SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 January 28, 2005
--------------------
TURKCELL ILETISIM HIZMETLERI A.S.
Turkcell Plaza
Mesrutiyet Caddesi No.153
34430 Tepebasi
Istanbul, Turkey
--------------------
(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: Third quarter MD&A.
OPERATING AND FINANCIAL REVIEW FOR THE NINE MONTH AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2004
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, 2002 and 2003, 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, 2003 and
the related notes there to included in our annual report on Form 20-F for the
year ended December 31, 2003 (the "20-F") and the consolidated balance sheets as
of December 31, 2003 and September 30, 2004, and for the related consolidated
statements of operations, for each of the three month and nine month periods
ended September 30, 2003 and 2004, changes in shareholders' equity and
comprehensive income for the nine month period ended September 30, 2004, and
cash flows for the nine month periods ended September 30, 2003 and 2004 included
herein. The information as of September 30, 2004 and for the three month and
nine month periods ended September 30, 2003 and 2004 is not audited.
Certain statements contained below, including information with respect
to our plans and strategy for our business, are forward-looking statements. The
statements contained in this discussion of operating results, which are not
historical facts, are forward-looking statements with respect to our plans,
projections or future performance, the occurrence of which involves certain
risks and uncertainties. For a discussion of important factors that could cause
actual results to differ materially from such forward-looking statements see
"Item 3D. Risk Factors" in our 20-F.
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. As a result
of intervention by the Telecommunications Authority, we also 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 and outgoing roaming revenues 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"), Aycell
Haberlesme ve Pazarlama Hizmetleri A.S. ("Aycell"), Is-Tim Telekomunikasyon
Hizmetleri A.S. ("IsTim"), 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. After the merger of Aria and Aycell, a new company was
formed with the name TT&TIM Iletisim Hizmetleri A.S. ("TT&TIM"). Our
interconnection agreement with IsTim was renewed with TT&TIM and the
interconnection agreement with Aycell was cancelled. On October 15, 2004, TT&TIM
changed its name to AVEA Iletisim Hizmetleri A.S. ("AVEA"). On October 9, 2003,
we also signed a supplemental protocol with Telsim, revising the pricing terms
of the interconnection agreement signed on October 4, 2001. However, after the
resolution of the Telecommunications Authority on the pricing terms, on November
21, 2003,
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Telsim and we determined the new pricing terms, which resulted in an amendment
on the pricing terms. On September 10, 2003, we entered into a new
interconnection agreement with Globalstar, which became effective on September
10, 2003. As a result of the intervention by the Telecommunications Authority,
we entered in to a new supplemental protocol with Globalstar on December 11,
2003, with amended tariffs and tariff adoption procedures. The business
relationship on interconnection between Milleni.com and us has been bilaterally
terminated as of June 21, 2004.
As of September 30, 2004, we have made capital expenditures amounting
to approximately $4.3 billion including the cost of our licenses. As of
September 30, 2004, our network coverage area in Turkey included 100% of the
population living in cities of 10,000 or more people, including the 81 largest
cities, 923 subprovince centers and a majority of the country's tourist areas
and principal intercity highways.
Our subscriber base in Turkey has expanded from 63,500 at year-end 1994
to approximately 12.2 million at year-end 2001, 15.7 million at year-end 2002,
19.0 million at year-end 2003 and 22.3 million as of September 30, 2004. The
rate of increase in the nine month period ended September 30, 2004 was higher
than the same period of 2003 and slower than the same period of 2002. In the
last quarter of 2004, we added approximately 1.1 million net new subscribers to
our network and our subscriber base reached to 23.4 million as of December 31,
2004. We expect to achieve a continued growth in net new additions 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 September 30, 2004, 17.3 million subscribers had commenced usage of
the prepaid service. Average monthly minutes of use per prepaid subscriber and
average revenue per prepaid subscriber tend to be lower than postpaid
subscribers. Our average monthly minutes of use per subscriber has increased 11%
to 65.2 minutes for the nine month period ended September 30, 2004 from 58.8
minutes for the same period in 2003 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
increased 3% to $12.4 for the nine month period ended September 30, 2004 from
$12.0 for the same period in 2003. The increase was mainly due to improved
consumer sentiment and its impact on usage levels, tariff increases and the
appreciation of TL against US dollars. Despite the increase in competition in
the market, the improvement in the macroeconomic indicators and the continuing
impact of volume-based campaigns, we expect average minutes of usage per
subscriber to improve in 2005 compared to 2004. However we expect average
revenue per subscriber to decrease as a result of decrease in incoming revenue,
the dilutive impact of prepaid subscribers and continued "value for money"
initiatives started in 2004 which aimed to strike the right balance between our
revenue goals and maintaining "value for money" image in the market.
Churn is calculated as the total number of subscribers' disconnections
during a period as a 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, 2003, we
disconnected approximately 170,993 additional subscribers for nonpayment of
bills and our annual churn rate was 14.5%. For the nine month period ended
September 30, 2004, we disconnected approximately 103,767 additional subscribers
for nonpayment of bills. Our churn rate was 7.3% for the nine month period ended
September 30, 2004. For the year ended 2004, our churn rate was recorded as
9.1%. We have a bad debt provision in our financial statements for such
non-payments and disconnections which amounting to $135.9 million and $121.9
million as of December 31, 2003 and September 30, 2004, respectively, which we
believe is adequate. Prior to 2003, the majority of subscriber disconnections
were due to non-
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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
that churn rate will 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 become a provisional licensee in Iran through our planned
investment in Irancell and we have invested in Digital Cellular Communications
("DCC"), which is located in Ukraine. Our operations in Ukraine commenced during
the second quarter of 2004. We are continuing roll-out activities and expect to
launch operations early in the first quarter of 2005. The operations in Iran
have not commenced yet. For a description and additional information regarding
our international and other domestic operations see "Liquidity and Capital
Resources - Off-Balance Sheet Arrangements" in this report and "Item 4B.
Business Overview - International and Other Domestic Operations" in our 20-F.
Critical Accounting Policies
For a discussion of our critical accounting policies, please see "Item
5. Operating and Financial Review and Prospects-Critical Accounting Policies" in
the 20-F. There have been no material changes in our critical accounting
policies since the date of the 20-F.
Revenues
Our revenues are mainly derived from communication fees, monthly fixed
fees, call center revenues and sales of SIM cards. 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 amount that varies according to the subscriber's service package,
without regard to 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. Call center revenues
consist of revenues for call center services provided by our call center
subsidiary to affiliated 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 and SMS and Internet applications. GPRS charges to
subscribers are based on the amount of data downloaded.
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
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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 Turkish Lira ("TL"). We have taken actions to increase
revenues, including raising tariffs in February, April and June 2002, March and
December 2003 and May and November 2004. We also launched a variety of new
tariff packages 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 "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 tariffing for the telecommunications
sector. See "Item 4B-Business Overview-Regulation of the Turkish
Telecommunications Industry" in our 20-F.
Per the Amended Agreement, effective from September 20, 2003 onwards,
we charge Turk Telekom a net amount of TL 210,000 (equivalent to $0.14 at
September 30, 2004) per minute after deducting VAT, communications tax and other
taxes from the basic one-minute charge for local, metropolitan and long-distance
traffic switched from Turk Telekom to our network instead of a net amount of
basic unit price minus $0.06. For incoming international calls that are
terminated at our network, we were charging Turk Telekom 30% of the
international settlement charge which is transferred by the foreign PSTN and GSM
operators to Turk Telekom. Under the Amended Agreement, we charge Turk Telekom
45% of international settlement charge. On October 11, 2003, the
Telecommunications Authority resolved that we would charge TL 178,750
(equivalent to $0.12 at September 30, 2004) per minute for traffic originating
on all other mobile operators' networks and terminating on our network effective
from September 23, 2003. Previously, from March 1, 2001 to September 22, 2003,
we had charged Telsim a net amount of $0.20 per minute for traffic switched from
Telsim to us. We entered into an interconnection agreement with IsTim that
became effective on March 9, 2001, after the Ministry of Transportation's
approval. Under this agreement, we charged IsTim a net amount of $0.20 per
minute for traffic switched from IsTim to us. We also entered into an
interconnection agreement with Aycell on July 19, 2001. We charged Aycell a net
amount of $0.20 per minute for traffic switched from Aycell to us. After the
merger of Aria and Aycell, a new company was formed with the name TT&TIM. Our
interconnection agreement with IsTim was renewed with TT&TIM and the
interconnection agreement with Aycell was cancelled. After the merger, we
started to negotiate on new interconnection agreement with TT&TIM, which changed
its name to AVEA on October 15, 2004. 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.
Under the interconnection agreement with Globalstar, effective from September
10, 2003, we charged Globalstar a net amount of $0.20 per minute for our network
terminated traffic. After the new supplemental 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.
4
The following table shows the amounts we charge Turk Telekom, Telsim and
AVEA as of September 30, 2004 and December 31, 2004 both in TL and equivalent US
dollars at September 30, 2004.
September 30, December 31,
2004 2004
------------ ------------ ------------ ------------
TL USD TL USD
------------ ------------ ------------ ------------
Turk Telekom 215,333 0.14 219,086 0.15
Telsim 181,165 0.12 184,323 0.12
TT&TIM (AVEA) 191,507 0.13 194,845 0.13
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.
Together with the improvement in the macroeconomic indicators, we
expect our revenues to increase in 2005 compared to 2004 mainly due to the
increase in subscriber base and usage compared to 2004 despite our expectation
of devaluation of TL against US dollars in 2005. For a description of the
dispute regarding the national roaming agreement and the risks relating to such
dispute, see "Item 3D. Risk Factors" in our 20-F.
Operating Costs
Direct Cost of Revenues
Direct cost of revenues include mainly ongoing license fees,
transmission fees, base station rents, billing costs, depreciation and
amortization charges, repair and maintenance expenses directly related to
services rendered, roaming charges paid to foreign GSM operators for calls made
by our subscribers while outside Turkey, interconnection fees paid to Telsim,
AVEA, Milleni.com and Globalstar and wages, salaries and personnel expenses for
technical personnel. Direct cost of revenues also include 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 and Arbitration
Proceedings" in our 20-F.
Under the Amended Agreement, we pay Turk Telekom interconnection fees
of TL 50,000 (equivalent to $0.03 at September 30, 2004) per minute for local
calls from our network to the Turk Telekom fixed-line network and TL 70,000
(equivalent to $0.05 at September 30, 2004) per minute for non-local calls from
our network to the Turk Telekom fixed-line network. 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. Prior to September 20, 2003, we paid Turk
Telekom interconnection fees of $0.06 per minute for calls to our GSM network,
$0.014 per minute for local calls from our network to the Turk Telekom
fixed-line network and $0.025 per minute for non-local calls from our network to
the Turk Telekom fixed-line network.
Pursuant to the Amended Agreement signed with Telsim, effective from
October 9, 2003, we pay Telsim a net amount of TL 210,000 (equivalent to $0.14
at September 30, 2004) per minute for traffic switched from us to Telsim.
However, after the resolution of the Telecommunications Authority on the pricing
terms, on November 11, 2003, Telsim and we determined the new pricing terms,
which resulted in an amendment in the agreement. Per the Telecommunications
Authority resolution, we paid
5
TL 178,750 (equivalent to $0.12 at September 30, 2004) per minute for calls
originating on our network and terminating on Telsim's network effective from
September 23, 2003. On October 11, 2003, the Telecommunications Authority
resolved that we would pay TL 233,750 (equivalent to $0.16 at September 30,
2004) per minute for traffic originating on our network and terminating on
Aycell's and Aria's network effective from September 23, 2003. We entered into
an interconnection agreement with IsTim that became effective on March 9, 2001,
after the Ministry of Transportation's approval. Under the IsTim interconnection
agreement, each party agreed, among other things, to permit the interconnection
of its network after the other's network to enable calls to be transmitted to,
and received from, the GSM system operated by each party in accordance with
technical specifications set out in the interconnection agreement. Under the
agreement, we had paid IsTim a net amount of $0.20 per minute for traffic
switched from us to IsTim. After the merger of Aria and Aycell, a new company
was formed with the name TT&TIM. Our interconnection agreement with IsTim was
renewed with TT&TIM.
We also entered into an interconnection agreement with Aycell on July
19, 2001. Under the agreement, we had paid Aycell a net amount of $0.20 per
minute for traffic switched from us to Aycell. After the merger of Aria and
Aycell under the company name of TT&TIM, we cancelled our interconnection
agreement with Aycell. After the merger, we started to negotiate a new
interconnection agreement 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.
The following table shows the amounts we pay Turk Telekom, Telsim and
AVEA as of September 30, 2004 and December 31, 2004 both in TL and equivalent US
dollars at September 30, 2004.
September 30, December 31,
2004 2004
---------- ----------- ---------- -----------
TL USD TL USD
---------- ----------- ---------- -----------
Turk Telekom
Local Calls 53,833 0.04 54,772 0.04
Non-Local Calls 75,366 0.05 76,680 0.05
Telsim 181,165 0.12 184,323 0.12
TT&TIM (AVEA) 250,432 0.17 254,798 0.17
Under the Globalstar interconnection agreement, we pay Globalstar a net
amount of $0.40 per minute up to 500,000 minutes, $0.31 per minute for traffic
between 500,000-1,000,000 minutes, $0.25 per minute for traffic between
1,000,000-2,000,000 minutes and $0.20 per minute for traffic after 2,000,000
minutes. In addition, we pay Globalstar a net amount of $0.03 per SMS.
General and Administrative
General and administrative expenses consist of fixed costs, company
cars, office rent, office maintenance, insurance, consulting, wages, salaries
and personnel expenses for non-technical and non-marketing employees and other
overhead charges. In addition, while these expenses are generally related to the
size of our employee base, the general and administrative expense per employee
has decreased over the past three years due to economies of scale. Our general
and administrative expenses also include bad debt expenses of our postpaid
subscribers.
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Selling and Marketing
Selling and marketing expenses consist of public relations, sales
promotions, dealer activation fees, advertising, subsidies, 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 $26.0 and $21.3 per new
subscriber for the nine month periods ended September 30, 2003 and 2004,
respectively. We compute average acquisition cost per new subscriber by adding
sales promotion expenses, SIM card subsidies, activation fees and the special
transaction tax and dividing the sum by the gross number of new subscribers for
the related period. These costs are recorded as either selling and marketing
expense or reduction of revenue in our statements of operations. We believe that
despite the recent decline in acquisition costs, the average acquisition cost
may increase in 2005 as a result of an increasingly competitive environment.
Therefore, we expect our selling and marketing expenses to increase in 2005.
However, we plan to keep it stable as a percentage of revenues in 2005.
Nine month period ended September 30, 2004 compared to nine month period ended
September 30, 2003 and three month period ended September 30, 2004 compared to
the three month period ended September 30, 2003
The following table shows information concerning our consolidated
statements of operations for the periods indicated.
Nine months ended Three months ended
September 30, September 30,
---------- ---------- ---------- ----------
2003 2004 2003 2004
---------- ---------- ---------- ----------
Revenues 1,839.4 2,321.2 764.6 969.3
Direct cost of revenues (1,131.6) (1,523.5) (441.4) (549.2)
-------- -------- ------ ------
Gross profit 707.8 797.7 323.2 420.1
General and administrative expenses (79.2) (94.0) (30.4) (26.5)
Selling and marketing expenses (173.8) (242.0) (67.0) (89.1)
-------- -------- ------ ------
Operating income 454.8 461.7 225.8 304.5
Income from related parties, net 3.3 1.4 0.6 0.5
Interest income (expense), net (168.7) 76.4 (48.9) 78.0
Other income (expense), net 3.8 2.4 (2.8) 1.6
Equity in net income of unconsolidated investees 13.0 31.7 6.6 15.4
Minority interest 2.5 4.5 1.8 1.8
Translation gain (loss), net (76.0) 21.6 (22.5) 12.9
-------- -------- ------ ------
Income before taxes 232.7 599.7 160.6 414.7
Income tax expense (3.1) (226.5) (43.8) (264.0)
-------- -------- ------ ------
Net income 229.6 373.2 116.8 150.7
======== ======== ====== ======
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The following table shows certain items in our consolidated statements
of operations as a percentage of revenues.
Nine months ended Three months ended
September 30, September 30,
---------- ---------- ---------- ----------
2003 2004 2003 2004
---------- ---------- ---------- ----------
Revenues
Communication fees 97.2 96.7 97.4 97.1
Monthly fixed fees 1.6 1.7 1.4 1.5
SIM card sales 0.8 0.9 0.8 1.0
Call center revenues 0.3 0.3 0.3 0.2
Other 0.1 0.4 0.1 0.2
Total revenues 100.0 100.0 100.0 100.0
Direct cost of revenues (61.5) (65.6) (57.7) (56.7)
Gross margin 38.5 34.4 42.3 43.3
General and administrative expenses (4.3) (4.1) (4.0) (2.7)
Selling and marketing expenses (9.5) (10.4) (8.8) (9.2)
Operating income 24.7 19.9 29.5 31.4
We had 22.3 million subscribers, including 17.3 million prepaid
subscribers, as of September 30, 2004, compared to 18.2 million subscribers,
including 13.5 million prepaid subscribers, as of September 30, 2003. In the
nine month period ended September 30, 2004, we added approximately 3.3 million
net new subscribers. We added 1.5 million net new subscribers to our network in
the third quarter of 2004 compared to 0.9 million net new subscribers for the
corresponding period of 2003. We expect to achieve a continued growth in net new
additions in 2005 but at a slower pace compared to 2004. In the last quarter of
2004, we added approximately 1.1 million net new subscribers to our network and
our subscriber base reached to 23.4 million, including 18.3 million prepaid
subscribers, 5.1 million postpaid subscribers as of December 31, 2004.
Revenues
Total revenues for the nine month period ended September 30, 2004
increased 26% to $2,321.2 million from $1,839.4 million for the same period in
2003. The increase in revenues is mainly due to the growth in the number of
subscribers, increased usage and tariff increase. Total revenues increased 27%
to $969.3 million in the third quarter of 2004 from $764.6 million in the
corresponding period in 2003 for the same reasons. Together with the improvement
in the macroeconomic indicators, we expect our revenues to increase in 2005
compared to 2004 mainly due to the expected increase in our subscriber base and
usage compared to 2004 despite our expectation of devaluation of TL against US
dollars in 2005.
Revenues from communication fees for the nine month period ended
September 30, 2004 increased 26% to $2,246.8 million from $1,787.6 million for
the same period in 2003 mainly due to increased usage, the increase in our
subscriber base and the increase in tariffs. Revenues from communication fees
increased 27% to $944.3 million in the third quarter of 2004 from $744.5 million
in the corresponding period of 2003 for the same reasons. Communication fees
include SMS revenue, which amounted to $256.2 million for the nine month periods
ended September 30, 2004, $173.4 million for the same period in 2003, $93.9
million for the three month period ended September 30, 2004 and $67.2 million
for the three month period ended September 30, 2003. Although the monthly fixed
fee in TL remained the same, revenues from monthly fixed fees for the nine month
period ended September 30, 2004 increased 28% to $38.4 million from $30.1
million for the same period in 2003 mainly due to increase in our subscriber
base and appreciation of TL against US dollars. In addition, monthly fixed
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fees increased 30% to $14.2 million in the third quarter of 2004 from $10.9
million in the third quarter of 2003 mainly due to increase in our subscriber
base. SIM card revenues for the nine month period ended September 30, 2004
increased 48% to $21.5 million from $14.5 million for the same period in 2003.
SIM card revenues slightly increased 8% to $6.7 million in the third quarter of
2004 from $6.2 million in the third quarter of 2003.
Direct cost of revenues
Direct cost of revenues increased 35% to $1,523.5 million for the nine
month period ended September 30, 2004 from $1,131.6 million for the same period
in 2003 mainly due to the increase in revenue-based costs such as the ongoing
license fees paid to the Turkish Treasury and additional legal provisions
related to the disputes with Turk Telekom and the Turkish Treasury. For the same
reasons, direct cost of revenues increased 24% to $549.2 million in the third
quarter of 2004 from $441.4 million in the third quarter of 2003.
Ongoing license fees paid to the Turkish Treasury increased 73% to
$564.6 million for the nine month period ended September 30, 2004 from $325.5
million for the same period in 2003 due to additional legal provisions, the
increase in revenues and the appreciation of TL against US dollars. Ongoing
license fees increased 49% to $198.5 million in the third quarter of 2004
compared to $133.6 million in the third quarter of 2003 mainly due to additional
legal provisions and the increase in revenues. Interconnection costs increased
2% to $202.0 million for the nine month period ended September 30, 2004 from
$197.7 million for the same period in 2003. Interconnection cost increased 6% to
$89.5 million in the third quarter of 2004 from $84.2 million in the third
quarter of 2003.
Transmission costs, site costs, information technology and network
maintenance expenses and infrastructure costs increased approximately 75% to
$155.3 million for the nine month period ended September 30, 2004 from $88.5
million for the same period in 2003 mainly due to the settlement related with
Turk Telekom infrastructure dispute, appreciation of TL against US dollars and
the reversal of an accrual in the second quarter of 2003 by $10.2 million. In
accordance with the settlement discussions made with Turk Telekom on Turk
Telekom insfrastructure dispute, we have recorded $36.4 and $23.9 million
expense in the second and the third quarter of 2004, respectively. In addition,
we had provided an accrual related with transmission cost as of December 31,
2002 based on our best estimate at that time whereas the amount actually
invoiced was below our expectations. Those expenses increased 48% to $51.7
million in the third quarter of 2004 from $35.0 million in the same period of
2003 mainly due to the expenses related to Turk Telekom infrastructure amounting
to $23.9 million in the third quarter of 2004 and the decrease in transmission
rent costs made by Turk Telekom of approximately 23% on June 1, 2004. In
addition, uncapitalizable antenna site costs and expenses increased 44% to $91.4
million for the nine month period ended September 30, 2004 from $63.4 million
for the same period in 2003 mainly due to increase in radio network operations,
increase in radio rent expenses which resulted from the renewal of rent
agreements, application of Turk Telekom's 2001 regulations since July 2004 which
resulted an increase in unit price and appreciation of TL against US dollars.
Uncapitalizable antenna site costs and expenses increased 33% to $34.3 million
for the third quarter of 2004 from $25.8 million for the third quarter of 2003
for the same reasons except the appreciation of TL against US dollars.
Roaming expenses increased 45% to $38.4 million for the nine month
period ended September 30, 2004 from $26.5 million for the same period in 2003,
mainly due to the increase in roaming revenue generated from the calls made by
our subscribers while outside Turkey, primarily reflecting better economic
conditions. For the same reason, roaming expenses increased 54% to $14.6 million
in the third quarter of 2004 from $9.5 million in the third quarter of 2003.
Billing costs increased 17% to $20.4 million for the nine month period
ended September 30, 2004 from $17.5 million for the same period in 2003 mainly
due to the appreciation of TL against US dollars and increase in postage fees.
Billing costs decreased 7% to $6.9 million in the third quarter of
9
2004 from $7.4 million in the third quarter of 2003 mainly due to the
devaluation of TL against US dollars for the third quarter of 2004 compared to
the same period of 2003.
Depreciation and amortization charges slightly increased 0.6% to $317.0
million for the nine month period ended September 30, 2004 from $315.0 million
for the same period in 2003. Depreciation and amortization expenses increased
0.2% to $105.4 million for the third quarter in 2004 from $105.1 million for the
third quarter in 2003. The amortization expense for our GSM license was $15.0
million for the first nine month period ended 2004 and 2003.
The cost of SIM cards sold decreased 4% to $29.1 million for the nine
month period ended September 30, 2004 from $30.3 million for the same period in
2003. The cost of SIM cards sold decreased 15% to $11.5 million for the third
quarter of 2004 from $13.6 million for the third quarter of 2003.
Wages, salaries and personnel expenses for technical personnel
increased 47% to $69.6 million for the nine month period ended September 30,
2004 from $47.3 million for the same period in 2003 due to the increase in the
headcount, periodic increase in salaries and appreciation of TL against US
dollar. Wages, salaries and personnel expenses for technical personnel increased
21% to $23.3 million for the third quarter of 2004 from $19.2 million for the
third quarter of 2003 mainly due to the increase in headcount and periodic
increase in salaries.
As a percentage of revenue, direct cost of revenues increased to 66%
for the nine month period ended September 30, 2004 from 62% for the same period
in September 2003. In addition, as a percentage of revenue, direct cost of
revenues decreased to 57% for the third quarter of 2004 from 58% for the third
quarter of 2003.
Gross profit increased to $797.7 million for the nine month period
ended September 30, 2004 from $707.8 million for the same period in 2003. Gross
profit increased $420.1 million for the third quarter of 2004 from $323.2
million for the third quarter of 2003.
General and administrative expenses
General and administrative expenses increased 19% to $94.0 million for
the nine month period ended September 30, 2004 from $79.2 million for the same
period in 2003, mainly due to the early extinguishment of Cellco debt and
one-time fees paid for the Iran GSM license in the second quarter of 2004.
General and administrative expenses decreased 13% to $26.5 million in the third
quarter of 2004 from $30.4 million in the third quarter of 2003 mainly due to
the effect of one-time cost related to taxes on roaming revenues in the third
quarter of 2003. As a percentage of revenues, general and administrative
expenses remained stable at 4% for both the nine month period ended September
30, 2004 and the corresponding period of 2003. In addition, as a percentage of
revenues, general and administrative expenses decreased to 3% for the three
month periods ended September 30, 2004 compared to 4% for the same period in
2003.
During 2004 and 2003, we have invested in the 12.75% Senior Notes,
issued by Cellco. The nominal value and amortized cost of such bonds amounted to
$65.0 million and $73.1 million, respectively. Our reacquisition of these bonds
is considered an early extinguishment of debt under the provisions of SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The difference between the reacquisition price
and net carrying amount of Cellco bonds amounting to $8.1 million is recorded in
general and administrative expenses.
In the 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.
10
Bad debt expenses increased 4% to $10.4 million for the nine month
period ended September 30, 2004 from $10.0 million for the same period in 2003.
Although we have improved our collection activities through initiatives such as
credit scoring, permitting subscribers to make payments under an installment
plan, and new collection channels and improvement in the legal follow-up system
to decrease fraud, our bad debt expenses increased to $3.3 million in the third
quarter of 2004 from $0.9 million in the third quarter of 2003 mainly due to
decreasing effects of these collection activities. We provided an allowance of
$121.9 million for doubtful receivables for the nine month period ended
September 30, 2004 identified based upon past experience in our consolidated
financial statements.
Consulting expenses increased 3% to $9.3 million for the nine month
period ended September 30, 2004 from $9.0 million for the same period in 2003.
Consulting expenses increased 3% to $3.1 million for the third quarter of 2004
from $3.0 million for the third quarter of 2003.
Wages, salaries and personnel expenses for non-technical and
non-marketing employees increased 83% to $28.5 million for the nine month period
ended September 30, 2004 from $15.6 million for the same period in 2003 mainly
due to the increase in the headcount, periodic increase in salaries and
appreciation of the TL against the US dollars. These expenses increased 83% to
$10.6 million for the third quarter of 2004 from $5.8 million for the third
quarter of 2003 for the same reasons except the appreciation of TL against US
dollars.
Selling and marketing expenses
Selling and marketing expenses increased 39% to $242.0 million for the
nine month period ended September 30, 2004 from $173.8 million for the same
period in 2003, mainly due to the increase in prepaid subscribers' frequency
usage fees, increased sponsorships and appreciation of TL against US dollars.
Selling and marketing expenses increased 33% to $89.1 million in the third
quarter of 2004 from $67.0 million in the third quarter of 2003 mainly due to
the increase in prepaid subscribers' frequency usage fees and increased
sponsorships. As a percentage of revenues, selling and marketing expenses were
10% and 9% for the nine month periods ended September 30, 2004 and 2003,
respectively. In addition, as a percentage of revenues, selling and marketing
expenses were 9% for the third quarter of both 2004 and 2003. We expect our
selling and marketing expenses to increase in 2005. However, we aim to keep it
stable as a percentage of revenues.
Total postpaid advertising, market research, product management, public
relations and call center expenses increased 41% to $57.2 million for the nine
month period ended September 30, 2004 from $40.7 million for the same period in
2003 mainly due to the increased corporate and social sponsorships. For the same
reasons, total postpaid advertising, market research, product management, public
relations and call center expenses increased 22% to $22.4 million in the third
quarter of 2004 from $18.4 million in the third quarter of 2003.
Total prepaid advertising, market research, product management, public
relations expenses and prepaid subscribers' frequency usage fee expenses
increased 55% to $112.2 million for the nine month period ended September 30,
2004 from $72.4 million for the same period in 2003. The increase in 2004 mainly
stemmed from the increase in prepaid subscribers' frequency usage fees. See
"Item 8A. Consolidated Statements and Other Financial Information-Legal and
Arbitration Proceedings" in our 20-F. For the same reasons, total prepaid
advertising, market research, product management, public relations expenses and
prepaid subscribers' frequency usage fee expenses increased 65% to $40.7 million
in the third quarter of 2004 from $24.6 million in the third quarter of 2003.
Activation fees increased 5% to $22.2 million for the nine month period
ended September 30, 2004 from $21.2 million for the same period in 2003. Of the
total dealer activation fees for the nine
11
month period ended September 30, 2004, for the nine month period ended September
30, 2003, for the three month period ended September 30, 2004 and for the three
month period ended September 30, 2003, $15.3 million, $16.4 million, $6.8
million, $5.4 million were for prepaid activations, respectively.
Wages, salaries and personnel expenses for selling and marketing
employees increased 33% to $26.9 million for the nine month period ended
September 30, 2004 from $20.3 million for the same period in 2003 mainly due to
the increase in the headcount, periodic increase in salaries and appreciation of
TL against US dollars. Wages, salaries and personnel expenses for selling and
marketing employees increased 21% to $9.4 million in the third quarter of 2004
from $7.8 million in the third quarter of 2003 for the same reasons except the
appreciation of TL against US dollars.
Operating income
Operating income increased 2% to $461.7 million for the nine month
period ended September 30, 2004 from $454.8 million for the same period in 2003.
Operating income increased 35% to $304.5 million in the third quarter of 2004
from $225.8 million in the third quarter of 2003 mainly due to the increase in
revenues.
Interest income (expense), net
Net interest income was $76.4 million for the nine month period ended
September 30, 2004 compared to $168.7 net interest expense for the same period
in 2003. The change between periods was mainly due to the effect of legal
provisions, repayment of principal portion of loans made during 2003 amounting
to $673.5 million and increase in average time deposited cash balance. Interest
income related to legal provisions was $26.3 million for the nine month period
ended September 30, 2004 and interest expense related to legal provisions was
$141.4 for the corresponding period in 2003. In addition, interest expense
related to the principal repayments of loans decreased to $50.8 million for the
nine month period ended September 30, 2004 from $90.4 million for the nine month
period ended September 30, 2003. For the same reason, net interest income was
$78.0 million in the third quarter of 2004 compared to $48.9 million, net
interest expense for the same period in 2003.
Equity in net income of unconsolidated investees
Our share of the net income of unconsolidated investees was $31.7
million for the nine month period ended September 30, 2004 compared to $13.0
million for the same period in 2003. The increase in net income of
unconsolidated investees is due to an increase in Fintur's net income to $76.6
million for the nine month period ended September 30, 2004 from $31.4 million
for nine month period ended September 30, 2003. For the same reason net income
of unconsolidated investees increased to $15.4 million in the third quarter of
2004 from $6.6 million in the third quarter of 2003.
Translation gain (loss), net
We recorded a translation gain of $21.6 million for the nine month
period ended September 30, 2004 compared to a translation loss of $76.0 million
for the same period in 2003. Translation gain experienced in 2004 stemmed from
the devaluation of the TL against US dollars at September 30, 2004 compared to
December 31, 2003. On the other hand, TL appreciated against US dollars at
September 30, 2003 compared to December 31, 2002 which caused translation loss
in 2003. As we recorded significant amount of accruals against legal disputes in
our balance sheet, and nearly all of the accruals are in terms of TL, the
devaluation of TL resulted in a translation gain. For the same reasons, we
recorded $12.9 million of translation gain in the third quarter of 2004 compared
to translation loss of $22.5 million in the third quarter of 2003.
12
Income tax expense
Income tax expense for the nine month period ended September 30, 2004
and 2003 were $226.5 million and $3.1 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 2004
and have generated taxable income for nine consecutive quarters. We believe that
subsequent to the conclusion of the war in Iraq during the second quarter of
2003 and the limited impact it has had on the economic situation in Turkey, the
economic and political uncertainties surrounding us have become less uncertain
and provided us better visibility about the near term future. In addition, the
economic and political situation in Turkey has become more stable and there are
positive expectations about the near term future. Furthermore, the
interconnection agreement with Turk Telekom has been revised in late 2003. We
believe that these matters also provide us better visibility about the near term
future. As a result, we concluded that it was more likely than not that the
deferred tax assets of $323.5 million were realizable. Turkish tax legislation
does not allow companies to file tax returns on a consolidated basis.
Accordingly, 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 $12.1 million is recorded as of September 30, 2004 (December 31,
2003: $11.0 million) for such amounts. The valuation allowance at December 31,
2003 and September 30, 2004 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 $323.5 million as of September 30, 2004 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 to $373.2 million for the nine month period ended
September 30, 2004 compared to net income of $229.6 million for the same period
in 2003. The increase was mainly due to the increase in revenues, net interest
income and translation gain despite negative effect of taxation charges for the
nine month period ended September 30, 2004 compared to the same period in 2003.
For the same reasons, net income increased 29% to $150.7 million in the third
quarter of 2004 compared to a net income of $116.8 million in the third quarter
of 2003.
Taxation Issues in Telecommunications Sector
On August 1, 2004 certain provisions of the Special Communication Tax
Law were amended. In particular, the Special Communications Tax which was
imposed on new subscribers that transfer from one mobile operator to another,
has been abolished. In addition, Turk Telekom has started to calculate 15% of
special communication tax on interconnect invoices and subscriber invoices.
Furthermore, applicable from January 1, 2005, Special Communication Tax on new
subscription is increased to TL 22.0 million from TL 20.0 million per
subscriber.
Effective from January 1, 2005, a one time license fee, which is paid
for each handset purchased by the subscriber, has been increased to TL 9.8
million (equivalent to $6.54 at September 30, 2004) from TL 8.9 million
(equivalent to $5.94 at September 30, 2004).
Applicable from January 1, 2005, lump-sum stamp duty liability from the
subscription contracts, which does not state any amount on the contract is
abolished.
13
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, and 2001, 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 and call
center 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 September 30, 2004, investment incentive
certificates provide for tax benefits on cumulative purchases of up to
approximately $4.1 billion in qualifying expenditures as defined in the
certificates. As of September 30, 2004, we had unused tax credit carryforwards
under the certificates of approximately $298.5 million ($343.0 million as of
December 31, 2003) which can be carried forward indefinitely. The certificates
are denominated in TL. However, approximately $0.6 billion of qualifying
expenditures through September 30, 2004 ($2.1 billion as of December 31, 2003)
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" in the 20-F.
Capital Transactions
On June 23, 2004, our board of directors decided that Turkcell's
statutory paid-in capital should be increased from TL 500 trillion to TL 1,474.6
trillion by adding TL 118.1 trillion out of the total dividend for the year 2003
and the statutory capital inflation adjustment (included in the financial
statements prepared in accordance with the accounting standards promulgated by
the Turkish Capital Markets Board) amounting to TL 856.5 trillion for 2003. The
Turkish Capital Markets Board approved the share capital increase on July 15,
2004 and the distribution of bonus shares commenced on July 30, 2004. This
statutory capital increase was treated as stock split in our consolidated
financial statements prepared in accordance with US GAAP. As a result of the
aforesaid transactions we issued 974,639,361,000 new shares. Accordingly, all
share amounts and per share figures reflected in our historical financial
statements have been retroactively restated.
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 9% as of September 30, 2004
and 23% for the same period in 2003. 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 starting 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 ("EU")
on December 17, 2004 which allows Turkey to 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.
14
New Accounting Standards Issued
The Financial Accounting Standards Board (the "FASB") has issued
Statements of Financial Accounting Standards ("SFAS") No. 153, "Exchanges of
Non-monetary Assets", an amendment of APB Opinion No. 29, Accounting for
Non-monetary Transactions. The amendments made by SFAS No. 153 are based on the
principle that exchanges of non-monetary assets should be measured based on the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for non-monetary exchanges of similar productive assets and replace it
with a broader exception for exchanges of non-monetary assets that do not have
commercial substance. Previously, Opinion No 29 required that the accounting for
an exchange of a productive asset for a similar productive asset or an
equivalent interest in the same or similar productive asset should be based on
the recorded amount of the asset relinquished. SFAS No. 153 is effective for
non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The provisions of SFAS No. 153 shall be applied prospectively. The
adoption of SFAS No. 153 is not expected to have a material effect on our
consolidated financial statements.
On December 12, 2004 the FASB published 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 interim or 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.
On November 2004, the FASB has issued SFAS No. 151, "Inventory Costs",
an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing", to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). SFAS No. 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal". In addition, SFAS No. 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The guidance is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The provisions of
SFAS No. 151 should be applied prospectively. The adoption of SFAS No. 151 is
not expected to have a material effect on our consolidated financial statements.
At June 30-July 1, 2004 meetings, Emerging Issues Task Force ("EITF")
reached a consensus on EITF 02-14, "Whether an Investor Should Apply the Equity
Method of Accounting to Investments Other Than Common Stock". The consensus was
reached regarding an investor that has the ability to exercise significant
influence over the operating and financial policies of the investee. This type
of investor should apply the equity method of accounting only when it has an
investment(s) in common stock and/or an investment that is in-substance common
stock. EITF also reached a consensus on the definition of in-substance common
stock and related guidance. EITF 02-14 is effective for reporting periods
beginning after September 15, 2004. The adoption of EITF 02-14 is not expected
to have a material impact on our consolidated financial statements.
Through an announcement at the EITF meeting on September 29, 2004, the
Staff of the United States Securities and Exchange Commission (the "SEC")
provided guidance relating to the use of the residual method to value acquired
assets other than goodwill under US GAAP. The new guidance requires the use of a
direct value method when assigning fair values to intangible assets other than
goodwill acquired in business combinations under SFAS No. 141, "Business
15
Combinations", completed after September 29, 2004 and for impairment testing
under SFAS No. 142 "Goodwill and Other Intangible Assets". SEC registrants that
have applied the residual method to intangible assets other than goodwill in
impairment testing are required to perform a transitional impairment test using
a direct method no later than the beginning of their fiscal year beginning after
December 15, 2004. Any transitional impairment should be recorded, net of tax,
as a cumulative effect in a change in accounting principle. Reclassification of
recorded balances between goodwill and intangible assets immediately prior to
adoption of this guidance is prohibited. The adoption of the Topic D-108 is not
expected to have a material effect on our consolidated financial statements.
On September 2004, EITF reached a consensus on EITF 04-01, "Accounting
for Preexisting Relationships between the Parties to a Business Combination".
This Issue applies when two parties that have a pre-existing contractual
relationship enter into a business combination. Specifically, the Issue is
whether a consummation of a business combination between two parties that have a
pre-existing contractual relationship should be evaluated to determine if a
settlement of a pre-existing contractual relationship exists, thus requiring
accounting separate from the business combination. The measurement and
recognition of a settlement of a preexisting relationship in conjunction with a
business combination and whether certain reacquired rights should be recognized
as intangible assets apart from goodwill. The FASB staff recommends that any
consensuses on recognition and measurement of a settlement of a preexisting
relationship in a business combination should be applied prospectively to
business combinations completed in reporting periods beginning after October 13,
2004. The adoption of EITF 04-01 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 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. As of September 30, 2004, total net outstanding Cellco debt amounts to
$335 million. During 2003 and 2004, we purchased Cellco notes with a nominal
value of $65.0 million. Our reacquisition of these bonds is considered an early
extinguishment of debt under the provisions of SFAS No. 140 and reduces
outstanding indebtedness.
Summary of our consolidated cash flows for the nine month periods ended
September 30, 2004 and 2003 are as follows:
(In millions of USD) 2003 2004
---- ----
Net cash provided by operating activities 733.4 637.9
Net cash used in investing activities (154.7) (352.1)
Net cash (used in) provided by financing activities (276.6) 85.6
------- -------
Net cash increase 302.1 371.4
======= =======
The net cash provided by our operating activities for the nine month
period ended September 30, 2004 and 2003 amounted to $637.9 million and $733.4
million, respectively. The decrease in 2004 was primarily due to the net effect
of payments with respect to litigations and increase in revenues in 2004.
16
The net cash used in investing activities for the nine month periods
ended September 30, 2004 and 2003 amounted to $352.1 million and $154.7 million,
respectively. Total investments in investees amounted to $184.1 million as of
September 30, 2004 compared to $143.0 million as of September 30, 2003.
For the nine month period ended September 30, 2004, we spent
approximately $352.1 million for capital expenditures compared to $128.7 million
for the same period in 2003. Increase in capital expenditures was mainly due to
increase in capital expenditures of DCC. Capital expenditures made by DCC of
$128.3 million mainly represent GSM 1800 license fees and new network
investments. Capital expenditures are expected to be at higher levels ($300.0
million up to $500.0 million) in 2005 compared to 2004 due to the improved
subscriber base and profile.
The net cash provided by financing activities for the nine month period
ended September 30, 2004 amounted to $85.6 million and the net cash used in
financing activities for the nine month period ended September 30, 2003 amounted
to $276.6 million. As of September 30, 2004, $775.5 million was outstanding as
short-term and long-term borrowings. We also entered into lease agreements in
the amount of $77.0 million with various leasing companies ($64.7 million for
our headquarters and other real estate, $3.7 million for computers installed at
the building, office equipment and company cars and $8.6 million for a central
betting system).
We have obtained additional borrowings of $100.0 million from Akbank
TAS ("Akbank") in February 2004 and $100.0 million from Turkiye Garanti Bankasi
AS ("Garanti") in March 2004. Both facilities will be repaid in three years.
During the second quarter of 2004, we have fully drawn the $100.0 million
Syndicated Murabaha facility arranged with Islamic Development Bank ("IDB") and
HSBC Bank AS. ("HSBC"). The facility became effective on January 16, 2004 with
the final drawdown made on June 16, 2004. This facility has maturity of two
years from each drawdown.
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:
o provided guarantee contracts;
o retained or contingent interests in transferred assets;
o any obligation under derivative instruments classified as
equity; or
o 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.
Based on the shareholders agreement signed on January 27, 2004 and
effective from April 2, 2004, we committed to arrange at least $150.0 million of
financing for DCC until the end of 2006. We have substantially fulfilled our
above mentioned commitment by acting as the guarantor of vendor financing
agreements signed by LLC Astelit ("Astelit"), our 50% owned subsidiary with
Nokia Corporation ("Nokia") and ABN AMRO NV, Ericsson AB and Ericsson Credit AB
and Sysdate Pty. Ltd. ("Sysdate") and ABN AMRO NV. In return of these
guarantees, we pledged minority shares of Euroasia Telecommunications Holding
B.V. ("Euroasia").
Based on the shareholders loan agreement signed on January 6, 2005, the
shareholders of Euroasia committed to arrange $40.0 million of financing to
Euroasia in proportion to their respective shareholding in Euroasia. The loan
shall be used by Euroasia to fund its indirect subsidiary Astelit. Turktell
Uluslararasi has fulfilled its commitment amounting to $20.4 million by signing
a deposit pledge agreement at an equal amount, with HSBC Bank Plc in return for
which HSBC Bank Plc. has
17
allowed a back to back loan to Euroasia. According to the shareholders loan
agreement, financing commitments should be fulfilled on or prior to February 28,
2005. If any of the shareholders fails to fulfill its commitment until February
28, 2005, either the shares of the non-funding shareholders will then be diluted
by the funding shareholders in proportion to their existing holdings and up to
the unfunded amount; or the amount of the loans will increase to $50.0 million
and the deadline to arrange the financing will be extended to March 31, 2005.
The increase in the loan will cause an increase in each shareholder's commitment
in proportion to their respective shareholding in Euroasia. If any of the
shareholders fails to fulfill its increased commitment on or before March 31,
2005, the shares of the non-funding shareholder will then be diluted by the
funding shareholders in proportion to their existing holdings and up to the
unfunded amount.
Irancell has 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 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. It should be noted that Irancell is in
the progress of formation. Once Irancell is formally established and the license
will be awarded to Irancell, Irancell will be required to pay an initial upfront
fee of EUR 300 million and an ongoing license fee based on a percentage of the
precommitted gross revenue or the actual gross revenue, whichever is greater.
As a condition of the GSM license bid in Iran, the Consortium was
obliged to provide a bid bond amounting to 263.0 billion Iranian Rial
(equivalent to $24.1 million at September 30, 2004), which was approximately
equal to EUR 25 million at the date of issuance, to the Iranian Authorities.
This bid bond was issued by Bank Saderat under a Deutsche Bank AG
counter-guarantee on February 8, 2004 and was underwritten by us. Although the
maturity of the bid bond was February 5, 2005, it was released on December 13,
2004 according to the instructions of the Iranian Authorities.
The Consortium was also obliged to provide a payment guarantee to the
Iranian Authorities of EUR 300.0 million, for an upfront license fee. The
payment guarantee becomes effective when the license is formally awarded to
Irancell. We have guaranteed a EUR 210.0 million (equivalent to $258.7 million
as of September 30, 2004) portion 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,
the payment guarantee has been extended until February 10, 2005.
As of September 30, 2004, we have entered into purchase contracts
relating to advertising services, the value of which amounted to $33.0 million.
Subsequent to September 30, 2004, we received advertising services amounting to
$10.0 million and the amount of such purchase contracts decreased to $23.0
million. In addition, we routinely enter into operating leases for property and
equipment in the normal course of business. At September 30, 2004, there were no
commitments and contingent liabilities in material amounts arising from such
operating leases.
18
Contractual Obligations and Commercial Commitments
The following table illustrates our major contractual obligations and
commitments as of September 30, 2004.
(US$ 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 773.5 501.7 271.8 - -
Finance Lease Obligations 17.3 13.1 4.2 - -
Purchase Obligations 278.5 18.5 260.0 - -
Advertising services 33.0 17.5 15.5 - -
GSM Equipment 243.0 - 243.0 - -
Other Equipment 2.5 1.0 1.5 - -
Total Contractual Cash Obligations 1,069.3 533.3 536.0 0.0 0.0
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 $5.0 million on June 18, 2004, $2.5 million on September 30,
2004 and $2.5 million on December 30, 2004.
With respect to the sponsorships agreement signed between ADD and us,
we have paid $7.0 million to ADD on June 23, 2004. In respect to the agreement,
we have committed to pay $8.0 million to ADD in two equal installments on July
1, 2006 and on July 1, 2007, respectively.
Purchase obligations in relation to GSM equipment arise from GSM
equipment supply and service contracts signed by Astelit. Astelit has entered
into a $89.0 million vendor financing agreement with Ericsson AB and Ericsson
Credit AB on June 30, 2004 and EUR 125.0 million (equivalent to $154.0 million
as of September 30, 2004) with Nokia and ABN AMRO NV. Under these agreements
Ericsson Credit AB and ABN AMRO NV will make credit facilities available to
Astelit in respect of equipment purchases from Ericsson and Nokia. We have
provided guarantees for 55% of the amounts financed plus 55% of interest and
costs in case of non-payment by Astelit.
Purchase obligations in relation to betting terminals arise from a
financial lease agreement signed between Inteltek and ABN AMRO Finansal Kiralama
AS ("ABN AMRO Leasing") on June 14, 2004, under which we committed to purchase
1,500 betting terminals amounting EUR 2 million (equivalent to $2.5 million as
of September 30, 2004).
Subsequently on November 2, 2004, Astelit has also entered into a $13.2
million supply contract including cost of equipment and services, interest and
fees and $7.2 million portion of this contract is financed through vendor
financing agreement with Sysdate and ABN AMRO N.V., under which ABN AMRO N.V.
will finance Astelit's purchases of GSM 1800 billing equipment, software and
services. On November 23, 2004, we provided a guarantee for $7.2 million plus
interest and costs in case of non-payment by Astelit. This guarantee will expire
on May 2, 2006.
Subsequent to September 30, 2004, with respect to the dispute on the
additional ongoing license fee on value added services and other charges; the
dispute on additional ongoing license fee on special transaction tax and stamp
duty; the dispute on additional ongoing license fee on
19
interconnection revenues, the settlement agreement has been signed between us
and the Turkish Treasury. According to the agreement, we agreed to pay TL 866.5
trillion (equivalent to $578.6 million at September 30, 2004) to the Turkish
Treasury, which consists of TL 596.7 trillion (equivalent to $398.4 million at
September 30, 2004) in principal and TL 269.8 trillion (equivalent to $180.1
million at September 30, 2004) in interest. We made two payments amounting to TL
300 trillion (equivalent to $200.3 as of September 30, 2004) and TL 150 trillion
(equivalent to $100.2 million as of September 30, 2004) that have become a
requirement to the settlement on October 19, 2004 and on November 25, 2004,
respectively. Also after the agreement has been signed, we paid TL 156.4
trillion (equivalent to $104.4 million at September 30, 2004) and TL 93.5
trillion (equivalent to $62.4 million at September 30, 2004) to the Turkish
Treasury on December 27, 2004 and on January 25, 2005 including TL 6.4 trillion
(equivalent to $4.3 million at September 30, 2004) and TL 4.7 trillion
(equivalent to $3.1 million at September 30, 2004) interest, respectively.
Subsequent to September 30, 2004, the settlement agreement has been
signed with Turk Telekom with respect to the dispute on Turk Telekom
interconnection fee. After we and Turk Telekom agreed that we owed Turk Telekom
a total of TL1,530.6 trillion (equivalent to $1,022.0 million as of September
30, 2004), including principal, interest, VAT and SCT. We accepted and committed
to pay TL 997.6 trillion (equivalent to $666.1 million as of September 30, 2004)
after Turk Telekom's deductions on our interconnection receivables through May
2003 to November 2004, amounting to TL533.0 trillion (equivalent to $355.9
million as of September 30, 2004), including principal, interest, VAT and SCT.
Based on the payment plan at the agreement, the first installment on December
31, 2004 was equal to the monthly interconnection fee receivables of us. The
remaining balance will be paid in 17 equal monthly installments.
Subsequent to September 30, 2004, we settled infrastructure usage
dispute with Turk Telekom by an agreement through negotiation. We and Turk
Telekom agreed on Turk Telekom's receivables with respect to infrastructure
usage dispute being TL 102 trillion (equivalent to $68.1 million at September
30, 2004) including principle, interest, VAT; and our receivables with respect
to 15% fund payment being TL 39.5 trillion (equivalent to $26.3 million at
September 30, 2004). After netting the receivables we agreed with Turk Telekom
that we owed Turk Telekom TL 62.5 trillion (equivalent to $41.8 million at
September 30, 2004). We will pay the agreed amount in ten instalments with the
interest upon. We made payments amounting to TL 29.6 trillion (equivalent to
$19.7 million at September 30, 2004) in accordance with the payment plan.
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.
20
Contingent Liabilities
The following table illustrates our major contingent liabilities as of
September 30, 2004.
Amount of contingent liability expiration per period
Remaining
commitment
USD million at September,30
Total amount ---------------- Less than 1 Over 5
committed 2004 year 1 - 3 years 4 - 5 years years
--------- ---- ---- ----------- ----------- -----
Guarantees
Irancell 282.8 282.8 282.8 - - -
Iranian Authorities 258.7 258.7 258.7 - - -
Iranian Authorities 24.1 24.1 24.1 - - -
Digital Platform 87.2 22.7 17.0 5.7 - -
BNP - Brussels (Buyer Credit) 50.2 17.8 13.6 4.2 - -
BNP - Brussels (Financial Loan) 8.2 0.4 0.4 - - -
BNP - Hungary (Buyer Credit) 11.7 4.4 2.9 1.5 - -
Websterbank - USA 1.2 0.1 0.1 - - -
--------------------------------------------------------------------------------------------------------------------
We have contingent liabilities in respect of bank letters of guarantee
obtained from Yapi Kredi and given to the Telecommunications Authority amounting
to $5.0 million, and customs authorities, private companies and other public
organizations amounting to $32.2 million. In addition, as of September 30, 2004,
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 $0.7 million.
As a condition of its GSM license bid, the Consortium was obliged to
provide a bid bond amounting to 263.0 billion Iranian Rial (equivalent to $24.1
million at September 30, 2004), which was approximately equal to EUR 25 million
at the date of issuance, to the Iranian Authorities. This bid bond was issued by
Bank Saderat under Deutsche Bank AG counter-guarantee on February 8, 2004 and
was underwritten by us. Although the maturity of the bid bond was February 5,
2005, it was released on December 13, 2004.
Under the terms of the license, Irancell will be required to pay an
ongoing license fee based on a percentage of the precommitted gross revenue or
the actual gross revenue, whichever is greater.
Additionally, the Consortium was also obliged to provide a payment
guarantee to the Iranian Authorities of EUR 300 million, for an upfront license
fee. The guarantee becomes effective when the license is formally awarded to
Irancell. We have guaranteed a EUR 210 million (equivalent to $258.7 million at
September 30, 2004) portion 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, the payment
guarantee has been extended until February 10, 2005.
Guarantees given on behalf of Digital Platform are related to loans for
set-top box, head-end and uplink imports and working capital financing used from
the respective banks.
Based on the shareholders agreement signed on January 27, 2004 and
effective from April 2, 2004, we committed to arrange at least $150.0 million of
financing to DCC until the end of 2006. 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, Ericsson AB and Ericsson
Credit AB and Sysdate and ABN AMRO NV. In return of these guarantees, we pleged
minority shares of Euroasia.
Astelit has entered into vendor financing agreements with Ericsson AB
and Ericsson Credit AB, Nokia and ABN AMRO NV and Sysdate and ABN AMRO NV;
amounting to $89.0 million, EUR 125.0 million (equivalent to $154.0 million as
of September 30, 2004) and $7.2 million on June
21
30, 2004, July 12, 2004 and November 2, 2004, respectively. The payment
guarantees were issued on July 22, 2004, August 26, 2004 and November 23, 2004
and will expire on January 21, 2006, December 30, 2005 and May 2, 2006,
respectively.
Based on the shareholders loan agreement signed on January 6, 2005, the
shareholders of Euroasia committed to arrange $40.0 million of financing to
Euroasia in proportion to their respective shareholding in Euroasia. The loan
shall be used by Euroasia to fund its indirect subsidiary Astelit. Turktell
Uluslararasi has fulfilled its commitment amounting to $20.4 million by signing
a deposit pledge agreement at an equal amount, with HSBC Bank Plc in return for
which HSBC Bank Plc. has allowed a back to back loan to Euroasia. According to
the shareholders loan agreement, financing commitments should be fulfilled on or
prior to February 28, 2005. If any of the shareholders fails to fulfill its
commitment until February 28, 2005, either the shares of the non-funding
shareholders will then be diluted by the funding shareholders in proportion to
their existing holdings and up to the unfunded amount; or the amount of the
loans will increase to $50.0 million and the deadline to arrange the financing
will be extended to March 31, 2005. The increase in the loan will cause an
increase in each shareholder's commitment in proportion to their respective
shareholding in Euroasia. If any of the shareholders fails to fulfill its
increased commitment on or before March 31, 2005, the shares of the non-funding
shareholder will then be diluted by the funding shareholders in proportion to
their existing holdings and up to the unfunded amount.
We also provided a letter of guarantee to the Turkish Treasury
amounting to TL 566.5 trillion (equivalent to $378.2 million as of September 30,
2004), which has been obtained from Yapi Kredi and will expire on April 15,
2005. The amount of the bank letter of guarantee reduced by the payments of TL
150 trillion payment made on November 25, 2004, TL 150 trillion payment made on
December 27, 2004 and TL 88.8 trillion payment made on January 25, 2005 and
further payments will be deducted from the remaining portion of the letter of
guarantee.
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 business. According to our current business plan, 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 September 30, 2004 and certain financing transactions
we have completed in the first three quarters of 2004.
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 and the ongoing legal cases.
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. Turkish Government's efforts to engage in a new economic
program with IMF lasting until 2007, acceptance of Turkey for membership
negotiations with the European Union ("EU"), recovery in the purchasing power in
line with the developments such as 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.
22
Loans
During the second quarter of 2004, we have fully utilized the $100
million Syndicated Murabaha facility, arranged by IDB and HSBC. This facility
has a maturity of two years from each drawn down date and was used to finance
network equipment purchases in 2004. This agreement was signed on January 16,
2004 and the facility has been utilized completely as of June 16, 2004. Our aim
was to diversify our international investor base and lower our borrowing costs
on an unsecured basis.
In the first quarter of 2004, we obtained an additional $200 million
from Akbank and Garanti , $100 million from each with maturities of three years.
These facilities provided us further financial flexibility for equity injections
to be made to our foreign investment and possible payments to be made related
with legal disputes. Meanwhile, we were able to extend the maturity of our loan
portfolio while lowering our total borrowing costs through these local bilateral
facilities.
Also on October 30, 2003, Yapi Kredi has committed to provide a cash
loan facility, with market rates available at our future drawdown, up to $150
million. This credit line expired as of October 30, 2004. As part of our risk
management strategy, we always monitor and consider contingency financing
alternatives in line with our business plans.
We believe that our cash from operations will be sufficient to fully
fund our business plan through the remaining quarter of 2004 and in 2005, which
includes repayments of approximately $4.2 million and $677.4 million,
respectively in debt obligation, including principal and interest. 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, 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. Depending on the availability in both
domestic and international debt and capital markets, we may continue to look for
new financing alternatives for both restructuring and contingency purposes. 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. We are watching international debt markets
for possible long term club deal or syndication. In addition, we are
continuously evaluating the fixed income financing instruments along with all
other debt and capital market instruments for any contingency funding.
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 consolidated financial
condition, results of operations, or liquidity.
23
Credit Ratings
Our debt ratings since Jan 18, 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 domestic and international
debt and capital markets. Conversely, any ratings downgrade may limit our future
access to debt and capital markets and increase the cost of borrowing.
Dividend Payments
Until 2003, we did not make any dividend payments as a result of our
accumulated losses under previous Capital Markets Board ("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 reported accumulated profit under
these new accounting standards.
In 2004, we declared that we would pay a dividend amounting TL 236,317
billion (equivalent to $157.8 million at September 30, 2004), of which one half
TL 118,159 billion (approximately $78.9 million) 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 profitability in accordance
with the new accounting standards 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 November 24, 2004, our board of directors decided that our general
dividend policy would be to distribute cash dividends in an amount of not less
than 50% of our distributable profits for each fiscal year, starting from 2004.
Future payment of dividends will depend, among other things, on our
profitability as determined under the new accounting standards, on our financial
performance, changes in the economic conditions and other developments in the
environment. The payment of dividends will also be subject to our cash flow
requirements, compliance with Turkish law and the approval of our board of
directors and the General Assembly of Shareholders.
New Technology Investments and Partnership Opportunities
Cash flow from the operations provides us with the sufficient means to
implement our plans. However, new technologies are excluded from the current
projections, so addition of any new technology such as 3G technology or any new
partnership opportunity may require both higher operating expense and capital
expenditures leading to a need for additional cash injection in the future.
Investment in Iran
In order to get the 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
24
agreement has been signed on September 12, 2004 between the Consortium and the
Iranian Authorities. On September 26, 2004, both the Iranian Parliament and
Guardian Council stated that the agreement concerning the mobile phone network,
will be 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. It should be noted that Irancell is in the progress of formation. Once
Irancell is formally established and the license will be awarded to Irancell,
Irancell will be required to pay an initial upfront fee of EUR 300 million. We
have provided a payment guarantee of EUR 210 million (equivalent to $258.7
million at September 30, 2004) portion 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,
maturity of the payment guarantee has been extended until February 10, 2005. The
guarantee becomes effective when the license is formally awarded to Irancell. On
August 12, 2004, capital contributions to Eastasia, which was increased from EUR
13.5 million to EUR 91 million on May 26, 2004, have been fully completed by us
and Ericsson Turkey in proportion to respective shares in capital. Initial
capital contributions to Irancell is recorded at an escow account amounting to
$110.9 million in Iran and we do not have access to this cash. It will be
released to Irancell as soon as Irancell is established.
Quantitative and Qualitative Discussion of Market Risk
Total indebtedness denominated in foreign currencies (all in US
dollars) amounted to $788.8 million, representing almost all of our total
indebtedness at September 30, 2004.
During nine month period ended September 30, 2004, we made principal
loan payments of $172.3 million.
Fair value of indebtedness as of September 30, 2004, which was
outstanding at December 31, 2003, has not changed significantly except for loans
under 1999 Issuer Credit Agreements. The fair value of the loan under 1999
Issuer Credit Agreement has decreased from $446.0 million at December 31, 2003
to $359.3 million at September 30, 2004. The carrying amount of the loan under
1999 Issuer Credit Agreement was $400.0 million at December 31, 2003 and $335.0
million at September 30, 2004.
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 portion of our debt obligations and
capital expenditures are, and are expected to continue to be, denominated in US
dollars. By contrast, substantially all of our revenues are, and will continue
to be, denominated in TL. In the normal course of business, in order to manage
our foreign exchange risk more efficiently, through the third quarter of 2004,
we engaged in 65 forward transactions for a total of $159.0 million to buy USD
on different maturity dates prior to year-end 2004. As of September 30, 2004, we
have executed the purchase of $14.0 million out of these transactions.
Subsequently, we have entered in an additional 47 forward transactions for a
total of $86 million to buy USD on maturity dates throughout 2004 and 2005. As
of January 25, 2005, we have executed the purchase of a further $161.0 million
per all maturing forward contracts. There is no covenant restriction related to
hedging transactions provided that the transaction is 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.
However, we keep a reasonable proportion of our monetary assets in US dollars
and EURO's to reduce our currency exposure and the maximum tariffs we may charge
are adjusted periodically by the Telecommunications Authority to account, among
other things, for the devaluation of the TL.
25
Legal and Arbitration Proceedings
We are involved in various claims, which are described in "Item 8A.
Consolidated Statements and Other Financial Information - Legal and Arbitration
Proceedings" in our 20-F.
The material changes in our legal and arbitration proceedings since the
date of our 20-F are as follows:
Within the first half of 2004, we have started to engage in discussions
with third parties relating to settlement of certain legal proceedings, which
include the dispute on the additional ongoing license fee on value added
services and other charges; the dispute on additional ongoing license fee on
special transaction tax and stamp duty; the dispute on additional ongoing
license fee on interconnection revenues; the dispute on Turk Telekom
interconnection fee; and the dispute on Turk Telekom infrastructure.
Subsequent to September 30, 2004, the settlement agreement has been
signed with Turk Telekom with respect to the dispute on Turk Telekom
interconnection fee. We and Turk Telekom agreed that we owed Turk Telekom a
total of TL 1,530.6 trillion (equivalent to $1,022.0 million as of September 30,
2004), including principal, interest, VAT and SCT. We accepted and committed to
pay TL 997.6 trillion (equivalent to $666.1 million as of September 30, 2004)
after Turk Telekom's deductions on our interconnection receivables through May
2003 to November 2004, amounting to TL 533.0 trillion (equivalent to $355.9
million as of September 30, 2004), including principal, interest, VAT and SCT.
Based on the payment plan at the agreement, the first installment on December
31, 2004 was equal to the monthly interconnection fee receivables of us. The
remaining balance will be paid in 17 equal monthly installments. As of September
30, 2004, we accrued TL 748.2 trillion (equivalent to $499.6 million as of
September 30, 2004) on our consolidated financial statements for the aforesaid
dispute. We made necessary applications for termination of respective court
cases.
Subsequent to September 30, 2004, with respect to the dispute on the
additional ongoing license fee on value added services and other charges; the
dispute on additional ongoing license fee on special transaction tax and stamp
duty; the dispute on additional ongoing license fee on interconnection revenues,
the settlement agreement has been signed with the Turkish Treasury. According to
the agreement, we agreed to pay TL 866.5 trillion (equivalent to $578.6 million
at September 30, 2004) to the Turkish Treasury, which consists of TL 596.7
trillion (equivalent to $398.4 million at September 30, 2004) in principal and
TL 269.8 trillion (equivalent to $180.1 million at September 30, 2004) in
interest.
We made two payments amounting to TL 300 trillion (equivalent to $200.3
million at September 30, 2004) and TL 150 trillion (equivalent to $100.1 million
at September 30, 2004) have become a requirement to the settlement and paid on
October 19, 2004 and on November 25, 2004, respectively. Also after the
agreement has been signed, we have paid TL 156.5 trillion (equivalent to $104.4
million at September 30, 2004) and TL 93.5 trillion (equivalent to $62.4 million
at September 30, 2004) to the Turkish Treasury on December 27, 2004 and on
January 25, 2005 including TL 6.5 trillion (equivalent to $4.3 million at
September 30, 2004) and TL 4.7 trillion (equivalent to $3.1 million at September
30, 2004) interest, respectively. We also provided a letter of guarantee to the
Turkish Treasury amounting to TL 566.5 trillion (equivalent to $378.2 million as
of September 30, 2004) which has been obtained from Yapi Kredi and will expire
on April 15, 2005. The amount of the bank letter of guarantee reduced by the
payments of TL 150 trillion payment made on November 25, 2004, TL 150 trillion
payment made on December 27, 2004 and TL 88.8 trillion payment made on January
25, 2005 and further payments will be deducted from the remaining portion of the
letter of guarantee. As of September 30, 2004, we have accrued TL 865.9 trillion
(equivalent to $578.2 million as of September 30, 2004) on our consolidated
financial statements for the aforesaid disputes. With respect to the settlement
agreement, we made necessary applications for termination of respective court
cases.
26
Afterwards June 2004, we have begun to make payments for additional
ongoing license fee on value added services and other charges expect interest
charges for late collections, additional ongoing license fee on special
transaction tax and stamp duty and additional ongoing license fee on
interconnection revenues.
Subsequent to September 30, 2004, we settled infrastructure usage
dispute with Turk Telekom by an agreement through negotiation. We and Turk
Telekom agreed on Turk Telekom's receivables with respect to infrastructure
usage dispute being TL 102 trillion (equivalent to $68.1 million at September
30, 2004) including principle, interest, VAT; and our receivables with respect
to 15% fund payment being TL 39.5 trillion (equivalent to $26.3 million at
September 30, 2004). After netting the receivables we agreed with Turk Telekom
that we owed Turk Telekom TL 62.5 trillion (equivalent to $41.8 million at
September 30, 2004). We will pay the agreed amount in ten instalments with the
interest upon. We made payments amounting to TL 29.6 trillion (equivalent to
$19.7 million at September 30, 2004) in accordance with the payment plan. With
respect to the settlement agreement we made necessary applications for
termination of respective court cases.
With respect to the dispute on the investigation of the Turkish
Competition Board against Telsim and us, the Competition Board announced its
decision regarding the investigation and stated that no penalties are required.
In response to the lawsuit filed by us regarding the Telecommunications
Authority's ruling for the investigation of the Telecommunications Authority on
international voice traffic the Danistay has issued an injunction to cease the
decisions and actions that are the subject of a lawsuit until the case is
finalized, but rejected our request for an injunction to cease implementation of
the related items of the Telecommunications Authority's regulation regarding
application of administrative fines to operators. With respect to the aforesaid
injunction of Danistay, on January 26, 2005 Telecommunications Authority has
paid TL 18.0 trillion (equivalent to $12.0 million at September 30, 2004) back
to us and informed us that the remaining balance amounting to TL 13.7 trillion
(equivalent to $9.2 million as of September 30, 2004) will be deducted from the
payables of us.
As of September 30, 2004, we have provided legal provisions amounting
to $1.1 billion with respect to settlement discussions regarding certain legal
proceedings, which include the dispute on the additional ongoing license fee on
value added services and other charges; the dispute on additional ongoing
license fee on special transaction tax and stamp duty; the dispute on additional
ongoing license fee on interconnection revenues; the dispute on Turk Telekom
interconnection fee. Subsequent to September 30, 2004, the settlement agreements
have been signed with Turk Telekom and the Turkish Treasury the outcome of
agreements are in line with the settlement discussions and our opinion.
The Telecommunications Authority decided that we have not complied with
our responsibility under Turkish regulations to provide national roaming and
fined us by approximately TL 21.8 trillion (equivalent to $14.6 million as of
September 30, 2004). On April 7, 2004, we made the related payment. On May 27,
2004, we commenced a lawsuit against Telecommunications Authority's decision. On
December 1, 2004, the Danistay has issued an injunction to cease the decisions
and actions subject to the lawsuit until the case is finalized but rejected our
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
Telecommunication Authority has paid back TL 21.8 trillion (equivalent to $14.6
million as of September 30, 2004) with respect to the injunction of Danistay to
cease the decisions and actions subject to the related lawsuit until the case is
finalized.
27
Other Matters
As per the request of Istanbul Stock Exchange regarding the transition
process to New Turkish Lira, issues related to information and accounting
systems have been resolved, and compliance process of our system to New Turkish
Lira has been finalized.
Our application to the Turkish Treasury to obtain an investment incentive
for the modernization and development of our infrastructure has been approved.
The investment incentive, which covers a total expenditure amounting to TL 1,047
trillion (equivalent to $699.1 million at September 30, 2004), is valid through
December 31, 2007 and enables us to be exempted from customs tax, 18% VAT
(except for software purchases) and corporate tax on 40% of the invested amount.
On January 3, 2005, the management of Digital Platform Iletisim
Hizmetleri A.S. ("Digiturk") has submitted a frame agreement proposing the
rescheduling of its liabilities to us. On January 14, 2005, our Board of
Directors resolved to make the necessary amendments on the proposal in
accordance with our requirements and authorized our management to make the
required preparations.
Meanwhile, major shareholders of Digiturk, Yapi Kredi and Fintur
Technologies B.V., assigned Yapi Kredi Yatirim Menkul Degerler A.S. as the
financial adviser for the sale of 90.64% of Digiturk shares owned by Yapi Kredi.
The invitation to bid for the majority shares of Digiturk has been announced on
January 15, 2005. The deadline for sending the final bids for the majority
shares of Digiturk is February 25, 2005.
28
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2003 AND SEPTEMBER 30, 2004 (Unaudited)
(In thousands, except share data)
December 31, September
2003 30, 2004
-------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 582,680 954,094
Trade receivables and accrued income, net (Note 5) 255,017 282,894
Due from related parties (Note 6) 70,625 83,542
Inventories 9,222 7,133
Prepaid expenses 23,739 50,773
Other current assets, includes $110,910 of restricted cash (Note 7) 63,018 308,723
Deferred tax assets (Note 17) 406,375 279,754
------------- ------------
Total current assets 1,410,676 1,966,913
DUE FROM RELATED PARTIES (Note 8) 56,611 72,331
PREPAID EXPENSES 4,637 6,306
INVESTMENTS (Note 9) 149,798 184,134
INVESTMENT SECURITIES 1,993 -
FIXED ASSETS, net (Note 10) 1,224,937 1,090,143
CONSTRUCTION IN PROGRESS (Note 11) 53,758 176,171
INTANGIBLES, net (Note 12) 823,969 870,272
GOODWILL (Note 12) 1,349 1,349
OTHER LONG TERM ASSETS 6,911 10,190
DEFERRED TAX ASSETS (Note 17) 132,688 56,917
------------- -------------
$ 3,867,327 4,434,726
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings (Note 13) $ 95,031 503,711
Trade payables (Note 14) 47,519 114,648
Due to related parties (Note 15) 4,585 3,753
Taxes payable (Note 17) 68,734 127,794
Other current liabilities and accrued expenses (Note 16) 1,566,652 1,306,888
------------- -------------
Total current liabilities 1,782,521 2,056,794
LONG TERM BORROWINGS (Note 18) 512,500 271,833
LONG TERM LEASE OBLIGATIONS 9,705 3,685
RETIREMENT PAY LIABILITY 10,834 10,916
DEFERRED TAX LIABILITIES (Note 17) - 13,154
MINORITY INTEREST (Note 2) 1,255 65,988
OTHER LONG TERM LIABILITIES (Note 16) 3,234 167,467
SHAREHOLDERS' EQUITY
Common stock
Par value one thousand TL; authorized, issued and outstanding
500,000,000,000 shares in 2003 and 1,474,639,361,000 shares in
2004 (Note 19) 636,116 636,116
Additional paid in capital 178 178
Legal reserves 5 42,501
Accumulated other comprehensive income (loss) (Note 3) (2,246) 193
Retained earnings 913,225 1,165,901
------------- -------------
Total shareholders' equity 1,547,278 1,844,889
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 20) $ 3,867,327 4,434,726
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2003 AND 2004 (Unaudited)
(In thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2004 2003 2004
------------------ ------------------- ------------------- ------------------
(Unaudited) (Unaudited)
Revenues $ 764,564 969,353 1,839,362 2,321,239
Direct cost of revenues (441,370) (549,220) (1,131,616) (1,523,552)
------------------ ------------------- ------------------- ------------------
Gross profit 323,194 420,133 707,746 797,687
General and administrative expenses (30,332) (26,520) (79,162) (94,006)
Selling and marketing expenses (66,996) (89,069) (173,761) (242,022)
------------------ ------------------- ------------------- ------------------
Operating income 225,866 304,544 454,823 461,659
Income from related parties, net 621 439 3,253 1,378
Interest income 36,378 39,124 84,847 114,475
Interest expense (85,318) 38,923 (253,574) (38,010)
Other income (expense), net (2,770) 1,612 3,822 2,459
Equity in net income of unconsolidated
investees (Note 9) 6,571 15,358 13,034 31,748
Minority interest (Note 2) 1,760 1,783 2,462 4,499
Translation gain (loss), net (22,450) 12,880 (76,020) 21,555
------------------ ------------------- ------------------- ------------------
Income before taxes 160,658 414,663 232,647 599,763
Income tax expense (Note 17) (43,816) (264,005) (3,093) (226,519)
------------------ ------------------- ------------------- ------------------
Net income $ 116,842 150,658 229,554 373,244
================== =================== =================== ==================
Basic and diluted earnings per common
share (Note 19) $ 0.00008 0.00010 0.00016 0.00025
================== =================== =================== ==================
Weighted average number
of common shares outstanding (Note 19) 1,474,639,361,000 1,474,639,361,000 1,474,639,361,000 1,474,639,361,000
================== =================== =================== ==================
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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2004 (Unaudited)
(In thousands)
September 30, September 30,
2003 2004
---------------------- ------------------
(Unaudited) (Unaudited)
Operating Activities:
Net income $ 229,554 373,244
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 315,049 316,957
Provision for retirement pay liability 3,884 82
Provision for inventories (391) (414)
Provision for doubtful receivables 34,471 (14,052)
Equity in net income of unconsolidated investees (13,034) (31,748)
Minority interest (229) 64,733
Deferred taxes (80,557) 215,546
Changes in assets and liabilities:
Trade receivables (124,120) (30,781)
Due from related parties (35,500) (28,637)
Inventories 832 2,503
Prepaid expenses (26,813) (28,703)
Other current assets (41,144) (244,355)
Taxes payable 86,498 59,060
Other long term assets (682) (4,606)
Due to related parties 1,105 (832)
Accrued income 7,435 16,956
Accrued expense 274,590 (116,172)
Trade payables 16,842 67,129
Other current liabilities 87,200 18,314
Other long term liabilities (1,578) 3,665
--------------- -------------
Net cash provided by operating activities 733,412 637,889
Investing Activities:
Additions to fixed assets (72,404) (217,583)
Additions to intangibles (56,319) (134,551)
Investments in securities (1,993) -
Investments in investees (23,968) -
--------------- -------------
Net cash used in investing activities (154,684) (352,134)
Financing Activities:
Proceeds from issuance of long and short term debt 4,929 342,297
Payment on long and short term debt (299,015) (172,291)
Net decrease (increase) in debt issuance expenses 20,294 (23)
Dividend paid - (78,072)
Payment on lease obligations (8,349) (11,357)
Increase in lease obligations 5,513 5,105
--------------- -------------
Net cash (used in) provided by financing activities (276,628) 85,659
--------------- -------------
Net increase in cash 302,100 371,414
Cash at the beginning of period 394,071 582,680
--------------- -------------
Cash at the end of period $ 696,171 954,094
=============== =============
Supplemental cash flow information:
Interest paid $ 110,731 62,939
Taxes paid 841 1,701
Non-cash investing activities-
Finance lease obligations 5,513 5,105
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 NINE MONTH PERIOD ENDED SEPTEMBER 30, 2004 (Unaudited)
(In thousands, except share data)
Common stock Additional Legal Comprehensive Retained
Shares Amount paid in capital reserves income earnings
------------------ ------------ --------------- -------- ------------- ---------
Balances at December 31, 2003 500,000,000,000 $ 636,116 178 5 913,225
Comprehensive income:
Net income 373,244 373,244
Other comprehensive income:
Translation adjustment 2,439
--------------
Comprehensive income 375,683
==============
Transfer to legal reserves 42,496 (42,496)
Dividend paid (78,072)
Stock splits 974,639,361,000
------------------ ----------- -------------- --------- ----------
Balances at September 30, 2004 1,474,639,361,000 $ 636,116 178 42,501 1,165,901
================== =========== ============== ========= ==========
Accumulated
other Total
comprehensive shareholders'
income (loss) equity
------------- ------------
Balances at December 31, 2003 (2,246) 1,547,278
Comprehensive income:
Net income 373,244
Other comprehensive income:
Translation adjustment 2,439 2,439)
Comprehensive income
Transfer to legal reserves
-
Dividend paid (78,072)
Stock splits
------------ ----------
Balances at September 30, 2004 193 1,844,889
============ ==========
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, 2003 and September 30, 2004 (Unaudited) and for the
Three Month and Nine Month Periods Ended September 30, 2003 and 2004
(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.
From 1994 to 1998, Turkcell and Turk Telekomunikasyon AS ("Turk Telekom"),
a state owned organization of Turkey, were parties to a revenue sharing
agreement (the "Revenue Sharing Agreement"), in accordance with which, Turk
Telekom contracted with subscribers, performed billing and collection,
assumed collection risks and provided access to its telecommunications
network, while Turkcell made related GSM network investments. Under the
agreement, Turkcell was entitled to receive 100% of the fees received from
subscriber identity module card or simcard sales, but was required to pay
Turk Telekom approximately 67% of the fees billed for connection, monthly
fixed fees and ongoing calls, and 90% of the fees billed for incoming
calls. As a result of the Revenue Sharing Agreement, Turkcell retained
approximately 25% and 30% of the revenues generated by subscribers on its
GSM network.
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 freed 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 revenue.
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 1998, Cellco Finance N.V. ("Cellco"), a financing entity set up to
issue debt instruments in order to refinance Turkcell's existing
indebtedness, issued $300,000 in 15% senior subordinated notes due in 2005,
which were fully paid on November 10, 2003, and in December 1999, Cellco
issued $400,000 in 12.75% senior notes due in 2005. All amounts raised
under Cellco's debt offerings were loaned to Turkcell. As of and for the
year ended December 31, 2003, all of the assets and liabilities of Cellco,
which were previously recorded in the consolidated financial statements of
Turkcell and its subsidiaries (the "Company"), for the first time are
consolidated under the guidance of FASB Interpretation No. 46
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51", as revised in December 2003 ("FIN 46 (R)"). The consolidation had no
effect on the Company's consolidated financial position or results of
operations.
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.
5
Two significant founding shareholders, the Cukurova Group and TeliaSonera,
currently own approximately 42.4% and 37.1%, 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. Kibris Telekom and the Ministry of Prosperity and Transportation of
the Turkish Republic of Northern Cyprus are parties to a revenue sharing
agreement, which covers a period of 10.5 years commencing in March 1999,
under which revenues billed for subscription fees, monthly fixed fees,
incoming and outgoing calls are shared at a ratio of 50% between the
parties.
In December 2003, the management decided to invest $50,000 in Digital
Cellular Communications ("DCC"), a Ukrainian telecommunications company
with 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 the shares of DCC to Euroasia in exchange for a 49%
interest in that company in 2004.
For the three and seven month periods ended September 30, 2004, Euroasia's
revenues, direct cost of revenues, loss before taxes and net loss were as
follows:
3 months ended 7 months ended
September 30, September 30,
2004 2004
(Unaudited) (Unaudited)
-------------- --------------
Revenues $ 5,724 7,693
Direct cost of revenues (3,234) (5,993)
Loss before taxes (4,425) (6,784)
Net loss (2,916) (4,497)
Under a shareholders agreement signed on January 27, 2004 and effective
from April 2, 2004, the Company has committed to arrange at least $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
vendor financing agreements signed by LLC Astelit ("Astelit"), a 50% owned
subsidiary of the Company with Nokia Corporation ("Nokia") and ABN AMRO NV,
Ericsson AB and Ericsson Credit AB and Sysdate PTY Ltd. ("Sysdate") and ABN
AMRO NV. In return of these guarantees, Turkcell pledged minority shares of
Euroasia.
Turkcell and Ericsson Telekomunikasyon AS ("Ericsson Turkey") have
established a company named East Asian Consortium B.V. ("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 Electronic Development Company.
Turkcell and Ericsson Turkey own 85% and 15% of Eastasia, respectively, and
Turkcell indirectly will own 51% of Irancell through Eastasia.
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 has guaranteed a EUR 210 million portion of
this guarantee through HSBC plc expiring on February 10, 2005.
6
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 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.
In addition, as of September 30, 2004, the Company was involved in various
activities, including call centers and database management, directory
assistance, advertising, on-line and telephone gaming, Wireless Application
Protocol (WAP), value added GSM services (VAS) and internet services
through the following consolidated subsidiaries: Global Bilgi Pazarlama
Danisma ve Cagri Servisi Hizmetleri AS ("Global"), Corbuss Kurumsal Telekom
Servis Hizmetleri AS ("Corbuss"), Turktell Bilisim Servisleri AS
("Turktell"), Hayat Boyu Egitim AS ("Hayat"), Kibrisonline Limited Sirketi
("Kibrisonline"), Iyi Eglenceler Eglence ve Turizm AS ("Iyi Eglenceler"),
Interaktif Cocuk Programlari Yapimciligi ve Yayinciligi AS ("Digikids"),
Mapco Internet ve Iletisim Hizmetleri Pazarlama AS ("Mapco"), Inteltek
Internet Teknoloji Yatirim ve Danismanlik Ticaret AS ("Inteltek"), Libero
Interaktif Hizmetler AS ("Libero"), Bilisim Telekomunikasyon Hizmetleri AS
("Bilisim Telekomunikasyon") and Turktell Uluslararasi Yatirim Holding AS
("Turktell Uluslararasi"). The subsidiaries are owned 100%, 99%, 100%, 75%,
60%, 100%, 60%, 100%, 55%, 55%, 100% and 100%, respectively, by Turkcell or
its subsidiaries.
(2) Financial Position and Basis of Preparation of Financial Statements
Turkcell and its subsidiaries (the "Company") maintain 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. The unaudited consolidated financial
statements of the Company as of September 30, 2004 and for the three and
nine month periods ended September 30, 2003 and 2004, in the opinion of the
management of the Company, include all the adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation 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 accounting principles generally accepted in the United
States of America. 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.
(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 and nine month periods ended September 30, 2003
and 2004 was $63,057, $151,156, $230,463 and $375,683, respectively.
(4) New Accounting Standards Issued
The Financial Accounting Standards Board (the "FASB") has issued Statements
of Financial Accounting Standards ("SFAS") No. 153, "Exchanges of
Non-monetary Assets", an amendment of
7
APB Opinion No. 29, Accounting for Non-monetary Transactions. The
amendments made by SFAS No. 153 are based on the principle that exchanges
of non-monetary assets should be measured based on the fair value of the
assets exchanged. Further, the amendments eliminate the narrow exception
for non-monetary exchanges of similar productive assets and replace it with
a broader exception for exchanges of non-monetary assets that do not have
commercial substance. Previously, Opinion No. 29 required that the
accounting for an exchange of a productive asset for a similar productive
asset or an equivalent interest in the same or similar productive asset
should be based on the recorded amount of the asset relinquished. SFAS No.
153 is effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The provisions of SFAS No. 153 shall
be applied prospectively. The adoption of SFAS No. 153 is not expected to
have a material effect on the Company's consolidated financial statements.
On December 12, 2004 the FASB published 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 interim or 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.
On November 2004, the FASB has issued SFAS No. 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing", to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). SFAS No. 151 requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal". In addition, SFAS No. 151 requires that
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The guidance is
effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The provisions of SFAS No. 151 should be applied
prospectively. The adoption of SFAS No. 151 is not expected to have a
material effect on the Company's consolidated financial statements.
At June 30-July 1, 2004 meetings, Emerging Issues Task Force ("EITF")
reached a consensus on EITF 02-14, "Whether an Investor Should Apply the
Equity Method of Accounting to Investments Other Than Common Stock". The
consensus was reached regarding an investor that has the ability to
exercise significant influence over the operating and financial policies of
the investee. This type of investor should apply the equity method of
accounting only when it has an investment(s) in common stock and/or an
investment that is in-substance common stock. EITF also reached a consensus
on the definition of in-substance common stock and related guidance. EITF
02-14 is effective for reporting periods beginning after September 15,
2004. The adoption of EITF 02-14 is not expected to have a material impact
on the Company's consolidated financial statements.
Through an announcement at the EITF meeting on September 29, 2004, the
Staff of the United States Securities and Exchange Commission (the "SEC")
provided guidance relating to the use of the residual method to value
acquired assets other than goodwill under US GAAP. The new guidance
requires the use of a direct value method when assigning fair values to
intangible assets other than goodwill acquired in business combinations
under SFAS No. 141, "Business Combinations", completed after September 29,
2004 and for impairment testing under SFAS No. 142 "Goodwill and Other
Intangible Assets". SEC registrants that have applied the residual method
to intangible assets other than goodwill in impairment testing are required
to perform a transitional impairment test using a direct method no later
than the beginning of their fiscal year beginning after December 15, 2004.
Any transitional impairment should be recorded, net of tax, as a cumulative
effect in a change in accounting principle.
8
Reclassification of recorded balances between goodwill and intangible
assets immediately prior to adoption of this guidance is prohibited. The
adoption of the Topic D-108 is not expected to have a material effect on
the Company's consolidated financial statements.
On September 2004, EITF reached a consensus on EITF 04-01, "Accounting for
Preexisting Relationships between the Parties to a Business Combination".
This Issue applies when two parties that have a pre-existing contractual
relationship enter into a business combination. Specifically, the Issue is
whether a consummation of a business combination between two parties that
have a pre-existing contractual relationship should be evaluated to
determine if a settlement of a pre-existing contractual relationship
exists, thus requiring accounting separate from the business combination.
The measurement and recognition of a settlement of a preexisting
relationship in conjunction with a business combination and whether certain
reacquired rights should be recognized as intangible assets apart from
goodwill. The FASB staff recommends that any consensuses on recognition and
measurement of a settlement of a preexisting relationship in a business
combination should be applied prospectively to business combinations
completed in reporting periods beginning after October 13, 2004. The
adoption of EITF 04-01 is not expected to have an effect on the Company's
consolidated financial statements.
(5) Trade Receivables and Accrued Income, net
At December 31, 2003 and September 30, 2004, the breakdown of trade
receivables and accrued income is as follows:
December 31, September 30,
2003 2004
--------------- ---------------
(Unaudited)
Receivables from subscribers $ 256,597 243,194
Accounts and checks receivable 40,749 80,332
Receivable from Turk Telekom 17,662 22,263
-------- --------
315,008 345,789
Accrued service income 75,929 58,973
Allowance for doubtful receivables (135,920) (121,868)
-------- --------
$ 255,017 282,894
======== ========
9
Movements in the allowance for doubtful receivables are as follows:
December 31, September 30,
2003 2004
-------------- --------------
(Unaudited)
Beginning balance $ 126,677 135,920
Provision for doubtful receivables 13,415 10,820
Write offs (27,715) (15,034)
Effect of change in exchange rate 23,543 (9,838)
--------- ---------
Ending balance $ 135,920 121,868
========= =========
(6) Due from Related Parties
As of December 31, 2003 and September 30, 2004, the balance comprised:
December 31, September 30,
2003 2004
-------------- -------------
(Unaudited)
KVK Teknoloji Urunleri AS ("KVK Teknoloji") $ 31,287 28,024
Cukurova Investments NV ("Cukurova Investments") - 18,920
Digital Platform Iletisim Hizmetleri AS ("Digital Platform") 8,000 14,176
A-Tel Pazarlama ve Servis Hizmetleri AS ("A-Tel") 21,019 8,819
Other 10,319 13,603
------- -------
$ 70,625 83,542
======= =======
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 Cukurova Investments, a company whose majority shares are owned by
some of the shareholders of the Company, resulted from the payment of
capital commitment to Irancell's share capital account on behalf of
Cukurova Investments.
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 and advances given for current and planned
sponsorships.
Due from A-Tel, a 50-50 joint venture of Yapi Kredi Bankasi AS (a
shareholder of the Company) and Sabah media group, mainly resulted from
simcard and prepaid card sales to this company.
10
(7) Other Current Assets
At December 31, 2003 and September 30, 2004, the balance comprised:
December 31, September 30,
2003 2004
-------------- ---------------
(Unaudited)
Prepaid taxes $ 37,755 161,576
Restricted cash - 110,910
Advances to suppliers 7,013 8,525
Deferred financing costs 2,565 3,915
Promotional material 3,600 2,529
Other 12,085 21,268
-------- --------
$ 63,018 308,723
======== ========
Restricted cash represents the capital contribution for Irancell deposited
in escrow in Iran related with the incorporation of Irancell. Currently,
the Company does not have access to this account. This amount will be
released to Irancell as soon as this company is established.
(8) Due from Related Parties - Long Term
December 31, September 30,
2003 2004
-------------- ---------------
(Unaudited)
Digital Platform $ 56,112 71,979
Other 499 352
-------- --------
$ 56,611 72,331
======== ========
Due from Digital Platform mainly resulted from call center revenues,
financial support for operations and advances given for current and planned
sponsorships.
11
(9) Investments
At December 31, 2003 and September 30, 2004, investments in associated
companies were as follows:
December 31, September 30,
2003 2004
------------- -------------
(Unaudited)
Fintur
$ 127,179 161,515
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
-------- --------
$ 149,798 184,134
======== ========
At December 31, 2003 and September 30, 2004, the Company's ownership
interest in Fintur was 41.45%.
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.
Aggregate summarized information of Fintur as of December 31, 2003 and
September 30, 2004 and for the three month and nine month periods ended
September 30, 2003 and 2004 are as follows:
December 31, September 30,
2003 2004
-------------- --------------
(Unaudited)
Current assets $ 120,372 146,149
Non-current assets 440,926 575,591
-------- --------
561,298 721,740
======== ========
Current liabilities 211,885 229,156
Non-current liabilities 159,517 219,846
Shareholders' equity 189,896 272,738
-------- --------
$ 561,298 721,740
======== ========
3 months ended 3 months ended 9 months ended 9 months ended
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- --------------- --------------- ---------------
Revenues $ 93,056 154,521 235,696 392,417
Direct cost of revenues (40,371) (62,715) (113,754) (163,435)
Income before tax 20,258 46,162 38,574 101,657
Net income 15,851 37,051 31,444 76,593
12
(10) Fixed Assets, net
As of December 31, 2003 and September 30, 2004, the analysis of fixed
assets is as follows:
Useful December 31, September 30,
Lives 2003 2004
-------------- ---------------- -------------
(Unaudited)
Operational fixed assets:
Base terminal stations 8 years $ 971,805 1,009,916
Mobile switching center/Base station controller 8 years 828,969 857,239
Minilinks 8 years 205,327 209,312
Supplementary system 8 years 36,333 36,892
Call center equipment 5 years 9,127 9,729
GSM services equipment 8 years 87,853 88,047
----------- -----------
2,139,414 2,211,135
Accumulated depreciation (1,101,567) (1,297,204)
----------- -----------
Operational fixed assets, net 1,037,847 913,931
Non-operational fixed assets:
Land 773 846
Buildings 20-33 years 174,038 179,086
Furniture, fixture and equipment 3-5 years 160,521 175,151
Motor vehicles 4-5 years 8,072 8,637
Leasehold improvements 3-5 years 54,032 54,428
----------- -----------
397,436 418,148
Accumulated depreciation (210,346) (241,936)
----------- -----------
Non-operational fixed assets, net 187,090 176,212
----------- -----------
$ 1,224,937 1,090,143
=========== ===========
At December 31, 2003 and September 30, 2004, total fixed assets acquired
under finance leases amounted to $72,351 and $ 76,280, respectively.
Depreciation of these assets amounted to $804, $1,194, $1,588 and $3,268
for the three month and nine month periods ended September 30, 2003 and
2004, respectively, and is included in depreciation expense.
(11) Construction in Progress
At December 31, 2003 and September 30, 2004, construction in progress
consisted of expenditures in GSM and non-operational items and is as
follows:
December 31, September 30,
2003 2004
-------------- -------------
(Unaudited)
Turkcell-GSM network $ 51,203 131,805
Astelit-GSM network - 31,905
Non-operational items 1,525 6,799
Turkcell-Other projects 400 5,107
-------- --------
Kibris Telekom-GSM network 630 555
$ 53,758 176,171
======== ========
13
(12) Intangibles, net
As of December 31, 2003 and September 30, 2004, intangibles consisted of
the following:
Useful December 31, September 30,
Lives 2003 2004
---------- -------------- -------------
(Unaudited)
GSM and other telecommunications licenses 4-25 years $ 500,000 571,988
Computer software 3-10 years 762,753 821,174
Transmission lines 10 years 15,708 18,658
Other 2 years - 1,192
--------- ---------
1,278,461 1,413,012
Accumulated amortization (454,492) (542,740)
--------- ---------
$ 823,969 870,272
========= =========
GSM and other telecommunications licenses are comprised of a 25 year GSM
license of Turkcell amounting to $500,000 (Note 1), GSM licenses of Astelit
amounting to $66,384 and three fixed line licenses of DCC totaling to
$5,604. GSM licenses of Astelit were granted on June 8, 1998 and March 3,
2004 and will expire on June 8, 2008 and March 3, 2019, respectively. Three
fixed line licenses of DCC, one for local, one for long distance and one
for international calls, will expire on July 8, 2005, June 17, 2013 and
October 30, 2017, respectively.
As of September 30, 2004, amortized intangible assets are as follows:
Gross carrying Accumulated
amount amortization
------ ------------
GSM and other telecommunications licenses $ 571,988 128,333
Computer software 821,174 406,396
Transmission lines 18,658 7,812
Other 1,192 199
---------- ----------
$1,413,012 542,740
========== ==========
Aggregate amortization expense
------------------------------
Aggregate amortization expense for the three month and nine month periods
ended September 30, 2003 and 2004 are $28,232, $29,888, $83,308 and
$88,248, respectively.
Estimated amortization expense
------------------------------
For the year ended December 31, 2004 $ 119,486
For the year ended December 31, 2005 120,387
For the year ended December 31, 2006 117,076
For the year ended December 31, 2007 106,046
For the year ended December 31, 2008 68,660
14
As of September 30, 2004, the Company does not have any indefinite live
intangible assets. Goodwill amounting to $1,349 as of September 30, 2004
was recorded on the acquisition of the remaining 30% shares of Mapco.
In February 2004, the Company created a new wholly-owned company named
Euroasia to facilitate the investment in DCC, the third largest mobile
operator in Ukraine in terms of number of subscribers, and capitalized it
with cash contributions of $50,000. In 2004, the owners of DCC contributed
the shares of DCC to Euroasia in exchange for a 49% interest in that
company. The acquisition of DCC expands the Company's potential subscriber
market, and the Company currently holds a 51% interest in DCC.
DCC, which holds a 99% interest in Astelit, owns three fixed line licenses
and two GSM licenses. As a result of this acquisition, the Company expects
to be a significant participant in the GSM market in Ukraine.
The consolidated financial position of Euroasia as of September 30, 2004
and results of its operations for the three month and seven month periods
ended September 30, 2004 are included in the accompanying consolidated
balance sheet as of September 30, 2004 and statement of operations for the
three month and nine month periods ended September 30, 2004, respectively.
Management has not yet completed its evaluation of the fair value of
identifiable assets and liabilities of DCC or its allocation of the
purchase price. Turkcell is in the process of obtaining third party
valuations of identifiable assets and liabilities at the date of
acquisition and as final purchase accounting adjustments may differ from
initial estimates the allocation of purchase price is subject to
refinement. Management plans to complete such assessment before the
consolidated financial statements of the Company as of and for the year
ended December 31, 2004 are issued.
(13) Short Term Borrowings
At December 31, 2003 and September 30, 2004, short-term borrowings
comprised the following:
December 31, September 30,
2003 2004
------------ -------------
(Unaudited)
Current portion of long term borrowings (Note 18) $ 93,375 501,652
Other short term bank loans and overdrafts 1,656 2,059
-------- --------
$ 95,031 503,711
======== ========
15
(14) Trade Payables
At September 30, 2004, the balance mainly consists of the payable to Turk
Telekom regarding to the settlement for infrastructure usage dispute
amounting to $41,795 including principal, interest and VAT. The remaining
of the balance includes amounts due to Ericsson Turkey and Ericsson Radio
Systems AB ("Ericsson Sweden") totaling to $32,750 (December 31, 2003:
$11,631) resulting from fixed asset purchases, site preparation and other
services, and amounts due to other suppliers totaling to $40,103 (December
31, 2003: $35,888) 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 give 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.
Turkcell also entered into a GSM service agreement with Ericsson Sweden
under which Ericsson Sweden supplies Turkcell with the following system
services: trouble report handling service, hardware service, consultation
service and emergency service. This agreement expired on December 31, 1998
but contains successive one-year automatic renewals up until December 31,
2005 unless terminated by either party in writing no later than nine months
prior to the expiration of the then current term. At December 31, 2003, the
agreement was automatically extended through December 31, 2004.
(15) Due to Related Parties
As of December 31, 2003 and September 30, 2004, due to related parties
comprised:
December 31, September 30,
2003 2004
------------ -------------
(Unaudited)
Turkiye Genel Sigorta AS ("Genel Sigorta") $ 976 1,553
Hobim Bilgi Islem Hizmetleri AS ("Hobim") 1,694 1,291
Yapi Kredi Sigorta AS ("Yapi Kredi Sigorta") 792 -
Other 1,123 909
------ ------
$ 4,585 3,753
====== ======
Due to Genel 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.
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.
16
(16) Other Current Liabilities and Accrued Expenses
At December 31, 2003 and September 30, 2004, the balance comprised:
December 31, September 30,
2003 2004
------------ -------------
(Unaudited)
License fee accrual--The Turkish Treasury (Note 20) $ 538,930 610,808
Interconnection dispute accrual (Note 20) 461,803 339,016
Taxes and withholdings 137,446 132,304
Deferred income 85,223 82,490
Selling and marketing expense accruals 27,317 40,520
Transmission fee accrual 16,671 14,466
Accrued interest on borrowings 22,399 12,146
Lease obligations--short term portion 12,993 11,655
Telecommunications Authority share accrual 12,005 7,580
Telecommunications Authority penalty accrual (Note 20) 104,476 -
Annual frequency usage fee (Note 20) 94,111 -
Class action accrual 19,200 -
Other expense accruals 34,078 55,903
---------- ----------
$ 1,566,652 1,306,888
========== ==========
At September 30, 2004, total interconnection dispute accrual amounted to
$499,584, of which $339,016 and $160,568 are included in other current
liabilities and accrued expenses and other long term liabilities,
respectively.
(17) Taxes on Income
The income tax expense is attributable to income from continuing operations
and consists of:
3 Months Ended 9 Months Ended
September 30, September 30,
2003 2004 2003 2004
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Current tax charge $ (60,368) (49,033) (83,650) (49,033)
Deferred tax benefit (expense) 16,552 (214,972) 80,557 (177,486)
-------- -------- -------- --------
Income tax expense $ (43,816) (264,005) (3,093) (226,519)
======== ======== ======== ========
Income tax expense attributable to income from continuing operations was
$264,005 and $226,519 for the three month and nine month periods ended
September 30, 2004. These amounts are different from the amount computed by
applying the Turkish income tax rate of 33% (2003: 30%) to pretax income
from continuing operations as a result of the following:
17
3 Months Ended 9 Months Ended
September 30, September 30,
2003 2004 2003 2004
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Computed "expected" tax expense $ (48,197) (134,153) (69,794) (193,986)
Non taxable translation gain (60,359) (25,957) (121,174) (65,137)
Investment tax credit 10,503 (10,018) 47,158 3,883
Effect of change in tax rates - (84,951) - (62,713)
Change in valuation allowance 51,529 (479) 161,122 (1,219)
Non-taxable items - (17,148) - 78,761
Other 2,708 8,701 (20,405) 13,892
-------- -------- -------- --------
Income tax expense $ (43,816) (264,005) (3,093) (226,519)
======== ======== ======== ========
For the three and nine month periods ended September 30, 2003 and 2004,
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, 2003
and September 30, 2004 are presented below:
December 31, September 30,
2003 2004
------------- -------------
(Unaudited)
Deferred tax assets:
Accrued expenses $ 345,363 288,427
Accounts and other receivables (principally due
to allowance for doubtful accounts) and other 71,867 981
Net operating loss carry forwards 12,690 15,527
Tax credit carry forwards (Investment tax credit) 342,964 298,470
--------- ---------
Gross deferred tax assets 772,884 603,405
Less: Valuation allowances (11,038) (12,058)
--------- ---------
Deferred tax assets 761,846 591,347
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 (222,783) (267,830)
--------- ---------
Total deferred tax liabilities (222,783) (267,830)
--------- ---------
Net deferred tax assets $ 539,063 323,517
========= =========
18
At September 30, 2004, net operating loss carry forwards are as follows:
Expiration
Year Amount Date
---- ------ ---------------
1999 $ 74 2004
2000 4,197 2005
2001 9,159 2006
2002 2,869 2007
2003 16,934 2008
2004 15,854 2009 thereafter
Non taxable translation gain results from translation of Turkish Lira
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 gains and losses 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 Turkish Lira 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 and
call center 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 September 30, 2004, investment incentive certificates provide
for tax benefits on cumulative purchases of up to approximately $4,092,262
(December 31, 2003: $4,389,386) in qualifying expenditures, as defined in
the certificates. As of September 30, 2004, the Company had unused tax
credit carryforwards under the certificates of approximately $298,470
(December 31, 2003: $342,964), which can be carried forward indefinitely.
The certificates are denominated in Turkish Lira. However, approximately
$626,191 of qualifying expenditures through September 30, 2004 (December
31, 2003: $2,087,834) 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 2004 and
onwards and has generated taxable income for nine consecutive quarters.
Management believes that subsequent to the conclusion of the war in Iraq
during the Company's second quarter of 2003 and the limited impact it has
had on the economic situation in Turkey, the economic and political
uncertainties surrounding the Company have become less uncertain and
provided management better visibility about the near term future. Further,
economic and political situation in Turkey became more stable and there are
positive expectations about the near term future. In addition, the
interconnection agreement with Turk Telekom has been revised in late 2003.
Management believes that these matters also provide management better
visibility about the near term future. As a result, management concluded
that it was more likely than not that the deferred tax assets of $323,517
were realizable. Turkish tax legislation does not allow companies to file
tax returns on a consolidated basis. Accordingly, 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 $12,058 is recorded as of September 30, 2004 (December 31,
2003: $11,038) for such amounts. The valuation allowance at December 31,
2003 and September 30, 2004 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 $323,517 as of September
30, 2004, will be realized through reversal of taxable temporary
differences as well as future taxable income exclusive of reversing taxable
temporary
19
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 will be determined based on the financial statements
restated for the effects of inflation. The change in tax law is not
expected to have a material impact on future taxable income.
(18) Long Term Borrowings
At December 31, 2003 and September 30, 2004, long-term borrowings
comprised:
Interest Contractual December 31, September 30,
Rate (%) Maturity 2003 2004
------------------- ------------------- --------------- -----------------
(Unaudited)
Cellco 12.75% senior notes, due 2005 12.75% August 2005 $ 400,000 335,000
Murabaha syndicated facility Libor + 4.50% June 2006 - 100,000
Akbank TAS ("Akbank") - 2 Libor + 3.50% February 2007 - 100,000
Turkiye Garanti Bankasi AS
("Garanti Bankasi") - 1 Libor + 3.40% March 2007 - 100,000
Akbank - 1 Libor + 5.25% June 2005 125,000 62,500
Garanti Bankasi - 2 Libor + 5.62% April 2006 75,000 50,000
Nordbanken--Stockholm ("Nordbanken") Libor + 0.6% September 2004 5,875 -
Nokia Euribor + 2.80% December 2005 - 15,437
Ericsson Credit AB Libor + 5.00% January 2006 - 10,474
Other - 74
--------- ---------
605,875 773,485
Less: Current portion of long term borrowings (Note 13) (93,375) (501,652)
--------- ---------
$ 512,500 271,833
========= =======
During 2003 and 2004 the Company invested in the 12.75% senior notes issued
by Cellco. The nominal value and amortized cost of such bonds amounted to
$65,000 and $73,113, respectively. Reacquisition of these bonds is
considered an early extinguishment of debt under the provisions of SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The difference between the reacquisition
price and net carrying amount of Cellco bonds amounting $8,113 is recorded
in general and administrative expenses.
The Company has short and long term credit lines with local and foreign
banks. On October 30, 2003, Yapi Kredi has committed to provide a loan
facility, at market rates, of up to $150,000 to the Company over the next
twelve months. This credit line has not been used as of September 30, 2004
and has expired on October 30, 2004.
Turkcell signed a Murabaha syndicated facility, which is led by HSBC Bank
AS and the Islamic Development Bank, amounting to $100,000 in January 2004.
The facility has a maturity of two years from
20
each drawdown and the grace period is one year from each drawdown. The
facility is unsecured and will be used for certain qualified equipment
purchases.
Turkcell has fully drawn down additional borrowings of $100,000 from Akbank
in February 2004 and $100,000 from Garanti Bankasi in March 2004. There are
no covenant requirements for these borrowings and both facilities will be
repaid in 3 years.
As of September 30, 2004, the Company is not subject to any financial
covenants or ratios with respect to its borrowings. No facilities are
collateralized by letters of guarantee or sureties of the Company's
shareholders.
(19) Common Stock
At September 30, 2004, common stock represented 1,474,639,361,000 (December
31, 2003: 500,000,000,000) authorized, issued and fully paid shares with a
par value of one thousand Turkish Lira each.
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended, Nine months Ended,
September 30, September 30,
2003 2004 2003 2004
-------------------------------------------- -----------------------------------------
(Unaudited) (Unaudited)
Numerator:
Net income 116,842 150,658 229,554 373,244
Denominator:
Basic and diluted weighted
average shares 1,474,639,361,000 1,474,639,361,000 1,474,639,361,000 1,474,639,361,000
Basic and diluted net income
per share 0.00008 0.00010 0.00016 0.00025
On February 26, 2004, Cukurova Holding AS informed Turkcell that it sold
8,998,845,000 Turkcell shares (nominal value of TL 8,998,845 million) to
Yapi Kredi. Following this transaction, Cukurova Holding AS and Yapi Kredi
held 7.47% and 2.89% of Turkcell, respectively.
On June 23, 2004, the board of directors decided that Turkcell's statutory
paid-in capital would be increased from TL 500 trillion to TL 1,474.6
trillion by adding TL 118.1 trillion out of the total dividend for the year
2003 and the statutory capital inflation adjustment (included in the
financial statements prepared in accordance with the accounting standards
promulgated by the Turkish Capital Markets Board) amounting to TL 856.5
trillion for 2003. The increase of TL 974.6 trillion would be distributed
to the Company's shareholders in the form of a share split. The capital
increase was recorded as stock split, and the Company issued
974,639,361,000 new shares. All share amounts and per share figures
reflected in the Company's historical financial statements have been
retroactively restated.
21
The total effects of restatements in number of shares are as follows:
December 31, September 30,
2003 2004
------------------ ------------------
Historical number of shares 500,000,000,000 500,000,000,000
After bonus share distribution - statutory capital inflation
adjustment 1,356,480,756,000 1,356,480,756,000
After bonus share distribution - dividend for the year 2003 1,474,639,361,000 1,474,639,361,000
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 January 31, 2005, the Cukurova Group will have the
option to purchase up to 26,540,102,081 Turkcell shares (as restated for
stock split) at nominal value of TL 26,540,102 million (equivalent to
$17,861 at September 30, 2004) plus interest at Libor +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.
22
(20) Commitment and Contingencies
As of December 31, 2003 and September 30, 2004, commitments and contingent
liabilities comprised the following:
December 31, September 30,
2003 2004
-------------- -------------
(Unaudited)
Bank Letters of Guarantee $ 44,952 37,910
Guarantees
-Irancell Consortium
Iranian Authorities-Payment guarantee - 258,720
Iranian Authorities-Bid bond - 24,058
-Digital Platform
BNP--Brussels (Buyer credit) 31,825 17,771
BNP--Hungary (Buyer credit) 7,417 4,385
BNP--Brussels (Financial loan) 2,658 426
HSBC--Istanbul Main Branch 3,850 -
BNP--Hungary (Financial loan) 864 -
Websterbank--USA 351 117
-Hobim
BNP AK Dresdner (Finance lease) 129 40
Purchase Commitments
-Nokia - 154,000
-Ericsson AB - 89,042
-Asli Gazetecilik ve Matbaacilik AS ("Asli Gazetecilik") 25,000 25,000
-ADD Production Medya AS ("ADD") - 8,000
-ABN Amro Finansal Kiralama AS ("ABN AMRO Leasing") - 2,521
As of September 30, 2004, the Company is contingently liable in respect of
bank letters of guarantee obtained from Yapi Kredi and given to the
Telecommunications Authority amounting to $5,000 (December 31, 2003:
$5,000), and customs authorities, private companies and other public
organizations amounting to $32,226 (December 31, 2003: $37,916). In
addition, as of September 30, 2004, 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 $684
(December 31, 2003: $2,036).
As a condition of the GSM license bid in Iran, the Consortium was obliged
to provide a bid bond amounting to 263,000,000,000 Iranian Rial (equivalent
to $24,058 at September 30, 2004), which was approximately equal to EUR 25
million at the date of issuance, to the Iranian Authorities. This bid bond
was issued by Bank Saderat under a Deutsche Bank AG counter-guarantee on
February 8, 2004 and was underwritten by Turkcell. Although the maturity of
the bid bond was February 5, 2005, it was released on December 13, 2004
according to the instructions of the Iranian Authorities. (Note 21)
23
The Consortium was also obliged to provide a payment guarantee to the
Iranian Authorities of EUR 300 million for an upfront license fee. The
payment guarantee becomes effective when the license is formally awarded to
Irancell. Turkcell has guaranteed a EUR 210 million (equivalent to $258,720
at September 30, 2004) portion 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, the payment guarantee has been extended until February 10,
2005. In addition to the upfront license fee, once the Iranian subsidiary
of the Company is formally established and the license is awarded, the
Iranian subsidiary will pay an ongoing license fee based on the greater of
a 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.
Guarantees given for Hobim are related to financial leasing agreements made
with the respective lessor.
The Company has signed a shareholders agreement with the other shareholders
of DCC, the Ukrainian subsidiary, on January 27, 2004 and effective from
April 2, 2004. Turkcell has committed to arrange at least $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 Nokia Corporation
("Nokia") and ABN AMRO NV, Ericsson AB and Ericsson Credit AB and Sysdate
PTY Ltd. ("Sysdate") and ABN AMRO NV. In return of these guarantees,
Turkcell pledged minority shares of Euroasia.
Astelit, which is a 99% subsidiary of DCC, has entered into a $89,042
vendor financing agreement with Ericsson AB and Ericsson Credit AB on June
30, 2004 and EUR 125,000 (equivalent to $154,000 at September 30, 2004)
with Nokia and ABN AMRO NV. Under these agreements Ericsson Credit AB and
ABN AMRO NV will make credit facilities available to Astelit in respect of
equipment purchases from Ericsson and Nokia. Turkcell has provided
guarantees for 55% of the amounts financed plus 55% of interest and costs
in case of non-payment by Astelit.
Astelit has also entered into a $13,200 supply contract including cost of
equipment and services, interest and fees and $7,200 portion of this
contract is financed through vendor financing agreement with Sysdate and
ABN AMRO N.V., under which ABN AMRO N.V. will finance Astelit's purchases
of GSM 1800 billing equipment, software and services. On November 23, 2004,
Turkcell provided a guarantee for $7,200 plus interest and costs in case of
non-payment by Astelit. This guarantee will expire on May 2, 2006.
Based on the shareholders loan agreement signed on January 6, 2005, the
shareholders of Euroasia committed to arrange $40,000 of financing to
Euroasia in proportion to their respective shareholding in Euroasia. The
loan shall be used by Euroasia to fund its indirect subsidiary Astelit. The
Company has fulfilled its commitment amounting to $20,400 by signing a
deposit pledge agreement at an equal amount, with HSBC Bank Plc in return
for which HSBC Bank Plc. has allowed a back to back loan to Euroasia.
According to the shareholders loan agreement, financing commitments should
be fulfilled on or prior to February 28, 2005. If any of the shareholders
fails to fulfil its increased commitment on or before February 28, 2005,
either the shares of the non-funding shareholders will then be diluted by
the funding shareholders in proportion to their existing holdings and up to
the unfunded amount; or the amount of the loans will increase to $50,000
and the deadline to arrange the financing will be extended to March 31,
2005. The increase in the loan will cause an increase in each shareholder's
commitment in proportion to their respective shareholding in Euroasia. If
any of the shareholders fails to fulfil its increased commitment on or
before March 31, 2005, the shares of the non-funding shareholder will then
be diluted by the funding shareholders in proportion to their existing
shareholding in Euroasia and up to the unfunded amount.
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
framework agreement until
24
December 31, 2005 and, in accordance with the Amended Framework Agreement,
the Company paid $5,000 on June 18, 2004, $2,500 on September 30, 2004 and
$2,500 on December 30, 2004.
With respect to a sponsorship agreement signed between ADD and Turkcell on
June 21, 2004, relating to the sponsorship of Besiktas Jimnastik Kulubu
("BJK"), a football club in Istanbul, Turkcell has paid $ 7,000 to ADD on
June 23, 2004. In respect to the agreement, Turkcell has also committed to
pay $8,000 to ADD in two equal installments on July 1, 2006 and July 1,
2007, respectively.
In respect to the agreement signed between Inteltek and ABN Amro Leasing on
June 14, 2004, Inteltek has a commitment to acquire 1,500 betting terminals
amounting to EUR 2,046 (equivalent to $2,521 at September 30, 2004) under
finance lease. As of September 30, 2004, no acquisition has been made.
In relation with the settlement discussions for the treasury share,
Turkcell has paid TL 300 trillion (equivalent to $200,308 at September 30,
2004) and TL 150 trillion (equivalent to $100,154 at September 30, 2004) to
the Turkish Treasury on October 19, 2004 and on November 25, 2004,
respectively. Also, after the settlement agreement has been made, Turkcell
has paid TL 156.5 trillion (equivalent to $104,427 at September 30, 2004)
and TL 93.5 trillion (equivalent to $62,429 at September 30, 2004) to the
Turkish Treasury on December 27, 2004 and on January 25, 2005 including TL
6.5 trillion (equivalent to $4,273 at September 30, 2004) and TL 4.7
trillion (equivalent to $3,114 at September 30, 2004) interest,
respectively. Turkcell has also provided a bank letter of guarantee
amounting to TL 566.5 trillion (equivalent to $378,248 at September 30,
2004), which has been obtained from Yapi Kredi and will expire on April 15,
2005. The amount of the bank letter of guarantee was reduced by the
payments of TL 150 trillion made on November 25, 2004, TL 150 trillion made
on December 27, 2004 and TL 88.8 trillion made on January 25, 2005 and
further payments will be deducted from the remaining portion of the letter
of guarantee.
Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business described below.
Dispute on Ongoing License Fee on Value Added Taxes, Education Fund and
Frequency Usage and Transmission Fees
On an ongoing basis, Turkcell must pay 15% of its monthly gross revenue,
which is defined in its license agreement as subscription fees, monthly
fixed fees and communication fees including taxes, charges and duties to
the Turkish Treasury. The Turkish Ministry and the Turkish Treasury
informed Turkcell that, in their view, its 15% ongoing license fee should
be calculated before deduction of VAT, the education fund and the frequency
usage and transmission fees. Turkcell had calculated its 15% ongoing
license fee after deducting for these items, which Turkcell believes is
consistent with the terms of its license.
Turkcell disagrees with the Turkish Treasury's position, and initiated an
administrative suit at the Danistay against the Turkish Ministry and the
Turkish Treasury. On October 15, 2001, the Danistay ruled that VAT should
be included in the calculation of gross revenue whereas the education fund
and the frequency usage and transmission fees should not. Turkcell has
appealed the Danistay's decision with respect to the VAT and the Ministry
appealed the decision with respect to the other items. Both appeals have
been rejected by General Assembly of Administrative Courts of Danistay.
Turkcell initiated "Correction of decision" against this decision following
the notification. On March 24, 2000, Turkcell paid to the Turkish Treasury
a sum of $57,163 for ongoing license fees on VAT including interest since
April 1998, which excludes ongoing license fees on the education fund and
the frequency usage and transmission fees.
Turkcell has paid the above amount, with a reservation, to the Turkish
Treasury and will continue to pay ongoing license fees in respect of VAT
collections, subject to a final judgment to be rendered by the Danistay.
Turkcell and its legal counsel believe that Turkcell will prevail with
respect to the ongoing license fees on the education fund and frequency
usage and transmission fees. Accordingly, Turkcell has not made any
provisions in its consolidated financial statements for ongoing license
fees on the education fund and frequency usage and transmission fees. There
can be no assurance, however, that there will not be
25
an unfavorable ruling in this matter or that such an outcome would not have
a material adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.
On June 11, 2002, Turkcell initiated an arbitration suit in the
International Court of Arbitration of the International Chamber of Commerce
("ICC") against the Turkish Treasury and the Telecommunications Authority,
concerning the definition of the items that should be included in the gross
revenue used in the calculation of the amounts to be paid to the Turkish
Treasury in accordance with Article 8 of the License Agreement. On January
5, 2004, ICC rendered a decision stating that taxes collected by Turkcell
under its tax responsibility should be excluded from the calculation of
gross revenue. The Turkish Ministry and the Telecommunications Authority
filed a challenge to the ICC's decision to annul the decision. On May 20,
2004, the Ankara 20th Civil Court annulled the part of ICC's decision
concerning exclusion of the taxes collected by Turkcell under its tax
responsibility that it conflicts with Danistay's previous rulings. Turkcell
has appealed this decision.
Subsequent to September 30, 2004, the settlement agreement has been signed
with the Turkish Treasury. In accordance with the settlement agreement,
Turkcell will continue to pay ongoing licence fee on VAT but education fund
and frequency usage and transmission fees are not subject to ongoing
licence fee. Turkcell made necessary applications for termination of
respective court cases. (Note 21)
Dispute on Additional Ongoing License Fee on Value Added Services and Other
Charges
On November 2, 2000, Turkcell received a notice from the Turkish Ministry
stating that certain value-added services, transaction fees, roaming
revenue and interest charges for late collections should be included in the
determination of the ongoing license fees paid to the Turkish Treasury. The
Turkish Treasury informed Turkcell that the ongoing license fees for all
such services would be retroactively recalculated from the date of its
license agreement and paid to the Turkish Treasury with interest. On
December 22, 2000, Turkcell initiated a suit against the Turkish Ministry
and the Turkish Treasury to enjoin the Turkish Ministry and the Turkish
Treasury from charging Turkcell these fees. On October 20, 2003, Danistay
dismissed the case. On February 10, 2004, Turkcell appealed this decision.
On June 11, 2002, Turkcell initiated an arbitration suit in the ICC against
the Turkish Treasury and the Telecommunications Authority, concerning the
definition of the items that should be included in the gross revenue used
in the calculation of the amounts to be paid to the Turkish Treasury in
accordance with Article 8 of the License Agreement. On January 5, 2004, ICC
rendered a decision stating that all the revenue items originating from
telecommunication services should be included in the calculation of gross
revenue, while the interest charges for late collections should be
excluded. The Turkish Ministry and the Telecommunications Authority filed a
challenge to the ICC's decision to annul the decision. On May 20, 2004, the
Ankara 20th Civil Court annulled the part of ICC's decision concerning
exclusion of interest charges for late collections that it conflicts with
Danistay's previous rulings. Turkcell has appealed this decision.
Within the first half of 2004, Turkcell has started to engage in
discussions with third parties relating to settlement of certain legal
proceedings, which include the dispute on the additional ongoing license
fee on value added services and other charges; the dispute on additional
ongoing license fee on special transaction tax and stamp duty; the dispute
on additional ongoing license fee on interconnection revenues; the dispute
on Turk Telekom interconnection fee; and the dispute on Turk Telekom
infrastructure. Based on settlement discussions and its management opinion,
Turkcell has accrued TL 294.9 trillion (equivalent to $196,898 as of
September 30, 2004) for additional ongoing license fees for certain
value-added services, transaction fees, incoming roaming revenue and
interest charges for late collections and TL 128.4 trillion (equivalent to
$85,700 as of September 30, 2004) for additional ongoing license fees for
simcard and outgoing roaming revenues on its consolidated financial
statements as of September 30, 2004. Since the simcard and outgoing roaming
revenues were not subject to dispute at the previous periods, based on its
management and legal counsel's opinion, Turkcell has not made any accrual
related with these items previously.
From June 2004 onwards, Turkcell has begun to make payments for additional
ongoing license fee on value added services and other charges, except
interest charges for late collections.
26
Subsequent to September 30, 2004, the settlement agreement has been signed
with the Turkish Treasury. The outcome of the settlement agreement is in
line with the settlement discussions and the management's opinion. With
respect to the settlement agreement, Turkcell made necessary applications
for termination of respective court cases. (Note 21)
Dispute on Additional Ongoing License Fee on Special Transaction Tax and
Stamp Duty
Turkcell received a notice from the Turkish Treasury stating that special
transaction tax and stamp duty should be included in the determination of
the ongoing license fees paid to the Turkish Treasury. Turkcell initiated a
suit against the Turkish Treasury before the Administrative Court to obtain
an injunction. On July 10, 2001, Danistay dismissed the case. On July 17,
2001, the General Assembly of Administrative Courts of Danistay rejected
Turkcell's request to obtain an injunction to prevent the Turkish Treasury
to collect such fees. On November 19, 2003, the Danistay rendered a
decision rejecting the case. Turkcell has appealed the decision.
On January 5, 2004, ICC rendered a decision stating that taxes collected by
Turkcell under its tax responsibility should be excluded from the
calculation of gross revenue. The Turkish Ministry and the
Telecommunications Authority filed a challenge to the ICC's decision to
annul the decision. On May 20, 2004, the Ankara 20th Civil Court annulled
the part of ICC's decision concerning exclusion of the taxes collected by
Turkcell under its tax responsibility that it conflicts with Danistay's
previous rulings. Turkcell has appealed this decision.
Within the first half of 2004, Turkcell has started to engage in
discussions with third parties relating to settlement of certain legal
proceedings, which include the dispute on the additional ongoing license
fee on value added services and other charges; the dispute on additional
ongoing license fee on special transaction tax and stamp duty; the dispute
on additional ongoing license fee on interconnection revenues; the dispute
on Turk Telekom interconnection fee; and the dispute on Turk Telekom
infrastructure.
Based on settlement discussions and its management opinion, Turkcell has
accrued TL 57.1 trillion (equivalent to $38,120 as of September 30, 2004)
on its consolidated financial statements as of September 30, 2004 for
additional ongoing license fees for special transaction tax and stamp duty.
From June 2004 onwards, Turkcell has begun to make payments for additional
ongoing license fee on special transaction tax and stamp duty.
Subsequent to September 30, 2004, the settlement agreement has been signed
with the Turkish Treasury. The outcome of the settlement agreement is in
line with the settlement discussions and the management's opinion. With
respect to the settlement agreement; Turkcell made necessary applications
for termination of respective court cases. (Note 21)
Dispute on Additional Ongoing License Fee on Interconnection Revenues
In December 2000, Turkcell informed the Turkish Treasury that it would no
longer include its interconnection revenues in the determination of ongoing
license fees paid to the Turkish Treasury as 15% of gross revenues.
Effective from March 1, 2001, Turkcell's ongoing license payments made to
the Turkish Treasury have been calculated by excluding its interconnection
revenues from the gross revenues. Turkcell obtained an injunction from the
judicial court on November 2, 2001 allowing it to compute the gross revenue
on which the ongoing license fees are to be computed without including
interconnection revenues. On October 29, 2001, Turkcell initiated an
arbitration suit in the ICC against the Turkish Ministry, the
Telecommunications Authority and the Turkish Treasury. On October 7, 2003,
the ICC decided that the interconnection revenues should be included in the
calculation of the ongoing license fees paid to the Turkish Treasury.
Turkcell filed a suit of annulment against the ICC ruling as per the
International Arbitration Code. On April 6, 2004, Ankara 26th Civil Court
rejected the case. Turkcell appealed this decision.
Within the first half of 2004, Turkcell has started to engage in
discussions with third parties relating to settlement of certain legal
proceedings which include the dispute on the additional ongoing license fee
on value added services and other charges; the dispute on additional
ongoing license fee on special transaction tax and stamp duty; the dispute
on additional ongoing license fee on interconnection revenues; the dispute
27
on Turk Telekom interconnection fee; and the dispute on Turk Telekom
infrastructure. Based on settlement discussions and its management opinion,
as of September 30, 2004, it has accrued TL 385.6 trillion including
interest (equivalent to $257,468 as of September 30, 2004) for the unpaid
amounts and included them in the determination of net income.
From June 2004 onwards, Turkcell has begun to make payments for additional
ongoing license fee on interconnection revenues.
Subsequent to September 30, 2004, the settlement agreement has been signed
with the Turkish Treasury. The outcome of the settlement agreement is in
line with the settlement discussions and the management's opinion. With
respect to the settlement agreement, Turkcell made necessary applications
for termination of respective court case. (Note 21)
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 TL
91.4 trillion (equivalent to $61,010 at September 30, 2004) 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 TL 145.3 trillion (equivalent to
$96,997 at September 30, 2004) 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 TL 45.7 trillion (equivalent to $30,505 as of September 30,
2004) 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 TL 4.6 trillion
(equivalent to $3,040 as of September 30, 2004).
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 to this decision.
Dispute with Turk Telekom on Payments to the Turkish Treasury and Turkish
Radio and Television Institution
Turk Telekom notified Turkcell on February 14, 2000, that it was modifying
the method by which it calculates the interconnection fee that it pays to
Turkcell. Turk Telekom believes that it should be permitted to deduct from
the revenues used to determine the interconnection fee the 15% fund payment
that it pays to the Turkish Treasury and a 2.5% payment that it pays to
Turkish Radio and Television Institution (the "TRT"), which is a payment
that Turk Telekom was required to make during 2000 only. Based on this
position, Turk Telekom withheld TL 6.6 trillion (equivalent to $4,408 at
September 30, 2004) from the amount it paid to Turkcell for interconnection
for the first two months of 2000. On May 4, 2000, Turkcell commenced a
first lawsuit against Turk Telekom to recover the TL 6.6 trillion.
Turk Telekom subsequently notified Turkcell on October 16, 2000 that it was
requesting payment for TL 37.5 trillion (equivalent to $25,038 at September
30, 2004) representing the amount Turk Telekom would have deducted from its
revenues for the period between March 2000 and September 2000. On October
31, 2000, Turkcell paid Turk Telekom a first installment of TL 16.0
trillion (equivalent to $10,750 at September 30, 2004) with a reservation.
On May 11, 2001, the appeals court ruled that Turk Telekom should be
permitted to deduct from its revenues the 2.5% payment that it paid to the
TRT for the year 2000 but remanded the decision regarding the 15% fund to
the lower court.
On January 24, 2002, the lower court rendered a decision in line with the
appeals court's decision. On March 13, 2002, Turkcell received
approximately TL 14.0 trillion (equivalent to $9,092 at payment date
28
and equivalent to $9,364 at September 30, 2004) from Turk Telekom, which
was related to the TL 6.6 trillion (equivalent to $4,408 at September 30,
2004) withheld by Turk Telekom, plus interest.
On November 10, 2000, Turkcell filed a second lawsuit to recover the TL
16.0 trillion (equivalent to $10,750 at September 30, 2004) paid to Turk
Telekom as its first installment. The appeals court decided in favor of
Turkcell with respect to the fund payment. On June 10, 2004, the lower
court rendered a decision in line with the appeals court's decision, Turk
Telekom has appealed to such decision. On November 25, 2004, the appeals
court approved the decision of the lower court.
Subsequent to September 30, 2004, Turkcell settled its infrastructure usage
dispute with Turk Telekom by an agreement through negotiation. Turkcell and
Turk Telekom agreed on Turk Telekom's receivables with respect to
infrastructure usage dispute being TL 102 trillion (equivalent to $68,137
at September 30, 2004) including principal, interest and VAT; and
Turkcell's receivables with respect to 15% fund payment being TL 39.5
trillion (equivalent to $26,342 at September 30, 2004). After netting the
receivables, Turkcell agreed with Turk Telekom that Turkcell owed Turk
Telekom TL 62.5 trillion (equivalent to $41,795 at September 30, 2004).
Turkcell has made necessary applications for termination of respective
court case on above mentioned dispute with respect to 15% fund payment.
(Note 21)
Dispute on Turk Telekom Interconnection Fee
The Turkish Electrical Engineers' Society commenced a lawsuit against Turk
Telekom claiming that Turkcell's interconnection agreement with Turk
Telekom violates public policy and the provisions of the Turkish
Constitution relating to the protection of consumers and the prevention of
monopolies and cartels. In October 2000, the court annulled Annex 1-A.1 of
Turkcell's interconnection agreement with Turk Telekom, which deals with
call tariffs. Although Turkcell was not a party to the lawsuit, its
interest has been affected by the decision. On November 20, 2000, Turkcell
was informed of the court's decision and received notification from Turk
Telekom that all interconnection fees since the acquisition of its license
paid by Turkcell to Turk Telekom and by Turk Telekom to Turkcell must be
the same to comply with the court's decision and should be retroactively
calculated from the date of its license with interest. Turk Telekom made a
first claim pertaining to the period extending from the date of its license
up to October 2000, and a second up to January 2001. Turkcell initiated two
separate lawsuits for each period to cancel Turk Telekom's request until
Turkcell agrees with Turk Telekom to replace the cancelled provisions of
its interconnection agreement. In November 2001, Turkcell obtained an
injunction in the second lawsuit which helps cover both periods. In the
first case, the court decided to postpone its decision until the court in
the second case renders a final decision. Turk Telekom appealed the
decision in the second case. This case has been dismissed and, on March 5,
2003, the court decision communicated to Turkcell. On March 14, 2003,
Turkcell has applied for a "Correction of decision" against this decision
but Turkcell's request was rejected. On July 3, 2003, Turk Telekom informed
Turkcell that the injunction was lifted and it would calculate the sharing
of its interconnection revenue with Turkcell on an equal basis. Turk
Telekom did not make the monthly interconnection payment to Turkcell due in
June 2003, amounting to TL 83.9 trillion (equivalent to $55,977 as of
September 30, 2004) to offset the amount against its receivables from
Turkcell according to its claim that interconnection revenues should be
shared equally. Turkcell has applied to obtain another injunction to cease
Turk Telekom's action. On December 17, 2003, the Administrative court
rejected Turkcell's appeal. On July 17, 2003, the Ankara Seventh Commercial
Court decided that the terms of the Interconnection Agreement should remain
in effect until the parties reach a new interconnection agreement. The
appeals court annulled the decision of the lower court. Following the
decision of the appeals court on May 27, 2004, the lower court dismissed
the case on the ground that compliance with decisions of the appeals court
is a legal obligation. After the notification of court to Turkcell, the
period for Turkcell for application to administrative courts will begin.
Turkcell concluded the negotiations with Turk Telekom by signing an
addendum, which changed some articles of the Interconnection Agreement on
September 20, 2003. As the juridical process continues, Turk Telekom
initiated a lawsuit with the aim to collect the amount calculated via its
claim that interconnection revenues should be shared equally. On November
14, 2003, the Ankara First Commercial Court decided that monthly
interconnection payments made by Turk Telekom to Turkcell be ceased with
the aim of collection of Turk Telekom's receivable. Accordingly, on
December 3, 2003, Turk Telekom informed
29
Turkcell that it has stopped making its monthly interconnection fee
payments. Turkcell appealed the decision. On January 29, 2004, the
commercial court rendered a decision excluding 30% of monthly
interconnection payments made by Turk Telekom from the scope of the
previous decision dated November 14, 2003. According to this decision, Turk
Telekom would have to pay 30% of its monthly interconnection payments to
Turkcell. On March 2, 2004, Turk Telekom appealed this decision but the
court rejected Turk Telekom's request.
In addition to the foregoing, Turk Telekom initiated two separate lawsuit
to share interconnection fees equally and requested TL 1,083.2 trillion and
TL 490 trillion (equivalent to $723,244 and $327,176 at September 30, 2004
respectively). The respective courts decided the cases should be
consolidated with the first case. Furthermore, Turk Telekom initiated
another lawsuit on the same grounds in a different court with a payment
request of TL 280.1 trillion (equivalent to $187,053 as of September 30,
2004) including interest of TL 35.3 trillion (equivalent to $23,592 as of
September 30, 2004).
Turkcell has deducted the interconnection receivables from Turk Telekom
amounting to TL 512.6 trillion (equivalent to $342,250 as of September 30,
2004) from its interconnection receivables on its consolidated financial
statements as of September 30, 2004. The balance of TL 121.5 trillion
(equivalent to $81,120 as of September 30, 2004), which results from taxes
on interconnection receivables, is classified as other current assets.
Since Turkcell believes that Turk Telekom's payments are substantially
lower than the amounts that should have been paid under the Interconnection
Agreement, Turkcell has initiated the necessary legal actions against Turk
Telekom for the recovery of its confiscated portion of interconnection
receivables. Within the first half of 2004, Turkcell has started to engage
in discussions with Turk Telekom relating to settlement of dispute on Turk
Telekom interconnection fee. Based on settlement discussions and its
management's opinion, Turkcell has accrued TL 748.2 trillion (equivalent to
$499,584 at September 30, 2004) including interest on its consolidated
financial statements as of September 30, 2004. Turkcell has classified TL
240.5 trillion (equivalent to $160,568 as of September 30, 2004) as other
long-term liabilities.
Subsequent to September 30, 2004, the settlement agreement has been signed
with Turk Telekom. The outcome of the settlement agreement is in line with
settlement discussions and the management's opinion. With respect to the
settlement agreement, Turkcell made necessary applications for termination
of respective court cases. (Note 21).
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 TL 3.0 trillion ($2,018 as of September 30, 2004) for possible
interest charges as of December 31, 2000. On May 9, 2002, Turk Telekom
requested an interest amounting to TL 30.1 trillion (equivalent to $20,076
as of September 30, 2004). 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 September 30,
2004, Turkcell recorded a provision of TL 13.3 trillion (equivalent to
$8,878 as of September 30, 2004) because its management and legal counsel
believe that this is the maximum potential liability in accordance with the
relevant provisions of the Interconnection Agreement.
Dispute on National Roaming Agreement
During the third quarter of 2001, Turkcell was approached by IsTim 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
30
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 its proposal is
technically impossible to apply and commercially unacceptable, 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 IsTim and Turkcell has been prevented.
The Telecommunications Authority and IsTim have appealed the granting of
the injunction and the appeals were disapproved in the court trials on
February 6, 2003 and February 24, 2003.
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, 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
regarding procedures and policies related to a national roaming agreement.
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, which 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 IsTim's request for national roaming to the condition that it be
reasonable, economically viable, and technically possible. Nevertheless the
Telecommunications Authority declared that Turkcell is under an obligation
to enter a national roaming agreement with IsTim 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. On January 23, 2004, 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 ICC decision.
Turkcell will appeal 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 IsTim, and fined Turkcell by
approximately TL 21.8 trillion (equivalent to $14,570 at September 30,
2004). 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 December 28, 2004
Danistay has issued an injunction to cease the decisions and actions
subject to the lawsuit until the case is finalized. On December 10, 2004,
Tax Office Directorate (the "Tax Office") requested approximately TL 21.8
trillion (equivalent to $14,570 at September 30, 2004) 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 requesting and injunction and cancellation of the payment
order. Based on its management and legal counsel's opinion, Turkcell has
not recorded any accrual for Competition Board's decision.
31
The Telecommunications Authority decided that Turkcell has not complied
with its responsibility under Turkish regulations to provide national
roaming and fined Turkcell by approximately TL 21.8 trillion (equivalent to
$14,570 at September 30, 2004). 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
has 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
Telecommunication Authority has paid back TL 21.8 trillion (equivalent to
$14,570 at September 30, 2004) with respect to the aforesaid injunction of
Danistay. (Note 21)
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 was disrupting 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 TL 7 trillion (equivalent to
$4,656 as of September 30, 2004) and were 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 TL 7 trillion (equivalent to $4,656 at
September 30, 2004) on its consolidated financial statements as of
September 30, 2004.
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 Supreme 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 Supreme Court's decision. The decision is final and is not subject
to appeal. On April 20, 2004, Turkcell paid TL 145.6 trillion (equivalent
to $97,245 as of September 30, 2004) for the frequency usage fees of 2002
including interest through that date with reservation.
Dispute on the Determination of Items of Gross Revenue
On June 11, 2002, Turkcell initiated an arbitral proceeding before the ICC
against the Turkish Treasury and the Telecommunications Authority to
resolve the dispute in respect to the determination of the items to be
taken into account in the calculation of gross revenue, which is the base
for the calculation of the amounts to be paid to the Turkish Treasury in
accordance with Article 8 of the License Agreement. On January 5, 2004, ICC
rendered a decision stating that all the revenue items originating from
telecommunication services should be included in the calculation of gross
revenue, while the taxes collected by Turkcell under its tax responsibility
and interest charges for late collections should be
32
excluded. The Turkish Ministry and the Telecommunications Authority filed a
challenge to the ICC's decision to annul the decision. On May 20, 2004, the
Ankara 20th Civil Court annulled the part of ICC's decision concerning
exclusion of the taxes collected by Turkcell under its tax responsibility
and interest charges for late collections that it conflicts with Danistay's
previous rulings. Turkcell has appealed this decision.
With respect to the settlement agreement signed with the Turkish Treasury,
Turkcell made necessary applications for termination of respective court
case. (Note 21)
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 Turkish 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 has appealed the Danistay's decision with respect to the
injunction received by Turk Telekom. Its appeal has been 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 has made additional payments with reservation.
With respect to the settlement agreement signed with the Turk Telekom,
Turkcell made necessary applications for termination of respective court
case. (Note 21)
Investigation of the Telecommunications Authority on International Voice
Traffic
In May 2003, Turkcell has been 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 TL 31.7 trillion (equivalent to $21,186 as of
September 30, 2004). On April 9, 2004, Turkcell made the respective
payment. On June 2, 2004, Turkcell has commenced a lawsuit against the
decision of the Telecommunications Authority.
On November 5, 2004, the Danistay has 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.
On January 26, 2005, Telecommunications Authority has paid TL 18.0 trillion
(equivalent to $12,018 at September 30, 2004) back to Turkcell and informed
Turkcell that the remaining balance amounting to TL 13.7 trillion
(equivalent to $9,168 as of September 30, 2004) will be deducted from the
payables of Turkcell with respect to the injunction of Danistay to cease
the decisions and actions subject to the related lawsuit until the case is
finalized.
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 TL 1.8 trillion (equivalent to $1,200 as of September 30, 2004). The
Tax Office also imposed a penalty fee of TL 4.3 trillion (equivalent to
$2,843 as of September 30, 2004). 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 has
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 has
appealed to this decision. The case is still pending. Management and the
legal counsel believe that Turkcell will prevail in this matter.
33
Dispute on Turk Telekom Infrastructure
On December 29, 2001, Turk Telekom notified Turkcell that it has issued a
new regulation and increased prices related to infrastructure services that
it renders to Turkcell and requested TL 9.0 trillion TL (equivalent to
$6,040 as of September 30, 2004) including interest. Turkcell refused to
make the payment and Turk Telekom deducted such amount from Turkcell's
receivables from Turk Telekom. Turkcell commenced a lawsuit against Turk
Telekom before the Ankara First Commercial Court requesting an injunction,
annulment of the regulation and collection of the deducted amount from its
receivables. On February 27, 2002, the Telecommunications Authority decided
that Turk Telekom has no right to regulate the prices of services rendered
from its infrastructure on its own. Turk Telekom commenced a lawsuit
against this decision before the administrative court. In the first case,
the Ankara First Commercial Court decided to postpone its decision until
the administrative court in the second case renders a final decision. On
March 4, 2004, the administrative court decided to annul the
Telecommunications Authority's decision dated February 27, 2002. On May 13,
2004, the Ankara First Commercial Court dismissed the case. Turkcell has
appealed to this decision.
Subsequent to September 30, 2004, Turkcell settled its infrastructure usage
dispute with Turk Telekom by an agreement through negotiation. Turkcell and
Turk Telekom agreed on Turk Telekom's receivables with respect to
infrastructure usage dispute being TL 102 trillion (equivalent to $68,137
at September 30, 2004) including principal, interest and VAT; and
Turkcell's receivables with respect to 15% fund payment being TL 39.5
trillion (equivalent to $26,342 at September 30, 2004). After netting the
receivables, Turkcell agreed with Turk Telekom that Turkcell owed Turk
Telekom TL 62.6 trillion (equivalent to $41,795 at September 30, 2004).
Turkcell has made necessary applications for termination of respective
court case on above mentioned dispute with respect to infrastructure usage
dispute. Turkcell made payments amounting to TL 29.6 trillion (equivalent
to $19,739 at September 30, 2004), in accordance with the payment plan. As
of September 30, 2004, Turkcell recorded a liability of TL 62.6 trillion
(equivalent to $41,795 at September 30, 2004) for the remaining portion.
(Note 21)
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 TL 16 trillion
(equivalent to $10,687 as of September 30, 2004) for principal, an interest
charge of TL 10.8 trillion (equivalent to $7,186 as of September 30, 2004)
and a penalty of TL 63.4 trillion (equivalent to $42,373 as of September
30, 2004). 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 has rejected Turkcell's
request for injunction for annulment of Telecommunications Authority's
decision. The case is transferred to upper court. Turkcell's request for
injunction has been also rejected by the upper court. On April 16, 2004,
Turkcell paid TL 103.7 trillion (equivalent to $69,267 as of September 30,
2004) including interest through that date regarding the Telecommunication
Authority's claim.
Dispute on Special Transaction Taxation Regarding Prepaid Card Sales
On September 18, 2003, 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 special transaction tax payment amounting to TL
7 trillion (equivalent to $4,668 as of September 30, 2004) and a tax
penalty of TL 9.9 trillion (equivalent to $6,593 as of September 30, 2004).
On November 20, 2003, Turkcell has initiated a lawsuit in the tax court
related with this dispute. On May 31, 2004, the Tax court decided in favor
of Turkcell. The case is still pending. Management and legal counsel
believe that Turkcell will prevail in this matter.
Investigation of the Turkish Competition Board
The Competition Board initiated an investigation against Turkcell and
Telsim, alleging that both companies have abused their dominant position by
restricting IsTim and Aycell's entry into market via increasing their call
termination rates of interconnection between each other's networks 1.4
cents per
34
minute to 20 cents per minute before IsTim and Aycell entered into the
market. On November 4, 2004, The Competition Board announced its decision
regarding the investigation and stated that no penalties are required.
(21) Subsequent Events
(a) Subsequent to September 30, 2004, Turkcell settled its infrastructure
usage dispute with Turk Telekom by an agreement through negotiation.
Turkcell and Turk Telekom agreed on Turk Telekom's receivables with respect
to infrastructure usage dispute being TL 102 trillion (equivalent to
$68,137 at September 30, 2004) including principal, interest, VAT; and
Turkcell's receivables with respect to 15% fund payment being TL 39.5
trillion (equivalent to $26,342 at September 30, 2004). After netting the
receivables, Turkcell agreed with Turk Telekom that Turkcell owed Turk
Telekom TL 62.6 trillion (equivalent to $41,795 at September 30, 2004).
Turkcell will pay the agreed amount in ten installments with the interest
upon. Subsequently, Turkcell has made payments totaling to TL 29.6 trillion
(equivalent to $19,739 at September 30, 2004) in accordance with the
payment plan.
(b) On November 24, 2004, the Company's board of directors decided that
general dividend policy would be to distribute cash dividends in an amount
of not less than 50% of the Company distributable profits for each fiscal
year, starting from 2004. Future payment of dividends will depend, among
other things, on profitability as determined under the new accounting
standards, on the Company's financial performance, changes in the economic
conditions and other developments in the environment. The payment of
dividends will also be subject to the Company's cash flow requirements,
compliance with Turkish law and the approval of board of directors and the
General Assembly of Shareholders.
(c) As a condition of the GSM license bid in Iran, the Consortium, was
obliged to provide a bid bond amounting to 263,000,000,000 Iranian Rial
(equivalent to $24,058 at September 30, 2004), which was approximately
equal to EUR 25 million at the date of issuance, to the Iranian
Authorities. This bid bond was issued by Bank Saderat under a Deutsche Bank
AG counter-guarantee on February 8, 2004 and was underwritten by Turkcell.
Although the maturity of the bid bond was February 5, 2005, it was released
on December 13, 2004 according to the instructions of the Iranian
Authorities.
(d) Subsequent to September 30, 2004, with respect to the dispute on the
additional ongoing license fee on value added services and other charges;
the dispute on additional ongoing license fee on special transaction tax
and stamp duty; the dispute on additional ongoing license fee on
interconnection revenues, the settlement agreement has been signed with the
Turkish Treasury. According to the agreement, Turkcell agreed to pay TL
866.5 trillion (equivalent to $578,555 at September 30, 2004) to the
Turkish Treasury, which consists of TL 596.7 trillion (equivalent to
$398,412 at September 30, 2004) in principal and TL 269.8 trillion
(equivalent to $180,143 at September 30, 2004) in interest. Turkcell made
two payments amounting to TL 300 trillion (equivalent to $200,308 as of
September 30, 2004) and TL 150 trillion (equivalent to $100,154 as of
September 30, 2004) that have become a requirement to the settlement and
paid on October 19, 2004 and on November 25, 2004, respectively. Also after
the agreement has been signed, Turkcell paid TL 156.5 trillion (equivalent
to $104,427 at September 30, 2004) and TL 93.5 trillion (equivalent to
$62,429 at September 30, 2004) to the Turkish Treasury on December 27, 2004
and on January 25, 2005 including TL 6.5 trillion (equivalent to $4,273 at
September 30, 2004) ) and TL 4.7 trillion (equivalent to $3,114 at
September 30, 2004) interest, respectively.
Turkcell also provided a letter of guarantee to the Turkish Treasury
amounting to TL 566.5 trillion (equivalent to $378,248 as of September 30,
2004), which has been obtained from Yapi Kredi and will expire on April 15,
2005. The amount of the bank letter of guarantee was reduced by the
payments of TL 150 trillion payment made on November 25, 2004, TL 150
trillion payment made on December 27, 2004 and TL 88.8 trillion payment
made on January 25, 2005 and further payments will be deducted from the
remaining portion of the letter of guarantee.
(e) Subsequent to September 30, 2004, the settlement agreement has been
signed with Turk Telekom with respect to the dispute on Turk Telekom
interconnection fee. After Turkcell and Turk Telekom agreed that Turkcell
owed Turk Telekom a total of TL 1,530.6 trillion (equivalent to $1,022,002
at September 30,
35
2004), including principal, interest, VAT and SCT. Turkcell accepted and
committed to pay TL 997.6 trillion (equivalent to $666,120 at September 30,
2004) after Turk Telekom's deductions on Turkcell's interconnection
receivables through May 2003 to November 2004, amounting to TL 533.0
trillion (equivalent to $355,882 at September 30, 2004), including
principal, interest, VAT and SCT. Based on the payment plan at the
agreement, the first installment on December 31, 2004 was equal to the
monthly interconnection fee receivables of Turkcell. The remaining balance,
will be paid in 17 equal monthly installments. As of September 30, 2004,
the Company has accrued TL 748.2 trillion (equivalent to $499,584 as of
September 30, 2004) on its consolidated financial statements for the
aforesaid disputes.
(f) Turkcell's application to the Turkish Treasury to receive an incentive
for the modernization and development of its infrastructure has been
approved. The investment incentive, which covers a total investment amount
of TL1,047 trillion (equivalent to $699,074 at September 30, 2004), is
valid through December 31, 2007 and enables Turkcell to be exempted from
customs tax, 18% VAT (except for software purchases) and corporate tax on
40% of the invested amount.
(g) The Telecommunications Authority decided that Turkcell has not complied
with its responsibility under Turkish regulations to provide national
roaming and fined Turkcell by approximately TL 21.8 trillion (equivalent to
$14,570 at September 30, 2004). On April 7, 2004, Turkcell made the related
payment. On January 3, 2005 Telecommunications Authority has paid TL 21.8
trillion (equivalent to $14,570 at September 30, 2004) back to Turkcell
with respect to the injunction of Danistay to cease the decisions and
actions subject to the related lawsuit until the case is finalized.
(h) The Telecommunications Authority decided that Turkcell has violated
Turkish laws by carrying some of its international voice traffic through an
operator other than Turk Telekom and fined Turkcell by approximately TL
31.7 trillion (equivalent to $21,186 as of September 30, 2004). On April 9,
2004, Turkcell made the related payment. On January 26, 2005,
Telecommunications Authority has paid TL 18.0 trillion (equivalent to
$12,018 at September 30, 2004) back to Turkcell and informed Turkcell that
the remaining balance amounting to TL 13.7 trillion (equivalent to $9,168
as of September 30, 2004) will be deducted from the payables of Turkcell
with respect to the injunction of Danistay to cease the decisions and
actions subject to the related lawsuit until the case is finalized.
(i) As per the request of Istanbul Stock Exchange regarding the transition
process to New Turkish Lira, issues related to information and accounting
systems, have been resolved, and compliance process of the Company's
systems to New Turkish Lira has been finalized.
(j) On January 3, 2005, the management of Digital Platform has submitted a
frame agreement proposing the rescheduling of its liabilities to the
Company. On January 14, 2005, the Company's board of directors resolved to
make the necessary amendments on the proposal in accordance with the
Company's requirements and authorised the Company management to make the
required preparations.
Meanwhile, major shareholders of Digital Platform, Yapi Kredi and Fintur
Technologies B.V., assigned Yapi Kredi Yatirim Menkul Degerler A.S. as the
financial advisor for the sale of 90.64% of Digital Platform shares owned
by Yapi Kredi. The invitation to bid for the majority shares of Digital
Platform has been announced on January 15, 2005. The deadline for sending
the final bids for the majority shares of Digital Platform is February 25,
2005.
36
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: January 28, 2005 By: /s/ MUZAFFER AKPINAR
------------------------
Name: Muzaffer Akpinar
Title: Chief Executive Officer