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 September 3, 2004
------------------
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: Turkcell Audit Report dated March 31, 2004
Turkcell MDA Q1 2004
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2003 AND MARCH 31, 2004 (Unaudited)
(In thousands, except share data)
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 582,680 939,272
Trade receivables and accrued income, net (Note 5) 255,017 266,950
Due from related parties (Note 6) 70,625 61,614
Inventories 9,222 6,202
Prepaid expenses 23,739 106,402
Other current assets (Note 7) 63,018 140,515
Deferred tax assets (Note 17) 406,375 410,789
----------- -----------
Total current assets 1,410,676 1,931,744
DUE FROM RELATED PARTIES (Note 8) 56,611 60,480
PREPAID EXPENSES 4,637 5,239
INVESTMENTS (Note 9) 149,798 158,800
INVESTMENT SECURITIES 1,993 15,329
FIXED ASSETS, net (Note 10) 1,224,937 1,165,289
CONSTRUCTION IN PROGRESS (Note 11) 53,758 80,051
INTANGIBLES, net (Note 12) 823,969 806,012
GOODWILL 1,349 1,349
OTHER LONG TERM ASSETS 6,911 6,774
DEFERRED TAX ASSETS (Note 17) 132,688 133,189
----------- -----------
$ 3,867,327 4,364,256
----------- ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings (Note 13) $ 95,031 132,663
Trade payables (Note 14) 47,519 54,361
Due to related parties (Notes 15) 4,585 3,951
Taxes payable (Note 17) 68,734 121,921
Other current liabilities and accrued expenses (Note 16) 1,566,652 1,651,608
----------- -----------
Total current liabilities 1,782,521 1,964,504
LONG TERM BORROWINGS (Note 18) 512,500 701,540
LONG TERM LEASE OBLIGATIONS 9,705 6,049
RETIREMENT PAY LIABILITY 10,834 11,973
MINORITY INTEREST 1,255 1,226
OTHER LONG TERM LIABILITIES 3,234 4,400
SHAREHOLDERS' EQUITY
Common stock
Par value one thousand TL; authorized, issued and outstanding
500,000,000,000 shares in 2003 and 2004 (Note 19) 636,116 636,116
Additional paid in capital 178 178
Legal reserves 5 5
Accumulated other comprehensive loss (Note 3) (2,246) (1,127)
Retained earnings 913,225 1,039,392
----------- -----------
Total shareholders' equity 1,547,278 1,674,564
----------- -----------
$ 3,867,327 4,364,256
=========== ===========
COMMITMENTS AND CONTINGENCIES (Note 20)
The accompanying notes are an integral part of these consolidated financial
statements.
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2004 (Unaudited)
(In thousands, except share data)
March 31, March 31,
2003 2004
------------- ------------
(Unaudited) (Unaudited)
Revenues 491,091 745,548
Direct cost of revenues (326,658) (433,007)
--------------- ---------------
Gross profit 164,433 312,541
General and administrative expenses (22,223) (29,305)
Selling and marketing expenses (49,040) (76,007)
--------------- ---------------
Operating income 93,170 207,229
Income from related parties, net 1,990 464
Interest income 27,517 36,841
Interest expense (87,682) (77,373)
Other income (expense), net 3,017 (487)
Equity in net income of unconsolidated investees (Note 9) 2,211 7,886
Minority interest 369 1,027
Translation loss (1,077) (20,247)
--------------- ---------------
Income before taxes 39,515 155,340
Income tax expense (note 17) - (29,173)
--------------- ---------------
Net income 39,515 126,167
=============== ===============
Basic and diluted earnings per common
share (Note 19) 0,00008 0,00025
=============== ===============
Weighted average number of common shares
outstanding (Note 19) 500,000,000,000 500,000,000,000
The accompanying notes are an integral part of these consolidated financial
statements.
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2004 (Unaudited)
(In thousands)
March 31, March 31,
2003 2004
----------- -----------
(Unaudited) (Unaudited)
Operating Activities:
Net income $ 39,515 126,167
Adjustments in reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 105,088 104,514
Provision for retirement pay liability 474 1,139
Provision for inventories (974) (685)
Provision for doubtful receivables 2,648 2,771
Accrued income 27,390 (9,088)
Accrued expense 34,702 94,913
Equity in net income of unconsolidated investees (2,211) (7,886)
Minority interest 371
(29)
Deferred taxes - (4,915)
Changes in assets and liabilities:
Trade receivables (3,776) (5,616)
Due from related parties (9,539) 5,142
Inventories 2,689 3,705
Prepaid expenses (7,330) (83,265)
Other current assets 5,063 (77,037)
Taxes payable - 53,187
Other long term assets 88 40
Due to related parties (863) (634)
Trade payables 3,717 6,842
Other current liabilities 19,726 (9,351)
Other long term liabilities (535) 1,166
--------- ---------
Net cash provided by operating activities 216,243 201,080
Investing Activities:
Additions to fixed assets (20,137) (15,985)
Reductions in (additions to) construction in progress 5,922 (26,293)
Additions to intangibles (36,416) (10,922)
Investments in investees (9,500) -
Investments in securities - (13,336)
--------- ---------
Net cash used for investing activities (60,131) (66,536)
Financing Activities:
Proceeds from issuance of long and short term debt - 228,178
Payment on long and short term debt (261,347) (1,506)
Net decrease in debt issuance expenses 18,095 (362)
Payment on lease obligations (3,119) (3,156)
Decrease (increase) in lease obligations 5,129 (1,106)
--------- ---------
Net cash provided by (used for) financing activities (241,242) 222,048
--------- ---------
Net increase (decrease) in cash (85,130) 356,592
Cash at the beginning of period 394,071 582,680
--------- ---------
Cash at the end of period $ 308,941 939,272
========= =========
Supplemental cash flow information:
Interest paid 51,193 25,541
The accompanying notes are an integral part of these consolidated financial
statements.
TURKCELL ILETISIM HIZMETLERI ANONIM SIRKETI
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2004 (Unaudited)
(In thousands, except share data)
Accumulated
Additional other Total
Common stock paid in Legal Comprehensive Retained comprehensive shareholders'
Shares Amount capital reserves income earnings loss equity
--------------- --------- ---------- -------- ------------- ---------- ------------- -------------
Balances at December 31, 2003 500,000,000,000 $ 636,116 178 5 913,225 (2,246) 1,547,278
Comprehensive income:
Net income 126,167 126,167 126,167
Other comprehensive loss:
Translation adjustment 1,119 1,119 1,119
Comprehensive income 127,286
Balances at March 31, 2004 500,000,000,000 $ 636,116 178 5 1,039,392 (1,127) 1,674,564
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 March 31, 2004 (Unaudited) and for the Three
Month Periods Ended March 31, 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 and
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 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 million. The License permits
Turkcell to operate as a stand-alone GSM operator and frees it from some of
the operating constraints in the Revenue Sharing Agreement. Under the
License, Turkcell collects all of the revenue generated from the operations
of its GSM network and pays the Undersecretariat of Treasury (the "Turkish
Treasury") an ongoing license fee equal to 15% of its gross 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 million in 15% senior subordinated notes due in
2005, which were fully paid on November 10, 2003, and in December 1999,
Cellco issued $400 million 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"), 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
Depository Shares, or ADSs, on the New York Stock Exchange.
5
Two significant founding shareholders, the Cukurova Group and TeliaSonera,
currently own approximately 42.3% 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") and a company that operates GSM network in Northern Cyprus.
In addition, as of March 31, 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"), Bilisim ve Egitim Teknolojileri AS ("Bilisim"),
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"), Hurrem Sultan Produksiyon Yapim, Turizm
ve Ticaret AS ("Hurrem Sultan") and Euroasia Telecommunications Holding BV
("Euroasia"). The subsidiaries are owned 99.89%, 99.25%, 100.00%, 75.00%,
60.00%, 100.00%, 60.00%, 100.00%, 55.00%, 55.00%, 51.00% and 100.00%
respectively, by Turkcell or its subsidiaries.
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, management decided to invest $50,000 in Digital Cellular
Communication (DCC), a Ukrainian telecommunications company with a GSM 1800
license. In order to facilitate the investment in DCC, Turktell created a
new wholly-owned company named Euroasia in the Netherlands in February
2004, and capitalized it with cash contributions of $50,000. The owners of
DCC are expected to contribute the shares of DCC to Euroasia in exchange
for a 49% interest in the company in 2004. Under a shareholders agreement
dated April 2, 2004, Turkcell has committed to arrange at least $150
million of financing for DCC prior to 2006, or to provide such financing
from its own resources.
(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 March 31, 2004 and for the three month
periods ended March 31, 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.
6
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.
As of March 31, 2004, the consolidated financial statements include the
accounts of Turkcell and thirteen (December 31, 2003: twelve) majority
owned subsidiaries and of Cellco, all assets and liabilities of which were
previously recorded in the Company's financial statements, which was
consolidated for the first time at December 31, 2003 under the guidance of
FIN 46 (R). The investment in Fintur is included under the equity method of
accounting (Note 9). All significant intercompany balances and transactions
have been eliminated in consolidation. Minority interest in net assets and
net income of the consolidated subsidiaries are separately classified in
the consolidated balance sheets and consolidated statements of operations.
(3) Comprehensive Income
Comprehensive income generally encompasses all changes in shareholders'
equity (except those arising from transactions with owners) and includes
net income, net unrealized capital gains or losses on available for sale
securities and foreign currency translation adjustments. The Company's
comprehensive income differs from net income applicable to common
shareholders only by the amount of the foreign currency translation
adjustment charged to shareholders' equity for the period. Comprehensive
income for the three month periods ended March 31, 2003 and 2004 was
$40,109 and $127,286, respectively.
(4) New Accounting Standards Issued
In March 2004, Emerging Issues Task Force ("EITF") reached a consensus on
EITF 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". EITF 03-01 provides guidance for
assessing other-than-temporary impairment. That proposed guidance would
apply to investments accounted for under the cost method or the equity
method, investments classified as either available-for-sale or
held-to-maturity under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (including individual securities and mutual
funds). The adoption of EITF 03-01 is not expected to have a material
effect on the Company's consolidated financial statements.
7
(5) Trade Receivables and Accrued Income, net
At December 31, 2003 and March 31, 2004, the breakdown of trade receivables
and accrued income is as follows:
December 31, March 31,
2003 2004
------------ ----------
(Unaudited)
Receivables from subscribers $ 256,597 251,301
Receivable from Turk Telekom 17,662 24,438
Accounts and checks receivable 40,749 44,886
--------- --------
315,008 320,625
Accrued service income 75,929 85,016
Allowance for doubtful receivables (135,920) (138,691)
--------- --------
$ 255,017 266,950
========= ========
Movements in the allowance for doubtful receivables are as follows:
December 31, March 31,
2003 2004
------------ ----------
(Unaudited)
Beginning balance $ 126,677 135,920
Provision for doubtful receivables
Write offs 13,415 7
Effect of change in exchange rate (27,715) (6,029)
23,543 8,793
--------- --------
Ending balance $ 135,920 138,691
========= ========
(6) Due from Related Parties
As of December 31, 2003 and March 31, 2004, the balance comprised:
December 31, March 31,
2003 2004
------------ ---------
(Unaudited)
KVK Teknoloji Urunleri AS ("KVK Teknoloji") $31,287 26,701
Digital Platform Iletisim Hizmetleri AS ("Digital Platform") 8,000 14,924
A-Tel Pazarlama ve Servis Hizmetleri AS ("A-Tel") 21,019 14,798
Milleni.com GmbH ("Milleni.com") 3,886 714
Geocell Ltd. ("Geocell") 2,345 539
Other 4,088 3,938
------- ------
$70,625 61,614
======= ======
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.
8
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.
Due from Milleni.com, a company whose majority shares are owned by some of
the shareholders of the Company, mainly resulted from interconnection
receivables.
Due from Geocell, a company whose majority shares are owned by Fintur,
mainly resulted from roaming receivables and sales of GSM equipment.
(7) Other Current Assets
At December 31, 2003 and March 31, 2004, the balance comprised:
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
Prepaid taxes $ 37,755 103,548
Advances to suppliers 7,013 8,574
Promotional material 3,600 3,398
Deferred financing costs 2,565 3,025
Other 12,085 21,970
-------- --------
$ 63,018 140,515
======== ========
(8) Due from Related Parties - Long Term
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
Digital Platform $56,112 60,077
Other 499 403
-------- --------
$56,611 60,480
======== ========
Due from Digital Platform mainly resulted from call center revenues,
financial support for operations, and advances given for current and
planned sponsorships.
(9) Investments
At December 31, 2003 and March 31, 2004, investments in associated
companies were as follows:
December 31, March 31,
2003 2004
------------ ---------
(Unaudited)
Fintur $127,179 136,181
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
-------- --------
$149,798 158,800
======== ========
9
At December 31, 2003 and March 31, 2004, the Company's ownership interest
in Fintur was 41.45%.
In 2003, Bilisim acquired a 6.24% interest in Aks TV and an 8.23% interest
in Basin Yatirim, media companies owned by the Cukurova Group. Investments
in these companies are accounted for under cost method.
Aggregate summarized information of Fintur as of December 31, 2003 and
March 31, 2004 and for the three month periods ended March 31, 2003 and
2004 are as follows:
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
Current assets $ 120,372 140,740
Noncurrent assets 440,926 461,584
---------- -------
$ 561,298 602,324
========== =======
Current liabilities $ 211,885 218,550
Noncurrent liabilities 159,517 172,154
Shareholders' equity 189,896 211,620
---------- -------
$ 561,298 602,324
========== =======
3 months ended 3 months ended
March 31, 2003 March 31, 2004
-------------- --------------
(Unaudited) (Unaudited)
Revenue $ 65,079 108,649
Direct cost of revenue (35,584) (46,656)
Income before taxes 4,699 25,879
Net income 5,335 19,026
10
(10) Fixed Assets, net
As of December 31, 2003 and March 31, 2004, the analysis of fixed assets is
as follows:
Useful December 31, March 31,
Lives 2003 2004
------ ------------ -----------
(Unaudited)
Operational fixed assets:
Base terminal stations 8 years $ 971,805 978,985
Mobile switching center/Base station controller 8 years 828,969 833,628
Minilinks 8 years 205,327 206,329
Supplementary system 8 years 36,333 36,491
Call center equipment 5 years 9,127 9,165
GSM services equipment 8 years 87,853 87,994
----------- ---------
2,139,414 2,152,592
Accumulated depreciation (1,101,567) (1,164,909)
----------- ---------
Operational fixed assets, net 1,037,847 987,683
Non-operational fixed assets:
Land 773 846
Buildings 25 years 174,038 174,067
Furniture, fixture and equipment 4-5 years 160,521 162,041
Motor vehicles 4-5 years 8,072 8,224
Leasehold improvements 3-5 years 54,032 54,599
----------- ---------
397,436 399,777
Accumulated depreciation (210,346) (222,171)
----------- ---------
Non-operational fixed assets, net 187,090 177,606
----------- ---------
$ 1,224,937 1,165,289
=========== =========
There is no interest capitalized on fixed assets during the three month
period ended March 31, 2004. Total interest capitalized on fixed assets
during the three month period ended March 31, 2003 amounted to $29. Such
capitalized interest is depreciated over the remaining useful lives of the
related fixed assets.
At December 31, 2003 and March 31, 2004, total fixed assets acquired under
finance leases amounted to $72,351 and $ 71,245, respectively. Depreciation
of these assets amounted to $784 and $974 for the three month periods ended
March 31, 2003 and 2004, respectively, and is included in depreciation
expense.
(11) Construction in Progress
At December 31, 2003 and March 31, 2004, construction in progress consisted
of expenditures in GSM and non-operational items and is as follows:
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
Turkcell-GSM network $51,203 74,676
Non-operational items 1,525 2,269
Turkcell-Other projects 400 2,744
Kybrys Telekom-GSM network 630 362
------- ------
$53,758 80,051
======= ======
11
(12) Intangibles, net
As of December 31, 2003 and March 31, 2004, intangibles consisted of the
following:
December 31, March 31,
Useful lives 2003 2004
------------ ------------ -------------
(Unaudited)
GSM-License (Note 1) 25 years $ 500,000 500,000
Computer software 8 years 762,753 773,448
Transmission lines 10 years 15,708 15,937
----------- ---------
1,278,461 1,289,385
Accumulated amortization (454,492) (483,373)
----------- ---------
$ 823,969 806,012
=========== =========
As of March 31, 2004, amortized intangible assets are as follows:
Gross carrying Accumulated
amount amortization
-------------- ------------
Turkcell-License $ 500,000 118,333
Computer software 773,448 358,398
Transmission lines 15,937 6,642
------------ -------
$ 1,289,385 483,373
============ =======
Aggregate amortization expense
------------------------------
Aggregate amortization expense for the three month periods ended March 31,
2003 and 2004 are $27,239 and $28,881, respectively.
Estimated amortization expense
------------------------------
For the year ended December 31, 2004 $ 115,927
For the year ended December 31, 2005 114,430
For the year ended December 31, 2006 110,621
For the year ended December 31, 2007 98,167
For the year ended December 31, 2008 $ 60,834
The Company adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS
No. 142 did not have a material impact on the Company's consolidated
financial position or results of operations. As of March 31, 2004, the
Company does not have any indefinite live intangible assets. Goodwill
amounting to $1,349 as of March 31, 2004 was recorded on the acquisition of
the remaining 30% shares of Mapco.
12
(13) Short Term Borrowings
At December 31, 2003 and March 31, 2004, short-term borrowings comprised
the following:
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
Current portion of long term borrowings (Note 18) $ 93,375 130,226
Other short term bank loans and overdrafts 1,656 2,437
-------- -------
$ 95,031 132,663
======== =======
(14) Trade Payables
At March 31, 2004, the balance includes amounts due to Ericsson
Telekomunikasyon AS ("Ericsson Turkey") and Ericsson Radio Systems AB
("Ericsson Sweden") totalling $27,277 (December 31, 2003: $11,631)
resulting from fixed asset purchases, site preparation and other services,
and amounts due to other suppliers totalling $27,084 (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 six months
prior to the expiration of the then current term. As of December 31, 2003,
the agreement was automatically extended through December 31, 2004.
(15) Due to Related Parties
As of December 31, 2003 and March 31, 2004, due to related parties
comprised:
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
Hobim Bilgi Islem Hizmetleri AS ("Hobim") $ 1,694 1,178
Turkiye Genel Sigorta AS ("Genel Sigorta") 976 795
Yapi Kredi Sigorta AS ("Yapi Kredi Sigorta") 792 382
Other 1,123 1,596
-------- -----
$ 4,585 3,951
======== =====
Due to Hobim resulted from the invoice printing services rendered by this
company.
Due to Genel Sigorta and Yapy Kredi Sigorta resulted from fixed assets
insurance premiums and health insurance premiums of the Company's
personnel.
13
(16) Other Current Liabilities and Accrued Expenses
At December 31, 2003 and March 31, 2004, the balance comprised:
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
License fee accrual--The Turkish Treasury (Note 20) $ 538,930 606,421
Interconnection dispute accrual (Note 20) 461,803 488,587
Telecommunications Authority penalty accrual (Note 20) 104,476 118,422
Annual frequency usage fee (Note 20) 94,111 109,473
Taxes and withholdings 137,446 108,584
Deferred income 85,223 101,452
Selling and marketing expense accruals 27,317 27,767
Transmission fee accrual 16,671 18,417
Accrued interest on borrowings 22,399 14,235
Lease obligations--short term portion 12,993 12,387
Telecommunications Authority share accrual 12,005 10,814
Class action accrual 19,200 -
Other expense accruals 34,078 35,049
---------- ---------
$1,566,652 1,651,608
========== =========
(17) Taxes on Income
The income tax expense is attributable to income from continuing operations
and consists of:
3 Months Ended
March 31,
2003 2004
-------- --------
(Unaudited)
Current tax expense $ - -
Deferred tax expense - (29,173)
------- -------
Income tax expense $ - (29,173)
======= =======
Income tax expense attributable to income from continuing operations was
nil and $29,173 for the three month periods ended March 31, 2003 and 2004,
respectively. 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:
3 Months Ended
March 31,
2003 2004
-------- --------
(Unaudited)
Computed "expected" tax expense $(13,038) (51,494)
Non taxable translation gain (9,714) (33,047)
Investment tax credit 19,989 5,828
Change in valuation allowance 10,262 (1,592)
Nontaxable items - 48,755
Other (7,499) 2,377
-------- -------
Income tax expense $ - (29,173)
======== =======
14
For the three month periods ended March 31, 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 March 31, 2004 are presented below:
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
Deferred tax assets:
Accrued expenses $ 345,363 346,082
Accounts and other receivables (principally due
to allowance for doubtful accounts) and other 71,867 77,248
Net operating loss carryforwards 12,690 15,091
Tax credit carryforwards (Investment tax credit) 342,964 370,629
--------- -------
Gross deferred tax assets 772,884 809,050
Less: Valuation allowances (11,038) (12,630)
--------- -------
Deferred tax assets 761,846 796,420
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) (252,442)
Total deferred tax liabilities (222,783) (252,442)
--------- -------
Net deferred tax assets $ 539,063 543,978
========= =======
At December 31, 2004, net operating loss carry forwards are as follows:
Expiration
Year Amount Date
---- ------ ----------
1999 $ 84 2004
2000 7,369 2005
2001 10,888 2006
2002 3,294 2007
2003 21,048 2008
2004 5,644 2009
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.
15
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 March 31, 2004, investment incentive certificates provide for
tax benefits on cumulative purchases of up to approximately $4,616,132
(December 31, 2003: $4,389,386) in qualifying expenditures, as defined in
the certificates. As of March 31, 2004, the Company had incurred cumulative
qualifying expenditures of approximately $3,612,014 (December 31, 2003:
$3,362,333), resulting in tax credit carryforwards under the certificates
of approximately $370,629 (December 31, 2003: $342,964), net of foreign
exchange translation losses. Such tax credits can be carried forward
indefinitely. The certificates are denominated in Turkish Lira. However,
approximately $632,453 of qualifying expenditures through March 31, 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 seven 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 $543,978
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 $12,630 is recorded as of March 31, 2004 (December 31, 2003:
$11,038) for such amounts. The valuation allowance at December 31, 2003 and
March 31, 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 $543,978 as of March 31, 2004 will be
realized through reversal of taxable temporary differences as well as
future taxable income exclusive of reversing taxable temporary differences.
The Company will continue to evaluate the realizability of its deferred tax
assets including net operating loss and tax credit carryforwards and the
related impact on the valuation allowance.
In accordance with the Law No. 4842, which made changes in certain laws
announced on April 24, 2003, the surcharge of 10% applied on the
corporation tax is abolished effective for all tax returns filed on or
after January 1, 2004. Accordingly, substantially all taxable income earned
from January 1, 2003 is taxed at a rate of 30%. However, in accordance with
the Law No. 5035, which was enacted during December 2003 and announced on
January 2, 2004, the corporation tax rate will be applied as 33% for
taxable income earned in 2004 only.
Further, in accordance with the Law No. 5024, which was announced on
December 30, 2003, effective from January 1, 2004, taxable income will be
determined based on the financial statements restated for the effects of
inflation. Accordingly, taxable income earned from January 1, 2004 will be
taxed based on restated financial statements if the conditions in the law
are met. Based on the Company's financial position, restated for the
effects of inflation at December 31, 2003 in accordance with the Law No.
5024, the change in tax law is not expected to have a material impact on
future taxable income.
16
(18) Long Term Borrowings
At December 31, 2003 and March 31, 2004, long-term borrowings comprised:
Interest December 31, March 31,
Rate (%) 2003 2004
-------- ------------ ---------
(Unaudited)
Cellco 12.75% senior notes, due 2005 12.75% $ 400,000 400,000
Akbank TAS ("Akbank") - 1 Libor + 5.25% 125,000 125,000
Akbank - 2 Libor + 3.50% - 100,000
Turkiye Garanti Bankasi AS ("Garanti Bankasi") - 1 Libor + 3.40% - 100,000
Garanti Bankasi - 2 Libor + 5.62% 75,000 75,000
Murabaha syndicated facility Libor + 4.50% - 28,125
Nordbanken--Stockholm ("Nordbanken") Libor + 0.6% 5,875 3,601
Other - 53
----------- ---------
605,875 831,779
Less: Current portion of long term borrowings (Note 13) (93,375) (130,239)
----------- ---------
$ 512,500 701,540
=========== =========
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 March 31, 2004.
As of March 31, 2004, the outstanding balances of Cellco 12.75% senior
notes, Akbank-1, Garanti Bankasi -2 and Nordbanken were, $400,000,
$125,000, $75,000 and $3,601, respectively. Cellco 12.75% senior notes
mature in August 2005. Akbank-1, Garanti Bankasi -2 and Nordbanken loans
mature in June 2005, in April 2006 and in September 2004, respectively.
There are no unused commitments under these facilities.
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
and initial drawdown was made on March 3, 2004. The facility has a maturity
of two years from each drawdown. The availability period is 180 days from
the date of agreement and the grace period is one year from each drawdown.
The facility is unsecured and will be used for certain qualified equipment
purchases. As of June 16, 2004, the facility was fully drawn down.
Turkcell has fully drawn down additional borrowings of $100,000 from Akbank
in February 2004 and $100,000 from Garanti Bankasi in March 2004. Both
facilities will be repaid in 3 years.
As of March 31, 2004, the Company is not subject any financial covenants or
ratios with respect to its borrowings.
As of March 31, 2004, the borrowing from Nordbanken was collateralized by
letter of guarantee obtained from Yapi Kredi. No other facilities are
collateralized by letters of guarantee or sureties of the Company's
shareholders.
17
(19) Common Stock
At December 31, 2003 and March 31, 2004, common stock represented
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:
3 Months Ended
March 31,
2003 2004
-------------- --------------
(Unaudited)
Numerator:
Net income 39,515 126,167
Denominator:
Basic and diluted weighted average shares 500,000,000,000 500,000,000,000
Basic and diluted net income per share 0.00008 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, the direct ownership of Cukurova
Holding AS and Yapi Kredi in Turkcell is 7.47% and 2.89%, respectively.
On July 21, 2004, it has been made public 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, have been finalized by mutual agreement. In accordance with this
agreement, the Cukurova Group will purchase 5,699,493,626 Turkcell shares
(nominal value of TL 5,699,494 million) based on the weighted average price
of the last 30 trading days in Istanbul Stock Exchange and 8,998,845,000
Turkcell shares (nominal value of TL 8,998,845 million), based on the
acquisition cost plus Libor+3.5% annual interest from Yapi Kredi until
April 30, 2005.
18
(20) Commitment and Contingencies
As of December 31, 2003 and March 31, 2004, commitments and contingent
liabilities comprised the following:
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
Bank Letters of Guarantee $ 44,952 41,975
Guarantees
Irancell 281,070
Iranian Authorities - 256,200
Iranian Authorities - 24,870
Digital Platform 46,965 35,045
BNP--Brussels (Buyer Credit) 31,825 24,327
BNP--Brussels (Financial Loan) 2,658 2,172
BNP--Hungary (Buyer Credit) 7,417 5,790
BNP--Hungary (Financial Loan) 864 422
Websterbank--USA 351 234
HSBC--Istanbul Main Branch 3,850 2,100
Hobim
BNP AK Dresdner (Financial Leasing) 129 129
Purchase Commitment
Asli Gazetecilik 25,000 25,000
As of March 31, 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 $34,816 (December 31, 2003: $37,916). In
addition, as of March 31, 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 $2,159
(December 31, 2003: $2,036).
As a condition of the GSM license bid in Iran, the Consortium is obliged to
provide a bid bond amounting to 263,000,000,000 Iranian Rial (approximately
EUR 25 million) to the Iranian Authorities. This bid bond was issued in
Iranian Rial amounting 263,000,000,000 Rial (equivalent to $24,870 at March
31, 2004), which was equivalent to EUR 25 million at the date of issuance,
by Bank Saderat under a Deutsche Bank AG counter-guarantee on February 8,
2004 and was underwritten by Turkcell. The bid bond originally expired on
August 7, 2004. Since Irancell has not been established as of August 7,
2004, the bid bond maturity was extended by Bank Saderat under Deutsche
Bank AG counter-guarantee until November 7, 2004.
19
The Consortium is also obliged to provide a payment guarantee to the
Iranian Authorities amounting to EUR 300 million, which is equal to the
upfront license fee. The guarantee becomes effective when the license is
formally awarded to Irancell. Turkcell has guaranteed a EUR 210 million
(equivalent to $256,200 at March 31, 2004) portion of this guarantee
through HSBC plc, which issued the payment guarantee under a syndicate with
Akbank and BNP Paribas. The payment guarantee was issued on March 5, 2004
and expires in September 7, 2004. .In addition to the upfront license fee,
once the Iranian subsidiary of the Company is formally established and the
license will be awarded, the Iranian subsidiary of the Company 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.
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 of Asli Gazetecilik advertisement
services for the Company and services that will be deemed satisfactory to
the Company, the Company will pay a total amount of $25,000. As of March
31, 2004, no payments were made and no services were rendered under the
framework agreement. On May 30, 2004, the Company signed the "Amended
Framework Agreement" with Asli Gazetecilik, extending the terms of the
agreement until December 31, 2005 and, in accordance with the amended
agreement, the Company paid $5,000 on June 18, 2004.
20
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 judgement to be rendered by the Danistay.
Turkcell and its legal counsel believe that Turkcell will prevail with
respect to the ongoing licence 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 an unfavourable 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.
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.
Based on its management and legal counsel's opinion, Turkcell has accrued
TL 288.6 trillion (equivalent to $220,096 as of March 31, 2004) including
TL 136.3 trillion of interest (equivalent to $103,953 as of March 31, 2004)
on its consolidated financial statements as of March 31, 2004 for
additional ongoing license fees for certain value-added services,
transaction fees, roaming revenue and interest charges for late
collections.
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.
Based on its management and legal counsel's opinion, Turkcell has accrued
TL 39.0 trillion (equivalent to $29,733 as of March 31, 2004) including TL
23.2 trillion of interest (equivalent to $17,671 as of March 31, 2004) on
its consolidated financial statements as of March 31, 2004 for additional
ongoing license fees for special transaction tax and stamp duty.
22
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 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. Although Turkcell did not pay such
fees, as of March 31, 2004, it has accrued TL 439.0 trillion including
interest (equivalent to $334,794 as of March 31, 2004) for the unpaid
amounts and included them in the determination of net income.
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 $69,683 at March 31, 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
$110,786 at March 31, 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 licence fee. Turkcell and the Tax Office
agreed that Turkcell would made payments for the VAT amounts amounting to
TL 45.7 trillion (equivalent to $34,841 as of March 31, 2004) covering the
period between April 1998 and November 2001 by nine equal instalments
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 $3,472
as of March 31, 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 $5,034 at
March 31, 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 $28,598 at March 31,
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 instalment of TL 16.0 trillion
(equivalent to $12,278 at March 31,
23
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 $10,092 at payment date and
equivalent to $10,696 at March 31, 2004) from Turk Telekom, which was
related to the TL 6.6 trillion (equivalent to $5,034 at March 31, 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 $12,278 at March 31, 2004) paid to Turk
Telekom as its first instalment. The appeals court decided in favour 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.
Management and legal counsel of the Company are confident that Turkcell
will recover the TL 16.0 trillion paid to Turk Telekom with interest.
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 $63,934 as of March
31, 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 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
24
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 $826,059 and $373,686 at March 31, 2004).
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 $213,645 as of March 31, 2004) including interest of TL 35.3
trillion (equivalent to $26,945 as of March 31, 2004).
Turkcell has deducted the interconnection receivables from Turk Telekom
amounting to TL 248.3 trillion (equivalent to $189,380 as of March 31,
2004) from its interconnection receivables on its consolidated financial
statements as of and for the three months period ended March 31, 2004. The
remaining balance of TL 70.1 trillion (equivalent to $53,488 as of March
31, 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. However, based on
current legal status and the management's negotiation strategies, Turkcell
has accrued TL 640.7 trillion (equivalent to $488,587 at March 31, 2004)
including interest of TL 294.4 trillion (equivalent to $224,532 as of March
31, 2004) on its consolidated financial statements as of March 31, 2004.
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 ($2,304 as of March 31, 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 $22,930
as of March 31, 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 March 31,
2004, Turkcell recorded a provision of TL 13.3 trillion (equivalent to
$10,138 as of March 31, 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 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.
25
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. The case is still
pending.
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 $16,642 at March 31, 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. Turkcell believes that it has not abused
its dominant position and based on its management and legal counsel's
opinion, it has not recorded any accrual for Competition Board's decision.
The Telecommunications Authority decided that Turkcell has not complied
with its responsibility under Turkish regulations to provide national
roaming and fined Turkcell by approximately TL 21.8 trillion (equivalent to
$16,642 at March 31, 2004). Turkcell has recorded an accrual amounting to
$16,642 on its consolidated financial statements as of March 31, 2004. On
April 7, 2004, Turkcell made the related payment. On May 27, 2004, Turkcell
commenced a lawsuit against Telecommunications Authority's decision.
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.
26
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
$5,318 as of March 31, 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
case and Turkcell appealed this decision. Turkcell has accrued TL 7
trillion (equivalent to $5,318 at March 31, 2004) on its consolidated
financial statements as of March 31, 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 favour
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. Accordingly, Turkcell accrued TL 52.3 trillion
(equivalent to $39,912 as of March 31, 2004) for principal and TL 85.3
trillion (equivalent to $65,057 as of March 31, 2004) for interest for the
frequency usage fees of 2002 in the accompanying consolidated financial
statements as of March 31, 2004. 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 $111,070 as of March 31, 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 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.
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
27
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. The case is still pending. Turkcell and its legal counsel
believe that it is premature to estimate the outcome of this dispute.
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 $24,198 as of
March 31, 2004). On June 2, 2004, Turkcell has commenced a lawsuit against
the decision of the Telecommunications Authority. Turkcell accrued TL 31.7
trillion (equivalent to $24,198 as of March 31, 2004) for this penalty in
the accompanying consolidated financial statements as of March 31, 2004. On
April 9, 2004, Turkcell made the respective payment.
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 $1,370 as of March 31, 2004). The Tax
Office also imposed a penalty fee of TL 4.3 trillion (equivalent to $3,247
as of March 31, 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.
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
$6,845 as of March 31, 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. Based on its management and legal counsel's
opinion, Turkcell has not made any accrual related with this dispute.
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 $12,206 as of March 31, 2004) for principal, an interest
charge of TL 10.8 trillion (equivalent to $8,207 as of March 31, 2004) and
a penalty of TL 63.4 trillion (equivalent to $48,396 as of March 31, 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. Turkcell accrued TL 101.7 trillion
(equivalent to $77,582 as of March 31, 2004) for this penalty in the
accompanying consolidated financial statements as of
28
March 31, 2004. The court has rejected Turkcell's appeal for annulment of
Telecommunications Authority's decision. The case is transferred to upper
court. On April 16, 2004, Turkcell paid TL 103.7 trillion (equivalent to
$79,114 as of March 31, 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 $5,332 as of March 31, 2004) and a tax penalty of
TL 9.9 trillion (equivalent to $7,530 as of March 31, 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 minute to 20 cents per minute before IsTim and Aycell entered
into the market. The investigation is pending.
29
(21) Subsequent Events
(a) On May 26, 2004, the Board of Directors declared a distributable
dividend of TL 236,317 billion (equivalent to $180,218 at March 31, 2004).
TL 118,159 billion (equivalent to $90,109 at March 31, 2004) of the
dividend will be distributed in the form of bonus shares and TL 118,159
billion (equivalent to $90,109 at March 31, 2004) will be distributed in
cash. The rate of the bonus share certificate to be issued for each share
having a nominal value of TL 1,000 will be 23.63%. Also, net TL 236.3
(equivalent of approximately 0.018 cents at March 31, 2004) will be paid to
shareholders for each share they own.
At the Board of Directors Meeting of the Company, which was held on June
23, 2004, it was resolved that the issued capital of the Company would be
increased to TL 1,474,639 billion from TL 500,000 billion. Accordingly, the
total amount to be increased is TL 974,639 billion. Of this, TL 118,158
billion is from the distributable income of the Company from 2003 earnings
while TL 856,480 billion is from the statutory capital inflation
adjustment. The total amount will be added to the capital of the Company
and the bonus shares to be issued accordingly will be distributed to the
shareholders. As a result of the above decision, 1.949278722 bonus shares
will be issued for each ordinary share having a nominal value of TL 1,000.
The application for the registration of the bonus share certificates to be
issued after the capital increase is approved by the Turkish Capital
Markets Board on July 15, 2004.
(b) The Company and Ericsson Turkey have established a company named East
Asian Consortium B.V. ("East Asian"), with a share capital of EUR 91
million, in order to invest in the Iranian GSM business. Turkcell owns 85%
of this company and Ericsson owns the remaining 15%. Subsequent to March
31, 2004, Turkcell has fully completed its capital contribution in East
Asian. East Asian is a member of the Irancell Consortium (the
"Consortium").
(c) On July 21, 2004, it has been made public 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, have been finalized by mutual agreement. In accordance with this
agreement, the Cukurova Group will purchase 5,699,493,626 Turkcell shares
(nominal value of TL 5,699,494 million) based on the weighted average price
of the last 30 trading days in Istanbul Stock Exchange and 8,998,845,000
Turkcell shares (nominal value of TL 8,998,845 million), based on the
acquisition cost plus Libor+3.5% annual interest from Yapi Kredi until
April 30, 2005.
(d) Subsequent to March 31, 2004, Turkcell has engaged in discussions with
third parties relating to the settlement of certain legal proceedings
discussed in footnote 20, 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. Since these discussions are ongoing
Turkcell management believes that it is too early to estimate the outcome
of these disputes. However, based upon these ongoing discussions the
Turkcell management believes that the amounts required to resolve these
disputes may be higher than Turkcell's net legal provisions as of March 31,
2004 as much as $250 million to $350 million.
30
OPERATING AND FINANCIAL REVIEW FOR THE THREE MONTH PERIOD ENDED MARCH 31, 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 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 March 31, 2004, and the related consolidated statements of
operations, changes in shareholders' equity and comprehensive income, and cash
flows for each of the three month periods ended March 31, 2003 and 2004 and the
related notes included herein. The information as of March 31, 2004 and for each
of the three month periods ended March 31, 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.
We were formed in 1993 and we commenced operations in 1994 pursuant to
a revenue sharing agreement with Turk Telekom. Since April 1998, we have
operated under a 25-year GSM license, which was granted upon payment of an
upfront license fee of $500 million. At the same time we entered into an
interconnection agreement with Turk Telekom for the interconnection of our
network with Turk Telekom's fixed-line network. On September 20, 2003, we signed
an agreement (the "Amended Agreement") with Turk Telekom amending certain
sections of the Interconnection Agreement dated April 24, 1998. As a result of
intervention by the Telecommunications Authority, we entered into a new
supplemental protocol with Turk Telekom on November 10, 2003, with amended
tariffs and tariff adoption procedures.
Under our GSM license, we pay the Turkish Treasury a monthly amount
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. 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,
Aycell, IsTim, Milleni.com and 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. On October 9, 2003, we also signed a new agreement 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, Telsim and we determined the new pricing
terms, which resulted in an amendment on the pricing terms. On September 10,
2003, we entered into an interconnection agreement with Globalstar Avrasya Uydu
ve Data Iletisim AS ("Globalstar"), which is effective from September 10, 2003.
The agreement between Turkcell and Globalstar was concluded on December 11,
2003, with amended tariffs and tariff adoption procedures.
We commenced construction of our GSM network in 1993. As of March 31,
2004, we have made capital expenditures amounting to approximately $4.0 billion
including the cost of our license.
As of March 31, 2004, our network coverage area included 100% of the all cities
and towns with a population of 10,000 or more 99.87% of all cities with a
population of 5,000 or more and 99.45% of all cities with a population of 3,000
or more. Our coverage also includes all holiday destinations, seasonally
populated areas and intercity highways.
Our subscriber base 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 19.7 million as of March 31, 2004. The rate of
increase in the first three months of 2004 was slower than in previous years,
mainly due to the increase in penetration levels. We believe we can achieve
similar subscriber growth in nominal terms compared to that in 2003; however the
percentage growth in 2004 is likely to be smaller than in 2003 since the
subscriber base is higher in 2004.
During the first quarter of 1999, we introduced a prepaid mobile
service in order to increase penetration and limit credit risk. This service
permits access to our GSM services to subscribers who prefer to avoid monthly
billing or to better control their mobile communication expenses. By March 31,
2004, 14.8 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 11.0% to 56.4 minutes for
the three month period ended March 31, 2004 from 50.8 minutes for the same
period in 2003 mainly due to the favorable effect of the improving macroeconomic
environment on consumer sentiment along with volume based campaigns and mass
loyalty programs. Our average monthly revenue per user increased 26% to $12.7
for the three month period ended March 31, 2004 from $10.1 for the same period
in 2003. This increase was mainly due to the appreciation of TL against US
dollars, the increase in average minutes of use per subscriber, two price
increases and improved consumer sentiment. Together with the improvement in the
macroeconomic indicators, improving consumer sentiment and their impact on usage
levels, we expect average minutes of use per subscriber and average monthly
revenue per user to improve compared to 2003. We expect average monthly minutes
of usage to improve compared to 2003 as a result of the improvement in
macroeconomic indicators and consumer sentiment.
Churn is calculated as the total number of subscribers disconnections
during a period as the percentage of the average number of subscribers for the
period. Churn refers to subscribers that are disconnected, both voluntary and
involuntary. Under our disconnection process, subscribers who do not pay their
bills are disconnected from our network, and included in churn, upon the
commencement of the legal process to disconnect them, which occurs approximately
180 days from the due date of the unpaid bill. Pending disconnection, non-paying
subscribers are suspended from service (but are still considered subscribers)
and receive a suspension warning, which in some cases results in payment and
reinstatement of service. During the year ended December 31, 2003, we
disconnected approximately 170,993 additional subscribers for nonpayment of
bills and our annual churn rate was 14.5%. For the three month period ended
March 31, 2004, we disconnected approximately 31,000 additional subscribers for
nonpayment of bills. Our churn rate was 3.2% for the three month period ended
March 31, 2004. We have a bad debt provision in our financial statements for
such non-payments and disconnections amounting to $135.9 million and $138.7
million as of December 31, 2003 and March 31, 2004, respectively, which we
believe is adequate. Prior to 2003, the majority of disconnections were due to
non-payment of bills. However, starting with 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 will keep
churn rate at lower levels compared to 2003 levels.
International and Other Domestic Operations
In 2004, we have expanded our international GSM operations, by our
investments in Irancell and Digital Cellular Communications, which are located
in Iran and Ukraine, respectively. For a description and additional information
regarding our international and other domestic operations see "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. Call center revenues
consist of revenues for call center services provided by our call center
subsidiary to affiliated non-consolidated companies. 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. 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 multifunctional mobile
service platform under the commercial name "Shubuo." Shubuo provides our
subscribers with access to quality content while creating a new medium for
subscriber brands to promote their goods and services. Under the Shubuo brand,
subscribers are allowed to choose from several service packages each catering to
different interest areas including news, finance, football, flirt, city life and
music. Subscribers may choose from these services according to their interests
and buy individual packages for a monthly fee. Subscribers receive a fixed
number of text messages containing information on the subject they choose and
are able to utilize content-rich and personalized mobile internet services
allowing them to interact with other Shubuo subscribers through chat,
competition, voting, etc.
We recognize SIM card sales as revenue upon initial entry of a new
subscriber into the GSM network, only to the extent of the direct costs
associated with providing these services. Excess SIM card sales are, deferred
and recognized over the estimated effective subscription contract life. In
connection with postpaid and prepaid subscribers, we currently incur costs for
activation fees to dealers and other promotional expenses, which historically
offset all or substantially all of the subscription fees. We charge a usage fee
for certain services we offer, such as SMS, voicemail and data and facsimile
transmission. Our revenues depend on the number of subscribers, call volume and
tariff pricing.
As is the case throughout Europe, airtime charges are generally 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 7 days before the
amendment of any tariff. We raise tariffs from time to time to offset Turkish
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. 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 be depending on the competitive, regulatory and macroeconomic
environment. We will continue to take the necessary actions to maintain the
right balance between our revenue goals and our customers' perception on our
price-value relation.
Although 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 is working towards implementation of 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, we charge
Turk Telekom a net amount of TL 210,000 (equivalent to $0.16 at March 31, 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 net amount of basic unit
price minus $0.06. For incoming international calls that are terminated at our
network, we were charging Turk Telekom 30% of the international settlement
charge, which is transferred by the foreign PSTN and GSM operators to Turk
Telekom. Under the Amended Agreement, we charge Turk Telekom 45% of the
international settlement charge. On October 11, 2003, the Telecommunications
Authority resolved that we will charge TL 178,750 (equivalent to $0.14 at March
31, 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, 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 charge
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
charge Aycell a net amount of $0.20 per minute for traffic switched from Aycell
to us. After Aria-Aycell merger under the company name of TT&TIM, we started to
negotiate on new interconnection agreement. We entered into an interconnection
agreement with Milleni.com in April 2001. Under the interconnection agreement
with Milleni.com, we charge Milleni.com a net amount of (euro)0.11 per minute
for our network terminated traffic. Our agreement with Milleni.com is not
affected by the Telecommunications Authority resolution of October 11, 2003.
Under the interconnection agreement with Globalstar, effective from September
10, 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.
Under our GSM license, we estimate that the amount of revenue after
deducting ongoing license fees, international roaming and interconnect expenses
represent 71% and 70% of our revenues for the three month periods ended March
31, 2003 and 2004. 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 and consumer sentiment, we
expect revenues to increase under current macroeconomic projections compared to
2003. 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 costs of revenues include mainly ongoing license fees,
transmission fees, base station rents, billing costs, depreciation and
amortization charges, technical, 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
Turk Telekom, Telsim, TT&TIM, Milleni.com and Globalstar and wages, salaries and
personnel expenses for technical personnel. Direct costs 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 $0.04 at March 31, 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 March 31, 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.
Per the Amended Agreement signed with Telsim, effective from October 9,
2003, we pay Telsim a net amount of TL 210,000 (equivalent to $0.16 at March 31,
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 TL 178,750 (equivalent to $0.14 at March 31, 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 $0.18 at March 31, 2004)
per minute for traffic originating on our network and terminating on Telsim'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 paid IsTim a net amount of
$0.20 per minute for traffic switched from us to IsTim.
We also entered into an interconnection agreement with Aycell on July
19, 2001. Under the agreement, we paid Aycell a net amount of $0.20 per minute
for traffic switched from us to Aycell. After Aria-Aycell merger under the
company name of TT&TIM, we have been negotiating on new interconnection
agreement. Under our interconnection agreement with Milleni.com, each of the
parties agrees to provide telecommunications services to each other whereby
Milleni.com may convey calls to our switch and we may convey calls to
Milleni.com's switch for onward transmission to their destinations. Milleni.com
charges us at various prices identified within the scope of the agreement for
the calls destined to numerous networks around the globe. 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.
Selling and Marketing
Selling and marketing expenses consist of public relations, sales
promotions, dealer activation fees, advertising, subsidies, wages and 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 remained stable at $23 per new subscriber
for the three month periods ended March 31, 2003 and 2004, respectively. We
compute average acquisition cost per new subscriber by adding sales promotion
expenses, SIM card subsidies, activation fees and 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. The average acquisition cost per
subscriber in 2004 is expected to remain at levels similar to 2003. However, in
case that the average acquisition cost per subscriber increases due to
comparatively lower acquisitions, its impact on financials is not expected to be
significant.
The following table shows certain items in our statement of operations
as a percentage of revenues.
Three months ended
March 31,
------------------------
2003 2004
---------- ----------
Statement of Operations (% of revenue)
Revenues
Communication fees 96.9 96.8
Monthly fixed fees 1.8 1.6
SIM card sales 0.9 1.1
Call center revenues 0.3 0.3
Other 0.1 0.2
Total revenues 100.0 100.0
Direct cost of revenues (66.5) (58.1)
Gross margin 33.5 41.9
General and administrative expenses (4.5) (3.9)
Selling and marketing expenses (10.0) (10.2)
Operating income 19.0 27.8
Three month period ended March 31, 2004 compared to three month period ended
March 31, 2003
We had 19.7 million subscribers, including 14.8 million prepaid
subscribers, as of March 31, 2004, compared to 16.3 million subscribers,
including 11.6 million prepaid subscribers, as of March 31, 2003. During the
first quarter of 2004, we added approximately 0.7 million net new subscribers.
Based on our understanding of the market, and considering the changing dynamics
this year, we expect to add similar numbers of new subscribers in the second
half of 2004 in nominal terms, compared to the first half of 2004.
Revenues
Total revenues for the three month period ended March 31, 2004
increased 52% to $745.5 million from $491.1 million for the same period in 2003.
The increase in revenues is mainly due to the growth in the number of
subscribers and increased usage, and tariff increase in 2003.
Revenues from communication fees for the three month period ended March
31, 2004 increased 52% to $721.8 million from $475.9 million for the same
period in 2003. Communication fees include SMS revenue, which amounted to $82.5
million and $52.1 million for the three month periods ended March 31, 2004 and
2003, respectively. Although the monthly fixed fee in TL remained the same, in
line with the appreciation of TL against US dollars, revenues from monthly
fixed fees for the three month period ended March 31, 2004 increased 32% to
$11.9 million from $9.0 million for the same period in 2003. SIM card revenues
for the three month period ended March 31, 2004 increased 93% to $8.3 million
from $4.3 million for the same period in 2003.
Direct cost of revenues
Direct cost of revenues increased 33% to $433.0 million for the three
month period ended March 31, 2004 from $326.7 million for the same period in
2003, mainly due to the increase in revenue-based costs such as the ongoing
license fee paid to the Turkish Treasury. The ongoing license fee increased 57%
to $137.5 million for the quarter ended March 31, 2004 from $87.6 million for
the same period in 2003, due to the increase in revenues and appreciation of TL
against US dollars. Interconnection costs increased 28% to $63.7 million for the
three month period ended March 31, 2004 from $49.8 million for the same period
in 2003, mainly due to the appreciation of TL against US dollars and the
increase in Turk Telekom's interconnection tariff under the Amended Agreement,
effective from September 20, 2003.
Transmission costs, site costs, information technology and network
maintenance expenses increased approximately 27% to $35.3 million for the three
month period ended March 31, 2004 from $27.8 million for the same period in
2003, mainly due to appreciation of TL against US dollars. In addition,
uncapitalizable antenna site costs and expenses increased 71% to $27.8 million
for the three month period ended March 31, 2004 from $16.3 million for the same
period in 2003, mainly due to increase in radio network operations and increase
in radio rent expenses under the renewed rent agreements.
Roaming expenses increased 26% to $11.7 million for the three month
period ended March 31, 2004 from $9.3 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 the better economic
climate and appreciation of TL against US dollars.
Billing costs increased 40% to $6.7 million for the three month period
ended March 31, 2004 from $4.8 million for the same period in 2003, mainly due
to appreciation of TL against US dollars and increase in postage fees.
Depreciation and amortization charges slightly decreased 1% to $104.5
million for the three month period ended March 31, 2004 from $105.1 million for
the same period in 2003. The amortization expense for our GSM license was $5.0
million for the three month period ended 2004 and the same period in 2003.
The cost of SIM cards sold increased 11% to $8.2 million for the three
month period ended March 31, 2004 from $7.4 million for the same period in 2003
reflecting the increase in simcard revenue as compared to the same period in
2003.
Wages, salaries and personnel expenses for technical personnel
increased 79% to $24.3 million for the three month period ended March 31, 2004
from $13.6 million for the same period in 2003 mainly due to appreciation of TL
against US dollars, periodic increase in salaries and increase in headcount.
As a percentage of revenue, direct cost of revenues decreased to 58%
for the three month period ended March 31, 2004 from 67% for the same period in
2003 mainly due to increased operational efficiency.
Gross profit increased to $312.5 million for the three month period
ended March 31, 2004 from $164.4 million for the same period in 2003, mainly due
to stable depreciation and amortization charges in 2004 as compared to 2003.
General and administrative expenses
General and administrative expenses increased 32% to $29.3 million for
the three month period ended March 31, 2004 from $22.2 million for the same
period in 2003, mainly due to one time fees paid for the Iran GSM license
tender. As a percentage of revenues, general and administrative expenses
decreased to 4% for the three month period ended March 31, 2004 compared to 5%
for the same period in 2003.
Bad debt expenses decreased to $7 thousand for the three month period
ended March 31, 2004 compared to $8.4 million for the same period in 2003,
mainly due to improved collection activities such as credit scoring, a new
option whereby subscribers can make payments under an installment plan and new
collection channels and improvement in the legal follow-up system to decrease
fraud. We provided an allowance for doubtful receivables identified based upon
past experience in our consolidated financial statements.
In the first quarter of 2004, Turkcell made a payment to BNP Paribas
related with Iran GSM license tender on behalf of Irancell. According to the
tender conditions, the consortium that acquires the license will pay the
consultancy fees of BNP Paribas (which acts as the consultant to the Iranian
government). In the first quarter of 2004, we paid such consultancy fees and
charged $8.9 million to general and administrative expenses. We do not foresee
any additional payment.
Wages, salaries and personnel expenses for non-technical and
non-marketing employees increased 100% to $9.2 million for the three month
period ended March 31, 2004 from $4.6 million for the same period in 2003. The
increase was mainly due to the increase in headcount, appreciation of TL against
US dollars and periodic increase in salaries.
Selling and marketing expenses
Selling and marketing expenses increased 55% to $76.0 million for the
three month period ended March 31, 2004 from $49.0 million for the same period
in 2003, mainly due to increase in the prepaid subscribers' frequency usage
fees, increased sponsorships and appreciation of TL against US
dollars. As a percentage of revenues, selling and marketing expenses were 10%
for the first quarter of 2004 and 2003. We expect our selling and marketing
expenses to increase due to increasing competition. 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 49% to $14.9 million for the three
month period ended March 31, 2004 from $10.0 million for the same period in
2003, mainly due to increased corporate and social sponsorships.
Total prepaid advertising, market research, product management, public
relations expenses and prepaid subscribers' frequency usage fee expenses
increased 75% to $37.9 million for the three month period ended March 31, 2004
from $21.6 million for the same period in 2003. The increase in 2004 stemmed
mainly 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.
Activation fees decreased 2% to $6.1 million for the three month period
ended March 31, 2004 from $6.2 million for the same period in 2003. Of the total
dealer activation fees for the three month period ended March 31, 2004 and March
31, 2003, $4.1 million and $5.0 million were for prepaid activations,
respectively.
Wages, salaries and personnel expenses for selling and marketing
employees increased 52% to $9.3 million for the three month period ended March
31, 2004 from $6.1 million for the same period in 2003 mainly due to
appreciation of TL against US dollars and periodic increase in salaries.
Operating income
Operating income increased 122% to $207.2 million for the three month
period ended March 31, 2004 from $93.2 million for the same period in 2003,
mainly due to increase in revenues.
Income from related parties, net
Income from related parties, which includes sales of GSM equipment and
SIM cards and charges for management, promotional materials and technical
advisory services provided to Azercell, Moldcell, Milleni.com, Geocell and GSM
Kazakhstan net of cost of goods sold after accounting for intercompany profit
elimination was $0.5 million for the three month period ended March 31, 2004
compared to $2.0 for the same period in 2003, mainly due to the sales of GSM
equipment to Geocell in the first quarter of 2003.
Interest income (expense), net
Interest expense net of interest income decreased 33% to $40.5 million
for the three month period ended March 31, 2004 compared to $60.2 million for
the same period in 2003. The decrease in net interest expense was mainly due the
repayment of principal portion of loans made during 2003 amounting to $673.5
million. Interest expense related to the principal repayments of the loans
decreased to $17.4 million for the three month period ended March 31, 2004 from
$31.7 million for the three month period ended March 31, 2003. Interest expense
related to legal cases increased to $55.1 million for the three month period
ended March 31, 2004 from $39.5 million for the three month period ended March
31, 2003.
Other income (expense), net
Other expense net of other income was $0.5 million for the three month
period ended March 31, 2004 compared $3.0 million other income, net for the same
period in 2003.
Translation gain (loss)
We have recorded a translation loss of $20.2 million for the three
month period ended March 31, 2004, compared to $1.1 million for the same period
in 2003. The increase in translation loss experienced for the three month period
ended March 31, 2004 stemmed from the 6% appreciation of TL against the US
dollar for the three month period ended March 31, 2004 compared to the 4%
devaluation of the TL against the US dollar for the same period in 2003. As we
recorded significant accruals, against legal disputes in our balance sheet, and
nearly all accruals are in terms of TL, the appreciation of TL resulted in
translation loss.
Income tax expense
Income tax expense was $29.2 for the three month periods ended March
31, 2004 and nil for the same period in 2003. 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 taxable income in 2004 and onwards and have generated
taxable income for seven 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, economic and
political situation in Turkey became more stable and there are positive
expectations about the near term future. Furthermore, the interconnection
agreement with Turk Telekom was 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 $544.0 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 allowance of approximately $12.6
million is recorded as of March 31, 2004 (December 31, 2003: $11.0 million) for
such amounts. The valuation allowance at December 31, 2003 and March 31, 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. We believe
that it is more likely than not the net deferred tax asset of approximately
$544.0 million as of March 31, 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.
Equity in net income of unconsolidated investees
Our share of the net income of unconsolidated investees was $7.9
million for the three month period ended March 31, 2004 compared to $2.2 million
for the same period in 2003. The increase in net income of unconsolidated
investees was mainly due to an increase in Fintur's net income from $5.3 million
for the three month period ended March 31, 2003 to $19.0 million for three month
period ended March 31, 2004.
Net income
Net income was $126.2 million for the three month period ended March
31, 2004 compared to the net income of $39.5 million for the same period in
2003. The increase was mainly due to the strong operational performance and the
appreciation of TL against US dollars.
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 imposed on new
subscribers that transfer from other mobile operator to another, which used to
be TL 20.0 million per subscriber, has been abolished.
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 otherwise disclosed herein,
here 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 Undersecretariat of the Treasury
approved investment incentive certificates for a program of capital expenditures
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 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 qualifiying expenditures but it
is not subject to any withholding tax). Investment incentive certificates
provide for tax benefits on cumulative purchases of up to approximately $4.6
billion in qualifying expenditures. As of March 31, 2004, we had incurred
cumulative qualifying expenditures of approximately $3.6 billion ($3.4 billion
as of December 31, 2003), resulting in tax credit carryforwards under the
certificates of approximately $370.6 million ($343.0 million as of December 31,
2003), net of foreign exchange translation losses. Such tax credits can be
carried forward indefinitely. The certificates are denominated in TL. However,
approximately $0.6 billion of qualifying expenditures through March 31, 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 - Investment Incentive Certificates" in the 20-F.
Capital Transactions
On June 23, 2004, our board of directors decided that Turkcell's
paid-in capital shall 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) difference amounting to TL 856.5 trillion for 2003 to
Turkcell's paid-in capital. An application to the Turkish Capital Markets Board
has been made for the approval of such capital increase and the registration of
the bonus shares to be issued and distributed to our shareholders. The Turkish
Capital Markets Board approved the application on July 15, 2004.
Effects of Inflation
The annual inflation rates in Turkey were 29.7% and 18.4% for the years
ended December 31, 2002 and 2003, respectively, based on the Turkish consumer
price index. Annual inflation rates were 11.8% as of March 31, 2004 and 29.4%
for the same period in 2003. Within a hyperinflationary
economy such as Turkeys', holding TL-denominated monetary assets in excess of
TL-denominated monetary liabilities results in a loss as the real value of the
net monetary assets decreases in line with the inflation rate. In a situation
where monetary liabilities exceed monetary assets, a gain results as the real
value of the net liabilities decreases. In order to try to contain inflation
rates that have averaged about 38.9% per annum over the past three years, the
Turkish government has implemented policies, including certain austerity
measures that could have a negative impact on the Turkish economy and on our
profitability. For additional information about the effects of inflation, see
"Item 3A. Selected Financial Data - Exchange Rate Data "and "Item 3D. Risk
Factors" in our 20-F.
New Accounting Standards Issued
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." EITF 03-01 provides guidance for assessing
other-than-temporary impairment. That proposed guidance would apply to
investments accounted for under the cost method or the equity method,
investments classified as either available-for-sale or held-to-maturity under
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
(including individual securities and mutual funds). The adoption of EITF 03-01
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 finance vehicle and
subsidiary, Cellco Finance N.V. ("Cellco"), which issued $300 million of debt
securities in July 1998 and $400 million of debt securities in December 1999,
and a rights issue. As of March 31, 2004, total outstanding payables related to
the Cellco transactions were $400 million.
Summary of our consolidated cash flows for the three month periods
ended March 31, 2004 and 2003 are as follows:
(In millions of USD) 2003 2004
---- ----
Net cash provided by operating activities 216.2 201.1
Net cash used for investing activities (60.1) (66.5)
Net cash provided by (used for) financing activities (241.2) 222.0
------- ------
Net cash increase (decrease) (85.1) 356.6
======= ======
The net cash provided by our operating activities for the three month
period ended March 31, 2004 and 2003 amounted to $201.1 million and $216.2
million, respectively. The decrease in 2004 was primarily due to the net effect
of payments with respect of litigations and increase in revenues in 2004.
The net cash used for investing activities the three month periods
ended March 31, 2004 and 2003 amounted to $66.5 million and $60.1 million,
respectively. Total investments in investees amounted to $158.8 million as of
March 31, 2004 compared to $118.8 million as of March 31, 2003.
We have invested in the 12.75% Senior Notes due August 1, 2005 issued
by Cellco, in the total nominal amount of $2.0 million in 2003 and will hold the
bonds till maturity. Additionally, on
February 17, 2004, on February 18, 2004, on February 26, 2004, on March 29, 2004
and on March 31, 2004, we purchased $12.1 million Senior Notes bringing the
total to $14.1 million as of March 31, 2004. Subsequent to March 31, 2004, we
purchased another $50.9 million Senior Notes.
For the three month period ended March 31, 2004, we spent approximately
$53.2 million for capital expenditures compared with $50.6 million for the same
period in 2003. In line with the need of additional capacity, our management
decided to increase total capital expenditures budget approximately up to $300.0
million by the end of 2004 for purchase of additional infrastructure equipment.
This was mainly due to improved subscriber base and profile, which resulted in
higher voice and data usage.
The net cash provided by financing activities for the three months
period ended March 31, 2004 amounted to $222.0 million and the net cash used for
financing activities for the three month period ended March 31, 2003 amounted to
$241.2 million. As of March 31, 2004, $834.2 million was outstanding as
short-term and long-term borrowings. We also entered into lease agreements in
the amount of $72.5 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 $4.1 million for a central
betting system, which is classified as other long term assets).
Since the beginning of 2004, we have fully drawn down additional
borrowings of $100 million from Akbank in February 2004 and $100 million from
Garanti in March 2004. Both facilities will be repaid in three years. In
addition, we have finalized the Syndicated Murabaha facility with Islamic
Development Bank and HSCB Bank AS, which became effective on January 16, 2004
with the initial drawdown done on March 3, 2004. 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.
We have signed a shareholders agreement with the other shareholders of
DCC, our Ukrainian subsidiary, on April 2, 2004. Under the shareholders
agreement, we have provided a financial assistance guarantee pursuant to which
we agreed to arrange at least $150 million of financing for DCC prior to 2006.
Irancell (of which Turkcell has an effective 51% interest) 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. It should be
noted that Irancell is in the process 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 greater of the precommitted gross revenue or
the actual gross revenue, whichever is greater.
As a condition of its GSM license bid, the Irancell Consortium was
obliged to provide a bid bond amounting to 263,000,000,000 Iranian Rial
(approximately EUR 25 million) to the Iranian
Authorities. This bid bond was issued in Iranian Rial amounting 263,000,000,000
Rial (equivalent to $24.9 million at March 31, 2004), which was equivalent to
EUR 25 million at the date of issuance , by Bank Saderat under a Deutsche Bank
AG counter-guarantee on February 8, 2004 underwritten by us. The bid bond
originally matured on August 7, 2004. Since Irancell has not been established as
of August 7, 2004, the bid bond maturity was extended by Bank Saderat under
Deutsche Bank AG counter-guarantee until November 7, 2004.
The Irancell Consortium was also obliged to give a payment guarantee
amounting EUR 300 million, which is equivalent to the upfront license fee. The
guarantee becomes effective when the license is formally awarded to Irancell. We
have provided a guarantee of EUR 210 million (equivalent to $256.2 million at
March 31, 2004) of this payment guarantee to HSBC plc, which issued the payment
guarantee under a syndicate with Akbank and BNP Paribas. The payment guarantee
was issued on March 5, 2004 and matures in September 7, 2004. Subsequently, we
have started to process the extension of this payment guarantee for an
additional three months.
The remaining guarantees that we have provided to third parties are set
put in the contingent liabilities table below.
As of March 31, 2004, we have entered into purchase contract in
relation advertising services, the value of which amounted to $25 million. In
addition, we routinely enter into operating leases for property and equipment in
the normal course of business. At March 31, 2004, there were no commitments and
contingent liabilities in material amounts arising from such operating leases.
Contractual Obligations and Commercial Commitments
The following table illustrates our major contractual obligations and
commitments as of March 31, 2004.
(US$ Million) Payments due by period
Total Less than 1 year 1-3 years 4-5 years After 5 years
----- ---------------- --------- --------- -------------
Contractual Obligations
Long-Term Borrowings 831.7 130.2 701.5 -
Capital Lease Obligations 21.5 14.6 6.9 -
Purchase Obligations 25.0 12.5 12.5 - -
Operating Leases -
Total Contractual Cash Obligations 878.2 157.3 720.9 0.0 0.0
Related Party Transactions
For a discussion of our transactions with related parties see "Item 7B.
Related Party Transactions" in our 20-F. There have been no material changes in
our related party transactions since the date of our 20-F.
Contingent Liabilities
The following table illustrates our major contingent liabilities as of
March 31, 2004.
Amount of contingent liability expiration per period
Remaining
commitment
USD million Total amount at March,31 Less than 1 1 - 3 4 - 5 Over 5
committed 2004 year years years years
--------- ---- ---- ----- ----- -----
Guarantees
Irancell 281.1 281.1 281.1 - - -
Iranian Authorities 256.2 256.2 256.2 - - -
Iranian Authorities 24.9 24.9 24.9 - - -
Digital Platform 87.2 35.0 21.3 13.8 - -
BNP - Brussels (Buyer Credit) 50.2 24.3 13.5 10.9 - -
BNP - Brussels (Financial Loan) 8.2 2.2 2.2 - - -
BNP - Hungary (Buyer Credit) 11.7 5.8 2.9 2.9 - -
BNP - Hungary (Financial Loan) 1.9 0.4 0.4 - - -
Websterbank - USA 1.2 0.2 0.2 - - -
HSBC - Istanbul Main Branch 14.0 2.1 2.1 - - -
Hobim 0.1 0.1 0.1 - - -
BNP AK Dresdner (Financial Leasing) 0.1 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 $34.8 million. In addition, as of March 31, 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 $2.2 million.
Guarantees given for Digital Platform are related to loans for set-top
box, 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.
Irancell Consortium was obliged to provide a bid bond amounting EUR 25
million to the Iranian Authorities. This bid bond was issued by Bank Saderat
under Deutsche Bank AG counter-guarantee on February 8, 2004 with Turkcell
guarantee. The maturity of the Bid Bond is August 7, 2004 and it was issued in
Iranian Rial amounting 263,000,000,000 Rial (equivalent to $24.9 million at
March 31, 2004), which was equivalent to EUR 25 million at the date of issuance.
Since Irancell has not been established as of August 7, 2004, the bid bond
maturity was extended by Bank Saderat under Deutsche Bank AG counter-guarantee
until November 7, 2004. Under the terms of the license Irancell will be required
to pay an ongoing license fee based on a percentage of the greater of the
precommitted gross revenue or the actual gross revenue, whichever is greater.
Additionally, Irancell Consortium was also obliged to provide a payment
guarantee amounting EUR 300 million, which is equivalent to the upfront license
fee. The guarantee becomes effective when the license is formally awarded to
Irancell. Turkcell has given a guarantee of EUR 210 million (equivalent to
$256.2 million at March 31, 2004) of this payment guarantee. EUR 210 million
(equivalent to $256.2 million at March 31, 2004) payment guarantee was issued by
HSBC Plc. under Akbank and BNP Paribas counter-guarantee of EUR 100 million
(equivalent to $122.0 million at March 31, 2004) and EUR 85 million (equivalent
to $103.7 million at March 31, 2004), respectively. The payment guarantee was
issued on March 5, 2004 and has maturity date of September 7, 2004.
Subsequently, we have started to process the extension of this payment guarantee
for an additional
three months. Also, according to the Shareholders Agreement, signed by us and
other shareholders of Digital Cellular Communication (DCC) on April 2, 2004, we
have provided a financial assistance guarantee pursuant to which we agreed to
arrange at least $150 million of financing for DCC prior to 2006.
Astelit, which is a 99% subsidiary of DCC, has signed vendor financing
agreements with Ericsson and Nokia; amounting to $89.0 million and EUR 125.0
million on June 30, 2004 and July 12, 2004, respectively. We have given
guarantees of $49.0 million and EUR 68.9 million, which are equivalent to 55% of
contract amount plus 55% of interest and costs in case of non-payment by
Astelit. The payment guarantee given to Ericsson was issued on July 22, 2004 and
has maturity date of January 31, 2006.The guarantee agreement with Nokia will be
signed once the conditions present in credit agreement are satisfied and will
have maturity date of December 30, 2005.
Liquidity Outlook
Under the current assumptions and knowledge of the present facts, we
expect Turkcell to be cash self-sufficient maintaining its strong cash position
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 March 31, 2004 and certain financing transactions we
have completed in the first half 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 competition, developments in the
domestic and international capital markets, investments, changes in telecom
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, Turkcell is expected to maintain its
net cash generation trend to be sustained. Government's efforts to comply with
IMF and the economic program, recovery in the purchasing power parallel 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 Turkcell.
Loans
During the first quarter of 2004, we continued to restructure our debt
in line with our priorities to decrease the borrowing costs, extending the
maturity. We have finalized the Syndicated Murabaha facility with IDB and HSBC
in January 2004, amounting to $100 million with a maturity of two years. This
facility has an availability period of 180 days, and will be 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 16 June 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 Bank, $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 drawdowns, up to $150
million to us over the next twelve months. As part of our risk management
strategy, we always monitor and consider contingency financing alternatives in
line with our business plans.
Also, on March 13, 2003, Garanti Bankasi agreed to extend the maturity
of its outstanding loan to us. As a result of this extension, the outstanding
balance of $75 million will be repaid in three equal installments on June 21,
2004, which is completed, January 23, 2006 and April 21, 2006. Further, on April
30, 2003, Akbank agreed to extend the principal payments of $100 million and $25
million, which were due on May 9, 2003 and June 5, 2003, respectively. As a
result of this extension, $100 million will be repaid in two equal installments
on May 10, 2004 which is completed and May 9, 2005, and $25 million will be
repaid in two equal installments on June 7, 2004, which is completed, and June
6, 2005. We believe that our cash from operations will be sufficient to fully
fund our business plan through in the remaining three quarters of 2004, which
includes the repayment of approximately $132.9 million in debt principal and
interest obligations. Based on our current expectations regarding the domestic
and international macroeconomic environment, developments in the
telecommunications sector in general, our debt repayment schedule, costs arising
from pending litigation, our obligations on our domestic and international
investments and partnerships and the cost of new financing, we do not foresee
any funding gap in 2004.
Meanwhile, we are continuing to evaluate different financing
alternatives through domestic and international markets to ensure the continuity
of our long-term borrowing structure and strategies. We will continue to focus
on strategies for lowering the weighted average cost of total borrowing and
extending the maturity of outstanding borrowings. We are reviewing the domestic
loan alternatives of either extending the existing facilities or by obtaining
additional domestic debt. In addition, we will be watching international debt
markets for opportunities to make a longer term club deal or syndication. In the
meantime, we will be following the high yield markets in 2004, depending on the
performance of the existing Cellco Bonds and market availability.
We cannot assure you that we will be able to obtain any of this
additional financing on terms that are satisfactory to us, or at all. If for any
reason adequate internal resources or external financing are not available as
needed, we may not be able to maintain and enhance the quality of our network or
to meet our other obligations and liabilities as they become due. This could
lead to a loss of subscribers and market share, as well as potential defaults
under, and refinancing or restructuring of, existing debt and other obligations,
all of which could have a material adverse effect on our business, consolidated
financial condition or results of operations, or liquidity.
Credit Ratings
Our long term credit ratings were upgraded by Fitch on October 16, 2003
from B- to B and again on February 17, 2004 from B to B+. Although Moody's and
S&P's ratings were unchanged at B2 and B, respectively, S&P has changed our
outlook from stable to positive.
Our debt ratings since May 24, 2004:
Standard & Poor's B
Moody's B2
Fitch B+
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 indebtness in the internal and external
debt/capital markets. Conversely, any ratings downgrade may limit our future
access to debt/capital markets and increase the cost of borrowing.
Dividend Payments
Until 2003, we were not making any dividend payments due to our
previous accumulated loss under previous Capital Market Board ("CMB") accounting
standards. The CMB has 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. We have reported accumulated
profit according to the new accounting standards. We have declared that we will
pay dividend amounting TL 236,317 billion (equivalent to $180.2 million at March
31, 2004). TL 118,159 billion (equivalent to $90,1 million at March 31, 2004) of
the dividend will be distributed in the form of bonus shares and TL 118,159
billion (equivalent to $90.1 million at March 31, 2004) is distributed in cash
subsequent to March 31, 2004. The rate of the bonus share certificate to be
issued for each share having a nominal value of TL 1,000 will be 23.63%. Also,
net TL 236.3 (equivalent of approximately 0.018 cents at March 31, 2004) will be
paid to shareholders for each share they own. The distribution of the ordinary
bonus shares started on July 30, 2004.
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.
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
Irancell Consortium were obliged to give a payment guarantee amounting to a EUR
300 million, which is equivalent to license fee. The guarantee becomes effective
when the license is formally awarded to Irancell. We have given guarantee of EUR
210 million of this payment guarantee. EUR 210 million (equivalent to $256.2
million at March 31, 2004) payment guarantee was issued by HSBC Plc. under
Akbank and BNP Paribas counter-guarantee of EUR 100 million (equivalent to
$122.0 million at March 31, 2004) and EUR 85 million (equivalent to $103.7
million at March 31, 2004), respectively. Payment guarantee was issued on March
5, 2004 and has maturity date of September 7, 2004. Subsequently, we have
started to process the extension of this payment guarantee for an additional
three months. Upon establishment of Irancell, we will make capital injection to
Irancell amounting to EUR 76.5 million. Under current circumstances Irancell is
expected to be consolidated.
Quantitative and Qualitative Discussion of Market Risk
Total indebtedness denominated in foreign currencies (all in US dollar)
amounted to $850.2 million, representing almost 100% of our total indebtedness
at March 31, 2004.
During the first three month period of 2004, we made principal loan
payments of $2.3 million.
Fair value of indebtedness as of March 31, 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 $442.5
million at March 31, 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 we engaged in 12 forward transactions
to buy USD in July 2004 with different maturities. The transactions totaled to
$25 million. 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 the company from fluctuations in currency values. However, we
keep a significant proportion of our monetary assets in US dollars 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.
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.
There has not been any material change in our legal and arbitration
proceedings since the date of our 20-F, except for the following:
Our net legal provision as of March 31, 2004 was $1,278.0 million which
included provisions of $1,073.1 million with respect to ongoing uncertainties
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 and the dispute on Turk Telekom
infrastructure. Our estimate of the amount required to resolve these disputes
was based on an analysis of potential results, assuming a combination of
litigation and settlement strategies. For additional information on these
disputes and provisions see note 20 to the consolidated financial statements
attached hereto.
Subsequent to March 31, 2004 we have engaged in discussions with third
parties relating to the settlement of these disputes. Since these discussions
are ongoing we believe that it is too early to estimate the outcome of these
disputes. However, based upon these ongoing discussions we believe that the
amounts required to resolve these disputes may be higher than our net legal
provisions as of March 31, 2004 as much as $250 million to $350 million.
Our estimate of the amounts required to resolve these disputes is based
upon assumptions and judgments regarding the ultimate outcome of these disputes.
If our assumptions or judgments are wrong or the actual costs associated with
resolving these disputes differ from our estimates, our results may be
materially, adversely affected.
Other Matters
On February 26, 2004, Cukurova Holding AS informed us that it sold
8,998,845,000 Turkcell shares (nominal value of TL 8,998,845 million) to Yapi
Kredi. Following this transaction, the direct ownership of Cukurova Holding AS
and Yapi Kredi in Turkcell is 7.47% and 2.89%, respectively.
On July 21, 2004, it has been made public that the debt restructuring
talks between the Banking Regulation and Supervision Agency (the "BRSA") and the
Cukurova Group, one of our significant founding shareholders, have been
finalized by mutual agreement. In accordance with this agreement, the Cukurova
Group will purchase 5,699,493,626 Turkcell shares (nominal value of TL 5,699,494
million) based on the weighted average price of the last 30 trading days in
Istanbul Stock Exchange and 8,998,845,000 Turkcell shares (nominal value of TL
8,998,845 million), based on the acquisition cost plus Libor+3.5% annual
interest from Yapi Kredi until April 30, 2005.
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: September 3, 2004 By: /s/ MUZAFFER AKPINAR
----------------------------
Name: Muzaffer Akpinar
Title: Chief Executive Officer