Annual Report 2006 A little difference, a big step On behalf of us, for all of us Financial Highlights 1 Honorary Chairman's Message 2 Chairman's Statement 4 Board of Directors 6 CEO's Letter 8 Executive Management 10 Corporate Profile 12 Corporate Values 13 Strategies and Vision 14 The Added Value of Koç Holding 14 Review of the Year 15 Automotive 16 Consumer Durables 24 Food & Retailing 32 Energy 38 Finance 46 Other 52 Corporate Citizenship 56 Curriculum Vitae of the Board Members and Executive Management 62 Corporate Governance Compliance Report 66 Board of Directors' Report 78 Segmental Reporting of Summary Financial Indicators 81 Auditor's Report 84 Independent Auditor's Report, Consolidated Financial Statements and Notes 85 Contact Details 170 Contents
Transcript
Koç
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Annual Report 2006
A little difference, a big stepOn behalf of us, for all of us
Financial Highlights 1Honorary Chairman's Message 2Chairman's Statement 4Board of Directors 6CEO's Letter 8Executive Management 10Corporate Profile 12Corporate Values 13Strategies and Vision 14The Added Value of Koç Holding 14Review of the Year 15Automotive 16Consumer Durables 24Food & Retailing 32Energy 38Finance 46Other 52Corporate Citizenship 56Curriculum Vitae of the Board Members and Executive Management 62Corporate Governance Compliance Report 66Board of Directors' Report 78Segmental Reporting of Summary Financial Indicators 81Auditor's Report 84Independent Auditor's Report, Consolidated Financial Statements and Notes 85Contact Details 170
Contentswww.koc.com.tr
30 countries88,000 employees
Koç HoldingShareholder Structure
1.97% Koç Holding Pension& Assistance Foundation 70.51% Koç Family
20.35%Free Float
Koç Holding shares are listed on the ‹stanbul Stock Exchange (ISE) with KCHOL symbol.
7.17% Vehbi KoçFoundation
Automotive Consumer Durables Food & Retailing
Main CompaniesFord Otosan * / Tofafl* / Türk Traktör* / Otokar*Otoyol / Otokoç / Birmot
Number of Companies Included in ConsolidationDomestic: 14
International AlliancesFord Motor Co. / Fiat Auto S.P.A.Case New Holland / Iveco / Yamaha
Share in Consolidated Revenues12.8%
Share in Operating Profit14.4%
Number of Employees17,760
Domestic Market Position#1 in passenger cars#1 in commercial vehicles#2 in farm tractors#1 in total automotive#1 in automotive retailing
Main CompaniesArçelik* / Beko Elektronik* / Türk Demir Döküm*Arçelik - LG / Arctic / Blomberg / Elektra BregenzGrundig
Number of Companies Included in ConsolidationDomestic: 6International: 39
International AlliancesLG Electronics / Alba Plc
Share in Consolidated Revenues15.5%
Share in Operating Profit20.1%
Number of Employees19,271
Domestic Market Position#1 in refrigerators, washing machines,dishwashers and ovens,#1 in air conditioners, combi boilers, waterheaters and heating equipment#1 in TVs
Main CompaniesMigros* / Ramenka / KoçtaflTat* / Düzey
Number of Companies Included in ConsolidationDomestic: 6International: 6
International AlliancesB&Q / Kagome Sumitomo / Kaneka Seeds
Share in Consolidated Revenues10.9%
Share in Operating Profit8.2%
Number of Employees20,846
Domestic Market Position#1 in FMCG retailing#1 in DIY retailing
Number of Companies Included in ConsolidationDomestic: 14International: 11
International AlliancesUniCredit / Allianz / Tokyo Marine
Share in Consolidated Revenues9.9%
Share in Operating Profit22.7%
Number of Employees17,146
Domestic Market Position#4 in total banking assets among private banks#1 in credit cards#1 in insurance (non-life) and individualpensions#1 in mutual funds#1 in leasing and factoring
Main CompaniesTüprafl* / Aygaz* / Opet / Entek / Mogaz / Akpa
Number of Companies Included in ConsolidationDomestic: 12International: 5
International AlliancesStatoil
Share in Consolidated Revenues48.5%
Share in Operating Profit34.0%
Number of Employees8,089
Domestic Market PositionSole petroleum refiner in Turkey#1 in LPG distribution#4 in petroleum products distribution
Main CompaniesRam / Koç Sistem / Koçnet / SeturMares* / Palmira / Setur Marinalar› / RMK MarineDemir Export
Number of Companies Included in ConsolidationDomestic: 17
Share in Consolidated Revenues2.4%
Share in Operating Profit0.6%
Number of Employees5,136
Koç Group in Brief
Koç Holding is not only the largest company in Turkey, but it is also rapidlyclimbing the steps in the ranking of world's 500 largest corporations, withleadership positions in profitable business lines. Total exports of Koç Groupaccount for 12% of Turkey's total exports, while Koç Holding and 19 publiclytraded Group companies comprise 16% of the total market value of companiestraded on the Istanbul Stock Exchange.
(1) Convenience translation with 2006 average exchange rates for income statement items (including net income), and 2006 year end exchange rates for balance sheet items;Average exchange rates: YTL1.4311=USD1 and YTL1.8000=EUR1; Year end exchange rates: YTL1.4056=USD1 and YTL1.8515=EUR1(2) Convenience translation with 2005 average exchange rates for income statement items (including net income), and 2005 year end exchange rates for balance sheet items;Average exchange rates: YTL1.3408=USD1 and YTL1.6695=EUR1; Year end exchange rates: YTL1.3418=USD1 and YTL1.5875=EUR1
We pledge to reinforce our position of leadership in the nationaleconomy and are determined, as always, to fulfill the socialresponsibilities that such a position entails.
Rahmi M. KoçKoç Holding Honorary Chairman
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2006 witnessed a significant increase in KoçGroup's business volume, reflecting thesuccess of initiatives put in place over thelast few years. The addition of newcompanies to our business portfolio had aconsiderable impact on the rapid expansionof operating results. The successfulabsorption of these large entities into thesystem and culture of the Koç Group is dueto the tireless efforts and the commitmentto change on the part of our bothlongstanding and new managers andemployees.
Fluctuations in the global financial marketsin the middle of the year affected Turkeynegatively. However, in contrast to similarcrises in the past, the impact of this wasovercome quickly. This difference signifiesthat Turkey has entered into a new phasein which political stability and economicdiscipline mutually reinforce the resilienceof the Turkish financial markets to sharpchanges in currency and interest rates.
The uninterrupted economic growthexperienced over the last five years is indeednoteworthy given the track record in recenthistory. The economy expanded by another6% in 2006, despite widespreadexpectations that the rate of growth wouldcool down slightly, thus raising hopes forthe future. Other indicators, including thestrong inflow of foreign direct investment,the significant increase in exports, theslowing down of the current account deficitand the improvement, however slight, in thedistribution of income–support our optimism.
The positive developments in the economyis reflected in our business results.Traditionally, Koç Group always outperformsmarket developments in Turkey and thisproved to be the case once again in2006. However, we judge our businessperformance not only by economic resultsbut by the added value we create. We seekto distinguish ourselves from our competitorsin both domestic and international marketsby the quality of our goods and services aswell as by such factors as innovation, design,reliability and customer satisfaction. Theresults we have achieved demonstrate thatwe have attained our objectives.
In today's environment of global competitionin the industrial and service sectors,relentless dynamism is the key to success.In addition to continuing to enhance theproductivity and profitability of ourbusinesses, we are committed to utilizingtechnology, processing information,supporting innovation and funding research& development. We give utmost priority torisk management and the evaluation ofopportunities amidst constantly changingmarket conditions. By establishing abusiness system that trains all of ouremployees to follow these principles, wehave empowered our companies tocompete and succeed.
In 2007, risks and difficulties are likely tostem from the two upcoming elections inTurkey in addition to any unforeseenfluctuations in the global markets. However,I am hopeful that these risks and difficultieswill remain at minimal levels or even will notmaterialize at all provided that the
government, bureaucrats, businessmen,media–in sum all segments of society–remember the lessons of the past andcontinue to apply strict economic policies.
Koç Group has set high growth and profittargets for 2007. We will make every effortto achieve these objectives. We pledge toreinforce our position of leadership in thenational economy and are determined, asalways, to fulfill the social responsibilitiesthat such a position entails.
As Koç Group enters its 81st year, I extendmy sincere thanks to our shareholders,customers, dealers, business partners andemployees for their unfaltering support andcooperation.
Chairman's Letter
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Turkey enjoys an unprecedentedinflow of foreign capitalinvestment continuing at fullspeed. The noteworthy stepsachieved in attracting foreigninvestment, particularly in thebanking sector indicate thatconfidence in Turkey is growing.
In 2006 the Koç Group, spurred on by themotto “The World is our Playing Field”,performed exceptionally well, attainingseveral of its long term objectives soonerthan expected.
The pace of growth in the Turkish economycontinued at 6% in 2006, faster than theglobal average of 4%. This makes Turkey–along with India and China–one of the mostrapidly growing countries in the world.
Economic reform and political stabilityincreased the resilience of the Turkisheconomy, minimizing the negative impactof fluctuations in financial markets on inflation,growth rates, investment and foreign capitalinflows.
Political stability and economic growth alsoenabled Turkey to deflect the critical attitudeof some European countries vis-à-visTurkey's membership, which resulted in thepostponement of negotiations on someaspects of full membership.
The Koç Group views these attitudes as abump on the long road yielding to fullmembership in the EU. We know that justas Turkey needs the EU to ensure continuedrapid growth, to establish strong ties withworld markets and to attain internationalstandards, the EU needs Turkey just asmuch. Conditions exist that can makerelations a win-win equation, thus we are notoverly worried about periodic setbacks inEU-Turkey relations. Turkey's vibranteconomy and potential for continued highgrowth intensifies our confidence regardingthe eventual positive outcome of the EU-Turkey negotiations.
Multinational companies share the sameview. Turkey enjoys an unprecedented inflowof foreign capital investment continuing atfull speed. The noteworthy steps achievedin attracting foreign investment, particularlyin the banking sector, indicate thatconfidence in Turkey is growing. All signspoint to Turkey becoming a center ofattraction for foreign investment andacquisitions in the near future.
For Koç Group, 2006 has been a challengingand rewarding year. We tackled theintegration of the three large companies weacquired in the last quarter of 2005–Tüprafl, Yap› Kredi and Tansafl–and,following the conclusion of this process,have begun to see positive results fromthese important additions to the Group.
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rThe merger of supermarket chains Tansafland Migros was completed mid-year.The presence of these two strong brands,together with the sub-brands of Macrocenteron the high-end and fiok on the discount-end, puts Koç in an unrivalled position inthe FMCG retailing sector.
The integration of oil refinery Tüprafl intoKoç Group was carried out expeditiouslyand smoothly. Through this key acquisition,Koç now owns and operates one of thelargest refineries not just in Turkey but inthe entire Mediterranean region. We planto raise productivity and production qualityat Tüprafl and thus create added value forTurkey.
The merger of Koçbank with Yap› Krediunder a new corporate identity has startedto bear fruit. Yap› Kredi ranks as one of thefour biggest private sector banks in Turkeyand has significantly increased its marketvalue since the merger.
The successful conclusion of these threemajor integrations in the course of one yearis a very significant accomplishment byitself. Yet, the achievements of the Groupdo not stop here.
We made significant progress in both localand international markets, fortifying ourposition of leadership in our core businessesand thus paving the way to becoming aglobal player in these areas.
In the automotive sector, Ford Otosan'sKocaeli factory, which has been repeatedlychosen as Ford's best production facility inEurope for the last five years, was selectedas the world's best vehicle production plantand best engine production center in 2006due to its achievements in the areas ofquality, work management processes andenvironmental sensitivity.
Tofafl, in partnership with Fiat SpA, derived63% of revenues from exports in 2006 andwill pursue mainly export-based rapid growthwith the introduction of Minicargo and Lineamodels in 2007.
In the consumer durables sector, we remainthe unrivaled leader in the local market.Growth abroad accelerated with the openingof a factory in Russia and exports to China.
A strong focus on our core businesses overthe past few years has produced excellentresults. In 2006, in line with a more focusedgrowth and a more proactive divestiturestrategy, we sold off three of our peripheralbusinesses–Döktafl, an iron foundry,‹zocam, a manufacturer of insulationmaterials, and Biletix, an internet ticketagency. We believe that these sales willbenefit these companies and theiremployees as well as our Group. Lookingahead, we will continue to take advantageof opportunities to divest non-core assetsin line with our strategic objectives.
The customer oriented approach of KoçGroup and its subsidiary companies–andthe emphasis placed on business ethics,quality and corporate citizenship–have madeKoç brands the most respected and popularbrand in Turkey. Koç Group ranked as themost admired and respected corporationin Turkey in an independent survey of topprofessionals. Our subsidiary companiesranked among Turkey's most admired, best-known and closest with the highest customersatisfaction. Periodic independent researchnamed Arçelik, for the third time in a row in2006, as the “most recognized brand” andthe brand that is “closest to the consumer”.Another independent survey voted Aygazas number one for customer satisfactionamong all products and sectors.
As well as being a year of noteworthybusiness accomplishments, 2006 alsomarked our 80th Anniversary. We celebratedthis milestone with new corporate socialresponsibility projects, a proliferation of ourcontinuous commitment to “responsiblecitizenship”.
For many years we have supportedinnovative and sustainable projects in theareas of education, healthcare and culturalheritage through the Vehbi Koç Foundation,one of the largest philanthropic foundationsin Europe.
While increasing our support and level ofinvestment in the Foundation, we adopteda more grass-roots approach to corporatesocial responsibility in 2006 with twoprojects.
We initiated the Support VocationalTechnical Education program to encouragethe transformation of our country's youngpopulation into qualified human resourcesby supporting and upgrading Turkey'svocational high school system. Ourcampaign seeks to motivate both the publicand private sector to support the studentswho attend these schools by grantingscholarships, providing internships andincreasing awareness.
“For my Country” program harnessed theenergy and passion of our entireorganization to address public issuesthrough their personal involvement andcreativity. These initiatives served as a solidtestament of our commitment to socialresponsibility ratified under the UnitedNations Global Compact, which we signedearlier in the year.
Outstanding performance, high energy anda fast tempo characterized Koç Group in2006. We are prepared to sustain this pace,enthusiasm and level of achievement in2007.
Mustafa V. KoçChairman of the Board of Directors
Board of Directors
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Rahmi M. KoçHonorary Chairman
Mustafa V. KoçChairman
Suna K›raçVice Chairman
Temel AtayVice Chairman
Semahat ArselMember
Prof. Dr. Yavuz AlangoyaMember
H. Oswald MaucherMember
W. Wayne BookerMember
Curricula Vitae are provided on page 62.
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Bülend Özayd›nl›Member - CEO
‹nan K›raçMember
Ömer M. KoçMember
Hasan Subafl›Member
Prof. Dr. John H. McArthurMember
Dieter Christoph UrbanMember
Dr. Füsun Akkal BozokAuditor
Nevzat Tüfekçio¤luAlternate Auditor
CEO's Letter
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Over the last five years, ourconsolidated revenues haverisen by five times to USD34.5billion.
From Turkey's perspective 2006 was a yearin which we acquired new experiences. Thefluctuations seen in financial markets in thefirst half of the year showed that our economyis still fragile and that we are among theeconomies most affected by financial shocksin the world. This reality demonstrated onceagain very clearly the necessity to implementeconomic, political and social reformsdecisively without any deviation.
The reluctance of the European Union tocarry out its commitments, no matter howmuch uncertainty it brings to the EU-Turkeyrelations, is a reason for Turkey to speed upreforms and revive relations.
In 2006, despite the negative effects of thefluctuations in financial markets on the privatesector, Koç Group continued to grow in allits core businesses, more than doublingoperating profit.
Our strengthening in international marketscontinued without losing speed. We arecarrying our leadership position in the areaswe operate to a more ambitious dimension.
The size and scope of Koç Group todaystems from the strategic plan adopted in2002. At a time when the 2001 economiccrisis in Turkey left many companies in aweakened position, Koç Group, in contrast,formulated new strategies and set newobjectives.
Our objectives were:
• Focusing on sectors close to the consumerwhere we have a competitive advantage,• Being the market leader or a close secondin all our business areas,• Increasing the strength of our brands andtechnology,• Generating at least 50% of our revenuesfrom international business.
As a natural extension of these objectives,Koç Group expanded its ambition from beingthe number one corporation in Turkey tobecoming a major international businessgroup.
Bülend Özayd›nl›CEO & Managing Director
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terRapid and profitable growth was the key to
achieving this goal. Consequently we setour growth objective at an average rate of14% per annum. In fact, by taking advantageof new opportunities that mesh with thestrategic plan, the Group has achievedaverage annual organic growth of 23% in itsexisting businesses in the last five years.If we include the companies that we haverecently acquired, the annual growth rateexceeds 40%.
Our original growth target of 14% per annumencompassed a forecast of consolidatedrevenues at USD40 billion within 15 years.In fact, we have attained consolidatedrevenues of USD34.5 billion in just five years.In other words, consolidated revenues haveincreased five times during this period. Atpresent, the combined sales of Koç Groupequal 13% of Turkey's GDP.
In 2001, the Group posted USD2 billion ininternational sales; this has increased by anaverage of 45% per annum over the last fiveyears to USD12.6 billion. Koç Group's sharein Turkey's total exports reached 12%.Despite this rapid growth, we fell short ofour goal of generating 50% of revenues frominternational sales. This was a consequenceof the very large acquisitions we made lastyear which focus mostly on domesticmarkets.
Sustainability of growth performancedepends on an increase in profitability parallelto revenues. In 2002, we reported EBITDAof USD688 million; by 2006, this had risenby four times to USD2.7 billion. Expressedanother way, our EBITDA has increased byan average of 41% per annum.
As the leading company in the nationaleconomy, Koç Holding measures its successby its position in the global economy.
Koç Group represents Turkey's premiercompanies with a nationwide industrial andservice network consisting of 88,000employees and over 15,000 dealers andbranches, retail chain outlets, agents andafter sales service points. In the global arena,its organization spans 30 countries.
We seek to strengthen our position in ourcore business areas and at the same timeproduce more value added for Turkey.We give importance to balancing thecontributions of various business areas tototal profitability.
Our core businesses in automotive,consumer durables, retailing, finance andenergy have all played a part in thedevelopment of the Group over the last fiveyears. This balance between businesssegments minimizes risk and increases ourresilience to economic downswings.In 2006, new acquisitions of Tüprafl, Tansafland Yap› Kredi Bank have been integratedinto the Group quickly and without difficulties,accelerating growth and bringing us closerto our objectives.
Similarly, the sales of ‹zocam, Döktafl andBiletix to major international players in theirrespective sectors have enabled us to focusour resources on key business areas in linewith our strategic plan.
The progress of Koç Group operatingperformance has deepened our dedicationto corporate social responsibility.
While continuing with our existingcommitments in education, healthcare andcultural heritage managed for the most partby Vehbi Koç Foundation, we initiated newinnovative projects this year. Using theslogan “Vocational High Schools are aNational Issue”, Koç Holding started acampaign to grant 8,000 vocational highschool scholarships with internships andemployment opportunities, thus directingattention to this important issue. We intendto create awareness among the public andstate institutions of the need to increase thequality and quantity of vocational schools inTurkey.
Koç Holding also launched “For My Country”,a grassroots social responsibility campaignthat enlisted the participation of our entireworkforce and dealers. Thousands of dealersand employees all over the country designedand implemented a wide variety of projectsthat contribute to the well-being of theircommunities.
Corporate citizenship and a personal senseof social responsibility have always beenintegral to the way we do business. Ourcorporate culture emphasizes universalbusiness values and standards; in the yearsahead, we will continue to apply theprinciples of the United Nations GlobalContract that we signed in 2006 as aconfirmation of our commitment to goodcorporate governance, employee rights andenvironmental protection. Even moreimportantly, we will act as a pioneer andmodel in the application of these principlesin our geographic region.
Keeping our objectives, products and servicequality at the highest levels will ensurecontinuous growth and advance us in theglobal arena. I feel confident that Koç Group'sambition to become a global player willbecome a reality in the very near future.
2006 marked the last full year I served asCEO at Koç Holding. Most of the objectivesset in our strategic plan have been achievedin less time than expected. This has led tomy decision to resign as CEO, effective May2007. I am satisfied that we have achievedwhat we set out to do and I feel that it is theright time to step down to lead the way to afresh restart.
In parting, I would like to extend myappreciation to our companies for the effortsthey have made and the results they haveproduced. It is due to their hard work anddedication that Koç Group has attained itsbold objectives.
I would also like to thank our shareholdersfor their support and encouragement duringthis period.
Executive Management
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Kudret ÖnenAutomotive Supplies and Other AutomotiveCompanies President
Ahmet Ashabo¤luCFO - Finance Group President
Tamer Haflimo¤luStrategic Planning President
Hasan BengüForeign Trade and Tourism Group President
Ömer BozerFood and Retailing Group President
Rüfldü Saraço¤lu, PhDBanking and Insurance Group President
Ali Tar›k UzunAuditing Group President
Dr. Bülent BulgurluConsumer Durables and ConstructionGroup President**
Ali Y. KoçCorporate Communications and InformationGroup President
Bülend Özayd›nl›Chief Executive Officer - CEO*
Erol Memio¤luEnergy Group President
(from left to right)
* Resigned as of May 01, 2007.** Became the CEO as of May 01, 2007.
Curricula vitae are provided on page 64.
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Established in 1926, today Koç Holding is one of the largest companies, notonly in Turkey, but also in Europe, in terms of its business volume, profitabilityand wide range of products and services. With consolidated revenues ofUSD34.5 billion, Koç Holding is the leading Turkish company listed in the“World's Most Admired Companies” ranking.
In line with its objective to transform from a national leaderto a global player, and the motto of being “the group closestto the consumer”, Koç Holding focuses on five core businesssectors with high growth potential and in which Koç enjoyssignificant competitive advantages:• automotive,• consumer durables,• food and retailing,• energy,• finance.
Across the board, the Group companies either lead theirsectors or rank among the strongest players.
Koç Holding has the largest nationwide service network inTurkey with 88,000 employees, more than 15,000 dealersand branches, retail chains, agencies and after-sales servicepoints. Koç Holding aims to create synergies through effectiveuse of technology and modern management applications atevery product-service circle and thus differentiate itself bybeing close to the consumer.
Koç Group also represents the strongest and most widespreadinternational network of Turkish origin, with exports to morethan 100 countries and operations in 30 countries.
Consolidated results for 2006 yield• total assets of USD40.7 billion• total revenues of USD34.5 billion• net income of USD392 million
Koç Group's exports reached USD9.9 billion in 2006, whichaccount for 12% of Turkey's total exports.
Koç Holding and its 19 publicly traded subsidiaries represent16% of the value of all companies traded on the IstanbulStock Exchange as of 2006 year-end.
Alongside its impressive operating performance, Koç Groupsigned the UN Global Compact, transforming its voluntaryethical values and corporate citizenship principles into astandard for all Group companies.
Koç Holding adheres to the highest international principlesof corporate governance, customer satisfaction, socialresponsibility and environmental protection and is anexemplary follower of ethical values in all its activities withthe fundamental objective of increasingly creating value forall its stakeholders.
Founded by Vehbi Koç in 1926, today Koç Group is movingforward towards the targets he set under the legacy ofprinciples he championed.
Values of the Koç Group
The customer is the focus of everything we do.Our top priority is to create value for our customers; to respondsteadily to their expectations with quality. It is our duty to takeresponsibility for our products for the long term.
To be “the best” is our ultimate goal.To be the best in quality, service, supplier, and dealerrelationships; as an investment opportunity for ourshareholders; and to sustain this public image are our primarygoals. To achieve these goals we are committed to managingour businesses to be the leader in the market.
Our most important asset is our people.The quality of our products and services is based on thequality of our people. For the continuity of the Koç Group,we follow a policy of recruiting the best people, and providingopportunities for development and advancement. To fullyutilize the talents, strength, and creativity of our people, wecreate a work environment which nourishes increasedproductivity, cooperation, and solidarity.
Creation of wealth for continuous development is ourkey objective.Creation of value for our shareholders is a guiding principleto assure continuity of service, investments in our future, andcontributions to the economic and social development of ourpeople and our society. Therefore, creation of value, eliminationof waste, and efficient utilization of all resources are keyobjectives.
Honesty, integrity, and superior business ethics are thefoundations of our behavior.The conduct of our business is pursued with good intentions,mutual benefit, and fair treatment in all our relationships. Weare committed to conforming at all times to the highest ethicaland legal standards. We are a leader in serving our societyand safeguarding the interests of future generations. Protectionof the environment and promotion of a higher level ofenvironmental awareness are our duty to both our countryand the world.
We aspire to strengthen the Turkish economy fromwhich we derive our own strength.
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Vehbi Koç
Corporate Values
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Our vision is “To become one of Europe'sleading companies through rapid andprofitable growth”.
Strategies and Vision
We have set ambitious targets that reflect our confidence inKoç Group companies as well as the Turkish economy. Ourstrategic management approach is instrumental in attainingour objectives.
We are pursuing a growth strategy focused on five coresectors which offer high growth potential in Turkey as wellas the neighboring countries.The following strategic principlesguide us in shaping our business portfolio:
• Focusing on those sectors in which we can create adifference and in which we have a competitive advantage,• Selecting sectors in which we can attain a strong positionboth in domestic and international markets; with preferenceto sectors which minimize risk through geographicaldiversification while generating sustainable revenues,• Growing in sectors in which we can leverage our brandsand technology and continuously developing the strength ofour brands and technological prowess,• Deriving maximum benefit from economies of scale bybeing the market leader or a close second in every businesswe operate.
These principles ensure the opportunity to grow in a rapidand profitable manner in Turkey and neighboring countrieswith high growth potential and low penetration levels. Ourgeographic proximity to Europe, the Customs Union with theEU, our competitive advantages and already strong marketpositions also enable us to pursue a profitable and sustainablegrowth strategy within the European market.
Koç Holding adds value to its subsidiaries through:• Transforming the confidence and esteem gained by theGroup over the last 80 years into added value for oursubsidiaries;• Ensuring the spread and adherence to universal values,business processes, working conditions, environmental andethical standards throughout the Group companies bydetermining Group-wide vision and objectives;• Contributing to the consistently high performance of ourcompanies through a performance management systemfocused on creating shareholder value;• Increasing the competitive strength of our subsidiaries byguiding them in defining their long term strategies as well asassisting operations through centrally coordinated supportfunctions such as human resources, finance, strategicplanning, auditing, customer database management andResearch & Development which ensure that our companieshave access to the most qualified human resources, the besttechnology, the strongest research sources, the best auditingmechanisms and the broadest customer potential;• Providing financing opportunities to our subsidiaries forinvestments which will improve their competitive strength onan international scale;• Improving long-term customer satisfaction by assisting oursubsidiaries to deliver superior products and services thatmeet customer expectations by sharing our wide distributionchannels, comprehensive customer data and feedback withour subsidiaries, dealers, branches and agents;• Promoting Turkey, Koç Group, our subsidiaries and ourbrands effectively through successful international projects,strong brand management and corporate citizenship initiatives.
The holding structure which is based on value creation andstrategic management approach lays the foundation of KoçGroup's success. In addition to its successful operationalresults, Koç Holding is among Turkey's most admiredcompanies based on its management quality, contributionto the Turkish economy and employment, its transparency,social responsibilities, successful HR management andshareholder value creation.
Koç Holding's strategic managementapproach and ability to create value liesat the foundation of the successful resultsachieved by the Group.
The Value Added of Koç Holding...
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earOver the last five years, Koç Holding has achieved rapid and profitable growth in
line with its strategic plan. Realignment of the business strategy vis-a-vis the changingdynamics of the Turkish economy, as well as significant acquisitions have createda portfolio that promises sustainable growth and high profitability.
Review of the Year
Breakdown of Consolidated Revenues by Segment
2.4% Other 48.5% Energy
9.9% Finance
10.9% Food &Retailing
15.5% ConsumerDurables 12.8% Automotive
Breakdown of Capital Expenditures by Segment
3.8% Other 33.1% Energy
2.8% Finance
14.6% Food &Retailing
20.6% ConsumerDurables
Breakdown of Operating Profit by Segment
0.6% Other 34.0% Energy
22.7% Finance
8.2% Food &Retailing
20.1% ConsumerDurables
14.4% Automotive
Breakdown of Total Employment by Segment
5.8% Other 9.2% Energy
19.4% Finance
23.6% Food &Retailing
20.1% Automotive
25.1% Automotive21.8% ConsumerDurables
Automotive
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Total units produced
461,000Koç Group automotive companiesincreased total production by 7%despite the contraction in thedomestic demand to manufacture461,000 vehicles.
Koç Group has been active in theautomotive sector since 1968,endowing it with unbeatablecompetitive advantages and power.
In Turkey, only 7.8% of thepopulation own cars compared toan average of 47.5% in the EuropeanUnion, creating unparalleled growthpotential.
Koç Group aims to benefits the mostfrom the growth of the automotivesector in the future.
Total number of units exported
314,000Exports, which climbed by 22% to314,000 units, are the driving forcebehind the growth of Koç Groupautomotive companies.
Market OverviewRapid growth in exports alleviated the11% contraction in the domesticautomotive market in 2006. Totalproduction expanded by 12% to exceedone million units.
The fluctuation in the Turkish economy inMay 2006 sent exchange rates and interestrates upward. This trend had an adverseimpact on automotive demand in the secondhalf of the year, resulting in a 15% contraction
in the passenger car segment and a 9%contraction in the commercial vehiclesegment. The share of imports in 2006remained unchanged at 55%.
During the year, total automotive exportsincreased steeply by 26% to reach 706,000.Strong growth in exports offset thecontraction in domestic sales; totalautomotive production rose 12% to over onemillion units. This growth was largely drivenby the export boom in passenger cars.
Total sales of motor vehicles in Turkey (000 units)
Source: Automotive Manufacturers Association (OSD), Companies
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Increase in automotive exports
26%In 2006, total automotive exportsincreased steeply by 26% to reach706,000 units.
Koç Group automotivecompanies continued to leadthe sector in 2006, furthergrowing and producinghigher value-added.
Group automotivecompanies reinforced theirleadership position in thesector by single-handedlycarrying out nearly half ofTurkey's automotiveproduction and exports.
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19Turkey is an international hub forautomotive production.Turkey possesses a dynamic domesticmarket with nearly 50 competing brands anda strong and well-established automotiveindustry. Many international automotivebrands have production facilities in Turkey,either through joint ventures or wholly ownedsubsidiaries, making Turkey an importantinternational production hub.
In 2006, the automotive sector, including thecomponent industry, had exports of USD15.5billion or 18% of Turkey's total exports,making it the country's top exporting sector.The Turkish automotive sector is in a strongposition to attract new large-scale exportprojects in the coming years due to the costadvantages of its workforce and otherproduction inputs, engineering skills andadvanced technological infrastructure,geographic location and zero customsaccess to the EU market.
Koç Group automotive segment
In 2006...Koç Group companies were responsible for45% of both total motor vehicle productionin the country and automotive exports in2006.
Koç Group automotive companies increasedtotal production by 7% despite thecontraction in the domestic market tomanufacture 461,000 vehicles, driven by the22% increase in exports to 314,000 units.
In the commercial vehicle segment, 82% ofTurkey's total production and 94% of exportswere made by Koç Group companies,demonstrating the Group's clear leadershipin this field.
Despite stiff competition and the contractionin the local market, Koç Group automotivecompanies improved their total market shareto 29%, up by half a point from the previousyear.
2007 and beyond...Ongoing large-scale export projects are theprinciple element triggering investment andgrowth in Koç Group automotive companies.These projects are also a major driving forcefor Koç Group's sustainable growth andprofitability. In the domestic market, theGroup is committed to maintaining its strongposition and leveraging its competitiveadvantages to gain market share.
The export agreements signed in 2005 haveplayed a significant role in reshaping future-oriented investment plans. Koç Group'sautomotive companies plan to investUSD826 million in 2007.
Koç Group share in Turkey's automotive production (000 units)
consecutive year in terms of total marketshareFord Otosan, a joint venture with Ford MotorCompany, is Turkey's biggest commercialvehicle manufacturer and exporter.
In 2006, Ford Otosan boosted productionby 6% to 258,000 commercial vehicles. Thisrecord production volume equals one quarterof all motor vehicle production in Turkey and58% of Turkey's total commercial vehicleproduction.
The company increased its total domesticmarket share to 17.1% by selling 114,000units, reinforcing its unrivaled leadership inthe sector.
On its own, Ford Otosan carried out 70% ofTurkey's total commercial vehicle exportsduring the year. The company increasedits total exports by 13% to 185,000 units,to become Turkey's top vehicle exporter forthe third year in a row. With export revenuesof USD2,454 million, Ford Otosan is one ofTurkey's three largest exporters. Internationalrevenues account for 55% of total net sales.
Total net revenues amounted to YTL6,521million (USD4,557 million). Despite intensecompetition in the automotive sector, FordOtosan maintained its record profitability byposting an operating profit of YTL569 million(USD398 million) for the year.
Sixth generation Ford Transit selectedas “Commercial Vehicle of the Year” inEuropeAward-winning Transit and Transit Connectmodels evidence Ford Otosan's successboth in Turkey and in European markets inthe light commercial vehicle segment. Thesixth generation Ford Transit was selectedas “Commercial Vehicle of the Year” inEurope in 2007.
Steady increase in market share for thepast 13 yearsFord Otosan has a 27.5% market share inlight commercial vehicles and a 10.2% sharein the passenger car segment, making it thesecond largest player in this area. S-Max,which was introduced to the market in 2006,was named “Car of the Year” in Europe for
2007. In the truck segment, Ford Otosanranks as number two with a 21.4% marketshare, reflecting the popularity of the Cargomodel.
Kocaeli plant chosen as the best FordBody and Assembly Operations Plant inEurope for five consecutive yearsFord Otosan Kocaeli production facility isdistinguished by its modern and flexibleproduction technology and a young andwell-trained work force. With an annualproduction capacity of 240,000 vehicles,Ford Otosan Kocaeli factory retains its titleas Europe's best Ford Body and AssemblyOperations Plant in 2006.
Ford Otosan's ‹nönü production facility isconsidered as Ford's most successful engineand powertrain plant, receiving a full scorein an inspection to share the “Best FordEngine Plant” title with Valencia.
Investment plans support Ford Transit'sinternational success.Ford Transit, one of the company's largestongoing export projects, occupies a centralplace in investment plans for 2007 andbeyond. Ford Otosan continues its work todevelop new engines and versions for FordTransit and cargo truck.
Ford Otosan plans to invest USD130 millionin 2007 to meet rising demand. Once theseinvestments are completed, the companywill have increased the current capacity of265,000 units to 315,000. In 2007, thecompany targets exports of more than200,000 units and domestic sales of 115,000units, continuing its growth and leadershipin both local and international markets.
Ford Otosan market share
17.1%The company boosted its share inthe local market to 17.1% by selling114,000 vehicles, making it the clearmarket leader.
In 2006, Ford Otosan boostedproduction to 258,000commercial vehicles. Thisrecord production volumerepresents more than onequarter of all motor vehicleproduction in Turkey and58% of Turkey's totalcommercial vehicleproduction.
Total Revenues: USD4,557 millionDomestic Market Position: Market leader for 5years in a row with 17.1% shareNetwork: 187 dealersInternational Market Position: Production & exportcenter for Transit & Transit Connect commercialvehicle modelsShare of International Sales: 55%EBITDA: USD525 millionGross Profit Margin: 13.8%Operating Profit Margin: 8.7%www.ford.com.tr
Shareholder Structure (%)
Ford Otosan
Ford Motor Company
Other Koç
Free Float Koç Holding
41.0
37.7
3.4
17.9
21
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In 2006, Tofafl became the first localproducer to manufacture its 2.5 millionthvehicle. Total production increased by11% to 178,000 units during the year.The company sold 73,000 vehicles in thedomestic market and despite lower demandmaintained its position as the third largestplayer in the market by raising its share to10.9%.
Exports soared by 40% reflecting steadygrowth of Doblò exports and the start ofAlbea exports to Russia's Severstal AssemblyPlant, a noteworthy example of internationalcooperation with Fiat. Tofafl exported a totalof 123,000 vehicles to earn export revenuesof USD1,226 million.
Revenues for the year totaled YTL3,054million (USD2,134 million). Operating profitamounted to YTL79 million (USD55 million)despite extremely competitive marketconditions.
Doblò: The best-selling vehicle in itssegmentDoblò has been a success story for Tofaflin the light commercial vehicle segmentsince its introduction in 2000. The restyledDoblò was introduced to the market in thelast quarter of 2005 and it was namedEurope's “Commercial Vehicle of the Year”for 2006. Tofafl increased its market sharein this segment to 30% in 2006.
Grande Punto: A success storyThe success of Tofafl' new passenger carGrande Punto, which was launched in early2006, played a key part in improving Tofafl'smarket share in the passenger car segmentto 8.8%.
Linea: A European born in BursaLinea, the sedan version of Grande Punto,developed by Tofafl, was announced in 2006.One third of annual production of 60,000units is slated to be exported to Western
European countries. With the launch ofLinea in May 2007, Tofafl will enter themedium luxury sedan segment, thusstrengthening its position in the overallpassenger car market.
Tofafl broadened its passenger car productrange in 2006 with the addition of the 4x4Sedici model. Furthermore, Fiat Bravo willbe launched in 2007. This year, the companywill also start selling Lancia branded modelstogether with Fiat, Alfa Romeo, Ferrari andMaserati brands.
Minicargo: Manufactured at Tofafl inpartnership with Fiat Auto and PSAThe Minicargo project, a joint effort of Tofafl,Fiat Auto and Peugeot Citroën (PSA), is amilestone since Tofafl will be manufacturingthis vehicle for three automotive brands–afirst in Turkey's automotive industry. Tofaflwill also own the intellectual property rights.
Scheduled to be introduced in late 2007,the Minicargo is a proactive response tothe expected development of the lightcommercial vehicle segment in Europeanmarket and is expected to fuel Tofafl' exports.Plans call for annual production volume of165,000 units and export revenues of EUR900 million with a guaranteed take-or-payagreement.
Cooperation between Tofafl, Fiat Autoand Severstal GroupThe agreement signed with Fiat Auto andSeverstal Group of Russia in 2006 called forthe assembly of Doblò in Russia with allparts to be sourced from Tofafl. Additionally,parts exports from Tofafl for the Albeaassembly in Russia started in 2006 andcontinue successfully in 2007.
This multilateral cooperation in the Russianmarket provides a successful model forTofafl' entry into new markets anddevelopment of a balanced profit model.
Tofafl targets becoming one of Fiat'sthree largest global production centersby 2010.The company aims to achieve higher growthin 2007 with exports of USD1.4 billion. Oncenew investments come on-stream, Tofafl willhave an annual production capacity of400,000. Development of ambitious exportprojects will support the export of more than70% of production, thus transforming Tofaflinto one of Fiat's three largest globalproduction centers by 2010.
Tofafl market share
10.9%Despite the contraction in the localmarket, Tofafl raised its market share to10.9%, strengthening its position as thethird largest player in the market.
The planned addition ofMinicargo and Lineaproduction in 2007 willnot only make Tofafl aninternational, multibrandmanufacturing center but willalso help enhance its scaleand profitability.
Total Revenues: USD2,134 millionDomestic Market Position: #3 in total marketwith 10.9% shareNetwork: 176 dealersInternational Market Position: Production & exportcenter for Doblò and Minicargo; In charge of theMiddle East and North Africa markets for Fiat;Joint projects with Severstal in RussiaShare of International Sales: 43%EBITDA: USD132 millionGross Profit Margin: 11.4%Operating Profit Margin: 2.6%www.tofas.com.tr
Shareholder Structure (%)
Tofafl
Fiat Auto S.p.A Other Koç
Free Float Koç Holding
0.337.9
37.6
24.3
Automotive
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22TÜRK TRAKTÖR
Türk Traktör is Turkey's prominent farmtractor manufacturer and exporter.A joint venture with Case New Holland, TürkTraktör is a major farm tractor manufacturerand exporter.
The Turkish farm tractor market grew by 6%in 2006 with total sales of 42,000 units. Thepreviously insignificant market share ofimported farm tractors increased to 15%with the entry of new brands and models inrecent years. Türk Traktör produced 17,000farm tractors during 2006 and exported 4,500units to around 30 countries, giving thecompany a share of 38% of Turkey's totalfarm tractor production and a 47% share offarm tractor exports.
The company posted YTL114 million (USD80million) net income on total revenues ofYTL493 million (USD345 million) in 2006,while export revenues reached USD115million.
Türk Traktör, which celebrated its 50th
anniversary in 2006, has a nationwidedistribution and service network.
New Holland Trakmak, our farm tractorand agricultural equipment distributor,performed successfully with a broadproduct range.New Holland Trakmak acts as the local salesand distribution company for Türk Traktör.In addition to farm tractors, New HollandTrakmak also operates in the non-tractoragricultural equipment segment with a broad
product range. The use of mechanizationand agricultural equipment is on the rise inparallel to economic stability. In 2006, thecompany gained 38% share in the rapidlyexpanding market for combine harvesters,which has grown from 100 units to 628 unitsper year in the last three years.
New Holland Trakmak is also active in themarket for cotton picking machines. Thecompany has attained 43% share in thissegment which began to take off in 2005and reached 230 units in 2006. New HollandTrakmak posted total revenues of YTL526million (USD367 million) for the year.
Türk Traktör's share in Turkey'sfarm tractor exports
47%Türk Traktör's 2006 exports to 30countries represent 47% of Turkey'stotal farm tractor exports.
Türk Traktör, whichcelebrated its 50th
anniversary in 2006,has a nationwidedistribution and servicenetwork with 34% marketshare.
Total Revenues: USD345 millionDomestic Market Position: Production share38%, market share 34%Network: 185 dealers managed by New HollandTrakmakInternational Market Position: Production & exportcenter for New Holland TD and Case JX modelfarm tractorsShare of International Sales: 29%EBITDA: USD90 millionGross Profit Margin: 26.6%Operating Profit Margin: 22.7%www.turktraktor.com.tr
Shareholder Structure (%)
Türk Traktör
Case New Holland Global N.V.
Free Float Koç Holding
37.5
37.525.0
23
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Producing customized solutionsSince 1963, Otokar has produced specialsolutions to meet the needs of its customersusing its own technology, design andapplications. Otokar manufactures mini andmidi buses for public transportation, four-wheel-drive tactical all-road vehicles for thedefense industry, and trailers and semi-trailers for the transportation and logisticssector.
Otokar produced 3,000 units in 2006. Exportswere up by 16% to 1,300 units due to defenseindustry contracts.
Otokar is recognized as Turkey's leader inmass transportation vehicles. The companyintroduced Doruk, a new medium-size ninemeter bus, at the Busworld 2007 Fair.
The company posted total sales of YTL338million (USD236 million) and export revenuesof USD112 million in 2006.
OTOYOL
Otoyol produced 4,000 vehicles in 2006.Otoyol, a joint venture with Iveco, Fiat'scommercial vehicle subsidiary, manufacturesand exports buses and trucks. The companymanufactured 4,000 vehicles during the yearand exported 1,000 vehicles.
Revenues for the year amounted to YTL303million (USD212 million) with exports ofUSD29 million.
Other automotive companies of theGroup
• Otokoç and Birmot, dealership chains forFord Otosan and Tofafl respectively, havea combined market share of 7% in passengercars and 9% in light and medium commercialvehicles. Total revenues for Otokoç andBirmot amounted to YTL1,607 million(USD1,123 million) for 2006.
• Avis car rental business, which is handledby Otokoç, performed successfully in carrental segment by focusing on long-termleases.
• Beldeyama, a joint venture with Yamaha,posted revenues of YTL115 million (USD80million) and exports of USD29 million.
• Oltafl, distributor of Continental tires, signeda new marketing and cooperation agreementwith Continental A.G., which helped thecompany to increase sales volume by 25%and achieve YTL61 million (USD43 million)of revenues.
Otokar’s total revenues
USD236Otokar's total revenues reachedYTL338 million (USD236 million),exports reached USD112 millionin 2006.
Otokar manufacturesvehicles for publictransportation, the defenseindustry and the logisticssector using its proprietarytechnology, design andapplications.
million
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Arçelik in Europe
3rd
Arçelik, with a production of over10 million units, is Europe's3rd largest household appliancesmanufacturer.
While Turkey represents a highgrowth potential due to its youngpopulation, low penetration ratesand rapid urbanization, Koçcompanies in the householdappliances and electronicssegments have become globallycompetitive and today rankamong the most importantplayers not only in Turkey butalso in Europe and neighboringcountries.
Beko Elektronik in Europe
2nd
Beko Elektronik, with production ofover 5 million TV sets,is the 2nd largest televisionmanufacturer in Europe.
Perfectingeveryday lifeOn behalf of us,for all of us
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Market overviewTurkey's household appliance exportsjumped by 33% in 2006, while televisionexports fell by 15%.
The global household appliance market,which reached a total volume of EUR100billion, has an annual sales volume of around322 million units. Developed regions suchas Western Europe, North America andJapan account for 63% of the demand eventhough these areas represent only 13% ofthe world's population. Turkey has anestimated 3% share in the global market.
Domestic sales volume increased by 5.1%in 2006, in line with the expectations,according to Turkish White Goods ProducersAssociation statistics. A total of 15.4 millionunits were produced by the industry wheredomestic sales totaled 5.5 million units. The
growth in sales was driven mainly bydishwashers, which have a low penetrationrate.
Household appliance exports roseby 33%.Exports of household appliances continuedto gain steam in 2006 as total exports rose33% to 10.4 million units. While EU countriesare the largest market for Turkey's exports,manufacturers sold goods to a wide set ofcountries throughout the world.
Proximity to the European market, customsunion with the EU, high quality and low costmanufacturing opportunities make Turkeyan important production hub in the sector.
Production and sales of major household appliances in Turkey (000 units)
Production Growth (%) Domestic Sales Growth (%) Exports Growth (%)
Source: Turkish White Goods Producers Association (BESD)
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Turkey's household applianceexports
10 millionExports of major householdappliances rose by 33% in 2006to reach 10 million units.
Koç Group's objective isto make Beko one of thetop 10 global brands inconsumer durables.
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27Television sector goes through atransition to digital products.In 2006, the Turkish market narrowed by10%, with total domestic sales of 2.8 millionTV sets. Exports slipped by 15%, mainly dueto the transition to digital products in theEuropean market, which represents thelargest share of exports. Parallel to thesetrends, total TV production in Turkey declinedby 14% in 2006.
Construction sector continued todrive growth in the heating andair conditioning market.With its 21% annual growth rate, constructionis the main driving sector of the heating andair conditioning market. Expansion in thereal estate sector and the channeling ofpersonal savings into housing, continued tohave a positive impact on the heating andcooling demand during the year.
The rise in natural gas consumption wasanother factor that triggered growth in thesector. With the introduction of mortgagelending and the increasing purchasing powerof consumers, growth in the sector isexpected to remain strong. The increase innew housing is also expected to drivedemand for consumer durables down theroad.
Koç Group consumer durables segment
Koç Group companies that are active inthe consumer durables sector operate 15production plants in four countries, manage16 brands and have 39 companies outsideTurkey.
Our companies maintained their leadershipin the domestic market in 2006 with 58%share in household appliances, with 41% intelevision sets, and practically in everycategory of the heating and cooling marketwith combustion boilers, panel radiators,water heaters, boilers, cast-iron radiatorsand air conditioning units. Our companiesboast the largest nationwide sales and after-sales service network in the country.
In Europe, Arçelik ranks as the third largesthousehold appliance manufacturer, whileBeko Elektronik is the second largesttelevision manufacturer.
Our companies continuously develop theirtechnological innovation capabilities. In 2006,the Turkish Patent Institute awarded Arçelikfirst place in the Patent League Awards, whileBeko Elektronik and DemirDöküm alsoranked among the top ten.
Koç Group share in majorhousehold appliances
58%Koç Group is number one in thehousehold appliances market inTurkey with a 58% share.
Arçelik: Turkey's favorite householdappliance brand for half a centuryArçelik is the undisputed leader of thehousehold appliance sector in Turkey. In2006, 55% of Turkey's major householdappliance manufacturing and exports arerealized by Arçelik.
Arçelik's products, which are exported tomore than 100 countries on five continents,are used by 17 million households in Turkeyand nearly 75 million households aroundthe world.
Arçelik continued to top the list, as in thelast 10 years, by scoring the highest unaidedrecall rate among Turkish consumers in the13th annual Brand Research study conductedby AC Nielsen.
Arçelik boosted production by 23%.In 2006, Arçelik increased applianceproduction by 23% over the previous yearto more than 10 million units.
In the domestic market, Arçelik sells itsproducts under Arçelik, Beko and Altusbrands. The company maintained itsdomestic market leadership by increasingits market share in major appliances from57% in 2005 to 58% in 2006. With 4,500dealers and 600 after sales service points,Arçelik has the largest nationwide network,offering consumers a wide product rangeincluding furniture, computers, linens andsmall appliances.
Arçelik's growth in 2006 was mainly drivenby exports. International sales reached6.5 million units, increasing by 24%.Consolidated international revenues reachedUSD2.3 billion
Competence in technologyDeveloping technology and introducinginnovative products is one of Arçelik's corecompetencies. World's fastest dishwasherand washing machine, lowest water andenergy consuming dishwasher, lowestenergy consuming refrigerator models areexamples of Arçelik's superior technology.In 2006, Arçelik started to produce Turkey'sfirst side by side refrigerator at the EskiflehirPlant.
With 136 patent filings in 2005, Arçelik wonthe first place in the first annual PatentLeague Awards organized by the TurkishPatent Institute.
Arçelik-Beko Elektronik synergiesArçelik and Beko Elektronik, Koç Group'sflagship companies in consumer durables,have traditionally worked in close cooperationwith each other.
In 2006, Arçelik increased its stake in BekoElektronik to 72.5% and the two companiesadopted a joint management approach inorder to further strengthen their competitivestance and conduct more effective brandmanagement and globalization strategies.
This restructuring aims to strengthencoordination of activities in the local andinternational markets, raise productivity andintroduce structural changes that will enablecost efficiencies, fortifying the position ofboth companies in the sector.
Multifaceted international growthstrategyArçelik is pursuing a multifaceted growthstrategy in international markets. Arçelikoperates production facilities in Russia andRomania while also replicating the sales anddistribution model in the domestic marketin a number of countries in the region.The Beko dealer network serves a widegeographical area stretching from Serbia to
Arçelik realized 55% ofTurkey’s major householdappliance production andexports in 2006.
Total Revenues: USD4,862 millionDomestic Market Position: Market leader in majorappliances with 58% shareNetwork: 4,500 dealers and 600 after-sales servicepoints in Turkey, 200 dealers in 20 countriesInternational Market Position: Production facilitiesin Russia and Romania,Europe's 3rd largest household appliancemanufacturer, 10% market share in EuropeShare of International Sales: 48%EBITDA: USD454 millionGross Profit Margin: 26.5%Operating Profit Margin: 7.1%*Financials include full consolidation of Beko Elektronik
www.arcelikas.com
Shareholder Structure (%)
Arçelik
Burla Group Other Koç
Free Float Koç Holding
22.3
39.1
17.2
21.3
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around 200 Beko dealers. The companytargets the expansion of this internationaldistribution network to 500 points by 2010.
Arçelik is the leader of the U.K. refrigeratormarket with its Beko brand, which has a16.7% share. In 2006, the company alsostarted exporting to the USA.
Russian factory started production inJune 2006.In line with its international growth strategy,Arçelik has started manufacturing in theRussian market in which it has been activesince 1997. Arçelik's EUR90 millionrefrigerator, washing machine and televisionproduction facility was officially opened onOctober 13, 2006.
Arçelik currently has a 5.5% share in theRussian washing machine market with theBeko brand. Following the start of localmanufacturing, Arçelik targets increasing itsshare in the Russian household applianceand TV markets, while at the same timestrengthening its position in the CIS andEastern Europe.
Beko branded products in ChinaArçelik took another step as part of itsinternational growth strategy and startedexporting washing machines anddishwashers to China. A sales and marketingcompany was established in Shanghai,followed by sales in four chain stores and46 sales points in seven provinces. Thecompany sold more than 4,000 units in 2006and targets revenues of USD13 million fromChina in 2007.
30% market share in RomaniaArctic S.A., the Romanian householdappliance manufacturer acquired by Arçelikin 2002, continues its sustained growth asthe market leader in the country.
Arctic also started manufacturing chestfreezers following an investment of EUR5million in 2005. Arctic manufactured morethan one million refrigerators and freezersin 2006.
Arçelik leads the market in Romania with a30% share.
Vision: To make Beko one of the top 10global brands in consumer durables by2010Arçelik generates 80% of its internationalrevenues from branded sales.
An independent study by researchorganization GFK covering 27 countriesincluding the EU, Turkey and Russia showedthat Arçelik has a 10% share with its ownbrands in this geographical area.
Arçelik's vision is to make Beko one of thetop 10 global brands in consumer durablesby 2010.
The company has succeeded in raisinginternational revenues by 18% on averageannually over the last five years as a resultof the implementation of its growth strategies.In 2007, Arçelik targets increasing productionto 11 million units and boosting internationalsales by 17%.
Arçelik manufactures themost energy-savingdishwasher and refrigeratorand the fastest dishwasherand washing machine inthe world, proving itstechnological prowess.
Increase in production of majorhousehold appliances
23%Arçelik increased production by 23% in2006 to manufacture over 10 million units.
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30BEKO ELEKTRON‹K
Beko Elektronik, the second largesttelevision manufacturer in EuropeBeko Elektronik produced more than fivemillion TV sets in 2006. While the transitionfrom analog technology (CRT) to digitaltechnology (LCD and PDP) had a negativeeffect on Beko Elektronik's production andsales volumes, the effect in terms of revenueswas limited.
Consolidated revenues for 2006 totaledYTL1,806 million (USD1,262 million).The company has a strong position in thelocal market, with a market share of 41%and sales volume of over one million units.Exports, which have grown by 6% on averageper year since 2002, reached USD758 millionin 2006. Beko Elektronik's European marketshare increased approximately 15% over thelast three years, up from 3% at the beginningof 2000s.
Strong R&DIn 2005, Beko Elektronik ranked fourthamong Turkish companies in the number ofpatent applications; in 2006, it ranked secondwith 22 filings. The company leads consumerelectronics sector in Turkey in terms of patentapplications.
Beko Elektronik, backed by its strong R&Dinfrastructure, state of the art manufacturingand scale advantages, offers a wide rangeof products and models to customers inboth local and overseas markets. Amongthe innovative products developed byBeko Elektronik in 2006 are the world's firstFull HD LCD television with motioncompensation, hard-disk LCD TVs (LCDPVR TV), HD DVB-S2 (module to display HDbroadcast), personal video players (PMP)and wireless LCD TVs.
Local and overseas investmentsunderline a global growth strategy.The company invested USD33 million in2006. In addition to the conventional TV sets,new assembly lines have boosted productioncapacity for LCD and Plasma television setsto 2.1 million units. In 2007, the addition ofanother LCD assembly line will furtherincrease capacity.
Grundig: A strong brand in consumerelectronicsSince acquiring Grundig in partnership withAlba Plc., the well-known European brandhas been a key element of Beko Elektronik'sgrowth strategy. Through the introduction ofnew marketing, branding and distributionstrategies, Grundig's market share inGermany for CRT TV sets has risen from4.7% in May 2004 to 19% in 2006. Grundigis in the third position with a 9% share in thetotal TV market in Germany.
Beko Elektronik, backedby its strong R&Dinfrastructure, state of theart manufacturing and scaleadvantages, offers a widerange of products andmodels to customers in bothdomestic and internationalmarkets.
Beko Elektronik's domesticmarket share
41%Beko Elektronik remains the marketleader in Turkey with a market shareof 41% and sales volume of over onemillion units.
Total Revenues: USD1,262 millionDomestic Market Position: Market leader in TVswith 41% shareNetwork: 30,000 Grundig sales points and 16,000Grundig service points in EuropeInternational Market Position: Europe's 2nd largestTV manufacturer, Production facility in RussiaShare of International Sales: 69%EBITDA: USD -16 millionGross Profit Margin: 12.4%Operating Profit Margin: -3.0%*As of March 30, 2007, the company is renamed asHamle Elektronik
www.bekoelektronik.com.tr
Shareholder Structure (%)
Beko Elektronik*
Arçelik
Other Koç Free Float
7,8
72,5
19,8
31
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sum
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DemirDöküm continued to lead the localheating and cooling products market in allmajor product categories in 2006. Thecompany increased its production capacityfor combi boilers to 400,000 units. Thecompany targets becoming one of the topthree manufacturers of combi boilers inEurope. In 2006, it posted a growth of 55%in the rapidly expanding Turkish combi boilermarket, which witnessed an overall increaseof 25% in sales during the year.
DemirDöküm raised production capacity forpanel radiators to 4.1 million meters with thecompletion of the Schaefer investment inline with its target to become the world'slargest production center for the product.DemirDöküm's domestic panel radiator saleswere up 24% compared to a 12% increasein the market.
International revenues contribute 30% to thecompany's 2006 consolidated revenues ofYTL776 millon (USD542 million).
ARÇEL‹K LG KL‹MA
In 2006, local air conditioner market sizeincreased from 800,000 to 1,000,000 units.
Arçelik LG Klima, boosted local sales by36% to over 500,000 units to maintain itsmarket leadership in 2006. The companytargets increasing production capacity from750,000 units to 1,100,000 in 2007.
Growth in DemirDökümcombustion boiler sales
55%DemirDöküm achieved 55% growthin the rapidly expanding Turkishcombustion boiler market, whichwitnessed an overall increase of 25%in 2006.
DemirDöküm continued tolead the local heatingproducts market in all majorproduct categories in 2006and increased its productioncapacity for combi boilers to400,000 units.
Food and RetailingK
oç H
oldi
ng 2
006
Ann
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epor
tFo
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32
Focusing onpeopleOn behalf of us,for all of us
Number of Migros customersserved
300 millionMigros served more than 300million customers in 2006.
The share of organized FMCG andDo-It-Yourself (DIY) retailing inTurkey, which are 38% and 7%respectively, is expected toincrease through a period ofsustained economic growth andEU convergence process. Migrosand Koçtafl, the undisputedleaders in their respectivesectors, aim at achieving growthby providing well priced productsand services to their clients andtransferring their experience andsuccess to the neighboringcountries which have lowpenetration levels.
Number of distribution pointsreached
180,000Düzey services 180,000 sales pointsacross the country through distributorswith its sales fleet of 329 vehicles.
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33
Market overview - RetailingThe USD24 billion fast moving consumerpackaged goods market has a stronggrowth potential.
The organized segment still comprisesonly 38%, underlining the strong growthpotential in the sector.In 2005, the retail sector was the scene tomajor mergers and acquisitions by local andinternational players, while 2006 was mainlya year for post-merger integration efforts.
The share of organized retail in the totalsector continued to increase and reached38% as of the last quarter of 2006. However,this rate is still significantly lower than theEU average of around 80% and representsthe high growth potential of the sector inTurkey.
Turkey is an attractive market for foreignretail chains. The growing share of organizedretail and the low penetration levels are thetwo main factors adding to this attraction.Nevertheless, the consolidation witnessedover the last few years has mainly shapedthe sector and it is foreseen that theconsolidation process will be at a smallerscale going forward.
Food and Retailing
Koç
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34
Market share of organized foodretailing
38%The market share of organizedretailing continued to increase,reaching 38% as of the end of 2006.
Koç Group's product andservice supply power inthe food and retailingbusinesses embraces allof Turkey.
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35Market overview - DIY market
Turkey's home improvement market hasgrown into a USD7 billion business.
DIY market is growingThe size of the Turkish home improvementmarket is estimated at USD7 billion. Themarket, which mainly comprises of largeshowrooms, small local hardware andconstruction material shops and DIY markets,is developing parallel to the revival in thereal estate market.
The share of organized retail in the homeimprovement market, which is composed ofDIY stores, is estimated at 7%.
Market overview - Food
The food sector is an important part ofthe Turkish economy and representshigh growth potential.
In 2006, some players in the sectorconcentrated on restructuring their operationswhile others focused on diversifying theirproduct range. During the recent years, thedecline in inflation has led to a narrowing ofthe margins in the food sector and intensifiedcompetition.
The food sector is one of the most attractiveareas for foreign investment in Turkey. Thefact that several players are seeking for agood entry point to the market suggests thatgoing forward, the sector will experiencemergers and acquisitions, especially amongsmall and medium sized enterprises.
Koç Group food & retailing segment
In 2006...• The merger of Migros and Tansafl wascompleted successfully by combining thebest practices of each company.• Migros continued to take steps to becomea leading regional retail chain and addedKyrgyzstan to its network.• Koçtafl continued its strong growth strategywhich started in 2005 and strengthened itsleadership in the DIY market.• Koç Group's food producer Tat saw theimprovement of its financial and operationalperformance, reflecting the restructuringefforts that started in 2005.• New projects between Migros and foodcompanies of the Group enhanced thesynergy in the Food & Retailing Segment.
Market share of organizedDIY markets
7%DIY stores make up an estimated7% of the total home improvementmarket in Turkey.
Migros' leadership position strengthenedby the successful completion of theMigros-Tansafl merger.The successful completion of the Migros-Tansafl merger significantly improved thecompany's business volume and grossprofitability in 2006. The best practices inboth companies were combined under theMigros umbrella. Standardization wasachieved in all processes and results beganto be reflected in the efficiency gains andthe increase in productivity.
The Tansafl acquisition fortifies the leadershipposition of Migros in the sector. The mergeris an important milestone for the Turkishretailing sector from many perspectivesincluding financial size, geographicalcoverage and variety of formats, customervolume and human resources.
Serving a total of 300 million customersin domestic and foreign markets via sixdistinct formatsFollowing the merger, the number of storesin Turkey increased to 798 with a total salesarea of 513,000 m2. Migros serves morethan 241 million customers in the domesticmarket with five distinct formats: Migros,Tansafl, Macrocenter, fiok and Kangurumand 60 million customers abroad throughRamstores.
Migros has established a presence in 52provinces in Turkey by opening an averageof two stores per week. In 2007, Migrosplans to keep up the pace of growth byopening 100 new stores in various formatswith additional 60,000 m2 of sales area.
A powerful regional retailer operating insix countriesMigros has grown into an increasinglypowerful regional retailer with a total of 80stores including 12 shopping centers in sixcountries: Russia, Kazakhstan, Kyrgyzstan,Azerbaijan, Bulgaria and Macedonia.
In 2006, Migros opened 20 Ramstores, withone new shopping center and hypermarket,including the first store in the Central AsianRepublic of Kyrgyzstan.
The largest Ramstore shopping center inRussia with a sales area of 130,000 m2,Kapitoli, was opened in Moscow inDecember.
Migros is determined to continue its strategyto become a leading regional retail chain.
New projects are under way to boostproductivity and synergies in order to supplycustomers with the best quality at the bestprice, including:• The Mig-Et project which targets supplyingfresh meat to Migros from Tat (Maret), thuscreating valuable synergies between the twocompanies and boosting volumes.• Harranova Livestock Farm, a subsidiaryof Tat, targets focusing on animal husbandryand supplying 25% of the meat requirementsof Migros and Tansafl.
The merger of Tansafl andMigros is an importantmilestone for the Turkishretailing sector from manyperspectives: financial size,geographical coverage andvariety of formats, customervolume and humanresources.
International stores
Shopping Centers Shopping Centersand Hypermarkets Supermarkets 2006 Total and Hypermarkets Supermarkets 2005 Total
Total Revenues: USD2,987 millionDomestic Market Position: Market leader with22% share of the organized segment and 8.3%share of the entire marketNetwork: A total of 878 stores; 798 in Turkey and80 abroadInternational Market Position: 80 stores; 64 inRussia, 7 in Kazakhstan, 1 in Kyrgyzstan, 3 inAzerbaijan, 3 in Bulgaria and 2 in MacedoniaShare of International Sales: 13%EBITDA: USD217 millionGross Profit Margin: 25.4%Operating Profit Margin: 4.8%
www.migros.com.tr
Shareholder Structure (%)
Migros
Koç Holding
Free Float
50.8
49.2
37
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and
Ret
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gKOÇTAfi
A Koç-Kingfisher partnershipKoçtafl was established in 2000 as a 50-50joint venture with B&Q, the largest homeimprovement retailer in Europe and the thirdlargest in the world. The parent of B&Q, U.K.based Kingfisher Group, has 700 stores ineight countries in Asia and Europe includingTurkey.
The number one DIY chain in TurkeyWith 10 stores and 60,000 m2 of sales areaas of year-end 2006, Koçtafl leads Turkey'shome improvement retailing sector. Thecompany opened new stores in ‹stanbulYenibosna, Ankara and Kufladas› during theyear. Sales revenues jumped by 85% toreach YTL277 million (USD194 million).
Koçtafl plans to open another 25 stores until2010 and thus remain in the forefront of thisfast-developing sector.
Wide product rangeKoçtafl offers thousands of products invarious categories from decorative items tofurniture, from lighting fixtures to householdappliances, from paint to constructionmaterials in order to meet the diverse needsof consumers under one roof. The company,by utilizing the international purchasing powerof Kingfisher, as well as a strong localsupplier network, is able to provideconsumers with a large choice of well-knownbrands at reasonable prices and theadvantage of flexible payment terms.
TAT
Restructuring leads to improvedperformance...Tat continued to improve its performance in2006 following the restructuring in 2005.Gross and operating profit marginsincreased, while various products in manycategories gained significant market share.
Tat raised gross profit margins from 11.3%in 2005 to 15.8% in 2006 while the 5%operating loss was transformed into a 3.9%profit. Tat remained the market leader intomato paste, ketchup and tomato productswhile standing at the number two spot formayonnaise and the number three positionfor pasta.
As a result of the restructuring, Tatdiscontinued categories that did not createvalue such as bottled water and relocatedits milk processing facility to a location moreadvantageous in terms of logistics.
During the year, Tat launched 16 newproducts.
Tomato cultivation in the southeast GAPRegionTat attained successful results from trialtomato cultivation on fields leased in fianl›urfain southeast Turkey. In 2007, the companywill conduct a large-scale trial in this regionusing modern agricultural methods. Tat hasleased a tomato paste factory in Birecik toprocess the tomatoes grown in the region.
If results from the trial are satisfactory, thecompany plans establishing a new tomatoprocessing plant near fianl›urfa for the 2008season.
Relocating production facilities closerto raw material suppliesA tomato paste factory will be establishedin Torbal› for the 2007 season using theexcess equipment from the Yeniflehir tomatopaste factory, which was closed down in2005. Relocating production facilities closerto raw material supplies will result insignificant savings in transportation costs.
DÜZEY
Supplying thousands of sales pointsacross TurkeyDüzey is the sales and distribution companyfor food brands belonging to Tat, Mercanand Fas›l brand rak› produced by Tarifl-Tatand British American Tobacco (BAT)products*.
In 2006, the company supplied and invoicedfood products to 33,000 sales points,tobacco products to 124,000 sales points,and alcoholic beverages to 25,000 salespoints. Together with its distributors, Düzeymanages a sales fleet of 329 vehicles inaddition to using 214 distribution and deliveryvehicles for food logistics.
During the year, the company madesignificant progress in controlling its expensebase and improved profitability. Theacquisition of Tansafl is expected to createsynergies for Düzey as well, in terms of intra-group sales and distribution activities, makinga positive contribution to its performance.
* The exclusive contract signed by Düzey in 2001 withBritish American Tobacco (BAT) for distribution of tobaccoproducts within Turkey was terminated in January 2007.BAT, in line with its global strategies as applied in othercountries, began to distribute its own products in Turkeyas of January 15, 2007.
Total Revenues: USD313 millionDomestic Market Position: Market leader intomato paste (30.5% share), tomato products(60.5%) and ketchup (29%);#2 in mayonnaise (21%);#3 in pasta (11.2%)International Market Position: Exports to 73countriesShare of International Sales: 8%EBITDA: USD17 millionGross Profit Margin: 15.8%Operating Profit Margin: 3.9%
www.tat.com.tr
Shareholder Structure (%)
Tat
Koç Holding
Kagome Co. Ltd.
Free Float
2.4 Sumitomo Corp.
45.1
28.1
5.8
Other Koç
18.6
Energy
Koç
Hol
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38
Tüprafl' rank in Europe
8th
Tüprafl' 27.6 million tons of annualpetroleum refining capacity is the8th largest in Europe.
Increasing demand for energy,structural changes in the sectorand its strategic location overvital international energy routesmake energy one of the mostimportant sectors in Turkey.Koç Group companies aspire tobecome key players in the rapidlygrowing energy sector.
LPG market share
30%Koç Group companies Aygaz andMogaz are leading the LPG marketwith 30% market share in Turkey.
Energizing lifeOn behalf of us,for all of us
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39
Market Overview
In order to sustain its economic growth,to boost its international power and toutilize its logistical advantages, Turkeyis expected to enter a period ofconcentrated investment in the energysector. Koç Group's target is to becomeone of the most influential players inthis high-growth area.
Turkey's energy sector has immensepotential.A program of liberalization, standardizationand regulation in recent years has pavedthe way for rapid investment in the Turkishenergy sector. The privatization of Tüpraflwas a milestone in this process. The 2006opening of the Baku-Tbilisi-Ceyhan pipeline,which is considered the Silk Road of the 21st
century, was another significant step towardsthe development of the sector.
According to the Ministry of Energy andNatural Resources, Turkey requires energyinvestments of USD128 billion through 2020
in order to sustain its economic growth.The vast majority of these investments areexpected to be made by the private sector.As part of this process, the electricitydistribution system of the country, which isdivided into 21 regions, is expected to beprivatized completely within the next twoyears. Plans also call for the privatization ofexisting electricity generation capacity andfor the establishment of new hydroelectric,thermal and wind power plants.
Demand for LPG remains high.Turkey is Europe's leading market forLiquefied Petroleum Gas (LPG). In 2006,Turkey consumed 3.6 million tons ofLPG, 3% below the previous year due tocompetition from natural gas, and despitethe growth in the Auto LPG market.Auto LPG is a preferred fuel, not only forcommercial vehicles but also for a growingnumber of passenger cars due to the savingsand the convenience it provides.
Energy
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40
The acquisition of Tüprafl,the 8th largest refinery inEurope, advanced Koç Grouptowards becoming aninfluential regional playerin the energy sector.
Turkey's position in the EuropeanLPG market
1Turkey is Europe's biggest LPGmarket with consumption of 3.6million tons in 2006.
41Reform of the LPG marketLPG Market Law and Licensing Regulationswere promulgated in 2005. Aygaz was oneof the first companies in the sector to receivelicenses for the transportation and distributionof LPG in the beginning of 2006.
The difference in the Special ConsumptionTax (ÖTV) between auto LPG and cylinderLPG, which led to unfair competition, wasdecreased to USD45/ton as of October 2006.Further efforts are under way to reduce thetax disadvantage of cylinder gas againstnatural gas through taxation on the basis ofcalorific value; an attempt aiming at the lowincome population in rural areas with noaccess to natural gas.
Oil prices spiral upwards.Oil prices continued to fluctuate in 2006 asa result of changing global crude oil supplyand demand dynamics due to disruptionsin supply and rising demand. The averageprice per barrel of Dated Brent crude oil hasincreased from USD29 in 2003 to USD38 in2004, to USD54 in 2005 and to USD65 in2006.
Oil prices are expected to remain flatin 2007.The size of Turkey's petroleum productsmarket decreased by 1.4% and fell to 17.6million tons in 2006, reflecting globalincreases in oil prices and declining demandfor black products such as heating fuel.Consumption of white products (gasolineand diesel) increased by 6.2%, butconsumption of heating fuel fell by 26.6%due to higher utilization of natural gas.
Almost 50 fuel distribution companies wereactive in Turkey at the end of 2006. The yearwas marked by mergers and acquisitions inthe sector.
Koç Group energy segment
Leading the energy sectorWith complete control of Turkey's refinerycapacity, Koç Group continued to leadTurkey's energy sector in 2006. The year sawimportant developments in the process ofchange, where significant steps were takentoward restructuring Tüprafl from a state-runinto a privately-run company.
Aygaz sold its 40% stake in Opet, Turkey's4th largest fuel distribution company, toTüprafl. The acquisition of Opet is asignificant step in the transformation ofTüprafl towards its goal of becoming anintegrated service provider.
Koç Group subsidiaries Aygaz and Mogaz,with an overall market share of 30% inTurkey's LPG market, reinforced theirleadership in the sector. On a segmentalbasis, they have a share of 38% in cylinder,41% in bulk and 22% in auto LPG as of theyear-end.
Koç Group energy companies, whichconstitute an end-to-end value chain fromrefining to distribution, posted successfulfinancial and operational results for 2006.
Koç Group share of cylinderLPG market
38%Koç Group has a 38% share inTurkey's cylinder LPG market.
Civil consumption ofpetroleum products in Turkey
Consumption Change2006 (million tons) (%)
White Products 14.6 6.2Black Products 2.9 -26.6Total 17.6 -1.4
Source: National Oil Industry Association (PETDER)
The 8th largest oil refinery in EuropeWith an annual capacity of 27.6 million tons,Tüprafl ranks as the 8th largest refiningcompany in Europe.
Tüprafl has a total of four oil refineries; twocoastal refineries in ‹zmir and ‹zmit and twoinland refineries in K›r›kkale and Batman.It also has one petrochemical plant in ‹zmit,a maritime transportation company, Ditafl,and a 40% stake in the fuel distributioncompany, Opet Petrolcülük A.fi.
Tüprafl is distinguished from other Europeanrefineries by its ability to process lowquality crude with high sulphur content. TheNelson Complexity ranking for Tüprafl, ameasurement of the capacity of refineriesto process high margin products, is wellabove the 5.67 average for Mediterraneanrefineries at 6.43.
In 2006, Tüprafl processed a total of 26.2million tons of crude oil, including 2.2 milliontons of local crude, to produce 24.6 milliontons of commercial products and achieved94.9% capacity utilization. Tüprafl suppliesapproximately 70% of Turkey's fuel (gasolineand diesel) and heating oil demand.
In addition, Tüprafl supplies approximately90% of the aviation fuel market in Turkeyand is the sole producer of asphalt for thedomestic market, which technically cannotbe imported.
Revenues and earnings show significantimprovement.In 2006, total revenues climbed by 35%to YTL20 billion (USD14 billion) whileconsolidated net income increased by21% to YTL822 million (USD575 million).
New investment of USD320 millionTüprafl is Turkey's largest industrial company.Following the privatization of the enterprise,successful steps have been taken towardrestructuring the company and a number ofimportant changes have taken place in theoperational and financial spheres.
In line with its objective to become anintegrated energy company, Tüprafl acquireda 40% stake in Opet, Turkey's 4th largest fueldistribution company, from Aygaz forUSD380 million.
The company has accelerated its investmentprogram as called for in the Master Plan, bystarting an additional USD320 millioninvestment project. In 2006, Tüprafl investedUSD274 million to upgrade its facilities. Theinvestment program, which targetsintegration with the EU standards, will raisethe Nelson Complexity of Tüprafl from thepresent 6.43 to 7.25, matching the level ofthe most complex refineries in theMediterranean.
The average USD5.86/barrel gross refinerymargin achieved in 2006 is USD0.56/barrelhigher than the USD5.30/barrel level ofMediterranean complex. While theMediterranean complex margin remained atthe same level as 2005, Tüprafl's grossrefinery margin increased by USD0.15/barrel.
Turkey's largest industrialcompany, Tüprafl tooksuccessful steps towardrestructuring after beingprivatized, making importantchanges in both theoperational and financialspheres.
Total Revenues: USD14,047 millionDomestic Market Position: Turkey's sole refinery,supplying 70% of market demandShare of International Sales: 22%EBITDA: USD711 millionGross Profit Margin: 5.7%Operating Profit Margin: 4.2%
Market shares of 14.4% in white productsand 15.1% in black productsOpet, together with its subsidiaries, is activein both the retail and wholesale segmentsof the fuel distribution market, as well aslubricants production and marketing, marinebunkering, and international trade ofpetroleum products.
Opet increased its market share in whiteproducts (gasoline and diesel) from 12.5%in 2005 to 14.4% in 2006 to remain the fourthlargest player in this segment. Opet rankssecond in black products (fuel-oil) with amarket share of 15.1%, up slightly from15.0% in 2005.
Opet's imports stood at USD415 million andexports reached USD100 million with USD3.3million from sales to Iraq and the rest fromtransit trade.
36 new gas stationsOpet continued to expand its gas stationchain in 2006 by opening 36 new stations.The total number of stations reached 1,256,including 613 operating under the Sunpetbrand.
Storage capacity increases.With 800,000 m3 of storage capacity, Opetboasts the largest storage capacity in Turkeyafter Tüprafl. The company completed the453,000 m3 Marmara Ere¤li terminal projectduring the year.
At the Marmara Ere¤lisi Terminal, Opet isestablishing a profitable cooperation withHETCO, a fully integrated oil company, withthe objective of taking advantage ofcontango opportunities in gasoline and jetfuels and the cargo size in fuel-oil with theFar East and North America.
Construction continues on terminals inGiresun on the Black Sea and Antalya onthe Mediterranean, which are scheduled tobe opened in 2007 and 2008, respectively.With the addition of these terminals, Opet'stotal storage capacity will reach 917,000 m3.
A leader in customer satisfactionAccording to the Turkish CustomerSatisfaction Index survey organized byKalDer (Turkish Quality Association), Opetwas the sector leader in 2006. The numberof registered members in the Opet Cardcustomer loyalty program reached 1.7 millionas of year-end 2006.
According to the TurkishCustomer Satisfaction Indexsurvey organized by KalDer(Turkish Quality Association),Opet was the sector leaderin 2006.
Opet's share in white products
14.4%OPET has a 14.4% market sharein white products (gasoline anddiesel).
Total Revenues: USD4,195 millionDomestic Market Position: #4 in white productswith 14.4% market share#2 in black products with 15.1% market shareThe fastest growing fuel distribution companysince 2003 through organic growthNetwork: 1,256 gas stations (including Sunpet)International Market Position: Distribution networkin Bulgaria in partnership with AygazShare of International Sales: 11%EBITDA: USD113 millionGross Profit Margin: 5.9%Operating Profit Margin: 1.9%
www.opet.com.tr
Shareholder Structure (%)
Opet
Other Koç
TüpraflÖztürk Group
4050
10
Energy
Koç
Hol
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44AYGAZ
Turkey's largest LPG distributorFounded in 1961, Aygaz is the largest LPGdistributor in Turkey with a sales volume of1.2 million tons.
Aygaz is active in the entire LPG supplychain, from LPG sourcing, storage, filling todistribution, sales and after-sales servicesfor cylinder, bulk and auto LPG. Thecompany has a nationwide presence in 81provinces through close to 1,400 cylinderLPG dealers and over 500 auto LPG stations.Everyday, Aygaz enters 200,000 homes,making it an household name in Turkey.
Leader in the LPG MarketAygaz leads the highly competitive LPGmarket in Turkey, in which 52 companiesare active, with a 24.4% overall share and ashare of over 30% in cylinder LPG. Aygazmade significant improvements in its cylinderLPG operations in 2006, including theintroduction of hologram valves, and MaviAygaz (Blue Aygaz), a new cylinder gasproduct for households. Reorganization ofthe order taking process resulted in thespread of the Integrated Order System whichaims to establish closer relations withcustomers.
Through cooperation with Yap› Kredi Bank'sWorldcard, Aygaz introduced credit cardpayment on delivery and installment paymentoptions, a first in the sector.
Aygaz maintained leadership in the autoLPG market as well. Approximately 300,000people ride vehicles fueled by Aygaz EuroLPG every day. The first brand to offerdifferent types of auto LPG according to theseason, Aygaz is gaining popularity parallelto the importance it gives to the customersafety and performance. The number ofstations selling Aygaz Euro LPG increasedto 506 by year-end.
Aygaz exported LPG equipment to 38countries in 2006. Sales to Europe, theMiddle East, Africa, South America and theFar East increased and total exportsamounted to USD90 million.
Satisfied customersAccording to the Turkish CustomerSatisfaction survey organized by KalDer(Turkish Quality Association), Aygaz was thenational leader in 2006 in the LPG segment.Furthermore, cylinder LPG segment ingeneral, has the highest satisfaction levelcompared to all other segments surveyed,making Aygaz a national champion incustomer satisfaction.
Changes in equity investment portfolioAygaz made important changes in its equityinvestment portfolio during the year. Thecompany invested USD500 million in a 20%stake in Enerji Yat›r›mlar› A.fi., which acquired51% of Tüprafl in January 2006. In anothermove, Aygaz sold its 40% stake in Opet toTüprafl for USD380 million in December. Inaddition, the company plans to divest its97.43% share in Birleflik Oksijen Sanayi A.fi.in 2007.
The restructuring of the portfolio is animportant step towards achieving sustainablegrowth and leadership for Koç Group in theenergy sector.
World class facilitiesAygaz operates 12 world class LPG storageand filling facilities using the latesttechnology. LPG sourced from domesticrefineries or by sea from the internationalmarket is distributed all over the country ascylinder, bulk and auto LPG and sold to theconsumer through dealers.
Aygaz has the largest LPG storage capacityin Turkey with 146,000 m3 excluding itsmarine fleet. This gives the company thehighest share in the country's total LPGstorage capacity of 540,000 m3.
Aygaz's LPG marine fleet expands.Aygaz is the first company in Turkey toestablish its own marine LPG fleet. In 2006,the fifth specially equipped tanker “Aygaz7” joined the fleet, bringing total capacity to21,300 m3.
The marine fleet is an important part of thecompany's supply network.
Since established 1961,Aygaz is the leading LPGdistributor in Turkey with asales volume of 1.2 milliontons.
Total Revenues: USD1,813 millionDomestic Market Position: Leader of the LPGsector since its establishment in 1961;30% market share (including Mogaz)Network: 1,400 cylinder LPG dealers, 500 autoLPG stationsInternational Market Position: Exports to morethan 40 countries in Europe, the MiddleEast, Africa, South America and the Far East;Distribution company in Bulgaria in partnershipwith OpetShare of International Sales: 6%EBITDA: USD184 millionGross Profit Margin: 14.9%Operating Profit Margin: 6.8%
www.aygaz.com.tr
Shareholder Structure (%)
Aygaz
Other Koç
Free Float and Other
40.748.8
Koç Holding
10.5
45
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rgyMOGAZ
Mogaz is Koç Group's other LPG distributioncompany, with a 600 dealer network. Mogazis licensed as an LPG distributor as requiredby the LPG Market Law and is active in allthree segments of the market. It distributesits products and services under the brandsMogaz and Lipet and has a steady marketshare of 5.5%. The company increased thenumber of stations selling Mogaz/Lipet autoLPG from 376 to 417 during the year.
OPET-AYGAZ BULGARIA
Opet-Aygaz Bulgaria is Koç Group's firstinternational venture in the energy sector.The company serves the Bulgarian LPG andfuel markets.
ENTEK
Entek, Koç Group's power generationcompany has a total production capacity of270 MW. It posted revenues of YTL190 million(USD133 million) in 2006.
Eltek operates in the wholesale electricitymarket and had earnings of YTL42 million(USD30 million) in 2006.
BOS
BOS started as a joint venture with the BOCof UK, and has been wholly owned by KoçGroup since the acquisition of the partner'sshares by Aygaz in 2004. BOS has a 21%market share and is Turkey's second largestindustrial and medical gas company. KoçGroup announced its plans to sell thecompany in 2006 in line with the restructuringof its portfolio.
AKPA
Akpa is active in LPG distribution, wholesalefuel marketing and retailing with branchesin the provinces of Bursa, Eskiflehir, Antalya,Ankara and ‹zmir. Revenues of the companyamounted to YTL228 million (USD160 million)in 2006.
DEM‹R EXPORT
Demir Export, a supplier and extractor ofcoal and iron ore in Turkey, also operatestwo stone quarries in the United ArabEmirates.
KOÇ-STATOIL GAZ
Koç-Statoil Gaz, a 50-50 joint venture withthe Norwegian oil and natural gas companyStatoil, was established in April 2004 toundertake natural gas importation,distribution and marketing activities. Thecompany, currently active in liquefied naturalgas (LNG) and compressed natural gas(CNG) marketing, posted revenues ofYTL38 million (USD27 million) in 2006.
According to the TurkishCustomer Satisfaction Indexsurvey organized by KalDer(Turkish Quality Association),Aygaz was the national leaderin 2006 for all segments.
Aygaz share of LPGcylinder market
30%Aygaz has a 30% share in Turkey'scylinder LPG market.
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Koç Financial Services ROE
24%ROE of Koç Financial Servicesincreased to 24% in 2006.
The deepening of financialmarkets in the current climate ofstable growth and low inflationhas increased the number offinancial products and servicesin Turkey; and the consolidationin the sector has strengthenedthe major players. Koç companiesseek to offer the largest varietyof products, and deliver theircustomers the best and fastestservice in every area of financialservices.
Share of Koç group in theinsurance sector
16.5% Property &Casualty
19.2% Pension
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Market overviewTurkey's banking sector offers a highgrowth potential in the current climateof stable growth and low inflation,considering the low penetration levelsfor banking products and services in thecountry.
Despite the rapid development in recentyears, the financial sector still has notreached a satisfactory volume and depth,underlining the high growth potential ofthe Turkish banking sector. The rate ofdevelopments in recent years, key indicatorssuch as assets per branch and the numberof banking products per capita that are wellbelow developed countries, and the interestof international players, all point out thatstrong potential.
Growth trend continues for loan portfolio.The sector's loan portfolio has shownsignificant developments in recent years.The positive macroeconomic environmentand a decline in the cost of lending seen in2004 onwards played a central role in thisgrowth.
The interest of foreign banks in the Turkishmarket is on the rise. Deepening of financialmarkets, improvements in the operatingenvironment and regulatory changes haveresulted in a significant increase in the interestof foreign banks. The share of foreign capitalin the Turkish banking system reached 20.2%as of December 2006.
In 2006...The volatility in the financial markets duringMay and June of 2006 caused the Turkishbanking sector to experience two verydifferent periods during the year.
The clearest indication of the change in thesector's asset structure was observed in loangrowth. During the first five months of theyear, total loans rose by 25% driven by a42% increase in consumer loans. The 57%increase in housing loans played a key rolein the expansion in consumer lending.However, following the mid-year devaluationof the YTL and the rise in interest rates,domestic demand slowed down and therate of growth in retail loans decreased.From June to November, consumer loansgrew by only 7%, while total loans increasedby 5%.
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Merger of Koçbank and Yap›Kredi, the largest transactionever closed in the Turkishbanking history, wasconcluded successfully onOctober 2, 2006.
Growth of the Turkish bankingsector
18%As of September 2006, total assetsof the Turkish banking sectorincreased by 18% to YTL469 billion(USD309 billion).
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49As of September 2006, total assets of theTurkish banking sector were up by 18%reaching to YTL469 billion (USD309 billion).The ratio of banking sector total assets toGDP is 88.2% while the ratio of loans to GDPis 36.4%.
Although the financial markets stabilized inJuly and August, growth stagnated for therest of the year due to higher interest rates.However a new period of growth isforecasted to commence in 2007.
The insurance sector attracts the interestof foreign institutions...In recent years, a large number of foreigninsurance companies have entered theTurkish market through acquisitions andestablishment of new companies. This trendreflects the high degree of confidence feltin the Turkish economy, while at the sametime highlighting the advantages of thesynergy between the banking and insurancesectors.
At present, 22 of the 47 insurance andpension companies active in Turkey haveforeign shareholders, whose share in totalpaid-in capital approach 25%. Companieswith international partners have a total marketshare of 60%.
Low penetration level and the demographicsof Turkey make the Turkish insurance market,which produces premiums of USD7.5 billionannually, especially attractive to foreigninstitutions.
Koç Group finance segment
In 2006...
• On October 2, 2006 the merger of Koçbankand Yap› ve Kredi Bankas›, the largesttransaction ever closed in the Turkish bankinghistory, was concluded successfully.
• Koç Financial Services (KFS) Groupnow has an 80.2% stake in Yap› Kredi, whichhas a paid-in capital of YTL YTL3.1 billion(USD2.2 billion) and a capital adequacyratio of 12%.
• The merger of all the financial subsidiariesof Yap› Kredi and Koçbank was completedin early 2007. Factoring, leasing, assetmanagement and securities companies ofthe two organizations were merged underthe Yap› Kredi brand.
• Integration of the information systems ofKoçbank and Yap› Kredi united the recordsof 13 million customers and transferred theinfrastructure into a single technologicalplatform.
• Koç Group is the leader in non-lifeinsurance and pension funds, with its fourcompanies active in the sector: Yap› KrediSigorta (non-life) and Yap› Kredi Emeklilik(life and pension funds) under KFS; KoçAllianz Sigorta (non-life) and Koç AllianzHayat ve Emeklilik (life and pension funds)in partnership with the Allianz Group.
Yap› Kredi's capitaladequacy ratio
Yap› Kredi's paid-in capital reachedYTL3.1 billion (USD2.2 billion), raisingits capital adequacy ratio to 12%.
Accelerated growth following the mergerKoç Financial Services, an equal partnershipof Koç Holding and UniCredit of Italy, grewin every business segment in 2006.Conclusion of the merger of Koçbank andYap› Kredi Bank under the Yap› Krediumbrella has had a positive effect in financialand operational results.
KFS posted consolidated net earnings ofYTL701 million (USD490 million) in 2006,resulting in a return on equity of 24%. Totalassets reached YTL54.8 billion (USD39billion).
A strong structure in financial servicesKFS companies are active in varioussegments of financial services includingbanking, leasing, factoring, assetmanagement and investment brokerage.The Group aspires to deliver all theseservices to the customer through a singlepoint. As of 2006-end, KFS companiesemployed a total of 16,000 people.
In addition to 653 service points, KFS utilizes1,715 ATMs and internet service applications.With the support of its strong distributionnetwork and Customer RelationshipManagement (CRM) infrastructure, KFS isthe leader in many business lines andproduct groups: Credit cards, factoring,leasing and corporate non-cash loans,among others.
YAPI KRED‹
Yap› Kredi: Turkey's 4th largest privatebankRanked as the country's fourth largest privatebank, Yap› Kredi continued to grow in 2006.
With 608 branches, 1,715 ATMs, 13,478employees, widely utilized alternativedistribution channels and a large customerbase, Yap› Kredi offers modern and highquality products and services in every areaof banking. In 2006, the bank continued itsorganic growth by opening 20 new branches.
Strong financial structureYap› Kredi's total assets reached YTL48.9billion (USD34.8 billion) as of year-end 2006.The Bank posted net income of YTL512million (USD358 million) with a return onequity ratio of 18% and a capital adequacyratio of 12.3%. Yap› Kredi's cost/income ratiowas 66% for the period.
Undisputed leader in credit cardsAs one of the most popular suppliers of retailbanking products and services in Turkey,Yap› Kredi enjoys a particularly strongposition in its deposit base, consumer loansand credit cards.
Yap› Kredi is the undisputed leader in thecredit cards sector. With a long history ofinnovation in credit cards, the bank has hadconsiderable success with its Worldcardprogram. In this extremely competitive sector,Yap› Kredi remained number one with a26.3% share in total transaction volume for2006.
While offering a wide range of loan productsto its retail customers, Yap› Kredi alsopossesses a strong and widespread depositbase. The bank's market share in totaldeposits exceeds 10%. Yap› Kredi is themost popular name in asset managementservices as well, with a market share of 23%.
The leader in corporate banking...Yap› Kredi also has a clear lead in corporatebanking with market shares of 10% in cashloans and 19% in non-cash loans. Yap› Krediis a preferred provider of banking servicesto companies of all sizes from largecorporations to small and medium sizedenterprises.
The Bank is also the market leader in bothleasing and factoring with market shares of18.3% and 22.7%, respectively.
Strong positioning in internationalmarketsYap› Kredi has a strong position and highcredibility in the international financialmarkets. In 2006, Yap› Kredi, bolstered bya new shareholder and capital structure,successfully repositioned itself in theinternational markets, receiving a total ofUSD1.35 billion syndicated loan facility,EUR850 million sub-loan, and a USD1.2billion DPR securitization, the largest of itskind in global markets in 2006.
KFS companies are active invarious segments of financialservices including banking,leasing, factoring, assetmanagement and investmentbrokerage; and aspire todeliver all types of financialservices to the customerthrough a single point ofcontact.
Yap› Kredi in credit cards
1Yap› Kredi is the undisputed leaderin credit cards in Turkey due to itslong history of innovation in this area.
Domestic Market Position: #4 among privatesector banks#1 in credit cards with a 26.3% share#1 in asset management (mutual funds) with a23% share#1 in non-cash loans with a 18.9% share#1 in leasing with a 18.3% share#1 in factoring with a 22.7% shareBranch Network: 608 branches13.5 million customers6.2 million credit cards (including virtual cards)Total Loans: USD16,010 millionCapital Adequacy Ratio: 12.3%Total Revenues: USD4,258 millionTotal Assets: USD34,780 millionCost/Income Ratio: 66%Return on Equity: 18%
www.yapikredi.com.tr
Shareholder Structure (%)
Yap› Kredi Bank
KFS
Free Float
19.8
80.2
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Yap› Kredi is focused on growth and seeksto capitalize on the unequalled growthpotential of the Turkish financial market tothe maximum extent. A wide product range,years of experience, market knowledge,strong human resources and committedshareholders endow Yap› Kredi with theenergy to grow.
Banking services abroadYap› Kredi's subsidiaries in Russia,Netherlands, Germany and Switzerlandcontinue their successful operations,contributing to the development ofcommercial relations with these countries.
Other KFS Group companies
YAPI KRED‹ F‹NANSAL K‹RALAMA
The market leader with a 18.3% shareWith a transaction volume of USD962 millionin 2006, Yap› Kredi Leasing ranked as thenumber one company in the sector. Yap›Kredi Leasing serves customers throughoutTurkey using the Yap› Kredi branch networkas well as nine representative offices.
YAPI KRED‹ FAKTOR‹NG
The market leader with revenues ofUSD3.6 billionYap› Kredi Factoring closed the year withrevenues of USD3.6 billion and a marketshare of 23%. The company's businessvolume consists of 60% domestic and 40%international transactions.
Yap› Kredi Factoring was named as the bestexport factoring company in the world byFactors Chain International (FCI) in 2006.Irrevocable export factoring transactionturnover amounted to USD1,078 million.
YAPI KRED‹ PORTFÖY YÖNET‹M‹
Leader in the Turkish mutual fundsmarketYap› Kredi Portföy maintained its leadershipin the Turkish mutual funds market, with aYTL5 billion (USD3.5 billion) portfolio and a23% market share at year-end 2006.
The company also manages eight KoçAllianz pension funds and 11 Yap› Kredipension funds.
Together with the assets of private portfoliosand individual pension funds, the companyhas total assets of YTL6.1 billion (USD4.4billion) under management.
YAPI KRED‹ YATIRIM MENKULDE⁄ERLER
4% market share in equity brokeragetransactionsIn 2006, Yap› Kredi Yat›r›m ranked secondin total capital markets transaction volumewith YTL136 billion (USD95 billion). Thecompany handles 4% of equity brokerageactivities, reporting transaction volume ofYTL20.4 billion (USD14.3 billion) for the year.
Following the merger with Koç Yat›r›m onJanuary 12, 2007, Yap› Kredi Yat›r›m becamethe leading brokerage company in Turkeywith YTL180 million (USD128 million) equityand YTL248 (USD177 million) million totalassets.
Insurance Companies
Koç Group gains market share in theinsurance sector.Koç Group insurance subsidiaries lead themarket with a 16.5% share in property &casualty and a 19.2% share in individualpension segments. The Group is committedto raising its market share and attainingfurther growth in these areas.
KOÇ ALLIANZ S‹GORTA - KOÇ ALLIANZHAYAT VE EMEKLiLiK
A long-term partnership with insurancegiant AllianzKoç Allianz companies date from the firstdays of the Turkish Republic and have atradition of innovation in the sector supportedby a large network of agencies, internationalpartners and the strength of the Koç Group.
Koç Allianz Sigorta and Koç Allianz Hayatve Emeklilik reported YTL867 million (USD606million) premium productions and YTL54.4million (USD38.0 million) individual pensionplan contributions in 2006.
With a 9% market share, Koç Allianz Groupis the third largest in the insurance sector,excluding pension funds. The company hasUSD680 million of funds under management.
In 2006, Koç Allianz Group was voted asTurkey's “Most Admired InsuranceCompany” for the sixth time by CapitalMagazine.
YAPI KRED‹ S‹GORTA - YAPI KRED‹EMEKL‹L‹K
A deep-rooted insurance companyFounded in 1943, Yap› Kredi Sigorta has 63years of experience in the sector. It is knownfor its ethical and fair business principles,well-qualified human resources, professionalagents and cooperation with majorinternational reinsurance companies.
With a premium production of YTL849 million(USD593 million) in 2006, Yap› KrediInsurance Group ranks fifth in the sector witha 7.9% market share. Total net assets ofYap› Kredi Insurance reached YTL570 million(USD405 million) at end-2006.
Yap› Kredi's subsidiary for individual pensionplans, Yap› Kredi Emeklilik, increased itsnumber of contracts to 190,000 and totalfunds to YTL481 million (USD342 million)by year-end 2006. The company producedYTL151 million (USD105 million) incontributions, corresponding to a 14.3%market share in this segment.
KOÇF‹NANS
Supporting the automotive sectorKoçfinans, the Group's consumer financecompany operating mainly in the automotivesector, reported consumer loan portfolio ofYTL803 million (USD571 million) as of 2006year end. Koçfinans, had a market share of9.4% in the total automotive loan marketincluding banks, as of September 2006.
In 2006, Koçfinans finalized the first privatesector corporate bond issue in Turkey aftermany years. The issue, with a nominal valueof YTL100 million (~USD70 million), wasquite well received by investors. The bondsare also being traded on the Istanbul StockExchange.
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Total revenue growth
23%
Total revenues of companiesoperating in other segments roseby 23% in 2006.
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Travel & Tourism
SETUR
A wide range of tourism servicesSetur, offering a wide range of tourism relatedproducts and services, is Turkey's leadingtravel and ticketing agency, cruise packagesand on-line travel services provider.
Setur has been voted as “Turkey's mostadmired company” in its sector for the lasttwo years; and in 2006, it was awarded firstprize in the “international tours” category bySkall International, world's largest travelassociation. Setur was also selected as thebest agency in Eastern Europe for cruiseship travel by Costa Cruises.
Strong international relationsSetur's strong international relationscontribute to its range of services. In 2007,the company became the Turkishrepresentative for BCD Travel andAbercrombie & Kent, one of the most highlyregarded travel brands in the world.
Since December 2005, Setur has beenexclusively handling visa services for theUnited Kingdom in Turkey.
Growing network of duty-free shopsIn addition to providing travel agencyservices, Setur also manages an extensivechain of duty-free shops. The company hasa total of 26 shops at airports, seaports andborders and also conducts in-flight duty-freeoperations for eight different airlines,supported by nine in-flight operation centers.
In 2006, Setur won the tender to conductduty-free sales, food & beverage operationsand other commercial activities at Turkey'sborder crossing stations of Kap›kule, Habur,Cilvegözü, Dereköy, Sarp and Sarpi for aperiod of 15 years. Setur will open itspremises at Habur and Cilvegözü in 2007and plans to open the others in 2008.
Operations at these border-crossing stationsare expected to serve 250 million travelersand generate USD4 billion revenues duringthe operating period.
D‹VAN GROUP
A symbol of traditional Turkish hospitalityThe Divan brand has symbolized unwaveringquality and a customer focused serviceapproach in the hotel and food & beveragesectors since 1963.
The group operates six highly regarded fivestar hotels: Divan ‹stanbul, Divan MarmarisMares, Divan Antalya Talya, Divan BodrumPalmira, Divan Taxim Suites and Divan City‹stanbul.
Divan Moment Ankara, scheduled to openin early 2007, will strengthen the position ofthe brand in the boutique city hotel segment.
Divan runs 39 food outlets (includingfranchises) in a variety of formats includingpatisseries, restaurants, pubs, cafeteriasand brasseries.
The Group is also active in the fast-growingindustrial food service business, operatingunder the “Yedi” brand. “Yedi” has shownaccelerated growth. As of 2006-end, it wasserving 81,000 customers daily at 178locations.
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Koç Group owns subsidiariesthat manage hotels and food& beverage outlets, travelagencies, ticket sales, duty-free shops and marinas.
Turkey's highest capacity marina chainSetur provides world-class services toyachtsman at eight marinas situated onTurkey's coastlines: Kalam›fl and Fenerbahçein ‹stanbul; Ayval›k, Çeflme and Kufladas›on the Aegean; and Marmaris, Antalya andFinike on the Mediterranean. Setur Marinashave the capacity to berth over 4,100 boats,representing 31% of Turkey's total capacity.Going forward, the company aims to expandits chain through the addition of internationaloperations to its portfolio.
Information Technologies
KOÇS‹STEM
Turkey's leading outsourcing servicesand technological solutions providerKoçSistem is Turkey's most respectedinformation technology company with 62years of experience in the sector. Over thepast five years, the company has transformeditself from a traditional systems integrator toa provider of customized technologysolutions and outsourcing services.
The leader in outsourcing servicesKoçSistem Processing Center, the largestshared data center in Turkey, completed itsinternational accreditation in 2006 with theITIL certificate. The “Twin Processing Center”in Ankara has one of the largest disasterrecovery infrastructures in Turkey.
The company's 400-seat call center andprinting center with a daily printing capacityof 1.5 million sheets, enables customers tocompletely outsource their IT-relatedbusiness processes.
Rapidly developing portfolio oftechnological solutionsKoçSistem provides the infrastructure for the“Paro” platform, one of Koç Group's mostimportant Customer RelationshipManagement projects and is using theexperience gained in this area to offer newproducts to the market. The company'shuman resources investments in the areasof supply chain and corporate resourcesplanning began to show positive businessresults in the last quarter of 2006.
KoçSistem achieved notable growth in 2006in the non-public segment, growing by 33%through its proprietary solutions and services.
KOÇ.NET
Integrated business communicationsolutionsThe leading service provider in the corporatemarket, Koç.net obtained a long-distancephone service license from theTelecommunications Agency in May 2004.The company provides international anddomestic VoIP services to a growing numberof customers all over Turkey. The companyhas interconnection agreements with all ofthe Turkish PSTN and GSM operators andmajor international telecom operators.
Koç.net increased it business potential andvolume in the international market bywidening its network infrastructure with itsnew POP (Point of Presence) in Frankfurt.With this international investment, thecompany has established the fundamentalinfrastructure to provide services tocustomers of international telecom giantssuch as Global Crossing and Bazaq inTurkey.
Koç.net also acts as a business partner ofBT (British Telecom) and KPN (Royal DutchTelecom), two of the world's largest telecoms,in the Turkish market.
In 2006, Koç.net increased internationalrevenues by 178%, and total revenues by102%.
B‹LKOM
Bilkom began to set up the requisiteinfrastructure (channels, service, supportand localization) for selling Apple productsin Turkey in 1983. Operating since 2005under the name Apple IMC, Bilkom offersApple and Adobe products through almost500 sales points, including authorizedsolution partners, Apple Premium Resellerconcept stores and a retail store chain.Bilkom raised revenues by 37% in 2006.
In recent years, research has named Applethe most innovative company and the brandwith the fastest increasing value. Today,Apple computers and software are thenumber one choice of professionals in theareas of desktop publishing, design,advertising and audio/video processing.Apple's iPod, on the other hand, is theundisputed leader around the world and inTurkey in the digital music player segment.
Bilkom has also been the principal agent ofAdobe, the world's fourth largest softwarecompany, in Turkey since 2003.
PROMENA
Promena utilizes e-business methods thatcreate significant cost savings inprocurement to Koç Group companies aswell as to other private and public sectorcompanies. Promena is increasingly knownas a “procurement advisor and enabler”.
TANI
Tan› provides Customer RelationsManagement to Koç Group companies aswell as to non-Koç companies. At the sametime, together with the participatingcompanies, it offers customers theadvantages of “Paro” customer satisfactionand loyalty program.
ZER (Formerly Beko Ticaret)
Zer acts as the centralized procurementmechanism of Group companies in media,support services and indirect suppliespurchasing. In 2006, Zer broadened itsservice range to boost business volume by100%.
Other
One of the largest privately owned shipyardsin Turkey, RMK Marine won a contract in2006 to supply four coast guard vessels tothe Ministry of National Defense. Valued atUSD450 million, “The Coast Guard Searchand Rescue Ship Project” represents a firstin Turkey, where a maritime military contactof this size has been awarded to a privatelyowned Turkish shipyard.
Ram D›fl Ticaret develops internationalbusiness opportunities for both Koç andnon-Koç companies, in the Middle East,North Africa and Central Asian Republics.
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Sharing in allthingsOn behalf of us,for all of us
Koç Group’s sense of socialresponsibility derives from thephilosophy of its founder VehbiKoç who said “I live and prosperwith my country”. Sensitivity andconcern regarding social andnational problems form thecommon component of theGroup's participatory andinnovative approach to corporatecitizenship.
Koç Holding and its subsidiariesactively contribute to the wellbeing of society through a varietyof projects and initiatives in theareas of cultural heritage, art,education, healthcare, sports,environmental protection andsocial development.
Koç Group has pledged to observe andimplement the principles of the agreementwith a view to transform the “responsiblecitizenship” approach into “responsiblebusiness” in the geographical region in whichit operates.
The Global Compact relies on publicaccountability, transparency and theenlightened self-interest of companies, laborand civil society to initiate and sharesubstantive action in pursuing the principlesupon which the Global Compact is based.Signers of the Global Compact work toadvance ten universal principles in the areasof human rights, labor, the environment andanti-corruption.
The parallelism between Koç Group's“Objectives and Principles” and the UN'sGlobal Compact facilitates Koç Holding'sadherence to the underlying principles.Consequently, the United Nations announcedKoç as the country and regional championfor the incorporation of these principlesthroughout Turkey and the region.
Since its establishment, Koç Group hasworked to give back to its country throughprojects that will add value to the community.Every year Koç extends thousands ofscholarships and initiates numerous projectsin the arts, environment and healthcaresectors. In addition to projects at home, KoçGroup sponsors events and activities abroadin order to promote Turkey in the internationalarena.
A pioneer in Turkey in countless areas, KoçGroup has broken new ground by establishingthe country's first private philanthropicfoundation, Vehbi Koç Foundation, which inturn signed up to many “firsts” like the firstprivately operated museum, first industrialmuseum and first student dormitory.
Koç Holding carries out projects all of whichshare the common aim of being an engineof change for economic and societaltransformation by striving for excellence inall its activities and commitments. The Group's80th anniversary provided an impetus to addnew projects to complement and expandpast efforts.
Vocational High SchoolsOne of the major corporate socialresponsibility projects initiated in 2006 aimsto increase attractiveness of vocationalsecondary schools. As a major employer ofblue collar workers, Koç invests in their
education from the secondary school level,thus bringing attention to the issue of theneed for skilled workers on one hand, andunemployment on the other. Thus it isenvisioned that the project will supportTurkey's bid for membership to the EU bytriggering a structural change in the economythrough productivity increase and enhancedvalue creation.
This project was developed to createawareness among public and to set off apublic debate among the private andacademic circles on the needs of vocationaleducation. Koç Holding has pledged to grant8,000 students scholarships throughout theireducation, while providing internshipopportunities and priority in employment.
Support for Education in SoutheastTurkeyThe Vehbi Koç Building of the Faculty ofVocational and Technical Education inAd›yaman was opened on September 20,2006. The Faculty will be the main pillar of auniversity to be established in thissoutheastern city. Foundations for the buildingwere laid in 2005 by Koç Holding andVehbi Koç Foundation and construction hasbeen completed in one year at a cost ofUSD2 million.
“Sizinkiler“ Musical for ChildrenLimon and Zeytin, the characters of cartoonistSalih Memecan's popular Sizinkiler series,came to life in a children's musical performedby the BKM Players. Nearly 100,000 childrensaw the show, which was performed inIstanbul and then in 16 cities in Turkey throughthe support of Koç Holding as part of its 80th
anniversary celebrations.
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Signing of the UN GlobalContract in 2006 confirmedin an official and internationalway Koç Group's commitmentto corporate citizenship andsensitivity to social issues,a commitment which hasdeepened over the 80 yearssince the establishment ofthe Group.
Koç Group continued to pioneer in the areaof corporate social responsibility through themany projects launched in 2006 in Turkey.The Founder's credo of “If there be mycountry, so will be me” has been reflectedin the “responsible citizenship” approachand evolved over the 80 years of the group'sexistence.
Signing of the UN Global Compact in 2006confirmed in an official and international wayKoç Group's commitment to “corporatecitizenship” and sensitivity to social issues,a cultural value inherent since theestablishment of the Group.
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59April 23rd International Children's FestivalKoç Holding has sponsored the TurkishRadio & Television (TRT) April 23rd
International Children's Festival for the pastten years. In 2006, children from 45 countries,representing a variety of languages, religionsand races participated in the Festival atAntalya's antique Aspendos Theatre in acelebration of brotherhood, love, peace andfriendship.
Donation of Atatürk's Wax Figure toAtatürk Mausoleum in AnkaraAfter replacing the wax figure of MustafaKemal Atatürk, the founder of TurkishRepublic, in 2005, donated a copy of thewax figure to Atatürk's Mausoleum in Ankaraon April 23rd 2006 as a present to the Turkishpublic.
“For My Country” DayAs a tribute to its 80th anniversary, the Grouplaunched in 2006, a grassroots effort tospread social responsibility efforts throughits distribution network in 81 Turkish citieswhich will be celebrated with a new projectat the Group's Anniversary, during the lastweek of May every year. The initiative asksall distributors, 87,000 employees and 15thousand local subsidiaries to bring inpersonal involvement and creativity toaddress a communal problem such asrenovation of a school, building of a park oreven cleaning a lake.
The projects encompassed a wide varietyof ideas: 144 focused on repairing andequipping schools, 51 contributed toorphanages and rehabilitation centers, othersdealt with specific social and environmentproblems. Dealers from Kahramanmarafl,for example, organized annual newspapersubscriptions to 185 families who did notreceive newspapers; in Mersin a daycarecenter was opened to look after streetchildren; and in Van employees of Migrosand Tansafl organized a clean-up of LakeVan together with local citizens.
Some projects initiated for “For My Country”Day have become part of the way ourcompanies do business. For example, Divancollects and refrigerates the leftovers fromindustrial meals it serves and donates themto animal shelters. Thanks to this project,close to 3,000 homeless dogs are fed eachweek.
Vehbi Koç Foundation
A major part of Koç Group's corporate socialresponsibility activities is carried out throughVehbi Koç Foundation. After the enactmentin 1967 of the law enabling the establishmentof private foundations, which he personallyled, Vehbi Koç founded in 1969, the firstprivate philanthropic foundation in Turkey.The Foundation has supported education,culture and healthcare for nearly 40 years.
With an endowment of close to USD1 billion,Vehbi Koç Foundation is one of the largestfoundations not only in Turkey but also inEurope. It operates The Koç School, a privateelementary and high school, and KoçUniversity in the area of education; AmericanHospital and MedAmerican Polyclinic in thefield of healthcare; Sadberk Han›m Museum,Vehbi Koç and Ankara Research Center andSuna - ‹nan K›raç Mediterranean CivilizationsResearch Institute and Kaleiçi Museum inthe field of culture. These organizations areamong the most highly regarded in theirfields in Turkey, serving hundreds ofthousands of people every year.
Both Koç School and University givescholarship support to promising low-incomestudents over and above the legal thresholdsset by law. Koç University has succeededin becoming a world-class institution of higherlearning in a short period of time in terms ofvarious criteria including student rankings,success of graduates in business andacademic life and the number of publicationsper faculty member. In 2006, Koç Universityfaculty members published a total of 412articles, 24 books and received 11 patents.Of the published materials, 140 appearedin ICI attributed journals.
The Scholarship Program, one of the mostimportant activities since the establishmentof the Foundation, gave over 5,000scholarships during the 2006 - 2007academic year.
The Vehbi Koç Award, which was firstpresented in 2002, was given in the area ofeducation in 2006 to the Governor of Sakaryafor his leadership and exemplary efforts inthe field of pre-school education.
During the year, American Hospital andMedAmerican Polyclinic treated over 220,000people. SANERC (Semahat Arsel NursingEducation and Research Center) continuedits program of research, training andpublications and initiated the “NursingServices and Quality Program” in cooperationwith the Ministry of Health.
The seminars, conferences and exhibitionsorganized by Sadberk Han›m Museum,VEKAM and Suna - ‹nan K›raç MediterraneanCivilizations Research Institute (AKMED) in2006 continued to make importantcontributions to cultural life.
Special exhibitions at Sadberk Han›mMuseum–Glittering Mementos and 150th
Anniversary of the Crimean War–attractedconsiderable interest. The Museum also lent64 objects for the “Istanbul - The City andthe Sultan” exhibition opened in Amsterdam.Adalya, the periodic journal of AKMED,succeeded in becoming the only Turkishjournal listed in the 2006 Arts & HumanitiesCitation Index.
Rahmi M. Koç Museum
Founded in 1994, The Rahmi M. KoçMuseum is the first major museum in Turkeydedicated to the history of transport, industryand communications. Housed in magnificentbuildings–prime examples of industrialarchaeology themselves–on the shore of thehistoric Golden Horn, the collection containsthousands of items from gramophoneneedles to full size cars, ships and aircraft.The Museum also conducts corporate socialresponsibility projects like “MuseumBusProject”. An exceptionally designed bustravels to the villages all around Turkey andprovides children the opportunity to seecertain parts of the exhibitions. Thus, it allowschildren to comprehend the significance oftechnological developments and to gain theconscience to protect historical artifacts.
Corporate Social Responsibilitythroughout the Group
Group companies support the efforts ofvarious key non-governmental organizationssuch as Turkish Volunteers for Education(TEGV), Foundation for Combating SoilErosion, Reforestation and Protection ofNatural Habitats (TEMA), Family Health andPlanning Foundation (TAPV), and TurkishMaritime Environment Protection Association(TURMEPA).
Environment
Within Koç Group, 21 companies apply ISO9001 environmental management system at31 plants. Thirteen companies have attainedISO 14001 certification for waste facilitieswhile eight companies apply OHSAS 18001,the international occupational health andsafety management system specificationsto minimize the risk of occupational accidentsand dangers and provide a safe workingenvironment.
Koç Group Occupational Health andSafety Committee meets every month.The Committee's major objective is to shareinformation, formulate a joint stance onuniversal problems and carry out activitiesto boost the environmental performanceof Group companies. The Koç GroupEnvironmental Reference Handbook,published in 2005, is a vital guide for all thecompanies in the Group. An environmentalinventory has been completed and is beingused to prioritize activities.
Migros, a member of Migros-Çevko,continues to be a leader in recycling byproviding financial support to collectioncenters and recycling facilities. Energysavings of around 5% have been attainedin stores and management offices throughcomputerized control of lighting andtemperature, an important step towardpreserving the ecological balance andeffective use of resources.
In 2006, Otokar received the AkdenizUniversity Environmental Service Award forthe environmental projects it has carried outin Turkey. Otokar has made an importantcontribution to the effective use of naturalresources by treating and recycling all sortsof waste water in a way that does not harmthe environment.
With the support of the Ministry of NationalEducation, Yap› Kredi and TURMEPAorganized the Limitless Blue project to makeprimary, middle and high school studentsaware of the need to preserve naturalresources. The program reached 3,000teachers and 400,000 students in 2006.
Sensitivity to the environment promptedreforestation projects from severalcompanies including DemirDöküm, Otokarand Koç Allianz. The Koç Allianz project inÇeflme hopes to save the nearly extinctmastic tree.
Through the Green Road Project, Opet hasplanted 261,923 trees and other plantsaround 302 stations and in areas designatedby city governments, taking care to chooseplants suited to the region's climate and soil.This project won Golden Compass Awardsfrom the Turkish Public Relations Associationin the categories of Social Responsibilityand Environment.
Education
Yap› Kredi and The Educational VolunteersFoundation (TEGV) organized “I am readingand learning Project”, which is a multifacetededucational project to contribute to thepersonal and social development of primaryschool children. The project aims to developthe capacity of school-age children to think,do research, question and analyze. WithYap› Kredi's support, the project will beimplemented at TEGV's 11 Education Parksand 57 Teaching Units by volunteer teachers,including well-known academicians, through2010 in order to instill the love of readingamong 50,000 students.
Migros prepared and distributed Turkish andMathematics CDs to students in the fourththrough eighth grades in a campaign thatbenefited 15,000 students. During the year,the company also sponsored the April 23Migros Theater Festival in cooperation withState Theaters in 11 provinces, bring thecolorful and exciting world of the theater to18,000 children. Throughout 2006, MigrosChildren's Theater, treated 25,400 childrenin eight provinces to free productions ofplays dealing with important topics such aslove and friendship.
Otokoç cooperated with Aygaz and TEGVto support the “Firefly Mobile Learning Units”.The project targets supporting the personaldevelopment of 7-16 year olds by introducingthem to computers and encouraging theirparticipation in drama, reading and otheractivities, In 2006, Otokoç and Aygaz mobileunits reached close to 104,000 children.
Aygaz organized a Careful ChildrenCampaign for primary school childreninstructing them in first aid and how to behavein case of accidents at home or in school,earthquakes, traffic accidents and fires.A play concerning Careful Children wasperformed free-of-charge and a total of310,000 children were presented withcertificates.
Arçelik's Volunteers for EducationAssociation, in cooperation with the Ministryof National Education, provides support toelementary-age students in 300 BoardingSchools throughout Turkey. The project aimsto contribute to the formation of modern,self-confident young men and women byraising the quality of education received bychildren studying in boarding schools.The project also intends to create publicawareness of the needs of these state-runboarding schools. In 2006, the number ofschools covered by the project increased to101 in 24 provinces, touching the lives of80,000 students. Effective training was givento 253 teachers who have in turn trainedanother 1800 teachers. At the end of theeight-year project, the program will havereached close to 200,000 students attending300 Boarding Schools.
Culture
Arçelik highlighted its support for culture andthe arts by sponsoring the Leonardo:Universal Genius, a traveling internationalexhibit, in order to expand the values ofinnovation and technology to a broadaudience. Over 114,000 people visited theblockbuster exhibit at the Rahmi M. KoçMuseum in Istanbul from November 2 -December 31. The exhibit featured real-lifereplicas of machines designed accordingto Leonardo Da Vinci's original drawings.
Çatalhöyük: From Earth to Eternity was thefirst exhibit in Turkey devoted to theexcavations of the Hittite city of Çatalhöyük,a site of great interest to archeologists sinceits discovery. The exhibit at the Yap› KrediVedat Nedim Tör Museum reflectedKoçbank's ten years of support for theongoing excavation.
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61Yap› Kredi Private Banking assumedsponsorship of fund-raising events to supportthe continuing excavation at Afrodisias, oneof the most beautiful Hellenistic and Romansites in Turkey. The temple to Aphrodite andthe well-preserved stadium, theatre, bathsand marketplace colonnade make the siteespecially noteworthy.
Aygaz has underwritten since 2005, therestoration of the antique city of Sagalassos,110 km from Antalya in the A¤lasun districtof Burdur and is the sole sponsor for therestoration of the Antonin Fountain (161-180A.D.), the site's most spectacular structure.The work is expected to be completed by2010.
Aygaz was one of the main sponsors ofTurks: A Journey of a Thousand Years, 600-1600, a landmark exhibition held at the RoyalAcademy of Art in London. The exhibitexplored the artistic and cultural riches ofthe Turks from Inner Asia to Istanbul andbeyond over a period of a thousand years,showing the artistic diversity that culminatedin the splendors of the Ottoman Empire. Theexhibit reached a broad audience througha program of gallery talks, workshops andconferences.
Koç Allianz provided Fine Arts Insurance tobring various exhibitions to Turkey includinga show of Alev Ebüzziya Siesbye's ceramicsfrom the Danish Museum of Decorative Artat the Istanbul Museum of Turkish and IslamicArt, and Drawings from Rembrandt and HisCircle from Rotterdam's Boijmans vanBeuningen Museum as part of the worldwidecelebrations of Rembrandt's 400th
anniversary.
As part of Opet's Respect to History project,rehabilitation of the villages of Alç›tepe,Seddülbahir, Bigal›, Kilitbahir Büyük andKüçük Anafarta was completed and thesurroundings renewed. Work was also doneon the Eceabat region. Improvements weremade in the infrastructure and appearanceof the Gallipoli peninsula and villages, anarea heavily visited by local and foreigntourists on March 18 and April 24. In thevillages on the peninsula, progress wasmade in key areas such as education, health,environment and tourism. Respect to Historyeducates locals regarding the importanceof historical preservation while ensuring thatvisitors to the area (over the 3.5 millionannually) are pleased and impressed bywhat they see. Classes in English,cleanliness, hygiene and bed and breakfastservices were conducted in cooperation withthe Popular Education Center; thelandscaping of village squares andmodernization of museums, toilets and shopshave helped encourage tourism to the region,securing a source of income for villages.
Sports
For Arçelik, investing in sports activities is apart of its vision to support youth and todevelop appreciation for and encourageparticipation to sports.
In 2006, Arçelik assumed the sponsorshipof the Turkish Basketball League for fouryears under the “Beko” brand, a symbol ofyouth, innovation and dynamism. With thelong-term cooperation between theBasketball Federation and the Beko brand,Arçelik believes it will make a significantcontribution to the development of youngathletes who represent Turkey abroad ininternational competitions.
As main sponsor of the Fenerbahçe Women'sBasketball Team for the 2004-2006 season,Koç Allianz has also contributed to thepopularity of basketball in Turkey.
Since 1999, Koç Allianz has sponsoredBasketball Schools for children from 6 to 16and sponsored many tournaments.
In addition, Koç Allianz is the main sponsorof the Marmaris Yacht Festival, continuingto bond with yacht enthusiasts since 2001through the sponsorship of the Aegean YachtRally. The company widened its involvementin this area with sponsorship of the WinterTrophy organized by the Bodrum Yacht ClubAssociation (BAYK) since 2005.
Migros has supported the Special Olympicsin Turkey for three years and given sportstraining to 1,000 mentally challenged athletesfor the past two years. In 2006, in cooperationwith P&G, it supported the sports training of1500 handicapped athletes.
Healthcare
Opet's Clean Toilet Campaign is one of thelongest running social projects in Turkey.The project highlights the importance ofcleanliness and hygiene in public restrooms.In cooperation with the Ministry of NationalEducation, nearly 100,000 school childrenwere educated. Furthermore, the restroomsin Opet gas stations were redressed for thehandicapped. Standards thus introducedwere enforced in all stations. Animated filmswere prepared to instruct children and adultsand these films were broadcast on television.The Opet Clean Toilet Campaign wasawarded first place in the International PublicRelations Association (IPRA) Golden WorldAwards in 2004 in the Social Responsibilitycategory as well as in the Golden CompassAward given by the Turkish Public RelationsAssociation. Opet was ranked as one of the“Top Companies” of Turkey in the SocialResponsibility category in an annual surveypublished by Nokta weekly magazine.
Sagalassos, as it will look after restoration
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Rahmi M. Koç (77), started his career in 1958 atOtokoç. In 1960, he transferred to Koç TicaretA.fi. which represented the Koç Group in Ankara.In 1963, following the establishment of KoçHolding, he managed its headquarters in Ankara.In 1964, it was moved to Istanbul and Rahmi Koçwas appointed as Koç Holding GeneralCoordinator. Subsequently, he became theChairman of the seven-person ExecutiveCommittee which was established in 1970. Heserved as Vice-Chairman of the ManagementBoard in 1975 and as Chairman of the four-personManagement Committee in 1980. Between 1984-2003, he was the Chairman of the Board of KoçHolding. During 1995-1996, he served asChairman of the International Chamber ofCommerce. Currently, Rahmi M. Koç is theHonorary Chairman of Koç Holding.
Mustafa V. Koç (47) has served as Chairman ofthe Board of Koç Holding since April 4, 2003. Heis a member of the Vehbi Koç Foundation Boardof Directors and the Board of Trustees of theEducational Volunteers Foundation, the IstanbulChamber of Industry, Foreign Economic RelationsBoard, Advisory Board of Kuwait InternationalBank and Rolls-Royce Advisory Board. He joinedthe JP Morgan International Council in June 2004.Currently, he is also the Chairman of the HighAdvisory Council of the Turkish Industrialists andBusinessmen's Association and Honorary ConsulGeneral of Finland for ‹stanbul
Suna K›raç (66) was appointed Vice-Chairmanof Koç Holding Board of Directors in 1980. Shestarted her career in 1960 as Assistant to VehbiKoç, the founder of Koç Holding. Suna K›raçserved as Vice-President of the Personnel andAdministration Department in 1970. She is amember of the Vehbi Koç Foundation Board ofDirectors, Koç University Board of Trustees,Turkish Educational Foundation Board of Trusteesand the Founding Member and HonoraryChairman of the Educational VolunteersFoundation. Suna K›raç received the State Awardfor Outstanding Service from Süleyman Demirel,the ex-President of the Turkish Republic, in 1997.She received “Honorary Membership” on July 1,1999, and was awarded as the “Woman of theYear” on March 13, 2001 and the MillenniumVolunteers Outstanding Service Award onNovember 7, 2001 from KASACOM, the VolunteerOrganizations National Women's HealthCommission.
Temel Atay (67) has been a member of the Boardof Directors since 1996 and has been the Vice-Chairman since 1998. He started his career in1966 as Product Development Manager at Otosanand was named Koç Holding AutomotiveAssistant Coordinator in 1972. After serving asGeneral Manager of Otoyol and later Tofafl hewas appointed as the Tofafl Group President,Vice-President of the Group Operating Committeeand the CEO.
Semahat Arsel (79), a member of Koç HoldingBoard of Directors, is also the Second Chairmanof the Florence Nightingale Foundation and thefounder of Koç University School of Health. Shebegan her business life as a member of the Boardof Directors of Koç Holding in 1964 and assumedthe role of Chairman of the Board of Setur. Shecurrently holds the capacity of Chairman ofSANERC (Semahat Arsel Nursing Education andResearch Center) and Vehbi Koç Foundation andas a member of Board of TURYAT. (TourismInvestment and Service Company)
Bülend Özayd›nl› (58) has served as a memberof the Koç Holding Board of Directors and CEOsince 2002. From 1987-1990 he was firstCoordinator and then Assistant Vice President ofMigros Türk and Maret. Özayd›nl› was the GeneralManager of Migros Türk during 1990-2000. In2000, he joined Koç Holding as Fiat GroupPresident and was appointed Acting CEO of KoçHolding in 2001.
‹nan K›raç has been a member of Koç HoldingBoard of Directors and the Chairman of the Boardof Directors of K›raça Group of Companies since1998. He started his career at Koç Holding in1961 as a Sales Officer at Ormak A.fi. He wassubsequently named Assistant Manager of thiscompany. He became General Manager of Otoyolin 1966 and General Manager of Tofafl in 1970.In 1973, he was appointed as Tofafl GroupCoordinator at Koç Holding and then Vice-Chairman of Koç Holding in 1980. He was namedAutomotive Companies President in 1987;member of Koç Holding Board of Directors andChairman of the Management Committee in 1993.From 1994-1998, he served as CEO of the Group.
Ömer M. Koç (45) has been a member of KoçHolding Board of Directors since 2004. He beganhis career as Sales Manager at Kofisa TradingCompany. In 1989, after working as SalesManager at Ramerica International, he was namedManager of Gazal in 1991. Ömer Koç wasappointed as Finance Coordinator in 1992, EnergyGroup Vice-President in 1996 and Energy GroupPresident in 2000.
Hasan Subafl› (66) has been a member of KoçHolding Board of Directors since 1994. He beganhis career in 1969 as a Project Engineer at KoçHolding Industrial Business Coordination Group.He worked at Arçelik in various capacities from1970-1983 and was named General Manager ofAsil Çelik A.fi. in 1982. The same year, he wasappointed as General Manager of Arçelik. In1991, he became the Vice President of KoçHolding Consumer Durables Group; in 1992 hewas appointed as a member of the ManagementCommittee; in 1994, he was named a memberof Koç Holding Board of Directors and Presidentof the Consumer Durables Group. In 1998, heserved as Vice-Chairman of Koç Holding Boardof Directors.
Prof. Dr. Yavuz Alangoya (69) became a memberof Koç Holding Board of Directors in 2003. Hejoined Koç Holding in 1981 as Chief Legal Advisor.He has served on the Board of Trustees of KoçUniversity since 1994 and in 2005 was appointedas a Faculty Member at Koç University Schoolof Law lecturing on Civil Law of Procedures.
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W. Wayne Booker (73) has been a member ofKoç Holding Board of Directors since 1999. Heis also an advisor to BSI Group and a member ofthe Board of Directors of AGCO Corporation, apart of Duluth GA. Previously, he served as Vice-Chairman of Ford Motor Company where heworked for 43 years. During the transition to anew management team, he had responsibility fornew markets and business development ingrowing markets. In 1996, he was appointed Vice-Chairman with responsibility for all the company'sinternational automotive operations until they werecombined with Ford Automotive Operations,encompassing China, Japan, Southeast Asia,India, Russia and Belarus. He was also in chargeof Ford's automotive joint ventures with worldclass companies such as Mazda, Kia and otherswith responsibility for relations with major globalbusiness partners. In addition to his responsibilitiesat Ford Motor Company, he was an active memberof the US-China Business Council, US-ChinaRelations National Committee, APEC NationalCenter and US-Thailand Business Council.
H. Oswald Maucher (80) has been a member ofKoç Holding Board of Directors since March 26,1999. He is also the Honorary Chairman of NestleS.A. He worked in various management capacitiesat Nestle in Germany during 1964-1980. After1975, he served as Chairman and CEO of NestleGruppe Deutschland GmbH in Frankfurt. OnOctober 1, 1980, he was transferred to NestleS.A. in Vevey, Switzerland as Assistant ManagingDirector and a member of the ExecutiveCommittee. He was appointed Chief ExecutiveOfficer in November 1981. From June 1, 1990until June 5, 1997, he served as Chairman of theBoard of Directors as well as CEO. He resignedhis post of CEO of Nestle S.A., on June 6, 1997but remained as Chairman of The Board until2000 when he was appointed Honorary Chairman.
John H. McArthur (73) has been a member ofKoç Holding Board of Directors since 1999. Hewas the Dean of Harvard Business School from1980-1995. The John and Netilia McArthurUniversity Professorship was established atHarvard University in 1997. He is currently amember of the Board of Directors of The AESCorporation; Senior Advisor to the President ofThe World Bank; Chairman of the Canada AsiaPacific Foundation; member of the Board ofTrustees of Reuters Founders Share CompanyLimited. He has served on the Boards of BCEInc., Cabot Corporation, Columbia/HCAHealthcare Corporation, Glaxo Wellcome plc,Rohm and Haas Company, Springs Industries,Inc. and The Vincam Group, Inc. He has been adirector of Chase Manhattan Corporation, aTrustee in Bankruptcy of Penn CentralTransportation Company and a founding boardmember of the Canada Development InvestmentCorporation and a member of the Task Force onthe Future of the Canadian Financial ServicesSector. For many years, he served as chair of theBrigham and Women's Hospital. Later he wasfounding Co-chair of the Board of Trustees ofPartners HealthCare System, Inc. He has beenawarded honorary doctorates from MiddleburyCollege, Queens University, Simon FraserUniversity, the University of British Columbia, theUniversity of Western Ontario, and the Universityof Navarra in Spain. Other awards have includeda Management Achievement Award, McGillUniversity; Harvard Statesman Award, from theHBS Club in New York; and a Canadian BusinessLeadership Award, from the combined HBS Clubsof Canada.
Dieter Christoph Urban (64) has been a memberof Koç Holding Board of Directors since 2005.He was appointed Chief Financial Officer ofSiemens plc in November 1998. He joinedSiemens in the United Kingdom from Turkey,where he was Executive Vice President andMember of the board of Siemens Group withspecial responsibility for Finance. As a ChiefFinancial Officer, Mr. Urban had overallresponsibility for financial matters for Siemens inthe United Kingdom. In this role, he also oversawInformation Technology, Siemens Shared Servicesand Siemens Properties in the UK. Prior to joiningSiemens in Turkey at the end of 1992, Mr. Urbanworked as Treuhandanstalt Administrative Directorof the East Germany Privatization Association.Having joined as a Director of Administration in1991, Mr. Urban became Director of CorporatePlanning, and, while posted in New York in 1992,was in charge of attracting potential AmericanInvestors. He resigned from Siemens in April 2006.Currently, he serves as chief advisor to RolandBerger and London & Oxford Group. He alsoteaches at London School of Economics and KoçUniversity.
Dr. Füsun Akkal Bozok (50), has been Auditor ofKoç Holding Board of Directors since April 2006.She began her career in 1980 at Arthur AndersenAudit Co. Istanbul. Joining the Auditing andFinancial Control Group of Koç Holding in 1983,she worked as an auditing specialist and assistantto the Coordinator of Auditing and Financial Group.She served as the Coordinator of the Auditingand Financial Control Group for 11 years and in2003, she became the Coordinator of the FinancialGroup. Currently She lectures at Koç and Sabanc›Universities is a member of the Board of Directorsof Yap› Kredi Bank since September 28, 2005.
Nevzat Tüfekçio¤lu (66) served as Auditor of KoçHolding Board of Directors during 2002-2006 andis currently Auxiliary Auditor. He began his careerin 1963 as an Account Specialist at the Ministryof Finance, joining Koç Holding in 1974 asAssistant Finance Coordinator. During 1991-1994,he served as Group Coordinator of Finance. Hewas Vice President of the Auditing and FinancialControl Group from 1994-1999, becomingPresident of the Auditing and Financial ControlGroup in 1999.
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Bülend Özayd›nl› (58) CEO
He has served as a member of the Koç HoldingBoard of Directors and CEO since 2002. From1987-1990 he was first Coordinator and thenAssistant Vice President of Migros Türk and Maret.Özayd›nl› worked as the General Manager ofMigros Türk between 1990-2000. In 2000, hejoined Koç Holding as Fiat Group President andwas appointed Acting CEO of Koç Holding in2001.
Hasan Bengü (58) Foreign Trade and TourismGroup President
He started his career in 1975 as an Engineer atBeko Teknik (now Beko Elektronik), becomingPlanning Manager at Asil Çelik in 1979. Between1981-1983 he worked as Purchasing Manager atAsil Çelik. He served as Assistant General Managerat KOF‹SA Foreign Trade for two years and thenbecame the General Manager in 1985. In 1991-he started to work as General Manager of RamForeign Trade. He was appointed as ForeignTrade Group President in 1998 and between 2003-2006 was also the President of the CorporateCommunications Group. Since 2006, he is theForeign Trade and Tourism Group President.
Dr. Bülent Bulgurlu (60) Consumer Durables andConstruction Group President
He started his career in 1972 as a ConstructionEngineer at 1 Elliot Strömme A/S in Oslo, returningto Turkey in 1977 to join ‹ntes A.fi as a ConstructionEngineer. He worked in various positions at Garanti‹nflaat, including Engineering, Planning andConstruction Manager, Construction SiteCoordination and Construction Manager, AssistantGeneral Manager and General Manager. He wasappointed Vice-President of the Tourism andServices Group at Koç Holding in 1996, andbecame the President of this group in 2000. In2001, he was named President of the Tourismand Construction Group until he was appointedas the President of the Consumer Durables andConstruction Group in 2004. Bülent Bulgurlu willcontinue his career as the CEO of Koç Holdingeffective May 2007.
Ali Y. Koç (40) Corporate Communications andInformation Group President
He worked from 1991-1992 as Coordinator ofRamerica International, Inc., and participated inthe Securities Analyst Trainee program at MorganStanley Group after earning his MBA from HarvardBusiness School. He was named New BusinessDevelopment Coordinator at Koç Holding in 1997as part of the Strategic Planning Group and servedas the Information Group Operating CommitteeChairman as well as the New BusinessDevelopment Coordinator between 2000-2002.Since 2002, he has been the Information GroupPresident and in 2006, he has added thePresidency of the Corporate Communications tohis position.
Dr. Rüfldü Saraço¤lu (59) Banking and InsuranceGroup President
He started his career in 1975 at the FederalReserve Bank. Between 1977-1979, he was anAssistant Professor of Economics at BostonCollege, Massachusetts, joining the IMF as aneconomist in 1979. Dr. Saraço¤lu returned toTurkey in 1984 to take up the post of Research,Planning and Training Manager at the CentralBank of Turkey. He was named Assistant Governorof the Central Bank in 1986 and served asGovernor of the Central Bank between 1987-1993.He was elected as a Member of Parliament fromIzmir in December 24, 1995 elections and servedin the 53rd Government as a State Minister. Hejoined Koç Holding in March 2002 as FinanceGroup President. Currently he is the Chairman ofthe Board of Yap› Kredi Bank and President ofthe Banking and Insurance Group at Koç Holding.
Ömer Bozer (49) Food and Retailing GroupPresident
He started his career in 1983 as a ManagementTrainee at Koç Holding. Subsequently he heldvarious posts including Budgeting & PlanningManager and then Assistant General Manager atMaret and Assistant General Manager and theGeneral Manager of Düzey. He was appointedGeneral Manager of Migros Türk in 2002. InOctober 2004, he was named Co-President ofKoç Holding Food, Retailing & Tourism Groupand then President. He has been President ofKoç Holding Food & Retailing Group since 2006.
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Tamer Haflimo¤lu (43) Strategic PlanningPresident
He started his career in 1989 at Koç Holding asPlanning Department Management Trainee until1993. For two years he worked as a PlanningSpecialist and later assumed the role of StrategicPlanning Manager in 1995. Between 1997-2003he served as Strategic Planning Coordinator atKoç Holding until he was appointed as KoçHolding Strategic Planning Group Vice-Presidentin January 2004, and President in May 2004.
Ali Tar›k Uzun (43) Auditing Group President
He started his career in 1985 as an AccountSpecialist at the Ministry of Finance, and joinedKoç Holding in 1992 as Assistant Coordinator ofFinancial Affairs in the Auditing and Finance Group.Between 1996-2003, he served as Coordinatorand he has become the President of the AuditingGroup at Koç Holding since 2004.
Erol Memio¤lu (53) Energy Group President
He started his career in 1979 at TPAO as SpecialistEngineer, became the Production Manager andworked as President of International Group, TPAOPresident of Turkish Petroleum Overseas Co. Hejoined Koç Holding in 1999 as the Vice-Presidentof the Energy Group. Between 2003-2004, he wasa member of the Board of Directors of Koç Holdingresponsible for the operations of the Energy GroupCompanies. Since May 2004 he has been thePresident of the Energy Group at Koç Holding.
Kudret Önen (54) Automotive Supplies and OtherAutomotive Companies President
He began his career in 1975 as a PlanningEngineer at Ford Otosan. He served as ProjectEngineer and then became Manager of theResearch & Development at Koç Holding in 1980.In 1984, he was appointed as Assistant GeneralManager of Otokar, and served in this capacityfor 10 years before becoming the GeneralManager. In 2005 he was appointed as Co-President of Koç Holding Other AutomotiveCompanies Group. He is the President ofAutomotive Supplies and Other AutomotiveCompanies Group at Koç Holding since 2006.
Ahmet Ashabo¤lu (36), CFO - Finance GroupPresident
He began his career as a Researcher atMassachusetts Institute of Technology in 1994,going on to work at UBS Warburg, New York asAssociate Director-American Treasury BondTrading. Between 1998-1999, he served as HeadTrader/Branch Manager-FX Options at UBSWarburg, Philadelphia. For four years he workedas Engagement Manager at McKinsey &Company, New York until he joined Koç Holdingin 2003 as Finance Group Coordinator and hasbeen the CFO since 2006.
Growth in today’s increasingly global and competitive environment requires compliance with internationally accepted practices andimplementation of a set of respective principles. It is extremely important for both the country and for publicly traded companies that theTurkish capital markets become a part of the global liquidity system in order to increase the funding opportunities from international financialmarkets.
As a Group, we believe that good corporate governance brings considerable benefits to companies in terms of increasing managementquality, reducing risks and raising confidence and esteem in financial and capital markets.
Koç Holding was one of the first companies to implement necessary measures to reach the highest standards in this area at a time whencorporate governance principles were not generally applied in Turkey. Koç Holding’s approach to corporate governance has always beenvoluntary and proactive. Therefore, Koç Holding has made 1) Transparency, 2) Fairness, 3) Responsibility and 4) Accountability its fourinviolable principles.
Koç Group’s deeply-rooted and prominent corporate identity facilitates good corporate governance. Honesty, respect, ethical behavior andcompliance with all laws and regulations are central to the way the Group does business and an integral part of its culture.
Koç Holding's management structure, processes and policies have been set in conformity with laws and regulations, ensuring clarity andtransparency in the areas of decision making and responsibility.
Koç Holding is one of the first Turkish companies to appoint independent members to its Board of Directors and one of the few to link thecompensation of top management to economic profitability and share performance. Koç Holding has voluntarily applied internationalstandards and practices. Consolidated financials have been prepared in accordance with International Accounting Standards (IAS) since 1995and International Financial Reporting Standards (IFRS) since 2004, as required by Capital Market Regulations.
Koç Holding, in accordance with laws and governing principles, provides the requisite information to all investors and analysts simultaneouslyin a regular, reliable and consistent fashion. In order to ensure continuous and effective communication, Koç Holding organizes investormeetings, conferences and panels and targets to reach a wider audience through media interviews. Koç Holding initiated a program with theobjective of increasing coordination among the Investor Relations departments of the Koç Group companies, held training sessions for theGroup companies to provide the most transparent, accurate and detailed communication to the investors and defined minimum standardswhich the Group companies must comply with.
As the first Holding Company to be established in Turkey and as a Group that is committed to institutionalization, we have applied universalcorporate governance principles for many years and adopted the “Corporate Governance Principles” approved by The Capital Markets Board(CMB) on July 4, 2003 as decision number 35/835 and revised in May 2005. We are working on principles that have yet not been implementedand plan to apply them immediately after the administrative and technical infrastructure work is completed.
The detailed compliance report that summarizes our standing in respect of the CMB’s Corporate Governance Principles is presented below.
SECTION I – SHAREHOLDERS
Investor Relations DepartmentAn Investors Relations Department has been established within the Strategic Planning Group at Koç Holding in order to manage relations withshareholders and potential investors, respond to investor inquiries in the most effective manner and carry out activities aimed at increasing thecompany value. The President of Strategic Planning is also a member of the Corporate Governance Committee.
The Department’s main responsibilities are as follows:• to ensure coordination with the Finance Group and Legal Affairs on issues regarding shareholders.• to promote Koç Holding and the Group companies to individual and institutional investors in Turkey and abroad • to inform shareholders and potential investors about the Group’s operations, financial results and strategies on a regular basis• to meet the requests for information regarding Koç Holding and Group companies from analysts and researchers and to prepare currentand comprehensive reports for investors in order to promote the Group effectively• to issue presentations and analysis related to Koç Holding and Group companies following the announcement of quarterly results • to inform investors and participants in conferences and investor meetings on a regular basis about developments in Koç Group and theTurkish Capital Markets.
• to develop recommendations on capital market transactions related to Koç Holding and Group companies• to update communication tools such as the website and annual report in order to provide accurate and complete information toshareholders regarding Koç Group• to keep accurate records of meetings that are held for and with shareholders• In cooperation with the Legal Affairs department, to ensure that the General Shareholder Meetings are held in accordance with regulationsand the company’s Articles of Association and internal practices; prepare documents that will be used by the shareholders in the meetings;keep records and publish reports regarding the results of these meetings on the internet.
The Investor Relations Department contacts are provided below:
In 2006, the Department attended 12 conferences in Turkey and abroad, held one-on-one meetings with over 300 investors, and answeredmore than 500 telephone and e-mail inquiries. Utmost attention was given to ensure compliance with all regulations in carrying out thesefunctions. There are no complaints filed with our company regarding the exercise of shareholders’ rights nor are there any administrative orlegal proceedings regarding this subject. Potential questions and concerns of shareholders have been answered through frequent andregular meetings held in various locations around the world. Koç Days have been initiated in financial centers such as London and New Yorkto bring investors together with the top-level executives of the Group.
Handling of capital increases and dividend payments and the coordination and announcement of these transactions with the CMB, the CentralRegistry Agency (CRA) and ‹stanbul Stock Exchange (ISE) and preparation of consolidation reports are the responsibility of the FinanceDepartment.
Shareholders’ Right to Obtain InformationEnquiries directed to the Investor Relations Department, with the exception of information considered confidential or a trade secret, areanswered in writing or by phone by the most authorized person concerning that particular issue. Shareholders are provided access tofirsthand information regarding strategy and operations by bringing top management and shareholders together at meetings and conferences.Throughout the year, any information that is of importance to shareholders is announced a material disclosure. These announcements, pastand current, are distributed via email and also posted in English and Turkish on our website.
Koç Holding does not discriminate among shareholders in the exercise of their right to obtain and evaluate information.
All information that is of interest to shareholders for both the current and past periods is published in Turkish and English on our website(www.koc.com.tr) under Investor Relations section. Public announcements are published in the website under the “Company Internet Websiteand contents” heading.
Company activities are audited periodically by Independent External Auditors appointed at the General Shareholders’ Meeting and by theauditors selected at the General Shareholders’ Meeting. In the last General Shareholders’ Meeting, a member of PriceWaterhouseCooperswas appointed as the independent external auditor. During this reporting period, no shareholder requests have been received for theappointment of a special auditor.
The General Shareholders’ MeetingThe Ordinary Shareholders’ Meeting was held on April 25 2006 with 81.2% attendance and in full compliance with the relevant notice periodsset forth by the ISE and CMB regulations. Due to the holding company structure, the Ordinary Shareholders’ Meetings are held towards theend of April following the consolidation of Group companies’ financial statements.
The 2006 Ordinary Shareholders’ Meeting was open to the public including the stakeholders and the media and was held under thesupervision of a government observer from the Ministry of Industry and Trade.
Invitations to the General Shareholders’ Meeting are issued by the Board of Directors in compliance with the Turkish Commercial Code, CMBregulations and Koç Holding’s Articles of Association. The public is informed by notifying the ISE and CMB immediately of the Board ofDirectors’ decision to hold the General Shareholders’ Meeting.
In addition, at least 21 days prior to the General Shareholders’ Meeting, the announcement of the meeting is published on our websitewww.koc.com.tr and in a high circulation daily newspaper in Turkey.
Prior to the Ordinary Shareholders’ Meeting, the agenda items and all related documents are announced to the public in compliance with alllegal processes and regulations. The agenda items of the Shareholders’ Meeting – annual report, financial statements, corporate governancereport, profit distribution proposal, independent external auditor’s and internal auditors’ reports and, proposed amendments, if any, to theArticles of Association with copies of the old and new versions, permissions issued by the CMB and the Ministry of Industry and Trade – areposted on the company website and at Koç Holding headquarters to facilitate easy access to the shareholders.
Proxy forms are provided on the company website and in newspaper notices for shareholders who wish to be represented by a proxy at theShareholders’ Meeting.
The voting procedure is explained to shareholders on the company website and newspaper notices.
All Koç Holding shares are registered. Shareholders who wish to participate in the Shareholders’ Meeting, whose shares are in custody ininvestment accounts under intermediary institutions at the CRA are noted in the ‘General Meeting Blocked List’ within the framework of therespective regulations. The CRA list of blocked shares is issued on the evening before the shareholders’ meeting.
Our Shareholders’ Meetings are held at the company headquarters. However, as stated in our Articles of Association, the meeting may alsotake place in another part of the city where the majority of shareholders are located. The location of the General Shareholders’ Meeting isselected to facilitate easy access to all shareholders.
At the General Shareholders’ Meeting, the agenda items are expressed in an unbiased and detailed manner and presented in a clear andconcise method to provide shareholders an opportunity to express their opinions under equal conditions and raise any questions. At theGeneral Shareholders’ Meeting, questions asked by the shareholders, the audience and members of the press are answered by the Chairmanof the Board and Executive Managers.
No deadline has been specified for registration in the share ledger to allow owners of registered shares to attend the General Meeting.
Minutes of the General Shareholders’ Meeting are posted at our company website www.koc.com.tr . In addition, these minutes are madeavailable to all shareholders for examination purposes at the headquarters of the company.
Regarding division and merger of shares which change the capital and management structure of the company, decisions are taken in theShareholders’ Meeting. Decisions related to the sale, purchase or lease of tangible/intangible assets are made by the Board of Directors asstipulated by the Articles of Association.
Voting Rights and Minority RightsKoç Holding shares are divided into A and B groups. Every registered A Group share has 2 voting rights at the Shareholders’ Meeting. Ifamendments are required to the Articles of Association, A Group preferred shareholders meet and approve the decisions taken at theShareholders Meeting. However, in decisions requiring a change in the Articles of Association, all shareholders are entitled to 1 vote. Asstated in Koç Holding’s Articles of Association, shareholders of preferred stock do not have the privilege to nominate candidates to the Boardof Directors.
The company respects corporate representation within the context of using voting rights and as such takes all precautionary measures thatwould increase the effectiveness of corporate representation.
In our company, actions that may complicate the use of voting rights are avoided. Each shareholder is given the opportunity to exercisehis/her voting right in the most appropriate, fair and convenient manner.
A shareholder can vote either personally or by appointing a third person as his/her representative. The Articles of Association does not includea provision preventing non-holders to vote by proxy as an appointed representative. However, A Group shareholders may only be representedby another A Group shareholder. If such is the case, it should be documented in the legal representations in writing.
Within the Holding, no cross ownerships exist that are associated with a controlling relationship.
Save for the special provisions of the relevant legislation and Articles of Association, voting is conducted through open ballot and by raisinghands during the General Shareholders’ Meeting. Upon request by shareholders, the voting procedure will be determined by the GeneralShareholders’ Meeting.
Koç Holding gives utmost care to the exercise of minority rights. There were no criticisms or complaints filed with our company in this regardin 2006. Our Articles of Association does not include the cumulative voting procedure. The advantages and disadvantages of this method willbe evaluated in line with regulatory developments.
Dividend Distribution Policy and TimingOur dividend distribution policy is based on the capital requirements of our company and subsidiaries, the long term strategy of our Group,investment and financing policies, profitability and cash conditions, and Capital Market Board regulations.
In accordance with the decision taken at the General Shareholders’ Meeting, dividends may be paid out in full either in cash or as a bonusissue or partially in cash and partially as bonus issue. Dividend distribution is carried out in compliance with the Turkish Commercial Code,CMB regulations and our Articles of Association within the legal timeframe recommended by the Shareholders’ Meeting and set forth by theregulations. In line with the dividend policy, all outstanding shares receive equal dividends during the pay-out period.
Our company's paid-in capital is comprised of A and B type shares and neither have preference in receiving dividends. In the Articles ofAssociation, in the section related to distribution of profits, under article 32 paragraph (d) and again in the Articles of Association under article12 related to dividend right certificate, according to the ratio and amount to be determined by the CMB that will not disrupt distribution of thefirst dividend payment, from the company's distributable profit, according to Turkish Commercial Code regulations, 5% legal reserves andafter all financial provisions and deducting 5% of paid-in capital, 3% of the amount calculated is paid to dividend right certificate holders. Theamount paid to dividend right certificate holders from pure profits following deductions as described in paragraphs (a) and (b) of this articlecannot exceed 1/10 of the amount.
Again in the Articles of Association under article 32 paragraph (c), after the 5% legal reserves and all financial provisions as stipulated in theTurkish Commercial Code, and after deducting the amount paid to dividend right certificate holders, an amount in the range of 1% to 2%, asdetermined by the General Assembly, is given out to Koç Holding Pension and Assistance Fund.
Our company’s dividend policy, dividend history and details on capital increases are announced to the public on the company’s website.
Transfer of SharesThere are no provisions in the Articles of Association restricting B type share transfers.
As stated in the Articles of Association under article 13 paragraph (b), Koç Holding Board of Directors may avoid transfer of A type shares, inaccordance with the article 418 in the Turkish Commercial Code.
PART II – PUBLIC DISCLOSURE AND TRANSPARENCY
Company Disclosure PolicyKoç Holding, as one of Turkey’s leading and most respected corporations making a significant contribution to the Turkish economy andcomprising a substantial share of the ISE, follows a transparent and effective disclosure policy that is in compliance with the relevant rules andregulations. The aim of the disclosure policy is to share information about Koç Holding’s and Koç Group’s past performance, futureexpectations, strategies, goals and vision, excluding information considered as a trade secret, with the public, relevant authorities, existingand potential investors and shareholders in a fair manner, to announce the financial statements in an accurate, fair, timely and detailedmanner as set forth by the CMB and to establish a continuous, effective and open communication platform by the Investor Relations andCorporate Communications Departments.
Koç Holding carries out an active and transparent public disclosure policy in accordance with the regulations and directives of the CMB andISE with the objective of implementing the most effective communication policy in line with CMB Corporate Governance Principles.
Our disclosure policy is announced to the public on our website.
While it is the responsibility of the Corporate Communications and Investor Relations Departments to prepare the Disclosure Policy, thePresident of Corporate Communications and Information Technology Group is responsible for its implementation and development and isrequired to brief the Audit Committee, Strategic Planning Department and Finance Department on a regular basis.
Inquiries from outside the company are answered by the Chairman of the Board of Directors, the CEO, CFO, Strategic Planning President orthe Investor Relations and Corporate Communications coordinators, depending on the content of the inquiry. While answering these inquiries,we take utmost care to ensure that, all stakeholders are treated equally.
Except in the instances specified by the regulations, printed and visual media, electronic data distribution channels, websites and electronicmail are used effectively in disclosing information to the public.
Announcement of future expectations are also part of our disclosure policy and are supported by underlying assumptions and relevant data.
Board members, executives and shareholders, who directly or indirectly own 5% of the company’s capital, are required to disclose the detailsof their purchase or sale transactions in Koç Holding or Group Companies’ in accordance with CMB regulations.
Material Disclosures Koç Holding made a total of 51 material disclosures during 2006, 3 of which were additional disclosures upon the requests of the CMB andISE. Koç Holding is not listed on any foreign securities exchanges and therefore is not required to issue any material disclosures other thanwhat is required by the CMB and ISE. No sanctions have been imposed by the CMB against Koç Holding for not complying with materialdisclosures timeframes.
Internet Site and ContentsKoç Holding’s website (www.koc.com.tr) provides contemporary and historic information in both Turkish and English, as follows: • Detailed information on corporate identity • Vision and main strategies • Information about members of the Board of Directors and executive management • Company organization and shareholder structure • Articles of Association • Commercial registry information• Foreign partnerships• Summary information about business segments and companies • Financial information, key performance indicators and analyses • Press releases• CMB Material Disclosures
• Stock information, charts and calculators regarding share price performance • Investor presentations • Analyst reports • Date, agenda and topics concerning the agenda of the Shareholders’ Meeting• Minutes of the Shareholders’ Meeting and list of participants • Proxy forms• Corporate Governance Practices and Compliance Report • Dividend policy, payout history and capital increases • Disclosure policy• Frequently asked questions• Detailed information regarding corporate social responsibility
The principles related to the management of our website are part of the Disclosure Policy.
Disclosure of Ultimate Controlling Shareholder(s)Koç Holding's shareholder structure is published in the website and related documents. As the public is aware that Koç Family members arethe “ultimate controlling shareholders”, a separate public announcement has not been made.
Disclosure of Individuals who are in a Position to Have Insider InformationIn order to promote transparency while protecting our Company's interests, utmost importance is given to compliance with Company policiesregarding prevention of insider trading. Information that is obtained by working in the Company, that belongs to the Company and that bearscommercial value is defined as “Company Information”. All Koç Holding employees are responsible for protecting such information during andafter their employment with Koç Holding and cannot, directly or indirectly, use Company Information for any other purpose.
All Koç Holding employees are strictly forbidden to use Company Information for insider trading of Koç Holding or Koç Group companyshares.
Board of Directors: Rahmi M. Koç Honorary Chairman - Member Mustafa V. Koç Chairman Suna K›raç Vice Chairman Temel Atay Vice ChairmanSemahat Arsel MemberF. Bülend Özayd›nl› Member - CEO‹nan K›raç MemberÖmer M. Koç MemberHasan Subafl› MemberProf. Yavuz Alangoya MemberW. Wayne Booker MemberH. Oswald Maucher MemberJohn H. McArthur MemberDieter Christoph Urban MemberF.Füsun Akkal Bozok AuditorNevzat Tüfekçio¤lu Alternate Auditor
Group Presidents: Ahmet Ashabo¤lu CFO (Finance Group)Hasan Bengü Foreign Trade and Tourism GroupÖmer Bozer Food and Retailing Group Dr. Bülent Bulgurlu Consumer Durables and Construction
Group Tamer Haflimo¤lu Strategic Planning Group Ali Y. Koç Corporate Communications and
Information Technology Group Erol Memio¤lu Energy GroupKudret Önen Supplies and Other Automotive
Companies GroupDr. Rüfldü Saraço¤lu Banking & Insurance Group Ali Tar›k Uzun Auditing Group
Finance GroupFerda Ergino¤lu CoordinatorMemet ‹lkan Kamber Coordinator Dr. Önder Kutman Coordinator Murat Timur CoordinatorAli Uzcan Coordinator
AccountingEmine Alangoya Director
Human ResourcesNeslihan Tözge Director Buket Çelebiöven CoordinatorKadir Eflber Çekiç Coordinator Emre Görgün Coordinator
Legal AffairsKenan Y›lmaz Chief Legal Advisor
Auditing GroupMert fiaban Bayram Coordinator Mehmet Erkan Özdemir Coordinator Serkan Özyurt Coordinator Kemal Uzun CoordinatorAli Yavuz Coordinator
Corporate Communications Oya Ünlü K›z›l Coordinator
Information Technologies Services Alper Gö¤üfl Coordinator
Public AffairsÖmer Tunç Koyuncu Coordinator
General Secretariat Tahsin Salt›k General Secretary
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As of the date of this report, Members of the Board of Directors and Senior Management who could be in such a position to obtain insiderinformation are listed below:
Company Policy Regarding StakeholdersStakeholders are informed of issues that may concern them by means of invitations to regular meetings or via telecommunication tools.Public disclosures are made by press conferences and through statements and bulletins in the media, while information sharing withemployees are realized through various meetings and organizations and the company intranet site. We endeavor to fulfill shareholders’meeting requests and facilitate management attendance at the most senior level.
Important announcements, management changes and press bulletins are posted on the intranet for the convenience of Group employees.Additionally, some important announcements and executive management messages are sent to employees by e-mail. Once a year, thesenior management of all Group companies meets to evaluate and exchange ideas about the developments in the Group and our targets.
In addition, regular dealer meetings are organized in a different city each time. The Chairman of the Board, CEO and executive managementparticipate in these meetings to share information regarding recent developments in the Group and listen to the dealers’ opinions..Stakeholders’ Participation in the Company ManagementStakeholders are able to share their views, suggestions and complaints and express their requests through the feedback mechanism on ourwebsite, or directly to the Investor Relations Department. Over the Group’s intranet, company employees also have the opportunity to sharetheir requests, complaints and suggestions with management and to chat with the company CEO. Furthermore, our companies hold meetingsduring the year with both their dealers and suppliers to encourage a mutual exchange of ideas. Suggestions put forth in these meetings areevaluated and put into practice accordingly. In addition,our dealers’ satisfaction levels are measured through regular independent surveys.
Human Resources PolicyAt the end of 2006, Koç Group had a total of 90,092 employees–79,967 in Turkey and 10,125 abroad. (Employees in consolidatedsubsidiaries total 88,248)
Our objective as the Koç Group is, while growing and increasing value to our investors and shareholders, to simultaneously ensuredevelopment and commitment of our employees, who are essential in creating this value added. We aspire to become the ideal company,with a competent professional staff, that is closest to the consumer, as well as to its employees.
In order to more effectively manage the Group’s more than 90,000 employees and keep track of their developments parallel to the growthtrend of the Group, an HR web portal (Koc@insan) was introduced in 2006. The web portal is multilingual to enable employees around theworld to access the site. The application and implementation of processes, such as integrated performance management and personaldevelopment planning, on this open communication web based portal make our HR policies fair and transparent.
Thanks to performance focused policies, Integrated Performance Management has started to become a wide-spread management culture.Performance targets are derived from strategic objectives such as Economic Profit, Company Value, Growth, Employee Satisfaction andCustomer Satisfaction. By spreading these objectives to all Group employees and ensuring that we are all focused on the same targets, weare able to achieve and even exceed our targets. In this regard, all of our top and middle managers and over 60% of our managers havescore cards. It is essential for the future of our companies that we can attract competent management candidates, who can carry our Groupinto the future. According to the research we conducted at selected target universities, Koç Group is the most preferred employer amongstudents. In addition, in a survey conducted by Capital, the monthly business and economy magazine, among senior executives Koç Holdingwas voted the most admired company in Turkey.
The continuous development of our Group in an increasingly competitive environment is directly related to the development of our employees.In this respect, through Koç Academy, a web-based training and development platform launched in 2005, our employees can form theirdevelopment plans and access their development and training activities on-line. In addition, 1,200 of our managers attended the Group’s“Leadership Development” program which aim to nurture their leadership abilities.
The integration of Tüprafl to our Group, which was bought through the privatization tender in 2005, and the merger of Yap› Kredi-Koçbank andMigros-Tansafl, further to the acquisitions, were completed in 2006 and our companies were able to continue strengthening their economicactivities without being adversely affected from this process.
‘Koç Group Occupational Health and Safety Committee’, which is composed of representatives who are responsible for the occupationalhealth and safety of Koç Group companies, published the Koç Group Health and Safety Reference Handbook. This handbook will be used asa vital guide by the Group companies. The Committee meets once a month to share information, formulate a joint stance on commonproblems, set standards and carry out activities to improve the health and safety conditions at Group companies.
In addition, “Koç Group Environment Committee”, which is composed of representatives who are responsible for environmental issues in theKoç Group companies, meets once a month. The committee’s aim is to share ideas to improve the environmental standards in Groupcompanies. Koç Group Environmental Handbook that was prepared by the Committee and published in 2005 is being used as an importantguide by our Group companies.
In addition, an environmental inventory has been completed and is being used in the prioritization of relevant activities.
Many of our companies have obtained by OHSAS 18001, SA 8000, ISO14001 and ISO9001 certifications and efforts continue to certify morecompanies.
In line with the regulations, in workplaces with unionized workers including in collective bargaining agreements, there are designated unionrepresentatives that manage employee relations. They cooperate with management to ensure the sustainability of business success.
Finally, work environment evaluation surveys are used to measure employee satisfaction and commitment on a regular basis andimprovements are made according to the results.
Customer and Supplier Relations Since 2003, Koç Holding has been conducting centralized customer satisfaction surveys on a regular basis as a sign of the importance givento this issue. As Turkey’s most comprehensive consumer survey, it encompasses 45 brands belonging to 20 Koç companies as well as 104brands belonging to the competition. The results of the survey conducted with 47,000 customers nationwide are shared with upper andmiddle management of Koç Holding and Group companies, areas of improvement are highlighted and corrective actions are taken.
Due to the importance of company-dealer-customer relations at the customer touch points, the level of satisfaction of our dealers is alsomonitored. The Dealer Satisfaction Survey was conducted for the fourth time this year by an independent research company among 7,200dealers of 16 companies. Results are shared with upper and middle management of Koç Holding and Group companies, areas ofimprovement are highlighted and corrective actions are taken.
Upper management’s performance score cards include targets to improve customer and dealer satisfactions.
Corporate Citizenship Koç Holding, the Group companies and Vehbi Koç Foundation ramped up Corporate Citizenship activities in 2006, as a result of specialattention paid to social responsibility.
The United Nations has appointed Koç Holding as Turkey’s representative and spokesman due to its success in complying with the GlobalCompact Criteria and its leadership role in spreading these principles throughout the country. Various projects are being carried out toimprove compliance to the Global Compact, which is a turning point for the development of the industry and corporate social responsibility inTurkey. The Group as a whole, both through individual companies and the Vehbi Koç Foundation, continues to show leadership to the privatesector and to develop awareness of corporate citizenship through implementation of these projects.
Koç Holding’s Corporate Citizenship approach is based on the principle espoused by our founder Vehbi Koç: “I exist if my country exists’.Within this context, Koç Group seeks to create value for the society, in which it has grown and developed, through projects that will contributeto the development of the society. Every year, thousands of scholarships are extended to students and numerous projects in the fields ofculture, art, environment and health are initiated. In addition to projects in Turkey, Koç Group actively contributes to the promotion of Turkeyin the international arena by sponsoring a cultural event each year.
Koç Group, which has been the pioneer of many firsts in Turkey, has acted through the Vehbi Koç Foundation, to establish the first privately-owned museum, the first industrial museum and the first private student dormitory in Turkey, making it a leader in the area of corporatecitizenship as well.
One of the Corporate Citizenship Projects initiated in 2006 concerns Vocational High Schools. Koç Holding endeavored to develop a solutionto Turkey’s unemployment problem by encouraging vocational technical education and aims to set an example to the private sector with thisproject. Accordingly, Koç Holding has pledged to grant scholarships to 8,000 students throughout their education, to provide internshipopportunities at Group companies and to give them employment priority upon their graduation. The project targets the development oftechnically adept human capital in order to contribute to the economy.
Similarly, all Koç Group dealers and employees implemented a total of 223 projects that they chose and managed in 81 cities within thecontext of the ‘For My Country’ project, which was launched in 2006 with the aim to spread the corporate citizenship culture throughout theGroup.
Koç Holding and its subsidiaries contribute to society with a common understanding and shared principles through their projects.
Koç Group views the activities and investments relating to corporate citizenship, not as a duty, but as an integral part of doing business. Thisphilosophy of corporate citizenship is one of the distinguishing characteristics of Koç Group. Koç Group has assumed an important socialmission, not just in terms of the large number of people it employs, the economic value it creates and the taxes it pays, but also through itsphilosophy of corporate citizenship.
PART IV – BOARD OF DIRECTORS
Structure and Formation of the Board of Directors and Independent DirectorsKoç Holding is the first Turkish company to appoint internationally respected non-Turkish professionals to its Board of Directors. The structureof the Board of Directors conforms to Capital Market Board principles. On the Board of Directors, no member other than the CEO isresponsible for execution. Four of the 14 members of the Board are independent.
The names and attributes of the Board of Directors are given below:
Rahmi M. Koç Honorary Chairman - non-executiveMustafa V. Koç Chairman - non-executiveSuna K›raç Vice Chairman - non-executiveTemel Atay Vice Chairman - non-executiveSemahat Arsel Member - non-executiveF. Bülend Özayd›nl› Member - CEO‹nan K›raç Member - non-executiveÖmer M. Koç Member - non-executiveProf. Yavuz Alangoya Member - non-executiveHasan Subafl› Member - non-executiveW. Wayne Booker Member - independentH. Oswald Maucher Member - independentJohn H. McArthur Member - independentDieter Christoph Urban Member - independentF. Füsun Akkal Bozok AuditorNevzat Tüfekçio¤lu Alternate Auditor
There were no changes in the structure or independence of the Board of Directors in 2006. Following the Shareholders’ Meeting in whichBoard members are selected, the Chairman and Vice-Chairmen determine the division of duties. If a seat on the Board is vacated during theyear, clause 315 of the Turkish Commercial Code is invoked.
There is no restriction on members taking on other employments or functions. Due to the significant contribution made to the Board by thework experience and knowledge of independent members, no such restriction was considered necessary.
Qualification of DirectorsThe Board of Directors is structured to optimize its effectiveness and efficiency. The basic qualifications of the members meet CMB CorporateGovernance Principles, Section 4, articles 3.1.1, 3.1.2, 3.1.3, 3.1.4 and 3.1.5. Qualified candidates with high level of knowledge and skills,higher education, specific experience and background are eligible for Board membership.
The CVs of our Board members are available on our website. Efforts are under way to provide CVs for new candidates proposed formembership at Shareholders’ Meetings.
Company Mission, Vision and Strategic Goals The strategic objectives defined within the context of Koç Group’s vision and portfolio theme are assessed and approved by the Board. Theseobjectives and strategies are made public through the Annual Report, our website and press releases. Our strategy, whose main highlightshave been cited below, is explained in more detail in the relevant part of our Annual Report and website.
Our vision To become one of Europe’s leading companies through rapid and profitable growth
‘The Closest Group to the Consumer’ • To manufacture, market and sell products and services that appeal to the end-user.
Our Strategic Goals • To focus on businesses in which we have an international competitive advantage • To generate 50% of revenues from international business • To become the leader or close second in sectors in which we operate • To grow in sectors in which we can leverage our brands and technologies
Every year Koç companies prepare their strategic plans in line with the principles and methods defined by Koç Holding’s strategic plan andthe Group objectives approved by the Board of Directors. Following the evaluation of these strategic plans, strategies and financialprojections are consolidated and, if necessary, the Group strategic plan is revised and the final strategic plan and financial plan are submittedto the Board of Directors for approval. The Board of Directors may approve the strategic plan and financial plan as they are submitted or theymay request changes. At the end of the year, in line with the strategic plan and financial plan approved by the Board of Directors, companiesprepare an annual budget that is consistent with the methods and principles defined by Koç Holding. After being approved by seniormanagement, the budgets submitted by the companies are consolidated and submitted to the Board of Directors for approval.
The Board of Directors may approve the budgets as they are submitted or they may request changes. To ensure effective implementation ofstrategic plans and budgets, annual scorecards for top managers and companies are prepared according to the strategic plans and budgetsthat have been prepared by the companies and approved by the Board of Directors.
Koç Holding’s strategic objectives such as economic profit, company value, growth and employee, dealer and customer satisfaction areintegrated in all scorecards.
Koç Holding Board of Directors and senior management monitor the performance and operations of companies against their budgets andachievement of objectives in periodic meetings throughout the year. At the quarterly meetings attended by the Chairman of the Board, CEOand Koç Holding senior management, the financial performance, developments in our business segments and the actual performance of KoçHolding senior management and general managers is assessed and measured against objectives and budgets.
The Board of Directors meets every three months to review the quarterly financial performance of Koç Group against the budget, monitorstrategic developments and make recommendations.
Risk Management and Internal Control Mechanisms The responsibility for Risk Management and Reporting is shared among Koç Holding Presidents. Risks are investigated and assessed indetail at periodic meetings.
Great importance has been given to internal control since the establishment of the company. To date, there has always been an InternalControl unit operating under various names. In line with the principle of “separation of management and audit functions” the Audit GroupPresident charged with this duty has been reporting directly to the Board of Directors since 2004. Our Group companies are also auditedperiodically regarding processes, risks, finances, operations and fraud. The senior management of Koç Holding and the respective Groupcompany as well as the President and members of the Audit Committee are updated on the audit results on a regular basis.
Authority and Responsibilities of the Board of DirectorsThe authority and responsibilities of the members of the Board of Directors have been clearly defined in the Company’s Articles ofAssociation. The authority to sign has been indicated in detail in the Company Signature Circular.
Fundamental Activities of the Board of Directors Matters which have been made subject to the decision of the Board of Directors in the Company’s Articles of Association are determinedthrough notification of senior management and Board of Directors members by the concerned departments, who, in turn determine theagenda for Board Meetings. In the event that any one of the members of the Board of Directors notifies Company Senior Management abouta decision that must be taken about a certain matter, the agenda of the meeting is drawn up accordingly. Matters that are to be discussed atthe Company’s Board of Directors meeting are collected at the General Secretariat, which consolidates and places them on the agenda.
The Koç Holding A.fi. General Secretariat and the Finance Group Presidency have been assigned the duties of determining the agenda forthe Koç Holding A.fi. Board of Directors Meetings, preparing Board decisions within the scope of the provisions of TCC 330/II, makingdisclosures to the Board and ensuring the flow of communication. The Board of Directors meets, as far as business dictates and in any caseat a minimum, the number of times set forth by the company articles of association. In 2006, the Board met four times.
Differences of opinion and grounds for opposing votes at Board Meetings are recorded in the Resolution Book. Since no opposition ordifference of opinion has been declared recently, no public announcement has been made in this regard.
In relation to subject matters included in the CMB Corporate Governance Principles under Section IV. Article 2.17.4, active attendance isattained.
Prohibition of engaging in transactions and competing with the companyAccording to Articles 334 and 335 of the Turkish Commercial Code, it is necessary to obtain permission from the General Assembly for aboard member to, directly or indirectly, engage in transactions in the same business scope of the company and compete with the company.
Ethical RulesThroughout its 80 years, Koç Group’s culture has given priority to honesty, respect, ethical behavior and compliance with all laws andregulations.
Koç Group made further progress in terms of both corporate citizenship and corporate governance and ethical rules by signing the UnitedNations Global Compact.
The Number, Structure and Autonomy of Committees Formed by the Board of Directors Board Committees are formed at our Company with the aim of ensuring that the Board of Directors is able to fulfill its duties andresponsibilities more effectively. These committees work under the following principles.
Management Committee Members of the Board of Directors meet four times a year due to their busy schedules. For this reason, outside of the restrictions set down inthe definition of the Management Committee, the Board of Directors assigns its authorities and duties to the Management Committee. Themembers of the committee are nominated by the Board members who represent the majority shares and are approved by the Board. Theevaluation and approval procedure of the Committee’s decisions at the Board are undertaken in accordance with the Company Articles ofAssociation.
In principle, the Committee may not take decisions or make revisions about matters previously decided upon by the Board of Directors or onsubjects that are contrary to the Strategic Plan. The Committee shall bring the decisions it has taken between Board Meetings to the nextmeeting of the Board and have them approved. The Management Committee is comprised of five persons.
Audit Committee This Committee is responsible for selecting the independent audit firm and submitting the proposal, including the reasoning, to theManagement Committee, the Board of Directors and the General Assembly.
The responsibility of the Audit Committee and of company management is to not only undertake internal and external auditing, but also to seeto it that records, procedures and reporting is in accordance with the laws, rules and regulations, and with the principles set forth by the CMBand IFRS. This Committee is comprised of three persons in addition to the Chairman of the Board and the CEO. One person acts aschairman. The Committee meets at least four times a year and more frequently when the need arises.
Corporate Governance CommitteeThis committee oversees compliance to corporate governance principles, assesses the reasons behind non-compliance in some areas, andproposes improvements to the Board of Directors.
The committee consists of 3 members and meets at least four times a year and more frequently when the need arises.
Human Resources Committee This committee evaluates and supervises the implementation of policies related to salaries and bonuses. It evaluates the human resourcesrequirement of the Company through senior management succession plans and development programs.
The committee comprises of three people including the Chairman of the Board and meets at least four times a year or more frequently ifnecessary.
Financial Benefits Granted to the Board of Directors The financial benefits to be granted to the members of the Board of Directors are determined at the Shareholders’ Meeting and announced tothe public by means of minutes of meeting ,which is open to the press.
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KOÇ HOLD‹NG A.fi.BOARD OF DIRECTORS’ REPORT
To our shareholders,The results and developments of Koç Group companies during 2006 were presented at Koç Holding’s 43rd General Assembly on May 1, 2007.The first part of the annual report describes and assesses 2006 operations while the succeeding pages give detailed information regardingthe developments of our core business segments. The second part of the report contains audited financial statements and accompanyingnotes as of December 31, 2006 and other disclosures required by the Capital Markets Board.
The consolidated financial statements presented in this report are prepared in compliance with International Financial Reporting Standards(IFRS). However, in accordance with the decree issued by the Capital Markets Board on March 17, 2005, inflation accounting has not beenapplied to the financial statements. Convenience translation of financial figures is carried out using average exchange rates for incomestatement items and year end exchange rates for balance sheet items.
Overview of 2006Koç Group continued to grow and improve its performance in 2006, its 80th anniversary year. Recently acquired companies were integratedsuccessfully into the Group and contributed significantly to business growth. Business volume, number of customers and profitabilityincreased significantly in all areas in which we are active.
Consolidated revenues increased by 103% to YTL49.4 billion (USD34.5 billion), while operating profit rose by 146%. Net profit for the yeardeclined by 6% to YTL561 million (USD392 million) due to a YTL475 million (USD332 million) foreign exchange loss that occurred as the resultof fluctuating foreign exchange rates compared to a YTL8 million foreign exchange gain posted previous year.
With these results, we have attained 41% average annual revenue growth (in USD terms) over the last five years.
The ratio of our combined revenues to Turkey’s GDP is 13%. Our exports are equivalent to 12% of Turkey’s total exports. The market value ofour publicly traded companies equals 16% of the total market value of the Istanbul Stock Exchange. These indicators underline the keyposition of Koç Group in the Turkish economy.
Our success is not limited to Turkey however. We were ranked 358th in the Fortune Global 500, and anticipate entering the first 200 with ourperformance in 2006. We are the only Turkish company listed in “World’s Most Admired Companies” survey.
Koç Holding and Koç Group developments in 2006 In line with our strategic management approach, we achieved a great deal during the year. The main items are summarized below.
• Following our successful bid for the privatization of Tüprafl in 2005, we completed the transfer of 51% of the shares in Tüprafl from thePrivatization Administration in early 2006 to Enerji Yat›r›mlar› A.fi., a company formed for this purpose with paid-in capital of YTL3.3 billion(USD2.5 billion) owned 75% by Koç Holding, 20% by Aygaz and 3% by Opet. The transition to a new management team went smoothly withno interruption in operations or investments. Tüprafl completed its first year as part of Koç Group with outstanding results.
• The merger of Tansafl, which was acquired in 2005, with Migros was concluded in June 2006. The merger strengthened our leading positionin the food retailing sector and produced significant gains in efficiency. Organic growth with new store openings and expansion ofinternational operations continued.
• The merger of Yap› Kredi Bank, which was acquired in 2005, and Koçbank was completed in October 2006. All activities are now carriedout under the Yap› Kredi name supported by a new corporate identity. As a result of the merger, Yap› Kredi ranks as the fourth largest privatesector bank in Turkey with total assets of YTL49 billion (USD35 billion).
• Despite the contraction in the automotive market, our companies continued to perform successfully. New models introduced by FordOtosan and Tofafl strengthened their positions in the local market while winning awards in Europe. We manufactured a total of 461,000vehicles, selling 208,000 in Turkey and exporting 314,000.
• Arçelik, the leader of the consumer durables market, continued to develop products that made an impact not only in Turkey but in world.This year, the world’s fastest dishwasher and washing machine were introduced. In line with our international growth strategy, we opened arefrigerator and washing machine factory in Russia. Exports to China began. In line with the consolidation trends in the sector, the transfer ofthe majority of shares in Beko Elektronik to Arçelik created a joint management structure, thus increasing competitive power.
• In line with our strategy of focusing on core businesses, we sold our shares in automotive components manufacturer Döktafl toComponenta of Finland and insulation construction materials manufacturer ‹zocam to a partnership of Saint-Gobain of France and KuwaitiAlghanim Industries.
Revenues 34,511 49,389 24,353 103Operating Profit 2,081 2,979 1,209 146Income Before Taxes on Income and Minority Interest 1,451 2,076 1,280 62Net Income Before Minority Interest 1,031 1,475 981 50Net Income 392 561 598 -6
Capital Expenditures 1,226 1,755 1,177 49Depreciation and Amortization 592 848 776 9
Revenues / Total Assets 0.86 0.66 0.20**Operating Profit / Total Assets (%) 5.2 3.3 1.9**Return on Equity (%) 12.4 14.6 -2.2**Current Ratio 0.88 0.83 0.05**Total Liabilities / Equity 3.9 3.5 0.4**
* Convenience translation with 2006 average exchange rate of 1.4311YTL=1USD for income statement items (including capital expenditures)and 2006 year end exchange rate of 1.4056YTL=1USD for balance sheet items** Change expressed as the difference between percentages
Financial and Operational Results The Group’s core business segments of automotive, consumer durables, food & retailing, energy and finance continued to producesuccessful results.
Koç Holding’s combined revenues for 2006 increased by 64.6% to YTL72.6 billion (USD50.7 billion). Consolidated revenues amounted toYTL49.4 billion (USD34.5 billion), 103% higher than the previous year. Of the difference between combined and consolidated figures, YTL14.6billion (USD10.2 billion) is attributable to joint venture accounting and YTL8.5 billion (USD6.0 billion) to inter company eliminations.
Recent acquisitions in energy, food & retailing and finance were the major reasons behind the notably increase in revenues.
Koç Holding's consolidated operating profit climbed by 146% from the previous year to YTL2,979 million (USD2,081 million). Profit beforeinterest, taxes and depreciation (EBITDA) increased by 93% to YTL3,827 million (USD2,674 million). Consolidated net income for 2006amounted to YTL561 million (USD392 million).
Total assets of Koç Holding A.fi. in 2006 rose by 56% to YTL57.3 billion (USD40.7 billion). Total shareholders’ equity increased from YTL4,686million (USD3,492 million) in 2005 to YTL5,088 million (USD3,620 million) in 2006, due to profit for the period and capital movements duringthe year.
The steep increase in most financial indicators is attributable to the acquisition of Tüprafl, as well as to the growth and increased profitability ofall our core businesses.
Koç Holding invested a total of YTL1,755 million (USD1,226 million) in 2006, excluding acquisitions. Major investments were made formodernization of refineries, gas stations and terminals in the energy segment; capacity increases, new models and modernization in theautomotive and consumer durables segments; and new stores in the food & retailing segment.
Rapid growth in international sales continued in 2006. Group companies generated combined international revenues of USD12.6 billion, 48%over the previous year. Most of international revenues are generated by the automotive, energy, consumer durables and retailing segments.
Employment and labor relations Total employment of Group companies increased by 6,322 people to reach 88,248 at the end of 2006. On a segment basis, the biggestemployers are food & retailing, consumer durables, automotive and finance. Nearly 85% of employees work in these four segments.
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KOÇ HOLD‹NG A.fi.BOARD OF DIRECTORS’ REPORT
During 2006, collective bargaining agreements between 14 Group companies that are members of MESS (Union or Employers) and TurkishMetal Workers Union were signed, covering 29,000 employees. In addition, collective bargaining agreements were signed at RMK Marine andDemir Export, without any interruption of operations.
Risk Management The Group has focused on managing various financial risks arising from its operations including the effect of changes in foreign exchangeand interest rates on pricing of loans and capital markets. The Group intends to minimize the negative effects of market volatility by applying arisk management program (e-risk). Companies manage their own interest rate, loan and foreign exchange risks according to the policiesapproved by the board of directors.
Dividend Payment ProposalAccording to the financial statements prepared by Koç Holding A.fi. and audited by Baflaran Nas Ba¤›ms›z Denetim ve Serbest MuhasebeciMali Müflavirlik A.fi. (a member of PricewaterhouseCoopers), for the period January 1 – December 31, 2006, after the 5% legal reserverequired by Turkish Commercial Code, Article 446, amounting to YTL3.3 million, distributable profits of YTL169.8 million are obtainedaccording to the Capital Markets Regulations. We submit to the approval of the General Assembly of Shareholders, in accordance with CapitalMarkets Regulation and our Articles of Association, the distribution of IFRS distributable profits as follows;
YTL34.0 million As first dividend to shareholders,YTL3.2 million To holders of usufruct certificates as per article 32/d of our Articles of Association,YTL1.0 million To Koç Holding Foundation for Pensions and Assistance as per article 32/c of our Articles of
Association (1% and after deducting payments made within the year),YTL21.0 million As second dividend to shareholders,
and that the balance is considered as extraordinary reserve, and that the first dividends of YTL34.0 million and second dividends of YTL21.0million, totaling YTL55 million is not distributed as cash, but added to the paid-in capital and respective bonus shares be given to ourshareholders; and that payments to the usufruct certificate holders and Koç Holding Foundation for Pensions and Assistance is made fromthe portion of current year profit attributable to tax exempt earnings, and that the distribution date is set as May 25, 2007.
Capital IncreaseAccording to a decision taken by Koç Holding Board of Directors on April 20, 2007 to raise paid-in capital from YTL1,265 million by 38% toYTL1,745.7 million by;
YTL417.45 million In cash,YTL55.00 million Addition of 2006 dividends to paid-in capital in accordance with the resolution of the General
Assembly held on May 1, 2007,YTL8.25 million Transfer from inflation adjustment reserves.
Dear Shareholders: On behalf of the Board of Directors, I would like to thank our valued shareholders and customers for their continued trust and support and ouremployees for their dedication and outstanding contribution to Koç Group.
Mustafa V. KoçChairman
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KOÇ HOLD‹NG A.fi.SEGMENTAL REPORTING OF SUMMARY FINANCIAL INDICATORS
AUTOMOTIVE
2006* 2006 2005 Change
(USD millions) (YTL millions) (YTL millions) (%)
External Revenues 4,411 6,313 5,656 12
Inter segment revenues 62 89 101 -11
Total revenues 4,474 6,402 5,757 11
Cost of Sales 3,788 5,421 4,929 10
Gross profit 685 981 828 18
Operating expenses 397 568 503 13
Administrative 157 224 208 8
Selling and distribution 215 308 263 17
Research and development 25 35 32 11
Inter segment profit elimination 11 15 15 1
Operating profit 299 428 341 26
Gross profit margin 15.3% 14.4% 0.9**
Operating profit margin 6.7% 5.9% 0.8**
Total assets 2,145 3,015 2,696 12
Net assets 837 1,177 1,290 -9
Capital expenditures 307 440 258 70
Depreciation and amortization 118 169 231 -27
Koç Holding’s revenues in the automotive segment increased 11% and reached
YTL6,402 million (USD4,474 million) in 2006. YTL6,313 million (USD4,411 million) of
this derives from external sales, accounting for 12.8% of Koç Holding’s consolidated
revenues.
Turkey’s automotive demand contracted by 11% in 2006, resulting in a 10% decline
in domestic sales units of Group companies. Total revenues increased by 11%
however, thanks to the 22% jump in export units.
Despite intense competition in the local market, both gross margin and operating
margin improved by nearly one percentage point each, to 15.3% and 6.7%
respectively. This was a result of the growth in volume and continuous emphasis on
systematic cost control.
The YTL440 million (USD307 million) capital expenditures contributed to the 12%
increase in total assets to YTL3,015 million (USD2,145 million). The main reason of
the 9% decline in net assets was the divestiture of Döktafl during the year.
CONSUMER DURABLES
2006* 2006 2005 Change
(USD millions) (YTL millions) (YTL millions) (%)
External Revenues 5,359 7,669 6,796 13
Inter segment revenues 95 136 133 3
Total revenues 5,454 7,805 6,929 13
Cost of Sales 3,998 5,722 5,251 9
Gross profit 1,456 2,083 1,678 24
Operating expenses 1,048 1,500 1,293 16
Administrative 261 373 327 14
Selling and distribution 732 1,048 899 17
Research and development 55 79 67 18
Inter segment profit elimination 10 15 14 1
Operating profit 417 597 399 50
Gross profit margin 26.7% 24.2% 2.5**
Operating profit margin 7.7% 5.8% 1.9**
Total assets 4,553 6,400 4,890 31
Net assets 1,594 2,241 1,905 18
Capital expenditures 253 362 281 29
Depreciation and amortization 121 173 201 -14
Total revenues of the consumer durables segment increased by 13% and reached
YTL7,805 million (USD5,454 million). External revenues, at YTL7,669 million
(USD5,359 million), make up 15.5% of Koç Holding’s consolidated turnover.
Top-line growth, combined with the rise in margins, resulted in a 24% increase in
gross profit and a 50% jump in operating profit.
Total assets of the segment increased by 31% to YTL6,400 million (USD4,553
million), while net assets reached YTL2,241 million (USD1,594 million).
Koç Holding’s capital expenditures in the consumer durables segment amounted to
YTL362 million (USD253 million), representing 21% of total consolidated capital
expenditures in 2006.
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* Convenience translation with 2006 average exchange rate of 1.4311YTL=1USD for income statement items (including capital
expenditures) and 2006 year end exchange rate of 1.4056YTL=1USD for balance sheet items
** Change expressed as the difference between percentages
KOÇ HOLD‹NG A.fi.SEGMENTAL REPORTING OF SUMMARY FINANCIAL INDICATORS
FOOD & RETAILING
2006* 2006 2005 Change
(USD millions) (YTL millions) (YTL millions) (%)
External Revenues 3,753 5,372 3,639 48
Inter segment revenues 23 33 22 48
Total revenues 3,776 5,404 3,661 48
Cost of Sales 2,905 4,158 2,924 42
Gross profit 871 1,247 737 69
Operating expenses 704 1,007 642 57
Administrative 183 261 199 32
Selling and distribution 521 746 443 68
Inter segment profit elimination 4 6 3 111
Operating profit 171 245 98 151
Gross profit margin 23.1% 20.1% 2.9**
Operating profit margin 4.5% 2.7% 1.9**
Total assets 2,027 2,849 2,501 14
Net assets 493 694 666 4
Capital expenditures 179 256 239 7
Depreciation and amortization 81 116 94 24
Food and retailing sector generated YTL5,404 million (USD3,776 million) total
revenues in 2006, 48% above previous year. Besides organic growth, the Tansafl
acquisition in the last quarter of 2005 had a major contribution to this jump. The
segment’s share in Koç Holding’s consolidated revenues is 10.9%.
Efforts aiming to increase efficiency in all operations manifested themselves in
financial results; gross margin increased by 2.9 percentage points to 23.1% and
gross profit increased by 69% to YTL1,247 million (USD871 million). Operating profit
reached YTL245 million (USD171 million), corresponding to a 4.5% margin, 1.9
percentage points above 2005.
Total assets rose by 14% to YTL2,849 million (USD2,027 million), net assets inched
up 4% to YTL694 million (USD493 million). Capital expenditures in the segment
reached YTL256 million (USD179 million) and made up 15% of Koç Holding’s
consolidated figure.
ENERGY
2006* 2006 2005 Change
(USD millions) (YTL millions) (YTL millions) (%)
External Revenues 16,743 23,961 4,756 404
Inter segment revenues 75 107 102 4
Total revenues 16,818 24,068 4,859 395
Cost of Sales 15,690 22,454 4,457 404
Gross profit 1,128 1,615 401 302
Operating expenses 438 627 292 115
Administrative 252 361 116 211
Selling and distribution 185 264 174 52
Research and development 1 2 2 29
Inter segment profit elimination 17 25 18 38
Operating profit 707 1,012 127 694
Gross profit margin 6.7% 8.3% -1.6**
Operating profit margin 3.8% 2.6% 1.2**
Total assets 10,062 14,143 1,880 652
Net assets 3,110 4,371 1,280 241
Capital expenditures 406 581 204 184
Depreciation and amortization 175 250 133 87
With the effect of Tüprafl acquisition early in 2006, total revenues in the energy
segment increased nearly five times to YTL24.1 billion (USD16.8 billion). YTL24.0
billion (USD16.7 billion) of this derives from external sales, accounting for 48.5% of
Koç Holding consolidated revenues.
Gross profit quadrupled to YTL1,615 million (USD1,128 million). Operating profit
reached YTL1,012 million (USD707 million) with a %694 increase and a 1.2
percentage point improvement in operating margin.
Total assets in the energy segment increased by 652% to YTL14.1 billion (USD10.1
billion), while the increase in net assets, which reached YTL4,371 million (USD3,110
million), was 241%.
The energy segment realized 33% of Koç Holding’s total capital expenditures with
YTL581 million (USD406 million).
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* Convenience translation with 2006 average exchange rate of 1.4311YTL=1USD for income statement items (including capital
expenditures) and 2006 year end exchange rate of 1.4056YTL=1USD for balance sheet items
** Change expressed as the difference between percentages
KOÇ HOLD‹NG A.fi.SEGMENTAL REPORTING OF SUMMARY FINANCIAL INDICATORS
FINANCE
2006* 2006 2005 Change
(USD millions) (YTL millions) (YTL millions) (%)
External Revenues 3,426 4,903 2,398 104
Inter segment revenues 37 52 77 -32
Total revenues 3,463 4,955 2,475 100
Cost of Sales 2,319 3,318 1,670 99
Gross profit 1,144 1,637 805 103
Operating expenses 685 980 521 88
Inter segment profit elimination 14 20 -7 -373
Operating profit 473 677 276 145
Gross profit margin 33.0% 32.5% 0.5**
Operating profit margin 13.7% 11.2% 2.5**
Total assets 20,714 29,116 22,716 28
Net assets 2,373 3,335 2,508 33
Capital expenditures 35 50 18 182
Depreciation and amortization 65 94 47 100
Total revenues in banking and insurance doubled in 2006 and reached YTL4,955
million (USD3,463 million), the main source of the jump being the acquisition of Yap›
Kredi in 2005. External revenues increased to YTL4,903 million (USD3,426 million),
representing a 10% contribution to Koç Holding’s total consolidated revenues.
Profitability increased in the segment, resulting in improvements of 0.5 and 2.5
percentage points in gross margin and operating margin respectively. Gross margin
doubled to YTL1,637 million (USD1,144 million), operating profit jumped by 145% to
YTL677 million (USD473 million).
Total assets of the segment reached YTL29,116 million (USD20,714 million) by 2006
year end, net assets reached YTL3,335 million (USD2,373 million).
Capital expenditures, with YTL50 million (USD35 million), make up 2.8% of Koç
Holding consolidated figure.
OTHER
2006* 2006 2005 Change
(USD millions) (YTL millions) (YTL millions) (%)
External Revenues 819 1,172 1,108 6
Inter segment revenues 1,016 1,454 1,030 41
Total revenues 1,835 2,626 2,138 23
Cost of Sales 1,605 2,297 1,879 22
Gross profit 230 329 260 27
Operating expenses 212 303 303 0
Administrative 159 227 199 14
Selling and distribution 53 75 105 -28
Inter segment profit elimination -5 -7 12 -157
Operating profit 13 19 -31 -161
Gross profit margin 12.5% 12.1% 0.4**
Operating profit margin 0.7% -1.5% 2.2**
Total assets 1,177 1,654 1,497 10
Net assets 92 129 83 55
Capital expenditures 47 67 177 -62
Depreciation and amortization 32 46 69 -33
Companies in other business segments realized total revenues of YTL2,626 million
(USD1,835 million) in 2006. External revenues, accounting for 2.4% of Koç Holding
consolidated revenues, stood at YTL1,172 million (USD819 million).
Gross profit reached YTL329 million (USD230 million) with a 27% increase.
Improving by 2.2 percentage points, operating margin turned positive.
Total assets increased by 10% and net assets jumped by 55%. The segment
accounted for 3.8% of Koç Holding’s total consolidated capital expenditures with
YTL67 million (USD47 million).
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* Convenience translation with 2006 average exchange rate of 1.4311YTL=1USD for income statement items (including capital
expenditures) and 2006 year end exchange rate of 1.4056YTL=1USD for balance sheet items
** Change expressed as the difference between percentages
KOÇ HOLD‹NG A.fi.AUDITOR’S REPORT
To the Shareholders’ Meeting of Koç Holding A.fi.
The findings of our audit covering the 2006 accounting year are presented below:
1. The audit was carried out by examining the records of Koç Holding A.fi. which are kept in accordance with the provisions of the TaxationProcedures Law (VUK) and the Capital Markets Law (SPK), attending the meetings of the Board of Directors of Koç Holding A.fi, conductingan actual count and verifying the amount of cash and securities held by the company.
2. The company’s compulsory books as required by the Turkish Commercial Code (TTK), Taxation Procedures Law and Capital Markets Lawwere properly kept; its records were substantiated by supporting documents; decisions taken by the Board of Directors were entered into itsregistry books; and the financial statements accurately reflect the consolidated financial statements of Koç Holding A.fi.
3. In my opinion, the consolidated financial statements that were prepared in accordance with Decree No. 25 Series XI of the Capital MarketsBoard “Communiqué Regarding Accounting Standards in the Capital Markets” which was revised on December 31, 2006 and, in accordancewith the decree 11/367 issued by the Capital Markets Board on March 17, 2005 that states that inflation accounting shall not be applied as ofJanuary 1, 2005, accurately reflect the consolidated financial position of the Company on December 31, 2006 and the consolidated results ofits operations for the period.
4. The proposal of the Board of Directors for distribution of dividends is in accord with the relevant Capital Market Board regulations.
As a result of the audit of Koç Holding A.fi. 2006 accounts and operations, performed in accordance with generally accepted accountingprinciples, the Turkish Commercial Code, Capital Markets Legislation and the company’s Articles of Association, I hereby submit for approvalthe annual report and financial tables presented to the Shareholders’ Meeting and deem it appropriate that the Board of Directors be absolvedwith regard to its activities in 2006.
Respectfully yours,April 12, 2007
Dr. Füsun AkkalAuditor
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INDEPENDENT AUDITOR’S REPORT
To the Board of Directors of Koç Holding A.fi.
1. We have audited the accompanying consolidated financial statements of Koç Holding A.fi., its subsidiaries and its joint-ventures (the “Group”) whichcomprise the consolidated balance sheet as of 31 December 2006 and the consolidated income statement, the consolidated statement of changes inequity and the consolidated cash flows statement for the year then ended and a summary of significant accounting policies and other explanatorynotes.
Management’s Responsibility for the Financial Statements2. The Group management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with thefinancial reporting standards issued by the Capital Markets Board (“CMB”). This responsibility includes: designing, implementing and maintaininginternal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement,whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in thecircumstances.
Auditor’s responsibility3. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordancewith the auditing standards issued by the CMB. Those standards require that we comply with ethical requirements and plan and perform the audit toobtain reasonable assurance on whether the consolidated financial statements are free from material misstatement.
An audit involves performing audit procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The proceduresselected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due tofraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion onthe effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion4. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of KoçHolding A.fi. as of 31 December 2006, and of its consolidated financial performance and its consolidated cash flows for the year then ended inaccordance with the financial reporting standards issued by the CMB (Note 2).
Emphasis of Matter5. As explained in Note 3 to the consolidated financial statements, the consolidated financial statements include the accounts of the parent company,its Subsidiaries and Joint Ventures. Subsidiaries are companies in which Koç Holding has power to control the financial and operating policies for thebenefit of Koç Holding through the exercise of voting power relating to the shares held by Koç Holding and its Subsidiaries together with the votingpower which Koç Holding effectively exercises relating to the shares held by Koç family members and enterprises controlled by them. Joint Venturesare companies in respect of which there are contractual arrangements through which an economic activity is undertaken subject to joint control by KoçHolding and its Subsidiaries (through the “control basis”) and one or more other parties. In effect the Koç family members allow Koç Holding toexercise the voting power in respect of their shares held in these companies. In the accompanying consolidated financial statements, the shares heldby Koç family members are treated as minority interest.
Additional paragraph for Euro (“EUR”) and US Dollar (“USD”) translation6. As explained in Note 2 to the consolidated financial statements, EUR and USD amounts shown in the accompanying consolidated financialstatements have been included solely for the convenience of the reader of the consolidated financial statements and have been translated from NewTurkish Lira (“YTL”), as a matter of arithmetic computation only, at the official EUR and USD bid rates announced by the Central Bank of the Republicof Turkey (“CBRT”) at 31 December 2006 for the consolidated balance sheet and the consolidated cash flows statement, and the official EUR and USDaverage CBRT bid rates of the year 2006 for the consolidated income statement. Such translations should not be construed as a representation thatthe YTL amounts have been or could be converted into EUR and USD at these or any other rates.
Additional paragraph for convenience translation into English7. The accounting principles described in Note 2 to the consolidated financial statements (defined as “CMB Accounting Standards”) differ fromInternational Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board with respect to the application of inflationaccounting for the period between 1 January - 31 December 2005, measurement principles and disclosure requirements for retirement benefits in theperiod subsequent to balance sheet date and presentation of basic financial statements and the notes to them. Accordingly, the accompanyingconsolidated financial statements are not intended to present the financial position and results of operations in accordance with IFRS.
Baflaran Nas Ba¤›ms›z Denetim ve Serbest Muhasebeci Mali Müflavirlik A.fi.a member ofPricewaterhouseCoopers
Zeynep Uras, SMMMPartnerIstanbul, 13 April 2007
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Baflaran Nas Ba¤›ms›z Denetim ve Serbest Muhasebeci Mali Müflavirlik A.fi.a member of PricewaterhouseCoopersBJK Plaza, Süleyman Seba CaddesiNo:48 B Blok Kat 9 AkaretlerBefliktafl 34357 ‹stanbul-Turkeywww.pwc.com.trTelephone +90 (212) 326 6060Facsimile +90 (212) 326 6050
KOÇ HOLD‹NG A.fi.CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
As restated2006 2006 2006 2005
Notes EUR’000 (*) USD’000 (*) YTL’000 YTL’000ASSETSCurrent assets:Cash and due from banks 4.a 2,270,378 2,990,612 4,203,604 3,721,720Reserve deposits with the central banks 4.b 843,347 1,110,883 1,561,457 721,911Marketable securities (net) 5 2,084,984 2,746,406 3,860,348 1,870,198Trade receivables (net) 7.a 3,070,469 4,044,518 5,684,974 4,037,938Loans and advances to customers (net) 7.b 3,980,977 5,243,866 7,370,778 6,462,181Lease receivables (net) 8 185,060 243,766 342,638 234,172Due from related parties (net) 9.a 148,357 195,420 274,683 180,304Other receivables (net) 10 7,965 10,492 14,747 11,728Biological assets (net) 11 - - - -Inventories (net) 12 2,501,191 3,294,647 4,630,956 2,181,903Construction contracts receivables (net) 13 8,905 11,730 16,487 29,259Deferred tax assets 14 - - - -Other current assets 15.a 477,007 628,328 883,177 491,959
Total current assets 15,578,640 20,520,668 28,843,849 19,943,273
Total non-current assets 15,343,777 20,211,300 28,409,002 16,714,529
Total assets 30,922,417 40,731,968 57,252,851 36,657,802
(*) Euro (“EUR”) and US Dollar (“USD”) amounts presented above have been translated from New Turkish Lira (“YTL”) for convenience purposes only, at theofficial YTL bid rate announced by the Central Bank of the Republic of Turkey (“CBRT”) at 31 December 2006, and therefore do not form part of theseconsolidated financial statements (Note 2.3).
These consolidated financial statements as at and for the year ended 31 December 2006 have been approved for issue by the Board of Directors (“BOD”) on 13April 2007 and signed on its behalf of BOD by Ahmet Fad›l Ashabo¤lu, Chief Financial Officer and by Emine Alangoya, Accounting Director.
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The accompanying notes form an integral part of these consolidated financial statements.
KOÇ HOLD‹NG A.fi.CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
SHAREHOLDERS’ EQUITYShare capital 25 683,230 899,972 1,265,000 1,150,000Treasury shares 25 - - - -Capital reserves 26 853,928 1,124,821 1,581,047 1,597,582Share premium 26 961 1,266 1,779 1,779Share cancellation gains - - - -Revaluation fund - - - -Financial assets fair value reserve 26 12,715 16,749 23,542 20,077Inflation adjustment to shareholders’ equity 26 840,252 1,106,806 1,555,726 1,575,726Profit reserves 27 291,861 384,447 540,380 253,815Legal reserves 27,722 36,517 51,328 33,531Statutory reserves - - - -Extraordinary reserves 27 263,713 347,371 488,265 250,515Special reserves - - - -Investment and property sales income to be added to the capital - - - 715Translation differences 27 4,466 5,883 8,269 (40,263)Cumulative gain/(loss) on hedging 27 (4,040) (5,324) (7,482) 9,317Net income 302,897 398,984 560,812 597,624Prior years’ income 28 616,127 811,583 1,140,760 1,087,059
Total shareholders’ equity 2,748,043 3,619,807 5,087,999 4,686,080
Total liabilities and shareholders’ equity 30,922,417 40,731,968 57,252,851 36,657,802
Commitments, contingent assets and liabilities 31
(*) EUR and USD amounts presented above have been translated from YTL for convenience purposes only, at the official YTL bid rate announced by the CBRTat 31 December 2006, and therefore do not form part of these consolidated financial statements (Note 2.3).
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The accompanying notes form an integral part of these consolidated financial statements.
KOÇ HOLD‹NG A.fi.CONSOLIDATED CASH FLOWS STATEMENTFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Income before taxes 645,281 811,618 1,161,506 896,082
Taxes on income 41 (333,719) (419,743) (600,694) (298,458)
Net income 311,562 391,875 560,812 597,624
Earnings per share (YTL) 42 0.443 0.472
(*) EUR and USD amounts presented above have been translated from YTL for convenience purposes only, at the EUR and USD average CBRT bid rates for theyear 2006, and therefore do not form part of these consolidated financial statements (Note 2.3).
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The accompanying notes form an integral part of these consolidated financial statements.
KOÇ HOLD‹NG A.fi.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated) 89
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ual R
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Cap
ital r
eser
ves
Pro
fit r
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Ret
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arni
ngs
Inve
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ent
and
Fina
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asse
ts
adju
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e to
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Cum
ulat
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Net
Prio
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esh
areh
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ers’
Leg
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xtra
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to
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Tran
slat
ion
gai
n/(lo
ss)
inco
me
year
s’sh
areh
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ers’
cap
ital
pre
miu
mre
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uity
rese
rves
rese
rves
cap
ital
diff
eren
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on h
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/(lo
ss)
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Tota
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Bal
ance
s at
31
Dec
emb
er 2
004
–
as p
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y re
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ted
1,00
0,00
032
-1,
575,
726
27,1
0021
4,64
61,
431
(22,
080)
(4,2
20)
508,
496
855,
141
1,36
3,63
74,
156,
272
Acc
ount
ing
polic
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ange
- IA
S 3
9 (*
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-7,
174
--
--
--
(303
)(6
,871
)(7
,174
)-
Acc
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ange
- IA
S 8
(*)
-
--
--
--
--
17,0
03(1
67,8
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(150
,879
)(1
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Bal
ance
s at
1 J
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ry 2
005
-
as r
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7,17
41,
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4,64
61,
431
(22,
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(4,2
20)
525,
196
680,
388
1,20
5,58
44,
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Abo
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Not
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--
--
--
--
--
9,37
69,
376
9,37
6
Tran
sfer
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--
--
-(7
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--
(525
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)52
5,91
271
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Cap
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ase
150,
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1,74
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--
--
--
--
-15
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7
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-12
,903
--
--
--
--
-12
,903
Tran
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es-
--
--
--
(18,
183)
--
--
(18,
183)
Cum
ulat
ive
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on
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ing
(net
)-
--
--
--
-13
,537
--
-13
,537
Div
iden
ds p
aid
--
--
6,43
135
,869
--
--
(128
,617
)(1
28,6
17)
(86,
317)
Net
inco
me
--
--
--
--
-59
7,62
4-
597,
624
597,
624
Bal
ance
s at
31
Dec
emb
er 2
005
1,15
0,00
01,
779
20,0
771,
575,
726
33,5
3125
0,51
571
5(4
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3)9,
317
597,
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1,08
7,05
91,
684,
683
4,68
6,08
0
Tran
sfer
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--
--
237,
750
(715
)-
-(5
97,6
24)
360,
589
(237
,035
)-
Cap
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ase
115,
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--
(20,
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--
--
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(95,
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(95,
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-3,
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--
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Tran
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--
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48,5
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-48
,532
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--
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-(1
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sact
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(N
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--
--
--
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-(1
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(188
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Div
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--
--
17,7
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--
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(23,
218)
(23,
218)
(5,4
21)
Net
inco
me
--
--
--
--
-56
0,81
2-
560,
812
560,
812
Bal
ance
s at
31
Dec
emb
er 2
006
1,26
5,00
01,
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23,5
421,
555,
726
51,3
2848
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8,26
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0,81
21,
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1,70
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25,
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(*)
The
deta
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re d
iscl
osed
at N
ote
2.4.
The accompanying notes form an integral part of these consolidated financial statements.
KOÇ HOLD‹NG A.fi.CONSOLIDATED INCOME STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Operating activities:Income before tax and minority interests 1,121,240 1,476,932 2,075,976 1,279,660Adjustments to reconcile net income/(loss) to
net cash provided by operating activities:Depreciation and amortisation 18,19,20 457,962 603,242 847,917 776,036Changes in provisions 43 194,563 256,285 360,234 317,871Net interest income 43 (281,348) (370,600) (520,916) (488,611)Banking sector interest income 33,h,43 1,455,582 1,917,337 2,695,010 1,110,487Banking sector interest expense 33,h,43 (891,111) (1,173,799) (1,649,892) (612,051)Exchange (gains)/losses on borrowings 270,916 356,859 501,602 (42,698)Gain on sale of tangible and intangible assets (net) 38 (16,159) (21,286) (29,919) (46,952)Gain on sale of investments 38 (65,767) (86,630) (121,767) -
Net cash provided from operating activities before changes in operating assets and liabilities 2,245,878 2,958,340 4,158,245 2,293,742
Net changes in operating assets and liabilities 43 (2,829,909) (3,727,643) (5,239,576) (1,817,376)Changes in other non-current assets and liabilities 43 (6,092) (8,025) (11,280) (4,372)Income taxes paid (203,521) (268,084) (376,819) (402,583)
Net change in operating assets and liabilities (3,039,522) (4,003,752) (5,627,675) (2,224,331)
Net cash used in operating activities (793,644) (1,045,412) (1,469,430) 69,411
Investing activities:Purchase of property, plant and equipment
and intangible assets 18,19,20 (947,920) (1,248,629) (1,755,073) (1,177,050)Cash provided from sale of tangible and
intangible assets 95,968 126,412 177,685 153,842Cash provided from sale of investments (net) 89,373 117,726 165,475 -Net cash inflow/(outflow) on acquisitions of
Net increase in cash and cash equivalents 250,288 329,687 463,409 1,739,044Cash and cash equivalents at the beginning of the year 4.a 1,996,462 2,629,802 3,696,449 1,957,405
Cash and cash equivalents at the end of the year 4.a 2,246,750 2,959,489 4,159,858 3,696,449
(*) EUR and USD amounts presented above are translated from YTL for convenience purposes only, at the official YTL bid rate announced by CBRT at 31December 2006, and therefore do not form part of these consolidated financial statements (Note 2.3).
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The accompanying notes form an integral part of these consolidated financial statements.
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 1 - GROUP’S ORGANISATION AND NATURE OF OPERATIONSKoç Holding A.fi. (“Koç Holding”) was established on 11 December 1963 in Turkey as a corporation to coordinate the activities of, and liaisebetween, companies operating in different fields including trade, manufacturing, agriculture, finance and retailing .
As of 31 December 2006, the number of people employed by Koç Holding, Subsidiaries and Joint Ventures (collectively referred as the“Group”) is 88,248 (31 December 2005: 81,926).
The address of the registered office is as follows:Nakkafltepe Azizbey Sok. No: 1Kuzguncuk-‹STANBUL
Koç Holding is registered with the Capital Markets Board (“CMB”) and its shares have been quoted on the Istanbul Stock Exchange (“ISE”)since 10 January 1986. At 31 December 2006, the principal shareholders and their respective shareholding rates in Koç Holding are as follows(Note 25):
%Companies owned by Koç Family members 42.29Koç Family members 28.22Vehbi Koç Vakf› 7.17Koç Holding Emekli ve Yard›m Sand›¤› Vakf› 1.97Other 20.35
100.00
Koç Holding is organised mainly in Turkey in six main business segments:• Energy• Automotive• Consumer durable• Food and retailing• Finance (*)• Other (**)
(*) The finance segment includes three main groups; banking, insurance and consumer finance. In the segmental presentation of theaccompanying consolidated financial statements, banking, leasing, factoring, portfolio management, custody and brokerage services areincluded in the banking group.(**) Other operations of Koç Holding mainly comprise of foreign trade, tourism, information technologies and construction, none of which is ofa sufficient size to be reported separately.
Geographical segment information has not been included in the consolidated financial statements since geographical segments other thanTurkey are not material enough to be reported separately.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The subsidiaries (“Subsidiary”) and the joint ventures (“Joint Venture”) of the Group, their country of incorporation, nature of business and theirrespective business segment, are as follows:
Energy SectorCountry of Nature of
Subsidiaries incorporation businessAkpa Dayan›kl› Tüketim LPG ve Akaryak›t Ürünleri Pazarlama A.fi. (“Akpa”) Turkey TradingAygaz A.fi. (“Aygaz”) Turkey LPGBirleflik Oksijen Sanayi A.fi. (“BOS”) Turkey ChemicalsDitafl Deniz ‹flletmecili¤i ve Tic. A.fi. (“Ditafl”) Turkey Transportation of
Crude Oil andPetroleum Products
Enerji Yat›r›mlar› A.fi. (“Enerji Yat›r›mlar›”) Turkey InvestmentEntek Elektrik Üretimi A.fi. (“Entek”) Turkey Power GenerationMogaz Petrol Gazlar› A.fi. (“Mogaz”) Turkey LPGOpet Aygaz Bulgaria E.A.D. (“Opet Aygaz Bulgaria”) Bulgaria DistributionOpet Aygaz B.V. (“Opet Aygaz BV”) The Netherlands DistributionTürkiye Petrol Rafinerileri A.fi. (“Tüprafl”) Turkey Production and Trading
of Petroleum Products
Country of Nature ofJoint Ventures Joint Venture Partner incorporation businessOpet G›da ve ‹htiyaç Mad. Tur. San.
‹ç ve D›fl Ticaret A.fi. (“Opet G›da”) Öztürk Family Turkey Food DistributionOpet International Limited (“Opet International”) Öztürk Family The U.K. TradingOpet Madeni Ya¤ ve Katk›lar› San. ve Tic. A.fi. Öztürk Family Turkey Production and
(“Opet Madeni Ya¤”) DistributionOpet Petrolcülük A.fi. (“Opet”) Öztürk Family Turkey PetroleumOpet Trade BV (“Opet Trade BV”) Öztürk Family The Netherlands TradingOpet Trade Ireland (“Opet Trade Ireland”) Öztürk Family Ireland TradingTBS Denizcilik ve Petrol Ürünleri Ticaret A.fi. (“TBS”) Öztürk Family Turkey Marine Fuel
Supplier
Automotive SectorCountry of Nature of
Subsidiaries incorporation businessBeldesan Otomotiv Yan Sanayii ve Tic. A.fi. (“Beldesan”) Turkey ProductionBeldeyama Motorlu Vas›talar San. ve Tic A.fi. (“Beldeyama”) Turkey ProductionBirmot Birleflik Motor Sanayi ve Tic. A.fi. (“Birmot”) Turkey TradingOtokar Otobüs Karoseri Sanayi A.fi. (“Otokar”) Turkey ProductionOtokoç Otomotiv Tic. ve San. A.fi. (“Otokoç”) Turkey TradingOtomotiv Lastikleri Tevzi A.fi. (“Otomotiv Lastikleri”) Turkey TradingOtoyol Sanayi A.fi. (“Otoyol”) Turkey Production
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Country of Nature ofJoint Ventures Joint Venture Partner incorporation businessFer-Mas Oto Ticaret A.fi. (“Fer-Mas”) Fiat Auto S.p.A. Turkey Spare Part TradingFord Otomotiv Sanayi A.fi. (“Ford Otosan”) Ford Motor Co. Turkey Production
Research andMekatro Araflt›rma Gelifltirme A.fi. (“Mekatro”) Fiat Auto S.p.A. Turkey DevelopmentNew Holland Trakmak Traktör ve
Ziraat Makinalar› A.fi. (“Trakmak”) CNH Global NV Turkey TradingPlatform Araflt›rma Gelifltirme Research and
Tasar›m ve Tic. A.fi. (“Platform”) Fiat Auto S.p.A. Turkey DevelopmentTofafl Türk Otomobil Fabrikas› A.fi. (“Tofafl”) Fiat Auto S.p.A. Turkey ProductionTürk Traktör ve Ziraat Makinalar› A.fi. (“Türk Traktör”) CNH Global NV Turkey Production
(“Blomberg Vertrieb”) Germany DistributionBlomberg Werke GmbH (“Blomberg Werke”) Germany ProductionDD Heating Limited (“DD Heating”) The U.K. TradingDemir Döküm Chung Mei Industries Limited
(“DD Chung Mei”) China ProductionDemrad Döküm Ürünleri S›nai ve Tic. A.fi. (“Demrad”) Turkey ProductionElektra Bregenz AG (“Elektra Bregenz”) Austria TradingFusion Digital Technology Ltd. (“Fusion Digital”) The U.K. Technology
DevelopmentIzodutch B.V. (“Izodutch”) The Netherlands InvestmentPanel Radyatör Sanayi ve Ticaret A.fi. (“Panel”) Turkey ProductionRaupach Wollert GmbH (“Raupach”) Germany HoldingSC Arctic SA (“Arctic”) Romania ProductionTürk Demir Döküm Fabrikalar› A.fi. (“Demirdöküm”) Turkey Production
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Country of Nature ofJoint Ventures Joint Venture Partner incorporation businessArçelik LG Klima San. ve Tic. A.fi. (“Arçelik LG Klima”) LG Electronics Inc. Turkey Air ConditionersGrundig Australia Pty. Limited (“Grundig Australia”) Alba Plc. Australia Sales and ServiceGrundig Benelux B.V., Netherlands (“Grundig Benelux”) Alba Plc. The Netherlands Sales and ServiceGrundig Danmark A/S, Denmark (“Grundig Denmark”) Alba Plc. Denmark Sales and ServiceGrundig Espana S.A., Spain (“Grundig Espana”) Alba Plc. Spain Sales and ServiceGrundig Intermedia GmbH (“Grundig Austria”) Alba Plc. Austria Sales and ServiceGrundig Intermedia GmbH, Germany (“Grundig GmbH”) Alba Plc. Germany Sales and ServiceGrundig Italiana S.p.A., Italy (“Grundig Italy”) Alba Plc. Italy Sales and ServiceGrundig Magyarország Kft., Hungary (“Grundig Hungary”) Alba Plc. Hungary Sales and ServiceGrundig Multimedia B.V. (“Grundig Multimedia”) Alba Plc. The Netherlands HoldingGrundig Norge AS, Norway (“Grundig Norway”) Alba Plc. Norway Sales and ServiceGrundig OY, Finland (“Grundig Finland ”) Alba Plc. Finland Sales and ServiceGrundig Polska Sp. z o.o., Poland (“Grundig Polska”) Alba Plc. Poland Sales and ServiceGrundig Portuguesa, Lda, Portugal (“Grundig Portugal”) Alba Plc. Portugal Sales and ServiceGrundig S.A.S. (“Grundig France”) Alba Plc. France Sales and ServiceGrundig (Schweiz) AG, Switzerland (“Grundig AG”) Alba Plc. Switzerland Sales and ServiceGrundig Svenska AB. (“Grundig Sweden”) Alba Plc. Sweden Sales and Service
Country of Nature ofJoint Ventures Joint Venture Partner incorporation businessLimited Liability Company Ramenka (“Ramenka”) Enka ‹nfl. ve San. A.fi. Russia RetailKoçtafl Yap› Marketleri Ticaret A.fi. Construction and
(“Koçtafl Yap› Market”) B & Q Holding BV Turkey Housing EquipmentTarifl-Tat Alkollü ‹çecekler A.fi (“Tarifl-Tat”) Tarifl Group Turkey Alcoholic Beverages
Finance SectorCountry of Nature of
Subsidiaries incorporation businessKoç Allianz Hayat ve Emeklilik A.fi. (“Koç Allianz Hayat”) Turkey Life InsuranceKoç Allianz Sigorta T.A.fi. (“Koç Allianz Sigorta”) Turkey InsuranceKoç Tüketici Finansman› ve Kart Hizmetleri A.fi. (“Koç Finans”) Turkey Consumer Finance
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Country of Nature ofJoint Ventures Joint Venture Partner incorporation businessAzur Tourism Investment N.V.(“Azur”) UniCredito Italiano The Netherlands InvestmentHavenfields Tourism Investment N.V. (“Havenfields”) UniCredito Italiano The Netherlands InvestmentKoç Fiat Kredi Tüketici Finansman› A.fi. (“Fiat Finans”) Fiat Auto S.p.A. Turkey FinanceKoç Finansal Hizmetler A.fi.
(“Koç Finansal Hizmetler” veya “KFS”) UniCredito Italiano Turkey HoldingKoç Yat›r›m Menkul De¤erler A.fi. (“Koç Menkul”) UniCredito Italiano Turkey BrokerageKoçbank Azerbaijan Ltd. (“Koçbank Azerbaycan”) UniCredito Italiano Azerbaijan BankingKoçbank Nederland N.V. (“Koçbank Nederland”) UniCredito Italiano The Netherlands BankingStiching Custody Services KBN (“Stiching Custody”) UniCredito Italiano The Netherlands CustodyYap› ve Kredi Bankas› A.fi. (“Yap› Kredi Bankas›”) UniCredito Italiano Turkey BankingYap› Kredi Bank Deutschland A.G.
(“Yap› Kredi Deutschland”) UniCredito Italiano Germany BankingYap› Kredi Bank Holding B.V. (“Yap› Kredi Holding”) UniCredito Italiano The Netherlands Financial ConsultingYap› Kredi Bank Nederland N.V. (“Yap› Kredi Nederland”) UniCredito Italiano The Netherlands BankingYap› Kredi Diversified Payment Rights Company Special Purpose
(“Yap› Kredi Finansal Kiralama”) UniCredito Italiano Turkey LeasingYap› Kredi Global Custody B.V.
(“Yap› Kredi Global Custody”) UniCredito Italiano The Netherlands CustodyYap› Kredi Moscow (“Yap› Kredi Moscow”) UniCredito Italiano Russia BankingYap› Kredi Portföy Yönetimi A.fi. (“Yap› Kredi Portföy”) UniCredito Italiano Turkey Portfolio ManagementYap› Kredi Sigorta A.fi. (“Yap› Kredi Sigorta”) UniCredito Italiano Turkey InsuranceYap› Kredi Yat›r›m Menkul De¤erler A.fi.
(“Yap› Kredi Menkul”) UniCredito Italiano Turkey BrokerageYap› Kredi Yat›r›m Ortakl›¤› A.fi. (“Yap› Kredi Yat›r›m”) UniCredito Italiano Turkey Investment Trust
(*) Although Yap› Kredi Bankas›, a Joint Venture of the Group, has no shareholding interest in the company, the special purpose companyestablished for Yap› Kredi Bankas›’s securitisation transactions is included in the scope of consolidation.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Other SectorsCountry of Nature of
Subsidiaries incorporation businessAyval›k Marina ve Yat ‹flletmecili¤i San.
ve Tic. A.fi. (“Ayval›k Marina”) Turkey TourismBeko Ticaret A.fi. (“Beko Ticaret”) Turkey TradingBilkom Biliflim Hizmetleri A.fi. (“Bilkom”) Turkey TradingBozkurt Tar›m ve G›da San. ve Tic A.fi. (“Bozkurt”) Turkey AgricultureDemir Export A.fi. (“Demir Export”) Turkey MiningKav Dan›flmanl›k Pazarlama ve Ticaret A.fi. (“Kav Dan›flmanl›k”) Turkey ConsultancyKoçnet Haberleflme Teknoloji ve ‹letiflim Hizm. A.fi. (“Koçnet”) Turkey Information TechnologyKoç Sistem A.fi. (“Koç Sistem”) Turkey TechnologyKoç Yap› Malzemeleri A.fi. (“Koç Malzeme”) Turkey TradingMarmaris Alt›nyunus Turistik Tesisleri A.fi. (“Mares”) Turkey TourismPalmira Turizm Ticaret A.fi. (“Palmira”) Turkey TourismRam D›fl Ticaret A.fi. (“Ram D›fl Ticaret”) Turkey Foreign TradeRMK Marine Gemi Yap›m Sanayi ve
Deniz Tafl. ‹fll. A.fi. (“RMK Marine”) Turkey ProductionSetur Servis Turistik A.fi. (“Setur”) Turkey TourismTek-Art Kalam›fl ve Fenerbahçe Marmara
Turizm Tesisleri A.fi. (“Tek-Art Marina”) Turkey Tourism
Country of Nature ofJoint Ventures Joint Venture Partner incorporation businessNetsel Turizm Yat›r›mlar› A.fi. (“Netsel”) Toray ‹nflaat A.fi. Turkey TourismUltra Kablolu Televizyon ve Do¤an Yay›n Holding A.fi. Media and
Telekomünikasyon San. ve Tic. A.fi. (“Ultra Kablo”) Turkey Communication
For the purposes of segment information in these consolidated financial statements, Koç Holding’s stand-alone financial statements havebeen included within the “Other” segment (Note 33).
As a result of the transactions related to the disposition of some of subsidiaries of the Group in 2006, the Group’s control over ‹zocam Ticaretve San. A.fi. (“‹zocam”), Döktafl Ticaret ve San. A.fi. (“Döktafl”) and Ram Pacific Ltd. (“Ram Pacific”) and the Group’s joint control over KofisaS.A. (“Kofisa”) ceased.
NOTE 2 - BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
2.1 Accounting standardsThe consolidated financial statements of Koç Holding have been prepared in accordance with the accounting and reporting principlespublished by the Capital Markets Board (“CMB”), namely “CMB Accounting Standards”. The CMB issued a comprehensive set of accountingprinciples in Communiqué No. XI-25 “The Accounting Standards in the Capital Markets”. In the aforementioned communiqué, it has beenstated that applying the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”)is accepted as an alternative to confirm with the CMB Accounting Standards.
With the decision taken on 17 March 2005, the CMB announced that, effective from 1 January 2005, the application of inflation accounting isno longer required for companies operating in Turkey and preparing their financial statements in accordance with CMB Accounting Standards.Accordingly, International Accounting Standards (“IAS”) 29 (“Financial Reporting in Hyperinflationary Economies”), issued by IASB, has notbeen applied in the consolidated financial statements for the accounting year commencing from 1 January 2005. These consolidatedfinancial statements and the related notes have been prepared under the alternative application defined by the CMB as explained above andpresented in accordance with the formats required by the CMB with the announcement dated 20 December 2004.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Koç Holding and its Subsidiaries and Joint Ventures registered in Turkey maintain their books of account and prepare their statutory financialstatements (“Statutory Financial Statements”) in YTL in accordance with the Turkish Commercial Code (“TCC”), tax legislation, and theUniform Chart of Accounts issued by the Ministry of Finance, applicable Turkish insurance laws for insurance companies and banking law,accounting principles and instructions promulgated by the Banking Regulation and Supervising Agency (“BRSA”) for banks (Note 34) and forlisted companies and accounting principles issued by the CMB. The foreign Subsidiaries and Joint Ventures maintain their books of accountin accordance with the laws and regulations in force in the countries in which they are registered. These consolidated financial statements arebased on the statutory records, which are maintained under historical cost conversion, with the required adjustments and reclassificationsreflected for the purpose of fair presentation in accordance with the CMB Accounting Standards.
2.2 Financial statements of foreign Subsidiaries and Joint VenturesFinancial statements of Subsidiaries and Joint Ventures operating in foreign countries are prepared according to the legislation of the countryin which they operate, and adjusted to the CMB Accounting Standards to reflect the proper presentation and content. Foreign Subsidiariesand Joint Ventures’ assets and liabilities are translated into YTL from the foreign exchange rate at the balance sheet date and income andexpenses are translated into YTL at the average foreign exchange rate. Exchange differences arising from the retranslation of the opening netassets of foreign undertakings and differences between the average and balance sheet date rates are included in the “translation differences”under the shareholders’ equity.
2.3 EUR and USD translationEUR and USD amounts shown in the consolidated balance sheet and cash flows statement have been translated from YTL, as a matter ofarithmetic computation only, at the official EUR and USD bid rates announced by the CBRT on 31 December 2006 of YTL1.8515 = EUR1 andYTL1.4056 = USD1, respectively and EUR and USD amounts shown in the consolidated income statement have been translated from YTL, asa matter of arithmetic computation only, at the average EUR and USD bid rates calculated from the official daily bid rates announced by theCBRT for 2006 of YTL1.8000 = EUR1 and YTL1.4311 = USD1, respectively, and do not form part of these consolidated financial statements.
2.4 Comparatives and adjustment of prior periods’ financial statementsThe consolidated financial statements of the Group include comparative financial information to enable the determination of the financialposition and performance. Comparative figures are reclassified, where necessary, to conform to changes in presentation in the current periodconsolidated financial statements; the significant changes are explained.
The prior years’ consolidated financial statements, due to accounting policies and other changes applied in the preparation of theconsolidated financial statements as of 31 December 2006, are restated in accordance with the principles of IAS 8 “Accounting Policies,Changes in Accounting Estimates and Errors” and other related standards. The effects of related changes to the prior years’ income and netincome (all together referred to as “retained earnings”) as of 1 January 2005 are summarised below:
1 January 2005 – as previously reported 1,363,637Change in accounting policies IAS 39 (a) (7,174)Change in accounting policies IAS 8 (b) (150,879)1 January 2005 – as restated 1,205,584
(a) IAS 39 (“Financial Instruments: Recognition and Measurement”) has been revised effective from the period beginning on or after 1 January2005. In accordance with the revised standard, gains and losses on available-for-sale financial assets shall be directly recognised in equityuntil the financial assets are derecognised. The Group recognised such gains and losses on available-for-sale financial assets in theconsolidated statement of income until 31 December 2004.
As a result of the revision in IAS 39, the Group applied the accounting policy change retrospectively, and adjusted all related comparativefinancial information. The mentioned adjustment caused a decrease in the retained earnings amount reported at 1 January 2005 amounting toYTL7,174 thousand and an increase in the financial assets fair value reserve by the same amount.
(b) The Group started to consider the transactions with minority interests as transactions with equity owners of the Group as of 31 December2006 in order to reflect the economic substance of such transaction more reliably and accurately, while the Group was applying a policy oftreating such transactions with minority interests as transactions with parties external to the Group previously. In the prior years, disposals tominority interests resulted in gains and losses for the Group that were recorded in the income statement where purchases from minorityinterest resulted in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of netassets of the subsidiary. However, in the consolidated financial statements as of 31 December 2006, the Group accounted for the differences
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary in the equity. Additionally,the gains or losses on disposals to minority interests were also recorded in the equity (Note 3.14). As of 31 December 2006, such a change inthe accounting policy has been applied retrospectively in the consolidated financial statements and the previously reported retained earningsand goodwill as of 1 January 2005 have been decreased by YTL150,879 thousand, accordingly.
In addition to the restatements listed above, KFS and Koçbank, Joint Ventures of the Group, restated their financial statements dated 31December 2005 due to the changes in the provisionally determined fair values of acquired identifiable assets and liabilities used in thecalculation of goodwill arising from the acquisition of Yap› Kredi Bankas› in 2005. Additionally, Migros, a Subsidiary of the Group, has restatedits goodwill arising from the acquisition of Tansafl in 2005 due to changes in the calculation of the shares of minority interests. Therefore, theGroup has reflected the effects of these changes in the consolidated financial statements dated 31 December 2005 (Note 32).
2.5 OffsettingFinancial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set offthe recognised amounts and there is an intention to settle on a net basis, or realise the net asset and settle the liability simultaneously.
2.6 Convenience translation into English of consolidated financial statements originally issued in TurkishThe accounting principles described in Note 2.1 to the consolidated financial statements (defined as CMB Accounting Standards) differ fromInternational Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board with respect to the application ofinflation accounting, for the period between 1 January – 31 December 2005, measurement for retirement benefits in the period subsequent tobalance sheet date and presentation of the basic financial statements and the notes to them. Accordingly, the accompanying consolidatedfinancial statements are not intended to present the financial position and results of operations in accordance with IFRS.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESAccounting policies used in the preparation of consolidated financial statements are consistent with the accounting policies used in theconsolidated financial statements for the year ended 31 December 2005.
Where necessary, accounting policies for Subsidiaries and Joint Ventures have been changed to ensure consistency with the policies adoptedby the Group.
3.1 Group accounting
a) The consolidated financial statements include the accounts of the parent company, Koç Holding, its Subsidiaries and its Joint Ventures(collectively referred to as the “Group”) on the basis set out in sections (b) to (f) below. The financial statements of the companies included inthe scope of consolidation have been prepared as of the date of the consolidated financial statements with adjustments and reclassificationsfor the purpose of fair presentation in accordance with CMB Accounting Standards and the application of uniform accounting policies andpresentation.
b) Subsidiaries are companies over which Koç Holding has the power to control the financial and operating policies for the benefit of KoçHolding, either (a) through the power to exercise more than 50% of voting rights relating to shares in the companies as a result of ownershipinterest owned directly and indirectly by itself, and/or as a result of agreements by certain Koç Family members and companies owned bythem (collectively referred to as the “Koç Family members”) whereby Koç Holding exercises control over the ownership interest of (but doesnot have the economic benefit of) the shares held by them; or (b) although not having the power to exercise more than 50% of the ownershipinterest, otherwise has the power to exercise control over financial and operating policies.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The table below sets out all Subsidiaries included in the scope of consolidation and shows their ownership and effective interests as of 31December:
Direct and indirect Ownership interestProportion ownership interest shares held by Total
of effective held by Koç Holding Koç Family ownershipSubsidiaries interest (%) and its Subsidiaries (%) members (%) interest (%)
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Direct and indirect Ownership interestProportion ownership interest shares held by Total
of effective held by Koç Holding Koç Family ownershipSubsidiaries interest (%) and its Subsidiaries (%) members (%) interest (%)
(1) Established in 2006.(2) Liquidation in progress.(3) Included in the scope of consolidation in 2006.(4) Acquired in 2006 (Note 44.a).(5) Excluded from the scope of consolidation following the share transfers in 2006.(6) Although the ownership interest of Koç Holding in these subsidiaries is less than 50%, Koç Holding has the power to exercise control overfinancial and operating policies of these companies.(7) Merged with Migros in 2006.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The balance sheets and statements of income of the Subsidiaries are consolidated on line-by-line basis and the carrying value of theinvestment held by Koç Holding and its Subsidiaries is eliminated against the related shareholders’ equity. Intercompany transactions andbalances between Koç Holding and its Subsidiaries are eliminated during the consolidation. The cost of, and the dividends arising from,shares held by Koç Holding in its Subsidiaries are eliminated from shareholders' equity and income for the period, respectively.
Subsidiaries are consolidated from the date on which the control is transferred to the Group and are no longer consolidated from the date thatthe control ceases. Where necessary, accounting policies for Subsidiaries have been changed to ensure consistency with the policiesadopted by the Group.
c) Joint Ventures are companies in respect of which there are contractual arrangements through which an economic activity is undertakensubject to joint control by Koç Holding and one or more other parties.
Koç Holding exercises such joint control through the power to exercise voting rights relating to shares in the companies as a result ofownership interest directly and indirectly by itself and/or as a result of written agreements by certain Koç Family members and companies,whereby Koç Holding exercises control over the voting rights of (but does not have the economic benefit of) the shares held by them. TheGroup’s interest in Joint Ventures is accounted for by way of proportionate consolidation. According to this method, the Group includes itsshare of the assets, liabilities, income and expenses of each Joint Venture in the relevant components of the financial statements.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The table below sets out the Joint Ventures and shows their shareholding structure at 31 December:
Direct and indirect Ownership interestProportion ownership interest shares held by Total
of effective held by Koç Holding Koç Family ownershipJoint Ventures interest (%) and its Subsidiaries (%) members (%) interest (%)
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Direct and indirect Ownership interestProportion ownership interest shares held by Total
of effective held by Koç Holding Koç Family ownershipJoint Ventures interest (%) and its Subsidiaries (%) members (%) interest (%)
(1) Merged with Grundig Multimedia in 2006.(2) Mergers related to the restructuring in finance sector realised in 2006 are disclosed in Note 32.(3) Excluded from the scope of consolidation following the share transfers in 2006.(4) Merged with Opet in 2006 (Note 32).
d) Available-for-sale investments, in which the Group together with Koç Family members, have ownership interests below 20%, or over whichthe Group does not exercise a significant influence or which are immaterial and do not have quoted market prices in active markets andwhose fair values cannot be reliably measured, are carried at cost, less any provision for diminution in value (Note 16).
Available-for-sale investments, in which the Group together with Koç Family members, have ownership interests below 20% or which theGroup does not exercise a significant influence and that have quoted market prices in active markets and whose fair values can be reliablymeasured, are carried at fair value in the consolidated financial statements.
e) The minority shares in the net assets and operating results of Subsidiaries are separately classified in the consolidated balance sheets andstatements of income as “minority interest”. Certain Koç Family members and companies controlled by them have interests in the sharecapital of certain Subsidiaries. In the consolidated financial statements, these interests of Koç Family members and companies controlled bythem are treated as minority interest and are not included in the Group's net assets and profits attributable to shareholders of Koç Holding.
f) All balances and transactions of/with the Joint Ventures in the notes to the consolidated financial statements are presented with the totalownership interest of such Joint Ventures.
3.2 Related partiesFor the purpose of these consolidated financial statements, shareholders, key management personnel and Board members, in each casetogether with their families and themselves and Subsidiaries excluded from the scope of consolidation are considered and expressed as“related parties” (Note 9).
3.3 Financial assetsThe Group classifies its investments in debt and equity securities as assets at fair value through profit or loss, held-to-maturity and available-for-sale.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
“Financial assets at fair value through profit or loss” are either acquired for generating a profit from short-term fluctuations in price or dealers’margin, or included in a portfolio in which a pattern of short-term profit making exists. Financial assets at fair value through profit or loss, areinitially recognised at cost and are subsequently re-measured at fair value based on quoted bid prices. All related realised and unrealisedgains and losses are included in the consolidated income statement.
The Group has designated its trading securities as financial assets at fair value through profit or loss in accordance with the revised IAS 39which is effective from 1 January 2005.
Debt securities with fixed maturities, where management has both the intent and the ability to hold to the maturity excluding the financialassets classified as originated loans and advances to customers are classified as “held-to-maturity financial assets”.
Investment securities intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes inthe interest rates, exchange rates or equity prices, or client’s servicing activity are classified as “available-for-sale financial assets”. These areincluded in non-current assets unless management has the intention of holding these investments for less than 12 months from the balancesheet date, or unless they will need to be sold to raise operating capital, in which case they are included in current assets. The appropriateclassification of investments is determined at the time of the purchase and re-evaluated by management on a regular basis.
All purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell theasset. Cost of purchase includes transaction costs. Available-for-sale investments that have quoted market prices in active markets andwhose fair values can be reliably measured are subsequently carried at fair value, whilst held-to-maturity investments are carried at amortisedcost using the effective yield method. Available-for-sale investments that do not have quoted prices in active markets are initially recognised atcost and subsequently re-measured at transaction/companies prices in active markets and whose fair values cannot be reliably measured arestated at cost and restated to the equivalent purchasing power.
Available-for-sale investments, in which the Group has attributable interests of 20% or less or Subsidiaries and Joint Ventures which are eitherimmaterial, or where a significant influence is not exercised by Koç Holding, are carried at cost less provision for diminution in value, if theseinvestments do not have quoted market prices in active markets or their fair values cannot be reliably measured.
Unrealised gains and losses arising from changes in the fair value of securities classified as available-for-sale are deferred to in the equityunder “financial assets fair value reserve” until the financial asset is sold, collected or otherwise disposed of (Note 2,4). Unrealised gains andlosses arising from changes in the fair value of available-for-sale debt securities are the differences between the fair value of such securitiesand their amortised costs at the balance sheet date. When available-for-sale securities are sold, collected or otherwise disposed of, relateddeferred gains and losses in equity are released to the statement of income. If the difference between the amortised cost and the fair value ofthe available-for-sale securities is permanent, gains and losses are carried in the statement of income.
3.4 Repurchase and resale transactionsSecurities sold subject to linked repurchase agreements (“repo”) are retained in the consolidated financial statements as held-to-maturity oravailable-for-sale investments with the counter party liability included in customer deposits. The portion of the difference between the sale andrepurchase price of these agreements in the current period is treated as interest expense and accrued over the life of the repurchaseagreement.
Securities purchased under agreements to resell (“reverse repurchase agreements”) are recorded as loans to banks in the consolidatedfinancial statements. The difference between the purchase and resale price of these repurchase agreements is treated as interest income andaccrued over the life of the reverse repurchase agreement (Note 4).
3.5 Trade receivables and provision for doubtful receivablesTrade receivables that are created by the Group by way of providing goods or services directly to a debtor are carried at amortised cost.Trade receivables, net of unearned financial income, are measured at amortised cost, using the effective interest rate method, less theunearned financial income. Short duration receivables with no stated interest rate are measured at the original invoice amount unless theeffect of imputing interest is significant.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
A credit risk provision for trade receivables is established if there is objective evidence that the Group will not be able to collect all amountsdue. The amount of the provision is the difference between the carrying amount and the recoverable amount. The recoverable amount is thepresent value of all cash flows, including amounts recoverable from guarantees and collateral, discounted based on the original effectiveinterest rate of the originated receivables at inception.
If the amount of the impairment subsequently decreases due to an event occurring after the write-down, the release of the provision iscredited to other income (Note 7).
3.6 Loans and advances to customers and provisions for loan impairmentLoans originated by the Group, by providing money directly to the borrower are categorised as loans and advances to customers and arecarried at amortised cost, less any provision for loan losses.
All loans and advances are recognised when cash is advanced to borrowers.
A credit risk provision for loan impairment is established if there is objective evidence that the Group will not be able to collect all the amountsdue. The amount of the provision for impaired loans and loans under legal follow-up is the difference between the carrying amount and therecoverable amount. The recoverable amount is the net present value of expected cash flows, including amounts recoverable from guaranteesand collateral, discounted at the original effective interest rate of loans.
The provision for loan also covers losses where there is objective evidence that probable losses are present in components of the loanportfolio at the balance sheet date. These have been estimated based upon historical patterns of losses in each component, the internalcredit risk rating of the borrowers and the current economic climate in which the borrowers operate. The level of provision is also in line withthe applicable Banking Legislation.
The movement in provision is charged against the income for the period. When a loan is deemed uncollectible, it is written-off against therelated provision for impairment. The loan is written-off after all the necessary legal proceedings have been completed and the amount of theloan loss is finally determined. Subsequent recoveries are credited to the income statement if previously written-off. Provisions are reversed, inpart or as a whole, if the reason that originated them ceases to exist.
3.7 Factoring receivables/Factoring fees and commissionsReceivables from factoring are recorded net of provisions and are carried at amortised cost. The level of the provision is based on themanagement’s evaluation of the portfolio including such factors as the volume and character of receivables, past pattern of losses andgeneral economic conditions. The movement in the provision made during the period is charged against the income for the period.Receivables that cannot be recovered are written-off and charged against the provision for loss. These receivables are written-off after all thenecessary legal proceedings have been completed and the amount of loss is finally determined. Recoveries of amounts previously providedfor are treated as the reduction of the charge for provision for factoring receivables for the period.
3.8 Credit finance income/chargesCredit finance income/charges represent imputed finance charges on credit sales and purchases. Such income and charges are recognisedusing the effective yield method over the year of credit sales and purchases, and included under financial income and expenses (Note 39).
3.9 InventoriesCost elements included in inventories are materials, labour and an appropriate amount of factory overheads. The cost of inventories formerchandise stocks is determined by the weighted average method. Inventories are valued at the lower of cost or net realisable value. Netrealisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses (Note 12).
3.10 Investment propertyLand and buildings that are held in the production or supply of goods or services or for administrative purposes or for long-term rental yieldsor for capital appreciation or both rather than for the sale in the ordinary course of business are classified as “investment property”.Investment properties are carried at cost less accumulated depreciation (except for land) (Note 18).
Investment properties are reviewed for possible impairment losses and where the carrying amount of the investment property is greater thanthe estimated recoverable amount, it is written down to its recoverable amount. Recoverable amount of the investment property is the higherof future net cash flows from the utilisation of this investment property or fair value less cost to sell.
3.11 Property, plant and equipment and related depreciationProperty, plant and equipment are carried at cost less accumulated depreciation in each case. Depreciation is provided for property, plantand equipment on a straight-line basis. Land is not depreciated as it is deemed to have an indefinite useful life.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The Group reviewed useful lives of tangible assets as of 1 January 2006, and redetermined the useful lives as follows:
New useful life Previous useful lifeeffective from 1 January 2006 until 31 December 2005
Buildings 10 - 50 years 6 - 50 yearsLand improvements 10 - 50 years 4 - 50 yearsMachinery and equipment 4 - 25 years 3 - 20 yearsFurniture and fixtures 4 - 15 years 3 - 20 yearsMotor vehicles 4 - 15 years 3 - 10 yearsLeasehold improvements Shorter of lease period or useful livesOther tangible assets 4 - 10 years 4 - 10 years
Useful life and the depreciation method are constantly reviewed, and accordingly, parallels are sought between the depreciation method andthe period and the useful life to be derived from the related asset. The Group reviewed the useful lives of tangible assets, and revised theuseful lives of some assets effective from 1 January 2006. As a result of these changes, current period depreciation expenses decreased byYTL160,158 thousand for the year ended 31 December 2006.
Property, plant and equipment are reviewed for impairment losses whenever events or changes in circumstances indicate that the carryingamount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds itsrecoverable amount, which is the higher of asset net selling price or value in use. Recoverable amount of the property, plant and equipment isthe higher of future net cash flows from the utilisation of this property, plant and equipment or fair value less cost to sell.
Repairs and maintenance are charged to the statements of income during the financial period in which they are incurred. The cost of majorrenovations is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originallyassessed standard of performance of the existing asset will flow to the Group. Major renovations are depreciated over the remaining useful lifeof the related assets.
Machinery and equipment are capitalised and amortised when their capacity is fully available for use and their physical situations meet thedetermined production capacities.
Gains or losses on disposals of property, plant and equipment are determined by comparing proceeds with their restated carrying amountsand are included in the related income and expense accounts, as appropriate (Note 19).
3.12 Leases
(1) The Group as the lessee
Finance leasesLeases of property, plant and equipment where the Group substantially assumes all the risks and rewards of ownership are classified asfinance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased property or the presentvalue of the minimum lease payments. Each lease payment is allocated between the liability and finance charges to achieve a constant rateon the finance balance outstanding. The corresponding lease obligations, net of finance charges, are included as finance lease obligations.The interest element of the finance cost is charged to the income statement over the lease period. The property, plant and equipmentacquired under finance leases are depreciated over the useful life of the asset.
Obligations under finance leases are stated in the consolidated financial statements at the acquisition values of the related property, plant andequipment. Future interest payments inherent in the lease contract are charged to the consolidated statement of income over the period of thelease.
Operating leasesLeases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement ona straight-line basis over the period of the lease.
(2) The Group as the lessor
Finance leasesWhen assets are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The differencebetween the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognisedover the term of the lease using the net investment method, which reflects a constant periodic rate of return.
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Operating leasesAssets leased out under operating leases are included in property, plant and equipment in the consolidated balance sheet. They aredepreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment. Rental income (net of anyincentives given to lessees) is recognised on a straight-line basis over the lease term.
3.13 Intangible assets and related amortisationIntangible assets comprise of expenditures to acquire usage rights, brands, development costs, information systems and other identifiedrights. They are initially recognised at acquisition cost and amortised on a straight-line basis over their estimated useful lives. Intangible assetswith indefinite useful lives are not amortised, however are tested for impairment annually. Whenever there is an indication that the intangibleimpaired, the carrying amount of the intangible asset is reduced to its recoverable amount and an impairment loss is recognised as anexpense (Note 20).
3.14 Business combinations and goodwillA business combination is the bringing together of separate entities or businesses into one reporting entity.
Business combinations are accounted for using the purchase method in the scope of IFRS 3.
The cost of a business combination is allocated by recognising the acquiree’s identifiable assets, liabilities and contingent liabilities at the dateof acquisition. Any excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilitiesover the business combination cost is accounted for as goodwill. In business combinations, the acquirer recognises identifiable assets,intangible assets (such as trademarks) and/or contingent liabilities which are not included in the acquiree’s financial statements and whichcan be separated from goodwill, at their fair values in the consolidated financial statements. The goodwill previously recognised in thefinancial statements of the acquiree is not considered as an identifiable asset.
Any excess of the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of thebusiness combination, is accounted for as income in the related period.
The carrying amount of previously recognised negative goodwill is derecognised in the consolidated financial statements in accordance withIFRS 3 with a corresponding adjustment to the opening balance of retained earnings as of 1 January 2005 (Note 17). The carrying value ofgoodwill is reviewed annually at the same time for impairment and the impairment provision, if any, is immediately recognised in theconsolidated statements of income.
Legal mergers arising between companies controlled by the Group are not within the scope of IFRS 3. Consequently, there is no recognitionof any goodwill in these transactions. Similarly, the effects of all transaction between the legally merged enterprises, whether occurring beforeor after the legal merger, are eliminated in the preparation of the consolidated financial statements (Note 32).
Transactions with minority shareholdersThe Group applies a policy of treating transactions with minority interests as transactions with equity owners of the Group. For purchases fromminority interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of thesubsidiary is deducted from equity. Gains or losses on disposals to minority interests are also recorded in equity. For disposals to minorityinterests, differences between any proceeds received and the relevant share of minority interests are also recorded in equity.
3.15 Taxes on incomeTaxes include current period income tax liabilities and deferred tax liabilities. A provision is recognised for the current period tax liability basedon the period results of the Group at the balance sheet date.
Deferred income tax is provided in full, using the liability method, on all temporary differences arising between the tax bases of assets andliabilities and their carrying values in the consolidated financial statements. Currently enacted tax rates are used to determine deferred incometax (Note 14).
The principal temporary differences arise from the restatement of property, plant and equipment and inventory over their tax bases, the portionof allowance for unearned credit finance income and expenses, provision for employment termination benefits, carry forward tax losses andunused investment incentives.
Deferred tax liabilities are recognised for all taxable temporary differences, where deferred tax assets resulting from deductible temporarydifferences are recognised to the extent that it is probable that future taxable profit will be available against which the deductible temporarydifference can be utilised.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
When the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority and there is a legallyenforceable right to set off current tax assets against current tax liabilities, deferred tax assets and deferred tax liabilities are offset accordingly.
3.16 Employment termination benefits Provision of employment termination benefits, as required by Turkish Labour Law, is recognised in these financial statements as they areearned. The total provision represents the present value of future probable obligation of the Group arising from the retirement of its employeesregarding the actuarial projections (Note 23.b).
3.17 Foreign currency transactionsTransactions in foreign currencies have been translated at the exchange rates prevailing at the dates of the transactions. Monetary assets andliabilities denominated in foreign currencies have been translated into YTL at the exchange rates prevailing at the balance sheet dates.Exchange gains or losses arising from settlement and translation of foreign currency items have been included in the consolidated statementof income as net sales in companies operating in the finance sector and as financial income in other sectors.
3.18 Provisions, contingent assets and contingent liabilities Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that anoutflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.
Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected tobe required to settle the obligation. The discount rate reflects current market assessments of the time value of money and the risks specific tothe liability. The discount rate shall be a pre-tax rate and shall not reflect risks for which future cash flow estimates have been adjusted.
Possible assets or obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence ofone or more uncertain future events not wholly within the control of the Group are not included in the consolidated financial statements andtreated as contingent assets or liabilities (Note 31).
Provision for the Pension Fund technical deficits (“Retirement Benefits”)Yap› ve Kredi Bankas› Anonim fiirketi Mensuplar› Yard›m ve Emekli Sand›¤› Vakf› (“Pension Fund”) is a separate legal entity and a foundationrecognised by an official decree, providing all qualified employees of Yap› Kredi Bankas›, a Joint Venture of the Group, with pension and post-retirement benefits.
The Banking Law No.5411 with the temporary article 23 requires the transfer of the pension funds of banks to the Social Security Institution(“SSK”) within three years following the publication date of the article. On 2 November 2005, the President of Turkish Republic applied to the Constitutional Court of Turkey for abrogation of the relevant article. Yap› Kredi Bankas› obtained an actuarial report the Pension Fundprepared registered actuary in accordance with the Decree published by the Council of Ministers in Official Gazette dated 15 December 2006No.26377 for the purpose of determining the principals and procedures to be applied during the transfer of funds. The Group has provided aprovision for the total amount of deficit that is indicated in the actuarial report and recorded the amount in the “Provisions” account (Note 23.band Note 34).
3.19 Impairment of assetsAt each reporting date, the Group evaluates whether there is any indication that an asset other than deferred tax asset, intangible assets withindefinite useful lives and financial asset at fair value may be impaired. When an indication of impairment exists, the Group estimates therecoverable values of such assets. Impairment exists if the carrying value of an asset or a cash generating unit is greater than its recoverableamount which is the higher of value in use or fair value less costs to sell. Value in use is the present value of the future cash flows expected tobe derived from an asset or cash-generating unit. An impairment loss is recognised immediately in the consolidated statement of income. Acash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash flowsfrom other assets or group of assets. An impairment loss recognised in prior periods for an asset is reversed if the subsequent increase in theasset’s recoverable amount is caused by a specific event since the last impairment loss was recognised. Such a reversal amount cannot behigher than the previously recognised impairment and is recognised as income in the consolidated financial statements.
3.20 Revenue recognition
Finance sector
BankingInterest income and expenses are recognised in the income statement on an accrual basis. When loans and advances to customers areconsidered doubtful of collection by management, they are written down to their recoverable amount, and interest income is thereafterrecognised based in the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount.Interest income includes coupons earned on fixed income investment securities and amortised discount and premium on treasury bills andgovernment bonds.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Fee and commission income and expense on banking services are recorded as income or expense at the time of effecting the transactions towhich they relate.
Insurance
Life insurancePremium income represents premiums on policies written during the year, net of cancellations for the life, health and personal accidentbranches.
Non-life insurancePremium income represents premiums on policies written during the year, net of cancellations.
Other sectorsRevenues of the Group companies operating in the energy, automotive, consumer durables, food and retailing and other segments includethe invoiced amounts of goods and services sold. Revenues are recognised on an accrual basis at the time deliveries are made, risks andbenefits related to the product are transferred, income amount is reliably measured and when it is highly probable that the Group will obtainfuture economic benefits. Interest income is realised according to the cut-off basis and accrued income is determined through taking intoconsideration the effective interest rate and the rate effective until maturity date. Net sales represent the invoiced value of goods shipped lesssales returns and commission and excluding sales taxes. When the arrangement effectively constitutes a financing transaction, the fair valueof the consideration is determined by discounting all future receipts using an imputed rate of interest. The difference between the fair valueand the nominal amount of the consideration is recognised on an accrual basis as financial income (Note 39).
3.21 Insurance technical reserves
Life mathematical reserves Mathematical reserves are the difference between the net present values of premiums written in return of the risk covered by the Companyand the liabilities to policyholders. In policies where the accumulation premium is written additionally, life insurance provision is the sum of theremainder of collected premiums and accumulated life insurance provision. Mathematical reserves are computed on the basis of actuarialmortality assumptions as approved by the Turkish Treasury, which are applicable for Turkish Insurance Companies.
Outstanding claims provisionOutstanding claim provision is booked for all claims that are incurred but not paid as of the period-end.
Full provision is made for outstanding claims, including claim settlements, reported at the period-end. Incurred but not reported claims areincluded under claim provisions.
Outstanding claims provision is booked for all claims that are notified after, but occurred before the balance sheet date (IBNR).
Unearned premium reservesUnearned premiums set aside to provide for the period of risk extending beyond the date of the balance sheets, are determined frompremiums written during the period, less reinsurance, on the basis that premiums are written over the period for the life branch.
Liability adequacy testAt each balance sheet date, liability adequacy tests are performed to ensure the adequacy of the contract liabilities. In performing these tests,current best estimates of future cash flows are used. Any deficiency is immediately charged to income statement. The Group has recognisedno additional liability with respect to the portion of its life insurance portfolio which, in the revised tariffs, provides an annual return of the lowerof the guaranteed rate or the annual inflation rate.
3.22 DividendsDividend income is recognized by the Group at the date the right to collect the dividend is realised. Dividend payables are recognised as aresult of profit distribution in the period they are declared.
3.23 Research and development costsResearch and development costs are recognised and expensed in the statement of income in the period in which they are incurred. Costsincurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when itis probable that the project will be a success considering its commercial and technological feasibility and only if the cost can be measuredreliably (Note 20). Other development expenditures are recognised as an expense as incurred. Development costs previously recognised asan expense are not recognised as an asset in subsequent periods. Development costs that have been capitalised are amortised from thecommencement of the commercial production of the product on a straight-line basis over five years.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
3.24 Warranties Warranty expenses are recorded as a result of repair and maintenance expenses for products produced and sold, authorised services’ labourand material costs for products under the scope of the warranty terms without any charge to the customers, initial maintenance costs andestimated costs based on statistical information for possible future warranty services and returns of products with respect to the products soldduring the period.
3.25 Government grantsTurkish Government investment grants in the form of Resource Utilisation Support Premium ("RUSP") are accounted for on an accrual basisfor estimated amounts expected to be realised under grant claims filed by the Group. These grants are accounted for as deferred income inthe consolidated balance sheet and amortised over the depreciation period of the relevant assets on a straight-line basis (Note 30).
3.26 Borrowing costsBorrowings are recognised initially at the proceeds received, net of transaction costs incurred. Borrowings are subsequently stated atamortised cost using the effective yield method; any difference between proceeds, net of transaction costs, and the redemption value isrecognised in the income statement over the period of the borrowings. Borrowing costs are charged to the income statement when they areincurred. However, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset arecapitalised as part of the cost of that asset in the period in which the asset is prepared for its intended use or sale, in accordance with theallowed alternative treatment in IAS 23 “Borrowing Costs”.
3.27 Accounting for derivative financial instruments, embedded derivatives and hedging activitiesDerivative financial instruments are initially recognised in the consolidated balance sheet at cost and subsequently are re-measured at theirfair value. The derivative instruments of the Group mainly consist of foreign exchange forward contracts and currency swap instruments.These derivative transactions, even though providing effective economic hedges under the Group risk management position, do not qualify forhedge accounting under the specific rules in IAS 39, “Financial Instruments: Recognition and Measurement”, and are therefore treated asderivatives held for trading.
In addition, on the date a derivative contract is entered into, the Group designates certain derivatives as either (1) a hedge of the fair value ofa recognised asset or liability (“fair value hedge”), or (2) a hedge of a forecasted transaction or of a firm commitment (“cash flow hedge”).
Changes in the fair value of derivatives that are designated as being and qualify as cash flow hedges and are highly effective, are recognisedin equity as “cumulative loss on hedging”. Where the forecasted transaction or firm commitment results in the recognition of an asset or of aliability, the gains and losses previously booked under equity are transferred from equity and included in the initial measurement of the cost ofthe asset or liability. Otherwise, amounts booked under equity are transferred to the consolidated statement of income and classified asrevenue or expense in period in which the hedged firm commitment or forecasted transaction affects the consolidated statement of income.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting under IAS 39, anycumulative gain or loss existing in equity at that time remains in equity and is recognised when the committed or forecasted transactionultimately is recognised in the statement of income. However, if a committed or forecasted transaction is no longer expected to occur, thecumulative gain or loss that was reported in equity is immediately transferred to the consolidated statement of income.
3.28 Financial risk managementThe Group’s activities expose it to a variety of financial risks, including the effects of changes in debt and equity market prices, foreigncurrency exchange rates and interest rates. The Group’s overall risk management programme focuses on the unpredictability of financialmarkets and seeks to minimise potential adverse effects on the financial performance of the Group.
Risk management is carried out by individual Subsidiaries and Joint Ventures under policies, which are approved by their own Board ofDirectors.
Interest rate riskThe Group is exposed to interest rate risk through the impact of rate changes on interest bearing financial instruments. These exposures aremanaged by using natural hedges that arise from offsetting interest rate sensitive assets and liabilities.
Funding risk The ability to fund the existing and prospective debt requirements is managed by maintaining the availability of adequate committed fundinglines from high quality lenders.
Credit risk
Advances and loans given to customers Holding financial instruments can be defined as carrying in the likelihood that the counterparty cannot meet the obligations of the agreement.These risks are monitored by credit ratings and by limiting the aggregate risk to any individual counterparty. It is expected to diversify this riskthrough funding many companies operating in different sectors.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Trade receivablesConcentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of customers who are nationallyand internationally dispersed and have a variety of end markets in which they sell. The Group’s historical experience in collection of accountreceivable falls within the recorded allowances. Due to these factors, management believes that no additional credit risk beyond amountsprovided for collection losses is inherent in the Group’s trade receivables.
Foreign currency risk The Group is exposed to foreign currency risk through the impact of rate changes on the translation of foreign currency assets and liabilities tolocal currency. These risks are monitored by management and limited by analysis of the foreign currency position through obtaining positionswithin the approved limits.
Fair value of financial instrumentsFair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in aforced sale or liquidation, and is best evidenced by a quoted market price, if one exists.
The estimated fair values of financial instruments have been determined by the Group, using available market information and appropriatevaluation methodologies. However, judgement is necessarily required to interpret market data to estimate the fair value. Accordingly, theestimates presented herein are not necessarily indicative of the amounts the Group could realise in a current market exchange.
The following methods and assumptions are used in the estimation of the fair value of the financial instruments for which it is practicable toestimate fair value:
Financial assetsThe fair values of balances denominated in foreign currencies, which are translated at period-end exchange rates, are considered toapproximate carrying value.
The fair values of certain financial assets carried at cost, including cash and cash equivalents and debt securities are considered toapproximate their respective carrying values due to their short-term nature and negligible credit losses.
The fair values of marketable securities are determined according to the methods explained in Note 3.3.
Financial liabilitiesThe fair values of customer deposits, funds borrowed and other monetary liabilities are considered to approximate their respective carryingvalues due to their short-term nature. Long-term borrowings, which are denominated in foreign currencies, are translated at period-endexchange rates and accordingly their fair values approximate their carrying values.
Assets at fair value through profit or loss, derivative financial instruments have been presented at their fair values.
3.29 Earnings per shareEarnings per share disclosed in the consolidated statement of income are determined by dividing net income by the weighted averagenumber of shares outstanding during the period concerned.
In Turkey, companies can increase their share capital through a pro-rata distribution of shares (“bonus shares”) to existing shareholders fromretained earnings and inflation adjustment to shareholders’ equity (Note 25). For the purpose of earnings per share computations, theweighted average number of shares in existence during the period has been adjusted in respect of bonus share issues without acorresponding change in resources, by giving them retroactive effect for the period in which they were issued and each earlier period as if theevent had occurred at the beginning of the earliest period reported.
3.30 Significant accounting estimates and decisionsPreparation of consolidated financial statements requires the usage of estimations and assumptions which may affect the reported amountsof assets and liabilities as of the balance sheet date, disclosure of contingent assets and liabilities and reported amounts of income andexpenses during financial period. Although the estimations and assumptions are based on the best estimates of the management’s existingincidents and operations, they may differ from the actual results.
The accounting estimates regarding the useful lives of the property, plant and equipment have been revised in the current period which isexplained in detail in Note 3.11.
3.31 Subsequent eventsThe Group adjusts the amounts recognised in its financial statements to reflect the adjusting events after the balance sheet date. If non-adjusting events after the balance sheet date have material influence on the economic decisions of users of the financial statements, they aredisclosed in the notes to the consolidated financial statements.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
3.32 Cash flowCash flows during the period are classified and reported by operating, investing and financing activities in the cash flow statements. Cashflows from operating activities represent the cash flows generated from the Group’s activities.
Cash flows related to investing activities represent the cash flows that are used in or provided from the investing activities of the Group (fixedinvestments and financial investments).
Cash flows arising from financing activities represent the cash proceeds from the financing activities of the Group and the repayments ofthese funds.
3.33 Segment reportingA reportable segment is a business segment or a geographical segment identified based on the foregoing definitions for which segmentinformation is required to be disclosed. A business segment is a distinguishable component of an enterprise that is engaged in providing anindividual product or service or a group of related products or services and that is subject to risks and returns that are different from those ofother business segments. A geographical segment is a distinguishable component of an enterprise that is engaged in providing products orservices within a particular economic environment and that is subject to risks and returns that are different from those of componentsoperating in other economic environments.
A business segment or geographical segment should be identified as a reportable segment if a majority of its revenue is earned from sales toexternal customers and if its revenue from sales to external customers and from transactions with other segments is 10% or more of the totalrevenue, external and internal, of all segments; or its segment result, whether profit or loss, is 10% or more of the combined result of allsegments in profit or the combined result of all segments in loss, whichever is the greater in absolute amount; or its assets are 10% or moreof the total assets of all segments.
The Group has chosen business segments as the Group’s primary segment reporting format based on the risks and returns on productsproduced and services rendered reflecting the primary source of the enterprise’s risks and returns. Geographical segments have not beendisclosed in these consolidated financial statements as the secondary segment reporting format on the grounds of materiality as theoperations of the Group in geographical areas other than Turkey are not reportable geographical segments individually when compared withthe overall consolidated financial statements (Note 33).
NOTE 4 - CASH AND CASH EQUIVALENTS
a) Cash and due from banks
2006 2005Banking Other Total Banking Other Total
Cash in hand 231,454 246,995 478,449 205,316 170,548 375,864Cheques received 1,582 172,237 173,819 551 120,326 120,877Balances with the central banks
At 31 December 2006, total time deposits with maturities over one year amount to YTL43,746 thousand (31 December 2005: YTL25,271thousand). Reverse repurchase agreements are all short-term with periods of less than three months.
At 31 December 2006, total blocked deposits amount to YTL240,924 thousand (31 December 2005: YTL149,505 thousand).
Balances with the central banks other than reserve requirements represent funds deposited with the central banks of Turkey, the Netherlands,Azerbaijan, Russia and Germany in an interest free demand account in the central banks for liquidity requirements.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Reserve requirements of the CBRT represent the minimum deposits, as required by the Turkish Banking Law, calculated on the basis ofcustomer deposits (foreign or domestic) taken at the rates determined by the CBRT which are between 6.0%-11.0%, respectively (31December 2005: 6.0%-11.0%). These funds cannot be used for financing the daily operations of the banks.
Reserve requirements of the De Nederlandsche Bank represent reserve deposits equivalent to 2.0% (31 December 2005: 2.0%) of theovernight deposits, deposits with agreed maturity or deposits redeemable at notice up to 2 years, debt securities issued with agreed maturityup to 2 years and money market paper.
Reserve requirements of the Central Bank of Azerbaijan represent reserve deposits equivalent to 10.0% (31 December 2005: 10.0%) of thestatutory balances of customer accounts, due to banks and other funds borrowed.
Reserve requirements of the Central Bank of the Russian Federation represent reserve deposits equivalent to 3.5% (31 December 2005: 3.5%)of the Russian Ruble denominated saving deposits and all commercial deposits and 2.5% (31 December 2005: 2.0%) of the outside funds.
Reserve requirements of the Deutsche Bundesbank represent reserve deposits equivalent to 2.0% (31 December 2005: 2.0%) of all financialliabilities except for borrowings and bank deposits.
2006 2005Central Bank of the Republic of Turkey 1,537,214 708,261De Nederlandsche Bank 19,848 9,009Central Bank of Azerbaijan 2,119 1,984Deutsche Bundesbank 600 1,482Central Bank of the Russian Federation 1,676 1,175
1,561,457 721,911
The average effective annual interest rates (%) of cash and cash equivalents and reserve deposits with the central bank as of 31 Decemberare as follows :
Assets at fair value through profit or loss 475,471 575,157Available-for-sale investments 421,158 397,620Held-to-maturity investments 2,963,719 897,421
3,860,348 1,870,198
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
At 31 December 2006, short-term government bonds and investment funds amounting to YTL81,927 thousand (31 December 2005:YTL186,116 thousand), YTL15,700 thousand (31 December 2005: YTL16,833 thousand) respectively represent investments that theSubsidiaries and Joint Venture Companies in the insurance sector are required to deposit in a blocked account in favour of the TurkishTreasury, based on year-end net premiums written.
At 31 December 2006, there is no treasury bills (31 December 2005: YTL1,662 thousand) that the Subsidiaries and Joint Venture Companiesin the insurance sector are required to deposit in a blocked account in favour of the Turkish Treasury, based on written year-end netpremiums.
At 31 December 2006, YTL2,827 thousand of short-term financial assets at fair value through profit or loss are pledged to the CBRT for legalrequirements, to Interbank Money Market, to ISE and ‹fl Borsa for marketable securities and money market operations as a guarantee (31December 2005: YTL11,878 thousand).
The list of equity securities and the shareholding rates as of 31 December are as follows:
2006 2005Thousand YTL (%) Thousand YTL (%)
Listed‹zocam (*) 10,393 2.69 - -
10,393 - -
(*) The control of the Group over ‹zocam, a Subsidiary of the Group, ceased with the sale of shares on 29 November 2006 and ‹zocam wasexcluded from the scope of consolidation as of the date on which the subsidiary control ceased. The shares, whose transfer transactions havenot been finalised yet, although their voting and the dividend rights have been transferred, have been valued considering the sales price.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Analysis of assets at fair value through profit or loss based on the remaining period to the contractual maturity date as of 31 December are asfollows:
At 31 December 2006, short-term government bonds and Eurobonds amounting to YTL257,305 thousand (31 December 2005: YTL8,745thousand) and YTL8,700 thousand (31 December 2005: None) respectively represent investments that the Subsidiaries in the insurance sectorare required to deposit in a blocked account in favour of the Treasury and Foreign Trade Department of the Republic of Turkey, based on thewritten year-end net premiums.
At 31 December 2006, YTL8,599 thousand (31 December 2005: YTL27,059 thousand) of short-term financial assets held as available-for-saleare pledged to the CBRT for legal requirements and to ISE for marketable securities and money market operations as a guarantee.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The list of equity securities and the shareholding rates as of 31 December are as follows:
(*) Based on the “A-Tel Option Agreement” signed between Çukurova Holding A.fi. (“Çukurova Holding”) and Yap› Kredi Bankas›, a JointVenture of the Group, on 28 September 2005, the transfer of A-Tel shares worth USD75,000,000 to Turkcell ‹letiflim was realised on 9 August2006.(**) Based on the “Digitürk, Superonline and Fintur Purchase and Sale Agreement” signed between Yap› Kredi Bankas› and Çukurova Holdingon 28 September 2005, Fintur and Digitürk shares worth EUR21,100,000 and YTL53,020 thousand, respectively, were sold to ÇukurovaHolding on 5 January 2006. Following the extensions at 27 January 2006 and thereafter for the procedures that has to be completed related totransfer of Superonline shares, the deadline has been extended for another additional three months on 26 February 2007 (Note 34).
Analysis of available-for-sale investments based on the remaining period to the contractual maturity date as of 31 December are as follows:
2006 2005Banking Other Total Banking Other Total
Demand 45,250 82 45,332 50,900 5,042 55,9420-90 days 17,878 50,029 67,907 6,625 10,487 17,11291-365 days 16,666 236,684 253,350 43,358 42,148 85,506Over 1 year - 47,632 47,632 - 45,058 45,058
At 31 December 2006, there are no Eurobonds that the Subsidiaries and Joint Venture Companies in the insurance sector are required todeposit in a blocked account in favour of the Turkish Treasury, based on written year-end net premiums (31 December 2005: YTL731thousand).
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
At 31 December 2006, YTL168,267 thousand of short term held-to-maturity investment securities are pledged to the CBRT and Interbankmoney market for legal requirements, UniCredit S.p.A. due to the loan agreements and Istanbul Menkul K›ymetler Borsas› Takas ve SaklamaBankas› A.fi. for stock exchange and money market operations as a guarantee (31 December 2005: YTL122,478 thousand).
Analysis of held-to-maturity investments based on the remaining period to the as of contractual maturity date as of 31 December are asfollows:
2006 2005Banking Other Total Banking Other Total
0-90 days 1,809,008 13,042 1,822,050 266,067 - 266,06791-365 days 1,126,961 14,708 1,141,669 631,354 - 631,354
2,935,969 27,750 2,963,719 897,421 - 897,421
NOTE 6 - FINANCIAL LIABILITIES
a) Borrowings
2006 2005Short-term bank borrowingsShort-term bank borrowings 5,827,374 3,691,007Short-term portion of long-term bank borrowings 1,426,119 1,056,811
Total short-term bank borrowings 7,253,493 4,747,818
Long-term bank borrowingsLong-term bank borrowings 10,429,378 2,630,787
Total bank borrowings 17,682,871 7,378,605
At 31 December 2006, the details of the loans in order to finance the Tüprafl share acquisition amount and to re-finance the Group’s existingloans is given below (Note 31.b):
• a loan from the consortium composed of JP Morgan Europe Limited, Calyon Corporate and Investment Bank, JP Morgan Plc., WestLB AGLondon Branch and JP Morgan Chase Bank NA at an amount of USD1,000,000,000 with a maturity of three years which bears an interest rateof Libor+1.0;• a loan from the consortium composed of JP Morgan Europe Limited and JP Morgan Chase Bank NA in an amount of USD950,000,000 witha maturity of seven years which bears an interest rate of Libor+1.9;• a loan from the consortium composed of JP Morgan Europe Limited, JP Morgan Plc. and JP Morgan Chase Bank NA in an amount ofUSD550,000,000 with a maturity of two years and a one year option period which bears an interest rate of Libor+1.2;• a loan from the consortium composed of Akbank T.A.fi. Malta Branch, Türkiye Garanti Bankas› A.fi. Luxembourg Branch, Türkiye ‹fl Bankas›A.fi. Bahrain Offshore Branch, Standard Bank Plc, Türkiye Vak›flar Bankas› T.A.O. Bahrain Offshore Branch, Türkiye Halk Bankas› A.fi. in anamount of USD1,800,000,000 with a maturity of 10 years which bears an interest rate of Libor+2.3 until the beginning of 2013 and an interestrate of Libor+2.8 afterwards, were obtained.
The Group has loans from the International Finance Corporation (“IFC”) in the amount of YTL478,802 thousand (USD86,076,607,EUR193,255,339) and from Netherlands Development Finance Company (“FMO”) in the amount of YTL24,687 thousand (EUR13,333,333)which are being used for production and modernisation, and research and development, as well as acquisitions and increased workingcapital requirements (31 December 2005: YTL596,637 thousand and YTL31,750 thousand).
At 31 December 2006, Yap› Kredi Bankas›, a Joint Venture of the Group, obtained a syndication loan comprising of YTL447,753 thousand(USD325,000,000) with an interest rate of Libor+0.3, which is provided by 24 international financial institutions with Sumitomo Mitsui BankingCorporation acting as an agent (31 December 2005: USD332,573 thousand which bears an interest rate of Libor+0.4).
At 31 December 2006, Yap› Kredi Bankas› obtained a syndication loan comprising of YTL482,195 thousand (USD350,000,000) with an interestrate of Libor+0.4, provided by 16 international banks with The Bank of Tokyo Mitsubishi UFJ Ltd. acting as an agent.
As of 31 December 2006, Yap› Kredi Bankas› has subordinated loans amounting to YTL317,118 thousand (EUR175,000,000) and YTL453,025thousand (EUR250,000,000) respectively with a 10 year maturity and a repayment option at the end of the first five years with interest rates ofEuribor+2.3% and Euribor+2.0%. The loans have been obtained from Goldman Sachs International Bank and Merrill Lynch CapitalCorporation with Unicredito Italiano S.p.A. as guarantor.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The average effective annual interest rates (%) for the bank borrowings as of 31 December are as follows:
Analysis of customer deposits in terms of periods remaining to contractual repricing dates as of 31 December are as follows:
2006 20050-90 days 12,538,210 9,321,96891-365 days 740,070 989,8951-5 years 164,734 200,725Over 5 years 5,700 5,428Non-interest bearing 2,617,360 3,002,083
16,066,074 13,520,099
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 7 - TRADE RECEIVABLES AND PAYABLES/LOANS AND ADVANCES TO CUSTOMERS
a) Trade receivables and payables
Short-term trade receivables2006 2005
Trade receivables - net of unearned credit finance income 3,910,872 2,466,713Notes receivables - net of unearned credit finance income 1,568,360 1,324,284Cheques received 339,372 340,349Advances given 777 2,978Deposits and guarantees given 3,218 933Other trade receivables 858 505
Short-term trade receivables 5,823,457 4,135,762
Less: Provision for doubtful receivables (138,483) (97,824)
Carrying amounts of trade receivables and related provision for doubtful receivables are assumed to approximate to their fair values.
Movement of provision for doubtful receivables as of 31 December is as follows:
2006 2005Beginning of the year 97,824 61,112
Increase/(decrease) during the period (net) 59,035 55,361Collections (18,376) (18,649)
End of the year 138,483 97,824
Long-term trade receivablesTrade receivables - net of unearned credit finance income 12,722 23,237Notes receivables - net of unearned credit finance income 52,594 38,642Deposits and guarantees given 2,787 1,443
Long-term trade receivables 68,103 63,322
Less: Provision for doubtful receivables - (105)
Long-term trade receivables (net) 68,103 63,217
Short-term trade payablesTrade payables - net of unearned credit finance charges 4,433,879 2,565,349Notes payables - net of unearned credit finance charges 151,811 89,237Deposits and guarantees received 5,278 2,805Other trade payables 154,760 5,475
Long-term trade payablesTrade payables - net of unearned credit finance charges 45,717 13,933Deposits and guarantees received 7,895 9,713
Long-term trade payables (net) 53,612 23,646
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
b) Loans and advances to customers
2006 2005Over Over
Up to 1 year 1 year Total Up to 1 year 1 year TotalCommercial and industrial loans 2,814,634 2,708,192 5,522,826 2,476,681 2,284,956 4,761,637Credit card receivables 2,212,729 412,846 2,625,575 1,947,225 102,542 2,049,767Consumer loans 644,246 1,450,243 2,094,489 551,093 1,115,086 1,666,179Export loans 1,057,030 - 1,057,030 1,031,683 - 1,031,683Factoring receivables 314,016 - 314,016 169,251 - 169,251Investment loans - 440,346 440,346 - 257,195 257,195Other 2,522 - 2,522 25,688 - 25,688
Net loans and advances to customers 7,370,778 5,011,627 12,382,405 6,462,181 3,759,779 10,221,960
According to the Çukurova Group Loans - Financial Restructuring Modification Agreement (“Modification Agreement”) signed between Yap›Kredi Bankas›, a Joint Venture of the Group, and Çukurova Group companies on 28 September 2005, the risk balance of Çukurova Groupamounts to USD376,472,918 as of 31 December 2006, of which maturity of the last payment is on 30 September 2015. The related riskbalance is classified under “commercial and industrial loans” in the table above. According to the pledge agreement signed on 28 September2005, the Group has a pledge on 3.34% of Turkcell ‹letiflim shares in relation to the Çukurova Group loans repayment liability. The marketvalue of these collaterals amount to approximately YTL495,502 thousand at 31 December 2006.
The average effective annual interest rates (%) for loans and advances to customers as of 31 December are as follows:
Analysis of loans and advances to customers in terms of periods remaining to contractual repricing dates as of 31 December is as follows:
2006 20050-90 days 4,955,260 5,168,71191-365 days 4,453,173 3,065,2561-5 years 1,930,222 1,357,935Over 5 years 851,217 461,447Non-interest bearing 192,533 168,611
12,382,405 10,221,960
Fair value of loans and advances to customers is YTL12,489,715 thousand as of 31 December 2006 (31 December 2005: YTL10,285,355thousand).
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Movement in provision for loan losses is as follows:
2006 2005Beginning of the year 829,095 218,507
Provisions for loan losses during the period 165,317 115,096Recoveries of amounts previously provided (25,686) (46,003)Write-off during the period as uncollectible (21,815) (32,561)Acquisitions - 574,056
End of the year 946,911 829,095
At 31 December 2006, YTL815,524 thousand of consumer loans have been given by consumer finance companies. (31 December 2005:YTL690,368 thousand) The collaterals obtained for these loans amount to YTL737,467 thousand (31 December 2005: YTL645,911 thousand).The allowance for losses on consumer loans given by consumer finance companies included in the provision for loan losses amounts toYTL11,390 thousand at 31 December 2006 (31 December 2005: YTL7,967 thousand).
The loans and advances to customers including factoring receivables are shown below:
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Movements in the provision for lease receivables are as follows:
Beginning of the year 29,461 15,477
Provisions for lease receivables during the year 12,319 4,135Recoveries of amounts previously provided (7,482) (4,991)Write-off during the year as uncollectible (1,302) (587)Acquisitions - 15,427
End of the year 32,996 29,461
Net investment in finance leases is shown below:
Gross investment in finance leases 921,509 548,267Less: Unearned finance income (168,568) (89,250)
Net investment in finance leases (net) 752,941 459,017
Lease receivables consist of rentals over the terms of leases. The rentals according to maturity are as follows:
2006 - 316,0802007 406,891 131,7342008 265,765 63,2132009 and over 248,853 37,240
The redemption schedule of long-term lease payables is as follows:
2006 20052007 - 1,8232008 159 222009 301 1782010 and over 410 -
870 2,023
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 9 - DUE FROM/TO RELATED PARTIES
Due from and due to related parties as of 31 December are given below:
(i) Related party balances
a) Due from related parties 2006 2005Grundig Multimedia B.V. 100,285 100,471Opet Petrolcülük A.fi. 88,906 3,938Ram Sigorta Arac›l›k Hizmetleri A.fi. 18,890 17,833Ford Otomotiv Sanayi A.fi. 9,855 18,113Tofafl Türk Otomobil Fabrikas› A.fi. 7,358 4,420Tan› Pazarlama ve ‹letiflim Hizmetleri A.fi. 4,104 112Sanal Merkez Ticaret A.fi. 3,612 3,188Arçelik LG Klima San. ve Tic. A.fi. 3,047 2,045Koçtafl Yap› Marketleri Sanayi ve Ticaret A.fi. 3,014 1,341Tianjin Demrad International Trading Co. Ltd. 1,953 1,436Opet Trade BV 1,845 -Vehbi Koç Vakf› 1,349 394Kofisa S.A. (*) - 5,361Other 21,636 15,798
265,854 174,450
Due from personnel 8,829 5,854274,683 180,304
(*) The controlling rights of the Group over Kofisa S.A. ceased due to the share transfers in 2006, therefore the aforementioned company isnot considered a related party as of 31 December 2006.
b) Due to related parties 2006 2005Ford Otomotiv Sanayi A.fi. 121,969 67,134Ram Pacific Ltd. (*) 87,299 -Arçelik LG Klima San. ve Tic. A.fi. 37,054 39,713Tofafl Türk Otomobil Fabrikas› A.fi. 30,693 32,646Türk Traktör ve Ziraat Makinalar› A.fi. 20,652 29,970Ram Sigorta Arac›l›k Hizmetleri A.fi. 10,600 8,550Opet Petrolcülük A.fi. 5,880 3,064Chung Mei Industries Limited 5,148 8,026Ark ‹nflaat A.fi. 2,437 6,096Tan› Pazarlama ve ‹letiflim Hizmetleri A.fi. 1,628 1,417Harranova Besi ve Tar›m Ürünleri A.fi. 1,308 2,387Eltek Elektrik ‹thalat ‹hracat ve Toptan Ticaret A.fi. 1,234 5,119Kofisa S.A. (**) - 97,057Other 7,599 8,758
333,501 309,937
Due to personnel 86,508 72,867420,009 382,804
(*) Due to the share transfer in 2006, the control of the Group over Ram Pacific ceased, therefore the aforementioned company was excludedfrom the scope of consolidation and assessed as a related party.(**) Due to the share transfer in 2006, the control of the Group over joint venture (Kofisa) ceased, therefore the aforementioned company isnot considered a related party as of 31 December 2006.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
ii) Transactions with related parties
a) Sales of goods and services to related parties 2006 2005Opet Petrolcülük A.fi. 783,931 18,571Grundig Multimedia B.V. 196,070 155,327Ford Otomotiv Sanayi A.fi. 80,345 98,199Tofafl Türk Otomobil Fabrikas› A.fi. 52,217 35,683Türk Traktör ve Ziraat Makinalar› A.fi. 22,587 17,863Arçelik LG Klima San. ve Tic. A.fi. 18,575 15,407Koçtafl Yap› Marketleri Sanayi ve Ticaret A.fi. 17,740 10,116Kofisa S.A. 16,564 23,357Other 95,061 112,710
1,283,090 487,233
b) Purchases of goods and services from related parties 2006 2005Kofisa S.A. 523,799 452,330Ford Otomotiv Sanayi A.fi. 466,861 496,333Tofafl Türk Otomobil Fabrikas› A.fi. 255,859 253,466Arçelik LG Klima San. ve Tic. A.fi. 132,153 97,128Opet Petrolcülük A.fi. 77,362 48,991Türk Traktör ve Ziraat Makinalar› A.fi. 67,159 63,008Ram Sigorta Arac›l›k Hizmetleri A.fi. 65,929 55,898Harranova Besi ve Tar›m Ürünleri A.fi. 17,725 8,295Eltek Elektrik ‹thalat ‹hracat ve Toptan Ticaret A.fi. 19,536 16,670Other 84,626 77,287
1,711,009 1,569,406
c) Benefits provided to the key managementAt 31 December 2006, total benefits provided to key management personnel by Koç Holding amount to YTL9,484 thousand (31 December2005: YTL8,908 thousand).
NOTE 10 - OTHER RECEIVABLES AND PAYABLES
2006 2005Other receivablesReceivable from recoverable claims 14,747 11,728
14,747 11,728
Other current financial liabilitiesTaxes and duties payable 1,089,623 256,471Social security premiums payable 30,832 26,352Rescheduled taxes payable 13,065 15,460Pension Fund payables 3,638 6,710
1,137,158 304,993
Other non-current financial liabilitiesRescheduled taxes payable 10,869 10,676
10,869 10,676
NOTE 11 - BIOLOGICAL ASSETSNone (31 December 2005: None).
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 12 - INVENTORIES
2006 2005Raw materials and supplies 1,747,594 693,758Work in progress 244,134 64,470Finished goods 1,082,925 345,734Merchandises 1,231,087 865,300Order advances given 274,483 178,625Other inventories 50,733 34,016Total inventories 4,630,956 2,181,903
NOTE 13 - CONSTRUCTION CONTRACT RECEIVABLES AND PROGRESS BILLINGS
Koç Holding, its Subsidiaries and Joint Ventures recognise deferred tax assets and liabilities based upon temporary differences arisingbetween their financial statements prepared in accordance with CMB Accounting Standards and their statutory tax financial statements. Thesetemporary differences usually result in the recognition of revenue and expenses in different reporting periods for CMB Accounting Standardsand tax purposes.
Tax rates used for deferred tax assets and liabilities calculated on temporary differences that are expected to be realised or settled based onthe taxable income in coming periods under the liability method is 20% or 30% for the companies operating in Turkey (Note 41).
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Deferred taxes calculated by using the principal tax rates of the tax authorities of each country that the Group operates in as of 31 December2006, are as follows:
Country Tax rate (%) Country Tax rate (%)Germany 39.6 Ireland 12.5Australia 30.0 Spain 35.0Austria 25.0 Switzerland 25.0Azerbaijan 22.0 Italy 37.3Bulgaria 15.0 Kazakhstan 30.0Czech Republic 24.0 Hungary 16.0China 33.0 Macedonia 15.0Denmark 30.0 Norway 28.0Finland 26.0 Poland 19.0France 33.3 Portugal 27.5Holland 25.5 Romania 16.0England 30.0 Russia 20.0
The breakdown of cumulative temporary differences and deferred tax assets/liabilities provided as of 31 December using principal tax rates,are as follows:
2006 2005 2006 2005Property, plant and equipment and intangible assets 5,541,298 1,528,645 (835,592) (450,692)Unused investment incentive (Note 30) (684,113) (1,708,493) 69,884 176,202Tax losses carried forward (593,784) (527,566) 136,813 159,294Impairment of real estate and assets held for resale (503,345) (368,581) 68,532 110,574Provision for loan losses (329,537) (274,331) 65,907 82,299Provision for employment termination benefits (Note 23.b) (308,630) (200,172) 62,092 60,052Warranty and assembly reserve (302,756) (200,253) 62,830 59,207Provision for the Pension Fund (Note 23.b) (299,620) (277,810) 59,924 83,343Inventories (129,282) (2,139) 26,970 546Provision for lawsuits (64,543) (19,727) 12,995 5,918Provision for unused vacation (Note 15.c) (45,015) (27,906) 8,947 8,372Impairment of investments (40,065) (297,293) 8,013 89,188Provision for credit card bonus (Note 15.c) (26,721) (26,165) 5,344 7,849Other (net) (17,084) (164,413) 4,984 47,974Deferred tax assets/(liabilities) (net) (242,357) 440,126
In the Subsidiaries’ and Joint Ventures’ financial statements prepared in accordance with CMB Accounting Standards, net deferred tax assetsand liabilities of the related companies are classified under deferred tax assets and liabilities accounts in Koç Holding’s consolidated balancesheet. Temporary differences and deferred tax assets and liabilities presented above, which are prepared on the basis of gross amounts,show the net deferred tax position.
Movements in deferred taxes for the years ended at 31 December can be analysed as follows:
2006 2005Beginning of the year 440,126 (5,213)
Charge for the year (net) (Note 41) (172,000) 56,201Cumulative gain/(loss) on hedging (net) 9,303 -Financial asset fair value reserve gains (net) (571) 1,722Translation differences (net) (3,645) -Acquisitions (Note 32) (521,030) 387,416Disposals from the scope of consolidation (*) 5,460 -
End of the year (242,357) 440,126
(*) The amount is related to the sales of subsidiaries (Döktafl and ‹zocam) and joint venture (Kofisa) in 2006.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 15 - OTHER CURRENT/NON-CURRENT ASSETS AND LIABILITIES
a) Other current assets 2006 2005Value added tax receivable 198,735 94,514Prepaid expenses 192,001 87,537Taxes and funds deductible 101,916 50,877Assets held for sale 93,979 99,465Advances given 59,245 35,414Derivative financial instruments (Note 31.a) 43,264 11,283Payments for credit card settlements 27,337 21,427Income accruals 25,212 14,559Other 141,488 76,883
883,177 491,959
b) Other non-current assets 2006 2005Spare parts and materials 211,854 -Prepaid expenses 135,691 61,073Other 5,346 4,408
352,891 65,481
c) Other current liabilities 2006 2005Credit card payables 804,216 723,586Blocked accounts 213,622 65,266Warranty provision 212,362 155,809Import deposits and transfer orders 186,835 90,718Accrual for costs 170,807 171,565Lawsuit provision 117,048 85,170Deferred income 87,225 77,304Provision for losses related to loan commitments (Note 31.a) 80,288 77,029Provision for the non-core assets option agreement (Note 31.a) 61,844 56,039Premium accruals 57,905 35,452Export commitment provision 46,107 46,636Unused vacation provision (Note 14) 45,015 27,906Assembly provision 42,828 23,525Interbank cheque clearing account 32,172 61,857Derivative financial instruments (Note 31.a) 31,339 21,287Credit card bonus provisions (Note 14) 26,721 26,165Provision for the advertising publication agreement (Note 31.a) 26,037 38,601Sales and customer premiums 20,906 17,825Non-transferred loans 17,633 17,064Other 364,096 202,498
2,645,006 2,021,302
d) Other non-current liabilities 2006 2005Warranty provision 101,122 64,141Revenue share (*) 79,329 -Deposits and guarantees received 37,500 26,916Other 35,741 27,538
253,692 118,595
(*) According to Petroleum Market Law, the financing needs of refinery owners to maintain the National Petroleum Stock (Note 31) aresupplied by the revenue share, which is a surplus added to the sales price, limited to a ceiling of USD 10/ton by the Turkish Republic EnergyMarket Regulatory Authority (“EMRA”). In the case of the importation of petroleum products, the revenue share is to be paid to the refineryowner by the importer. Tüprafl, a Subsidiary of the Group, has been collecting the revenue share over the sales of petroleum products andnon-refinery imports of petroleum products since 1 January 2005, the date the relevant article of the regulation came into effect.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Tüprafl, a Subsidiary of the Group, has been collecting revenue share for LPG sales since 16 September 2005 in addition to the revenue sharecollected for petroleum products, in accordance with the Liquefied Petroleum Gas (“LPG”) Market Regulation.
It has been decided by the National Petroleum Reserves Commission that the investment management of the revenue share collected will beconducted by the General Directorate of Tüprafl, a Subsidiary of the Group, and the collected amount will be invested in overnight reverserepurchase agreements.
NOTE 16 - FINANCIAL ASSETS
2006 2005Assets at fair value through profit or loss 360,068 1,026,581Available-for-sale investments 536,125 395,535Held-to-maturity investments 5,810,454 3,677,831
At 31 December 2006, long-term government bonds amounting to YTL47,604 thousand (31 December 2005: YTL347,957 thousand),represent investments that the Subsidiaries and Joint Venture Companies in the insurance sector are required to deposit in a blocked accountin favour of the Turkish Treasury, based on year-end net premiums written. At 31 December 2006, there are no long-term Eurobonds (31December 2005: YTL24,931 thousand).
At 31 December 2006, YTL4,819 thousand (31 December 2005: YTL111,575 thousand) of long-term financial assets at fair value through profitor loss are pledged to the CBRT for legal requirements as a guarantee.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
At 31 December 2006, government bonds and Eurobonds amounting to YTL230,848 thousand (31 December 2005: YTL8,547 thousand) andYTL163,552 thousand (31 December 2005: YTL134,124 thousand), respectively represent investments that the Subsidiaries and Joint VentureCompanies in the insurance sector are required to deposit in a blocked account in favour of the Turkish Treasury, based on year-end netpremiums written.
At 31 December 2006, YTL10,062 thousand of long-term available-for-sale investments are pledged to the CBRT for legal requirements as aguarantee (31 December 2005: YTL1,578 thousand).
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The list of available-for-sale equity securities and shareholding rates at 31 December are as follows:
2006 2005YTL’000 (%) YTL’000 (%)
ListedÇeflme Alt›nyunus Turizm Tes. A.fi. 24,431 30.00 25,486 30.00Yap› Kredi Koray Gayrimenkul Yat›r›m Ortakl›¤› A.fi. 15,087 15.22 14,028 15.22Goodyear Tyre and Rubber Company 14,268 0.27 11,278 0.27Mastercard Incorporated 7,532 0.06 1 0.10Karsan Otomotiv Sanayi ve Ticaret A.fi. 711 0.95 1,101 0.95Yat›r›m Finansman A.fi. 7 0.07 13 0.07
62,036 51,907
UnlistedBanque de Commerce et de Placements S.A. 20,676 15.34 17,959 15.34Enternasyonel Turizm Yat›r›m A.fi. 17,441 50.00 6,139 7.40Akdeniz Marmara Turizm ve Tic. A.fi. 13,687 50.00 13,687 50.00Harranova Besi ve Tar›m Ürünleri A.fi. 10,766 99.67 8,196 33.00Koç Statoil Gaz A.fi. 9,065 50.00 5,944 49.00Bay›nd›rl›k ‹flleri A.fi. 8,602 49.59 8,602 49.59Tan› Pazarlama ve ‹letiflim Hizmetleri A.fi. 6,701 99.00 9,311 99.00British American Tobacco Export BV 6,469 5.00 6,469 5.00Takas ve Saklama Bankas› A.fi. 6,180 2.43 6,122 2.43Koç Bilgi Grubu ‹letiflim ve Teknoloji fiirketleri A.fi. 5,180 92.23 2,180 90.13Promena Elektronik Ticaret A.fi. 5,000 50.00 11 1.00Ram Pasific Ltd. (*) 3,256 25.00 - -Sanal Merkez Ticaret A.fi. 2,273 99.99 2,273 99.99Other 20,130 19,231 -
135,426 106,124
197,462 158,031
(*) Due to the share transfers in 2006, the control over subsidiary (Ram Pasific), a subsidiary of the Group, has ceased and the subsidiary hasbeen excluded from the scope of consolidation from the date that the control ended.
Available-for-sale investments (instrument that is not traded in an active market), in which Koç Holding, its Subsidiaries and Joint Ventures,together with Koç Family members, have attributable interests of 20% or more, which are either immaterial, or where a significant influence isnot exercised by Koç Holding, are carried at cost less provision for diminution in value. These companies have neither been accounted forusing the equity method nor consolidated line-by-line due to the insignificance of their combined impact on the net worth, financial positionand results of Koç Holding.
Available-for-sale investments, in which Koç Holding, its Subsidiaries and Joint Ventures, together with Koç Family members, have attributableinterests of 20% or more, which are either immaterial, or where a significant influence is not exercised by Koç Holding, are carried at cost lessprovision for diminution in value. These companies have neither been accounted for using the equity method nor consolidated line-by-line dueto the insignificance of their combined impact on the net worth, financial position and results of Koç Holding.
Provision for impairment of unlisted financial assets amounts to YTL72,825 thousand at 31 December 2006 (31 December 2005: YTL92,967thousand).
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
At 31 December 2006, Eurobonds amounting to YTL24,201 thousand (31 December 2005: YTL22,959 thousand) represent investments thatthe Subsidiaries and Joint Venture Companies in the insurance sector are required to deposit in a blocked account in favour of the TurkishTreasury, based on written year-end net premiums.
At 31 December 2006, YTL592,973 thousand (31 December 2005: YTL638,489 thousand) of long term held-to-maturity investment securitiesare pledged to the CBRT for legal requirements, Lehman Brothers International, Bayerische Hypo-Und Vereins Bank AG., DZ Bank andUniCredit S.p.A. due to loan agreements and Istanbul Menkul K›ymetler Borsas› Takas ve Saklama Bankas› A.fi. for stock exchange andmoney market operations as a guarantee.
2006 2005Banking Other Total Banking Other Total
1-5 years 3,359,931 261,174 3,621,105 2,319,098 226,297 2,545,395Over 5 years 2,186,334 3,015 2,189,349 1,132,436 - 1,132,436
Total net book value 1,051,328 2,749,525 - 3,800,853
(*) Additions to goodwill arose from the acquisitions of Tüprafl, Yap› Kredi Bankas› and Tansafl (Note 32).
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
1 January 31 December2005 Additions (*)Disposals (**) 2005
(*) Additions to goodwill arose from the acquisition of Yap› Kredi Bankas› and Tansafl (Note 32).
(**) Previously recognised negative goodwill with a carrying value of YTL18,889 thousand as of 1 January 2005 resulting from acquisitions ofthe Group has been derecognised from financial statements at the beginning of the year according to IFRS 3 with a correspondingadjustment to the opening balance of retained earnings.
NOTE 18 - INVESTMENT PROPERTY
2006 2005As of 1 January Cost 80,236 74,119Accumulated depreciation (9,365) (9,330)
Net book value 70,871 64,789
Net book value at the beginning of the year 70,871 64,789
Additions 344 -Disposals (397) (2,381)Acquisitions (Note 32) 38,117 -Current year depreciation (1,946) (1,380)Transfers (Note 19) 36,904 11,934Effects of exchange rate differences 8,499 (2,091)Disposals from the scope of consolidation (*) (1,337) -
Net book value at the end of the year 151,055 70,871
As of 31 DecemberCost 162,783 80,236Accumulated depreciation (11,728) (9,365)
Net book value 151,055 70,871
(*) The amount is related to the sale of joint venture (Kofisa) in 2006.
Investment property amounting to YTL102,963 thousand represents designated areas within stores that are let out under rent agreementsowned by Ramenka, a Joint Venture of the Group. The fair value of these investment properties as of 31 December 2006 based onindependent appraiser’s report is determined as YTL230,466 thousand (31 December 2005: YTL127,970 thousand). The valuation includesland that is under operating lease, as it cannot be separated from the valuation of the investment properties.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 19 - PROPERTY, PLANT AND EQUIPMENT
DisposalsAddition from the
1 January to the scope of Translation scope of 31 December2006 Acquisitions(1) Additions consolidation(2) Disposals Transfers(3) differences consolidation(4) 2006
(1) The property, plant and equipment with a net book value of YTL4,828,684 thousand is related to the acquisition of Tüprafl (Note 32).(2) The property, plant and equipment with a net book value of YTL33,744 thousand is related to the addition of Demir Export to scope ofconsolidation.(3) The property, plant and equipment with net book values of YTL3,489 thousand, YTL36,904 thousand and YTL1,318 thousand have beentransferred to the intangible assets (Note 20), investment properties (Note 18) and to other current assets, respectively.(4) The property, plant and equipment with a net book value of YTL171,555 thousand have been disposed of due to the sale of subsidiaries(Ram Pacific, ‹zocam, Döktafl and Sherbrook) and joint venture (Kofisa) in 2006.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
At 31 December 2006, there are mortgages amounting to YTL385,095 thousand on property, plant and equipment.
DisposalsAddition from the
1 January to the scope of Translation scope of 31 December2005 Acquisitions(1) Additions consolidation Disposals Transfers(2) differences consolidation 2005
(1) The property, plant and equipment with a net book value of YTL624,600 thousand and YTL170,749 thousand is related to the acquisition ofYap› Kredi Bankas› and Tansafl (Note 32). (2) The property, plant and equipment with net book values of YTL11,934 thousand, YTL1,399 thousand and YTL3,176 thousand have beentransferred to investment properties (Note 18), to the intangible assets (Note 20) and to other current assets, respectively.
At 31 December 2005, there are mortgages amounting to YTL332,851 thousand on property, plant and equipment.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 20 - INTANGIBLE ASSETS
2006 2005As of 1 January Cost 929,796 530,631Accumulated amortisation (370,486) (280,758)
Net book value 559,310 249,873
Net book value at the beginning of the year 559,310 249,873
Additions 113,146 108,069Disposals (5,069) (6,253)Acquisitions (Note 32) 361,870 274,305Current year amortisation (84,308) (64,101)Transfers (Note 19) 3,489 1,399Effects of exchange rate differences 5,504 (3,982)Disposals from the scope of consolidation (*) (355) -
Net book value at the end of the year 953,587 559,310
As of 31 DecemberCost 1,388,447 929,796Accumulated amortisation (434,860) (370,486)
Net book value 953,587 559,310
(*) The amount is related to the sales of subsidiaries (Döktafl and ‹zocam) in 2006.
2006 2005Order advances received (*) 109,468 253,954Other advances received 14,443 336
123,911 254,290
(*) Order advances received includes mainly the advances from prearranged campaigns received by the companies in the consumer durablesector.
NOTE 22 - RETIREMENT PLANSNone (31 December 2005: None).
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 23 - PROVISIONS
a) Short-term provisions 2006 2005Provision for tax and legal cases (Note 41) 69,856 32,918Provision for employment termination benefits 16,487 -
86,343 32,918
b) Long-term provisions 2006 2005Provision for the Pension Fund (Note 14) 299,620 277,810Provision for employment termination benefits 296,489 201,943
596,109 479,753
Provision for employment termination benefits2006 2005
Under the Turkish Labour Law, the Company and its Turkish Subsidiaries and Joint Ventures are required to pay termination benefits to eachemployee who has completed one year of service and whose employment is terminated without due cause, is called up for military service,dies or who retires after completing 25 years of service (20 years for women) and reaches the retirement age (58 for women and 60 for men).
The amount payable consists of one month’s salary limited to a maximum of YTL1,857.44 (31 December 2005: YTL1,727.15) for each year ofservice at 31 December 2006.
The liability is not funded, as there is no funding requirement.
The provision has been calculated by estimating the present value of the future probable obligation of the Koç Holding and its Subsidiariesand Joint Ventures registered in Turkey arising from the retirement of employees.
The principal assumption is that the maximum liability for each year of service will increase in line with inflation. Thus, the discount rate appliedrepresents the expected real rate after adjusting for the anticipated effects of future inflation. As the maximum liability is revised semi-annually,the maximum amount of YTL1,960.69 effective from 1 January 2007 (1 January 2006: YTL1,770.62) has been taken into consideration incalculating the reserve for employment termination benefit of the Group.
CMB Accounting Standards require actuarial valuation methods to be developed to estimate the enterprise’s obligation under defined benefitplans. Accordingly the following actuarial assumptions were used in the calculation of the total liability:
2006 2005Discount rate (%) 5.71 5.49Turnover rate to estimate the probability of retirement (%) 99 96
Movements in the provision for employment termination benefits are as follows:
2006 2005Beginning of the year 201,943 141,724
Increase/(decrease) during the period (net) 17,464 21,146Acquisitions (Note 32) 100,025 39,073Addition to the scope of consolidation (*) 3,916 -Disposal from the scope of consolidation (10,372) -
End of the year 312,976 201,943
(*) The amount is related to the addition of Demir Export to the scope of consolidation in 2006.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Provision for the Pension Fund:The Banking Law No.5411 with the temporary article 23 (“the Article”), which was approved by the Grand National Assembly of Turkey(“National Assembly”) on 2 July 2005, requires 23 requires the transfer of the pension funds of banks to the Social Security Institution (“SSK”)within three years following the publication date of the article. However, the Article was vetoed by the President of the Republic of Turkey(“President”) and sent back to the National Assembly for reconsideration on 22 July 2005. Upon discussion in National Assembly the Articlewas approved without any modification on 19 October 2005. On 2 November 2005 the President has applied to the Constitutional Court ofTurkey for abrogation of the Article.
Yap› Kredi Bankas›, a Joint Venture of the Group, obtained an actuarial report the Pension Fund prepared registered actuary in accordancewith the Decree published by the Council of Ministers in Official Gazette dated 15 December 2006 No.26377 for the purpose of determiningthe principals and procedures to be applied during the transfer of funds. Based on the actuarial report dated 31 December 2006, the actuarialbalance sheet of the Pension Fund comprises a technical deficit amounting to YTL299,620 thousand and the Group provided a provision forthe total amount of the deficit.
2006 2005Beginning of the year 277,810 -
Acquisitions (Note 32) - 277,810Current year charges 21,810 -
End of the year 299,620 277,810
c) Insurance technical reserves 2006 2005Unearned premiums reserve - net of reinsurers’ share 315,015 262,831Claim provisions - net of reinsurers’ share 144,609 98,375Deferred commission income 425 389
Insurance technical reserves - current 460,049 361,595
Total insurance technical reserves 1,151,367 1,091,721
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 24 - MINORITY INTEREST
Changes in minority interest during the years are as follows:
2006 2005Beginning of the year 3,403,207 2,689,520
Net income attributable to minority interest 914,470 383,578Dividend payments (446,180) (230,130)Increase in share capital 139,177 107,895Acquisitions (Note 32) 2,872,724 436,270Disposal of subsidiaries (1) (208,532) (547)Addition to the scope of consolidation (2) 67,099 -Effects of restructuring (3) (206,481) 22,226Change in financial assets fair value reserve (5,617) 414Translation differences 40,097 (16,123)Cumulative gain/(loss) on hedging (net) (3,765) 10,104
End of the year 6,566,199 3,403,207
(1) There has been decrease amounting to YTL208,532 thousand due to the subsidiaries excluded from the scope of the consolidation,consequent to the share transfers in 2006. The aforementioned decrease is related to the share transfers of ‹zocam, Döktafl, Ram Pacific andSherbrook by YTL118,679 thousand, YTL82,172 thousand, YTL4,671 thousand and YTL3,010 thousand, respectively.(2) Due to the addition of Demir Export to the scope of consolidation in 2006. (3) There has been a decrease due to additional share purchases of Yap› Kredi Bankas› by YTL185,145, Rambutya and Ramstore by a total ofYTL9,849, and the transfer of Beko shares to Arçelik by YTL39,815 thousand and an increase due to the merger of Yap› Kredi Bankas› andKoçbank by YTL46,607. In addition, due to the purchase of additional shares of KFS, Entek and Ram by Koç Holding from the groupcompanies, the minority interest has also decreased.
The allocation of minority interest is as follows:
2006 2005Koç Family members 1,382,870 1,279,105Other 5,183,329 2,124,102
6,566,199 3,403,207
The allocation of the net income attributable to minority interest is as follows:
Koç Family members 106,007 92,210Other 808,463 291,368
914,470 383,578
Detailed information regarding the minority interest is disclosed in Note 33.g.
NOTE 25 - SHARE CAPITAL/TREASURY SHARESKoç Holding adopted the registered share capital system available to companies registered with the CMB and set a limit on its registeredshare capital representing registered type shares with a nominal value of YKr1 Koç Holding’s historical authorised and paid-in share capital asof 31 December are as follows:
2006 2005Limit on registered share capital (historical) 3,000,000 3,000,000Historical authorised and paid-in share capital 1,265,000 1,150,000
Companies in Turkey may exceed the limit on registered share capital in the event of the issuance of free capital shares to existingshareholders.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
As of 31 December, the shareholding structures of Koç Holding are as follows:
2006 2005Share % YTL’000 Share % YTL’000
Temel Ticaret ve Yat›r›m A.fi. 42.18 533,634 41.84 481,130Semahat Arsel 6.42 81,259 5.89 67,704Suna K›raç 5.26 66,460 5.25 60,418Rahmi M. Koç 5.23 66,205 5.23 60,186Mustafa V. Koç 3.20 40,470 2.88 33,081Ali Y. Koç 3.20 40,468 2.88 33,081Ömer M. Koç 2.98 37,673 2.98 34,248‹pek K›raç 1.93 24,446 1.49 17,128Rahmi M. Koç ve Mahdumlar› Maden, ‹nflaat,
Turizm, Ulaflt›rma, Yat›r›m ve Ticaret A.fi. 0.11 1,330 0.11 1,209Nazar Dayan›kl› ve Dayan›ks›z S›nai Mallar Paz. A.fi. - - 0.33 3,839Zer Madencilik Dayan›kl› Mallar Yat›r›m ve Paz. A.fi. - - 0.01 153
Total Koç Family and companies owned by Koç Family members 70.51 891,945 68.89 792,177
“Adjustment to share capital” represents the restatement effect of cash contributions to share capital at the balance sheet date equivalentpurchasing power. It also includes the difference of YTL121,732 thousand between the fair value of the acquired minority interest from KoçYat›r›m Sanayi Mamülleri Pazarlama A.fi. and the nominal value of shares issued by Koç Holding in 1997, and the difference of YTL436,272thousand between the fair and nominal value of the shares issued for the acquisition of Migros shares by 50.81%, in 2003 which are allpresented as the inflation adjustment to share capital.
The Articles of Koç Holding established 100 registered shares. These are bearer shares and are transferable. The holders of registered sharesare entitled to receive 5% of the profit before tax, which remains after taxes, 5% of legal reserves and 3% of the paid capital have beendeducted. However, this cannot be higher than 10% of the amount obtained after deducting legal reserves, taxes and first dividend fromdistributable profit. Registered shares do not have any interest in the capital of Koç Holding and do not have any voting rights associated withthem. In the event of liquidation, registered shareholders are not entitled to receive any portion of the liquidation proceeds.
Dividends are paid to “Koç Holding Foundation for Pensions and Assistance” up to 2% but not less than 1% of the income before taxremaining after deducting taxes, 5% legal reserves rate determined by CMB and the first dividend.
The analysis of shares by group is as follows:
Group Unit of shares YTL’000 Nature of sharesA 33,945,120,000 339,451 RegisteredB 92,554,880,000 925,549 Registered
126,500,000,000 1,265,000
The Articles of Association (“the Articles”) of Koç Holding set out the following privileges for A-group shares:
1. In accordance with Article 11, pre-emptive rights not used by B-group shareholders, can be used by A-group shareholders within the termsof CMB Legislation.
2. In accordance with Article 25, A-group shareholders have two voting rights for each share owned at the General Assembly meeting (exceptfor meetings with an agenda to change the Articles).
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 26 - 27 - 28 CAPITAL RESERVES, PROFIT RESERVES, RETAINED EARNINGSRetained earnings as per the statutory financial statements, other than legal reserve requirements, are available for distribution subject to thelegal reserve requirement referred to below.
The legal reserves consist of first and second reserves, appropriated in accordance with the Turkish Commercial Code (“TCC”). The TCCstipulates that the first legal reserve is appropriated out of statutory profits at the rate of 5% per annum, until the total reserve reaches 20% ofthe Group’s paid-in share capital. The second legal reserve is appropriated at the rate of 10% per annum of all cash distributions in excess of5% of the paid-in share capital. Under the TCC, the legal reserves can only be used to offset losses and are not available for any other usageunless they exceed 50% of paid-in share capital.
Quoted companies are subject to dividend requirements regulated by the CMB as follows:
In addition, based on the CMB Decree 7/242, dated 25 February 2005, if the amount of profit distributions calculated in accordance with thenet distributable profit requirements of the CMB does not exceed the statutory net distributable profit, the whole amount of distributable profitshould be distributed. If it exceeds the statutory net distributable profit, the whole amount of the statutory net distributable profit should bedistributed. It is stated that dividend distributions should not be made if there is a loss in either the financial statements prepared inaccordance with CMB regulations or in the statutory financial statements.
In accordance with the Communiqué No. XI/25 Section 15 paragraph 399, the accumulated deficit amounts arising from the first application ofinflation adjustment, in line with CMB’s profit distribution regulations, are considered to be deductible when computing the distributable profit.The accumulated deficit will first be netted-off from net income and retained earnings, and the remaining amount of deficit from extraordinaryreserves, legal reserves and adjustment to share capital.
In accordance with Communiqué No. XI/25 the quoted companies are required to distribute a minimum of 20% of their distributable profitsover financial statements prepared in accordance with CMB Accounting Standards. This distribution may be made by either as cash or bonusshares or as a combination of both over the minimum limit of 20% depending on the decisions of the General Assemblies of the companies.
The profits of subsidiaries, joint ventures and associates, that are included in the consolidated financial statements of the parent, are notconsidered in the calculation of distributable profits, if the decision on profit distribution has not been taken in the general assemblies of therelated subsidiaries, joint ventures and associates.
In accordance with Communiqués No. XI/21 and No. XI/25, if a profit distribution decision is taken in the general assemblies of subsidiaries,joint ventures and associates, which are consolidated under parent financials, the parent can distribute its share of the profits at thesecompanies up to the profit level included in the consolidated financial statements with reference to the profit distribution decision taken in thegeneral assemblies of these subsidiaries, joint ventures and associates.
In accordance with the Communiqué No. XI/25 items of statutory shareholders’ equity such as share capital, share premium, legal reserves,other reserves, special reserves and extraordinary reserves, are presented at their historical amounts. The difference between the inflated andhistorical amounts of these items is presented in shareholders’ equity as inflation adjustment to shareholders’ equity.
Inflation adjustment to shareholders’ equity can only be netted-off against prior years’ losses and used as an internal source in capitalincrease where extraordinary reserves can be netted-off against prior years’ loss and used in the distribution of bonus shares and dividends toshareholders.
In accordance with the above explanation, the composition of Koç Holding’s shareholders’ equity, which is considered as the basis for profitdistribution, in accordance with Communiqué No. XI/25, is as follows:
2006 2005Share capital 1,265,000 1,150,000Share premium 1,779 1,779Legal reserves 51,328 33,531Extraordinary reserves 488,265 250,515Inflation adjustment to shareholders’ equity 1,555,726 1,575,726Investment and property sales income to be added to the equity - 715Translation differences 8,269 (40,263)Cumulative gain/(loss) on hedging (7,482) 9,317Financial assets fair value reserve 23,542 20,077Net income 560,812 597,624Retained earnings 1,140,760 1,087,059
5,087,999 4,686,080
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The restated amounts and the inflation adjustment to shareholders’ equity of the aforementioned nominal values as of 31 December are asfollows:
2006
Inflation adjustmentNominal Restated to shareholders’
value amounts equityShare capital 1,265,000 2,232,288 967,288Share premium 1,779 6,497 4,718Legal reserves 51,328 147,588 96,260Extraordinary reserves 488,265 975,725 487,460
1,806,372 3,362,098 1,555,726
2005Inflation adjustment
Nominal Restated to shareholders’value amounts equity
Net balance sheet position (8,874,016) (2,286,878)
Off-balance sheet derivative instruments net position 812,135 371,811
Net foreign currency position (8,061,881) (1,915,067)
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
2006USD EUR Other Total
ASSETSCurrent assets:Cash and due from banks 2,476,579 847,491 230,831 3,554,901Reserve deposits with the central banks 123,071 661,922 1,675 786,668Marketable securities (net) 788,901 1,307,256 40,743 2,136,900Loans and advances to customers 1,237,202 558,877 131,581 1,927,660Trade receivables and due from related parties (net) 638,154 1,114,890 279,050 2,032,094Lease receivables (net) 58,083 166,864 1,946 226,893Inventories (net) 72,565 183,243 191,392 447,200Other current assets 58,130 139,205 130,070 327,405
Total current assets 5,452,685 4,979,748 1,007,288 11,439,721
Total non-current liabilities 7,104,180 2,227,978 216,721 9,548,879
Total liabilities 17,923,216 7,975,017 990,268 26,888,501
Net balance sheet position (7,285,954) (1,661,817) 73,755 (8,874,016)
Off-balance sheet derivative instruments net position 181,884 537,199 93,052 812,135
Net foreign currency position (7,104,070) (1,124,618) 166,807 (8,061,881)
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
2005USD EUR Other Total
ASSETSCurrent assets:Cash and due from banks 1,119,920 1,139,719 209,321 2,468,960Reserve deposits with the central banks 226,416 333,546 1,175 561,137Marketable securities (net) 220,610 66,081 11,681 298,372Loans and advances to customers 970,689 437,829 93,655 1,502,173Trade receivables and due from related parties (net) 410,841 953,254 368,968 1,733,063Lease receivables (net) 84,157 132,285 3,765 220,207Inventories (net) 56,751 148,257 120,366 325,374Other current assets 23,797 51,462 70,268 145,527
Total current assets 3,113,181 3,262,433 879,199 7,254,813
Total non-current liabilities 1,499,127 1,071,532 130,575 2,701,234
Total liabilities 9,181,491 5,265,630 745,869 15,192,990
Net balance sheet position (1,470,798) (1,013,844) 197,764 (2,286,878)
Off-balance sheet derivative instruments net position (22,046) 326,185 67,672 371,811
Net foreign currency position (1,492,844) (687,659) 265,436 (1,915,067)
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 30 - GOVERNMENT GRANTSThe Group has obtained investment incentive certificates from the Turkish government authorities in connection with certain major capitalexpenditures. These incentives entitle the Group to the following rights:
i) 100% exemption from customs duty and VAT on machinery and equipment imported,
ii) Exemption from customs duty on imported investment goods, exemption from VAT on investment goods supplied from home and abroad,100% exemption from VAT on taxes, stamp and duties and domestic investment expenditures,
iii) 40% of the research and development expenditures (Note 41),
iv) Investment allowance of 40%, 60%, 100% and 200% on approved capital expenditures (*),
v) 40% investment incentive allowance for capital expenditures after 24 April 2003 relating to non-current assets over YTL10 thousand (*).
The investment allowance indicated in (iv) and (v) above is deductible from current or future taxable profit for the purposes of corporation tax,and is exempt from corporation tax. The total amount of investment incentive allowance for the year ended 31 December 2006 is YTL684,113thousand (31 December 2005: YTL1,708,493 thousand) (Note 14).
(*) The exemption for investment allowance has been abolished with Law No,5479 effective from 1 January 2006. However, income andcorporate taxpayers who have unutilised investment incentives as of 31 December 2005 and who will qualify for investment incentiveallowance with the investment expenditures to be made in future periods related to ongoing projects as of 31 December 2005 have beenprovided a three-year transition year ending at 31 December 2008 (Note 41).
NOTE 31 - COMMITMENTS, CONTINGENT ASSETS AND LIABILITIES
Commitments and contingencies, from which the management does not anticipate any significant losses or liabilities are summarised below:
2006 2005Guarantees given:Letters of guarantee 2,844,788 1,291,903Guarantee notes 42,802 41,657
Guarantees received:Letters of guarantee 2,423,907 1,585,596Guarantee notes 76,291 65,627Marketable securities given as guarantee 30,216 22,228
Commitments - given:
a) Commitments - Banking
i) The final version of the Share Purchase Agreement was signed between Çukurova Holding, various Çukurova Group companies, MehmetEmin Karamehmet, and the Joint Venture Companies of the Group, Koç Finansal Hizmetler, Koçbank Nederland and Koçbank regarding thesale of 57.4% of the shares of Yap› Kredi Bankas› on 28 September 2005 (Note 44.b). In addition to the Share Purchase Agreement (“SPA”),several agreements have been signed between Yap› Kredi Bankas› and Çukurova Group companies on 28 September 2005 which aim to re-establish the loan and other relations of Yap› Kredi Bankas› with the Çukurova Group. As of the date of these consolidated financialstatements, a part of the conditions in those agreements have been fulfilled or secured by Koç Finansal Hizmetler, the indirect mainshareholder of Yap› Kredi Bankas›. The effects of the remaining agreements have been reflected in force as of 31 December 2006 by takingthe agreements and the best estimations of the Group into consideration.
ii) Based on the “Non-Core Assets Option Agreement” signed between Yap› Kredi Bankas›, a Joint Venture of the Group, and ÇukurovaHolding on 28 September 2005, the parties agreed that, if the non-core assets with carrying value of approximately YTL224,796 thousand at31 December 2006, are sold to third parties in 6 years from the date of share transfer; 57.4% of the difference between the sale price and theagreed adjusted book value will be netted off from the cash loan exposure of Çukurova Group in Yap› Kredi Bankas›.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Koç Finansal Hizmetler, the indirect main shareholder of Yap› Kredi Bankas›, declared to Yap› Kredi Bankas› on 31 January 2006 that it hasagreed and committed to irrevocably pay any difference in favour of Çukurova Group resulting from the transactions subject to this agreementduring the life of the Option Agreement, which will be deducted from Çukurova Group’s debts. According to the clauses of the agreement, theestimated value of option as YTL61,844 thousand was recognised as a provision in the consolidated financial statements at 31 December2006 (31 December 2005: YTL56,039 thousand) (Note 15.c).
iii) On 10 August 2006, new advertisement agreements were signed between Yap› Kredi Bankas›, Çukurova Media companies and KoçFinansal Hizmetler, to supersede the agreement signed on 28 September 2005 between Yap› Kredi Bankas› and Çukurova Media companies.The conditions such as the advertisement amount and the agreement term were unchanged and Yap› Kredi Bankas› is anticipated toadvertise on the basis of the Koç Group’s prices through Çukurova Media companies in these new agreements also, however this time, withthe guarantee of Koç Finansal Hizmetler. A provision amounting to YTL26,037 thousand regarding this agreement has been recognised in theconsolidated financial statements at 31 December 2006 (31 December 2005: YTL38,601 thousand) (Note 15.c).
iv) According to SPA, if Yap› Kredi Bankas› is obliged to pay less than EUR175,000,000 in case of the transfer of the Pension Fund to the SSK,Çukurova Group’s payables to Yap› Kredi Bankas› will be decreased by 50% of the differences between EUR175,000,000 and the amount thatis going to be paid. Koç Finansal Hizmetler has declared to Yap› Kredi Bankas› that it agreed and is committed to irrevocably pay the amountof any discount, if any, provided by the Yap› Kredi Bankas› to Çukurova Group loans.
In the banking segment, the normal course of banking activities requires the undertaking of various commitments and incurs certaincontingent liabilities that are not presented in the consolidated financial statements, including letters of guarantee, acceptance credits, lettersof credit and off-balance sheet derivative instruments. The Group does not expect any material losses as a result of these transactions.
The following is a summary of significant commitments and contingent liabilities related to banking sector companies as of 31 December 2006and 31 December 2005:
Credit related commitments
2006 2005Letters of guarantee-Foreign currency 2,700,995 2,635,065-YTL 3,072,752 2,560,638Letters of credit 1,325,059 1,039,352Acceptance credits 108,325 123,869Other commitments and contingencies 748,807 240,512
7,955,938 6,599,436
Less: Provision for losses on credit related commitments (Note 15.c) (80,288) (77,029)
7,875,650 6,522,407
The economic sector risk concentrations for outstanding credit related commitments of the Group are as follows:
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Custody services:The Group’s Joint Ventures in the financial sector provide custody services to third parties. The assets held in a fiduciary capacity are notincluded in these consolidated financial statements. At 31 December 2006, the Group has custody accounts amounting to YTL14,754,421thousand (31 December 2005: YTL10,091,436 thousand).
Interest rate cap and floor arrangements 190,357 273 (1,537)Option agreement 2,962 - (932)Commodity futures 69,466 1,632 -
2,794,367 11,283 (21,287)
b) Commitments - Energy
i) Koç Holding’s shares in Arçelik and Migros, with nominal value of YTL156,546 thousand and YTL80,854 thousand, respectively, werepledged as collateral against the loan amounting to USD950,000,000 taken from the consortium composed of JP Morgan Europe Limited andJP Morgan Chase Bank NA, in addition shares in Tüprafl with the nominal value of YTL127,714 thousand were pledged as collateral againstthe loan amounting to USD1,800,000,000 taken up by Enerji Yat›r›mlar›, a Subsidiary of the Group, from the consortium of Akbank T.A.fi. MaltaBranch, Türkiye Garanti Bankas› A.fi. Luxembourg Branch, Türkiye ‹fl Bankas› A.fi. Bahrain Offshore Branch, Standard Bank Plc, TürkiyeVak›flar Bankas› T.A.O. Bahrain Offshore Branch and Türkiye Halk Bankas› A.fi. (Note 6.a).
ii) Several financial and non-financial covenants exist with respect to the loans obtained in order to finance the cost of Tüprafl share purchaseand to re-finance the Group’s existing loans in 2006. In the event that these covenants are not fulfilled, the aforementioned creditors have theright to recall the outstanding loans (Note 6.a)
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
iii) Commitments related to Tüprafl Share Purchase Agreement signed by Enerji Yat›r›mlar›, a Subsidiary of the Group, and the Republic ofTurkey Prime Ministry Privatisation Administration (“PA”) on 26 January 2006 are as follows (Note 44.a):• Enerji Yat›r›mlar›, a Subsidiary of the Group, has accepted and committed to provide the petroleum products requirements of Turkish MilitaryForces timely, at the requested quality and at the market value, and to maintain and protect the production of petroleum products and theirtransfer systems within refineries or under Tüprafl’s proprietorship.• Enerji Yat›r›mlar› has committed to operate the Batman refinery for a minimum of three years. As a guarantee of this commitment, EnerjiYat›r›mlar› has provided a definite guarantee letter amounting to USD30,000,000 equivalent to YTL42,168 thousand to the PrivatisationAdministration at the date the Share Sales Agreement was signed. For each year that the commitment is fulfilled, the relevant commitmentamounting to USD10,000,000 will be released. Otherwise, the amount will be liquidated and recorded as income by the PrivatisationAdministration.
iv) At 31 December 2006, short-term and long-term bank borrowings of Entek, a Subsidiary of the Group, amounting to YTL77,273 thousandhave been guaranteed as follows: • YTL49,676 thousand of a loan is guaranteed by USD35,000,000 and USD65,000,000 of receivable collections to be made from Çelikkordand Pirelli (shareholders and customers of ‹ztek), respectively.• YTL27,597 thousand of a loan is guaranteed by a mortgage amounting to USD67,500,000.
v) As an outcome of a sector-wide inspection, the EMRA Control Board criticised certain dealership practices of 26 companies in the sectorwith the decision dated 31 August 2006 and accordingly imposed on and notified administrative fines to Opet and Opet D›fl Ticaret, JointVentures of the Group. The fine amounting to YTL84,307 thousand was levied in accordance with Law No,5015 (19th article, 2nd paragraph,4th subparagraph of Section a) and the 19th article of the Petroleum Market Law, “Communiqué about the administrative fines to be appliedafter 1 January 2005”, hereby underlining the right to take this decision to the State Council. Subsequently, these companies publiclyannounced that they would take legal action for the cancellation of the mentioned fine.
Regarding the sentence of the 13th State Council on 10 November 2006; the demand of Opet for a stay of execution was accepted for onlyYTL1,072 thousand of the total demand, and Opet D›fl Ticaret’s demand for a stay of the cancellation was rejected. Consequently, Opet andOpet D›fl Ticaret paid YTL1,736 thousand, including the interest, to Anatolian Corporate Tax Administration of Ministry of Finance.
Regarding the sentence of the 13th State Council on 25 January 2007, the rejection of the demand of Opet for a stay of execution on 10November 2006 has been cancelled and the demand for a stay of execution has been accepted for YTL81,449 thousand. Based on thissentence of the State Council, the Istanbul 8th Administrative Court also accepted the stay of execution for the collection of the fine on 8February 2007. As of the preparation date of the accompanying consolidated financial statements, the lawsuits for the cancellation of theadministrative fine are still continuing. As there is uncertainty on the final conclusion of the subject, and as discussions between the partiesand legal observations continue, no provision has been provided in the accompanying consolidated financial statements due to thisuncertainty.
c) Commitments - Automotive
i) The management of Ford Otosan, a Joint Venture of the Group, believes that there is an effective cash flow hedge between the foreigncurrency denominated payables (a non-derivative hedging instrument) with regard to engineering expenses and anticipated future sales(hedged item) of the new light commercial vehicle (“V227 or Transit Connect”). The hedge relationship has been considered effective since itsinception when the business principles for V227 between Ford Otosan and Ford Motor Company were formally discussed and agreed. Theanticipated sale of 31,000 units of Transit Connect to Ford of Europe to fully offset engineering payables is considered highly probable at aperiod between 31 December 2006 and 30 June 2007. Accordingly, unrealised foreign exchange losses on foreign currency denominatedengineering payables from inception to 31 December 2006 amounting to YTL3,952 thousand have been booked under the shareholders’equity as “cumulative loss on hedging”.
ii) The long-term loan amounting to EUR27,603,345 (31 December 2005: EUR38,889,432) and EUR56,335,844 (31 December 2005: None)was obtained to finance the investment to manufacture the Doblo light commercial vehicles and Mini Cargo commercial vehicles of Tofafl, aJoint Venture of the Group, respectively. According to the manufacturing agreements signed between Fiat Auto S.p.A. (“Fiat”) (the customer ofthe majority of Doblo production) and Tofafl, and between Fiat and Peugeot Citroen Auto SA (“PSA”) (major importers of Mini Cargo) therepayment obligations related to such a loan are guaranteed by Fiat and PSA through future purchases of Doblo and Mini Cargo. Accordingly,the Group’s exposure to the foreign exchange rate and interest rate fluctuations has been undertaken by Fiat and PSA. The portion of theforeign exchange gains in excess of the inflation index amounting to YTL5,018 thousand on the bank loan that is determined to be an effectivehedge is accounted under shareholders’ equity as “cumulative gain on hedging”.
iii)Ford Otosan, a Joint Venture of the Group, entered into two collar agreements in 2000, which are outstanding as of 31 December 2006, tohedge the interest rate risk arising from borrowings amounting to EUR3,821,980. The collar agreements have fixed floor and ceiling rates.Accordingly, at the dates defined in the agreements, if the Euribor rate is below the floor rate Ford Otosan compensates the differencebetween the floor rate and the actual rate to the counter bank. Contrarily, if the Euribor rate is above the ceiling rate, the counter bankcompensates the difference to Ford Otosan.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Details of the collar agreement, which is valid as of 31 December 2006, are as follows:
Euribor EuriborAgreement Floor rate Ceiling rate Amount Due dateCitibank 5.15% 6% EUR3,821,980 28 February 2008
iv) Ford Otosan, a Joint Venture of the Group, entered into a loan agreement with Akbank T.A.fi. in 2003. During the term of this agreement,Ford Otosan is required to ensure that its export proceeds up to an amount of EUR123,120,000 for each calendar year, except for the lastyear, will be processed through a deposit account at Akbank T.A.fi. for 2008, the last year of the agreement, the transaction commitment inthis deposit account at Akbank is EUR82,080,000. According to the terms of agreement made in 2006, Ford Otosan is required to ensure thatits export proceeds an amount of EUR10,260,000 during 2007.
v) Tofafl, a Joint Venture of the Group, shall make investments amounting to EUR65,119,200 and EUR132,510,000 according to theagreements signed which concern two investment projects that are planned to be completed in 2007 and 2008. Development actions that arein the scope of investment expenditures mentioned shall be taken by Fiat and Fiat has charged EUR13,326,720 to Tofafl in 2006 regardingthese investment projects.
vi) Tofafl, a Joint Venture of the Group, has realised export amounting to USD169,613,000 as of 31 December 2006 in the scope of an exportincentives certificate which requires Tofafl to ensure an export amount of USD280,164,000 until the end of the year 2007 (As of 31 December2005, the Group was required to ensure total exports amounting to USD217,932,000 until the end of the certificates’ expiry date according tothe three different export incentive certificates. According to three investment certificates which were ended as of 31 December 2005, exportsamounting USD745,998,000 have been realised).
Commitments given:2006 2005
Commitments with respect to export incentive certificates 1,808,574 3,555,308Mortgages given 386,912 332,851Commitments with respect to investment incentive certificates - 102,103
2,195,486 3,990,262
Commitments received:2006 2005
Mortgages taken 311,722 238,300
NOTE 32 - BUSINESS COMBINATIONS
Acquisitions
Business combinations in 2006i)Enerji Yat›r›mlar›, a Subsidiary of the Group, acquired 51% of Tüprafl shares on 26 January 2006 (Note 44.a). As a result of the acquisition,the excess of the acquirer’s interest in the net fair value of aquirer’s identifiable assets, liabilities and contingent liabilities over the cost of thecombination amounting to YTL2,736,463 thousand has been accounted for goodwill in the consolidated financial statements (Note 17). Theprocedures of allocating the cost of the business combination to the fair values of the assets acquired and liabilities and contingent liabilitiesassumed have been completed at the date of the preparation of these consolidated financial statements.
The details of the net assets acquired and the goodwill concerning Tüprafl are as follows:
Paid in cash 5,464,800Dividend payment liability (*) 236,889
Total acquisition cost 5,701,689Net assets acquired (2,965,226)
Goodwill (Note 17) 2,736,463
(*) In accordance with the Tüprafl Share Purchase Agreement (Note 44.a) signed on 26 January 2006, the dividend rights, the distributableprofits of 2005 shall be paid to PA until 31 May 2006. The amount is the fair value of the calculated dividend at the date of acquisition.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The assets and liabilities arising from the acquisition are as follows:
Cash and due from banks 838,848Inventories 1,213,018Investment property (Note 18) 38,117Property, plant and equipment (Note 19) 4,828,684Intangible assets (Note 20) 361,870Trade receivables 757,919Other current and non-current assets 274,978Borrowings (466,994)Trade payables (733,178)Provision for employment termination benefits (Note 23) (100,025)Deferred tax liabilities (net) (Note 14) (521,030)Other current and non-current liabilities (654,257)
Net assets 5,837,950
Minority interest (Note 24) (2,872,724)
Net assets acquired 2,965,226
Total acquisition cost (5,701,689)Cash and due from banks - acquired 838,848
Cash outflow on acquisition (net) (4,862,841)
ii) As mentioned in the business combinations in 2005, the Group acquired 78.10% of Tansafl shares in 2005. The 3.61% shares of Tansaflowned by the shareholders who participated in the tender offer that aimed to collect the remaining 21.90% of shares of Tansafl were acquiredby the Group in January 2006. Thus, the percentage of the shares of Tansafl owned by the Group increased from 78.10% to 81.71%. Thesetransactions were considered as part of the Tansafl acquisition and therefore goodwill has been calculated by taking into account the relatednet assets, as follows:
Total acquisition cost 26,744Net assets acquired (13,682)
Goodwill (Note 17) 13,062
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Business combinations in 2005
i)On 28 September 2005, Koçbank, a Joint Venture of the Group, acquired 57.42% of the shares of Yap› Kredi Bankas› (Note 44.b). As a resultof the acquisition, the excess of the acquirer’s interest in the fair value of identifiable assets, liabilities and contingent liabilities acquired in abusiness combination over the cost of the combination amounting to YTL613,682 thousand is accounted as goodwill in the consolidatedfinancial statements (Note 17).
The details of the net assets acquired and the goodwill concerning Yap› Kredi Bankas› are as follows:
Paid in cash 962,982Direct costs relating to the acquisition 21,028Provision for Non-Core Assets Option Agreement (Note 31.a) 56,039Provision for the Advertising Publication Agreement (Note 31.a) 38,601
Total acquisition cost 1,078,650Net assets acquired (464,968)
Goodwill 613,682
The assets and liabilities arising from the acquisition are as follows:
Cash and due from banks 1,441,725Marketable securities 1,289,991Reserve deposits with the central banks 506,995Loans and advances to customers 5,297,385Financial assets 2,757,479Property, plant and equipment (Note 19) 624,600Worldcard and client portfolio value (*) (Note 20) 81,542Intangible assets (Note 20) 16,286Deferred tax assets (net) (Note 14) 288,579Other current and non-current assets 367,153Customer Deposits (9,276,268)Borrowings (601,969)Provision for the Pension Fund (277,810)Provision for employment termination benefit (Note 23) (37,419)Other current and non-current liabilities (1,660,028)
Net assets 818,241
Minority interest (Note 24) (353,273)
Net assets acquired 464,968
Purchase consideration paid in cash (984,010)Cash and due from banks - acquired 1,441,725
Cash inflow on acquisition (net) 457,715
(*) The work in order to estimate the fair value of Worldcard and customer portfolio, which are considered as identifiable intangible assets ofYap› Kredi Bankas›, was performed by an independent appraisal firm for the Group. The appraisal firm estimated the fair value of Worldcardand customer portfolio of Yap› Kredi Bankas› in the amount of YTL81,542 thousand.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
In 2006, the assets, liabilities and contingent liabilities related to the acquisition of Yap› Kredi Bankas›, provisionally determined in 2005, havebeen restated in the consolidated financial statements at 31 December 2005 in accordance with IFRS 3 and the related adjustments are asfollows:
Adjustments related to net assetsDecrease in property, plant and equipment (9,883)Decrease in financial assets (2,822)Decrease in deferred tax assets (674)Decrease in other current assets (1,568)Decrease in employment termination benefits (3,099)Increase in other current liabilities 12,096
(5,950)
Adjustments related to acquisition costAdjustments related to direct costs concerning the acquisition 967Adjustments related to provision for Non-Core Assets Option Agreement 56,039Adjustments related to provision for Advertising Publication Agreement 38,601
95,607
ii) On 10 November 2005, the Group acquired 78.10% of the shares of Tansafl. As a result of the acquisition, the excess of the acquirer’sinterest in the fair value of identifiable assets, liabilities and contingent liabilities acquired in a business combination over the cost of thecombination amounting to YTL282,689 thousand is accounted as goodwill in the consolidated financial statements.
The details of the net assets acquired and the goodwill concerning Tansafl is as follows:
Total acquisition cost 578,702Net assets acquired (**) (296,013)
Goodwill (**) 282,689
The assets and liabilities arising from the acquisition are as follows:
Cash and due from banks 132,859Inventories 76,644Financial assets 23,648Property, plant and equipment (Note 19) 170,749Brand value of Tansafl (*) (Note 20) 174,158Intangible assets (Note 20) 2,319Deferred tax assets (net) (Note 14) 98,837Other current and non-current assets 8,336Borrowings (10,453)Trade payables (234,279)Provision for employment termination benefits (Note 23) (1,654)Other current and non-current liabilities (62,154)
Net assets 379,010
Minority interest (**) (Note 24) (82,997)
Net assets acquired (**) 296,013
Total acquisition cost (578,702)Cash and due from banks - acquired 132,859
Cash outflow on acquisition (net) (445,843)
(*) The work in order to estimate the fair value of the brand, which is considered as an identifiable intangible asset of Tansafl, was performedby an independent appraisal firm for the Group. The appraisal firm estimated the fair value of the brand in the amount of YTL174,158thousand in its report dated 6 March 2006 and the Group recognised this amount as an intangible asset in the consolidated financialstatements.(**) In 2006, the minority interest calculated on the net assets of Tansafl, provisionally determined in 2005, has been restated by YTL38,139thousand in the consolidated financial statements at 31 December 2005 in accordance with IFRS 3. The mentioned restatement caused adecrease in the net assets acquired and an increase the goodwill by the same amount.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Legal mergersLegal mergers represent transactions between subsidiaries of the Group under common control and are not dealt with IFRS 3 (Note 3.14).
Legal mergers in 2006With the decision taken in the Extraordinary General Assembly Meeting held on 26 June 2006, Tansafl, a Subsidiary of the Group, wasdissolved as of 30 June 2006 and merged with Migros, a Subsidiary of the Group, as of 1 July 2006. The issued capital of Migros increasedfrom YTL158,355 thousand to YTL176,267 thousand by an amount of YTL17,912 thousand due to the merger. The capital increase iscompensated by the equity acquired from Tansafl and by constraining the new share acquisition of the current shareholders. The capitalincrease was registered on 1 August 2006. The exchange transactions for the current Tansafl share owners, apart from Migros, started at 3 August 2006 which is also the date of ending the trade of Tansafl shares in ISE. Moreover, each Tansafl share is exchanged for 0.1569 unitsof Migros share. Following the capital increase the share of the Group in Migros decreased from 51.06% to 50.83%.
The approval of the BRSA with regard to the merger of the two banks through the transfer of Koçbank with all its rights, receivables, liabilitiesand obligations to Yap› Kredi Bankas›, a Joint Venture of the Group, and the consequential dissolution of Koçbank without liquidation and thetransfer of all its rights, receivables, liabilities and obligations to the Yap› Kredi Bankas› in accordance with the provisions of article 19 ofBanking Law and all other relevant legislation, was published in the Official Gazette dated 1 October 2006. The new capital of Yap› KrediBankas› was registered with the Istanbul Commercial Registrar on 2 October 2006. Yap› Kredi Bankas›’s current capital increased fromYTL1,896,662 thousand to YTL3,142,818 thousand and a distribution of the increased portion amounting to YTL1,246,156 thousand was madeto the shareholders of Koçbank starting from 10 October 2006. The existing shareholders of Koçbank have the right to purchase 0.5314 unitsof YKr1 nominal valued Yap› Kredi Bankas› shares in exchange for each Ykr1 nominal valued Koçbank share. As Koçbank was dissolvedwithout a liquidation following the transfer, it has been deregistered from the commercial register as of 2 October 2006.
The decision on the transfer of Opet D›fl Ticaret, a Joint Venture of the Group, with all its assets and liabilities to Opet, a Joint Venture of theGroup. was given in the Extraordinary General Assembly Meetings of Opet and Opet D›fl Ticaret held on 28 September 2006 and the mergeragreement was registered on 5 October 2006.
The decision on the transfer of Koç Finansal Kiralama, a Joint Venture of the Group, with all its assets and liabilities to Yap› Kredi FinansalKiralama, a Joint Venture of the Group, was given in the Extraordinary General Assembly Meetings of Koç Finansal Kiralama and Yap› KrediFinansal Kiralama held on 21 December 2006 and the merger agreement was registered on 27 December 2006.
The decision on the transfer of Koç Factoring, a Joint Venture of the Group, with all its assets and liabilities to Yap› Kredi Factoring, a JointVenture of the Group, was given in the Extraordinary General Assembly Meetings of Koç Factoring and Yap› Kredi Factoring held on 22December 2006 and 27 December 2006, respectively and the merger agreement was registered on 29 December 2006.
The decision on the transfer of Koç Portföy Yönetimi, a Joint Venture of the Group, with all its assets and liabilities to Yap› Kredi PortföyYönetimi, a Joint Venture of the Group, was given on 22 December 2006, and the merger agreement was registered on 29 December 2006.
Legal mergers in 2005 Otoyol Pazarlama A.fi. merged with Otoyol Sanayi, a Subsidiary of the Group, by transferring all its assets and liabilities on 29 April 2005.
Set Oto Ticaret ve Turizm A.fi. merged with Otokoç, a Subsidiary of the Group, by transferring all its assets and liabilities on 20 November2005.
The tangible assets and immovable recorded in the assets of Setur, a Subsidiary of the Group, and Temel Ticaret A.fi., a shareholder of KoçHolding, were transferred to Palmira, a Subsidiary of the Group, as a result of the share capital increase using the partial division method. Theshare capital increase in Palmira amounting to YTL7,255 thousand as a result of this transaction was approved on 28 June 2005.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Other Transactions
Other transactions in 2006Koçbank, a Subsidiary of the Group, acquired 57.42% of Yap› Kredi Bankas› shares as disclosed in the business combinations in 2005.Koçbank purchased further 9.09% of Yap› Kredi Bankas› shares traded in ISE and 0.79% of the shares under a foreign mutual fund in Yap›Kredi Bankas›’s available-for-sale portfolio in April 2006 and as a result, the ownership of the Koçbank increased to 67.31%. After thesetransactions, Group has recognised the difference between the acquisition amount and net assets acquired under shareholders’ equity.
On 4 January 2006, Beko Elektronik, a Subsidiary of the Group, increased its share in Fusion Digital from 95% to 100% by contributing to theshare capital increase amounting to GBP5,500,000.
As a result of share transfers in 2006, Migros, a Subsidiary of the Group, increased its share in Rambutya from 51% to 100% and in Ramstorefrom 94.75% to 100%.
Other transactions in 2005On 22 August 2005, Tek-Art Marina, a Subsidiary of the Group, acquired 55% of the shares of Netsel for a purchase consideration ofEUR13,400,000.
On 26 June 2005, Beko Elektronik, a Subsidiary of the Group, holding 65% of the shares of Fusion Digital, acquired 30% of the shares ofFusion Digital by a purchase consideration of GBP10,000,000 and increased its share to 95%.
NOTE 33 - SEGMENT REPORTING
2006 2005a) Net revenuesEnergy 23,961,235 4,756,201Automotive 6,312,676 5,655,909Consumer durable 7,668,666 6,795,977Food and retail 5,371,607 3,639,145Finance 4,902,940 2,398,056Other 1,172,189 1,108,086
49,389,313 24,353,374
b) Net operating profit/(loss)Energy 1,012,109 127,486Automotive 428,363 340,646Consumer durable 597,435 398,832Food and retail 245,138 97,749Finance 676,694 276,091Other 19,053 (31,480)
2,978,792 1,209,324
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated) 154
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31
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emb
er 2
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Fina
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r
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Fina
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Oth
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Ext
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l rev
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s23
,961
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6,31
2,67
67,
668,
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5,37
1,60
73,
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1,37
6,02
112
1,18
9-
4,90
2,94
01,
172,
189
-49
,389
,313
Intra
seg
men
t rev
enue
s1,
131,
207
745,
519
990,
289
521,
838
3,22
83,
916
--
7,14
473
,235
-3,
469,
232
Inte
r seg
men
t rev
enue
s10
6,97
089
,395
136,
283
32,7
6026
,295
1,81
124
,342
-52
,448
1,45
3,59
0-
1,87
1,44
6
Com
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ed r
even
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25,1
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127,
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8,79
5,23
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926,
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3,43
5,25
31,
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748
145,
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-4,
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2,69
9,01
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54,7
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Ext
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l rev
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s23
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6,31
2,67
67,
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5,37
1,60
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1,37
6,02
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1,18
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4,90
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-49
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Inte
r seg
men
t rev
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s10
6,97
089
,395
136,
283
32,7
6026
,295
1,81
124
,342
-52
,448
1,45
3,59
0(1
,871
,446
)-
Rev
enue
s24
,068
,205
6,40
2,07
17,
804,
949
5,40
4,36
73,
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1,37
7,83
214
5,53
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4,95
5,38
82,
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(1,8
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49,3
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13
Cos
t of
sal
es(2
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8)(5
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)(5
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)(4
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)(1
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(2,2
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1,29
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rofit
1,61
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0,70
82,
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1,24
6,67
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54,3
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1,63
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4(5
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7,17
4
Gen
eral
adm
inis
trativ
e
expe
nses
(360
,811
)(2
24,2
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(373
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)(2
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(806
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)(1
54,5
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(19,
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-(9
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(227
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4,60
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ion
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nses
(2
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(307
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)(1
,048
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)(7
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--
--
-(7
5,28
0)35
2,33
0(2
,089
,083
)
Res
earc
h &
dev
elop
men
t
expe
nses
(2,0
44)
(35,
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(79,
262)
--
--
--
--
(116
,756
)
987,
424
413,
152
582,
769
239,
436
656,
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26,1
6372
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2,97
8,79
2
Inte
r seg
men
t pro
fit e
limin
atio
n24
,685
15,2
1114
,666
5,70
219
,785
(7,1
10)
(72,
939)
-
Net
op
erat
ing
pro
fit/(
loss
)1,
012,
109
428,
363
597,
435
245,
138
676,
694
19,0
53-
2,97
8,79
2
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated) 155
Koç
Hol
ding
2006
Ann
ual R
epor
t
c)S
egm
ent
anal
ysis
fo
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d 1
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s4,
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5,65
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,353
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Intra
seg
men
t rev
enue
s13
3,05
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7,12
72,
110,
714
359,
778
44,5
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088
--
50,6
2951
,200
-3,
472,
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Inte
r seg
men
t rev
enue
s10
2,37
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0,90
113
2,58
122
,078
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,862
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Com
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4,99
1,62
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-29
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s10
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113
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7,64
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-
Rev
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s4,
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5,75
6,81
06,
928,
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3,66
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t of
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)(7
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401,
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828,
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6,84
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37,6
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4,71
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0(3
95,2
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5
Gen
eral
adm
inis
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e
expe
nses
(116
,158
)(2
07,5
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(327
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)(1
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(365
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)(1
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(15,
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(198
,727
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4,01
0(1
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)
Sel
ling,
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(174
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)(2
63,1
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(898
,866
)(4
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--
--
-(1
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206,
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(1,6
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Res
earc
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t
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nses
(1,5
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(31,
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(67,
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--
--
--
--
(100
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)
109,
547
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384,
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9,32
4
Inte
r seg
men
t pro
fit e
limin
atio
n17
,939
15,1
3314
,454
2,70
2(7
,250
)12
,478
(55,
456)
-
Net
op
erat
ing
pro
fit/(
loss
)12
7,48
634
0,64
639
8,83
297
,749
276,
091
31,4
80-
1,20
9,32
4
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Deferred tax assets 380,415 721,058Less: Inter segment elimination (305,089) (243,913)
Total assets as per consolidated financial statements 57,252,851 36,657,802
Total liabilitiesEnergy 9,771,462 599,975Automotive 1,838,356 1,405,684Consumer durable 4,159,209 2,984,772Food and retail 2,155,825 1,835,450Finance 25,780,592 20,208,139Other 1,525,034 1,413,882
Segment liabilities 45,230,478 28,447,902
Deferred tax liabilities 622,772 280,932Tax and legal provisions (Note 23.a) 69,856 32,918Less: Inter segment elimination (324,453) (193,237)
Total liabilities as per consolidated financial statements 45,598,653 28,568,515
e) Purchase of tangible and intangible assets and investment property, depreciation and amortisation
2006 2005Purchase of tangible and intangible assets and investment propertyEnergy 580,728 204,309Automotive 439,858 258,094Consumer durable 361,713 281,373Food and retail 255,766 239,044Finance 49,949 17,713Other 67,059 176,517
1,755,073 1,177,050
Depreciation and amortisationEnergy 249,879 133,457Automotive 168,934 231,302Consumer durable 172,797 201,282Food and retail 116,188 93,892Finance 93,651 46,800Other 46,468 69,303
847,917 776,036
156
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Hol
ding
2006
Ann
ual R
epor
t
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
f) Non-cash expenses/(income)
2006Consumer Food and
Energy Automotive Durable Retail Finance Other TotalChanges in sales and customer premiums - (4,534) 7,615 - - - 3,081Changes in warranty provision - 9,792 83,789 - - (48) 93,533Changes in insurance reserves - - - - 59,646 - 59,646Changes in provision for cost (33,077) 1,296 (10,413) 2,504 (1,042) (8,500) (49,232)Changes in provision for loan losses - - - - 121,351 - 121,351Changes in provision for employment
termination benefit (8,178) 15,519 5,929 (1,154) 5,657 (308) 17,465Changes in provision for assembly costs - - 19,304 - - - 19,304Changes in provision for doubtful receivables 956 731 38,882 124 1,960 (2,289) 40,364Changes in impairment for inventories 4,103 (103) 6,040 (956) - 1,375 10,459Changes in bonus and premium accruals 362 2,392 (1,105) - 20,937 (133) 22,453
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
i) The Constitutional Court cancelled the clause “b” of the 23rd item of Banking Law No:5411 effective from its enactment date. The cancelleditem of the Banking Law required the transfer of pension funds to Social Security Institution. Such cancellation decision of the ConstitutionalCourt was taken on 22 March 2007 and was published in the Official Gazette numbered 26479 on 31 March 2007. Such decision is a matterof interest for the Group as Yap› Kredi Bankas›’s personnel are members of Pension Fund which its transfer to Social Security Institution wascancelled. Accounting policies applied in the year 2006 for retirement benefits of the members of Pension Fund is described under Note 3.Banking Regulation and Supervision Agency, which is the regulatory body Yap› Kredi Bankas› is subject to, announced that theaforementioned cancellation decision in the subsequent period should not change the accounting policies in effect for the retirement benefitsand possible obligation of the Pension Fund.
ii) As of 1 March 2007, Yap› Kredi Bankas›, a Joint Venture of the Group, received external financing which consists of two parts and amountsto USD400 million according to the securitisation programme based on the diversified payment rights of future cash flows with the leadershipof the Standard Chartered Bank and Bayerische Hypo-und Vereinsbank AG. The maturity of both parts which amount to EUR115 million andUSD250 million, respectively is eight years. With the external financing, the fifth part of the transaction realised in 2006 with a five-year maturityamounting to USD310 million was repaid.
158
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Hol
ding
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Ann
ual R
epor
t
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
iii) Based on “Fintur, Superonline and Digitürk Purchase-Sale agreement” signed between Yap› Kredi Bankas›, a Joint Venture of the Group,and the Çukurova Group companies on 28 September 2005, the date set for the transfer of the Superonline shares was extended for anadditional three months on 26 February 2007.
iv) Extraordinary General Assembly meetings regarding the transfer of Koç Menkul, a Joint Venture of the Group, with all its rights, receivables,liabilities and obligations to Yap› Kredi Menkul, a Joint Venture of the Group, were held on 29 December 2006 and the merger was approvedon 12 January 2007.
v) Within the framework of restructuring foreign subsidiaries of Koç Finansal Hizmetler, a Joint Venture of the Group, the merger of Yap› KrediNederland and Kocbank Nederland, Joint Ventures of the Group, the liquidation of Yap› Kredi Deutschland, a Joint Venture of the Group, andthe commencement of the applications to the related authorities were approved by the Board of Directors of aforementioned Joint Ventures.
vi) A contract between RMK Marine, a Subsidiary of the Group, and Turkish Coast Guard Command concerning the production of 4 searchand rescue vessels was signed on 16 January 2007. The project is EUR352.5 million. Out of this amount, EUR140 million relates to direct workand EUR120 million will stay in Turkey as offset.
vii) Koç Holding Chief Executive Officer (“CEO”) Bülend Özayd›nl› has tendered his resignation as of 1 May 2007, the Board of Directors ofKoç Holding has decided to appoint Bülent Bulgurlu, Chairman of the Durables Consumption and Construction Group, to the position of KoçHolding CEO.
viii) The Sale Purchase Agreement, regarding the sale of 100% shares of BOS, a Subsidiary of the Group, owned by Koç Holding, TemelTicaret ve Yat›r›m A.fi., a shareholder of Koç Holding, Aygaz, Koç Yap› Malzeme and Beko Ticaret, Subsidiaries of the Group (collectivelyreferred to as “Sellers”) to Linde Gaz A.fi. (“Buyer”) considering the company value of USD123.5 million was signed at 5 April 2007. Thepayment of the mentioned amount is going to be made in cash by the Buyer after the completion of the share transfer.
NOTE 35 - DISCONTINUED OPERATIONSKoç Holding initiated the use of advisory services to utilise the shares of Demirdöküm and Mares, the Subsidiaries of the Group, by variousmeans including the sale of these shares and appointed advisory firms. Accordingly, Koç Holding signed authorisation contracts on 23 June2006 with ABN Amro N.V. Istanbul Office for Demirdöküm and on 9 October 2006 with Lazard & Co. Limited for Mares, for the purpose ofauthorising the use of these advisory firms.
The Group has decided to sell its shares in BOS, a Subsidiary of the Group, through a tender and as a result of the offers for the mentionedtender, a share transfer agreement was signed on 5 April 2007 (Note 34).
159
Koç
Hol
ding
2006
Ann
ual R
epor
t
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Summary of financial information pre-consolidation adjustments regarding the mentioned companies is as follows:
Net operating profit/(loss)Demirdöküm 79,526 58,692BOS 12,669 11,239Mares (3,704) (4,490)
88,491 65,441
Net income/(loss)Demirdöküm 41,024 28,350BOS 14,470 10,536Mares (6,447) (4,131)
49,047 34,755
Share sales agreements regarding the sales of ‹zocam, Döktafl and Kofisa shares were signed on 5 September 2006, 18 October 2006 and16 November 2006, respectively (Note 38).
160
Koç
Hol
ding
2006
Ann
ual R
epor
t
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Summary of financial information regarding the mentioned companies as of the date they are excluded from the scope of consolidation is asfollows:
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Finance sector:Information on the banking, insurance and consumer finance sectors is disclosed in Note 33.c and Note 33.h.
NOTE 37 - OPERATING EXPENSES
2006 2005General administrative expenses 2,132,543 1,325,591Marketing, selling and distribution expenses 2,089,083 1,677,431Research and development expenses 116,756 100,729
Operating expenses 4,338,382 3,103,751
NOTE 38 - OTHER INCOME/EXPENSES
Other income and expenses for the years ended 31 December are as follows:
2006 2005Other incomeProfit on sale of investments (*) 121,767 -Provision reversals 42,471 30,288Profit on sale of property, plant and equipment 29,919 46,952Income from incentives 19,084 13,539Rent and service income 12,229 1,211Indemnity income 5,617 2,558Licence income 4,223 1,319Transportation charges 3,612 2,145Other 66,310 31,197
Other income 305,232 129,209
(*) As a result of the share transfers in 2006 (Note 35), YTL47,393 thousand from the sale of Döktafl shares, YTL49,040 thousand from sale of‹zocam shares and YTL15,029 thousand from sale of Biletix shares have been generated as gross earnings. In addition, YTL8,930 thousandgenerated from the liquidation of Basic Investment Ltd. has been recognised as income.
162
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Hol
ding
2006
Ann
ual R
epor
t
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
2006 2005Other expensesProvision expenses (221,628) (94,047)Pension Fund provision expenses (30,370) -Commission expenses (15,205) -Idle time expenses (13,239) (3,313)Loss on sale of property, plant and equipment (9,694) (4,924)Other (35,792) (11,734)
Other expenses (325,928) (114,018)
(20,696) 15,191
NOTE 39 - FINANCIAL INCOME/EXPENSES
Financial income and expenses related with the years ended 31 December are as follows:
NOTE 40 - NET MONETARY POSITION GAIN/LOSSOn 17 March 2005, the CMB announced that, the application of inflation accounting is no longer required for the companies in Turkeyeffective from 1 January 2005 (Note 2.2).
Consequently, inflation accounting was not applied effective from 1 January 2005 in line with CMB Accounting Standards, therefore there is nogain/loss on net monetary position for the first nine month periods of 2006 and 2005.
NOTE 41 - TAXES ON INCOME
2006 2005Provision for corporate tax
Domestic 337,704 218,422Foreign 125,815 136,237
463,519 354,659
Less: Prepaid corporate tax (393,663) (387,577)
Corporate tax payable 69,856 (32,918)
Turkish tax legislation does not permit a parent company and its subsidiaries to file a consolidated tax return. Therefore, provisions for taxes,as reflected in these consolidated financial statements, have been calculated on a separate-entity basis.
163
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ual R
epor
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
Corporate Tax Law numbered 5520 became effective at 21 June 2006 by being published in the Official Gazette numbered 26205. By theissue of this law, Corporate Tax Law numbered 5422 was abolished.
The corporation tax rate of the fiscal year 2006 is 20% (2005: 30%). Corporation tax is payable at a rate of 20% on the total income of theCompany after adjusting for certain disallowable expenses, exempt income and allowances. The annual corporate income tax return isrequired to be filed in the period between the 1st and 25th days of the fourth month following the close of the related fiscal year. Paymentscan be made up until the end of the month in which the tax return is to be filed.
Corporations established abroad and controlled directly or indirectly by tax resident companies and real persons by means of separate orjoint participation in the capital or dividends or voting rights at the rate of a minimum 50% are considered as Controlled Foreign Corporations(“CFC”) provided that the below conditions are fulfilled:
a) 25% or more of the gross revenue of the foreign subsidiary must be composed of passive income like interest, dividend, rent, license fee,or marketable securities sales income;b) The CFC must be subject to an effective income tax rate lower than 10% for its commercial profit in its home country; and, c) Gross revenue of the CFC must exceed the equivalent of YTL100 in a foreign currency in the related period.
CFC’s profit is included in the corporate income tax base of the controlling resident corporation, irrespective of whether it is distributed or not,at the rate of the shares controlled, in the fiscal period covering the month of closing of the fiscal period of the CFC. The CFC’s profit that hasalready been taxed in Turkey as per this article will not be subject to additional tax in Turkey in the event of dividend distribution; whereas theportion of the profit distributed that has not been previously taxed in Turkey will be subject to taxation.
If the ratio of the borrowings from shareholders or from persons related to the shareholders exceeds three times the shareholders’ equity ofthe borrower company at any time within the relevant year, the exceeding portion of the borrowing will be considered as thin capital.Accordingly, under the new thin capitalisation regulation, the ratio of the loans received from related parties to shareholders’ equity will beconsidered as three to one. Except for the loans received from credit institutions that provide loans only to related companies, half of the loansreceived from related banks and similar institutions are to be taken into account during thin capitalisation calculations.
If a taxpayer enters into transactions regarding sale or purchase of goods and services with related parties, where the prices are not set inaccordance with the arm’s length principle, then related profits are considered to be distributed in a disguised manner through transferpricing. Such disguised profit distributions through transfer pricing are not accepted as tax deductible for corporate income tax purposeseffective from 1 January 2007. The expression “purchase or sale of goods or services” is used in a broad sense and includes all economic,commercial or financial transactions and employment relations between related parties.
All sorts of payments made to corporations (including branches of resident corporations) that are established or are operational in countrieswhich are regarded by the Council of Ministers to undermine fair tax competition due to tax and other practices, will be subject to taxation inTurkey irrespective of the fact that the payments in question are subject to tax or not; or, whether the corporation receiving the payment is ataxpayer or not. In this case, withholding tax at the rate of 30% is envisaged to be levied over these payments.
Dividends paid to non-resident corporations, which have a place of business in Turkey, or resident corporations are not subject to withholdingtax. Otherwise, dividends paid are subject to withholding tax at the rate of 15%. An increase in capital via issuing bonus shares is notconsidered as a profit distribution and thus does not incur withholding tax.
Corporations are required to pay advance corporation tax quarterly at the rate of 20% on their corporate income. Advance tax is payable bythe 17th of the second month following each calendar quarter end. Advance tax paid by corporations is credited against the annualcorporation tax liability. The balance of the advance tax paid may be refunded or used to set off against other liabilities to the Government.
In Turkey, there is no procedure for a final and definitive agreement on tax assessments.
164
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ding
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ual R
epor
t
KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
There are numerous exemptions in the Corporate Tax Law concerning the corporations. Those related to the Company are as follows:
Exemption for participation in subsidiariesDividend income from participation in shares of capital of another full fledged taxpayer corporation (except for dividends from investmentfunds participation certificates and investment partnerships shares) are exempt from corporate tax.
Exemption for sale of preferential right certificates and share premiumsProfits from sale of preferential right certificates and share premiums generated from sale of shares at a price exceeding face values of thoseshares during incorporations or capital increases of joint stock companies are exempt from corporate tax.
Exemption for income from foreign construction, maintenance, assembly and technical servicesIncome generated from construction, maintenance, assembly and technical services realised in foreign countries and recorded to results ofoperations are exempted from corporate taxation.
Exemption for participation into foreign subsidiariesIf the below conditions are fulfilled, participation revenues obtained from abroad and those transferred to Turkey by the date when corporatetax declaration regarding the taxation period in which they are obtained is filed shall not be subject to corporate tax in Turkey. Conditions areas follows:
If the Turkish resident company holds at least 10% stake for a continuous period of a year in the non resident company whose main activityshould not be financial leasing or investment in any type of security. If the total tax burden of the non resident company is at least 15% (Forinsurance and financing leasing companies tax burden should be equal to at least the corporate tax burden in Turkey). If the profit istransferred to Turkey in cash till the corporate tax declaration date.
Exemption for income generated from foreign offices and permanent representativesGains obtained by corporations through their places of business abroad or permanent offices abroad (except those with the main field ofactivity of financial leasing or any type of investment securities) and bearing a tax liability similar to that of corporate tax at least at the rate of15% in accordance with the tax law of the country where that place of business and permanent office is located, (equal to at least thecorporate tax burden in Turkey regarding insurance and financial activities), and which is transferred to Turkey until the submission date of thecorporate tax return of the related period, will be exempt from corporate tax.
Participation exemption and reduced dividend withholding tax rate for holding companiesThe participation income of full tax resident Joint Stock Companies (“JSC”) in Turkey are exempt from corporate income tax assuring that theJSC must held the shares of the subsidiary, for at least 2 continuous years as at the date the income is generated, and 75% or more of thetotal assets of the JSC comprise of participation in 25% or more of the capital of the limited or joint stock companies (except from thosewhose core business is financial leasing or security investment), whose legal or business centre is located abroad, and the participationincome constitute 75% or more of the corporate income of the JSC and, the subsidiary must be subject to corporate income tax, or alike, in itscountry of legal or business centre at the rate of at least 20% (this rate is applied as the corporate income tax rate applicable in Turkey at theminimum for those companies whose core business is financial assurance or insurance), and 75% of the income generated must consist ofcommercial, agricultural or independent professional service income, and the participation income is transferred to Turkey until the date offiling of the corporate income tax return of the fiscal year in which the income is generated.
Exemption for sale of participation shares and propertyProfit of corporations’ from sale of participation shares and property which have been in their assets at least for two years is exempt fromcorporate tax provided that they are added to corporations’ share capital until the end of second calendar year following the year in which salewas realised.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
On the other hand, the condition of adding this profit to share capital is not required for corporations other than full fledged taxpayercorporations and non-resident taxpayer corporations and these profits are accounted under special reserves. In the event that these profitsadded to share capital or accounted under special reserves are withdrawn from the entity in any means, transferred to abroad by non-residenttaxpayer corporations or the entity liquidates (except by take over, merger and de-merger) within five years, those profits are considered asprofits regarding that year and are subject to corporate tax.
Exemption for investment allowanceCapital expenditures, with some exceptions, over YTL10 thousand are eligible for investment incentive allowance of 40% is exempted fromcorporate income tax and this allowance is not subject to withholding tax without the requirement of an investment incentive certificate.Investment allowances calculated are deferred to the following years in cases where corporate income is insufficient. Investment allowancesutilised within the scope of investment incentive certificates granted prior to 24 April 2003 in accordance with provisions of Income Tax LawTransitional Article 61 are subject to withholding tax at the rate of 19.8%, irrespective of profit distribution.
As of 1 January 2006, the exemption for investment allowance has been abolished with Corporate Income Tax Law No.5479.
A transition period of three years has been provided for income and corporate taxpayers which have investment incentive allowance rights asof 31 December 2008, which have not yet utilised and which have been deferred to the following years where corporate income may beinsufficient and where investment allowance will be earned from the investment expenditures made for the ongoing projects as of 31December 2005. According to this,
• investment allowances that exist at 31 December 2005 and that cannot be deductible from income generated in 2005 (advance corporatetax or investment allowance of 40%),• investment allowances calculated in accordance with the legislation valid as of 31 December 2005 and its related 19.8% tax deduction forinvestment incentive share certificates granted prior to 24 April 2003 and started before 1 January 2006; and• investment allowances calculated at a rate of 40% in accordance with the legislation valid as of 31 December 2005 for investment incentivesgranted after 24 April 2003 in accordance with the abolished Article No.19 of Corporate Income Tax Law, which were started before 1 January2006 and which present an economic and technical integrity with the investments,
can be utilised for the income generated in the years 2006, 2007 and 2008 in accordance with the articles valid on 31 December 2005(including the 30% corporate tax rate).
Once one of the above alternatives has been chosen, the alternative chosen cannot be changed. Corporations that choose to utilise this rightwill be subject to the previous legislation of tax rates.
Apart from the abovementioned exemptions considered in the determination of the corporate income tax base, allowances stated in CorporateIncome Tax Law Article 8, 9 and 10, and Income Tax Law Article 40 are also taken into consideration.
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
The taxes on income reflected to consolidated income statement for the years ended 31 December are summarised as follows:
2006 2005Current year corporate tax (483,358) 354,659Deferred tax (Note 14) (172,000) (56,201)Refund from tax litigation against the corporate tax (*) 54,664 -
(600,694) 298,458
(*) The tax litigations concerning the corporation tax of fiscal years 2003 and 2004 and the withholding tax of the 2004/4 period wereconcluded in favour of Koçbank, a Joint Venture of the Group, with the decisions of Istanbul 1. Tax Court dated 17 May 2006 and the Istanbul3. Tax Court dated 12 June 2006. The Tax Office has already appealed to the Council of State against the resolutions of the Tax Courts andthe appeal investigations are continuing. Based on the resolutions of the Tax Courts, the tax amount subject to litigation of YTL54,686thousand has been refunded from the Tax Office to Koçbank and has been recognised in the Group’s consolidated financial statements asdeferred tax income as of 31 December 2006.
NOTE 42 - EARNINGS PER SHARE
2006 2005Net profit for the year 560,812 597,624Weighted average number of shares with nominal value YTL1 each 1,265,000,000 1,265,000,000
Basic and diluted earning per share in YTL 0.443 0.472
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 43 - SUPPLEMENTARY CASH FLOW INFORMATION
Analysis of cash and cash equivalents included in the consolidated cash flows statement for the years ended 31 December 2006 and 2005are as follows:
2006 2005Changes in reserves and provisions:Changes in provision for sales and customer premiums 3,081 8,227Changes in provision for warranty and assembly 112,837 55,913Changes in provision for cost and expenses (49,232) (17,664)Changes in insurance technical reserve 59,646 136,005Changes in provision for loans and doubtful receivables 161,715 63,786Changes in provision for the Pension Fund 21,810 -Changes in provision for employment termination benefits 17,465 21,146Changes in bonus and premium accruals 22,453 19,134Changes in impairment for inventories 10,459 31,324
360,234 317,871
Add back net interest income:Non-banking interest income (361,665) (230,695)Banking interest income (2,695,010) (1,110,487)Non-banking interest expenses 885,867 240,520Banking interest expenses 1,649,892 612,051
(520,916) (488,611)
Net changes in the operating assets and liabilities:Changes in current assets and liabilities:Inventories (1,308,013) 38,288Trade receivables (1,113,110) (1,082,730)Other current assets (365,711) 231,505Trade payables 1,714,384 463,356Other current liabilities 702,425 107,681Balances with related parties (net) (365,987) 9,811Investments (3,601,384) 410,157
(4,337,396) 178,068
Changes in finance segment current assets and liabilities:Cash and cash equivalents with original maturities of more than 3 months (18,475) 3,725Reserve deposits with the central banks (839,546) 109,443Loans and advances to customers, short-term (1,138,414) (1,543,529)Loans and advances to customers, long-term (1,451,720) (1,148,804)Customer deposits 2,545,975 583,721
(902,180) (1,995,444)
(5,239,576) (1,817,376)
Changes in other non-current assets (69,214) (19,623)Changes in other non-current liabilities 57,934 15,251
(11,280) (4,372)
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KOÇ HOLD‹NG A.fi.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED 31 DECEMBER 2006 AND 2005(Amounts expressed in thousands of New Turkish Lira (“YTL”) unless otherwise indicated)
NOTE 44 - DISCLOSURE OF OTHER MATTERS
a) Tüprafl Share Purchase AgreementThe tender process for the privatisation of public shares of Tüprafl, amounting to 51% of total shares, through the block sale method wasfinalised on 12 September 2005 and the decision of the Tender Commission regarding the ultimate takeover was approved with the decisionof the Supreme Privatization Board (“SPB”) on 7 November 2005; numbered 2005/128. The Share Purchase Agreement was signed on 26January 2006 between PA and Enerji Yat›r›mlar›, established by the Koç-Shell Consortium, and the Tüprafl shares were handed over to EnerjiYat›r›mlar›.
With respect to the lawsuits filed by Türkiye Petrol Kimya Lastik Sendikas› (“Petrol ‹fl”) for a stay of execution and the cancellation of the tenderspecification document prepared in relation to the decision concluded by the Tender Commission related to the privatisation of public sharesof Tüprafl amounting to 51% of total shares. 13th Division of the Council of State rejected the motion for a stay of execution acting as the courtof first instance. Upon the rejection of 13th Division of the Council of State, Petrol ‹fl appealed the decision. Following the examination of theCouncil of State’s General Assembly of Administrative Chambers of the related decision, the rejection of the above cases is approved at 13July 2006.
b) Yap› Kredi Bankas› Share Purchase AgreementFinal version of the Share Purchase Agreement was signed between Çukurova Holding, various Çukurova group companies, Mehmet EminKaramehmet and Koç Finansal Hizmetler, Koçbank Nederland and Koçbank regarding the sale of 57.42% of the shares of Yap› Kredi Bankas›on 28 September 2005. Accordingly, Share Purchase Agreement, which has been initialled for identification purposes on 8 May 2005, wasagreed by all parties. Based on the agreement on 28 September 2005,
i) 44.52% of Yap› Kredi Bankas› shares with a nominal value of YTL335,015 thousand that belong to Çukurova group companies and,
ii) 12.90% of Yap› Kredi Bankas› shares with a nominal value of YTL97,032 thousand that belong to the Savings and Deposits Insurance Fundwere transferred to Koçbank, a Joint Venture of the Group.
The value of 57.42% of the shares of Yap› Kredi Bankas› was realised as EUR1,182,368 thousand.
c) Interest in Joint VenturesAggregate amounts of assets, liabilities, net income related to Joint Ventures which are proportionately consolidated, as described in Note 3,to these consolidated financial statements, are as follows on a combined basis:
d) FundsAt 31 December 2006, the Group manages 30 mutual and 18 pension funds which were established under the Turkish CMB Regulations. At31 December 2006, the Group earned fund management fees amounting to YTL105,197 thousand (31 December 2005: YTL17,961 thousand).
Phone Call Center Web SiteSC Arctic S.A. +40 212048000 www.arctic.roSet Auto Azerbaycan +99 414975455Setair Hava Tafl›mac›l›¤› ve Hizm. A.fi. +90 216 5543700 www.setair.com.trSetur Marinalar› Marina ve Yat ‹flletmecili¤i +90 216 346 14 77 www.seturmarinas.comSetur Servis Turistik A.fi. +90 216 554 37 00 +90 212 444 07 38 www.setur.com.trSherbrook International Limited +44 1543 495555 www.sherbrook.co.ukTan› Pazarlama ve ‹letiflim Hizmetleri A.fi. +90 216 556 02 00 +90 212 454 15 15 www.paro.com.trTat Konserve San. A.fi. +90 216 430 02 00 0800 26173 01 www.tat.com.trTat Tohumculuk A.fi. +90 216 430 80 40 - 41 0800 26173 01 www.tat.com.trTBS Denizcilik ve Petrol Ürünleri D›fl Ticaret A.fi. +90 216 522 90 49 www.tbs.com.trTofafl Türk Otomobil Fabrikasi A.fi. +90 212 275 29 60 +90 212 444 22 55 www.tofas.com.trTÜPRAfi-Türkiye Petrol Rafinerileri A.fi. +90 262 316 30 00 (20 lines) www.tupras.com.trTürk Demir Döküm Fabrikalar› A.fi. +90 224 714 82 00 0800 211 33 33 www.demirdokum.com.trTürk Traktör ve Ziraat Makineleri A.fi. +90 312 211 01 90 www.turktraktor.com.trUltra Kablolu TV ve Telekominikasyon San.Tic. A.fi. +90 216 578 60 00 www.ultratv.netVehbi Koç Foundation +90 216 531 00 00 www.vkv.org.trYap› Kredi Bank ( Deutschland) AG +49 69 97 136-201 www.yapikredibank.deYap› Kredi Bank Azerbaycan +99 412 497 77 95 www.yapikredi.com.azYap› Kredi Bank Moskow +7095 234 98 89 www.ykb.ruYap› Kredi Bank Nederland N.V. +31 20 344 55 66 0800-44 44 044 www.ykb.nlYap› Kredi Emeklilik A.fi. +90 212 336 76 00 +90 212 336 76 00 www.yapikrediemeklilik.comYap› Kredi Faktoring A.fi. +90 212 355 99 99 www.yapikredifaktoring.com.trYap› Kredi Finansal Kiralama A.fi. +90 212 336 60 00 www.yapikredileasing.com.trYap› Kredi Kültür ve Sanat Yay›nc›l›k Tic.ve San.A.fi. +90 212 252 47 00 www.ykykultur.com.trYap› Kredi Portföy Yönetimi A.fi. +90 212 385 48 48 www.yapikrediportfoy.com.trYap› Kredi Sigorta A.fi. +90 212 336 06 06 www.yksigorta.comYap› Kredi Yat›r›m Menkul De¤erler A.fi. +90 212 280 10 30 www.yapikrediyatirim.com.trYap› Kredi Yat›r›m Ortakl›¤› A.fi. +90 212 325 22 95 www.yapikrediyo.com.trYap› Kredi-Koray Gayrimenkul Yat›r›m Ortakl›¤› A.fi. +90 212 284 13 56 www.yapikredikoray.com.trZer Merkezi Hizmetler A.fi. +90 216 454 01 80 www.bekoticaret.com.tr
DIRECTORY
30 countries88,000 employees
Koç HoldingShareholder Structure
1.97% Koç Holding Pension& Assistance Foundation 70.51% Koç Family
20.35%Free Float
Koç Holding shares are listed on the ‹stanbul Stock Exchange (ISE) with KCHOL symbol.
7.17% Vehbi KoçFoundation
Automotive Consumer Durables Food & Retailing
Main CompaniesFord Otosan * / Tofafl* / Türk Traktör* / Otokar*Otoyol / Otokoç / Birmot
Number of Companies Included in ConsolidationDomestic: 14
International AlliancesFord Motor Co. / Fiat Auto S.P.A.Case New Holland / Iveco / Yamaha
Share in Consolidated Revenues12.8%
Share in Operating Profit14.4%
Number of Employees17,760
Domestic Market Position#1 in passenger cars#1 in commercial vehicles#2 in farm tractors#1 in total automotive#1 in automotive retailing
Main CompaniesArçelik* / Beko Elektronik* / Türk Demir Döküm*Arçelik - LG / Arctic / Blomberg / Elektra BregenzGrundig
Number of Companies Included in ConsolidationDomestic: 6International: 39
International AlliancesLG Electronics / Alba Plc
Share in Consolidated Revenues15.5%
Share in Operating Profit20.1%
Number of Employees19,271
Domestic Market Position#1 in refrigerators, washing machines,dishwashers and ovens,#1 in air conditioners, combi boilers, waterheaters and heating equipment#1 in TVs
Main CompaniesMigros* / Ramenka / KoçtaflTat* / Düzey
Number of Companies Included in ConsolidationDomestic: 6International: 6
International AlliancesB&Q / Kagome Sumitomo / Kaneka Seeds
Share in Consolidated Revenues10.9%
Share in Operating Profit8.2%
Number of Employees20,846
Domestic Market Position#1 in FMCG retailing#1 in DIY retailing
Number of Companies Included in ConsolidationDomestic: 14International: 11
International AlliancesUniCredit / Allianz / Tokyo Marine
Share in Consolidated Revenues9.9%
Share in Operating Profit22.7%
Number of Employees17,146
Domestic Market Position#4 in total banking assets among private banks#1 in credit cards#1 in insurance (non-life) and individualpensions#1 in mutual funds#1 in leasing and factoring
Main CompaniesTüprafl* / Aygaz* / Opet / Entek / Mogaz / Akpa
Number of Companies Included in ConsolidationDomestic: 12International: 5
International AlliancesStatoil
Share in Consolidated Revenues48.5%
Share in Operating Profit34.0%
Number of Employees8,089
Domestic Market PositionSole petroleum refiner in Turkey#1 in LPG distribution#4 in petroleum products distribution
Main CompaniesRam / Koç Sistem / Koçnet / SeturMares* / Palmira / Setur Marinalar› / RMK MarineDemir Export
Number of Companies Included in ConsolidationDomestic: 17
Share in Consolidated Revenues2.4%
Share in Operating Profit0.6%
Number of Employees5,136
Koç Group in Brief
Koç Holding is not only the largest company in Turkey, but it is also rapidlyclimbing the steps in the ranking of world's 500 largest corporations, withleadership positions in profitable business lines. Total exports of Koç Groupaccount for 12% of Turkey's total exports, while Koç Holding and 19 publiclytraded Group companies comprise 16% of the total market value of companiestraded on the Istanbul Stock Exchange.
The complete reporting of our 2006 results includes the following elements:
Annual Report 2006Interactive CD versionComplete 2006annual reporting
Web Report 2006on www.koc.com.trComplete 2006annual reporting
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Annual Report 2006
A little difference, a big stepOn behalf of us, for all of us
Financial Highlights 1Honorary Chairman's Message 2Chairman's Statement 4Board of Directors 6CEO's Letter 8Executive Management 10Corporate Profile 12Corporate Values 13Strategies and Vision 14The Added Value of Koç Holding 14Review of the Year 15Automotive 16Consumer Durables 24Food & Retailing 32Energy 38Finance 46Other 52Corporate Citizenship 56Curriculum Vitae of the Board Members and Executive Management 62Corporate Governance Compliance Report 66Board of Directors' Report 78Segmental Reporting of Summary Financial Indicators 81Auditor's Report 84Independent Auditor's Report, Consolidated Financial Statements and Notes 85Contact Details 170
