish
Treasury have been signed in the fourth quarter of 2004. Management
believes that these developments provide management a better visibility
about the near term future. As a result, as of June 30, 2005, management's
assessment of the realizability of the deferred tax assets and related
valuation allowance requirements is consistent with that made at December
31, 2004. Management concluded that it was more likely than not that the
deferred tax assets of $213,583 were realizable. Turkish tax legislation
does not allow companies to file tax returns on a consolidated basis.
Therefore, management believes a valuation allowance should continue to be
provided on a portion of the deferred tax assets, resulting from certain
consolidated subsidiaries, as they are unable to conclude that the
likelihood of realizing these deferred tax assets is more likely than not.
Accordingly, a valuation allowance of approximately $17,250 is recorded as
of June 30, 2005 (December 31, 2004: $17,177) for such amounts. The
valuation allowance at December 31, 2004 and June 30, 2005 has been
allocated between current and non-current deferred tax assets on a pro-rata
basis in accordance with the provisions of SFAS No. 109. Management
believes that it is more likely than not the net deferred tax asset of
approximately $213,583 as
17
of June 30, 2005, will be realized through reversal of taxable temporary
differences as well as future taxable income exclusive of reversing taxable
temporary differences. The Company will continue to evaluate the
realizability of its deferred tax assets including net operating loss and
tax credit carryforwards and the related impact on the valuation allowance.
In accordance with the Law No. 4842, which made changes in certain laws
announced on April 24, 2003, the surcharge of 10% applied on the
corporation tax is abolished effective for all tax returns filed on or
after January 1, 2004. Accordingly, substantially all taxable income earned
from January 1, 2003 is taxed at a rate of 30%. However, in accordance with
the Law No. 5035, which was enacted during December 2003 and announced on
January 2, 2004, the corporation tax rate will be applied as 33% for
taxable income earned in 2004 only.
Further, in accordance with the Law No. 5024, effective from January 1,
2004, taxable income is determined based on the financial statements
restated for the effects of inflation if the cumulative three-year
inflation rate exceeds 100% and annual inflation rate in the current period
exceeds 10%. Accordingly, taxable income for the period ended December 31,
2004 has been determined based on such restated financial statements.
However, on April 19, 2005, the Ministry of Finance declared that since the
cumulative three-year inflation rate does not exceed 100% and the annual
inflation rate in the current period does not exceeds 10%, financial
statements as of and for the three month period ended March 31, 2005 are
not subject to the restatement for the determination of taxable income.
Financial statements as of and for the six month period is not subject to
the restatement for the determination of taxable income. It is not certain
yet that whether financial statements for the remaining quarters of 2005 or
for whole year will be restated for the determination of taxable income or
not. The change in tax law is not expected to have a material impact on
future taxable income.
(18) Long Term Borrowings
At December 31, 2004 and June 30, 2005, long-term borrowings comprised:
Interest Contractual December 31, June 30,
rate (%) maturity 2004 2005
------------------- ----------------- ------------------ -------------
(Unaudited)
Cellco 12.75% senior notes, due 2005 12.75% August 2005 $ 335,000 335,000
Turkiye Garanti Bankasi AS
("Garanti Bankasi") - 2 Libor + 3.40% March 2007 100,000 100,000
ABN Amro NV-1 Euribor + 2.80% December 2005 26,712 90,983
Ericsson Credit AB Libor + 5.00% January 2006 37,170 80,842
Murabaha syndicated facility Libor + 4.50% June 2006 100,000 74,375
Akbank TAS ("Akbank") - 2 Libor + 3.50% February 2007 100,000 66,500
Garanti Bankasi - 1 Libor + 5.62% April 2006 50,000 50,000
ABN Amro NV-2 Libor + 3.00% May 2006 3,372 7,214
Akbank-1 Libor + 5.25% June 2005 62,500 -
Other 49 45
----------------- -------------
814,803 804,959
Less: Current portion of long term borrowings (Note 13) (548,356) (721,942)
------------------ -------------
$ 266,447 83,017
================== =============
For the purpose of establishing a GSM network in Ukraine, Astelit signed an
$89,042 vendor financing facility with Ericsson AB and Ericsson Credit AB
on June 30, 2004, under which, Ericsson AB provides equipment and services
and Ericsson Credit AB provides credit facilities to Astelit in respect of
these purchases from Ericsson AB. On August 28, 2005, Astelit has entered
into term facility agreement with Ericsson AB amounting to $45,000 in
accordance with the clause which allows Astelit to purchase additional
equipment and services within the vendor financial agreement. Maturity of
this additional financing is December 21, 2005.
18
Additionally, Astelit signed an Euro 125,000 (equivalent to $150,665 at
June 30, 2005) vendor financing agreement with Nokia Corporation ("Nokia")
and ABN Amro NV on July 12, 2004, under which, Nokia provides equipment and
services and ABN Amro NV provides credit facilities in respect of these
purchases from Nokia.
On November 2, 2004, Astelit has entered into another supply contract with
Sysdate Pty Ltd ("Sysdate"), amounting to $12,445. $7,214 of this contract
is financed through a vendor financing agreement signed with Sysdate and
ABN Amro NV, under which ABN Amro NV committed to finance Astelit's
purchases of GSM 1800 billing equipment, software and services from
Sysdate.
Shareholders of Astelit have provided letters of guarantee for the above
mentioned facilities, which will be repaid in 2005 and 2006.
These vendor financing agreements contain certain customary covenants that
limit the ability of Astelit to, among other things, pledge equipment
acquired under the vendor financing agreements, change its business from
telecommunications or invest in other business, sell certain fixed assets,
merge with other companies except DCC, declare or pay dividends, and
repurchase or repay any of its share capital.
In order to decrease borrowing costs and foreign exchange risk, Turkcell
signed a loan agreement with West LB AG, London Branch on August 24, 2005
to obtain an unsecured loan amounting to TRY 50,000 (equivalent to $37,277
as of June 30, 2005). The loan will be repaid semiannually in six equal
installments and has an interest rate of six month TRYibor (TRY Libor)
minus 15 basis points.
The outstanding balance of the senior notes issued by Cellco in 1999 has
been fully repaid on August 1, 2005. The loan had an interest rate of
12.75% and its original maturity was August 1, 2005.
As of June 30, 2005, the Company is not subject any financial covenants or
ratios with respect to its borrowings. There are no unused commitments
under these facilities.
(19) Common Stock
At June 30, 2005, common stock represented 1,854,887,341,000 (December 31,
2004: 1,854,887,341,000) authorized, issued and fully paid shares with a
par value of TRY 0.001 each. In accordance with the Law No 5083 with
respect to the TRY, on May 9, 2005, par value of each share is registered
to be one TRY.
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended, Six Months Ended,
June 30, June 30,
2004 2005 2004 2005
-------------------- ------------------- ------------------ ---------------------
(Unaudited) (Unaudited)
Numerator:
Net income 96,420 213,740 222,587 342,147
Denominator:
Basic and diluted weighted
average shares 1,854,887,341,000 1,854,887,341,000 1,854,887,341,000 1,854,887,341,000
Basic and diluted net income
per share 0.000052 0.000115 0.000120 0.000184
On April 5, 2005, the board of directors decided that Turkcell's statutory
capital would be increased from TRY 1,474.6 million to TRY 1,854.9 million
by adding TRY 234.1 million out of the total dividend for 2004 and the
statutory capital inflation adjustment (included in the financial
statements prepared in accordance with the accounting standards promulgated
by the statutory tax laws) amounting to TRY 146.2 million for 2004. The
increase of TRY 380.3 million would be distributed to the Company's
shareholders in the form of a stock split. The capital increase was
accounted for as a stock split in the Company's accompanying consolidated
financial statements. As a result of the aforesaid transactions, the
Company
19
issued new shares with a total nominal value of TRY 380,247,980. On July 6,
2005, the Capital Market Board (the "CMB") approved the capital increase.
The increase in statutory capital had no impact on the account balances in
the consolidated statements of shareholders' equity. All share amounts and
per share figures reflected in the Company's historical financial
statements have been retroactively restated for the stock splits discussed
above.
The total effects of restatements in number of shares are as follows:
December 31, June 30,
2004 2005
---------------------- ----------------------
Historical number of shares 1,474,639,361,000 1,474,639,361,000
After bonus share distribution - statutory capital inflation
adjustment 2004 1,620,795,740,000 1,620,795,740,000
After bonus share distribution - dividend for the year 2004 1,854,887,341,000 1,854,887,341,000
On July 21, 2004, it became public information that the debt restructuring
talks between the Banking Regulation and Supervision Agency (the "BRSA")
and the Cukurova Group, one of the significant founding shareholders of the
Company, were finalized by mutual agreement. On September 28, 2005,
transfer of Yapi Kredi shares to Koc Group was completed. With respect to
the Turkcell Option Contract, parties agreed to give purchase option to
Cukurova Holding A.S. or a Cukurova Group company that will be determined
by Cukurova Holding A.S. to buy the shares over their market value in 12
months following the transfer of Yapi Kredi shares to Koc Group.
On March 25, 2005, the Cukurova Group announced that it intended to sell
approximately 53% of its directly and indirectly held shares in Turkcell
Holding AS for a cash consideration of $3,103,762 to Sonera Holdings BV
(Sonera). Finalization of the deal was subject to completion of the final
share purchase/sale agreement, due diligence reports and obtaining the
necessary permissions from regulatory authorities including exemption to be
granted to Sonera by the Turkish Capital Markets Board for not offering the
same purchase price per share for the public shares. If the deal had been
finalized as planned, the Cukurova Group's effective interest in Turkcell
would have decreased approximately to 13.3% and Sonera's effective interest
would have increased to 64.1%. On May 23, 2005, Cukurova Holding announced
that the exclusive negotiation obligation period was finalized without a
conclusion on a share purchase/sale agreement between the parties. In the
same announcement, it was noted that, as a result of public reaction and
opinions raised at the Annual Shareholders' Meeting on the issue, Cukurova
Group would start to work on options that may not lead to a change in
control structure of Turkcell and/or Turkcell Holding AS. Following
Cukurova Holding's announcement, Sonera filed a request for arbitration at
the International Court of Arbitration of the International Chamber of
Commerce (the "ICC"). Sonera also filed a request for interim measures at a
civil court in Geneva. Sonera demanded that the court prohibit Cukurova
Holding from initiating or continuing contacts with third parties other
than Sonera, with a view to the sale or pledge of shares in Turkcell
Holding.
On June 13, 2005, the Cukurova Group announced that the Cukurova Group and
Alfa Group had formed a $3.3 billion financial package. The financial
package consists of an approximately $1.7 billion six-year duration loan
while the remaining portion will be a year 2011 dated convertible bond. The
bonds can be exchanged into shares of a Cukurova Group company after 18
months, which may lead to a 13.2% indirect ownership of Alfa Group in
Turkcell. Finalization of the transaction was subject to due diligence
reports and obtaining the necessary permissions from regulatory
authorities. In the same announcement, it was noted that the funds would be
primarily used by the Cukurova Group to retire its debt to the SDIF and
finance the Cukurova Group's option regarding the acquisition of Yapi Kredi
Bank's shares in Turkcell and Turkcell Holding.
20
Turkcell is currently in the process of merging 1,000 existing ordinary
shares, each having a nominal value of 0.001 TRY, to one ordinary share
having a nominal value of TRY 1. On May 23, 2005, the bonus share
certificates have been registered by Turkish Capital Market Board and the
Istanbul Stock Exchange and started to be distributed to the shareholders
of Turkcell.
(20) Commitment and Contingencies
As of December 31, 2004 and June 30, 2005, commitments and contingent
liabilities comprised the following:
December 31, June 30,
2004 2005
------------------ -------------
Bank Letters of Guarantee $ 257,607 71,524
Guarantees
Irancell Consortium 285,842 253,118
Iranian Authorities-Payment Guarantee 285,842 253,118
Digital Platform 25,066 10,097
BNP--Brussels (Buyer Credit) 19,634 7,237
BNP--Hungary (Buyer Credit) 4,845 2,860
BNP--Brussels (Financial Loan) 470 -
Websterbank--USA 117 -
Purchase Commitments 269,210 121,716
Nokia 147,052 61,456
Baytur 39,650 27,430
Asli Gazetecilik 17,500 10,000
Ericsson AB 46,964 8,895
ADD 8,000 8,000
Sysdate 9,045 5,935
ABN Amro Finansal Kiralama AS ("ABN Amro Leasing") 999 -
As of June 30, 2005, the Company is contingently liable in respect of bank
letters of guarantee obtained from Yapi Kredi and given to customs
authorities, private companies and other public organizations amounting to
TRY 54.5 million (equivalent to $40,603 at June 30, 2005) (December 31,
2004: $41,522). In addition, as of June 30, 2005, the Company is
contingently liable in respect of bank letters of guarantee obtained from
other banks and given to private companies and other public organizations
amounting to $921 (December 31, 2004: $767).
As of December 31, 2004, the Company was contingently liable to the Turkish
Treasury in relation to the Turk Telekom settlement agreement, amounting to
TRY 266.5 million (equivalent to $198,693 at June 30, 2005). As of June 30,
2005, payments related to the bank letter of guarantee have been completed
and contingent liability has been released.
Within the context of the tender of privatization of Turk Telekom, on June
16, 2005, the Board of Directors of Turkcell, decided to form a consortium
structure in order to submit to the Bidding Committee with Turktell
participating in the consortium with a 40% shareholding. In relation to the
bidding agreement, a bank letter of guarantee amounting to USD 30,000 was
obtained but since the bidding process was finalized in favor of another
party, the bank letter of guarantee had been released as of July 8, 2005.
As a condition of the GSM license bid in Iran, the Consortium was obliged
to provide a payment guarantee for a six month period to the Iranian
Authorities amounting to EUR 300 million for an upfront license fee.
21
The payment guarantee becomes effective when the license is formally
awarded to Irancell. Turkcell guaranteed EUR 210 million (equivalent to
$253,118 at June 30, 2005) of this guarantee through HSBC plc, which issued
the payment guarantee under a syndicate with Akbank and BNP Paribas with an
initial maturity of September 7, 2004. Since Irancell was not established,
Turkcell has notified HSBC plc that it does not request any more extension
of the payment guarantee and stated that HSBC plc can release the payment
guarantee. On July 26, 2005, EUR 210 million guarantee has been released.
In addition to the upfront license fee, if the Iranian subsidiary of the
Company is formally established and if license is awarded, the Iranian
subsidiary of the Company will pay an ongoing license fee based on the
greater of minimum precommitted gross revenues agreed with the Iranian
Authorities, or the actual gross revenues.
Guarantees on behalf of Digital Platform are related to loans for set-top
boxes, head-end and uplink imports and working capital financing used from
the respective banks.
Turkcell has committed to arrange at maximum $150,000 of financing for DCC
until the end of 2006. Turkcell has substantially fulfilled the above
mentioned commitment by acting as the guarantor of the vendor financing
agreements signed by Astelit with Ericsson AB and Ericsson Credit AB, Nokia
and ABN Amro NV and Sysdate and ABN Amro NV. In return of these guarantees,
Turkcell pledged minority shares of Euroasia.
Astelit has entered into vendor financing agreements with Ericsson AB and
Ericsson Credit AB amounting to $89,042 on June 30, 2004, and with Nokia
and ABN Amro NV amounting to EUR 125,000 (equivalent to $150,665 at June
30, 2005) on July 12, 2004. As of June 30, 2005, outstanding purchase
commitments to Ericsson AB and Nokia amount to $8,895 and $61,456,
respectively. On August 28, 2005, Astelit has entered into term facility
agreement with Ericsson AB amounting to $45,000 in accordance with the
clause which allows Astelit to purchase additional equipment and services
within the vendor financial agreement. Maturity of this additional
financing is December 21, 2005.
Astelit has also entered into a $12,445 supply contract of which $7,214 is
financed through a vendor financing agreement signed with Sysdate and ABN
Amro NV. As of June 30, 2005, outstanding purchase commitment to Sysdate
amounts to $5,935.
Under a framework agreement, (the "framework agreement") Asli Gazetecilik
agreed to provide advertisement services to the Company from July 1, 2002
until October 4, 2004. In consideration, the Company will pay a total
amount of $25,000. On May 30, 2004, the Company signed the "Amended
Framework Agreement" with Asli Gazetecilik, extending the terms of the
agreement until December 31, 2005. As of June 30, 2005, the Company paid
$15,000 and obtained respective advertising services amounting to $15,000
in accordance with this agreement.
With respect to the sponsorships agreement signed between ADD and Turkcell
on June 21, 2004, relating to the sponsorship of Besiktas Jimnastik Klubu
("BJK"), a football club in Istanbul, Turkcell has paid $7,000 to ADD on
June 23, 2004 for 2004-2005 and 2005-2006 Football League Seasons. In
respect to the agreement, Turkcell has also committed to pay $8,000 to ADD
in two equal installments on July 1, 2006 and July 1, 2007 with respect to
2006-2007 and 2007-2008 Football League Seasons. On May 31, 2005, BJK
informed ADD that they want to terminate the agreement unilaterally and
asked for the terms of termination. On June 1, 2005, ADD informed BJK that
the agreement may be terminated immediately upon pay back of $3,500 paid
for the 2005-2006 Football League Season, related stamp duty and interest
and release of the commitment amounting to $8,000. On June 21, 2005, ADD
made a repayment to Turkcell amounting to $3,500. On July 19, 2005
Turkcell's commitment amounting to $8,000 has been released with the mutual
agreement of the parties.
The principal shareholder of Baytur, a construction company, is the
Cukurova Group. Baytur committed to complete construction of 484 apartments
within the scope of an agreement signed among Turkcell, Baytur and the land
owner, which is a governmental organization, on October 19, 2004. The
agreement amount is $39,650 and the project is planned to be completed in
2008. Turkcell paid $12,220 to Baytur within the scope of this contract as
of June 30, 2005.
22
The interconnection agreement with Turk Telekom provided for a
renegotiation of pricing terms after December 31, 2004, and in the event
that the parties could not agree on new terms by February 28, 2005, for
referral to the Telecommunications Authority for resolution. As the parties
were unable to agree on new terms, Turk Telekom referred the matter to the
Telecommunications Authority, which has temporarily set call termination
fees for calls terminating on each operator's network starting from August
10, 2005. According to its resolution procedure, the Authority is expected
to set final termination fees, which are binding on both parties, by
February 2006. On October 7, 2005 Turkcell filed a lawsuit against the
Telecommunications Authority for the injunction and cancellation of this
decision, which has temporarily set call termination fees for calls
terminating on each operator's network starting from August 10, 2005.
These temporary prices are not as favorable to Turkcell as they have been
previously, and the Telecommunications Authority may impose further
reductions in call termination fees. At this point, the Company is unable
to estimate the timing and impact of the possible changes to its fees,
however, new pricing terms, could be lower and these could have a material
adverse affect on Turkcell's financial position, results of operations and
cash flows .
Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business described below.
Disputes on Ongoing License Fee resolved after the settlement agreement
(the "Turkish Treasury Settlement Agreement")
Dispute on VAT on Ongoing License Fee
On December 28, 2001, the board of accounting experts of the Ministry of
Finance issued an opinion stating that Turkcell should pay VAT on the
ongoing license fee paid to the Turkish Treasury. Accordingly, the Tax
Office delivered to Turkcell a notice on January 31, 2002, asserting
deficiencies in VAT declarations requesting payments of approximately TRY
91.4 million (equivalent to $68,124 as of June 30, 2005) for VAT, which
would be offset by a VAT recoverable and would not result in a cash outflow
from Turkcell and a total of approximately TRY 145.3 million (equivalent to
$108,307 as of June 30, 2005) for penalty. Turkcell applied on March 1,
2003 to benefit from the Tax Amnesty Law entered into force in February
2003 for the amounts covering the period between April 1998 and November
2001. Turkcell's application was accepted and, accordingly, it received
amnesty in respect to VAT on the ongoing license fee. Turkcell and the Tax
Office agreed that Turkcell would made payments for the VAT amounts
amounting to TRY 45.7 million (equivalent to $34,062 as of June 30, 2005)
covering the period between April 1998 and November 2001 by nine equal
installments between March 31, 2003 and June 30, 2004. By completing the
payments in 2003, Turkcell received a discount of TRY 4.6 million
(equivalent to $3,394 as of June 30, 2005).
Turkcell has begun to make payments for VAT on ongoing license fees with
reservation starting from June 2003 and commenced a lawsuit against the Tax
Office for the related period. On December 31, 2003, the Tax Court decided
that Turkcell would not have to pay VAT on ongoing license fee from
February 2004 onwards. The Tax Office has appealed this decision. Based on
its management and legal counsel's opinion, Turkcell has not provided any
accrual related with this dispute in its consolidated financial statements
as of and for the six month period ended June 30, 2005.
Dispute on Turk Telekom Transmission Lines Leases
Effective from July 1, 2000, Turk Telekom annulled the discount of 60% that
it provided to Turkcell based on its regular ratio, which had been provided
for several years, and, at the same time, Turk Telekom started to provide a
discount of 25% being subject to certain conditions. Turkcell filed a
lawsuit against Turk Telekom for the application of the agreed 60%
discount. However, on July 30, 2001, Turkcell had been notified that the
appeals court upheld the decision made by the commercial court allowing
Turk Telekom to terminate the 60% discount. Accordingly, Turkcell paid and
continues to pay transmission fees to Turk Telekom based on the 25%
discount. Although Turk Telekom did not charge any interest on late
payments at the time of such payments, Turkcell recorded an accrual
amounting to TRY 3 million ($2,253 as of June
23
30, 2005) for possible interest charges as of December 31, 2000. On May 9,
2002, Turk Telekom requested an interest amounting to TRY 30.1 million
(equivalent to $22,417 as of June 30, 2005). Turkcell did not agree with
the Turk Telekom's interest calculation and, accordingly, obtained an
injunction from the commercial court to prevent Turk Telekom from
collecting any amounts relating to this interest charge. Also, Turkcell
initiated a lawsuit against Turk Telekom on the legality of such interest.
As of June 30, 2005, Turkcell recorded a provision of TRY 13.3 million
(equivalent to $9,913 as of June 30, 2005) because its management and legal
counsel believe that this is the maximum potential liability in accordance
with the relevant provisions of the Interconnection Agreement.
Dispute on National Roaming Agreement
During the third quarter of 2001, Turkcell was approached by Is-Tim to
negotiate a national roaming agreement. These negotiations did not result
in a mutual agreement. Therefore, the discussions continued under the
supervision of the Telecommunications Authority. The Telecommunications
Authority proposed a solution on October 18, 2001 and asked the parties to
reach a decision by November 15, 2001. As Turkcell believes that the
Telecommunications Authority is not authorized to intervene in this issue
and Is-Tim's proposal is unreasonable, economically not proportional and
technically impossible, Turkcell obtained an injunction on November 12,
2001 from the Ankara Fourth Court of First Instance regarding the conflict.
On December 6, 2001, the Ankara Fourth Court upheld the injunction it
rendered in Turkcell's favor on November 12, 2001. According to the Court's
decision, the execution of a national roaming agreement between Is-Tim and
Turkcell has been prevented. The Telecommunications Authority and Is-Tim
have appealed the granting of the injunction and the appeals were
disapproved.
In addition, on November 26, 2001, Turkcell initiated an arbitration suit
in the ICC against the Turkish Ministry and the Telecommunications
Authority. On November 25, 2003, the ICC rendered a decision stating that
the case is not under its jurisdiction. In January 2004, Turkcell appealed
the decision before the Ankara 13th Court of First Instance. On April 6,
2004, the court dismissed the appeal. Turkcell has appealed this decision.
Furthermore, Turkcell had previously initiated an action before the Ankara
Ninth Administrative Court on November 13, 2001 to annul the
above-mentioned proposed solution of the Telecommunications Authority. On
April 18, 2002, the court decided that the issue is not under its
jurisdiction and transferred the case to Danistay. On September 13, 2003,
Danistay rejected Turkcell's request of injunction.
On March 8, 2002, the Telecommunications Authority issued a new regulation
"Regulation on Principles and Procedures Relating to National Roaming
Agreements". Two of the most important provisions of the new regulation are
Provisional Article 1 and Article 17. Provisional Article 1, which deals
with negotiations, agreements and documents relating to the issuance of
this regulation, states that all ongoing negotiations shall continue in
compliance with the new regulation and that all agreements and documents
completed before issuance of the new regulation shall remain valid and
binding. Article 17 sets out penalties to be imposed on any party violating
the provisions of the new regulation.
In a letter dated March 14, 2002, the Telecommunications Authority
subjected Is-Tim's request for national roaming to the condition that it be
reasonable, economically proportional, and technically possible.
Nevertheless the Telecommunications Authority declared that Turkcell is
under an obligation to enter a national roaming agreement with Is-Tim
within a 30 day period. On April 8, 2002, Turkcell obtained a precautionary
injunction from the court against the application of the new regulation
issued by the Telecommunications Authority requiring it to agree on
national roaming within 30 days and providing for penalties in case
Turkcell did not agree. Turkcell initiated proceedings against application
of the new regulation before the ICC on April 11, 2002, requesting
certification of the fact that it is not required to enter into an
agreement within 30 days and that it is under no obligation to pay any
penalties whatsoever if it does not agree within 30 days. While the ICC
proceedings are being pursued Turkcell has initiated a lawsuit before the
Danistay, concerning the annulment of these regulations. Based on the
second request for the injunction of the decision, on May 12, 2005 Turkcell
received a notification from Danistay that the decisions and actions
regarding the notification of Telecommunications Authority dated March 14,
2004 has been ceased until the case is finalized, but rejected Turkcell's
request for an injunction to cease application of the procedures and
policies under the new regulation with respect to national roaming. On
24
January 23, 2004, the ICC rendered a decision stating that the case is not
under its jurisdiction. In March 2004, Turkcell appealed the decision
before the Ankara 21st Court of First Instance. On December 14, 2004 the
court rejected Turkcell's request of annulment of the ICC's decision.
Turkcell has appealed this decision.
On June 9, 2003, the Turkish Competition Board (the "Competition Board")
decided that Turkcell abused its dominant position by refusing to enter
into a national roaming agreement with Is-Tim, and fined Turkcell by
approximately TRY 21.8 million (equivalent to $16,269 at June 30, 2005). On
June 7, 2004, the Competition Board's written decision was communicated to
Turkcell. Turkcell initiated a lawsuit requesting the cancellation of the
Competition Board's decision. On November 3, 2004 Danistay issued an
injunction to cease the decisions and actions subject to the lawsuit until
the case is finalized. On December 10, 2004, Tax Office requested
approximately TRY 21.8 million (equivalent to $16,269 at June 30, 2005)
regarding the Competition Board decision. On December 30, 2004, Turkcell
initiated a lawsuit before the Administrative Court against the Tax Office
and the Competition Board's requesting injunction and cancellation of the
payment order. The court has sent the case to Danistay and Danistay decided
that the issue is not under its jurisdiction and transferred the case to
the Administrative Court. Turkcell obtained an injunction from the
Administrative Court. Telecommunications Authority and Tax Office appealed
this decision. Both the Telecommunications Authority and Tax Office appeals
rejected. Based on its management and legal counsel's opinion, Turkcell has
not recorded any accrual for Competition Board's decision.
The Telecommunications Authority decided that Turkcell has not complied
with its responsibility under Turkish regulations to provide national
roaming and fined Turkcell by approximately TRY 21.8 million (equivalent to
$16,269 at June 30, 2005). On April 7, 2004, Turkcell made the related
payment. On May 27, 2004, Turkcell commenced a lawsuit against
Telecommunications Authority's decision. On December 1, 2004, the Danistay
issued an injunction to cease the decisions and actions subject to the
lawsuit until the case is finalized, but rejected Turkcell's request for an
injunction to cease application of the procedures and policies under the
new regulation with respect to national roaming. On January 3, 2005
Telecommunications Authority paid back TRY 21.8 million (equivalent to
$16,269 at June 30, 2005) with respect to the aforesaid injunction of
Danistay. Telecommunications Authority appealed the Danistay's decision
with respect to the injunction. The appeal has been rejected by General
Assembly of Administrative Courts of Danistay. Based on its management and
legal counsel's opinion, Turkcell recorded income amounting to TRY 21.8
million (equivalent to $16,269 at June 30, 2005) in its consolidated
financial statements as of and for the year ended December 31, 2004.
If Turkcell is forced to enter a national roaming agreement on terms and
conditions that do not provide an adequate return on its investment in its
GSM network, its financial position, results of operations and cash flows
could be materially adversely affected.
Investigation of the Turkish Competition Board
The Competition Board commenced an investigation of business dealings
between Turkcell and KVK, in October 1999. The Competition Board decided
that Turkcell disrupted the competitive environment through an abuse of
dominant position in the Turkish mobile market and infringements of certain
provisions of the Law on the Protection of Competition. As a result,
Turkcell was fined by approximately TRY 7 million (equivalent to $5,199 as
of June 30, 2005) and was enjoined to cease these infringements. The
Competition Board's written decision was communicated to Turkcell on June
29, 2003 and Turkcell initiated a lawsuit before Danistay for the
injunction and cancellation of the decision. Danistay dismissed the request
for injunction and Turkcell appealed this decision. General Assembly of
Administrative Courts of Danistay dismissed the request for injunction.
Turkcell has accrued TRY 7 million (equivalent to $5,199 at June 30, 2005)
on its consolidated financial statements as of June 30, 2005.
Dispute on Collection of Frequency Usage Fees
On May 21, 1998, Turkcell entered into a protocol with the Wireless
Communications General Directorate (the "Directorate") regarding the
application of the governing provisions of the Wireless Law No. 2813 to the
administration of its GSM mobile phone network. Under this protocol,
Turkcell is to collect frequency
25
usage fees, which are calculated by the Directorate, from the taxpayers
using mobile phones on behalf of the Directorate, and to pay the levied tax
to the Directorate. In 2001, the Directorate's power, including all of its
rights and obligations, was transferred to the Telecommunications
Authority. On March 22, 2002, as a consequence of the impossibility in fact
and at law of collecting such tax from its prepaid subscribers, Turkcell
applied to the Ankara 17th Judicial Court and obtained an injunction in
respect of the collection of the frequency usage fees. Immediately after
this decision, on March 27, 2002, Turkcell filed a lawsuit against the
Telecommunications Authority requesting cancellation of the protocols
obligating it to collect the frequency usage fees from the prepaid
subscribers and to pay it to the Telecommunications Authority. On July 10,
2002, the court decided in favor of Turkcell. On March 31, 2003, the
appeals court notified Turkcell that it has accepted Telecommunications
Authority's appeal and annulled the decision of the lower court. The lower
court revised its decision in line with the appeals court's decision. On
April 20, 2004, Turkcell paid TRY 145.6 million (equivalent to $108,584 at
June 30, 2005) for the frequency usage fees of 2002 including interest
through that date with reservation. The court rejected Turkcell request and
decided that there should be no further judgement on this issue since the
frequency usage fees of 2002 are paid. Turkcell will appeal this decision.
New Action by Turk Telekom on Basic Unit Price
In a case filed by Turk Telekom against the Turkish Telecommunications
Authority, the Danistay granted an injunction limiting the applicability of
the last paragraph of Article 13 of the License Agreement signed between
the Telecommunications Authority and Turkcell. Article 13 regulates the
base unit price, the minimum price charged by the Turk Telekom to its
subscribers for calls originating on fixed lines and terminating on
Turkcell's network. Pursuant to the injunction by the Danistay, Turk
Telekom informed Turkcell that it will recalculate and make its monthly
payments to Turkcell on an ongoing basis beginning from the January 2003
payment. Turkcell appealed the Danistay's decision with respect to the
injunction received by Turk Telekom. Its appeal was rejected by General
Assembly of Administrative Courts of Danistay. In spite of the injunction
obtained from Danistay, for the period between January - April 2003, Turk
Telekom made respective payments with reservation.
With respect to the settlement agreement signed with the Turk Telekom,
Turkcell has made the necessary applications for termination of respective
court case.
Investigation of the Telecommunications Authority on International Voice
Traffic
In May 2003, Turkcell was informed that the Telecommunications Authority
had initiated an investigation against Turkcell claiming that Turkcell has
violated Turkish laws by carrying some of its international voice traffic
through an operator other than Turk Telekom. Turkcell is disputing whether
Turk Telekom should be the sole carrier of international voice traffic. On
March 5, 2004, the Telecommunications Authority fined Turkcell by
approximately TRY 31.7 million (equivalent to $23,657 at June 30, 2005). On
April 9, 2004, Turkcell made the respective payment. On June 2, 2004,
Turkcell commenced a lawsuit against the decision of the Telecommunications
Authority.
On November 5, 2004, the Danistay issued an injunction to cease the
decisions and actions subject to the lawsuit until the case is finalized,
but rejected Turkcell's request for an injunction to cease application of
related items of Telecommunications Authority's regulation with respect to
execution of administrative fines to operators. Telecommunications
Authority appealed to this decision and the case is sent to General
Assembly of Administrative Courts of Danistay and General Assembly of
Administrative Courts of Danistay rejected Telecommunications Authority's
appeal.
With respect to the Danistay's injunction on January 26, 2005,
Telecommunications Authority paid TRY 18 million (equivalent to $13,420 at
June 30, 2005) back to Turkcell and the remaining balance amounting to TRY
13.7 million (equivalent to $10,237 at June 30, 2005) was deducted from
Turkcell's payables. Telecommunications Authority appealed this decision.
Based on its management and legal counsel's opinion, Turkcell has recorded
income amounting to TRY 31.7 million (equivalent to $23,657 at June 31,
2005) in the consolidated financial statements as of and for the year ended
December 31, 2004.
26
On March 2, 2005, Turk Telekom notified Turkcell that, Turkcell has damaged
Turk Telekom because of the interconnection agreement signed with
Milleni.com. Accordingly, Turk Telekom requested Turkcell to pay TRY 219.1
million (equivalent to $163,385 as of June 30, 2005) of principal and TRY
178.4 million (equivalent to $132,979 as of June 30, 2005) of interest,
which make a sum of TRY 397.5 million (equivalent to $296,365 as of June
30, 2005) until March 7, 2005.
In addition, on August 19, 2005, Turk Telekom applied to the Ankara 7th
Commercial Court of First Instance and filed a lawsuit against Turkcell to
obtain an injunction and to block all deposits and receivables of Turkcell
to collect its damage amounting TRY 450.9 million ($336,190 as of June 30,
2005) including principal and interest because of the interconnection
agreement signed with Milleni.com. Ankara 7th Commercial Court of First
Instance rejected the injunction request of Turk Telekom. Management and
legal counsel believe that such a request has no legal basis. At this point
in the litigation it is premature to estimate its potential outcome, if
any, from Milleni.com interconnection dispute. Accordingly, the Company has
not provided any accruals with respect to this matter in its consolidated
financial statements as of June 30, 2005.
Dispute on Taxation on Investment Tax Credit
On July 14, 2003, the Tax Office claimed that Turkcell should have paid
withholding tax and fund on investment tax credit used for 1999. The notice
stated that, based on calculation made by the Tax Office, Turkcell should
pay TRY 1.8 million (equivalent to $1,339 at June 30, 2005). The Tax Office
also imposed a penalty fee of TRY 4.3 million (equivalent to $3,175 at June
30, 2005). Management decided not to pay such amounts and initiated a
juridical process based on the decision of the general counsel of Danistay
in relation with withholding tax and fund on investment tax credit for
1999. On September 10, 2003, Turkcell initiated a lawsuit in the Tax Court
related with this dispute. On May 12, 2004, the Tax Court decided in favor
of Turkcell. The Tax Office appealed this decision. On June 15, 2005,
Danistay rejected the Tax Office's appeal. The case is still pending.
Management and the legal counsel believe that Turkcell will prevail in this
matter.
Investigation of the Telecommunications Authority on Frequency Fee Payments
On October 23, 2003, the Telecommunications Authority fined Turkcell,
claiming that Turkcell has made inadequate annual frequency usage fee
payments. The Telecommunications Authority requested TRY 16 million
(equivalent to $11,933 as of June 30, 2005) for principal, an interest
charge of TRY 10.8 million (equivalent to $8,023 as of June 30, 2005) and a
penalty of TRY 63.4 million (equivalent to $47,314 as of June 30, 2005).
Management and legal counsel believe that the Telecommunications
Authority's decision is due to a misinterpretation of the applicable
regulations. On February 20, 2004, Turkcell initiated the legal proceedings
for the annulment of the decision. The court rejected Turkcell's request
for injunction for annulment of Telecommunications Authority's decision.
The case was transferred to upper court. Turkcell's request for injunction
was also rejected by the upper court. Turkcell appealed this decision. On
April 16, 2004, Turkcell paid TRY 103.7 million (equivalent to $77,343 as
of June 30, 2005) including interest through that date regarding the
Telecommunication Authority's claim. The Appeal Court rejected the case.
Turkcell appealed this decision.
Dispute on Special Transaction Taxation Regarding Prepaid Card Sales
On September 18, 2003, the Ministry of Finance issued a report stating that
by applying discounts for prepaid card sales for the period between June -
December 2002, Turkcell calculated the special transaction tax on
post-discounted amount. Pursuant to this report, the Tax Office delivered
to Turkcell a notice, asserting deficiencies in special transaction tax
declarations and requesting a special transaction tax payment amounting to
TRY 7 million (equivalent to $5,213 at June 30, 2005) and a tax penalty of
TRY 9.9 million (equivalent to $7,362 at June 30, 2005). On November 20,
2003, Turkcell initiated a lawsuit in the Tax Court related with this
dispute. On May 31, 2004, the Tax Court decided in favor of Turkcell. The
Tax Office has appealed this decision on September 6, 2004. The case is
still pending. Management and legal counsel believe that Turkcell will
prevail in this matter.
27
Disputes on annulment of fixed odd betting tender related to establishment
and operation of risk management center head agency
Reklam Departmani Basin Yayin Proje Yapim Danismanlik ve Ticaret Limited
Sirketi ("Reklam Departmani") commenced a lawsuit against the Spor Toto
Teskilat Mudurlugu in the Ankara Fourth Administrative Court. In the
lawsuit, Reklam Departmany claimed for the annulment of fixed odd betting
tender related to the establishment and operation of risk management center
and acting as head agency. The Company is not a party to the lawsuit but
Inteltek's operations may be affected by the court's decision. Accordingly,
the Company joined the case. On February 21, 2005, Ankara Fourth
Administrative Court rejected the case. Reklam Departmany has appealed the
case. Management and legal counsel believe that the Company will prevail in
this matter. Accordingly, the Company has not provided any accruals with
respect to this matter in its consolidated financial statements as of June
30, 2005.
With respect to the same tender Gtech Avrasya Teknik Hizmet ve Musavirlik
AS ("Gtech") commenced a lawsuit against Public Tender Authority and
Genclik ve Spor Genel Mudurluou in the Ankara Fourth Administrative Court.
The Company is not a party to the lawsuit but Inteltek's operations may be
affected by the court's decision. Accordingly, the Company joined the case.
On February 21, 2005, Ankara Fourth Administrative Court rejected the case.
Gtech has appealed the case. Management and legal counsel believe that the
Company will prevail in this matter. Accordingly, the Company has not
provided any accruals with respect to this matter in its consolidated
financial statements as of June 30, 2005.
Dispute with Spor Toto Teskilat Mudurlugu
On April 15, 2005, Spor Toto Teskilat Mudurlugu, a governmental body,
notified Inteltek that Inteltek is obliged to pay TRY 1.4 million
(equivalent to $1,069 at June 30, 2005) including 5% interest charge, with
the claim of the inadequacy of the system software, failure to spot dealer
sales on a live basis and lack of control mechanisms and cause for the
non-collection of a certain portion of turnover from dealers, Inteltek
management believes that the claim of Spor Toto Teskilat Mudurlugu has no
legal base and collection risks from dealer belongs to Spor Toto Teskilat
Mudurlugu.
Dispute on call termination fee
Telsim has initiated a lawsuit claiming that, Turkcell has not applied the
reference interconnection rates determined by the Telecommunications
Authority, and has charged interconnection fees exceeding the ceiling rates
approved by Telecommunications Authority and requested an injunction to be
applicable starting from August 1, 2005, to cease this practice and
requested a payment of its damages totaling to TRY 26.1 million (equivalent
to $19,465 as of June 30, 2005) including principal, interest and penalty
on late payment. At this point the Court rejected the appeal request of
Telsim.Turkcell is still charging interconnection fees applicable to the
Interconnection Agreement with Telsim which is still effective. As it is
stated in the Interconnection Agreement with Telsim,Telsim referred the
matter to the Telecommunications Authority. The resolution procedure has
not been finalized yet. At this point in the litigation it is premature to
estimate the legal outcome. Based on its management and legal counsel's
opinion, Turkcell has not recorded any accrual with respect to this matter
in its consolidated financial statements as of June 30, 2005.
Invalidity of the Board Resolution
On June 23, 2005, the Board of Directors of Turkcell has decided to allow
Alfa Group to conduct a due diligence in Turkcell and to entitle the
management. On July 1, 2005, Sonera filed a suit with an injunction request
against Turkcell in Beyoglu 2nd Commercial Court of First Instance for the
purpose of determination of the invalidity of the resolution dated June 23,
2005. On July 4, 2005, Beyoglu 2nd Commercial Court of First Instance
rejected Sonera's injunction request. The case is still pending.
(21) Subsequent Events
(a) On August 19, 2005, Sonera announced that they filed lawsuit against
Cukurova Holding in the ICC at Vienna claiming that the shareholder
agreement between Sonera and Cukurova Holding has been violated.
28
(b) On September 2, 2005, the Board of Directors of Turkcell decided to
continue with the Irancell project and approved the ownership structure of
Irancell with a stake of 49% in Irancell for Eastasia. However, it has been
stated that 21% of the shares of Irancell should be transferred to the
National Bank of Iran, Bank Melli, and the parties should agree that these
shares shall be publicly offered in the third year following the initiation
of the Irancell operations and these agreed terms should be reflected into
all agreements between the parties in Irancell. Iranian Telecommunications
Ministry has set November 21, 2005 as the deadline with respect to the
finalization of the shareholder structure of the Consortium.
In the meantime, Eastasia has deposited EUR 172.7 million in Bank Saderat
Plc. located in London as its potential contribution to the GSM network
license fee and a portion of the initial capital, to show its willingness
to invest in Irancell. Turkcell provided a deposit pledge with Garanti
Bankasy in the amount of EUR 91.6 million, and Garanti Bankasy provided a
bank loan to Eastasia for the same amount. The maturity of this loan is set
as November 21, 2005 which is also the proposed deadline for the completion
of the negotiations over the shareholder structure of the Consortium.
Turkcell is continuing to negotiate the terms of its shareholding in
Irancell with the other members of the Consortium. The level of Turkcell's
shareholding in the revised Consortium shareholder structure, including
whether Turkcell will participate at all in Irancell, is uncertain and
subject to continuing negotiation.
Although Irancell has plans for commencing operations in Iran, it has not
commenced operations in Iran and will not do so, if at all, prior to
finalizing the terms of the revised Consortium shareholder structure.
Although Turkcell does not currently conduct any operations in Iran, to the
extent the members of the Consortium finalize the shareholder structure of
Irancell with one another and Irancell commences operations in Iran, such
operations may in the future be material to Turkcell. As with any other
investment, Turkcell's potential investment in Iran through Eastasia and
the Consortium involves risk.
Notwithstanding the foregoing, Turkcell believes the Iranian Ministry of
Communication and Information Technology has not properly implemented the
laws and regulations passed by the Iranian Parliament in connection with
the GSM tender process, which was won by the Consortium. As a result,
Turkcell has brought a claim in Iranian courts seeking to compel the
Ministry to implement the laws and regulations passed by the Iranian
Parliament in connection with the GSM tender process.
(c) With the amendment to the Privatization Law, on July 3, 2005,
definition of the items that should be included in the gross revenue used
in the calculation of the amounts to be paid to the Turkish Treasury has
been amended. According to the amendment, interest charges for late
collections and indirect taxes such as value added taxes, special
transaction tax and stamp duty are excluded from the definition of the
gross revenue. This amendment has been approved by the President of Turkish
Republic and published at Official Gazette on July 21, 2005. This amendment
will come into effect pursuant to the Turkcell's application to the
Telecommunications Authority for the revision of related articles of the
Licence Agreement and the respective approval of Danistay.
(d) Based on the shareholders loan agreement signed on October 3, 2005, the
shareholders of Euroasia committed to arrange an additional $55,600 of
financing to Euroasia in proportion to their respective shareholding in
Euroasia, first as a shareholder loan, then converted to equity through the
shareholders' resolution. The Company provided a deposit pledge in the
amount of $30,605, representing its commitment within the shareholder's
loan agreement, and in return for this pledge HSBC plc. provided a bank
loan to Euroasia for the same amount. All proceeds have been used by
Euroasia to fund its consolidated subsidiary, Astelit. On October 24, 2005,
the Board of Directors of Turkcell, decided to pay TRY 35.0 million to
Turktell Uluslararasy, in the form of capital advance, which shall be used
in the future capital increase of Astelit which is Turktell Uluslararasi's
indirect subsidiary. Additionally, Turktell Uluslararasi, through a board
decision dated October 24, 2005, approved the equity injection into
Euroasia in the amount of $30,605, representing its share and to apply to
and perform all procedures in front of Turkish Treasury and other
authorized bodies. The Euroasia loan will be repaid and converted to equity
injection prior to the end of November 2005. Following the $55,600
additional equity injection, the total equity in Euroasia will be $203,639,
with the Company's shareholding being 54.4%.
29
(e) Within the framework of Cukurova Group`s proposal regarding Turkcell's
purchase of 50% shares of A-Tel owned by Yapy Kredi in return for a
consideration amounting to $150 million, on October 24, 2005, the Board of
Directors of Turkcell decided to purchase 50% of A-Tel shares provided that
such shares' value concluded as per the tax, legal and financial due
diligence review to be conducted in A-Tel and the evaluation to be made by
an audit firm or an investment bank as per such due diligence report is at
least $150 million.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Turkcell Iletisim Hizmetleri A.S. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TURKCELL ILETISIM HIZMETLERI A.S.
Date: October 27, 2005 By: /s/ MUZAFFER AKPINAR
------------------------------------
Name: Muzaffer Akpinar
Title: Chief Executive Officer