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 May 11, 2006
--------------------
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: Consolidated Financial Statements for the Three Months Ended and
as at March 31, 2006
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
CONSOLIDATED INTERIM INCOME STATEMENT
For the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
Three months ended 31 March
--------- --------------------------------------
Note 2006 2005
--------- ------------------ ----------------
Revenue 1,132,201 914,869
Direct cost of revenues 1 (667,354) (576,544)
------------------ ----------------
Gross profit 464,847 338,325
------------------ ----------------
Other operating income 2 1,492 5,910
Selling and marketing expenses 1 (206,090) (134,366)
Administrative expenses 1 (41,273) (34,492)
Other operating expenses 2 (3,628) (4,760)
------------------ ----------------
Operating profit before financing costs 215,348 170,617
------------------ ----------------
Financial income 3 53,603 38,591
Financial expenses 3 (20,152) (78,324)
------------------ ----------------
Net financing costs 33,451 (39,733)
------------------ ----------------
Share of profit of associates 15,848 13,282
------------------ ----------------
Profit before loss on net monetary position 264,647 144,166
------------------ ----------------
Gain on net monetary position, net - 1,565
------------------ ----------------
Profit before tax 264,647 145,731
------------------ ----------------
Income tax expense 4 (87,447) (61,499)
------------------ ----------------
Profit for the period 177,200 84,232
------------------ ----------------
Attributable to:
Equity holders of the parent 187,185 86,113
Minority interest (9,985) (1,881)
------------------ ----------------
Profit for the period 177,200 84,232
------------------ ----------------
Basic and diluted earnings per share 15 0.100914 0.046425
The accompanying notes are an integral part of these consolidated interim financial statements.
1
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENT OF RECOGNIZED INCOME AND EXPENSE
For the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
Three months ended 31 March
--------------------------------------
2006 2005
------------------ ----------------
Effect of indexation for hyperinflation - (26,644)
Foreign exchange translation differences 2,066 5,249
Change in fair value of equity securities available-for-sale 390 -
------------------ ----------------
Net income/(loss) recognized directly in equity 2,456 (21,395)
------------------ ----------------
Profit for the period 177,200 84,232
------------------ ----------------
Total recognized income for the period 179,656 62,837
================== ================
Attributable to:
Equity holders of the parent 189,641 64,718
Minority interest (9,985) (1,881)
------------------ ----------------
Total recognized income for the period 179,656 62,837
================== ================
The accompanying notes are an integral part of these consolidated interim financial statements.
2
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
CONSOLIDATED INTERIM BALANCE SHEET
As at 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
31 March 31 December
Note 2006 2005
--------------- ------------------ -------------------
Assets
Property, plant and equipment 6 2,111,893 2,142,710
Intangible assets 7 1,259,319 1,298,055
Investments in associates 8 311,034 290,412
Other investments 9 31,386 29,395
Due from related parties 25 77,368 80,894
Other non-current assets 15,951 16,476
Deferred tax assets 10 782 2,940
------------------ -------------------
Total non-current assets 3,807,733 3,860,882
------------------ -------------------
Inventories 9,310 8,910
Other investments 9 120,963 23,287
Income tax receivable 5 8,420 -
Due from related parties 25 66,476 66,312
Trade receivables and accrued income 11 317,894 321,102
Other current assets 12 245,603 126,451
Cash and cash equivalents 13 1,000,346 808,153
------------------ -------------------
Total current assets 1,769,012 1,354,215
------------------ -------------------
Total assets 5,576,745 5,215,097
================== ===================
Equity
Issued capital 14 1,438,966 1,438,966
Share premium 14 434 434
Reserves 14 87,046 84,590
Retained earnings 14 2,289,722 2,102,537
------------------ -------------------
Total equity attributable to
equity holders of the parent 3,816,168 3,626,527
------------------ -------------------
Minority interest 14 64,400 63,794
------------------- --------------------
Total equity 3,880,568 3,690,321
------------------- --------------------
Liabilities
Interest - bearing loans and borrowings 16 16,220 79,165
Employee benefits 17 18,337 16,600
Other non-current liabilities 7,581 6,417
Deferred tax liabilities 10 105,944 89,964
------------------- --------------------
Total non-current liabilities 148,082 192,146
------------------- --------------------
Bank overdraft 3,146 -
Interest-bearing loans and borrowings 16 811,222 578,105
Income taxes payable 5 124,695 60,864
Due to related parties 25 5,832 6,180
Trade payables 19 143,263 137,237
Provisions 18 19,461 32,993
Other current liabilities 20 440,476 517,251
------------------- --------------------
Total current liabilities 1,548,095 1,332,630
------------------- --------------------
Total liabilities 1,696,177 1,524,776
------------------- --------------------
Total equity and liabilities 5,576,745 5,215,097
=================== ====================
The accompanying notes are an integral part of these consolidated interim financial statements.
3
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENT OF CASH FLOW
For the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
Three months ended 31 March
-------------------------------
2006 2005
------------- -------------
Cash flows from operating activities
Profit for the period 177,200 84,232
Adjustments for: 271,841 233,966
Depreciation 138,157 120,929
Amortization 58,639 49,440
Foreign exchange gain/(loss) (7,858) 17,396
Interest income (43,396) (38,335)
Interest expense 19,505 21,108
Income tax expense 87,447 61,499
Share of profit of associates (15,848) (12,355)
Effect of indexation for hyperinflation - (1,147)
Change in minority interest 27,252 952
Cumulative translation differences 7,943 14,479
Operating loss before changes in working capital and provisions (323,711) (52,857)
Trade receivables 3,208 40,457
Due from related parties 3,362 37,781
Inventories (400) 2,258
Other current assets (119,152) 223,546
Increase in trading securities (96,780) -
Other non-current assets 526 1,688
Due to related parties (347) 10
Trade payables 6,026 36,405
Other current liabilities (77,166) (134,929)
Other non-current liabilities 1,163 (215,340)
Employee benefits 1,737 1,436
Provisions (13,532) (11,870)
Cash generated from operations
Interest paid (18,651) (34,299)
Income taxes paid (13,705) -
Net cash from operating activities 125,330 265,341
Cash flows from investing activities
Additions to tangibles (133,449) (159,948)
Additions to intangibles (4,215) (50,930)
Investments in other investments, net (1,927) (1,986)
Acquisition of minority shares (16,661) -
Interest received 42,892 36,054
Net cash used for investing activities (113,360) (176,810)
Cash flows from financing activities
Proceeds from issuance of long and short term interest-bearing loans
and borrowings 664,049 147,709
Payment on long and short term interest-bearing loans and borrowings (494,830) (108,992)
Net cash provided by financing activities 169,219 38,717
Net increase in cash and cash equivalents 181,189 127,248
Effect of change in foreign exchange rates in cash and cash equivalents 7,858 (17,396)
Cash and cash equivalents at the beginning of year 808,153 764,931
---------- -------------
Cash and cash equivalents at the end of period for cash flow 997,200 874,783
========== =============
The accompanying notes are an integral part of these consolidated interim financial statements.
4
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Significant accounting policies and operations
Turkcell Iletisim Hizmetleri Anonim Sirketi (the "Company") was
incorporated in Turkey on 5 October 1993 and commenced its operations in
1994. It is engaged in establishing and operating a Global System for
Mobile Communications ("GSM") network in Turkey and neighboring states.
In April 1998, the Company signed a license agreement (the "License") with
the Ministry of Transportation and Communications of Turkey (the "Turkish
Ministry"), under which it was granted a 25 year GSM license in exchange
for a license fee of $500,000. The License permits the Company to operate
as a stand-alone GSM operator and frees it from some of the operating
constraints in the Revenue Sharing Agreement, which was in effect prior to
the License. Under the License, the Company 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 from Turkish GSM operations. The
Company continues to build and operate its GSM network and is authorized
to, among other things, set its own tariffs within certain limits, charge
peak and off-peak rates, offer a variety of service and pricing packages,
issue invoices directly to subscribers, collect payments and deal directly
with subscribers.
On 25 June 2005, the Turkish government declared that GSM operators are
required to pay 10% of their existing monthly ongoing license fee to the
Ministry of Transportation as a universal service fund contribution in
accordance with Law No 5369. As a result, starting from 30 June 2005, the
Company pays the 90% of the ongoing license fee to the Turkish Treasury and
10% to the Ministry of Transportation as universal service fund.
In July 2000, the Company completed an initial public offering with the
listing of its ordinary shares on the Istanbul Stock Exchange and American
Depositary Shares, or ADSs, on the New York Stock Exchange.
Two significant founding shareholders, TeliaSonera AB and the Cukurova
Group own approximately 37.1% and 27.1%, respectively, of the Company's
share capital, and are ultimate counterparties to a number of transactions
that are discussed in the related party footnote. On 28 November 2005, upon
completion of a series of transactions, Alfa Telecom Turkey Limited
("Alfa"), an affiliate of Alfa Telecom, one of Russia's leading private
telecommunications investors, acquired 13.2% indirect ownership in the
Company.
The consolidated interim financial statements of the Company as at and for
the three months ended 31 March 2006 comprise the Company and its sixteen
subsidiaries (together referred to as the `Group') and the Group's interest
in one associate. The Company's, subsidiaries' and associate's separate
interim financial statements are prepared as at and for the three months
ended 31 March 2006. The Group's interim financial statements were
authorized for issue by the Board of Directors on 10 May 2006.
(a) Statement of compliance
The consolidated interim financial statements have been prepared in
accordance with International Financial Reporting Standards (IFRSs) and its
interpretations adopted by the International Accounting Standards Board
(IASB). These are the Group's first consolidated interim financial
statements for part of the period covered by the first IFRS annual
financial statements and International Financial Reporting Standard No. 1
("IFRS 1") "First-time Adoption of IFRS" has been applied.
An explanation of how the transition to IFRSs has affected the reported
financial position, financial performance and cash flows of the Group is
provided in Note 29. This Note includes reconciliations of equity and
income statement for comparative periods reported under USGAAP (previous
GAAP) to those reported for those periods under IFRSs.
5
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Significant accounting policies and operations (continued)
(b) Basis of preparation
The Group maintains books of account and prepares statutory financial
statements in local currencies and in accordance with local commercial
practice and tax regulations applicable in each subsidiary's respective
country of residence.
The accompanying consolidated interim financial statements are based on
these statutory records, with adjustments and reclassifications for the
purpose of fair presentation in accordance with IFRS. The consolidated
interim financial statements are presented in US Dollars, rounded to the
nearest thousand. They are prepared on the historical cost basis adjusted
for the effects of inflation during the hyperinflationary period lasted by
31 December 2005, except that the following assets and liabilities are
stated at their fair value: derivative financial instruments, financial
instruments held for trading and financial instruments classified as
available-for-sale.
The preparation of interim financial statements in conformity with
International Accounting Standard No. 34 (IAS 34) "Interim Financial
Reporting" requires management to make judgments, estimates and assumptions
that affect the application of policies and reported amounts of assets and
liabilities, income and expenses. The estimates and associated assumptions
are based on historical experience and various other factors that are
believed to be reasonable under the circumstances, the results of which
form the basis of making the judgments about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognized in the period in which the
estimate is revised if the revision affects only that period or in the
period of the revision and future periods if the revision affects both
current and future periods.
Judgements made by management in the application of IFRSs that have
significant effect on the consolidated interim financial statements and
estimates with a significant risk of material adjustment in the next year
are discussed in Note 28.
Financial statements for the year ended 31 December 2005 were restated for
the changes in the general purchasing power of the functional currency
based on International Accounting Standard No. 29 ("IAS 29") "Financial
Reporting in Hyperinflationary Economies". IAS 29 requires that financial
statements prepared in the currency of a hyperinflationary economy be
stated in terms of the measuring unit current at the balance sheet date and
that corresponding figures for previous periods be restated in the same
terms. One characteristic that necessitates the application of IAS 29 is a
cumulative three-year inflation rate approaching or exceeding 100%. Three
years inflation rate in Turkey has been 36% as at 31 December 2005, based
on the Turkish nation-wide wholesale price indices announced by the State
Statistics Association ("SSA"). However, IAS 29 does not establish the rate
of 100% as an absolute rate at which hyperinflation is deemed to arise. It
is a matter of judgment when restatement of financial statements in
accordance with IAS 29 becomes necessary. Moreover, hyperinflation is also
indicated by characteristics of the economic environment of a country.
As hyperinflationary conditions in Turkey no longer existed starting from 1
January 2006, New Turkish Lira ("TRY") has been treated as a more stable
currency since that time and the financial statements of the Company and
those of the subsidiaries located in Turkey and Turkish Republic of
Northern Cyprus prepared in accordance with IFRS are not required to be
adjusted for hyperinflationary accounting.
The accounting policies set out below have been applied consistently to all
periods presented in these consolidated interim financial statements and in
preparing an opening IFRS balance sheet at 1 January 2005 for the purposes
of the transition to IFRSs.
6
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Significant accounting policies and operations (continued)
(c) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Company. Control exists when
the Company has the power, directly or indirectly, to govern the financial
and operating policies of an entity so as to obtain benefits from its
activities. In assessing control, potential voting rights that presently
are exercisable or convertible are taken into account. The interim
financial statements of subsidiaries are included in the consolidated
interim financial statements from the date that control commences until the
date that control ceases.
(ii) Associates
Associates are those entities in which the Company has significant
influence, but not control, over the financial and operating policies. The
consolidated interim financial statements include the Group's share of the
total recognised gains and losses of associates on an equity accounted
basis, from the date that significant influence commences until the date
that significant influence ceases. When the Group's share of losses exceeds
its interest in an associate, the Group's carrying amount is reduced to nil
and recognition of further losses is discontinued except to the extent that
the Group has incurred legal or constructive obligations or made payments
on behalf of an associate. The Group's only associate, Fintur Holdings B.V.
("Fintur") is accounted under the equity method.
(iii) Transactions eliminated on consolidation
Intragroup balances and any unrealised gains and losses or income and
expenses arising from intragroup transactions, are eliminated in preparing
the consolidated interim financial statements. Unrealised gains arising
from transactions with associates are eliminated to the extent of the
Group's interest in the entity. Unrealised losses are eliminated in the
same way as unrealised gains, but only to the extent that there is no
evidence of impairment.
(d) Foreign currency
(i) Foreign currency transactions
Transactions in foreign currencies are translated at the foreign exchange
rate ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated
to the functional currency, TRY, at the foreign exchange rate ruling at
that date. Foreign exchange differences arising on translation of foreign
currency transactions are recognised in the income statement. Non monetary
assets and liabilities that are measured in terms of historical cost in a
foreign currency are translated using the exchange rate at the date of the
transaction. Non-monetary assets and liabilities denominated in foreign
currencies that are stated at fair value are translated to TRY at foreign
exchange rate ruling at the dates the fair value was determined.
(ii) Financial statements of foreign operations
The assets and liabilities of foreign operations, including fair value
adjustments arising on consolidation, are translated to US Dollars at
foreign exchange rates ruling at the balance sheet date. The revenues and
expenses of foreign operations are translated to US Dollars at rates
approximating to the foreign exchange rates ruling at the dates of the
transactions. Foreign exchange differences arising on retranslation are
recognized directly in a separate component of equity.
7
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Significant accounting policies and operations (continued)
(d) Foreign currency (continued)
(iii) Translation from functional to presentation currency
Items included in the financial statements of each company are measured
using the currency of the primary economic environment in which the
entities operate, normally, under their local currencies.
The consolidated interim financial statements are presented in US Dollars,
which is the presentation currency of the Group. The Group uses US Dollars
as the presentation currency for the convenience of investor and analyst
community.
Assets and liabilities for each balance sheet presented (including
comparatives) are translated to US Dollars at the foreign exchange rates at
the balance sheet date. Revenues and expenses for each income statement
(including comparatives) in hyperinflationary economies are translated to
US Dollars at foreign exchange rates at the balance sheet date. Revenues
and expenses for each income statement (including comparatives) in
non-hyperinflationary economies are translated to US Dollars at rates
approximating to the foreign exchange rates at the dates of the
transactions.
Foreign exchange differences arising on retranslation are recognised
directly in a separate component of equity.
Prior to translating the financial statements in hyperinflationary
economies, the financial statements, including comparatives, are restated
to account for changes in the general purchasing power of the local
currency. The resulting gain on net monetary position is recognized as a
separate component of the income statement. The restatement is based on
relevant price indices at the balance sheet date.
(iv) Net investment in foreign operations
Exchanges differences arising from the translation of the net investment in
foreign operations are taken to translation reserve. They are released into
the income statement upon disposal.
(e) Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to
foreign exchange risk arising from operational, financing and investment
activities. In accordance with its treasury policy, the Group engages in
forward and option contracts. However, these derivatives do not qualify for
hedge accounting and are accounted for as trading instruments.
Derivative financial instruments are recognised initially at cost.
Subsequent to initial recognition, derivative financial instruments are
stated at fair value. The gain or loss on remeasurement to fair value is
recognised immediately in income statement.
The fair value of forward exchange contracts and options is their quoted
market price at the balance sheet date, being the present value of the
quoted forward prices and fair values based on option pricing models for
option contracts.
(f) Property, plant and equipment
(i) Owned assets
Items of property, plant and equipment are stated at cost adjusted for the
effects of inflation during the hyperinflationary period lasted by 31
December 2005 less accumulated depreciation (see below) and impairment
losses (see accounting policy l).
Where parts of an item of property, plant and equipment have different
useful lives, they are accounted for as separate items of property, plant
and equipment.
8
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Significant accounting policies and operations (continued)
(f) Property, plant and equipment (continued)
(ii) Leased assets
Leases in terms of which the Group assumes substantially all the risks and
rewards of ownership are classified as finance leases. The owner-occupied
property acquired by way of finance lease is stated at an amount equal to
the lower of its fair value and the present value of the minimum lease
payments at inception of the lease, less accumulated depreciation (see
below) and impairment losses (see accounting policy l). The property held
under finance leases and leased out under operating lease is classified as
investment property and stated at the fair value model. Lease liabilities
are reduced by repayments of principal, while the interest charge component
of the lease payment is charged to the income statement. Property held
under operating leases that would otherwise meet the definition of
investment property may be classified as investment property on a
property-by-property basis.
(iii) Subsequent costs
The Group recognises in the carrying amount of an item of property, plant
and equipment the cost of replacing part of such an item when that cost is
incurred if it is probable that the future economic benefits embodied with
the item will flow to the Group and the cost of the item can be measured
reliably. All other costs are recognised in the income statement as an
expense as incurred. There is no interest capitalization on property, plant
and equipment as at 31 March 2006 and 2005.
(iv) Depreciation
Depreciation is charged to the income statement on a straight-line basis
over the estimated useful lives of each part of an item of property, plant
and equipment. Land is not depreciated. The estimated useful lives are as
follows:
Buildings 25 - 50 years
Network infrastructure 5 - 8 years
Equipment, fixtures and fittings 4 - 5 years
Motor vehicles 4 - 5 years
Leasehold improvements 5 years
(g) Intangible assets
Intangible assets are acquired by the Group are stated at cost adjusted for
the effects of inflation during the hyperinflationary period that lasted by
31 December 2005 less accumulated amortisation (see below) and impairment
losses (see accounting policy l).
Expenditure on internally generated goodwill and brands is recognised in
the income statement as an expense as incurred.
(i) Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is capitalised only
when it increases the future economic benefits embodied in the specific
asset to which it relates. All other expenditure is expensed as incurred.
9
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Significant accounting policies and operations (continued)
(g) Intangible assets (continued)
(ii) Amortization
Amortisation is charged to the income statement on a straight line basis
over the estimated useful lives of intangible assets unless such lives are
indefinite. Goodwill and intangible assets with an indefinite useful life
are systematically tested for impairment at each balance sheet date. Other
intangible assets are amortised from the date they are available for use.
The estimated useful lives are as follows:
Computer software 3 - 8 years
GSM and other telecommunications license 4 - 25 years
Transmission lines 10 years
Central betting system operating right 4 - 5 years
Customer base 2 years
(h) Investments
Financial instruments held for trading are classified as current assets and
are stated at fair value, with any resultant gain or loss recognised in the
income statement.
Where the Group has the positive intent and ability to hold government
bonds and treasury bills to maturity, they are stated at amortised cost
less impairment losses (see accounting policy l).
Other financial instruments held by the Group are classified as being
available-for-sale and are stated at fair value, with any resultant gain or
loss being recognised directly in equity, except for impairment losses and,
in the case of monetary items such as debt securities, foreign exchange
gains and losses which are recognized in the income statement. When these
investments are derecognised, the cumulative gain or loss previously
recognised directly in equity is recognised in the income statement. Where
these investments are interest-bearing, interest calculated using the
effective interest method is recognised in the income statement.
The fair value of financial instruments classified as held for trading and
available-for-sale is their quoted bid price at the balance sheet date.
Financial instruments classified as held for trading or available-for-sale
investments are recognised (derecognised) by the Group on the date it
commits to purchase (sell) the investments. Securities held-to-maturity are
recognised (derecognised) on the day they are transferred to/by the Group.
Held to maturity, available for sale and held for trading securities at 31
March 2006, consist of government bonds, foreign investment equity funds
and the Company's equity investments in certain entities (see Note 9).
(i) Trade and other receivables
Trade and other receivables are stated at their amortized cost less
impairment losses.
(j) Inventories
Inventories are stated at the lower of cost and net realisable value. Net
realisable value is the estimated selling price in the ordinary course of
business, less the estimated costs of completion and selling expenses. The
cost of inventory is determined using the weighted average method and
includes expenditure incurred in acquiring the inventories and bringing
them to their existing location and condition. At 31 March 2006 and 31
December 2005, inventories consisted of simcards and scratch cards
(finished goods).
10
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Significant accounting policies and operations (continued)
(k) Cash and cash equivalents
Cash and cash equivalents comprise cash balances and bank deposits. Bank
overdrafts that are repayable on demand and form an integral part of the
Group's cash management are included as a component of cash and cash
equivalents for the purpose of the statement of cash flows.
(l) Impairment
The carrying amounts of the Group's assets other than inventories (see
accounting policy j), and deferred tax assets (see accounting policy r) are
reviewed at each balance sheet date to determine whether there is any
indication of impairment. If any such indication exists, the asset's
recoverable amount is estimated.
For intangible assets that are not yet available for use, the recoverable
amount is estimated at each balance sheet date.
An impairment loss is recognised whenever the carrying amount of an asset
or its cash generating unit exceeds its recoverable amount. Impairment
losses are recognised in the income statement.
Goodwill was tested for impairment at 1 January 2005, the date of
transition to IFRS, even through no indication of impairment existed. As at
31 December 2005, the Company provided impairment for its only goodwill
amounting to $803 with respect to acquisition of the remaining 30% shares
of Mapco Internet ve Iletisim Hizmetleri Pazarlama AS ("Mapco") in June
2003.
When a decline in the fair value of an available-for-sale financial asset
has been recognised directly in equity and there is objective evidence that
the asset is impaired, the cumulative loss that had been recognised
directly in equity is recognised in the income statement even though the
financial asset has not been derecognised. The amount of the cumulative
loss that is recognised in the income statement is the difference between
the acquisition cost and current fair value, less any impairment loss on
that financial asset previously recognised in the income statement.
(i) Calculation of recoverable amount
The recoverable amount of the Group's investments in held to maturity
securities and receivables carried at amortised cost is calculated as the
present value of estimated future cash flows, discounted at the original
effective interest rate. Receivables with a short duration are not
discounted.
The recoverable amount of other assets is the greater of their net selling
price and value in use. In assessing value in use, the estimated future
cash flows are discounted to their present value using a discount rate that
reflects current market assessments of the time value of money and the
risks specific to the asset.
(ii) Reversal of impairment
An impairment loss in respect of a held-to-maturity security or receivable
carried at amortised cost is reversed if the subsequent increase in
recoverable amount can be related objectively to an event occurring after
the impairment loss was recognised.
An impairment loss in respect of an investment in an equity instrument
classified as available for sale is not reversed through the income
statement. If the fair value of a debt instrument classified as
available-for-sale increases and the increase can be objectively related to
an event occurring after the impairment loss was recognised in the income
statement, the impairment loss shall be reversed, with the amount of the
reversal recognised in the income statement.
An impairment loss in respect of goodwill is not reversed.
11
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Significant accounting policies and operations (continued)
(l) Impairment (continued)
In respect of other assets, an impairment loss is reversed if there has
been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset's carrying
amount does not exceed the carrying amount that would have been determined,
net of depreciation or amortisation, if no impairment loss had been
recognised.
(m) Share capital
(i) Share Capital
Common stock of the Company represented 1,854,887,341 authorized, issued
and fully paid shares with a par value of TRY 1 each as at 31 March 2006.
The Company has no preference share capital as at 31 March 2006.
(ii) Repurchase of share capital
When share capital recognized as equity is repurchased, the amount of the
consideration paid, including directly attributable costs, is recognized as
a change in equity. Repurchased shares are classified as treasury shares
and presented as a deduction from total equity.
(iii) Dividends
Dividends are assumed as a liability in the period in which they are
declared.
(n) Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less
attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost with any
difference between cost and redemption value being recognised in the income
statement over the period of the borrowings on an effective interest basis.
(o) Employee benefits
(i) Retirement pay liability
In accordance with existing labor law in Turkey, the Company and its
subsidiaries in Turkey are required to make lump-sum payments to employees
who have completed one year of service and whose employment is terminated
without cause, or who retire, are called up for military service or die.
Such payments are calculated on the basis of 30 days' pay maximum TRY 1,771
as at 31 March 2006 (31 December 2005: TRY 1,727) per year of employment at
the rate of pay applicable at the date of retirement or termination.
Reserve for retirement pay is computed and reflected in the consolidated
interim financial statements on a current basis. The reserve has been
calculated by estimating the present value of future probable obligation of
the Group arising from the retirement of the employees. The calculation was
based upon the retirement pay ceiling announced by the government.
(ii) Defined contribution plans
Obligations for contributions to defined contribution plans are recognised
as an expense in the income statement as incurred. The Company initiated a
defined contribution retirement plan for all eligible employees during
2005. Besides, Inteltek Internet Teknoloji Yatirim ve Danismanlik Ticaret
AS (Inteltek), another consolidated subsidiary, initiated a defined
contribution retirement plan for all eligible employees during 2006. The
assets of the plan are held separately from the financial statements of the
Group. The Company and Inteltek are required to contribute a specified
percentage of payroll costs to the retirement benefit scheme to fund the
benefits. The only obligation of the Company and Inteltek with respect to
the retirement plan is to make the specified contributions.
12
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Significant accounting policies and operations (continued)
(p) Provisions
A provision is recognised in the balance sheet when the Group has a present
legal or constructive obligation as a result of a past event, and it is
probable that an outflow of economic benefits will be required to settle
the obligation. If the effect is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and, where
appropriate, the risks specific to the liability.
(q) Trade and other payables
Trade payables are initially measured at fair value, and are subsequently
measured at amortised cost, using the effective interest rate method.
(r) Revenue
Communication fees include all types of postpaid revenues from incoming and
outgoing calls, additional services and prepaid revenues. Communication
fees are recognized at the time the services are rendered.
With respect to prepaid revenues, the Group generally collects cash in
advance by selling scratch cards to distributors. In such cases, the Group
does not recognize revenue until the subscribers use the telecommunications
services. Instead, deferred revenue is recorded under current liabilities.
Commission fees mainly comprised of net takings earned to a maximum of 12%
of gross takings, as a head agent of fixed odds betting games and 4.3%
commission recognized based on the para-mutual and fixed odds betting games
operated on Central Betting System. Commission revenues are recognized at
the time all the services related with the games are fully rendered. Under
the head agency agreement, Inteltek is obliged to undertake any excess
payout, which is presented on net basis with the commission fees.
Monthly fixed fees represent a fixed amount charged to postpaid subscribers
on a monthly basis without regard to the level of usage. Fixed fees are
recognized on a monthly basis when billed.
Simcard sales are recognized upon initial entry of a new subscriber into
the GSM system only to the extent of direct costs. Excess simcard and
prepaid simcard sales, if any, are deferred and amortized over the
estimated effective subscriber life.
Call center revenues are recognized at the time the services are rendered.
(s) Expenses
(i) Operating lease payments
Payments made under operating leases are recognized in the income statement
on a straight-line basis over the term of the lease. Lease incentives
received are recognized in the income statement as an integral part of the
total lease expense.
(ii) Finance lease payments
Minimum lease payments are apportioned between the finance charge and the
reduction of the outstanding liability. The finance charge is allocated to
each period during the lease term so as to produce a constant periodic rate
of interest on the remaining balance of the liability.
13
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Significant accounting policies and operations (continued)
(s) Expenses (continued)
(iii) Net financing costs
Net financing costs comprise interest payable on borrowings calculated
using the effective interest rate method, interest receivable on funds
invested, foreign exchange gains and losses and gains and losses on
derivative financial instruments that are recognized in the income
statement.
Interest income and expense is recognised in the income statement as it
accrues, using the effective interest method. The interest expense
component of finance lease payments is recognised in the income statement
using the effective interest rate method.
(t) Transactions with related parties
A related party is essentially any party that controls or can significantly
influence the financial or operating decisions of the Group to the extent
that the Group may be prevented from fully pursuing its own interests. For
reporting purposes, investee companies and their shareholders, key
management personnel, shareholders of the Group and the companies that the
shareholders have a relationship with are considered to be related parties.
(u) Income taxes
Income tax on the income statement for the periods presented comprises
current and deferred tax. Income tax is recognized in the income statement
except to the extent that it relates to items recognized directly in
equity, in which case it is recognized in equity.
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantially enacted at the balance sheet date,
and any adjustment to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method,
providing for temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
taxation purposes. The following temporary differences are not provided
for: goodwill not deductible for tax purposes, the initial recognition of
assets or liabilities that affect neither accounting nor taxable profit and
differences relating to investments in subsidiaries to the extent that they
will probably not reverse in the foreseeable future. The amount of deferred
tax provided is based on the expected manner of realization or settlement
of the carrying amount of assets and liabilities, using tax rates enacted
or substantively enacted at the balance sheet date.
A deferred tax asset is recognized only to the extent that it is probable
that future taxable profits will be available against which the asset can
be utilized. Deferred tax assets are reduced to the extent that it is no
longer probable that the related tax benefit will be realized.
Additional income taxes that arise from the distribution of dividends are
recognized at the same time as the liability to pay the related dividend.
Information as to the calculation of income tax on the income statement for
the interim periods presented is included in Note 4.
14
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
Notes to the consolidated interim financial statements
Page
1. Operating expenses 16
2. Other operating income and expenses 16
3. Net financing costs 16
4. Income tax expense 17
5. Income tax payable 17
6. Property, plant and equipment 18
7. Intangible assets 19
8. Investments in associates 20
9. Other investments 20
10. Deferred tax assets and liabilities 21
11. Trade receivables and accrued income 22
12. Other current assets 23
13. Cash and cash equivalents 23
14. Capital and reserves 24
15. Earnings per share 26
16. Interest-bearing loans and borrowings 27
17. Employee benefits 30
18. Provisions 30
19. Trade payables 31
20. Other current liabilities 31
21. Financial instruments 31
22. Operating leases 36
23. Capital commitments 36
24. Contingencies 37
25. Related parties 49
26. Group entities 54
27. Subsequent events 55
28. Accounting estimates and judgments 56
29. Explanation of transition to IFRSs 56
15
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
1. Operating expenses
Operating expenses were distributed by functions as follows:
Three months ended 31 March
-----------------------------------
2006 2005
--------------- --------------
Direct cost of revenues 667,354 576,544
Other functions
Sales and marketing expenses 206,090 134,366
Administrative expenses 41,273 34,492
--------------- --------------
Total other functions 247,363 168,858
--------------- --------------
Total 914,717 745,402
=============== ==============
Direct cost of revenues mainly include ongoing license fee and universal
service fund, interconnection expenses, transmission fees, base station
rents, billing costs, depreciation and amortization charges and technical,
repair and maintenance expenses directly related to services rendered,
wages, salaries and personnel expenses for technical personnel.
Selling and marketing expenses mainly consisted of advertising expenses,
public relations expenses, dealer activation fees, wages, salaries and
personnel expenses of selling and marketing related personnel, subscriber
acquisition expenses and frequency usage fees.
Administrative expenses mainly consisted of payroll, bad debt provision,
consulting, travel, project, rent and collection expenses.
2. Other operating income and expenses
All income and expenses are classified according to function, only income
and expenses that cannot be allocated to a specific function are classified
as other operating income or expenses.
3. Net financing costs
Net financing costs for the three months ended 31 March 2006 and 2005
comprised of the following:
Three months ended 31 March
------------------------------------
2006 2005
------------------ --------------
Interest income 43,396 38,335
Foreign exchange gain, net 7,858 -
Other 2,349 256
------------------ --------------
Financial income 53,603 38,591
------------------ --------------
Interest expense (19,505) (21,108)
Interest expense resulting from litigations - (37,004)
Foreign exchange loss, net - (17,396)
Other (647) (2,816)
------------------ --------------
Financial expenses (20,152) (78,324)
------------------ --------------
Net financing costs 33,451 (39,733)
================== ==============
16
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
4. Income tax expense
Recognised in the income statement
Three months ended 31 March
-----------------------------------
2006 2005
----------------- --------------
Current tax expense
Current year (69,506) (28,083)
----------------- --------------
(69,506) (28,083)
----------------- --------------
Deferred tax expense
Origination and reversal of temporary
differences (31,030) (34,845)
Benefit of investment incentive
recognized 13,089 1,429
----------------- --------------
(17,941) (33,416)
----------------- --------------
Total income tax expense in income
statement (87,447) (61,499)
================= ==============
Current tax expense for the interim periods presented is the expected tax
payable on the taxable income for the period, calculated as the estimated
average annual effective income tax rate applied to the pre-tax income of
the interim period.
Total deferred tax recognized directly in equity was $490 and nil for the
three months ended 31 March 2006 and 2005.
Reconciliation of effective tax rate
The reported income tax expense for the three months ended 31 March 2006
and 2005 are different than the amounts computed by applying the statutory
tax rate to profit before tax as shown in the following reconciliation:
Three months ended 31 March
----------------------------------
2006 2005
------------ ------------
Profit before tax 274,632 147,612
Income tax using the domestic
corporation rate 30% (82,390) 30% (44,284)
Effect of tax rates in foreign
jurisdictions -1% 1,582 -1% 781
Non-deductible expense 4% (11,321) 16% (23,619)
Investment tax credit -5% 13,089 -1% 1,429
Effect of tax losses utilised 0% - -4% 5,666
Unrecognized deferred tax assets 4% (12,453) 0% (545)
Other -1% 4,046 1% (927)
------------ ------------
(87,447) (61,499)
============ ============
5. Income taxes payable
The income taxes payable of $124,695 and $60,864 at 31 March 2006 and 31
December 2005, respectively represents the amount of income taxes payable
in respect of related taxable profit for the three months ended 31 March
2006 and for the year ended 31 December 2005.
Current tax for current and prior period is classified as current liability
to the extent that it is unpaid. Amounts paid in excess of amounts owed are
classified as income tax receivable under current assets. Income tax
receivable is amounting to $8,420 as at 31 March 2006 (31 December 2005:
nil).
17
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
6. Property, plant and equipment
Effect of
movements
Cost Balance at in foreign Balance at
1 January 2006 Additions Disposals Transfers* exchange 31 March 2006
Network infrastructure (All Operational) 4,220,485 951 (495) 92,945 (2,485) 4,311,401
Land and buildings 250,517 103 (11) 274 (161) 250,722
Equipment, fixtures and fittings 292,428 1,233 (307) 9,897 (72) 303,179
Motor vehicles 18,982 54 (330) (34) (13) 18,659
Leasehold improvements 137,196 94 (104) 712 (77) 137,821
Construction in progress 385,367 127,681 -- (120,958) (6,137) 385,953
--------- --------- --------- --------- --------- ---------
Total 5,304,975 130,116 (1,247) (17,164) (8,945) 5,407,735
--------- --------- --------- --------- --------- ---------
Accumulated Depreciation
Network infrastructure (All Operational) 2,716,223 127,349 (146) -- (3,443) 2,839,983
Land and buildings 59,342 2,563 (1) -- (72) 61,832
Equipment, fixtures and fittings 246,696 5,978 (295) -- (174) 252,205
Motor vehicles 14,991 537 (285) -- (17) 15,226
Leasehold improvements 125,013 1,730 (53) -- (94) 126,596
--------- --------- --------- --------- --------- ---------
Total 3,162,265 138,157 (780) -- (3,800) 3,295,842
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Total property, plant and equipment 2,142,710 (8,041) (467) (17,164) (5,145) 2,111,893
========= ========= ========= ========= ========= =========
*The remaining portion of transfer amounting to $17,164 comprise of intangible assets.
18
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
6. Property, plant and equipment (continued)
Leased assets
The Group leases equipments under a number of finance lease agreements. At
the end of each of the leases, the Group has the option to purchase the
equipment at a beneficial price. At 31 March 2006 and 31 December 2005
total fixed assets acquired under finance leases amounted to $148,941 and
$149,041, respectively.
Property, plant and equipment under construction
Construction in progress consisted of expenditures in GSM network of the
Company, LLC Astelit ("Astelit") and Kibris Mobile Telekomunikasyon Limited
Sirketi ("Kibris Telekom") and non-operational items as at 31 March 2006
and 31 December 2005.
As at 31 March 2006, fixed assets of the Company amounting to $1,490 are
pledged as collateral to the banks that have loans to the Company (31
December 2005: $1,491). Besides, under the syndicated long term Project
financing package there are certain restrictions on Astelit's assets. In
accordance with this agreement, Astelit may not dispose any of its assets
nor can pledge them under any contract until the termination of the
syndicated long term project financing package.
7. Intangible assets
In April 1998, the Company signed the License with the Turkish Ministry,
under which it was granted a GSM license, which will be amortized in 25
years. The amortisation period of the licence will be ended in 2023.
Effect of
movements
Cost Balance at in foreign Balance at
1 January 2006 Additions Disposals Transfers* exchange 31 March 2006
GSM and other telecommunication
operating licences 940,015 289 -- -- (594) 939,710
Computer Software 1,454,452 2,328 -- 17,145 (922) 1,473,003
Transmission Lines 31,735 162 -- 8 (21) 31,884
Central Betting System Operating
Right 4,431 -- -- -- (3) 4,428
Customer Relations 1,255 -- -- -- 11 1,266
Other 80 -- -- 11 53 144
--------- --------- -- --------- --------- ---------
Total 2,431,968 2,779 -- 17,164 (1,476) 2,450,435
--------- --------- -- --------- --------- ---------
Accumulated Amortization
GSM and other telecommunication
operating licences 280,629 13,607 -- -- (386) 293,850
Computer Software 833,459 43,825 -- -- (1,062) 876,222
Transmission Lines 16,660 802 -- -- (22) 17,440
Central Betting System Operating
Right 2,146 241 -- -- (5) 2,382
Customer Relations 1,002 158 -- -- -- 1,160
Other 17 6 -- -- 39 62
--------- --------- -- --------- --------- ---------
Total 1,133,913 58,639 -- -- (1,436) 1,191,116
--------- --------- -- --------- --------- ---------
--------- --------- ----- --------- --------- ---------
Total intangible assets 1,298,055 (55,860) -- 17,164 (40) 1,259,319
========= ========= ===== ========= ========= =========
19
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
8. Investments in associates
At 31 March 2006 and 31 December 2005, the ownership interest in Fintur is
41.45%. Fintur is accounted for under the equity method. The Company's
investment in Fintur amounts to $311,034 as at 31 March 2006 (31 December
2005: $290,412).
Summary financial information of Fintur as at 31 March 2006 and 31 December
2005 and for the three months ended 31 March 2006 and 2005 is as follows:
31 March 31 December
2006 2005
--------------- ----------------
Non-current assets 870,020 852,569
Current assets 323,430 250,724
--------------- ----------------
1,193,450 1,103,293
--------------- ----------------
Equity 860,261 814,473
Non-current liabilities 31,515 25,846
Current liabilities 301,674 262,974
--------------- ----------------
1,193,450 1,103,293
--------------- ----------------
Three months ended 31 March
------------------------------------
2006 2005
--------------- ----------------
Revenues 237,968 168,799
Direct cost of revenues (103,657) (72,111)
Profit before tax 57,915 39,808
Profit for the period 38,234 32,059
9. Other investments
The Company has the following non-current available for sale investments:
Ownership (%)
Country of 31 March 31 December
incorporation 2006 2005
----------------------------------------
Aks Televizyon Reklamcilik ve
Filmcilik Sanayi Ve Ticaret AS
("Aks TV") Turkey 6.24 6.24
T Medya Yatirim Sanayi ve
Ticaret AS ("T Medya") Turkey 8.23 5.91
The Group's interest in Aks TV and T Medya was amounting to $19,870 and
$11,516 as at 31 March 2006 (31 December 2005: $19,882 and $9,513),
respectively.
In 2003, the Group acquired a 6.24% interest in Aks TV and a 8.23% interest
in T-Medya, media companies owned by the Cukurova Group. On 24 June 2005,
at T-Medya's General Assembly Meeting, it has been decided to increase the
share capital of T Medya. However, the Group did not participate in the
capital contribution, accordingly the ownership of the Group in T-Medya
decreased to 5.91%. Subsequent to the first share capital increase, the
Group decided to participate in the second share capital increase and on 2
January 2006, the Group paid TRY 2,700 (equivalent to $2,011 at 31 March
2006) in cash as capital contribution to T-Medya and the Group's ownership
interest in T-Medya increased back to 8.23%.
20
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
9. Other investments (continued)
Other current investments as at 31 March 2006 and 31 December 2005 compose
of the following:
31 March 31 December
2006 2005
------------- ----------------
Held to maturity securities 10,256 10,191
Government bonds, treasury bills 10,256 10,191
Available for sale securities 13,927 13,096
Foreign investment equity funds 12,671 11,686
Government bonds, treasury bills 1,256 1,410
Held for trading securities 96,780 --
Government bonds, treasury bills 96,780 --
------------- ----------------
120,963 23,287
============= ================
10. Deferred tax assets and liabilities
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities at 31 March 2006 and 31 December 2005
are attributable to the following:
Assets Liabilities Net
2006 2005 2006 2005 2006 2005
Property, plant & equipment and
intangible assets -- -- (431,183) (468,920) (431,183) (468,920)
Investment -- -- (12,929) -- (12,929) --
Provisions 62,935 71,078 (377) (366) 62,558 70,712
Other items 20,448 21,587 (56) (8) 20,392 21,579
Tax credit carry forwards 256,000 289,605 -- -- 256,000 289,605
Tax assets / (liabilities) 339,383 382,270 (444,545) (469,294) (105,162) (87,024)
Set off of tax (338,601) (379,330) 338,601 379,330 -- --
Net tax assets / (liabilities) 782 2,940 (105,944) (89,964) (105,162) (87,024)
The Company forecasts taxable income in 2006 and onwards and has generated
taxable income for several years. Currently, economic and political
situation in Turkey became more stable and there are positive expectations
about the near term future. Further, there are positive developments
regarding the Turkey's membership to the European Union. On 3 October 2005,
the member states of European Union decided to start membership discussions
with Turkey, a decision that is expected to have certain political and
economic benefits for Turkey in near future. Management believes that these
developments provide management a better visibility about the near term
future. As a result, as at 31 March 2006, management concluded that it is
probable that the deferred tax assets of $782 were realizable.
21
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
10. Deferred tax assets and liabilities (continued)
Unrecognised deferred tax assets
Deferred tax assets have not been recognised in respect of the following
items:
31 March 31 December
2006 2005
------------- --------------
Deductible temporary differences (21,599) (13,753)
Tax credit carry forwards 4,559 4,508
Operating loss carry forwards 49,763 29,515
------------- --------------
Total unrecognised deferred tax assets 32,723 20,270
============= ==============
The deductible temporary differences do not expire under current tax
legislation. Turkish tax legislation does not allow companies to file tax
returns on a consolidated basis. Therefore, deferred tax assets have not
been recognised in respect of these items resulting from certain
consolidated subsidiaries because it is not probable that future taxable
profit will be available against which the Company can utilise the benefits
thereafter.
As at 31 March 2006 net operating loss carry forwards are as follows;
Year Amount Expiration Date
---- ------ ---------------
2001 1,665 2006
2002 672 2007
2003 9,493 2008
2004 35,186 2009
2005 64,099 2010
2006 81,576 2011 thereafter
11. Trade receivables and accrued income
The breakdown of trade receivables and accrued income as at 31 March 2006
and 31 December 2005 is as follows:
31 March 31 December
2006 2005
--------------- ---------------
--------------- ---------------
Receivables from subscribers 147,535 143,180
Accounts and checks receivable 73,729 79,430
Receivables from Turk Telekom 13,598 16,305
Accrued service income 83,032 82,187
--------------- ---------------
317,894 321,102
=============== ===============
Trade receivables are shown net of impairment losses amounting to $154,612
as at 31 March 2006 (31 December 2005: $149,209).
Receivables from Turk Telekom as at 31 March 2006 and 31 December 2005
represent net amounts that are due from Turk Telekom under the
Interconnection Agreement. The Interconnection Agreement provides that Turk
Telekom will pay to the Company for Turk Telekom's fixed-line subscribers'
calls to GSM subscribers.
22
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
11. Trade receivables and accrued income (continued)
The accrued service income represents revenues accrued for subscriber calls
(air-time), which have not been billed. Due to the volume of subscribers,
there are different billing cycles; accordingly, an accrual is made at each
period end to accrue revenues for rendered but not yet billed.
Letters of guarantee received with respect to the accounts and cheques
receivable are amounting to $46,346 and $48,066 at 31 March 2006 and 31
December 2005, respectively.
12. Other current assets
The breakdown of other current assets at 31 March 2006 and 31 December 2005
is as follows:
31 March 31 December
2006 2005
-------------- ----------------
Prepaid expenses 171,259 40,289
Value added tax ("VAT") receivable 31,465 28,175
Advances to suppliers 13,009 7,665
Forward contracts 12,752 267
Restricted cash 3,500 34,105
Prepaid taxes 3,376 3,531
Promotional materials 2,220 2,465
Receivable from personnel 1,312 1,810
Other 6,710 8,144
-------------- ----------------
245,603 126,451
============== ================
Prepaid expenses mainly consist of prepaid frequency usage fees, amounting
to $125,775 as at 31 March 2006 (31 December 2005: nil).
13. Cash and cash equivalents
The breakdown of cash and cash equivalents as at 31 March 2006 and 31
December 2005 is as follows:
31 March 31 December
2006 2005
---------------- ----------------
Cash in hand 102 101
Cheques received 1,532 25,451
Banks 998,577 782,494
-Demand deposits 120,783 114,200
-Time deposits 877,794 668,294
Bonds and bills 135 107
---------------- ----------------
Cash and cash equivalents 1,000,346 808,153
Bank overdrafts (3,146) --
---------------- ----------------
Cash and cash equivalents in the
statement of cash flows 997,200 808,153
================ ================
23
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
14. Capital and reserves
Reconciliation of movement in capital and reserves
Issued Share Legal Fair value Translation Retained Profit for Total Minority Total
Capital Premium Reserves Reserve Reserve Earnings the period Interest Equity
---------------------------------------------------------------------------------------------------------
Balance at 1 January
2005 1,207,142 415 50,458 -- (13,935) 1,670,402 -- 2,914,482 65,514 2,979,996
Increase in capital 169,092 -- -- -- -- (169,092) -- -- -- --
Increase in legal
reserves -- -- 49,503 -- -- (49,503) -- -- -- --
Total recognized income
and expense 62,732 19 4,526 800 (6,762) 59,160 772,246 892,721 (24,793) 867,928
Dividends to shareholders -- -- -- -- -- (180,676) -- (180,676) -- (180,676)
Change in minority
interest -- -- -- -- -- -- -- -- 23,073 23,073
Transfer to retained
earnings -- -- -- -- -- 772,246 (772,246) -- -- --
---------- ------- -------- --------- --------- --------- ---------- --------- ------- ---------
Balance at 31 December
2005 1,438,966 434 104,487 800 (20,697) 2,102,537 -- 3,626,527 63,794 3,690,321
========== ======= ======== ========= ========= ========= ========== ========= ======= =========
Balance at 1 January 2006 1,438,966 434 104,487 800 (20,697) 2,102,537 -- 3,626,527 63,794 3,690,321
Total recognized income
and expense -- -- -- 390 2,066 -- 187,185 189,641 (9,985) 179,656
Acquisition of minority
shares -- -- -- -- -- -- -- -- (16,661) (16,661)
Change in minority
interest -- -- -- -- -- -- -- -- 27,252 27,252
Transfer to retained
earnings -- -- -- -- -- 187,185 (187,185) -- -- --
---------- ------- -------- --------- --------- --------- ---------- --------- ------- ---------
Balance at 31 March 2006 1,438,966 434 104,487 1,190 (18,631) 2,289,722 -- 3,816,168 64,400 3,880,568
========== ======= ======== ========= ========= ========= ========== ========= ======= =========
24
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
14. Capital and reserves (continued)
Reconciliation of movement in capital and reserves (continued)
At 31 March 2006, common stock represented 1,854,887,341 (31 December 2005:
1,854,887,341) authorized, issued and fully paid shares with a par value of
TRY 1 each. In accordance with the Law No. 5083 with respect to the TRY, on
9 May 2005, par value of each share is registered to be one TRY.
In connection with the redenomination of the Turkish Lira and as per the
related amendments of Turkish Commercial Code, in order to increase the
nominal value of the shares to TRY 1, 1,000 units of shares, each having a
nominal value of TRY 0.001 shall be merged and each unit of share having a
nominal value of TRY 1 shall be issued to represent such shares. The
Company is currently in the process of merging 1,000 existing ordinary
shares, each having a nominal value of TRY 0.001 to one ordinary share
having a nominal value of TRY 1 each. After the share merger which appears
as a provisional article in the Articles of Association to convert the
value of each share with a nominal value of TRY 0.001 to TRY 1, all shares
will have a value of TRY 1. Although the merger process has not been
finalized, the practical application is to state each share having a
nominal value of TRY 1 which is consented by Capital Markets Board of
Turkey ("CMB").
The holders of shares are entitled to receive dividends as declared and are
entitled to one vote per share at meetings of the Company.
Translation reserve
The translation reserve comprises all foreign exchange differences arising
from the translation of the interim financial statements of foreign and
domestic operations from the functional currencies of domestic and foreign
operations to presentation currency of US Dollars.
Fair value reserve
The fair value reserve includes the cumulative net change including
deferred tax effects in the fair value of available-for-sale investments
until the investment is derecognized.
Dividends
The Company has adopted a dividend policy, which is set out in its
corporate governance guidance. As adopted, the Company's general dividend
policy is to pay dividends to shareholders with due regard to trends in the
Company's operating performance, financial condition and other factors.
The Board of Directors intends to distribute cash dividends in an amount of
not less than 50% of the Company's distributable profits based on the
financial statements prepared in accordance with the accounting principles
accepted by the CMB, for each fiscal year starting with profits for fiscal
year 2004. However, the payment of dividends will still be subject to cash
flow requirements of the Company, compliance with Turkish law and the
approval of, amendment by, the Board of Directors and the General Assembly
of Shareholders.
On 22 March 2006, the Board of Directors of the Company decided to make a
proposal to the General Assembly for distribution of a total net cash
dividend of TRY 509,075 (equivalent to $379,143 at 31 March 2006) (which
constitutes 50% of distributable income per statutory accounts) and
dividend in the form of bonus issue amounting of TRY 345,113 (equivalent to
$257,029 at 31 March 2006) for the year ended 31 December 2005. The
distribution of dividends is subject to approval at the General Assembly
Meeting, which is planned to be held on 22 May 2006. In the case of
approval of dividend dstribution in the General Assembly Meeting, dividend
distribution will start on 29 May 2006.
14. Capital and reserves (continued)
25
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
Dividends (continued)
The net distributable income, after deducting legal reserves, amounts to
TRY 1,018,150 (equivalent to $758,286 at 31 March 2006). Accordingly, the
recommended dividend distribution will be as follows:
Amount per
share Total USD equivalent
(TRY in full) (TRY) 31 March 2006
------------- ----- -------------
Dividend cash 0.274450 509,075 379,143
Bonus issue -- 345,113 257,029
Accordingly, the rate of bonus issue certificate to be issued for each
share having a nominal value of TRY 1 is recommended as 18.610559%.
15. Earnings per share
The calculation of basic and diluted earnings per share as at 31 March 2006
were based on the profit attributable to shareholders for the three months
ended 31 March 2006 and 2005 of $187,185 and $86,113, respectively and a
weighted average number of shares outstanding during the three months ended
31 March 2006 and 2005 of 1,854,887,341 calculated as follows:
Three months ended 31 March
-------------------------------------
2006 2005
------------------ ---------------
Numerator:
Profit for the period 187,185 86,113
Denominator:
Weighted average number of shares 1,854,887,341 1,854,887,341
------------------ ----------------
Basic and diluted earnings per share 0,100914 0,046425
================== ================
Basic and diluted weighted average number of shares and profit for the
period per share for the three months ended 31 March 2005 are
retrospectively changed to reflect each share having a nominal value of TRY
1.
26
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
16. Interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group's
interest-bearing loans and borrowings. For more information about the
Group's exposure to interest rate and foreign currency risk, see Note 21.
31 March 31 December
2006 2005
-------------- -------------
Non-current liabilities 16,220 79,165
Unsecured bank loans 16,214 79,156
Finance lease liabilities 6 9
Current liabilities 811,222 578,105
Current portion of unsecured bank loans 289,865 194,372
Current portion of secured bank loans 261,013 277,727
Unsecured bank facility 258,580 46,713
Secured bank facility -- 56,397
Current portion of finance lease
liabilities 1,764 2,896
--------------- --------------
827,442 657,270
=============== ==============
As at 31 March 2006, total short term secured and unsecured bank facility
of the Group is amounting to $258,580 (31 December 2005: $103,110). Short
term borrowings denominated in TRY as at 31 March 2006 have an interest
rate that vary between 13.30% and 13.50% and mature in one month. Short
term borrowings denominated in foreign currency as at 31 March 2006 have
interest rates that vary between 5.03% and 12.00% and mature in one to two
months. As at 31 December 2005, most of the short term borrowings are
denominated in foreign currency. Interest rates of these short term
borrowings denominated in foreign currency as at 31 December 2005 varied
between 6.00% and 12.00% and had a maturity of one to two months.
27
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
16. Interest-bearing loans and borrowings (continued)
As at 31 March 2006 and 31 December 2005, long term loans comprised:
31 March 2006 31 December 2005
------------------- ----------------------
Contractual Foreign Foreign
Interest Rate Maturity Currency USD Currency USD
--------------------- ------------- ------------------- ----------------------
Junior loan Libor + 2.25% March 2012 USD 122,763 122,763 -- --
Syndicated long term financing facility Libor + 1.50% - 4.50% December 2011 USD 261,013 261,013 -- --
Turkiye Garanti Bankasi AS - 2* Libor + 3.40% March 2007 USD 76,395 76,395 77,769 77,769
Akbank TAS - 2 Libor + 3.50% February 2007 USD 34,205 34,205 69,232 69,232
West LB* Tryibor - 0.15% August 2008 TRY -- 31,184 -- 39,225
Turkiye Garanti Bankasi AS - 1* Libor + 3.75% April 2006 USD 25,729 25,729 49,888 49,888
Murabaha Libor + 4.50% June 2006 USD 15,776 15,776 37,380 37,380
ABN Amro N.V. 1 Euribor + 2.8% - 7.00% January 2006 EUR -- -- 125,000 147,889
Ericsson Credit AB Libor + 5.00% January 2006 USD -- -- 122,702 122,702
ABN Amro N.V. 2 Libor + 3.00% May 2006 USD -- -- 7,136 7,136
Other 27 34
567,092 551,255
-------- --------
Current portion of long term loans (550,878) (472,099)
-------- --------
16,214 79,156
======== ========
(*) These loans have early settlement options.
28
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
16. Interest-bearing loans and borrowings (continued)
On 30 December 2005, Astelit, together with ING Bank N.V. ("ING Bank") and
Standard Bank London Ltd. ("Standard Bank"), finalized a syndicated long
term project financing of $390,000. As at 31 March 2006, $302,492 of that
facility has been utilized and $87,508 was undrawn.
These financing agreements contain a number of restrictive debt covenants
applicable to Astelit and Euroasia Telecommunications Holding B.V.
("Euroasia"), which may be summarized as follows:
o Astelit has to comply with certain financial ratios during the period
of financing;
o Astelit may not pledge any of its assets (including its rights under
the supply contracts and its rights under the material insurance
contracts);
o Euroasia may not pledge shares owned in Astelit to other parties;
o Euroasia may not pledge any loans issued to Astelit;
o There are restrictions on disposal of assets by Astelit;
o Astelit can not attract financing from parties other than Euroasia and
Lenders, without the consent of the Lenders;
o There are restrictions on finance leasing and supplier financing
arrangements;
o Astelit may not conduct any other business apart from the operation of
telecommunications services, and business ancillary thereto;
o Astelit may not merge with other companies;
o There are restrictions on acquisitions of subsidiaries;
o There are restrictions on issuance of guarantees by Astelit;
o Astelit can not issue any shares for purposes other than receiving
financial support from current shareholders;
o Payment of dividends may only occur once Astelit complies with certain
financial ratios.
Besides, as part of the project financing package, a long term junior
facility up to $150,000 was also finalized with Turkiye Garanti Bankasi AS
Luxemburg Branch and Akbank TAS Malta Branch. The junior facility is fully
guaranteed by the Company. As at 31 March 2006, $126,000 of this facility
has been utilized.
As at 31 March 2006, only the syndicated long term project financing
package is secured with asset pledge.
Based on Astelit's separate interim financial statements as at and for the
three months ended 31 March 2006, Astelit is in breach of its covenants
contained in its syndicated long term project financing. The breach of a
covenant is an event of default and the lenders in the syndicated long term
project may demand immediate repayment of the outstanding amounts which
would also trigger the cross-default to and acceleration upon notice of,
substantially all of the Astelit's borrowings. The breach of the
consolidated EBITDA is an event of default and in accordance with IFRS, the
Group has reclassified its total long term debt amounting $382,063
(including its junior loan) as short term debt payable as at 31 March 2006.
Astelit requested the facility agent, the senior creditors and the Export
Credit Agency ("ECA") to waive this requirement in order to make further
drawings under the syndicated long term financing. The Company and System
Capital Management Limited ("SCM") have agreed to contribute their
respective share of approximately $150,000 required by the facility agent
to Astelit which is subject to the approval of Board of Directors of each
to be obtained on or before 31 May 2006. As at 10 May 2006, Astelit has
obtained the waiver letter from the lenders enabling Astelit to draw loans
under the syndicated long term financing.
16. Interest-bearing loans and borrowings (continued)
29
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
As a result of the reclassification of syndicated long term financing
package and long term junior facility as current liabilities, amount of
borrowings that are due in 2006, 2007 and 2008 are $746,303, $71,076 and
$10,063, respectively.
17. Employee benefits
International Accounting Standard No. 19 ("IAS 19") "Employee Benefits"
requires actuarial valuation methods to be developed to estimate the
enterprise's obligation under defined benefit plans. The liability for this
retirement pay obligation is recorded in the accompanying consolidated
interim financial statements at its present value using a discount rate of
5.49%.
Movement in the reserve for employee termination benefits as at 31 March
2006 is as follows:
Three months ended
31 March 2006
------------------------
Balance at 1 January 2006 16,600
Provision set during the period 3,429
Payments made during the period (865)
Unwind of discount (816)
Effect of change in foreign exchange rate (11)
------------------------
Balance at 31 March 2006 18,337
========================
Obligations for contributions to defined contribution plans are recognized
as an expense in the consolidated interim income statement as incurred. The
Company incurred $252 in relation to defined contribution retirement plan
for the three months ended 31 March 2006 (31 March 2005: nil).
18. Provisions
Three months ended 31 March 2006
----------------------------------------
Legal Bonus Total
----------- ----------- ----------
Balance at 1 January 2006 15,106 17,887 32,993
Provision set during the period -- 6,797 6,797
Provisions used during the period -- (19,788) (19,788)
Unwind of discount -- (519) (519)
Effect of change in foreign
exchange rate (10) (12) (22)
----------- ----------- ----------
Balance at 31 March 2006 15,096 4,365 19,461
=========== =========== ==========
In note 24, under legal proceedings section, detailed explanations are
given with respect to legal provisions in the captions under "Disputes on
Turk Telekom Transmission Lines Leases" and "Investigation of the Turkish
Competition Board".
The bonus provision totalling to $4,365 comprise of only the provision for
the three months ended 31 March 2006 and is planned to be paid in March
2007.
30
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
19. Trade payables
The breakdown of trade payables as at 31 March 2006 and 31 December 2005 is
as follows:
31 March 31 December
2006 2005
-------------- ----------------
Payables to Ericsson companies 61,212 43,404
Payables to other suppliers 82,051 93,833
-------------- ----------------
143,263 137,237
============== ================
Payables to Ericsson Turkey, Ericsson Sweden and Ericsson AB are arising
from fixed asset purchases, site preparation and other services. Balances
due to other suppliers are arising in the ordinary course of business.
20. Other current liabilities
The breakdown of other current liabilities as at 31 March 2006 and 31
December 2005 is as follows:
31 March 31 December
2006 2005
------------- -------------
Taxes and withholdings payable 150,559 175,031
Deferred income 110,973 123,613
Selling and marketing expense accrual 50,519 30,633
License fee accrual 44,603 109,764
Interconnection accrual 16,031 14,855
Telecommunications Authority share accrual 15,995 12,334
Roaming expense accrual 10,557 12,351
Transmission fee accrual 8,912 7,335
Maintenance expense accrual 8,488 305
Other 23,839 31,030
------------- -------------
440,476 517,251
============= =============
21. Financial instruments
Exposure to credit, interest rate and currency risks arises in the normal
course of the Group's business. Derivative financial instruments such as
forward contracts and options are used to hedge exposure to fluctuations in
foreign exchange rates. The Group's Treasury is committed to effectively
manage financial market risks in the context of Group's business strategies
and with a view to achieve a balance between acceptable levels of risk and
reward. Within this context, the Group implemented a Treasury Risk
Management Policy that articulates the recognition, measurement and
management of interest rate, foreign exchange, credit and liquidity risks
while monitoring macro economic and financial markets' conditions. In
addition to this, the Group publishes and periodically updates procedures
for each type of financial instrument used.
Credit risk
Management has a credit policy in place and the exposure to credit risk is
monitored on an ongoing basis. The Group may require collateral in respect
of financial assets. Also, the Group may demand letter of guarantees from
third parties related with certain projects or contracts. The Group may
also demand certain pledges from counterparties if necessary in return for
the credit support it gives related to certain financings.
31
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
21. Financial instruments (continued)
Credit risk (continued)
Investments are allowed only in liquid securities and mostly with
counterparties that have a credit rating equal or better than the Company.
Some of the collection banks have credit ratings that are lower than the
Company's, or they may not be rated at all, however, policies are in place
to review the paid-in capital and capital adequacy ratios periodically to
ensure credit worthiness.
At the balance sheet date there were no significant concentrations of
credit risk. The maximum exposure to credit risk is represented by the
carrying amount of each financial asset, in the balance sheet. The Company
does not expect any counterparty to fail to meet its obligations.
Interest rate risk
As at 31 March 2006, interest on the Company's assets was fixed excluding
floating rate note holdings. Holdings of Turkish government floating rate
notes carry a face value of TRY 78,160 with an overnight return of 14.83%.
Therefore the Company is not exposed to interest rate risk on financial
assets, apart from floating rate notes, as at 31 March 2006. As at 4 May
2006, interest on the Company's assets was fixed excluding floating rate
note holdings. Holdings of Turkish government floating rate notes carry a
face value of TRY 75,400 with an overnight return of 14.80%.
The Company has not entered into any type of derivative instrument in order
to hedge interest rate risk as at 31 March 2006.
In order to take advantage of market volatility in the local and
international bond markets, and increase the yield on its free cash, the
Company has been entering into option transactions to buy or sell Turkish
sovereign Eurobonds. As at 31 March 2006, company has outstanding options
in the notional amount of $30,000 for trading purposes. The fair value of
Eurobond options used as economic hedges of monetary assets and liabilities
in foreign currencies at 31 March 2006 was $222 (31 December 2005: nil)
recognized in fair value derivatives. As at 4 May, 2006, company has
outstanding Eurobond options in the notional amount of $10,000 for trading
purposes.
32
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
21. Financial Instruments (continued)
Interest rate risk (continued)
The Company manage interest rate risk by financing non-current assets with
long-term debt with both fixed and variable interest rates and equity.
31 March 2006 31 December 2005
------------------------------------------------------------ ----------------------------------------------------
More Effec- More
Effective than tive than
interest 1 1-2 2-5 5 inter- 1 1-2 2-5 5
Note Rate Total Years years years years est rate Total years years years years
Cash and cash
equivalents* 13 15.6% 1,000,346 1,000,346 -- -- -- 15.4% 808,153 808,153 -- -- --
Held to maturity
securities 9 20.9% 10,256 10,256 -- -- -- 21.5% 10,191 10,191 -- -- --
Available for sale
securities 9 15.4% 13,927 13,927 -- -- -- 10.1% 13,096 13,096 -- -- --
Held for trading
securities 9 14.5% 96,780 96,780 -- -- -- -- -- -- -- -- --
Secured bank loans 16
USD floating and
fixed rate
loans 8.3% (261,013) (261,013) -- -- -- 8.3% (186,235) (186,235) -- -- --
Euro floating rate
loans -- -- -- -- -- -- 8.0% (147,889) (147,889) -- -- --
Unsecured bank loans 16
USD floating and
fixed rate
loans 7.0% (385,367) (385,367) -- -- -- 7.9% (266,770) (209,967) (56,803) -- --
Euro fixed rate loans -- -- -- -- -- -- 11.7% (10,673) (10,673) -- -- --
TRY floating and
fixed rate
loans 14.8% (179,292) (163,078) (11,526) (4,688) -- 15.9% (42,798) (20,446) (12,691) (9,661) --
Finance lease
obligations 16 8.1% (1,770) (1,764) (6) -- -- 8.1% (2,905) (2,896) (9) -- --
(*) Effective interest rate of cash and cash equivalents represent effective interest rate on time deposits amounting
to $877,794 as at 31 March 2006 (31 December 2005: $668,294).
33
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
21. Financial instruments (continued)
Foreign currency risk
The Group's functional currency is TRY for operations conducted in Turkey,
but certain revenues, purchases, operating costs and expenses and resulting
receivables and payables are denominated in foreign currencies, primarily
US Dollars, Euros, Swedish Krona and Ukranian Hryvnia.
To manage the Company's foreign exchange risk more efficiently, in 2006,
the Company entered into structured forward transactions. As at 31 March
2006, the Company has outstanding structured forward contracts amounting to
notional $381,000 to buy US dollar against TRY and notional $150,000 to
sell US dollar against TRY. Changes in the fair value of forward exchange
contracts that economically hedge monetary assets and liabilities in
foreign currencies and for which no hedge accounting is applied are
recognised in the income statement. The fair value of forward exchange
contracts used as economic hedges of monetary assets and liabilities in
foreign currencies at 31 March 2006 was $12,921 (31 December 2005: $267)
recognised in fair value derivatives. As at 4 May 2006, the Company has
outstanding structured forward contracts amounting to notional $618,000 to
buy US dollar against TRY and notional $150,000 to sell US dollar against
TRY.
In order to take advantage of market volatility in the foreign exchange
markets and increase the yield on its free cash, the Company enters into
option transactions to buy or sell certain currencies, beginning from 2006.
Option contracts allow the Company to either hedge its exposure or collect
premiums depending on their types. As at 31 March 2006, the Company has
bought and sold currency options in the notional amounts of $160,000 and
(euro)110,000. Changes in the fair value of options that economically hedge
monetary assets and liabilities in foreign currencies and for which no
hedge accounting is applied are recognised in the income statement. The
fair value of currency options used as economic hedges of monetary assets
and liabilities in foreign currencies at 31 March 2006 was $539 (31
December 2005: nil) recognised in fair value derivatives. As at 4 May 2006,
the Company has outstanding foreign currency options in the notional
amounts of $140,000 and (euro)85,000, respectively.
Sensitivity analysis
In managing currency risk, the Company aims to reduce the impact of
short-term fluctuations on the Company's earnings. Over the longer-term,
however, permanent changes in foreign exchange and interest rates would
have an impact on the Company's earnings.
Sensitivity analysis on the Company's portfolio of structured US dollar
hedging products has been run. Two extreme case scenarios of 10%
appreciation and 10% depreciation of TRY/$ exchange rate have been
included. In case of a 10% depreciation, from a spot rate of 1,3240 on 4
May 2006, total structured US dollar call transaction size would not be
effected and total structured US dollar put forward transaction size would
rise to a total of $300,000 with a total loss effect of $14,624. In the
case of a 10% appreciation, total structured US dollar call forward
transaction size would rise to $902,000 with a total loss effect of $80,261
and total structured US dollar put forward transaction size would not be
affected.
34
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
21. Financial instruments (continued)
Fair values
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
(a) Other Investments
Held to maturity securities
The fair values of government bonds and treasury bills classified as
held-to-maturity investments are based on quoted market prices at 31 March
2006.
Available for sale securities
The fair values of foreign investment equity funds and government bonds
classified as available for sale securities are based on both quoted market
and over the counter market prices at 31 March 2006.
Held to trading securities
The fair values of government bonds and treasury bills classified as
trading securities are based on both quoted market and over the counter
market prices at 31 March 2006.
(b) Trade receivable, accrued income and due from related parties
The carrying amount approximates fair value because of the short maturity
of those financial assets.
(c) Other current assets
The carrying amount approximates fair value because of the short maturity
of those financial assets. Forward contracts are presented under other
current assets and current market pricing models are used to estimate their
fair values.
(d) Cash and cash equivalents
The carrying amounts approximate fair value because of the short maturity
of those instruments.
(e) Short and long term borrowings
(i) Borrowings from Akbank, Garanti, Murabaha Syndicated facility, West LB,
Junior loan, syndicated long term financing facility: The carrying amount
approximates fair value because the interest rate varies based on the
London or TRY interbank offered rates.
(ii) Other short term bank loans and overdrafts: The carrying amount
approximates fair value because of the short term maturity of those
instruments.
(iii) As at 31 December 2005, the estimation of fair value of borrowings
from ABN Amro NV and Ericsson Credit AB approximates carrying amount
because the interest rate varies based on the London or Euro interbank
offered rates.
(f) Trade payables and due to related parties
The carrying amount approximates fair value because of the short maturity
of those financial liabilities.
35
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
21. Financial instruments (continued)
Fair values (continued)
The fair values together with the carrying amounts shown in the balance
sheet are as follows:
31 March 2006 31 December 2005
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------- -------------------------
Financial assets
Due from related parties-long term 77,368 77,368 80,894 80,894
Other long term assets 2,718 2,718 2,470 2,470
Held for trading securities 96,780 96,780 -- --
Available for sale securities 13,927 13,927 13,096 13,096
Held to maturity securities 10,256 10,651 10,191 10,763
Due from related parties 66,476 66,476 66,312 66,312
Trade receivables and accrued income 317,894 317,894 321,102 321,102
Other current assets 74,344 74,344 86,162 86,162
Cash and cash equivalents 1,000,346 1,000,346 808,153 808,153
Financial liabilities
Interest-bearing loans and borrowings
- long term 16,220 16,220 79,165 79,165
Bank overdrafts 3,146 3,146 -- --
Interest-bearing loans and borrowings
- short term 811,222 811,222 578,105 578,105
Due to related parties 5,832 5,832 6,180 6,180
Trade payables 143,263 143,263 137,237 137,237
22. Operating leases
The Company entered into various operating lease agreements. At 31 March
2006 and 31 December 2005, there were no commitments and contingent
liabilities in material amounts arising from those agreements. For the
three month ended 31 March 2006 and 2005 total rent expenses for operating
leases were $36,888 and $31,483, respectively.
23. Capital commitments
During the three months ended 31 March 2006, the Company entered into
several contracts to purchase property, plant and equipment for $25,598 (31
December 2005: $48,732).
Purchase Obligations
According to the "Sponsorship and Advertising Agreements" signed in the
context and as an integral part of the "Restructuring Framework Agreement",
the Group committed to purchase sponsorship and advertisement from Digital
Platform Iletisim Hizmetleri AS ("Digital Platform") amounting to $94,538
(31 December 2005: $99,785) excluding VAT through 15 July 2011.
36
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
23. Capital commitments (continued)
Purchase Obligations (continued)
The principal shareholder of Baytur Insaat Taahhut AS ("Baytur"), a
construction company, is the Cukurova Group. Baytur committed to complete
construction of 484 apartments within the scope of an agreement signed
among the Company, Baytur and the land owner, which is a governmental
organization, on 19 October 2004. The contract amount is $39,650 and the
project is planned to be completed in 2008. The Company paid $21,715 to
Baytur within the scope of this agreement as at 31 March 2006 (31 December
2005: $18,550).
24. Contingencies
As at 31 March 2006 and 31 December 2005, commitments and contingent
liabilities comprised the following:
31 March 31 December
2006 2005
--------------- --------------
Bank Letters of Guarantee 41,618 41,319
Guarantees
Digital Platform -- 5,419
BNP--Brussels (Buyer Credit) -- 4,015
BNP--Hungary (Buyer Credit) -- 1,404
Guarantees
As at 31 March 2006, the Company is contingently liable in respect of bank
letters of guarantee obtained from banks given to customs authorities,
private companies and other public organizations amounting to TRY 55,881
(equivalent to $41,618 at 31 March 2006) (31 December 2005: $41,319).
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. In February 2006, all related loans have been repaid
by Digital Platform and the corporate guarantees have been released.
License Agreements
Turkcell:
On 27 April 1998, the Company signed the License Agreement with the Turkish
Ministry. In accordance with the License Agreement, the Company was granted
a 25 year GSM license for a license fee of $500,000. The License Agreement
permits the Company to operate as a stand-alone GSM operator. Under the
License, the Company collects all of the revenue generated from the
operations of its GSM network and pays the Turkish Treasury and the
Ministry of Transportation an ongoing license fee and universal service
fund, respectively, equal to 15% of its gross revenues in total. The
Company 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.
37
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
License Agreements (continued)
In February 2002, the Company renewed its License with the
Telecommunications Authority, and became subject to a number of new
requirements, including those regarding the build-out, operation, quality
and coverage of the Company's GSM network, prohibitions on anti-competitive
behavior and compliance with national and international GSM standards.
Failure to meet any requirement in the renewed License, or the occurrence
of extraordinary unforeseen circumstances, can also result in revocation of
the renewed License, including the surrender of the GSM network without
compensation, or limitation of the Company's rights thereunder, or could
otherwise adversely affect the Company's regulatory status. Certain
conditions of the renewed License Agreement include the following:
Coverage: The Company had to attain geographical coverage of 50% and 90% of
the population of Turkey with certain exceptions within three years and
five years, respectively, of the License's effective date. The Company has
completed its related liabilities with respect to coverage as at 31 March
2006.
Service offerings: The Company must provide certain services in addition to
general GSM services, including free emergency calls and technical
assistance for subscribers, free call forwarding to police and other public
emergency services, receiver-optional short messages, video text access,
fax capability, calling and connected number identification and
restrictions, call forwarding, call waiting, call hold, multi-party and
third-party conference calls, billing information and barring of a range of
outgoing and incoming calls.
Service quality: In general, the Company must meet all the technical
standards determined and updated by the European Telecommunications
Standards Institute and Secretariat of the GSM MoU. Service quality
requirements include that call blockage cannot exceed 5% and unsuccessful
calls cannot exceed 2%.
Tariffs: Telecommunications Authority sets the initial maximum tariffs in
TRY and US Dollar. Thereafter, the revised License provides that the
Telecommunications Authority will adjust the maximum tariffs at most every
six months or, if necessary, more frequently. The Company is free to set
its own tariffs up to the maximum tariffs.
Rights of the Telecommunications Authority, Suspension and Termination:
The revised License is not transferable without the approval of the
Telecommunications Authority. In addition, the License Agreement gives the
Telecommunications Authority certain monitoring rights and access to the
Company's technical and financial information and allows for inspection
rights, and gives certain rights to suspend operations under certain
circumstances. Also, the Company is obliged to submit financial statements,
contracts and investment plans to the Telecommunications Authority.
The Telecommunications Authority may suspend the Company's operations for a
limited or an unlimited period if necessary for the purpose of public
security and national defence. During period of suspension, the
Telecommunications Authority may operate the Company's GSM network. The
Company is entitled to any revenues collected during such period and the
Licensee's term will be extended by the period of any suspension. The
revised License may also be terminated upon a bankruptcy ruling against the
Company or for other license violations, such as operating outside of its
allocated frequency ranges, and the penalties for such violations can
include fines, loss of frequency rights, revocation of the license and
confiscation of the network management centre, the gateway exchanges and
central subscription system, including related technical equipment,
immovables and installations essential for the operation of the network.
38
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
License Agreements (continued)
Based on the enacted law on 3 July 2005 with respect to the regulation of
privatization, gross revenue description based for the calculation of
ongoing license fee and universal service fund has been changed. According
to this new regulation, accrued interest charged for the late payments,
indirect taxes such as VAT, and accrued revenues are excluded from the
description of gross revenue. Calculation of gross revenue for ongoing
license fee and universal service fund according to the new regulation is
effective after Danistay's approval on 10 March 2006.
Astelit:
Astelit owns three GSM frequency licenses and one GSM activity license. GSM
frequency licenses are valid until 8 June 2008, 3 March 2019 and 26 July
2019, respectively. Astelit GSM Activity license will expire on 8 June
2008. On 10 November 2005, Astelit signed a license agreement which is
granting a GSM 900 frequency. The right to use the GSM 900 license starts
from 1 January 2006 and will expire in November 2020.
According to licenses Astelit should adhere to state sanitary regulations
to ensure that equipment used does not injure the population by means of
harmful electro-magnetic emissions. Licenses require Astelit to inform
authorities about start / end of operations in one month; about changes in
incorporation address in ten days. Also, Astelit must present all the
required documents for inspection by Ukrainian Telecommunications Authority
at their request. The Ukrainian Telecommunications Authority may suspend
the operations of Astelit for a limited or an unlimited period if necessary
because of the expiration of licenses, upon mutual consent, or in case of
violation of terms of radio frequencies use. If such a violation is
determined, Ukrainian Telecommunications Authority notifies Astelit of
provisions violated and sets deadline for recovery. If the deadline is not
met, licenses may be terminated.
CJSC Digital Cellular Communications ("DCC"):
DCC owns four licenses; three on for local telephone network construction,
maintenance and use compliant to D-AMPS standard and one on long distance
and international traffic carriage business. DCC licenses for local
telephone network construction, maintenance and use compliant to D-AMPS
standard will expire on 8 July 2010, 30 October 2017, and 15 December 2018,
respectively. DCC long distance and international carrier services license
was issued on 17 June 1998 and will expire on 17 June 2013.
The Ukrainian Telecommunications Authority may suspend DCC operations for a
limited or an unlimited period if necessary because of expiration of
licenses, upon mutual consent, or in case of violation of terms of radio
frequencies use. If such a violation is determined, Ukrainian
Telecommunications Authority notifies DCC of provisions violated and sets
deadline for recovery. If the deadline is not met, licenses may be
terminated.
Interconnection Agreements
The Company has entered into interconnection agreements with a number of
operators in Turkey and overseas including Turk Telekom, Telsim Mobil
Telekomunikasyon Hizmetleri AS ("Telsim"), Avea Iletisim Hizmetleri AS
("Avea"), Milleni.com GMBH (Milleni.com) and Globalstar Avrasya Uydu Ses ve
Data Iletisim AS ("Globalstar"). The Access and Interconnection Regulation
(the "Regulation") became effective when it was issued by the
Telecommunications Authority on 23 May 2003.
39
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
Interconnection Agreements (continued)
The Regulation is driven largely by a goal to improve the competitive
environment and ensure that users benefit from telecommunications services
and infrastructure at a reasonable cost. Under the Regulation, the
Telecommunications Authority may compel all telecommunications operators to
accept another operator's request for use of and access to its network. All
telecommunications operators in Turkey may be required to provide access to
other operators on the same terms and qualifications provided to their
shareholders, subsidiaries and affiliates.
In accordance with the Regulation, the telecommunications providers in
Turkey (including Turk Telekom), are obliged to renew their interconnection
agreements within two months following the issuance of the Regulation. The
Company entered into a new interconnection agreement with Globalstar on 9
September 2003, and as a result of intervention by the Telecommunications
Authority, the Company entered into supplemental agreements with Turk
Telekom on 10 November 2003, Telsim on 21 November 2003, and Globalstar on
11 December 2003, with amended tariffs and tariff adoption procedures.
After the merger of Is-Tim Telekominikasyon Hizmetleri AS ("Is-Tim") and
Aycell Haberle(0)me ve Pazarlama Hizmetleri AS ("Aycell"), a new company
was formed with the name TT&TIM Iletisim Hizmetleri A.S. ("TT&TIM"). The
interconnection agreement with Is-Tim was renewed with TT&TIM and the
interconnection agreement with Aycell was cancelled. On 15 October 2004,
TT&TIM changed its name to AVEA Iletisim Hizmetleri A.S. ("AVEA"). On the
other hand, the business relationship on interconnection between
Milleni.com and the Company has been bilaterally terminated as at 21 June
2004.
On 21 February 2005, Tellcom Iletisim Hizmetleri AS ("Tellcom") and
Milleni.com have signed an agreement to provide telecommunications services
to each other whereby Milleni.com may convey calls to the Company's switch
and the Company may convey calls to Milleni.com's switch, in both cases,
for onward transmission to their destinations. In addition, the
Telecommunications Authority has required operators holding significant
market power, as well as Turk Telekom, to share certain facilities with
other operators under certain conditions, and to provide co-location on
their premises for the equipment of other operators at a reasonable price.
The Telecommunications Authority may also require telecommunications
operators to provide number portability, which means allowing users to keep
the same phone numbers even after they switch from one network to another.
Under a typical interconnection agreement, each party agrees, among other
things to permit the interconnection of its network with the Company'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. Typical interconnection
agreements also establish understandings between the parties relating to a
number of key operational areas, including call traffic management, quality
and performance standards, interconnection interfaces and other technical,
operational and procedural aspects of interconnection. The Company's
interconnection agreements usually provide that each party will assume
responsibility for the safe operation of its own network. Each party is
also typically responsible for ensuring that its network does not endanger
the safety or health of employees, contractors, agents or customers of the
other party or damage interfere with or cause any deterioration in the
operation of the other party's network.
Interconnection agreements also specify the amount of the payments that
each party will make to the other for traffic originated on one network but
switched to the other. These payments vary by contract, and in same cases,
may require the Company to pay the counterparty less, the same amount, or a
greater amount per minute, for traffic originating on the Company's network
but switching to the counterparty's network, then it receives for a similar
call originating on another network and switched to the Company's network.
40
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
License Agreements (continued)
There are no minimum payment obligations under the interconnection
agreements; however, failure to carry the counterparty's traffic may expose
the Company to financial and other penalties or loss of interconnection
privileges for its own traffic. The Company and other operators have
entered into interconnection agreements which set out the terms and
conditions regarding the price terms as well as periodical revision of such
terms. However, revisions of the pricing terms of the interconnection
agreements have been pending as the Company has not been able to agree on
the pricing terms with other operators through discussions. As per the
Access and Interconnection Regulation, the issue has been escalated to the
Telecommunications Authority by Turk Telekom, Telsim and Avea. Meanwhile,
the Telecommunications Authority issued reference interconnection rates
during the fourth quarter of 2004, which indicate pricing terms.
Consequently, on 10 August 2005, the Telecommunications Authority issued a
`temporary interconnection price schedule' for the interconnection between
Turk Telekom and the Company which are in line with the reference tariff
structure defined by the Telecommunications Authority during the fourth
quarter of 2004. The Telecommunications Authority is expected to issue a
final price structure.
Legal Proceedings
The Group is involved in various claims and legal actions arising in the
ordinary course of business described below.
Dispute on VAT on Ongoing License Fee
Starting from June 2003, the Company has begun to make payments for VAT on
ongoing license fees with reservations and commenced a lawsuit against the
Tax Office for the related period. On 31 December 2003, the Tax Court
decided that the Company would not have to pay VAT on ongoing license fee
from February 2004 onwards. The Tax Office has appealed this decision.
Based on the management and legal counsel's opinion, the Company has not
provided any accrual related with this dispute in its consolidated interim
financial statements as at and for the three months ended 31 March 2006.
Dispute on Turk Telekom Transmission Lines Leases
Effective from 1 July 2000, Turk Telekom annulled the discount of 60% that
it provided to the Company 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. The Company
filed a lawsuit against Turk Telekom for the application of the agreed 60%
discount. However, on 30 July 2001, the Company had been notified that the
court of appeal upheld the decision made by the commercial court allowing
Turk Telekom to terminate the 60% discount. Accordingly, the Company 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, the Company recorded an accrual
amounting to a nominal amount of TRY 3,022 ($2,251 as at 31 March 2006) for
possible interest charges as at 31 December 2000. On 9 May 2002, Turk
Telekom requested an interest amounting to a nominal amount of TRY 30,068
(equivalent to $22,394 as at 31 March 2006). The Company 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, the Company
initiated a lawsuit against Turk Telekom on the legality of such interest.
The case is still pending. As at 31 March 2006, the Company recorded a
provision of nominal amount of TRY 13,296 (equivalent to $9,902 as at 31
March 2006) because its management and legal counsel believe that this is
the most likely outcome in accordance with the relevant provisions of the
Interconnection Agreement.
41
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
Legal Proceedings (continued)
Dispute on National Roaming Agreement
During the third quarter of 2001, the Company was approached by Is-Tim to
negotiate a national roaming agreement. These negotiations did not result
in a mutual agreement. Therefore, the discussions continuing under the
supervision of the Telecommunications Authority has been subject to several
lawsuits. The cases are still pending.
On 9 June 2003, the Turkish Competition Board (the "Competition Board")
decided that the Company abused its dominant position by refusing to enter
into a national roaming agreement with Is-Tim, and fined the Company by
nominal amount of approximately TRY 21,822 (equivalent to $16,252 at 31
March 2006). On 28 March 2006, Danistay cancelled the Competition Board's
decision.
On 10 December 2004, Tax Office requested nominal amount of approximately
TRY 21,822 (equivalent to $16,252 at 31 March 2006) regarding the
Competition Board decision. On 25 November 2005, the Administrative Court
decided the cancellation of the aforementioned payment order. Both the
Competition Board and Tax Office have appealed the decision. Based on its
management and legal counsel's opinion, the Company has not recorded any
accrual for Competition Board's decision.
Additionally, the Telecommunications Authority decided that the Company has
not complied with its responsibility under Turkish regulations to provide
national roaming and fined the Company by nominal amount of approximately
TRY 21,822 (equivalent to $16,252 at 31 March 2006). On 7 April 2004, the
Company made the related payment. On 3 January 2005 Telecommunications
Authority paid back nominal amount of TRY 21,822 (equivalent to $16,252 at
31 March 2006). On 13 December 2005, Danistay decided the cancellation of
the administrative fine but rejected the Company's request for cancellation
of the regulation on procedures and policies with respect to national
roaming. Based on its management and legal counsel's opinion, the Company
recorded income amounting to nominal amount of TRY 21,822 (equivalent to
$16,252 at 31 March 2006) in its consolidated interim financial statements
as at and for the year ended 31 December 2004.
If the Company 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 adversely affected.
Investigation of the Turkish Competition Board
The Competition Board commenced an investigation of business dealings
between the Company and KVK Teknoloji, in October 1999. The Competition
Board decided that the Company disrupted the competitive environment
through an abuse of dominant position in the Turkish mobile market and
infringements of certain provisions of the Law on the Protection of
Competition. As a result, the Company was fined by nominal amount of
approximately TRY 6,973 (equivalent to $5,193 as at 31 March 2006) and was
enjoined to cease these infringements. The Company initiated a lawsuit
before Danistay for the injunction and cancellation of the decision. On 15
November 2005, Danistay cancelled the Competition Board's decision on the
ground that Competition Board infringed the procedural rules governing the
investigation process. The Company has accrued nominal amount of TRY 6,973
(equivalent to $5,193 as at 31 March 2006) on its consolidated interim
financial statements as at 31 March 2006.
42
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
Legal Proceedings (continued)
Investigation of the Turkish Competition Board (continued)
After the cancellation of the Competition Board's decision, the Competition
Board has given the same decision again on 29 December 2005. On 10 March
2006, the Company initiated a lawsuit before Danistay for the injunction
and cancellation of the decision. The case is still pending. Based on its
management and legal counsel's opinion, the Company continues to accrue for
TRY 6,973 (equivalent to $5,193 as at 31 March 2006) on its consolidated
interim financial statements as at 31 March 2006.
Dispute on Collection of Frequency Usage Fees
On 21 May 1998, the Company 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, the
Company 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 22 March 2002, as a
consequence of the impossibility in fact and at law of collecting such tax
from its prepaid subscribers, the Company filed a lawsuit 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. After respective legal procedures, on 20 April 2004, the Company
paid nominal amount of TRY 145,644 (equivalent to $108,471 at 31 March
2006) for the frequency usage fees of 2002 including interest through that
date with reservation. The court rejected the Company's request and decided
that there should be no further judgment on this issue since the frequency
usage fees of 2002 are paid. Both the Company and Telecommunications
Authority have appealed this decision. Supreme Court will review this
lawsuit.
Investigation of the Telecommunications Authority on International Voice
Traffic
In May 2003, the Company was informed that the Telecommunications Authority
had initiated an investigation against the Company claiming that the
Company has violated Turkish laws by carrying some of its international
voice traffic through an operator other than Turk Telekom. The Company is
disputing whether Turk Telekom should be the sole carrier of international
voice traffic. On 5 March 2004, the Telecommunications Authority fined the
Company by nominal amount of approximately TRY 31,731 (equivalent to
$23,632 at 31 March 2006). On 9 April 2004, the Company made the respective
payment. With respect to the Danistay's injunction on 26 January 2005,
Telecommunications Authority paid back the nominal amount.
Telecommunications Authority appealed this decision. Case is still pending.
Based on its management and legal counsel's opinion, the Company has
recorded income amounting to nominal amount of TRY 31,731 (equivalent to
$23,632 at 31 March 2006) in the consolidated financial statements as at
and for the year ended 31 December 2004.
On 2 March 2005, Turk Telekom notified the Company that, the Company has
damaged Turk Telekom because of the interconnection agreement signed with
Milleni.com. Accordingly, Turk Telekom requested the Company to pay nominal
amount of TRY 219,148 (equivalent to $163,214 as at 31 March 2006) of
principal and nominal amount of TRY 178,364 (equivalent to $132,840 as at
31 March 2006) of interest, which make a sum of nominal amount of TRY
397,515 (equivalent to $296,056 as at 31 March 2006) until 7 March 2005.
Related case is still pending. However, on 13 December 2005, Danistay
rejected the request of Turk Telekom regarding the cancellation of the
interconnection agreement between Milleni.com and the Company. Management
and legal counsel believe that the aforementioned request has no legal
basis. At this point, regarding this litigation it is premature to estimate
its potential outcome, if any.
43
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
Legal Proceedings (continued)
Investigation of the Telecommunications Authority on International Voice
Traffic (continued)
Based on its management and legal counsel's opinion, the Company has not
provided any accruals with respect to this matter in its consolidated
interim financial statements as at 31 March 2006.
Investigation of the Telecommunications Authority on Frequency Fee Payments
On 23 October 2003, the Telecommunications Authority fined the Company,
claiming that the Company has made inadequate annual frequency usage fee
payments by notifying its subscriber numbers less than the actual. The
Telecommunications Authority requested nominal amount of TRY 16,005
(equivalent to $11,920 as at 31 March 2006) for principal, an interest
charge of nominal amount of TRY 10,761 (equivalent to $8,014 as at 31 March
2006) and a penalty of nominal amount of TRY 63,463 (equivalent to $47,265
as at 31 March 2006). Management and legal counsel believe that the
Telecommunications Authority's decision is due to a misinterpretation of
the applicable regulations. On 20 February 2004, the Company initiated
legal proceedings for the annulment of the decision. On 16 April 2004, the
Company paid nominal amount of TRY 103,740 (equivalent to $77,262 as at 31
March 2006) including interest through that date regarding the
Telecommunication Authority's claim. Danistay rejected the Company's
request of injunction. On 12 October 2005, the Tax Office sent a payment
order amounting to nominal amount of TRY 63,463 (equivalent to $47,265 as
at 31 March 2006) which was paid by the Company previously. On 8 November
2005, the Company initiated another lawsuit before the Administrative Court
against the Tax Office requesting an injunction and cancellation of the
payment order.
Dispute on Special Transaction Taxation Regarding Prepaid Card Sales
On 18 September 2003, the Ministry of Finance issued a report stating that
by applying discounts for prepaid card sales for the period between June -
December 2002, the Company calculated the special transaction tax on
post-discounted amount. Pursuant to this report, the Tax Office delivered
to the Company a notice, asserting deficiencies in special transaction tax
declarations and requesting a special transaction tax payment amounting to
nominal amount of TRY 6,993 (equivalent to $5,208 at 31 March 2006) and a
tax penalty of nominal amount of TRY 9,875 (equivalent to $7,355 at 31
March 2006). The case is still pending. Management and legal counsel
believe that the Company will prevail in this matter. Accordingly, the
Company has not provided any accruals with respect to this matter in its
consolidated interim financial statements as at 31 March 2006.
Disputes on annulment of fixed odd betting tender related to establishment
and operation of risk management center head agency
Reklam Departmani Basin Yayin Proje Yapim Danismanlik ve Ticaret Limited
Sirketi ("Reklam Departmani") commenced a lawsuit against the Spor Toto
Teskilat Mudurlugu. In the lawsuit, Reklam Departmani claimed for the
annulment of fixed odd betting tender related to the establishment and
operation of risk management center and acting as head agency. The Company
is not a party to the lawsuit but Inteltek's operations may be affected by
the court's decision. Accordingly, the Company requested to join the case.
Danistay accepted the request of Reklam Departmani with respect to the
appeal. On 17 February 2006, Spor Toto has applied for the correction of
this decision. The case is still pending. Besides, the request of Inteltek
to join the case was rejected by Danistay on 6 March 2006 and Inteltek has
appealed this decision. Legal counsel and management believe that it is not
practicable to issue an opinion on the conclusion of the case. The Company
has not provided any accruals with respect to this matter in its
consolidated interim financial statements as at 31 March 2006.
44
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
Legal Proceedings (continued)
Disputes on annulment of fixed odd betting tender related to establishment
and operation of risk management center head agency (continued)
With respect to the same tender Gtech Avrasya Teknik Hizmet ve Musavirlik
AS ("Gtech") commenced a lawsuit against Public Tender Authority and
Genclik ve Spor Genel Mudurluou. The Company is not a party to the lawsuit
but Inteltek's operations may be affected by the court's decision.
Accordingly, the Company joined the case. Danistay accepted the request of
Gtech regarding the appeal. Inteltek has applied for the correction of
decision on 9 February 2006. Gtech commenced also another lawsuit against
Genclik ve Spor Genel Mudurluou for the cancellation of the fixed odd
betting contract signed in the same tender. The Ankara 4th Administrative
Court rejected the request of Gtech. Gtech appealed this decision and
Danistay also rejected the request. The cases are still pending. Legal
counsel believes that it is not practicable to issue an opinion on the
conclusion of these cases. Based on its management and legal counsel's
opinion The Company has not provided any accruals with respect to these
matters in its consolidated interim financial statements as at 31 March
2006.
Gtech commenced also another lawsuit against Genclik ve Spor Genel
Mudurluou for the cancellation of the fixed odd betting contract signed in
the same tender. The Ankara 4th Administrative Court rejected the request
of Gtech. Gtech appealed this decision to Danistay and Danistay also
rejected the request. The case is still pending.
Dispute with Spor Toto Teskilat Mudurlugu
On 15 April 2005, Spor Toto Teskilat Mudurlugu, regulatory authority of
sports betting in Turkey, notified Inteltek that Inteltek is obliged to pay
nominal amount of TRY 1,434 (equivalent to $1,068 at 31 March 2006)
including 5% interest charge, with the claim of the inadequacy of the
system software, failure to spot dealer sales on a live basis and lack of
control mechanisms and cause for the non-collection of a certain portion of
turnover from dealers. On 2 November 2005, Spor Toto Teskilat Mudurlugu
sent a second letter to Inteltek that Inteltek is obliged to pay nominal
amount of TRY 1,711 (equivalent to $1,274 at 31 March 2006) of uncollected
turnover from agents including 5% interest charge regarding the same issue.
Inteltek management has replied this notification letter and rejected to
pay the requested amount.
On 9 November 2005, Spor Toto Teskilat Mudurlugu sent another notification
letter to Inteltek that Inteltek is obliged to pay nominal amount of TRY
3,292 (equivalent to $2,452 at 31 March 2006) due to the difference in the
reconciliation methods. Spor Toto Teskilat Mudurlugu claims that the
reconciliation periods should be six-month independent periods whereas
Inteltek management believes that those periods should be cumulative as
stated in the agreement. Inteltek did not pay the requested amount.
Respective legal procedure is still pending. Based on its management and
legal counsel's opinion Inteltek accrued nominal amount of TRY 3,292
(equivalent to $2,452 at 31 March 2006) for this amount in the accompanying
consolidated interim financial statements as at 31 March 2006 due to the
probability of negative outcome of the declaratory action.
45
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
Legal Proceedings (continued)
Dispute on call termination fee
Telsim has initiated a lawsuit claiming that, the Company has not applied
the reference interconnection rates determined by the Telecommunications
Authority, and has charged interconnection fees exceeding the ceiling rates
approved by Telecommunications Authority and requested an injunction to be
applicable starting from 1 August 2005, to cease this practice and
requested a payment of its damages totalling to nominal amount of TRY
26,108 (equivalent to $19,444 as at 31 March 2006) including principal,
interest and penalty on late payment. On 6 April 2006, the case is
rejected. The Company is still charging interconnection fees under the
existing Interconnection Agreement with Telsim. As it is stated in the
existing Interconnection Agreement with Telsim, Telsim referred the matter
to the Telecommunications Authority. The resolution procedure has not been
finalized yet. The management and legal counsel of the Company believe that
it is premature to estimate the legal outcome at this point. Therefore, the
Company has not recorded any accrual with respect to this matter in its
consolidated interim financial statements as at 31 March 2006.
Invalidity of the Board Resolution
On 23 June 2005, the Board of Directors of the Company has decided to allow
Alfa Group to conduct a due diligence in the Company and to entitle the
management. On 1 July 2005, Sonera filed a suit with an injunction request
against the Company for the purpose of determination of the invalidity of
the resolution dated 23 June 2005. On 28 December 2005, the court rejected
the injunction request of Sonera. Sonera has appealed this decision on 24
February 2006.
Dispute with Iranian Ministry in connection with the GSM tender process
The Company believes the Iranian Ministry has not properly implemented the
laws and regulations passed by the Iranian Parliament in connection with
the GSM tender process, which was won by the Consortium. As a result, the
Company has brought a claim in Iranian courts seeking to compel the
Ministry to implement the laws and regulations passed by the Iranian
Parliament in connection with the GSM tender process. The case is still
pending.
Dispute with the Telecommunications Authority with respect to temporary set
call termination fees
The interconnection agreement with Turk Telekom provided for a
renegotiation of pricing terms on call termination fees after 31 December
2004, and in the event that the parties could not agree on new terms by 28
February 2005, for referral to the Telecommunications Authority for
resolution. As the parties were unable to agree on new terms, Turk Telekom
referred the matter to the Telecommunications Authority, which has set
temporary call termination fees for calls terminating on each operator's
network starting from 10 August 2005.
46
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
Legal Proceedings (continued)
Dispute with the Telecommunications Authority with respect to temporary set
call termination fees (continued)
On 7 October 2005, the Company filed a lawsuit against the
Telecommunications Authority for the injunction and cancellation of this
decision, which has set temporary call termination fees for calls
terminating on each operator's network starting from 10 August 2005. The
case is still pending. At this point in the litigation it is premature to
estimate the legal outcome. As at 10 May 2006, the final termination fees
have not been set yet.
As mentioned above, Telecommunications Authority has set temporary call
termination fees for calls terminating on each operator's network starting
from 10 August 2005. However, Turk Telekom does not apply these termination
fees for the international calls. Therefore, on 22 December 2005, the
Company filed a lawsuit against Turk Telekom to cease this practice and
requested collection of its damages totaling to nominal amount of TRY
11,970 (equivalent to $8,915 at 31 March 2006) including principal,
interest and penalty on late payment covering the period from August 2005
until October 2005.
These temporary prices are not as favorable to the Company as they have
been previously, and the Telecommunications Authority may impose further
reductions in call termination fees. At this point, the Company is unable
to estimate the timing and impact of the possible changes to its fees,
however, new pricing terms, could be lower and these could have an adverse
affect on the Company's financial position, results of operations and cash
flows.
Dispute with Avea
On 28 February 2006, Avea has initiated a lawsuit against the Company
claiming that although there is an agreement between the Company and Avea
stating that both parties would not charge any SMS interconnection
termination fees, the Company has charged SMS interconnection fees for the
messages terminating on its own network and also assumed liabilities for
the messages terminating in Avea's network and made interconnection
payments to Avea after deducting the net balance of those SMS charges and
accruals. Avea requested provisions of Interconnection Agreement regarding
SMS pricing to be applied and requested collection of its losses amounting
to nominal amount of TRY 12,275 (equivalent to $9,142 at 31 March 2006) for
the period between February 2005 and December 2005 with its accrued
interest till payment. Based on its management and legal counsel's opinion,
the Company has the right to charge SMS interconnection terminating fees
with respect to SMS interconnection services provided to Avea. SMS
interconnection fees charged to Avea, is the same with the SMS
interconnection fees charged to other GSM operators in Turkey. The case is
still pending. The management and legal counsel believe that the Company's
claim on this issue has a fair basis. Accordingly, the Company charges SMS
interconnection fees and has accrued with respect to its assumed
liabilities as at and for the three months ended 31 March 2006.
47
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
24. Contingencies (continued)
Legal Proceedings (continued)
Dispute on value added taxation with respect to roaming services
On 6 April 2006, the Tax Office claimed that the Company should have paid
VAT on the invoices issued by foreign GSM operators for the international
calls originated by the Company's subscribers and terminating on those
foreign GSM operators' networks during the year 2000. It has been notified
that, based on the calculation made by the Tax Office, the Company should
pay nominal amount of TRY 3,654 (equivalent to $2,721 at 31 March 2006) for
VAT and also a penalty fee of nominal amount of TRY 16,137 (equivalent to
$12,018 at 31 March 2006). Management decided not to pay such amounts and
initiated a judicial process on 6 April 2006. Management and legal counsel
believe that the Company will prevail in this matter. Accordingly, the
Company has not provided any accruals with respect to this matter in its
consolidated interim financial statements as at 31 March 2006.
Dispute on ongoing license fee and universal service fund payment based on
the amended license agreement
Based on the enacted law on 3 July 2005 with respect to the regulation of
privatization, gross revenue description based for the calculation of
ongoing license fee and universal service fund has been changed. According
to this new regulation, accrued interest charged for the late payments,
taxes such as indirect taxes, and accrued revenues are excluded from the
description of gross revenue. Calculation of gross revenue for ongoing
license fee and universal service fund according the new regulation is
valid after Danistay's approval on 10 March 2006. In the meanwhile, the
Company realized the payments including above-mentioned items between 21
July 2005 and 10 March 2006, when the amendment in license agreement was
effective. On 21 April 2006, the Company initiated a lawsuit against
Turkish Treasury for the difference between the payments that were realized
started from 21 July 2005 until 10 March 2006 totalling TRY 111,316
(equivalent to $82,905 at 31 March 2006) including interest of TRY 8,667
(equivalent to $6,455 at 31 March 2006).
The above-mentioned enacted law dated 3 July 2005 also assigned
Telecommunications Authority for the revision of license agreement
according to new regulation. However Telecommunication Authority suffered
delay in the revision of license agreement. Therefore, on 5 May 2006, the
Company has initiated a lawsuit against the Telecommunications Authority
for the delay of the revision in license agreement preventing the new
regulation to become effective until 10 March 2006. By this lawsuit, the
Company has requested totalling TRY 112,317 (equivalent to $83,650 at 31
March 2006) including interest of TRY 9,668 (equivalent to $7,200 at 31
March 2006).
Dispute on Telecommunication Authority fee payment based on the amended
license agreement
Based on the 9th article of the new license agreement dated 10 March 2006,
the Company has been obliged to pay 0.35% of its yearly gross revenue once
in a year as Telecommunication Authority Fee. However in the previous
license agreement, the Company was obliged to pay 0.35% of its yearly gross
revenue after deducting ongoing license fee, universal service fund and
other indirect taxes from the calculation base whereas in the new
agreement, these aforementioned payments are not deducted from the base of
the calculation. Therefore, on 12 April 2006, the Company has initiated a
lawsuit for the cancellation of the 9th article of the new license
agreement.
48
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
25. Related parties
The Company has agreements or protocols with several of its shareholders,
consolidated subsidiaries and affiliates of the shareholders. The Company's
management believes that all such agreements or protocols are on terms that
are at least as advantageous to the Company as would be available in
transactions with third parties and the transactions are consummated at
their fair values.
31 March 31 December
Due from related parties - short term 2006 2005
----------- --------------
KVK Teknoloji Urunleri AS ("KVK Teknoloji") 24,185 30,525
A-Tel Pazarlama ve Servis Hizmetleri AS
("A-Tel") 13,784 6,790
ADD Production Medya AS ("ADD") 9,916 7,169
Digital Platform 7,244 10,183
Baytur 6,759 5,892
Other 4,588 5,753
----------- --------------
66,476 66,312
=========== ==============
Due from related parties - long term 31 March 31 December
2006 2005
----------- --------------
Digital Platform 75,749 78,264
Other 1,619 2,630
----------- --------------
77,368 80,894
=========== ==============
Substantially all of the significant due from related party balances are
from Cukurova Group companies.
Due from KVK Teknoloji, a company whose majority shares are owned by
Cukurova Group, mainly resulted from simcard and prepaid card sales to this
company.
Due from A-Tel, a 50-50 joint venture of Yapi Kredi Bankasi AS ("Yapi
Kredi") and Savings Deposit Insurance Fund ("SDIF"), mainly resulted from
simcard and prepaid card sales to this company. On 28 September 2005,
Cukurova Group transferred its Yapi Kredi shares to Koc Group following
which A-Tel ceased to be considered a related party. In the Board of
Directors meeting dated 22 March 2006, it is resolved to accept the
proposal and to purchase 50% of A-Tel shares for a consideration of
$150,000 based on the findings of the due diligence conducted at A-Tel.
Due from ADD, a company whose majority shares are owned by Cukurova Group,
mainly resulted from balances paid in advance in order to benefit from the
expertise and bargaining power of ADD with third parties in media
purchasing.
Due from Digital Platform, a company whose majority shares are owned by
Cukurova Group, mainly resulted from receivables from call center revenues,
financial support for borrowing repayments and advances given for current
and planned sponsorships. On 23 December 2005, a "Restructuring Framework
Agreement" was signed between Digital Platform and the Company. The
agreement includes the restructuring of the Group's receivables from
Digital Platform amounting to $82,993 as at 31 March 2006 in exchange for
sponsorship and the advertisement services that the Company will receive on
Digital Platform's infrastructure. Under the agreement, Digital Platform
commits to pay amounts due to the Group through 15 July 2011 along with the
interest in cash and advertisement services. $82,993 represents present
value of future cash flows and services discounted using imputed interest
rate. As at 31 March 2006, $75,749 of the balance is classified as long
term due from related parties in accordance with the revised repayment
schedule.
49
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
25. Related parties (continued)
Due from Baytur, a company whose majority shares are owned by Cukurova
Group, mainly resulted from advances given to Baytur for the construction
of a residence project.
31 March 31 December
Due to related parties - short term 2006 2005
------------ -------------
Hobim Bilgi Islem Hizmetleri AS ("Hobim") 2,300 2,099
Betting Organization Operation and Promotion
Company SA
("Betting SA") 1,392 1,265
Telia Sonera International Carrier AB
("Telia Sonera") 901 1,327
Other 1,239 1,489
------------ -------------
5,832 6,180
============ =============
Due to Hobim, a company whose majority shares are owned by Cukurova Group,
resulted from the invoice printing services rendered by this company.
Due to Betting SA whose majority shares are owned by one of the
shareholders of Inteltek resulted from the consultancy services received
for the operations of Inteltek.
Due to Telia Sonera which is one of the shareholders of the Company
resulted from services terminated in the network of Telia Sonera.
Intragroup transactions that have been eliminated are not recognized as
related party in the following table.
31 March 31 March
Related party revenues 2006 2005
----------- -----------
Sales to KVK Teknoloji
----------------------
Simcard and prepaid card sales 115,137 89,889
Sales to A-Tel
--------------
Simcard and prepaid card sales 56,338 67,624
Sales to Digital Platform
-------------------------
Call center revenues and interest charges 3,130 2,542
Income from Yapi Kredi (*)
----------------------
Interest income 2,665 4,623
Sales to Millenicom Telekomunikasyon AS
---------------------------------------
Telecommunications services 2,591 --
Sales to Superonline
--------------------
Call center revenues 379 373
(*) Since Cukurova Group transferred its shares in Yapi Kredi to Koc Group
on 28 October 2005, Yapi Kredi is not a related party as at 31 March 2006.
50
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
25. Related parties (continued)
31 March 31 March
Related party expenses 2006 2005
----------- ---------
Charges from ADD
----------------
Advertisement services 30,885 38,206
Charges from A-Tel
------------------
Dealer activation fees and others 18,284 17,273
Charges from Hobim
------------------
Invoicing service 2,826 2,388
Charges from Baytur
-------------------
Residence project 2,394 2,238
Charges from Betting SA
-----------------------
Consultancy services 3,684 1,607
Charges from Milleni.com
------------------------
Telecommunications services 526 2,463
Charges from KVK Teknoloji
--------------------------
Dealer activation fees and others 2,548 1,568
Charges from Millenicom Telekomunikasyon AS
-------------------------------------------
Telecommunications services 1,321 --
The significant agreements are as follows:
Agreements with KVK Teknoloji:
KVK Teknoloji incorporated on 23 October 2002, one of the Company's
principal SIM card distributors, is a Turkish company, which is affiliated
with some of the Company's shareholders. In addition to sales of SIM cards
and scratch cards, the Company has entered into several agreements with KVK
Teknoloji, in the form of advertisement support protocols, each lasting for
different periods pursuant to which KVK Teknoloji must place advertisements
for the Company's services in newspapers. The objective of these agreements
is to promote and increase handset sales with the Company's prepaid and
postpaid brand SIM cards, thereby supporting the protection of the
Company's market share in the prevailing market conditions. The prices of
the contracts were determined according to the cost of advertising for KVK
Teknoloji and the total advertisement benefit received, reflected in the
Company's market share in new subscriber acquisitions. Distributors'
campaign projects and market share also contributed to the budget
allocation.
Agreements with A-Tel:
A-Tel is involved in the marketing, selling and distributing the Company's
prepaid systems. A-Tel is a 50-50 joint venture of Yapi Kredi and SDIF.
A-Tel acts as the only dealer of the Company for Muhabbet Kart (a prepaid
card), and receives dealer activation fees and simcard subsidies for the
sale of Muhabbet Kart. In addition to the sales of simcards and scratch
cards through an extensive network of newspaper kiosks located throughout
Turkey, the Company has entered into several agreements with A-Tel for
sales campaigns and for subscriber activations.
51
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
25. Related parties (continued)
Agreements with Digital Platform:
Digital Platform, a direct-to-home digital broadcasting company under the
Digiturk brand name, is a subsidiary of one of the Company's principal
shareholders, the Cukurova Group. Digital Platform reacquired the
broadcasting rights for Turkish Super Football League by the tender held on
15 July 2004, until 31 May 2008. On 23 December 2005, "Restructuring
Framework Agreement" was signed between Digital Platform and the Company.
The Company also has an agreement related to the corporate group SMS
services that the Company offers to Digital Platform, and an agreement for
call center services provided by the Company's subsidiary Global Bilgi
Pazarlama Danizma ve Cagri Servisi Hizmetleri AS ("Global").
Agreements with Yapi Kredi:
Yapi Kredi, one of the largest commercial banks in Turkey, was one of the
significant shareholders of the Company. Since Cukurova Group transferred
its Yapi Kredi shares to Koc Group on 28 September 2005, Yapi Kredi is not
a related party as at 31 March 2006. Following this transaction, ownership
relationship of the Company with Yapi Kredi has been terminated. The
Company also receives services from Yapi Kredi as one of its major
collection channels for its postpaid subscribers. Apart from the collection
accounts, the Company also invests cash into time deposits and repo
transactions at Yapi Kredi, from which it earns interest income.
Agreements with Millenicom Telokominikasyon Hizmetleri AS:
European Telecommunications Holding AG ("ETH"), a subsidiary of Cukurova
Group, holds the majority shares of Millenicom Telekomunikasyon Hizmetleri
AS. Millenicom Telekomunikasyon Hizmetleri AS is rendering and receiving
call termination and international traffic carriage services to the and
from the Company.
Agreements with Superonline:
Superonline was a subsidiary of one of the Company's shareholders, the
Cukurova Group, through Yapi Kredi and other Cukurova Group companies.
Following the transfer of Yapi Kredi to Koc Group on 28 September 2005 by
Cukurova Group, interest of Cukurova Group in Superonline decreased to
3.3%. However, Cukurova Group has an option right to buy the shares of
Superonline from Yapi Kredi. The Company and Superonline, which is a
subsidiary of one of the Company's principal shareholders, the Cukurova
Group, have entered into an agreement to provide mutual services to each
other. According to the agreement, Superonline provides dealer automation
services, web hosting services, internet access services, high speed
circuit switched data services, wireless application protocol services and
unified messaging services. Against the services provided by Superonline,
the Company provides space to Superonline on base station sites to install
servers and equipments to increase the performance of the system
infrastructure of Superonline.
Global has also agreed to provide call center services to Superonline to
provide technical assistance to Superonline subscribers and to facilitate
the subscription of new users. The price charged for this service has been
determined by service level, and computed by commission rates within one
percent to eight percent.
52
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
25. Related parties (continued)
Agreements with Milleni.com:
Milleni.com, one of the active players in the international carrier market,
was a Fintur subsidiary in Germany prior to the Fintur restructuring in
2002. Currently, the Cukurova Group, one of the Company's principal
shareholders, owns Milleni.com. On 21 February 2005, Tellcom and
Milleni.com has signed an agreement to provide telecommunications services
to each other whereby Milleni.com may convey calls to Tellcom's switch and
Tellcom may convey calls to Milleni.com's switch, in both cases, for onward
transmission to their destinations. The prices vary according to the
destinations.
Agreements with ADD:
ADD, a media planning and marketing company, is a Turkish company owned by
one of the Company's principal shareholders, the Cukurova Group. The
Company entered into a media purchasing agreement with ADD on 23 January
2002, which expired on 31 December 2002 and further extended to 31 December
2003. In 2004 and 2005, the agreement is revised again with similar terms.
The purpose of this agreement is to benefit from the expertise and
bargaining power of ADD against third parties, regarding the formation of
media purchasing strategies for both postpaid and prepaid brands. The
prices are based on cost plus commission on cost. Additionally, ADD is a
party of the sponsorship and advertisement agreements which are integral
part of "Restructuring Framework Agreement" signed between the Company and
Digital Platform.
Agreements with Hobim:
Hobim, one of the leading data processing and application service provider
companies in Turkey, is owned by the Cukurova Group. The Company has
entered into invoice printing and archiving agreements with Hobim under
which Hobim provides the Company with scratch card printing services,
monthly invoice printing services, manages archiving of invoices and
subscription of documents for an indefinite period of time. Prices of the
agreements are determined as per unit cost plus profit margin.
Agreements with Baytur:
The principal shareholder of Baytur, a construction company, is the
Cukurova Group. Baytur committed to complete construction of 484 apartments
within the scope of an agreement signed among the Company, Baytur and the
land owner, which is a governmental organization, on 19 October 2004. The
agreement amount is $39,650 and the project is planned to be completed in
2008. The Company paid $3,165 in the first quarter of 2006 and $18,550 in
2005 and 2004 to Baytur within the scope of this contract.
Agreements with Betting SA:
Betting SA is incorporated under the laws of Greece, owned by one of the
major shareholders of Inteltek. The Company signed a service agreement with
Betting SA on 11 March 2004 to get consultancy services including;
monitoring operations, providing continuous evaluation of betting,
maximizing game revenues of fixed odds betting, operating fixed odds
betting games in the most efficient manner, with integrity and securely. In
consideration of such services, Betting SA receives an amount equal to
0.95% of the gross revenues of the fixed odds betting games.
53
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
25. Related parties (continued)
Transactions with key management personnel:
Key management personnel comprise of the Group's directors and key
management executive officers.
As at 31 March 2006 and 31 December 2005, none of the Group's directors and
executive officers has outstanding personal loans from the Company.
In addition to their salaries, the Group also provides non-cash benefits to
directors and executive officers and contributes to a post-employment
defined plan on their behalf. The Group is required to contribute a
specified percentage of payroll costs to the retirement benefit scheme to
fund the benefits.
Total compensation provided to key management personnel is $1,393 and $483
for the three months ended 31 March 2006 and 2005, respectively.
26. Group entities
The Group's ultimate parent company is Turkcell. Subsidiaries of the
Company as at 31 March 2006 and 31 December 2005 is as follows:
Subsidiaries Ownership Interest
Country of 31 March 2006 31 December 2005
Name incorporation % %
------------------------------------------------------------------------------------------------------------------------------
Turkish Repuclic of
Kibris Telekom Northern Cyprus 100 100
Global Turkey 100 100
Turktell Bilisim Servisleri AS Turkey 100 100
Yyi Eglenceler Eglence ve Turizm AS Turkey 100 100
Mapco Turkey 100 100
Tellcom Turkey 100 100
Turktell Uluslararasi Turkey 100 100
Hayat Boyu Egitim AS Turkey 100 100
East Asian Consortium BV Netherlands 100 85
Corbuss Kurumsal Telekom Servis
Hizmetleri AS ("Corbuss") Turkey 99 99
Interaktif Cocuk Programlari Yapimciligi
ve Yayinciligi AS ("Digikids") Turkey 60 60
Inteltek Turkey 55 55
Libero Interaktif Hizmetler AS Turkey 55 55
Euroasia Netherlands 54 54
DCC Ukraine 54 54
Astelit Ukraine 54 54
54
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
27. Subsequent events
(a) On 20 October 2005, Cukurova Group offered to sell the Company the A-Tel
Option Contract, under which the holder has the right to purchase 50%
shares of A-Tel for a consideration of $150,000. The Company conducted tax,
legal and financial due diligence review at A-Tel. On 22 March 2006, the
Board of Directors of the Company resolved to accept the proposal and the
purchase 50% of A-Tel shares for a consideration of $150,000 based on the
findings of the due diligence conducted at A-Tel. On 14 April 2006,
Cukurova Holding declared Yapy Kredi that they use the right in question
and in this respect, they also requested the sale of the above-mentioned
shares at $150,000 to the Company.
(b) On 22 March 2006, the Board of Directors of the Company decided to conduct
the required studies for the pre-qualification stage and submit a
prequalification application in accordance with the relevant provisions of
the Request for Proposals dated 19 February 2006, for the tender of the
third GSM license in Arab Republic of Egypt. In this respect, the Company
signed a Memorandum of Understanding with Amwal El Khaleej and Banque Misr
in order to form a consortium to apply for the pre-qualification of the
third GSM license in Arab Republic of Egypt. The Company will have a 60%
stake in the consortium where the remaining stake will be equally divided
between other consortium members. On 2 May 2006, the Company obtained the
letter of guarantee, in the name of the National Telecommunication
Regulatory Authority, from Banque Misr. The Company is still evaluating the
third GSM license in Arab Republic of Egypt. As at 4 May 2006, the Company
submitted necessary pre-qualification documentation to the Authorities in
Egypt.
(c) Ordinary General Assembly of the Company, which was planned to convene on
28 April 2006 postponed as the meeting quorum could not be reached. In
order to discuss the same items as stated in the postponed meeting's
agenda, Ordinary General Assembly meeting will be held on 22 May 2006.
(d) In the Ordinary General Assembly Meeting, dated 3 April 2006, of DCC,
merger of DCC with Astelit, another indirect subsidiary of the Company, was
decided.
(e) In the Shareholders Meeting of Kybris Telekom dated 27 April 2006, dividend
distribution amounting to TRY 5,254 was decided.
(f) The corporation tax rate is 30% for the three months ended 31 March 2006.
However, the Prime Minister of Turkey has announced in December 2005 that
the corporation tax rate will be reduced to 20% starting from 1 January
2006. The issue is still being debated by the government as at 10 May 2006
and as no change in tax rate has been enacted or substantially enacted by
31 March 2006, the current tax rate of 30% has been consistently used.
According to the Income Tax Law which has been published in Official
Gazette on 8 April 2006, the investment allowance application has been
abolished effective from 1 January 2006. However, the respective law allows
the taxpayers to utilise their investment allowance rights obtained under
the scope of the previous provisions only for their income generated in the
years 2006, 2007, and 2008.
(g) In the Ordinary General Assembly Meeting at 21 April 2006 of Aks TV, it was
decided that share capital will be increased to TRY 50,000 of which TRY
35,602 will be transferred from extraordinary reserves and TRY 14,298 will
be in cash or through additional paid in capital. Iyi Eglenceler has to pay
TRY 7,187, which is calculated according to the shareholder structure until
31 May 2006.
(h) Turktell Uluslararasy applied to the Turkish Treasury on 28 April 2006 for
the permission of capital transfer to abroad in order to participate in the
capital increase of Euroasia amounting to $22,020 million which is
calculated according to its shareholding rate at Euroasia.
55
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
28. Accounting estimates and judgements
Management discussed with the Audit Committee the development, selection
and disclosure of the Company's critical accounting policies and estimates
and the application of these policies and estimates. In note 2, detailed
analysis is given with respect to accounting estimates and judgements of
bad debts, useful life or expected pattern of consumption of the future
economic benefits embodied in, depreciable assets and deferred tax assets.
Key sources of estimation uncertainty
In note 21, detailed analysis is given of the foreign exchange exposure of
the Company and risks in relation to foreign exchange movements.
Critical accounting judgements in applying the Company's accounting
policies
Certain critical accounting judgements in applying the Company's accounting
policies are described below.
Trade and other receivables
The impairment losses in trade and other receivables are based on
management's evaluation of the volume of the receivables outstanding, past
experience and general economic conditions.
Useful life of assets
The useful economic lives of the Group's assets are determined by
management at the time the asset is acquired and regularly reviewed for
appropriateness. The Group defines useful life of its assets in terms of
the assets' expected utility to the Group. This judgement is based on the
experience of the Group with similar assets. In determining the useful life
of an asset, the Group also follows technical and/or commercial
obsolescence arising on changes or improvements from a change in the
market. Life of the License is based on duration of license agreement.
29. Explanation of transition to IFRSs
As stated in note 1, these are the Company's first consolidated interim
financial statements for part of the period covered by the first IFRS
annual consolidated interim financial statements prepared in accordance
with IFRSs.
The accounting policies set out in note 1 have been applied in preparing
the consolidated interim financial statements for the three months ended 31
March 2006, the comparative information for the three months ended 31 March
2005, the consolidated financial statements for the year ended 31 December
2005 and the preparation of an opening IFRS balance sheet at 1 January 2005
(the Group's date of transition).
In preparing its opening IFRS balance sheet, comparative information for
the three months ended 31 March 2005 and financial statements for the year
ended 31 December 2005, the Group has adjusted amounts reported previously
in its consolidated financial statements prepared in accordance with
previous GAAP (US GAAP). An explanation of how the transition from US GAAP
to IFRSs has affected the Group's financial position, financial performance
and cash flows is set out in the following tables and the notes that
accompany the tables.
a) Revenues:
Under US GAAP, revenues, gross profit, and selling and marketing expenses
were reduced due to the standards issued by the Emerging Issues Task Force
(EITF) within the Financial Accounting Standards Board (FASB) that
addressed the extent to which different types of payments or benefits to
retailers or customers shall be reported as reductions either in revenue or
incurred as expenses. With the transition to IFRS, EITF rules are no longer
applied.
56
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
29. Explanation of transition to IFRSs (continued)
b) Financial Instruments:
IAS 32 "Financial Instruments: Disclosure and Presentation" and IAS 39
"Financial Instruments: Recognition and Measurement" address the accounting
for, and reporting of, financial instruments. IAS 39 sets out detailed
accounting requirements in relation to financial assets and liabilities.
Financial assets and liabilities are stated at present value using
effective interest method with charges flowing through the income
statement. Under US GAAP there is no requirement for discounting in certain
specified circumstances including trade receivables and payables maturing
in less than one year and for borrowings.
c) Restatement of Non Monetary Items:
Under US GAAP, revenues, costs, capital and non-monetary assets and
liabilities are translated at historical exchange rates while monetary
assets and liabilities are translated at exchange rates prevailing at
balance sheet dates. All foreign exchange adjustments resulting from
translation of financial statements into US dollars are included in
determination of net income whereas under IFRS, when the functional
currency is the currency of a hyperinflationary economy, the reported
revenues, costs, capital and non monetary assets and liabilities are
recognized based on IAS 29 principles in terms of the measuring unit
current at the balance sheet date. Depreciation and amortization, monetary
gain/(loss) accounts are also affected by these accounting differences.
As hyperinflationary conditions in Turkey no longer existed starting from 1
January 2006, TRY has been treated as a more stable currency since that
time and the financial statements of the Company and those of the
subsidiaries located in Turkey and Turkish Republic of Northern Cyprus
prepared in accordance with IFRS are not required to be adjusted for
hyperinflationary accounting.
d) Deferred Tax:
Distinctions arise in deferred tax calculation due to the accounting
methodology differences between US GAAP and IFRS standards.
e) Share of earnings in associates and minority interest:
The Group's share of net income of its associate is determined using the
equity method and is based on financial statements of the investee's
prepared in accordance with IFRS. The reconciliation item reflects
adjustments for the difference between IFRS and US GAAP relating to the
separate financial statements of subsidiaries and the associate.
f) Change in presentation:
Amounts within the reconciliations for the year ended 31 March 2006 and 31
December 2005 and shareholder's equity as at 31 March 2005, 31 December
2005 and 31 December 2004 have been reclassified to provide comparability.
The reclassification does not have an effect on net income under IFRS.
57
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
29. Explanation of transition to IFRSs (continued)
Reconcilition of US GAAP Consolidated Financials to IFRS Consolidated
Financials for the year ended 31 December 2004
Measurement and
Recognition
USGAAP Format USGAAP Note Differences
FIXED ASSETS, net 1,061,268 c 652,176
INTANGIBLES, net 881,511 c 442,749
INVESTMENTS 197,760 e 43,814
HELD TO MATURITY SECURITIES 10,266 b, c 5,316
DUE FROM RELATED PARTIES 65,971 b (12)
OTHER LONG TERM ASSETS 1,624 b, c 4,241
DEFERRED TAX ASSETS 80,163 d 64,817
CONSTRUCTION IN PROGRESS 230,191 -
PREPAID EXPENSES 6,482 -
GOODWILL 1,349 -
---------
Total non-current assets 2,536,585
---------
Inventories 13,007 c (275)
Held to maturity securities 45,329 -
Due from related parties 103,948 b (3,576)
Trade receivables and accrued income, net 271,792 b (6,008)
Other current assets 325,741 b, c 2,295
Cash and cash equivalents 763,821 b 1,110
Deferred tax assets 277,589 d (277,589)
Prepaid expenses 23,685 -
---------
Total current assets 1,824,912
---------
---------
Total assets 4,361,497
=========
Common stock 636,116 c 571,026
Additional paid in capital 178 c 237
Legal reserves 42,501 c (8,223)
Retained earnings 1,304,478 c 365,925
Accumulated other comprehensive income 2,244 -
---------
Total shareholders' equity 1,985,517
e 1,470
LONG TERM BORROWINGS 266,447 b (8,306)
RETIREMENT PAY LIABILITY 12,875 -
OTHER LONG TERM LIABILITIES 7,813 b (582)
TRADE PAYABLES 213,740 -
DEFERRED TAX LIABILITIES 11,757 d (464)
LONG TERM LEASE OBLIGATIONS 3,284 -
MINORITY INTEREST 64,044 -
---------
Total non-current liabilities 579,960
---------
Short term borrowings 549,079 b 34,062
Taxes payable 99,939 -
Due to related parties 6,711 b (560)
Trade payables 616,816 b (1,590)
b (433)
Other current liabilities and accrued expenses 523,475 b (24,044)
---------
Total current liabilities 1,796,020
---------
---------
Total equity and liabilities 4,361,497
=========
Presentation
Differences IFRS IFRS Format
Assets
222,983 1,936,427 Property, plant and equipment
8,557 1,332,817 Intangible assets
(22,619) 218,955 Investments in associates
22,619 38,201 Other investments
- 65,959 Due from related parties
6,482 12,347 Other non-current assets
- 144,980 Deferred tax assets
(230,191) -
(6,482) -
(1,349) ----------
3,749,686 Total non-current assets
----------
- 12,732 Inventories
- 45,329 Other investments
- 100,372 Due from related parties
- 265,784 Trade receivable and accrued income
23,685 351,721 Other current assets
- 764,931 Cash and cash equivalents
- - Deferred tax assets
(23,685) -
----------
1,540,869 Total current assets
----------
----------
5,290,555 Total assets
==========
Equity
- 1,207,142 Issued capital
- 415 Share premium
2,244 36,522 Reserves
- 1,670,403 Retained earnings
(2,244) -
---------
Total equity attributable to equity
2,914,482 holders of the parent
---------
64,044 65,514 Minority interest
---------
2,979,996 Total equity
---------
Liabilities
3,284 261,425 Interest bearing loans and borrowings
- 12,875 Employee benefits
- 7,231 Other non-current liabilities
- 213,740 Trade payables
- 11,293 Deferred tax liabilities
(3,284) -
(64,044) ---------
506,564 Total non-current liabilities
---------
13,798 597,479 Interest bearing loans and borrowings
- 99,939 Income taxes payable
- 6,151 Due to related parties
- 615,226 Trade payables
30,985 30,552 Provisions
(44,783) 454,648 Other current liabilities
---------
1,803,995 Total current liabilities
---------
---------
2,310,559 Total liabilities
---------
5,290,555 Total equity and liabilities
=========
58
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
29. Explanation of transition to IFRSs (continued)
Reconcilition of US GAAP Consolidated Financials to IFRS Consolidated Financials
for the three months ended 31 March 2005
Measurement and
Recognition
USGAAP Format USGAAP Note Differences
FIXED ASSETS, net 1,074,619 c 583,629
INTANGIBLES, net 891,192 c 413,831
INVESTMENTS 209,904 e 41,945
HELD TO MATURITY SECURITIES 11,037 b, c 5,234
DUE FROM RELATED PARTIES 65,154 b (12)
OTHER LONG TERM ASSETS 1,883 c (18)
DEFERRED TAX ASSETS 7,376 d 99,228
CONSTRUCTION IN PROGRESS 315,970 -
PREPAID EXPENSES 8,794 -
GOODWILL 1,349 -
---------
Total non-current assets 2,587,278
---------
Inventories 9,879 c 595
Held to maturity securities 48,824 -
Due from related parties 65,215 b (1,807)
Trade receivables and accrued income, net 229,657 b (4,329)
Other current assets 98,711 b, c (2,406)
Cash and cash equivalents 871,959 b 2,824
Deferred tax assets 277,168 d (277,168)
Prepaid expenses 31,870 -
---------
Total current assets 1,633,283
---------
---------
Total assets 4,220,561
=========
Common stock 636,116 c 559,962
Additional paid in capital 178 c 234
Legal reserves 42,501 c (8,482)
Retained earnings 1,432,885 c 308,516
Accumulated other comprehensive income 7,290 -
---------
Total shareholders' equity 2,118,970
---------
e 1,332
LONG TERM BORROWINGS 153,208 b (6,159)
RETIREMENT PAY LIABILITY 14,310 -
OTHER LONG TERM LIABILITIES 8,851 b (824)
TRADE PAYABLES 83,718 -
DEFERRED TAX LIABILITIES 11,890 d (2,593)
LONG TERM LEASE OBLIGATIONS 1,898 -
MINORITY INTEREST 63,252 -
---------
Total non-current liabilities 337,127
---------
Short term borrowings 705,767 b 24,668
Taxes payable 97,904 -
Due to related parties 6,390 b (230)
Trade payables 568,395 b (2,877)
- b (4)
Other current liabilities and accrued expenses 357,969 b (11,997)
Provision for income taxes 28,039 -
---------
Total current liabilities 1,764,464
---------
---------
Total equity and liabilities 4,220,561
=========
Presentation
Differences IFRS IFRS Format
Assets
300,327 1,958,575 Property, plant and equipment
16,992 1,332,015 Intangible assets
(22,619) 229,230 Investments in associates
22,619 38,890 Other investments
- 65,142 Due from related parties
8,794 10,659 Other non-current assets
- 106,604 Deferred tax assets
(315,970) -
(8,794) -
(1,349) ----------
3,731,115 Total non-current assets
----------
- 10,474 Inventories
- 48,824 Other investments
- 63,408 Due from related parties
- 225,328 Trade receivable and accrued income
31,870 128,175 Other current assets
- 874,783 Cash and cash equivalents
- - Deferred tax assets
(31,870) -
----------
1,350,992 Total current assets
----------
----------
5,082,107 Total assets
==========
Equity
- 1,196,078 Issued capital
- 412 Share premium
7,290 41,309 Reserves
- 1,741,401 Retained earnings
(7,290) -
---------
Total equity attributable to equity
2,979,200 holders of the parent
---------
63,252 65,584 Minority interest
---------
3,043,784 Total equity
---------
Liabilities
1,898 148,947 Interest bearing loans and borrowings
- 14,310 Employee benefits
- 8,027 Other non-current liabilities
- 83,718 Trade payables
- 9,297 Deferred tax liabilities
(1,898) -
(63,252) -
---------
264,299 Total non-current liabilities
---------
5,837 736,272 Interest bearing loans and borrowings
28,039 125,943 Income taxes
- 6,160 Due to related parties
- 565,518 Trade payables
18,686 18,682 Provisions
(24,523) 321,449 Other current liabilities
(28,039) -
---------
1,774,024 Total current liabilities
---------
---------
2,038,323 Total liabilities
---------
5,082,107 Total equity and liabilities
=========
29. Explanation of transition to IFRSs (continued)
59
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
Reconcilition of US GAAP Consolidated Financials to IFRS Consolidated Financials
for the three months ended 31 March 2005 (continued)
Measurement and
Recognition
USGAAP Format USGAAP Note Differences
Revenues 897,970 a,c 16,899
Direct cost of revenues (523,504) c (53,040)
----------
Gross Profit 374,466
c 2,718
Selling and marketing expenses (103,578) a,c (30,788)
Genera an administrative expenses (35,116) c 624
--------- c (3,401)
Operating income 235,772
Income (expense) from related parties, net 306 -
Interest income 36,202 b,c 2,389
Interest expense (59,447) b,c (18,877)
Other income, net 1,527 -
Equity in net (loss) income of unconsolidated investees 13,145 -
Minority intrest in income of consolidated subsidiaries 1,922 -
Translation loss (4,058) c 4,058
--------
225,369
-------- e 137
Income (loss) before taxes 225,369
c 1,565
Income tax benefit (expense) (96,962) d 35,463
--------
Net income 128,407
========
e 41
Presentation
Differences IFRS IFRS Format
- 914,869 Revenue
- (576,544) Cost of sales
---------
338,325 Gross profit
3,192 5,910 Other operating income
- (134,366) Selling and marketing expenses
- (34,492) Administrative expenses
(1,359) (4,760) Other operating expense
---------
170,617 Operating profit before financing costs
(306) -
- 38,591 Financial income
- (78,324) Financial expense
(1,527) -
(13,145) -
(1,922) -
- -
---------
(39,733) Net financing costs
13,145 13,282 Share of profit of associates
---------
144,166 Profit before tax
- 1,565 Loss/gain on net monetary position, net
---------
145,731 Profit before tax
- (61,499) Income tax expense
---------
84,232 Profit for the period
=========
Attributable to:
86,113 Equity holders of the parent
(1,922) (1,881) Minority interest
---------
84,232 Profit for the period
=========
60
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
29. Explanation of transition to IFRSs (continued)
Reconciliation of USGAAP Consolidated Financials to IFRS Consolidated Financials
for the year ended 31 December 2005
Measurement and
USGAAP Format USGAAP Note Recognition Differences
FIXED ASSETS, net 1,224,543 c 528,792
INTANGIBLES, net 871,362 c 426,693
INVESTMENTS 266,198 e 46,823
- b,c 6,786
DUE FROM RELATED PARTIES 80,906 b (12)
OTHER LONG TERM ASSETS 2,440 c 157
DEFERRED TAX ASSETS 306 d 2,634
CONSTRUCTION IN PROGRESS 389,375 -
PREPAID EXPENSES 13,879 -
---------
Total non-current assets 2,849,009
---------
Inventories 9,198 c (288)
Held to maturity securities 10,191 148
Due from related parties 67,327 b (1,015)
Trade receivables and accrued income, net 324,611 b (3,509)
Other current assets 106,453 b,c (12,966)
Cash and cash equivalents 795,091 b 13,062
Deferred tax assets 192,731 d (192,731)
Prepaid expenses 38,029 -
Available for sale securities 12,948
---------
Total current assets 1,556,579
---------
---------
Total assets 4,405,588
=========
Common stock 636,116 c 802,850
Additional paid in capital 178 c 256
Legal reserves 92,414 c (74,510)
Retained earnings 1,983,316 c 180,358
Accumulated other comprehensive income 5,549 -
---------
Total shareholders' equity 2,717,573
---------
e 1,367
LONG TERM BORROWINGS 82,848 b (3,692)
RETIREMENT PAY LIABILITY 16,707 (107)
OTHER LONG TERM LIABILITIES 7,623 b (1,206)
DEFERRED TAX LIABILITIES 185,297 d (95,333)
LONG TERM LEASE OBLIGATIONS 9 -
MINORITY INTEREST 62,427
---------
Total non-current liabilities 354,911
---------
Short term borrowings 564,503 b 14,080
Taxes payable 60,864 -
Due to related parties 5,774 b 406
Trade payables 137,775 b (538)
- b (571)
Other current liabilities and accrued expenses 564,188 b (8,787)
---------
Total current liabilities 1,333,104
---------
---------
Total equity and liabilities 4,405,588
=========
Presentation
Differences
IFRS IFRS Format
Assets
389,375 2,142,710 Property, plant and equipment
- 1,298,055 Intangible assets
(22,609) 290,412 Investments in associates
22,609 29,395 Other investments
- 80,894 Due from related parties
13,879 16,476 Other non-current assets
- 2,940 Deferred tax assets
(389,375) -
(13,879) -
---------
3,860,882 Total non-current assets
---------
- 8,910 Inventories
12,948 23,287 Other investments
- 66,312 Due from related parties
- 321,102 Trade receivable and accrued
income
32,964 126,451 Other current assets
- 808,153 Cash and cash equivalents
- - Deferred tax assets
(38,029) -
(12,948) -
---------
1,354,215 Total current assets
---------
---------
5,215,097 Total assets
=========
Equity
- 1,438,966 Issued capital
- 434 Share premium
66,686 84,590 Reserves
(61,137) 2,102,537 Retained earnings
(5,549) -
---------
Total equity attributable to
3,626,527 equity holders of the parent
---------
62,427 63,794 Minority interest
---------
3,690,321 Total equity
---------
Liabilities
9 79,165 Interest bearing loans and
borrowings
- 16,600 Employee benefits
- 6,417 Other non-current liabilities
- 89,964 Deferred tax liabilities
(9) -
(62,427) -
---------
192,146 Total non-current liabilities
---------
(478) 578,105 Interest bearing loans and
borrowings
- 60,864 Income Taxes Payable
- 6,180 Due to related parties
- 137,237 Trade payables
33,564 32,993 Provisions
(38,150) 517,251 Other current liabilities
---------
1,332,630 Total current liabilities
---------
---------
1,524,776 Total liabilities
---------
5,215,097 Total equity and liabilities
=========
61
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
29. Explanation of transition to IFRSs (continued)
Reconciliation of USGAAP Consolidated Financials to IFRS Consolidated Financials
for the year ended 31 December 2005 (continued)
Measurement and
USGAAP Format USGAAP Note Recognition Differences
Revenues 4,268,492 a,c 259,488
Direct cost of revenues (2,390,977) c (310,588)
-----------
Gross Profit 1,877,515
c 1,612
Selling and marketing expenses (488,659) a,c (211,842)
General and administrative expenses (152,025) c (2,010)
c 2,561
-----------
Operating income 1,236,831
Income (expense) from related parties, net 1,145 c -
Interest income 138,918 b,c 3,733
Interest expense (147,367) b,c (19,011)
Other income, net 5,183
Equity in net (loss) income of unconsolidated 67,599
investees
Minority interest in income of consolidated 24,335
subsidiaries
Translation loss (8,320) c 8,320
-----------
1,318,324
e 635
-----------
Income (loss) before taxes 1,318,324
11,037
Income tax benefit (expense) (407,397) d 116,925
-----------
Net income 910,927
===========
e (458)
Presentation
Differences IFRS IFRS Format
- 4,527,980 Revenue
- (2,701,565) Cost of sales
-----------
1,826,415 Gross profit
13,791 15,403 Other operating income
- (700,501) Selling and marketing expenses
- (154,035) Administrative expenses
(7,462) (4,901) Other operating expenses
-----------
982,381 Operating profit before
financing costs
(1,145) -
- 142,651 Financial income
- (166,378) Financial expense
(5,183) -
(67,599) -
(24,335) -
- -
-----------
(23,727) Net financing costs
67,599 68,234 Share of profit of associates
-----------
1,026,888 Profit before tax
- 11,037 Loss /gain on net monetary position,net
-----------
1,037,925 Profit before tax
- (290,472) Income tax expense
-----------
747,453 Profit for the period
===========
Attributable to:
772,246 Equity holders of the parent
(24,335) (24,793) Minority interest
-----------
747,453 Profit for the period
===========
62
TURKCELL ILETISIM HIZMETLERI AS AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the three months ended 31 March 2006
(Amounts expressed in thousands of US dollars unless otherwise indicated except
share amounts)
--------------------------------------------------------------------------------
29. Explanation of transition to IFRSs (continued)
Explanation of material adjustments to the cash flow statements for three months
ended 31 March 2006 and 2005:
For the three months ended 31 March 2005, non monetary assets and liabilities
recognized based on IAS 29 principles in terms of the measuring unit current at
the balance sheet date is presented under effect of indexation for
hyperinflation in the consolidated interim statement of cash flow under IFRS.
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: May 11, 2006 By: /s/ MUZAFFER AKPINAR
----------------------------------------
Name: Muzaffer Akpinar
Title: Chief Executive Officer