SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
Form 6-K dated November 29, 2002
Hizmetleri A.S.
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(Translation of Registrant's Name Into English)
Turkcell Plaza Mesrutiyet
Caddesi No.153 80050 Tepebasi
Istanbul, Turkey
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(Address of Principal Executive Office)
(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 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
(If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b).)
Enclosure: Third Quarter Results 2002
OPERATING AND FINANCIAL REVIEW FOR THE NINE MONTH AND THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2002
Overview
The financial information contained in the following discussion and
analysis has been prepared and is presented on a consolidated basis in
accordance with US GAAP in US dollars. The following discussion and analysis
should be read in conjunction with the consolidated financial statements and
related notes as of December 31, 2000 and 2001 and for each of the years in the
three year period ended December 31, 2001 included in our annual report on Form
20-F for the year ended December 31, 2001 (the "20-F") and the consolidated
financial statements and related notes as of December 31, 2001 and September 30,
2002, and for the three month and nine month periods ended September 30, 2001
and 2002 included herein. The information as of September 30, 2002 and for the
three month and nine month periods ended September 30, 2001 and 2002 is not
audited.
This discussion of operating results is based upon our financial
statements prepared under US GAAP. Certain statements contained below, including
information with respect to our plans and strategy for our business, are
forward-looking statements. The statements contained in this discussion of
operating results, which are not historical facts, are forward-looking
statements with respect to our plans, projections or future performance, the
occurrence of which involves certain risks and uncertainties.
We were formed in 1993 and we commenced operations in 1994 pursuant to
a revenue sharing agreement with Turk Telekom. Since April 1998, we have
operated under a 25-year GSM license, which was granted upon payment of an
upfront license fee of $500 million. At this time we also entered into an
interconnection agreement with Turk Telekom for the interconnection of our
network with Turk Telekom's fixed-line network.
Under the license, we pay the Turkish Treasury a monthly treasury share
equal to 15% of our gross revenue, which includes subscription fees,
fixed-monthly fees and communication fees including taxes, charges and duties to
the Turkish Treasury. Under our interconnection agreement with Turk Telekom, we
pay Turk Telekom an interconnection fee per call based on the type and length of
call for calls originating on our network and terminating on Turk Telekom's
fixed-line network, as well as fees for other services. We also collect an
interconnection fee from Turk Telekom for calls originating on the fixed-line
network and terminating on our network. In addition, we have entered into
interconnection agreements with Telsim, Aycell and IsTim pursuant to which we
have agreed, among other things to pay interconnection fees to the other parties
for calls originating on our network and terminating on theirs and they have
agreed to pay interconnection fees for calls originating on their networks and
terminating on ours.
Prior to the award of the license, we operated under a revenue sharing
agreement with Turk Telekom. Under the revenue sharing agreement, Turk Telekom
contracted with customers, set tariffs, performed customer billing and
collection, assumed collection risks and permitted us access to Turk Telekom's
communications network. We received 100% of the fees generated by SIM card
sales, 32.9% of fees billed for connection, monthly fees and outgoing calls and
10% of fees billed for incoming calls, an arrangement which resulted in payment
to us of approximately 25% to 30% of the net system revenues generated by
customers of our GSM network.
Since the award of the license, we bear the full risks and rewards of
all aspects of our business. As a result, our results of operations for periods
prior to the grant of the license are not directly comparable to our results of
operations for periods after the award of the license. The financial statement
effects of the acquisition of the license are difficult to quantify because we
have experienced growth in revenue from both the acquisition of the license and
the expansion of our customer base. A description of the impact of the award of
the license on our revenues and costs is provided below under "--Revenues" and
"--Operating Costs".
We commenced construction of our GSM network in 1993. As of September
30, 2002, we have made capital expenditures amounting to approximately $3.7
billion including the cost of our license. As of September 30, 2002, our network
coverage area included approximately 100% of the population living in cities of
10,000 or more people, including the 81 largest cities, and a majority of the
country's tourist areas and principal intercity highways.
The build-out of our network and the development of our business to
date have required substantial operating and marketing expenditures, which
resulted in net losses in 1994, 1995 and 1996. We achieved our first full year
of positive net results in 1997. We generated net income under US GAAP of $212.0
million in 1998, $369.1 million in 1999, $227.9 million in 2000, a net loss of
$186.8 million in 2001 and net income of $65.0 million for the nine month period
ended September 30, 2002. The net income realized in the first nine months of
2002 is mainly due to the 10% increase in revenues in the first nine months of
2002 compared with the same period of 2001. Our ability to continue to grow and
to generate operating cash flows and increase operating profits in the future
will depend upon a number of factors, including: the level of competition in the
Turkish market and its effect on pricing; the stability of the Turkish economy;
our rate of churn; our ability to attract new customers to our network or retain
existing customers in our network; customer usage; the level of tariff; incoming
call revenue; and our ability to control costs relating to expanding and
enhancing the network and developing and servicing our customer base.
Our customer base has expanded from 63,500 at year-end 1994 to
approximately 2.3 million at year-end 1998, 5.5 million at year-end 1999, 10.1
million at year-end 2000, 12.2 million at year-end 2001 and 14.9 million as of
September 30, 2002. The rates of increase in 2001 and in the first nine months
of 2002 were slower than previous years, mainly due to the increase in
penetration levels and effects of the economic turmoil in 2001.
During the first quarter of 1999, we introduced a prepaid mobile
service in order to increase penetration and limit credit risk. This service
permits access to our GSM services to customers who prefer to avoid monthly
billing or to better control their mobile communication expenses. With prepaid
service, we extended the reach of our services by providing an alternative to
lower income and younger segments of the market. By September 30, 2002, 10.2
million customers had commenced usage of the prepaid service. Prepaid customers
do not pay monthly fees, and this service currently includes data, call waiting,
call barring, roaming and information line services. In addition, while
additional prepaid customers to the network increase total revenues and total
minutes of use, average minutes of use per prepaid customer and average revenue
per prepaid customer tend to be lower than for postpaid customers.
Our average monthly minutes of use per customer has decreased from
132.9 minutes in 1999 to 103.4 minutes in 2000, 63.9 minutes in 2001 and to 57.3
minutes for the first nine months of 2002. This decrease was mainly due to the
effect of recent economic crisis and the increased portion of prepaid
subscribers in our customer base. We believe that, minutes of use per customer
may continue to decrease in the fourth quarter of 2002, mainly due to the change
in the subscriber mix as well as due to seasonal effects. Our average monthly
revenue per customer decreased 10% to $12.0 for the nine month period ended
September 30, 2002 from $13.4 for the same period in 2001. The significant
economic and political difficulties in Turkey contributed to the decrease in
average revenue per customer for the nine month period ended September 30, 2002.
In addition, average revenue per customer has been negatively impacted by the
implementation of a 25% special communications tax on December 1, 1999 in
response to the earthquakes that hit Turkey in 1999. The special communications
tax was scheduled to terminate at the end of 2000 but has been extended for two
more years. The 2003 temporary budget, which was proposed prior to the November
elections and is therefore subject to amendment, called for the extension of the
special communications tax through 2003. Average revenue per customer has also
been negatively impacted as a result of the increased portion of prepaid
customers in our subscriber base. Prepaid customers represented 59% and 69% of
total subscribers by the end of the first nine months of 2001 and 2002,
respectively. Total revenues for the nine months period ended September 30, 2002
compared to the same period in 2001 increased as our customer base grows. We
expect that the proportion of prepaid subscribers in our subscriber base will
continue to increase, which may adversely affect our average monthly revenue per
customer in the fourth quarter of 2002.
Churn is calculated as the total number of customer disconnections
during a period as the percentage of the average number of customers for the
period. Churn refers to disconnected subscribers, both voluntary and
involuntary.
We adopted a shorter disconnection process on September 14, 2000 for
nonpaying subscribers. Under this disconnection process, subscribers who do not
pay their bills will be disconnected from our network, and included in churn,
upon the commencement of the legal process to disconnect them, which occurs
approximately 180 days from the due date of the unpaid bill. Pending
disconnection, non-paying subscribers are suspended from service (but are still
considered subscribers) and receive a suspension warning, which in some cases
results in payment and reinstatement of service. As a result, for the year ended
December 31, 2001, we disconnected approximately 786,000 subscribers for
nonpayment of bills and our annual churn rate was 13.1%. For the nine month
period ended September 30, 2002, we disconnected approximately 183,000
additional subscribers for nonpayment of bills. Our churn rate was 9.3% for the
nine month period ended September 30, 2002. We have a bad debt provision in our
financial statements for such non-payments and disconnections amounting to
$111.0 million and $116.7 million as of December 31, 2001 and September 30,
2002, respectively, which we believe is adequate. In previous periods, the
material portion of disconnections was due to non-payment of bills. In the first
nine months of 2002, however, subscriber disconnections were not mainly due to
non-payment of bills primarily as a result of the increase in our prepaid
subscribers, which have lower usage patterns than postpaid customers, in our
subscriber base.
International Operations
In order to facilitate the diversification of our telecommunications
business and the development of additional telecommunications services using
advanced technologies, such as digital television and Internet services, we and
several of our founding shareholders formed a new holding company in 2000 to
hold many of our non-GSM and international investments. The holding company,
Fintur Holdings B.V. (Fintur), is currently owned jointly with one of our
principal shareholders. At September 30, 2002, we own 41.45% of Fintur and the
remaining equity of Fintur is owned by Sonera Holding B.V.. As of September 30,
2002, we accounted for the investment in Fintur using the equity method.
Fintur currently holds our entire interest in all of our international
GSM investments other than our Northern Cyprus operations. Fintur may, in the
future, hold other businesses in which we decide to invest with the other Fintur
shareholders. The GSM operations of Fintur consist of the following directly or
indirectly owned assets: a 51.3% interest in Azercell Telecom B.M. of
Azerbaijan; an 83.2% interest in Geocell LLC of Georgia; a 51% interest in GSM
Kazakhstan LLP of Kazakhstan; and a 77% interest in Moldcell S.A. of Moldova.
Jointly these operators had approximately 1.5 million customers at the end of
September 30, 2002. The total population of these countries is approximately 31
million, and currently the companies' networks cover a total population of
approximately 23 million. The companies in Azerbaijan and Kazakhstan are market
leaders in their respective markets, and Geocell of Georgia and Moldcell of
Moldova are the second largest operators in their respective markets.
On February 28, 2002, the shareholders of Fintur signed a letter of
intent for the restructuring of Fintur's two business divisions, the
international GSM businesses and the technology businesses. On May 10, 2002, we
and the other shareholders of Fintur signed a Share Purchase Agreement in
connection with the restructuring of Fintur's two business divisions, which
includes the basic principles agreed in the letter of intent. On August 21,
2002, the shareholders of Fintur finalized the restructuring of Fintur's two
business divisions. In line with the terms of the transaction, we acquired an
additional 16.45% of Fintur's international GSM business from the Cukurova
Group, increasing our stake in the business to 41.45%. We also transferred our
entire interest in Fintur's technology businesses to the Cukurova Group. As of
September 30, 2002, we remain contingently liable for $63.1 million debt related
to the technology businesses. The consideration paid by us to the Cukurova Group
resulting from this transaction amounted to $70.7 million. On March 7 and May
29, 2002, we paid $35.4 million and $3.8 million to the Cukurova Group,
respectively, and on August 21, 2002 we paid the remaining $31.6 million to the
Cukurova Group. We had receivables from Fintur of $67.3 million as of August 21,
2002 (December 31, 2001: $63.2 million; September 30, 2002: $0.8 million) and on
August 22, 2002 we collected such receivables upon the completion of the
transaction. The receipt of these receivables offset a major portion of the
consideration paid by us to the Cukurova Group. Therefore, our net cash outflows
in connection with the restructuring amounted to approximately $3.5 million.
Upon the signing of the letter of intent, Fintur classified the subsidiaries in
the technology businesses as held for sale and measured them at the lower of
their carrying amount or fair value less cost to sell. Accordingly, Fintur had
an impairment charge of approximately $27 million based on its unaudited
consolidated financial statements for the three month period ended March 31,
2002. The $27 million impairment charge has been recognized in Fintur's
unaudited consolidated financial statements for the three month period ended
March 31, 2002, which had an effect amounting to approximately $6.7 million in
our consolidated results of operations for the three month period ended March
31, 2002. This transaction will enable us to focus on our core mobile business
since these GSM operations are located in countries with low mobile penetration
rates, which our management believes will provide opportunities for future
growth.
In addition to our interest in Fintur, we also have interests in other
Turkish ventures. On June 13, 2000, Turktell Bilisim Servisleri A.S. (Turktell)
was established to provide and manage marketing activities for the services
developed by us or our group companies and to act as a venture capital company
for new projects for our group companies. We have also established Global Bilgi
Pazarlama Danisma ve Cagri Servisi Hizmetleri A.S. (Global) as a subsidiary to
provide us with telemarketing, telesales, directory assistance and call center
services. In addition, we established Corbuss Kurumsal Telekom Servis Hizmetleri
A.S. (Corbuss) to provide data services for corporate customers using GSM,
satellite, Internet and digital platform technologies. Starting from January 1,
2002, the services of Corbuss are being provided within our organization. We
have also established Mapco Internet ve Iletisim Altyapilari A.S. (Mapco) for
our content aggregation and content management. Additionally, we established
Hayat Boyu Egitim A.S. (Hayat) on June 7, 2000 to provide educational digital
broadcasting services for children. On July 14, 2000, Digikids Interaktif Cocuk
Programlari Yapimciligi ve Yayinciligi A.S. (Digikids) was established to
provide entertainment services for children via Internet and television. Bilisim
ve Egitim Teknolojileri A.S. (Bilisim), established on July 24, 2000 and
Inteltek Internet Teknoloji Yatirim ve Danismanlik Ticaret A.S. (Inteltek),
established on April 6, 2001, were incorporated for search for business
opportunities on multimedia platforms. Inteltek has a new project on
installation and management of the infrastructure of sports betting activities
under the license obtained from T.C. Basbakanlik Genclik ve Spor Mudurlugu
Sportoto Teskilati Mudurlugu (Sportoto). We are also planning to establish
another subsidiary of Turktell, with a similar shareholding structure as
Inteltek's, which will act as an intermediary electronic agent via GSM, ITV, web
and call center.
Additionally, Kibris Mobile Telekomunikasyon Limited Sirketi (Kibris
Telekom) was incorporated on March 25, 1999 for the purpose of constructing and
operating a GSM network in Northern Cyprus. Kibrisonline Limited Sirketi
(Kibrisonline) was incorporated on July 10, 2000 to provide Internet services.
On April 25, 2002, Turktell transferred its shares in Siber Egitim ve
Iletisim Teknolojileri A.S. (Siber Egitim) to other shareholders of Siber Egitim
without any consideration, which resulted in a loss of $0.05 million.
At the Board of Directors meetings of Turktell held on March 13, 2002
and April 19, 2002, it was resolved that Turktell acquires total 396,825 shares
of Inteltek, owned by Superonline Uluslararasi Elektronik Bilgilendirme ve
Haberlesme Hizmetleri A.S. (Superonline) with a par value of one million TL
each. In addition, at the Board of Directors meeting of Turktell held on March
13, 2002, it was resolved that Turktell acquires one share of Inteltek owned by
Filiz Bikmen with a par value of one million TL for TL 0.25 million. At the
Board of Directors meeting held on July 19, 2002, it was resolved that Turktell
acquires total 153,170 paid shares of Inteltek, owned by Superonline with a par
value of one million TL each for TL 153,170 million. At the Board of Directors
meeting held on August 27, 2002, it was resolved that Turktell sells 137,500
paid shares of Inteltek with a par value of one million TL each to Intralot Sa
Trading, Production, Support and Management of Software and Electronic Systems
of Multiple Use-Instant Lottery for TL 137,500 million. It was also resolved
that Turktell sells 109,999 shares of Inteltek with a par value of one million
TL each to Teknoloji Holding A.S. Since the share transfers are not completed
yet, as of September 30, 2002, our ownership interest in Inteltek is 99.95%.
Upon completion of the share transfers, our ownership interest in Inteltek will
decrease to 55%.
Critical Accounting Policies
For a discussion of our critical accounting policies, please see "Item
5. Operating and Financial Review and Prospects-Critical Accounting Policies" in
our 20-F.
Revenues
Our revenues are mainly derived from communication fees, monthly fixed
fees, call center revenues and sales of SIM cards. Communication fees consist of
charges for calls that originate or terminate in our GSM network, including
international roaming, and are based on minutes of actual usage of service.
Per-minute communication fees vary according to the customer's service package.
Monthly fixed fees are charged to each postpaid customer each month in a
specified amount that varies according to the customer's service package,
without regard to actual use of our GSM network services. Prior to March 1,
2000, we charged a one-time nonrefundable subscription fee when a new customer
initially contracted with us for the provision of GSM network services. The
subscription fee was waived in many cases after the award of the license and was
finally terminated on March 1, 2000, as part of our promotions to increase our
customer base. SIM card revenues are receipts from the sale of SIM cards, which
we sell to handset importers and which are needed to operate a handset used by a
customer. Call center revenues consist of revenues for call center services
provided by our call center subsidiary to affiliated non-consolidated companies.
In March 2001, we launched General Packet Radio Services (GPRS) in Turkey, which
allows users to remain connected to the network at all times for the receipt of
data transmissions, enabling bearer capability for WAP and SMS and Internet
applications. GPRS charges to subscribers are based on the amount of data
downloaded.
Since the acquisition of our license, we have recognized subscription
fees (until their discontinuation on March 1, 2000) and SIM card sales as
revenue upon initial entry of a new customer into the GSM network, only to the
extent of the direct costs associated with providing these services. In order to
promote growth in the number of our customers, we terminated subscription fees
on March 1, 2000. Excess subscription fees, if any, were, and SIM card sales
continue to be, deferred and recognized over the estimated effective customer
life. In connection with postpaid and prepaid customers, we currently incur
costs for activation fees to dealers and other promotional expenses, which
historically offset all or substantially all of the subscription fees. We charge
a usage fee for certain services we offer, such as SMS, voicemail and data and
facsimile transmission. Our revenues depend on the number of customers, call
volume and tariff pricing.
As is the case throughout Europe, airtime charges generally are paid
only by the initiator of a call, except when a customer travels outside Turkey,
in which case we charge the customer for a portion of the incoming call.
In accordance with the Telecommunications Law, we set our tariffs
independently, within the limits of maximum prices defined by the
Telecommunications Authority, which are based on among other things, prices
abroad for comparable GSM services, the Turkish consumer price index and the US
consumer price index. We also notify the Authority at least 7 days before the
amendment of any tariff. Prior to the award of our license in April 1998, the
rates charged to customers for communication, monthly access and subscription
fees were set by Turk Telekom. We periodically raise tariffs to offset Turkish
inflation and devaluation of the Turkish Lira. As a result of the recent
economic crisis, we have taken actions to increase revenues. We raised tariffs
in January, March, June, August and November of 2001 and in February, April and
June 2002. We also launched a variety of new tariff packages to attract new
customers. Despite the limited impact of price competition thus far, we will
continue to communicate our existing price advantages, while launching a variety
of new tariff packages. Although the Amending Law has no specific regulations in
case of tariff policy, it authorizes the Telecommunications Authority to
scrutinize activities in contradiction to fair competition. On the regulatory
side, Telecommunications Authority is working towards implementation of cost
based interconnect tariffing for telecom sector.
Revenue increased by 10% for the nine month period ended September 30,
2002 compared to the same period in 2001 and increased by 21% in the third
quarter of 2002 compared to the same period in 2001. The increase in revenues is
mainly due to the growth of our subscriber base and increased usage.
We charge Turk Telekom a net amount of $0.06 per minute after deducting
VAT, communications tax and other taxes from the basic one-minute charge for
local, metropolitan and long-distance traffic switched from Turk Telekom to our
network. Prior to the award of the license, we did not receive payments from
Turk Telekom for interconnection. Starting from March 1, 2001, we charge Telsim
a net amount of $0.20 per minute for traffic switched from Telsim to us. Prior
to October 1999, we did not have an interconnection agreement with Telsim. We
entered into an interconnection agreement with IsTim Telekomunikasyon Hizmetleri
A.S. (IsTim) on February 13, 2001, that became effective on March 9, 2001, after
the Ministry of Transportation's approval. Effective March 9, 2001, we charge
IsTim a net amount of $0.20 per minute for traffic switched from IsTim to us. We
also entered into an interconnection agreement with Aycell Haberlesme ve
Pazarlama Hizmetleri A.S. (Aycell) on July 19, 2001. We charge Aycell a net
amount of $0.20 per minute for traffic switched from Aycell to us.
Under our license, we estimate that the amount after deducting treasury
share, international roaming and interconnect expenses from revenues represent
72% of our revenues for the nine month period ended September 30, 2002. Prior to
the award of our license, we received approximately 25% to 30% of net GSM
network revenues under our revenue sharing agreement with Turk Telekom.
During the third quarter of 2001, we were approached by IsTim, a new
competitor that began its operations in March 2001 under the brand name of Aria,
to negotiate a national roaming agreement. These negotiations did not result in
a mutual agreement. Therefore, the discussions continued under the supervision
of the Telecommunications Authority. The Telecommunications Authority proposed a
solution on October 18, 2001, and asked the parties to reach a decision by
November 15, 2001. The proposal included an upfront fee amounting to $60 million
as well as a per minute fee of $0.12 for voice and $0.037 for each SMS messaging
with a guaranteed volume of airtime usage of 600 million minutes until the end
of December 31, 2003. As we believe that the Telecommunications Authority is not
authorized to intervene in this issue and its proposal is technically impossible
to apply and commercially unacceptable, we obtained an injunction on November
12, 2001 from the Ankara Fourth Court of First Instance regarding the conflict,
preventing the implementation of a national roaming agreement between IsTim and
us. The Telecommunications Authority and IsTim have appealed the granting of the
injunction. In addition, on November 26, 2001, we initiated an arbitration suit
in the International Arbitral Tribunal of the International Chamber of Commerce
(ICC) against the Ministry and the Telecommunications Authority. Furthermore, we
have initiated an action before the Ankara Ninth Administrative Court on
November 13, 2001, to annul the above-mentioned proposed solution of the
Telecommunications Authority. On December 6, 2001, the Ankara Fourth Court of
First Instance upheld our injunction that it rendered in our favor on November
12, 2001. We have commenced an arbitral proceeding against the Ministry and the
Telecommunications Authority in accordance with the supplemental agreement
relating to resolution of the disputes arising in connection with the License
Agreement signed and entered into by and between us and the Ministry on May 15,
2001. The cases are currently pending and the parties are filing their petition
and responses.
On March 8, 2002, the Telecommunications Authority published a new
regulation regarding procedures and policies related to a national roaming
agreement. The Telecommunications Authority has invited all parties affected by
the new regulation, including us, to discuss the new regulations with the
Telecommunications Authority. Two of the most important provisions of the new
regulation are Provisional Article 1 and Article 17. Provisional Article 1,
which deals with negotiations, agreements and documents relating to the issuance
of this regulation, states that all ongoing negotiations shall continue in
compliance with the new regulation and that all agreements and documents
completed before issuance of the new regulation shall remain valid and binding.
Article 17, which sets out penalties to be imposed on any party violating the
provisions of the new regulation, imposes the following penalties and sanctions:
o a penalty of 0.01% of an operator's turnover in the previous
year for failure to provide the documents or information
requested by the Telecommunications Authority, or the provision
of defective or misleading information;
o a penalty of no less than 1% and no more than 3% of an
operator's turnover in the previous year for failure to
implement the national roaming requirements set by the
Telecommunications Authority within the required time period;
and
o a penalty of no less than 1% and no more than 3% of an
operator's turnover in the previous year for the interruption of
service without a valid reason following commencement of
national roaming service.
If we are forced to enter a national roaming agreement with IsTim
and/or the other operators in Turkey on terms and conditions that do not provide
an adequate return on our investment in our GSM network, our financial position,
results of operations and cash flows could be materially adversely affected.
In a letter dated March 14, 2002, the Telecommunications Authority
subjected IsTim's request for national roaming to the condition that it be
reasonable, economically viable, and technically possible. Nevertheless, the
Telecommunications Authority declared that we are under an obligation to enter a
national roaming agreement with IsTim within a 30 day period. However, we still
benefit from the injunctive relief obtained on November 12, 2001.
On April 8, 2002, we obtained a cautionary injunction from the Court
against the application of the new regulation published by the
Telecommunications Authority requiring us to agree on national roaming within 30
days and providing for penalties in case we did not agree. We initiated
proceedings against application of the new regulation before the ICC on April
11, 2002, requesting certification of the fact that we are not required to enter
into an agreement within 30 days and that we are under no obligation to pay any
penalties whatsoever if we do not agree within 30 days. We believe that Telsim
has obtained a similar injunction but has not yet enforced it. The parties have
appointed their arbitrators and third arbitrator has been appointed by the ICC
International Court of Arbitration since those two arbitrators of the parties
cannot reach an agreement.
We have not been approached by Aycell regarding entering into a
national roaming agreement.
Operating Costs
Direct Cost of Revenues
Direct cost of revenues include mainly treasury share payments,
transmission fees, base station rents, billing costs, depreciation and
amortization charges, technical, repair and maintenance expenses directly
related to services rendered, roaming charges paid to foreign GSM network
operators for calls made by our customers while outside Turkey, interconnection
fees paid to Telsim, IsTim, Aycell and Turk Telekom and wages, salaries and
personnel expenses for technical personnel. Direct costs of revenues also
include costs arising from legal disputes, which relates items included in
direct cost of revenues.
Under the Turk Telekom interconnection agreement, we pay Turk Telekom
interconnection fees of $0.06 per minute for calls to our GSM network, $0.014
per minute for local calls from our network to the Turk Telekom fixed-line
network and $0.025 per minute for non-local calls from our network to the Turk
Telekom fixed-line network. Prior to the award of the license, we did not pay
treasury share. In addition, we did not pay Turk Telekom separately for
interconnection. Interconnection costs were covered in the revenues that Turk
Telekom retained under the Revenue Sharing Agreement.
Effective March 1, 2001, we pay Telsim a net amount of $0.20 per minute
for traffic switched from us to Telsim. Prior to October 1999, we did not have
an interconnection agreement with Telsim. Calls originating on our network and
terminating on the Telsim network were routed through the Turk Telekom network
and we paid Turk Telekom for the interconnection. We entered into an
interconnection agreement with IsTim that became effective on March 9, 2001,
after the Ministry of Transportation's approval. Under the IsTim interconnection
agreement, each party agreed, among other things, to permit the interconnection
of its network after the other's network to enable calls to be transmitted to,
and received from, the GSM system operated by each party in accordance with
technical specifications set out in the interconnection agreement. Starting from
March 9, 2001, we pay IsTim a net amount of $0.20 per minute for traffic
switched from us to IsTim. We also entered into an interconnection agreement
with Aycell on July 19, 2001. We pay Aycell a net amount of $0.20 per minute for
traffic switched from us to Aycell. These charges are included in direct cost of
revenues.
General and Administrative
General and administrative expenses consist of fixed costs, including
services provided from outside sources, company cars, office rent, office
maintenance, insurance, consulting, payroll and other overhead charges. In
addition, while these expenses are generally related to the size of our employee
base, the general and administrative expense per employee has decreased over the
past four years due to economies of scale. Since the award of the license in
April 1998, our general and administrative expenses also include bad debt
expenses of our postpaid customers.
Selling and Marketing
Selling and marketing expenses consist of public relations, sales
promotions, dealer activation fees, advertising, wages and salaries and
personnel expenses of sales and marketing related employees and other expenses,
including travel expenses, office expenses, insurance, company car expenses,
training expenses and telephone cost services.
The average acquisition cost was approximately $43 and $27 per new
customer for the nine month periods ended September 30, 2001 and 2002,
respectively. We compute average acquisition cost per new customer by adding
sales promotion expenses, simcard subsidies, activation fees and special
transaction tax and dividing the sum by the gross number of new customers for
the related period. These costs are recorded as either selling and marketing
expense or reduction of revenue in our statements of operations. We believe that
despite the recent decline in acquisition costs, the average acquisition cost
may increase in the future as a result of increased spending of our competitors
in the market to attract new customers.
The following table shows certain items in our statement of operations
as a percentage of revenues.
Year ended Nine Months ended Three Months ended
December 31, September 30, September 30,
2000 2001 2001 2002 2001 2002
---- ---- ---- ---- ---- ----
Statement of Operations (% of revenue)
Revenues
Communication fees 88.2% 93.9% 93.4% 96.8% 95.5% 97.5%
Monthly fixed fees 10.4 4.9 5.5 2.1 3.0 1.7
SIM card sales 1.0 0.7 0.6 0.6 1.0 0.4
Call center revenues 0.3 0.5 0.4 0.4 0.4 0.3
Other 0.1 0.0 0.1 0.1 0.1 0.1
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0
Direct cost of revenues (58.0) (69.0) (67.8) (68.3) (70.1) (65.0)
Gross margin 42.0 31.0 32.2 31.7 29.9 35.0
General and administrative expenses (9.1) (7.6) (8.0) (5.3) (6.2) (4.7)
Selling and marketing expenses (12.3) (10.6) (9.5) (9.7) (6.2) (8.4)
Operating income 20.6 12.8 14.7 16.7 17.5 21.9
Nine month period ended September 30, 2002 compared to nine month period ended
September 30, 2001 and three month period ended September 30, 2002 compared to
the three month period ended September 30, 2001
We had 14.9 million customers, including 10.2 million prepaid
customers, as of September 30, 2002, compared to 11.8 million customers,
including 6.9 million prepaid customers, as of September 30, 2001. During the
first nine months of 2002, we added approximately 2.7 million net new customers.
We added 1.05 million net new subscribers to our network in the third quarter of
2002 compared to 0.47 million net new subscribers for the corresponding period
in 2001.
Revenues
Total revenues for the nine month period ended September 30, 2002
increased 10% to $1,469.0 million from $1,331.7 million for the same period in
2001. The increase in revenues is mainly due to the growth of the subscriber
base. For the same reasons, revenue increased 21% to $534.3 million in the third
quarter of 2002 from $440.6 million in the corresponding period in 2001. We
expect revenues to decrease in the fourth quarter of 2002 due to the negative
seasonality impact of winter months and Ramadan.
Revenues from communication fees for the nine month period ended
September 30, 2002 increased 14% to $1,421.4 million from $1,244.5 million for
the same period in 2001 mainly due to the increase in tariffs and the growth of
our subscriber base. Revenues from communication fees increased 24% to $521.1
million in the third quarter of 2002 from $420.6 million in the corresponding
period of 2001 for the same reasons. Communication fees include SMS revenue,
which amounted to $135.7 million for the nine month period ended September 30,
2002, $125.6 million for the same period in 2001, $46.3 million for the three
month period ended September 30, 2002 and $38.0 million for the three month
period ended September 30, 2001. As the monthly fixed fee in Turkish Lira
remained the same for the period between May 15, 2001 and September 30, 2002,
devaluation effects caused monthly fixed fees to decline as a percentage of
revenues. Accordingly, revenues from monthly fixed fees for the nine month
period ended September 30, 2002 decreased 57% to $31.5 million from $73.0
million for the same period in 2001. In addition, monthly fixed fees decreased
30% to $9.2 million in the third quarter of 2002 from $13.1 million in the third
quarter of 2001. SIM card revenues for the nine month period ended September 30,
2002 increased 21% to $9.2 million from $7.6 million for the same period in
2001. SIM card revenues decreased 58% to $1.9 million in the third quarter of
2002 from $4.5 million in the third quarter of 2001.
In 2001, the Emerging Issues Task Force (EITF) within the Financial
Accounting Standards Board (the FASB) discussed EITF 00-14 "Accounting for
Certain Sales Incentives", EITF 00-22 "Accounting for Points and Certain Other
Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
or Services to Be Delivered in the Future" and EITF 00-25 "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products", which in November 2001 led to the issuance of EITF 01-09 "Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products". EITF 00-14, 00-22 and 00-25 address the extent to which different
types of payments or benefits to retailers or customers shall be reported as
reductions in revenue or expenses. EITF 01-09 codifies and reconciles standards
in the area. The regulations are effective for annual or interim periods
beginning after December 15, 2001. We have adopted EITF 01-09 on January 1,
2002. As a result of applying the provisions of EITF 01-09, our revenues, gross
profit, and selling and marketing expenses each were reduced by an equal amount
of $71.8 million and $16.9 million in the first nine months of 2001 and third
quarter of 2001, respectively. As a result of applying the provisions of EITF
01-09, we have reduced our revenues, gross profit and selling and marketing
expenses by an equal amount of $65.8 million and $22.5 million in the first nine
months of 2002 and third quarter of 2002, respectively. The adoption of EITF
01-09 had no impact on operating income, net income (loss) or earnings (loss)
per share. As a result of the application of EITF 01-09 to prior periods,
certain figures provided in this review will differ from figures provided
previously.
Direct cost of revenues
Direct cost of revenues increased 11% to $1,003.5 million for the nine
month period ended September 30, 2002 from $903.5 million for the same period in
2001 mainly due to the increase in revenue-based costs such as the treasury
share paid to the Turkish Treasury, which increased 16% to $252.1 million for
the first nine month period ended September 30, 2002 from $218.0 million for the
same period in 2001. For the same reason, direct cost of revenues increased 12%
to $347.4 million in the third quarter of 2002 from $309.0 million in the third
quarter of 2001. Treasury share increased 31% to $92.4 million in the third
quarter of 2002 compared to $70.4 million in the third quarter of 2001. Treasury
share increased due to the increase in revenue. Interconnection costs increased
27% to $143.7 million for the first nine month period ended September 30, 2002
from $113.0 million for the same period in 2001, mainly due to the effect of
renegotiation of interconnection terms with Telsim in line with the agreements
signed with IsTim and Aycell and the increase in transmission costs.
Interconnection costs increased 79% to $57.2 million in the third quarter of
2002 from $32.0 million in the third quarter of 2001, mainly due to the increase
in off net traffic.
Transmission costs, site costs, information technology and network
maintenance expenses increased slightly to $130.2 million for the first nine
month ended September 30, 2002 from $129.5 million in 2001. Those expenses
decreased 42% to $36.2 million in the third quarter of 2002 from $62.5 million
in the same period of 2001, mainly due to the decrease in site costs as a result
of the finalization of the project aimed to remove our GSM equipment from Turk
Telekom sites. In addition, uncapitalizable antenna site costs and expenses
increased 24% to $49.8 million for the nine month period ended September 30,
2002 from $40.2 million for the same period in 2001. Uncapitalizable antenna
site costs and expenses increased 41% to $16.5 million for the third quarter of
2002 from $11.7 million for the third quarter of 2001.
Roaming expenses decreased 5% to $22.5 million for the nine month
period ended September 30, 2002 from $23.7 million for the same period in 2001.
Roaming expenses increased 9% to $8.5 million in the third quarter of 2002 from
$7.8 million in the third quarter 2001, mainly due to the increase in roaming
revenue generated from the calls made by our customers while outside Turkey,
primarily reflecting the decreasing effect of economic crisis.
Billing costs increased 8% to $15.6 million for the nine month period
ended September 30, 2002 from $14.5 million for the same period in 2001,
principally due to the increase in postage fees. Due to the same reason, billing
costs increased 18% to $5.2 million in the third quarter of 2002 from $4.4
million in the third quarter of 2001.
Depreciation and amortization expenses increased 6% to $309.4 million
for the nine month period ended September 30, 2002 from $292.8 million for the
same period in 2001 as a result of an increase in fixed assets and intangibles
due to additional capitalization of network investments in the second half of
2001 and in the first half of 2002. Due to the same reasons, depreciation and
amortization expenses increased 4% to $104.1 million for the third quarter in
2002 from $99.9 million for the third quarter in 2001. The amortization expense
for our GSM license was $15.0 million both for the first nine months of 2002 and
2001.
The cost of SIM cards sold increased 12% to $23.4 million for the nine
month period ended September 30, 2002 from $20.8 million for the same period in
2001, reflecting primarily an increase in the number of prepaid SIM cards sold
during the first nine months of 2002. The cost of SIM cards sold decreased 1% to
$7.2 million for the third quarter of 2002 from $7.3 million for the third
quarter of 2001.
Wages and salaries and personnel expenses for technical personnel
decreased 10% to $34.1 million for the nine month period ended September 30,
2002 from $37.8 million for the same period in 2001. The decrease was primarily
due to reduction in the headcount between March 31, 2001 and September 30, 2002.
Wages and salaries and personnel expenses for technical personnel increased 15%
to $10.5 million for the third quarter of 2002 from $9.1 million for the third
quarter of 2001. The increase in wages and salaries and personnel expenses
experienced in the third quarter of 2002 stemmed mainly from the temporary
unpaid leaves as a result of cost cutting efforts undertaken in the third
quarter of 2001.
As a percentage of revenue, direct cost of revenues remained stable at
68% for the nine month period ended September 30, 2002 and 2001. In addition, as
a percentage of revenue, direct cost of revenues decreased to 65% for the third
quarter of 2002 from 70% for the third quarter of 2001.
General and administrative expenses
General and administrative expenses decreased 27% to $77.3 million for
the nine month period ended September 30, 2002 from $106.6 million for the same
period in 2001, mainly due to positive effects of cost saving efforts undertaken
by us after the first quarter of 2001, decreased bad debt expenses and a
decrease in wages and salaries. For the same reasons, general and administrative
expenses decreased 7% to $25.1 million in the third quarter of 2002 from $27.1
million in the third quarter of 2001. As a percentage of revenues, general and
administrative expenses were 5% for the nine month period ended September 30,
2002 compared to 8% for the same period in 2001. In addition, as a percentage of
revenues, general and administrative expenses were 5% for the three month period
ended September 30, 2002 compared to 6% for the corresponding period in 2001.
Bad debt expenses decreased 46% to $27.3 million for the nine month
period ended September 30, 2002 from $50.5 million for the same period in 2001
mainly due to the increased proportion of prepaid subscribers in our customer
base, improved collection activities such as credit scoring, and new collection
channels and improvement in the legal follow-up system to decrease fraud. For
the same reasons, bad debt expenses decreased 11% to $8.7 million in the third
quarter of 2002 from $9.8 million in the third quarter of 2001. We provided an
allowance for doubtful receivables identified based upon past experience in our
consolidated financial statements.
Rent expense increased 3% to $3.2 million for the nine month period
ended September 30, 2002 from $3.1 million for the nine month period ended
September 30, 2001. Rent expense increased 11% to $1.0 million in the third
quarter of 2002 from $0.9 million in the third quarter of 2001.
Consulting expenses increased 5% to $6.9 million for the nine month
period ended September 30, 2002 from $6.6 million for the same period in 2001,
mainly due to consulting expenses related to due diligence and relevant
fair-value assessments in connection with the restructuring of Fintur incurred
in the second quarter of 2002. Consulting expenses decreased 62% to $1.4 million
for the third quarter of 2002 from $3.7 million for the third quarter of 2001,
mainly due to the consulting expenses incurred in the third quarter of 2001
related to our capital increase.
Wages, salaries and personnel expenses for non-technical and
non-marketing employees decreased 16% to $12.8 million for the nine month period
ended September 30, 2002 from $15.2 million for the same period in 2001. The
decrease was mainly due to the decrease in devaluation of the Turkish Lira
against the US Dollar to 13% in the nine month period ended September 30, 2002
from 56% in the nine month period ended September 30, 2001. These expenses were
$4.1 million both for the third quarter of 2002 and 2001.
Selling and marketing expenses
Selling and marketing expenses increased 13% to $142.7 million for the
nine month period ended September 30, 2002 from $126.7 million for the same
period in 2001, mainly due to the increase in advertising expenses related with
additional marketing. Due to the same reasons, selling and marketing expenses
increased 63% to $44.8 million in the third quarter of 2002 from $27.5 million
in the third quarter of 2001. As a percentage of revenues, selling and marketing
expenses were 10% for both of the nine month periods ended September 30, 2002
and 2001. In addition, as a percentage of revenues, selling and marketing
expenses increased to 8% for the third quarter of 2002 from 6% for the same
period in 2001. Selling and marketing expenses for the nine month period ended
September 30, 2001 and for the three month period ended September 30, 2001 were
reduced by $71.8 million and $16.9 million, respectively, due to the adoption of
EITF 01-09 as discussed above. We expect our selling and marketing expenses to
slightly increase as a percentage of revenue in the fourth quarter of 2002 due
to expected seasonal drop in revenue.
Total postpaid advertising, market research, product management, public
relation and call center expenses increased 48% to $53.8 million for the nine
month period ended September 30, 2002 from $36.3 million for the same period in
2001 mainly due to increased advertising and product management activities. For
the same reasons, total postpaid advertising, market research, product
management, public relation and call center expenses increased 34% to $14.3
million in the third quarter of 2002 from $10.7 million in the third quarter of
2001.
Total prepaid advertising, market research, product management, public
relations expenses and prepaid subscribers' frequency usage fee expenses
increased 8% to $31.9 million for the nine month period ended September 30, 2002
from $29.5 million for the same period in 2001. The increase in the first nine
months of 2002 stemmed mainly from the fact that the increase in prepaid
advertising expenses incurred for additional marketing campaigns is higher than
the decrease in prepaid subscribers' frequency usage fees, which were not
expensed for the nine month period ended September 30, 2002 as a result of the
court decree described below. Due to the same reason, total prepaid advertising,
market research, product management and public relation expenses increased 36%
to $13.1 million in the third quarter of 2002 from $9.6 million in the third
quarter of 2001. Until the end of 2001, we were required to collect frequency
usage fees from the taxpayers using mobile phones on behalf of the
Telecommunications Authority and pay the levied tax to the Telecommunications
Authority. On March 22, 2002, as a consequence of the impossibility in fact and
at law of collecting such tax from our prepaid subscribers, we applied to the
court and obtained an injunction in respect of the collection of the frequency
usage fees. Immediately after this decision, on March 27, 2002, we filed a
lawsuit against the Telecommunications Authority requesting cancellation of the
protocols obligating us to collect the frequency usage fees from the subscribers
and to pay it to the Telecommunications Authority. On July 10, 2002 the court
decided in our favour. Therefore, we did not pay and provide an accrual for the
frequency usage fees in our consolidated financial statements as of and for the
nine month period ended September 30, 2002. We and our legal counsel believe
that we will prevail in this matter. However, the Telecommunications Authority
has appealed the decision.
Total sales promotion expenses decreased 29% to $1.5 million for the
nine month period ended September 30, 2002 from $2.1 million for the same period
in 2001, primarily due to the positive effects of cost saving efforts undertaken
by us after the first quarter of 2001. Total sales promotion expenses increased
to $0.4 million in the third quarter of 2002 from nil in the third quarter of
2001, mainly as a result of new sales promotion campaigns for our prepaid
services. Of the total sales promotion expenses for the nine month period ended
September 30, 2002, for the nine month period ended September 30, 2001, for the
three month period ended September 30, 2002 and for the three month period ended
September 30, 2001, $1.6 million, $0.9 million, $0.6 million and $0.4 million
were for prepaid sales promotion activities, respectively.
Activation fees increased 11% to $29.0 million for the nine month
period ended September 30, 2002 from $26.1 million for the same period in 2001.
Activation fees increased 49% to $8.8 million in the third quarter of 2002 from
$5.9 million in the third quarter of 2001, mainly due to the increase in new
additions to subscriber base. Of the total dealer activation fees for the nine
month period ended September 30, 2002, for the nine month period ended September
30, 2001, for the three month period ended September 30, 2002 and for the three
month period ended September 30, 2001, $24.1 million, $18.9 million, $7.2
million and $4.6 million were for prepaid activations, respectively.
Wages, salaries and personnel expenses for selling and marketing
employees increased 39% to $16.0 million for the nine month period ended
September 30, 2002 from $11.5 million for the same period in 2001, mainly due to
the temporary unpaid leaves as a result of cost cutting efforts undertaken in
the first nine months of 2001. For the same reason, wages, salaries and
personnel expenses for selling and marketing employees increased 68% to $4.7
million in the third quarter of 2002 from $2.8 million in the third quarter of
2001.
Operating income
Operating income increased 26% to $245.5 million for the nine month
period ended September 30, 2002 from $194.9 million for the same period in 2001,
mainly due to the increase in our revenues and decrease in general and
administrative expenses and despite an increase in our operating costs resulting
from an increase in revenue-based costs. Operating income increased 52% to
$117.0 million in the third quarter of 2002 from $77.0 million in the third
quarter of 2001 for the same reasons.
Income from related parties, net
Income from related parties, which includes sales of GSM equipment and
SIM cards and charges for management, promotional materials and technical
advisory services provided to Azercell, Moldcell, Global Georgia, Geocell and
GSM Kazakhstan net of cost of goods sold after accounting for intercompany
profit elimination was $0.1 million for the nine month period ended September
30, 2002 compared to $2.2 million for the same period in 2001. Income from
related parties was nil in the third quarter of 2002 compared to $1.1 million in
the third quarter of 2001.
Interest income (expense), net
Net interest expense decreased 13% to $139.4 million for the nine month
period ended September 30, 2002 from $160.6 million for the same period in 2001,
mainly due to principal repayments of loans in the first nine months of 2001 and
first nine months of 2002. For the same reason, net interest expense decreased
19% to $45.4 million in the third quarter of 2002 from $56.0 million in the
third quarter of 2001.
Other income (expense), net
Other income, net amounted to $2.7 million for the nine month period
ended September 30, 2002, compared to an expense of $15.1 million for the same
period in 2001. Other expense, net amounted to $2.7 million for the three month
period ended September 30, 2002 compared to an expense of $13.8 million for the
same period of 2001.
Translation gain/(loss)
We have recorded a translation loss of $20.7 million for the nine month
period ended September 30, 2002, compared to a translation loss of $130.9
million for the same period in 2001. The decrease in translation loss
experienced in the first nine month period of 2002 stemmed from the 13%
devaluation of the Turkish Lira against the US Dollar in the first nine month
period of 2002 compared to the 56% devaluation of the Turkish Lira against the
US Dollar in the first nine month period of 2001. Translation loss decreased 56%
to $10.4 million in the third quarter of 2002 from $23.5 million in the third
quarter of 2001. The decrease in translation loss in the third quarter of 2002
resulted from the 5% devaluation of the Turkish Lira against the US Dollar in
the third quarter of 2002 compared to the 18% devaluation during the third
quarter of 2001.
Income tax benefit (expense)
Income tax benefit under US GAAP was nil for the nine month period
ended September 30, 2002 compared to an income tax benefit of $8.8 million for
the same period in 2001. We have experienced significant losses and have
historically provided a valuation allowance on certain deferred tax assets,
which we determined it is more likely than not that they would not be
recognized. We have recently begun to be profitable. However, no provision for
income taxes has been made as we can offset the provision against net operating
loss carryforwards. We will continue to monitor the valuation allowance, and if
profits continue in the future, we may reverse a portion of valuation allowance.
Income tax benefit was nil both in the third quarter of 2002 and 2001. As of
September 30, 2002, we have generated approximately $325.4 million of potential
future tax benefit from tax credit carry forwards arising under our Investment
Incentive Certificates. See "--Investment Incentive Certificates".
Equity in net income (loss) of unconsolidated investees
Equity in net loss of unconsolidated investees was $23.4 million for
the nine month period ended September 30, 2002 whereas equity in net loss of
unconsolidated investees was $41.6 million in the same period 2001. Equity in
net income of unconsolidated investees was $0.2 million in the third quarter of
2002 whereas the equity in net loss of unconsolidated investees was $11.5
million in the third quarter of 2001. Equity in net income (loss) of
unconsolidated investees figure is not comparable to the previous quarter's
figure as the technology businesses operated by Fintur have been transferred to
the Cukurova Group and our ownership of Fintur has increased from 25% to 41.45%
due to the restructuring of Fintur completed in August 2002.
Net income (loss)
Net income was $65.0 million for the nine month period ended September
30, 2002 compared to the net loss of $141.8 million in the same period of 2001.
The change was mainly due to the decrease in devaluation of the Turkish Lira
against the US Dollar, which resulted in a translation loss of $20.7 million for
the nine month period ended September 30, 2002 compared to the translation loss
of $130.9 million in the same period of 2001. For the same reason, net income
was $58.8 million in the third quarter of 2002 compared to net loss of $26.6
million in the third quarter of 2001.
Taxation Issues in Telecommunications Sector
For a discussion of Turkish Tax legislation on telecommunications
revenues, please see "Item 5A. Operating Results-Taxation Issues in
Telecommunications Sector" in the 20-F. There have been no material changes in
the taxes imposed on telecommunications services since the date of the 20-F.
Investment Incentive Certificates
In 1993, 1997, 2000 and 2001, the Undersecretariat of the Treasury
approved investment incentive certificates for a program of capital expenditures
by us and our subsidiaries in our mobile communications operations and call
center operations. Such incentives entitle us to a 100% exemption from customs
duty on imported machinery and equipment and an investment tax benefit of 100%
on qualifying expenditures. The investment tax benefit takes the form of
deductions for corporation tax purposes, but these deductions are subject to
withholding tax at the rate of 19.8%. Investment incentive certificates provide
for tax benefits on cumulative purchases of up to approximately $3.3 billion in
qualifying expenditures. As of September 30, 2002, we had incurred cumulative
qualifying expenditures of approximately $2.5 billion ($2.1 billion as of
December 31, 2001), resulting in tax credit carryforwards under the certificates
of approximately $325.4 million ($271.7 million as of December 31, 2001), net of
foreign exchange translation losses. Such tax credits can be carried forward
indefinitely. However, as of September 30, 2002, a valuation allowance of
approximately $525.0 million has been recorded against such amount, as we
believe that currently there exists significant uncertainty regarding the
realizability of tax credit carryforwards ($539.7 million as of December 31,
2001). The certificates are denominated in Turkish Lira. However, approximately
$2.2 billion of qualifying expenditures through September 30, 2002 ($2.0 billion
as of December 31, 2001) under the certificates are indexed against future
inflation.
Recapitalization
On March 30, 2001, our General Assembly Meeting authorized an increase
in our authorized share capital from TL 240 trillion to TL 263.8 trillion. In
May 2001, we announced that we would increase our capital from TL 240 trillion
to approximately TL 263.8 trillion through a bonus share issue. The TL 23.8
trillion increase was profit gained from the sale of certain of our subsidiaries
in June 2000.
On May 16, 2001, we announced our intention to increase our authorized
share capital by approximately TL 236.2 trillion (approximately $178 million at
the payment dates) through a rights offering, assuming the rights are exercised
in full. During the rights issue, we offered qualifying shareholders the
opportunity to subscribe for approximately 236 billion new ordinary shares at a
subscription price of TL 1,000 per ordinary share. During the subscription
period, the take up rate for the rights issue was approximately 99.97%, which
resulted in our receiving gross proceeds of approximately $178 million. We
completed the offering in August 2001. We used the proceeds from the rights
issue for debt repayment and to strengthen our cash position. As of September
30, 2002, our share capital was $636.1 million.
Effects of Inflation
The annual inflation rates in Turkey were 39.0% and 68.5% for the years
ended December 31, 2000 and 2001, respectively, based on the Turkish consumer
price index. Annual inflation rates were 37.0% as of September 30, 2002 and
61.8% for the same period in 2001. Within a hyperinflationary economy such as
Turkey's, holding TL-denominated monetary assets in excess of TL-denominated
monetary liabilities results in a loss as the real value of the net monetary
assets decreases in line with the inflation rate. In a situation where monetary
liabilities exceed monetary assets, a gain results as the real value of the net
liabilities decreases. In order to try to contain inflation rates that have
averaged about 60% per annum over the past three years, the Turkish government
has implemented policies, including certain austerity measures that could have a
negative impact on the Turkish economy and on our profitability.
New Accounting Standards Issued
In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No.142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after September 30, 2001 as well as all purchase method business
combinations completed after September 30, 2001. SFAS No. 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of this
statement. SFAS No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". As of September 30, 2002, we do not have any goodwill
or indefinite live intangible assets. We have adopted these statements on
January 1, 2002. This adoption did not have a material effect on our
consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. This statement addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. We have not
determined the impact, if any, of the adoption of SFAS No. 143 on our
consolidated financial position or results of operations.
On October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 is effective for the fiscal years beginning after December 15,
2001. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", it retains
many of the fundamental provisions of that statement. SFAS No. 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of a business. However,
it retains the requirement in APB Opinion No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. By broadening the presentation of
discontinued operations to include more disposal transactions, the FASB has
enhanced managements' ability to provide information that helps financial
statement users to assess the effects of a disposal transaction on the ongoing
operations of an entity. We have adopted SFAS No. 144 on January 1, 2002. The
adoption did not have a material impact on our financial position, results of
operations, or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", an amendment of APB Opinion No. 30, that required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria set forth by APB Opinion 30 will now be used to classify
those gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longer
necessary because SFAS No. 4 has been rescinded. SFAS No. 44 was issued to
establish accounting requirements for the effects of transition to the
provisions of the Motor Carrier Act of 1980. SFAS No. 145 also amends SFAS No.
13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 also makes non-substantive technical
corrections to existing pronouncements. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002 with earlier adoption encouraged. We have not
determined the impact, if any, of the adoption of SFAS No. 145 on our
consolidated financial position or results of operations.
In 2001, the Emerging Issues Task Force (EITF) within the FASB
discussed EITF 00-14 "Accounting for Certain Sales Incentives", EITF 00-22
"Accounting for Points and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to Be Delivered in
the Future" and EITF 00-25 "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products", which in November
2001 led to the issuance of EITF 01-09 "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor's Products". EITF 00-14, 00-22
and 00-25 address the extent to which different types of payments or benefits to
retailers or customers shall be reported as either reductions in revenue or
expenses. EITF 01-09 codifies and reconciles standards in the area. The
regulations are effective for annual or interim periods beginning after December
15, 2001. We adopted EITF 01-09 on January 1, 2002. As a result of applying the
provisions of EITF 01-09, our revenues, gross profit, and selling and marketing
expenses each were reduced by an equal amount of $71.8 million and $16.9 for the
nine month and three month periods ended September 30, 2001, respectively. The
adoption of EITF 01-09 had no impact on our operating income, net income (loss)
or earnings (loss) per share.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. An entity would continue to apply
the provisions of EITF 94-3 to an exit activity that it initiated under an exit
plan that met the criteria of EITF 94-3 before the entity initially applied SFAS
No. 146. We have not determined the impact, if any, of the adoption of SFAS No.
146 on our consolidated financial position or results.
Liquidity and Capital Resources
Liquidity
We require significant liquidity to finance capital expenditures for
the expansion and improvement of our GSM network, for non-operational capital
expenditures, for working capital and to service our debt obligations. To date,
these requirements have been funded largely through supplier financings, bank
borrowings, and the issuance of $700 million in bonds by a special purpose
finance vehicle, Cellco Finance N.V. (Cellco), which issued $300 million of debt
securities in July 1998 and $400 million of debt securities in December 1999,
and a rights issue. As of September 30, 2002, total outstanding payables related
to the Cellco transaction was $700 million.
The net cash provided by our operating activities for the nine month
periods ended September 30, 2001 and 2002 amounted to $164.8 million and $396.1
million, respectively. The increase in 2002 was primarily due to net income
recorded for the nine month period ended September 30, 2002 compared with net
loss for the same period in 2001.
The net cash used for investment activities for the nine month period
ended September 30, 2001 and 2002 amounted to $154.8 million and $131.1 million,
respectively. From our formation through September 30, 2002, we made total
capital expenditures for assets of $3.7 billion including our license, of which
$87.3 million was for construction in progress and $2,067.3 million was for the
build-out of the network. We also invested $667.1 million in computer software
over that period. In February 1999, July 1999, January 2000 and January 2001, we
signed contracts with Ericsson, our primary equipment supplier, to purchase
approximately $514 million, $551 million, $640 million and $400 million,
respectively, of equipment to expand and improve our network. Total investments
in investees amounted to $103.7 million as of September 30, 2002 compared to
$68.2 million as of September 30, 2001.
On February 28, 2002, the shareholders of Fintur signed a letter of
intent for the restructuring of Fintur's two business divisions, the
international GSM businesses and the technology businesses. On May 10, 2002, we
and the other shareholders of Fintur Holdings B.V. signed a Share Purchase
Agreement in connection with the restructuring of Fintur's two business
divisions, which includes the basic principles agreed in the letter of intent.
On August 21, 2002, the shareholders of Fintur finalized the restructuring of
Fintur's two business divisions. In line with the terms of the transaction, we
acquired an additional 16.45% of Fintur's international GSM business from the
Cukurova Group, increasing our stake in the business to 41.45%. We also
transferred our entire interest in Fintur's technology businesses to the
Cukurova Group. As of September 30, 2002, we remain contingently liable for
$63.1 million debt related to the technology businesses. The consideration paid
by us to the Cukurova Group resulting from this transaction amounted to $70.7
million. On March 7 and May 29, 2002, we paid $35.4 million and $3.8 million to
the Cukurova Group, respectively, and on August 21, 2002 we paid the remaining
$31.6 million to the Cukurova Group. We had receivables from Fintur of $67.3
million as of August 21, 2002 (December 31, 2001: $63.2 million; September 30,
2002: $0.8 million), and on August 22, 2002 we collected such receivables upon
the completion of the transaction. The receipt of these receivables offset a
major portion of the consideration paid by us to the Cukurova Group. Therefore,
our net cash outflows in connection with the restructuring amounted to
approximately $3.5 million. Upon the signing of the letter of intent, Fintur
classified the subsidiaries in the technology businesses as held for sale and
measured them at the lower of their carrying amount or fair value less cost to
sell. Accordingly, Fintur had an impairment charge of approximately $27 million
based on its unaudited consolidated financial statements for the three month
period ended March 31, 2002. The $27 million impairment charge has been
recognized in Fintur's unaudited consolidated financial statements for the three
month period ended March 31, 2002, which had an effect amounting to
approximately $6.7 million in our consolidated results of operations for the
three month period ended March 31, 2002. This transaction will enable us to
focus on our core mobile business since these GSM operations are located in
countries with low mobile penetration rates, which our management believes will
provide opportunities for future growth.
The net cash used for financing activities for the nine month period
ended September 30, 2001 and 2002 amounted to $240.0 million and $202.7 million,
respectively. As of September 30, 2002, $1,396.9 million was outstanding as
short-term and long-term borrowings. We also entered into lease agreements in
the amount of $66.7 million with various leasing companies ($63.2 million for
our headquarters and other real estate and $3.5 million for computers installed
at the building, office equipment and company cars). On November 24, 1999, we
entered into another bank facility, which provides for $550 million of senior
amortizing term loan facilities. We made our first drawing in the amount of
$332.5 million on December 9, 1999 under this bank facility, and as of September
30, 2002, $244.4 million was outstanding.
On November 9, 2000, we signed a loan agreement for three years
amounting to $200 million for investment financing purposes. The lender under
the agreement is Akbank T.A.S. (Akbank). The loan will be repaid in semi-annual
installments starting on November 11, 2002, and the repayments will be in the
amount of $50 million, $100 million and $50 million on November 11, 2002, May 9,
2003 and November 10, 2003, respectively. The loan bears an interest rate of
LIBOR plus 5.25%.
On November 22, 2000, we signed two new loan agreements for three years
amounting to $100 million and $150 million for investment financing purposes.
The $100 million loan from Vakiflar Bankasi T.A.O. (Vakifbank) will be repaid in
seven consecutive quarterly installments starting on June 24, 2002, and bears an
interest rate of 11.95% per annum, which was amended to 16.0% per annum as of
March 22, 2001, and amended to 14% per annum as of November 1, 2001. A further
rate cut was effective as of February 1, 2002 after which the interest rate
became 12% per annum. On June 3, 2002, we agreed with Vakifbank to amend the
interest rate further. Accordingly, the interest rate has been amended as 10%
per annum effective May 1, 2002, 9% per annum effective June 1, 2002 and 8.5%
per annum effective October 1, 2002. The $150 million loan from Garanti Bankasi
A.S. (Garanti) will be repaid in four semi-annual equal installments starting on
June 21, 2002, and bears an interest rate of LIBOR plus 5.30% per annum, which
was amended to 17% per annum as of March 22, 2001, and amended to 14% per annum
as of November 1, 2001. Further rate cuts were effective as of January 3, 2002,
April 1, 2002 and June 30, 2002 after which the interest rates became 12%, 9%
and 8.21% per annum, respectively. On December 5, 2000, we signed a loan
agreement with Akbank for three years amounting to $50 million for investment
financing purposes. The loan will be repaid in semi-annual installments starting
on December 5, 2002 and the repayments will be in the amount of $12.5 million,
$25 million and $12.5 million on December 5, 2002, June 5, 2003 and December 5,
2003, respectively. The loan bears an interest rate of LIBOR plus 5.25%.
In the first nine months of 2002, we spent approximately $59.3 million,
after deducting fixed asset disposals of $1.1 million, for capital expenditures
compared with $181.9 million for the same period in 2001. We are now in a
position to complete the year with capital expenditures of approximately $85
million, which is well below the budgeted amount of $150 million. Our capital
expenditures will be lower than budgeted mainly due to slower technological
improvements for our 2.5G network and delayed investments in related data
services because of lower market demand.
In 2001, we increased our authorized share capital by approximately TL
236.2 trillion (approximately $178 million at the payment dates) through a
rights offering. During the rights issue, we offered qualifying shareholders the
opportunity to subscribe for approximately 236 billion new ordinary shares at a
subscription price of TL 1,000 per ordinary share. During the subscription
period, the take up rate for the rights issue was approximately 99.97%, which
resulted in our receiving gross proceeds of approximately $178 million. We
completed the offering in August 2001. We used the proceeds from the rights
issue for debt repayment and to strengthen our cash position. As of September
30, 2002, our share capital was $636.1 million.
At December 31, 2001, our current liabilities exceeded our current
assets by approximately $248.7 million. At September 30, 2002, our current
liabilities exceeded our current assets by approximately $252.6 million.
Contractual Obligations and Commercial Commitments
The following table illustrates our major contractual obligations and
commitments as of September 30, 2002.
---------------------------------------------------------------------------------------------------------------------
US$ Million Payments due by period
---------------------------------------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 1-3 years 4-5 years After 5 years
year
---------------------------------------------------------------------------------------------------------------------
Long-Term Borrowings 1,396.1 452.4 943.7 - -
---------------------------------------------------------------------------------------------------------------------
Capital Lease Obligations 38.0 12.9 22.4 2.7
---------------------------------------------------------------------------------------------------------------------
Operating Leases 12.5 2.3 5.5 3.1 1.6
---------------------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations 1,446.6 467.6 971.6 5.8 1.6
---------------------------------------------------------------------------------------------------------------------
Related Party Transactions
KVK Mobil Telefon Sistemleri A.S. (KVK)
KVK, one of our principal SIM card distributors, is a Turkish company,
which is affiliated with our shareholders. In addition to sales of simcards and
scratch cards, we have entered into several agreements with KVK, in the form of
advertisement support protocols, each lasting for different periods pursuant to
which KVK must place advertisements for our services in newspapers. The
objective of these agreements was to promote and increase handset sales with our
prepaid and postpaid brand SIM cards, thereby supporting the protection of our
market share in the prevailing market conditions. The prices of the contracts
were determined according to the cost of advertising for KVK and the total
amount of advertisement benefit received, reflected in our market share in new
subscriber acquisitions. Distributors' campaign projects and market share also
contributed to the budget allocation. The total amount of simcard and scratch
card sales to KVK in the nine month and three month periods ended September 30,
2002 amounted to $66.8 million and $11.0 million, respectively.
ADD Production Medya A.S. (ADD)
ADD, a media planning and marketing company, is a Turkish company owned
by one of our principal shareholders, Cukurova Group. We entered into a media
purchasing agreement with ADD on January 23, 2002, which will last until
December 31, 2002. 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 contract prices were determined according to prevailing market prices for
media purchasing. The total amount charged by ADD in the nine month and three
month periods ended September 30, 2002 amounted to $38.7 million and $15.9
million, respectively.
Geocell LTD (Geocell)
Geocell, one of the cellular phone operators in Georgia, is an indirect
subsidiary of Fintur. We have signed an agreement for the export of a set of
renovated but usable GSM equipments to Geocell. The objective of the agreement
is to make use of the fixed assets that are no longer used in our network. The
prices were determined following the examination of fair values of the equipment
in consideration. The contract amount is $5.7 million, which will be received
within one year after the delivery date of the goods. The total GSM equipment
sold to Geocell in the nine month and three month periods ended September 30,
2002 amounted to $1.8 million and nil, respectively.
Hobim Bilgi Islem Hizmetleri A.S. (Hobim)
Hobim, one of the leading data processing and application service
provider companies in Turkey, is owned by the Cukurova Group. We have entered
into invoice printing and archiving agreements with Hobim under which Hobim
provides us with monthly invoice printing services and manages archiving of
invoices and subscription documents for an indefinite period of time. Prices of
the agreements are determined as per unit cost plus profit margin. The total
amount charged by Hobim related to these contracts in the nine month and three
month periods ended September 30, 2002 amounted to $4.1 million and $1.4
million, respectively.
A-Tel Pazarlama ve Servis Hizmetleri A.S. (A-Tel)
A-Tel is one of the principal importers of handsets and is involved in
marketing, selling and distributing of our prepaid system. A-Tel acts as our
sole dealer for Muhabbet Kart (a prepaid card), and receives dealer activation
fees and simcard subsidies for the sale of Muhabbet Kart. In addition to sales
of simcards and scratch cards we have entered into several agreements with A-Tel
for sales campaigns and for subscriber activations. Sales campaigns are also
incorporated with Sabah, the media company. The total amount of simcard and
scratch card sales to A-Tel in the nine month and three month periods ended
September 30, 2002 amounted to $88.2 million and $32.0 million, respectively.
Asli Gazetecilik ve Matbaacilik A.S. (Asli Gazetecilik)
Asli Gazetecilik, a media planning and marketing company, is a Turkish
company owned by one of our principal shareholders, Cukurova Group. We receive
services related to making space and airtime reservations for advertisements on
television stations, radio stations, newspapers and magazines. Services we
received are priced according to prevailing market prices. The total amount
charged by Asli Gazetecilik related to these services in the nine month and
three month periods ended September 30, 2002 amounted to $12.3 million and $4.2
million, respectively.
Superonline Uluslararasi Elektronik Bilgilendirme ve Haberlesme
Hizmetleri A.S. (Superonline)
We have entered into an agreement with Superonline to provide each
other with mutual services. According to this agreement, Superonline will
provide us with dealer automation services, web hosting services, internet
access services, high speed circuit switched data services, wireless application
protocol services and unified messaging services. We will provide space to
Superonline on base station sites to install servers and equipments to increase
the performance of the system infrastructure of Superonline. The total amount of
services charged by Superonline in the nine month and three month periods ended
September 30, 2002 was $0.6 million and $0.2 million, respectively.
Digital Platform Iletisim Hizmetleri A.S. (Digital Platform)
Digital Platform, a direct-to-home digital broadcasting company under
Digiturk brand name, is a Turkish company owned by one of our principal
shareholders, Cukurova Group. Digital Platform holds the broadcasting rights for
Turkish Super Football League until May 2004. We have entered into several
agreements with Digital Platform, in order to exploit the unique position of
Digital Platform in Turkey, including a slow motion advertising agreement,
relating to our ads shown on digital television screens during football games
and related events, amounting to $5.0 million for a period of one year and
extendable if any of the parties do not oppose it. The contract prices were
determined by the related media channels. We have agreed with Digital Platform
to sponsor some of the films broadcast on its pay-per-view channels. We also
have a rent agreement for the space occupied by Digital Platform in one of our
leased buildings, an agreement related to the provision of Group SMS services
that we offer to Digital Platform, and an agreement for call center services
provided by our subsidiary Global. Prices for these contracts were determined
based on prevailing market prices for these services. The total amount charged
by Digital Platform related to these contracts in the nine month and three month
periods ended September 30, 2002, including payments for sponsorships and
services, amounted to $6.6 million and $2.6 million, respectively.
Genel Yasam Sigorta A.S. (Genel Yasam Sigorta)
Genel Yasam Sigorta, a life insurance company, is a Turkish company
owned by one of our principal shareholders, Cukurova Group. We have signed
agreements for the life insurance policies related to our personnel and the
personnel of some of our dealers, based on their performance. The contract
prices were determined based on the prevailing market prices. Total amount
charged by Genel Yasam Sigorta related to these contracts in the nine month and
three month periods ended September 30, 2002 amounted to $8.0 million and $3.0
million, respectively.
Yapi ve Kredi Bankasi A.S. (Yapi ve Kredi)
Yapi ve Kredi, one of the largest commercial banks in Turkey, is one of
our shareholders. We have entered into an agreement with Yapi ve Kredi providing
for Yapi ve Kredi to issue a co-brand Turkcell credit card. The card provides a
discount to cardholders on their purchases using the card and we and Yapi ve
Kredi share the expenses created by the discount. We participate in the interest
paid under the card. We collected about $119.3 million under this program from
its inception in August 1998 through September 30, 2002. We also use Yapi ve
Kredi as one of our major collection channels for our postpaid customers. Total
amounts collected via Yapi ve Kredi ATMs and branches in the nine month and
three month periods ended September 30, 2002 amounted to $214.7 million and
$72.0 million, respectively.
Pamukbank T.A.S. (Pamukbank)
Pamukbank, one of the largest commercial banks in Turkey. We use
Pamukbank as one of our major collection channels for our postpaid customers.
Total amounts collected via Pamukbank ATMs and branches in the nine month and
three month periods ended September 30, 2002 amounted to $53.1 million and $17.0
million, respectively.
Baytur Insaat Taahhut A.S. (Baytur)
Baytur is a leading international construction company owned by one of
our principal shareholders, Cukurova Group. We had agreements with Baytur
regarding the construction of various Turkcell Operation Centers in a number of
cities throughout the country. The total amount of the agreements regarding
these projects amounted to $29.0 million. All payments regarding these contracts
have been made by us and contracts have expired as of September 30, 2002.
Yapi Kredi Finansal Kiralama A.S. (Yapi Kredi Leasing)
Yapi Kredi Leasing, an affiliate of Yapi ve Kredi Bankasi A.S., one of
our shareholders, is a financial leasing company. We have entered into a finance
lease agreement with Yapi Kredi Leasing for the new headquarters building we
began to occupy in early 1998. The purchase price of the building was $14.2
million. We purchased the building on May 17, 2002 for its nominal purchase
price.
In addition, we have entered into a lease agreement with Yapi Kredi
Leasing for a building in Ankara for regional offices. The total purchase price
of the building was $16.4 million and our outstanding lease obligation at
September 30, 2002 was $10.3 million (December 31, 2001: $11.9 million). We may
purchase the buildings at the end of the lease period for a nominal purchase
price. Total amount paid to Yapi Kredi Leasing related to these contracts in the
nine month and three month periods ended September 30, 2002 amounted to $4.7
million and $1.0 million, respectively.
Pamuklease Pamuk Finansal Kiralama A.S. (Pamuk Leasing)
Pamuk Leasing (formerly Interlease Inter Finansal Kiralama A.S.) is a
Cukurova Group Company. We have entered into five lease agreements with Pamuk
Leasing for our departments and regional offices in Istanbul, Ankara and Izmir.
The total purchase price of the buildings was $32.7 million and our outstanding
lease obligation at September 30, 2002 was $18.7 million (December 31, 2001:
$22.6 million). We may purchase the buildings at the end of the lease period for
a nominal purchase price. Total amount paid to Pamuk Leasing related to these
contracts in the nine month and three month periods ended September 30, 2002
amounted to $6.7 million and $2.3 million, respectively.
GSM Kazakhstan LLP OAO (GSM Kazakhstan)
GSM Kazakhstan, one of the largest cellular phone operators in
Kazakhstan, is a subsidiary of Fintur. We have signed various agreements for the
export of a set of renovated but usable GSM equipment to GSM Kazakhstan. The
objective of the agreement is to make use of the fixed assets that are no longer
used in our network. The prices were determined following the examination of
fair values of the equipment in consideration. The total amount of contracts is
$7.6 million, which will be received within one year after the delivery date of
the goods. The total GSM equipment sold to GSM Kazakhstan in the nine month and
three month periods ended September 30, 2002 amounted to $0.1 million and nil,
respectively.
Milleni.com GmbH (Milleni.com)
Milleni.com, one of the active players in the international carrier's
carrier market, is a subsidiary of Fintur's subsidiary in Germany, European
Telecommunications Holding A.G. (ETH). We have signed an agreement to provide
telecommunications services to each other whereby Milleni.com may convey calls
to our switch and we may convey calls to Milleni.com's switch, in both cases,
for onward transmission to their destinations. The prices per airtime are
changed depending on the destination. In the nine month and three month periods
ended September 30, 2002, the total amount charged by Milleni.com related to
this agreement was $5.5 million and $2.6 million, respectively. In the nine
month and three month periods ended September 30, 2002, the total amount charged
to Milleni.com related to this agreement was $5.2 million and $2.2 million,
respectively.
Personal loans to directors and executive officers
As of December 31, 2001 and September 30, 2002, 10 of our directors and
executive officers have outstanding personal loans from us amounting to $0.2
million and $0.1 million, respectively.
Contingent Liabilities
The following table illustrates our major contingent liabilities as of
September 30, 2002.
Amount of contingent liability expiration per period
Remaining
Total commitment
(USD million) amount at September Less than 1 - 3 4 - 5 Over 5
committed 30, 2002 1 year years years years
Guarantees
Digital Platform 88.9 63.1 29.3 29.3 4.5 -
BNP - Brussels (Buyer Credit) 50.2 35.7 10.8 21.6 3.3 -
BNP - Brussels (Financial Loan) 8.2 4.9 2.8 2.1 - -
BNP - Hungary (Buyer Credit) 13.1 8.1 2.3 4.6 1.2 -
BNP - Hungary (Financial Loan) 2.2 1.3 0.7 0.6 - -
Websterbank - USA 1.2 0.6 0.2 0.4 - -
HSBC - Istanbul Main Branch 14.0 12.5 12.5 - - -
Moldcell 5.0 5.0 5.0 - - -
Toprakbank 5.0 5.0 5.0 - - -
Geocell 3.6 3.6 3.6 - - -
Toprakbank 3.6 3.6 3.6 - - -
Inteltek 0.2 0.2 0.2 - - -
Denizbank 0.2 0.2 0.2
Hobim 0.1 0.1 0.1 - - -
BNP AK Dresdner (Financial Leasing) 0.1 0.1 0.1 - - -
Guarantees given for Digital Platform are related to loans for set-top
box, head-end and uplink imports and working capital financing used from the
respective banks.
Guarantees given for Moldcell and Geocell are related to loans for
working capital financing used from the respective banks.
Guarantees given for Inteltek are related to a guarantee letter issued
by the respective bank to Sportoto. Additionally, on November 8, 2002, another
guarantee, amounting to $1.1 million, is given for Inteltek related to a letter
of guarantee issued by Garanti Bank for financial leasing agreements with
Garanti Leasing.
Guarantees given for Hobim is related to financial leasing agreements
made with the respective lessor.
On March 4, 2002, we provided financial support letters for Moldcell,
GSM Kazakhstan and Geocell, which are subsidiaries of Fintur, for twelve months.
Initially, we estimated our cash outflows in 2002 in this respect to be
approximately $20.0 million, however as of September 30, 2002, we have not
provided any financial support to these companies.
Liquidity Outlook
According to our current business plan, we believe that we will be able
to finance our current operations, capital expenditures and financing costs and
maintain and enhance our network in 2002 through our operating cash flow, our
strong cash balance as of September 30, 2002 and certain financing arrangements
that we have recently entered.
In March 2002, we received intention letters from Vakifbank and Garanti
Bankasi agreeing to the extension of approximately $120 million relating to 2002
principal repayments for one year. We will continue to pay interest during the
extension period. During the first nine months of 2002, we did not use our
option of those extensions and paid a total amount of $66.1 million in principal
for these two loans. In March 2002, we also received a commitment letter from
Yapi Kredi Bankasi for a loan of $200 million over one year. In addition, on May
9, 2002, we agreed with Akbank T.A.S. to extend two principal repayments of
existing borrowings totaling $62.5 million, which were due in May and June 2002,
for twelve months subsequent to their initial maturities. Furthermore, according
to the agreement that we signed with Ericsson on December 14, 2001, $225 million
of trade payable due in 2002 was scheduled to be repaid in three equal
installments in April, May and June 2002. We have completed all repayments of
$75 million each in April, May and June 2002, respectively. We believe that our
cash from operations, will be sufficient to fully fund our business plan through
December 31, 2002, which includes the repayment of approximately $138 million in
principal and interest in debt obligations during the fourth quarter of 2002.
Based on our current expectations regarding the domestic and international
macroeconomic environment, developments in the telecommunications sector in
general, our debt repayment schedule, costs arising from pending litigation and
the cost of new financing, we do not foresee any funding gap in 2003.
Notwithstanding this, if our current expectations regarding any of the foregoing
items prove incorrect, we may need to obtain additional financing to fully fund
our business plan through 2003.
In order to finance certain payments that we may be required to make in
relation with outstanding legal disputes and/or in order to maintain our
liquidity position, we may raise a precautionary new financing in the fourth
quarter of 2002 or during 2003. During the fourth quarter of 2002 or during
2003, we may seek such new financing through some combination of debt financing
alternatives, the extension and/or refinancing of our existing obligations under
certain loan agreements or through the issuance of new debt depending on the
maturity and cost of new financing alternatives. We are currently evaluating
different financing alternatives through domestic and international markets to
ensure the continuity of our long-term borrowing structure and strategies. We
will continue to focus on strategies for lowering weighted average cost of total
borrowing and extending the maturity of outstanding borrowings. We are reviewing
domestic loan alternatives either by extending the existing facilities or by
obtaining additional domestic debt. In addition, we will be watching
international debt markets for opportunities to make a longer term club deal or
syndication. In the meantime, we will be following the high yield markets
throughout 2002 and 2003 depending on the performance of the existing Cellco
Bonds. We cannot assure you that we will be able to obtain any of this
additional financing on terms that are satisfactory to us, or at all.
Additionally, we may incur indebtedness only in compliance with the terms of the
covenants regulating our existing debt. If for any reason adequate internal
resources or external financing are not available as needed, we may not be able
to maintain and enhance the quality of our network or to meet our other
obligations and liabilities as they become due. This could lead to a loss of
customers and market share, as well as potential defaults under, and refinancing
or restructuring of, existing debt and other obligations, all of which could
have a material adverse effect on our business, financial condition and results
of operations.
Based on our consolidated financial statements as of and for the six
month period ended June 30, 2001, we were in breach of one of the covenants
contained in our 1998 and 1999 bank facilities. We were not in breach of our
covenant at December 31, 2000, September 30, 2001, December 31, 2001 or
September 30, 2002. The breach of leverage ratio covenant was an event of
default and in accordance with US GAAP we reclassified $305.5 million of our
long-term debt as short-term debt payable in the current period as of June 30,
2001. During November 2001, we renegotiated the maximum leverage ratio and
minimum interest coverage covenant. The renegotiated maximum leverage ratio
covenant was agreed with retroactive effect by the lenders of our bank
facilities. In addition, during the third quarter of 2001 we repaid the 1998
bank facility. As a result of the repayment of the 1998 bank facility and the
renegotiations of the covenants, $244.4 million of debt that was classified as
short-term debt at June 30, 2001, was reclassified as long-term debt as of
December 31, 2001. For additional information on this breach, see "Item 13.
Defaults, Dividends, Arrearages and Delinquencies" in the 20-F.
As a result of recent improvements in the Turkish economy and
legislative reforms undertaken by the government, we expect that we will be able
to comply with the amended financial covenants in our debt agreements. However,
we can make no assurances that there will not be any negative changes in our
business or financial results, or any negative changes in the Turkish economy or
the telecommunications industry that impact our financial condition negatively
and cause us to breach the amended covenants. In such a case we may request
additional amendments to our covenants but we can make no assurances that we
will be able to obtain future amendments. Any breach of one or more of our
financial covenants triggering acceleration of our indebtedness would have a
material adverse effect on our business, financial conditions and results of
operations.
Please see note 2 to our consolidated financial statements and related
notes as of December 31, 2000 and 2001 and for each of the years in the
three-year period ended December 31, 2001.
Quantitative and Qualitative Discussion of Market Risk
Total indebtedness denominated in foreign currencies (all in US Dollar)
amounted to $1,425.2 million, representing almost 100% of our total indebtedness
at September 30, 2002.
During the first nine month period of 2002, we made principal loan
payments of $205.3 million. We have incurred no additional indebtedness since
December 31, 2001.
Since December 31, 2001, the following terms of our indebtedness were
amended:
o The interest rate of the Garanti loan was 14% per annum as of
December 31, 2001 and has been amended as 12% per annum on
January 3, 2002, 9% per annum on April 1, 2002 and 8.21% per
annum on June 30, 2002.
o The interest rate of the Vakifbank loan was 14% per annum as of
December 31, 2001 and has been amended as 12% per annum on
February 1, 2002. On June 3, 2002, we agreed with Vakifbank to
amend the interest rate further. Accordingly, the interest rate
has been amended as 10% per annum effective May 1, 2002, 9% per
annum effective June 1, 2002 and 8.5% per annum effective
October 1, 2002.
o On May 9, 2002, we agreed with Akbank T.A.S. to extend two
principal repayments of existing borrowings totalling $62.5
million, which were due in May and June 2002, for twelve months
subsequent to their initial maturities.
Fair value of indebtedness as of September 30, 2002, which was
outstanding at December 31, 2001, has not changed significantly except for loans
under 1999 and 1998 Issuer Credit Agreements. The fair value of 1998 Issuer
Credit Agreement has increased from $270.0 million at December 31, 2001 to
$291.0 million at September 30, 2002; and the fair value of 1999 Issuer Credit
Agreement has increased from $348.0 million at December 31, 2001 to $372.0
million at September 30, 2002.
We are exposed to foreign exchange availability and rate risks that
could significantly impact our ability to meet our obligations and finance our
network construction. A substantial majority portion of our debt obligations and
capital expenditures are, and are expected to continue to be, denominated in US
Dollar. By contrast, substantially all of our revenues are, and will continue to
be, denominated in Turkish Lira. In the normal course of business, on October
14, 2002 and October 16, 2002, we employed three USD/TL forward transactions
maturing on December 30, 2002, facilitated by Deutsche Bank AG London, totalling
to $20 million, in order to manage our foreign exchange risk more efficiently.
There is no covenant restriction related with hedging transactions provided that
the transaction is not made for purely speculative purposes and leverage ratio
is below 4.00X. However, we keep our monetary balances in US Dollar to reduce
our currency exposure and the maximum tariffs we may charge are adjusted
periodically by the Telecommunications Authority to account, among other things,
for the devaluation of the Turkish Lira.
Legal and Arbitration Proceedings
We are involved in various claims, which are described in "Item 8A.
Consolidated Statements and Other Financial Information-Legal and Arbitration
Proceedings" in the 20-F.
Subsequent to the filing of 20-F on May 21, 2002, we initiated an
arbitral proceeding before the International Court of Arbitration of the
International Chamber of Commerce against the Turkish Treasury and the
Telecommunications Authority to resolve the dispute in respect to the
determination of the items to be taken into account in the calculation of the
"gross revenue", which is base for the calculation of the amounts to be paid to
the Turkish Treasury in accordance with Article 8 of the License Agreement.
Also, in connection with the dispute on collection of frequency usage
fees, on March 27, 2002 we filed a lawsuit against the Telecommunications
Authority requesting cancellation of the protocols obligating us to collect the
frequency usage fees from the prepaid subscribers and to pay the collections to
the Telecommunications Authority. On July 10, 2002, the court decided in our
favour. The Telecommunications Authority has appealed the decision. We and our
legal counsel believe that we will prevail in this matter. Accordingly, we have
not made any provision in our consolidated financial statements.
Further, effective from July 1, 2000, Turk Telekom had annulled the
discount of 60% that it had provided to us based on its regular ratio, which had
been provided for several years, and, at the same time, Turk Telekom had started
to provide a discount of 25% being subject to certain conditions. We had filed a
lawsuit against Turk Telekom for the application of the agreed 60% discount.
However, on July 30, 2001, we had been notified that the appeals court upheld
the decision made by the commercial court allowing Turk Telekom to terminate the
60% discount. Accordingly, we had paid and continue to pay transmission fees to
Turk Telekom based on the 25% discount. Although Turk Telekom had not charged
any interest on late payments at the time of such payments, we recorded an
accrual amounting to TL 3.0 trillion (equivalent to $2.1 million and $1.8
million as of December 31, 2001 and September 30, 2002, respectively) for
possible interest charges as of December 31, 2000. On May 9, 2002, Turk Telekom
requested an interest payment amounting to TL 30.1 trillion (equivalent to $18.2
million at September 30, 2002) on these late payments. We did not agree with the
Turk Telekom's interest calculation and, accordingly, we obtained an injunction
from the commercial court to prevent Turk Telekom from collecting any amounts
relating to this interest charge. Also, we initiated a lawsuit against Turk
Telekom on the legality of such interest. As of September 30, 2002, we made a
provision of TL 13.3 trillion (equivalent to $8.1 million as of September 30,
2002) because we and our legal counsel believe that this is the maximum
potential liability in accordance with the relevant provisions of the
Interconnection Agreement.
There have been no other material changes in our legal and arbitration
proceedings since the date of the 20-F.
Other Matters
On June 18, 2002, the Banking Regulation and Supervision Agency of
Turkey (the BRSA) transferred the management and supervision of Pamukbank T.A.S.
(Pamukbank), one of our shareholders, to the Savings Deposit Insurance Fund of
Turkey (the SDIF) who took over all shareholding rights of all Pamukbank
shareholders, excluding their dividend entitlements. The BRSA cited that
Pamukbank failed to take measures required under the Turkish Banks Act; that its
total liabilities exceed its total assets and that its financial weakness
threatened depositors' rights as well as the safety and soundness of the Turkish
financial system. In addition, the SDIF has acquired ownership of Pamukbank by
paying the amount equivalent to Pamukbank's losses. As of September 30, 2002, to
the best of our knowledge, Pamukbank held 7.87% ownership interest indirectly
over Turkcell Holding A.S in Turkcell. On August 9, 2002, Pamukbank advised us
that the BRSA decided to transfer shares of Turkcell held directly by Pamukbank,
approximately 0.51% of Turkcell's outstanding share capital, to the SDIF.
Pamukbank is majority owned by the Cukurova Group, which was our largest
shareholder. Accordingly, on August 21, 2002, the Board of Directors of Turkcell
resolved to register such shares in the Share Register of Turkcell under the
name of the SDIF. On November 22, 2002, Council of State Administrative Cases
Department General Assembly rendered precautionary judgement regarding
Pamukbank's case.
On October 1, 2002, Telia AB and Sonera published a prospectus for the
share exchange offer related to the announced merger of the two companies.
According to the prospectus, the transaction is expected to be completed before
the end of 2002. We do not currently know how the merger will be finalized and
what its legal effects will be. Prior to the finalization of the transaction we
do not anticipate that we will be able to provide any further or additional
clarity.
TURKCELL ILETISIM HIZMETLERI A.S.
AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2001 AND SEPTEMBER 30, 2002 (Unaudited)
(In thousands, except share data)
December 31, September 30,
2001 2002
----------- --------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 243,114 305,403
Trade receivables and accrued income, net (Note 5) 256,143 265,370
Due from related parties (Note 6) 164,448 86,531
Inventories 12,154 10,578
Prepaid expenses 20,843 21,462
Other current assets (Note 7) 46,965 34,493
----------- ---------
Total current assets 743,667 723,837
DUE FROM RELATED PARTIES (Note 8) 10,085 10,085
PREPAID EXPENSES 3,300 2,259
INVESTMENTS (Note 9) 58,329 103,682
FIXED ASSETS, net (Note 10) 1,655,110 1,490,074
CONSTRUCTION IN PROGRESS (Note 11) 119,636 87,270
INTANGIBLES, net (Note 12) 916,920 865,369
OTHER LONG TERM ASSETS 28,996 18,934
----------- ---------
$ 3,536,043 3,301,510
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings (Note 13) $ 383,167 453,201
Trade payables (Note 14) 302,039 93,011
Due to related parties (Note 15) 3,626 1,254
Taxes payable (Note 17) 130 --
Other current liabilities and accrued expenses (Note 16) 303,425 428,954
----------- ---------
Total current liabilities 992,387 976,420
LONG TERM BORROWINGS (Note 18) 1,218,903 943,710
LONG TERM LEASE OBLIGATIONS (Note 19) 27,103 20,627
RETIREMENT PAY LIABILITY 4,737 6,053
MINORITY INTEREST 896 737
OTHER LONG TERM LIABILITIES 6,792 5,681
SHAREHOLDERS' EQUITY
Common stock
Par value one thousand TL; authorized, issued
and outstanding 500,000,000,000 shares in 2001
and 2002 (Note 20) 636,116 636,116
Additional paid in capital 178 178
Advances for common stock 119 119
Legal reserves 5 5
Accumulated other comprehensive loss (Note 3) (1,875) (3,793)
Retained earnings 650,682 715,657
----------- ---------
Total shareholders' equity 1,285,225 1,348,282
----------- ---------
COMMITMENTS AND CONTINGENCIES (Note 23) $ 3,536,043 3,301,510
----------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
TURKCELL ILETISIM HIZMETLERI ADS.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2002
(Unaudited)
(In thousands, except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
----------------- --------------- --------------- ---------------
$ (Unaudited) (Unaudited)
Revenues (Notes 4 and 21) $ 440,636 534,332 1,331,726 1,469,001
Direct cost of revenues (309,029) (347,455) (903,535) (1,003,494)
---------------- --------------- --------------- ---------------
Gross profit 131,607 186,877 428,191 465,507
General and administrative expenses (27,088) (25,076) (106,556) (77,278)
Selling and marketing expenses (Note 4) (27,555) (44,762) (126,707) (142,764)
--------------- --------------- --------------- ---------------
Operating income 76,964 117,039 194,928 245,465
Income (expense) from related parties,
net (Note 22) 1,072 (17) 2,184 62
Interest income 19,021 22,360 74,364 79,123
Interest expense (74,992) (67,776) (234,944) (218,534)
Other income (expense), net (13,777) (2,661) (15,059) 2,782
Equity in net income (loss)
of unconsolidated investees (Note 9) (11,478) 165 (41,626) (23,413)
Minority interest 72 46 488 165
Translation loss (23,462) (10,359) (130,872) (20,675)
---------------- --------------- --------------- ---------------
Income (loss) before taxes (26,580) 58,797 (150,537) 64,975
Income tax benefit (Note 17) -- -- 8,783 --
---------------- --------------- --------------- ---------------
Net income (loss) $ (26,580) 58,797 (141,754) 64,975
================ =============== =============== ===============
Basic and diluted earnings (loss)
per common share (Note 20) $ (0.00006) 0.00012 (0.00031) 0.00013
================ =============== =============== ===============
Weighted average number of common shares
outstanding (Note 20) 480,033,876,523 500,000,000,000 460,356,343,683 500,000,000,000
The accompanying notes are an integral part of these consolidated financial
statements.
TURKCELL ILETISIM HIZMETLERI A.S.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2002 (Unaudited)
(In thousands)
September 30, September 30,
2001 2002
------------- -------------
(unaudited) (unaudited)
Operating Activities:
Net income (loss) $(141,754) 64,975
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 292,835 309,408
Provision for retirement pay liability (107) 1,316
Provision for inventories -- 2,275
Provision for doubtful receivables (49,697) 5,718
Provision for income taxes -- (130)
Accrued income 29,885 5,291
Accrued expense (35,078) 117,777
Equity in net loss of unconsolidated investees 41,626 23,413
Minority interest 786 (159)
Deferred taxes (24,594) --
Changes in assets and liabilities:
Trade receivables 114,009 (20,236)
Due from related parties (21,411) 77,917
Inventories (3,435) (699)
Prepaid expenses (5,933) 422
Other current assets (8,115) 12,920
Advances to related parties 1,020 --
Other long term assets 406 477
Due to related parties (586) (2,372)
Trade payables (17,376) (209,028)
Other current liabilities (8,868) 7,971
Other long term liabilities 1,150 (1,111)
--------- ---------
Net cash provided by operating activities 164,763 396,145
Investing Activities:
Additions to fixed assets (126,025) (66,916)
Reductions in construction in progress 44,797 32,366
Additions to intangibles (22,062) (25,858)
Investments in investees (51,544) (70,741)
--------- ---------
Net cash used for investing activities (154,834) (131,149)
Financing Activities:
Proceeds from issuance of and
advances for common stock 178,033 --
Payment on long and short term debt (429,769) (205,159)
Net decrease in debt issuance expenses 17,779 9,137
Payment on lease obligations (6,025) (6,685)
--------- ---------
Net cash used for financing activities (239,982) (202,707)
Net increase (decrease) in cash (230,053) 62,289
Cash at the beginning of period 363,365 243,114
--------- ---------
Cash at the end of period $ 133,312 305,403
========= =========
Supplemental cash flow information:
Interest paid 175,574 130,644
Taxes paid -- --
Non-cash investing activities
Accrued capital expenditures 82,208 --
The accompanying notes are an integral part of these consolidated financial
statements.
TURKCELL ILETISIM HIZMETLERI A.S.
AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002 (Unaudited)
(In thousands, except share data)
Advances Accumulated
Additional for other Total
Common stock paid in common Legal Comprehensive Retained comprehensive shareholders'
Shares Amount capital stock reserves income earnings loss equity
--------------- ---------- ------- ------- -------- ------------ ------- ------------- -------------
Balances at
December 31, 2001 500,000,000,000 $ 636,116 178 119 5 -- 650,682 (1,875) 1,285,225
Comprehensive income:
Net income 64,975 64,975 64,975
Other comprehensive loss:
Translation adjustment (1,918) (1,918) (1,918)
------
Comprehensive income 63,057
======
--------------- ---------- --- --- - ------- ------ ---------
Balances at
September 30, 2002 500,000,000,000 $ 636,116 178 119 5 715,657 (3,793) 1,348,282
=============== ========== === === = ======= ====== =========
The accompanying notes are an integral part of these consolidated financial
statements.
Turkcell Iletisim Hizmetleri Anonim Sirketi and Its Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2001 and September 30, 2002 (Unaudited), and for the
Three and Nine Month Periods Ended September 30, 2001 and 2002
(Unaudited)
(Amounts in thousands of US Dollar unless otherwise stated except share
amounts)
1) Business:
Turkcell Iletisim Hizmetleri Anonim Sirketi (Turkcell-Parent company)
was incorporated on October 5, 1993. It is engaged in establishing and
operating a Global System for Mobile Communications (GSM) network in
Turkey. Turkcell and Turk Telekomunikasyon A.S. (Turk Telekom), a state
owned organization of Turkey, were parties to a revenue sharing
agreement signed in 1993, which set forth the terms related to the
construction and operating phases of GSM network (the Revenue Sharing
Agreement). In accordance with this agreement, Turk Telekom contracted
with subscribers, performed billing and collection and assumed
collection risks, while Turkcell made related GSM network investments.
The Revenue Sharing Agreement covered a period of 15 years commencing
in 1993. Turk Telekom and Turkcell shared revenues billed for
subscription fees, monthly fixed fees and outgoing calls, at a ratio of
67.1% and 32.9%, respectively. In addition, Turkcell received 10% of
revenues billed for incoming calls. On April 27, 1998, Turkcell signed
a license agreement (the License Agreement or License) with the
Ministry of Transportation and Communications of Turkey (the Turkish
Ministry). In accordance with the License Agreement, Turkcell was
granted a 25 year GSM license for a license fee of $500,000. The
License Agreement permits Turkcell to operate as a stand-alone GSM
operator and free it from some of the operating constraints, which were
stated in the Revenue Sharing Agreement. Under the License, Turkcell
collects all of the revenue generated from the operations of its GSM
network and pays the Undersecretariat of Treasury (the Turkish
Treasury) an ongoing license fee equal to 15% of its gross revenue.
Turkcell also continues to build and operate its GSM network and is
authorized to, among other things, set its own tariffs within certain
limits, charge peak and off-peak rates, offer a variety of service and
pricing packages, issue invoices directly to subscribers, collect
payments and deal directly with subscribers. In May 2001, the Turkish
Ministry's power relating to concession or license agreements or
general permissions was transferred to the Telecommunications
Authority, pursuant to new changes in the Telecommunications Law. On
July 24, 2001, Turkcell renewed its License Agreement with the
Telecommunications Authority. The Supreme Court (Danistay) refused some
of the terms of this agreement and parties revised some of the terms.
The Company signed the revised License Agreement on February 12, 2002.
Pursuant to Danistay's examination, Telecommunications Authority signed
the revised License Agreement on February 13, 2002, which became valid
thereafter. In the revised License Agreement, all major rights and
obligations included in the original License Agreement were preserved,
with certain additional requirements including an obligation to pay an
administration fee to the Telecommunications Authority equaling to
0.35% of net revenues.
As of December 31, 2001, Kibris Mobile Telekomunikasyon Limited Sirketi
(Kibris Telekom), Global Bilgi Pazarlama Danisma ve Cagri Servisi
Hizmetleri A.S. (Global), Corbuss Kurumsal Telekom Servis Hizmetleri
A.S. (Corbuss), Turktell Bilisim Servisleri A.S. (Turktell), Hayat Boyu
Egitim A.S. (Hayat), Kibrisonline Limited Sirketi (Kibrisonline),
Bilisim ve Egitim Teknolojileri A.S. (Bilisim), Digikids Interaktif
Cocuk Programlari Yapimciligi ve Yayinciligi A.S. (Digikids) and Mapco
Internet ve Iletisim Hizmetleri Pazarlama A.S. (Mapco) (the
subsidiaries) were consolidated subsidiaries, owned 100.00%, 99.85%,
99.44%, 99.96%, 74.97%, 60.00%, 99.96%, 59.98% and 77.50%,
respectively, by Turkcell or the subsidiaries.
At the Board of Directors meetings of Turktell held on March 13, 2002
and April 19, 2002, it was resolved that Turktell acquires total
396,825 shares of Inteltek Internet Teknoloji Yatirim ve Danismanlik
Ticaret A.S. (Inteltek), owned by Superonline Uluslararasi Elektronik
Bilgilendirme ve Haberlesme Hizmetleri A.S. (Superonline) with a par
value of one million TL each. In addition, at the Board of Directors of
Turktell held on March 13, 2002, it was resolved that Turktell acquires
one share of Inteltek owned by Filiz Bikmen with a par value of one
million TL for TL 0.25 million. At the Board of Directors meeting held
on July 19, 2002, it was resolved that Turktell acquires total 153,170
paid shares of Inteltek, owned by Superonline with a par value of one
million TL each for TL 153,170 million. At the Board of Directors
meeting held on August 27, 2002, it was resolved that Turktell sells
137,500 paid shares of Inteltek with a par value of one million TL each
to Intralot Sa Trading, Production, Support and Management of Software
and Electronic Systems of Multiple Use-Instant Lottery for TL 137,500
million. It was also resolved that Turktell sells 109,999 shares of
Inteltek with a par value of one million TL each to Teknoloji Holding
A.S. Since the share transfers are not completed yet, as of September
30, 2002, the ownership interest of the Company in Inteltek is 99.95%.
Upon completion of the share transfers, the Company's ownership
interest in Inteltek will decrease to 55%.
On April 25, 2002, Turktell transferred its shares in Siber Egitim ve
Iletisim Teknolojileri A.S. (Siber Egitim) to other shareholders of
Siber Egitim without any consideration.
As of September 30, 2002, Kibris Telekom, Global, Corbuss, Turktell,
Hayat, Kibrisonline, Bilisim, Digikids, Mapco, and Inteltek are
consolidated subsidiaries, owned 100.00%, 99.89%, 99.25%, 99.95%,
74.96%, 60.00%, 99.95%, 59.97%, 70% and 99.95% respectively.
As of September 30, 2002, Fintur Holdings B.V. (Fintur) was an equity
investee. As of December 31, 2001, Fintur and Siber Egitim were equity
investees. (Note 9)
(2) Financial Position and Basis of Preparation of Financial Statements:
Turkcell and its subsidiaries (the Company) maintain their books of
account and prepare their statutory financial statements in their local
currencies and in accordance with local commercial practice and tax
regulations applicable in the countries where they are resident. The
accompanying consolidated financial statements are based on these
statutory records, with adjustments and reclassifications for the
purpose of fair presentation in accordance with accounting principles
generally accepted in the United States of America. The financial
statements as of December 31, 2001 and September 30, 2002, and for the
three month and nine month periods ended September 30, 2001 and 2002
present the consolidated financial position and consolidated results of
operations of the Company. The unaudited consolidated financial
statements of the Company as of September 30, 2002, and for the three
month and nine month periods ended September 30, 2001 and 2002, in the
opinion of the management of the Company, include all the adjustments,
consisting of normal recurring adjustments, necessary for a fair
presentation of the results of such unaudited interim periods.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with accounting principles generally
accepted in the United States of America. Actual amounts could differ
from those estimates. Significant estimates and assumptions include the
depreciable lives of fixed assets and intangibles; amounts reflected as
allowances for doubtful receivables and deferred tax assets.
At September 30, 2002, current liabilities exceeded current assets by
$252,583 (December 31, 2001: $248,720). This matter may raise doubt
about the Company's ability to continue as a going concern. The
consolidated financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. Management
believes that the Company will generate sufficient operating cash flows
to continue as a going concern. Accordingly, the consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty. In addition, on March 5, 2002, Yapi ve
Kredi Bankasi A.S. (Yapi Kredi), a shareholder and one of the largest
Turkish banks, has committed to provide a cash loan, with market rates,
up to $200,000 to the Company over the next twelve months. Also, on
March 6, 2002, Vakiflar Bankasi TAO (Vakifbank) provided a letter of
intent to extend the principal repayments of existing borrowings
amounting to $42,857 and $57,143 that are due in 2002 and 2003,
respectively, for twelve months subsequent to their initial maturities.
Further on March 7, 2002, Turkiye Garanti Bankasi A.S. (Garanti)
provided a letter of intent to extend the principal repayments of
existing borrowings amounting to $75,000 that are due in 2002 for
twelve months subsequent to their initial maturities. During the first
nine months of 2002, the Company did not use the option of these
extensions and paid a total amount of $66,071 principal for these two
loans. Management will consider to make such extensions for the
remaining principal repayments if necessary. Furthermore, on May 9,
2002, Turkcell agreed with Akbank T.A.S. to extend two principal
repayments of existing borrowings totaling $62,500, which were due in
2002, for twelve months subsequent to their initial maturities.
In its statutory financial statements prepared in accordance with local
commercial and tax regulations, Turkcell has generated negative cash
flows and losses from operating activities as of December 31, 2001 and
September 30, 2002. Interest expense and exchange losses associated
with financing the business have contributed to the negative cash flows
and operating losses as well as tax saving accounting treatments
applied by Turkcell in its statutory financial statements. In
accordance with Turkish commercial legislation, Turkcell is required to
maintain certain minimum levels of shareholders' equity in its
statutory financial statements. Turkcell has met those minimum
requirements.
These unaudited interim financial statements should be read in
conjunction with the Company's Annual Report on Form 20-F.
As of September 30, 2002, the consolidated financial statements include
the accounts of Turkcell and ten (December 31, 2001: nine) majority
owned subsidiaries. Its investment in Fintur (December 31, 2001: Fintur
and Siber Egitim) is included under the equity method of accounting
(Note 9).
The major principles of consolidation are as follows:
-- All significant intercompany balances and transactions have been
eliminated in consolidation.
-- Minority interest in net assets and net income of the consolidated
subsidiaries are separately classified --in the consolidated balance
sheets and consolidated statements of operations.
(3) Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income",
which requires the presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income
generally encompasses all changes in shareholders' equity (except those
arising from transactions with owners) and includes net income (loss),
net unrealized capital gains or losses on available for sale securities
and foreign currency translation adjustments. The Company's
comprehensive income (loss) differs from net income (loss) applicable
to common shareholders only by the amount of the foreign currency
translation adjustment charged to shareholders' equity for the period.
Comprehensive income (loss) for the three month and nine month periods
ended September 30, 2001 and 2002 were ($26,761), $57,137, ($142,305)
and $63,057, respectively.
(4) New Accounting Standards Issued
In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires that the purchase method of accounting used for all business
combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. SFAS No.
141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price allocable
to an assembled workforce may not be accounted for separately. SFAS No.
142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS
No. 142 also requires that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". The Company adopted these
statements on January 1, 2002. As of September 30, 2002, the Company
does not have any goodwill or indefinite live intangible assets.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. This statement addresses financial
accounting and reporting for obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except
for certain obligations of lessees. Management has not determined the
impact, if any, of the adoption of SFAS No. 143 on the Company's
consolidated financial position or results of operations.
On October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for the fiscal years beginning after
December 15, 2001. While SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", it retains many of the fundamental
provisions of that Statement. SFAS No. 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a
business. However, it retains the requirement in APB Opinion No. 30 to
report separately discontinued operations and extends that reporting to
a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held
for sale. By broadening the presentation of discontinued operations to
include more disposal transactions, the FASB has enhanced managements'
ability to provide information that helps financial statement users to
assess the effects of a disposal transaction on the ongoing operations
of an entity. The Company adopted SFAS No. 144 on January 1, 2002 and
has not had a material impact on its financial position, results of
operations, or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt", an amendment of APB
Opinion No. 30, which required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the
criteria set forth by APB Opinion 30 will now be used to classify those
gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longer
necessary because SFAS No. 4 has been rescinded. SFAS No. 44 was issued
to establish accounting requirements for the effects of transition to
the provisions of the Motor Carrier Act of 1980. SFAS No. 145 also
amends SFAS No. 13 to require that certain lease modifications that
have economic effects similar to sale-leaseback transactions be
accounted for in the same manner as sale-leaseback transactions. SFAS
No. 145 also makes non-substantive technical corrections to existing
pronouncements. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002 with earlier adoption encouraged. Management has not
determined the impact, if any, of the adoption of SFAS No. 145 on the
Company's consolidated financial position or results of operations.
In 2001, the Emerging Issues Task Force (EITF) within FASB discussed
EITF 00-14, "Accounting for Certain Sales Incentives", EITF 00-22
"Accounting for Points and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to Be
Delivered in the Future" and EITF 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's
Products", which in November 2001 led to the issuance of EITF 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products". EITF 00-14, 00-22 and 00-25 address
the extent to which different types of payments or benefits to
retailers or customers shall be reported as either reductions in
revenue or expenses. EITF 01-09 codifies and reconciles standards in
the area. The regulations are effective for annual or interim periods
beginning after December 15, 2001. The Company adopted EITF 01-09 on
January 1, 2002. As a result of applying the provisions of EITF 01-09,
the Company's revenues, gross profit, and selling and marketing
expenses each were reduced by an equal amount of $16,931 and $71,769
for the three month and nine month periods ended September 30, 2001,
respectively. The adoption of EITF 01-09 had no impact on operating
income, net income (loss) or earnings (loss) per share.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS
No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002. An entity would continue to apply the
provisions of EITF 94-3 to an exit activity that it initiated under an
exit plan that met the criteria of EITF 94-3 before the entity
initially applied SFAS No. 146. The Company has not determined the
impact, if any, of the adoption of SFAS No. 146 on the Company's
consolidated financial position or results of operations.
(5) Trade Receivables and Accrued Income, net:
At December 31, 2001 and September 30, 2002, the breakdown of trade
receivables and accrued income is as follows:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
Receivables from subscribers $ 193,558 196,764
Receivable from Turk Telekom 50,810 67,765
Accounts and checks receivable 37,901 37,976
--------- -------
282,269 302,505
Accrued service income 84,876 79,585
Allowance for doubtful receivables (111,002) (116,720)
--------- -------
$ 256,143 265,370
========= =======
The Company has a receivable from Turk Telekom at December 31, 2001 and
September 30, 2002, which represents amounts that are due from Turk
Telekom under the Interconnection Agreement. The Interconnection
Agreement provides that Turk Telekom will pay Turkcell for Turk
Telekom's fixed line subscribers' calls to Turkcell's GSM subscribers.
The accrued service income represents revenues accrued for subscriber
calls (air-time), which have not been billed. Due to the volume of
subscribers, there are different billing cycles; accordingly, an
accrual is made at each period end to accrue revenues for services
rendered but not yet billed.
Additionally, based on the decision of the Court of Appeal related to
Turk Telekom Interconnection Dispute, management and legal counsel of
the Company believes that no further provision for the 15% fund
payments will be required and thus the Company reversed the unpaid two
installments related to March-August period in 2000 amounting $11,252
as of September 30, 2002 by increasing the receivables from Turk
Telekom with the same amount. For the paid amounts in 2000, the Company
recorded an accrued income amounting $16,247 as of September 30, 2002.
(Note 23)
Accounts and cheques receivable represent amounts due from dealers and
roaming receivables.
Movements in the allowance for doubtful receivables are as follows:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
Beginning balance $ 146,069 111,002
Provision for doubtful receivables 59,640 27,321
Write-off - (5,054)
Effect of change in exchange rate (94,707) (16,549)
--------- -------
Ending balance $ 111,002 116,720
========= =======
(6) Due from Related Parties:
As of December 31, 2001 and September 30, 2002, the balance comprised:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
A-Tel Pazarlama ve Servis Hizmetleri A.S. (A-Tel) $ 35,011 24,482
Digital Platform Iletisim Hizmetleri A.S. (Digital Platform) 21,379 14,137
Asli Gazetecilik ve Matbaacilik A.S. (Asli Gazetecilik) 8,677 10,306
KVK Mobil Telefon Sistemleri Ticaret A.S. (KVK) 13,436 9,841
ADD Production Medya A.S. (ADD) - 7,116
Sonera Corporation Inc. 3,262 3,083
Geocell Ltd. (Geocell) 2,555 2,962
Azertel Telekomunikasyon Yatirim Dis Ticaret A.S. (Azertel) 1,755 2,815
Milleni.com GmbH (Milleni.com) 1,659 2,385
Cukurova Investments N.V. (Cukurova Investments) 1,735 1,735
GSM Kazakhstan LLP OAO Kazakhtelecom (GSM Kazakhstan) 4,167 1,640
Azercell Telecom B.M. (Azercell) 2,940 1,416
Superonline 2,150 1,142
Fintur 63,158 759
Moldcell S.A. 417 589
Mobicom Bilgi Iletisim Hizmetleri A.S. (Mobicom) 434 428
Gurtel Telekomunikasyon Yatirim Dis Ticaret A.S. (Gurtel) 1,264 88
Other 449 1,607
--------- ------
$ 164,448 86,531
========= ======
Due from A-Tel mainly resulted from simcard and prepaid card sales and
advances given for hand-set subsidies provided by A-Tel in certain
campaigns started by this company. (Note 22)
Due from Digital Platform mainly resulted from receivables from call
center revenues and advances given for current and planned
sponsorships. (Note 22)
Due from Asli Gazetecilik mainly resulted from advances given for
making space and airtime reservations for advertisements on
televisions, radio stations, newspapers and magazines mainly owned by
Cukurova Group. (Note 22)
Due from KVK mainly resulted from simcard and prepaid card sales to
this company. (Note 22)
Due from ADD mainly resulted from services rendered related to making
space and airtime reservations for advertisements on television
stations, radio stations, newspapers and magazines. (Note 22)
Due from Sonera Corporation Inc. and Cukurova Investments resulted from
the allocation of certain expenses made on behalf of these shareholders
during the public offering.
Due from Geocell mainly resulted from roaming receivables and sales of
GSM equipment. (Note 22)
Due from Azertel mainly resulted from expenses paid by Turkcell on
behalf of this company.
Due from Milleni.com mainly resulted from interconnection receivables.
Due from GSM Kazakhstan mainly resulted from sales of GSM equipment and
roaming receivables.
Due from Azercell resulted from roaming receivables and consultancy
services given to this company.
Due from Superonline mainly resulted from receivables from call center
revenues. (Note 22)
Upon completion of Fintur restructuring described in Note 9, due from
Fintur consisted of the invoices issued to Fintur regarding the
expenses made on behalf of Fintur.
Due from Gurtel mainly resulted from the equipment sales made to
Geocell.
(7) Other Current Assets:
At December 31, 2001 and September 30, 2002, the balance comprised:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
Deferred financing costs $ 14,123 14,571
Blocked deposits 11,403 11,125
Advances to suppliers 8,245 6,063
Prepaid taxes 5,078 766
Other 8,116 1,968
-------- ------
$ 46,965 34,493
======== ======
(8) Due from Related Parties - Long Term
At December 31, 2001 and September 30, 2002, the balance represented an
amount due from Azertel mainly resulted from the payment made by
Azertel on behalf of Azercell to the Azerbaijan Ministry of
Communication as profit guarantee for 1997, in accordance with Article
13 of the GSM contract dated January 19, 1996. Under an amendment made
in 1998 to the original contract, the dividend guarantee was cancelled
and advance payments on amounts already distributed as dividends for
1997 were repayable to Azercell. This balance is to be paid off by the
cash generated from future dividends of Azercell to Azertel.
(9) Investments:
At December 31, 2001 and September 30, 2002, investments in associated
companies were as follows:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
Fintur $58,229 103,682
Siber Egitim 100 -
------- -------
$58,329 103,682
======= =======
At December 31, 2001, the Company's ownership interest in Fintur and
Siber Egitim were 25.00% and 49.98%, respectively. Investments in
Fintur and Siber Egitim were accounted for under the equity method of
accounting.
On April 25, 2002, Turktell transferred its shares in Siber Egitim to
other shareholders of Siber Egitim without any consideration.
On February 28, 2002, the shareholders of Fintur signed a letter of
intent for the restructuring of Fintur's two business divisions, the
international GSM businesses and the technology businesses. On May 10,
2002, Turkcell and the other shareholders of Fintur signed a Share
Purchase Agreement in connection with the restructuring of Fintur's two
business divisions, which includes the basic principles agreed in the
letter of intent. On August 21, 2002, the transaction has been
completed. As per the subject transaction, Turkcell acquired an
additional 16.45% of Fintur's international GSM business from the
Cukurova Group, increasing its stake in the business to 41.45%. As part
of the subject transaction, Turkcell transferred its entire interest in
Fintur's technology businesses to the Cukurova Group. The consideration
paid by Turkcell to the Cukurova Group resulting from this transaction
amounted to $70,741. On March 7, 2002 and May 29, 2002, Turkcell paid
$35,371 and $3,789 to the Cukurova Group, respectively, and upon
completion of the transaction, on August 21, 2002 Turkcell paid the
remaining $31,581 to the Cukurova Group. Turkcell had receivables from
Fintur of $67,274 as of August 21, 2002 (December 31, 2001: $63,158;
September 30, 2002: $759) and on August 22, 2002, Turkcell collected
such receivables upon the completion of the transaction. The receipt of
these receivables offset a major portion of the consideration paid by
Turkcell to the Cukurova Group. Therefore, the Company's net cash
outflows in connection with the restructuring amounted to $3,467. Upon
the signing of the letter of intent, Fintur classified the subsidiaries
in the technology businesses as held for sale and measured them at the
lower of their carrying amount or fair value less the cost to sell,
which resulted in an impairment charge of approximately $26,940 based
on its unaudited consolidated financial statements for the three month
period ended March 31, 2002. The $26,940 impairment charge has been
recognized in Fintur's unaudited consolidated financial statements for
the three month period ended March 31, 2002, which had an effect
amounting to $6,735 in Turkcell's consolidated results of operations
for the three month period ended March 31, 2002. This transaction will
enable Turkcell to focus on its core mobile business since these GSM
operations are located in countries with low mobile penetration rates,
which management believes will provide opportunities for future growth.
At September 30, 2002, the Company's ownership interest in Fintur was
41.45%. Investment in Fintur was accounted for under the equity method
of accounting.
Aggregate summarized information of Fintur and Siber Egitim as of
December 31, 2001, and for the nine month period ended September 30,
2001, and of Fintur as of September 30, 2002, and of Fintur and Siber
Egitim for the nine month period ended September 30, 2002 are as
follows:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
Current assets $ 218,375 98,232
Noncurrent assets 781,824 351,323
---------- -------
1,000,199 449,555
========== =======
Current liabilities 571,604 194,595
Noncurrent liabilities 223,559 121,676
Shareholders' equity 205,036 133,284
---------- -------
$1,000,199 449,555
========== =======
Nine months ended Nine months ended
September 30, 2001 September 30, 2002
------------------ ------------------
(Unaudited) (Unaudited)
Revenues $ 226,539 174,700
Direct cost of revenues (264,583) (86,559)
Loss before taxes (159,718) (60,330)
Net loss (166,256) (70,010)
Aggregate summarized information of Fintur and Siber Egitim for the
nine month period ended September 30, 2002 includes activities of Siber
Egitim for the three month period ended March 31, 2002. Turkcell
transferred its shares in Siber Egitim to other shareholders of Siber
Egitim on April 25, 2002. For the three month period ended March 31,
2002, Siber Egitim's revenues, direct cost of revenues, loss before
taxes and net loss were $16, $28, $73 and $73, respectively.
(10) Fixed Assets, net:
As of December 31, 2001 and September 30, 2002, the analysis of fixed
assets is as follows:
Useful December 31, September 30,
Lives 2001 2002
------ ------------ -------------
(Unaudited)
Operational fixed assets:
Base terminal stations 8 years $ 890,323 931,869
Mobile switching center/base station controller 8 years 808,683 823,110
Minilinks 8 years 191,247 192,381
Supplementary system 8 years 34,492 34,867
Call center equipment 5 years 7,210 7,776
GSM services equipment 8 years 77,308 77,308
----------- ---------
2,009,263 2,067,311
Accumulated depreciation (600,671) (792,031)
----------- ---------
Operational fixed assets, net 1,408,592 1,275,280
Non-operational fixed assets:
Land 531 531
Buildings 25 years 169,147 171,617
Furniture, fixture and equipment 4-5 years 133,300 139,896
Motor vehicles 4-5 years 6,047 6,076
Leasehold improvements 5 years 52,856 51,469
----------- ---------
361,881 369,589
Accumulated depreciation (115,363) (154,795)
----------- ---------
Non-operational fixed assets, net 246,518 214,794
----------- ---------
$ 1,655,110 1,490,074
=========== =========
Total amount of interest capitalized on fixed assets during the nine
month periods ended September 30, 2001 and 2002 amounted to $925 and
$8, respectively. Total amount of interest capitalized on fixed assets
during the three month periods ended September 30, 2001 and 2002
amounted to $235 and $1, respectively. Such capitalized interest is
depreciated over the useful lives of the related assets.
At December 31, 2001 and September 30, 2002, total fixed assets
acquired under finance leases amounted to $66,771 and $66,728,
respectively. Depreciation of these assets amounted to $784, $846,
$2,553 and $2,536 for the three month and nine month periods ended
September 30, 2001 and 2002, respectively, and is included with
depreciation expense.
(11) Construction in Progress:
At December 31, 2001 and September 30, 2002, construction in progress
consisted of expenditures in GSM and non-operational items and is as
follows:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
Turkcell-Phase 9 $ 116,409 77,687
Turkcell-Other projects -- 6,296
Non-operational items 2,268 2,750
Kibris Telekom-GSM network 959 537
---------- ------
$ 119,636 87,270
========== ======
(12) Intangibles, net:
At December 31, 2001 and September 30, 2002, intangibles consisted of
the following:
December 31, September 30,
Useful lives 2001 2002
------------ ------------ -------------
(Unaudited)
Turkcell-License (Note 1) 25 years $ 500,000 500,000
Computer software 8 years 641,473 667,117
Transmission lines 10 years 13,762 14,023
----------- ---------
1,155,235 1,181,140
Accumulated amortization (238,315) (315,771)
----------- ---------
$ 916,920 865,369
=========== =========
As of September 30, 2002, amortized intangible assets are as follows:
Gross carrying Accumulated
amount amortization
-------------- -----------
Turkcell-License $ 500,000 88,333
Computer software 667,117 223,174
Transmission lines 14,023 4,264
----------- ---------
$ 1,181,140 315,771
=========== =========
The Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets"
on January 1, 2002. The adoption of SFAS No. 142 did not have a
material impact on the Company's consolidated financial position or
results of operations. As of September 30, 2002, the Company does not
have any goodwill or indefinite live intangible assets.
Aggregate amortization expense
------------------------------
Aggregate amortization expense for the three month and nine month
periods ended September 30, 2001 and 2002 were $24,049, $26,103,
$68,898 and $77,461, respectively.
Estimated amortization expense
------------------------------
For the year ended December 31, 2002 $ 103,166
For the year ended December 31, 2003 102,215
For the year ended December 31, 2004 100,810
For the year ended December 31, 2005 98,901
For the year ended December 31, 2006 94,569
(13) Short Term Borrowings:
At December 31, 2001 and September 30, 2002, short-term borrowings
comprised the following:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
Current portion of long term borrowings (Note 18) $ 381,773 452,432
Other short term bank loans and overdrafts 1,394 769
--------- -------
$ 383,167 453,201
========= =======
(14) Trade Payables:
At September 30, 2002, the balance represents amount due to Ericsson
Telekomunikasyon A.S. (Ericsson Turkey) and Ericsson Radio Systems AB
(Ericsson Sweden) of $46,924 (December 31, 2001: $170,194) and $22,593
(December 31, 2001: $88,737), respectively, resulting from fixed asset
purchases, site preparation and other services, and amounts due to
other suppliers totalling $23,494 (December 31, 2001: $43,108) arising
in the ordinary course of business.
Turkcell is party to a series of supply agreements with Ericsson Turkey
(collectively the Supply Agreements) under which Ericsson Turkey has
agreed to supply Turkcell with an installed and operating GSM network,
spare parts, training and documentation. The Supply Agreements also
give Turkcell a non-exclusive restricted software License for GSM
software. Under the Supply Agreements, Ericsson Sweden guarantees all
of Ericsson Turkey's obligations to Turkcell.
Turkcell also entered into a GSM service agreement with Ericsson Sweden
under which Ericsson Sweden supplies Turkcell with the following system
services: trouble report handling service, hardware service,
consultation service and emergency service. This agreement expired on
December 31, 1998 but contains successive one-year automatic renewals
unless terminated by either party in writing no later than nine months
prior to the expiration of the current term, but not beyond December
31, 2005. As of September 30, 2002, the agreement was automatically
extended through December 31, 2002.
(15) Due to Related Parties:
As of December 31, 2001 and September 30, 2002, due to related parties
comprised:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
Hobim Bilgi Islem Hizmetleri A.S. (Hobim) $ - 480
Turkiye Genel Sigorta A.S. (Genel Sigorta) 425 -
Digital Platform 1,033 -
Superonline 397 -
Other 1,771 774
------- ------
$ 3,626 1,254
======= ======
Due to Hobim resulted from the invoice printing services rendered by
this company. (Note 22)
(16) Other Current Liabilities and Accrued Expenses:
At December 31, 2001 and September 30, 2002, the balance comprised:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
License fee accrual-The Turkish Treasury $ 98,318 207,014
Taxes and withholdings 70,675 82,073
Deferred income 40,930 43,351
Accrued interest on borrowings 45,176 29,526
Selling and marketing expense accruals 8,040 22,286
Transmission fee accruals 3,266 13,790
Lease obligations-short term portion (Note 19) 8,660 8,451
Interconnection accrual-Turk Telekom 11,425 4,773
Roaming expense accrual 2,240 3,632
Radio cost accrual 5,877 1,983
Accrued interest on lease obligations 1,534 1,193
Other expense accruals 7,284 10,882
--------- -------
$ 303,425 428,954
========= =======
In accordance with the License Agreement (Note 1), Turkcell pays the
Turkish Treasury an ongoing license fee equal to 15% of its gross
revenue. The balance of $98,318 at December 31, 2001 represents the
license fee accrual amounting to $11,154 for the month of December 2001
and license fee accrual on interconnection revenues amounting to
$87,164 including interest of $22,560 for the months of March 2001
through December 2001. The balance of $207,014 at September 30, 2002
consists of license fee accrual amounting to $17,163 for the month of
September 2002 and license fee accrual on interconnection revenues
amounting to $189,851 including interest of $68,851 for the months of
March 2001 through September 2002.
Interconnection accrual at December 31, 2001 and September 30, 2002
represents amounts payable under the Interconnection Agreement (Note
23). The Interconnection Agreement requires that Turkcell pays Turk
Telekom for Turkcell's GSM subscribers' calls to Turk Telekom's
fixed-line subscribers.
(17) Taxes on Income:
The income tax benefit is attributable to income/loss from continuing
operations and consists of:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
-------- -------- -------- --------
(Unaudited) (Unaudited)
Current tax charge - - - -
Deferred tax benefit - - $ 8,783 -
------- ------- ------- -------
Income tax benefit - - $ 8,783 -
======= ======= ======= =======
Income tax benefit attributable to income from continuing operations
was $8,783 and nil for the nine month periods ended September 30, 2001
and 2002, respectively. These amounts differ from the amount computed
by applying the Turkish income tax rate of 33% to pretax income from
continuing operations as a result of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
-------- -------- -------- --------
(Unaudited) (Unaudited)
Computed "expected" tax benefit
(expense) $ 8,772 (19,403) $ 54,895 (21,442)
Non taxable translation gain (loss) 17,361 (5,106) 252,265 (2,992)
Investment tax credit 19,333 16,276 106,955 53,673
Change in valuation allowance (67,339) 8,005 (479,275) (19,455)
Other 21,873 228 73,943 (9,784)
------- ------- -------- -------
Income tax benefit - - $ 8,783 -
======= ======= ======== =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31,
2001 and September 30, 2002 are presented below:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
Deferred tax assets:
Accrued expenses $ 18,783 63,848
Accounts and other receivables (principally due
to allowance for doubtful accounts) and other 34,572 56,132
Net operating loss carryforwards 250,520 81,243
Tax credit carryforwards (Investment tax credit) 271,698 325,372
---------- --------
Gross deferred tax assets 575,573 526,595
Less: Valuation allowances (539,739) (524,977)
---------- --------
Net deferred tax assets 35,834 1,618
Deferred tax liabilities:
Fixed assets and intangibles, principally due to
financial leases, differences in depreciation and
amortization, and capitalization of interest and
foreign exchange loss for tax purposes (35,834) (1,618)
---------- --------
Total deferred tax liabilities (35,834) (1,618)
---------- --------
Net deferred tax liabilities (assets) $ - -
========== ========
At September 30, 2002, net operating loss carry forwards are as follows
(unaudited):
Expiration
Year Amount Date
-------- ----------
1999 $ 1,815 2004
2000 4,649 2005
2001 237,415 2006
2002 1,408 2007
Non taxable translation gain results from translation of Turkish Lira
denominated non-monetary assets and liabilities to the US Dollar, the
functional and reporting currency, in accordance with the relevant
provisions of SFAS No. 52 as applied to entities in highly inflationary
economies. Under SFAS No. 109, such translation gains and losses
between the tax and book basis of related assets and liabilities do not
give rise to temporary differences. Such amounts are primarily
attributable to translation gain resulting from the translation of
Turkish Lira denominated fixed assets and intangibles into the US
Dollar.
In 1993, 1997, 2000 and 2001, the Turkish Treasury approved investment
incentive certificates for a program of capital expenditures by
Turkcell and its subsidiaries in GSM and call center operations. Such
incentives entitle the Company to a 100% exemption from customs duty on
imported machinery and equipment and an investment tax benefit of 100%
on qualifying expenditures. The investment tax benefit takes the form
of deductions for corporation tax purposes, but such deductions are
subject to withholding tax at the rate of 19.8%. Investment incentive
certificates provide for tax benefits on cumulative purchases of up to
approximately $3,309,141 in qualifying expenditures, as defined in the
certificates. As of September 30, 2002, the Company had incurred
cumulative qualifying expenditures of approximately $2,464,939
(December 31, 2001: $2,058,317), resulting in tax credit carry forwards
under the certificates of approximately $325,372 (December 31, 2001:
$271,698), net of foreign exchange translation losses.
Such tax credits can be carried forward indefinitely. The certificates
are denominated in Turkish Lira. However, approximately $2,168,342 of
qualifying expenditures through September 30, 2002, (December 31, 2001:
$1,994,427) under such certificates are indexed against future
inflation.
The Company establishes valuation allowances in accordance with the
provisions of SFAS No. 109. The Company continually reviews the
adequacy of the valuation allowance based on changing conditions in the
market place in which the Company operates and its projections of
future taxable income, among other factors. Management believes that
currently, based on a number of factors, including a history of
statutory tax losses, its limited operating history, the continuing
increase in competition, political and economic uncertainty within
Turkey and in certain neighboring countries, and other factors, the
available objective evidence creates significant uncertainty regarding
the realizability of its deferred tax assets. Accordingly, a valuation
allowance of approximately $524,977 is recorded as of September 30,
2002 (December 31, 2001: $539,739) for such amounts. The valuation
allowance at September 30, 2002 and December 31, 2001 has been
allocated between current and non-current deferred tax assets on a
pro-rata basis in accordance with the provisions of SFAS No. 109.
Management believes that it is more likely than not that the net
deferred tax asset of approximately $1,618 as of September 30, 2002
(December 31, 2001: $35,834) will be realized through reversal of
taxable temporary differences. Changes in valuation allowances mainly
result from changes in management's projections on recoverability of
certain deferred tax assets. The Company has recently begun to be
profitable. However, no provision for income taxes has been made as the
Company can offset the provision against net operating loss
carryforwards. The Company will continue to review the adequacy of the
valuation allowance, and if profits continue in the future the Company
may reverse a portion of the valuation allowance.
(18) Long Term Borrowings:
At December 31, 2001 and September 30, 2002, long-term borrowings
comprised:
December 31, September 30,
2001 2002
------------ -------------
(Unaudited)
Loan under the 1999 Issuer Credit Agreement $ 400,000 400,000
Loan under the 1998 Issuer Credit Agreement 300,000 300,000
Akbank T.A.S. (Akbank) 250,000 250,000
1999 Bank Facility 366,667 244,444
Garanti -Malta 150,000 112,500
Vakifbank 100,000 71,429
Nordbanken--Stockholm (Nordbanken) 24,757 16,643
Yapi ve Kredi Bankasi-Bahrain (Yapi Kredi) 3,500 -
AB Svensk Exportcredit (AB Svensk) 2,252 1,126
London Forfaiting Company 3,500 -
---------- ---------
1,600,676 1,396,142
Less: Current portion of long term borrowings (Note 13) (381,773) (452,432)
---------- ---------
$1,218,903 943,710
========== =========
The Company has short and long term credit lines with local and foreign
banks. At December 31, 2001, unused credit lines do not exist. On March
5, 2002, Yapi Kredi has committed to provide a cash loan facility up to
$200,000 to the Company over the next twelve months.
As of December 31, 2001 and September 30, 2002, interest on the loan
under the 1999 Issuer Credit Agreement accrues at the rate of 12.75%
per annum.
As of December 31, 2001 and September 30, 2002, the interest rate on
the 1999 Bank Facility varies between LIBOR plus 1.00% and LIBOR plus
3.50% per annum in respect of the tranches.
As of December 31, 2001 and September 30, 2002, interest on the loan
under the 1998 Issuer Credit Agreement accrues at the rate of 15% per
annum.
The interest rate of the Garanti loan was 14% per annum as of December
31, 2001 and has been amended as 12% per annum on January 3, 2002 and
9% per annum on April 1, 2002. On September 9, 2002, the Company agreed
with Garanti Bank to amend the interest rate to 8.21% per annum which
is effective June 30, 2002.
The interest rate of the Vakifbank loan was 14% per annum as of
December 31, 2001 and has been amended as 12% per annum on February 1,
2002. On June 3, 2002, Turkcell agreed with Vakifbank to amend the
interest rate further. Accordingly, the interest rate has been amended
as 10% per annum effective May 1, 2002 and 9% per annum effective June
1, 2002. On October 18, 2002, the Company agreed with Vakifbank to
amend the interest rate further to 8.5% per annum which is effective
October 1, 2002.
The interest rate of Akbank loan is LIBOR plus 5.25% per annum as of
December 31, 2001 and September 30, 2002. On May 9, 2002, Turkcell
agreed with Akbank T.A.S. to extend two principal repayments of
existing borrowings totaling $62.5 million, which were due in 2002, for
twelve months subsequent to their initial maturities.
As of December 31, 2001 and September 30, 2002, the Company is in
compliance with the financial covenants and ratios with respect to its
borrowings.
Generally, long-term borrowings are collateralized by bank letters of
guarantee and sureties of the Company's shareholders and commercial
enterprises.
(19) Long Term Lease Obligations:
Future minimum finance lease payments as of September 30, 2002 are:
Years
-----
2002 3,237
2003 12,949
2004 12,318
2005 and thereafter 9,617
------
Total minimum lease payments 38,121
Less: Amount representing interest (9,043)
Less: Current installments of obligations under finance
leases (Note 16) (8,451)
------
20,627
======
(20) Common Stock:
At December 31, 2001 and September 30, 2002, common stock represented
500,000,000,000 authorized, issued and fully paid shares with a par
value of one thousand Turkish Lira each.
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
--------------- --------------- --------------- ---------------
Numerator:
Net Income/(loss) (26,580) 58,797 (141,754) 64,975
Denominator:
Basic and diluted weighted average shares 480,033,876,523 500,000,000,000 460,356,343,683 500,000,000,000
Basic and diluted net income/(loss) per share (0.00006) 0.00012 (0.00031) 0.00013
On June 18, 2002, the Banking Regulation and Supervision Agency of
Turkey (the BRSA) transferred the management and supervision of
Pamukbank T.A.S. (Pamukbank), one of the Company's shareholders, to the
Savings Deposit Insurance Fund of Turkey (the SDIF) who took over all
shareholding rights of all Pamukbank shareholders, excluding their
dividend entitlements. The BRSA cited that Pamukbank failed to take
measures required under the Turkish Banks Act; that its total
liabilities exceed its total assets; that its financial weakness
threatened depositors' rights as well as safety and soundness of the
Turkish financial system and transferred the management and supervision
to the SDIF in accordance with third and fourth paragraphs of Article
14 of the Turkish Banks Act. Further, in accordance with fifth
paragraph of Article 14 of the Turkish Banks Act, the SDIF, has
acquired ownership of Pamukbank by paying the amount equivalent to
Pamukbank's losses. As of September 30, 2002, to the best of the
management's knowledge, Pamukbank held 7.87% ownership interest
indirectly over Turkcell Holding A.S. in Turkcell. On August 9, 2002,
Pamukbank advised the Company that the BRSA decided to transfer the
shares of Turkcell held directly by Pamukbank, approximately 0.51% of
Turkcell's outstanding share capital, to the SDIF. Pamukbank is
majority owned by the Cukurova Group, which was our largest
shareholder. Accordingly, on August 21, 2002, the Board of Directors of
Turkcell resolved to register such shares in the Share Register of
Turkcell under the name of the SDIF. On November 22, 2002, the Council
of State Administrative Cases Department General Assembly rendered
precautionary judgement regarding Pamukbank's case.
(21) Revenues:
For the three month and nine month periods ended September 30, 2001 and
2002, revenues consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Communication fees $ 420,643 521,191 1,244,502 1,421,445
Monthly fixed fees 13,080 9,239 72,961 31,528
Simcard sales 4,464 1,846 7,605 9,174
Call center revenues (Note 22) 1,948 1,777 5,886 6,267
Other 501 279 772 587
--------- ------- --------- ---------
$ 440,636 534,332 1,331,726 1,469,001
========= ======= ========= =========
(22) Related Party Transactions:
For the three month and nine month periods ended September 30, 2001 and
2002, significant transactions with the related parties were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2002 2001 2002
-------- -------- -------- --------
(Unaudited) (Unaudited)
Sales to A-Tel
Simcard and prepaid card sales $31,311 31,992 112,515 88,190
Sales to Digital Platform
Call center revenues 1,478 1,373 3,770 4,644
Charges from Digital Platfrom
Reimbursement of the costs of its free subscriptions to 2,868 2,589 4,764 6,627
Turkcell subscribers and advertisement services
Charges from Asli Gazetecilik
Advertisement services 2,300 4,246 8,748 12,331
Sales to KVK
Simcard sales 8,641 10,975 21,364 66,766
Charges from Hobim
Invoicing service 931 1,377 2,635 4,065
Charges from Superonline
Contribution to advertising expenses and internet 374 157 724 564
services rendered
Sales to Sugeronline
Call center revenues 241 232 1,422 1,068
Charges from Genel Yabam Sigorta
Life insurance premiums 2,548 2,986 5,894 8,000
Sales To Geocell
GSM Equipment 1,396 0 1,413 1,819
Sales To Millenicom
Telecommunication services 478 2,214 478 5,225
Charges to Digital Platform
Telecommunication services and rent charges 1,641 180 2,717 690
Charges from Millenicom
Telecommunication services 134 2,642 134 5,487
Charges from Genel Sigorta
Insurance 541 118 1,545 1,177
Charges From ADD
Advertisement services - 15,930 - 38,657
Turkcell has agreements or protocols with several of its shareholders,
unconsolidated 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.
The significant agreements are as follows:
Agreements with A-Tel
A-Tel is one of the principal importers of handsets and is involved in
marketing, selling and distributing a part of Turkcell's prepaid
system. A-Tel is a 50-50 joint venture of KVK and Sabah media group.
A-Tel acts as the only dealer of Turkcell for Muhabbet Kart (a prepaid
card), and receives dealer activation fees and simcard subsidies for
the sale of Muhabbet Kart. In addition to sales of simcards and scratch
cards Turkcell has entered into several agreements with A-Tel for sales
campaigns and for subscriber activations. Sales campaigns are also
incorporated with Sabah, the media company.
Agreements with KVK
KVK, one of Turkcell's principal SIM card distributors, is a Turkish
company controlled by three individuals who are affiliated with
Turkcell's shareholders. In addition to sales of simcards and scratch
cards Turkcell has entered into several agreements with KVK, in the
form of advertisement support protocols, each lasting for different
periods pursuant to which KVK must place advertisements for Turkcell's
services in newspapers. The objective of these agreements was to
promote and increase handset sales with Turkcell's prepaid and postpaid
brand SIM cards, thereby supporting the protection of Turkcell's market
share in the prevailing market conditions. The prices of the contracts
were determined according to the cost of advertising for KVK and total
amount of advertisement benefit received, reflected in Turkcell's
market share in new subscriber acquisitions. Distributors' campaign
projects and market share also contributed to the budget allocation.
Agreements with Digital Platform
Digital Platform, a direct-to-home digital broadcasting company under
Digiturk brand name, is a Turkish company owned by one of our principal
shareholders, Cukurova Group. Digital Platform holds the broadcasting
rights for Turkish Super Football League until May 2004. Turkcell has
entered into several agreements with Digital Platform, in order to
exploit the unique position of Digital Platform in Turkey, including a
slow motion advertising agreement, relating to Turkcell ads shown on
digital television screens during football games and related events,
amounting to $5,000 for a period of one year and extendable if any of
the parties do not oppose it. In addition, Turkcell has agreed with
Digital Platform to sponsor some of the films broadcast on its
pay-per-view channels. Turkcell also has a rent agreement for the space
occupied by Digital Platform in one of Turkcell's buildings, an
agreement related to the provision of Group SMS services that Turkcell
offers to Digital Platform, and an agreement for call center services
provided by Turkcell's subsidiary Global.
Agreements with Asli Gazetecilik
Asli Gazetecilik, a media planning and marketing company, is a Turkish
company owned by one of Turkcell's principal shareholders, Cukurova
Group. Turkcell receives services related to making space and airtime
reservations for advertisements on television stations, radio stations,
newspapers and magazines.
Agreements with Genel Yasam Sigorta
Genel Yasam Sigorta, a life insurance company, is a Turkish company
owned by one of Turkcell's principal shareholders, Cukurova Group.
Turkcell has signed agreements for the life insurance policies related
to its personnel and the personnel of some of its dealers.
Agreements with Hobim
Hobim, one of the leading data processing and application service
provider companies in Turkey, is owned by the Cukurova Group. Turkcell
has entered into invoice printing and archiving agreements with Hobim
nder which Hobim provides Turkcell with monthly invoice printing
services, manages archiving of invoices and subscription of documents
for an indefinite period of time.
Agreements with Superonline
Turkcell and Superonline 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, Turkcell provides space to
Superonline on base station sites to install servers and equipments to
increase the performance of the system infrastructure of Superonline.
Financial lease agreements with Yapi Kredi Finansal Kiralama A.S.
Turkcell has entered into a finance lease agreement with Yapi Kredi
Finansal Kiralama A.S (Yapi Kredi Leasing), an affiliate of Yapi Kredi,
a shareholder of the Company, for the new headquarters building it
began to occupy in early 1998. The purchase price of the building was
$14,162. Turkcell has purchased the building at May 17, 2002 for its
nominal purchase price.
In addition, Turkcell has entered into a finance lease agreement with
Yapi Kredi Leasing for a building in Ankara for regional offices. The
purchase price of the building was $16,400 and Turkcell's outstanding
lease obligation at September 30, 2002 was $10,346 (December 31, 2001:
$11,902). Turkcell may purchase the building at the end of the lease
period for a nominal purchase price.
Financial lease agreements with Pamuklease Pamuk Finansal Kiralama A.S.
Turkcell has entered into five finance lease agreements with Pamuklease
Pamuk Finansal Kiralama A.S. (formerly Interlease Inter Finansal
Kiralama A.S.), a Cukurova Group Company, for Turkcell's departments
and regional offices in Istanbul, Ankara and Izmir. The purchase price
of the buildings was $32,673 and Turkcell's outstanding lease
obligation at September 30, 2002 was $18,733 (December 31, 2001:
$22,609). Turkcell may purchase the building at the end of the lease
period for a nominal purchase price.
ADD Production Medya A.S. (ADD)
ADD, a media planning and marketing company, is a Turkish company owned
by one of the Company's principal shareholders, Cukurova Group. The
Company entered into a media purchasing agreement with ADD on January
23, 2002, which will last until December 31, 2002. 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 contract prices
were determined according to prevailing market prices for media
purchasing.
Personal loans to directors and executive officers
As of December 31, 2001 and September 30, 2002, 10 of the Company's
directors and executive officers have outstanding personal loans from
the Company amounting $179 and $64, respectively.
(23) Commitments and Contingencies:
Legal Proceedings
The Company is involved in various claims and legal actions arising in
the ordinary course of business described below.
Dispute on Treasury Share:
On an ongoing basis, Turkcell must pay 15% of its monthly gross
revenue, which is defined in its license agreement as subscription
fees, fixed-monthly fees and communication fees including taxes,
charges and duties to the Turkish Treasury. The Turkish Ministry and
the Turkish Treasury informed Turkcell that, in their view, its 15%
ongoing license fee should be calculated before deduction of VAT, its
required contribution to the education fund and the frequency usage and
transmission fees. Turkcell has consistently calculated its 15% ongoing
license fee after deducting for these items, which Turkcell believes is
consistent with the terms of its license. VAT in Turkey is currently
18% and the education fund and frequency usage and transmission fees,
which are calculated as fixed fees, have amounted to approximately
$174,203 between acquisition of its license and September 30, 2002. The
Turkish Ministry and the Turkish Treasury have taken the position that
such collections are required to be included in calculating the amount
of its ongoing license fee. On November 8, 1999, the Turkish Ministry
notified Turkcell and Telsim, the other GSM operator at that time,
which Turkcell believes was computing its license fee obligation in the
same manner as Turkcell were, that the Danistay ruled that the
interpretation of the Turkish Ministry was correct and that from
November 1999 forward its 15% ongoing license fee should be calculated
according to the Turkish Treasury's method. On November 18, 1999, the
Turkish Treasury informed Turkcell that all payments under its license
should be calculated retroactively using such methodology and paid to
the Turkish Treasury applying the statutory interest rate on the unpaid
balance from April 27, 1998, the date its license was granted.
Under the Turkish Treasury's calculation, the cumulative amount of VAT,
education fund, frequency usage and transmission fees from April 27,
1998, until December 31, 1999, was $264,126. The Turkish Treasury
requested that Turkcell pays 15% of this amount, which was $7,482 for
the year ended December 31, 1998 and $32,137 for the year ended
December 31, 1999. The statutory interest rate as applied on this
unpaid balance results in an additional payment of $12,536 for the year
ended December 31, 1998 and $15,424 for the year ended December 31,
1999. Turkcell disagrees with the Turkish Treasury's position, and
initiated an administrative suit at the Danistay against the Turkish
Ministry and the Turkish Treasury. On December 29, 1999, Turkcell
obtained an injunction to prevent the Turkish Treasury from collecting
the license fee in respect of the disputed amounts. On February 16,
2000, the Danistay lifted the injunction in respect of the license fee
payable on account of collections of VAT but upheld the injunction with
respect to the state education fund and the frequency usage and
transmission fees. Subsequent to the Danistay's decision on February
16, 2000, the Turkish Ministry and the Turkish Treasury filed a
challenge to the Danistay's decision to uphold the injunction with
respect to the state education fund, frequency usage and transmission
fees, and Turkcell filed a challenge to the Danistay's decision with
respect to VAT. Both challenges were rejected by the Danistay on April
21, 2000. On October 15, 2001, a substantive decision in line with the
injunctive relief was rendered by the Danistay. The Danistay ruled that
VAT should be included in the calculation of gross revenue whereas the
state education fund, the frequency usage fees and transmission fees
should not. Turkcell expects that both parties will appeal the parts of
the decision adverse to their interests. On March 24, 2000, Turkcell
paid to the Turkish Treasury a sum of $57,163 for license fees on
account of VAT and the accrued late payment interest collected since
April 1998, which sum excludes license fees on account of the education
fund and the frequency usage and transmission fees.
Turkcell has paid the above amount, with a reservation, to the Turkish
Treasury, and will continue to pay license fees in respect of VAT
collections, subject to a final judgment to be rendered by the
Danistay. On March 27, 2000, Turkcell filed a challenge against the
Danistay's decision to lift the injunction with respect to VAT, which
was rejected on April 21, 2000. Unpaid amounts with respect to the
state education fund, frequency usage and transmission fees, including
interest, amounted to $47,591 and $62,385 as of December 31, 2001 and
September 30, 2002, respectively. Turkcell and its legal counsel
believe that Turkcell will prevail with respect to payment of the
education fund, frequency usage and transmission fees. Accordingly,
Turkcell has not made any provisions in the Company's consolidated
financial statements for license fee payments with respect to
collections on account of the education fund, frequency usage and
transmission fees. There can be no assurance, however, that there will
not be an unfavorable ruling in this matter or that such an outcome
would not have a material adverse effect on the Company's consolidated
financial position, results of operations, or liquidity.
Dispute on VAT on License Fee:
On May 4, 2000, Turkcell received a notice from the Istanbul Bogazici
Tax Office of the Ministry of Finance, or the Tax Office, asserting
deficiencies in VAT declarations for the month of April 1998. The Tax
Office claims that Turkcell should have paid VAT on the $500,000
upfront license fee paid to the Turkish Treasury. The notice stated
that, based on calculations made by the Tax Office on February 29,
2000, Turkcell should have paid VAT of TL 18.6 trillion (equivalent to
$11,301 at September 30, 2002) on the upfront license fee in April
1998. The Tax Office has also imposed late interest charges equal to TL
48.1 trillion (equivalent to $29,156 at September 30, 2002) and a
penalty fee of TL 37.3 trillion (equivalent to $22,602 at September 30,
2002). The Tax Office's position is premised on the view that the
license was not transferred or sold to Turkcell but leased for a period
of 25 years. Accordingly, the Tax Office claimed that under Turkish
law, VAT should be paid on the upfront license fee and that Turkcell
should pay the VAT because the lessor, the Turkish Ministry, is not a
registered tax payer.
If the Tax Office prevailed in this case, Turkcell would have a payable
to the Tax Office for the amount of VAT, which would be offset by a VAT
recoverable in the same amount and would not result in cash outflow
from Turkcell for the VAT payment. However, the interest charge on the
unpaid VAT of TL 59.1 trillion (equivalent to $35,847 at September 30,
2002) and the penalty fee of TL 37.3 trillion (equivalent to $22,602 at
September 30, 2002) would have to be paid. Turkcell has filed a
petition in the Tax Court to challenge all deficiencies as ruled by the
Tax Office. The Tax Court has rejected its claim and Turkcell has
appealed the case to the Danistay.
While the case was pending at the Danistay, the Tax Office requested on
March 16, 2001 that Turkcell pays VAT on the upfront license fee as
well as the late payment interest on the unpaid VAT and the penalty
fee. While continuing its court challenge, Turkcell has established a
payment schedule for such amounts. In accordance with the payment
schedule, Turkcell was required to pay VAT on the upfront license fee
amounting to TL 18.6 trillion (equivalent to $11,301 at September 30,
2002), the outstanding interest charge amounting to TL 60.7 trillion
(equivalent to $36,842 at September 30, 2002) and the penalty fee
amounting to TL 9.3 trillion (equivalent to $5,650 at September 30,
2002).
On March 16, 2001, Turkcell paid TL 21.4 trillion (equivalent to
$21,280 at March 16, 2001 and $12,995 at September 30, 2002), of which
TL 18.6 trillion (equivalent to $18,501 at March 16, 2001) was for VAT
on the upfront license fee and TL 2.8 trillion (equivalent to $2,779 at
March 16, 2001) was for the outstanding interest charges. The remaining
TL 67.3 trillion (equivalent to $66,787 at March 16, 2001 and $40,794
at September 30, 2002) was to be payable in 15 monthly installments
starting March 30, 2001. The first installment was for TL 5.4 trillion
(equivalent to $5,313 at March 16, 2001 and $3,246 at September 30,
2002) and the remaining installments were to be in equal amounts of TL
4.4 trillion (equivalent to $4,391 at March 16, 2001 and $2,683 at
September 30, 2002). On March 21, 2001, Turkcell also provided a bank
letter of guarantee from Yapi ve Kredi Bankasi to the Tax Office
amounting to TL 68.0 trillion (equivalent to $70,005 at March 21, 2001
and $41,246 at September 30, 2002). On April 12, 2001, the Istanbul
Fifth Tax Court reduced the outstanding interest charge from TL 60.7
trillion to TL 11.1 trillion (equivalent to $8,698 at April 12, 2001
and $6,746 at September 30, 2002). The Tax Office has appealed this
decision. Pursuant to the Istanbul Fifth Tax Court's ruling, on May 31,
2001, Turkcell replaced its previous bank letter with a new bank letter
of guarantee amounting to TL 15.0 trillion (equivalent to $12,970 at
May 31, 2001 and $9,098 at September 30, 2002) reflecting the reduction
in the outstanding interest charge. Accordingly, its payment schedule
was amended. Payments already made have been set-off against future
payments.
On July 9, 2001, the Danistay remitted the issue regarding the legality
of the penalty fee to the Tax Court. On September 13, 2002, the Tax
Court decided to reduce the penalty fee to TL 9.3 trillion (equivalent
to $5,650 as of September 30, 2002). As of September 30, 2002, Turkcell
recorded an accrual of TL 9.3 million (equivalent to $5,650 at
September 30, 2002) for the penalty fee. Turkcell will appeal this
decision.
Out of a total interest charge of TL 13.2 trillion (equivalent to
$8,001 as of September 30, 2002), which includes additional accrued
interest of TL 2.1 trillion (equivalent to $1,254 as of September 30,
2002), Turkcell has paid TL 4.5 trillion (equivalent to $2,698 as of
September 30, 2002) pursuant to the payment plan and an accrual was
made for the unpaid portion of TL 8.7 trillion (equivalent to $5,303 as
of September 30, 2002) in the consolidated financial statements as of
and for the nine months period ended September 30, 2002. There can be
no assurance, however, that there will not be an unfavorable ruling in
this matter or that such an outcome would not have a material adverse
effect on the Company's consolidated financial position, results of
operations, or liquidity. If the cases are resolved in favor of the Tax
Office, Turkcell will be liable to the Tax Office for the additional
interest charges of TL 46.0 trillion (equivalent to $27,834 as of
September 30, 2002) and the additional penalty fee up to TL 28.0
trillion (equivalent to $16,951 as of September 30, 2002).
In addition to the foregoing, Turkcell has not paid VAT on the ongoing
license fees paid to the Turkish Treasury since this was also not
stated in the License Agreement at the time the License was acquired.
However, on December 28, 2001, the board of accounting experts of the
Ministry of Finance issued an opinion stating that GSM licensees in
Turkey should pay VAT on the ongoing license fee paid to the Turkish
Treasury. In addition, the opinion stated that since GSM operators have
not paid such amounts, penalties and interest should be paid as well as
back payments of VAT. Pursuant to this opinion, the Tax Office
delivered to Turkcell a notice on January 31, 2002, asserting
deficiencies in VAT declarations requesting payments of approximately
TL 91.4 trillion (equivalent to $55,423 at September 30, 2002) for VAT,
which will be offset by a VAT recoverable and will not result in a cash
outflow from Turkcell and a total of approximately TL 145.3 trillion
(equivalent to $88,115 at September 30, 2002) for penalty fees.
Turkcell began discussions with the Tax Office to discuss their
deficiency notice. If Turkcell is unable to settle this matter with the
Tax Office, legal claims may be brought by Turkcell or the Tax Office.
Turkcell and its legal counsel believe that if such claims are
asserted, Turkcell will prevail. However, Turkcell has made a provision
of TL 1.9 trillion (equivalent to $1,166 at September 30, 2002) in its
consolidated financial statements for interest payment considering that
the case is identical with the dispute regarding VAT on Turkcell's
upfront License fee. Turkcell has pledged assets worth TL 749.5
trillion (equivalent to $454,609 at September 30, 2002) to the Tax
Office. There can be no assurance, however, that legal proceedings will
not be instituted or that if such proceedings were instituted that
there would not be an unfavorable ruling in this matter. An adverse
outcome in any such proceeding or the payment of VAT on the ongoing
license fees paid to the Turkish Treasury would have a material adverse
effect on the Company's consolidated financial position, results of
operations, or liquidity.
Dispute on Turk Telekom Interconnection Fee:
Turk Telekom notified Turkcell on February 14, 2000, that it was
modifying the method by which it calculates the interconnection fee
that it pays to Turkcell. Turk Telekom believes that it should be
permitted to deduct from the revenues used to determine the
interconnection fee the 15% "fund" payment that it pays to the Turkish
Treasury and a 2.5% payment that it pays to the Turkish Radio and
Television Institution, which is a payment that Turk Telekom was
required to make during 2000 only. Based on this position, Turk Telekom
withheld TL 6.6 trillion (equivalent to $4,004 at September 30, 2002)
from the amount it paid to Turkcell for interconnection for the first
two months of 2000. On April 25, 2000, Turkcell obtained an injunction
from the commercial court preventing Turk Telekom from calculating the
interconnection fee in this manner from March 1, 2000 onwards.
On May 4, 2000, Turkcell commenced a first lawsuit against Turk Telekom
to recover the TL 6.6 trillion it retained with respect to the first
two months of 2000. On October 5, 2000, the court ruled against
Turkcell in this lawsuit and lifted the injunction Turkcell obtained on
April 25, 2000. Turk Telekom subsequently notified Turkcell on October
16, 2000 that it was requesting payment for TL 37.5 trillion
(equivalent to $22,744 at September 30, 2002) representing the amount
Turk Telekom would have deducted from its revenues for the period
between March 2000 and September 2000. On October 31, 2000, Turkcell
paid Turk Telekom a first installment of TL 16.0 trillion (equivalent
to $9,765 at September 30, 2002) with a reservation. Turkcell filed an
appeal against the October 5, 2000 decision before the appeals court.
On November 3, 2000, Turkcell obtained an injunction to prevent Turk
Telekom from continuing to calculate its interconnection fee in this
manner. Out of the total additional interconnection fee of $91,151
sought by Turk Telekom, which includes a statutory interest charge of
$3,828, $35,332 was paid to Turk Telekom and liability was recorded for
the unpaid portion of $55,819 in the consolidated financial statements
as of and for the year ended December 31, 2000. On May 11, 2001, the
appeals court ruled that Turk Telekom should be permitted to deduct
from its revenues the 2.5% payment that it paid to the Turkish Radio
and Television Institution for the year 2000 but remanded the decision
regarding the 15% fund to the lower court. At the end of first half of
2001, Turkcell has reversed $81,317, which was previously accrued but
not paid and included in direct cost revenues both in year 2000 and in
the first half of 2001. Additionally, as a result of the progress in
the legal proceeding with Turk Telekom for 15% fund previously paid to
Turk Telekom, $23,287 was recorded as income in direct cost of revenues
related with the paid portion of $35,332 as of and for the year ended
December 31, 2000. As a result, Turkcell has recorded $49,595 as income
in the direct cost of revenues in the accompanying financial statements
for the year ended December 31, 2001. On January 24, 2002, the lower
court rendered a decision in line with the appeals court's decision and
ruled that Turk Telekom is permitted to deduct the 2.5% payment from
its revenue for the year 2000 but that it is not permitted to do so for
the 15% fund payment. As a result, on March 13, 2002, Turkcell received
approximately TL 14.0 trillion (equivalent to $10,092 at payment date)
from Turk Telekom, which was related to the TL 6.6 trillion (equivalent
to $4,004 at September 30, 2002) withheld by Turk Telekom, plus
interest.
On November 10, 2000, Turkcell filed a second lawsuit to recover the TL
16.0 trillion (equivalent to $9,765 at September 30, 2002) paid to Turk
Telekom as its first installment. In this second lawsuit the court
decided to await the appeals court decision to be rendered in the first
lawsuit and to be bound by such decision. While the appeals court
decided in favour of Turkcell in first lawsuit, the court decided in
favour of Turk Telekom. The Company has appealed the court's decision
and management and legal counsel of the Company expects a similar
decision with the first lawsuit and to recover the TL16.0 trillion paid
to Turk Telekom with interest.
Dispute on Turk Telekom Interconnection Fee:
The Turkish Electrical Engineers' Society commenced a lawsuit against
Turk Telekom in 2000 in the Ninth Administrative Court. In the lawsuit,
the Turkish Electrical Engineers' Society claimed that its
interconnection agreement with Turk Telekom violates public policy and
the provisions of the Turkish Constitution relating to the protection
of consumers and the prevention of monopolies and cartels. In October
2000, the court annulled Annex 1-A.1 of its interconnection agreement
with Turk Telekom, which deals with call tariffs. Although Turkcell was
not a party to the lawsuit, its interest has been affected by the
decision. Under Annex 1-A.1, Turk Telekom retains a net amount of 6
cents per minute, after deducting VAT, communications tax and other
taxes from the basic one-minute unit charges of Turk Telekom, and pays
the remaining amount to Turkcell for traffic switched from the Turk
Telekom network to its network. Turkcell pays Turk Telekom a net amount
of 1.4 cents per minute for local traffic and a net amount of 2.5 cents
per minute for metropolitan and long-distance traffic switched from
Turkcell to Turk Telekom.
On November 20, 2000, Turkcell was informed of the court's decision and
received notification from Turk Telekom that all interconnection fees
since the acquisition of its license paid by Turkcell to Turk Telekom
and by Turk Telekom to Turkcell must be the same to comply with the
court's decision and should be retroactively calculated from the date
of its license and include the statutory interest rate on the unpaid
balance. Turk Telekom made one claim pertaining to the period extending
from the date of its license up to October 2000, and a second to
January 2001. Turkcell initiated two separate lawsuits for each period
before the commercial court to cancel Turk Telekom's request until
Turkcell agrees with Turk Telekom to replace the cancelled provisions
of its interconnection agreement. The case is still pending and the
injunction granted in the first case was subsequently lifted but in
November 2001, Turkcell obtained an injunction in the second lawsuit
which helps cover both periods and which is currently in effect
preventing Turk Telekom from collecting this amount. In the first case,
the court decided to postpone its decision until the court in the
second case renders a final decision. An expert opinion was rendered in
its favor on August 21, 2001 in the second lawsuit, Turk Telekom
appealed the decision in the second lawsuit. Turkcell is preparing to
file its response to their appeal as soon as Turkcell is served with
Turk Telekom's filing.
In addition to the foregoing, Turk Telekom initiated a lawsuit to have
the principle of equivalent computation decided and made a payment
request of TL 1,083.2 trillion (equivalent to $657,014 at September 30,
2002). The court decided the case should be consolidated with the first
lawsuit. Turkcell and its legal counsel believe that Turkcell will
prevail in this matter. There can be no assurance, however, that there
will not be an unfavorable ruling in this matter or that such an
outcome would not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
Dispute on Additional Treasury Share on Value Added Services and Other
Charges:
On November 2, 2000, Turkcell received a notice from the Turkish
Ministry stating that certain value-added services, transaction fees,
roaming revenue and interest charges for late collections should be
included in the determination of the ongoing license fees paid to the
Turkish Treasury. The Turkish Treasury informed Turkcell that the
license fees for all such services would be retroactively recalculated
from the date of its license agreement and paid to the Turkish Treasury
after applying the statutory interest rate. On December 22, 2000,
Turkcell initiated a suit against the Turkish Ministry and the Turkish
Treasury before the Administrative Court to enjoin the Turkish Ministry
and the Turkish Treasury from charging Turkcell these fees. The
Administrative Court dismissed the case based on lack of jurisdiction
and transferred the case to the Danistay, which has jurisdiction over
the case. On July 25, 2001, the Danistay notified Turkcell that it has
rejected Turkcell's request to obtain an injunction to prevent the
Turkish Treasury to collect such fees. On July 25, 2001, Turkcell
appealed this decision. On October 15, 2001, Turkcell was notified that
the Danistay's decision, which was dated September 14, 2001, to reject
its request to obtain an injunction to prevent the Turkish Treasury to
collect such fees was reaffirmed. Turkcell and its legal counsel have
not reasonably estimated the possible outcome of this uncertainty.
Accordingly, Turkcell has not recorded any accrual for additional
ongoing license fees for such services and revenues and interest. If
the case is resolved in favour of the Turkish Treasury, Turkcell will
be liable to the Turkish Treasury for up to TL 274.0 trillion
(equivalent to $166,199 as of September 30, 2002) including interest of
TL 149.4 trillion (equivalent to $90,628 as of September 30, 2002) as
of September 30, 2002. There can be no assurance, however, that there
will not be an unfavorable ruling in this matter or that such an
outcome would not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.
Class action lawsuit against Turkcell:
On November 22, 2000, a purported class action lawsuit was initiated in
the United States District Court for the Southern District of New York
against Turkcell and other defendants. The complaint alleges that the
prospectus issued in connection with its initial public offering in
July 2000 contains false and misleading statements regarding its "churn
rate" and omits material financial information.
The plaintiff brought the lawsuit as a class action on behalf of
individuals and entities that purchased its American Depository Shares,
or ADSs, at or traceable to the initial public offering. The plaintiff
seeks to recover damages pursuant to sections 11 and 15 of the
Securities Act of 1933 for the difference between the price each
purchaser paid for ADSs and either the price of the ADSs at the time
the complaint was filed or the price at which such ADSs were sold if
sold prior to November 22, 2000. Since November 2000, approximately ten
substantially identical purported class action lawsuits have been filed
on behalf of the same class. On March 5, 2001, the court consolidated
the lawsuits, appointed two lead plaintiffs and appointed lead counsel.
On March 29, 2001, plaintiffs in securities lawsuits against Turkcell
filed a consolidated and amended class action complaint, which alleges
that the prospectus issued in connection with its initial public
offering in July 2000 contained false and misleading statements
regarding its churn rate and omitted material financial information. On
September 11, 2001, Turkcell filed a motion to dismiss plaintiffs'
claims. On November 1, 2001, its motion to dismiss was granted on the
claim alleging omission of material financial information but denied
for the claim regarding churn. Turkcell has now entered the discovery
process. On March 20, 2002, the plaintiffs filed a motion asking the
court to certify the case as a class action. On May 10, 2002, Turkcell
filed a memorandum of law opposing Plaintiff's Motion for Class
Certification. On August 22, 2002, the Court granted plaintiffs' motion
for class certification and certified a class of people who purchased
Turkcell ADSs during the period from July 10, 2000 through September
21, 2000, and who can trace their purchases to Turkcell's July 10, 2000
registration statement. Turkcell intends to defend itself vigorously
once the case is examined on a substantive basis. At this point in the
litigation it is premature to estimate its potential liability, if any,
from the class action lawsuit.
Dispute on tariff increase of transmission lines leases:
Currently, Turkcell leases all of its transmission lines from Turk
Telekom. Turkcell is required to do so to the extent that Turk Telekom
can satisfy its requirements. Turk Telekom's monopoly on providing
transmission lines is scheduled to expire no later than the end of
2003.
Effective from July 1, 2000, Turk Telekom annulled the discount of 60%
that it provided to Turkcell based on its regular ratio, which had been
provided for several years, and, at the same time, Turk Telekom started
to provide a discount of 25% being subject to certain conditions.
Turkcell filed a lawsuit against Turk Telekom for the application of
the agreed 60% discount. However, on July 30, 2001, the Company had
been notified that the appeals court 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 TL 3.0 trillion (equivalent to
$2,099 and $1,833 as of December 31, 2001 and September 30, 2002,
respectively) for possible interest charges as of December 31, 2000. On
May 9, 2002, Turk Telekom requested an interest amounting to TL 30.1
trillion (equivalent to $18,238 at September 30, 2002) on these late
payments. The Company did not agree with the Turk Telekom's interest
calculation and, accordingly, Turkcell 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. As of September
30, 2002, the Company made a provision of TL 13.3 trillion (equivalent
to $8,065 as of September 30, 2002) because its management and legal
counsel believe that this is the maximum potential liability in
accordance with the relevant provisions of the Interconnection
Agreement.
On March 2, 2001, Turk Telekom unilaterally, and without the approval
of the Turkish Ministry, increased the fees it charges Turkcell for
access to its transmission lines by 100%, effective April 1, 2001, and
refused to lease Turkcell any further transmission lines. On May 25,
2001, Turkcell obtained an injunction from the commercial court to
compel Turk Telekom to lease additional transmission lines to Turkcell
and to prevent Turk Telekom from collecting any amounts relating to
their increase in the transmission line fee. On June 4, 2001, Turkcell
initiated a lawsuit against Turk Telekom to rule on the legality of
Turk Telekom's increase in the transmission line fees and their refusal
to lease additional transmission lines to Turkcell. In this lawsuit,
Turk Telekom objected to the May 25, 2001 injunction but the injunction
was upheld. In November 2001, Turk Telekom set new fees in accordance
with Telecommunications Authority's rules for access to Turk Telekom's
transmission lines. From that date Turkcell has paid the fees set by
the Telecommunications Authority. Therefore, Turk Telekom's claim for
increased transmission fees relates to fees they claim they should have
received between the end of March and the end of October 2001. On
February 28, 2002, the commercial court granted its request for an
expert opinion. Turkcell and its legal counsel believe that Turkcell
will prevail in this matter. If the case is resolved in favour of Turk
Telekom, Turkcell will be liable to Turk Telekom for up to TL 76.8
trillion (equivalent to $46,561 as of September 30, 2002) including
interest of TL 39.4 trillion (equivalent to $23,909 as of September 30,
2002) as of September 30, 2002. There can be no assurance, however,
that there will not be an unfavorable ruling in this matter or that
such an outcome would not have a material adverse effect on the
Company's consolidated financial position, results of operations, or
liquidity.
Dispute on National Roaming Agreement:
The introduction of national roaming in Turkey could have a negative
impact on the Company's consolidated financial position, results of
operations or liquidity. Roaming allows subscribers to other operators'
services to use its networks when they are outside the reach of their
own operators' network service areas. National roaming is an issue in
Turkey because several Turkish mobile operators have networks with
limited geographic reach.
During the third quarter of 2001, Turkcell was approached by IsTim to
negotiate a national roaming agreement. These negotiations did not
result in a mutual agreement. Therefore, the discussions continued
under the supervision of the Telecommunications Authority. The
Telecommunications Authority proposed a solution on October 18, 2001
and asked the parties to reach a decision by November 15, 2001. The
proposal included an upfront fee as well as a per minute fee and a
guaranteed volume of airtime usage for the term of the agreement. As
Turkcell believes that the Telecommunications Authority is not
authorized to intervene in this issue and its proposal is technically
impossible to apply and commercially unacceptable, Turkcell obtained an
injunction on November 12, 2001 from the Ankara Fourth Court of First
Instance regarding the conflict. According to the Court's decision, the
execution of a national roaming agreement between IsTim and Turkcell
has been prevented. The Telecommunications Authority and IsTim have
appealed the granting of the injunction. In addition, on November 26,
2001, Turkcell initiated an arbitration suit in the International Court
of Arbitration of the International Chamber of Commerce ("ICC") against
the Turkish Ministry and the Telecommunications Authority. Furthermore,
Turkcell has initiated an action before the Ankara Ninth Administrative
Court on November 13, 2001 to annul the above-mentioned proposed
solution of the Telecommunications Authority. On December 6, 2001, the
Ankara Fourth Court upheld the injunction it rendered in Turkcell's
favor on November 12, 2001.
On March 8, 2002, the Telecommunications Authority published a new
regulation regarding procedures and policies related to a national
roaming agreement. The Telecommunications Authority has invited all
parties affected by the new regulation, including Turkcell, to discuss
the new regulations with the Telecommunications Authority. Two of the
most important provisions of the new regulation are Provisional Article
1 and Article 17. Provisional Article 1, which deals with negotiations,
agreements and documents relating to the issuance of this regulation,
states that all ongoing negotiations shall continue in compliance with
the new regulation and that all agreements and documents completed
before issuance of the new regulation shall remain valid and binding.
Article 17, which sets out penalties to be imposed on any party
violating the provisions of the new regulation, imposes the following
penalties and sanctions:
- a penalty of 0.01% of an operator's turnover in the previous
year for failure to provide the documents or information
requested by the Telecommunications Authority, or the
provision of defective or misleading information;
- a penalty of no less than 1% and no more than 3% of an
operator's turnover in the previous year for failure to
implement the national roaming requirements set by the
Telecommunications Authority within the required time period;
and
- a penalty of no less than 1% and no more than 3% of an
operator's turnover in the previous year for the interruption
of service without a valid reason following commencement of
national roaming service.
In a letter dated March 14, 2002, the Telecommunications Authority
subjected IsTim's request for national roaming to the condition that it
be reasonable, economically viable, and technically possible.
Nevertheless the Telecommunications Authority declared that Turkcell is
under an obligation to enter a national roaming agreement with IsTim
within a 30 day period. However, Turkcell still benefits from the
injunctive relief obtained on November 12, 2001.
On April 8, 2002, Turkcell obtained a cautionary injunction from the
Court against the application of the new regulation published by the
Telecommunications Authority requiring it to agree on national roaming
within 30 days and providing for penalties in case Turkcell did not
agree. Turkcell initiated proceedings against application of the new
regulation before the ICC on April 11, 2002, requesting certification
of the fact that it is not required to enter into an agreement within
30 days and that it is under no obligation to pay any penalties
whatsoever if it does not agree within 30 days. Turkcell believes that
Telsim has obtained a similar injunction but has not yet enforced it.
The parties have appointed their arbitrators and third arbitrator has
been appointed by the ICC International Court of Arbitration since
those two arbitrators of the parties cannot reach an agreement.
If Turkcell is forced to enter a national roaming agreement with IsTim
on terms and conditions that do not provide an adequate return on its
investment in its GSM network, its financial position, results of
operations and cash flows could be materially adversely affected.
Investigation of the Turkish Competition Board
The Turkish Competition Board (the Competition Board) commenced an
investigation of business dealings between Turkcell and KVK, the
primary distributor of Ericsson GSM handsets in Turkey, in October
1999. The decision of the Competition Board concerning this
investigation was verbally rendered to Turkcell on August 1, 2001. The
Competition Board decided Turkcell was disrupting the competitive
environment through an abuse of dominant position in the Turkish mobile
market and infringements of certain provisions of the Law on the
Protection of Competition. As a result, Turkcell was fined
approximately TL 7.0 trillion (equivalent to $5,270 at August 1, 2001
and $4,230 at September 30, 2002) and were enjoined to cease these
infringements. Turkcell believes that it has not infringed the law and
plans to initiate an action requesting the cancellation of the
Competition Board's written decision before the Danistay once it
receives the Competition Board's decision enclosing the reasoning of
the decision.
Dispute Regarding Interconnection Revenues
In December 2000, Turkcell informed the Turkish Treasury that it would
no longer include its interconnection revenues in the determination of
ongoing license fees paid to the Turkish Treasury as 15% of gross
revenues. Effective from March 1, 2001, Turkcell's ongoing license
payments made to the Turkish Treasury have been calculated by excluding
its interconnection revenues from the gross revenues. Upon request of
the Turkish Ministry, the Danistay issued a non-binding opinion
concluding that the interconnection revenues should be included in the
determination of ongoing license fees and that Turkcell should pay the
relevant unpaid ongoing license fees, including interest, for the
period from March 1, 2001 onwards.
Turkcell received letters from the Turkish Treasury on July 18, 2001,
and September 6, 2001, in which the Turkish Treasury notified Turkcell
that it is required to include the interconnection revenue in the gross
revenue from which the ongoing license fees are to be computed.
Turkcell obtained an injunction from the judicial court of first
instance on November 2, 2001, allowing it to compute the gross revenue
on which the ongoing license fees are to be computed without including
the interconnection revenues. The Turkish Treasury, the Turkish
Ministry and the Telecommunications Authority contested the injunction
but their claim was rejected. Turkcell has accrued for the unpaid
amounts and included them in the determination of net income. Since the
parties failed to reach an agreement, on October 29, 2001, Turkcell
initiated an arbitration suit in the ICC against the Turkish Ministry,
the Telecommunications Authority and the Turkish Treasury. The parties
have appointed their arbitrators and third arbitrator has been
appointed by the ICC International Court of Arbitration since those two
arbitrators of the parties cannot reach an agreement.
Dispute on Collection of Frequency Usage Fees
On May 21, 1998, Turkcell entered into a protocol with the Wireless
Communications General Directorate (the Directorate) regarding the
application of the governing provisions of the Wireless Law No. 2813 to
the administration of its GSM mobile phone network. Under this
protocol, Turkcell is to collect frequency usage fees, which are
calculated by the Directorate, from the taxpayers using mobile phones
on behalf of the Directorate, and to pay the levied tax to the
Directorate. In 2001, the Directorate's power, including all of its
rights and obligations, was transferred to the Telecommunications
Authority, pursuant to the amendments in the Telecommunications Law. On
March 22, 2002, as a consequence of the impossibility in fact and at
law of collecting such tax from its prepaid subscribers, Turkcell
applied to the Ankara 17th Judicial Court and obtained an injunction in
respect of the collection of the frequency usage fees. Immediately
after this decision, on March 27, 2002, Turkcell filed a lawsuit
against the Telecommunications Authority requesting cancellation of the
protocols obligating it to collect the frequency usage fees from the
subscribers and to pay it to the Telecommunications Authority. On July
10, 2002, the court decided in favour of Turkcell. Telecommunications
Authority has appealed the decision. Turkcell and its legal counsel
believe that Turkcell will prevail in this matter. Accordingly,
Turkcell has not made any provisions in its consolidated financial
statements.
Dispute on the Determination of Items of Gross Revenue
On June 6, 2002, Turkcell initiated an arbitral proceeding before the
ICC against the Turkish Treasury and the Telecommunications Authority
to resolve the dispute in respect to the determination of the items to
be taken into account in the calculation of "gross revenue", which is
the base for the calculation of the amounts to be paid to the Turkish
Treasury in accordance with Article 8 of the License Agreement.
(24) Subsequent Events:
On October 1 , 2002, Telia AB and Sonera Corporation Inc. published a
prospectus for the share exchange offer related to the announced merger
of the two companies. According to the prospectus, the transaction is
expected to be completed before the end of 2002. The Company does not
currently know how the merger will be finalized and what its legal
effect will be. Prior to the finalization of the transaction, the
Company does not anticipate that it will be able to provide any further
or additional clarity.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant, Turkcell Iletisim Hizmetleri A.S., has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 29, 2002 Turkcell Iletisim Hizmetleri A.S.
By: /s/ Muzaffer Akpinar
----------------------------
Name: Muzaffer Akpinar