20-F 1 d886780d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on March 10, 2015

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                    

Commission File Number: 1-15092

 

 

TURKCELL ILETISIM HIZMETLERI A.S.

(Exact Name of Registrant as Specified in Its Charter)

TURKCELL

(Translation of Registrant’s Name into English)

 

 

Republic of Turkey

(Jurisdiction of Incorporation or Organization)

Turkcell Plaza

Mesrutiyet Caddesi No: 71

34430 Tepebasi

Istanbul, Turkey

(Address of Principal Executive Offices)

Mr. Nihat Narin

Telephone: +90 212 313 1244

Facsimile: +90 212 292 9322

Turkcell Plaza

Mesrutiyet Caddesi No: 71

34430 Tepebasi

Istanbul, Turkey

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares

Ordinary Shares, Nominal Value TRY 1.000*

 

New York Stock Exchange

New York Stock Exchange

 

* Not for trading on the NYSE, but only in connection with the registration of ADSs representing such ordinary shares pursuant to the requirements of the Securities and Exchange Commission.

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Ordinary Shares, Nominal Value TRY 1.000                                2,200,000,000

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x                Accelerated Filer   ¨                Non-Accelerated Filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ¨    International Financial Reporting Standards as issued by the International Accounting Standards Board  x    Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

ITEM 1.

   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      2   

ITEM 2.

   OFFER STATISTICS AND EXPECTED TIMETABLE      2   

ITEM 3.

   KEY INFORMATION      2   
   3.A SELECTED FINANCIAL DATA      2   
   3.B CAPITALIZATION AND INDEBTEDNESS      7   
   3.C REASONS FOR THE OFFER AND USE OF PROCEEDS      7   
   3.D RISK FACTORS      7   

ITEM 4.

   INFORMATION ON THE COMPANY      21   
   4.A HISTORY AND DEVELOPMENT OF THE COMPANY      21   
   4.B BUSINESS OVERVIEW      22   
   4.C ORGANIZATIONAL STRUCTURE      70   
   4.D PROPERTY, PLANT AND EQUIPMENT      70   

ITEM 4A.

   UNRESOLVED STAFF COMMENTS      72   

ITEM 5.

   OPERATING AND FINANCIAL REVIEW AND PROSPECTS      72   
   5.A OPERATING RESULTS      74   
   5.B LIQUIDITY AND CAPITAL RESOURCES      93   
   5.C RESEARCH AND DEVELOPMENT, PATENTS AND LICENSESETC.      95   
   5.D TREND INFORMATION      95   
   5.E OFF-BALANCE SHEET ARRANGEMENTS      97   
   5.F TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS      97   
   5.G SAFE HARBOR      98   

ITEM 6.

   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      98   
   6.A DIRECTORS AND SENIOR MANAGEMENT      98   
   6.B COMPENSATION      103   
   6.C BOARD PRACTICES      104   
   6.D EMPLOYEES      105   
   6.E SHARE OWNERSHIP      108   

ITEM 7.

   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      108   
   7.A MAJOR SHAREHOLDERS      108   
   7.B RELATED PARTY TRANSACTIONS      109   
   7.C INTERESTS OF EXPERTS AND COUNSEL      109   

ITEM 8.

   FINANCIAL INFORMATION      109   
   8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION      109   
   8.B SIGNIFICANT CHANGES      111   

ITEM 9.

   THE OFFER AND LISTING      111   
   9.A OFFER AND LISTING DETAILS      111   
   9.B PLAN OF DISTRIBUTION      112   
   9.C MARKETS      112   
   9.D SELLING SHAREHOLDERS      112   
   9.E DILUTION      113   
   9.F EXPENSES OF THE ISSUE      113   

ITEM 10.

   ADDITIONAL INFORMATION      113   
   10.A SHARE CAPITAL      113   
   10.B MEMORANDUM AND ARTICLES OF ASSOCIATION      113   
   10.C MATERIAL CONTRACTS      126   
   10.D EXCHANGE CONTROLS      126   
   10.E TAXATION      126   
   10.F DIVIDENDS AND PAYING AGENTS      133   
   10.G STATEMENT BY EXPERTS      133   
   10.H DOCUMENTS ON DISPLAY      133   
   10.I SUBSIDIARY INFORMATION      133   


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ITEM 11.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      134   

ITEM 12.

   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      135   

ITEM 13.

   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      137   

ITEM 14.

  

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     138   

ITEM 15.

   CONTROLS AND PROCEDURES      138   
ITEM 16.      140   
   16.A AUDIT COMMITTEE FINANCIAL EXPERT      140   
   16.B CODE OF ETHICS      141   
   16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES      141   
   16.D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      141   
   16.E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      141   
   16.F CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT      141   
   16.G CORPORATE GOVERNANCE      141   
   16.H MINE SAFETY DISCLOSURE      146   

ITEM 17.

   FINANCIAL STATEMENTS      146   

ITEM 18.

   FINANCIAL STATEMENTS      146   

ITEM 19.

   EXHIBITS      146   


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INTRODUCTION

This is the 2014 annual report for Turkcell Iletisim Hizmetleri A.S. (“Turkcell”), a joint stock company organized and existing under the laws of the Republic of Turkey. The terms “Company,” “we”, “us”, “our”, and similar ones refer to Turkcell, its predecessors, and its consolidated subsidiaries, except as the context otherwise requires.

Our audited Consolidated Financial Statements as of December 31, 2014 and 2013 and for each of the years in the three-year period ended December 31, 2014 included in this annual report have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown for the same category presented in different tables may vary slightly, and figures shown as totals in certain tables may not total exactly. In this annual report, references to “TL”, “TRY” and “Turkish Lira” are to the Turkish Lira, and references to “$”, “U.S. Dollars”, “USD”, “U.S. $” and “cents” are to U.S. Dollars and, except as otherwise noted, all interest rates are on a per annum basis. In this annual report, references to “Turkey” or the “Republic” are to the Republic of Turkey.

Statements regarding our market share and total market size in Turkey are based on the Information and Communication Technologies Authority’s (“ICTA”) or operators’ announcements, and statements regarding penetration are based on the Turkish Statistical Institute’s (“TUIK”) announcements pertaining to the Turkish population. Furthermore, statements regarding our 2G coverage are based on the ICTA’s specifications as well as the TUIK’s announcements, and statements regarding our 3G coverage are based on the ICTA’s 3G coverage calculation specifications issued on April 25, 2012.

References to the Information and Communication Technologies Authority or the ICTA include its predecessor entity, the Telecommunications Authority.

FORWARD-LOOKING STATEMENTS

This annual report includes forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this annual report, including, without limitation, certain statements regarding our operations, financial position, and business strategy, may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “continue”, or similar statements.

Although we believe that the expectations reflected in such forward-looking statements are reasonable at this time, we can give no assurance that such expectations will prove to be correct. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations are contained in cautionary statements in this annual report, including, without limitation, in conjunction with the forward-looking statements listed below, and include, among others, the following:

 

   

competition in our main market;

 

   

increased competition and/or the entrance of new direct and indirect competitors in the market due to new applications and regulatory changes in Turkey with respect to certain technologies;

 

   

failure to successfully integrate and manage the opportunities we pursue, particularly related to our current mobile communications business and 3G business, new business models, new technologies and international activities;

 

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regulatory decisions and changes in the regulatory environment, in particular the ICTA’s decisions in 2013, 2014 and 2015;

 

   

failure to abide by the requirements of our licenses or applicable regulations;

 

   

economic and political developments in Turkey and internationally;

 

   

exposure to certain risks through our interests in associated companies, especially due to political instability in Ukraine;

 

   

foreign exchange rate risks;

 

   

reduction in cash generated from operations and increased capital needs, which may increase our borrowing requirements, and consequently, our finance costs and exposure to the risks associated with borrowing;

 

   

our ability to deal with spectrum limitations;

 

   

zoning limitations related to our Base Transceiver Stations (“BTS”) and potential increase in coverage requirements;

 

   

potential liability and possible reduced usage of mobile phones as a result of alleged health risks related to BTSs and the use of handsets;

 

   

our dependence on certain suppliers for network equipment and the provision of data services;

 

   

Turkcell’s complex ownership structure and ongoing disagreements among our main shareholders;

 

   

our dependence on certain systems and suppliers for IT services and our exposure to potential natural disasters, regular or severe IT and network failures, human error, security breaches and other cybersecurity incidents and IT migration risk;

 

   

technological changes in the telecommunications market;

 

   

our dependence on third party providers to help us navigate the regulatory, security and business risks of industries where we traditionally do not compete;

 

   

our ability to retain key personnel and distributors;

 

   

legal actions and claims to which we are a party; and

 

   

effective internal control over financial reporting.

All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their entirety by reference to these cautionary statements.

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

 

ITEM 3. KEY INFORMATION

3.A Selected Financial Data

Our audited Consolidated Financial Statements as of December 31, 2014 and 2013 and for each of the years in the three-year period ended December 31, 2014 included in this annual report have been prepared in accordance with IFRS as issued by the IASB.

 

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The following information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects”, our audited Consolidated Financial Statements as of December 31, 2014 and 2013 and the related consolidated statements of profit or loss, comprehensive income, changes in equity, and cash flows for the years ended December 31, 2014, 2013 and 2012, and the related notes appearing elsewhere in this annual report.

The following table presents our selected consolidated statements of operations, statement of financial position and cash flows data as of and for each of the years in the five-year period ended December 31, 2014, presented in accordance with IFRS as issued by the IASB which have been derived from our audited Consolidated Financial Statements as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010.

 

    2014     2013     2012     2011     2010  
    (Million $, except share data and certain other data)  
Selected Financial Data Prepared in Accordance with IFRS as Issued by the IASB          

Consolidated Statement of Operations Data

         

Revenues

         

Communication fees

    4,779.3        5,369.0        5,374.0        5,225.4        5,670.2   

Commission fees on betting business

    54.0        52.2        47.1        39.1        31.2   

Monthly fixed fees

    23.6        40.0        50.6        63.0        75.4   

Revenue from betting business

    82.1        68.2        41.9        12.3        —     

Simcard sales

    14.6        15.6        18.3        21.2        22.9   

Call center revenues

    75.8        57.8        44.9        38.1        25.2   

Other revenues

    483.5        372.6        289.0        210.6        157.2   

Total revenues

    5,512.9        5,975.4        5,865.8        5,609.7        5,982.1   

Direct cost of revenues(1)

    (3,375.5     (3,693.3     (3,622.3     (3,528.9     (3,349.0

Gross profit

    2,137.4        2,282.1        2,243.5        2,080.8        2,633.1   

Other income

    27.1        18.3        18.1        32.6        14.7   

Administrative expenses

    (256.8     (286.8     (270.5     (246.5     (347.3

Selling and marketing expenses

    (903.1     (964.1     (953.2     (1,010.6     (1,085.8

Other expenses

    (62.6     (47.5     (76.9     (161.3     (64.2

Results from operating activities

    942.0        1,002.0        961.0        695.0        1,150.5   

Finance income

    437.5        395.4        386.1        330.3        277.1   

Finance costs

    (559.3     (95.5     (125.5     (289.7     (102.6

Net finance income/(costs)

    (121.8     299.9        260.6        40.6        174.5   

Monetary gain(2)

    88.4        82.9        95.3        144.8        —     

Share of profit of equity accounted investees(3)

    96.6        155.4        121.7        136.9        122.8   

Profit before income taxes

    1,005.2        1,540.2        1,438.6        1,017.3        1,447.8   

Income tax expense

    (334.6     (310.7     (291.5     (292.2     (320.8

Profit for the period

    670.6        1,229.5        1,147.1        725.1        1,127.0   

Attributable to:

     

Equity holders of the Company

    864.9        1,228.2        1,158.8        751.7        1,170.2   

Non-controlling interest

    (194.3     1.3        (11.7     (26.6     (43.2

Profit for the period

    670.6        1,229.5        1,147.1        725.1        1,127.0   

Basic and diluted earnings per share

    0.39        0.56        0.53        0.34        0.53   

Consolidated Statement of Financial Position Data (at period end)

         

Cash and cash equivalents

    3,894.9        3,808.7        3,926.2        2,508.5        3,302.2   

Total assets

    10,217.9        9,972.6        10,483.2        9,098.8        9,794.6   

Long-term debt(4)

    538.1        716.2        619.2        1,057.4        1,407.3   

Total debt(5)

    1,594.6        1,561.4        1,705.2        1,868.1        1,837.5   

Total liabilities

    3,011.6        3,068.7        3,323.1        3,367.2        3,561.0   

Share capital

    1,636.2        1,636.2        1,636.2        1,636.2        1,636.2   

Total equity/net assets

    7,206.3        6,903.9        7,160.1        5,731.6        6,233.6   

Weighted average number of shares

    2,200,000,000        2,200,000,000        2,200,000,000        2,200,000,000        2,200,000,000   

Consolidated Cash Flows Data

         

Net cash generated by operating activities

    801.8        994.0        1,188.3        925.8        1,262.6   

Net cash (used in)/ generated by investing activities

    (573.1     (469.7     304.6        (1,410.5     (704.9

Net cash generated by/(used in) financing activities

    39.5        (121.6     (171.2     31.6        (303.7

Other Financial Data

         

Dividends declared or proposed(6)(7)

    —          —          —          —          573.0   

Dividends per share (declared or proposed)(7)

    —          —          —          —          0.26   

Gross margin(8)

    39     38     38     37     44

Adjusted EBITDA(9)

    1,725.2        1,858.0        1,808.4        1,748.1        1,957.4   

Capital expenditures

    924.9        853.8        975.5        866.0        1,078.6   

 

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(1) Direct cost of revenues includes payments for our treasury share (the amount paid to the government under our license) and universal service fund, transmission fees, base station rent and energy expenses, billing costs, depreciation and amortization charges, technical, repair and maintenance expenses, roaming charges, interconnection fees, costs of simcards sold, handset costs where we are the principal in the sale of handsets and personnel expenses related to our technicians.
(2) See Note 2 (Basis of preparation) to our Consolidated Financial Statements in this Form 20-F for information regarding monetary gain.
(3) Share of profit of equity accounted investees primarily includes the income related to our 41.45% and 50.00% stake in Fintur Holdings B.V. (“Fintur”) and A-Tel Pazarlama ve Servis Hizmetleri A.S. (“A-Tel”), respectively. Fintur currently holds all of our international mobile communications investments other than those related to our operations in Northern Cyprus, Ukraine, Belarus and Germany. The service provider and distribution agreement with A-Tel was annulled via notification dated January 31, 2012, which was effective from August 1, 2012. Turkcell’s ownership in A-Tel was sold to Bereket Holding A.S. for a consideration of TL 31.0 million (equivalent to $14.3 million as at transaction date) pursuant to the Share Sale Agreement signed on August 27, 2014. See Note 16 and 34 to our audited Consolidated Financial Statements included in “Item 18. Financial Statements” of this annual report on Form 20-F.
(4) Long-term debt consists of long-term loans and borrowings as well as long-term lease obligations.
(5) Total debt consists of long-term and short-term loans and borrowings as well as lease obligations excluding option contracts.
(6) On March 23, 2011, our Board of Directors proposed a dividend distribution for the year ended December 31, 2010 amounting to TRY 1,328.7 million ($573.0 million computed using the Central Bank of the Republic of Turkey’s (CBRT) TRY/U.S. Dollar exchange rate on December 31, 2014), which corresponds to 75% of our distributable net income for the year. This dividend proposal was discussed but not approved at the General Assembly Meetings held in 2011. There were no Board of Directors’ resolutions for the dividend distribution for the years 2011, 2012, 2013 and 2014. The General Assembly Meetings, on June 29, 2012, May 22, 2013, June 24, 2013 and May 29, 2014 could not be held since the quorum required had not been reached and the dividend payment could not be discussed. Our Board of Directors has decided to convene the General Assembly meeting of our Company pertaining to the years 2010, 2011, 2012, 2013 and 2014 on March 26, 2015.
(7) The U.S. Dollar equivalent of the dividend for the year ended December 31, 2010 was computed by using the CBRT’s TRY/USD exchange rate on December 31, 2014. Dividends per share for the year ended December 31, 2010 was computed over 2,200,000,000 shares. For the year ended December 31, 2010, the dividend per share was TRY 0.60 (equivalent to $0.24 as of March 3, 2015).
(8) Gross margin is calculated as gross profit divided by total revenues.
(9) Adjusted EBITDA is a non-GAAP financial measure that we have defined as net cash from operating activities adjusted to exclude the effects of the net change in assets and liabilities, finance income, finance costs, income tax expense, other operating income and expense.

Non-IFRS measures

Adjusted EBITDA is a non-GAAP financial measure that we have defined as net cash from operating activities adjusted to exclude the effects of the net change in assets and liabilities, finance income, finance costs, income tax expense, other operating income and expense. Our management views adjusted EBITDA as a key indicator each month to monitor our cash generation ability and liquidity position. Net income is generally considered by our management as the main indicator for our operating performance. Adjusted EBITDA is not a measurement of liquidity under IFRS as issued by the IASB and should not be construed as a substitute for profit for the period as a measure of performance or cash flow from operations as a measure of liquidity.

We believe adjusted EBITDA, among other measures, facilitates liquidity comparisons from period to period and management decision making. It also facilitates liquidity comparisons from company to company. Adjusted EBITDA as a liquidity measure eliminates potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact of changes in effective tax rates on periods or companies) and the age and book depreciation of tangible and intangible assets (affecting relative depreciation expense). We also present adjusted EBITDA because we believe it is frequently used by securities analysts, investors and other interested parties in evaluating the liquidity of other mobile operators in the telecommunications industry in Europe, many of whom present adjusted EBITDA when reporting their results.

Nevertheless, adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation from, or as a substitute for analysis of, our results of operations, as reported under IFRS as issued by the IASB.

Some of these limitations are:

 

   

it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

it does not reflect changes in, or cash requirements for, our working capital needs;

 

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it does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;

 

   

it is not adjusted for all non-cash income or expense items that are reflected in our consolidated statement of cash flows; and

 

   

other companies in our industry may calculate this measure differently than we do, which may limit its usefulness as a comparative measure.

We compensate for these limitations by relying primarily on our results under IFRS as issued by the IASB and using adjusted EBITDA measures only supplementally. See “Item 5. Operating and Financial Review and Prospects” and the Consolidated Financial Statements contained elsewhere in this annual report.

The following table provides a reconciliation of adjusted EBITDA, as calculated using financial data prepared in accordance with IFRS as issued by the IASB, to net cash from operating activities, which we believe is the most directly comparable financial measure calculated and presented in accordance with IFRS as issued by the IASB.

 

     Year ended December 31,  
     2014     2013     2012     2011     2010  
     (Million $)  

Adjusted EBITDA

     1,725.2        1,858.0        1,808.4        1,748.1        1,957.4   

Income tax expense

     (334.6     (310.7     (291.5     (292.2     (320.8

Other operating income/(expense)

     (40.3     (29.2     17.5        (57.9     (49.4

Finance income/(costs)

     17.8        299.9        (120.3     (52.5     (99.9

Net (decrease) in assets and liabilities

     (566.3     (824.0     (225.8     (419.7     (224.7

Net cash from operating activities

     801.8        994.0        1,188.3        925.8        1,262.6   

The following table presents selected operational data:

I. Operating Results

 

     Year ended December 31,  
     2014     2013     2012  

Industry Data

      

Population of Turkey (in millions)(1)

     77.7        76.7        75.6   

Turkcell Data(2)

      

Number of postpaid subscribers at end of period (in millions)(3)

     15.2        14.0        13.2   

Number of prepaid subscribers at end of period (in millions)(3)

     19.4        21.2        21.9   

Total subscribers at end of period (in millions)(3)

     34.6        35.2        35.1   

Average monthly revenue per user (in $)(4)

     11.2        11.4        11.6   

Postpaid

     18.8        19.6        21.0   

Prepaid

     5.8        6.2        6.4   

Average monthly minutes of use per subscriber(5)

     275.3        259.3        243.3   

Churn(6)

     28.3     27.4     27.1

Number of Turkcell employees at end of period

     3,319        3,316        3,585   

Number of employees of consolidated subsidiaries at end of period(7)

     12,311        10,999        9,829   

 

(1) The population of Turkey for 2014, 2013 and 2012 is based on TUIK’s announcements.
(2) For a discussion of how these metrics affect our revenues, please see “Item 5A. Operating Results,—VI. Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013—a. Revenues”.

 

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(3) Subscriber numbers do not include subscribers in Ukraine, Belarus, Northern Cyprus and Germany or those of Fintur subsidiaries.
(4) We calculate average revenue per user (“ARPU”) using the weighted average number of our mobile subscribers in Turkey during the period.
(5) Average monthly minutes of use per subscriber is calculated by dividing the total number of incoming and outgoing airtime minutes of use by the average monthly sum of postpaid and prepaid GSM subscribers in Turkey for the year divided by twelve.
(6) Churn rate is the percentage calculated by dividing the total number of subscriber disconnections during a certain period by the average number of subscribers for the same period. For these purposes, we define “average number of subscribers” as the number of subscribers at the beginning of the period plus one half of the total number of gross subscribers acquired during the period. Churn refers to our mobile subscribers in Turkey that are both voluntarily and involuntarily disconnected from our network.
(7) See “Item 6.D. Employees” for information concerning our consolidated subsidiaries.

II. Exchange Rate Data

The Federal Reserve Bank of New York does not report, and historically has not reported, a noon buying rate for the Turkish Lira. For the convenience of the reader, this annual report presents translations of certain Turkish Lira amounts into U.S. Dollars at the relevant Turkish Lira exchange rate for purchases of U.S. Dollars at the $/TRY exchange rate announced by the CBRT. As of January 1, 2006, any statement of financial position data (monetary or non-monetary), except for equity items in U.S. Dollars derived from our Consolidated Financial Statements, are translated from Turkish Lira into U.S. Dollars at exchange rates at the reporting date. Income and expenses for each statement of profit or loss except foreign operations in hyperinflationary economies (including comparatives) are translated to U.S. Dollars at monthly average exchange rates.

The income and expenses of foreign operations in hyperinflationary economies are translated into USD at the exchange rate as of the reporting date. Prior to translating the financial statements of foreign operations in hyperinflationary economies (Republic of Belarus), their financial statements for the current period are restated to account for changes in the general purchasing power of the local currency. The restatement is based on relevant price indices at the reporting date. Unless otherwise indicated, the $/TRY exchange rate used in this annual report is the $/TRY exchange rate in respect of the date of the financial information being referred to. As stated in the annual monetary and exchange rate policy announcements of the CBRT, which have been published since 2002, the foreign exchange rate is not a policy tool or target; it is determined by the supply and demand conditions in the market. Along with inflation targeting, the CBRT announced that it will continue the implementation of the floating exchange rate regime in 2015.

The following table sets forth, for the periods and the dates indicated, the CBRT’s buying rates for U.S. Dollars. These rates may differ from the actual rates used in preparation of our Consolidated Financial Statements and other information appearing herein. The $/TRY exchange rate on March 3, 2015 was TRY 2.512= $1.00.

 

     2015(2)(3)      2014(2)      2013(2)      2012(2)      2011(2)      2010(2)  

High

     2.512         2.367         2.160         1.889         1.907         1.598   

Low

     2.278         2.071         1.746         1.734         1.496         1.388   

Average(1)

     2.396         2.188         1.901         1.793         1.670         1.500   

Period End

     2.512         2.319         2.134         1.783         1.889         1.546   

 

Source: CBRT

(1) Calculated based on the average of the daily exchange rates of each month during the relevant period.
(2) These columns set forth the CBRT’s buying rates for U.S. Dollars expressed in Turkish Lira.
(3) Through March 3, 2015.

 

     March
2015(1)
     February
2015
     January
2015
     December
2014
     November
2014
     October
2014
 

High

     2.512         2.490         2.401         2.367         2.271         2.288   

Low

     2.508         2.410         2.278         2.210         2.203         2.217   

 

Source: CBRT

 

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(1) Through March 3, 2015.

No representation is made that Turkish Lira or the U.S. Dollar amounts as presented in this annual report could have been or could be converted into U.S. Dollars or Turkish Lira, as the case may be, at any particular rate. Changes in the exchange rate between Turkish Lira and U.S. Dollars could affect our financial results. For a discussion of the effects of fluctuating exchange rates on our business, see “Item 5A. Operating Results”.

3.B Capitalization and Indebtedness

Not applicable.

3.C Reasons for the Offer and Use of Proceeds

Not applicable.

3.D Risk Factors

The following is a discussion of those risks that we believe are the principal material risks faced by our Company and its subsidiaries. No assurance can be given that risks that we do not believe to be material today will not prove to be material in the future. Consequently, the risks described below should not be considered to be exhaustive.

The majority of our revenue comes from our operations in Turkey. Competition in this market and certain regulatory actions that limit our ability to respond effectively to competitive pressures may adversely affect the growth of our business and our financial condition.

The majority of our revenue comes from our operations in Turkey and, thus, the growth and development of our business is mainly dependent on the development of the Turkish mobile telecommunications and broadband markets. In this market, we currently face intensifying competition from two other mobile operators, Vodafone Telekomunikasyon A.S. (“Vodafone”) and Avea Iletisim Hizmetleri A.S. (“Avea”), and from the incumbent fixed line telecommunications operator, Turk Telekomunikasyon A.S. (“Turk Telekom”). Continued price and higher incentive-driven competition has, and will continue to, put pressure on our prices, market shares and profitability, as well as our liquidity. If the competition further intensifies, or the market slows or develops in unexpected ways, this could harm our business and financial condition.

Turkey’s principal telecommunications regulator, the ICTA, has interfered, and may continue to interfere, with our ability to price our services and respond to competitive pressures. Regulatory actions such as the introduction of mobile number portability in 2008, the ICTA’s regulations on our retail pricing and the ICTA’s ongoing pressure on interconnection rates and maximum retail prices have also been, and will likely continue to be, a significant factor in shaping the development of the Turkish market and in our ability to respond to changes in the market. In addition, regulatory interventions, which have often favored our competitors, have increased competition. Furthermore, sub-brand initiatives of the existing competitor mobile operators, and new licenses and authorizations issued by the regulator such as Fixed Telephony Service (“FTS”) and Mobile Virtual Network Operator (“MVNO”) licenses have made it easier and/or more attractive for new direct and indirect competitors to enter the market. Competition in the mobile market may also be affected by regulatory actions in other areas, such as banking and tax. For example, new regulations banning credit card installment plans for handsets or the inability of providing contracted bundled campaigns may have a negative impact on our ability to drive forward our revenues from existing and new customers. Any precautionary measures taken by the government as a response to the current account deficit, such as additional taxes on imported handsets, may have a negative impact on smartphone penetration in the market and have an adverse impact on our revenues and profitability. The increase in smartphone penetration in our bundled offers is an important part of our strategy, and thus such regulations may adversely affect the execution of this strategy and our financial condition.

 

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In addition, competition may be affected by the increasing use of applications and services that make use of the internet as a substitute (namely “over the top” or “OTT” services) for some of our more traditional services, such as messaging and voice, competition from new technologies such as wifi, and converged offers. Our competitive position may be adversely impacted if we fail to provide converged services on a timely basis relative to our competitors. These have had an impact on our revenues which may in the future be material. Reduced demand for our core services of voice, messaging and data could significantly impact our growth and profitability.

With respect to terminals, there is an increasing emphasis in the Turkish market on terminal bundled campaigns. Increased demand for terminal bundled campaigns has led and may continue to lead to higher working capital requirements and bad debt expense. In addition, our competitive position is dependent on certain distributors for products, such as terminals, and the failure of any of our distributors to supply products to our distribution channel, and at the level of quality we require, may adversely affect our business and financial condition. Our distributors’ financial performance is vital to our business and financial model as they are a critical component within the ecosystem while providing terminals that are offered in contracted bundled campaigns. At the same time, any regulations that could decelerate these bundled campaigns may also impact distributors’ revenues and profitability, which could in turn affect our business and financial condition.

We are expecting a major step forward in the development of telecommunications in Turkey with the deployment of 4G networks. The auction for the 4G license is planned to be held in 2015. There can be no assurance that we will obtain a license, that we will be able to develop a 4G network on technologically and commercially reasonable terms, and/or that we will not experience delays in developing our networks and that competing licensees will not get to market before us, in each case harming our competitive position. If we are not successful in the pursuit of such a license, or if one were to be owned or operated by a competitor, we could find ourselves at a competitive disadvantage in this key market.

These factors together with macroeconomic factors are likely to continue to result in changes in consumer behavior that have and may continue to adversely affect our revenues and expenses.

Our growth strategy is partly dependent on new investment opportunities, which could affect our business and financial condition, and the return on our investments cannot be guaranteed.

In addition to growing our existing business as a leading communications and technology company, our strategy for growth involves selectively seeking and evaluating new investment opportunities and participating in those meeting our criteria. We may consider launching greenfield operations, as well as forming alliances, which may include management service agreements and marketing partnerships, and conducting mergers and/or acquisitions, both inside and outside of Turkey or in countries in which we already have a presence. These opportunities may be in the area of mobile or fixed telecommunications and services, including as an MVNO or in a marketing partnership with a local operator. In addition, we may provide services in related areas and also consider investing or increasing our investments in business areas outside of the scope of our core business.

New investments may not achieve expected returns or returns that are in line with those of our core business, which may cause high value erosion. In many of the markets and businesses in which we have invested or may invest, it may take several years and significant investments to achieve desired profitability, if at all. In addition, if an asset in which we have invested does not provide the expected returns, we may need to make further investment or we may consider disposal at a sale price that may be below carrying value or liquidation.

In the context of our evaluation of potential investments in the regions we target for international expansion, Turkcell has, from time to time, considered opportunities in countries in Eastern Europe, the Balkans, and the Middle East and Africa (“MEA”), and may consider such opportunities in the future. As further described below, operations in many of these countries are subject to economic, political and other risks. Furthermore, for acquisitions outside of Turkey, current and future E.U., U.S. and international laws and regulations, as well as

 

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legal and regulatory actions, targeting certain countries, local companies and individuals may curtail our ability to do business in affected countries and may impede our exercise of control. Turkcell itself, as well as certain of its key employees (notably those who are E.U. or U.S. citizens), could be subject to sanctions under such laws and regulations. Some of the countries and companies in which we have contemplated making investments and in which we may from time to time consider opportunities, such as Iran, Libya and Syria, and certain individuals involved in such companies, have been the specific targets of such laws and regulations. In the same vein, jurisdictions in which we have invested may from time to time come under sanctions, as has been the case in Crimea. Investors may be reticent to invest in a company doing business in such countries or other countries that may be at risk due to the political instability. These factors could have an adverse effect on the demand for our shares.

Regulatory decisions and changes in the regulatory environment could adversely affect our business and financial condition.

We operate in an industry that is subject to extensive regulation, in Turkey and the other countries in which we operate. Compliance with new and existing laws and regulations has had and is likely to continue to have a significant impact on the ways in which we do business. This may include but is not limited to the impact on our ability to set our pricing and offer new and existing services, on customer use of our services, the way we handle, process and store customer data, the terms of our subscriber contracts, the way we can communicate with customers and our ability to obtain and maintain licenses. Furthermore, the laws, regulations, regulatory orders and licenses under which we operate are subject to interpretation and enforcement by regulators with which we are not always in agreement. Complying with regulations may be costly, and failure to comply may lead to significant penalties, adverse publicity and the loss of licenses and could adversely affect our business and financial condition. For more information on regulation and how it may impact our business, see “Item 4.B. Business Overview—Regulation of the Turkish Telecommunications Industry”.

Pricing is one of the key areas in which we are subject to regulation. The actions of the ICTA and the Ministry of Transport, Maritime Affairs and Communications in our voice, SMS, data, value added services, roaming and interconnection pricing have, and will continue to, negatively affect our pricing and our ability to design and launch campaigns and offers. Consequently, these actions have and will continue to adversely affect our business and financial condition. For instance, by linking the mobile termination rates to our retail tariff, the ICTA has indirectly increased the minimum retail tariff to be applied by Turkcell and set the minimum retail price for SMS, applicable to both tariffs and campaigns, as well as reduced voice and SMS mobile termination rates, which adversely affected and is likely to continue to adversely affect our competitive position and our financial condition. For more information, see “Item 4.B. Business Overview—Regulation of the Turkish Telecommunications Industry”. In addition, the ICTA may in certain markets determine that we are an operator with significant market power and as a result impose certain constraints on us, while imposing less stringent ones on other mobile and fixed telecom players in the market, both of which may adversely affect our business and financial condition. Furthermore, such determinations may be made on the basis of the ICTA’s own market analysis, with which we may not agree, and on the basis of definitions and terms that may change. Additionally, in Northern Cyprus there have been regulatory changes regarding mobile termination rates and price caps which could affect our business performance. Another recent example of ICTA pricing-related action that adversely affects us is that as of April 1, 2015, the ICTA is imposing new rules regarding the proration of service fees that will lead to loss of revenue for us in several scenarios such as a change of tariff/plan, new subscription, suspension or cancellation of subscription, etc., for subscribers billed in arrears.

In addition, regulations regarding the quality of service, the sharing of our infrastructure, the protection of personal data and electronic commerce are among those regulations which may have an adverse effect on various aspects of our business. For example, as a result of the amendment of the Law for Metropolitan Municipalities, the number of metropolitan municipalities increased and the borders of some metropolitan municipalities were extended. After this amendment, the ICTA increased our coverage obligations, defined in our concession agreement, by its decision, based on this amendment. This decision imposed a heavy financial burden on us by requiring material capital expenditures. Therefore, we filed a lawsuit for the cancellation of this decision. There

 

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has been no progress in this case yet. If another increase in the number of metropolitan municipalities or borders occurs, we may face additional coverage obligations. We may also be required to share infrastructure or operate through a common infrastructure with our competitors, and to offer national roaming to their subscribers, which could adversely affect our ability to use our network to maintain a competitive edge. With respect to personal data, the law on Electronic Commerce passed in October 2014 that comes into force on May 1, 2015, requires service providers to obtain permission from customers to use their data, for example to send them commercial electronic messages, or to demand double opt-in from customers before purchasing mobile services, which will likely result in a decline in revenues for some corporate messaging and other mobile services we provide, as well as a decline in the sales of online stores. Furthermore, current and proposed regulations may affect our business by limiting our ability to obtain and maintain the necessary licenses for our operations, which could affect our business plan and expectations.

In the area of consumer protection, new regulations have been enacted that could limit our marketing and advertising activities, allow certain forms of advertising by competitors that could weaken our brand image, or limit our flexibility to respond to customer needs immediately. This could encourage further price-driven competition, causing us to lose subscribers and/or revenue, and potentially increase operating expenses.

Any downturn in the economy and instability in the political environment in Turkey and internationally may have an adverse effect on our business and our financial condition.

With a substantial portion of our revenues, assets and business derived from and located in Turkey, and denominated in Turkish Lira, adverse developments in the Turkish market are likely to have a material adverse effect on our business and financial condition. In our view, the biggest threats to the global economy, including Turkey, in 2015, are sustainability of economic growth, sustainability of current low energy prices, which have generally benefitted the Turkish economy and current account balance, uncertainty regarding U.S. accommodative monetary policy, continuing Eurozone recession and deflation risks, and geopolitical risks in Ukraine and the Middle East region.

The Turkish economy grew uninterruptedly for twenty quarters in a row and grew by 2.8% in the first nine months of 2014. If the Turkish economy slows or develops in unexpected ways, this may have an adverse impact on our operations and financial condition. The performance of the Turkish economy may be affected by domestic and regional political developments. Turkey will enter into an electoral period, with parliamentary elections in 2015. On a regional level, potential or further instability in the Commonwealth of Independent States (CIS), Balkans, Middle East, North Africa and Caucasian regions may impact the development of the Turkish economy.

We hold interests in several companies that may expose us to various economic, business, political, social, financial, liquidity, regulatory and legal risks and may not provide the benefits that we expect, and our pursuit of acquisition opportunities may increase these risks.

Our investments in subsidiaries and associated companies within Turkey and internationally could expose us to economic, political, social, financial, regulatory and legal risks. Any such risks in our subsidiaries or associated companies could lead us to exit an investment and/or may result in write-down of the carrying value of our assets. These risks have affected and could adversely affect our result of operations and the value of certain companies in which we have invested in our financial statements. Turkcell Group has investments in Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, the Turkish Republic of Northern Cyprus and Ukraine and has operations or business activities that involve other emerging markets. We are also exploring new investment opportunities, primarily in emerging markets. Our current and potential future activities in these countries include operating mobile communications networks and routing cables. We may also transfer data through such countries. Legal systems, including telecommunications regulations, institutions, commercial practices and economies in emerging markets tend to be relatively underdeveloped and some of these countries may also suffer from relatively high rates of fraud and corruption. Furthermore, through our subsidiaries in Turkey and internationally, we engage in businesses outside of the scope of our core mobile business. These other businesses are subject to risks that are in some respects different from those of our mobile business.

 

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In some countries, we hold our investments with another shareholder or local government and in some cases we are a non-controlling shareholder. Should there be a disagreement between us and other shareholders in the future, the ability of the invested company’s management to move forward with its business plan may be affected and no assurance can be given that it will be able to take the course of action we believe is appropriate. In these cases, we may consider exiting, or alternatively increasing our investment and our stake in order to take control. Furthermore, some of the countries in which we have businesses or would consider investing, and the companies and individuals that we come into contact with, may be the target of E.U., U.S. and international sanctions, as has occurred in Crimea. There can be no assurance that political, legal, economic, social or other actions or developments in these countries or involving such companies and individuals will not have an adverse impact on our investments and businesses in these countries.

In this regard, we have and are likely to continue to experience issues in some of our international businesses that adversely affect our Company. Recent issues include the following:

 

   

Our operations in Ukraine may be adversely affected by military actions, political instability, civil unrest and economic problems in that country in 2015. Due to increased political instability in the Crimea region, providing services remained a significant challenge throughout 2014 and we were eventually obliged to discontinue these services during the fourth quarter. After evaluating our alternatives, we impaired our assets in the Crimea region down to their scrap value, while retaining our license and frequency rights. Astelit is currently evaluating its options with respect to the disposal of its assets in Crimea. The operating environment in Crimea and the actions that we may take in response may raise challenges with respect to compliance with Astelit’s license requirements. Furthermore, the current military and political crisis in the Eastern part (mainly in Donetsk and Luhansk) and with Russia remains unresolved, similar to the situation in Crimea and could lead us to evaluate our options in the Eastern region. The ongoing crisis may further adversely affect the Ukrainian economy and our results of operations in Ukraine and/or the value and security of our operations there. We are unable to predict the likely course or duration of these events, or the extent of the adverse impact that they have had and are likely to have on the telecommunications market dynamics and composition, our investment in Ukraine and our operations there.

 

   

In Ukraine, the local currency, Ukrainian Hryvnia (“UAH”), has depreciated against the U.S. Dollar by 97% in 2014. In November 2014, the National Bank of Ukraine announced a fixed rate foreign exchange regime based on interbank foreign exchange. However, in order to comply with IMF aid negotiations, the UAH was once again allowed to float freely in February 2015. Following this decision, the UAH has depreciated by 57% to 24.8 per USD as of March 3, 2015, from the 2014 year-end official rate of UAH 15.77 per USD. Furthermore, the National Bank of Ukraine, among other measures, continues to impose certain restrictions on the processing of client payments by banks and on the purchase of foreign currency on the inter-bank market. In December 2014, Ukraine’s sovereign rating was further downgraded to CCC- by S&P with a negative outlook. The National Bank of Ukraine increased its discount rate from 19.5% to 30% in its latest monetary policy meeting on March 3, 2015. The move was aimed at tightening liquidity conditions to curb devaluation in the UAH. As a result, the UAH appreciated to UAH 23 per USD from UAH 28 per USD. There is a further currency devaluation risk as the country is suffering from continuing instability as noted above, and has a large current account deficit and high external funding needs. The debt balance related to our Ukranian operations is approximately $681.5 million as of December 31, 2014. Astelit’s foreign currency revenues were estimated at 19% of revenues and its foreign currency operational expenses were estimated at 20% of the total in 2014. Any further depreciation of the UAH will lead to a foreign exchange loss. We have been unable to hedge this exposure to the UAH.

 

   

Our development strategy in Ukraine may lead us to increase our investment there, which will further increase our country and currency risk exposure. In Ukraine, a 3G licensing tender was announced by the Ukrainian National Commission for Communications and IT Regulation in December 2014 and was held in February 2015. After bidding the highest offer among three bidders retained for the three licenses, Astelit was awarded the license for the first lot. The associated costs will increase our

 

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Ukrainian financing needs, which could in turn require us to consider new sources of funding or the extension of existing sources and could require Turkcell to provide guarantees in respect of any Astelit debt, in addition to the guarantees already provided. There can be no assurance that we will be able to develop a 3G network on commercially reasonable terms, that we will not experience delays in developing our network and that competing licensees will not get to market before us (one bidder has already begun tests), in each case harming our competitive position. This could have an adverse effect on the value of our investment there.

 

   

The economic situation is fragile in Belarus. The country remains vulnerable to global shocks which may trigger renewed weakness in the country’s ability to service its external debt and further depreciation of the local currency, Belarusian Rubles (“BYR”), which could in turn lead to a further reduction in the value of our investment in this country. The BYR depreciated against the U.S. Dollar by 25% in 2014 and further devaluated in 2015 by 26% as of March 3, 2015 following decreases in both foreign exchange purchase taxes and minimum reserve requirements. Devaluation risks still remain, as limited currency reserves, high debt repayments and the current account deficit coupled with the close ties to the currently troubled Russian Economy puts the recent BYR stabilization at risk and creates inflationary and devaluation pressure. Our subsidiary in Belarus, Best, had foreign currency debt of $660 million as of December 31, 2014, guaranteed by Turkcell.

 

   

Corruption is an area of concern in emerging markets and can lead to reputational risk, losses, significant fines and sanctions against affected companies and their personnel and may extend to controlling persons. In this regard, allegations have been made regarding improper payments relating to the operations of Kcell, a mobile operator in Kazakhstan and 51% subsidiary of Fintur Holdings B.V., in which we hold a 41.45% stake and TeliaSonera holds the remainder. With respect to Kcell, through our representation on the Fintur board, we remain vigilant about such allegations, however there can be no assurance that such issues will not be substantiated or that new allegations will not arise. More generally, there can be no assurance that other acts of corruption will not occur or be alleged in respect of any of our activities, including but not limited to those of the Fintur companies. Turkcell has received and responded to a request from the U.S. Securities and Exchange Commission (“SEC”) to submit documents and information related to Uzbekistan and the Uzbek subsidiary of TeliaSonera (which, as noted above, is the majority owner of Fintur).

We are subject to laws such as the U.S. Foreign Corrupt Practices Act, which prohibit corrupt payments to governmental officials or certain payments or remunerations to customers. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees and could adversely affect our business in affected countries. Such violations or allegations of violations may also adversely affect our reputation, our revenue or our overall financial performance.

In addition to the foregoing, the new Turkish Commercial Code and related legislation may require us to provide new capital or other financial support to certain of our controlled subsidiaries, which may divert resources from other needs. Our international and Turkish subsidiaries may not benefit us in the way we expect for the reasons cited above, as well as other reasons, including general macroeconomic conditions, poor management and legal, regulatory or political obstacles. For many of these subsidiaries, we do not expect to achieve desired levels of profitability in the near or mid-term, and we may be required to record impairments. We may also in response to such conditions consider increasing, restructuring or exiting certain of our investments.

Furthermore, in addition to investing in our international operations, we also engage in business through roaming agreements in a number of countries. In international markets in which duopoly markets exist, such as the United Arab Emirates, Tunisia or the Maldives, operators tend to increase their roaming prices despite the overall trend of declining roaming prices in the world, which could increase our roaming costs.

 

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We are exposed to foreign exchange rate risks and risks relating to our cash balance management that could significantly affect our results of operation and financial position.

We are exposed to foreign exchange rate risks because our income, expenses, assets and liabilities are denominated in a number of different currencies, primarily Turkish Lira, U.S. Dollars, Euros, Ukrainian Hryvnia, Belarusian Rubles and Azerbaijani Manat. In particular, a substantial majority of our debt obligations and equipment expenditures are currently, and are expected to continue to be, denominated in U.S. Dollars, while the revenues generated by our activities are denominated in other currencies, in particular the Turkish Lira, Ukrainian Hryvnia, Belarusian Ruble, Azerbaijani Manat and Euro. In addition, we are exposed to such currency mismatches with respect to certain capital expenditures and off-balance sheet obligations, in particular our obligations in respect of universal service for the installation of infrastructure in uncovered areas of Turkey, a service that we have contracted to provide for an amount in TRY, but which requires expenditures in foreign currencies. See “Item 8. Financial Information” and Note 31 to our audited Consolidated Financial Statements included in “Item 18. Financial Statements” of this annual report on Form 20-F.

The TRY depreciated by 8.6% against the U.S. Dollar in 2014, driven mainly by expectations regarding the Federal Reserve’s increasing interest rates, and there is a possibility of further devaluation. The Belarusian Ruble depreciated against the U.S. Dollar by 25% while the Ukrainian Hryvnia lost 97% of its value in 2014. Furthermore, as of March 3, 2015, the Belarussian Ruble had depreciated against the U.S. Dollar by an additional 26% while the Ukrainian Hryvnia had lost an additional 57%. There was no major change in the Azerbaijani Manat against the U.S. Dollar in 2014. However, the Azerbaijani Manat depreciated against the U.S. Dollar by 34% as of March 3, 2015.

Sudden increases in inflation or the devaluation of these currencies or other currencies in which we generate revenue, have had, and may continue to have, an adverse effect on our consolidated financial condition or liquidity. In the current economic environment and considering the fragile economic conditions in Belarus and the current situation in Ukraine, there is a possibility of further devaluation. There are no tools to hedge foreign exchange rate risks effectively due to restricted and undeveloped financial markets in these countries.

Fluctuations between Turkish Lira, Ukrainian Hryvnia, Belarusian Rubles and Azerbaijani Manat, on the one hand, and U.S. Dollars and Euros, on the other, have had and may have an unfavorable impact on us. We may enter into derivative transactions to manage the risk with respect to the Turkish Lira; however, these transactions have a cost and do not fully cover all of our risks. As of December 31, 2014, our consolidated debt was $1,594.6 million and around $1,385.8 million of this amount was in foreign currency of which $252.6 million was related to operations in Turkey.

When we translate our results of operations and financial position into U.S. Dollars for the purpose of preparing our financial statements that are expressed in U.S. Dollars, the dollar amounts will vary in accordance with applicable exchange rates. We do not hedge this so-called “translation risk”.

Reduction in cash generated from operations and increased capital needs may increase our borrowing requirements, which may increase our financing costs and our exposure to the risks associated with borrowing.

We continue to experience challenging macroeconomic, regulatory and competitive conditions in our markets that may reduce cash generated from operations, and we may continue to face increased capital needs to finance our technological and geographic expansion. In 2015, this may include significant additional capital expenditure requirements with respect to the 3G license in Ukraine and with respect to 4G in Turkey, if we are successful in our pursuit of a 4G license. Furthermore, depending on the result of our general assembly meetings in 2015, we may pay a dividend for the first time in several years. In addition, an increase in the volume of assigned contracted receivables has resulted in and may continue to result in higher working capital requirements. These pressures have in the past reduced, and may continue to reduce, our liquidity. Reduced liquidity may lead to an increase in our borrowing requirements. Borrowing by Turkcell group companies

 

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exposes us to interest rate risk and possibly increases interest expense, obligates us to meet certain covenants and exposes us to financial risks if covenants are not satisfied or if additional financing is required, each of which could have a material adverse effect on our consolidated financial condition and results of operations. Furthermore, no assurance can be given that we will continue to have access to financing on terms that are satisfactory to us.

As of December 31, 2014, our consolidated debt was $1,594.6 million. $347.9 million of our debt portfolio consisted of financing obligations paying interest at fixed rates. The remainder of our debt portfolio pays interest at floating rates, which has been favorable in the current interest rate environment, but would expose us to increased costs if rates increase further.

In June 2011, we engaged in a forward start collar agreement for some portion of our debt which is due in 2015 and exposed to interest rate risk. The collar hedges variable interest rate risk for the period between 2013 and 2015.

Some of the borrowing agreements entered into or guaranteed by Turkcell have financial covenants that the borrower is required to observe. Although we are not presently concerned with Turkcell’s ability to meet its financial covenants, no assurance can be given that the covenants in borrowings entered into or guaranteed by Turkcell will at all times be met. Furthermore some of our borrowing agreements contain cross default clauses under which a default by a group company could constitute an event of default under certain of our borrowings.

A company in our Group has defaulted, and others may in the future default on their financial covenants and payment obligations. For example, we cannot ensure that our subsidiary in Belarus will be able to meet its payment obligations. It may default on its debt obligations if it fails to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on its debt obligation. Additionally since June 2011, Astelit has not met certain payment obligations, which were waived until February 1, 2012. Since that date, our Board of Directors has not acted to approve or reached a consensus for the extension of repayment dates. As a result, Astelit was unable to meet its repayment obligations to its parent company, Euroasia Telecommunications Holdings BV (“Euroasia”) (55% owned by Turkcell) and Financell BV (100% owned by Turkcell) totaling $323 million and defaulted on its loan agreements (Astelit has made partial payments and as of December 31, 2014, Astelit’s outstanding obligations under its loans to Financell and Euroasia reached a total of $622 million). In addition to the Euroasia loan and Financell loans, as given above, Astelit has defaulted on one SCM loan agreement currently totaling $42 million (the “SCM Loan”).

As a consequence of Astelit’s default, cross default clauses have been triggered on five loan agreements totaling $554 million (currently decreased to $79 million, on two loan agreements following the Company’s $150 million guarantee payment and other principal payment) and waivers were obtained for the aforementioned loans before December 31, 2014. In the same vein, Euroasia, a Group company that is a 100% shareholder of Astelit, which had previously borrowed $150 million to finance Astelit, also defaulted on its loan on March 30, 2012. As a guarantor, the Company paid $150 million to related banks on April 6, 2012. As a consequence of Euroasia’s default, cross default clauses have been triggered on four loan agreements (the same ones referenced above, currently decreased to two loan agreements) totaling $79 million and waivers have also been obtained for the aforementioned loans. As no waiver has been received for the SCM Loan from SCM, this loan has been classified in current liabilities. Accordingly, as a result of the event of default, SCM has the right to demand immediate loan repayment, although it has not perfected any pledges in connection with this loan.

There can be no assurance that we will not have to make similar payments in the future, which could adversely affect our business and results of operation. Furthermore, if Astelit cannot obtain new financing and if our Board or shareholders fail to achieve consensus on Astelit-related issues, Astelit’s and our own financial results and condition would be adversely affected. As noted above, our development strategy in Ukraine may lead us to increase our investment there, which will further increase our exposure.

 

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Limitations on spectrum as a scarce resource in mobile telecommunication systems, alleged health risks with BTS and dependence on suppliers for network equipment may adversely affect our ability to maintain operational excellence.

Spectrum limitations and frequency costs may adversely affect our ability to provide services to our subscribers and the cost to us of providing such services.

Our GSM and UMTS licenses have specified terms and are subject to renewal upon a payment of a fee, but renewal is not assured. The loss of, or failure to renew, our licenses could have a material adverse effect on our business and financial condition. Those licenses have also specified radio spectrum. The spectrum is a continuous range of frequencies within which the waves have certain specific characteristics. The number of subscribers that can be accommodated on a mobile network is constrained by the limited amount of spectrum allocated to the operator of the network and is also affected by subscriber usage patterns and network infrastructure. We have 2x11 MHz of FDD spectrum in 900 MHz band for GSM and 2x20 MHz from 2100 MHz FDD band for UMTS services. As our subscriber base and their demand for mobile services such as voice and data grow and as we offer a greater number of services, we will require additional capacity. We may face capacity problems, which may in turn lead to deterioration in our network’s quality and may negatively impact our operational results.

In addition, if we fail to obtain additional frequencies at a reasonable cost, the competitive coverage advantage of our Company may be adversely impacted. The cost of obtaining new frequencies has increased significantly in recent years and is expected to continue to increase. This has had and is likely to continue to have an adverse impact on our cost of providing service and results of operations.

In July 2011, the ICTA proposed to the Ministry of Transport, Maritime Affairs and Communications, on the subject of GSM frequencies, to be permitted to serve 3G services and the spectrum award of 2x8.6 MHz E-GSM band to the operator that has less than 10 MHz spectrum in 900 MHz and 2x15 MHz of 1800 MHz to each operator that does not have the spectrum. The ICTA decision implies that only Avea will be eligible for the E-GSM auction, while Vodafone and Turkcell will be eligible for the 1800 auction, which may enable Avea to be the sole beneficiary of the E-GSM band. In that case, Avea would be able to begin UMTS900 services immediately from the E-GSM band, whereas Turkcell and Vodafone would only begin after extensive technical works regarding spectrum clearance are done. Consequently, the competitive coverage advantage of Turkcell may be adversely impacted.

Consistent with the nature of terminal technology development, traffic on the 2G network is expected to shift to the 3G network. However, 3G terminal penetration is the key factor in providing the expected shift in traffic from 2G to 3G. Penetration may stay low or our subscribers may choose to stay on the 2G network for reasons such as the 2G network’s lower battery power consumption. In addition, 3G coverage depends on the deployment of the 3G network, which will certainly take time to achieve, compared to the coverage level of the 2G network. As a result, Turkcell may have difficulties in releasing 900 MHz band for future technologies.

The next step in the development of telecommunications in Turkey is the deployment of 4G networks. The auction for the 4G license is planned to be held in 2015. The band and the width of frequency range for 4G has been announced as a total of 390 MHz to be auctioned in 800 MHz, 900 MHz, 1800 MHz, 2100 MHz and 2600 MHz bands by the Minister of Transport, Maritime Affairs and Communications. We have not received an official notification from the Ministry yet. The cost of 4G network development and the quality of services (including data speed and quality of coverage) depend on the band and the width of frequency range given to an operator. New network development requires significant financial investments and there can be no assurance that we will be able to develop 4G networks on commercially reasonable terms, that we will not experience delays in developing our networks or that we will be able to meet all of the license terms and conditions or that we will be granted such licenses at all. We could also face increased costs due to the increase in frequency spectrum usage fees with this technology. We may encounter difficulties in maintaining our service quality and differentiating our service if there are unfavorable license terms and conditions, if we are obliged to use equipment from certain manufacturers or share infrastructure with other operators.

 

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There are alleged health risks, zoning limitations and certification requirements associated with our Base Transceiver Stations (“BTS”), which make it difficult to build and maintain BTS.

We are aware of allegations that there may be health risks associated with the effects of electromagnetic signals from BTS and from mobile handsets. While we believe that there is currently no substantiated link between exposure to electromagnetic signals at the level transmitted by our BTS and mobile handsets and long term damage to health, the actual or perceived health risks of mobile communications devices could adversely affect us through a reduction in subscribers, reduced usage per subscriber, increased difficulty in obtaining sites for base stations and exposure to potential liability. Furthermore, we may not be able to obtain insurance with respect to such liability on commercially reasonable terms.

In recent years, legal proceedings have been brought against mobile operators seeking the removal of base station sites for health reasons. In addition, the Turkish Supreme Court overruled the decisions of some local courts, finding that a base station in question could have negative effects on human health over the long term. If the number of those cases increases or if new regulations were to result, these could have a material adverse effect on our operations and financial results. Such legal proceedings may make it more difficult for us to establish and maintain such sites. Furthermore, there are conflicting and confusing reports in the media about the health effects of BTS. These reports have even caused local residents in certain regions to form large protests in strong objection to the BTS sites. Such obstacles have made it increasingly difficult to build new BTS sites and maintain our existing sites.

Furthermore, there are zoning limitations related to our BTS that require operators to obtain construction permits and certificates, which may be costly and may have an adverse effect on our operating results. A draft zoning law in Turkey may require mobile operators to obtain certifications for all existing and new BTS, which may result in significant compliance costs and closing of BTS for which certification cannot be obtained, negatively impacting our financial condition. Any difficulty in maintaining or building BTS due to health concerns and our inability to obtain the required permission and certificates, may negatively impact the quality of our network, including our ability to expand and upgrade it, and affect our operational performance.

In addition, municipalities regulate the choice of operators’ BTS locations, and if we do not have, or are unable to obtain, a construction certificate in our preferred location, we may have to move our BTS to another location. In relation to our fiber business, there is an obligation to get permission for excavations from authorized municipalities or institutions. In some areas, excavations may have to be stopped due to the high cost of tariffs requested from municipalities. Our investment plans may be affected due to excavations being banned during certain seasons within the administrative boundaries of municipalities. In some cases, we could face the risk that, although we get the approval of the Ministry, institutions under the Ministry do not recognize these approvals and do not give permission to excavate. In addition, the new Metropolitan law has increased the number of metropolitan municipalities and in some cases, the size of their territory was increased, which may have the effect of increasing our coverage obligations and the number of BTS required to meet them. Related regulatory actions in the future are likely to increase our costs and affect results of operations, in many cases, adversely.

We are dependent on certain suppliers for network equipment and for the provision of data and services. The failure of any of our suppliers to supply equipment to us, and at the level of quality we require, may have an adverse effect on our business and financial condition.

Like all operators, we purchase our mobile communications network equipment, from a limited number of major suppliers. There can be no assurance that we will be able to obtain equipment from one or more alternative suppliers on a timely basis in the event that any current supplier for any reason, including that the technological requirements for our increasingly advanced infrastructure are too complex, is unable or unwilling to satisfy our demands. This could also affect our competitive position, if our suppliers stay behind technological developments compared to the suppliers of our competitors.

 

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Adverse economic conditions have negatively affected and may continue to affect our domestic and international suppliers, leading to a contraction in their business, which in turn may lead to a decrease in the quality of the services that they render to us and adversely affect timely delivery of such services, negatively impacting our business and operations. In addition, our existing and new license agreements or new regulations may require us to purchase network equipment from specified suppliers or bring certain specifications regarding our existing suppliers. Equipment from these suppliers may not always be compatible with our existing equipment or the supplier may fail to integrate it, and our employees may not be familiar with the technical specifications and maintenance requirements of equipment from these suppliers. Furthermore, if our suppliers fail to meet the requirements, we may end up violating the terms of our license agreements. These factors could also have a material adverse effect on our business and financial condition.

Turkcell’s complex ownership structure and ongoing disagreements among our main shareholders have adversely impacted and may continue to impact decision-making on important matters. These ongoing disputes may lead to further regulatory or legal actions, and affect the ownership and control of our shares.

Our principal shareholders are Sonera Holding B.V. and Turkcell Holding A.S., which hold 13.07% and 51.00%, respectively, of Turkcell’s shares as of March 3, 2015 based on the Company’s share book. Turkcell Holding A.S. is 52.91% owned by Cukurova Telecom Holdings Limited and 47.09% by Sonera Holding B.V., which according to public filings (a Schedule 13D filed in November 2009), is a wholly owned subsidiary of TeliaSonera Finland Oyj, which in turn is a wholly owned subsidiary of TeliaSonera AB (“TeliaSonera”). Cukurova Telecom Holdings Limited is 51% owned by Cukurova Finance International Limited and 49% by Alfa Telecom Turkey Limited. According to public filings (a Schedule 13D filed in November 2009), Alfa and TeliaSonera entered into an agreement regarding a possible consolidation of their holdings in Turkcell in a new company. In a recent Schedule 13D filing, Alfa has deleted references to this agreement.

Cukurova and Alfa were involved in a long-running dispute regarding, in summary, amounts due by Cukurova to Alfa and Alfa’s claim to take ownership of Cukurova’s indirect 13.8% interest in our Company in settlement of such amounts. In 2014, as a result of a court decision, Cukurova paid Alfa $1.6 billion to release this claim. Cukurova has been provided loan financing amounting to $1.6 billion by the Turkish state-owned Ziraat Bank for which an indirect 13.8% interest in our Company has been provided as collateral. This dispute and other disputes have effectively blocked shareholder decision-making on important corporate matters, and could have an adverse effect on the ability of our management to execute business decisions and take other actions. We cannot predict how the resolution of this dispute will affect our Company, whether other disputes will be resolved and whether our shareholders will be able to achieve agreement on matters regarding the operation of our Company.

The shareholding structure and the ongoing disputes have adversely affected our company in a number of ways and present a number of risks, including in particular:

 

   

Our Articles of Association contain quorum and majority requirements, at various levels, for shareholder meetings and decisions. Failure to achieve a quorum or the required majority vote can block decisions that require shareholder approval. We have had difficulty convening shareholder meetings and numerous items submitted to our shareholders have not been approved, including the distribution of dividends, the approval of our dividend policy, the election of independent board members, the release of directors for actions taken and the approval of financial statements. In 2012, 2013 and 2014, due to lack of quorum, the annual general assemblies could not convene. For 2015, our Board of Directors has decided to convene the general assembly meeting of our Company pertaining to the years of 2010, 2011, 2012, 2013 and 2014 on March 26, 2015. No assurance can be given that quorum requirements will be met and that actions will be taken.

 

   

A number of new corporate governance requirements were enacted under Turkish regulations by the Capital Markets Board of Turkey (“CMB”) with mandatory effect from June 30, 2012.

 

 

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We were unable to comply with some of these requirements because of a lack of consensus among our main shareholders, including a requirement that one-third of our Board members and that all of our Audit Committee members be “independent”.

Under the Capital Markets Law, the CMB has the power to take action against the Company, our Board members and our main shareholders in respect of the various governance issues that have arisen or to amend the Articles of Association without general assembly approval. Under such powers, the CMB directly appointed all of the current members of our Board. The CMB appointed members’ terms of office will last until new appointments are made in accordance with applicable legislation.

An “Investor Compensation Center” (“ICC”) was formed in 2013 by the CMB under the 2013 Capital Markets Law. Under Art. 128 paragraph k (which was added by a law on July 12, 2013) of the Capital

  Markets Law that deals with the duties and responsibilities of the CMB, it is stipulated that the ICC may use the rights vested on the general assembly in public companies whose ordinary general meetings of two consecutive financial years could not be made within statutory deadlines and whose board members have been nominated partly or wholly by the CMB. By the end of March 2015, we will be in this situation if our general assembly cannot convene on March 26, 2015 and the head of the CMB has publicly stated that he would expect the ICC to act if we fail to convene the general assembly meeting before the end of March 2015. On February 27, 2015, the Regulation on the Investor Compensation Center was published in the Official Gazette with no further details on how this right shall be exercised by the ICC. The form and scope of such actions are not clearly defined and we are not aware of any precedents, thus we cannot predict what actions the ICC might eventually take, if any.

No assurance may be given regarding the impact of past or future CMB actions, future ICC actions, or any future legal actions against our Company, on the overall company strategy, convening of our general assembly or the distribution of dividends.

Compliance with our home country governance rules is an important element of our compliance with the listing requirements of the New York Stock Exchange (“NYSE”). Failure to comply with such rules could jeopardize the continued listing and trading of our ADRs on the NYSE.

 

   

Under the new Turkish Commercial Code, an “independent auditor” for our Company should have been approved by the general assembly by March 31, 2013. This action was not taken although our Board has agreed to present DRT Bagimsiz Denetim ve Serbest Muhasebeci Mali Musavirlik A.S. (“Deloitte”) for approval of the general assembly. Our Company’s board member, Mr. Jan Erik Rudberg, filed a court case with the request of an independent auditor appointment in relation to our Company’s 2013 financials as required by the Turkish Commercial Code. The related court decided to appoint Deloitte as the independent auditor of our Company. Regarding the year 2014, our Board has agreed to present Deloitte for approval of the general assembly and in the meantime, Mr. Jan Erik Rudberg filed another court case requesting the appointment of Deloitte as an independent auditor in relation to our Company’s 2014 financials. If we are not able to comply with this requirement through approval by the general assembly in future, an auditor may be appointed for us by court order upon request of any shareholder or board member.

For so long as our main shareholders are in dispute and/or unable to achieve consensus, we are likely to continue to experience difficulties obtaining corporate decisions, including with respect to the matters discussed above, and we may have difficulty obtaining decisions regarding our business and operations. This situation may also lead to further regulatory and legal actions being taken in respect of our Company, the nature and effects of which we cannot predict. Ongoing disputes among the shareholders may affect the ownership and control of our shares, the demand for our shares and our ability to manage our business, and no assurance can be given that the interests of these shareholders will be aligned with those of our other shareholders.

 

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We face risks related to our dependence on IT systems and the products and services we provide through third party suppliers as well as our exposure to technological changes in the communications market, including in industries where we traditionally do not compete.

We are dependent on certain systems and suppliers for information technology (“IT”) services and our business continuity is at risk due to our exposure to potential natural disasters, regular or severe IT and network failures, human error, security breaches and other cyber security incidents and IT migration risk, any of which could have an adverse effect on our operations, damage our reputation and affect our relationships with our customers.

We are heavily dependent on IT systems, suppliers of IT services and our IT employees for the continuity of our business and we are continually upgrading and converting our IT systems. Although we devote significant resources to the development and improvement of IT and of security, backup and continuity systems, we could still experience IT and network failures and outages due to system deficiencies, human error, security breaches, terrorist or other destructive acts, natural disasters such as earthquakes and floods, unsuccessful migration to alternative or improved IT systems, or other factors. We have, from time to time, experienced attempted cyber attacks of varying degrees of sophistication by unauthorized parties attempting to obtain access to our computer systems and networks. As of the date of this annual report, we believe that no such attacks have succeeded in obtaining access to our critical systems, although such attacks in practice may develop over long periods of time during which they can remain undetected. Computer hackers routinely attempt to breach the security of technology products, services, and systems. If successful, these could result in, for example, unauthorized access to, misuse, loss, or destruction of our data or systems and theft of sensitive or confidential data, including personal information of our employees and customers, and theft of services and/or funds. In the event of such breaches, we could be exposed to potential liability, litigation, and regulatory action, as well as the loss of existing or potential customers, damage to our reputation, and financial loss. In addition, the cost and operational consequences of responding to breaches and implementing remediation measures could be significant.

2G and 3G networks are migrating towards IP technology to transport information. These networks open up the possibility for IP-based services. However, once these services are introduced into the IP domain, the mobile network may be harmed by potential attacks. The threats on the mobile network can originate from external sources, such as the public internet, or internal sources, such as terminals connected to our mobile network. Despite our efforts in taking security issues very seriously, we could encounter successful attacks on our infrastructure, which could have an adverse effect on our operations, damage our reputation and affect our relationships with our customers.

Although we closely follow general technological trends in communications and technology, we may be unable to adapt to rapid technological changes in communications and information technology, which could result in higher capital expenditures and a greater possibility of commercial failure.

Rapid technological changes in communications and information technology are redefining the markets in which we operate and the products and services we offer, shortening product life cycles and facilitating the convergence of various segments, including in our core mobile communications and 3G businesses. If we fail to anticipate, invest in and implement new technologies with the levels of service and prices that customers demand or to respond effectively to technological changes, our business, financial condition and results of operations could be adversely affected. In addition, such new technologies require significant capital expenditures and it is impossible to predict with any certainty whether the technology selected by us will be the most economical, efficient or capable of attracting customer usage, or whether such technologies will be developed according to anticipated schedules, will perform according to expectations or will achieve commercial acceptance. Although we are following general technological trends in communications and technology, there can be no assurance that we will be able to develop new products and services that will enable us to compete efficiently.

 

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We have become active in providing products and services for industries other than telecommunications, many of which are developed and/or maintained by third party providers. Our dependence on these third party providers to help us navigate the regulatory, security and business risks of industries where we traditionally do not compete adversely affects our business.

The operation of our business depends, in part, upon the successful deployment of continually-evolving products and services, including for applications in industries other than telecommunications, such as TV, mobile financial services, mobile health and mobile education solutions, authentication solutions and entertainment and community services. We are reliant upon third party providers to help us navigate risks relating to security, regulations and business in the industries where we do not traditionally compete. Changes in such industries may impair our partners’ business and/or negatively impact the content we are developing, such as for entertainment, which, in turn, could have a material adverse effect on our business and financial condition.

Our business, consolidated financial results and/or operational performance could be adversely affected unless we retain our key personnel, our partners and their employees.

Our performance depends, to a significant extent, on the abilities and continued service of our key personnel. Competition for qualified telecommunications and technology personnel in Turkey and elsewhere is intense. In addition, we depend on our dealers, distributors and their employees for the growth and maintenance of our customer base. The loss of the services or loyalty of key personnel could adversely affect our business and financial condition and could lead to breaches of confidentiality, particularly if a number of such persons were to join a competitor.

Our former Chief Executive Officer, Mr. Sureyya Ciliv, resigned from his position effective January 31, 2015. Mr. Ilker Kuruoz is now serving as our interim Chief Executive Officer, in addition to maintaining his position as our Chief Technology Group Officer. Our Board is leading a search to find our new Chief Executive Officer. Our future success will be dependent upon the ability to identify and engage a suitable candidate within a reasonable time period and, thereafter, the ability of the new Chief Executive Officer to effectively transition into this role. Our new Chief Executive Officer could make organizational changes, including changes to our management team and may make changes to our Company’s structure and business strategy. Failure to manage these transitions successfully could adversely affect our ability to compete effectively, which could impact our revenues, operations, or results of operations.

We are involved in various claims and legal actions arising in connection with our business, which could have a material effect on our financial condition.

We are subject to investigations and regular audits by governmental authorities in Turkey, including the Competition Board, the ICTA, tax authorities and certain other parties, and governmental authorities in other countries in which we have operations. We are currently involved in various claims and legal actions with such authorities. We have set aside provisions for ongoing disputes based on applicable accounting standards. However, no assurance can be given that the provisions we set aside will be sufficient to cover our actual losses under these matters, and that new disputes will not arise under which we would face additional liabilities and reputational risk. For a more detailed discussion of all of our significant disputes, see “Item 8. Financial Information” and Note 34 to our audited Consolidated Financial Statements included in “Item 18. Financial Statements” of this annual report on Form 20-F.

In particular, we have an ongoing dispute regarding the application of the Turkish Special Communication Tax. The tax authority has assessed a significant special communication tax and a related penalty against our company as a result of a tax investigation regarding the years 2008 to 2012. The tax amount assessed with respect to the Company is TRY 211.1 million (approximately $84 million as of March 3, 2015) and the tax penalty imposed is TRY 316.6 million (approximately $126 million as of March 3, 2015) as of December 31, 2014. This assessment is based on the tax authority’s claim that the Company should pay the special communication tax on prepaid card sales made by distributors. Turkcell has filed 60 separate lawsuits before the

 

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tax court for the cancellation of the tax and tax penalty demand. After the lawsuits were filed, the Company applied for a settlement procedure. However, settlement has not been reached, and the lawsuits are still ongoing. While we intend to vigorously defend our rights and our position in this case, no assurance can be given regarding the outcome. If decided against us, these cases could have a material and adverse effect on our results of operations and our financial condition. Currently, we are under tax investigation for the year 2013 and there is a risk that we may incur a special communication tax and a penalty as a result of this investigation.

Although we maintain and regularly review our internal control over financial reporting, there are inherent limitations on the effectiveness of our controls.

We maintain and regularly review internal control over our financial reporting. However, internal control over financial reporting has inherent limitations and there is no assurance that a system of internal control over financial reporting, including one determined to be effective, will prevent or detect all misstatements on a timely basis. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance regarding financial statement preparation and presentation. Our latest review has revealed certain deficiencies in our controls, although none that we believe constitute “material weaknesses”. However, our controls have in the past suffered from these and lesser deficiencies and no assurance can be given that others will not emerge in the future. A failure to detect or correct deficiencies and weaknesses in a timely manner could have an adverse effect on the accuracy of our financial reporting.

 

ITEM 4. INFORMATION ON THE COMPANY

4.A History and Development of the Company

Turkcell Iletisim Hizmetleri A.S. (“Turkcell”), a joint stock company organized and existing under the laws of the Republic of Turkey, was formed in 1993 and commenced operations in 1994. Our principal shareholders are Sonera Holding B.V. and Turkcell Holding A.S., which hold 13.07% (does not include additional shares totaling approximately 0.94% that Teliasonera holds, according to public filings) and 51.00%, respectively, of Turkcell’s shares based on the Company’s official share book. Turkcell Holding A.S. is 52.91% owned by Cukurova Telecom Holdings Limited and 47.09% by Sonera Holding B.V. Cukurova Telecom Holdings Limited is 51% owned by Cukurova Finance International Limited and 49% by Alfa Telecom Turkey Limited. The address of our principal office is Turkcell Iletisim Hizmetleri A.S., Turkcell Plaza, Mesrutiyet Caddesi, No. 71, 34430 Tepebasi, Istanbul, Turkey. Our telephone number is +90 (212) 313 10 00. Our website address is www.turkcell.com.tr. In July 2000, we completed our initial public offering with the listing of our ordinary shares on the Borsa Istanbul and our ADSs on NYSE.

We operate under a 25-year GSM license, which we were granted in April 1998 upon payment of an upfront license fee of $500 million. Under our license, we pay the Undersecretariat of the Treasury (the “Turkish Treasury”) a monthly treasury share equal to 15% of our gross revenue. Of such fee, 10% is paid to the Ministry of Transport, Maritime Affairs and Communications of Turkey (“Turkish Ministry”) for a universal service fund. We also operate under interconnection agreements with other operators that allow us to connect our networks with those operators to enable the transmission of calls to and from our GSM system.

In early 2009, we were granted the 20-year type A 3G license, which provides the widest frequency band, for a consideration of EUR 358 million (excluding VAT), and we signed the related 3G license agreement on April 30, 2009. The 3G license agreement has similar provisions to the aforementioned 2G license agreement.

In 2013, we won an auction held by the Turkish Ministry related to universal service, which requires installing sufficient infrastructure to uncovered areas with a population of less than 500 and its operations for 3 years. We started the service in August 2013 and as of the end of 2014, infrastructure covering 1,610 settlements has been installed (out of the three-year target of 1,799) within the scope of the project, with network-sharing technology.

 

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Our subscriber base has grown substantially since we began operations in 1994. At year-end 1994, we had 63,500 subscribers. By year-end 2014, that number for the Group had grown to 71.5 million.

In 2014, we had total revenues of $5,512.9 million, our adjusted EBITDA totaled $1,725.2 million and we reported a net income attributable to the owners of Turkcell amounting to $864.9 million.

For the year ended December 31, 2014, we spent approximately $924.9 million on capital expenditures, compared to $853.8 million and $975.5 million in 2013 and 2012, respectively.

In addition to our operations in Turkey, we have various international operations. For more information, see “Item 4.B. Business Overview—International and Domestic Subsidiaries”.

4.B Business Overview

Based on operator announcements, we are the leading provider of mobile services in Turkey in terms of the number of subscribers, with 48% of the Turkish subscriber market as of December 31, 2014, compared to 51% as of December 31, 2013. We provide high-quality mobile voice, broadband and other services over our mobile communications network and have developed the premier mobile brand in Turkey by differentiating ourselves from our competitors with our value offers, which include: superior and innovative technologies, more advantages, outstanding and extensive service quality, and being a leader in social responsibility. We maintain our strong position in the market due to our customer-oriented approach and our ability to provide quick and differentiated solutions to meet customers’ needs through lifestyle segments. We are in compliance with all of our license requirements in all material respects.

I. Industry

a. Overview

GSM, one of the digital standards for mobile communications, was developed in 1987 to facilitate unification and integration of mobile communications worldwide.

As a digital standard, GSM offers a wide range of services that include voice, circuit switched data, packet data and fax, in addition to standard service offerings such as call barring, call forwarding, call waiting and roaming into areas serviced by other GSM carriers. A key component of the GSM network is the simcard, which enables the user of a mobile phone to be identified. Simcards, also known as “smart cards”, are placed inside each handset and function as its digital brain. The simcard’s digital memory allows for storage of the subscribers’ personal information, such as the rate plan, phone number and service features. Both postpaid and prepaid subscribers are required to purchase a simcard in order to use the telecommunications service offered by Turkcell.

GSM networks have traditionally been used exclusively as personal voice communications networks. Data communication in GSM networks has started with speeds of 9.6 kilobits per second (“Kbps”) and continued to improve with High Speed Circuit Switched Data (“HSCSD”), General Packet Radio Service (“GPRS”) and Enhanced Data rates for GSM Evolution (“EDGE”) technologies. Today, GSM networks can provide high-speed wireless data services of up to 300 Kbps.

The mobile telecommunications industry has increasingly provided mobile data services and used 3G/HSPA+ as a technology platform that is more suitable for data transmission. Currently, many advanced technology platforms are being developed to enable the provision of more sophisticated data services.

In the early 3G networks, the platform was only able to provide network speeds up to 384 Kbps. By using the new radio access technology, High Speed Downlink Packet Access (“HSDPA”) in UMTS networks, operators gain increased capacity and improved downlink speeds up to 14.4 megabits per second (“Mbps”). High

 

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Speed Packet Access Evolution (“HSPA+”) further enhanced the mobile broadband experience and increased the data capacity of HSPA. HSPA+ enhances mobile broadband with peak rates of 63.3 Mbps.

The latest mobile communications technology available in the commercial networks is 4G (LTE and LTE-Advanced) which is an IP-based flat data network that offers ultrafast mobile broadband speeds of up to 300 Mbps with latencies of less than 10 ms. 4G networks have also evolved to offer voice services (VoLTE:Voice over LTE) and new services like LTE Broadcast (eMBMS).

b. The Turkish Mobile Market

The Turkish mobile market has growth potential with favorable demographics, relatively low penetration levels and continued economic growth.

According to a TUIK announcement, the Turkish population is young, with an estimated median age of 31, which is lower than elsewhere in Western Europe, and the majority of the population lives in urban areas. In addition, there were 77.7 million people living in Turkey as of December 31, 2014.

Penetration level increased to 92% in 2014 (based on the operators’ announcement). According to the operators’ announcements, there are currently three mobile communication operators in Turkey—Turkcell, Vodafone and Avea—with a total of 71.9 million GSM lines as of December 31, 2014. Vodafone entered the Turkish GSM market by acquiring Telsim on May 24, 2006. Telsim, which had received a 25-year license at the same time as us and on what we believe to be identical terms, including the $500 million upfront license fee, had been put up for sale by the Savings Deposit Insurance Fund (“SDIF”) in August 2005. The auction for Telsim was held on December 13, 2005, with Vodafone submitting the winning bid of $4.55 billion. Avea is an operator majority-owned by Turk Telekom. Turk Telekom is 55% owned by Oger Telecom, a multinational GSM operator owned 35% by Saudi Telecom Company. In September 2006, Turk Telekom acquired Telecom Italia SpA’s shares of 40.6% in Avea for $500 million. Turk Telekom now holds 89.99% of the shares in Avea. The remaining 10.01% belongs to Is Bankasi.

II. Strategy

Our vision is to ease and enrich the lives of our customers with leading communications and technology solutions. We strive to build value for our customers, shareholders and employees.

As a leading communications and technology company, our goal is to continue organic growth while selectively seeking and evaluating new investment opportunities. Building on our strength in brand, people, infrastructure and scale, we have identified five strategic priorities in which we intend to pursue opportunities for profitable business growth:

 

   

Deliver superior customer experience;

 

   

Grow our mobile internet business;

 

   

Drive adoption of mobile services;

 

   

Drive operations excellence and productivity; and

 

   

Invest in future growth businesses.

III. Customer Segmentation & Services

a. Customer Segmentation

Through our increased focus on customers, all loyalty actions are designed in line with the targeted segments’ lifestyles, needs, priorities, and expectations.

 

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The aims of the segmentation are:

 

   

to increase the loyalty of existing Turkcell customers;

 

   

to ensure behavioral and emotional brand loyalty; and

 

   

to ensure a seamless series of positive brand experiences throughout all customer touch points, as well as to attract new customers.

We focus on segments, which are youth, professionals (white collar, self-employed, blue collar, governmental workers subsegments), households (disabled, farmers, housewives, retired, unemployed subsegments) and premium, with differentiated GSM and non-GSM offers, as well as campaigns and co-branded activities with selected companies from other sectors to create added values to targeted segments.

The youth segment management includes the loyalty program called “gnctrkcll” which is the largest youth club in Turkey, and ensures customer retention by presenting campaigns and advantages that fit the trends of young people. Gnctrkcll aims to reinforce Turkcell’s brand recognition as a young, dynamic, popular and intimate brand.

We also diversified the offers and packages for our prepaid customers, which include monthly fee-based packages that include voice, SMS, MMS and data advantages. We launched such packages to increase the retention of prepaid subscribers and the revenue generated from them.

b. Services

We currently provide high quality mobile voice, broadband and other services to subscribers throughout Turkey. Subscribers can choose between our postpaid and prepaid services. Currently, postpaid subscribers sign a subscription contract and receive monthly bills for services. Prepaid subscribers must purchase a starter pack, which consists of a simcard with balance of TRY 5 or TRY 20, while the top-up cards (both physical and digital) can be purchased in amounts ranging from TRY 15 to TRY 360.

As of December 31, 2014, we had approximately 19.4 million prepaid subscribers and 15.2 million postpaid subscribers, compared to approximately 21.2 million prepaid subscribers and 14.0 million postpaid subscribers as of December 31, 2013.

(i) Voice Services

Voice services are the main services that we provide to our customers. Voice services consist of high quality GSM services on a prepaid and postpaid basis. Throughout 2014, we simplified our tariff structure so that it is easy to use and can be tailored to our customers’ needs.

(ii) Mobile Broadband

We commercially launched 3G simultaneously in 81 province centers and major cities in Turkey at the end of July 2009 and reached 91.21% population coverage as of December 31, 2014. There are approximately 28.9 million registered 3G subscribers and 14.2 million 3G-enabled handsets in our network. Smartphones are an important component for the growth of our mobile broadband business. The smartphone penetration on our network reached 40% by the end of December 2014, up from a 30% penetration at the end of 2013.

A wide variety of data offers are made available as part of our voice and terminal bundled campaigns, where terminals are provided by dealers and distributors, to increase 3G device penetration, create a unique terminal experience and enhance the broadband internet experience. Distributors, dealers and Turkcell offer joint campaigns to the subscribers, which may include the sale of devices by the dealer and/or distributor and a communication service to be provided by us. In particular campaigns, the dealer makes the handset sale to the

 

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subscribers whose instalments will be collected by us based on the letter of undertaking signed by the subscriber. These campaigns contain a variety of 3G-enabled terminal devices such as feature phones, smartphones, 3G modems and tablets.

Throughout 2014, we sustained our position as leader of handset campaigns through our dealer channel and we delivered attractive joint campaigns with “top of the class” models of brands in high demand such as Samsung, Apple, and Nokia.

Turkcell launched its first Turkcell-branded handset, T10, the affordable Android smartphone joint campaign, to widen access to mobile broadband in 2010. Since then, Turkcell and our dealer channel introduced 6 additional T-series smartphone models and 1 tablet. In 2013, the domestically designed and produced smartphone T40 and the Turkcell-branded tablet were released and both of these devices brought dynamism to the market. Then in July 2014, the T50, which is Turkey’s first operator-branded 4G smartphone, gained significant market share in the smartphone market. The T50, which attracted great attention in the Turkish market, became the best selling smartphone in the market in the third quarter and was ranked number 1 in the SP hitlist published by GFK Market Research Company.

In addition to constant communication emphasizing 3G’s coverage, penetration and speed, we have launched many campaigns together with our dealer channels and applications to increase smartphone penetration and mobile broadband usage.

(iii) Other Mobile Services

By providing a wide range of services, Turkcell enables users to remain connected wherever they are, via their mobile devices. From basic telecommunications services to social community services, Turkcell responds to the diverse needs of subscribers to help them connect to life.

Consumer Products and Services

Consumer Product Management is focused on developing and managing products and services to address the diverse needs of both consumers and corporate customers, thereby enriching their lives. These services are designed around three pillars: enhancing the communication experience of our customers via better call management and messaging services, enriching their “on the go” experience by using mobile technologies, especially in the areas of entertainment, i.e. TV, music, sports, and gaming, and enabling our customers to access information according to their needs.

Turkcell seeks to differentiate itself by providing innovative and pioneering solutions in collaboration with its strong solution providers and various partnerships. Consumer Product Management offers various products and services, including but not limited to, call and balance management services and messaging options, government-related applications that provide information on schooling, court case statuses, financial transactions, educational services, cloud services and entertainment options (such as sports, gaming, TV and music).

In addition, Turkcell has developed a number of Turkcell-branded mobile applications in-house. Turkcell App Market is a localized application store for users to download both free and paid mobile applications to their supported handsets. It enables people to download more than 10,000 applications including Turkcell-branded applications and third party applications such as news, games and sports. As of December 31, 2014, Turkcell has 55 active Turkcell-branded mobile applications that were downloaded over 8 million times in 2014. The most popular downloads among Turkcell applications include Hesabim, which is a multi-platform application for Turkcell subscribers allowing them to keep track of mobile usage, change user settings and TL top-ups. The remaining popular applications that users can download through App Market are Turkcell Music, which is a legal music platform to stream and download music, Gollercepte, which allows fans to follow their team and be updated on a wide variety of categories such as game scores and player transfers, and Akilli Depo, which is a cloud service that helps data storage.

 

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Corporate Products and Services

Corporate Product Management provides corporate customers with a competitive advantage by providing non-core industrial solutions, thereby delivering a new category of revenue sets for customers. Spanning from frozen food chains to farming, many types of solutions are available to streamline customer processes and provide operational efficiency through new revenue streaming channels, better consumer reach and experience.

Real-time Enterprise

Turkcell has started the “Real-time Enterprise” initiative which aims to transform traditional enterprise processes into innovative, mobile-centric, real-time business processes. Real-time Enterprise consists of 3 major strategies: Mobile Enterprise, Real-time Marketing and Zero Infrastructure Enterprise.

Mobile Enterprise: Aims to create a difference by using end-to-end solutions running on smartphones and tablets, which are replacing computers, to access information from anywhere. The solutions consist of automation solutions such as field sales automation, M2M products such as Smart Fleet, EkipMobil and communication solutions such as the Turkcell Video Conference.

Real-time Marketing: Enables enterprises to reach the right and relevant audience at the right time and location. With the help of the big data analytics and the Internet of Things (IoT), Turkcell marketing solutions allow enterprises to understand their current or potential customers and provide the opportunity for effective marketing.

Zero Infrastructure Enterprise: Lets enterprises own a flexible, fast and secure IT & communication infrastructure without the burden of capital expenditure. The solutions are customer-oriented and such flexible solutions are located in Turkcell’s data center and cloud.

Turkcell Smart Enablers Services

Turkcell Smart Enablers is a network of mobile-based and innovative technological services that offers companies the opportunity to know their customers better, reach the right customer in the right place, and increase security measures. These services are provided through a web service (API) that is easy to integrate into companies’ own systems. Eighteen services have been launched within this service group.

As of the date of this annual report, more than 200 companies evaluate their business processes and provide new technological services to their customers by using Turkcell Smart Enablers web services (APIs).

Turkcell Smart Map: The Turkcell Smart Map service, which is another first for Turkey, makes it possible for companies who want to target specific customers to analyze large-scale data. Turkcell Smart Map is working on a website in which companies can analyze masses in 21 different sub-demographic profile combinations and reach the real target audience density. Turkcell’s corporate customers can analyze Turkcell’s mobile activity concentration at a point and time where an activity is being planned, or analyze where their own customers are concentrated at a specific time of day. Turkcell Smart Map transforms this concentration into user-friendly language. Through this application, companies may have access to important data that will help them conduct marketing activities, develop growth strategies, and decide on new investment and design campaigns. In 2015, Turkcell plans to integrate new features such as Point of Interest (POI) analysis, movement analysis and interactive dashboard reports.

Location Based Services: Corporate customers can monitor and manage their sales forces and fleets with Ekip Mobil. Ekip Mobil is a management console that allows customers to view their field teams/vehicles on a map, define alarms for specific regions and create direct communication channels to the field. Ekip Mobil can be used on any mobile device. For companies, the investment costs are minimal.

 

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Turkcell Smart Education: The aim of the Turkcell Smart Education program is to provide an interactive education platform for corporate customers. Classrooms with interactive whiteboards, document cameras and lecture capture systems will support active-learning environments. Telepresence systems, video and web conferencing enables online education or distance learning for participants around the world.

Authentication Services

Mobile Signature, which was launched in February 2007, enables mobile subscribers to sign electronic documents and transactions with a legally-accepted digital signature using GSM SIM cards. Mobile signature subscribers can easily verify their personal identity in a digital environment and complete transactions remotely, without needing to be physically present. There are currently 80 application providers in the market, representing industries as diverse as banking, e-government, insurance, healthcare and e-commerce. One Time Password is widely used by corporate customers for two-level authentication controls on transactions. The service allows corporate customers to send a single-use password via SMS to consumers when providing authentication on transactions. It is widely used for online banking processes and login transactions.

Machine to Machine (“M2M”)

Since 2009, Turkcell has focused on its M2M business, whose principal markets in Turkey are car telematics, team tracking, fleet management, POS terminals, security alarms, smart metering, mobile health management, smart agriculture and sales force automation applications. Turkcell launched Turkey’s first M2M Platform in March 2012. With the M2M Platform, customers can manage their devices more effectively. As of December 31, 2014, the number of M2M subscribers reached 1.5 million.

Turkcell’s Smart Fleet offers logistics companies new opportunities in many aspects of their work, ensuring increased productivity. Also, the system greatly contributes to the environment by preventing wasteful fuel consumption.

Turkcell Energy Monitoring Service enables corporate customers to reduce their energy costs and also carbon emissions.

Turkcell Connected Car Platform offers an infotainment screen that works online. The driver can connect to vital information and entertainment under three categories: Navigation, Internet, and Roadside Assistance.

Turkcell also offers telemetry solutions to its corporate customers. In partnership with specialized third parties, Turkcell telemetry solutions allow customers to remotely access and collect metering data without utilizing a field force. Some examples of where telemetry services may be used include alarm systems, remote machine management, cold chain control, transformer stations, pipeline metering controls, and meteorology stations, among others.

Mobile Marketing

The increase in smartphone and tablet penetration has resulted in more data usage, more space to be creative and more interactive marketing tools in order to be engaged with customers. As the use of mobiles increases, mobile marketing is becoming a necessary part of every brand’s marketing strategy and Turkcell continues to grow its mobile marketing business as consumers move from a desktop to computing “on the go”. Turkcell utilizes mobile marketing and advertising channels to create additional value for customers. This value is ensured by one of the largest opt-in (customer permission) databases in Turkey, a variety of innovative marketing products and channels, and high response rates in comparison with traditional media. Through this database, advertisers can concentrate on their target market, segment their target groups and send specific messages to their recent and potential customers via different advertising channels.

 

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During 2014, Turkcell was a very active and innovative player in the field of mobile advertising and launched several innovative products, including Micro Location Platform, Self-Service Location Portal, Mobile Site Wizard Platform and other display advertising services.

In 2015, Turkcell is aiming to develop more innovative services and products for innovative mobile marketing and advertising opportunities for companies and brands.

Turkcell Partner Services

Since 2002, Turkcell has been developing new products and services with its partners. Since 2004, these partnerships have been realized under the Turkcell Partner Network programs. The Turkcell Partner Network is a business ecosystem comprising more than 200 registered business partners functioning as application service providers, content providers, service provider system integrators, independent service vendors, and original equipment manufacturer business partners. This ecosystem comprises a business network of more than 10,000 professionals recruited by our partners and their distribution channels. Functioning in a versatile business environment, the Turkcell Partner Network is reinforced with a framework of development programs, technological systems and digital communications infrastructure to announce, publicize, process, monitor, grade, analyze, improve, regulate and sustain partnership management schemes and models. By utilizing this framework, partners in the Turkcell Partner Network are evaluated on a semi-annual basis on financial and customer experience performances. Based on the outcome of their achievements throughout the year, those with superior scorecards are promoted to benefit from Gold or Silver partner programs.

Turkcellpartner.com serves as a primary digital communication channel for the Turkcell Partner Network and incorporates various interactive components: the public portal (open access to all visitors), partner selfcare portal (partner-exclusive), blog, API portal, newsletters, and social media feeds. The portal also acts as a virtual professional networking platform, wherein partners can expose their skill sets and areas of interest and blog about the trends of mobile technologies.

Turkcell Partner Mobil is the pioneering mobile application in Turkey, allowing Turkcell customers and sales channels to interact with and learn about the products and services of the entirety of the business partners in the Turkcell Partner Network ecosystem. The application introduces more than 400 partner products and services and acts as a leveraging instrument to motivate partner willingness to do business with Turkcell, as well as emphasizing the in-depth use of mobile technologies available to corporate customers.

The Partner Sales Performance System is a state-of-the-art platform to monitor the end-to-end sales process of the partner sales force in the field. Made available for use by business partners operating on Turkcell Superonline products, M2M vehicle tracking, and corporate messaging business lines in 2014, this platform allows partners to submit potential sales leads and follow them up until and if the sales are successfully closed and the product order is activated. These operations help analyze the performance of partners before sales closure and their level of collaboration with the Turkcell sales force, i.e account managers and mobile/fixed solution specialists.

c. New Businesses

We are looking beyond our current value-added offerings and focusing our efforts on continuously-developing innovative products, services and solutions to meet our consumer and corporate customer needs and expectations. We have built a strong innovation partner network consisting of both internal and external innovation resources to extend to new business areas and to provide an advanced customer experience with unique value propositions delivered through cutting-edge technology. We are partnering with various adjacent industry players and startup ventures in different industries such as finance, media and connected-living to launch competitive offerings and build new businesses that will both differentiate us in the market and contribute to our growth. We are also connected to leading global innovation hubs, such as Silicon Valley and Boston in the U.S. and the Far East, to closely follow global market trends and identify new business

 

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opportunities. We are now one of the main local stakeholders for organizations such as Endeavor and the U.S. State Department-led Global Entrepreneurship Program. In addition, one of the major activities has been to take an active role in the local entrepreneurial network since 2002. We collaborate with key stakeholders such as entrepreneurs, institutional investors, universities, business incubation and acceleration centers, and non-governmental organizations, as well as angel investors.

We continuously support initiatives such as acceleration program partnerships, business plan generation competitions, events such as “the Global Entrepreneurship Weekend”, university roadshows, seminars and many others. In addition to these activities, in 2013, we launched our “Developers of the Future” project which guides the youth population towards becoming mobile application developers and provides them with an open innovation platform as they are building their collaborative software projects. The program, which celebrated its first anniversary in September 2014, had strong participation. More than 30,000 people registered to become community members, benefiting from 10 million pages of content on how to code in iOS, Android, Windows Phone and server platforms. In the first year of the program, 6,500 online and 150 printed certificates were issued to participants who successfully took the “Mobile Application Development Sufficiency Exam” given by Turkcell.

Launching its “Corporate Entrepreneurship Program”, Turkcell has been the first corporation in Turkey to support its employees in executing their own business ideas by providing them with training, funding and mentorship. There is a team dedicated to running the program and supporting the cultural shift towards a more entrepreneurial business approach. The program consists of 2 bootcamps, lasting 1 month and 3 months, respectively. There is an evaluation process before and after the program to select validated business ideas among others. During 2014, the program was run four times, 214 business ideas were evaluated, 28 of them were passed through validation processes and 7 of them are being built by the teams who brought the business idea. The increase in the number of applicants to the programs shows the interest in building innovative and customer-centric products amongst employees.

Within the organization, all employees are encouraged to join the innovation process with their voluntary efforts on creating and evaluating new business ideas. Furthermore, Turkcell has created a team dedicated to corporate entrepreneurship. Events promoting the sharing of ideas and encouraging brainstorming are organized regularly.

(i) Mobile Finance Business

Turkcell Mobile Payment is a SMS-based operator billing service, which was launched in 2009 and became the preferred payment method for more than 1,500 merchants. The main focus of Turkcell Mobil Payment is online gaming, dating, social networks, digital content and subscriptions and most importantly offering innovations to its customer base.

In 2014, Turkcell Mobile Payment service continued its growth and extensive use. By enabling Turkcell Direct Carrier billing at Google Play, Turkcell Mobile Payment took an important step by allowing its customers to shop without having to enter their credit card information. Even though Turkcell Mobile Payment is widely used for digital goods, Turkcell is determined to make the service live up to its full potential by expanding it into the physical world. Turkcell subscribers have already started to make their payments via just one SMS from parking lots, airports, restaurants, transportation vehicles, and so on. Considering that mobile penetration has reached 92% in Turkey, everyone has the possibility of making payments on their bills and for the upcoming years, Turkcell aims to add those subscribers into the mobile payment ecosystem.

After introducing two new mobile financial services in 2011, Turkcell formed a new strategy in order to increase the penetration of financial services and launched Turkcell Wallet in October 2012. During 2014, Turkcell focused on new business models to increase the penetration of wallet payments. In order to achieve its aim, Turkcell worked on enabling cards of any bank, performed further research and evaluated partnership

 

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opportunities in new business areas. The strategy has evolved into omni-channel payments. Now Turkcell customers can register the credit cards of any bank in every transaction channel. Turkcell aims to enable its customers to use their registered cards in both digital and physical transactions.

(ii) Digital Media Services

By streaming technology at 3G speed, Turkcell introduced the MobilTV service in 2009 enabling Turkcell subscribers to watch live television channels and on-demand video content on their mobile phones.

On April 18, 2012, Turkcell re-launched MobilTV service and introduced Turkcell TV with an enhanced multiscreen “personal” user experience and a rich content library. Turkcell’s multi-screen TV platform Turkcell TV+, launched in October 2014 by Turkcell Superonline, delivers the next generation TV experience to its subscribers across four screens anywhere, any time. With Turkcell TV+, subscribers can enjoy over 100 channels, popular TV series, and famous shows and hit movies as Video-On-Demand. Turkcell TV+ offers a new-age TV experience with playback of TV broadcasts of up to 12 hours, and subscribers receive unlimited storage for recording their TV content to the cloud. Users can also access this service from any device, and switch between four screens for a seamless TV experience.

Turkcell Magazine Kiosk is an application that gives users free access to the highest-quality magazines published in Turkey on their iOS/Android tablets and smartphones. The magazines available through this application are enriched with additional videos, photographs and music and provide a unique experience to users with 3D animations.

(iii) Digital Life Services

Instant Messaging Service (BiP)

Turkcell’s instant messaging app BiP, which offers an easy and fun way of messaging, increased its subscriber base through marketing activities focusing on BiP’s new content reflecting the Turkish culture and its better customer experience.

Music

Turkcell’s digital music service Turkcell Muzik enables its users to access millions of songs. With more than 4 million songs, Turkcell Muzik offers the largest Turkish music archive as well as popular songs from all around the world. With improved features and user experience provided through the new version launched in October 2014, users can enjoy legal music from their mobile phone, tablets or their computers and stream millions of songs online and even listen to their favorite songs offline.

Cloud Services

Turkey’s first personal cloud service was launched by Turkcell and has increased its user base to 1 million within one year. Turkcell’s personal cloud service, Turkcell Akilli Depo, provides its users the ability to store their photos, documents, and videos in one secure, convenient, personal space and share them easily. With Akilli Depo’s safe and secure structure and autosyncing abilities, we believe that Turkcell users do not have to worry about losing their digital assets anymore and can access their assets from anywhere, any time. We plan to offer improved features during 2015.

Mother & Child

The Turkcell Mother & Child initiative is a mobile application in which parents and children access content intended for them through different interfaces. Pre-school kids and parents can access significant information and rich content through this app. All information, recommendations regarding child development (which have been provided on the Mother interface) and all content provided to children on the Child interface have been prepared with the guidance of teachers and approved by the Association of Pedagogues.

 

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Education

In January 2014, Turkcell Academy, which was founded in 2006 to train Turkcell’s employees, went digital in collaboration with leading educational institutions. This initiative has made digital learning available to Turkcell customers and to the general public with more than 2,500 videos that span a wide range of subjects in multiple categories: Innovation-Entrepreneurship, Leadership, Business World, Technology, MIT, Coursera, Khan Academy, Business English and preparation for exams, which provides courses on the basics of sciences and finance.

Health

Turkcell Smart Health Solution effectively enables patients with chronic diseases, such as diabetes, hypertension, asthma and heart arrhythmia, to automatically record and send their test results to their healthcare providers (primary physicians, hospitals, etc.) in a secure way, providing a reliable remote healthcare monitoring solution, backed up with a 24/7 medical call center. This solution was developed by Turkcell and its benefits have been recognized by the Istanbul University Faculty of Medicine through a comprehensive clinical study. It has been commercially available since May 2014.

d. Other Services

(i) International Roaming

Our coverage extends to many countries in the world. As of December 31, 2014, we have further enhanced our position as the leading mobile operator of international roaming services by expanding our partnership in 208 destinations throughout the world, pursuant to commercial roaming agreements with 680 operators.

Since July 2002, we have provided roaming services for prepaid subscribers of foreign mobile operators visiting Turkey. We were the first operator to provide such a service in Turkey. This service, called Passive Customized Applications for Mobile Network Enhanced Logic (“passive CAMEL”), can only be enabled if both operators have installed the CAMEL system on their networks. As of December 31, 2014, we offered prepaid roaming to the prepaid subscribers of 380 operators in 151 destinations.

Since October 2004, we have offered roaming services for Turkcell prepaid subscribers traveling abroad. This service, called Active Customized Applications for Mobile Network Enhanced Logic (“active CAMEL”), can only be enabled if both operators have installed the CAMEL system on their networks. As of December 31, 2014, we offered prepaid roaming to Turkcell prepaid subscribers through 431 operators in 174 destinations.

Since October 2002, we have offered GPRS roaming. As of December 31, 2014, we allowed our subscribers to access the internet and reach their email accounts while traveling, through 544 GPRS roaming partners across 193 destinations.

As of December 31, 2014, our subscribers can send SMS to more than 680 mobile operators located in 208 destinations, including North America and China and in order to balance international SMS traffic, we have 128 International SMS Interworking Agreements in place.

Since December 2005, our subscribers have been able to send and receive MMS to and from subscribers of foreign operators. As of December 31, 2014, our subscribers were able to send MMS to 150 mobile operators in 78 destinations.

On July 30, 2009, we became the first operator in Turkey to launch 3G Roaming services in many different locations around the world. As of December 31, 2014, our subscribers enjoyed high speed mobile internet connections with 372 operators in 156 destinations.

 

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We have entered into direct international roaming agreements with GSM operators around the world, including in Cuba, Iran, Sudan, Libya and Syria. These arrangements have been entered into in the ordinary course of business and on arm’s-length terms that we believe to be in line with industry standards. Under the roaming arrangements in the listed countries, our net revenues for roaming on our Turkish network totaled less than $1.8 million and our net expense for our subscribers roaming on the networks of operators in the listed countries was less than $2.2 million. In financial terms, we do not believe that our roaming arrangements with operators in Cuba, Iran, Sudan, Libya and Syria are material.

IV. Tariffs

Our charges for voice, messaging, and data consist of monthly fees, usage prices, bundles and volume discount schemes and options under various tariff schemes. Our license agreement regulates our tariffs for GSM services. The license agreement provides that, after consultation with us and consideration of tariffs applied abroad for similar services, the ICTA sets the initial maximum tariffs in Turkish Lira and U.S. Dollars. Thereafter, our license agreement provides that the maximum tariffs shall be adjusted at least every six months. The license agreement provides a formula for adjusting the existing maximum tariffs. For the maximum tariffs established in Turkish Lira, the formula is: the Turkish Consumer Price Index announced by the Ministry of Industry and Trade for Turkey minus 3% of the Turkish Consumer Price Index announced by the Ministry of Industry and Trade. For the maximum tariffs established in U.S. Dollars, the same method is applied to the USA Consumer Price All Item Index Numbers.

Although the Concession Agreement includes a provision regarding the increase of the maximum tariffs, the ICTA has decreased the maximum tariff since 2007, which has negatively affected our tariff structure. The Company initiated lawsuits for the annulment of such decisions. Some of the lawsuits were rejected by the courts and we appealed these decisions. The Plenary Session of The Chambers for Administrative Cases approved two of the first instance courts’ decisions and we applied for correction of the decision process for the two respective decisions. The other lawsuits are pending.

For more information on how our maximum and minimum price levels are established, see also “Item 4.B. Business Overview—Regulation of the Turkish Telecommunications Industry”.

There are various tariffs based on the subscriber segment (postpaid or prepaid, corporate or consumer).

a. Main Tariffs

We have segmented tariff plans that target specific subscriber groups. In the postpaid segment, linear tariffs offer flat and on-net (Turkcell subscriber to Turkcell subscriber) usage advantages. A majority of our customers prefer packages which include minutes to Turkcell, intra-company calls (for the corporate segment) and all national directions. Turkcell also offers all-inclusive packages which are offered with annual fixed-price plans that include price discounts and/or extra minutes. In the prepaid segment, the main tariffs offering advantageous prices that are based on a refill amount are the “Super Tariff” and “Youth Tariff”. In addition, we provide fee-based optional minute packages/TRY cards for calls to PSTN (Public Switched Telephone Network).

(i) Consumer Data and Terminal Campaigns

We have different tariff bundled terminal campaigns offered jointly by our dealer channel in which minutes, SMS and data services can be bundled with these terminals, which could lead to the use of 3G services and mobile broadband.

We also have many mobile data bundled offers based on different customer needs according to their usage patterns, such as lifestyle segments, data amount, usage hours, and seasonal usage. Examples include shared data packages, URL-based offers, throttling data packages, Vinn (dongle) and Vinn wifi offers, Kamu Vinn and Need-based Vinn offers.

 

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(ii) Corporate Tariffs and Loyalty Programs

We offer a variety of voice packages to our corporate customers to meet their communication needs. These packages include company, on-net and/or flat minutes. We also offer bundled versions of these packages including data and flat SMS.

In addition to mobile voice tariffs, we also address and provide solutions to our corporate customers’ different telecommunication needs with the Total Telecom Solutions Provider (“TTSP”) approach. We collaborate with our subsidiary, Superonline Iletisim Hizmetleri A.S. (“Turkcell Superonline”), to serve TTSP products like VOIP, MPLS/VPN, data center, cloud, and mobile and fixed bundle offers to our customers from a single source. Moreover, we have initiated new data center investments in Gebze and Ankara, which are expected to become active at the end of 2015 and the second half of 2016, respectively. Our corporate customers will benefit from the services provided such as co-location, cloud and security services in the data centers.

We realized that our customers require the optimization and fulfillment of their telecom needs. In order to meet their expectations, for our corporate customers, we launched a new initiative named “Technology Initiative for Corporates”, aiming to match our products and services with the vertical and situational needs of their companies. With this initiative, we aimed to fulfill their needs as a one-stop shopping experience with the “applicable & affordable Turkcell high quality technological solutions” and let them focus on growing their business.

We are focused on two primary business areas in which companies in Turkey can benefit the most from our services and improve their businesses in many different ways. These areas are “Marketing” and “Network&IT” solutions. In 2014, these frameworks were highly preferred by our customers. Within the framework of this initiative, which differentiates us from competitors, we also focus on the situational conditions of the companies, such as “starting a new business”, “opening a new branch”, “cost-cutting” and “institutionalization”.

For small and micro businesses, we have dedicated voice and non-voice offers, and provide different benefits for craftsmen. Other than the horizontal areas listed above, we have created a club that addresses the 360-degree needs of professionals such as lawyers, doctors, pharmacists, freelance accountants and real estate consultants. In addition to dedicated products and tariffs for these lines of work, we created a platform in which professionals can get extra Platinum Business benefits and can benefit from customized customer experience processes which are designed only for them.

We have 2 loyalty programs which are called IsteKazan and Platinum Business. We launched our business to business (“B2B”) loyalty program, IsteKazan, in March 2010, for Turkcell corporate customers. IsteKazan is the first loyalty program focused on the B2B segment, where we have worked with 5 different brands across the country. The main focus of IsteKazan is to offer advantages to our corporate customers and provide them with cost advantages on their non-GSM costs. Based on customer preferences and requirements, the most appropriate solution package is designed, such as discount bundles, cost level alternatives, and so on. With this program, Turkcell corporate customers get discounts in several areas such as market, gas, transportation, technology, car rentals, dry cleaning services, and so on. Platinum Business is the other loyalty program which provides special solutions for company subscribers to increase the luxury and convenience in their lives. Thus, this program provides attractive co-branding offers with various brands. For instance, it offers discounts on sea taxi services between the Asian-European sides of Istanbul, as well as providing shuttle services in order to help our customers reach their destination during ski holidays. All corporate subscribers can attend the Platinum Business Club, have the Platinum Business Star package and benefit from brand discounts.

(iii) Roaming Tariffs

Turkcell intends to provide advantageous price schemes to customers when abroad. With a customer-oriented focus, Turkcell offers products to subscribers with high- and low-roaming usage. For subscribers preferring low-usage, Turkcell offers a linear roaming tariff known as the “Turkcell World Tariff”.

 

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The subscribers, unless they apply for a specific roaming package, are subject to the Turkcell World Tariff when traveling abroad. In January 2013, the “Smart Roaming Tariff” was launched. With this tariff, voice/SMS bundle and data-only solutions are offered. The Smart Roaming Tariff activates automatically, if and only when, the subscriber makes/receives a call, sends an SMS or uses GPRS. The tariff is activated again after the limits are exceeded. Whenever the subscriber goes abroad again, the tariff is reactivated automatically with the first usage unless the subscriber has already opted out. Additionally, Platinum customers enjoy “Super Roaming Campaign” which enables them to use their domestic tariff while abroad by paying a daily fee. Other than the Smart and Super Roaming options, Turkcell offers advantageous voice, internet and SMS packages for high-usage levels. Overall, Turkcell aims to provide better roaming experiences with various pricing schemes that fit different usage patterns.

Based on Turkcell’s roaming agreements, Turkcell hosts the subscribers of foreign operators on its network. When a subscriber of a foreign operator makes a call using Turkcell’s network, that subscriber’s operator pays us our inter-operator tariff (“IOT”) for the specific call type. IOT is a wholesale tariff applied between mobile operators having roaming agreements.

V. Churn

Churn rate is the percentage calculated by dividing the total number of subscriber disconnections during a period by the average number of subscribers for the same period. For these purposes, we define “average number of subscribers” as the number of subscribers at the beginning of the period plus one half of the total number of gross subscribers acquired during the period. Churn refers to subscribers that are both voluntarily and involuntarily disconnected from our network. Under our disconnection process, postpaid subscribers who do not pay their bills are disconnected and included in churn upon the commencement of a legal process to disconnect them, which commences 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. Prepaid subscribers who do not reload TRY for a period of 270 days are disconnected (this was changed in 2010 from 210 days).

In 2014, the churn rate slightly increased to 28.3%, primarily due to competition and the impact of Turkcell’s compliance with the ICTA decision, dated March 13, 2013, raising the lower limit applied on our on-net voice tariffs. We have what we believe to be an adequate allowance for doubtful receivables in our Consolidated Financial Statements for non-payments and disconnections amounting to $313.8 million and $324.0 million as of December 31, 2014 and 2013, respectively.

VI. Seasonality

The Turkish mobile communications market is affected by seasonal peaks and troughs. Historically, the effects of seasonality on mobile communications usage has positively influenced our results in the second and third quarters of the fiscal year and negatively influenced our results in the first and fourth quarters of the fiscal year. Recently, however, due to changing market dynamics, such as the ICTA’s intervention in our tariffs and increasing competition in the Turkish telecommunications market, the effects of seasonality from our customers’ mobile communications usage has decreased. Local and religious holidays in Turkey have also generally affected our operational results.

VII. Mobile Network

a. Coverage

Statements regarding our 2G coverage are based on the ICTA’s specifications as well as the TUIK’s announcements regarding the population, and statements regarding our 3G coverage are based on the ICTA’s 3G coverage calculation specifications issued on April 25, 2012. Our mobile communications network is designed to provide high-quality coverage to the majority of Turkey’s population throughout the areas in which they live,

 

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work and travel. As of December 31, 2014, Turkcell covered 94.79% of Turkey and 99.81% of its population, including 100% of cities with a population of 1,000 or more. Coverage also includes a substantial part of the Mediterranean and Aegean coastline, and during 2014, we enhanced coverage in low-populated areas (populations of less than 1,000 people) as well. We have significantly exceeded the minimum coverage requirements of our license.

We have also expanded our mobile communications network to add capacity to existing service areas and to offer service to new areas, including the improvement of existing urban, suburban and intercity road coverage. In 2015, we will continue to expand our coverage and further enhance capacity in populated areas. During 2015, Turkcell will continue with the roll out of 2G coverage to 1,799 settlements of populations of less than 500 (total population is around 258 thousand) within the scope of the Ministry of Transport, Maritime Affairs and Communications’ Rural Coverage Project as part of Universal services. We started the service in August 2013 and as of the end of 2014, infrastructure covering 1,610 settlements has been installed within the scope of the project, with network sharing technology, which enables all operators to use the same BTS, BSC and IP Transmission lines.

We commercially launched 3G simultaneously in 81 province centers and major cities in Turkey in July 2009. As of December 31, 2014, we had covered 91.21% of Turkey’s population and more than 99.7% of 16 metropolitan municipalities’ population. As a result of the amendment of the Law for Metropolitan Municipalities, the number of metropolitan municipalities increased and the borders of some municipalities were extended. After this amendment, the ICTA increased our coverage obligations, defined in our concession agreement, by its decision, based on this amendment. We filed a lawsuit for the cancellation of this aforementioned decision. There has been no progress in this case yet.

Benefiting from higher-quality communications provided by the widest spectrum in 3G, Turkcell will continue to offer seamless communications services to its customers with by far the most extensive coverage amongst its peers.

In 2014, we continued to develop and improve the coverage and capacity of our network. In urban areas, we increased both coverage and capacity by placing network infrastructure in commercial sites such as shopping malls, business complexes and entertainment centers. We became the first mobile operator extending 3G coverage to all of the districts of Turkey.

We began using 3G Small Cells (such as Femto, pico and micro) - solutions to further enhance our coverage at some places where signal penetration problems may exist due to thick concrete walls, coated glass windows, basement floors, etc.

b. Quality of Service

The ICTA published a “Regulation on Quality of Service in the Electronic Communications Sector” on September 12, 2010, effective as of December 31, 2011 (see “—Regulation of the Turkish Telecommunications Industry” for further details). The Turkcell Network is currently above the standards set by the statement. As usual, “Call Drop” was one of the major Quality of Service figures that we focused on during 2014.

Dropped calls are calls that are terminated involuntarily and are measured by using the ratio of total dropped calls during the most congested hour of network traffic during the relevant time period to the traffic intensity in that congested hour. Using such industry standard for dropped calls, our dropped call rate for our 2G network has further decreased below 0.5%.

Turkcell also provides high quality services through its 3G network. In a short time, we have succeeded in reducing the 3G dropped call rate below the 2G network. The rate of service quality is being enhanced all the time due to investments in our 2G and 3G network to improve the quality and capacity of the network.

 

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We have started to offload data traffic by increasing the percentage of small cells in the network for improving customer satisfaction. We also focused on Special Distributed Antenna Solutions and customization of parameter settings in major stadiums to maximize the capacity of our 2G/3G Access Network.

Together with Turkcell Superonline, we have also implemented WiFi offload integrated with the Turkcell 3G network to further enhance the customer experience.

We are the only operator in Turkey that can increase its carrier number up to 4, due to our A-type license agreement. We use this feature to increase our capacity and provide services to a larger number of subscribers. In 2014, we continued to increase the number of carriers with the advantage of an A-type license (2x20 MHz) and we have sufficient bandwidth to serve our current and projected short-term subscriber base and we currently meet the capacity requirements of both our 2G and 3G subscribers. Turkcell has been awarded the ISO 9001 certificate since 1999 and renews its ISO 9001 certification every two years in the scope of design, installation, operation, sales, after sales services of global mobile communications within Turkcell functions. The latest certification Turkcell was awarded is the ISO 9001:2008 Quality Management System Certificate in 2014. In addition, Turkcell received the ISO/IEC 20000-1:2005 IT Service Management System Certificate in January 2011. As the first telecommunications company with the ISO 20000-1:2005 certificate in Turkey, Turkcell has promoted the adoption of an integrated process approach to effectively deliver managed services to meet business requirements.

c. Network Evolution

(i) Radio Network

We have already achieved a speed of 43.2 Mbps through dual-carrier technology in more than 99% of the base stations across the country. We have also implemented HSUPA 5.76 Mbps in our entire 3G network. In the GSM network, EDGE is used as a complementary technology to UMTS/HSPA. EDGE is an evolution of the GSM technology which allows consumers to use cellular handsets, PC cards and other wireless devices at faster data rates of up to 300 Kbps. Today, all of our base stations support EDGE technology. To enhance our 2G network capacity where congestion is a possibility, we intend to construct additional network sub-infrastructure, or implement technological advances that will permit bandwidths to be used more efficiently.

In 2014, we focused on 3-Carrier High-Speed Downlink Packet Access (3C-HSDPA) and Dual-Carrier High-Speed Uplink Packet Access (DC-HSUPA) technologies. Turkcell, together with Ericsson and Qualcomm Technologies, Inc., a wholly owned subsidiary of Qualcomm Incorporated, successfully demoed the world’s first live 3C-HSDPA on a commercial network. 3C-HSDPA is engineered to increase user speeds for downlink by up to 50 percent throughout the entire cell compared to dual-carrier, regardless of network load. The demo recorded 63 Mbps downlink and 11.5 Mbps for uplink. In 2014, we also implemented 3C-HSDPA (63.3 Mbps) and DC-HSUPA (11.5 Mbps) technology in our 3G network becoming the first mobile operator worldwide to provide this service in its network. Our customers will soon be able to experience the highest download/upload speeds of 3G technology.

Turkcell’s radio network has evolved to a multilayer architecture including 3G Small Cell (such as Femto, pico and micro).

In 2013, we installed a 4G (LTE Advanced) trial network and tested LTE Advanced with Carrier Aggregation. The speed of the Carrier Aggregation technique combines different frequency bands making it possible to reach very high speeds. During the tests, we reached speeds of up to 900 Mbps in a lab environment (a record speed for Turkey on a mobile network) and up to 300 Mbps, with prototype LTE A modems.

During 2014, Turkcell continued to work on 4G technology as the next step in the network evolution path of mobile broadband services including field trials and network infrastructure readiness activities.

 

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Turkcell became a member of the NGMN (Next Generation Mobile Networks) and also a member of the NGMN Board in 2013. Turkcell joined NGMN 5G work groups along with other global mobile operators to define the requirements of a 5G network during 2014.

(ii) Transmission Network

Turkcell is the first operator in Turkey to start deploying All-IP NodeBs throughout its network. We are not only expanding our 3G network but also migrating legacy TDM-GSM sites to IP through the deployment of Abis over IP technologies. Thus, we currently have an All-IP mobile backhaul of more than 20,000 BTSs and Node-Bs that provides resiliency, ease of operation and operational expense advantages. In addition to this, we have also invested in topology redundancy projects due to our IP/MPLS backhaul for better service availability. Backhaul bandwidth capacities were increased for wide coverage of 43.2 Mbps dual-carrier applications and the Microwave Radio Link network was modernized for Native Ethernet and Adaptive Modulation support to increase availability and reduce outages due to severe rain conditions. Usage of fiber connectivity is moving deeper from High-RAN aggregation points towards Low-RAN aggregation points. Also fiber to the site applications have been started for 4G readiness of sites with very high traffic.

(iii) Core Network

The whole Turkcell Core Network is currently composed of new layered structure Next Generation Network (“NGN”) nodes. By using MIP structure, we get (i) full redundant MSC-Ss, (ii) redundant physical interfaces to MGWs, (iii) CAPEX efficiency, and (iv) improvement in radio network KPIs.

We have deployed and continue to develop our GPRS network to provide the speed and reliability to meet the demand of our businesses and consumers.

(iv) Services and Platforms

We have an intelligent network and other service platforms enabling our services and we also provide secure and controlled access to the network for the content and service providers to provide messaging and data services. This infrastructure is being improved to open up more capabilities on the network for the application and content providers. New infrastructure also contains a portal where subscribers buy services, receive promotions and enroll for campaigns easily.

d. Network Operations

We have primarily employed experienced internal personnel for network engineering and other design activities while employing suppliers for our network infrastructure and as our partners in product/service development. Our suppliers install the base station cell site equipment and switches on a turn-key basis, while subcontractors employed by our suppliers perform the actual site preparation.

e. Network Maintenance

We have entered into several system service agreements. Under these agreements, our mobile communications network, including hardware repair and replacement, software and system support services, consultation services and emergency services are serviced by local providers. Our subcontractors perform corrective and preventative maintenance on our radio network in the field, although providers repair all the network equipment. We have regional operation units with qualified Turkcell staff that operate and maintain our network in Turkey.

In addition, the Turkcell Network Control Center located in Istanbul monitors our entire network 24 hours a day, 365 days a year, and ensures that necessary maintenance is performed in response to any problems.

 

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f. Site Leasing

Once a new coverage area has been identified, our technical staff determines the optimal base station location and the required coverage characteristics. The area is then surveyed to identify BTS sites. In urban areas, typical sites are building faces and rooftops. In rural areas, masts and towers are usually constructed. Our technical staff also identifies the best means of connecting the base station to the network. Once a preferred site has been identified and the exact equipment configuration for that site determined, we start the process of site leasing and obtaining necessary regulatory permits. Site leasing processes and construction of the masts or towers is performed by Kule Hizmet ve Isletmecilik A.S. (“Global Tower”), a company 100% indirectly owned by us. We lease the sites and towers based on the agreed tariffs and also buy antenna space and provide maintenance and management services from Global Tower.

g. Business Continuity Management (“BCM”)

Turkcell Business Continuity Management identifies potential threats, their impact and provides a framework for building resilience with the ability to create an effective response that safeguards the interests of our key stakeholders, their reputation, brand and value-creating activities. We established the Business Continuity Management System (“BCMS”) to implement, operate, monitor, review, maintain and improve the business continuity.

Turkcell BCMS is assisted by the coordinators and business continuity virtual team. Regular BCM training and awareness programs are carried out throughout the organization. The effectiveness of BCMS is monitored every year through internal/external audits, and integrated exercises, the results of which are reviewed in management review meetings. In 2014, we exercised and tested our business continuity plans, communication and warning procedures to ensure that they are consistent with the business continuity objectives.

Turkcell’s BCM will be able to cover the majority of Turkcell’s operations through potential environmental events and natural disasters. Our aim is to ensure the continuity of the call, messaging, internet and societal security services at acceptable predefined levels following disruptive incidents. Business continuity plans are prepared by taking into consideration the customer’s expectations, company policies and legal obligations. They are regularly exercised to guarantee the operation of time-sensitive business activities in case of business disruptions. We are continuously improving our business continuity capacity in accordance with the “ISO 22301 Societal Security, Business Continuity Management System” international standards and continue to work with our group companies, Turkcell Superonline and Global Tower, while preserving our image as a reputable and solid GSM operator.

In 2013, Turkcell applied for the ISO 22301 “Societal Security, Business Continuity Management Systems” certification which demonstrates our commitment to provide reliable services to our customers. On January 6, 2014, Turkcell’s ISO 22301 certificate was approved by an external certification body. This certificate demonstrates our commitment to provide reliable products and services to our customers with the scope of the business continuity management activities comprising voice, messaging, internet and social security services.

Turkcell has started to implement the ISO 50001 Energy Management System since the beginning of 2014 and issued an “Energy Review Report” in April 2014 in order to analyze energy use and consumption, identify the areas of significant energy use, and identify, prioritize and record opportunities for improving energy performance. Turkcell received the ISO50001 Energy Management System Certificate in October 2014 as the first telecommunications company with the ISO 50001 certificate in Turkey.

VIII. Sales and Marketing

We design our sales and marketing strategy around subscriber needs and expectations. We try to ensure the loyalty of our subscribers by providing offers, campaigns and our advanced service delivery platforms.

 

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a. Sales Channel

Our nationwide distribution channel is an important asset that helps us differentiate ourselves from our competitors and achieve our sales targets. Our strong and extensive distribution network consists of distributors, Turkcell Distribution Centers (“TDC”), Corporate Solution Centers, non-exclusive dealers, Turkcell Communication Centers (“TIMs”), and Turkcell Stores as well as points of sale for scratch cards and prepaid airtime, including digital channels, ATMs, Point of Sales (POSs), web, call centers, supermarkets, gas stations and kiosks. We sell postpaid and prepaid services to subscribers through our distribution network. The number of exclusive and non-exclusive dealers totaled approximately 13,700 sales points as of December 31, 2014.

Our exclusive retail network consists of powerful retail dealers with good locations, modern designs and superior after-sales service. TIMs lead the market with their user-friendly atmosphere, new products and services and dedicated employees. In 2009, TIMs were relaunched with the motto “We aim to ease your life with technology” in order to enhance our customer service-oriented image under the “TIM” brand. As of December 31, 2014, Turkcell had 1,176 exclusive sales points. Every year, 20-22 million customers are served by our specialized sales force, which consists of approximately 9,000 people in TIMs. In addition, the six flagship Turkcell Stores in three cities (Istanbul, Ankara, Antalya), fully operated by Turkcell, continue to enhance Turkcell’s brand image in the retail world by providing what we believe to be the best customer experience and introducing top-of-the-line new products and services to our customers. Moreover, we have 254 Technology Specialists in TIMs who coach the entire sales force, help customers experience technology and spread the latest technological information.

Our non-exclusive dealer network provides us with a high penetration of Turkcell products and services in Turkey. Our 36 TDCs are aimed at enhancing our distribution effectiveness in the non-exclusive channel and ensure the timely and efficient distribution of Turkcell products and merchandising materials. They also facilitate the Turkcell brand and offer awareness in this competitive channel.

Alternative sales channels are re-designed under four main branches: Telesales, New Sales Channels, Online Sales and Self-Service Channels.

We are working on attracting our customers to all of our channels through digital channels and by co-branding. We offer our customers fast and safe access to our products and services 7/24 via turkcell.com.tr, our Online Sales Channel. Another channel is our Self-Service Channel (which consists of ATMs, Call Centers, internet branches of banks, Kiosks, and in other channels, over 10 thousand national and local markets and post office branches) where we give our customers the opportunity to access Turkcell’s products easily and quickly.

All dealers are compensated based on the number of new subscribers they sign up and the level of such subscribers’ usage, as well as additional incentives based on their performance.

Sales Management develops strong relationships with and promotes brand loyalty among dealers through a variety of support and incentive programs. Training programs aim to educate dealers’ personnel on the technical aspects of our products and services, as well as sales techniques to increase sales and enhance customer relations. The technological development projects commenced in 2007, coupled with merchandising services, point-of-purchase (POP) materials and channel specific campaigns, help to support the sales efforts in all of our sales channels.

We address strategic enterprises, large enterprises and medium businesses through three channels, which are account managers and small businesses with indirect sales channels, corporate focused dealer organizations and telesales operations. With the objective of coordinating all sales processes, working closely with more customers and improving effectiveness and efficiency, corporate customers are managed directly by these sales channels. The main aim of this activity is to provide mobile services to strategic and large enterprises and medium and small businesses in order to meet their communication requirements and also to support these solutions with retention and acquisition programs and tariffs. We work closely with solution partners and application providers to integrate mobility into companies’ operations through tailor-made total solutions packages.

 

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b. Advertising

We believe that technology-empowered innovation will define how the lives of every individual, every company and the world will prosper in the future. At Turkcell, our objective is to transform the latest technologies into innovative communication solutions that ease and enrich consumers’ lives and improve productivity of the companies we partner with. As a result, we believe that consumers will make Turkcell the most beloved brand and reward us with leadership and loyalty.

In 2014, we remained focused on understanding the needs of each consumer segment thoroughly and offered to them tailored solutions comprising our value offers: superior coverage, 3G speed and mobile technologies, more advantages, outstanding and extensive service quality, and leadership in social responsibility. We lend our power to our customers by enabling them to be more connected to life with simple communications solutions ready at their fingertips. Turkcell brand communications continued to be harmonized in different forms of media, such as television, internet, outdoor events, etc., in order to deliver more consistent messages.

In 2015, our aim is to revitalize the brand DNA to accelerate our pace of innovation and to further improve our superior performance. We will further improve brand image via transforming those advancements into communication.

c. Customer Services

The key part of our strategy is to provide basic and premium services by thinking and acting in a customer-focused manner. Our goal is to sustain a continuous relationship with the customer through customer satisfaction. We continuously ask our customers how satisfied they are with the service they experience and for any suggestions through near real-time mobile surveys. We aim to achieve operational excellence throughout all customer touch points by continuously improving and simplifying processes and services. We design our processes and structures based on our customers’ feedback. In 2014, we expanded this practice and started to implement segmented customer experience, focusing on consumer’s lifestyles, consumption habits, jobs, etc., and offering services accordingly.

We mainly work with Global Bilgi Pazarlama Danisma ve Cagri Servisi Hizmetleri A.S. (“Turkcell Global Bilgi”). Turkcell Global Bilgi offers 24 hours-a-day, 7 days-a-week contact center services at several sites and manages more than 200 million contracts annually. Turkcell’s customer service strategies for contact centers are implemented by Turkcell Global Bilgi and we ensure that customer services and customer satisfaction programs, which are also provided by Turkcell Global Bilgi, are executed in line with Turkcell’s customer strategies. Turkcell Global Bilgi’s success has been verified by a number of domestic and international awards in 2014. Among these were “The winner of Excellence in Practise Award” for “Best Outsourcing Partnership” in the American Society for Training and Development, “The Gold Medal winner for Best Customer Experience and Practise” in the EMEA region and “The Gold Medal winner for Best Customer Contact Center and Excellence” in Europe at the Europe Call Center Awards. With regard to Turkcell’s customer satisfaction, we received “The Customer Satisfaction Sustainability Award” at the National Quality Awards organized by the Turkish Quality Association (“KalDer”) for sustaining our number one ranking in the Turkish Customer Satisfaction Index for the past seven years. Turkcell Global Bilgi was ranked first in the world in the category of “Best Customer Experience and Application” in the “2014 Top Ranking Performers” awards due to its successful performance in customer service in the world’s largest organization named “Contact Center World”. We ranked first in the ALFA awards regarding “Complaint Management” in the GSM sector. We won the prize with our following successes: ratio of the complaints turned into “appreciation”, and first-time feedback speed for the complaints and complaint ratio, which is equal to market share over number of complaints.

We also offer customer service at face-to-face communication centers named TIMs and Turkcell stores. Our 1,182 centers are established all around Turkey in order to meet our customers’ technological needs and demands.

 

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Furthermore, meeting the service needs of our customers online is crucial for us. We have a self-service mobile application called My Account available on web, mobile and smartphone platforms. We also respond to customer requests on social media platforms, both proactively and reactively via deliberately-established corporate customer service accounts. Customer services via web chat, e-mail and SMS chat for specific customer segments are progressing with a high-volume experience. In addition, we offered Turkcell Forum and proactive web chat capabilities to our customers in 2014.

For corporate customers, account managers are assigned for exclusive service. An account manager is the single point of contact and provides proper solutions in response to customer needs. While managing our corporate customers through four sales segments, we also support our customers through e-mails, calls and back office, under the umbrella of our Contact Center. We have Corporate Customer Representatives to support direct requests from our strategic enterprises and large enterprises and/or to support indirect requests received through our account managers. In addition, for small and medium businesses, we aim to meet faster and higher quality service standards by providing online solutions to satisfy the demands of our sales teams regarding their customers’ demands with our “Field Support Desk”. Moreover, we developed a mobile application called “My Business” for our corporate customers, which enables them to complete Turkcell-related corporate operations quickly.

In order to provide segmented customer service, we design and make improvements for all of the customer processes throughout all channels for different customer segments as well as monitor the quality of service provided.

In addition to the operational targets, we aim to achieve excellent customer satisfaction. We evaluate the performance of our service providers with the help of satisfaction surveys and make our service providers aware of any deficiencies and offer suggestions as to how to improve their service to our customers.

Turkcell has been awarded the ISO 10002 certificate since 2011 and continuously renews its ISO 10002 certification every year in the scope of design, installation, operation, sales, and after-sales services of global mobile communications within Turkcell Functions. The latest certification is ISO 10002:2004 Quality Management-Customer Satisfaction-Complaints Handling Certificate, which was awarded in 2014.

IX. International and Domestic Subsidiaries

A component of our strategy has been to grow or improve our business in both international and domestic markets. International expansion and, in particular, continued strong operations in the countries in which we are currently present is important for us. We believe these operations will provide additional value to us in the future and will continue to serve an important role in our goal to be a leader in communications and technology.

While continued improvement of our current operations is a key priority, we may further expand and increase our presence in key emerging markets in the region, such as the C.I.S. region, Eastern Europe, the Middle East, Africa and the Balkans, in addition to our current investments in Ukraine and Belarus. Through such investments, we intend not only to transfer our technological know-how and marketing expertise, but also to maximize economies of scale and group synergy.

Our international and domestic endeavors will continue in 2015. We will continue to selectively seek and evaluate new investment opportunities both in our main and adjacent communication and technology business areas as well as the businesses outside of the scope of our core business.

Ukraine—Life:)

We acquired our interest in our subsidiary Astelit on April 2, 2004, by purchasing the entire share capital of Astelit’s parent, CJSC Digital Cellular Communications (“DCC”), from its shareholders. Astelit, 99% owned by DCC, held a nationwide GSM 1800 license. On April 4, 2006, Astelit announced a merger of DCC and Astelit,

 

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which was completed on August 1, 2006. Our interest in Astelit was previously held through our wholly owned subsidiary, Turktell Uluslararasi Yatirim Holding A.S. (“Turktell Uluslararasi”). However, Turktell Uluslararasi merged into Turkcell and the registry record of Turktell Uluslararasi was deregistered on December 24, 2014. Therefore, Turkcell directly holds 55% of Euroasia, which is the 100% owner of Astelit. System Capital Management Limited (“SCM”) indirectly holds 45% of Astelit through Euroasia.

Astelit began its operations in the Ukrainian market in February 2005 with its new brand “life:)”. As of December 31, 2014, Astelit had 13.9 million registered subscribers, a 10.3% annual increase from 12.6 million registered subscribers as of December 31, 2013. The majority of subscribers are prepaid subscribers as of December 31, 2014. Astelit’s three-month active subscribers reached 10.3 million as of December 31, 2014 from 9.2 million subscribers as of December 31, 2013. During the third quarter of 2010, the definition of active subscriber was modified to churn out any subscriber whose only activity was the receipt of bulk SMSs or call forwarding.

The life:) brand has become one of the best-known in the country and reached 99% recognition in the market due to its strong differentiation from existing mobile brands and its focus on innovation, transparency and youthful spirit. The company has been known in the market as one of the most dynamic and innovative ever since life:) was the first to introduce a number of new technologies and products that had previously been unavailable to Ukrainian subscribers. The company is highly motivated to keep its innovation leadership in marketing and sales. In 2011, Astelit adopted its new regional strategy, which divides the country into three major regions and focuses on each region with tailored marketing and sales activities. As a result, Astelit expands and improves its sales network to bring its products and services to the most remote parts of the country. By the end of 2014, Astelit had 41,172 non-exclusive sales points throughout Ukraine, 195 life:) exclusive sales points, 151 branded life:) partners’ sales points and 81 customer service centers operating in 60 cities in the country. As of December 2014, Astelit provided roaming opportunities in 187 countries via 462 roaming partners.

As of December 31, 2014, Astelit operated in 100% of the cities of Ukraine with a population of more than 2,000 inhabitants (2,257 settlements) and in total more than 28,825 settlements nationally, and all principal intercity highways and roads, which corresponds to coverage of approximately 98.6% of the whole population of Ukraine or 94.4% geographical coverage with 10,702 base stations. Astelit stopped recording revenues from Crimea starting from the end of September 2014 and impaired its assets in that region. Astelit is currently evaluating its options with respect to the disposition of its assets in Crimea. Furthermore, the current military and political crisis in the Eastern part (mainly in Donetsk and Luhansk) and with Russia remains unresolved, which could lead us to evaluate our options in the Eastern region. Cumulative capital expenditure for the development of Astelit’s coverage amounted to $1,547 million as of December 31, 2014. In 2015, Astelit will continue investing to increase capacity of its network.

Astelit is dedicated to further developing innovations in the market. The National Commission for the State Regulation of Communications and Informatization (“NCCIR”) announced in December 2014 that a tender making the 3G license available will take place on February 16, 2015. In compliance with the 3G tender conditions, Astelit paid tender guarantees of UAH 270 million for each of the three lots, totaling UAH 810 million, on February 10, 2015. To pay the tender guarantee amount, Aselit utilized a loan of UAH 810 million in January and February 2015 with cash collateral from a local bank. Astelit is in the process of obtaining consents. The tender began on February 16, 2015 and the auction was held on February 23, 2015. Astelit submitted a bid of UAH 3.4 billion and was awarded the first lot, which is the 1920-1935 / 2110-2125 MHz frequency band. Official notification was received from the NCCIR on March 2, 2015 and we expect the license payment to be made within 30 days from this date. The associated costs will increase our Ukrainian financing needs, which could in turn require us to consider new sources of funding or the extension of existing sources. Prior to the recent 3G license tender, there was only one 3G license (UMTS/WCDMA) in Ukraine, granted without tender to Ukrtelecom, which in 2013 was acquired by SCM Group (which also owns 45% of

 

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Astelit). Ukrtelecom had completed the spin-off procedure of its mobile communication division and established a separate legal entity, “TriMob LLC”. Currently, Ukrtelecom has transferred its 3G license (30 MHz in each region), network infrastructure and subscribers base to “TriMob LLC”.

The Ukrainian telecommunications market is regulated by the Cabinet of Ministers of Ukraine (main state policy), the State Service of Special Communication Administration (“SSSC”) (technical policy aspects) and by the NCCIR controlled by the President of Ukraine and which carries out general telecommunication market regulation and inspection.

The NCCIR has published the draft glidepath for the decrease in mobile termination rates. According to this draft plan, the mobile termination rates will decrease to UAH 0.23 from UAH 0.36 starting from July 1, 2015, UAH 0.18 starting from January 1, 2016 and UAH 0.15 starting from July 1, 2016. This regulatory change may have a positive effect on our business in Ukraine. The regulatory authorities have been working on the draft regulation related to telecom markets identification and Significant Market Power (SMP) operators’ identification as well. This regulation, in terms of possible retail price control mechanisms in the future (requiring further legislative changes), may have a positive impact on our business.

The Mobile Number Portability (“MNP”) Procedure is at its final stage of elaboration and public discussion. Meanwhile, a new version of MNP Technical Requirements is being elaborated by the SSSC with the involvement of operators. It is expected that both documents shall be adopted by the NCCIR and the SSSC and sent for approval by state authorities simultaneously (initially scheduled for end of March—beginning of April 2015). There are 3 different deadlines for the MNP launch announced by the NCCIR: 2015-2017 (under Association Agreement with the EU); in the second half of 2015 (NCCIR MNP working group action plan); and in the first quarter of 2016 (NCCIR Head presentation made at the conference in London last year).

Since the acquisition of Astelit in the second quarter of 2004, the results of our operations in Ukraine have been consolidated in our Consolidated Financial Statements. For more information on Astelit’s loans as of December 31, 2014, see “Item 13. Defaults, Dividend Arrearages and Delinqencies” and Note 26 (Loans and Borrowings) to our Consolidated Financial Statements.

Belarusian Telecom

On July 29, 2008, Beltel Telekomunikasyon Hizmetleri A.S. (“Beltel”) signed a share purchase agreement to acquire an 80% stake in Belarusian Telecom, which is specialized in providing services using GSM and UMTS technologies, for a consideration of $500 million. On August 26, 2008, control of Belarusian Telecom was acquired from Belarus’ State Committee on Property and $300 million of the total consideration was paid. An additional $100 million was paid in December 2009 and another $100 million was paid in December 2010. An additional payment of $100 million will be made to the seller when Belarusian Telecom records a full-year positive net income for the first time. For more information, see Note 25 (Other non-current liabilities) to our Consolidated Financial Statements.

At December 31, 2014, Belarusian Telecom had 1.4 million registered subscribers, the majority of whom were prepaid, Belarusian Telecom’s three-month active subscribers reached 1.0 million as of December 31, 2014 from 926 thousand subscribers as of December 31, 2013. Belarusian Telecom had 151 exclusive and 467 non exclusive sales points. At December 31, 2014, Belarusian Telecom operated 2G services in all, and 3G services in 98.8%, of the cities with a population of more than 10,000, and provided 2G services on all principal intercity highways and roads of Republic of Belarus (total length of all Belarus highways and roads is 15,476 km), which corresponds to coverage of approximately 99.98% of the entire population of Belarus, or 97.9% geographical coverage.

As of February 1, 2012, Mobile Number Portability was launched with a donor-initiated mechanism where subscribers who want to port their numbers had to apply to their existing operator, which is in favor of the

 

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dominant market players. In April 2014, the mobile number portability procedure was revised to a recipient-initiated mechanism. Popularity of the mobile number portability service has increased with the revision of the procedure and the port-in subscribers’ count has increased approximately 4 times in 2014 compared to the previous year.

In Belarus, a lack of pricing regulations in the wholesale and retail markets, to prevent dominant operators’ abusive pricing practices, has created network externality problems and continues to have an adverse impact on our business.

Turkcell Kuzey Kibris

Turkcell Kuzey Kibris, a 100% owned subsidiary of Turkcell, was established in 1999. As of December 31, 2014, Turkcell Kuzey Kibris had 0.43 million subscribers.

On April 27, 2007, Turkcell Kuzey Kibris signed a license agreement for the installation and operation of a digital, cellular and mobile telecommunication system with the Ministry of Communications and Public Works of the Turkish Republic of Northern Cyprus. The license agreement became effective on August 1, 2007 and replaced the previous GSM-Mobile Telephony System Agreement dated March 25, 1999, which was based on revenue-sharing terms. The new license agreement granted a GSM 900, GSM 1800 and IMT 2000/UMTS license, for GSM 900 and GSM 1800 frequencies, while the usage of IMT 2000/UMTS frequency bands was subject to the fulfillment of certain conditions. The license agreement is valid for 18 years from the date of signing. The license fee was set at $30 million including VAT. The license fee was financed by Turkcell Kuzey Kibris through internal and external funds.

On March 14, 2008, Turkcell Kuzey Kibris was awarded a 3G infrastructure license at a cost of $10 million including VAT, which was paid at the end of March 2008.

In the third quarter of 2010, Turkcell Kuzey Kibris completed and began operating the radio transmission (airlink) project providing direct international voice and data connection to the mainland. The project is the only direct connection in the Turkish Republic of Northern Cyprus, aside from the Telecommunication Authority.

On October 1, 2012, Turkcell Kuzey Kibris acquired Internet Service Provider and Infrastructure establishment and operation licenses. Turkcell Kuzey Kibris applied for a right of way to major municipalities and the Ministry of Transportation in order to establish a national fiber optic infrastructure. On January 24, 2014, a protocol between Turkcell Kuzey Kibris and the Ministry of Transportation was signed for the right of way for highway sides. Total fiber optic infrastructure implementation reached 60 kilometers of line by the end of 2014.

The National Regulatory Authority announced a 70% decrease in mobile termination rates gradually (one-year glidepath) in July 2014. The Ministry of Transportation and Public Works announced new price caps with a 30% decrease for offnet calls at the end of 2014. New price caps came into effect starting from January 1, 2015. These recent price regulations have a substantial adverse effect on our business. Regulatory authorities have started working on Mobile Number Portability as well. Implementation of Mobile Number Portability may have an additional adverse effect on our business.

Turkcell Europe

Turkcell Europe was founded by Turkcell in 2010 as a mobile virtual network provider (MVNO) providing service over the T-Mobile (Deutsche Telekom AG) network. Headquartered in Cologne, Germany, Turkcell Europe commenced activity in March 2011.

Until the end of 2014, Turkcell Europe continued its operation as a MVNO and offered Turkcell’s service quality across both Germany and Turkey not only to the people of Turkish origin living in Germany but also those who have close commercial contact with Turkey. Besides providing advantageous offers to those who call

 

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Turkey from Germany, Turkcell Europe always aimed to provide its customers in Turkey and Germany with a unique user experience. As of December 31, 2014, Turkcell Europe had 387 thousand subscribers.

In order to increase the efficiency of our operations in Germany, we made changes to the business model prior to the termination of the contract with Deutsche Telekom AG, which occurred in August 2014.

The “wholesale traffic purchase” agreement, signed between Turkcell’s subsidiary Turkcell Europe GmbH operating in Germany and Deutsche Telekom for five years in 2010, has been modified to reflect the shift in business model to a “marketing partnership”.

The new agreement between our company and a subsidiary of Deutsche Telekom was signed on August 27, 2014. The transfer of Turkcell Europe subscribers and operations to Deutsche Telekom’s subsidiary was executed on January 15, 2015.

Financell

Financell is incorporated under the laws of The Netherlands and has its registered address in The Netherlands. It is established as an intermediate financing company that is wholly owned by Turkcell. Financell will borrow funds from third party lenders with or without a Turkcell guarantee to fund other Turkcell subsidiaries.

Turkcell Global Bilgi

On October 1, 1999, we established Turkcell Global Bilgi in order to provide telemarketing, telesales, and call center services, particularly for us. In 2005, Turkcell Global Bilgi completed its transition from call center to contact center as Turkcell Global Bilgi started to manage customer contacts at every channel. Since then, in addition to providing services to Turkcell, Turkcell Global Bilgi offers services to companies in various sectors from the public sector to finance, energy and the retail sector. As of December 31, 2014, Turkcell Global Bilgi employed 7,880 employees, of which approximately 52% provide us with customer care and retention services, around 39% serve customers of other clients while the remainder work as administrative personnel. We own 100% of Turkcell Global Bilgi.

Turkcell Global Bilgi has owned a 100% share of Global Bilgi LLC since 2008, which operates in Ukraine and provides telemarketing and telesales. Global Bilgi LLC launched a branch office in Russia in April 2013, in order to maintain a presence in the Russian market by increasing business relations and development activities with current and potential customers.

Turkcell Global Bilgi has owned a 99% share of Global Bilgi FLLC since 2009, which was operating in Belarus to provide call center services. As of October 9, 2014, the liquidation process was finalized for Global Bilgi FLLC, which solely served our subsidiary Belarusian Telecom. Belarusian Telecom continues to perform call center operations in-house.

Inteltek

Inteltek Internet Teknoloji Yatirim ve Danismanlik Ticaret A.S. (“Inteltek”) operates fixed-odds betting and pool games on sports games. Currently, Turkcell holds 55% of Inteltek through its wholly owned subsidiary Turktell Bilisim Servisleri A.S. (“Turktell”), while Intralot, a Greek gaming company, holds 20% and Intralot Iberia Holding, a Spanish company, holds 25%.

Inteltek’s business is currently operated under a contract entered into on August 29, 2008 with Spor Toto Teskilati A.S. (“Spor Toto”). The current contract is based on specific Turkish legislation relating to gaming enacted in 2008 and was entered into following numerous legal challenges to prior contracts. Under the current

 

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contract, Inteltek runs the sport betting business, iddaa, for a period of 10 years, effective as of March 1, 2009 and superseding a prior agreement. Under this contract, Inteltek guaranteed a TRY 1,500 million (equivalent to $597.2 million as of March 3, 2015) turnover for the first year of the contract and has given similar guarantees for future years. The guaranteed turnover for the following years will be computed using producer price indices. Inteltek shall pay the guaranteed turnover difference (after deducting commission income) to Spor Toto if actual turnover is below guaranteed turnover. To date, actual turnover has exceeded that amount. In addition to the foregoing, Inteltek signed a mobile betting dealer agreement with Spor Toto on January 12, 2010, which gives it the right to operate 1,000 mobile terminals.

In the context of evaluating investment opportunities in neighboring countries, Azerinteltek Closed Joint Stock Company (“Azerinteltek”) was incorporated on January 19, 2010 in Azerbaijan and is 51% owned by Inteltek. Azerinteltek received authorization from the Ministry of Youth and Sport of the Republic of Azerbaijan and signed the Agreement with Azeridmanservis Limited Liability Company set under the Ministry of Youth and Sport of the Republic of Azerbaijan to organize, operate, manage and develop the fixed-odds and parimutuel sports betting business in Azerbaijan for a period of 10 years. Azerinteltek started its operations, with the brand name “Topaz”, on January 18, 2011 and reached 558 agents as of December 31, 2014. As of January 1, 2013, Azerinteltek was authorized to engage in the operation of lottery games by Azerlotereya for a period of 3 years.

Inteltek is the domestic market leader and is ranked among the most prominent operators in the international gaming sector. Inteltek intends to continue to explore business opportunities both in Turkey and abroad in betting or adjacent businesses.

Turkcell Superonline

Turkcell Superonline has a Fixed Telephone Services right, which allows the company to provide call origination and termination for consumers and corporations, as well as wholesale voice carrying services. It also has authorization to provide satellite communication services, infrastructure operating services, internet services and wired broadcasting services, and mobile virtual network operating services. Currently, the company carries the majority of Turkcell’s traffic, previously carried by Turk Telekom (the incumbent operator). Turkcell Superonline was created in 2009 through the merger of our subsidiary Tellcom with the Superonline business acquired from the Cukurova Group.

Established to be an innovative telecom service operator and with its extensive international connectivity, Turkcell Superonline offers its international and national clients wholesale voice termination international leased data lines, internet access, telehouse and infrastructure services. Furthermore, Turkcell Superonline is in the retail broadband market, bringing fiber optics to residences. Turkcell Superonline provides fast communication technology with its own fiber optic infrastructure in Turkey and provides telecommunication solutions to individuals and corporations in the areas of voice, data and TV.

We believe that Turkcell Superonline differentiates itself through its steadfast commitment to the quality of after-sale services. Turkcell Superonline supplies corporations with industry-leading service-level agreements utilizing its professional technical support personnel and highly qualified team of consultants. Turkcell Superonline has been awarded the ISO 9001:2000 Quality Management System Certificate. Turkcell Superonline aims to become one of the “leading innovative telecommunications operators” in Turkey and it intends to continue to seize opportunities in the internet and telecommunications markets.

Turkcell Superonline won the tender of BOTAS, Turkey’s state-owned pipeline company, for the indefeasible right to use the capacity of the fiber optic cables already installed by BOTAS for 15 years in 2009, including the right to install additional fiber optic cables and the right to use the capacity of these fiber optic cables during the same period. This transaction has been considered as a finance lease as the lease term is for the major part of the remaining useful life of the fiber optic cables already installed by BOTAS and Turkcell Superonline made a significant investment during the initial period of the lease agreement which is an indicator that the transaction is a finance lease. The recognized cost of the indefeasible right of use as of December 31, 2014 is $18.2 million (December 31, 2013: $18.5 million).

 

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Turkcell Superonline began to provide 1000 Mbps service to homes in May 2011 for the first time in Turkey in line with the Turkcell Group’s strategy to provide state-of-the-art technology for its customers with top-quality service. Turkcell Superonline has rendered Turkey one of the first five countries in the world where a 1000 Mbps connection is provided to homes thanks to this service option. Since December 2014, Superonline has become the market leader with a total of 735 thousand fiber customers.

On August 12, 2011, Turkcell Superonline signed a share purchase agreement to acquire a 100% stake in Global Iletisim, which is specialized in providing internet and telecommunications services. In November 2011, the control over Global Iletisim was acquired from Yildiz Holding A.S. for a consideration of $(0.5) million. Turkcell Superonline and Global Iletisim merged on March 30, 2012.

On March 7, 2013, Turkcell Superonline signed a share purchase agreement to acquire a 100% stake in Deksarnet Telekomunikasyon A.S. (“Deksarnet”) which is an affiliate of Vestel Elektronik San. ve Tic. A.S. Group. In July 2013, the control over Deksarnet was acquired from Vestel Elektronik San. ve Tic. A.S. Group for a consideration of $1.8 million. Turkcell Superonline and Deksarnet merged on December 3, 2013.

On January 31, 2014, Turkcell Superonline signed a share purchase agreement to acquire a 100% stake in Metronet Iletisim Teknoloji A.S. (“Metronet”). In April 2014, the control over Metronet was acquired from Es Mali Yatirim ve Danismanlik. A.S. for a consideration of $12.4 million. Turkcell Superonline and Metronet merged on July 4, 2014. With this acquisition, Turkcell Superonline’s fiber in-city coverage increased to 14 cities, up from the existing 12. In 2014, Turkcell Superonline continued to invest in its transmission network by expanding the intercity and in-city fiber optic backbone along with establishing new fiber-based access points in selected residential and industrial areas for end-users and commercial account-holders. As of December 31, 2014, Turkcell Superonline’s installed backbone was approximately 33,500 km long and its services reached 14 cities, including Istanbul, Ankara, Izmir, Bursa, Kocaeli, Adana, Gaziantep, Antalya, Mersin, Samsun, Trabzon, Kayseri, Konya and Diyarbakir in Turkey. Turkcell Superonline increased its home passes to around 2.1 million as of December 31, 2014 from around 1.7 million a year ago. The total number of fiber subscribers rose to 735 thousand as of December 31, 2014 from 570 thousand a year ago.

Turkcell Superonline aims to turn Istanbul into an internet hub, lifting the boundaries between countries and initiating the “internet without a visa” era through direct-access agreements. Turkcell Superonline has nine international gateways, which enable fast and seamless internet access via connections with Europe’s most important internet traffic exchange points in Sofia, London, and Amsterdam, as well as through the Frankfurt POP in Germany. It also raises internet access speed and quality in residential, corporate, and wholesale segments via peering connections. In 2012, collaborating with Tier-1 telecom operators such as Tata Communications, Deutsche Telekom, Inteliquent, and KPN, Turkcell Superonline enabled access to globally-renowned networks directly from Istanbul, adding value not only for its business and partners, but also for the Turkish economy. Turkcell Superonline plays a major role in delivering transit data traffic and telecommunications services between Europe, CIS, Asia and the Middle East. It provides internet access in Iran, Iraq, Georgia, and Northern Cyprus.

Turkcell Superonline aims to continue to invest in and expand its own fiber optic network and further utilize the group synergy created with Turkcell. The Company intends to continue to take advantage of business opportunities within the broadband industry in 2015.

Global Tower

Global Tower, founded in 2006, is a wholly owned subsidiary of Turkcell and the leading technology infrastructure operator in Turkey. Its Ukraine branch, UkrTower, was founded in 2009. With the vision of “Carrying Communication Everywhere”, Global Tower rented, built and leased more than 8,000 towers for Telecom Operators and TV & Radio Broadcasters in Turkey and Ukraine. Today, Global Tower’s core business consists of renting from landlords, selling electronic equipment, installation, implementation, maintenance, tower

 

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and rooftop site leasing. Global Tower serves diverse markets including telecommunications, TV & radio broadcasting and providing technology services. The main goal of Global Tower in targeted markets is to increase cost efficiency by sharing sites and services. Global Tower’s site sharing business model eliminates the initial investment costs of its clients, decreases environmental impacts and promotes efficient use of resources. Global Tower manages 8,064 tower and 16,411 rooftop and in-building assets and installs more than 1,000 sites each year for Turkcell and other operators. Many of the most famous radio and TV channels of Turkey have placed their transmitters in Global Tower sites. Besides Telecom Networks, SCADA/Telemetry Networks implementation and maintenance are in Global Tower’s scope. From the day it was established, Global Tower has achieved a rapid and persistent growth and aims to continue its growth by providing high-quality and efficient services.

Turkcell Teknoloji

Turkcell Teknoloji, a wholly owned subsidiary of Turkcell, commenced operations in 2007 in the TUBITAK Marmara Research Center Technological Free Zone in Kocaeli, Turkey. In 2013, Turkcell Teknoloji consolidated its operations in Teknoloji Plaza, Maltepe, Istanbul, Turkey. Turkcell Teknoloji’s new R&D center employs 761 researchers (excluding part-time employees) who have been accredited by the Ministry of Science, Technology and Industry, and 5 sales representatives. Turkcell Teknoloji’s established team of experts develops a wide range of convenient and reliable solutions with innovative roadmaps. Through integrated intelligence and high-performance capabilities, Turkcell Teknoloji’s comprehensive portfolio addresses the following domains: SIM asset and services management, location-based services, value-added services, roaming solutions, big data processing, business intelligence applications, CRM solutions, network management, mobile finance, terminal applications, cloud solutions, mobile marketing machine-to-machine communication technologies and revenue management solutions.

Turkcell Teknoloji has been continuing to export technology and software to CIS, Europe, Middle East and Africa. The Turkcell Teknoloji Campaign Management System (CMS) is deployed and used in 6 countries. In 2014, the CMS “Inbound Campaign Module” was deployed in the GSM operator Zain Kuwait and a new CMS project in the GSM operator Belarus Best began.

To ensure a permanent competitive edge and value for its solutions, Turkcell Teknoloji cooperates with a wide network of national and international R&D companies, universities and research centers and plays an active role in international R&D programs. With the goal of being Turkey’s leading R&D and innovation base, Turkcell Teknoloji demonstrates the value it attaches to innovation with its increasing number of patents each year. In 2014, Turkcell Teknoloji R&D Center submitted 90 new national patent applications. As of December 31, 2014, Turkcell Teknoloji has 367 national and 45 international patents applications and 107 granted patents. Turkcell Teknoloji’s IPR performance is among the top three in Turkey and it has 26 TUBITAK (The Scientific and Technological Research Council of Turkey) supported projects, of which 11 are currently running.

Equity Accounted Investments

(i) Fintur

We hold a 41.45% stake in Fintur, which holds interests in international mobile communications operations. Below is a description of the businesses currently held by Fintur.

Azercell

Fintur indirectly owns 51.3% of Azercell Telekom B.M. (“Azercell”), which offers GSM services on both a prepaid and a postpaid basis in Azerbaijan. As of December 31, 2014, Azercell had approximately 4.6 million subscribers, of which approximately 0.5 million were postpaid and approximately 4.1 million were prepaid.

 

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The agreement for the privatization of the Republic of Azerbaijan’s 35.7% ownership in Azercell was signed in February 2008 and Azertel A.S., the parent company of Azercell, acquired the Republic of Azerbaijan’s entire stake. Azertel’s ownership in Azercell increased to 100%; however, Fintur’s effective ownership in Azercell remains at 51.3%. Azercell was granted a 3G license in the fourth quarter of 2011 and 4G license in the second quarter of 2012.

Geocell

At December 31, 2014, Fintur indirectly owned 100% of Geocell Ltd. (“Geocell”), which operates a GSM network and offers mobile telephony services in Georgia. As of December 31, 2014, Geocell had approximately 2.1 million subscribers, of which approximately 0.1 million were postpaid, approximately 0.2 million were paid-in-advance subscribers that had postpaid services but paid in advance and approximately 1.8 million were prepaid.

Kcell

Kcell is 51% owned by Fintur. In 2012, the remaining 49% was acquired by TeliaSonera from Kazakhtelecom JSC, the Kazakh incumbent fixed line telecom provider. TeliaSonera sold 25% of the shares minus one share in Kcell in an Initial Public Offering (“IPO”) on the London and Kazakhstan Stock Exchanges, which was completed in December 2012. Following the completion of the IPO, TeliaSonera’s effective ownership in Kcell is 61.74%. Kcell offers mobile telephony services in Kazakhstan and had approximately 13.1 million subscribers as of December 31, 2014, of which approximately 0.3 million were postpaid, approximately 1.2 million were paid-in-advance subscribers and approximately 11.6 million were prepaid.

Moldcell

At December 31, 2014, Fintur directly and indirectly owned 100% of Moldcell S.A. (“Moldcell”), which offers GSM services in Moldova. As of December 31, 2014, Moldcell had 1.1 million subscribers, of which approximately 0.1 million were postpaid, approximately 0.3 million were paid-in-advance subscribers and approximately 0.7 million were prepaid. Moldcell was granted a 4G license in the fourth quarter of 2012.

(ii) A-Tel

On August 9, 2006, Turkcell acquired 50% of A-Tel’s shares. A-Tel is a joint venture and the remaining 50% of its shares are held by Bilgin Holding A.S. Bilgin Holding’s 50% shares were acquired by the Savings Deposit Insurance Fund (SDIF) on October 18, 2004 in return to the debts of Bilgin Holding against the SDIF. Further, pursuant to the decision dated April 25, 2013, the SDIF resolved to reassign the shares in its possession to Bilgin. A-Tel was involved in marketing, selling and distributing our prepaid systems. It acted as our only dealer for Muhabbet Kart (a prepaid card), and received dealer activation fees and simcard subsidies for the sale of Muhabbet Kart. In addition to the sales of simcards and scratch cards through an extensive network of newspaper kiosks located throughout Turkey, we had entered into several agreements with A-Tel for the sale of campaigns and for subscriber activations. Since 1999, the business cooperation between us and A-Tel provided important support to our sales and marketing activities. However, the service provider and distribution agreement with A-Tel was annulled through a notification dated January 31, 2012, effective August 1, 2012. Additionally, Turkcell’s whole stake in A-Tel has been sold to Bereket Holding A.S. (formerly known as Bilgin Holding) for a consideration of $14.3 million as at the transaction date pursuant to a share sale agreement signed on August 27, 2014.

X. Potential Investments

Our efforts to selectively seek and evaluate new investment opportunities continue. These opportunities may include the purchase of new licenses and the acquisition of existing companies as well as alternative business models such as management contracts, marketing partnerships or other forms of cooperation both inside and

 

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outside of Turkey, focusing on communications, technology and adjacent and new business opportunities. In addition, we may provide services in related areas and also consider investing or increasing our investments in business areas outside of the scope of our core business. Our international expansion strategy focuses on key emerging markets, mainly in Eastern Europe, the Balkans, the Middle East and Africa.

We will continue to selectively seek and evaluate new international investment opportunities. In the context of our evaluation of potential investment opportunities within the regions we target for international expansion strategy, Turkcell has, from time to time, considered opportunities in countries in the C.I.S. Region, Eastern Europe, the Middle East, Africa and the Balkans and may consider such opportunities in the future. We may participate in additional public tenders for new licenses or the privatization of public telecom companies as well as in private sale transactions in emerging markets to pursue investment opportunities in line with our growth strategy.

Furthermore, we may evaluate expanding into other Western European countries where there is a sizeable Turkish community through wholesale partnerships or alternative cooperative business models.

XI. Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA)

Based on our information and the information provided to us by our affiliates, as of the date of this annual report, we believe that certain of our business activities in Iran in 2014, and the business activities of certain of our affiliates, are subject to disclosure pursuant to ITRA Section 219. During the year ended December 31, 2014, Turkcell and Astelit provided direct international roaming services in Iran through agreements with the following GSM operators: TCI Mobile Company of Iran, Telecommunication Kish Co., MTN Irancell, and Taliya Iran. During the year ended December 31, 2014, Turkcell had gross revenues of approximately $435,141 and a loss of approximately $1 million, while Astelit had gross revenues of approximately $141 and net profits of approximately $141, attributable to these agreements. In addition, during the year ended December 31, 2014, Turkcell had gross revenues of approximately $773,000 and a loss of approximately $205,000 attributable to international traffic services for the GSM operators listed above. TeliaSonera has informed us that certain Fintur companies had revenues under roaming agreements in Iran in 2014 with the following GSM operators: TCI Mobile Company of Iran, MTN Irancell, and Taliya Iran. During the year ended December 31, 2014, Azercell (Azerbaijan) had gross revenues and net profits of approximately $171,853 and $52,098, respectively, while Kcell (Kazakhstan) had gross revenues of approximately $7,759 and a loss of $8,640. In addition, during the year ended December 31, 2014, Geocell (Georgia), Moldcell (Moldova), Ncell (Nepal), Tcell (Tajikistan), and Ucell (Uzbekistan) had gross revenues totaling approximately $26,400 and net profits of approximately $20,957.

We have made enquiries of our major shareholders and TeliaSonera has informed us that during the year ended December 31, 2014, its wholly owned subsidiary, TeliaSonera International Carrier, Inc. (“TSIC”), had gross revenues of approximately €4 and net profits of approximately €0 from wholesale voice traffic exchange services with Telecommunications Infrastructure Company (“TIC”). TSIC also delivers IP Wholesale Transit services via ports in London and New York for TIC and had gross revenues of approximately €215,400 and net profits of approximately €0 during the year ended December 31, 2014. TSIC holds a license issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control authorizing the use of assets owned by TSIC in connection with the provision of IP Transit services to TIC. The current license is scheduled to expire on May 30, 2015 and the provision of service to TIC is subject to the maintenance of the license. TeliaSonera has also informed us that TeliaSonera Region Europe has bilateral roaming agreements with TCI Mobile Company of Iran and MTN Irancell. During the year ended December 31, 2014, TeliaSonera Region Europe had gross revenues and net profits of approximately €32,414 and €0, respectively.

In addition, Turkcell Superonline provided Transit IP and leased line services through network interface agreements with Telecom Infrastructure Company of Iran (“TIC”). During the year ended December 31, 2014, gross revenues and net profits attributable to these agreements were TRY 4 million (equivalent to $1.6 million as

 

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of March 3, 2015) and TRY 1.8 million (equivalent to $0.7 million as of March 3, 2015), respectively. In 2013, Turkcell Superonline received an order to provide leased line services to the Islamic Republic of Iran Broadcasting (“IRIB”), which will be delivered through our TIC interconnection. Services and revenues have yet to commence. Turkcell Superonline also provides wholesale voice traffic to Tadbir Ertebahat-E-Sigma (“Sigma Telecom”) but did not receive any traffic from Sigma Telecom in 2014. It generated no gross revenues or net profits related to this service in 2014. Finally, Turkcell Superonline uses Teleka Madea (“Telecom Idea”), which is a privately owned Iranian company, for consultancy, follow-up and representation services in the Iranian market. Turkcell Superonline generated no gross revenues or net profits related to this service in 2014.

Although it is difficult to do with a reasonable degree of certainty, we have concluded that our Iranian business partners described in this section may be owned or controlled indirectly by the Government of Iran. However, to our knowledge, none of the services provided by Turkcell and our affiliates in Iran described in this section have been used by the Government of Iran to commit serious human rights abuses against the people of Iran. Furthermore, we understand that the U.S. Department of the Treasury’s Office of Foreign Assets Control has issued a general license authorizing U.S. persons to engage in certain of the activities described in this section. We, and our affiliates, intend to continue the activities described in this section in 2015.

XII. Regulation of the Turkish Telecommunications Industry

a. Overview

All telecommunications activity in Turkey is regulated by the ICTA. The Electronic Communications Law No. 5809 (the “Electronic Communications Law”), which came into force on November 10, 2008, is the principal law governing telecommunications activity in Turkey. The Electronic Communications Law was published to correspond to the rapidly-evolving Turkish telecommunications industry, and all secondary regulations have been updated to be in accordance with this law. The duties of the ICTA, which may be exercised in a manner that is adverse to our operations and our financial results, include those described below.

b. ICTA

The ICTA has the authority to grant licenses and set fees in the electronic telecommunications industry.

According to Article 8 of the Electronic Communications Law, electronic communications services are rendered and/or established (as in the case of an electronic communications network or infrastructure) and operated following the authorization made by the ICTA. Authorization is granted either through notification made in accordance with the principles and procedures determined by the ICTA, in cases where scarce resource allocation is not necessary, or by the granting of usage rights, in cases where scarce resource allocation is necessary (allocation of frequency, satellite position, etc.). Under the Electronic Communications Law, usage rights may be granted for up to 25 years; however, there is no clause relating to the term of notification. According to the Electronic Communications Law, the principles and procedures relating to the notification and granting of usage rights shall be determined by the ICTA through secondary regulations.

On the other hand, in cases where the quantity of rights of use is limited, Section 9-6(a) of the Electronic Communications Law allows the Ministry of Transport, Maritime Affairs and Communications to determine the criteria, such as (i) the authorization policy regarding electronic communications services which cover the assignment of satellite position and frequency band on a national scale and which need to be operated by a limited number of operators, (ii) the starting date of the service, (iii) the duration of the authorization and the number of operators to serve. While the criteria are determined by the Ministry of Transport, Maritime Affairs and Communications, the authorization is still granted by the ICTA.

Under Article 51 of the Electronic Communications Law, the ICTA is authorized to determine the principles and procedures related to the process of personal data and protection of privacy. With its decision rendered on April 9, 2014 and published in the Official Gazette on July 26, 2014, the Turkish Constitutional Court decided

 

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that Article 51 of the Electronic Communications Law is a violation of Article 20(3) of the Constitution, which stipulates data protection as a constitutional measure and that the measures should be regulated by the laws and therefore annulled the aforementioned provision (Article 51). The decision of the Constitutional Court will become effective six months after its publication in the Official Gazette, on January 26, 2015.

The Electronic Communications Law establishes legal principles and broad policy lines that the ICTA must follow, some of which are stated below:

 

   

Creation and protection of a free and efficient competitive environment.

 

   

Protection of consumer rights and interests.

 

   

Protection of the objectives of development plans and Government programs as well as the strategies and policies set by the Ministry.

 

   

Promotion of implementations that ensure that everyone can benefit from electronic communications networks and services.

 

   

Ensuring non-discrimination among subscribers, users and operators under fair conditions.

 

   

Ensuring the conformity of electronic communications systems to international norms.

 

   

Protection of information safety and communication confidentiality.

The Electronic Communications Law also specifies general rules and principles relating to interconnection between operators. Agreements for interconnection are publicly available, but precautions are taken by the ICTA to protect commercial secrets of the parties.

The law entitled Universal Services and Amending Some Laws, Law No. 5369, determines the procedures and principles governing the provision and execution of universal service and the procedures and the rules relating to the fulfillment of universal services in the electronic communications sector, a universal public service that is financially difficult for operators to provide (and performance of a universal service obligation in the electronic communications sector). In accordance with Law No. 5369, the scope of universal services is determined periodically by the Council of Ministers, which will not exceed three years.

The legislation designates the following as universal services: fixed-line telephony services, public pay telephones, telephone directory services to be provided in printed or electronic environments, emergency call services, internet services, passenger services to residential areas where access is provided by sea and sea communication and sailing safety communication services.

This law mandates that designated operators must provide universal services and the General Directorate of Communication can demand that operators provide universal services on a national and/or geographical basis. Turk Telekomunikasyon A.S. and the GSM operators are currently designated as universal services providers.

The Cabinet of Ministers Decision No. 27984 and dated July 4, 2011 allowed the use of the universal service fund to extend the mobile GSM network coverage listed in the annex of the decision to uncovered areas with a population of 500 or less. On February 13, 2013, we were appointed as universal service provider after a tender process and the related contract was signed on February 20, 2013. Under the aforementioned contract, Turkcell duly carries out its undertakings for installing sufficient infrastructure to cover 1,799 rural locations and the investment and operating expenses will be compensated by the universal service fund of the Ministry of Transport, Maritime Affairs and Communications.

The Electronic Communications Law also specifies general rules and principles relating to tariffs. Pursuant to the Electronic Communications Law, operators may freely determine the tariffs they apply in compliance with the relevant legislation and the ICTA arrangements. In the event of determination of the significant market power

 

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of the operator, the ICTA may determine the method of the approval, tracking and auditing of the tariffs. It may also determine the lower and upper limit of the tariffs and principles and procedures of the application of the same.

The Electronic Communications Law provides basic guidelines for the tariffs and pricing and thus leaves the detailed rules and enforcement to the ICTA. According to the law:

(1) The tariff may be determined as one or more subscription fees, fixed fees, call charges, line rentals, and similar fee items.

(2) Tariffs to be imposed in return for providing any kind of electronic communications services shall be subject to the following provisions:

(a) Operators shall freely determine the tariffs under their possession, provided that they comply with the regulations of the ICTA and the relevant legislation.

(b) If an operator is designated as having significant market power in the relevant market, the ICTA shall be entitled to determine the procedures regarding the approval, monitoring and supervision of tariffs as well as the highest and lowest limits of the tariffs and the procedures and principles for the implementation thereof.

(c) If an operator is designated as having significant market power in the relevant market, the ICTA shall be entitled to make the necessary arrangements to prevent anti-competitive tariffs such as price squeezing and predatory pricing and to supervise the implementation thereof.

(3) Procedures and principles pertaining to the implementation of this article, submission of tariffs to the ICTA and publishing and announcing them to the public shall be determined by the ICTA.

According to this regulation, the ICTA may intervene in the structure of our tariffs or may impose certain criteria relating to the revision of our tariffs. Pursuant to its decision dated December 8, 2009, the ICTA determined Turkcell, individually, to be an operator holding a significant market power in the “Access to Mobile Networks and Call Originating Markets” and, together with Avea and Vodafone, to be an operator holding significant market power in the “Mobile Call Termination Market”. As a result of the significant market power designation in the “Access to GSM Mobile Networks and Call Originating Markets”, our Company may be required to provide access and call origination services to other operators such as MVNOs and Directory Services Operators on a cost-based basis, while operators not designated as operators “holding significant market power” can set their prices more freely. Being designated as an “operator holding significant market power” in the “Access to GSM Mobile Networks and Call Originating Markets” is likely to have the effect of reducing the rates that we can charge other operators, such as MVNOs, which would have a material adverse effect on our business and results of operations. The ICTA completed the market analysis for the 2012-2015 term. Turkcell has been recognized as the only operator holding significant power in “Access to GSM Mobile Networks and Call Originating Markets”. In 2015, market analysis for “Mobile Call Termination Market” and “Access to GSM Mobile Networks and Call Originating Markets” will be renewed and SMP operators will be determined for the 2016-2019 period.

c. Regulation on Quality of Service in the Electronic Communications Sector

The ICTA abolished the Regulation On Quality of Service (issued in 2005), and published a new Regulation On Quality of Service in the Electronic Communications Sector, effective as of December 31, 2011 and applicable to all operators that provide service to end users, which sets out the procedures and principles to control the conformity of the services of operators. Mobile telephone operators are required to meet new service quality requirements and submit a report based on these requirements every three months to the ICTA. Additional requirements for service quality must be fulfilled. If the operators fail to reach these requirements more than once, this may result in the imposition of penalties. The results of quality measurements can also be publicly available.

 

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d. Regulation on Administrative Fines, Sanctions and Precautions in the Electronic Communications Sector

The ICTA abolished the Regulation on Administrative Fines to be imposed on the operators (issued in 2004) and published a new Regulation on Administrative Fines, Sanctions and Precautions to be imposed on operators, effective as of February 15, 2014. The ICTA retains the right to impose fines in the event an operator: submits incorrect or misleading documents or fails to submit documents as requested by the ICTA; does not submit such documents in a timely manner; does not permit inspection or audits to be made by the ICTA; uses unpermitted equipment or equipment not complying with standards or alters technical features of equipment; or does not pay fees arising from its use of licenses and frequencies or does not comply with the provisions of license agreements, telecommunications licenses and general authorizations or the legislation. The ICTA is authorized to impose sanctions and precautions as well as administrative fines.

e. Regulation on Authorization regarding the Electronic Communications Sector

In 2009, the ICTA published the “Regulation on Authorization regarding the Electronic Communications Sector”, which determines the principles and procedures for the authorization of the companies that seek to provide electronic communication services and/or to install or operate electronic communications networks or infrastructure.

(i) Wireless Interoperability for Microwave Access (“WIMAX”) License

Regulatory changes in Turkey to introduce and promote WIMAX nationwide could have a material adverse effect on our business and results of operations. Specifically, they may result in increased competition and/or the entry of new direct or indirect competitors, which may have a negative impact on our ability to attract and retain customers, the competitiveness of our products and services, our distribution channels, our brand and visibility and our infrastructure investments.

(ii) Fixed Line Telephone Services

The ICTA issued Fixed Telephony Service (“FTS”) licenses pursuant to the Regulation on Authorization regarding the Electronic Communications Sector, which enables existing long-distance telephony services (“LDTS”) operators, such as our subsidiary Turkcell Superonline, to provide call origination and termination. LDTS and, consequently, FTS providers, have not yet had a significant effect on our operations. In the long term they could have the effect of driving down prices and shifting traffic patterns for in-city as well as long-distance calls in Turkey, potentially having an adverse effect on our mobile telecommunications business.

On February 3, 2010, the ICTA published a new Regulation entitled “The Right of Way in Execution of the Electronic Communications Services”. This Regulation aims to determine the principles and procedures for the right of way for the establishment and usage of all kinds of electronic communications networks and/or infrastructure facilities, which is required for the execution of electronic communications services.

f. Regulation on Mobile Number Portability (“MNP”)

Pursuant to Article 32 of the Electronic Communications Law, operators are required to supply operator number portability.

MNP allows subscribers to keep their existing telephone number when changing their telephone operator, their physical location or current service plan. These regulations became operational in the fourth quarter of 2008. Since we believe the MNP regulations conflict with our rights under our license agreement, without due compensation, we filed a lawsuit in 2007 for the cancellation of the MNP regulation. While we do not object to the substance of mobile number portability, we do, however, believe that our rights under our license agreement should remain protected or, if they are violated, we should be justly compensated. The Court rejected the case in June 2009 and we appealed the decision. The Plenary Session of the Chambers for Administrative Cases approved the court decision. We applied for the correction of the decision and this process is still pending. See

 

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“Item 8.A Consolidated Statements and Other Financial Information—Legal Proceedings”. In 2009, the ICTA issued a new Regulation on MNP, abolishing the 2007 regulation. For new subscriptions, subscribers cannot port out to another operator in the first three months.

g. Regulation on Security of Electronic Communications

In 2008, the ICTA published the “Regulation on Security of Electronic Communication”, which determines the principles and procedures for precautions to be taken by the operators for eliminating or derogating the risks caused by threads or weaknesses of (i) the physical area of the operators, data, hardware/software security and reliability, and (ii) sustaining the reliability of human resources. In accordance with the regulation, our Company is required to comply with TS ISO/IEC 27001 or ISO/IEC 27001 standards. Turkcell was the first mobile operator in Turkey to receive the ISO/IEC 27001:2005 certification for its Network Operations function in 2008 covering all operations throughout Turkey. In 2011, Turkcell’s IT function was also certified for ISO/IEC 27001:2005 and Turkcell’s ISO/IEC 27001:2005 scope became one of the largest among telecommunication operators in Europe. By having an ISO/IEC 27001:2005 certificate covering telecom infrastructure operations, Turkcell fulfils its regulatory obligations and offers its customers the benefits of an internationally-recognized secure management of operations and services. In July 2014, the ICTA revised the above regulation by adding a special clause on cyber security, which required the company to set up and maintain a specialized team to detect, prevent and report all cyber events and work in coordination with the National Cyber Event Reaction Center, available 24/7.

h. Turkish Competition Law and the Competition Authority

In 1997, the Competition Law (No. 4054) established a Competition Board. The Competition Board consists of seven members who are appointed for a term of six years. It is an autonomous authority with administrative and financial independence established to ensure effective competition in markets for goods and services.

The Competition Board can carry out investigations, evaluate requests for exemptions, monitor the market, assess mergers and acquisitions, submit views to the Ministry of Industry and Trade and perform other tasks stipulated by the Competition Law. The ICTA can apply to the Competition Board if it determines that agreements regarding access, network interconnection and roaming violate the Competition Law.

Any person or legal entity may file a complaint with the Competition Board. The Competition Board can take necessary measures to prevent violations and may impose fines on those who are liable for such prohibited practices. The Competition Board may impose fines of up to 10% of the annual gross income of the operators, which is constituted by the end of the previous financial year and determined by the Competition Board. The ICTA and the Competition Board entered into a Protocol on Cooperation in 2002, followed by a new Protocol in 2011. The original Protocol established a framework whereby the ICTA and the Competition Board can cooperate on legal actions and policies regarding measures, regulations and inspections that affect competition conditions and competition in the telecommunications sector. The new Protocol regulates the mechanisms to improve cooperation between the ICTA and the Competition Board.

i. Regulation on the Establishment of Metropolitan Municipalities in Fourteen Provinces and of Twenty-Seven Districts and Amending Certain Laws and Decree Laws

The Law No. 6360 on the “Establishment of Metropolitan Municipalities in Fourteen Provinces and of Twenty-Seven Districts and Amending Certain Laws and Decree Laws” was published in the Official Gazette on December 6, 2012 and enacted on March 30, 2014 through municipal elections. The Law, increasing the number of metropolitan cities from 16 to 30, dissolves the legal entity of villages and special provincial administrations in cities where there are metropolitan municipalities. By the amendment of the Law for Metropolitan Municipalities, the number of metropolitan municipalities increased and the borders of some metropolitan municipalities were extended. After this amendment, the ICTA increased our coverage obligations, defined in our concession agreement, by its decision, based on this law amendment. The ICTA has therefore imposed a heavy

 

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financial burden on us, which requires us to make material capital expenditures. We filed a lawsuit for the cancellation of the ICTA’s aforementioned decision. There has been no progress in the case yet.

j. Regulation on Base Station Implementation in Electronic Communication Sector

The Ministry of Transport, Maritime Affairs, and Communications, in coordination with the Ministry of Environment and Urban Planning, published a draft Regulation on the “Implementation of any kind of base station, antenna, tower, waveguide, container and related equipment and facility in fixed and mobile communication infrastructure” in September 2013. This draft is expected to come into force in 2015. With this regulation, mobile operators will be obliged to pay additional certificate fees according to the scale of charges, from governorships or municipalities, such as a site selection certificate. This may lead to additional certificate fees and operational costs, such as permission processes for implementation of base stations, which may take longer.

k. Zoning Law and Construction Certificate Requirement of Base Stations

The Supreme Court of Appeals rescinded the regulation regarding the base stations exemption from getting construction permits in the zoning law on October 1, 2009. The existing zoning law in Turkey requires mobile operators to obtain construction certificates for all existing and new base stations, resulting in the shutdown of some stations for which certification cannot be obtained. In Turkey, nearly half of the premises were built illegally without any permission. As a result, some municipalities started taking legal action such as affixing seals to suspend the construction or demolition orders against base stations, negatively affecting our coverage, quality of service and customer experience. We have also taken legal action requesting nullity of those acts. In addition, studies for altering zoning laws regarding procedures for building certifications are being prioritized.

l. Regulation on Waste Electrical and Electronic Equipment

In May 2012, the Regulation related to Waste Electrical and Electronic Equipment was published in the Official Gazette and became effective. Waste Electrical and Electronic Equipment regulations may impose some obligations on our Company and increase our operational costs.

m. Regulation on the Internet

Law no. 5651 for the Regulation of Web Content has been revised by Law no. 6518, which became effective on February 19, 2014. The new law requires that all internet access providers, which includes all mobile and fixed network operators as well as all internet service providers, should form a Union of Internet Access Providers (“UAP”) within three months. Failing to do so will result in a fine equal to the amount of one percent of the previous year’s revenues. After the establishment of the UAP, if any internet service provider or any operator giving internet services fails to become a member of the UAP, it shall also be fined with an amount equal to one percent of the previous year’s revenues.

In addition, the new law raises the existing fines for not removing content as requested by the court. The law also introduces URL-based blocking of websites which requires new capital as well as operating expenditures for all internet access providers.

n. GSM Licensing in Turkey

The terms of license agreements are governed by the Authorization Regulation, and it provides that the ICTA approve the transfer of licenses to third parties, ensure continuation of services in the event of cancellation of a license and approve the investment plans submitted by licensees.

A GSM license is subject to the ICTA’s right to suspend or terminate operations under the license on the grounds of security, public benefit, and national defense or to comply with the law. However, suspension or

 

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takeover of facilities under these circumstances is subject to the payment of compensation to the operator. The ICTA can also inspect such licensee and nullify its license if the licensee has materially failed to comply with the terms of its license. The ICTA may also terminate licenses in cases of gross negligence or non-payment of the authorization fee.

The licensee is responsible for installing telecommunications equipment in conformance with international signalization systems and numbering plans. Furthermore, the licensee is obligated to make the necessary investments to offer the licensed service, including the design of the service, the making of financial investments and the installation and operation of the facility required for the service. Licensees are allowed to determine the prices for services, subject to the regulations of the ICTA. Upon the expiry of a license, including termination, the facilities and immovables of the licensee, in operating condition, will be transferred by the licensee in accordance with the license agreement.

o. Our GSM License Agreement

(i) General

Since April 1998, we have operated under a 25-year GSM license for which we paid an upfront license fee of $500 million. In 2002, we signed a renewed license agreement for our GSM license which provides that a monthly payment of 15% over our gross revenue paid to the Turkish Treasury shall be subject to the legal interest rate. If such payments are not duly paid twice in any given year, a penalty in an amount equal to triple the last monthly payment shall be payable to the Turkish Treasury. In addition, we must pay annual contributions in an amount equal to 0.35% of our gross revenue to the ICTA’s expenses. After the tender relating to the allocation of additional GSM 900 frequency bands, made by the ICTA in June 2008, the license agreement was amended to include the additional frequency band and was signed by Turkcell and the ICTA in February 2009, which made small additional changes in the articles of the license agreement entitled performance bond and allocated frequency bands.

(ii) Terms and Conditions

Under the license agreement, we hold a licensed concession to provide telecommunications services in accordance with GSM-PAN European Mobile Telephone System standards in the 900 MHz frequency band. Our license covers 55 channels and allocates telephone numbers between the 530 and 539 area codes in the national numbering plan. Our license also permits us to establish customer service centers, sign contracts with subscribers and market our services to subscribers. Our license was issued with an effective date of April 27, 1998, for an initial term of 25 years. At the end of the initial term, we can renew our license, subject to the approval of the ICTA, provided that we apply between 24 months and 6 months before the end of our license. Our license is not exclusive and is not transferable without the approval of the ICTA.

We paid a license fee of $500 million to the Turkish Treasury upon effectiveness of our license. On an ongoing basis, we must pay 15% of our gross revenue, defined as of March 2006 to exclude interest charges for late collections from subscribers and indirect taxes such as 18% VAT as well as other expenses and the accrued amounts that are recorded for reporting purposes to the Turkish Treasury. We are required to pay 10% of our existing monthly treasury share to the Turkish Ministry as a universal service fund contribution. Since 2005, we pay 90% of the treasury share to the Turkish Treasury and 10% to the Turkish Ministry as a universal service fund contribution.

Furthermore, under the Regulation on Authorization regarding the Electronic Communications Sector, all kinds of share transfers, acquisitions and actions of the operators which are authorized by a Concession Agreement must be communicated to the ICTA, and such share transfers, acquisitions and actions shall be made with the written approval of the ICTA if they result in a change of control component of such operators. The “control component” is defined as “the rights that allow for applying a decisive effect on an enterprise, either separately or jointly, de facto or legally”.

 

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Our license subjects us to a number of conditions. It may be revoked in the event that we fail to meet any of these conditions.

(iii) Coverage

Our license requires that we meet coverage and technical criteria. We must attain geographical coverage of 50% of the population of Turkey (living in cities or towns of 10,000 or more inhabitants) within three years of our license’s effective date and at least 90% of the population of Turkey (living in cities or towns of 10,000 or more inhabitants) within five years of the effective date of our license. This coverage requirement excludes coverage met through national roaming and installation sharing arrangements with other GSM systems and operators. Upon the request of the ICTA, we may also be required, throughout the term of our license, to cover at most two additional areas each year. Except in the event of force majeure, we must pay a late performance penalty of 0.2% of the investment in the related coverage area per day for any delay of more than six months in fulfilling a coverage area obligation. As of today, we have met and surpassed all coverage obligations.

(iv) Service Offerings

Our license requires that we provide services that, in addition to general GSM phone services, include free emergency calls and technical assistance for customers, free call forwarding to police and other public emergency services, receiver-optional short messages, video text access, fax capability, calling and connected number identification and restrictions, call forwarding, call waiting, call hold, multi-party and three-party conference calls, billing information, and the barring of a range of outgoing and incoming calls.

(v) Service Quality

Generally, we must meet all the technical standards of the GSM Association as determined and updated by the European Telecommunications Standards Institute and Secretariat of the GSM Association. Moreover, we must meet the standards that the ICTA imposes under “Regulation on Quality of Service in the Electronic Communications Sector”.

(vi) Tariffs

The license agreement regulates our ability to determine our tariff for GSM services. The license agreement provides that, after consultation with us and consideration of tariffs applied abroad for similar services, the ICTA sets the initial maximum tariffs in Turkish Lira and U.S. Dollars. Thereafter, our license provides that the maximum tariffs shall be adjusted at least every six months. The license agreement provides a formula for adjusting the existing maximum tariffs. For the adjustment of the maximum tariffs established in Turkish Lira, the formula is: the Turkish Consumer Price Index announced by the Ministry of Industry and Trade for Turkey minus 3% of the Turkish Consumer Price Index announced by the Ministry of Industry and Trade. For the maximum tariffs established in U.S. Dollars, the same method is applied to the USA Consumer Price All Item Index Numbers.

The standard tariffs and the maximum tariffs set by the ICTA have been established in Turkish Lira and the ICTA’s schedule of standard tariffs and maximum rates are premised on the TRY/$ Exchange Rate in effect on the date they were approved by the ICTA. Although we believe the tariff structure in our license will, in most instances, permit adjustments designed to offset devaluations of the Turkish Lira against the U.S. Dollar, any such devaluation that we are unable to offset will require us to use a larger portion of our revenue to service our non-Turkish Lira foreign currency obligations. Additionally, in the event that the ICTA were to establish maximum tariffs at levels below those that would enable us to adjust our rates to offset devaluations, this could have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity.

We believe that, pursuant to our license agreement, we can determine our tariffs freely, provided that they remain within the framework of the applicable maximum price limit. However, under Article 13 of the Electronic

 

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Communications Law, in the event of determination of the significant market power of the operator, the ICTA may determine the lower and upper limit of the tariffs and principles and procedures of the application of the same. Based on such Article, the ICTA may take a similar decision which will have an effect on our future tariffs. With respect to our retail tariffs, in the fourth quarter of 2007, the ICTA intervened in our retail prices. Although we challenged that action on the basis that it exceeded the ICTA’s authority under then-applicable law, such action nonetheless had an adverse effect on our operational flexibility and our results of operations. With a board resolution dated March 25, 2009, the ICTA set a lower limit for solely Turkcell’s on-net retail tariffs. In addition, the ICTA with its board decision dated April 25, 2012 decided on the lower limit to be applied to our campaigns (specified offers and packages provided to specific customers for a limited time period) as well as on our tariffs, which further impacted our ability to price our services and respond to competitive pressures. Furthermore, with a board resolution dated March 13, 2013, the ICTA raised the lower limit to be applied on our tariffs to 0.0535 TRY/min (equivalent to $0.0213 as of March 3, 2015) from 0.0313 TRY/min (equivalent to $0.0125 as of March 3, 2015). Simultaneously, the ICTA also decided that a lower limit on our SMS tariffs should be applicable over a rate of 0.0291 TRY/SMS (equivalent to $0.0116 as of March 3, 2015). On the other hand, the ICTA excluded the campaigns from the scope of this decree, which was added in its decision dated April 25, 2012. The amendments were effective from July 2013 onwards. With the same board resolution, the ICTA linked the mobile termination rates to minimum on-net voice levels with a parameter of 1.7 such that our minimum on-net prices should be set multiplying the mobile termination rate with the above-mentioned parameter of 1.7. In addition, the ICTA with board resolutions dated April 12, 2013 and June 17, 2013, lowered the mobile termination rates for Turkcell from TRY 0.0170 (equivalent to $0.0068 as of March 3, 2015) to TRY 0.0043 (equivalent to $0.0017 as of March 3, 2015) for SMS and from TRY 0.0313 (equivalent to $0.0125 as of March 3, 2015) to TRY 0.0250 (equivalent to $0.0100 as of March 3, 2015) for voice. As a result, our minimum on-net price level has been decreased to TRY 0.0073 (equivalent to $0.0029 as of March 3, 2015) for SMS and TRY 0.0428 (equivalent to $0.0170 as of March 3, 2015) for voice due to the above-mentioned parameter. Moreover, with a board resolution dated January 6, 2014, the ICTA decided to bring the above-mentioned amendment back on our campaigns, which was effective as of February 1, 2014.

These pricing regulations are valid on each and every single voice tariff and campaign, whereas we are obliged to maintain our minimum on-net SMS rate on network base. The table below shows the current on-net prices and MTR rates:

 

TRY

   Before July 1, 2013      After July 1, 2013      Change %  

Minimum on-net voice price

     0.0313         0.0428         37

Minimum on-net SMS price

     —           0.0073         —     

Voice MTR

     0.0313         0.0250         (20 )% 

SMS MTR

     0.0170         0.0043         (75 )% 

 

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The maximum tariffs set by the ICTA constitute the highest rates we may charge for the services included in these customized service packages. Generally, the maximum tariffs set by the ICTA for particular services are set higher than the standard tariffs determined by the ICTA for those services. Although the Concession Agreement includes a provision regarding only the increase of the maximum tariffs, the ICTA has decreased the maximum tariff since 2007, which has negatively affected our tariff structure. In 2011, the maximum tariff on SMS decreased by 48% and the maximum tariff on mobile voice increased by 4%. In 2013, the maximum tariff on mobile voice increased by approximately 6% to TRY 0.439 (equivalent to $0.175 as of March 3, 2015), while as of January 2014 the maximum tariff on SMS decreased by 20% to TRY 0.332 (equivalent to $0.132 as of March 3, 2015). Finally, with a board resolution dated March 26, 2014, price caps for voice increased to 46.25 kurus/min by 5.4% as of July 2014. The table below shows the evolution of maximum tariffs on voice and SMS:

 

TRY

   Maximum tariff on voice      Maximum tariff on SMS  

13.10.2008

     0.80         0.71   

27.04.2009

     0.64         0.73   

12.10.2009

     0.65         0.74   

01.04.2010

     0.40         0.80   

01.10.2010

     0.40         0.80   

01.04.2011

     0.42         0.42   

01.10.2011

     0.42         0.42   

01.04.2012

     0.42         0.42   

01.10.2012

     0.42         0.42   

01.04.2013

     0.44         0.42   

01.10.2013

     0.44         0.42   

01.01.2014

     0.44         0.33   

01.07.2014

     0.46         0.33   

We filed lawsuits for the cancellation and stay of execution of some of the aforementioned decisions of the ICTA. Some of the lawsuits were rejected by the courts and we appealed these decisions. The Plenary Session of The Chambers for Administrative Cases approved some of the First Instance Courts’ decision. We applied for the correction of the decision process for the two respective decisions. For the other lawsuits, the appeal process and the correction of the decision process are pending.

The ICTA has in the past intervened and may again intervene with the charging period, impacting the prices we charge for our tariffs. For example, effective September 1, 2010, the ICTA requires all operators to apply the maximum price cap during the first minute of all calls. The usage behavior and our financial results will be adversely affected if the ICTA intervenes on charging periods.

(vii) Relationship with the ICTA

The license agreement creates a mechanism for an ongoing relationship between us and the ICTA. The ICTA and Turkcell coordinate their activities through a License Coordination Committee (“the Committee”), which is responsible for ensuring the proper and coordinated operation of the GSM network, assisting in the resolution of disputes under the license agreement and facilitating the exchange of information between the parties.

(viii) License Suspension and Termination

The ICTA may suspend our operations for a limited or an unlimited period if necessary for the purpose of public security or national defense, including war and general mobilization. During suspension, the ICTA may operate our business, but we are entitled to any revenues collected during such suspension, and our license term will be extended by the period of any suspension.

 

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Our license may be terminated under our license agreement upon a bankruptcy ruling that is not reversed or dismissed within 90 days, upon our failure to perform our obligations under the license agreement if such failure is not cured within 90 days, if we operate outside the allocated frequency ranges and fail to terminate such operations within 90 days or if we fail to pay our treasury fee.

In the event of termination, we must deliver the entire GSM system to the ICTA.

If our license is terminated for our failure to perform our obligations under our license, the performance guarantee given by us in an amount equal to 1% of the license fee may be called. The license agreement makes no provision for the payment of consideration to us for delivery of the system on such termination.

In the event of a termination of our license, our right to use allocated frequencies and to operate the GSM system ceases. Upon the expiration of the license agreement, initially scheduled to occur in 2023, without renewal, we must transfer to the ICTA, or an institution designated by the ICTA, without consideration, the network management center, the gateway exchanges, and the central subscription system, which are the central management units of the GSM network. We may apply to the ICTA between 24 and six months before the end of the 25-year license term for the renewal of the license. The ICTA may renew the license, taking into account the legislation then currently in effect.

(ix) Applicable Law and Dispute Resolution

Under our license agreement, any dispute arising from or under our license shall be brought before the License Coordination Committee. If the dispute is not settled within 30 days before the License Coordination Committee, it shall be referred to the parties. If the dispute is not resolved by the parties within 15 days, then it shall be settled by an arbitral tribunal in accordance with ICC Rules. The governing law of any arbitration is Turkish law and any such arbitration shall be conducted in English. Disputes relating to national security or public policy shall not be subject to arbitration proceedings.

p. Authorization of 3G Licenses

In 2008, the ICTA conducted a tender process to grant four separate licenses to provide IMT 2000/UMTS services and infrastructure. We were granted the A-type license, which provides the widest frequency band, at a consideration of EUR 358 million (excluding VAT). We signed the license agreement relating to 3G authorization on April 30, 2009. The license agreement has a term of 20 years.

The 3G License Agreement has provisions that are generally similar to those contained in our license agreement relating to 2G. However, with respect to dispute resolution, while our 2G license provides for arbitration for the settlement of disputes, under the 3G License Agreement, disputes arising between the parties shall ultimately be settled by the Council of State of the Republic of Turkey.

With the 3G License Agreement, we were obliged to meet certain coverage obligations. We are required to cover the population within the borders of all metropolitan municipalities within three years and all cities and municipalities within six years. We are also obliged to cover every region with a population over 5,000 within eight years and population larger than 1,000 within 10 years. By amendment of the Law for Metropolitan Municipalities, the number of metropolitan municipalities increased and the borders of some metropolitan municipalities were extended. After this amendment, the ICTA increased our coverage obligations, defined in our concession agreement, by its decision, based on this law amendment. We filed a lawsuit for the cancellation of this decision. There has been no progress in this lawsuit yet.

With the 3G License Agreement, as opposed to the 2G License Agreement, the Company assumed an obligation related to its electronic communications network investments, such as the obligation to provide at least 40% of its electronic communications investments from suppliers that have a Research and Development Center in Turkey and the obligation to provide at least 10% of its electronic communications investments from suppliers that are Small and Medium Size Enterprises (“SME”) established in Turkey.

 

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According to the Authorization Regulation, breaches by operators resulting in the termination of the GSM concession agreement for any reason shall also result in the termination of the operator’s concession agreement signed for IMT-2000/UMTS service. Also, if the GSM concession agreement is not renewed at the end of its natural expiration, the ICTA may continue to allow the utilization of the needed infrastructure by IMT-2000/UMTS services on terms and conditions to be set by the ICTA itself.

The statutes, rules and regulations applicable to our activities and our 2G and 3G licenses are generally new, subject to change, in some cases, incomplete, and have been subject to limited governmental interpretation. Precedents for and experience with business and telecommunications regulations in Turkey are generally limited. In addition, there have been several changes to the relevant legal regime in recent years. There can be no assurance that the law or legal system will not change further or be interpreted in a manner that could materially and adversely affect our operations.

In addition to the foregoing, our indirectly and majority owned subsidiaries, Astelit and Belarusian Telecom, and wholly owned subsidiary Kibris Telekom hold GSM licenses in Ukraine, Belarus and the Turkish Republic of Northern Cyprus, respectively, and some of them have obtained 3G licenses. If Astelit, Belarusian Telecom and Kibris Telekom fail to comply with the terms and conditions of their license agreements, they may incur significant penalties, which could have a material adverse effect on our strategy for international expansion and our business and results of operations. In addition, our subsidiaries Global Tower, Turkcell Superonline, Inteltek and Azerinteltek have licenses to perform their business. Failure to comply with the terms of such licenses may lead to significant penalties and adversely affect their, as well as our, results of operations.

q. Ukraine License Agreement

Astelit owns two GSM activity licenses, one for GSM 900 and the other for DCS-1800. As at December 31, 2014, Astelit owned 24 GSM 900, GSM 1800, CDMA and microwave Radiorelay frequency use licenses, which are regional and national. In addition to the GSM licenses, Astelit owns one license for international and long-distance calls and eight PSTN licenses for eight regions in Ukraine. Additionally, Astelit holds a specific number range—three NDC codes for mobile networks, four permissions on a number of resources for short numbers, eleven permissions on a number of resources for SS-7 codes (7 regional and 4 international), one permission on a number of resources for Mobile Network Code and sixteen permissions on a number of resources for local ranges for PSTN licences.

According to the licenses, Astelit must adhere to state sanitary regulations to ensure that the equipment used does not injure the population by means of harmful electromagnetic emissions. Licenses require Astelit to inform authorities of the start/end of operations within four months and changes in the incorporation address within 30 days. Also, Astelit must present all the required documents for inspection by the NCCIR by their request. The NCCIR may suspend the operations of Astelit for a limited or an unlimited period if necessary due to the expiration of the licenses, upon mutual consent, or in the case of a violation of the terms regarding the use of radio frequencies. If such a violation is determined, the Ukrainian Telecommunications Authority will notify Astelit of the violations and will set the deadline for recovery. If the deadline is not met, the licenses may be terminated.

The NCCIR announced in December 2014 that a tender making the 3G license available would take place on February 16, 2015. The auction was held on February 23, 2015 and Astelit was awarded the first lot, which is the 1920-1935 / 2110-2125 MHz frequency band. On February 27, 2015, the NCCIR approved the decision on the issuance of 3G licenses.

r. Belarus License Agreement

Belarusian Telecom owns a license, issued on August 28, 2008, that is valid for 10 years. In addition, the license shall be extended for an additional ten years. The State Property Committee of the Republic of Belarus, as

 

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the Seller, has fulfilled its obligations stated in the Sale and Purchase Agreement and submitted the related official documents on December 18, 2009. According to the current legislation of the Republic of Belarus, a license extension is made upon the expiration of its period of validity. Consequently, Belarusian Telecom will apply for such an extension to the Ministry of Communications and Information in August 2018. Under the terms of its license, Belarusian Telecom is required to gradually increase its geographical coverage through 2018. Belarus has fulfilled all coverage requirements except covering all Belarusian settlements by the end of 2017. The number of uncovered settlements is 61 out of a total of 22,491 settlements.

s. Turkcell Superonline License Agreement

Turkcell Superonline was authorized as a Fixed Telephony Service Provider as of November 19, 2004, Satellite Communication Service Provider as of March 24, 2004, Infrastructure Provider as of March 6, 2006, Internet Service Provider as of February 15, 2005, Cable Broadcast Service Provider as of November 23, 2009, Mobile Virtual Network Operator as of August 9, 2010 and Public Access Mobile Radio Service Provider for the Marmara and Guneydolu Anadolu regions as of January 27, 2007.

The Authorization By-Law for Telecommunication Services and Infrastructure published in the Official Gazette on August 26, 2004 was abrogated with the By-Law on Authorization for Electronic Communications Sector dated May 28, 2009. According to this abrogation, Turkcell Superonline’s “License” on Infrastructure Operating Service, Internet Service Provision and Satellite Communication Service has been changed to “Authority” on Infrastructure Operating Service, Internet Service Provision, Satellite Communication Service and Cable Broadcast Service. Turkcell Superonline’s “License” on Long Distance Telephony Services License has been changed to “Authority” relevant to the Fixed Telephony Services.

In accordance with the new legislation issued by the ICTA, the infrastructure operator authorization right of Turkcell Superonline has become indefinite. As a result, Turkcell Superonline revised the expected useful lives of its operating license and related fixed network equipment from 15 years to 25 years.

Turkcell Superonline was authorized as a Platform Operator and Infrastructure Operator, according to the Radio and Television Supreme Council’s decision numbered 24, dated March 26, 2014.

Such authorizations have been provided by the Radio and Television Supreme Council, according to the rules of the Media Law and also the Radio and Television Supreme Council By-Law on Broadcasting via Cable Networks.

In accordance with the Media Law and its regulations, the Platform Operator Authorization and Infrastructure Operator Authorization are provided annually.

Within the scope of the Platform Operator Authorization and Infrastructure Operator Authorization, Turkcell Superonline has the right to operate the platform and infrastructure of TV services.

t. Access and Interconnection Regulation

The Access and Interconnection Regulation (the “Regulation”) became effective when it was issued by the ICTA on September 8, 2009 and abolished the Access and Interconnection Regulation which was published on May 23, 2003. The Regulation sets forth the rights and obligations of the operators relating to access and interconnection and establishes rules and procedures pertaining to their performance of such obligations. The Regulation primarily sets forth applicable principles, details of access and interconnection obligations, financial provisions, and policies and procedures regarding negotiations and contracts for access and interconnection.

The Regulation is driven largely by the goal of improving the competitive environment and ensuring that users benefit from electronic communications services and infrastructure at a reasonable cost. Under the Electronic Communications Law, the ICTA may compel a telecommunications operator to accept another operator’s request for access to and use of its network. All telecommunications operators in Turkey may be

 

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required to provide access to other operators. The operators who are compelled to provide access to other operators may be obliged to provide service and information on the same terms and qualifications provided to their shareholders, subsidiaries, and affiliates by the ICTA.

In accordance with Article 7 of the aforementioned Electronic Communications Law, the ICTA may determine the operators that have significant market power in the relevant market as a result of market analysis. After determination of the operators who have significant market power, the ICTA may impose additional liabilities for such operators in order to protect the competitive environment. On December 15, 2005, the ICTA designated Turkcell, Vodafone, and Avea as “operators holding significant market power” in the “GSM Mobile Call Termination Services Market” and designated Turkcell individually as an “operator holding significant market power” in the “Access to GSM Mobile Networks and Call Originating Markets”. According to the new Regulation published in the Official Gazette dated September 1, 2009, numbered 27336, unless otherwise agreed, any decisions taken by the ICTA in the years 2005 and 2006 relating to market analysis were valid and effective until the end of calendar year 2009. Pursuant to its decision dated December 8, 2009, the ICTA designated Turkcell individually as an operator holding significant market power in the “Access to Mobile Networks and Call Originating Markets” and designated Turkcell, Vodafone and Avea as operators holding significant market power in the “Mobile Call Termination Market”. Based on the market analysis of the ICTA for the 2012-2015 term, all three operators were declared as operators holding significant market power in the “Mobile Call Termination Market” and Turkcell is once again recognized as the only operator holding significant power in “Access to GSM Mobile Networks and Call Originating Markets”. As explained above, market analysis for both markets will be renewed in 2015.

As a result of the significant market power designation in the “GSM Mobile Call Termination Services Market”, our company, as well as Avea and Vodafone, is required to provide interconnection services on a cost basis. Consequently, according to the Electronic Telecommunications Law, the ICTA may oblige such operators to provide access and to submit their reference offers for access and interconnection to the ICTA for review, and may require amendments to the offers. Operators are obliged to make the amendments requested by the ICTA in a prescribed manner and within a prescribed period. In addition, the operators are obliged to publish their reference offers for access and interconnection, which have been approved by the ICTA, and to provide access under the conditions specified in their reference offers and interconnection, which have been approved by the ICTA. Please refer to the Interconnection table under the caption “Interconnection Rates—Turkcell, Vodafone, Avea and Turk Telekom” below for the approved interconnection rates. In September 2011, the ICTA decided that national and international mobile terminating call rates should be differentiated. As a result of this, the ICTA decided that operators could start to set their own rates liberally for international mobile terminating calls. As of August 2012, Turkcell has started to set its own mobile termination rates for international calls.

In 2014, SMP operators did not provide any reference offers since the ICTA rearranged the current reference offers by itself aiming to make the reference offers aligned. With a board resolution dated October 2014, reference offers for interconnection operations were announced for Avea, Vodafone and Turkcell. The ICTA has also set the MMS termination rate for all operators that were not previously regulated. We are not obliged to prepare new reference offers for interconnection operations in 2015. The ICTA is currently working on our reference offer for the call origination market.

u. Regulation on Co-Location and Facility Sharing

The ICTA has required operators to share certain facilities with other operators under certain conditions specified in the Electronic Communications Law and to provide co-location on their premises for the equipment of other operators at a reasonable price.

Under the Regulation, operators holding significant market power are required to provide access and services to all operators on equal terms. Operators with significant market power are also required to

 

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perform unbundling of their services, which means that they have to provide separate service of, and access to, transmission, switching, and operation interfaces. Furthermore, the ICTA may establish rules applicable to the division of the costs of facilities among parties.

The ICTA published a Communiqué concerning “Co-Location and Facility Sharing” on December 2, 2010 (which abolished the Regulation published on December 31, 2003). According to the new Communiqué, the ICTA should determine operators to be co-location incumbent if operators do not enable co-location or there’s a dispute against competition or end-users. Similarly, the ICTA could set tariffs if the tariffs for co-layout are not determined on a cost basis.

The Communiqué defines the criteria for operators who are incumbents for facility sharing and also states the items which must be considered for determining the Facility Sharing prices.

Subsequently, the provisions that regulate the ICTA approval of the examination fee determined by the Co-Location and Facility Sharing incumbent have been removed, opening up the Co-Location and Facility Sharing process to negotiation. In addition, the Facility Sharing incumbent’s right to allocate a facility for its own network and investment plans has been reduced to 25% of the facility.

The ICTA published a Communiqué concerning “Cellular System Antenna Facility Design, Set Up and Sharing” on March 18, 2011 (which abolished the Regulation published on April 16, 2008). The Communiqué frames antenna facilities design, set up and sharing to enable antenna usage by multiple operators. The emission points will not be determined by operators, therefore operators will have to work cellular planning together. Operators must share every antenna facility regardless of tower or building-top distinction. Antenna facilities must be set up in certain capacity that at least one more operator can benefit. Some incentives, such as exemptions on some certification fees, will be given if sharing occurs on existing or new sites. Finally, when antenna facility set up and sharing requests are evaluated, if the owner of the facility refuses the request, the requesting operator will be informed of the reason for the refusal. This way, negotiation between parties is supported and ICTA involvement is kept at minimum levels.

The former Minister of Transportation, Communication and Maritime Affairs declared that 4G services will be considered a common infrastructure to be used by all mobile operators. Since then we have discussed our views supporting the independent infrastructure model with the ICTA across many platforms. Since our competitive advantage mainly consists of possessing the highest-quality infrastructure, a common network will have a negative impact on our ability to differentiate our services based on quality and on our ability to charge premium prices from subscribers for these services.

Current government officials declared that research & development (R&D) and production & development (P&D) in Turkey for high-tech products and services will be supported and some incentives will be introduced in the near future. One of the biggest local vendors in the defense industry that is already producing telecom equipment for the military declared it is planning to produce a 4G base station for commercial networks after 2015. The ICTA requested our views on this project in detail and emphasized that it was considering imposing an obligation for the usage of this locally-produced equipment in the network. We informed the ICTA that we support any local R&D and P&D, as long as it complies with international technical and financial standards and can be sustainable. In the event the vendor produces a product not yet fully compliant with international standards and the government imposes obligations for usage of the product in our network, it may cause technical problems in the network. Should such technical problems occur, it could affect our quality of service negatively, leading to more costs and time lost for the 4G infrastructure roll-out and could negatively affect our customers’ experience.

 

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v. Regulation on Spectrum in the Electronic Communication Sector

The ICTA proposed a strategy to Ministry of Transport, Maritime Affairs and Communications by a Board Decision dated July 27, 2011. Due to the fact that the decision-making authority of matters such as politics of authorization, start of service, authorization period, and the number of operators to provide service, lies with Ministry of Transport, Maritime Affairs and Communications, the ICTA has decided that:

 

  1. Frequencies allocated for GSM services should also be used for 3G services (within the allocation time period).

 

  2. Before the proposed GSM/3G usage, 2x8.6 MHz frequency (as 1 pack) in E-GSM band is to be auctioned for GSM bidders who have less than 10 MHz frequency in 900 MHz band, 2 packs of 2x15MHz frequency each in 1800 MHz band are to be auctioned for GSM bidders who do not have any frequency in 1800 MHz.

The second part of the Board Decision implies that only Avea will be eligible for the E-GSM auction and Vodafone and Turkcell for the 1800 auction.

w. Regulation on Consumer Rights in the Electronic Communications Sector

The ICTA published a “Regulation on Consumer Rights in the Electronic Communications Sector” on July 28, 2010 (which abolished the Regulation published on December 22, 2004) and made some changes to such regulation on June 20, 2013. This regulation introduces some radical changes to the electronic communications sector. With this regulation, the ICTA determined new procedures/changes regarding: the process and timing of churn steps, the obligation of operators to keep subscribers informed of services, including, but not limited to, informing customers about amendments of the campaigns and tariffs, the consumer complaints solution mechanism, billing processes and safe internet.

In addition, the ICTA may restrict the conditions under which certain mobile internet and services are provided by third parties. Moreover, the ICTA published a board decision regarding Safe Internet on August 22, 2011, and the service is now offered to subscribers free of charge. Operators must provide Safe Internet Service to subscribers, who request this service, as two separate profiles, the child profile and the family profile, each of which can restrict subscribers from accessing certain internet addresses and content. The subscribers can easily change their profiles or opt-out from the Safe Internet Service.

The ICTA’s regulation of these activities could have an adverse effect on our mobile telecommunications business and we may be fined if we do not comply. Furthermore, our compliance with the ICTA’s regulations may increase the costs of our doing business and could negatively impact our financial results.

x. Regulation on Data Privacy in Electronic Communications Sector

The ICTA abolished the Regulation on Processing Personal Information and Protecting Confidentiality (issued in 2004) and published a new Regulation on Data Privacy in Electronic Communications Sector, which came into force on July 24, 2013, which defines the procedures and principles that the operators and legal entities/individuals that provide/receive services in the electronic communications sector may employ in an effort to process, store and protect personal information. Compliance with this regulation will involve operational expenses and may make it harder to process the customer data and provide segmented offers to our customers. Furthermore, non-compliance with this Regulation may result in the imposition of monetary fines, which could have a negative impact on our financial condition and reputation.

y. Regulation on Electronic Commerce

With the Law No. 6563 on the Regulation of Electronic Commerce published in the Official Gazette on November 5, 2014, Article 50 of the Electronic Communications Law is amended, so that without the prior consent of the subscribers, unsolicited communications for the purposes of direct marketing or messages with

 

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sexual content via electronic means is prohibited. Therefore, an “opt-in” mechanism has been adopted for electronic messages. However, this provision will not be applied for the databases which are established by taking the data subjects’ consent before the Law No. 6563 on Regulation of Electronic Commerce enters into force on May 1, 2015.

z. Registered Email Service Regulation

Registered Electronic Mail Service was started in July 2012. Mobile operators cannot provide registered electronic mail service; however, the service may create a new mobile business area with new bundled mobile products, which are able to service our subscribers.

aa. Turk Telekom, Vodafone and Avea Interconnection Agreements

(i) General

We have interconnection agreements with Turk Telekom, Vodafone, Avea and Fixed Telephony Service Operators whereby they allow us to connect our networks with theirs to enable the transmission of calls to and from our mobile communications system.

The interconnection agreements establish understandings between the parties relating to various key operational areas, including call traffic management, and the agreements contemplate that we and the other parties will agree on the contents of various manuals setting forth additional specifications concerning matters that are not specifically covered in the interconnection agreement, such as quality and performance standards and other technical, operational and procedural aspects of interconnection.

The interconnection agreements specify that the parties shall comply with relevant international standards, including standards adopted by the GSM Memorandum of Understanding, the Telecommunications Standards Bureau of the International Telecommunications Union, and the European Telecommunications Standards Institute. In the absence of applicable international standards, the interconnection agreements provide that the parties will establish written standards to govern their relationship.

The interconnection agreements outline the applicable interconnection principles and provide the technical basis and rationale for technical specifications and manuals to be agreed to by the parties.

In addition, the parties agree to provide the other party with information that is necessary to enable the performance of their interconnection obligations, the provision of services, or the utilization of equipment and/or buildings as contemplated in the interconnection agreement.

We have ongoing disputes with Turk Telekom, Vodafone and Avea over these agreements and with the ICTA regarding its decision related to these agreements. See “Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings”.

(ii) Interconnection Rates—Turkcell, Vodafone, Avea and Turk Telekom

In accordance with the relevant articles of the Electronic Communications Law and subsequent Access and Interconnection Ordinance, the ICTA regulated both fixed and mobile interconnection rates. In previous years, the interconnection rates have substantially decreased with the interventions of the ICTA.

 

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Current interconnection rates are based on the ICTA’s decision on the Interconnection Tariffs issued in April and June 2013. New interconnection rates were published in October 2014 and there have been no updates in rates. However, the Authority published MMS interconnection rates for the first time. The evolution of interconnection rates for voice calls between Turkcell, Vodafone, Avea, Turk Telecom and Alternative Fixed Line Operators is summarized in the table below.

 

     VOICE (TRY Kurus)  
                          TURK TELECOM      Alternative Fixed  Line
Operators
 
     TURKCELL      VODAFONE      AVEA      Local      Single      Double     

01/10/2004

     15.60         15.60         15.60            4.10         5.90      

01/01/2005

     14.80         14.80         14.80            3.40         5.10      

01/10/2005

     14.00         14.00         14.00            2.00         3.70      

01/01/2007

     14.00         15.20         17.50            2.00         3.70      

01/03/2007

     13.60         14.50         16.70            1.89         3.00      

01/04/2008

     9.10         9.50         11.20            1.71         2.70      

01/05/2009

     6.55         6.75         7.75         1.39         1.71         2.70      

01/04/2010

     3.13         3.23         3.70         1.39         1.71         2.24         3.2   

01/07/2013

     2.50         2.58         2.96         1.39         1.71         2.24         3.2   

31/10/2014

     2.50         2.58         2.96         1.39         1.71         2.24         3.2   

 

* In September 2011, the ICTA amended its Regulation on mobile termination rates by removing the restriction on the rates applicable to calls originating from international operators. After reaching commercial agreements with Turk Telekom and alternative fixed-line carriers, we began to charge higher termination rates for international calls effective August 1, 2012.

Effective from July 2013, Turkcell is paid TRY 0.0043 per SMS (approximately $0.0017 as of March 3, 2015) for SMS termination in its network. Respective rates for Vodafone are TRY 0.0043 per SMS (approximately $0.0017 as of March 3, 2015) and for Avea TRY 0.0047 (approximately $0.0019 as of March 3, 2015).

 

     SMS (TRY Kurus)  
     TURKCELL      VODAFONE      AVEA      TT  

01/04/2010

     1.70         1.73         1.87         1.70   

01/07/2013

     0.43         0.43         0.47         1.70   

31/10/2014

     0.43         0.43         0.47         1.70   

 

                            MMS (TRY Kurus)                          
     TURKCELL      VODAFONE      AVEA  

31/10/2014

     0.86         0.86         0.94   

bb. Agreements Concluded with the Fixed Telecommunication Services Operators

(i) Interconnection/Call Termination Agreements

Turkcell, as an “operator holding significant market power”, entered into interconnection/call termination agreements with fixed telecommunication service operators that applied to Turkcell for an agreement. Interconnection rates are regulated by the ICTA. Turkcell pays fixed-line operators TRY 0.0320 per minute (approximately $0.0127 as of March 3, 2015) and fixed-line operators pay Turkcell TRY 0.0250 per minute (approximately $0.0100 as of March 3, 2015) for national voice call traffic.

(ii) International Transit Traffic Services Agreements

Turkcell entered into International Traffic Carrying Services Agreements with operators who applied to Turkcell for an agreement. Under these Agreements, we may carry calls to these operators’ switches for onward transmission to their destinations and these operators should provide the termination of these calls on the relevant

 

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network. These operators charge us at various prices identified within the scope of the agreement for the calls directed to numerous networks around the globe. The operators may modify their rates upon a fifteen day advanced written notice and such rates will become applicable upon our approval.

(iii) SMS Termination Agreements

During 2011, Turkcell entered into SMS Termination Agreements with alternative operators who applied to Turkcell for an agreement. In accordance with the ICTA regulations on SMS Termination Rates in Turkcell’s network, Fixed Telephony Service Operators pay Turkcell TRY 0.0043 per SMS (approximately $0.0017 as of March 3, 2015).

cc. MVNO Services

The ICTA has designated Turkcell as the operator having significant market power in the mobile access and call origination markets, which has implications such as mandatory MVNO access and cost-oriented call origination and termination rates. In its decision regarding the Reference Access Offer of Turkcell, the ICTA determined the call origination and termination fees for voice as TRY 0.0250 per minute (approximately $0.0100 as of March 3, 2015), wholesale on net voice call fee as TRY 0.0428 per minute (approximately $0.0170 as of March 3, 2015), origination and termination fees for SMS as TRY 0.0043 per SMS (approximately $0.0017 as of March 3, 2015) and wholesale on net SMS fee as TRY 0.0073 (approximately $0.0029 as of March 3, 2015) per SMS to be applied to the MVNOs.

Highly competitive market conditions and heavy tax burdens have discouraged potential MVNOs from entering the market for years. Nevertheless, commercial negotiations with some MVNO candidates are in progress and we expect to see some MVNO presence in the market in the coming years.

dd. Agreements Concluded with Directory Service Providers

Turkcell entered into agreements relating to the provision of directory services with thirteen Directory Service Providers, which are licensed to provide directory services by the ICTA. The aforementioned agreements determine the principles and procedures related to the access of companies to the Turkcell database, the provision of directory services to the subscribers and the clearing procedure of the parties. Such agreements are valid and binding for a term of one year. However, if neither party notifies the other party one month before the expiration of the agreement of its request to terminate, the agreement will automatically be renewed for another one-year term.

ee. Agreements Concluded with Operators Licensed to Provide Satellite Services

We have executed agreements with Globalstar Avrasya Uydu Ses ve Data Iletisim A.S. and Teknomobil Uydu Haberlesme A.S., operators licensed to provide satellite services. The scope of such agreements is the interconnection between the networks of the parties and the determination of the principles and procedures of the methods of network operation and clearance.

ff. Prospective Legislation and Regulations

The Electronic Communications Law provides that current telecommunications legislation shall be revised and amended. The revision and amending processes are still ongoing. However, during this period, all regulations and communiqués that were effective prior to the publication of the Electronic Communications Law will still be valid and binding, on the condition that they are not contrary to the provisions of the Electronic Communications Law.

 

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4.C Organizational Structure

The following chart lists each of our key subsidiaries (including our ownership interest in Fintur) and our proportionate direct and indirect ownership interest as of March 3, 2015:

 

LOGO

 

It was decided at the Board of Directors’ meeting held on November 28, 2013, to liquidate Global FLLC Belarus. The liquidation was completed on October 9, 2014.

 

(1) Global Odeme Sistemleri A.S. (formerly Corbuss) is 11% directly and 89% indirectly (in total 100%) owned by Turkcell. Global Odeme Sistemleri (“Global Odeme”) was renamed Global Odeme Hizmetleri on February 5, 2015.

As part of a restructuring project, the following intra-group merger transactions were carried out in 2014:

 

(2) Fizy Iletisim A.S. (“Fizy”), a subsidiary of Turkcell, merged into Turktell Bilisim Servisleri A.S., another subsidiary of Turkcell, and the registry record of Fizy was deregistered on December 18, 2014.
(3) Talih Kusu Altyapi Hizmetleri A.S. (“Talihkusu”), a subsidiary of Turkcell, merged into Turkcell Superonline Iletisim Hizmetleri A.S., another subsidiary of Turkcell, and the registry record of Talihkusu was deregistered on December 18, 2014.
(4) Turktell Uluslararasi Yatirim Holding A.S. (“Turktell”), a wholly owned subsidiary of Turkcell, merged into Turkcell and the registry record of Turktell was deregistered on December 24, 2014.

For information on the country of incorporation of our key subsidiaries, see “Item 4.B. Business Overview”.

4.D Property, Plant and Equipment

Our principal property, plant and equipment consist of management offices, switching sites, network infrastructure sites, and network and office equipment.

The Group owns buildings in Istanbul (Beyoglu headquarter), Maltepe, Kartal, Davutpasa, Mahmutbey, Halkali, Bodrum, Ankara (Cinnah, Sogutozu, Ivedik), Malatya, Izmit, Tekirdag/Corlu, Zonguldak, Aydin, Denizli, Konya, Karaman, Erzurum, Balikesir, Mugla, Mersin, Sakarya, Hatay, Adana, Diyarbakir, Samsun, Izmir, Antalya, Trabzon, Bursa, Van, Kayseri, Gaziantep, Minsk, Dnepropetrovsk, Donetsk, Kharkiv, Kramtorsk, Kyiv, Lviv and Simferopol.

 

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In addition to the foregoing properties, we maintain rented buildings in Istanbul (Maltepe, Umraniye, Academy, Levent, Bayrampasa, Avcilar, Maslak), Edirne, Eskisehir, Manisa, Samsun, Trabzon, Bodrum, Ankara, Izmir, Gaziantep, Sanliurfa, Adana, Diyarbakir, Antalya, Artvin, Van (Ercis), Siirt, Karabuk, Corum, Baku, Lefkosa, Minsk, Dnepropetrovsk, Kharkiv, Kyiv, Sumy, Moscow, Kiev, Koln and Odesa.

a. Core Network Infrastructure

Our core network consists of standalone Home Location Registers (“HLR”), a combined Number Portability Switch Relay Function (“SRF”) and Number Portability Database and Signal Transfer Point (“STP”). The Core Network is common for 2G and 3G radio networks and carries voice over IP, with combined Mobile Switch Centers/Visitor Location Registers (“MSC/VLR”), Media Gateways (“MGW”), Charging Control Node (“CCN”) and Virtual Private Network (“VPN”). Our core packet switching network consists of SGSNs (Serving GPRS Support Node) and GGSNs (Gateway GPRS Support Node) providing GPRS/EDGE, and HSPA/HSPA+ (High Speed Packet Access) capability for mobile packet traffic and also Policy and Charging Rules Function (“PCRF”) for subscriber policies.

We have switches in Istanbul, Ankara, Izmir, Adana, Antalya, Bursa, Corlu (Tekirdag), Denizli, Diyarbakir, Erzurum, Eskisehir, Gaziantep, Hatay, Kayseri, Kocaeli, Konya, Malatya, Mersin, Mugla, Samsun, Trabzon, Van and Zonguldak. We also have Remote BSC (“RBSC”) locations at Afyon, Alanya (Antalya), Elazig, Kars, Kutahya, and Sanliurfa.

In addition, we own switch buildings in different cities in Turkey, such as Istanbul (Mahmutbey), Denizli, Mugla, Izmit, Konya and Erzurum. Switch buildings are where the network switching equipment, such as MSC, MGW, BSC and RNC, is located.

b. Access Network Infrastructure

Our Access Network consists of Base Station Controllers (“BSC”) and Radio Network Controllers (“RNC”) at Network Data Centers (“NDC”) and BTS and Node-Bs located on rooftops or towers. In 2014, we started calling our OMCs (Operation Maintenance Centers) as NDCs (Network Data Centers). BTSs are the fixed transmitter and receiver equipment in each cell, or coverage area of a single antenna, of a mobile communications network that communicates by radio signal with mobile telephones in the cell. In the same manner, Node-Bs are radio signal transmitter and receiver equipment in each 3G cell, connected to and controlled by RNC in order to realize 3G and HSPA+ coverage for 3G /HSPA-equipped mobile phones.

At the end of December 2014, we owned over 39,500 base stations and leased the land underlying such base stations.

In 2009, the ICTA resolved that operators may transfer the right of use of their towers to third parties. In accordance with this resolution, we transferred the rights of some towers to Global Tower. As of December 2014, Global Tower provides services to the industry with over 3,175 masts and towers built by Global Tower, and over 2,370 towers transferred from Turkcell throughout Turkey.

c. Transmission Network Infrastructure

Turkcell’s Mobile Backhaul utilizes various transport technologies to provide for an efficient, resilient and cost effective transmission network. Connectivity between sites is provided using Microwave Radio Links and leased lines carried over Synchronous Digital Hierarchy (“SDH”) and Ethernet over Dense Wavelength Division Multiplexing (“DWDM”) where appropriate. Cell sites with site connectivity are mostly served by point-to-point microwave radio links owned and managed by Turkcell, make up more than 90% of our network. Interconnections with other Public Land Mobile Networks (“PLMN”), Public Switched Telephone Networks (“PSTN”), Long Distance Telephony Services (“LDTS”) and small operator companies are realized through leased line connections. More than 90% of our leased line network connectivity is currently provided by our subsidiary “Turkcell Superonline”. The rest of the leased lines are provided by the incumbent Telekom operator “Turk Telekom”. With the growth of data usage and in preparation for “4G”, fiber optic connectivity to cell cites

 

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has also become a part of our network topology. As a result the overall infrastructure capacity usage is fully optimized and a high grade of availability is achieved through topology resiliency and packet base IP Mobile Backhaul network infrastructure.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis of our management with regard to our financial condition and the results of our operations should be read together with the Consolidated Financial Statements included in this annual report. In addition to historical information, the following discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in “Item 3.D. Risk Factors” and elsewhere in this annual report.

I. Overview of the Turkish Economy

2014 was another challenging year for global markets. Global growth remained the same in 2014 with the gap between developed and developing markets decreasing and the world continuing its slow recovery. Turkey’s credit rating was kept the same at all three major rating agencies with only Standard &Poor’s still remaining one notch below investment grade. The Turkish economy grew uninterruptedly for twenty quarters in a row and grew by 2.8% in the first nine months of 2014. Based on market estimates, the year-on-year GDP growth in Turkey is expected to be at around 3.1% in 2014 and 3.0% in 2015, driven by domestic demand. 2015 is expected to be an even more challenging year globally due to high volatility from differing monetary policies from developed markets. On the U.S. side, the Federal Reserve (“FED”) has finalized its exit strategy by finishing its quantitative easing policy in October 2014. Although the FED is expected to begin increasing interest rates in the second half of 2015, global liquidity is expected by many to stay the same due to expansionary policies from Japan and the E.U. Furthermore, the recent drop in oil prices continues to give energy-importing countries like Turkey breathing space while increasing the pressure on energy exporters.

The TRY depreciated by 8.6% against the U.S. Dollar in 2014, and an additional 8.3% as of March 3, 2015. Further devaluation may happen in 2015. The inflation rate, based on the Turkish consumer price index, increased to 8.2% by the end of 2014 from 7.4% a year ago led by an increase in food prices and a pass through effect from TRY depreciation. The latest CBRT expectations survey, as of February 20, 2015, indicates that consumer inflation is expected to be 6.8% at the end of 2015 mainly due to base effects. Furthermore, the recent decrease in oil prices continues to put downward pressure on inflation, at the same time increasing the probability of a further rate cut by the CBRT following the 25 bps cut in February. The current account deficit decreased to approximately 5.7% of GDP in the first nine months of 2014 from approximately 7.2% in 2013. The current account deficit is expected to continue narrowing in 2015 due to low energy prices. Potential capital outflows due to a decrease in global USD liquidity and rising U.S. interest rates may have a negative impact on the Turkish economy if not counterbalanced by European Central Bank and Bank of Japan actions.

Turkey will hold parliamentary elections in June 2015. On a regional level, further instability in the CIS, Balkans, Middle East, North Africa and Caucasian regions may impact the development of the Turkish economy. Tension in Ukraine, Syria and the Middle East region remain the most important neighboring political risks.

II. Taxation Issues in the Telecommunications Sector

Under current Turkish tax laws, there are several taxes imposed on the services provided by telecommunications operators in Turkey. These taxes are charged to subscribers by GSM operators and remitted to the relevant tax authorities. They may be charged upon subscription, on an annual basis or on an ad valorem basis on the service fees charged to subscribers.

 

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The following are the most significant taxes imposed on our telecommunications services:

a. Special Communications Tax

The Turkish government imposed a special 25% communications tax on mobile telephone services as part of a series of new taxes levied to finance public works required to respond to the earthquakes that struck Turkey’s Marmara region in 1999. This tax is paid by mobile users and collected by GSM operators.

Under Law No. 5838, which became effective on March 1, 2009, wired, wireless and mobile Internet service providers are subject to a special 5% communications tax (previously such tax was 25%). Other than mobile Internet services, all mobile telecommunication services remain subject to a special 25% communications tax. The tax collected from subscribers in one calendar month is remitted to the tax authorities within the first 15 days of the following month.

Under Law No. 6322, effective July 1, 2012, new subscriptions for Machine to Machine (M2M) simcards is not subject to the special communication tax levied upon new subscriptions.

The special communications tax on new subscriptions was TRY 40 (equivalent to $15.9 as of March 3, 2015) and TRY 39 (equivalent to $15.5 as of March 3, 2015) in 2014 and 2013, respectively. As of January 1, 2015, the special communications tax on new subscriptions levied is TRY 44 (equivalent to $17.5 as of March 3, 2015). The tax has had a correlative negative impact on mobile usage.

b. Value Added Tax (“VAT”)

Like all services in Turkey, services provided by GSM operators are subject to VAT, which is 18% of the service fees charged to subscribers. We declare VAT to the Ministry of Finance within 24 days and remit VAT paid by our subscribers within the first 26 days of the month following when the tax was incurred, after the offset of input VAT incurred by us.

VAT for roaming services was, until November 3, 2009, calculated solely on the mark-up amount on subscribers’ invoices for roaming services. Following the Ministry of Finance’s declaration of a change in its position regarding roaming charges, we began imposing VAT and the special communications tax on the entire amount of roaming charges, starting from November 3, 2009, to comply with this change in position.

Reverse charge VAT is calculated on the invoices issued by foreign GSM operators.

c. License and Annual Utilization Fees

According to Article number 46 of the Electronic Communications Law, subscribers registered in the system are subject to both license and annual utilization fees.

The license fee is paid once on the subscription per subscriber. The license fee was TRY 16.30 (equivalent to $6.49 as of March 3, 2015) and TRY 15.68 (equivalent to $6.24 as of March 3, 2015) in 2014 and 2013, respectively. The license fee is paid to the government in equal installments, which is divided into the number of months remaining in the year. However, it is collected in 12 equal monthly installments. As of January 1, 2015, the license fee is TRY 17.95 (equivalent to $7.15 as of March 3, 2015).

The payment of the annual utilization fee to the government depends on whether a subscriber is postpaid or prepaid. For postpaid subscribers, the monthly utilization fee was TRY 1.36 (equivalent to $0.54 as of March 3, 2015) and TRY 1.31 (equivalent to $0.52 as of March 3, 2015) in 2014 and 2013, respectively, and is charged to subscribers monthly. For prepaid subscribers, the annual utilization fee is calculated by multiplying the number of registered prepaid subscribers at the previous year end by the annual utilization fee and the calculated bulk

 

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annual utilization fee is paid by the GSM operators the following year on the last business day in February. As of January 1, 2015, the monthly utilization fee is TRY 1.50 (equivalent to $0.60 as of March 3, 2015). We decided to collect utilization fees from some of our prepaid subscribers starting from June 2011.

d. Special Consumption Tax

The Special Consumption Tax (“SCT”) is a tax on prescribed goods, which includes mobile phones. The SCT is charged on mobile phones either when they are imported or when they are sold by Turkish manufacturers. The SCT rate on mobile phones (mobile phones are legally defined as “transmitter/receiver cellular phones”) was 20% prior to October 13, 2011, and the SCT calculated in accordance with the 20% rate must not fall below TRY 40 (equivalent to $15.9 as of March 3, 2015) per cellular phone device (Temporary Article 6 of Special Consumption Tax Code).

The SCT rates were raised on some motor vehicles, mobile phones, alcoholic beverages and tobacco products by a decision of the Board of Ministers, which was published in the Official Gazette on October 13, 2011. The SCT rate over cellular phones was increased from 20% to 25% and the minimum SCT amount to be calculated was increased to TRY 100 (equivalent to $39.81 as of March 3, 2015) (previously the minimum SCT amount was TRY 40 (equivalent to $15.9 as of March 3, 2015)) effective from October 13, 2011.

The SCT rates were again raised on some motor vehicles, mobile phones and alcoholic beverages by a decision of the Board of Ministers, which was published in the Official Gazette on January 1, 2014. The minimum SCT amount to be calculated over cellular phones was increased to TRY 120 (equivalent to $47.8 as of March 3, 2015) effective from January 1, 2014.

For a description of various tax related disputes to which we are party, see “Item 8.A. Consolidated Statements and Other Financial Information—Legal Proceedings”.

III. Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with IFRS as issued by the IASB. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended. On an ongoing basis, we evaluate the estimates used. We base our estimates on historical experience, actuarial estimates, current conditions and various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities and are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies are disclosed in Note 3 (Significant Accounting Policies) to our Consolidated Financial Statements in this Form 20-F.

5.A Operating Results

Our audited Consolidated Financial Statements as at December 31, 2014 and December 31, 2013 and for each of the years in the three-year period ended December 31, 2014 included in this annual report have been prepared in accordance with IFRS as issued by the IASB.

I. Overview of Business

Turkcell, a joint stock company organized and existing under the laws of the Republic of Turkey, was formed in 1993 and commenced operations in 1994. We operate under a 25-year GSM license (the “2G License”) and a 20-year GSM license (the “3G License”). We were granted the 2G License in April 1998 upon payment of an upfront license fee of $500 million. On April 30, 2009, we signed a license agreement with the ICTA, which provides authorization for providing IMT 2000/UMTS services and

 

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infrastructure. We acquired the A-type license providing the widest frequency band for a consideration of EUR 358 million (excluding VAT). The 3G License is effective for 20 years starting from April 30, 2009. Pursuant to the agreement, we started to provide IMT 2000/UMTS services as of July 30, 2009.

Under our 2G License, we pay the Undersecretariat of the Treasury (the “Turkish Treasury”) a monthly treasury share equal to 15% of our gross revenue. Of such fee, 10% is paid to the Ministry of Transport, Maritime Affairs and Communications of Turkey (“Turkish Ministry”) for the universal service fund.

We believe that the build-out of our network in Turkey is substantially completed. As of December 31, 2014, our network covered 100% of Turkish cities with a population of 1,000 or more and the majority of Turkey’s tourist areas and principal intercity highways (according to the Turkish Statistical Institute 2010 Census). We currently meet the coverage requirements of our 2G license in all material respects.

In accordance with our 3G license agreement, we are required to cover the population within the borders of all metropolitan municipalities and within the borders of all cities and municipalities in three and six years, respectively. Moreover, we are required to cover the population in all settlement areas with a population higher than 5,000 and 1,000 in eight and ten years, respectively, following the date of the agreement. As of December 31, 2014, we had reached 91.2% population coverage.

Other than our 2G and 3G licenses, we also operate under interconnection agreements with other operators that allow us to connect our networks with those operators to enable the transmission of calls to and from our mobile communications system through existing digital fixed telephone switches. For example, we have an interconnection agreement with Turk Telekom that provides for the interconnection of our network with Turk Telekom’s fixed-line network. Under our agreement with Turk Telekom, as amended, we pay Turk Telekom an interconnection fee per call based on the type and length of the 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 their fixed-line network and terminating on ours. We also have interconnection agreements with Vodafone and Avea pursuant to which we have agreed, among other things, to pay interconnection fees to them 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 our networks.

As at December 31, 2014, management believes that the Company is in compliance with the above mentioned license and interconnection agreements’ conditions and requirements in all material respects.

Our subscriber base has grown substantially since we began operations in 1994. At year-end 1994, we had 63,500 subscribers. By year-end 2014, that number for the Group had grown to 71.5 million.

According to operator announcements, there were 71.9 million GSM lines in the Turkish GSM market as of December 31, 2014. In addition, the penetration rate in such market was 92% as of December 31, 2014. Despite the increasingly competitive environment, we sustained our leading position with a market share of 48% for the year ended December 31, 2014, according to operator announcements. We increased our postpaid subscriber base from 40% in 2013 to 44% in 2014 due to our focus on value. As of December 31, 2014, we had 19.4 million prepaid and 15.2 million postpaid subscribers in our Turkish GSM network. Our average MoU in Turkey increased 6% to 275.3 minutes in 2014 from 259.3 minutes in 2013, as a result of our higher incentives and higher package utilization. Our average revenue per user in Turkey decreased slightly to $11.2 in 2014 from $11.4 in 2013 mainly arising from the 14.4% depreciation, on average, of the TRY against the USD. In TRY terms, ARPU increased to TRY 22.5 in 2014 compared to TRY 21.7 in 2013 mainly due to continued strong growth in data usage and an increase in the postpaid subscriber base despite the decrease in interconnection fees.

Our revenues are generated in large part from interconnection fees and retail tariffs. Regulatory decisions have had and may continue to have the effect of decreasing interconnection rates and imposing minimum and

 

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maximum prices on our retail tariffs. For a more detailed discussion of these factors, please see “Item 4.B. Business Overview—Regulation of the Turkish Telecommunications Industry” and “Item 5.D. Trend Information”.

Churn rate is the percentage calculated by dividing the total number of subscriber disconnections during a period by the average number of subscribers for the same period. For these purposes, we define “average number of subscribers” as the number of subscribers at the beginning of the period plus one half of the total number of gross subscribers acquired during the period. Churn refers to subscribers that are both voluntarily and involuntarily disconnected from our network. Our churn rate for mobile operations in Turkey was 28.3% for the year ended December 31, 2014, compared to 27.4% for the year ended December 31, 2013. Our churn rate increased 0.9 percentage points, primarily due to the increased competition in the market.

We have an allowance for doubtful receivables in our Consolidated Financial Statements for non-payments and disconnections that amounted to $313.8 million and $324.0 million as of December 31, 2014 and 2013 respectively, which we believe is adequate. The main reason for the decrease in allowance for doubtful receivables is the 8.6% depreciation of TRY against the USD and the write-off of overdue receivables amounting to $49.5 million, which was netted off with the impairment loss recognized amounting to $71.0 million. In TRY terms, allowance for doubtful receivables increased by 5.2%.

II. International and Other Domestic Operations

In addition to our businesses in Turkey, we have telecommunications operations in Ukraine, the Turkish Republic of Northern Cyprus, Belarus and Germany. We also operate in other countries through our associate, Fintur. For a description of, and additional information regarding, our international and other domestic operations, see “Item 4.B. Business Overview”.

III. Revenues

Revenues includes communication fees, revenue from betting business, call center revenue, commission fees on betting business, monthly fixed fees, simcard sales and other revenue. Other revenue mainly consists of handsets, modems, internet subscription revenue and tower rent incomes.

IV. Operating Costs

a. Direct Cost of Revenues

Direct cost of revenues includes treasury shares, transmission fees, base station rent and energy expenses, billing costs, cost of simcards sold, depreciation and amortization charges, repair and maintenance expenses directly related to services rendered, roaming charges paid to foreign mobile communications operators for calls made by our subscribers while outside Turkey, interconnection fees mainly paid to Turk Telekom, Vodafone and Avea, handset costs where the Company is the principal in the sale of the handsets, and wages and salaries and personnel expenses for technical personnel.

b. Administrative Expenses

Administrative expenses consist of fixed costs, including company cars, office rental, office maintenance, travel, insurance, consulting, collection charges, wages, salaries and personnel expenses for non-technical, non-marketing, and non-sales employees, and other overhead charges. Our administrative expenses also include bad debt expenses of our subscribers and customers.

c. Selling and Marketing

Selling and marketing expenses consist of dealer and distributor commissions, advertising, uncharged prepaid frequency usage fees, wages, salaries and personnel expenses of sales and marketing related employees, and other expenses, including travel expenses, office expenses, insurance, company car expenses, and training and communication expenses.

 

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d. Results of Operations

The following table shows information concerning our consolidated statements of operations for the years indicated:

 

     For the years ended December 31,  
     2014     2013     2012  
(in $ millions)                   

Revenues

     5,512.9        5,975.4        5,865.8   

Direct cost of revenues

     (3,375.5     (3,693.3     (3,622.3

Gross profit

     2,137.4        2,282.1        2,243.5   

Administrative expenses

     (256.8     (286.8     (270.5

Selling and marketing expenses

     (903.1     (964.1     (953.2

Other income/(expense), net

     (35.5     (29.2     (58.8

Results from operating activities

     942.0        1,002.0        961.0   

Finance costs

     (559.3     (95.5     (125.5

Finance income

     437.5        395.4        386.1   

Net finance (costs)/income

     (121.8     299.9        260.6   

Monetary gain

     88.4        82.9        95.3   

Share of profit of equity accounted investees

     96.6        155.4        121.7   

Profit before income taxes

     1,005.2        1,540.2        1,438.6   

Income tax expense

     (334.6     (310.7     (291.5

Profit for the year

     670.6        1,229.5        1,147.1   

Attributable to:

      

Equity holders of the Company

     864.9        1,228.2        1,158.8   

Non-controlling interest

     (194.3     1.3        (11.7

Profit for the year

     670.6        1,229.5        1,147.1   

The following table shows certain items in our consolidated statement of operations as a percentage of revenue:

 

     For the years ended December 31,  
     2014     2013     2012  

Statement of Operations Data (% of revenue)

      

Revenues

      

Communication fees

     86.7        89.9        91.6   

Commission fees and revenues on betting business

     2.5        2.0        1.5   

Other revenue

     10.8        8.1        6.9   

Total revenue

     100.0        100.0        100.0   

Direct cost of revenues

     (61.2     (61.8     (61.8

Gross margin

     38.8        38.2        38.2   

Administrative expense

     (4.7     (4.8     (4.6

Selling and marketing expenses

     (16.4     (16.1     (16.3

Other operating income/(expense), net

     (0.6     (0.5     (1.0

Results from operating activities

     17.1        16.8        16.4   

V. Segment Overview

We have four reportable segments, as described below, which are based on the dominant source and nature of our risk and returns as well as our internal reporting structure. In the current year, Turkcell Superonline has been broken out from the “Other” segment given the increasing importance of this business to us. Prior periods

 

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have been restated on a consistent basis. Some of these strategic segments offer similar types of services, however, they are managed separately because they operate in different geographical locations and are affected by different economic conditions.

We are comprised of the following main reportable segments: Turkcell, Euroasia and Belarusian Telecom, all of which are GSM operators in their countries and Turkcell Superonline, which provides fixed broadband services in Turkey.

Other operations mainly include our companies operating in telecommunications, betting, call center and value added services.

 

     Turkcell     Euroasia     Belarusian
Telecom
    Turkcell
Superonline
    Other     Total  
     2014     2014     2014     2014     2014     2014  
(in $ million)                                     

Total external revenues

     4,265.9        344.5        65.5        443.5        393.5        5,512.9   

Intersegment revenue

     27.3        2.7        0.1        130.1        414.5        574.7   

Reportable segment adjusted EBITDA*

     1,341.4        106.3        0.3        149.8        148.0        1,745.8   

Finance income

     407.9        1.7        4.2        6.3        67.7        487.8   

Finance cost

     90.3        (507.6     (162.0     (33.1     (59.8     (672.2

Monetary gain

     —          —          88.3        —          0.2        88.4   

Depreciation and amortization

     (462.4     (85.6     (41.9     (110.3     (69.8     (770.1

Share of profit of equity accounted investees

     —          —          —          —          96.6        96.6   

Other material non-cash items:

            

Bad debt expense

     (59.7     (0.2     (5.3     (4.9     (0.9     (71.0

 

     Turkcell     Euroasia     Belarusian
Telecom
    Turkcell
Superonline
    Other     Total  
     2013     2013     2013     2013     2013     2013  
(in $ million)                                     

Total external revenues

     4,759.6        445.4        70.6        359.4        340.4        5,975.4   

Intersegment revenue

     30.2        4.4        0.1        124.2        361.1        520.0   

Reportable segment adjusted EBITDA*

     1,485.1        137.1        (3.3     124.6        147.3        1,890.9   

Finance income

     370.8        2.7        6.1        8.3        72.6        460.6   

Finance cost

     61.1        (57.4     (104.6     (48.5     (66.3     (215.7

Monetary gain

     —          —          82.8        —          0.1        82.9   

Depreciation and amortization

     (491.8     (116.2     (77.7     (97.4     (67.2     (850.4

Share of profit of equity accounted investees

     —          —          —          —          155.4        155.4   

Other material non-cash items:

            

Bad debt expense

     (66.5     (0.5     (5.5     (5.4     (1.5     (79.5

 

     Turkcell     Euroasia     Belarusian
Telecom
    Turkcell
Superonline
    Other     Total  
     2012     2012     2012     2012     2012     2012  
(in $ million)                                     

Total external revenues

     4,844.9        402.2        62.2        270.7        285.9        5,865.8   

Intersegment revenue

     24.8        3.3        0.1        111.2        323.2        462.6   

Reportable segment adjusted EBITDA*

     1,511.5        114.4        (5.4     79.5        138.7        1,838.7   

Finance income

     369.2        2.5        0.6        3.4        66.5        442.1   

Finance cost

     (55.7     (56.7     (66.2     1.7        (50.6     (227.4

Monetary gain

     —          —          95.3        —          0.0        95.3   

Depreciation and amortization

     (506.2     (116.9     (46.3     (69.8     (67.6     (806.8

Share of profit of equity accounted investees

     —          —          —          —          121.7        121.7   

Other material non-cash items:

            

Bad debt expense

     (55.9     (0.2     (1.8     (3.2     (1.3     (62.4

Impairment on equity accounted investees

     —          —          —          —          (40.3     (40.3

 

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* For a definition of adjusted EBITDA, please see footnote 9 of the table in “Item 3.A. Selected Financial Data”.

Turkcell

a. 2014 compared to 2013

Total revenues generated by Turkcell decreased 10.4%, to $4,293.2 million in 2014 from $4,789.8 million in 2013, mainly due to 14.4% depreciation, on average, of the TRY against the USD partially offset by the increase in mobile broadband and services. On a TRY basis, total revenues increased 2.7%, mainly due to a 34% growth in mobile broadband revenues which partially offset with a 1% decrease in voice revenues. For a more detailed discussion of the factors affecting our revenues, please see “Item 4.B. Business Overview—Regulation of the Turkish Telecommunications Industry” and “Item 5.D. Trend Information”.

Turkcell’s adjusted EBITDA decreased 9.7% to $1,341.4 million in 2014 from $1,485.1 million in 2013. On a TRY basis, adjusted EBITDA increased 3.2%, primarily due to an increase in revenues which was partially offset by an increase in selling and marketing expense and administrative expenses. The increase in administrative expenses mainly resulted from an increase in bad debt expenses and wages, salaries and personnel expenses. The increase in selling and marketing expense mainly resulted from an increase in uncharged prepaid frequency usage fees, selling expenses and wages, salaries and personnel expenses.

Net finance income increased 15.4% from $431.9 million in 2013 to $498.2 million in 2014. On a TRY basis, net finance income also increased 31.7% mainly due to an increase in foreign exchange gain and interest earned on time deposits and assigned contracted receivables. The positive impact of significant change in net foreign exchange position, mainly due to an increase in foreign exchange denominated cash balance and a decrease in foreign exchange denominated borrowings, was partially offset by a lower depreciation of 8.6% in 2014 compared to a 19.7% depreciation of the TRY against the USD in 2013. Interest income on time deposits increased mainly due to an increase in cash balances and interest rates. The increase in interest earned on assigned contracted receivables is parallel to the increase in those receivables.

Depreciation expense decreased 6.0% from $491.8 million in 2013 to $462.4 million in 2014. On a TRY basis, depreciation expense increased by 7.8%.

b. 2013 compared to 2012

Total revenues generated by Turkcell slightly decreased 1.6%, to $4,789.8 million in 2013 from $4,869.7 million in 2012, mainly due to 6.6% depreciation, on average, of the TRY against the USD partially offset by the increase in mobile broadband and services. On a TRY basis, total revenues increased 4.6%, mainly due to 17% growth in mobile broadband and services revenues.

Turkcell’s adjusted EBITDA slightly decreased 1.7% to $1,485.1 million in 2013 from $1,511.5 million in 2012. On a TRY basis, adjusted EBITDA increased 4.5%, primarily due to an increase in revenues which was partially offset by an increase in direct cost of revenues, selling and marketing expense and administrative expenses. The increase in the direct cost of revenues mainly resulted from an increase in treasury share expenses stemming from increasing revenues, tax expenses regarding the ICTA decision dated September 26, 2012 enabling users of mobile lines without subscription to register those lines under their names at no charge and an increase in network-related costs. The increase in administrative expenses mainly resulted from an increase in bad debt expenses and wages, salaries and personnel expenses. The increase in selling and marketing expense mainly resulted from an increase in uncharged prepaid frequency usage fees, marketing expenses and wages, salaries and personnel expenses.

Net finance income increased 37.8% from $313.5 million in 2012 to $431.9 million in 2013. On a TRY basis, net finance income also increased 48.1%, mainly due to a change in foreign exchange gain/(loss) and

 

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interest income on assigned contracted receivables. The 19.7% depreciation of the TRY against the USD in 2013, as opposed to the 5.6% appreciation of the TRY against the USD in 2012, had a positive impact on net finance income since Turkcell has a long position. Interest income on assigned contracted receivables increased mainly due to an increase in the receivables from assigned contracted handset campaigns.

Depreciation expense decreased 2.8% from $506.2 million in 2012 to $491.8 million in 2013. On a TRY basis, depreciation expense increased by 3.5%.

Euroasia

a. 2014 compared to 2013

Astelit, in which we hold a 55.0% stake through Euroasia, has operated in Ukraine since February 2005 under the brand “life:)”. Since its inception in February 2005, Astelit has worked on establishing network coverage to provide high quality services in Ukraine. Astelit’s registered subscriber base increased 10.3% from 12.6 million at the end of December 31, 2013 to 13.9 million at the end of December 31, 2014. Euroasia’s segment revenue decreased 22.8%, from $449.8 million in 2013 to $347.2 million in 2014 due to devaluation in the UAH against the U.S. Dollar in 2014. Euroasia’s segment revenue increased by 12.7% on a local currency basis mainly stemming from stable subscriber base growth, increasing mobile data revenues as well as roaming and international services revenues.

Euroasia’s adjusted EBITDA decreased 22.5% from $137.1 million in 2013 to $106.3 million in 2014 due to devaluation in the UAH against the U.S. Dollar in 2014. Euroasia’s adjusted EBITDA increased by 12.9% on a local currency basis. As a percentage of revenues, adjusted EBITDA increased 0.1 percentage points to 30.6% in 2014 from 30.5% in 2013. Improvement in adjusted EBITDA mainly resulted from continued focus on business efficiency and operational profitability.

Net finance cost deteriorated by $451.2 million to a $505.9 million loss in 2014 from a $54.7 million loss in 2013, mainly due to an increase in foreign exchange loss as a result of the devaluation of the UAH against the U.S. Dollar by 97.3% in 2014.

b. 2013 compared to 2012

Astelit’s registered subscriber base increased 13.5% from 11.1 million at the end of December 31, 2012 to 12.6 million at the end of December 31, 2013. Euroasia’s segment revenue increased 11.0%, from $405.4 million in 2012 to $449.8 million in 2013. Euroasia’s segment revenue increased by 11.0% on a local currency basis mainly stemming from the subscriber base expansion and higher mobile internet and other value-added service revenues.

Euroasia’s adjusted EBITDA increased 19.8% to reach $137.1 million in 2013 from $114.4 million in 2012. As a percentage of revenues, adjusted EBITDA increased 2.3 percentage points to 30.5% in 2013 from 28.2% in 2012. The improvement in adjusted EBITDA mainly resulted from continued focus on business efficiency and operational profitability.

Net finance cost remained almost stable at a $54.7 million loss in 2013 compared to a $54.2 million loss in 2012.

Belarusian Telecom

a. 2014 compared to 2013

In 2014, Belarusian Telecom’s registered subscriber base increased 17% from 1.2 million in 2013 to 1.4 million subscribers as a result of increasing gross additions with the launch of the all-direction tariff plans.

 

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Belarusian Telecom’s segment revenues decreased 7.2% from $70.7 million in 2013 to $65.6 million in 2014. Belarusian Telecom’s segment revenues increased by 15.6% on a local currency basis mainly due to a strong position in data and growth in value added services despite a slight decrease in terminal revenues.

Belarusian Telecom’s adjusted EBITDA improved to $0.3 million in 2014 from negative $3.3 million in 2013. On a local currency basis, Belarusian Telecom’s adjusted EBITDA improved as well due to an increase in revenues partially set off by an increase in direct cost of revenues and selling and marketing expenses.

Net finance cost deteriorated by 60.2% to a $157.8 million loss in 2014 from a $98.5 million loss in 2013, mainly due to an increase in foreign exchange loss as a result of the depreciation of the Belarusian Ruble against the U.S. Dollar in 2014 by 24.6%, while the Belarusian Ruble depreciated by 11.0% in 2013.

As at December 31, 2014, an impairment test was performed for Belarusian Telecom and an after tax impairment in the amount of $15.0 million was calculated for the cash-generating unit, allocated to the fixed assets of the cash-generating unit on a pro-rata basis based on the carrying amount of each asset in the cash-generating unit and included in the depreciation expense. The tax effect of the long-lived asset impairment of $0.9 million is included in the deferred taxation benefit.

b. 2013 compared to 2012

In 2013, Belarusian Telecom’s registered subscriber base increased 9% from 1.1 million in 2012 to 1.2 million people in line with Belarusian Telecom’s churn policy and value focus approach. Belarusian Telecom’s segment revenues increased 13.6% from $62.3 million in 2012 to $70.7 million in 2013. Belarusian Telecom’s segment revenues increased by 26% on a local currency basis mainly due to strong position in data and growth in value added services in addition to terminal revenues.

Belarusian Telecom’s adjusted EBITDA improved 38.9% from a $5.4 million loss in 2012 to a $3.3 million loss in 2013. On a local currency basis, Belarusian Telecom’s adjusted EBITDA improved as well due to an increase in revenues partially netted off with an increase in direct cost of revenues and selling and marketing expenses.

Net finance cost increased 50.2% to a $98.5 million loss in 2013 from a $65.6 million loss in 2012, mainly due to an increase in foreign exchange loss as a result of the devaluation of the Belarusian Ruble against the U.S. Dollar in 2012 by only 2.6%, while the Belarusian Ruble depreciated 11.0% in 2013.

As at December 31, 2013, an impairment test was performed for Belarusian Telecom and an after tax impairment in the amount of $28.7 million was calculated for the cash-generating unit, allocated to the fixed assets of the cash-generating unit on a pro-rata basis based on the carrying amount of each asset in the cash-generating unit and included in the depreciation expense. The tax effect of the long-lived asset impairment of $1.7 million is included in the deferred taxation benefit.

Turkcell Superonline

a. 2014 compared to 2013

Total revenues generated by Turkcell Superonline increased 18.6% to $573.6 million in 2014 from $483.6 million in 2013. On a TRY basis, total revenues increased 35.2%, mainly due to a 53% growth in the residential segment driven by customer growth. Turkcell Superonline’s total subscriber base (including ADSL subscribers) reached 1.2 million as a result of 346 thousand net additions in 2014. The FTTH subscriber base increased to 735 thousand with a 165 thousand net increase for the full year. Based on the operators’ announcements, by the end of 2014, Turkcell Superonline has become the market leader in terms of number of total FTTH subscribers in Turkey. Turkcell Superonline has continued to invest in its fiber network, increasing

 

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home passes by 380 thousand in 2014 to 2.1 million. In 2014, by adding two new cities, the in-city coverage of Turkcell Superonline reached 14 cities. Furthermore, capitalizing on its network, Turkcell Superonline has strengthened its product offering with the addition of the cutting edge TV platform, Turkcell TV+.

Turkcell Superonline’s adjusted EBITDA increased 20.2% to $149.8 million in 2014 from $124.6 million in 2013. On a TRY basis, adjusted EBITDA increased 37.6%, primarily due to an increase in revenues which was partially offset by an increase in direct cost of revenues, selling and marketing expense and administrative expenses. The improvement in adjusted BITDA mainly resulted from an increasing scale of the business and a focus on business efficiency and operational profitability.

Net finance costs decreased 33.3% from $40.2 million in 2013 to $26.8 million in 2014. On a TRY basis, net finance cost also decreased 24.4% mainly due to a change in foreign exchange gain/(loss). The 8.6% depreciation of TRY against the USD in 2014, as opposed to the 19.7% depreciation of the TRY against the USD in 2013 had a positive impact on net finance cost since Turkcell Superonline has a short position.

Depreciation expense increased 13.2% from $97.4 million in 2013 to $110.3 million in 2014. On a TRY basis, depreciation expense increased by 30% as a result of an increase in the capex additions.

b. 2013 compared to 2012

Total revenues generated by Turkcell Superonline increased 26.6%, to $483.6 million in 2013 from $381.9 million in 2012. On a TRY basis, total revenues increased 35.2%, mainly due to the growth in residential and corporate segments. Turkcell Superonline continued its fiber investments, increasing home passes to 1.7 million and FTTH subscribers to 570 thousand by the end of 2013 with 145 thousand net additions for the year.

Turkcell Superonline’s adjusted EBITDA increased 56.7% to $124.6 million in 2013 from $79.5 million in 2012. On a TRY basis, adjusted EBITDA increased 67%, primarily due to an increase in revenues which was partially offset by an increase in direct cost of revenues, selling and marketing expense and administrative expenses. The improvement in adjusted EBITDA mainly resulted from growth in profitable retail segment revenues and the focus on business efficiency and operational profitability.

Turkcell Superonline’s net finance income of $5.1 million in 2012 turned to $40.2 million net finance cost in 2013 due to foreign exchange losses incurred in 2013 as a result of the unfavorable movements in foreign exchange rates.

Depreciation expense increased 39.5% from $69.8 million in 2012 to $97.4 million in 2013. On a TRY basis, depreciation expense increased by 47%.

VI. Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013

We had 34.6 million GSM subscribers in Turkey, including 19.4 million prepaid subscribers, as of December 31, 2014, compared to 35.2 million GSM subscribers in Turkey, with 21.2 million prepaid subscribers, as of December 31, 2013. During 2014, we recorded a decrease of 548 thousand Turkish GSM subscribers.

In Ukraine, we had 13.9 million and 12.6 million registered subscribers as of December 31, 2014 and 2013, respectively. During 2014, we gained approximately 1.3 million new Ukrainian GSM subscribers despite losing subscribers in Crimea. This was primarily due to successful regional strategy, effective regional tariffs and campaigns.

a. Revenues

Total revenues for the year ended December 31, 2014 decreased 7.7% to $5,512.9 million, from $5,975.4 million in 2013. On a TRY basis, our revenues increased 5.6% compared to 2013, mainly due to 34% growth in

 

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mobile broadband revenues, which was partially offset by a 1% decrease in voice revenues mainly resulting from the negative impact of the interconnection fee cuts effective July 1, 2013, as well as a higher contribution from our subsidiaries, particularly through Turkcell Superonline.

Revenues from communication fees for the year ended December 31, 2014 decreased 11.0% to $4,779.3 million, from $5,369.0 million in 2013, mainly due to the 14.4% depreciation, on average, of the TRY against the USD. Our revenues from communication fees increased 1.9% on a TRY basis mainly due to the growth in mobile broadband and service revenues together with the increase in roaming revenues, which was partially offset by the decrease in outgoing revenues and the decrease in interconnect revenues mainly due to the negative impact of the interconnection fee cuts effective from July 1, 2013, despite the increase in incoming airtime. Communication fees consist of revenues from postpaid and prepaid subscribers, interconnect revenues and roaming revenues. In Turkey, postpaid revenue increased significantly whereas prepaid revenue decreased compared to 2013. Postpaid subscriber usage is generally higher than prepaid subscriber. In Turkey, during 2014, we maintained our focus on the postpaid segment, with newly launched campaigns, offers and promotions to switch customers from the prepaid to the postpaid segment. We focus on postpaid subscribers because there is, in general, higher average revenue per postpaid subscriber and a lower churn rate. In 2014, postpaid average revenue per user was TRY 37.7 whereas prepaid average revenue per user was TRY 11.6. These figures indicate that postpaid average revenue per user is approximately 3.3 times the prepaid average revenue per user. Therefore, the increase in the number of postpaid subscribers has a positive effect on blended average revenue per user.

Commission fees and revenue on betting business increased to $136.1 million for the year ended December 31, 2014, from $120.4 million for the year ended December 31, 2013. On a TRY basis, commission fees and revenue on betting business increased 29.3%. This increase was primarily due to the increase in betting turnover in Turkey and revenue on betting business generated in Azerbaijan.

Monthly fixed fees revenue decreased 41.0% to $23.6 million for the year ended December 31, 2014, compared to $40.0 million for the year ended December 31, 2013. On a TRY basis, monthly fixed fees revenue decreased 32.1%, mainly due to the increased usage of packages which do not include monthly fixed fees.

b. Direct cost of revenues

Direct cost of revenues, including depreciation and amortization, decreased 8.6% to $3,375.5 million in 2014 from $3,693.3 million for the year ended December 31, 2013. On a TRY basis, direct cost of revenues increased 4.5% compared to 2013, due to an increase in treasury shares and universal funds paid, network related expenses, wages and salaries, depreciation expenses and other items.

Treasury shares and universal funds paid to the Turkish Treasury and Ministry of Transport, Maritime Affairs and Communications (“Turkish Ministry”) decreased 10.2%, from $761.0 million for the year ended December 31, 2013 to $683.3 million in 2014. However, they increased 2.8% on a TRY basis, which was lower than the increase in revenues due to the increased contribution of our subsidiaries to revenues.

Transmission costs remained stable at $49 million in 2014. On a TRY basis, transmission costs increased by 13.8%. Furthermore, uncapitalizable radio costs and expenses decreased 4.1%, from $395.3 million for the year ended December 31, 2013 to $379.0 million in 2014. Radio costs increased 9.4% on a TRY basis mainly due to the cumulative investment impact and increased taxes and costs, such as rent and energy.

Wages, salaries and personnel expenses for technical personnel decreased 8.5% to $300.1 million in 2014 from $327.9 million for the year ended December 31, 2013. They increased 4.6% on a TRY basis mainly due to the periodic increase in wages and salaries.

Depreciation and amortization charges (including impairment charges) decreased 9.6%, from $826.8 million for the year ended December 31, 2013 to $747.7 million in 2014, while on a TRY basis depreciation and

 

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amortization charges increased 2.8%, mainly due to the increase in depreciation and amortization charges of Turkcell Turkey and Turkcell Superonline, which was partially offset with the decrease in the after tax impairment loss for Belarusian Telecom from $28.7 million in 2013 to $15.0 million in 2014. The amortization expense for our GSM license and other telecommunication operating licenses was $48.5 million and $53.5 million for the years ended December 31, 2014 and 2013, respectively.

Roaming expenses increased 2.0% to $42.2 million in 2014 from $41.4 million for the year ended December 31, 2013. On a TRY basis they increased 15.8%, mainly due to 14.2% depreciation, on average, of the TRY against the EUR, and increased traffic despite the decreasing unit costs.

Interconnection and termination costs decreased 18.3% to $602.9 million in 2014 from $738.2 million for the year ended December 31, 2013. They decreased 6.1% on a TRY basis due to the impact of interconnection fee cuts effective July 1, 2013, which was partially offset by the increase in off net traffic.

Billing and archiving costs decreased 19.5% to $37.8 million in 2014 from $47.0 million for the year ended December 31, 2013. On a TRY basis they decreased 7.3%, mainly due to the increase in the usage of the electronic and SMS invoices for billing.

Other costs in direct cost of revenues increased 5.4% to $533.9 million in 2014 from $506.7 million for the year ended December 31, 2013. On a TRY basis they increased 20.6% due to the increased contribution of our subsidiaries to our revenues, particularly in the fixed broadband, betting and retail businesses.

As a percentage of revenues, direct cost of revenues decreased 0.6 percentage points to 61.2% in 2014 from 61.8% in 2013, as a result of decreases in interconnection and termination expenses of 1.4 pp and depreciation and amortization expenses of 0.3 pp as opposed to a rise in the operational expenses of certain subsidiaries.

Gross profit margin increased 0.6 percentage points from 38.2% in 2013 to 38.8% in 2014.

c. Administrative expenses

Administrative expenses decreased 10.5% to $256.8 million in 2014 from $286.8 million in 2013. On a TRY basis, these expenses increased 2.3%, mainly due to an increase in wages and salary expenses arising from periodic increases in such figures, together with the increase in bad debt expenses resulting from the increase in assigned contracted receivables. As a percentage of revenues, general and administrative expenses decreased to 4.7% for the year ended December 31, 2014, from 4.8% in 2013.

Wages, salaries and personnel expenses for non-technical and non-marketing employees decreased 10.5% to $96.8 million in 2014 from $108.1 million for the year ended December 31, 2013. On a TRY basis, they increased 1.9%, primarily due to periodic increases in wages and salaries, which was partially netted off with the decrease in the number of personnel.

Bad debt expenses decreased 10.6% to $71.0 million in 2014 from $79.5 million for the year ended December 31, 2013. On a TRY basis, bad debt expense increased 1.7%, mainly due to the increase in assigned receivables. We provided an allowance of $313.8 million and $324.0 million for doubtful receivables for the years ended December 31, 2014 and 2013, respectively, depending on the likelihood of recoverability of trade and other receivables based on the aging of the balances, historical collection trends and general economic conditions.

Other administrative expenses, including collection and consulting expenses, decreased 10.2% to $89.0 million in 2014 from $99.1 million for the year ended December 31, 2013 mainly due to the 14.4% depreciation, on average, of the TRY against the USD. On a TRY basis, other administrative expenses increased 3.0%.

 

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d. Selling and marketing expenses

Selling and marketing expenses decreased 6.3% to $903.1 million in 2014 from $964.1 million for the year ended December 31, 2013. However, on a TRY basis, they increased 7.1%, primarily due to an increase in selling expenses, uncharged frequency usage fees for prepaid subscribers and wages and salary expenses, partially offset by a decrease in marketing expenses. As a percentage of revenues, selling and marketing expenses increased from 16.1% for the year ended December 31, 2013 to 16.4% for the year ended December 31, 2014.

Selling expenses, which consist of distributor and dealer commissions and other selling expenses, decreased 4.9% to $393.0 million for 2014 from $413.0 million for 2013. On a TRY basis, selling expenses increased 8.6%, mainly due to an increase in dealer commissions arising from increased postpaid activations.

Prepaid subscribers’ uncharged frequency usage fee expenses increased 7.3%, to $85.2 million in 2014 from $79.4 million for the year ended December 31, 2013. On a TRY basis, these expenses increased 23.1%, mainly as a result of the decrease in the total amount charged to subscribers and higher tariffs.

Wages, salaries and personnel expenses for selling and marketing employees decreased 5.3%, to $163.8 million in 2014 from $173.0 million for the year ended December 31, 2013. On a TRY basis, these expenses increased 8.3%, mainly due to periodic increase in wages and salaries.

Total marketing expenses, which consist of advertising, market research and sponsorships expenses decreased 15.9%, to $206.2 million in 2014 from $245.3 million for the year ended December 31, 2013. On a TRY basis, marketing expenses decreased 3.6%.

e. Other operating income/(expense)

Other net operating expenses increased to $35.5 million in 2014 from $29.2 million in 2013, mainly due to payments and provisions for the penalties imposed by the ICTA for not complying with the relevant regulations as explained in Note 34 (Commitments and Contingencies, Legal Proceedings), partially offset by the absence of impairment recognized on our investment in T-Medya Yatirim Sanayi ve Ticaret AS (“T-Medya”) and Aks Televizyon Reklamcilik ve Filmcilik Sanayi ve Ticaret AS (“Aks TV”) and the proceeds from the sale of A-Tel which is also explained in Note 16 (Investments in Equity Accounted Investees) to our Consolidated Financial Statements in this Form 20-F.

f. Results from operating activities

Results from operating activities decreased to $942.0 million in 2014 from $1,002.0 million for the year ended December 31, 2013, whereas on a TRY basis, results from operating activities increased by 8.2%. As a percentage of revenues, results from operating activities also increased from 16.8% in 2013 to 17.1% in 2014 mainly due to a decrease in direct cost of revenues and administrative expenses as a percentage of revenues.

g. Net finance income/cost

Net finance cost/income deteriorated to a $121.8 million net expense in 2014 from a $299.9 million net income in 2013, due to an increase in finance cost from $95.5 million in 2013 to $559.3 million in 2014, which was partially offset by the increase in finance income from $395.4 million in 2013 to $437.5 million in 2014. On a TRY basis, net finance cost/income deteriorated to a TRY 291.6 million net expense in 2014 from a TRY 555.3 million net income in 2013.

Finance income increased 10.6% to $437.5 million in 2014 from $395.4 million for the year ended December 31, 2014. On a TRY basis, it increased 25.7%, mainly due to an increase in interest earned on time deposits and assigned contracted receivables.

 

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Finance cost increased 485.7% to $559.3 million in 2014 from $95.5 million for the year ended December 31, 2014. On a TRY basis, it increased 509.5%, mainly due to the increase in translation losses from $32.4 million in 2013 to $498.4 million in 2014. Translation loss increased mainly due to the 97.3% devaluation of the Ukrainian Hryvnia together with the 24.6% depreciation of the Belarusian Ruble against the U.S. Dollar in 2014. Foreign exchange losses in 2014 and 2013 were mainly attributable to our net foreign exchange position in our foreign operations.

h. Monetary gain

Monetary gain which we recognize from our Belarusian operations increased 6.6% in 2014 to $88.4 million from $82.9 million in 2013, as a result of an increase in the balance of non-monetary items. The economic environment in Belarus deteriorated significantly starting from the second quarter of 2011 and the three-year cumulative inflation rate exceeded 100% at the end of 2011. As a result, Belarus was considered a hyperinflationary economy. As a consequence, the accounting rules for “Reporting in hyperinflationary economies” are being applied to our Belarusian operations starting from the year ended December 31, 2011. With respect to this, monetary gain is recorded as a result of the effect of general inflation and calculated as the difference resulting from the restatement of non-monetary assets, equity and statement of income items.

The three-year cumulative inflation at the end of 2011 of 153% was primarily influenced by the high inflation experienced in 2011 of 109%. The decrease in the inflation rate in subsequent years led the three-year cumulative rate as of the end of 2014 to decrease to 65%.

i. Share of profit of equity accounted investees

Our share of profit of equity accounted investees decreased 37.8% in 2014 to $96.6 million from $155.4 million for 2013, mainly due to a lower net income contribution from Fintur, mainly due to non-cash charges of $125 million in the Fintur financials, stemming from the write-down of operational assets and impairment charges relating to goodwill and fixed assets. These charges negatively impacted our financials by TRY 116 million (equivalent to $46 million as of March 3, 2015) on the basis of our 41.45% share in Fintur

j. Income tax expense

Income tax expense increased 7.7% in 2014 to $334.6 million from $310.7 million in 2013. On a TRY basis, income tax expense increased 23.5%.

The effective tax rate was 33.3% and 20.2% for the years ended December 31, 2014 and 2013, respectively.

Our domestic tax rate is 20%. Differences between the effective tax rate and our domestic tax rate include, but are not limited to, the effect of allowance for deferred tax assets, tax rates in foreign jurisdictions (including Fintur), tax-exempt income and non-deductible expenses. The increase in the effective tax rate in 2014 is mainly due to the fact that since it is not probable that taxable profit will be available against which the unused tax losses or unused tax credits of Astelit and Belarusian Telecom can be utilized, no deferred tax asset is recognized on any loss incurred in Astelit and Belarusian Telecom.

k. Non-controlling interests

Non-controlling interests in the net profit of our consolidated subsidiaries is classified separately in the consolidated financial statements of operations under “non-controlling interests”. Non-controlling interests had a $194.3 million gain for the year ended December 31, 2014, compared to a $1.3 million loss for 2013.

Non-controlling interest gain from Euroasia’s net loss amounting to $484.3 million in 2014 is $217.8 million for the year ended December 31, 2014, whereas the non-controlling interest gain from Euroasia’s net loss amounting to $32.7 million in 2013 is $14.7 million. In addition, net profit generated by Inteltek for the years ended December 31, 2014 and 2013 resulted in a loss from non-controlling interests of approximately $16.5 million and $13.6 million, respectively.

 

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l. Profit for the year attributable to equity holders of the Company

Profit for the year attributable to equity holders of the Company decreased from $1,228.2 million in 2013 to $864.9 million in 2014. Profit for the period attributable to equity holders of the Company also decreased on a TRY basis by 19.8%. This was mostly due to deterioration in net finance cost and share of profit of equity accounted investees, which was partially netted off with the increase in results from operating activities and non-controlling interests.

VII. Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

We had 35.2 million GSM subscribers in Turkey, including 21.2 million prepaid subscribers, as of December 31, 2013, compared to 35.1 million GSM subscribers in Turkey, with 21.9 million prepaid subscribers, as of December 31, 2012. During 2013, we recorded positive net additions of 75 thousand Turkish GSM subscribers.

In Ukraine, we had 12.6 million and 11.1 million subscribers as of December 31, 2013 and 2012, respectively. During 2013, we gained approximately 1.5 million new Ukrainian GSM subscribers. This was primarily due to successful regional strategy, effective regional tariffs and campaigns.

a. Revenues

Total revenues for the year ended December 31, 2013 increased 1.9% to $5,975.4 million, from $5,865.8 million in 2012. On a TRY basis, our revenues increased 8.6% compared to 2012, mainly due to a 38% growth in Turkcell Turkey’s mobile broadband revenues, as well as a higher contribution from our subsidiaries, particularly through Turkcell Superonline and Astelit.

Revenues from communication fees for the year ended December 31, 2013 decreased 0.1% to $5,369.0 million, from $5,374.0 million in 2012, mainly due to the 6.6% depreciation, on average, of the TRY against the USD. Our revenues from communication fees increased 6.4% on a TRY basis due to the growth in mobile broadband and service revenues together with the increase in interconnect revenues mainly due to the increase in incoming airtime despite the negative impact of the interconnection fee cuts effective from July 1, 2013 and the increase in outgoing revenues due to an increase in outgoing airtime. Communication fees consist of revenues from postpaid and prepaid subscribers, interconnect revenues and roaming revenues. In Turkey, postpaid revenue increased significantly whereas prepaid revenue decreased slightly compared to 2012. Postpaid subscriber usage is generally higher than prepaid subscriber. In Turkey, during 2013, we maintained our focus on the postpaid segment, with newly launched campaigns and offers, increased data lines, increased penetration of smartphones and promotions to switch customers from the prepaid to the postpaid segment. We focus on postpaid subscribers because there is, in general, higher average revenue per postpaid subscriber and a lower churn rate. In 2013, postpaid average revenue per user was TRY 37.3 whereas prepaid average revenue per user was TRY 11.8. These figures indicate that postpaid average revenue per user was approximately 3.2 times the prepaid average revenue per user. Therefore, the increase in the number of postpaid subscribers had a positive effect on blended average revenue per user.

Commission fees and revenue on betting business increased to $120.4 million for the year ended December 31, 2013, from $89.0 million for the year ended December 31, 2012. On a TRY basis, commission fees and revenue on betting business increased 44.8%. This increase was primarily due to the increase in betting turnover in Turkey and revenue on betting business generated in Azerbaijan.

Monthly fixed fees revenue decreased 20.9% to $40.0 million for the year ended December 31, 2013, compared to $50.6 million for the year ended December 31, 2012. On a TRY basis, monthly fixed fees revenue decreased 16.3%, mainly due to the increased usage of packages which do not include monthly fixed fees.

 

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b. Direct cost of revenues

Direct cost of revenues, including depreciation and amortization, increased 2.0% to $3,693.3 million in 2013 from $3,622.3 million for the year ended December 31, 2012. On a TRY basis, direct cost of revenues increased 8.9% compared to 2012, due to an increase in treasury shares and universal funds paid, network related expenses, wages and salaries and other items (mainly from the increase in direct cost of revenues in Azerbaijan as a result of betting business turnover increase, increase in ADSL resell expense of Turkcell Superonline and tax expense regarding the ICTA decision dated September 26, 2012 enabling users of mobile lines without subscription to register those lines under their names at no charge.).

Treasury shares and universal funds paid to the Turkish Treasury and Ministry of Transport, Maritime Affairs and Communications (“Turkish Ministry”) decreased 0.8%, from $767.0 million for the year ended December 31, 2012 to $761.0 million in 2013. However, they increased 5.5% on a TRY basis lower than the increase in revenues due to increased contribution of subsidiaries to revenues.

Depreciation and amortization charges (including impairment charges) increased 4.8%, from $788.6 million for the year ended December 31, 2012 to $826.8 million in 2013, while on a TRY basis depreciation and amortization charges increased 12.9%, mainly due to the increase in depreciation and amortization charges of Turkcell Turkey, Turkcell Superonline and the impairment impact recognized for Belarusian operations. The amortization expense for our GSM license and other telecommunication operating licenses was $53.5 million and $57.5 million for the years ended December 31, 2013 and 2012, respectively.

Interconnection and termination costs decreased 3.9% to $738.2 million in 2013 from $768.1 million for the year ended December 31, 2012. They increased 1.9% on a TRY basis due to the increase in off-net traffic, which was partially offset by the impact of interconnection fee cuts effective from July 1, 2013.

Transmission costs, site costs and maintenance costs decreased approximately 13.2%, from $129.7 million for the year ended December 31, 2012 to $112.6 million in 2013. On a TRY basis, these costs decreased 7.7%, mainly resulting from the decrease in the maintenance cost as a result of the decrease of the prices in regular maintenance services. Furthermore, uncapitalizable radio costs and expenses increased 3.3%, from $382.8 million for the year ended December 31, 2012 to $395.3 million in 2013. Radio costs increased 10.6% on a TRY basis mainly due to the increase in the number of radio base stations.

Wages, salaries and personnel expenses for technical personnel increased 4.0% to $327.9 million in 2013 from $315.4 million for the year ended December 31, 2012. They increased 10.9% on a TRY basis mainly due to the periodic increase in wages and salaries.

Roaming expenses decreased 12.8% to $41.4 million in 2013 from $47.5 million for the year ended December 31, 2012. On a TRY basis they decreased 6.4%, mainly due to a decrease in roaming tariffs, partially offset by the increase in roaming durations between international operators and Turkcell.

Billing and archiving costs decreased 12.0% to $47.0 million in 2013 from $53.3 for the year ended December 31, 2012. On a TRY basis they decreased 6.8%, mainly due to the increase in the usage of the electronic invoices for billing.

As a percentage of revenues, direct cost of revenues remained stable at 61.8% in 2013 and 2012, as a result of increases in depreciation and amortization expenses 0.4 pp and other cost items 0.3 pp as opposed to a decrease in interconnection and termination expenses 0.7 pp as a percentage of revenues.

Gross profit margin remained stable at 38.2% in 2013 and 2012.

 

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c. Administrative expenses

General and administrative expenses increased 6.0% to $286.8 million in 2013 from $270.5 million in 2012. On a TRY basis, these expenses increased 13.7%, mainly due to an increase in bad debt expenses resulting from the increase in assigned contracted receivables, together with the increase in wages and salary expenses arising from periodic increases in such figures. As a percentage of revenues, general and administrative expenses increased to 4.8% for the year ended December 31, 2013, from 4.6% in 2012.

Wages, salaries and personnel expenses for non-technical and non-marketing employees increased 8.6% to $108.1 million in 2013 from $99.5 million for the year ended December 31, 2012. On a TRY basis, they increased 16.5%, primarily due to periodic increases in wages and salaries.

Bad debt expenses increased 27.3% to $79.5 million in 2013 from $62.4 million for the year ended December 31, 2012. On a TRY basis, bad debt expense increased 37.2%, mainly due to the increase in assigned contracted receivables. We provided an allowance of $324.0 million and $392.9 million for doubtful receivables for the years ended December 31, 2013 and 2012, respectively, depending on the likelihood of recoverability of trade and other receivables based on the aging of the balances, historical collection trends and general economic conditions.

Other administrative expenses, including collection and consulting expenses, decreased 8.6% to $99.1 million in 2013 from $108.6 million for the year ended December 31, 2012 mainly due to the 6.6% depreciation, on average, of the TRY against the USD. On a TRY basis, other administrative expenses decreased 2.5%.

d. Selling and marketing expenses

Selling and marketing expenses increased 1.1% to $964.1 million in 2013 from $953.2 million for the year ended December 31, 2012. However, on a TRY basis, they increased 8.1%, primarily due to an increase in selling expenses, wages and salary expenses and uncharged frequency usage fees for prepaid subscribers. As a percentage of revenues, selling and marketing expenses decreased from 16.3% for the year ended December 31, 2012 to 16.1% for the year ended December 31, 2013.

Selling expenses, which consist of distributor and dealer commissions, and other selling expenses, increased 0.9% to $413.0 million for 2013 from $409.2 million for 2012. On a TRY basis, selling expenses increased 8.0%, mainly due to an increase in commission paid to dealers.

Total marketing expenses, which consist of advertising, market research, sponsorships expenses and customer relations expenses, decreased 7.4%, to $245.3 million in 2013 from $264.9 million for the year ended December 31, 2012. On a TRY basis, marketing expenses decreased 1.1%.

Prepaid subscribers’ uncharged frequency usage fee expenses increased 19.0%, to $79.4 million in 2013 from $66.8 million for the year ended December 31, 2012. On a TRY basis, these expenses increased 26.5%, mainly as a result of the increase in tariffs and decrease in the charged amount to prepaid subscribers.

Wages, salaries and personnel expenses for selling and marketing employees increased 12.0%, to $173.0 million in 2013 from $154.5 million for the year ended December 31, 2012. On a TRY basis, these expenses increased 19.6%, mainly due to periodic increase in wages and salaries.

e. Other operating income/(expense)

Other net operating expenses decreased to $29.2 million in 2013 from $58.8 million in 2012, mainly due to a decrease in impairment charges recognized on our investments.

 

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Other expenses for the year ended December 31, 2013 mainly consists of payments and provisions for the penalties imposed by ICTA for not complying with relevant regulations as explained in Note 34 (Commitments and Contingencies, Legal Proceedings) to our Consolidated Financial Statements in this Form 20-F, amounting to $18.4 million and impairment recognized on our investment in T-Medya and Aks TV amounting to $9.3 and $10.0 million, respectively.

f. Results from operating activities

Results from operating activities increased to $1,002.0 million in 2013 from $961.0 million for the year ended December 31, 2012. As a percentage of revenues, results from operating activities increased from 16.4% in 2012 to 16.8% in 2013 mainly due to a decrease in selling and marketing expenses and other operating income/(expense) as a percentage of revenues.

g. Net finance income/(costs)

Net finance income increased $299.9 million in 2013 from $260.6 million in 2012, due to a decrease in finance costs from $125.5 million in 2012 to $95.5 million in 2013 (mainly arising from lower interest payments for legal cases and a decrease in discount interest expense) and an increase in finance income from $386.1 million in 2012 to $395.4 million in 2013. On a TRY basis, net finance income increased to TRY 555.3 million in 2013 from TRY 467.5 million in 2012.

Finance income increased 2.4% to $395.4 million in 2013 from $386.1 million for the year ended December 31, 2013. On a TRY basis, it increased 9.9% due to an increase in interest earned on assigned contracted receivables.

Finance cost decreased 23.9% to $95.5 million in 2013 from $125.5 million for the year ended December 31, 2013. On a TRY basis, it decreased 8.7%, mainly due to lower interest payments for legal cases and a decrease in discount interest expenses offset by the increase in translation losses a $2.4 million loss in 2012 compared to a $32.4 million loss in 2013 mainly due the higher depreciation of the Belarusian Ruble against the U.S. Dollar in 2013. Foreign exchange losses in 2013 and 2012 were mainly attributable to our net foreign exchange position.

h. Monetary gain

Monetary gain which we recognize from our Belarusian operations decreased 13.0% in 2013 to $82.9 million from $95.3 million in 2012, as a result of a decrease in inflation in Belarus.

i. Share of profit of equity accounted investees

Our share of profit of equity accounted investees increased 27.7% in 2013 to $155.4 million from $121.7 million for 2012, mainly due to a higher net income contribution from Fintur as well as the annulment of the A-Tel agreement. The lawsuit related to the annulment of the A-Tel agreement is explained in Note 34 (Commitments and Contingencies, Legal Proceedings) to our Consolidated Financial Statements in this Form 20-F.

j. Income tax expense

Income tax expense increased 6.6% in 2013 to $310.7 million from $291.5 million in 2012. On a TRY basis, income tax expense increased 13.2%.

The effective tax rate was 20.2% and 20.3% for the years ended December 31, 2013 and 2012, respectively.

 

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Our domestic tax rate is 20%. Differences between the effective tax rate and our domestic tax rate include, but are not limited to, the effect of allowance for deferred tax assets, tax rates in foreign jurisdictions, tax exempt income and non-deductible expenses.

k. Non-controlling interests

Non-controlling interests in the net profit of our consolidated subsidiaries is classified separately in the consolidated financial statements of operations under “non-controlling interests”. Non-controlling interests had a $1.3 million loss for the year ended December 31, 2013, compared to a $11.7 million gain for 2012.

Non-controlling interest gain from Euroasia’s net loss amounting to $32.7 million in 2013 is $14.7 million for the year ended December 31, 2013, whereas the non-controlling interest gain from Euroasia’s net loss amounting to $56.1 million in 2012 is $25.2 million. In addition, net profit generated by Inteltek for the years ended December 31, 2013 and 2012 resulted in a loss from non-controlling interests of approximately $13.6 million and $13.0 million, respectively.

l. Profit for the year attributable to equity holders of the Company

Profit for the year attributable to equity holders of the Company increased from $1,158.8 million in 2012 to $1,228.2 million in 2013. Profit for the period attributable to equity holders of the Company also increased on a TRY basis by 11.9%. This was mostly due to improvement in operating profit arising from an increase in revenues, which was partially offset by the increase in operational expenses, together with the improvement in net finance income, share of profit of equity accounted investees and the absence of impairment charges on A-Tel in 2012.

VIII. Effects of Inflation

The annual inflation rates in Turkey were 8.2%, 7.4% and 6.2% for the years ended December 31, 2014, 2013 and 2012, respectively, based on the Turkish consumer price index. While contracting domestic demand pulled inflation lower in 2014, the administrative price hikes and tax increases in addition to pass through effects from TRY depreciation, pushed it higher. The current inflation target set by the CBRT in its January 27 Inflation Report is 5.5%, with a 70% confidence interval between 4.1% and 6.9% for 2015. The most recent CBRT expectations survey, dated February 20, 2015, indicates that consumer inflation will be around 6.8% by the end of 2015, which is above the CBRT’s target. However, the prospects for the CBRT cutting its policy rate have increased in the first quarter of 2015 with inflation expectations easing due to base effects, a drop in energy prices and the normalization of food prices. For additional information, see “Item 3.A. Selected Financial Data—Exchange Rate Data” and “Item 3.D. Risk Factors”.

Inflationary pressure remains elevated in Belarus mainly due to devaluation in the BYR in the fourth quarter of 2014 and early 2015, even though headline CPI has been gradually moderating since the third quarter of 2014 and falling to 16.2% at year end from 20% in September amid official control over food prices. Despite a slowdown in inflation, tight monetary policy is set to continue due to concerns about external imbalances and currency stability. Macroeconomic stability is still fragile due to the country’s reliance on Russia and the Russian economy being challenged by decreasing oil and gas prices. External vulnerability remains a major concern and next year’s financing picture remains challenging due to Russia being the primary source of finance. Given Belarus’ lowest level of foreign currency reserves since 2011 coupled with the high debt repayments due this year and the current account deficit, and the depreciating Russian Ruble, these factors may create further devaluation and thus inflationary pressures.

Ukraine had experienced deflation since May 2012 until the political and economic tensions with Russia began to escalate and the rise in inflation continued even after the annexation of Crimea in April 2014. After 9 months of instability on the political front, annual inflation stood at 25% in December 2014. The fixed

 

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exchange rate (revised to floating exchange regime in early 2015) and the recession were the main factors explaining the persistent deflation in Ukraine. As the budgetary meetings of the Ukrainian government continue, the outlook for inflation remains elevated at 26.5%, while UAH devaluation and economic recession is estimated around 5.5% for 2015 in the draft budget. The uncertainty about the current political tensions in the region (although the recent ceasefire agreement has increased optimism), high debt repayments to Russia and growing financing needs make the outlook worse for the country.

IX. Foreign Currency Fluctuations

We conduct our business in several currencies other than functional currencies of each of our locations. As a result of our exposure to foreign currency, exchange rate fluctuations have a significant impact, in the form of both translation and transaction risks, on our Consolidated Financial Statements.

Exchange rate movements impact our assets and liabilities denominated in currencies other than TRY, Ukrainian Hryvnia (“UAH”), Belarusian Rubles, Euro and Azerbaijani Manat for our operations in Turkey, Ukraine, Belarus, Germany and Azerbaijan, respectively. We hold some of our cash portfolio in foreign currency to manage our non-TRY denominated liabilities in Turkey. Additionally, derivative financial instruments such as forward contracts and options are used.

The foreign exchange risks in Turkey as the result of purchases and borrowings in U.S. Dollars and Euros have been manageable, as there is a developed market enabling the hedging of such risk; however, in Belarus and Ukraine, there are no tools to hedge foreign exchange rate risks effectively due to restricted and undeveloped financial markets. In Belarus, no international bank offers hedging instruments and local banks are too undercapitalized to be able to enter into transactions.

In Ukraine, the only hedging tool seemed to be non-deliverable forwards (“NDF”) which is a cash settled product in U.S. Dollar, a short term forward contract on a non-convertible foreign currency which could not be delivered offshore. However, with the National Bank of Ukraine forbidding any NDF settlement, the already liquidity-thin market has become virtually non-existent. Also, Ukraine’s high current account deficit and external funding needs as well as low level of foreign currency reserves leave the country vulnerable to global shocks. As of March 3, 2015, following military actions, political instability, civil unrest, the return of the currency to free float and economic problems, the Ukrainian Hryvnia depreciated against the U.S. Dollar by 57% in 2015.

In the current economic environment and considering the aforementioned fragile economic conditions, there is a possibility of further devaluations in Ukraine and Belarus.

Our foreign currency risk management policy is focused on hedging foreign currency exposure arising from non-TRY denominated liabilities and purchase commitments. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

X. Interest Rate Hedging

Monitoring and examining financing opportunities to improve our financial flexibility and performance has been a continuous process for us. Depending on the availability in both domestic and international debt/capital markets, we continuously monitor new financing alternatives for contingency purposes as well as to fund potential new investments or acquisitions. We are exposed to interest rate risk as part of our total debt portfolio is based on floating rates. We also closely monitor various hedging alternatives to hedge our interest rate risk with a minimum cost. In June 2011, we engaged in a forward start collar agreement for some portion of our debt which is due in 2015 and exposed to interest rate risk. The collars hedge variable interest rate risk for the period between 2013 and 2015.

 

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a. New Accounting Standards Issued

See Note 3 (Significant accounting policies, new standards and interpretations) of our Consolidated Financial Statements in this Form 20-F.

5.B Liquidity and Capital Resources

a. Liquidity

We require significant liquidity to finance capital expenditures for the expansion and improvement of our mobile communications network, for operational capital expenditures, for working capital, and to service our debt obligations. A summary of our consolidated cash flows for the years ended December 31, 2014, 2013 and 2012, is as follows:

 

     2014     2013     2012  
U.S. $ million       

Net cash generated by operating activities

     801.8        994.0        1,188.3   

Net cash (used in)/generated by investing activities

     (573.1     (469.7     304.6   

Net cash generated by/(used in) financing activities

     39.5        (121.6     (171.2

Net cash increase in cash and cash equivalents

     268.2        402.7        1,321.6   

Effects of foreign exchange rate fluctuations on cash and cash equivalents

     (181.8     (520.5     97.2   

Net cash provided by our operating activities for the years ended December 31, 2014 and 2013, amounted to $801.8 million and $994.0 million, respectively.

Net cash from operating activities decreased in 2014, parallel to a $558.9 million decrease in profit compared to 2013. We consider the subtotal after the adjustments for profit for the period in order to analyze the increase in cash from operating activities. Since these lines are adjusting in nature, they are to be excluded from net cash from operating activities, as they either do not have any effect on net cash from operating activities or they have an offsetting effect on the changes in working capital. As a result, the trend in cash from operating activities should be correlated with the trend in results from operating activities, income tax expense and dividends received. The corresponding subtotal, after adjustments, decreased from $1,706.1 million in 2013 to $1,550.4 million in 2014. Furthermore, change in trade receivables had a higher negative impact on cash generated by operating activities mainly due to increased assigned contracted receivables, which partially offset the decrease in interest paid to $43.0 million in 2014 from $59.1 million in 2013 (also decreased in TRY terms) and the income tax paid to $317.7 million in 2014 from $337.8 million in 2013 (increased in TRY terms). These changes resulted in a 19.3% decrease in net cash provided by our operating activities.

Net cash used by investing activities for the year ended December 31, 2014, increased to $573.1 million from $469.7 million in 2013. The change in net cash used/generated by investing activities is mainly due to advances paid for the acquisition of property, plant and equipment of $110.9 million in 2014 and the increase in capital expenditures, which was partially offset by the increase in interest received. For the year ended December 31, 2014, we spent approximately $ 924.9 million on capital expenditures compared to $853.8 million in 2013. Of the $924.9 million in capital expenditures, approximately $587.2 million was related to capital expenditures made by Turkcell, mainly for our mobile communications network in Turkey, whereas such amount was $495.6 million in 2013. Total capital expenditures of Euroasia decreased from $67.8 million in 2013 to $43.7 million in 2014 whereas total capital expenditures of Turkcell Superonline increased from $187.0 million in 2013 to $238.4 million in 2014.

We have generated net cash from our financing activities for the year 2014 amounting to $39.5 million, whereas we had $121.6 million of net cash used for 2013. The change is mainly attributable to higher proceeds from the issuance of loans and borrowings partially netted with the increase in repayment of loans and borrowings. In 2014, proceeds from the issuance of loans and borrowings were $2,100.7 million, compared to $898.1 million in 2013. We repaid $2,057.5 million of our loans and borrowings in 2014, compared to $1,019.3 million in 2013.

 

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b. Sources of Liquidity

Our loans from financial institutions consist of local and international bank borrowings with either fixed or floating interest rates. A significant portion of our bank borrowings is utilized to finance our consolidated subsidiaries’ financing needs. All of our loans are denominated in U.S. Dollar, BYR, EUR or TRY. The floating interest rates vary from Libor + 0.7% to Libor + 3.5% for the loans denominated in U.S. Dollars. The fixed interest rates vary from 0.7% to 8.0% for the loans denominated in U.S. Dollars, from 8.3% to 10.5% for the loans denominated in TRY, from 12.00% to 16.00% for the loans denominated in BYR, and the fixed Euro rate is 3.4%. The loans are payable over the period from 2015 to 2024.

The ratio of our loans and borrowings to equity was 22% as of December 31, 2014, compared to 23% as of December 31, 2013. We have been able to maintain our leverage at a satisfactory level and well in line with our targets. For more information, see Note 26 to our Consolidated Financial Statements.

We are continuing our efforts to selectively seek out and evaluate new investment opportunities. These opportunities could include the purchase of licenses and acquisitions in markets inside and outside of Turkey. In the future, we may reinitiate, as necessary, our efforts to create a financing arrangement, such as a term loan facility.

In 2012, Astelit defaulted on its loan agreements. See “Item 3.D. Risk Factors” for more information.

Under the current assumptions and circumstances, we expect to generate adequate levels of cash to maintain a positive cash position in the future and to have positive cash flow related to our communications and technology activities in Turkey. According to our current business plan for the operations in Turkey, we believe that we will be able to finance our current operations, capital expenditures, and financing costs and maintain and enhance our network through our operating cash flow and our strong cash balance as of December 31, 2014. However, we continue to experience difficult pricing and competitive conditions in our markets, which we expect will continue. In addition, the increase in the volume of assigned contracted receivables may continue to result in higher working capital requirements. We are also facing increased capital needs to finance our technological and geographic expansion, which may increase our net cash used for investing activities. These pressures have reduced, and may continue to reduce, our liquidity and may lead to an increase in borrowing needs and net cash used by financing activities.

Our cash outflows through 2015 include possible dividend payments, depending on the result of our general assembly meetings, quarterly corporate tax payments, capital expenditures and working capital needs.

We expect that our total operational capital expenditures as a percentage of revenues in 2015 will be around 20%, with increased investments in preparation for the transition of the mobile network to 4G, further expansion of the fiber network, and the roll out of Astelit’s 3G network. This ratio excludes new spectrum fees in Turkey and Ukraine related to 4G and 3G, respectively.

The forward-looking statements made here regarding our liquidity and any other financial results are not a guarantee of performance. They are subject to risks and uncertainties that could cause future activities and results of operations to be different from those set forth in this annual report.

Important factors that may adversely affect our projections include general economic conditions, changes in the competitive environment, legal risks, developments in the domestic and international capital markets, increased investments, changes in telecommunications regulations and mismatches between the currencies in which we generate revenue and hold liquid assets and the currencies in which we incur liquid obligations and debt. See “Item 3.D. Risk Factors” for a discussion of these and other factors that may affect our projections.

c. Capital Transactions

All share amounts and per share figures reflected in our historical financial statements have been restated retrospectively for the aforementioned stock splits.

 

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d. General Economic Conditions

Turkey’s growth was 2.8% in the first nine months of 2014 and based on market estimates, growth for 2015 is expected to be around 3%, mainly driven by the domestic demand.

e. Dividend Payments

For additional details regarding our dividend policy, see “Item 8.A. Consolidated Statements and Other Financial Information—Dividend Policy”.

5.C Research and Development, Patents and Licenses, etc.

We own a number of patents, utility models, trademarks and industrial designs

The activities of our technology center, which houses all of our R&D operations in a single location, include the following:

 

   

Partnership software development, customization and/or integration of software products of suppliers through the service and product development processes;

 

   

Developing network infrastructure strategies in a fast evolving information-communication technologies world; and

 

   

Designing short and long-term technology road maps for our operations.

Internally developed software arising from our R&D partnership amounted to approximately $47.6 million, $37.2 million and $37.9 million in 2014, 2013 and 2012, respectively. Internally-developed software does not include any costs relating to the research phase.

5.D Trend Information

a. Changing Subscriber Base

The proportion of postpaid subscribers in our subscriber base was 44%, 40% and 38% in 2014, 2013 and 2012, respectively, due to our value focus.

The majority of our subscriber base, however, consists of prepaid subscribers. Trends indicate that prepaid subscribers have more control over their usage patterns.

b. Regulations affecting our prices

The ICTA has on several occasions intervened to place caps on the tariffs that we charge in the Turkish market. The ICTA’s intervention in our retail voice, SMS and mobile data prices, has, and will continue to, negatively affect our ability to design and launch campaigns and offers and, consequently, has had, and will continue to have, a negative impact on our business. The ICTA has also intervened to place caps on our interconnection rates.

With respect to the interconnection rates that we charge, after a 33% reduction for Turkcell in 2008, the interconnection rates issued by the ICTA on March 25, 2009 for all mobile operators in Turkey provided for a further 29% decrease, on average, among all operators. On February 10, 2010, there was an additional 52% reduction in Turkcell’s interconnection rates. Finally, with the ICTA’s board resolution dated June 17, 2013, our mobile termination rates have been set at TRY 0.0250 (equivalent to $0.0100 as of March 3, 2015), a 20% decline from TRY 0.0313 (equivalent to $0.0125 as of March 3, 2015). In addition, the ICTA with a board resolution dated April 12, 2013, lowered SMS termination rates for Turkcell from TRY 0.0170 (equivalent to

 

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$0.0068 as of March 3, 2015) to TRY 0.0043 (equivalent to $0.0017 as of March 3, 2015). With its latest decision dated October 22, 2014, the ICTA also set the tariff for MMS termination rates for Turkcell at TRY 0.0086 (equivalent to $0.0034 as of March 3, 2015).

With respect to minimum tariffs, with a board resolution dated March 25, 2009, the ICTA set a lower limit solely for Turkcell’s on-net retail tariffs. In 2013, the ICTA linked the mobile termination rates to minimum on-net voice levels with a parameter of 1.7 such that our minimum on-net prices should be set by multiplying the mobile termination rate with the above mentioned parameter of 1.7. As a result, the ICTA increased the minimum tariff to be applied by Turkcell from TRY 0.0313 (equivalent to $0.0125 as of March 3, 2015) to TRY 0.0428 (equivalent to $0.0170 as of March 3, 2015) for voice and to set the minimum tariff of TRY 0.0073 (equivalent to $0.0029 as of March 3, 2015) for SMS, applicable to both tariffs and campaigns. The amendments for tariffs were effective as of July 2013 and for campaigns as of February 2014. These pricing regulations are valid on each and every single voice tariff and campaign, whereas we are obliged to maintain our minimum on-net SMS rate on network base.

With respect to the maximum tariffs, although the Concession Agreement includes a provision regarding only the increase of the maximum tariffs, the ICTA has decreased the maximum tariff since 2007, which has negatively affected our tariff structure. The maximum tariff on mobile voice increased by approximately 6% to TRY 0.439 (equivalent to $0.175 as of March 3, 2015) in 2013 and by approximately 5.4% to 0.4625 (equivalent to $0.1841 as of March 3, 2015) as of July 2014, while as of January 2014 the maximum tariff on SMS decreased by 20% to TRY 0.332 (equivalent to $0.132 as of March 3, 2015).

Further cuts in interconnection rates and changes in minimum and maximum tariffs will make us redesign our tariffs and will impact our operational results, depending on pricing trends and marketing strategies in the Turkish mobile communications market.

Given these factors, it is difficult to predict with any degree of certainty the growth and usage patterns of our subscribers and our ability to maintain or increase revenues or profitability. General economic conditions, competitive pressures and the trend in our retail and interconnection pricing have exerted, and will continue to exert, pressure on our financial results.

c. Liquidity

Our activities have traditionally generated a strong positive cash flow. According to our current business plan for the operations in Turkey, we believe that we will be able to finance our current operations, capital expenditures, and financing costs and maintain and enhance our network through our operating cash flow and our strong cash balance as of December 31, 2014. However, we continue to experience difficult pricing and competitive conditions in our markets, which we expect will continue. In addition, the increase in the volume of assigned contracted receivables may continue to result in higher working capital requirements. We are also facing increased capital needs to finance our technological and geographic expansion, which may increase our net cash used for investing activities. Furthermore, depending on the result of our general assembly meetings, we may pay a dividend for the first time in several years. These pressures have reduced, and may continue to reduce, our liquidity and may lead to an increase in borrowing needs and net cash used by financing activities.

We expect that our total operational capital expenditures as a percentage of revenues in 2015 will be around 20%, with increased investments in preparation for the transition of the mobile network to 4G, further expansion of the fiber network, and the roll out of Astelit’s 3G network. This ratio excludes new spectrum fees in Turkey and Ukraine related to 4G and 3G, respectively.

d. Currency devaluation and impairments

Our results of operations and the value of certain of our assets have been adversely affected by devaluations in the currencies of certain countries, in particular Ukraine, Belarus, and Turkey. Further currency devaluation

 

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remains a risk and may continue to have an adverse effect in the future. Furthermore, operational and technological changes, general macroeconomic conditions, legal, regulatory or political obstacles in Ukraine and Belarus may lead to further impairments in the values of certain of our assets in the future.

5.E Off-Balance Sheet Arrangements

Off-balance sheet arrangements refer to any transaction, agreement, or other contractual arrangement involving an unconsolidated entity (other than contingent liabilities arising from litigation, arbitration or regulatory actions) under which a company has:

 

   

provided guarantee contracts;

 

   

retained or contingent interests in transferred assets;

 

   

any obligation under derivative instruments classified as equity; or

 

   

any obligation arising out of material variable interests in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging, or research and development arrangements with the company.

We routinely enter into operating leases for property in the normal course of business. The future minimum operating lease payments under non-cancellable leases amount to $114.2 million and $90.4 million as of December 31, 2014 and 2013, respectively.

a. Contingent Liabilities

The following table illustrates our major contingent liabilities as of December 31, 2014.

 

            Amount of contingent liability expiration per period—Remaining  commitment  
     Total
amount
committed
     At December 31,
2014
     Indefinite*      Less than
one year
     1-3
years
     3-5
years
     Over
5 years
 
U.S.$ million                                                 

Bank Letters of Guarantee

     217.6         217.6         48.5         29.0         48.1         71.0         21.0   

 

* Bank letters of guarantee are not given for a specific period. Most of the guarantees will remain as long as the business relationship with the counterparty continues.

As of December 31, 2014, we are contingently liable in respect of bank letters of guarantee obtained from banks and given to custom authorities, private companies and other public organizations amounting to $217.6 million. We also provided guarantees to private companies amounting to $40.6 million.

See “Item 5.B. Liquidity and Capital Resources—Sources of Liquidity”.

5.F Tabular Disclosure of Contractual Obligations

The following tables illustrate our major contractual and commercial obligations and commitments as of December 31, 2014.

 

     Payments due by period  

Contractual Obligations

   Total      Less than
1 year
     1-3
years
     3-5
years
     After
5 years
 
(U.S.$ million)                                   

Loans and borrowings (*)

     1,658.3         1,056.3         571.8         29.4         0.8   

Finance lease obligations

     21.1         2.8         4.1         4.1         10.1   

Payable in relation to the acquisition of Belarusian Telecom

     100.0         —           —           —           100.0   

Total Contractual Cash Obligations

     1,779.4         1,059.1         575.9         33.5         110.9   

 

* Includes undiscounted interest.

 

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     Amount of Commitment  

Other Commercial Commitments

   Total      Less than
1 year
     1-3
years
     3-5
years
     After
5 years
 
(U.S.$ million)                                   

Purchase obligations

     1,635.8         783.8         838.3         12.0         1.7   

As at December 31, 2014, outstanding purchase commitments with respect to the acquisition of property, plant and equipment, inventory and purchase of sponsorship and advertisement services amount to $1,635.8  million.

5.G Safe Harbor

Not applicable.

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6.A Directors and Senior Management

I. Board Members

Under the Turkish Commercial Code and our Articles of Association, the Board of Directors is responsible for our management. Our Articles of Association mandates a Board of Directors containing seven members.

Members of our Board of Directors are generally appointed for a term of three years. However, in a series of resolutions in 2013, the CMB appointed new members to our Board, who shall remain members until new members are elected or until the CMB announces a new resolution. The CMB with its resolution dated March 11, 2013, announced the replacement of Mehmet Bulent Ergin, Tero Erkki Kivisaari and Oleg Adolfovich Malis on our Board of Directors with three new members, Atilla Koc, Mehmet Hilmi Guler and Ahmet Akca, who serve as “independent board members” according to article 17/2 of the Capital Markets Law No. 6362. The CMB with its resolutions dated August 15, 2013 and September 13, 2013 announced the appointment of Mehmet Bostan, Bekir Pakdemirli, Jan Erik Rudberg and Erik Belfrage, as board members who satisfy the independency criteria. They were appointed by the CMB pursuant to sub-paragraph (k) of the first paragraph of article 128 of Capital Markets Law No. 6362, in place of members of our Board of Directors who were elected at the general assembly meeting on April 29, 2010 for a duty period of three years and whose duty periods have expired and whose successors could not be elected at the general assembly meetings.

As of March 3, 2015, our Board of Directors had the following members:

 

Name

  

Date appointed to the Board of Directors by
Capital Markets Board  resolution

Ahmet Akca (Chairman)

   March 11, 2013

Atilla Koc

   March 11, 2013

Bekir Pakdemirli

   August 15, 2013

Erik Belfrage

   September 13, 2013

Jan Erik Rudberg

   September 13, 2013

Mehmet Bostan

   August 15, 2013

Mehmet Hilmi Guler

   March 11, 2013

 

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II. Executive Officers

We are managed on a day-to-day basis by the Corporate Executive Team with the guidance of the Board of Directors. Officers do not have fixed terms of office. The following table sets forth the name and office of each member of our Corporate Executive Team as of December 31, 2014.

 

Name

  

Office(1)

Sureyya Ciliv(2)

   Chief Executive Officer

Ilker Kuruoz(3)

   Chief Technology Group Officer

Murat Dogan Erden

   Chief Financial Officer

Banu Isci Sezen(4)

   Chief Group Human Resources Officer

Bulent Elonu

   Chief Network Operations Officer

Burak Ersoy(5)

   Chief Consumer Sales Officer

Burak Sevilengul(6)

   Chief Consumer Marketing and Sales Officer

Doga Unay(7)

   Chief Group Strategy and Strategic Planning Officer

Gediz Sezgin

   Chief Information and Communication Technologies Officer

Ilter Terzioglu(8)

   Chief Strategic Projects Officer and acting Chief International Business Officer

Selen Kocabas

   Chief Corporate Business Officer

Semih Incedayi

   Chief Products and Services Officer

Seyfettin Saglam(9)

   Chief Group Human Resources Officer

Tayfun Cataltepe

   Chief Regulations, Legal & Wholesale Business Officer

Tolga Cem Seyfeli

   Chief Legal Officer

Yigit Kulabas

   Chief Corporate Marketing Officer

 

(1) Mr. Koray Ozturkler resigned from his position as Chief Corporate Affairs Officer effective April 30, 2014. This position no longer exists.
(2) Mr. Sureyya Ciliv resigned from his position as Chief Executive Officer effective January 31, 2015.
(3) Mr. Ilker Kuruoz, in addition to his current position, is the acting Chief Executive Officer effective January 31, 2015.
(4) Ms. Meltem Kalender Ozturk resigned from her position as Chief Group Human Resources Officer effective April 30, 2014 and Ms. Banu Isci Sezen was appointed as Chief Group Human Resources Officer effective July 7, 2014.
(5) Mr. Hulusi Acar resigned from his position as Chief Consumer Sales Officer effective April 30, 2014 and Mr. Ersoy was appointed as Chief Consumer Sales Officer effective July 7, 2014.
(6) Mr. Burak Sevilengul was appointed as Chief Consumer Marketing and Sales Officer effective April 30, 2014, which combined the Consumer Sales and Consumer marketing functions. The Corporate Communications Department will be reporting to this newly formed Consumer Marketing and Sales function.
(7) Mr. Doga Unay was appointed as Chief Group Strategy and Strategic Planning Officer effective July 7, 2014.
(8) Ms. Lale Saral Develioglu resigned from her position as Chief International Business Officer effective September 19, 2014. In addition to his current position as Chief Strategic Projects Officer, Mr. Terzioglu is the acting Chief International Business Officer effective September 19, 2014.
(9) Mr. Seyfettin Saglam was appointed as Chief Group Human Resources Officer effective July 7, 2014.

III. Biographies

a. Current Board Members

Ahmet Akca, born in 1956, was appointed to the Board of Directors on March 11, 2013. He also serves as a member of the Audit Committee of Turkcell’s Board of Directors. From 1980 to 1988, Mr. Akca served as a Foreign Trade Manager in the glass and food industry. In 1988, he became CEO of the International Trading House Company, a position he held until 1992. He later started his own business, which he still runs. Mr. Akca is the founder and Chairman of the Board of Directors of the logistics company Akca Lojistik Hizmetleri ve Ticaret A.S. He was a member of the Committee of Trustees in January 2010, at the time of the Bezmialem Vakif University foundation, and has been serving as Chairman of the Committee of Trustees since November 2011. After studying mathematics at Middle East Technical University and sociology at Istanbul University, Mr. Akca graduated from the Bursa Economics and Commercial Sciences Academy’s Department of Economics.

 

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Atilla Koc, born in 1946, was appointed to the Board of Directors on March 11, 2013. He also serves as a member of the Audit Committee of Turkcell’s Board of Directors. After working as an Undersecretary at the Ministry of Interior and as the Chief of Police in Konya, he served as the District Governor of the Ulubey, Nusaybin and Bayindir districts, and as the Governor of Siirt and Giresun provinces. He has also been the Counselor in the Undersecretary of Prime Ministry, the General Secretary of Ankara Metropolitan Municipality, and the Central Governor. Mr. Koc was the Minister of Culture and Tourism at the 59th Government. Mr. Koc graduated from Ankara University’s Faculty of Political Science.

Bekir Pakdemirli, born in 1973, was appointed to the Board of Directors on August 15, 2013. Over the past decade, Mr. Pakdemirli has worked as the Middle East Regional Manager of a multinational company, General Manager of a ceramic company in Izmir and as General Manager of a publicly traded food company. Currently, he is Business Development Manager of McCain, while providing consultancy services to companies in the domains of management, finance, efficiency and restructuring. Mr. Pakdemirli is a Board member of Tarkem, historical Kemeralti Inc., a Board member of the Anatolia Foundation for Autism and a member of the Capital Market Investors Association. Mr. Pakdemirli presents weekly economic programs on Ege TV. Mr. Pakdemirli is, in addition, an amateur captain, pilot and radio operator. After graduating from Bilkent University, Faculty of Business Administration, he completed his Master’s degree in Management at Baskent University. Currently, Mr. Pakdemirli is enrolled in a doctoral program in Economics at Celal Bayar University.

Erik Belfrage, born in 1946, was appointed to the Board of Directors on September 13, 2013. Previously, Mr. Belfrage worked as a Swedish diplomat in Geneva, Washington, Bucharest, Beirut, and Paris. He was also the Senior Vice President at SEB, an advisor to Dreter Wallenberg, an advisor to the Chairman at the Investor AB Jacob Wallenberg and SEB Marcus Wallenberg companies, and Chairman and Partner at Consilio International AB. Currently, Mr. Belfrage is the Chairman of several boards and commissions. He holds an M.B.A from the Stockholm School of Economics.

Jan Erik Rudberg, born in 1945, was appointed to the Board of Directors on September 13, 2013. He is currently Chairman of the Board of Directors and independent director of Kcell JSC, and the Chairman of the board of directors of Hogia AB companies. Since 2010, Mr. Rudberg has also been an independent director and the Chairman of the Audit Committee of OJSC Megafon. From 1994 until 2003, he held a variety of managerial positions with Telia AB. Mr. Rudberg previously served as Chief Executive Officer of Tele2 AB, Executive Vice President of Nordbanken AB, and Chief Executive Officer of Enator AB and several managerial positions at IBM. Mr. Rudberg holds a Business Administration degree from the Gothenburg School of Economics in Sweden.