FORM 6-K
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 July 29, 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: First quarter MD&A.
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OPERATING AND FINANCIAL REVIEW FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 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 March 31, 2005, and for the related consolidated
statements of operations, changes in shareholders' equity and comprehensive
income and cash flows for the each of three month periods ended March 31, 2004
and 2005 and the related notes included herein. The information as of March 31,
2005 and March 31, 2004 and for each of the three month periods ended March 31,
2004 and 2005 are 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 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. Since June 2004, SIM card sales, outgoing roaming revenues and late
payment interest charge 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 the 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.
As of March 31, 2005, we have made capital expenditures amounting to
approximately $4.6 billion including the cost of our licenses. The build-out of
our network in Turkey is now substantially complete, with coverage at March 31,
2005 of 100% of the Turkish population 10,000 or more people. As of March 31,
2005, our network covers 99.89% of the Turkish population living in cities of
5,000 or more and 99.66% of the Turkish population living in cities of
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3,000 or more. Coverage also includes substantially all of the 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 24.3 million as of March 31, 2005. Based on the
announcements of the Telecommunications Authority, there are approximately 36.8
million subscribers in the Turkish GSM market as of March 31, 2005. The
penetration rate in the Turkish GSM market was approximately 50% for the year
end of 2004 and market is expected to continue to grow. Based on expected
intensifying competition particularly during the second half of 2005, we believe
the market should continue to grow, though at a lower pace and the penetration
rate should reach approximately 65% by the 2007 year end. Based on improving
macro economic indicators such as GNP per capita, stable political environment
and high consumer sentiment, we may see penetration rates in Turkey as high as
some of the European peers. Increasing competition may induce higher than
expected growth and penetration in the longer term. We expect to achieve a
continued growth in our subscriber base in 2005 but at a slower pace compared to
that of 2004.
Our prepaid mobile service increases our market penetration and limits
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. By March 31, 2005, 19.1 million subscribers had commenced usage of the
prepaid service. Average selling and marketing expenses per prepaid subscriber
are generally less than that for postpaid subscribers 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 6% to 59.6 minutes for the three month period ended
March 31, 2005 from 56.4 minutes for the same period in 2004 mainly due to the
favorable effect of the improving macroeconomic environment on consumer
sentiment along with volume and segment based campaigns and mass loyalty
programs. Our average revenue per user decreased 6% to $12.0 for the three month
period ended March 31, 2005 from $12.7 for the same period in 2004. The decrease
was mainly due to price discount initiatives which started especially in the
second half of 2004 (e.g.PSTN=Onnet) and dilutive impact of prepaid subscriber
base despite increasing minutes of usage and tariff raises in May and November
2004. We expect the aggressive price competition to continue in 2005. However,
we expect that the blended minutes of usage will improve slightly in 2005
compared to 2004 due to the positive macroeconomic indicators and consumer
sentiment, our strong customer relations management activities and the
continuing impact of volume based campaigns. However, we expect average revenue
per subscriber to be similar to 2004 in 2005. Improvement in usage, favorable US
dollar / TRY parity and increasing VAS and data revenue are positive factors
while expected decrease in incoming interconnection rates, price discount
initiatives which started especially in the second half of 2004 and dilutive
impact of prepaid subscribers are expected to impact average revenue per
subscriber negatively in 2005. See "Item 5D. Trend Information" in our 20-F.
Churn is calculated as the total number of subscriber disconnections
during a period as the percentage of the average number of subscribers for the
period. Churn refers to subscribers that are disconnected, both voluntary and
involuntary. 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, we
disconnected approximately 123,038 additional subscribers for nonpayment of
bills and our annual churn rate was 9.1%. For the three month period ended March
31, 2005, we disconnected approximately 32,717 additional subscribers for
nonpayment of bills. Our churn rate was 2.5% for the three month period ended
March 31, 2005. We have a bad debt provision in our financial statements for
such non-payments and disconnections which amounted to $133.9 million and $136.8
million as of December 31, 2004 and March 31, 2005, respectively, which we
believe is adequate. Prior to 2003, the majority of subscriber
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disconnections were due to non payment of bills. However, starting from 2003,
the majority of subscriber disconnections were prepaid subscribers'
disconnections as a result of the increased number of our prepaid subscribers in
our subscriber base. We expect the churn rate 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 have invested in Digital Cellular Communications ("DCC"),
which is located in Ukraine and we continue to follow up investing 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.
The operations in Iran have not been able to commence. On April 25,
2005, the Iranian Parliament approved a revised proposal, which suggests
reduction of our stake in Irancell to 49% and included 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 has given their consent. The consent will be approved by the Iranian
President. Our management is assessing the impact of this change to the license
agreement including the reduction of our stake in Irancell which results in a
voting ownership of less than 50% for us and calls into question the expected
control structure of Irancell. This unilateral change by the Iranian Parliament
conflicts with the license agreement's terms and conditions and the agreements
signed between current shareholders of Irancell. Our management believes that
these developments call into question the future of our investment in Iran and
as a consequence of these developments, we are in the process of evaluating the
potential elements of the new structure and extend discussions with local
authorities as well as current and potential partners to ensure appropriate
ownership structure and management controls in the local company.
On May 27, 2005, Kibris Mobile Telekomunikasyon Limited Sirketi
("Kibris Telekom") sold all of its shares in Kibrisonline Limited Sirketi
("Kibrisonline") to Digitech Iletisim Limited ("Digitech") for a consideration
of TRY 25,000 (equivalent to $0.018 million at March 31, 2005)
For a description and additional information regarding our
international and other domestic operations see "Item 4B. Business
Overview--International Operations" and "--Other Domestic Operations" in our
20F.
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 our 20-F. There have been no material changes in our critical accounting
policies since the date of our 20-F.
Revenues
Our revenues are mainly derived from communication fees, monthly fixed
fees, sales of SIM cards, commission fees on betting business 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
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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, if any, 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.
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. We raise tariffs from time to time to offset inflation
and devaluation of the New Turkish Lira ("TRY"). We have taken actions to
increase revenues, including raising tariffs in March and December 2003, May and
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 the implementation of the price 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 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 in case of 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 tariff 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 $0.15 at March
31, 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
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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
international settlement charge. On October 11, 2003, the Telecommunications
Authority resolved that we would charge TRY 0.1788 (equivalent to $0.13 at March
31, 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, 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 business
relationship on interconnection 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 we charge Turk Telekom, Telsim and
AVEA as of March 31, 2005 and June 30, 2005 both in TRY and equivalent US
dollars at March 31, 2005.
March 31, June 30,
2005 2005
-------------- -------------- ------------ --------------
TL USD TL USD
-------------- -------------- ------------ --------------
Turk Telekom 0.1975 0.14 0.2017 0.15
Telsim 0.1922 0.14 0.1953 0.14
AVEA 0.2032 0.15 0.2065 0.15
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 compared to 2004,
mainly derived from increase in subscriber base and appreciation of TRY,
together with the improvement in the macroeconomic indicators and improving
usage despite lower interconnection rates in 2005, dilutive impact of increasing
prepaid subscribers and price discount initiatives which started in the second
half of 2004.
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
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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 March 31, 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 March 31, 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 quarter 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. We 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 the pricing terms, Telsim and we determined the new pricing terms,
which resulted in an amendment in the interconnection agreement. Per the
Telecommunications Authority resolution, we paid TRY 0.1788 (equivalent to $0.13
at March 31, 2005) per minute for calls originating on our network and
terminating on Telsim's network effective from September 23, 2003. On the basis
of the Amended 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 March 31, 2005) per minute for traffic 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 Aria 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
around the globe. The business relationship on interconnection between
Milleni.com and us has been bilaterally terminated as of June 21, 2004. However,
on February 21, 2005, Bilisim Telekom 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.
The following table shows the amounts we pay Turk Telekom, Telsim and
AVEA as of March 31, 2005 and June 30, 2005 both in TRY and equivalent US
dollars at March 31, 2005.
March 31, June 30,
2005 2005
-------------- ------------- ------------ ------------
TL USD TL USD
-------------- ------------- ------------ ------------
Turk Telekom
Local Calls 0.0494 0.04 0.0504 0.04
Non-Local Calls 0.0691 0.05 0.0706 0.05
Telsim 0.1922 0.14 0.1953 0.14
AVEA 0.2657 0.19 0.2700 0.20
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
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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 and $24 per new
subscriber for the three month periods ended March 31, 2004 and 2005,
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 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 may increase in 2005 as a result of an increasingly
competitive environment. Although our selling and marketing expenses may
increase in terms of amount, we plan to keep our selling and marketing expenses
stable as a percentage of our revenue under the foreseeable competition level in
2005.
Results of Operations
The following table shows information concerning our consolidated
statements of operations for the periods indicated.
Three month ended
March 31,
-----------------------------
2004 2005
-----------------------------
Revenues 745.5 898.0
Direct cost of revenues (433.0) (523.5)
------- -------
Gross profit 312.5 374.5
General and administrative expenses (29.3) (35.1)
Selling and marketing expenses (76.0) (103.6)
------- -------
Operating income 207.2 235.8
Income from related parties, net 0.5 0.3
Interest expense, net (40.5) (23.2)
Other income (expense), net (0.5) 1.6
Equity in net income of unconsolidated investees 7.9 13.1
Minority interest 1.0 1.9
Translation loss (20.2) (4.1)
------- -------
Income before taxes 155.4 225.4
Income tax expense (29.2) (97.0)
------- -------
Net income 126.2 128.4
======= =======
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The following table shows certain items in our consolidated statements
of operations as a percentage of revenues.
Three months ended
March 31,
--------------- --------------
2004 2005
--------------- --------------
Statements of Operations (% of revenue)
Revenues
Communication fees 96.8 94.7
Commission fees on betting business - 2.5
Monthly fixed fees 1.6 1.5
SIM card sales 1.1 1.0
Call center revenues 0.3 0.2
Other 0.2 0.1
Total revenues 100.0 100.0
Direct cost of revenues (58.1) (58.3)
Gross margin 41.9 41.7
General and administrative expenses (3.9) (3.9)
Selling and marketing expenses (10.2) (11.5)
Operating income 27.8 26.3
Three month period ended March 31, 2005 compared to three month period
ended March 31, 2004
We had 24.3 million subscribers, including 19.1 million prepaid
subscribers, as of March 31, 2005, compared to 19.7 million subscribers,
including 14.8 million prepaid subscribers, as of March 31, 2004. During the
first quarter of 2005, we added approximately 0.9 million net new subscribers.
Revenues
Total revenues for the three month period ended March 31, 2005
increased 20% to $898.0 million from $745.5 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.
Revenues from communication fees for the three month period ended March
31, 2005 increased 18% to $850.2 million from $721.8 million for the same
period in 2004 mainly due to increased usage, the increase in our subscriber
base and the increase in tariffs. Communication fees include SMS revenue, which
amounted to $103.8 million for the three month period ended March 31, 2005 and
$82.5 million for the same period in 2004.
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 $22.6 million as
of March 31, 2005.
Revenues from monthly fixed fees for the three month period ended March
31, 2005 increased 13% to $13.5 million from $11.9 million for the same period
in 2004 mainly due to the increase in our subscriber base and commencement of
operations in Ukraine.
SIM card revenues for the three month period ended March 31, 2005
increased 5% to $8.7 million from $8.3 million for the same period in 2004.
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Direct cost of revenues
Direct cost of revenues increased 21% to $523.5 million for the three
month period ended March 31, 2005 from $433.0 million for the same period in
2004 mainly due to the increase in revenue-based costs such as the ongoing
license fees paid to the Turkish Treasury.
Ongoing license fees paid to the Turkish Treasury increased 27% to
$174.2 million for the three month period ended March 31, 2005 from $137.5
million for the same period in 2004 due to increase in revenues and change in
the determination of gross revenue in accordance with the settlement agreement.
Interconnection costs increased 29% to $82.1 million for the three month period
ended March 31, 2005 from $63.7 million for the same period in 2004 mainly due
to the increase in revenues from communication fees.
Transmission costs, site costs, information technology and network
maintenance expenses and infrastructure costs decreased approximately 17% to
$29.2 million for the three month period ended March 31, 2005 from $35.3 million
for the same period in 2004 mainly due to the decrease in transmission fees by
Turk Telekom of approximately 23% on June 1, 2004. In addition, uncapitalizable
antenna site costs and expenses increased 44% to $40.0 million for the three
month period ended March 31, 2005 from $27.8 million for the same period in 2004
mainly due to the increase in capital expenditures and consequently increase in
radio network operations.
Roaming expenses increased 35% to $15.8 million for the three month
period ended March 31, 2005 from $11.7 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
climate during the first quarter of 2005 and the fact that we added 61 new
roaming operators for GSM, 81 for GPRS and 30 for Active Customised Applications
for Mobile Network Enhanced Logic ("active CAMEL") technologies since March 31,
2004 to March 31, 2005. Expansion of GPRS roaming coverage via additional GPRS
roaming agreements and active CAMEL, which enables our pre-paid subscribers to
be able to roam at foreign operators' networks, also resulted in higher roaming
expenses.
Billing costs increased 4% to $7.0 million for the three month period
ended March 31, 2005 from $6.7 million for the same period in 2004.
Depreciation and amortization charges increased 4% to $109.1 million
for the three month period ended March 31, 2005 from $104.5 million for the same
period in 2004. The amortization expense for our GSM and other telecommunication
licenses was $6.1 million and $5.0 million for the first three month periods
ended 2005 and 2004, respectively.
The cost of SIM cards sold increased 51% to $12.4 million for the three
month period ended March 31, 2005 from $8.2 million for the same period in 2004
reflecting primarily an increase in the number of SIM cards sold during the
first quarter of 2005.
Wages, salaries and personnel expenses for technical personnel
increased 26% to $30.6 million for the three month period ended March 31, 2005
from $24.3 million for the same period in 2004 mainly due to the increase in the
headcount, the periodic increase in salaries and commencement of operations in
Ukraine.
As a percentage of revenues, direct cost of revenues increased to 58.3%
for the three month period ended March 31, 2005 from 58.1% for the same period
in 2004.
Gross profit increased to $374.5 million for the three month period
ended March 31, 2005 from $312.5 million for the same period in 2004 mainly due
to increase in communication fees and commission fees on betting business.
10
General and administrative expenses
General and administrative expenses increased 20% to $35.1 million for
the three month period ended March 31, 2005 from $29.3 million for the same
period in 2004, mainly due to the increase in wages, salaries and personnel
expenses and bad debt expense despite the one-time fees paid for the Iran GSM
license tender in the first quarter of 2004. As a percentage of revenues,
general and administrative expenses remained stable at 3.9% for both the three
month periods ended March 31, 2005 and 2004.
Wages, salaries and personnel expenses for non-technical and
non-marketing employees increased 41% to $13.0 million for the three month
period ended March 31, 2005 from $9.2 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.
Bad debt expenses increased to $7.5 million for the three month period
ended March 31, 2005 from $7 thousand for the same period in 2004. Since the
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 was
activated in 2004, the positive impact of this new system has decreased the bad
debt expense at the first quarter of 2004. We provided an allowance of $136.8
million and $138.7 million for doubtful receivables for the three month period
ended March 31, 2005 and 2004, respectively, identified based upon past
experience in our consolidated financial statements.
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 Irancell Consortium (the "Consortium") that acquires the
license will pay the consultancy fees of BNP Paribas (which acts as the
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.
Consulting expenses increased 15% to $2.7 million for the three month
period ended March 31, 2005 from $2.3 million for the same period in 2004,
mainly due to the consulting services related with the commencement of
operations in Ukraine.
Selling and marketing expenses
Selling and marketing expenses increased 36% to $103.6 million for the
three month period ended March 31, 2005 from $76.0 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. As
a percentage of revenues, selling and marketing expenses were 12% and 10% for
the three month periods ended March 31, 2005 and 2004, respectively.
Total prepaid advertising, market research, product management, public
relations expenses and prepaid subscribers' frequency usage fee expenses
increased 43% to $54.2 million for the three month period ended March 31, 2005
from $37.9 million for the same period in 2004. The increase in 2005 mainly
stemmed from the increase in prepaid subscribers' frequency usage fees and
advertising expenses. See "Item 8A. Consolidated Statements and Other Financial
Information-Legal Proceedings" in our 20-F.
Total postpaid advertising, market research, product management, public
relations and call center expenses increased 34% to $19.9 million for the three
month period ended March 31, 2005 from $14.9 million for the same period in 2004
mainly due to the increased advertising and customer relations expenses.
Wages, salaries and personnel expenses for selling and marketing
employees increased 29% to $12.0 million for the three month period ended March
31, 2005 from $9.3 million for the same period
11
in 2004 mainly due to the increase in the headcount, periodic increase in
salaries and commencement of operations in Ukraine.
Activation fees increased 74% to $10.6 million for the three month
period ended March 31, 2005 from $6.1 million for the same period in 2004 mainly
due to the increase in the number of activations and the increase in premiums
per activation .
Operating income
Operating income increased 14% to $235.8 million for the three month
period ended March 31, 2005 from $207.2 million for the same period in 2004,
mainly due to the increase in revenues.
Interest expense, net
Interest expense, net decreased 43% to $23.2 million for the three
month period ended March 31, 2005 compared to $40.5 net interest expense, net
for the same period in 2004. The change between periods was mainly due to the
effect of legal provisions. Interest expense related to legal provisions was
$37.7 million for the three month period ended March 31, 2005 compared to $55.1
million for the same period ended March 31, 2004. For detailed information
related to these disputes see "Item 8A Consolidated Statements and Other
Financial Information - Legal Proceedings" in our 20F.
Equity in net income of unconsolidated investees
Our share of the net income of unconsolidated investees was $13.1
million for the three month period ended March 31, 2005 compared to $7.9 million
for the same period in 2004. The increase in net income of unconsolidated
investees is due to an increase in Fintur's net income to $31.7 million for the
three month period ended March 31, 2005 from $19.0 million for the same period
in 2004.
Translation loss
We recorded a translation loss of $4.1 million for the three month
period ended March 31, 2005 compared to $20.2 million for the same period in
2004. Decrease in translation loss experienced for the three months period ended
March 31, 2005 stemmed from the 2% depreciation of TRY against the US dollar for
the three month period ended March 31, 2005 compared to the 6% appreciation of
the TRY against the US dollar for the same period in 2004. As we recorded
significant amount of accruals against legal disputes in our balance sheet and
nearly all of the accruals are in terms of TRY, the devaluation of TRY resulted
in a translation gain.
Income tax expense
Income tax expense for the three month periods ended March 31, 2005 and
2004 was $97.0 million and $29.2 million, respectively. 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 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 Turkey's membership to the European Union. In the
fourth quarter of 2004, the member states of European Union decided that the
membership discussions with Turkey will start on October 3, 2005. 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. We believe that these
developments provide us a better visibility about the near term future. As a
result, as of March 31, 2005, our
12
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
$272.7 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 they are unable to
conclude that the likelihood of realizing these deferred tax assets is more
likely than not. Accordingly, a valuation of approximately $12.2 million is
recorded as of March 31, 2005 (December 31, 2004: $17.2 million) for such
amounts. The valuation allowance at December 31, 2004 and March 31, 2005 has
been allocated between current and non-current deferred tax assets on a pro-data
basis in accordance with the provisions of SFAS No. 109. We believe that it is
more likely than not the net deferred tax asset of approximately $272.7 million
as of March 31, 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.
Net income
Net income increased slightly to $128.4 million for the three month
period ended March 31, 2005 compared to net income of $126.2 million for the
same period in 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 benefit
equals 40% of qualifying expenditures but it is not subject to any withholding
tax). As of March 31, 2005, investment incentive certificates provide for tax
benefits on cumulative purchases of up to approximately $4.4 billion in
qualifying expenditures as defined in the certificates. As of March 31, 2005, we
had unused tax credit carryforwards under the certificates of approximately
$294.7 million ($313.1 million as of December 31, 2004). Such tax credit can be
carried forward indefinitely. The certificates are denominated in TRY. However,
approximately $0.5 billion of qualifying expenditures through March 31, 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
13
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 would be distributed to our
shareholders in the form of 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 February 21, 2005, our board of directors decided to increase the
our statutory paid-in capital ceiling from TRY 1,500.0 million to TRY 2,200.0
million. Our application for the statutory paid-in capital ceiling as TRY
2,200.0 million has been approved by the shareholders of us at the Annual
General Assembly Meeting held on April 29, 2005, the CMB and Ministry of Trade
of Turkey.
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 shares for a cash consideration of $3.1 billion to Sonera Holding BV
("Sonera"). Finalization of the transaction was subject to completion of the
final 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 Annual Shareholders' Meeting on the
issue, Cukurova Group will start to work on options that may not lead to a
change in our control structure and/or Turkcell Holding AS's control structure.
Following Cukurova Holding's announcement, Sonera has filed a request for
arbitration at the International Court of Arbitration of the International
Chamber of Commerce. Sonera has also filed a request for interim measures at a
civil court in Geneva. Sonera demanded the court to prohibit Cukurova Holding to
initiate or continue 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 deal
is subject to due diligence reports and obtaining the necessary permissions from
regulatory authorities. In the same announcement, it was noted that, the funds
will 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 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. Annual inflation rates were 7.9% as of March 31, 2005 and
11.8% 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.
Furthermore, the Central Bank of Turkey announced that it will start inflation
targeting from 2006. With adherence to the IMF program and implementation of
structural reforms, inflation could be decreased further in 2005. In addition to
the IMF Program, the decision by the European Union on December 17, 2004 which
allows Turkey to
14
start negotiations for a full membership starting from October 3, 2005, will
also be a very important factor in the success of 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 December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment". SFAS No. 123 (R) requires that the compensation costs
relating to share -based payment transactions will be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. SFAS No. 123 (R) focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based
payment transactions. SFAS No. 123 (R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans. Public entities (other than those filing as small business issuers) will
be required to apply SFAS No. 123 (R) as of the first annual reporting period
that begins after June 15, 2005. The adoption of SFAS No. 123 (R) is not
expected to have a material effect on our consolidated financial statements.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional
Asset Retirement Obligations an interpretation of SFAS No. 143". FIN 47
clarifies that 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 March 2005, the FASB staff issued FASB Staff Position ("FSP") FIN 46
(R)-5, "Implicit Variable Interests under FIN 46 (R), Consolidation of Variable
Interest Entities". FIN 46 (R)-5 is issued to address whether a reporting
enterprise should consider whether it holds an implicit variable interest in a
variable interest entity ("VIE") or potential VIE when specific conditions
exist. This issue commonly arises in leasing arrangements among related parties,
and in other types of arrangements involving related parties and previously
unrelated parties. For entities to which FIN 46(R) has been applied, the
guidance in FIN 46 (R)-5 shall be applied in the first reporting period
beginning after March 3, 2005 in accordance with the transition provisions of
Interpretation 46(R). Early application is permitted for periods for which
financial statements have not yet been issued. The adoption of FSP FIN 46(R)-5
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.
15
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.
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, for various domestic and international
business investments, for settled payments on legal disputes 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 our consolidated 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. We have extinguished the $300 million note early on
November 10, 2003. During 2003 and 2004, we purchased Cellco Notes with a
nominal value of $65.0 million from the market. Our reacquisition of these bonds
is considered as early extinguishment of debt under the provisions of SFAS No.
140 and reduces outstanding indebtedness. As of March 31, 2005, total net
outstanding Cellco debt amounts to $335 million.
Summary of our consolidated cash flows for the three month periods
ended March 31, 2005 and 2004 are as follows:
(In millions of USD) 2004 2005
----- -----
Net cash provided by operating activities 201.1 295.3
Net cash used in investing activities (66.5) (221.4)
Net cash provided by financing activities 222.0 34.3
----- -----
Net increase in cash and cash equivalents 356.6 108.2
====== =====
The net cash provided by our operating activities for the three month
periods ended March 31, 2005 and 2004 amounted to $295.3 million and $201.1
million, respectively. The increase in 2005 was primarily due to the net effect
of payments with respect to litigations and increase in revenues in 2005.
The net cash used in investing activities for the three month periods
ended March 31, 2005 and 2004 amounted to $221.4 million and $66.5 million,
respectively. Total investments in investees amounted to $209.9 million as of
March 31, 2005 compared to $158.8 million as of March 31, 2004. For the three
month period ended March 31, 2005, we spent approximately $217.2 million for
capital expenditures compared with $53.2 million for the same period ended March
31, 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. In 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 provided by financing activities for the three month
periods ended March 31, 2005 and 2004 amounted to $34.3 million and $222.0
million, respectively. As of March 31, 2005, $859.0 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 central
betting system).
16
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 quarter 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
quarter of 2005, under the vendor financing agreement signed with Ericsson AB
and Ericsson Credit AB, Astelit has utilized additional borrowings of $18.1
million. During the first quarter of 2005, under the vendor financing agreement
signed with Nokia Corporation ("Nokia") and ABN Amro NV, Astelit has utilized an
additional $29.5 million of borrowing. Astelit has also utilized $3.7 million
under the vendor financing agreement signed with Sysdate Pty Ltd ("Sysdate") and
ABN Amro NV during the first quarter 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, our strong cash balance as of March 31,
2005. Additionally, we are currently evaluating local and international markets
for new financing alternatives such as TRY denominated funding in order to
reduce currency mismatch of our balance sheet.
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. Astelit has not encountered any difficulties in attracting short term
loans from local banks for short term financing needs and has utilized $5.0
million during first quarter of 2005 which was fully repaid with the capital
increase proceeds. Additionally, loans amounting to $18.0 million from local
sources were utilized in the second quarter of 2005. All these short term
credits will be refinanced through the proceeds of long term financing.
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.
17
Based on the shareholders agreement signed on January 27, 2004 and
effective from April 2, 2004, we committed to arrange 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 of 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 will 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 to the Guardian Council for their consent. In May
2005, the Guardian Council has given their consent. The consent is expected to
be approved by the Iranian President. We are assessing the impact of this change
to the license agreement including the reduction of our stake in Irancell which
results in a voting ownership of less than 50% for us and calls into question
the expected control structure of Irancell. This unilateral change by the
Iranian Parliament conflicts with the license agreement's terms and conditions
and the agreements signed between current shareholders of Irancell. Our
management believes that these developments call into question the future of our
investment in Iran and as a consequence of these developments, we are in the
process of evaluating the potential elements of the new structure and extend
discussions with local authorities as well as current and potential partners to
ensure appropriate ownership structure and management controls in the local
company.
As a condition of the GSM license bid in Iran, the Consortium was
obliged to provide a payment guarantee to the Iranian Authorities to EUR 300.0
million, for an upfront license fee. The payment guarantee becomes effective
when the license is formally awarded to Irancell. We have guaranteed EUR 210.0
million (equivalent to $272.1 million as of March 31, 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 beyond March 7, 2005 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.
As of March 31, 2005, outstanding amount of the purchase contracts
relating to advertising services was $23.0 million. As of March 31, 2005, we
obtained advertising services amounting to $10.0 million from Asli Gazetecilik
and the amount under the framework agreement signed with Asli Gazetecilik
decreased to $15.0 million. In addition, we routinely enter into operating
leases for property in the normal course of business. At March 31, 2005, there
were no commitments and contingent liabilities in material amounts arising from
such operating leases.
Guarantees given on behalf of Digital Platform are related to loans for
set-top boxes, head-end and uplink imports and working capital financing used
from the respective banks.
18
Contractual Obligations and Commercial Commitments
The following table illustrates our major contractual obligations and
commitments as of March 31, 2005.
(US$ Million) Contractual obligations and commitments due by period
Total Less than 1 year 1-3 years 4-5 years After 5 years
----- ---------------- --------- --------- -------------
Long-Term Borrowings 830.6 677.4 153.2 - -
Settlement Agreements 604.3 520.6 83.7 - -
Finance Lease Obligations 8.2 6.3 1.9 - -
Purchase Obligations 168.7 61.9 106.8 - -
Advertising services 23.0 14.0 9.0 - -
GSM Equipment 144.7 46.9 97.8 - -
Other Equipment 1.0 1.0 - - -
Total Contractual Cash Obligations 1,611.8 1,266.2 345.6 - -
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 accumulated 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 March 31, 2005. With
respect to the interconnection settlement agreement with Turk Telekom, our
outstanding contractual obligation was $586.0 million as of March 31, 2005.
After netting our interconnection receivables from Turk Telekom, our outstanding
payable is $567.2 million of which $83.7 million is classified as long-term
trade payable and $483.5 million is classified as current trade payables in our
consolidated financial statements as of March 31, 2005. On October 13, 2004, we
also settled our infrastructure usage dispute with Turk Telekom through
negotiation. As of March 31, 2005 our outstanding payable is $18.3 related to
the infrastructure settlement. We have paid TRY 56.7 million (equivalent to
$42.2 million at March 31, 2005), TRY 266.5 million (equivalent to $198.6
million at March 31, 2005) and TRY 369.1 million (equivalent to $275.0 million
at March 31, 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 May 31, 2005. For more information related
to these disputes, see "Item 8A. Consolidated Statements and Other Financial
Information--Legal Proceedings" in our 20F.
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 $12.5 million and obtained advertising services amounting to
$10.0 million as of March 31, 2005. Subsequent to March 31, 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
19
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.
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 $162.0 million as of March 31, 2005)
with Nokia and ABN Amro NV and $12.4 million with Sysdate and ABN Amro NV. As of
March 31, 2005, Astelit has utilized $56.5 million, $58.2 million and $6.5
million of these facilities, respectively. As of March 31, 2005, our outstanding
purchase commitments under these facilities were $35.0 million, $104.1 million
and $5.9 million, respectively.
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
March 31, 2005.
Amount of contingent liability expiration per period
Remaining
commitment
USD million Total amount at March,31 Less than 1 1 - 3 4 - 5 Over 5
committed 2005 year years years years
--------- ----- ---- ----- ----- -----
Bank Letters of Guarantee 61.2 61.2 * - - -
Guarantees
Irancell 272.1 272.1 272.1 - - -
Iranian Authorities 272.1 272.1 272.1 - - -
Digital Platform 61.9 19.5 19.5 - - -
BNP - Brussels (Buyer 50.2 14.9 14.9 - - -
Credit)
----------------------------------
BNP - Hungary (Buyer Credit) 11.7 4.6 4.6 - - -
---------------------------------------------------------------------------------------------------------------
* Subsequent to March 31, 2005, $10.2 million of the commitment has been
released. Other than these guarantees, 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 March 31, 2005, we are contingently liable in respect of bank
letters of guarantee obtained from Yapi Kredi and given to the Turkish Treasury
amounting to $10.2 million, and customs authorities, private companies and
other public organizations amounting to $50.1 million. In addition, as of March
31, 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.
Subsequent to March 31, 2005, the bank letter of guarantee given to the
Turkish Treasury in relation to the settlement agreement with the Turkish
Treasury has been released.
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 $272.1 million at March 31, 2005) of this
guarantee
20
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 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.
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.
Guarantees given for Hobim are related to financial leasing agreements
made with the respective lessor.
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 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 has been 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 other 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 Uluslararasy and the other minority
shareholder, respectively. Our effective interest in Euroasia has increased to
54.2%.
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 network through our operating cash flow, our strong cash balance as of March
31, 2005. Besides, 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.
The important factors that may adversely affect our projections are
general economic conditions, change in the competitive environment, developments
in the domestic and international capital markets, increased investments,
changes in telecommunication regulations.
21
General Economic Conditions
With the support of the encouraging outlook of the economy and the
positive consumer sentiment in the market, we expect to maintain our net cash
generation trend to be sustained. Government's efforts to engage in a new
economic program with IMF lasting until 2007, acceptance of Turkey for
membership negotiations with the EU, recovery in the purchasing power in line
with the developments such as sustainable GDP growth, decreasing inflation in
line with government targets, improved distribution of wealth and 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 additional cash need for us.
Loans
In the first quarter of 2005, no borrowing has been obtained versus
year 2004's total new financings of $300 million by Turkcell.
In Ukraine, Astelit signed a mandate letter for a long term financing
arrangement. On April 28, 2005, Astelit provided 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 third quarter of 2005.
We believe that we will be able to fully fund the operations in Turkey
by our cash from operations through the year 2005, which includes the repayment
of approximately $590.2 million in debt principal and interest obligations.
Besides, in order to build GSM network and fund operations in Ukraine, long term
financing arrangements will be sufficient to fully fund Astelit's business plan
through the year 2005 which includes the repayment of approximately $25.8
million in debt principal and interest obligations. Until the financial closing
of the long term financing arrangements, Astelit will use funding resources in
Ukraine as well as bridge facilities from mandated banks. 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 by 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.
22
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 the
existing debt. Any further upgrades from the ratings agencies may allow us to
lower the cost of borrowing for any future indebtedness in the internal and
external debt and capital markets. Conversely, any ratings downgrade may limit
the Company's future access to debt and capital markets and increase the cost of
borrowing.
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 $172.4 million at March 31, 2005), of which one
half TRY 118.2 million (equivalent to $86.2 million as of March 31, 2005) was
distributed in cash and the other half was distributed in the form of bonus
shares in June and July 2004, respectively. Future payment of dividends depend
on our profitability and distribution of dividends in the following years may be
considered depending on our financial performance, changes in the economic
conditions and other developments in the environment.
On April 29, 2005, during the Annual Shareholders' Meeting, our
shareholders have decided to distribute all of its 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 will be in the form of 50% cash and 50% bonus shares. The net
distributable income, after deducting legal reserves, amounts to TRY 500.3
million (equivalent to $365.0 million at March 31, 2005). Accordingly, the
dividend will be distributed as follows:
Amount per
share Total USD equivalent
(TRY in full) (TRY Million) March 31, 2005
------------ ------------ --------------
Dividend in cash 0.000134848 250.1 $ 182.5
Dividend in bonus shares - 234.1 170.8
Accordingly, the rate of the bonus share certificate to be issued for
each share having a nominal value of TRY 0.001 is declared as 0.0204997881%. The
cash dividend payment to the shareholders has commenced on May 17, 2005 and
bonus share certificates has commenced on May 31, 2005.
23
New Technology Investments and Partnership Opportunities
Cash flow from the operations provides us with the sufficient means to
implement its 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 license fee. The GSM license agreement has been
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, will be effective
upon the approval of the Iranian Parliament. On April 25, 2005, the Iranian
Parliament approved a revised proposal, which suggests reduction of our stake in
Irancell to 49%, and submitted to the Guardian Council for their consent. In May
2005, the Guardian Council has given their consent. The consent will be approved
by the Iranian President.
We are assessing the impact of this change to the license agreement
including the reduction of our stake in Irancell which results in a voting
ownership of less than 50% for us and calls into question the expected control
structure of Irancell. This unilateral change by the Iranian Parliament
conflicts with the license agreement's terms and conditions and the agreements
signed between current shareholders of Irancell. Our management believes that
these developments call into question the future of our investment in Iran and
as a consequence of these developments, we are in the process of evaluating the
potential elements of the new structure and extend discussions with local
authorities as well as current and potential partners to ensure appropriate
ownership structure and management controls in the local company.
We have guaranteed EUR 210 million (equivalent to $272.1 million at
March 31, 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.
24
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 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 $856.1 million,
representing almost all of total indebtedness at March 31, 2005.
The fair value of indebtedness as of March 31, 2005 has not changed
significantly compared to March 31, 2004 except our loan under the 1999 Issuer
Credit Agreement. The fair value of indebtedness as of March 31, 2005 is $343.4
million with carrying amount of $335 million. The fair value of our indebtedness
at March 31, 2004 was $442.5 million with carrying amount of $400 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 $193.0 million notional of structured forward transactions to buy
US dollar against TRY. As of July 15, 2005, we have bought $131.0 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 July 15, 2005. As of July 15, 2005, we have
$100.0 million notional of structured forwards and $15.0 million outright
forwards to buy US dollar outstanding.
In 2005, we have also entered into SEK and EUR forward transactions. We
have EUR 2.0 million notional of structured 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.
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 a
10% depreciation, from a spot rate of 1.3348 on July 31, 2005, our total
structured US dollar call forward transaction size would fall to a total of
$39.0 million with a total gain effect of $4.4 million. In the case of a 10%
appreciation our total structured US dollar call forward transaction size would
rise to $204.0 million with a total loss effect of $26.6 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.
25
Legal Proceedings
We are involved in various claims, which are described in "Item 8A.
Consolidated Statements and Other Financial Information - Legal" in our 20-F.
There are no material changes in our legal and arbitration proceedings
since the date of our 20-F.
Other Matters
On April 25, 2005, the Iranian Parliament approved a revised proposal,
which suggests reduction of our stake in Irancell to 49%, and submitted to the
Guardian Council for their consent. In May 2005, the Guardian Council has given
their consent. The consent will be approved by the Iran President. Our
management is assessing the impact of this change to the license agreement
including the reduction of our stake in Irancell which results in a voting
ownership of less than 50% for us and calls into question the expected control
structure of Irancell. This unilateral change by the Iranian Parliament
conflicts with the license agreement's terms and conditions and the agreements
signed between current shareholders of Irancell. Our management believes that
these developments call into question the future of our investment in Iran and
as a consequence of these developments, we are in the process of evaluating the
potential elements of the new structure and extend discussions with local
authorities as well as current and potential partners to ensure appropriate
ownership structure and management controls in the local company.
On June 13, 2005, the Cukurova Group announced that Cukurova Group and
Alfa Telecom Turkey Limited ("Alfa Turkey") agreed on a $3.3 billion financial
package to sell shares of Turkcell Holding. The financial package consists of
approximately $1.7 billion six-year duration loan while the remaining $1.6
billion will be a six year convertible bond. The bonds can be converted into
Turkcell Holding AS shares in 18 months, which may lead to a 13.2% indirect
ownership of Alfa Turkey in us. Finalization of the deal is subject to due
diligence process and obtaining the necessary permissions from regulatory
authorities. In the same announcement, it was noted that, the funds will be
primarily used by Cukurova Group to retire its debt to the SDIF and finance
Cukurova Group's option regarding the acquisition of us and Turkcell Holding AS
shares owned by Yapi Kredi.
On April 15, 2005, Spor Toto Teskilat Mudurlugu, a governmental body
notified Inteltek that they are obliged to pay TRY 1.4 million (equivalent to
$1.0 million at March 31, 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.
On May 27, 2005, Kibris Telekom sold all of its shares in Kibrisonline
to Digitech Iletisim Limited ("Digitech") for a consideration of TRY 25,000
(equivalent to $18.2 thousand at March 31, 2005).
In connection with the redenomination of the Turkish Lira and the
change of the nominal value of the our ordinary shares, our ADR ratio was
changed from the existing ratio of one ADR to two thousand five hundred
ordinary shares to a new ratio of two ADRs to five ordinary shares. One
ordinary share is equal to one thousand existing ordinary shares with a nominal
value of TL 1,000 until such time as the existing ordinary shares are replaced
by new ordinary shares with a nominal value of TRY one, at which time one
ordinary share will be equal to one new ordinary share.
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
26
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
our application to the Telecommunications Authority for the revision of related
articles of the Licence Agreement and the respective approval of Danistay.
27
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2004 AND MARCH 31, 2005 (Unaudited)
(In thousands, except share data)
December 31, March 31,
2004 2005
-------------------- ------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 763,821 871,959
Held to maturity securities 45,329 48,824
Trade receivables and accrued income, net (Note 5) 271,792 229,657
Due from related parties (Note 6) 103,948 65,215
Inventories 13,007 9,879
Prepaid expenses 23,685 31,870
Other current assets, includes $110,166 and $25,500 of restricted cash
as of December 31, 2004 and March 31, 2005, respectively (Note 7) 325,741 98,711
Deferred tax assets (Note 17) 277,589 277,168
-------------------- ------------------
Total current assets 1,824,912 1,633,283
DUE FROM RELATED PARTIES (Note 8) 65,971 65,154
PREPAID EXPENSES 6,482 8,794
INVESTMENTS (Note 9) 197,760 209,904
HELD TO MATURITY SECURITIES 10,266 11,037
FIXED ASSETS, net (Note 10) 1,061,268 1,074,619
CONSTRUCTION IN PROGRESS (Note 11) 230,191 315,970
INTANGIBLES, net (Note 12) 881,511 891,192
GOODWILL (Note 12) 1,349 1,349
OTHER LONG TERM ASSETS 1,624 1,883
DEFERRED TAX ASSETS (Note 17) 80,163 7,376
-------------------- ------------------
$ 4,361,497 4,220,561
==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings (Note 13) $ 549,079 705,767
Trade payables (Note 14) 616,816 568,395
Due to related parties (Note 15) 6,711 6,390
Taxes payable (Note 17) 99,939 97,904
Provision for income taxes (Note 17) - 28,039
Other current liabilities and accrued expenses (Note 16) 523,475 357,969
-------------------- ------------------
Total current liabilities 1,796,020 1,764,464
LONG TERM BORROWINGS (Note 18) 266,447 153,208
TRADE PAYABLES (Note 14) 213,740 83,718
LONG TERM LEASE OBLIGATIONS 3,284 1,898
RETIREMENT PAY LIABILITY 12,875 14,310
DEFERRED TAX LIABILITIES (Note 17) 11,757 11,890
MINORITY INTEREST 64,044 63,252
OTHER LONG TERM LIABILITIES 7,813 8,851
SHAREHOLDERS' EQUITY
Common stock
Par value 0.001 TRY; authorized, issued and outstanding
1,854,887,341,000 shares in 2003 and 2004 (Note 19) 636,116 636,116
Additional paid in capital 178 178
Legal reserves 42,501 42,501
Accumulated other comprehensive income (Note 3) 2,244 7,290
Retained earnings 1,304,478 1,432,885
-------------------- ------------------
Total shareholders' equity 1,985,517 2,118,970
-------------------- ------------------
COMMITMENTS AND CONTINGENCIES (Note 20)
$ 4,361,497 4,220,561
==================== ==================
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 PERIODS ENDED MARCH 31, 2004 AND 2005 (Unaudited)
(In thousands, except share data)
March 31, March 31,
2004 2005
-------------------- -------------------
(Unaudited) (Unaudited)
Revenues $ 745,548 897,970
Direct cost of revenues (433,007) (523,504)
--------------------- -------------------
Gross profit 312,541 374,466
General and administrative expenses (29,305) (35,116)
Selling and marketing expenses (76,007) (103,578)
--------------------- -------------------
Operating income 207,229 235,772
Income from related parties, net 464 306
Interest income 36,841 36,202
Interest expense (77,373) (59,447)
Other (expense) income, net (487) 1,527
Equity in net income of unconsolidated investees (Note 9) 7,886 13,145
Minority interest in income of consolidated subsidiaries 1,027 1,922
Translation loss (20,247) (4,058)
-------------------- -------------------
Income before taxes 155,340 225,369
Income tax expense (Note 17) (29,173) (96,962)
--------------------- -------------------
Net income 126,167 128,407
$
===================== ===================
Basic and diluted earnings per common share (Note 19) 0.000068 0.000069
======== ========
Weighted average number of common shares outstanding (Note 19) 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 THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2005 (Unaudited)
(In thousands)
March 31, March 31,
2004 2005
------------------- ------------------
(Unaudited) (Unaudited)
Operating Activities:
Net income $ 126,167 128,407
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 104,514 109,136
Provision for retirement pay liability 1,139 1,435
Provision for inventories (685) (83)
Provision for doubtful receivables 2,771 2,874
Accrued income (9,088) 55,297
Accrued expense 94,913 (193,065)
Equity in net income of unconsolidated investees (7,886) (13,145)
Translation adjustment - 6,047
Minority interest in income of consolidated subsidiaries (29) (792)
Provision for income taxes - 28,039
Deferred taxes (4,915) 73,341
Changes in assets and liabilities:
Trade receivables (5,616) 23,866
Due from related parties 5,142 39,550
Inventories 3,705 3,211
Prepaid expenses (83,265) (10,497)
Other current assets (77,037) 186,244
Taxes payable 53,187 (2,035)
Other long term assets 40 (349)
Due to related parties (634) (321)
Trade payables 6,842 (178,443)
Other current liabilities (9,351) 35,519
Other long term liabilities 1,166 1,038
------------------- ------------------
Net cash provided by operating activities 201,080 295,274
Investing Activities:
Additions to fixed assets (42,278) (174,252)
Additions to intangibles (10,922) (42,907)
Investments in held to maturity securities - (4,266)
Investments in investees (13,336) -
------------------ ------------------
Net cash used for investing activities (66,536) (221,425)
Financing Activities:
Proceeds from issuance of long and short term debt 228,178 80,454
Payment on long and short term debt (1,506) (37,005)
Net (increase) decrease in debt issuance expenses (362) 974
Payment on lease obligations (3,156) (10,134)
Decrease in lease obligations (1,106) -
------------------- ------------------
Net cash provided by financing activities 222,048 34,289
------------------- ------------------
Net increase in cash and cash equivalents 356,592 108,138
Cash and cash equivalents at the beginning of period 582,680 763,821
------------------- ------------------
Cash and cash equivalents at the end of period $ 939,272 871,959
=================== ==================
Supplemental cash flow information:
Interest paid $ 25,541 34,299
Income taxes paid - -
Non-cash investing activities
Lease obligations (1,106) (9,346)
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 THREE MONTH PERIOD ENDED MARCH 31, 2005 (Unaudited)
(In thousands, except share data)
Common stock Additional Legal Comprehensive
paid in
Shares Amount capital reserves income
------------------ ------------- -------------- ------------- -----------------
Balances at December 31, 2004 1,854,887,341,000 $ 636,116 178 42,501
Comprehensive income:
Net income 128,407
Other comprehensive income:
Translation adjustment 5,046
-----------------
Comprehensive income 133,453
=================
------------------ ------------- -------------- -------------
Balances at March 31, 2005 1,854,887,341,000 $ 636,116 178 42,501
================== ============= ============== =============
Accumulated
other Total
Retained comprehensive shareholders'
earnings income equity
----------- ---------------- ---------------
1,304,478 2,244 1,985,517
128,407 128,407
5,046 5,046
----------- ---------------- ---------------
1,432,885 7,290 2,118,970
=========== ================ ===============
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 March 31, 2005 (Unaudited) and for the Three Month
Periods Ended March 31, 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.
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.
Two significant founding shareholders, the Cukurova Group and
TeliaSonera, own approximately 40.3% and 37.1% as of July 29, 2005,
respectively, of the Company's share capital, and are ultimate
counterparties to a number of transactions.
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 Kibris Mobile Telekomunikasyon Limited
Sirketi ("Kibris 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 March 31, 2005.
Turkcell and Ericsson Telekomunikasyon AS ("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 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
6
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 will 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 these amendments to the Guardian Council for their consent.
In May 2005, the Guardian Council has given their consent. The consent
will have to be approved by the Iranian President.
The Company management is assessing the impact of this change to the
license agreement including the reduction of Turkcell's stake in
Irancell, which results in a voting ownership of less than 50% for
Turkcell and calls into question the expected control structure of
Irancell. This unilateral change by the Iranian Parliament conflicts
with the license agreement's terms and conditions and the agreements
signed between current shareholders of Irancell. Turkcell management
believes that these developments call into question the future of the
Company's investment in Iran and as a consequence of these developments,
the Company is in the process of evaluating the potential elements of
the new structure and extend discussions with local authorities as well
as current and potential partners to ensure appropriate ownership
structure and management controls in the local company.
In addition, as of March 31, 2005, the Company was involved in various
activities, including call centers and database management, directory
assistance, advertising, operating a central betting system, Wireless
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 March 31, 2005 and for the three month
periods ended March 31, 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 accruals 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.
7
(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 charged to shareholders' equity for the period. Comprehensive
income for the three month periods ended March 31, 2004 and 2005 was
$127,286 and $133,453, respectively.
(4) New Accounting Standards Issued
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment". SFAS No. 123 (R) requires that the compensation
costs relating to share -based payment transactions will be recognized
in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS No. 123 (R)
focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No.
123 (R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans.
Public entities (other than those filing as small business issuers)
will be required to apply SFAS No. 123 (R) as of the first annual
reporting period that begins after June 15, 2005. The adoption of SFAS
No. 123 (R) is not expected to have a material effect on the Company's
consolidated financial statements.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations an interpretation of SFAS No. 143". FIN 47
clarifies that 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 March 2005, the FASB staff issued FASB Staff Position ("FSP") FIN 46
(R)-5, "Implicit Variable Interests under FIN 46 (R), Consolidation of
Variable Interest Entities". FIN 46 (R)-5 is issued to address whether a
reporting enterprise should consider whether it holds an implicit
variable interest in a variable interest entity ("VIE") or potential VIE
when specific conditions exist. This issue commonly arises in leasing
arrangements among related parties, and in other types of arrangements
involving related parties and previously unrelated parties. For entities
to which FIN 46(R) has been applied, the guidance in FIN 46 (R)-5 shall
be applied in the first reporting period beginning after March 3, 2005
in accordance with the transition provisions of Interpretation 46(R).
Early application is permitted for periods for which financial
statements have not yet been issued. The adoption of FSP FIN 46(R)-5 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 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
8
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 March 31, 2005, the breakdown of trade
receivables and accrued income is as follows:
December 31, March 31,
2004 2005
--------------------- ----------------
(Unaudited)
Receivables from subscribers $ 258,560 255,408
Accounts and checks receivable 77,027 56,314
--------------------- ----------------
335,587 311,722
Accrued service income 70,120 54,725
Allowance for doubtful receivables (133,915) (136,790)
--------------------- ----------------
$ 271,792 229,657
===================== ================
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, March 31,
2004 2005
------------------------ ----------------
(Unaudited)
Beginning balance $ 135,920 133,915
Provision for doubtful receivables 14,572 7,527
Write offs (22,890) (1,361)
Effect of change in exchange rate 6,313 (3,291)
------------- --------------
Ending balance $ 133,915 136,790
============= ==============
9
(6) Due from Related Parties
As of December 31, 2004 and March 31, 2005, the balance comprised:
December 31, March 31,
2004 2005
---------------------- ----------------
(Unaudited)
KVK Teknoloji Urunleri AS ("KVK Teknoloji") $ 37,019 37,712
Digital Platform Iletisim Hizmetleri AS ("Digital Platform") 8,995 11,088
A-Tel Pazarlama ve Servis Hizmetleri AS ("A-Tel") 24,549 8,684
Parman Ertabat 20,982 -
Other 12,403 7,731
------- ------
$ 103,948 65,215
======= ======
Substantially all of the significant receivables from related parties
are from Cukurova Group.
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)
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 Ertabat, 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 Ertabat. This receivable has been collected in March 2005.
(7) Other Current Assets
At December 31, 2004 and March 31, 2005, the balance comprised:
December 31, March 31,
2004 2005
---------------------- ----------------
(Unaudited)
Restricted cash $ 110,166 25,500
Value added tax ("VAT") receivable 149,777 21,568
Advances to suppliers 3,381 12,136
Prepaid taxes 273 7,774
Forward transactions income accruals 116 7,314
Expenses to be invoiced for Iran GSM tender 6,578 6,194
Promotional material 2,932 2,466
Deferred financing costs 3,204 2,320
Telecommunications Authority income accrual (Note 20) 39,903 -
Other 9,411 13,439
------- ------
$ 325,741 98,711
======= ======
10
Based on the shareholders loan agreement signed on January 6, 2005, the
shareholders of Euroasia committed to arrange $50,000 of financing to
Euroasia in proportion to their respective shareholding in Euroasia. 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 $25,500 with a back-to-back loan. On April 8,
2005, the restricted cash has been released and the capital of Euroasia
has been increased with an amount being equal to the aggregate of the
loan amount.
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.
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
$1,420,237 at March 31, 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.
(8) Due from Related Parties - Long Term
December 31, March 31,
2004 2005
--------------------- ----------------
(Unaudited)
Digital Platform $ 64,199 64,137
Other 1,772 1,017
-- ----- -- -----
$ 65,971 65,154
====== ======
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 $8,832 as of
March 31, 2005 (December 31, 2004: $9,520). 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 $19,536 (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 March 31, 2005, investments in associated
companies were as follows:
December 31, March 31,
2004 2005
------------------- -------------------
(Unaudited)
Fintur $ 175,141 187,285
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
------- -------
$ 197,760 209,904
======= =======
At December 31, 2004 and March 31, 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 a 8.23%
interest in Basin Yatirim, media companies owned by the Cukurova Group.
Investments in these companies are accounted for under cost method.
11
Aggregate summarized information of Fintur as of December 31, 2004 and March 31,
2005 and for the three month periods ended March 31, 2004 and 2005 are as
follows:
December 31, March 31,
2004 2005
------------------- -------------------
(Unaudited)
Current assets $ 146,258 164,832
Non-current assets 652,447 672,897
------- -------
$ 798,705 837,729
======= =======
December 31, March 31,
2004 2005
------------------- -------------------
(Unaudited)
Current liabilities $ 237,064 218,862
Non-current liabilities 256,029 283,958
Shareholders' equity 305,612 334,909
------- -------
$ 798,705 837,729
======= =======
3 month ended 3 month ended
March 31, March 31,
2004 2005
------------------- -------------------
(Unaudited) (Unaudited)
Revenues $ 108,649 167,116
Direct cost of revenues (46,656) (71,830)
Income before tax 25,879 39,462
Net income 19,026 31,713
12
(10) Fixed Assets, net
As of December 31, 2004 and March 31, 2005, the analysis of fixed assets
is as follows:
Useful December 31, March 31,
Lives 2004 2005
---------------- ------------------- -------------------
(Unaudited)
Operational fixed assets:
Base terminal stations 8 years $ 1,014,085 1,061,566
Mobile switching center/Base station controller 8 years 869,981 887,581
Minilinks 8 years 219,739 230,603
Supplementary system 8 years 37,440 37,615
GSM services equipment 8 years 91,575 92,485
Betting equipment 7 -8 years 14,458 14,154
Call center equipment 5 years 12,110 12,127
Other operational fixed assets 5 years - 1,319
----------- -----------
2,259,388 2,337,450
Accumulated depreciation (1,361,927) (1,429,769)
----------- -----------
Operational fixed assets, net 897,461 907,681
Non-operational fixed assets:
Land 899 962
Buildings 25 years 179,226 179,638
Furniture, fixture and equipment 4-5 years 165,301 174,826
Motor vehicles 4-5 years 8,710 9,087
Leasehold improvements 3-5 years 52,448 52,533
------ ------
406,584 417,046
Accumulated depreciation (242,777) (250,108)
--------- ---------
Non-operational fixed assets, net 163,807 166,938
------- -------
$ 1,061,268 1,074,619
========= =========
At December 31, 2004 and March 31, 2005, total fixed assets acquired
under finance leases amounted to $81,497 and $82,500, respectively.
Depreciation of these assets amounted to $974 and $1,127 for the three
month periods ended March 31, 2004 and 2005, respectively, and is
included in depreciation expense.
Depreciation expenses for the three month periods ended March 31, 2004
and 2005 are $75,633 and $75,859, respectively.
13
(11) Construction in Progress
At December 31, 2004 and March 31, 2005, construction in progress
consisted of expenditures in GSM and non-operational items and is as
follows:
December 31, March 31,
2004 2005
--------------------- -------------------
(Unaudited)
Turkcell-GSM network $ 138,303 228,769
Astelit-GSM network 67,077 70,392
Non-operational items 9,239 9,274
Turkcell-Other projects 6,915 6,978
Kibris Telekom-GSM network 451 557
Other 8,206 -
--------- -----------
$ 230,191 315,970
========= ==========
(12) Intangibles, net
As of December 31, 2004 and March 31, 2005, intangibles consisted of the
following:
Useful December 31, March 31,
Lives 2004 2005
---------------- --------------------- -------------------
(Unaudited)
GSM and other telecommunications licenses 4-25 years $ 572,181 572,502
Computer software 3-8 years 860,253 902,520
Transmission lines 10 years 19,531 19,656
Central betting system operating right 4-5 years 2,641 2,642
Customer base 2 years 1,132 1,138
--------- ---------
1,455,738 1,498,458
Accumulated amortization (574,227) (607,266)
--------- ---------
$ 881,511 891,192
========= =========
As of March 31, 2005, amortized intangible assets are as follows:
Gross carrying Accumulated
Amount Amortization
------------------- -------------------
GSM and other telecommunications licenses $ 572,502 140,033
Computer software 902,520 456,773
Transmission lines 19,656 9,316
Central betting system operating rights 2,642 639
Customer base 1,138 505
--------- -------
$ 1,498,458 607,266
========= =======
14
(13) Short Term Borrowings
At December 31, 2004 and March 31, 2005, short-term borrowings comprised
the following:
December 31, March 31,
2004 2005
-------------------- --------------
(Unaudited)
Current portion of long term borrowings (Note 18) $ 548,356 677,427
Other short term bank loans and overdrafts 723 28,340
------- -------
$ 549,079 705,767
======= =======
(14) Trade Payables
At March 31, 2005, the balance mainly consists of the payable to Turk
Telekom regarding to the settlements with respect to the disputes on
Turk Telekom interconnection fee and Turk Telekom infrastructure usage
amounting to $483,486 (December 31, 2004: $490,256) and $18,268
(December 31, 2004: $32,649), respectively. At March 31, 2005, $567,204
(December 31, 2004: $703,996) of total payables due to the dispute on
Turk Telekom interconnection fee amounting to $83,718 (December 31,
2004: $213,740) is classified as "long 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 to $17,601 (December 31, 2004:
$15,138) resulting from fixed asset purchases, site preparation and
other services, and amounts due to other suppliers totalling to $49,040
(December 31, 2004: $78,773) arising in the ordinary course of business.
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 March 31, 2005, due to related parties
comprised:
December 31, March 31,
2004 2005
------------------ --------------
(Unaudited)
Hobim Bilgi Islem Hizmetleri AS ("Hobim") $ 1,908 1,806
Milleni.com GmbH ("Milleni.com") - 1,270
Turkiye Genel Sigorta AS ("Genel Sigorta") 62 977
Turkiye Genel Yasam Sigorta AS ("Genel Yasam Sigorta") - 458
Baytur Insaat Taahhut A.S ("Baytur") 2,629 -
Yapi Kredi Sigorta AS ("Yapi Kredi Sigorta") 555 -
Other 1,557 1,879
----- -----
$ 6,711 6,390
===== =====
Substantially all of the significant due to balances are related to
Cukurova Group.
Due 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.
Due to Milleni.com resulted from international call termination
services.
15
Due to Genel Sigorta, Genel Ya(0)am Sigorta and Yapi Kredi Sigorta,
companies whose majority shares are owned by some of the shareholders of
the Company, resulted from health and life insurance premiums of the
Company's personnel.
(16) Other Current Liabilities and Accrued Expenses At December 31, 2004 and
March 31, 2005, the balance comprised:
December 31, March 31,
2004 2005
------------------------ ----------------
(Unaudited)
Deferred income $ 111,718 109,304
Taxes and withholdings 26,246 80,711
Selling and marketing expense accruals 26,941 47,575
License fee accrual--the Turkish Treasury 246,857 35,724
Accrued interest on borrowings 25,043 15,171
Transmission fee accrual 10,037 14,827
Telecommunications Authority share accrual 11,242 13,674
Roaming expense accrual 5,908 8,468
Lease obligations--short term portion 13,797 5,837
Personnel bonus accrual 15,752 3,897
Other expense accruals 29,934 22,781
------ ------
$ 523,475 357,969
======= =======
At 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 expense is attributable to income from continuing
operations and consists of:
3 Months Ended
March 31,
2004 2005
-------------------- --------------------
(Unaudited)
Current tax expense $ - (28,083)
Deferred tax expense (29,173) (68,879)
-------- --------
Income tax expense $ (29,173) (96,962)
======== ========
Income tax expense attributable to income from continuing operations was $29,173
and $96,962 for the three month periods ended March 31, 2004 and 2005,
respectively. 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 Months Ended
March 31,
2004 2005
-------------------- --------------
16
(Unaudited)
Computed "expected" tax expense $ (51,494) (68,112)
Non taxable translation gain (33,047) (22,368)
Investment tax credit 5,828 1,868
Change in valuation allowance (1,592) 5,027
Non-taxable items 48,755 -
Other 2,377 (13,377)
-------- --------
Income tax expense $ (29,173) (96,962)
======== --------
For the three month periods ended March 31, 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 March 31, 2005 are presented below:
December 31, March 31,
2004 2005
------------------ --------------------
(Unaudited)
Deferred tax assets:
Accrued expenses $ 334,288 283,163
Accounts and other receivables (principally due
to allowance for doubtful accounts) and other 20,562 19,100
Net operating loss carry forwards 21,086 16,906
Tax credit carry forwards (Investment tax credit) 313,120 294,658
------- -------
Gross deferred tax assets 689,056 613,827
Less: Valuation allowances (17,177) (12,150)
-------- --------
Deferred tax assets 671,879 601,677
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) (329,023)
--------- ---------
Total deferred tax liabilities (325,884) (329,023)
--------- ---------
Net deferred tax assets $ 345,995 272,654
========= =========
17
At March 31, 2005, net operating loss carry forwards are as follows:
Expiration
Year Amount Date
-------------------
2000 $ 3,517 2005
2001 6,863 2006
2002 2,004 2007
2003 9,459 2008
2004 34,614 2009
2005 5,323 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 March
31, 2005, investment incentive certificates provide for tax benefits on
cumulative purchases of up to approximately $4,387,449 (December 31,
2004: $4,459,855) in qualifying expenditures, as defined in the
certificates. As of March 31, 2005, the Company had unused tax credit
carryforwards under the certificates of approximately $294,658 (December
31, 2004: $313,120), which can be carried forward indefinitely. The
certificates are denominated in TRY. However, approximately $465,479 of
qualifying expenditures through March 31, 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. In the fourth quarter of 2004, the
member states of European Union decided that the membership discussions
with Turkey will start on October 3, 2005. 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 March 31, 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 $272,654 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 $12,150 is recorded as of March 31, 2005 (December 31,
2004: $17,177) for such amounts. The valuation allowance at December 31,
2004 and March 31, 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
18
$272,654 as of March 31, 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
March 31, 2005 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. 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 March 31, 2005, long-term borrowings comprised:
Interest Contractual December 31, March 31,
rate (%) maturity 2004 2005
------------------- ----------------- -------------- ----------------
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
Murabaha syndicated facility Libor + 4.50% June 2006 100,000 94,375
Akbank TAS ("Akbank") - 2 Libor + 3.50% February 2007 100,000 66,500
Akbank - 1 Libor + 5.25% June 2005 62,500 62,500
Ericsson Credit AB Libor + 5.00% January 2006 37,170 55,264
ABN Amro NV-1 Euribor + 2.80% December 2005 26,712 54,881
Garanti Bankasi - 1 Libor + 5.62% April 2006 50,000 50,000
ABN Amro NV-2 Libor + 3.00% May 2006 3,372 7,064
Other 49 5,051
--------- --------
814,803 830,635
Less: Current portion of long term borrowings (Note 13) (548,356) (677,427)
--------- ---------
$ 266,447 153,208
========= =========
For the purpose of establishing a GSM network in Ukraine, Astelit signed
a $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.
Additionally, Astelit signed an Euro 125,000 (equivalent to $161,950 at
March 31, 2005) vendor financing agreement with Nokia Corporation
("Nokia") and ABN Amro NV on July 12, 2004, under which, Nokia
19
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
abovementioned 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 this vendor financing agreement, change its
business from telecommunications or invest in other businesses, sale
certain fixed assets, merge with other companies except DCC, declare or
pay dividends, and repurchase or repay any of its share capital.
As of March 31, 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 March 31, 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.
On February 21, 2005, the board of directors decided to increase the
statutory capital ceiling of Turkcell from TRY 1,500.0 million to TRY
2,200.0 million. Turkcell's application for the statutory capital
ceiling as TRY 2,200.0 million has been approved by the shareholders of
Turkcell at the Annual General Assembly Meeting held on April 29, 2005
and by the Capital Markets Board of Turkey and Ministry of Trade of
Turkey.
The following table sets forth the computation of basic and diluted
earnings per share:
3 Months Ended
March 31,
2004 2005
--------------------- -----------------------
(Unaudited)
Numerator:
Net income $ 126,167 128,407
Denominator:
Basic and diluted weighted average shares 1,854,887,341,000 1,854,887,341,000
Basic and diluted net income per share $ 0.000068 0.000069
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 issued new shares with a total
nominal value of TRY 380,247,980.
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.
20
The total effects of restatements in number of shares are as follows:
December 31, March 31,
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. In accordance with this agreement, up until April 30, 2005,
the Cukurova Group would have the option to purchase up to
26,540,102,081 Turkcell shares (as restated for stock split) at nominal
value of TRY 26,5 million (equivalent to $19,364 at March 31, 2005) plus
interest at Libor plus 3.5% and 16,809,395,277 Turkcell shares (as
restated for stock split) for a consideration based on the weighted
average market value of the shares for the preceding 30 trading days on
the Istanbul Stock Exchange. Following the sale of Yapi Kredi to Koc
Group, on May 9, 2005, Cukurova Group announced that Cukurova Group will
be granted the right to purchase Turkcell and Turkcell Holding AS shares
owned by Yapi Kredi.
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 is subject to completion of the final
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 Annual Shareholders' Meeting on the issue,
Cukurova Group will 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 has filed a request
for arbitration at the ICC. Sonera has also filed a request for interim
measures at a Civil court in Geneva. Sonera demanded from the court to
prohibit Cukurova Holding to initiate or continue contacts with third
parties other than Sonera, with a view to sell or pledge shares in
Turkcell Holding.
On April 29, 2005, at the Annual Shareholders' Meeting, the shareholders
of Turkcell have decided to distribute all of its distributable income
(as defined in the financial statements prepared in accordance with the
accounting standards promulgated by the Turkish Capital Markets Board)
for the year ending December 31, 2004. The dividend will be in the form
of 50% cash and 50% bonus shares. The net distributable income, after
deducting legal reserves, amounts to TRY 500.3 million (equivalent to
$364,990 at March 31, 2005). Accordingly, the dividend will be
distributed as follows:
Amount per
Share Total $ equivalent
(TRY in full) (TRY million) March 31, 2005
------------- ----------- --------------
21
Dividend cash 0.000134848 250.1 182,495
Dividend bonus shares - 234.1 170,795
Payment of cash dividend has commenced on May 17, 2005 and distribution
of bonus share certificates has commenced on May 31, 2005.
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 March 31, 2005, commitments and contingent
liabilities comprised the following:
December 31, March 31,
2004 2005
------------------------ -----------------
Bank Letters of Guarantee $ 257,607 61,179
Guarantees
Irancell Consortium 285,842 272,068
Iranian Authorities-Payment Guarantee 285,842 272,068
Digital Platform 25,066 19,536
BNP--Brussels (Buyer Credit) 19,634 14,924
BNP--Hungary (Buyer Credit) 4,845 4,612
BNP--Brussels (Financial Loan) 470 -
Websterbank--USA 117 -
Purchase Commitments 229,560 167,705
Nokia 147,052 103,730
Ericsson AB 46,964 35,040
Sysdate 9,045 5,935
Asli Gazetecilik 17,500 15,000
ADD Production Medya AS ("ADD") 8,000 8,000
ABN Amro Finansal Kiralama AS ("ABN Amro Leasing") 999 -
As of March 31, 2005, the Company is contingently liable in respect of
bank letters of guarantee obtained from Yapi Kredi and given to the
Turkish Treasury amounting to TRY 14.0 million (equivalent to $10,179 at
March 31, 2005) (December 31, 2004: $215,318), and customs authorities,
private companies and other public organizations amounting to TRY 68.7
million (equivalent to $50,125 at March 31, 2005) (December 31, 2004:
$41,522). In addition, as of March 31, 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 $875 (December 31, 2004: $767).
Subsequent to March 31, 2005, the bank letter of guarantee given to the
Turkish Treasury in relation to the settlement agreement with the
Turkish Treasury has been released.
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. Turkcell guaranteed EUR 210 million (equivalent to $272,068 at
March 31, 2005) of this guarantee through HSBC plc, which issued the
payment
22
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 $161,950
at March 31, 2005) on July 12, 2004. As of March 31, 2005, outstanding
purchase commitments to Ericsson AB and Nokia amount to $35,040 and
$103,730, respectively.
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 March 31, 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 March 31, 2005, the
Company paid $12,500 and obtained respective advertising services
amounting to $10,000 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 instalments 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.
Based on the shareholders loan agreement signed on January 6, 2005, the
shareholders of Euroasia committed to arrange $50,000 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 $25,500. 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 $2,023. On May 19, 2005,
the transaction has been completed. The Company's 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 other minority shareholder with a cash consideration of $4,046 and
$3,304, respectively. Based on the agreement, Turktell Uluslararasi will
make related payments in three
23
instalments in three years. On June 15, 2005, required payments for the
first instalments amounting to $2,750 and $2,250 have been made by
Turktell Uluslararasy and the other minority shareholder, respectively.
The Company's effective interest in Euroasia has increased to 54.2%.
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 $66,667 as of March 31, 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 $105,991 as of March 31, 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 $33,334 as of March 31, 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 $3,322 as of March
31, 2005).
Turkcell has begun to make payments for VAT on ongoing license fee 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 three month period ended March
31, 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 ($2,205 as of
March 31, 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 $21,938 as of March 31, 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 March 31, 2005, Turkcell recorded a provision of
TRY 13.3 million (equivalent to $9,701 as of March 31, 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
24
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 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 $15,922 at March 31,
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
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10, 2004, Tax Office requested approximately TRY 21.8 million
(equivalent to $15,922 at March 31, 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. 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 $15,922 at March 31, 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 $15,922 at March 31, 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 $15,922 at March 31, 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
$5,088 as of March 31, 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 $5,088 at March 31, 2005) on its consolidated financial
statements as of March 31, 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 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 $106,263 at
March 31, 2005) for the frequency
26
usage fees of 2002 including interest through that date with
reservation. Turkcell is waiting for the final 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 has 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 have each 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 $23,151 at March 31, 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 Telecommunication 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
Telecommunication Authority's appeal.
With respect to the Danistay's injunction on January 26, 2005,
Telecommunications Authority paid TRY 18 million (equivalent to $13,133
at March 31, 2005) back to Turkcell and the remaining balance amounting
to TRY 13.7 million (equivalent to $10,018 at March 31, 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 $23,151 at March 31, 2005) in the consolidated financial statements
as of and for the year ended December 31, 2004.
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 $1,311 at March 31,
2005). The Tax Office also imposed a penalty fee of TRY 4.3 million
(equivalent to $3,107 at March 31, 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. 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
27
million (equivalent to $11,678 as of March 31, 2005) for principal, an
interest charge of TRY 10.8 million (equivalent to $7,852 as of March
31, 2005) and a penalty of TRY 63.4 million (equivalent to $46,302 as of
March 31, 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.
On April 16, 2004, Turkcell paid TRY 103.7 million (equivalent to
$75,690 as of March 31, 2005) including interest through that date
regarding the Telecommunication Authority's claim. Turkcell is still
waiting for the final 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 $5,101 at March 31,
2005) and a tax penalty of TRY 9.9 million (equivalent to $7,205 at
March 31, 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.
The case is still pending. Management and legal counsel believe that
Turkcell will prevail in this matter.
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 March 31, 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 March 31, 2005.
(21) Subsequent Events
(a) On June 17, 2005, Turktell formed the consortium structure within
the frame of Turk Telekom privatization tender. In accordance with the
structure, Turktell will have a 40% interest in the consortium. On June
24, 2005, Turktell consortium has given an unconditional and irrevocable
letter of guarantee amounting to $30,000 with respect to the bidding.
The expiration date is stated on the letter of guarantee as minimum of
364 days from date of issuance. On July 8, 2005, the $30,000 guarantee
letter has been released following the Turk Telekom privatization tender
results which turned to be in favor of another participant consortium.
(b) On April 25, 2005, the Iranian Parliament approved a revised
proposal, which suggests reduction of Turkcell's stake in Irancell to
49%, and submitted to the Guardian Council for their consent. In May
2005, the Guardian Council has given their consent. The consent will be
approved by the Iran President.
28
Turkcell management is assessing the impact of this change to the
license agreement including the reduction of Turkcell's stake in
Irancell which results in a voting ownership of less than 50% for
Turkcell and calls into question the expected control structure of
Irancell. This unilateral change by the Iranian Parliament conflicts
with the license agreement's terms and conditions and the agreements
signed between current shareholders of Irancell. Turkcell's management
believes that these developments call into question the future of the
Company's investment in Iran and as a consequence of these developments,
Turkcell is in the process of evaluating the potential elements of the
new structure and extend discussions with local authorities as well as
current and potential partners to ensure appropriate ownership structure
and management controls in the local company.
(c) On June 13, 2005, the Cukurova Group announced that Cukurova Group
and Alfa Telecom Turkey Limited ("Alfa Turkey") agreed on a $3.3 billion
financial package to sell shares of Turkcell Holding. The financial
package consists of an approximately $1.7 billion six-year duration loan
while the remaining portion will be a six year 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 deal is subject to due diligence process
and obtaining the necessary permissions from regulatory authorities. In
the same announcement, it was noted that, the funds will be primarily
used by Cukurova Group to retire its debt to the SDIF and finance
Cukurova Group's option regarding the acquisition of Turkcell and
Turkcell Holding AS shares owned by Yapi Kredi.
(d) 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 $1,046 at March 31, 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.
(e) On May 27, 2005, Kibris Telekom sold all of its shares in
Kibrisonline to Digitech Iletisim Limited ("Digitech") for a
consideration of TRY 25,000 (equivalent to $18 at March 31, 2005).
(f) In connection with the redenomination of the Turkish Lira and the
change of the nominal value of the Turkcell's ordinary shares, Turkcell
ADR ratio was changed from the existing ratio of one ADR to two thousand
five hundred ordinary shares to a new ratio of two ADRs to five ordinary
shares. One ordinary share is equal to one thousand existing ordinary
shares with a nominal value of TL 1,000 until such time as the existing
ordinary shares are replaced by new ordinary shares with a nominal value
of TRY one, at which time one ordinary share will be equal to one new
ordinary share.
(g) 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.
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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: July 29, 2005 By: /s/ MUZAFFER AKPINAR
----------------------------
Name: Muzaffer Akpinar
Title: Chief Executive Officer